<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JANUARY 3, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ____________
COMMISSION FILE NO. 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)
Registrant's telephone number, including area code: (724) 352-7520
<TABLE>
<S> <C>
Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered:
Title of each class Not applicable
-------------------
None
</TABLE>
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 2, 1999 was approximately $61,613,000. On that date, the
last sale price of registrant's common stock was $11.125 per share. Solely for
purposes of this calculation, shares beneficially owned by directors and
executive officers have been excluded. However, such exclusion is not intended
to be, nor is it to be deemed, a determination or an admission by the registrant
that such directors and officers are, in fact, affiliates of the registrant.
Indicated below is the number of shares outstanding of each of the registrant's
classes of common stock as of March 2, 1999.
<TABLE>
<S> <C>
Outstanding on
Class March 2, 1999
-------------
COMMON STOCK, PAR VALUE $.001 PER SHARE 6,368,836
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into which
Document the Document is Incorporated
----------------------------
DEFINITIVE PROXY STATEMENT TO SHAREHOLDERS PART III, ITEMS 10, 11, 12 AND 13
</TABLE>
<PAGE> 2
PART I
ITEM 1. BUSINESS
Sylvan Inc. (Sylvan, the company) is the successor to the business of a
Pennsylvania corporation which was chartered in 1937 and consists of a number of
subsidiaries which are engaged in the production and distribution of mushroom
spawn and fresh mushrooms. The company was organized as a Delaware corporation
on March 27, 1989, under the name of Sylvan Foods Holdings, Inc. The company
became a Securities and Exchange Commission registrant in August 1990 pursuant
to the irrevocable distribution by the company's then majority shareholder, The
Prospect Group, Inc., of the shares of the company which it owned to its
shareholders. The company changed its name to Sylvan Inc. in July 1994 in
conjunction with the change of its state of incorporation to Nevada from
Delaware. The company's principal executive offices are at 333 Main Street, P.O.
Box 249, Saxonburg, PA 16056-0249.
Sylvan operates in two reportable business segments. It is the leading worldwide
producer of mushroom spawn (the equivalent of seed for mushrooms) and a major
distributor of a variety of other value-added products and services for use by
mushroom growers. It is also a producer of fresh mushrooms for sale to
retailers, distributors and processors of mushroom products in the United
States. Its growth strategy calls for devoting increased capital and management
resources to supplying its spawn and related value-added products and services
to suitable markets throughout the world.
Spawn Operations: Spawn products accounted for 66% of the company's total sales
in 1998 and 92% of its operating income. Spawn is produced by a process whereby
carefully maintained mushroom cultures are introduced into specific nutrient
media to produce inoculum suitable for commercial spawn production. The inoculum
is then combined with a sterile, grain-based substrate in a manner that promotes
the colonization of the mushroom cultures throughout the substrate. The
resulting culture-enriched substrate is measured into sterilized containers and
the filled containers are incubated in environmentally controlled growing rooms.
Once the incubation is complete, the containers are refrigerated until they are
shipped to customers who then initiate their crop production cycle by adding
this seed-like material to the composted growing medium from which the mushrooms
grow.
The company conducts its operations principally through subsidiaries in the
United States, Europe and Australia and is a leading producer and distributor of
mushroom spawn and various spawn-related products in each of the markets in
which it has a presence. End-stage spawn production in most of the company's
manufacturing facilities takes place in specialized pressure vessels in plants
which are operated pursuant to rigorous quality-control standards. Two plants
are located in the United States and one each in England, Ireland, the
Netherlands, France, Hungary and Australia. Sylvan's Irish, Dutch and Australian
plants function under arrangements whereby certain prominent mushroom growers in
each respective country possess minority ownership of the operating company.
The company also operates two state-of-the-art spawn inoculum production plants.
These facilities, located in Kittanning, Pennsylvania, and Langeais, France,
incorporate the industry's most advanced production techniques and each is
capable of supplying all of the company's inoculum requirements. In addition,
the company produces nutritional supplements for mushroom compost at a plant in
Des Moines, Iowa. The value of backlog orders for spawn products is
insignificant.
The company's investment in biotechnical research has resulted in refinements of
techniques for genetic analysis of mushroom strains and its research programs
have produced some strains which possess commercial suitability. Another
successful product is Sylvan casing inoculum (CI), a mushroom production
additive which is applied to the top layer of mushroom compost. It enables
mushroom farmers to get more crops per year from their investment in raw
materials and equipment by shortening the mushroom growing cycle and reducing a
crop's exposure to disease. In addition, Sylvan has distribution rights for
products manufactured by others, such as pest control agents, which are targeted
for use by mushroom growers.
Fresh Mushroom Operations: The mushroom segment of Sylvan's business
accounted for 34% of the company's total sales and 8% of its operating income.
Sylvan operates a mushroom farm located in Quincy, Florida, which is one of the
most modern and efficient mushroom production operations in North America. It
serves a strategic role for Sylvan as a
1
<PAGE> 3
resource for production process innovations. The facility includes an
advanced computer-controlled production system with which compost is processed
more efficiently than with conventional systems. The mushrooms produced there
are sold to supermarkets, food processors and distributors principally in the
mideastern and southeastern United States.
Mushrooms are grown indoors in a continuous production process which employs a
temperature- and humidity-controlled environment. Compost, produced from a
carefully formulated and monitored mixture of hay or straw, water and various
organic supplements, is pasteurized and spawn is added to it. The spawn
colonizes the compost and, after about four to five weeks, grows into
harvestable mushrooms which are packaged and shipped to users. The value of
backlog orders for mushroom products is insignificant.
Other Biological Products: As part of its spawn products segment, Sylvan's
production experience and research capabilities lend themselves to a variety of
commercially viable microbial production applications. The company collaborates
from time to time with several chemical, biotechnological and pharmaceutical
companies for the purpose of evaluating and promoting these capabilities. The
value of backlog orders for biological products is insignificant.
PERSONNEL
On January 3, 1999, Sylvan had approximately 925 full-time employees, of whom
about 695 were engaged in production activities and 230 in supervision, sales
and administration. On December 28, 1997, Sylvan had approximately 910 full-time
employees, of whom about 685 were engaged in production activities and 225 in
supervision, sales and administration.
The employees of the company's French subsidiary are subject to a national,
industry-wide collective bargaining agreement. The remainder of the company's
workforce is not subject to collective bargaining arrangements although one U.S.
facility, the Quincy fresh mushroom operation, has experienced labor organizing
efforts since 1996. (See information provided in Item 3, Legal Proceedings, on
page 4 hereof.) Management believes that its employee relations are good.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The amounts of revenue, operating income, and asset-related expenditures
attributable to each of the company's industry segments are set forth in Note 9
of the consolidated financial statements which are filed as part of this annual
report.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
The amounts of revenue and long-lived assets attributable to each of the
company's geographic areas are set forth in Note 9 of the company's consolidated
financial statements which are filed as part of this annual report.
COMPETITIVE CONDITIONS
No single customer accounted for 10% or more of Sylvan's consolidated net sales
in 1998.
Spawn and Spawn-Related Products: Sylvan believes that there are seven firms in
the United States and three firms in Canada which produce and market almost all
of the spawn used by North American mushroom growers. Among these firms,
Sylvan's principal North American competitors are Lambert Spawn Company and J.B.
Swayne Spawn Company. In addition, Vlasic Foods International and Amycel, Inc.
(a division of Monterey Mushrooms, Inc.) are major U.S. spawn producers, but
much of their production is consumed by their mushroom production affiliates.
Sylvan believes that its principal European competitors are Italspawn and Le
Lion. In addition, numerous smaller spawn producers operate in the United
States, Canada and in almost every European country. Sylvan competes in the
spawn market with strict quality, consistency and reliability standards and
through its availability of broad-based, post-sale product support services to
mushroom growers. Sylvan has, and is further developing, the network by which it
distributes its products and services throughout the world.
Fresh Mushrooms: Sylvan believes that the top two producers of mushrooms in the
United States, in order of size, are Vlasic Foods International and Monterey
Mushrooms, Inc. Sylvan's production levels are comparable to those of a group of
six to
2
<PAGE> 4
eight regional producers of substantial size. The balance of the U.S.
industry is fragmented, comprised of about 200 small producers throughout the
country. Quality, supply consistency and price are the principal competitive
factors in the mushroom business. Although Sylvan and its competitors have
established brand names, competition is principally at the grocery retailer or
wholesaler level, rather than at the consumer level. Competition outside of
North America is characterized primarily by the importation of processed
mushroom products into the United States and Canada. However, processed
mushrooms are not a material factor in Sylvan's current operations because
Sylvan competes primarily in the fresh mushroom market. Due to the fragility of
fresh mushrooms, Sylvan believes that the fresh mushroom market in the United
States is somewhat protected from direct non-North American competition. Fresh
mushrooms have limited shelf life, which, together with the relatively high cost
of refrigerated transportation, causes markets to be regional in nature.
However, for the same reasons, imbalances of supply and demand, from time to
time, can and do induce price fluctuations.
SEASONALITY
Spawn and spawn-related product sales are not seasonal, except to the extent
that they correlate to a mushroom grower's expectations of consumer demand for
mushrooms. Since mushrooms are grown indoors, mushroom production is not
particularly sensitive to many of the problems normally associated with
agricultural crops, such as production seasonality and dependence on weather.
However, mushrooms are susceptible to bacterial, fungal and viral contamination
which can reduce yields and affect sales and earnings for periods of weeks or
months. In addition, mushroom prices are typically softened by the increased
availability of a variety of other fresh fruits and vegetables during the summer
months.
RESEARCH
In 1998, Sylvan's research and development expenditures totaled $1.7 million, as
compared with $1.5 million in 1997 and $2.0 million in 1996. These expenditures
were focused on improving the consistency, reliability and customer satisfaction
for the company's existing products and the development of new products. The
company also utilizes contracted research efforts for specific studies which may
be commercially useful, but fall outside of the scope of its expertise or
capabilities. None of these projects currently constitute a material proportion
of the company's ongoing business.
PATENTS
The company does not believe that its ability to maintain or improve its
competitive position is dependent upon its patents. However, the company holds
several non-U.S. patents that cover a process and apparatus for the cultivation
of cells on solid substrates. The process and apparatus are used in conjunction
with laboratory and technical know-how of the production of mushroom spawn and
are the means by which most of Sylvan's spawn products are generated. The
patents were issued in various years from 1982 to 1986. In addition, Sylvan was
granted patents in 1994, 1996 and 1997 relating to a technology and process
which facilitate mushroom breeding and may be capable of enhancing the company's
strain development and improvement efforts. The company also holds a process
patent that was issued in 1988, relating to the production of its compost
nutritional supplements.
