-----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, MHjKpRwf+NGwliQWNNv5XO2c17Fn02CKnmTgnImWaIVhzK/d1zC4W3WyCGDJDwue 8c21OnSgSoVFOu+Y/5rouQ== 0000950128-01-500378.txt : 20010808 0000950128-01-500378.hdr.sgml : 20010808 ACCESSION NUMBER: 0000950128-01-500378 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010701 FILED AS OF DATE: 20010807 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYLVAN INC CENTRAL INDEX KEY: 0000861291 STANDARD INDUSTRIAL CLASSIFICATION: AGRICULTURE PRODUCTION - CROPS [0100] IRS NUMBER: 251603408 STATE OF INCORPORATION: NV FISCAL YEAR END: 0103 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18339 FILM NUMBER: 1699550 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 j8977901e10-q.txt FOR QUARTER ENDED JULY 1, 2001 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 1, 2001 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, 2001...5,524,919 2 SYLVAN INC. AND SUBSIDIARIES INDEX
Page No. -------- PART I - FINANCIAL INFORMATION Item 1. Condensed Consolidated Balance Sheets, July 1, 2001 and December 31, 2000..............................................................3 Condensed Consolidated Statements of Income, Three Months Ended July 1, 2001 and July 2, 2000.............................................................5 Condensed Consolidated Statements of Income, Six Months Ended July 1, 2001 and July 2, 2000.............................................................6 Condensed Consolidated Statements of Cash Flows, Six Months Ended July 1, 2001 and July 2, 2000.............................................................7 Notes to Condensed Consolidated Financial Statements, July 1, 2001....................................................................................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 4. Submission of Matters to a Vote of Security Holders............................................17 Item 6. Exhibits and Reports on Form 8-K..............................................................17
3 PART I - FINANCIAL INFORMATION Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS Sylvan Inc. and Subsidiaries (In thousands)
July 1, 2001 December 31, 2000 ------------ ----------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 5,595 $ 5,371 Trade accounts receivable, net of allowance for doubtful accounts of $502 and $497, respectively 11,767 12,740 Inventories 10,522 10,398 Prepaid income taxes and other expenses 1,723 1,420 Other current assets 4,071 1,634 - ------------------------------------------------------------------------------------------------------------- Total current assets 33,678 31,563 Property, plant and equipment, net 53,552 52,536 Intangible assets, net of accumulated amortization of $3,053 and $2,925, respectively 10,989 11,899 Other assets, net of accumulated amortization of $450 and $407, respectively 6,988 9,776 - ------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $105,207 $105,774 =============================================================================================================
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 1, 2001 December 31, 2000 ------------ ----------------- (Unaudited) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 2,327 $ 192 Accounts payable - trade 4,724 4,108 Accrued salaries, wages and employee benefits 2,081 2,653 Other accrued liabilities 1,141 896 Income taxes payable 639 690 - --------------------------------------------------------------------------------------------------------------- Total current liabilities 10,912 8,539 - --------------------------------------------------------------------------------------------------------------- Long-term and revolving-term debt 38,123 39,871 - --------------------------------------------------------------------------------------------------------------- Other long-term liabilities: Other employee benefits 1,038 1,056 Other 5,195 5,215 - --------------------------------------------------------------------------------------------------------------- Total other long-term liabilities 6,233 6,271 - --------------------------------------------------------------------------------------------------------------- Minority interest 1,630 1,559 SHAREHOLDERS' EQUITY: Common stock, voting, par value $0.001, 10,000,000 shares authorized, 6,691,601 and 6,681,601 shares issued at July 1, 2001 and December 31, 2000, respectively 7 7 Additional paid-in capital 17,026 16,885 Retained earnings 57,014 54,467 Less: Treasury stock, at cost, 1,166,682 and 1,156,682 shares at July 1, 2001 and December 31, 2000, respectively (12,019) (11,917) ------- ------- 62,028 59,442 Accumulated other comprehensive income (13,719) (9,908) - --------------------------------------------------------------------------------------------------------------- Total shareholders' equity 48,309 49,534 - --------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $105,207 $105,774 ===============================================================================================================
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 1, 2001 July 2, 2000 ------------ ------------ NET SALES $ 21,074 $ 20,740 - ------------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of sales 12,194 11,511 Selling, administration, research and development 5,005 5,257 Depreciation 1,309 1,388 - ------------------------------------------------------------------------------------------------------------- 18,508 18,156 - ------------------------------------------------------------------------------------------------------------- OPERATING INCOME 2,566 2,584 INTEREST EXPENSE, NET, INCLUDING AMORTIZATION OF DEBT ISSUANCE COST 625 682 OTHER INCOME (EXPENSE) 41 (20) - ------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 1,982 1,882 PROVISION FOR INCOME TAXES 594 544 - ------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 1,388 1,338 MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 16 42 - ------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,372 $ 1,296 ============================================================================================================= NET INCOME PER SHARE - BASIC $ 0.25 $ 0.23 ============================================================================================================= NET INCOME PER SHARE - DILUTED $ 0.25 $ 0.23 ============================================================================================================= WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,522,172 5,663,883 ============================================================================================================= WEIGHED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 5,580,688 5,666,211 ===============================================================================================================
