-----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, K3CVFP3BMW1v8J4aNFQiw/rdtALlsYWX1otoN+RwxTYRJNAlYi/voqmMWzEaPgvg mTXFGMaU7GBve7UH7uJ18A== /in/edgar/work/0000950128-00-001240/0000950128-00-001240.txt : 20001102 0000950128-00-001240.hdr.sgml : 20001102 ACCESSION NUMBER: 0000950128-00-001240 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20001001 FILED AS OF DATE: 20001031 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: 749532 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 j8474401e10-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 OCTOBER 1, 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 October 20, 2000...5,639,919 2 SYLVAN INC. AND SUBSIDIARIES INDEX
Page No. -------- Part I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets, October 1, 2000 and January 2, 2000.............................................................3 Condensed Consolidated Statements of Income, Three Months Ended October 1, 2000 and October 3, 1999.......................................................5 Condensed Consolidated Statements of Income, Nine Months Ended October 1, 2000 and October 3, 1999.......................................................6 Condensed Consolidated Statements of Cash Flows, Nine Months Ended October 1, 2000 and October 3, 1999.......................................................7 Notes to Condensed Consolidated Financial Statements, October 1, 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.............................................................................17 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)
October 1, 2000 January 2, 2000 --------------- --------------- (Unaudited) ASSETS - ------ Current assets: Cash and cash equivalents $ 5,702 $ 7,601 Trade accounts receivable, net of allowance for doubtful accounts of $520 and $826, respectively 11,676 12,347 Inventories 9,833 10,110 Prepaid income taxes and other expenses 2,081 1,537 Other current assets 737 1,121 Deferred income tax benefit 498 500 - ---------------------------------------------------------------------------------------------- Total current assets 30,527 33,216 Property, plant and equipment, net 51,010 54,249 Intangible assets, net of accumulated amortization of $4,490 and $3,906, respectively 11,685 12,797 Other assets, net of accumulated amortization of $379 and $316, respectively 8,893 9,233 - ---------------------------------------------------------------------------------------------- TOTAL ASSETS $102,115 $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)
October 1, 2000 January 2, 2000 --------------- --------------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Current portion of long-term debt $ 179 $ 418 Accounts payable - trade 3,824 4,647 Accrued salaries, wages and employee benefits 2,589 2,970 Other accrued liabilities 1,812 1,703 Income taxes payable 684 697 - ------------------------------------------------------------------------------------------------------------ Total current liabilities 9,088 10,435 - ------------------------------------------------------------------------------------------------------------ Long-term and revolving-term debt 38,744 43,544 - ------------------------------------------------------------------------------------------------------------ Other long-term liabilities: Other employee benefits 1,096 1,053 Other 5,614 5,826 - ------------------------------------------------------------------------------------------------------------ Total other long-term liabilities 6,710 6,879 - ------------------------------------------------------------------------------------------------------------ Minority interest 1,529 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 October 1, 2000 and January 2, 2000, respectively 7 7 Additional paid-in capital 16,886 16,801 Retained earnings 52,079 47,785 Less: Treasury stock, at cost, 1,040,847 and 966,765 shares at October 1, 2000 and January 2, 2000, respectively (10,861) (10,166) -------- -------- 58,111 54,427 Accumulated other comprehensive deficit: Cumulative translation adjustment (12,067) (7,203) - ------------------------------------------------------------------------------------------------------------ Total shareholders' equity 46,044 47,224 - ------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $102,115 $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 ------------------------------------ October 1, 2000 October 3, 1999 --------------- --------------- NET SALES $20,926 $22,222 - --------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of sales 11,636 13,048 Selling, administration, research and development 4,920 5,009 Depreciation 1,331 1,372 - --------------------------------------------------------------------------------------------- 17,887 19,429 - --------------------------------------------------------------------------------------------- OPERATING INCOME 3,039 2,793 INTEREST EXPENSE, NET, INCLUDING AMORTIZATION OF DEBT ISSUANCE COST 694 595 OTHER INCOME (EXPENSE) (37) (17) - --------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 2,308 2,181 PROVISION FOR INCOME TAXES 670 582 - --------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 1,638 1,599 MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 52 97 - --------------------------------------------------------------------------------------------- NET INCOME $ 1,586 $ 1,502 ============================================================================================= NET INCOME PER SHARE - BASIC $ 0.28 $ 0.25 ============================================================================================= NET INCOME PER SHARE - DILUTED $ 0.28 $ 0.25 ============================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,666,718 6,021,483 ============================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 5,672,815 6,048,062 =============================================================================================
