<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JULY 2, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 0-18339
SYLVAN INC.
(Exact name of registrant as specified in its charter)
NEVADA 25-1603408
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
333 MAIN STREET, P.O. BOX 249, SAXONBURG, PA 16056-0249
(Address of principal executive offices) (Zip Code)
(724) 352-7520
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Number of shares of common stock outstanding as of July 20, 2000...5,680,854
<PAGE> 2
SYLVAN INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Part I - FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets,
July 2, 2000 and January 2, 2000..........................3
Condensed Consolidated Statements of Income, Three Months
Ended July 2, 2000 and July 4, 1999.......................5
Condensed Consolidated Statements of Income, Six Months
Ended July 2, 2000 and July 4, 1999.......................6
Condensed Consolidated Statements of Cash Flows, Six
Months Ended July 2, 2000 and July 4, 1999................7
Notes to Condensed Consolidated Financial Statements,
July 2, 2000..............................................8
Item 2. Management's Discussion and Analysis.....................12
Item 3. Quantitative and Qualitative Disclosures About Market
Risk.....................................................17
Part II - OTHER INFORMATION
Item 1. Legal Proceedings........................................18
Item 4. Submission of Matters to a Vote of Security Holders......18
Item 6. Exhibits and Reports on Form 8-K.........................18
<PAGE> 3
PART I-FINANCIAL INFORMATION
Item 1.
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In thousands)
<TABLE>
<CAPTION>
July 2, 2000 January 2, 2000
------------ ---------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,299 $ 7,601
Trade accounts receivable, net of allowance
for doubtful accounts of $608 and $826, respectively 11,093 12,347
Inventories 10,074 10,110
Prepaid income taxes and other expenses 1,942 1,537
Other current assets 920 1,121
Deferred income tax benefit 498 500
-----------------------------------------------------------------------------------------------------------
Total current assets 30,826 33,216
Property, plant and equipment, net 53,109 54,249
Intangible assets, net of accumulated amortization
of $4,302 and $3,906, respectively 12,307 12,797
Other assets, net of accumulated amortization
of $369 and $316, respectively 8,968 9,233
-----------------------------------------------------------------------------------------------------------
TOTAL ASSETS $105,210 $109,495
===========================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
CONDENSED CONSOLIDATED BALANCE SHEETS
Sylvan Inc. and Subsidiaries
(In thousands except share data)
<TABLE>
<CAPTION>
July 2, 2000 January 2, 2000
------------ ---------------
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
<S> <C> <C>
Current portion of long-term debt $ 192 $ 418
Accounts payable - trade 3,807 4,647
Accrued salaries, wages and employee benefits 2,487 2,970
Other accrued liabilities 1,538 1,703
Income taxes payable 365 697
--------------------------------------------------------------------------------------------------------------
Total current liabilities 8,389 10,435
--------------------------------------------------------------------------------------------------------------
Long-term and revolving-term debt 40,884 43,544
--------------------------------------------------------------------------------------------------------------
Other long-term liabilities:
Other employee benefits 1,123 1,053
Other 5,707 5,826
--------------------------------------------------------------------------------------------------------------
Total other long-term liabilities 6,830 6,879
--------------------------------------------------------------------------------------------------------------
Minority interest 1,476 1,413
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares authorized,
6,681,601 and 6,671,601 shares issued at
July 2, 2000 and January 2, 2000, respectively 7 7
Additional paid-in capital 16,886 16,801
Retained earnings 50,495 47,785
Less: Treasury stock, at cost, 1,000,747 and 966,765 shares
at July 2, 2000 and January 2, 2000, respectively (10,476) (10,166)
-------- --------
56,912 54,427
Accumulated other comprehensive deficit:
Cumulative translation adjustment (9,281) (7,203)
--------------------------------------------------------------------------------------------------------------
Total shareholders' equity 47,631 47,224
--------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $105,210 $109,495
==============================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sylvan Inc. and Subsidiaries
(Unaudited, in thousands except share data)
<TABLE>
<CAPTION>
----------Three Months Ended---------
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
NET SALES $20,677 $21,305
------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 11,448 12,565
Selling, administration, research and development 5,257 5,057
Depreciation 1,388 1,353
------------------------------------------------------------------------------------------------------------------
18,093 18,975
------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 2,584 2,330
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 682 525
OTHER INCOME (EXPENSE) (20) (13)
------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,882 1,792
PROVISION FOR INCOME TAXES 544 490
------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 1,338 1,302
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 42 (18)
------------------------------------------------------------------------------------------------------------------
NET INCOME $ 1,296 $ 1,320
==================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.23 $ 0.21