The company holds several Swiss patents which embody a process for commercially
producing spawn and spawn-related products and for the use of a variety of
nutrient substrates as incubation material for spawn. The process is not
currently employed by the company.
ENVIRONMENTAL MATTERS
Certain phases of the mushroom production process create discharges of
conventional pollutants and other organic materials. Expenditures will routinely
be required in order to enable the company's Quincy subsidiary to comply with
existing and future environmental laws and regulations.
3
<PAGE> 5
FINANCIAL INFORMATION
Information regarding Sylvan's financial performance is set forth herein
beginning on page F-1.
ITEM 2. PROPERTIES
Constructed in 1981 and expanded in 1990, the company operates a 43,000 square
foot spawn production facility located in Kittanning, Pennsylvania. Also located
in Kittanning are the company's 14,000 square foot inoculum production plant,
which opened in 1996, and a 22,000 square foot quality assurance facility which
opened in 1997. The company also operates a 49,000 square foot spawn plant in
Dayton, Nevada, which commenced commercial production in January 1993. In
addition, it leases a 12,000 square foot facility in Des Moines, Iowa, in which
it produces compost nutritional supplements, and 40,000 square feet at a former
mushroom farm located near Cabot, Pennsylvania, for various bioproducts
production and research operations.
The company's European operations in Langeais, France, include a 100,000 square
foot spawn production plant and an inoculum production plant, which opened in
1998, of a size similar to the Kittanning, Pennsylvania inoculum production
plant mentioned above. In addition, various spawn culture maintenance and
research operations are carried out in the Langeais inoculum production
facility. A 74,000 square foot spawn plant is operated in Yaxley, Peterborough,
England. Also at the site is a 1,500 square foot agricultural chemical
warehouse.
The company operates a 46,000 square foot spawn plant in Horst, Netherlands,
which commenced commercial production in January 1995. In addition, the company
has a 14,000 square foot spawn plant in Windsor, Australia, which opened in
1996; and a 16,000 square foot spawn plant near Budapest, Hungary, which opened
in 1997. A 15,500 square foot spawn plant is under construction in South Africa,
with commercial production expected to begin during the third quarter of 1999.
The company also acquired a 27,000 square foot spawn plant in Navan, Ireland, in
1998.
The company's mushroom farm in Florida, in which its compost preparation,
mushroom growing, packaging, warehousing, maintenance and administrative
activities are conducted, is 300,000 square feet in size and was constructed in
1981 and expanded in 1991.
The company owns its inoculum production plants, mushroom farm and the spawn
plants in the United States, England, France and Hungary. The company and its
joint venture partners own the spawn plants in the Netherlands, Australia and
Ireland. Incorporated into most of the company's plants are cold storage areas
and the company leases several small cold storage facilities to support its
sales operations in some of its North American and overseas market areas. The
spawn plants in England and in the Netherlands are the only properties that have
been mortgaged. The mortgages collateralize various construction loans.
ITEM 3. LEGAL PROCEEDINGS
The company's Quincy Corporation 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.
4
<PAGE> 6
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the last quarter of
the 1998 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names and ages of the executive officers in the
company indicating the positions and offices with the company held by each
person and each such person's most recent principal employment. There is no
arrangement or understanding between any executive officer and any other person
pursuant to which he was selected as an officer and no family relationship
exists among the company's officers and directors. The annual appointment of
officers is scheduled to occur on April 29, 1999, at the organizational meeting
of the board of directors, which follows the annual meeting of shareholders.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Dennis C. Zensen 60 Chairman of the Board,
President and Chief Executive Officer of Sylvan
Donald A. Smith 37 Chief Financial Officer of Sylvan
Fred Y. Bennitt 54 Secretary/Treasurer of Sylvan
Monir K. Elzalaki 43 President of Sylvan America
R. Scott Keefer 51 Chief Financial Officer of Sylvan America
Michael A. Walton 49 Manager of Sylvan's European Operations
</TABLE>
Biographical Information
Mr. Zensen was elected chairman of Sylvan in July 1990 and has served as a
director, president and chief executive officer of Sylvan since April 1989.
Mr. Smith was appointed chief financial officer of Sylvan in December 1998. He
joined the company in 1996 as manager of financial planning and analysis and was
named corporate controller in October 1997. Prior to that, he served as chief
financial officer of the company's Sylvan America, Inc. subsidiary from 1994 to
1996 and as controller of the company's former Moonlight Mushrooms, Inc.
subsidiary from 1989 through 1993.
Mr. Bennitt has served as secretary/treasurer of Sylvan since April 1989.
Mr. Elzalaki was named president of the company's Pennsylvania spawn production
subsidiary in March 1992 and president of the company's Nevada spawn production
subsidiary in December 1992 at the time of its creation. He joined the
Pennsylvania company as its director of sales and marketing in April 1990 and
served as vice president and general manager from September 1990 until his
appointment as president.
Mr. Keefer was appointed chief financial officer of the company's Sylvan
America, Inc. subsidiary in March 1998. Prior to joining Sylvan, Mr. Keefer
served as senior vice president of finance and chief financial officer of Calgon
Carbon Corporation from 1995 to 1997 and as vice president of finance and chief
financial officer of Quaker State Corporation from 1975 to 1995.
Mr. Walton was named manager of Sylvan's European operations in 1995. He joined
Sylvan in connection with the acquisition of Hauser Champignonkulturen AG
(Hauser) in June 1992. At the time, he was serving as managing director of
Hauser's U.K. subsidiaries and continued in that capacity until his present
appointment.
5
<PAGE> 7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Sylvan's common stock trades on The Nasdaq Stock Market(R) under the symbol
"SYLN." Set forth below are the high and low sales prices for Sylvan's common
stock for 1998 and 1997, as reported by The Nasdaq Stock Market(R).
1998 High Price Low Price
---- ---------- ---------
1st Qtr. 15-7/8 11-3/4
2nd Qtr. 18-3/4 13-3/4
3rd Qtr. 16-3/8 13-1/2
4th Qtr. 16-3/8 12-5/8
1997 High Price Low Price
---- ---------- ---------
1st Qtr. 13-1/4 11-1/2
2nd Qtr. 12-1/4 9
3rd Qtr. 15-3/8 10-1/2
4th Qtr. 15-5/8 12-1/4
(b) Holders of Common Equity
At year-end 1998, there were about 2,300 shareholders of record of Sylvan common
stock.
(c) Dividends
Sylvan has never paid cash dividends and currently has a policy of retaining its
earnings to fund operations and expansion. The company's revolving credit
agreement contains financial covenants which permit, but limit, the payment of
dividends by Sylvan.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a Five-Year Summary of Operating and Other Related Data with
respect to Sylvan.
6
<PAGE> 8
FIVE-YEAR SUMMARY OF OPERATING AND OTHER RELATED DATA
(In Millions Except Share Data)
<TABLE>
<CAPTION>
-------------------------- Fiscal Year Ended ----------------------------
1998 1997 1996 1995 1994(c)
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales $89.6 $81.6 $79.1 $75.8 $69.8
Operating income 11.1 11.5 10.6 11.9 11.2
Net income 6.3 6.5 7.8 6.5 6.4
Net income per common share - basic 0.98 1.01 1.23 (b) 1.04 1.03
Net income per common share - diluted 0.97 1.01 1.23 (b) 1.04 1.02
Weighted average shares - basic (a) 6,440,287 6,395,971 6,344,609 6,225,995 6,198,171
Weighted average shares - diluted (a) 6,533,740 6,406,544 6,354,379 6,251,015 6,223,499
BALANCE SHEET DATA:
Total assets $102.6 $93.7 $86.9 $81.8 $74.5
Long-term debt and other
long-term liabilities 38.4 36.4 34.3 35.6 35.9
Shareholders' equity 50.3 44.0 41.2 33.6 24.7
Working capital 18.9 16.9 12.7 10.6 9.0
Cash dividends per common share -- -- -- -- --
</TABLE>
- ---------------------
(a) Computation of weighted average number of shares outstanding restated to
conform with the provisions of SFAS No. 128, "Earnings per Share,"
adopted by the Company on December 28, 1997.
(b) See Notes 1 and 6 to the December 29, 1996 Consolidated Financial
Statements regarding the settlement of certain postretirement medical and
other benefit obligations.
(c) See Note 2 to the January 1, 1995 Consolidated Financial Statements
regarding the closure and sale of Moonlight Mushrooms, Inc.
7
<PAGE> 9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(In millions) -------------------- Fiscal Year Ended------------------
Jan. 3, 1999 Dec. 28, 1997 Dec. 29, 1996
------------ ------------- -------------
<S> <C> <C> <C>
NET SALES $ 89.6 $ 81.6 $ 79.1
OPERATING COSTS AND EXPENSES:
Cost of sales 52.8 47.3 45.3
Selling and administrative 18.7 16.7 16.9
Research and development 1.7 1.5 2.0
Depreciation 5.3 4.6 4.3
------ ------ -----
78.5 70.1 68.5
OPERATING INCOME 11.1 11.5 10.6
INTEREST EXPENSE, net 2.2 2.1 2.1
OTHER INCOME (EXPENSE) (0.1) - 2.3
------ ------ -----
INCOME BEFORE INCOME TAXES 8.8 9.4 10.8
PROVISION FOR INCOME TAXES 2.3 2.7 2.9
------ ------ -----
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 6.5 6.7 7.9
------ ------ -----
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 0.2 0.2 0.1
------ ------ -----
NET INCOME $ 6.3 $ 6.5 $ 7.8
====== ====== =====
</TABLE>
NET SALES
Consolidated net sales for 1998 were $89.6 million, a 10% increase when compared
with 1997 net sales of $81.6 million. Net sales increased 3% in 1997 when
compared with 1996 net sales of $79.1 million. International sales continued to
increase as a percentage of total net sales, climbing to 48% in 1998, compared
with 41% for 1997 and 40% for 1996. Although higher international sales expose
the company to larger currency translation fluctuations, the 1997 to 1998
currency translation difference was minimal. During 1998, the U.S. dollar
weakened 2% on average against the company's major foreign trading currencies.
Spawn and Spawn-Related Products: Net sales of spawn and spawn-related products
were $58.9 million in 1998, a 15% increase when compared with net sales of $51.4
million for 1997. Net sales for 1997 increased 2% over the $50.2 million for
1996. The 1998 increase was primarily due to two factors. The first factor was a
5% increase in the volume of spawn products shipped in 1998 over the 1997 total.