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)
Nine Months Ended ------------------------------------ October 1, 2000 October 3, 1999 --------------- --------------- NET SALES $63,999 $65,642 - --------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of sales 35,298 38,561 Selling, administration, research and development 16,242 15,653 Depreciation 4,079 4,088 - --------------------------------------------------------------------------------------------- 55,619 58,302 - --------------------------------------------------------------------------------------------- OPERATING INCOME 8,380 7,340 INTEREST EXPENSE, NET, INCLUDING AMORTIZATION OF DEBT ISSUANCE COST 2,029 1,655 OTHER INCOME (EXPENSE) (109) 49 - --------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 6,242 5,734 PROVISION FOR INCOME TAXES 1,809 1,543 - --------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 4,433 4,191 MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 138 98 - --------------------------------------------------------------------------------------------- NET INCOME $ 4,295 $ 4,093 ============================================================================================= NET INCOME PER SHARE - BASIC $ 0.76 $ 0.66 ============================================================================================= NET INCOME PER SHARE - DILUTED $ 0.76 $ 0.66 ============================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,673,675 6,217,052 ============================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 5,676,043 6,248,502 =============================================================================================
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)
Nine Months Ended --------------------------------- October 1, 2000 October 3, 1999 --------------- --------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 4,295 $ 4,093 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 4,717 4,635 Employee benefits (116) 670 Trade accounts receivable 617 486 Inventories (321) (293) Prepaid expenses and other assets (917) 52 Accounts payable and accrued liabilities (211) (1,201) Other 616 1,255 - ---------------------------------------------------------------------------------------------- Net cash provided by operating activities 8,680 9,697 - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Net expenditures for property, plant and equipment (4,745) (5,740) - ---------------------------------------------------------------------------------------------- Net cash used in investing activities (4,745) (5,740) - ---------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (383) (542) Proceeds from long-term debt borrowings 172 0 Net (repayments) borrowings under revolving credit line (4,313) 4,698 Proceeds from exercise of stock options 87 293 Purchase of treasury shares (960) (6,851) - ---------------------------------------------------------------------------------------------- Net cash used in financing activities (5,397) (2,402) - ---------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATES ON CASH (437) (163) - ---------------------------------------------------------------------------------------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (1,899) 1,392 CASH AND CASH EQUIVALENTS, beginning of period 7,601 6,497 - ---------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 5,702 $ 7,889 ============================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA: Interest paid $ 1,862 $ 1,690 Income taxes paid 1,662 628
The accompanying notes are an integral part of these financial statements. 7 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Sylvan Inc. and Subsidiaries October 1, 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 October 1, 2000. Inventories Inventories at October 1, 2000 and January 2, 2000 consisted of the following:
(in thousands) October 1, 2000 January 2, 2000 --------------- --------------- Growing crops and compost material $5,341 $ 5,021 Stores and other supplies 1,453 1,794 Mushrooms and spawn on hand 3,039 3,295 ------ ------- $9,833 $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 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, including the effect of stock options outstanding. Pursuant to the company's 1990 and 1993 stock option plans, options for a total of 1,259,750 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 October 1, 2000. 8 9 The following tables reconcile the number of shares utilized in the earnings per share calculations for the three and nine months ended October 1, 2000 and October 3, 1999.