==================================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.23 $ 0.21
==================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 5,663,883 6,269,388
==================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 5,666,211 6,290,613
==================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Sylvan Inc. and Subsidiaries
(Unaudited, in thousands except share data)
<TABLE>
<CAPTION>
------------Six Months Ended-----------
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
NET SALES $43,073 $43,420
----------------------------------------------------------------------------------------------------------------------
OPERATING COSTS AND EXPENSES:
Cost of sales 23,662 25,513
Selling, administration, research and development 11,322 10,643
Depreciation 2,748 2,717
----------------------------------------------------------------------------------------------------------------------
37,732 38,873
----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 5,341 4,547
INTEREST EXPENSE, NET, INCLUDING
AMORTIZATION OF DEBT ISSUANCE COST 1,335 1,060
OTHER INCOME (EXPENSE) (72) 66
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 3,934 3,553
PROVISION FOR INCOME TAXES 1,139 961
----------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 2,795 2,592
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 85 1
----------------------------------------------------------------------------------------------------------------------
NET INCOME $ 2,710 $ 2,591
======================================================================================================================
NET INCOME PER SHARE - BASIC $ 0.48 $ 0.41
======================================================================================================================
NET INCOME PER SHARE - DILUTED $ 0.48 $ 0.41
======================================================================================================================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES 5,677,153 6,314,836
======================================================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES 5,677,605 6,340,155
======================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Sylvan Inc. and Subsidiaries
(Unaudited, in thousands)
<TABLE>
<CAPTION>
---------Six Months Ended----------
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 2,710 $ 2,591
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 3,180 3,081
Employee benefits (317) 415
Trade accounts receivable 1,615 1,488
Inventories (258) (253)
Prepaid expenses and other assets (362) 244
Accounts payable and accrued liabilities (800) (1,433)
Other 152 882
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,920 7,015
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Net expenditures for property, plant and equipment (3,697) (4,012)
---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (3,697) (4,012)
---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (354) (366)
Proceeds from long-term debt borrowings 175 0
Net (repayments) borrowings under revolving credit line (2,496) 719
Proceeds from exercise of stock options 87 293
Purchase of treasury shares (576) (2,540)
---------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (3,164) (1,894)
---------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATES ON CASH (361) (651)
---------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,302) 458
CASH AND CASH EQUIVALENTS, beginning of period 7,601 6,497
---------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of period $ 6,299 $ 6,955
=====================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 1,261 $ 1,185
Income taxes paid 1,288 330
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Sylvan Inc. and Subsidiaries
July 2, 2000
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
General
These condensed consolidated financial statements of Sylvan Inc. are
unaudited and reflect all adjustments (consisting only of normal recurring
adjustments) which are, in the opinion of management, necessary for a fair
presentation of the results of operations for the interim period. These
statements should be read in conjunction with the consolidated financial
statements and notes thereto contained in the company's Annual Report to
Shareholders and its Form 10-K for the year ended January 2, 2000.
Cash
The company maintains a French-franc denominated cash balance of
approximately FF16.2 million with a U.S. bank in support of a loan
advanced by a European bank. This balance is reported under "Other Assets"
as of July 2, 2000.
Inventories
Inventories at July 2, 2000 and January 2, 2000 consisted of the
following:
<TABLE>
<CAPTION>
(in thousands) July 2, 2000 January 2, 2000
------------ ---------------
<S> <C> <C>
Growing crops and compost material $ 5,451 $ 5,021
Stores and other supplies 1,427 1,794
Mushrooms and spawn on hand 3,196 3,295
------- -------
$10,074 $10,110
======= =======
</TABLE>
Marketing Agreement
Effective January 16, 2000, the company's Quincy Farms subsidiary entered
into a marketing agreement with C And C Carriage Mushroom Company (C And
C) of Avondale, Pennsylvania. The agreement provides for C And C to
purchase all of the mushrooms produced at the Quincy, Florida operation at
a price, based on product quality, which is adjusted annually to reflect
market conditions. Under this agreement, Quincy sold its packaging and
distribution-related assets to C And C. The initial term of the agreement
is five years.
Earnings Per Common Share
Earnings per share were calculated using the weighted average number of
shares outstanding during the period and including the effect of stock
options outstanding. Pursuant to the company's 1990 and 1993 stock option
plans, options for a total of 1,276,417 shares of the company's common
stock have been granted and options for a total of 536,808 of these shares
have been exercised as of July 2, 2000.