Europe recorded an 11% increase from 1997 to 1998, Australia a 14% increase and
the Americas a 2% decrease. Average spawn selling prices were 2% higher in the
Americas in 1998 versus 1997 due to the implementation of a price increase
during the second quarter of 1998. European spawn selling prices were
essentially the same as in 1997. The average spawn selling price in Australia
decreased by 12% when translated to U.S. dollars, as the impact of a second
quarter price increase was more than offset by an unfavorable currency rate
movement with respect to the Australian dollar. The second factor contributing
to sales increases in 1998 was a 76% increase in the sales of nutritional
8
<PAGE> 10
supplements and disease-control agents from 1997 levels. Sylvan's acquisition of
Tartarin S.A. in December 1997 and sales gains in the Americas accounted for
most of this increase. Nutritional supplements and disease-control agents
accounted for 13% of the company's total 1998 net sales.
Fresh Mushrooms: Sylvan's net mushroom sales increased in 1998 to $30.7 million,
primarily due to a 1% increase in pounds sold. Net mushroom sales were 2% higher
in 1998, when compared with 1997's net sales of $30.2 million, and 5% higher in
1997 when compared with 1996's net sales of $28.9 million. The average selling
price per pound for 1998 increased 0.5% when compared with 1997. The percentage
of total pounds sold to the fresh market in 1998 was 92%, which was lower than
the 94% in 1997, but the same as the 1996 proportion. These percentages
fluctuate with variations in quality, availability of supply and various other
competitive conditions. Production difficulties in 1998 reduced the quality and
the supply of Quincy's mushrooms, which contributed to the lower fresh market
percentage. Increased competition in Quincy's southeastern United States market
area added to the decline and this competition is expected to continue into
1999.
U.S. industry activity as a whole, as described in Department of Agriculture
crop reports, experienced an 11% increase in fresh mushroom sales in 1998,
reflecting a 12% increase in pounds sold and a 1% decrease in the average
selling price, when compared with 1997. There was a 3% increase in fresh
mushroom sales in 1997 over 1996. The USDA crop reports also indicated that
sales of processed mushrooms decreased 17% from 1997 to 1998 and 11% from 1996
to 1997.
COST OF SALES
The company's cost of sales, expressed as a percentage of sales, was 59% for
1998, 58% for 1997 and 57% for 1996. The 1998 increase was primarily caused by
higher production costs in the fresh mushroom business.
Spawn and Spawn-Related Products: The cost of sales percentage for 1998 was 52%,
as compared with 51% for both 1997 and 1996. This increase was primarily due to
increases in the proportion of sales of nutritional supplements and
disease-control agents, which have a higher cost of sales percentage than spawn
products. In 1998, Sylvan benefited from additional European spawn production
capacity, which eliminated the need to ship spawn from the company's U.S.
production facilities to accommodate the strong demand from European markets.
Discard percentages in North America were at historically low levels due to
improvements in inoculum quality. Overseas discard rates were comparable to
prior years with the exception of the Australia operation. The company has
decided to replace the Australian plant's blender in the first half of 1999 in
order to rectify production problems.
Fresh Mushrooms: The fresh mushroom cost of sales percentage was 76% for 1998,
as compared with 72% for 1997 and 70% for 1996. The 1998 increase was due to
various production inefficiencies in the second half of the year. These
inefficiencies contributed to production yield reductions, spreading a cost
structure that is primarily fixed in nature over fewer pounds.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were 21% of net sales for 1998, as compared
with 20% for 1997 and 21% for 1996. The company recorded a nonrecurring expense
of $0.6 million in 1998 to reflect the tentative settlement of two lawsuits.
Fees for legal services were also higher than in prior years, primarily due to
the lawsuits. Selling expenses were higher as the company implemented an
expansion into Eastern European and Asian markets. This expansion will continue
in 1999. Certain noncash expenses related to pension and other postretirement
benefits were lower in 1998 when compared with 1997 and 1996, and are expected
to decline further in 1999. In addition, bonus payments were reduced in 1998
from the levels paid in 1997 and 1996. Currency translation rates did not have a
material effect on selling and administrative expenses for 1998.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by 14% in 1998 to $1.7 million, when
compared with $1.5 million for 1997; and decreased by 26% in 1997 when compared
with 1996 totals. In 1996, research and development expenses reflected
9
<PAGE> 11
charges related to the company's development of a proprietary compost
nutritional supplement product that was successfully introduced commercially in
the second half of 1997.
DEPRECIATION EXPENSE
Depreciation expense was $5.3 million in 1998, a 14% increase over the $4.6
million reported for 1997, and an 8% increase in 1997 when compared with the
$4.3 million reported for 1996. The 1998 increase was a result of capital
expenditures that totaled $8.2 million in 1998 and $7.6 million in 1997.
Additionally, the second quarter 1998 acquisition of International Mushrooms
Limited added to the depreciation expense.
INTEREST EXPENSE
Net interest expense for 1998 was $2.2 million, as compared with $2.1 million
for both 1997 and 1996. The increase resulted from higher average borrowings for
1998, in spite of a lower average effective borrowing rate of 6.8%, as compared
with 6.9% for 1997 and 7.9% for 1996.
OTHER INCOME (EXPENSE)
The company reported a net $0.1 million other expense total for 1998, which was
comparable to the less than $0.1 million income reported in 1997, but
substantially lower than the $2.3 million reported for 1996. The 1996 total
included a $1.9 million nonrecurring gain from the settlement of certain
postretirement medical benefit claims.
INCOME TAX EXPENSE
The company's effective income tax rate for 1998 was 26%, compared with 29% for
1997 and 27% for 1996. The 1998 decrease resulted from the contribution of a
higher portion of the company's taxable income from European operating units, as
compared with the previous years. The rate is expected to increase in 1999 in
conjunction with profitability improvements of various foreign and domestic
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
Sylvan evaluates its liquidity and capital resources position by comparing its
investment requirements with its cash position, operating cash flow trends and
credit availability. Available credit under the company's $55.0 million
revolving credit arrangement was $25.4 million as of January 3, 1999. The
arrangement provides for a reduction of the total credit amount over a six-year
period, with the first reduction to $50 million effective August 6, 2003.
Net cash provided by operating activities was $10.2 million in 1999, as compared
with $10.4 million in 1997 and $6.4 million in 1996. Sylvan's net investment in
working capital (defined as the period-to-period change in the difference
between current assets and current liabilities) increased by $2.0 million in
1998, compared with the 1997 level. The components of this change were a $1.6
million decrease in net accounts receivable, a $0.8 million increase in
inventories, a $0.8 million increase in prepaid expenses and other assets, a
$1.5 million decrease in accrued employee benefits and a $0.3 million increase
in income taxes payable and other accrued liabilities.
Accounts receivable collection periods did not change significantly in 1998 from
those experienced in 1997. Most of the decrease in accounts receivable was due
to the collection of receivables by the company's Tartarin subsidiary that was
acquired in late 1997. This decrease more than offset the increases in
receivable balances that were driven by sales growth. Inventory levels increased
in most territories to support sales growth and the expansion of operations.
When expressed as days of inventory held, 1998 inventory was 68 days, compared
with 62 days in 1997 and 59 days in 1996. Prepaid expenses and other assets
increased by $0.8 million in 1998, compared with 1997, mainly in the company's
French subsidiaries, as receivables relating to interest income and value-added
taxes grew. Accounts payable and accrued liabilities decreased by $1.3 million
in 1998, primarily as a result of the settlement of trade payables in Tartarin.
Postretirement medical and other employee benefit liabilities decreased by $1.5
million, as a result of adjustments to defined benefit pension plan accruals and
10
<PAGE> 12
compensation accrual balances, mainly in U.S. operations. The company paid $0.6
million in self-insured workers' compensation in 1998, compared with $0.5
million in 1997 and $1.9 million in 1996. Payments for postretirement medical
benefits were $0.1 million in both 1998 and 1997. The company anticipates cash
outlays for self-insured workers' compensation of $0.2 million and for
postretirement medical benefits of $0.1 million in 1999.
Cash used in investing activities totaled $9.8 million in 1998, compared with
$11.6 million in 1997. In May 1998, the company acquired 90% of the issued share
capital of International Mushrooms Limited, based in Navan, Ireland, for $1.6
million. Major capital expenditures in 1998 included the construction of a new
inoculum production and quality assurance facility in France ($2.7 million), the
completion of additional spawn production and storage facilities in the
Netherlands ($0.6 million), and the construction of a new spawn production
facility in South Africa ($0.9 million). Replacement capital expenditures
represented less than 50% of the total. Capital expenditures in 1999 are
expected to range from $7 million to $11 million, highlighted by the completion
of the South African spawn production facility and the installation of a new
blender and growing and storage facilities in our recently acquired Irish
subsidiary. During 1998, the company repurchased 109,425 shares of Sylvan common
stock at an average price of $13.94 per share. The comparative amounts in 1997
were 34,200 shares at an average price of $11.07 per share. Management expects
to continue the repurchase program during 1999, subject to price and share
availability conditions that make such purchases financially beneficial and
appropriate.
Term debt and revolving credit obligations increased by $1.1 million in 1998,
compared with an increase of $3.3 million in 1997. The company routinely
assesses its requirements for additional capital investments as it experiences
continued growth in the company's international spawn business. The revolving
credit facility and net operating cash flows are expected to provide sufficient
funding for projected 1999 expenditures.
Sylvan currently does not pay a dividend on its common stock. Management may, in
the future, propose dividend payments after evaluating the company's current and
projected liquidity and financing requirements, subject to net worth covenants
contained in the company's revolving credit bank agreement.
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:
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 U.S. 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,
11
<PAGE> 13
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 Products 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 company is in the
process of identifying such third parties and will be sending inquiries to them
during the next few months. Based on the responses from those parties and the
responses to any follow-up inquiries, the company will evaluate the necessity
for contingency plans and, if such plans appear warranted, will revisit and
revise those plans, as necessary, this year.
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 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage this risk, the company enters into
various contracts and options. A discussion of accounting policies for
derivative instruments is included in Note 1 to the consolidated financial
statements and further disclosure is provided in Note 12.
12
<PAGE> 14
Foreign Currency Exchange Rate Risk: Note 9 of the consolidated financial
statements sets forth revenues for five years based on the location of the
company's customers. Sylvan has foreign currency exposures related to buying,
selling, and financing in currencies other than the U. S. dollar. This exposes
the company's future earnings, assets, liabilities, cash flow and financial
instruments that are denominated in foreign currencies. 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. Currently,
Sylvan does not believe that the conversion to the Euro will have a material
impact on its business or financial condition.
Sylvan believes that its most significant financial instrument rate exposure
relates to its activities in the Netherlands. As of January 3, 1999, the net
fair value liability of Dutch guilder denominated financial instruments was
approximately $7.5 million. The potential fair value loss of a hypothetical 10%
adverse change in the currency exchange rate would be approximately $750,000.
Interest Rate Risk: The company is subject to market risk from exposure to
changes in interest rates based on its financing practices. This risk is managed
by entering into a variety of financial instruments to maintain a desired level
of exposure. The net fair value liability at January 3, 1999 of all financial
instruments subject to interest rate exposures was approximately $29.6 million.