Three Months Ended October 1, 2000 October 3, 1999 --------------- --------------- Net income (in thousands) $1,586 $1,502 ====== ====== Earnings per common share - basic $ 0.28 $ 0.25 ====== ====== Earnings per common share - diluted $ 0.28 $ 0.25 ====== ====== Common shares - basic 5,666,718 6,021,483 Effect of dilutive securities: stock options 6,097 26,579 --------- --------- Common shares - diluted 5,672,815 6,048,062 ========= =========
Nine Months Ended October 1, 2000 October 3, 1999 --------------- --------------- Net income (in thousands) $4,295 $4,093 ====== ====== Earnings per common share - basic $ 0.76 $ 0.66 ====== ====== Earnings per common share - diluted $ 0.76 $ 0.66 ====== ====== Common shares - basic 5,673,675 6,217,052 Effect of dilutive securities: stock options 2,368 31,450 --------- --------- Common shares - diluted 5,676,043 6,248,502 ========= =========
Options to purchase approximately 637,000 and 639,000 shares of common stock in the three and nine months ended October 1, 2000, respectively, and 424,000 and 386,000 shares of common stock in the three and nine months ended October 3, 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 October 1, 2000, the company had outstanding borrowings under the agreement of $35.1 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 October 1, 2000, a term loan amounting to 1.9 million Dutch guilders was outstanding under this agreement. 3. COMPREHENSIVE INCOME: Comprehensive income consisted of the following:
Three Months Ended (in thousands) October 1, 2000 October 3, 1999 --------------- --------------- Net income $ 1,586 $1,502 Other comprehensive income: Foreign currency translation adjustment (2,786) 1,254 ------- ------ Comprehensive (loss) income $(1,200) $2,756 ======= ======
Nine Months Ended (in thousands) October 1, 2000 October 3, 1999 --------------- --------------- Net income $ 4,295 $ 4,093 Other comprehensive income: Foreign currency translation adjustment (4,864) (2,419) ------- ------- Comprehensive (loss) income $ (569) $ 1,674 ======= =======
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 include 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 nine months ended October 1, 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 $16,003 $5,247 $21,250 1999 15,611 6,922 22,533 Intersegment revenues 2000 324 -- 324 1999 311 -- 311 Operating income 2000 3,550 367 3,917 1999 3,585 57 3,642
Nine Spawn Fresh Total Months Products Mushrooms Reportable (in thousands) Ended Segment Segment Segments ------ -------- --------- ---------- Total revenues 2000 $48,302 $16,681 $64,983 1999 44,956 21,610 66,566 Intersegment revenues 2000 984 -- 984 1999 924 -- 924 Operating income 2000 9,781 1,622 11,403 1999 9,171 907 10,078
Reconciliation to Consolidated Financial Data: - ---------------------------------------------
Three Months Ended Nine Months Ended (in thousands) Oct. 1, 2000 Oct. 3, 1999 Oct. 1, 2000 Oct. 3, 1999 ------------ ------------ ------------ ------------ Total revenues for reportable segments $21,250 $22,533 $64,983 $66,566 Elimination of intersegment revenues (324) (311) (984) (924) ------- ------- ------- ------- Total consolidated revenues $20,926 $22,222 $63,999 $65,642 ======= ======= ======= ======= Total operating income for reportable segments $ 3,917 $ 3,642 $11,403 $10,078 Unallocated corporate expenses (878) (849) (3,023) (2,738) Interest expense, net (694) (595) (2,029) (1,655) Other income (expense) (37) (17) (109) 49 ------- ------- ------- ------- Consolidated income before income taxes $ 2,308 $ 2,181 $ 6,242 $ 5,734 ======= ======= ======= =======
11 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS Sylvan Inc. and Subsidiaries RESULTS OF OPERATIONS (Three Months Ended October 1, 2000 and October 3, 1999) CONSOLIDATED REVIEW Net Sales
(dollars in thousands) 2000 1999 % Change ---- ---- -------- Net sales $20,926 $22,222 (6)
Net sales for the three months ended October 1, 2000 decreased by 6% from $22.2 million to $20.9 million. Four factors combined to create this net decrease. First, as detailed in the Fresh Mushrooms Segment discussion, Quincy Farms entered into a marketing arrangement in the first quarter of 2000 that changed its business structure. Operating income was not impacted, but the segment's net sales decreased by $1.7 million during the quarter ended October 1, 2000, as compared with the corresponding quarter of 1999. Second, the 2000 quarter includes $1.2 million in sales of the J.B. Swayne Spawn Company, which was acquired in the fourth quarter of 1999. Third, strengthening of the U.S. dollar had the effect of decreasing sales for the current quarter by approximately $2.1 million when compared with the third quarter of 1999. Last, sales increases, excluding Swayne, in the spawn and spawn products segment were $1.3 million. International sales for the quarter were 48% of the total, as compared with 51% for the corresponding 1999 quarter. Relative to the company's applicable foreign currencies, the U.S. dollar was approximately 15% stronger at the end of the current quarter than at the end of the third quarter of 1999. Operating Costs and Expenses