8
<PAGE> 9
The following tables reconcile the number of shares utilized in the
earnings per share calculations for the three and six months ended July 2,
2000 and July 4, 1999.
<TABLE>
<CAPTION>
Three Months Ended
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Net income (in thousands) $1,296 $1,320
====== ======
Earnings per common share - basic $ .23 $ .21
====== ======
Earnings per common share - diluted $ .23 $ .21
====== ======
Common shares - basic 5,663,883 6,269,388
Effect of dilutive securities: stock options 2,328 21,225
--------- ---------
Common shares - diluted 5,666,211 6,290,613
========= =========
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Net income (in thousands) $2,710 $2,591
====== ======
Earnings per common share - basic $ .48 $ .41
====== ======
Earnings per common share - diluted $ .48 $ .41
====== ======
Common shares - basic 5,677,153 6,314,836
Effect of dilutive securities: stock options 452 25,319
--------- ---------
Common shares - diluted 5,677,605 6,340,155
========= =========
</TABLE>
Options to purchase approximately 656,000 and 676,000 shares of common
stock in the three and six months ended July 2, 2000, respectively, and
406,000 and 391,000 shares of common stock in the three and six months
ended July 4, 1999, respectively, were outstanding, but were not included
in the computation of diluted earnings per share because the options'
exercise prices were greater than the average market prices of the
company's common shares for the respective periods.
2. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:
The company has a Revolving Credit Agreement with two commercial banks,
dated August 6, 1998. It provides for revolving credit loans on which the
aggregate outstanding balance available to the company may not initially
exceed $55.0 million. This aggregate outstanding balance will decline over
the life of the agreement as follows:
Maximum Aggregate
Period Beginning Outstanding Balance
---------------- -------------------
August 6, 2003 $50.0 million
August 6, 2004 45.0 million
Outstanding borrowings under the agreement bear interest at either the
Prime Rate or LIBOR (plus an applicable margin) at the company's option.
On July 2, 2000, the company had outstanding borrowings under the
agreement of $36.9 million. The revolving credit loans mature on August 5,
2005.
9
<PAGE> 10
The agreement provides for the maintenance of various financial covenants
and includes limitations as to incurring additional indebtedness and the
granting of security interests to third parties. Obligations under the
agreement are guaranteed by certain wholly owned subsidiaries of the
company.
The company has a French-franc denominated loan of FF16.2 million.
Interest is payable based on a formula that utilizes a Paris Interbank
Offered Rate plus an applicable margin. Repayment is due in January 2002.
This loan is supported by a compensating cash balance maintained in a U.S.
bank.
The company's majority-owned Dutch subsidiary has a long-term plant and
equipment and overdraft facility with a Dutch bank. At July 2, 2000, a
term loan amounting to 2.0 million Dutch guilders was outstanding under
this agreement.
3. COMPREHENSIVE INCOME:
Comprehensive income consists of the following:
<TABLE>
<CAPTION>
Three Months Ended
(in thousands) July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Net income $1,296 $ 1,320
Other comprehensive income:
Foreign currency translation adjustment (116) (1,368)
------ -------
Comprehensive income (loss) $1,180 $ (48)
====== =======
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended
(in thousands) July 2, 2000 July 4, 1999
------------ ------------
<S> <C> <C>
Net income $ 2,710 $ 2,591
Other comprehensive income:
Foreign currency translation adjustment (2,078) (3,673)
------- -------
Comprehensive income (loss) $ 632 $(1,082)
======= =======
</TABLE>
4. BUSINESS SEGMENT INFORMATION:
Sylvan is a worldwide producer and distributor of mushroom products,
specializing in spawn (the equivalent of seed for mushrooms) and
spawn-related products and services, and is a major grower of fresh
mushrooms in the United States. The company has two reportable business
segments: spawn products, which includes spawn-related products, services
and bioproducts; and fresh mushrooms. Spawn-related products include casing
inoculum, nutritional supplements and disease-control agents. During the
quarter and six months ended July 2, 2000, the company made no changes in
the basis of segmentation or in the basis of measurement of segment profit
or loss from that reported in the January 2, 2000 financial statements.