The table below provides information about the company's financial instruments
that are sensitive to interest rates. For debt obligations, the table presents
principal cash flow and related weighted average interest rates by expected
maturity dates. For interest rate swaps, the table presents notional amounts and
weighted average interest rates by expected maturity dates. Weighted average
interest rates are based on the three-month LIBOR rate in effect at the
reporting date. No future rate assumptions have been made.
<TABLE>
<CAPTION>
Expected Maturity Date for Periods Ended December 31,
-------------------------------------------------------------------------
1999 2000 2001 2002 2003 Thereafter Total Fair Value
---- ---- ---- ---- ---- ---------- ----- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities
Long term debt
Fixed rate $ 825 $ 3,134 $ 342 $ 197 $ 95 $ 1,190 $ 5,783 $ 5,783
Average interest rate 7.98% 8.01% 4.17% 7.21% 7.99% 8.53%
Variable rate $ 0 $ 0 $ 0 $ 0 $ 0 $ 29,627 $29,627 $29,627
Average interest rate 5.06% 5.06% 5.06% 5.06% 5.06% 5.06%
Interest rate swaps
Fixed to variable $10,000 $ 0 $ 0 $ 5,000 $ 0 $ 10,000 $25,000 $25,000
Average pay rate 6.05% 5.02% 5.78% 5.74%
Average receive rate 5.06% 5.06% 5.06%
</TABLE>
13
<PAGE> 15
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
From time to time in this report, references are made to expectations regarding
future performance of the company. Investors must recognize that events could
turn out to be significantly different from what is expected. The following
factors, among others, in some cases have affected and in the future could
affect the company's financial performance and could cause actual results to
differ materially from those expressed or implied in such forward-looking
statements:
o pricing or product initiatives of the company's competitors;
o changes in exchange risks with respect to the Euro and existing
currencies used in the company's markets;
o the loss of key executives or other employees of the company;
o failure to achieve production yield and quality expectations
from time to time; and
o unanticipated Year 2000 computer software exposures.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required is set forth as Exhibits beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
14
<PAGE> 16
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information required by this item is set forth under the caption "Election
of Directors" in Sylvan's definitive Proxy Statement to be filed pursuant to
Regulation 14A and is incorporated herein by reference.
(b) Identification of Executive Officers
The information required by this item is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption "Management
Compensation and Benefit Plans" in Sylvan's definitive Proxy Statement to be
filed pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in Sylvan's definitive
Proxy Statement to be filed pursuant to Regulation 14A and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Transactions with the Company" in Sylvan's definitive Proxy Statement to be
filed pursuant to Regulation 14A and is incorporated herein by reference.
15
<PAGE> 17
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2). FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and financial statement schedule listed in the
accompanying Index to Financial Statements, Schedules and Exhibits are
filed as part of this annual report.
(3). EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
3.1 Restated Certificate of Incorporation - previously filed as
Exhibit 3.2 on April 27, 1990 with the company's Form 8
Amendment to its Form 10 Registration Statement which was filed
on March 25, 1990 and is incorporated herein by reference
3.2 Bylaws - previously filed as Exhibit 3.2 on March 28, 1991 with
the company's Form 10-K Annual Report for the fiscal year ended
December 30, 1990 and are incorporated herein by reference
10.1 Compensation Plans and Arrangements - previously filed as (i)
Exhibit 10.3 on April 2, 1993 with the company's Form 10-K
Annual Report for the fiscal year ended January 2, 1994 and (ii)
Exhibit 10.1 on March 29, 1995 with the company's Form 10-K
Annual Report for the fiscal year ended January 1, 1995 and are
incorporated herein by reference
10.2 Material Contracts - (i) Revolving Credit Agreement dated as of
August 6, 1998 by and among Sylvan Inc., a Nevada corporation,
Sylvan Foods (Netherlands) B.V., a Dutch corporation, as
Borrowers, the Banks party thereto from time to time and Mellon
Bank, N.A., a national banking association, as issuing bank and
as agent for the Banks thereunder, together with various
annexes, exhibits and schedules and various related documents
previously filed on November 10, 1998 as Exhibits 10.1 through
10.10 with Sylvan's Form 10-Q Quarterly Report for the period
ended September 27, 1998 and are incorporated herein by
reference and (ii) Index of Other Exhibits to Revolving Credit
Agreement previously filed as Exhibit 10.11 with the above
referenced Form 10-Q Quarterly Report and is incorporated herein
by reference
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
21 Subsidiaries of the Registrant
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
16
<PAGE> 18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 25th day of March
1999.
By /s/ DENNIS C. ZENSEN
---------------------------
Dennis C. Zensen
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ DENNIS C. ZENSEN Chairman of the Board of March 25, 1999
- ------------------------------------------ Directors, President and ---------------------------
Dennis C. Zensen Chief Executive Officer
(Principal Executive Officer)
/s/ DONALD A. SMITH Chief Financial Officer March 25, 1999
- ------------------------------------------ (Principal Financial and ---------------------------
Donald A. Smith Accounting Officer)
/s/ WILLIAM L. BENNETT Director March 25, 1999
- ------------------------------------------ ---------------------------
William L. Bennett
/s/ MONIR K. ELZALAKI President, Sylvan America, Inc. March 25, 1999
- ------------------------------------------ Director ---------------------------
Monir K. Elzalaki
/s/ VIRGIL H. JURGENSMEYER Director March 25, 1999
- ----------------------------------------- ----------------------------
Virgil H. Jurgensmeyer
/s/ DONALD T. PASCAL Director March 25, 1999
- ------------------------------------------ ---------------------------
Donald T. Pascal
</TABLE>
17
<PAGE> 19
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
- ---------- ----------- --------
<S> <C> <C>
Consent of Independent Public Accountants F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at January 3, 1999, and
December 28, 1997 F-3
Consolidated Statements of Income for the Years Ended
January 3, 1999, December 28, 1997, and December 29, 1996 F-5
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended January 3, 1999, December 28, 1997,
and December 29, 1996 F-6
Consolidated Statements of Cash Flows for the Years Ended
January 3, 1999, December 28, 1997, and December 29, 1996 F-7
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts for the Years
Ended January 3, 1999, December 28, 1997, and December 29, 1996 F-26
Report of Independent Public Accountants on Financial Statement
Schedule F-27
3.1 Restated Certificate of Incorporation (a)
3.2 Bylaws (b)
10.1.1 Sylvan Foods Holdings, Inc. 1990 Stock Option Plan, as amended (c)
10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan (c)
10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for Nonemployee Directors (d)
10.2.1 Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc.
INC., a Nevada corporation, and SYLVAN FOODS (NETHERLANDS) B. V., a Dutch
corporation, as Borrowers; the Banks party thereto from time to time and MELLON
BANK, N.A., a national banking association, as issuing bank and as agent for the
Banks thereunder, together with various annexes, exhibits, and schedules (e)
10.2.2 Revolving Credit Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
amount of $25,000,000 (e)
10.2.3 Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO Bank,
Pittsburgh Branch, in the amount of $25,000,000 (e)
</TABLE>
18
<PAGE> 20
<TABLE>
<S> <C> <C>
10.2.4 Promissory Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
amount of $5,000,000 (e)
10.2.5 Mellon Global Cash Management ABS Agreement, dated August 6, 1998, by and
between Sylvan Inc. and Mellon Bank, N.A (e)
10.2.6 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan Inc. and Mellon Bank, N.A (e)
10.2.7 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan Foods, Inc. and Mellon Bank, N.A (e)
10.2.8 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan America, Inc. (a Pennsylvania corporation) and Mellon Bank, N.A (e)
10.2.9 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Sylvan America, Inc. (a Nevada corporation) and Mellon Bank, N.A (e)
10.2.10 Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
Quincy Corporation and Mellon Bank, N.A (e)
10.2.11 Index of Other Exhibits to the Revolving Credit Agreement referenced in Exhibit 10.1 (e)
21 Subsidiaries of the Registrant
</TABLE>
- ------------------
(a) This exhibit was previously filed on April 27, 1990 with the
company's Form 8 Amendment to its Form 10 Registration Statement
that was filed on March 25, 1990 and is incorporated herein by
reference.
(b) This exhibit was previously filed on March 28, 1991 with the
company's Form 10-K Annual Report for the fiscal year ended
December 30, 1990 and is incorporated herein by reference.
(c) This exhibit was previously filed on April 2, 1993 with the
company's Form 10-K Annual Report for the fiscal year ended
January 3, 1993 and is incorporated herein by reference.
(d) This exhibit was previously filed on April 1, 1994 with the
company's Form 10-K Annual Report for fiscal year ended January 2,
1994 and is incorporated herein by reference.
(e) This exhibit was previously filed on November 10, 1998 as Exhibits
10-1 through 10-11 with the company's Form 10-Q Quarterly Report
for the period ended September 27, 1998 and is incorporated herein
by reference.