(dollars in thousands) 2000 1999 % Change ---- ---- -------- Cost of sales $11,636 $13,048 (11) Selling, administration, research and development 4,920 5,009 (2) Depreciation 1,331 1,372 (3)
The company's cost of sales, expressed as a percentage of sales, was 55.6% for the third quarter of 2000, as compared with 58.7% for the third quarter of 1999. Most of the reduction was due to increased production yields and efficiencies at Quincy. Selling, administration, research and development expenses decreased to $4.9 million, or 23.5% of sales, as compared with $5.0 million, or 22.5% of sales, for the corresponding 1999 period. Depreciation expense for the third quarter of 2000 was $1.3 million, $41,000 lower than for the third quarter of 1999. Interest Expense The company's net interest expense for the 2000 third quarter was $694,000, 17% higher than for the 1999 corresponding quarter. Most of this increase was due to a higher average borrowing level. The effective borrowing rate for the current quarter was 6.9%, as compared with 6.5% for the third quarter of 1999. Income Tax Expense The effective income tax rate was 29% for the third 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. 12 13 BUSINESS SEGMENTS Spawn Products Segment
(dollars in thousands) 2000 1999 % Change ---- ---- -------- Sales, including intersegment $16,003 $15,611 3 Operating expenses 12,453 12,026 4 Operating income 3,550 3,585 (1)
Net sales of spawn and spawn-related products were $16.0 million for the current quarter, a 3% improvement over the corresponding 1999 quarter. Spawn product sales volume increased by 15%, with a 42% increase in the Americas and a 1% increase in overseas markets. Much of the Americas increase was due to the Swayne acquisition in the fourth quarter of 1999. The company also had significant volume increases in the Netherlands, Italy and Poland. The overseas U.S. dollar equivalent selling price was 14% lower during the current quarter, due to the 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, which accounted for 14% of consolidated net sales for the third quarter of 2000, were 3% higher than for the third quarter of 1999. Operating expenses were $12.5 million for the third quarter of 2000. Within operating expenses, cost of sales was 49.5% of sales, as compared with 48.3% of sales for the corresponding 1999 quarter. The remaining operating expenses increased by 1% to $4.9 million for the current quarter. Operating income for the third quarters of 2000 and 1999 was $3.6 million and, as a percentage of sales, was 22% and 23%, respectively. Operating income was negatively impacted by a 15% strengthening of the U.S. dollar against applicable foreign currencies, with an effect of approximately $235,000 on operating income. Fresh Mushrooms Segment
(dollars in thousands) 2000 1999 % Change ---- ---- -------- Sales $5,247 $6,922 (24) Operating expenses 4,880 6,865 (29) Operating income 367 57 544
Fresh mushroom sales decreased during the current quarter to $5.2 million, as compared with $6.9 million for the corresponding period of 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 an outside party. Since Quincy no longer provides such value-added 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 12% when compared with the corresponding 1999 quarter. Highly competitive market conditions continue in the southeastern United States and are expected to remain through 2000; however, one of the largest mushroom producers in the United States recently disclosed its plans to close four of its farms that produce an estimated 45 million pounds, in aggregate, annually. Fresh mushrooms cost of sales was $3.7 million, or 70.8% of sales, for the third quarter of 2000, as compared with $5.5 million, or 79.6% of sales, for the corresponding 1999 quarter. This improvement was the result of the increase in pounds sold and the change in business structure related to the marketing arrangement. Fresh mushrooms operating income increased by 544% when compared with the corresponding 1999 quarter. When expressed as a percentage of sales, operating income for the current quarter was 7%. 13 14 RESULTS OF OPERATIONS (Nine Months Ended October 1, 2000 and October 3, 1999) CONSOLIDATED REVIEW Net Sales