10
<PAGE> 11
<TABLE>
<CAPTION>
Three Spawn Fresh Total
Months Products Mushrooms Reportable
(in thousands) Ended Segment Segment Segments
----- ------- ------- --------
<S> <C> <C> <C> <C>
Total revenues 2000 $15,659 $ 5,338 $20,997
1999 14,253 7,362 21,615
Intersegment revenues 2000 320 -- 320
1999 310 -- 310
Operating income 2000 2,983 554 3,537
1999 2,673 547 3,220
</TABLE>
<TABLE>
<CAPTION>
Six Spawn Fresh Total
Months Products Mushrooms Reportable
(in thousands) Ended Segment Segment Segments
----- ------- ------- --------
<S> <C> <C> <C> <C>
Total revenues 2000 $32,299 $11,434 $43,733
1999 29,345 14,688 44,033
Intersegment revenues 2000 660 -- 660
1999 613 -- 613
Operating income 2000 6,231 1,255 7,486
1999 5,586 850 6,436
</TABLE>
Reconciliation to Consolidated Financial Data:
---------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in thousands) July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Total revenues for reportable segments $20,997 $21,615 $43,733 $44,033
Elimination of intersegment revenues (320) (310) (660) (613)
------- ------- ------- -------
Total consolidated revenues $20,677 $21,305 $43,073 $43,420
======= ======= ======= =======
Total operating income for reportable
segments $ 3,537 $ 3,220 $ 7,486 $ 6,436
Unallocated corporate expenses (953) (890) (2,145) (1,889)
Interest expense, net (682) (525) (1,335) (1,060)
Other income (expense) (20) (13) (72) 66
------- ------- ------- -------
Consolidated income before income taxes $ 1,882 $ 1,792 $ 3,934 $ 3,553
======= ======= ======= =======
</TABLE>
11
<PAGE> 12
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Sylvan Inc. and Subsidiaries
RESULTS OF OPERATIONS (Three Months Ended July 2, 2000 and July 4, 1999)
CONSOLIDATED REVIEW
Net Sales
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Net sales $20,677 $21,305 (3)
Net sales for the three months ended July 2, 2000 decreased by 3% to $20.7
million. Four factors combined to create the decrease in sales. First, as
detailed in the Fresh Mushrooms Segment discussion, Quincy Farms entered into a
marketing arrangement in the first quarter of 2000 that changed the business
structure, resulting in a $2.1 million decrease in sales. Operating income was
not impacted. Second, the 2000 quarter includes $1.3 million in sales of the
J.B. Swayne Spawn Company, which was acquired in the fourth quarter of 1999.
Third, the strengthening of the U.S. dollar had the effect of decreasing sales
for the current quarter by approximately $1.5 million when compared with the
second quarter of 1999. Last, sales increases, excluding Swayne, in the spawn
and spawn product segment were $1.6 million. International sales for the quarter
were 45% as compared with 47% for the corresponding 1999 quarter. In terms of
the company's applicable foreign currencies, the U.S. dollar was approximately
11% stronger at the end of the current quarter than at the end of the second
quarter of 1999.
Operating Costs and Expenses
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Cost of sales $11,448 $12,565 (9)
Selling, administration, 5,257 5,057 4
research and development
Depreciation 1,388 1,353 3
The company's cost of sales, expressed as a percentage of sales, was 55.4% for
the second quarter of 2000 as compared with 59.0% for the second quarter of
1999. The company expensed approximately $220,000 during the second quarter of
1999 in connection with the replacement of a blender that was removed from
service at the Australian facility. Excluding this charge, the cost of sales
percentage for the second quarter of 1999 was 57.9%. Most of the reduction in
the cost of sales percentage for 2000 was caused by improvements at Quincy.
Selling, administration, research and development expenses were $5.3 million, or
25.4% of sales, as compared with $5.1 million, or 23.7% of sales, for the
corresponding 1999 period. Depreciation expense for the second quarter of 2000
was $1.4 million, $35,000 higher than for the second quarter of 1999.
Interest Expense
The company's net interest expense for the second quarter of 2000 was $682,000,
30% higher than for the corresponding 1999 quarter. Most of this increase was
due to a higher average borrowing level. The effective borrowing rate for the
current quarter was 6.8%, as compared with 6.5% for the second quarter of 1999.
12
<PAGE> 13
Income Tax Expense
The effective income tax rate was 29% for the second quarter of 2000, as
compared with 27% for the corresponding 1999 quarter. The increase in U.S.
earnings for the quarter had the effect of increasing the consolidated income
tax rate.