19
<PAGE> 21
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in Sylvan Inc.'s Form 10-K of our reports included or incorporated by
reference in the Company's previously filed registration statements on Form S-8
(No. 33-46797 and No. 33-86332), including the prospectuses therein, relating
to the Company's 1990 Stock Option Plan and on Form S-8 (No. 33-83962),
including the prospectus therein, relating to the Company's 1993 Stock Option
Plan for Nonemployees Directors. It should be noted that we have not audited
any financial statements of the Company subsequent to February 5, 1999 or
performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
March 29, 1999
F-1
<PAGE> 22
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Sylvan Inc.:
We have audited the accompanying consolidated balance sheets of Sylvan Inc. (a
Nevada corporation) and Subsidiaries as of January 3, 1999 and December 28,
1997, and the related consolidated statements of income, changes in
shareholders' equity and cash flows for each of the three fiscal years in the
period ended January 3, 1999. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sylvan Inc. and
Subsidiaries as of January 3, 1999 and December 28, 1997, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 3, 1999, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Pittsburgh, Pennsylvania
February 5, 1999
F-2
<PAGE> 23
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
---------- ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,497 $ 5,567
Trade accounts receivable (less allowance
for doubtful accounts of $710 and
$812, respectively) 12,630 13,435
Inventories 9,820 8,723
Prepaid income taxes and other expenses 1,459 1,107
Other current assets 1,505 685
Deferred income tax benefit 856 686
-------- --------
Total current assets 32,767 30,203
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 3,016 2,999
Buildings 32,384 27,590
Equipment 47,168 40,363
-------- --------
82,568 70,952
Less- Accumulated depreciation (29,129) (23,324)
-------- --------
Total property, plant and equipment, net 53,439 47,628
-------- --------
INTANGIBLE ASSETS, net of accumulated
amortization of $3,249 and $2,647, respectively 12,218 11,466
OTHER ASSETS, net of accumulated amortization
of $1,711 and $1,473, respectively 4,126 4,383
-------- --------
TOTAL ASSETS $102,550 $ 93,680
======== ========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-3
<PAGE> 24
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
---------- ------------
<S> <C> <C>
CURRENT LIABILITIES:
Current portion of long-term debt $ 825 $ 448
Accounts payable - trade 5,341 5,643
Accrued salaries, wages and other employee benefits 2,504 3,323
Other accrued liabilities 2,150 1,434
Income taxes payable 3,041 2,416
-------- -------
Total current liabilities 13,861 13,264
-------- -------
LONG-TERM AND REVOLVING-TERM DEBT 34,586 32,690
-------- -------
OTHER LONG-TERM LIABILITIES:
Other employee benefits 1,054 1,767
Other 1,437 1,054
-------- -------
Total other long-term liabilities 2,491 2,821
-------- -------
MINORITY INTEREST 1,348 914
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares authorized,
6,637,201 and 6,589,784 shares issued and 6,387,336 and 6,449,344 shares
outstanding in 1998 and 1997, respectively 7 7
Common capital contributed in excess of par 16,443 15,638
Retained earnings 41,657 35,320
Less-Treasury stock, at cost, 249,865 and 140,440
shares in 1998 and 1997, respectively (2,318) (792)
-------- -------
55,789 50,173
Cumulative translation adjustment (2,122) (3,032)
Pension adjustment (3,403) (3,150)
-------- -------
Accumulated other comprehensive deficit (5,525) (6,182)
-------- -------
Total shareholders' equity 50,264 43,991
-------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $102,550 $93,680
======== =======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
<PAGE> 25
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
NET SALES $ 89,555 $ 81,560 $ 79,111
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales 52,749 47,256 45,262
Selling and administrative 18,710 16,719 16,922
Research and development 1,717 1,506 2,031
Depreciation 5,268 4,606 4,261
---------- ---------- ----------
78,444 70,087 68,476
---------- ---------- ----------
OPERATING INCOME 11,111 11,473 10,635
INTEREST EXPENSE, net 2,170 2,058 2,096
OTHER INCOME (EXPENSE) (116) 31 2,273
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 8,825 9,446 10,812
---------- ---------- ----------
PROVISION FOR INCOME TAXES:
Current 1,935 2,626 991
Deferred 344 113 1,901
---------- ---------- ----------
2,279 2,739 2,892
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 6,546 6,707 7,920
---------- ---------- ----------
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 209 225 101
---------- ---------- ----------
NET INCOME $ 6,337 $ 6,482 $ 7,819
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES 6,440,287 6,395,971 6,344,609
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 6,533,740 6,406,544 6,354,379
========== ========== ==========
NET INCOME PER SHARE - BASIC $ 0.98 $ 1.01 $ 1.23
========== ========== ==========
NET INCOME PER SHARE - DILUTED $ 0.97 $ 1.01 $ 1.23
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
<PAGE> 26
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED JANUARY 3, 1999,
DECEMBER 28, 1997, AND DECEMBER 29, 1996
(In Thousands Except Share Data)
<TABLE>
<CAPTION>
Common Common
Stock Capital
------------------ Contributed in Retained
Shares Amount Excess of Par Earnings
-------- ------ -------------- --------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 6,354,792 $6 $13,070 $21,019
Net income - - - 7,819
Exercise of stock options and stock
option compensation expense 125,300 - 1,307 -
Purchase of treasury stock - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - -
Minimum pension liability adjustment - - - -
--------- -- ------- -------
Comprehensive income
BALANCE, December 29, 1996 6,480,092 6 14,377 28,838
Net income - - - 6,482
Exercise of stock options 109,692 1 1,261 -
Purchase of treasury stock - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - -
Minimum pension liability adjustment - - - -
--------- -- ------- -------
Comprehensive income
BALANCE, December 28, 1997 6,589,784 7 15,638 35,320
Net income - - - 6,337
Exercise of stock options and stock
option compensation expense 47,417 - 805 -
Purchase of treasury stock - - - -
Other comprehensive income:
Foreign currency translation adjustment - - - -
Minimum pension liability adjustment - - - -
--------- -- ------- -------
Comprehensive income
BALANCE January 3, 1999 6,637,201 $7 $16,443 $41,657
========= == ======= =======
</TABLE>
<TABLE>
<CAPTION>
Accumulated
Other Total
Treasury Comprehensive Shareholders' Comprehensive
Stock Deficit Equity Income
-------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 $(281) $(179) $33,635
Net income - - 7,819 $7,819
Exercise of stock options and stock
option compensation expense - - 1,307
Purchase of treasury stock (133) (133)
Other comprehensive income:
Foreign currency translation adjustment - (1,839) (1,839) (1,839)
Minimum pension liability adjustment - 451 451 451
------- ------- ------- ------
Comprehensive income $6,431
======
BALANCE, December 29, 1996 (414) (1,567) 41,240
Net income - - 6,482 $6,482
Exercise of stock options - - 1,262
Purchase of treasury stock (378) - (378)
Other comprehensive income:
Foreign currency translation adjustment - (3,993) (3,993) (3,993)
Minimum pension liability adjustment - (622) (622) (622)
------- ------- ------- ------
Comprehensive income $1,867
======
BALANCE, December 28, 1997 (792) (6,182) 43,991
Net income - - 6,337 $6,337
Exercise of stock options and stock
option compensation expense - - 805
Purchase of treasury stock (1,526) - (1,526)
Other comprehensive income:
Foreign currency translation adjustment - 910 910 910
Minimum pension liability adjustment - (253) (253) (253)
------- ------- ------- ------
Comprehensive income $6,994
======
BALANCE January 3, 1999 $(2,318) $(5,525) $50,264
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-6
<PAGE> 27
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATIONS:
Net income $ 6,337 $ 6,482 $ 7,819
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 5,268 4,606 4,261
Amortization 839 631 677
Employee benefits (1,488) (757) (5,376)
Trade accounts receivable 1,557 (894) (1,311)
Inventories (757) (602) (518)
Prepaid expenses (1,119) (87) (295)
Other assets 309 1,442 393
Accounts payable, accrued expenses
and other liabilities (1,311) (806) (972)
Income taxes payable 519 423 1,103
Minority interest 302 225 485
Other (234) (246) 111
------- ------- -------
Net cash provided by operations 10,222 10,417 6,377
------- ------- -------
CASH FLOWS FROM INVESTING:
Expenditures for property, plant and equipment (8,195) (7,647) (9,980)
Payment for acquisition, net of cash acquired (1,619) (3,923) -
------- ------- -------
Net cash used in investing (9,814) (11,570) (9,980)
------- ------- -------
CASH FLOWS FROM FINANCING:
Principal payments on long-term debt (679) (425) (5,579)
Net borrowings under revolving credit loan 1,756 3,734 8,346
Proceeds from exercise of stock options 546 1,125 948
Purchase of treasury shares (1,525) (379) (133)
------- ------- -------
Net cash provided by financing 98 4,055 3,582
------- ------- -------
EFFECT OF EXCHANGE RATES ON CASH 424 (1,555) (1,134)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 930 1,347 (1,155)
CASH AND CASH EQUIVALENTS, beginning of period 5,567 4,220 5,375
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period $ 6,497 $ 5,567 $ 4,220
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 1,964 $ 2,352 $ 2,078
Income taxes paid 2,478 2,038 2,022
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCIAL ACTIVITIES:
ACQUISITION OF BUSINESSES:
Fair value of assets acquired $ 4,492 $ 5,619 $ -
Cash paid for the capital stock (1,619) (3,923) -
------- ------- -------
Liabilities assumed $ 2,873 $ 1,696 $ -
======= ======= =======
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-7
<PAGE> 28
SYLVAN INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Period
The Company maintains its accounting records on a 52-53 week fiscal year ending
the Sunday nearest December 31. The 1998 fiscal year was 53 weeks, the 1997 and
1996 fiscal years were 52 weeks.
Principles of Consolidation
The accounts of majority owned or controlled subsidiaries are included in the
Company's statements only for the period subsequent to their acquisition. All
material intercompany transactions and balances have been eliminated in
consolidation.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
All cash equivalents are stated at cost, which approximates market. The Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents. In addition, included in other assets is
a pledged, interest-bearing cash balance of approximately $2.7 million
maintained by a U.S. bank.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
The Company's property, plant and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful lives.
Upon disposal of property items, the asset and related accumulated depreciation
accounts are relieved of the amounts recorded therein for such items and any
resulting gain or loss is reflected in income.
For financial reporting purposes, the Company considers its depreciable assets
to have the following useful lives:
F-8
<PAGE> 29
Land improvements 10-20 years
Buildings 30-40 years
Equipment 2-15 years
Intangible Assets
Intangible assets consist of the excess of cost over net assets of acquired
companies and are being amortized over 30 years or less. Subsequent to its
acquisitions, the Company continually evaluates whether later events and
circumstances have occurred that indicate that the remaining estimated useful
life of goodwill may warrant revision or that the remaining balance of
intangible assets may not be recoverable. When factors indicate that intangible
assets should be evaluated for possible impairment, the Company will use an
estimate of the relevant undiscounted cash flows over the remaining life of the
goodwill in measuring whether the goodwill is recoverable. The Company's
evaluations have not resulted in any revision to goodwill or its related
amortization period.
Other Income
Included in other income for the year ended December 29, 1996, is the gain of
$1.9 million from the settlement of litigation related to postretirement medical
benefits for hourly employees of its defunct Moonlight Mushrooms, Inc.
subsidiary (Moonlight).
Research and Development
Research and development costs are expensed as incurred.
Foreign Currency Translation
The financial statements of all foreign operations are translated using the
standards established by Statement of Financial Accounting Standards (SFAS) No.
52, "Foreign Currency Translation."
Assets and liabilities of non-U.S. operations are translated into U.S. dollars
using year-end exchange rates, while revenues and expenses are translated at the
average exchange rates for the year. The resulting net translation adjustments
are recorded as a separate component of shareholders' equity.
Transaction gains and losses are reflected in income.
F-9
<PAGE> 30
Foreign Currency Exchange Risk Management
The Company evaluates and hedges foreign currency exchange risk exposure on a
transaction-by-transaction basis. As of January 3, 1999, the Company had no
outstanding foreign currency exchange contracts.
Highly Inflationary Currency
Beginning in 1998, the company categorized Turkey as highly inflationary and,
therefore, the U.S. dollar is the financial currency. Turkish operations are not
material to the Company as a whole.