(dollars in thousands) 2000 1999 % Change ---- ---- -------- Net sales $63,999 $65,642 (3)
Net sales for the nine months ended October 1, 2000 were $64.0 million, a 3% decrease when compared with the $65.6 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 $6.3 million decrease in sales. Operating income was not impacted by the structure change. After adjusting for the structure change, Quincy's sales would have increased by $1.4 million. Second, the first nine months of 2000 included $3.6 million in sales of Swayne, 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 $5.5 million, when compared with the corresponding 1999 period. Last, sales increases, excluding Swayne, in the spawn and spawn product segment were $5.3 million. International sales for the current nine-month period were 48% of the total, as compared with 50% for the nine months ended October 3, 1999. The U.S. dollar was approximately 13% stronger at the end of the current period, relative to the company's applicable foreign currencies, than at the end of the first nine months of 1999. Operating Costs and Expenses
(dollars in thousands) 2000 1999 % Change ---- ---- -------- Cost of sales $35,298 $38,561 (8) Selling, administration, 16,242 15,653 4 research and development Depreciation 4,079 4,088 --
The company's cost of sales, expressed as a percentage of sales, was 55.2% for the first nine months of 2000, as compared with 58.7% 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 nine months of 1999 in connection with the replacement of a blender that was removed from service at the Australian spawn facility. Selling, administration, research and development expenses increased to $16.2 million, or 25.4% of sales, as compared with $15.7 million, or 23.8% 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 associated with 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 was acquired as part of the May 1998 purchase of International Mushrooms Ltd. Fourth, additional ongoing costs were incurred by 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 that were assumed by an outside party under the terms of the new marketing arrangement. Depreciation expense for the current nine-month period was $9,000 less than for the corresponding 1999 period. 14 15 Interest Expense The company's net interest expense for the nine months ended October 1, 2000 was $2.0 million, 23% higher than the corresponding nine-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 6.9%, as compared with 6.5% for the first nine months of 1999. Income Tax Expense The effective income tax rate was 29% for the first nine 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 $48,302 $44,956 7 Operating expenses 38,521 35,785 8 Operating income 9,781 9,171 7
Net sales of spawn and spawn-related products increased by 7% to $48.3 million for the nine-month period ended October 1, 2000. Spawn product sales volume increased by 17%, with a 39% increase in the Americas and a 5% increase in overseas markets. Much of the Americas increase was due to the acquisition of Swayne in the fourth quarter of 1999. The company also had significant volume increases in the Netherlands, Italy, and France. The overseas U.S. dollar equivalent selling price was 12% lower during the current nine-month period, due to the 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 9% and accounted for 14% of consolidated net sales, as compared with 13% of consolidated net sales for the corresponding period of 1999. Operating expenses were $38.5 million for the first nine months of 2000. Within operating expenses, cost of sales was $23.1 million, or 49.8% of sales, as compared with $21.4 million, or 49.6% of sales, for the corresponding 1999 period. The remaining operating expenses increased by 7% to $15.5 million for the nine months ended October 1, 2000. The increase in other expenses related primarily to three items. First, the segment incurred a $0.2 million write-off of pre-construction costs associated with 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 incurred by operating the sales, administrative and research facilities of Swayne, which was acquired in November 1999. Operating income for the first nine months of 2000 and the first nine months of 1999 was 20% of sales. Operating income for the 2000 nine-month period was negatively impacted by a 12% strengthening of the U.S. dollar against applicable foreign currencies, as compared with the corresponding 1999 period, with an effect of $600,000 on operating income. 15 16 Fresh Mushrooms Segment
(dollars in thousands) 2000 1999 % Change ---- ---- -------- Sales $16,681 $21,610 (23) Operating expenses 15,059 20,703 (27) Operating income 1,622 907 79