BUSINESS SEGMENTS
Spawn Products Segment
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Sales, including intersegment $15,659 $14,253 10
Operating expenses 12,676 11,580 9
Operating income 2,983 2,673 12
Net sales of spawn and spawn-related products were $15.7 million for the current
quarter, a 10% improvement over the corresponding 1999 quarter. Spawn product
sales volume increased 20%, with a 43% increase in the Americas and a 5%
increase in overseas markets. Much of the Americas increase was due to the
acquisition of the J.B. Swayne Spawn Company in the fourth quarter of 1999. The
company also had significant volume increases in France, Canada and the United
States. The overseas U.S. dollar equivalent selling price was 12% lower during
the current quarter, primarily due to the strengthening of the U.S. dollar. The
average selling price in the Americas was 5% lower due to the inclusion of the
sales of Swayne, which has an overall lower pricing structure, and the continued
consolidation of the mushroom industry, as evidenced by the January 2000
acquisition of Vlasic Farms by a Canadian company. Sales of disease-control
agents and nutritional supplements, which accounted for 15% of consolidated net
sales for the second quarter of 2000, were 11% higher than the second quarter of
1999.
Operating expenses were $12.7 million for the second quarter of 2000. Within
operating expenses, cost of sales improved to 50% of sales, as compared with 51%
of sales for the 1999 corresponding quarter. The 1999 quarter included a
$220,000 nonrecurring charge taken in connection with the replacement of the
blender that was removed from service at the Australian facility. The remaining
operating expenses increased by 10% to $5.1 million for the current quarter.
Operating income, as a percentage of sales, was 19% for both the second quarter
of 2000 and the second quarter of 1999. Operating income was negatively impacted
by an 11% strengthening of the U.S. dollar against applicable foreign
currencies, with an effect of approximately $140,000 on operating income.
Fresh Mushrooms Segment
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Sales $5,338 $7,362 (27)
Operating expenses 4,784 6,815 (30)
Operating income 554 547 1
Fresh mushroom sales decreased during the current quarter to $5.3 million, as
compared with $7.4 million for the corresponding period in 1999. This decrease
was due to Quincy entering into the previously mentioned marketing arrangement
to sell all of the mushrooms it produces directly from its harvesting area to a
third party. Since Quincy no longer provides such value-added commercial
enhancements as slicing and packaging, it receives a lower price per pound of
mushrooms sold than when it distributed its commercially prepared products to
wholesalers and retailers. Total pounds sold increased by 2% when compared with
the corresponding 1999 quarter. Highly competitive market conditions continue in
the southeastern United States and are expected to remain throughout 2000.
13
<PAGE> 14
The fresh mushrooms cost of sales was $3.5 million, or 66% of sales, for the
second quarter of 2000, as compared with $5.3 million, or 72% of sales, for the
corresponding 1999 quarter. This improvement was primarily a result of the
business structure changes related to the marketing arrangement and the increase
in pounds sold.
The fresh mushrooms operating income increased by 1% when compared with the
corresponding 1999 quarter. When expressed as a percentage of sales, operating
income for the current quarter was 10%, as compared with 7% for the 1999 second
quarter.
RESULTS OF OPERATIONS (Six Months Ended July 2, 2000 and July 4, 1999)
CONSOLIDATED REVIEW
Net Sales
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Net sales $43,073 $43,420 (1)
Net sales for the six months ended July 2, 2000 were $43.1 million, a 1%
decrease when compared with the $43.4 million for the corresponding 1999 period.
Four factors combined to create this decrease in sales. First, Quincy entered
into a marketing arrangement in the first quarter of 2000 that changed its
business structure, resulting in a $4.1 million decrease in sales. After
adjusting for the structure change, Quincy's sales increased by $0.8 million.
Operating income was not impacted. Second, the first six months of 2000 included
$2.4 million in sales of the J.B. Swayne Spawn Company, which was acquired in
the fourth quarter of 1999. Third, the strengthening of the U.S. dollar had the
effect of decreasing sales for the current period by approximately $3.4 million,
when compared with the corresponding 1999 period. Last, sales increases,
excluding Swayne, in the spawn and spawn product segment were $4.0 million.
International sales for the current six-month period were 47%, as compared with
49% for the six months ended July 4, 1999. The U.S. dollar was approximately 11%
stronger at the end of the current period, when measured in terms of the
company's applicable foreign currencies, than at the end of the first six months
of 1999.