Interest Rate Risk Management
The Company uses interest rate swap agreements to convert a portion of its
floating rate debt to a fixed rate basis, thus reducing the impact of interest
rate changes on future results. The Company has these agreements with its banks
as counterparties. The agreements replace the floating (Euro-rate) LIBOR basis
with a 90-day fixed LIBOR basis as described in the table below. At the end of
each 90-day period, the Company and its counterparties make appropriate payments
to settle the difference between the floating rate LIBOR and the fixed rate
LIBOR. When the floating rate LIBOR exceeds the fixed rate LIBOR at the
beginning of a 90-day term, the counterparties will pay the difference between
the rates for the appropriate notional amount to the Company. Conversely, when
the fixed rate exceeds the floating rate, the Company will pay its
counterparties. Amounts receivable or payable under these swap agreements are
recorded as an adjustment to interest expense. The Company's contractual swap
agreements as of January 3, 1999, are as follows:
<TABLE>
<CAPTION>
Notional Origination Expiration Fixed
Amount Date Date Rate
----------- --------------- --------------- -----
<S> <C> <C> <C>
$ 5,000,000 October 3, 1997 October 4, 1999 6.08%
5,000,000 October 29,1997 October 29,1999 6.03%
10,000,000 August 25, 1998 August 25, 2007 5.78%
5,000,000 October 4, 1999 October 4, 2002 5.02%
</TABLE>
Recent Pronouncements
During 1998, the Company adopted several accounting pronouncements. SFAS No.
130, "Reporting Comprehensive Income," requires the components of comprehensive
income to be disclosed in the financial statements, which the company has
disclosed in the consolidated statements of changes in shareholders' equity.
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires certain information to be reported about operating
segments on a basis consistent with the Company's internal organizational
structure. SFAS No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits," revises the disclosures for pensions and other
postretirement benefits and standardizes them into a combined format. Required
disclosures have been made and prior years' information has been reclassified
for the impact of these 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
F-10
<PAGE> 31
will be effective for all fiscal quarters and fiscal years beginning after June
15, 1999. The Company has not completed the process of evaluating the impact
that will result from adopting SFAS No. 133.
Earnings Per Common Share
During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
per Share." Under SFAS No. 128, earnings per share are categorized as basic
earnings per share and diluted earnings per share. Basic earnings per share
includes only the weighted average common shares outstanding. Diluted earnings
per share includes the weighted average common shares outstanding and any
dilutive common stock equivalent shares. Treasury shares are treated as retired
for the purpose of the earnings per share calculation. All prior periods have
been restated to reflect this adoption.
The following table reflects the calculation of earnings per share under SFAS
No. 128 (in thousands except share data):
<TABLE>
<CAPTION>
January 3, December 28, December 29,
1999 1997 1996
---------- ------------ ------------
<S> <C> <C> <C>
Basic Earnings Per Share:
Net income $ 6,337 $ 6,482 $ 7,819
---------- ---------- ----------
Average shares outstanding 6,440,287 6,395,971 6,344,609
---------- ---------- ----------
Earnings per share $ 0.98 $ 1.01 $ 1.23
========== ========== ==========
Diluted Earnings Per Share:
Net income $ 6,337 $ 6,482 $ 7,819
Average shares outstanding 6,440,287 6,395,971 6,344,609
Stock options outstanding 93,453 10,573 9,770
---------- ---------- ----------
Diluted average shares outstanding 6,533,740 6,406,544 6,354,379
---------- ---------- ----------
Earnings per share $ 0.97 $ 1.01 $ 1.23
========== ========== ==========
</TABLE>
2. ACQUISITIONS:
In May 1998, the Company acquired 90% of the capital stock of International
Mushrooms Limited, a company incorporated in Ireland, that manufactures and
distributes mushroom spawn. The purchase price was $1.6 million. This
acquisition has been accounted for as a purchase transaction. As a result of
purchase price allocations, the purchase price exceeded the fair value of net
assets acquired by $0.8 million, which will be amortized over 20 years.
In December 1997, the Company acquired all of the issued share capital of
Tartarin S.A., a French distributor of compost nutritional supplements and
disease-control agents. The purchase price was $3.9 million. This acquisition
has been accounted for as a purchase transaction. As a result of purchase price
allocations, the purchase price exceeded the fair value of net assets acquired
by approximately $2.9 million which will be amortized over 20 years.
Had the acquisitions taken place at the beginning of 1998 and 1997,
respectively, the pro forma impact on sales, net income and diluted earnings per
share would not be materially different from the amounts reported.
F-11
<PAGE> 32
3. INVENTORIES:
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
January 3, December 28,
1999 1997
---------- ------------
<S> <C> <C>
Growing crops and compost material $4,882 $3,757
Stores and other supplies 1,632 2,023
Mushrooms and spawn on hand 3,306 2,943
------ ------
$9,820 $8,723
====== ======
</TABLE>
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:
The Company has a Revolving Credit Agreement (the 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:
<TABLE>
<CAPTION>
Maximum Aggregate
Period Beginning Outstanding Balance
---------------- -------------------
<S> <C>
August 6, 1998 $55.0 million
August 6, 2003 50.0 million
August 6, 2004 45.0 million
</TABLE>
Outstanding borrowings under the Agreement bear interest at either the Prime
Rate or LIBOR (plus an applicable margin), at the Company's option. On January
3, 1999, the Company had outstanding borrowings under the Agreement of $29.6
million. The revolving credit loans mature on August 5, 2005. The Company
intends to extend the terms of the revolving credit agreement or secure a
similar arrangement through August 2007, which is concurrent with the expiration
date of the longest term interest rate swap.
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.
In 1995, the Company obtained Dutch guilder financing for the acquisition of
plant and machinery in the Netherlands. Loans outstanding under this agreement,
amounting to approximately $1.9 million, are repayable in quarterly installments
over periods between three and eighteen years. Interest is payable with each
installment at a fixed rate of between 8.35% and 8.55% until 2000, after which
the interest rate may vary. The Company has granted a security interest over
certain Dutch assets to secure these borrowings.
The Company has a French-franc-denominated loan of FF15.0 million (approximately
$2.7 million). Interest is payable based on a formula that utilizes a Paris
Interbank Offer Rate plus an applicable margin. Repayment is due in January
2000. The loan is supported by a letter of credit.
F-12
<PAGE> 33
The Company incurred approximately $2.1 million in gross interest expense during
1998 at a weighted average interest rate of 6.78%. The contractual principal
payments due under the Company's loan agreements are as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
1999 $ 825
2000 3,134
2001 343
2002 197
2003 95
Thereafter 30,817
-------
Total $35,411
=======
</TABLE>
5. ACCRUED SALARIES, WAGES AND OTHER EMPLOYEE BENEFITS:
Accrued salaries, wages and other employee benefits are composed of the
following (in thousands):
<TABLE>
<CAPTION>
January 3, 1999 December 28, 1997
--------------- -----------------
<S> <C> <C>
Accrued compensation $1,536 $2,153
Accrued vacation 713 610
Other 255 560
------ ------
Total $2,504 $3,323
====== ======
</TABLE>
F-13
<PAGE> 34
6. INCOME TAXES:
The Company files a consolidated U.S. federal income tax return with its wholly
owned U.S. subsidiaries. The Company does not provide for federal income taxes
on unremitted earnings of non-U.S. subsidiaries.
The amounts of income before income taxes attributable to domestic and foreign
operations are as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 3, 1999 December 28, 1997 December 29, 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Domestic $2,417 $2,807 $ 5,783
Foreign 6,408 6,639 5,029
------ ------ -------
Total $8,825 $9,446 $10,812
====== ====== =======
</TABLE>
The provision (benefit) for income taxes consists of the following (in
thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 3, 1999 December 28, 1997 December 29, 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Current-
Federal $ 150 $ 668 $ 11
State (31) 74 248
Foreign 1,816 1,884 732
Deferred-
Federal 354 119 1,895
State (10) (6) 6
Foreign - - -
------ ------ -------
$2,279 $2,739 $ 2,892
====== ====== =======
</TABLE>
F-14
<PAGE> 35
A reconciliation between income taxes computed by applying the statutory U.S.
federal income tax rate to income before income taxes and the actual provision
for income taxes is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 3, 1999 December 28, 1997 December 29, 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Income tax at U.S.
federal statutory rate $3,000 $3,212 $ 3,642
State income taxes,
net of federal
income tax benefit (21) 49 164
Foreign taxes at rates
other than
effective U.S. rates (490) (382) (825)
Net (permanent benefits)
nondeductible charges (259) (22) (24)
Other, net 49 (118) (65)
------ ------ -------
Total provision for
income taxes $2,279 $2,739 $ 2,892
====== ====== =======
</TABLE>
The sources of deferred income taxes consist of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
January 3, 1999 December 28, 1997 December 29, 1996
--------------- ----------------- -----------------
<S> <C> <C> <C>
Workers' compensation $ 226 $ 201 $ 66
Depreciation 248 72 130
OPEB 38 (36) 1,613
Other, net (168) (124) 92
------ ------ -------
$ 344 $ 113 $ 1,901
====== ====== =======
</TABLE>
F-15
<PAGE> 36
Temporary differences which generate significant portions of the Company's
deferred tax assets and liabilities as of January 3, 1999, and December 28,
1997, were (in thousands):
<TABLE>
<CAPTION>
January 3, 1999 December 28, 1997
--------------- -----------------
<S> <C> <C>
Postretirement benefits other than pensions $ (364) $ (402)
Depreciation 3,691 3,443
Workers' compensation (109) (335)
Net operating loss carryforwards (610) (964)
Other, net (669) (501)
------ ------
Total 1,939 1,241
Less- Valuation allowance 610 964
------ ------
Net deferred tax liability $2,549 $2,205
====== ======
</TABLE>
Included in net deferred tax liabilities at January 3, 1999, are unrealized tax
benefits amounting to $0.6 million related to net operating loss carryforwards.
The realization of these tax benefits is contingent on future taxable net income
being generated by certain foreign operations. The life of the carryforwards is
determined by various foreign taxation jurisdictions, and will expire over
periods ranging from one year to an indefinite period. The Company has
recognized a valuation allowance that reduces the carrying value of unrealized
net deferred tax benefits relating to net operating loss carryforwards to offset
the deferred tax benefits that may not be realized.
7. EMPLOYEE BENEFITS:
The Company has a noncontributory defined benefit pension plan covering
substantially all of the former employees of Moonlight and certain employees of
Sylvan Foods, Inc. and Sylvan America, Inc., wholly owned subsidiaries of the
Company. The Company's funding policy is to contribute annually an amount that
satisfies the minimum funding requirement under the Employee Retirement Income
Security Act and that is also deductible for federal income tax purposes.
F-16
<PAGE> 37
The accumulated benefit obligation at January 3, 1999 and December 28, 1997, was
$33.9 million and $33.4 million, respectively, all of which was fully vested.