Fresh mushroom sales decreased by 23% to $16.7 million for the first three quarters of 2000, as compared with $21.6 million for the corresponding period of 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 an outside party. Since Quincy no longer provides such value-added 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 8% when compared with the corresponding 1999 nine-month period. Fresh mushroom cost of sales for the nine months of 2000 was $11.3 million, or 67.5% of sales, as compared with $16.3 million, or 75.3% of sales, for the corresponding 1999 period. This 10% improvement was the result of the increase in pounds sold and the change in business structure related to the marketing arrangement. Fresh mushroom operating income increased by 79% when compared with the corresponding 1999 period. When expressed as a percentage of sales, operating income for the nine months ended October 1, 2000 was 10%, as compared with 4% for the nine months ended October 3, 1999. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the nine months ended October 1, 2000 was $8.7 million, as compared with $9.7 million for the corresponding period of 1999. The $1.0 million decrease was attributable to the timing of some payments. During the first nine months of 2000, more cash was expended, as compared with the corresponding 1999 period, in satisfying construction invoices and employee compensation and benefit payments that had been accrued at the prior year-end. In addition, the payment timing of non-income-related taxes, primarily overseas, and insurance premiums was attributable to the increase in prepaid expenses and other assets. Cash used by investing activities was $4.7 million for the nine months ended October 1, 2000, as compared with $5.7 million used during the corresponding period of 1999. Most of the decrease was due to the receipt of proceeds from the sale of Quincy's packaging and distribution equipment and of a small Irish mushroom farm that was ancillary to a 1998 acquisition. Most of the capital expenditures during the first nine months of 2000 were for growth opportunities in Ireland and Canada, expanded U.S. research and development facilities and replacement of chilling equipment at Quincy. Net capital expenditures in 2000 are expected to total between $6.0 million and $8.0 million for existing operations, with additional expenditures, as required, for acquisitions or new initiatives. The company has plans to expand its North American spawn and bioproducts operations. The cost to renovate the recently acquired Canadian spawn plant and expand the existing Dayton, Nevada spawn production facility is expected to be approximately $3.15 million. The cost for the bioproducts facility is expected to be approximately $3.3 million. Additionally, the company has plans to construct two $0.5 million satellite mushroom growing facilities. 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 $19.9 million as of October 1, 2000. Term debt and revolving debt decreased by $4.5 million during the nine months ended October 1, 2000, as 16 17 compared with an increase of $4.2 million during the corresponding period of 1999. Most of this decrease was due to positive cash flows from operations after capital additions and share purchases. During 1999, additional borrowings were necessary to support share purchases of $6.9 million. During the first nine months of 2000, the company purchased 99,400 shares of Sylvan common stock at an average price of $9.66 per share. By comparison, 608,100 shares were purchased during the first nine months of 1999 at an average price of $11.27 per share. Management expects to continue the purchase program, subject to the existence of 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 from existing local currencies 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. 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. 17 18 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 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 18 19 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 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: October 31, 2000 SYLVAN INC. By: /s/ DONALD A. SMITH -------------------------- Donald A. Smith Chief Financial Officer By: /s/ FRED Y. BENNITT -------------------------- Fred Y. Bennitt Secretary/Treasurer 19 EX-27 2 j8474401ex27.txt FINANCIAL DATA SCHEDULE
5 0000861291 SYLVAN INC. 1000 9-MOS DEC-31-2000 JAN-03-2000 OCT-01-2000 5,702 0 12,196 520 9,833 30,527 84,056 33,046 102,115 9,088 0 0 0 7 46,037 102,115 63,999 63,999 35,298 55,619 109 0 2,029 6,242 1,809 0 0 0 0 4,295 0.76 0.76
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