Operating Costs and Expenses
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Cost of sales $23,662 $25,513 (7)
Selling, administration, 11,322 10,643 6
research and development
Depreciation 2,748 2,717 1
The company's cost of sales, expressed as a percentage of sales, was 54.9% for
the first six months of 2000, as compared with 58.8% for the corresponding 1999
period. Improved margins at Quincy accounted for much of the consolidated
improvement. The company expensed approximately $220,000 during the first six
months of 1999 in connection with the replacement of the blender that was
removed from service at the Australian facility. Selling, administration,
research and development expenses increased to $11.3 million, or 26.3% of sales,
as compared with $10.6 million, or 24.5% of sales, for the corresponding 1999
period. Most of the increase relates to five items recorded in the first quarter
of 2000. First, the spawn products segment incurred a $0.2 million write-off of
pre-construction costs related to scope revisions and a management change in the
company's Hungarian composting project. Second, a provision of $0.1 million was
recorded for non-income related state taxes, which should be a nonrecurring
expense. Third, a charge of $0.1 million was recorded as an anticipated loss in
the sale of a small mushroom farm that had been acquired as part of the May 1998
purchase of International Mushrooms Ltd. Fourth, additional ongoing costs were
associated
14
<PAGE> 15
with operating the sales, administrative and research facilities of Swayne,
which was acquired in November 1999. Last, Quincy realized recurring quarterly
cost savings of $0.2 million related to wages, employee benefits, and general
building overhead costs of its former sales and distribution functions that have
been assumed under the terms of the new marketing arrangement. Depreciation
expense for the current six-month period was $31,000 higher than the
corresponding 1999 period.
Interest Expense
The company's net interest expense for the six months ended July 2, 2000 was
$1.3 million, 26% higher than the corresponding six-month period of 1999. Most
of this increase was due to a higher average borrowing level. The effective
borrowing rate for the current period was 6.7%, as compared with 6.5% for the
first six months of 1999.
Income Tax Expense
The effective income tax rate was 29% for the first six months of 2000, as
compared with 27% for the corresponding 1999 period. The increase in U.S.
earnings for the period had the effect of increasing the consolidated income tax
rate.
BUSINESS SEGMENTS
Spawn Products Segment
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Sales, including intersegment $32,299 $29,345 10
Operating expenses 26,068 23,759 10
Operating income 6,231 5,586 12
Net sales of spawn and spawn-related products increased by 10% to $32.3 million
for the six months ended July 2, 2000. Spawn product sales volume increased by
18%, with a 37% increase in the Americas and a 7% increase in overseas markets.
Much of the Americas increase was due to the acquisition of the J.B. Swayne
Spawn Company in the fourth quarter of 1999. The company also had strong volume
increases in France, Italy, The Netherlands, Canada and the United States. The
overseas U.S. dollar equivalent selling price was 11% lower, due primarily to
the continued strengthening of the U.S. dollar. The average selling price in the
Americas was 4% lower due to the inclusion of the sales of Swayne, which has an
overall lower pricing structure, and the continued consolidation of the mushroom
industry, as evidenced by the January 2000 acquisition of Vlasic Farms by a
Canadian company. Sales of disease-control agents and nutritional supplements
increased by 13% and accounted for 14% of consolidated net sales, as compared
with 12% of consolidated net sales for the corresponding period of 1999.
Operating expenses were $26.1 million during the first six months of 2000.
Within operating expenses, cost of sales increased by 9% to $16.1 million, or
50% of sales, as compared with $14.8 million, or 50% of sales, for the
corresponding 1999 period. The increase in other expenses related primarily to
three items that were recorded in the first quarter of 2000. First, the spawn
products segment incurred a $0.2 million write-off of pre-construction costs
related to scope revisions and a management change in the company's Hungarian
composting project. Second, a provision of $0.1 million was recorded for
non-income related state taxes. This should be a nonrecurring expense. Third,
additional ongoing costs were associated with operating the sales,
administrative and research facilities of Swayne, which was acquired in November
1999.
Operating income for the first six months of 2000 and the first six months of
1999 was 19% of sales. Operating income was negatively impacted by an 11%
strengthening of the U.S. dollar against applicable foreign currencies, with an
effect of approximately $365,000 on operating income.
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Fresh Mushrooms Segment
(dollars in thousands) 2000 1999 % Change
---- ---- --------
Sales $11,434 $14,688 (22)
Operating expenses 10,179 13,838 (26)
Operating income 1,255 850 48
Fresh mushroom sales decreased by 22% to $11.4 million for the first six months
of 2000, as compared with $14.7 million for the corresponding 1999 period. This
decrease was due to Quincy entering into the previously mentioned marketing
arrangement to sell all of the mushrooms it produces directly from its
harvesting area to a third party. Since Quincy no longer provides such
value-added commercial enhancements, as slicing and packaging, it receives a
lower price per pound of mushrooms sold than when it distributed its
commercially prepared products to wholesalers and retailers. Total pounds sold
increased by 7% when compared with the corresponding 1999 six-month period.