The plan's assets consist primarily of U.S. government obligations, temporary
deposits, common stocks and corporate obligations.
The plan's funded status and amounts recognized in the Company's consolidated
financial statements, together with the accumulated postretirement benefit
obligations related to the former Moonlight operations, are set forth in the
following table (in thousands):
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------ -------------------------------------------
January 3, December 28, December 29, January 3, December 28, December 29,
1999 1997 1996 1999 1997 1996
---------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Change in benefit obligation:
Benefit obligation at beginning of year $33,413 $30,144 $29,882 $ 714 $ 800 $ 4,341
Interest cost 2,093 2,100 2,083 47 56 181
Plan amendments - - - - (42) -
USWA settlement - - - - - (4,605)
Actuarial (gain) loss 726 3,371 52 27 (11) 1,231
Benefits paid (2,346) (2,202) (1,873) (72) (89) (348)
------- ------- ------- ------- ------- -------
Benefit obligation at end of year $33,886 $33,413 $30,144 $ 716 $ 714 $ 800
======= ======= ======= ======= ======= =======
Change in plan assets:
Fair value of plan assets at
beginning of year $33,089 $30,142 $29,473 $ - $ - $ -
Actual return on plan assets 3,124 5,149 2,542 - - -
Employer contributions - - - 72 89 348
Benefits paid (2,346) (2,202) (1,873) (72) (89) (348)
------- ------- ------- ------- ------- -------
Fair value of plan assets at end of
year $33,867 $33,089 $30,142 $ - $ - $ -
======= ======= ======= ======= ======= =======
Reconciliation of funded status:
Funded status $ (19) $ (324) $ (2) $ (716) $ (714) $ (800)
Unrecognized net actuarial (gain)
or loss 4,704 4,451 3,828 (251) (293) (296)
Unrecognized prior service cost - - - (68) (74) (34)
------- ------- ------- ------- ------- -------
Prepaid (accrued) benefit liability $(4,685) $(4,127) $(3,826) $(1,035) $(1,081) $(1,130)
======= ======= ======= ======= ======= =======
Weighted-average assumptions as of end
of fiscal year:
Discount rate 6.50% 6.50% 7.25% 7.00% 7.00% 7.50%
Expected return on plan assets 9.00% 9.00% 9.00% - - -
Rate of compensation increase - - - - - -
Component of net periodic pension cost
(income):
Interest cost $ 2,093 $ 2,100 $ 2,083 $ 47 $ 56 $ 181
Expected return on plan assets (2,689) (2,426) (2,399) - - -
Amortization of prior service cost - - - (6) (2) (10)
Recognized net actuarial (gain) loss 37 26 30 (15) (14) (32)
------- ------- ------- ------- ------- -------
Net periodic benefit cost (income) $ (559) $ (300) $ (286) $ 26 $ 40 $ 139
======= ======= ======= ======= ======= =======
</TABLE>
F-17
<PAGE> 38
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------------------ -------------------------------------------
January 3, December 28, December 29, January 3, December 28, December 29,
1999 1997 1996 1999 1997 1996
---------- ------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Amounts recognized in the consolidated
balance sheet consist of:
Accrued benefit liability $ (19) $ (324) $ (2) $(1,035) $(1,081) $(1,130)
Accumulated other comprehensive
income 4,704 4,451 3,828 - - -
-------------------------------------- ---------------------------------------
Net amount recognized at year end $ 4,685 $ 4,127 $ 3,826 $(1,035) $(1,081) $(1,130)
====================================== =======================================
Other comprehensive income
attributable to change in additional
minimum liability recognition $ 253 $ 622 $ (451) - - -
Additional year-end information for pension
plans with accumulated benefit
obligations in excess of plan assets:
Projected benefit obligation $33,886 $33,413 $30,144 - - -
Accumulated benefit obligation $33,886 $33,413 $30,144 - - -
Fair value of plan assets $33,867 $33,089 $30,142 - - -
Assumed health care cost trend:
Initial trend rate - - - 7.12% 7.50% 7.50%
Ultimate trend rate - - - 5.25% 5.25% 5.25%
Year ultimate trend reached - - - 2003 2003 2003
A one-percentage-point change in
the assumed health care cost trend
rates would have the following effects:
</TABLE>
<TABLE>
<CAPTION>
One Percentage One Percentage
Point Increase Point Decrease
------------------------------------------------
<S> <C> <C>
Effect on total of service and
interest cost components for 1998 $ 4 $ (3)
Effect on 1998 postretirement
benefit obligation $ 64 $ (56)
</TABLE>
On October 31, 1996, the Company negotiated a settlement related to
postretirement medical benefits for hourly retirees of its former Moonlight
subsidiary. Under the settlement, the Company made a $1.2 million lump-sum
payment to the United Steelworkers of America AFL-CIO-CLC (USWA) in exchange for
the USWA's release of certain employment and benefit-related claims of the
Moonlight hourly retirees for current and future periods, and the assumption by
the USWA of the administration of the applicable benefit programs. A noncash
gain of $1.9 million resulted from the settlement of liabilities for
postretirement medical benefits that had been recorded in the financial
statements. The remaining liability as of January 3, 1999, represents
postretirement medical benefits of Moonlight's salaried retirees.
F-18
<PAGE> 39
8. STOCK OPTIONS:
In June 1991, the shareholders approved a stock option plan (the 1990 Plan) for
employees and others who perform substantial services for the Company covering
600,000 shares of common stock, and subsequently approved the use of an
additional 600,000 shares by the 1990 Plan in June 1995. In June 1993, the
shareholders approved a stock option plan (the 1993 Plan) for nonemployee
directors of the Company, covering 100,000 shares of common stock. The Company
accounts for both plans under the Accounting Principles Board Opinion No. 25,
under which no compensation cost is recognized for options granted at fair
market value. Had compensation cost for this plan been determined in accordance
with SFAS No. 123, "Accounting for Stock-Based Compensation," the Company's net
income and earnings per share (EPS) would have been reduced to the following pro
forma amounts (in thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C> <C>
Net Income: As Reported $6,337 $6,482 $7,819
Pro Forma 5,938 6,224 7,603
Diluted EPS: As Reported $ 0.97 $ 1.01 $ 1.23
Pro Forma 0.91 0.97 1.17
</TABLE>
The Company's Board of Directors, through its Stock Option and Compensation
Committee (the Board) may grant options for up to 1.2 million shares under the
1990 Plan and up to 100,000 shares under the 1993 Plan. The Board has granted
options (net of cancellations) for 1,193,750 shares through January 3, 1999,
under the 1990 Plan, and 68,000 shares under the 1993 Plan. Under both plans,
the option exercise price typically equals the stock's market price on date of
grant. The 1993 Plan options are exercisable six months from the grant date and
expire ten years after the grant. The 1990 Plan options are generally
exercisable one year from the grant date in installments over a period of three
to four years and expire after ten years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions used for grants made in 1998, 1997 and 1996, respectively: risk-free
interest rates of 5.08%, 5.87% and 6.47%; no expected dividend yields; expected
lives of 8.0, 8.0 and 6.3 years; expected volatility of 31%, 29% and 20%.
F-19
<PAGE> 40
A summary of the status of the Company's stock option plans at January 3, 1999,
December 28, 1997, and December 29, 1996, and changes during the years then
ended is presented in the table and narrative below (shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ----------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 614 $10.88 629 $10.36 680 $ 9.78
Granted 212 13.82 120 12.84 81 10.95
Exercised (47) 10.50 (110) 10.26 (125) 7.57
Forfeited (10) 12.88 (25) 9.55 (7) 10.38
--- ------ --- ------ --- ------
Outstanding at end of year 769 11.69 614 10.88 629 10.36
--- ------ --- ------ --- ------
Exercisable at end of year 462 10.60 395 10.26 402 10.03
Weighted average fair value
of options granted $ 6.60 $ 6.22 $ 4.08
</TABLE>
The 769,342 options outstanding under both plans at January 3, 1999, have
exercise prices of between $8.00 and $15.00 per share, with a weighted average
exercise price of $11.69 and a weighted average remaining contractual life of
7.1 years. 462,429 of these options are exercisable. The remaining 306,913
options have exercise prices between $10.31 and $15.00, with a weighted average
exercise price of $13.34 and a weighted average contractual life of 9.4 years.
9. NATURE OF OPERATIONS AND BUSINESS SEGMENT INFORMATION:
The Company has two reportable business segments: spawn and 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 the
manufacture and distribution of casing inoculum, nutritional supplements and
disease-control agents. The fresh mushrooms business segment is comprised of a
large, regional producer of fresh mushrooms.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company evaluates the
performance of each segment based on profit or loss from operations. The Company
accounts for intersegment sales at a transfer price that approximates an arms
length sale to an unrelated third party.
F-20
<PAGE> 41
The Company's reportable segments are strategic business units that offer
different products and serve different customers. They are managed separately
since each business requires different technology, techniques and marketing
strategies.
