-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KZClI0+mBsn02rMFl9xydSujHXFSrWdWSIMkPNSOdRvS2vZWhjQ3uvxEaY+0EN5v Jc0tPFNtdiTohqK8h09+OA== /in/edgar/work/20000728/0000950128-00-001006/0000950128-00-001006.txt : 20000921 0000950128-00-001006.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950128-00-001006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000702 FILED AS OF DATE: 20000728 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYLVAN INC CENTRAL INDEX KEY: 0000861291 STANDARD INDUSTRIAL CLASSIFICATION: [0100 ] IRS NUMBER: 251603408 STATE OF INCORPORATION: NV FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-18339 FILM NUMBER: 680517 BUSINESS ADDRESS: STREET 1: 333 MAIN STREET STREET 2: P.O. BOX 249 CITY: SAXONBURG STATE: PA ZIP: 16056-0249 BUSINESS PHONE: 724-352-75 MAIL ADDRESS: STREET 1: 333 MAIN STREET STREET 2: P.O. BOX 249 CITY: SAXONBURG STATE: PA ZIP: 16056-0249 FORMER COMPANY: FORMER CONFORMED NAME: SYLVAN FOODS HOLDINGS INC DATE OF NAME CHANGE: 19930328 10-Q 1 e10-q.txt SYLVAN INC. FORM 10-Q 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 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 3 PART I-FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS Sylvan Inc. and Subsidiaries (In thousands)
July 2, 2000 January 2, 2000 ------------ --------------- (Unaudited) 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 ===========================================================================================================
The accompanying notes are an integral part of these financial statements. 3 4 CONDENSED CONSOLIDATED BALANCE SHEETS Sylvan Inc. and Subsidiaries (In thousands except share data)
July 2, 2000 January 2, 2000 ------------ --------------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: 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 ==============================================================================================================
The accompanying notes are an integral part of these financial statements. 4 5 CONDENSED CONSOLIDATED STATEMENTS OF INCOME Sylvan Inc. and Subsidiaries (Unaudited, in thousands except share data)
----------Three Months Ended--------- July 2, 2000 July 4, 1999 ------------ ------------ 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 ==================================================================================================================
The accompanying notes are an integral part of these financial statements. 5 6 CONDENSED CONSOLIDATED STATEMENTS OF INCOME Sylvan Inc. and Subsidiaries (Unaudited, in thousands except share data)
------------Six Months Ended----------- July 2, 2000 July 4, 1999 ------------ ------------ 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 ======================================================================================================================
The accompanying notes are an integral part of these financial statements. 6 7 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Sylvan Inc. and Subsidiaries (Unaudited, in thousands)
---------Six Months Ended---------- July 2, 2000 July 4, 1999 ------------ ------------ 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
The accompanying notes are an integral part of these financial statements. 7 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:
(in thousands) July 2, 2000 January 2, 2000 ------------ --------------- 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 ======= =======
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 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.
Three Months Ended July 2, 2000 July 4, 1999 ------------ ------------ 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 ========= =========
Six Months Ended July 2, 2000 July 4, 1999 ------------ ------------ 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 ========= =========
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 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:
Three Months Ended (in thousands) July 2, 2000 July 4, 1999 ------------ ------------ Net income $1,296 $ 1,320 Other comprehensive income: Foreign currency translation adjustment (116) (1,368) ------ ------- Comprehensive income (loss) $1,180 $ (48) ====== =======
Six Months Ended (in thousands) July 2, 2000 July 4, 1999 ------------ ------------ Net income $ 2,710 $ 2,591 Other comprehensive income: Foreign currency translation adjustment (2,078) (3,673) ------- ------- Comprehensive income (loss) $ 632 $(1,082) ======= =======
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 11
Three Spawn Fresh Total Months Products Mushrooms Reportable (in thousands) Ended Segment Segment Segments ----- ------- ------- -------- 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
Six Spawn Fresh Total Months Products Mushrooms Reportable (in thousands) Ended Segment Segment Segments ----- ------- ------- -------- 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
Reconciliation to Consolidated Financial Data: ---------------------------------------------
Three Months Ended Six Months Ended (in thousands) July 2, 2000 July 4, 1999 July 2, 2000 July 4, 1999 ------------ ------------ ------------ ------------ 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 ======= ======= ======= =======
11 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 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 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 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. 15 16 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. 16 17 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. 17 18 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 18 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 19 20 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 20 EX-27 2 ex27.txt FINANCIAL DATA SCHEDULE
5 0000861291 SYLVAN INC. 1,000 6-MOS DEC-31-2000 JAN-03-2000 JUL-02-2000 6,299 0 11,701 608 10,074 30,826 86,587 33,478 105,210 8,389 0 0 0 7 47,624 105,210 43,073 43,073 23,662 37,733 72 0 1,335 3,934 1,139 0 0 0 0 2,710 0.48 0.48
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