The fresh mushroom cost of sales for the first six months of 2000 was $7.5
million, or 66% of sales, as compared with $10.8 million, or 73% of sales, for
the corresponding 1999 period. This improvement was primarily a result of the
business structure change related to the marketing arrangement and the increase
in pounds sold.
The fresh mushroom operating income increased by 48% when compared with the
corresponding 1999 period. When expressed as a percentage of sales, operating
income for the first six months of 2000 was 11%, as compared with 6% for the
corresponding 1999 period.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities for the six months ended July 2, 2000
was $5.9 million, a decrease of $1.1 million over the $7.0 million provided
during the corresponding period of 1999. Employee benefit accruals decreased by
$0.3 million for the six months ended July 2, 2000, as compared with the $0.4
million increase for the six-month period ended July 4, 1999. The principal
change between years relates to the payment of 1999 executive bonuses during the
first quarter of 2000, whereas no such payments were made during the first
quarter of 1999. Trade accounts receivable contributed $1.6 million to operating
cash flow for the first six months of 2000, as compared with the $1.5 million
that was contributed during the first six months of 1999. Due to seasonally
lower second quarter sales, particularly in early summer, the overall level of
trade accounts receivable typically decreases until the middle of the third
quarter. Trade accounts payable and accrued liabilities decreased by $0.8
million and $1.4 million during the first six months of 2000 and 1999,
respectively. Most of this decrease in 2000 was due to the timing of
construction payments relating to modifications to the company's Irish plant and
due to the timing of payments by one of the company's French subsidiaries. The
1999 decrease related primarily to payments made to contractors that had been
retained pending the satisfactory completion of equipment startup tests at the
French inoculum laboratory, and due to litigation settlements.
Cash used by investing activities was $3.7 million for the six months ended July
2, 2000, versus $4.0 million used during the corresponding period of 1999.
During the six months ended July 2, 2000, cash approximating $0.4 million was
provided from the sale of fixed assets, consisting primarily of Quincy's
packaging and distribution equipment. Major capital expenditures through the
first six months of 2000 included the completion of modifications to the Irish
facility, expansion of the U.S. research and development facility and the
routine replacement of certain chilling equipment at Quincy. Capital
expenditures in 2000 are expected to total between $6 million and $8 million for
existing operations, with additional expenditures as required for any
acquisitions or new initiatives.
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The company has plans to expand its North American spawn and bioproducts
operations. An agreement has been negotiated with a Canadian spawn producer to
acquire certain real property, building and equipment in Ontario, Canada, for
its approximate fair market value of $350,000. Execution of the sales agreement
and the closing on the transaction are expected to occur during the third
quarter. The cost to renovate the Canadian spawn plant and expand the existing
Dayton, Nevada spawn production facility is expected to be approximately $3.15
million. Negotiations are underway for the company's purchase of a parcel of
undeveloped real property, for approximately $250,000, near Saxonburg,
Pennsylvania for a state-of-the-art bioproducts facility.
The company routinely assesses its requirements for additional capital
investments as it experiences continued growth in its operations. The company
believes that it has sufficient cash resources from current cash balances,
internally generated funds and available bank credit facilities to meet its
ongoing capital needs.
Available credit under the company's revolving credit arrangement was $18.1
million as of July 2, 2000. Term debt and revolving debt decreased by $2.7
million during the six months ended July 2, 2000, as compared with an increase
of $0.4 million during the corresponding period of 1999. Most of this decrease
was due to the positive cash flows of operations after capital additions and
share purchases.
During the first six months of 2000, the company purchased 59,300 shares of
Sylvan common stock at an average price of $9.71 per share. By comparison,
215,600 shares were purchased during the six months of 1999 at an average price
of $11.78 per share. Management expects to continue the purchase program,
subject to price and share availability conditions that make such purchases
financially beneficial and appropriate.
EURO CURRENCY
Sylvan does not believe that the conversion to the Euro has a material impact on
its business or financial condition.