<TABLE>
<CAPTION>
Spawn Fresh
Products Mushroom
(in Thousands) Segments Segment Total
---- -------- -------- --------
<S> <C> <C> <C> <C>
Total revenues 1998 $59,968 $30,708 $ 90,676
1997 52,079 30,209 82,288
1996 50,921 28,874 79,795
1995 45,028 31,428 76,456
1994 39,595 30,961 70,556
Intersegment revenues 1998 $ 1,121 $ - $ 1,121
1997 728 - 728
1996 684 - 684
1995 705 - 705
1994 717 - 717
Depreciation expense 1998 $ 3,626 $ 1,569 $ 5,195
1997 3,012 1,499 4,511
1996 2,722 1,425 4,147
1995 2,297 1,622 3,919
1994 1,774 1,584 3,358
Segment operating income 1998 $12,850 $ 1,107 $ 13,957
1997 12,425 2,867 15,292
1996 11,530 3,039 14,569
1995 9,830 5,428 15,258
1994 8,697 6,198 14,895
Net fixed assets expenditures 1998 $ 7,545 $ 563 $ 8,108
1997 6,278 1,287 7,565
1996 8,167 1,715 9,882
1995 5,835 1,253 7,088
1994 6,671 785 7,456
Assets 1998 $82,468 $21,584 $104,052
1997 71,770 23,186 94,956
1996 65,659 22,936 88,595
1995 60,693 22,700 83,393
1994 53,222 23,038 76,260
</TABLE>
F-21
<PAGE> 42
Reconciliation to Consolidated Financial Data
<TABLE>
<CAPTION>
(in Thousands) 1998 1997 1996 1995 1994
-------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenues:
Total revenues for reportable segments $ 90,676 $82,288 $79,795 $76,456 $70,556
Elimination of intersegment revenues (1,121) (728) (684) (705) (717)
-------- ------- ------- ------- -------
Total consolidated revenues $ 89,555 $81,560 $79,111 $75,751 $69,839
======== ======= ======= ======= =======
Depreciation Expense:
Total depreciation expense for
reportable segments $ 5,195 $ 4,511 $ 4,147 $ 3,919 $ 3,358
Unallocated corporate depreciation
expenses 73 95 114 48 26
-------- ------- ------- ------- -------
Total consolidated depreciation expense $ 5,268 $ 4,606 $ 4,261 $ 3,967 $ 3,384
======== ======= ======= ======= =======
Operating Income:
Total operating income for reportable
segments $ 13,957 $15,292 $14,569 $15,258 $14,895
Unallocated corporate expenses (2,846) (3,819) (3,934) (3,404) (3,742)
-------- ------- ------- ------- -------
Total consolidated operating income $ 11,111 $11,473 $10,635 $11,854 $11,153
======== ======= ======= ======= =======
Net Fixed Asset Expenditures:
Total net fixed asset expenditures for
reportable segments $ 8,108 $ 7,565 $ 9,882 $ 7,088 $ 7,456
Unallocated corporate net fixed asset
expenditures 87 82 98 49 27
-------- ------- ------- ------- -------
Total consolidated net fixed asset
expenditures $ 8,195 $ 7,647 $ 9,980 $ 7,137 $ 7,483
======== ======= ======= ======= =======
Segment Assets:
Total assets for reportable segments $104,052 $94,956 $88,595 $83,393 $76,260
Elimination of unallocated corporate
assets (1,502) (1,276) (1,683) (1,609) (1,768)
-------- ------- ------- ------- -------
Total consolidated assets $102,550 $93,680 $86,912 $81,784 $74,492
======== ======= ======= ======= =======
</TABLE>
F-22
<PAGE> 43
Geographic Analysis of Revenues Based on Location of Customer
<TABLE>
<CAPTION>
(in Thousands) United States United Other Foreign
of America Kingdom Netherlands Countries TOTAL
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $46,012 $ 9,838 $ 9,768 $23,937 $89,555
1997 44,073 10,782 9,213 17,492 81,560
1996 42,987 9,428 10,589 16,107 79,111
1995 43,717 9,196 9,905 12,933 75,751
1994 42,379 7,838 8,233 11,389 69,839
</TABLE>
Geographic Analysis of Net Long-Lived Assets
<TABLE>
<CAPTION>
(in Thousands) United States Other Foreign
of America France Netherlands Countries TOTAL
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 $25,090 $9,462 $6,277 $12,610 $53,439
1997 26,581 6,087 5,548 9,412 47,628
1996 26,024 6,727 5,576 9,378 47,705
1995 23,762 7,528 6,060 5,142 42,492
1994 23,540 7,696 4,751 2,536 38,523
</TABLE>
No single customer accounted for 10% or more of Sylvan's sales during the years
ended January 3, 1999, December 28, 1997, or December 29, 1996. The majority of
the Company's trade accounts receivable are from regional mushroom growers. The
remaining portion of the Company's trade accounts receivable is from a number of
produce wholesalers in major cities within its marketing regions. Many of these
customers are privately held businesses with limited capital resources; however,
the Company's bad debt loss experience with these entities compares favorably
with the Company's bad debt loss experience with its customer base as a whole.
10. RELATED-PARTY TRANSACTIONS:
During fiscal years 1998, 1997 and 1996, a nonemployee director's business
interests purchased spawn and spawn-related products at fair market value
totaling $668,000, $568,000 and $611,000, respectively; and purchased mushrooms
at fair market value totaling $33,000 in 1998 and $14,000 in 1997 and sold
mushrooms at fair market value totaling $111,000 in 1996 in trading with the
Company's subsidiaries.
F-23
<PAGE> 44
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
<TABLE>
<CAPTION>
1998
Three Months Ended
(In Thousands Except Share Data)
----------------------------------------------------------------------------------
March 29, June 28, September 27, January 3,
1998 1998 1998 1999
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 21,988 $ 20,971 $ 22,316 $ 24,280
Gross profit 9,529 8,765 8,936 9,576
Net income 1,933 1,480 1,307 1,617
Basic earnings per share $ 0.30 $ 0.23 $ 0.20 $ 0.25
Diluted income per share 0.30 0.23 0.20 0.25
Basic weighted average
number of shares 6,450,771 6,460,989 6,448,245 6,403,939
Diluted weighted average
number of shares 6,539,391 6,575,834 6,528,630 6,485,460
</TABLE>
<TABLE>
<CAPTION>
1997
Three Months Ended
(In Thousands Except Share Data)
-----------------------------------------------------------------------------------
March 30, June 29, September 28, December 28,
1997 1997 1997 1997
---------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales $ 19,913 $ 19,565 $ 20,540 $ 21,542
Gross profit 8,414 8,214 8,501 9,176
Net income 1,533 1,338 1,640 1,971
Basic earnings per share $ 0.24 $ 0.21 $ 0.26 $ 0.31
Diluted income per share 0.24 0.21 0.26 0.30
Basic weighted average
number of shares 6,388,006 6,385,455 6,367,794 6,442,630
Diluted weighted average
number of shares 6,396,979 6,385,455 6,386,091 6,472,021
</TABLE>
F-24
<PAGE> 45
12. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND SIGNIFICANT GROUP
CONCENTRATIONS OF CREDIT RISK:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. Fair value is defined as the amount at which the instrument could be
exchanged in a transaction between willing parties.
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt
The fair value of the Company's long-term debt is estimated based on the quoted
market prices for the same or similar issues or on the current rates offered to
the Company for debt of the same remaining maturities. The Company is satisfied
that the stated value of its variably priced long-term debt approximates fair
market value.
Interest Rate Swaps
The fair value of these instruments is based on the difference between the
interest rates either received or paid on the notional amount of the underlying
liabilities. The calculation of fair value was computed on a net present value
basis as if the financial instruments were terminated on the balance sheet date.
A relationship spread was developed based on the difference between the
three-month LIBOR and quoted three-month treasuries. This spread was added to
the quoted treasury yield for the respective maturity period of the financial
instruments and used to compute the net present value. The negative or positive
fair value is an estimate of the amounts that the Company would either pay or
receive to cancel the contracts outstanding at the balance sheet date. The
instruments have no carrying value and had fair value deficits of $549,000 and
$34,000 as of January 3, 1999, and December 28, 1997, respectively.
F-25
<PAGE> 46
Schedule II
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED JANUARY 3, 1999, DECEMBER 28, 1997,
AND DECEMBER 29, 1996
(In Thousands)
<TABLE>
<CAPTION>
----------Additions-----------
Balance at Charged to Deductions Balance
Beginning Costs and from at End
Description of Period Expenses Recoveries Reserves (a) Other (b) of Period
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Year ended
January 3,
1999-
Allowance for
doubtful
accounts ....... $ 812 $ 495 $ 0 $ (526) $ (71) $ 710
====== ====== ====== ====== ====== ======
Year ended
December 28,
1997-
Allowance for
doubtful
accounts ....... $1,031 $ 356 $ 0 $ (418)(c) $ (157) $ 812
====== ====== ====== ====== ====== ======
Year ended
December 29,
1996-
Allowance for
doubtful
accounts ....... $1,088 $ 108 $ 11 $ (120) $ (56) $1,031
====== ====== ====== ====== ====== ======
</TABLE>
(a) Represents uncollected accounts charged against the allowance.
(b) Represents the effect of currency translation adjustments.
(c) Includes $268,000 set-off against related unrecoverable French trade
receivables.
F-26
<PAGE> 47
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of Sylvan Inc.:
We have audited, in accordance with generally accepted auditing standards, the
consolidated financial statements included in Sylvan Inc.'s annual report to
shareholders incorporated by reference in this Form 10-K, and have issued our
report thereon dated February 5, 1999. Our audits were made for the purpose of
forming an opinion on those statements taken as a whole. The schedule listed in
the index in Item 14(a)2 of this Form 10-K is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Pittsburgh, Pennsylvania,
February 5, 1999
F-27
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Sylvan Inc., a Nevada corporation, has the domestic and international
subsidiaries listed below. All are wholly owned except as noted. Certain
international subsidiaries are not named because they are not significant in the
aggregate.
Sylvan Inc. has no parent.
<TABLE>
<CAPTION>
State/Country of Incorporation
------------------------------
<S> <C>
International Mushrooms Limited (a) Ireland
Quincy Corporation Florida
Somycel S.A. France
Sylvan Africa (Pty) Ltd South Africa
Sylvan America, Inc. Nevada
Sylvan America, Inc. Pennsylvania
Sylvan Bioproducts, Inc. Pennsylvania
Sylvan Communications, Inc. California
Sylvan Export Corporation Barbados
Sylvan Foods, Inc. Pennsylvania
Sylvan Foods (France) S.A. France
Sylvan Foods (Netherlands) B.V. The Netherlands
Sylvan Holdings Pty Ltd. (b) Australia
Sylvan Horst B.V. (c) The Netherlands
Sylvan Hungaria KFT Hungary
Sylvan Italia S.r.l. Italy
Sylvan Nederlands B.V. The Netherlands
Sylvan Pilz AG Switzerland
Sylvan Polska Sp. z.o.o. Poland
Sylvan Spawn Laboratory Hungary Ltd. Hungary
Sylvan Spawn Limited England
Sylvan Tarim Urunleri Sanayi Ve Ticaret Limited Sirketi (d) Turkey
Tartarin S.A. France
White Queen Ltd. England
Worthington Holdings, Inc. Pennsylvania
</TABLE>
- --------------------------
(a) 90% ownership
(b) 49% ownership
(c) 75% ownership
(d) 60% ownership
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000861291
<NAME> SYLVAN INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-03-1999
<PERIOD-START> DEC-29-1997
<PERIOD-END> JAN-03-1999
<CASH> 6,497
<SECURITIES> 0
<RECEIVABLES> 13,340
<ALLOWANCES> 710
<INVENTORY> 9,820
<CURRENT-ASSETS> 32,767
<PP&E> 82,568
<DEPRECIATION> 29,129
<TOTAL-ASSETS> 102,550
<CURRENT-LIABILITIES> 13,861
<BONDS> 0
0
0
<COMMON> 7
<OTHER-SE> 50,257
<TOTAL-LIABILITY-AND-EQUITY> 102,550
<SALES> 89,555
<TOTAL-REVENUES> 89,555
<CGS> 52,749
<TOTAL-COSTS> 78,444
<OTHER-EXPENSES> 116
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,170
<INCOME-PRETAX> 8,825
<INCOME-TAX> 2,279
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,337
<EPS-PRIMARY> .98
<EPS-DILUTED> .97
</TABLE>