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
From time to time in this report and in other written reports and oral
statements, references are made to expectations regarding future performance of
the company. These "forward-looking statements" are based on currently available
competitive, financial and economic data and the company's operating plans, but
they are inherently uncertain. Events could turn out to be significantly
different from what is expected, depending upon such factors as mushroom growing
process inconsistencies, specific pricing or product initiatives of the
company's competitors and competitive conditions in the U.S. mushroom market in
general, changes in currency and exchange risks, or changes in a specific
country's or region's political or economic conditions.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information presented under this item in the company's Form 10-K for the
fiscal year ended January 2, 2000 has not changed materially. Information
relating to the sensitivity to foreign currency exchange rate changes of the
company's firmly committed sales transactions, in addition to what is presented
in Item 2 of this filing, is omitted because it is an immaterial portion of
total sales.
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PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
There are no material pending legal proceedings to which Sylvan or any of its
subsidiaries is a party, or of which any of their property is subject, other
than ordinary, routine litigation incidental to their respective businesses.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Sylvan Inc.'s annual meeting of shareholders was held on June 6, 2000. At the
meeting, the following persons, constituting the full board, were elected
directors of the company to serve for a term of one year, expiring in 2001.
-------Number of Votes--------
For Withheld
--- --------
William L. Bennett 5,011,703 507,071
Monir K. Elzalaki 5,000,501 518,273
Virgil H. Jurgensmeyer 4,963,612 555,162
Nelson Obus 5,040,936 477,838
Donald T. Pascal 5,011,912 506,862
Dennis C. Zensen 4,954,651 564,123
In addition, the shareholders rejected a proposal to amend the company's bylaws.
The amendment would have provided for the classification of the board into three
groups of directors with staggered terms of office. Votes received in favor of
the amendment totaled 1,096,229; votes against totaled 3,795,808; and the number
of abstentions totaled 22,297.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits required by Item 601 of Regulation S-K
3.3 Articles of Incorporation of S. F. Nevada, Inc. - previously
filed on November 12, 1999 with the company's Form 10-Q
Quarterly Report for the period ended October 3, 1999 and
incorporated herein by reference
3.4 Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods
Holdings, Inc. with exhibit - previously filed on November 12,
1999 with the company's Form 10-Q Quarterly Report for the
period ended October 3, 1999 and incorporated herein by
reference
3.5 Bylaws - previously filed on November 12, 1999 with the
company's Form 10-Q Quarterly Report for the period ended
October 3, 1999 and incorporated herein by reference
Compensation Plans and Arrangements
10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan,
previously filed as Exhibit 3.3.2 on April 2, 1993 with the
company's Form 10-K Annual Report for the fiscal year ended
January 3, 1993 and incorporated herein by reference
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<PAGE> 19
10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for
Nonemployee Directors, previously filed on April 1, 1994 with
the company's Form 10-K Annual Report for fiscal year ended
January 2, 1994 and incorporated herein by reference
10.12 Sylvan Inc. 1990 Stock Option Plan (amended and restated),
previously filed on November 12, 1999 with the company's Form
10-Q Quarterly Report for the period ended October 3, 1999 and
incorporated herein by reference
Material Contracts
10.2.1 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
as Exhibits 10.1 through 10.10 on November 10, 1998 with
Sylvan's Form 10-Q Quarterly Report for the period ended
September 27, 1998 and incorporated herein by reference
10.2.11 Index of Other Exhibits to the Revolving Credit Agreement,
previously filed as Exhibit 10.11 on November 10, 1998 with
Sylvan's Form 10-Q Quarterly Report for the period ended
September 27, 1998 and incorporated herein by reference
10.3.1 Collective Bargaining Agreement, dated July 20, 1999, between
Quincy Corporation and the United Farm Workers of America,
AFL-CIO, previously filed as Exhibit 10 on August 9, 1999 with
the company's Form 10-Q Quarterly Report for the period ended
July 4, 1999 and incorporated herein by reference
10.5.1 Agreement, dated January 14, 2000, by and between C And C
Carriage Mushroom Co., t/a Modern Sales Company, and Quincy
Corporation, previously filed on March 27, 2000 with the
company's 10-K Annual Report for the fiscal year ended January
2, 2000 and incorporated herein by reference
10.5.2 Index of Exhibits to the C And C Agreement referenced above,
previously filed on March 27, 2000 with the company's 10-K
Annual Report for the fiscal year ended January 2, 2000 and
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
27 Financial Data Schedule
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Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: July 28, 2000 SYLVAN INC.
--------------------
By: /s/ DONALD A. SMITH
--------------------------
Donald A. Smith
Chief Financial Officer
By: /s/ FRED Y. BENNITT
--------------------------
Fred Y. Bennitt
Secretary/Treasurer
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