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 1, 2001 July 2, 2000 ------------ ------------ NET SALES $ 41,954 $ 43,198 - ------------------------------------------------------------------------------------------------------------------- OPERATING COSTS AND EXPENSES: Cost of sales 24,105 23,787 Selling, administration, research and development 10,174 11,322 Depreciation 2,686 2,748 - ------------------------------------------------------------------------------------------------------------------- 36,965 37,857 - ------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 4,989 5,341 INTEREST EXPENSE, NET, INCLUDING AMORTIZATION OF DEBT ISSUANCE COST 1,243 1,335 OTHER INCOME (EXPENSE) (6) (72) - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 3,740 3,934 PROVISION FOR INCOME TAXES 1,122 1,139 - ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 2,618 2,795 MINORITY INTEREST IN INCOME OF CONSOLIDATED SUBSIDIARIES 70 85 - ------------------------------------------------------------------------------------------------------------------- NET INCOME $ 2,548 $ 2,710 =================================================================================================================== NET INCOME PER SHARE - BASIC $ 0.46 $ 0.48 =================================================================================================================== NET INCOME PER SHARE - DILUTED $ 0.46 $ 0.48 =================================================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON SHARES 5,519,864 5,677,153 =================================================================================================================== WEIGHTED AVERAGE NUMBER OF COMMON AND COMMON EQUIVALENT SHARES 5,566,012 5,677,605 ===================================================================================================================
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 1, 2001 July 2, 2000 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 2,548 $ 2,710 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 3,056 3,180 Employee benefits (446) (317) Trade accounts receivable 410 1,615 Inventories (535) (258) Prepaid expenses and other assets (436) (362) Accounts payable and accrued liabilities 1,253 (800) Other 122 152 - --------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,972 5,920 - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for property, plant and equipment (5,846) (4,118) Proceeds from sale of fixed assets 89 421 - --------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (5,757) (3,697) - --------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on long-term debt (164) (354) Proceeds from long-term debt borrowings -- 175 Net borrowings (repayments) under revolving credit line 848 (2,496) Proceeds from exercise of stock options 105 87 Purchase of treasury shares (102) (576) - --------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities 687 (3,164) - --------------------------------------------------------------------------------------------------------------- EFFECT OF EXCHANGE RATES ON CASH (678) (361) - --------------------------------------------------------------------------------------------------------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 224 (1,302) CASH AND CASH EQUIVALENTS, beginning of period 5,371 7,601 - --------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, end of period $ 5,595 $ 6,299 =============================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA: Interest paid $ 1,168 $ 1,261 Income taxes paid 1,334 1,288
The accompanying notes are an integral part of these financial statements. 7 8 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SYLVAN INC. AND SUBSIDIARIES JULY 1, 2001 (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 December 31, 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 Current Assets" as of July 1, 2001. Inventories Inventories at July 1, 2001 and December 31, 2000 consisted of the following:
(in thousands) July 1, 2001 December 31, 2000 ------------ ----------------- Growing crops and compost material $ 5,464 $ 5,521 Stores and other supplies 1,468 1,410 Finished products 3,590 3,467 ------- ------- $10,522 $10,398 ======= =======
Recent Pronouncement In June 2001, the Financial Accounting Standards Board issued SFAS No. 142, "Goodwill and Other Intangible Assets." Under its provisions, all goodwill and other intangible assets will no longer be routinely amortized under a straight-line basis of estimated useful life. Instead, they will be subject to assessments for impairment by applying a fair-value-based test. SFAS No. 142 is effective for fiscal years beginning after December 15, 2001. The company has not completed the process of evaluating the impact that will result from adopting it. 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 1,377,416 shares of the company's common stock have been granted and options for a total of 546,808 of these shares have been exercised as of July 1, 2001. 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 1, 2001 and July 2, 2000.
Three Months Ended Six Months Ended (in thousands) July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000 ------------ ------------ ------------ ------------ Net income $ 1,372 $ 1,296 $ 2,548 $ 2,710 ========= ========= ========= ========= Earnings per common share - basic $ 0.25 $ 0.23 $ 0.46 $ 0.48 ========= ========= ========= ========= Earnings per common share - diluted $ 0.25 $ 0.23 $ 0.46 $ 0.48 ========= ========= ========= ========= Common shares - basic 5,522,172 5,663,883 5,519,864 5,677,153 Effect of dilutive securities: stock options 58,516 2,328 46,148 452 --------- --------- --------- --------- Common shares - diluted 5,580,688 5,666,211 5,566,012 5,677,605 ========= ========= ========= =========
Options to purchase approximately 306,000 and 333,000 shares of common stock in the three and six months ended July 1, 2001, and 656,000 and 676,000 shares of common stock in the three and six months ended July 2, 2000, respectively, were outstanding, but were not included in the computation of diluted earnings per share because the exercise prices of these options were greater than the average market prices of the company's common shares for the respective periods. Reclassifications Certain reclassifications have been made to the July 2, 2000 financial statements to be consistent with the July 1, 2001 presentation. 2. LONG-TERM DEBT AND BORROWING ARRANGEMENTS: The company has a Revolving Credit Agreement with two commercial banks, dated August 6, 1998. It provides for revolving credit loans on which the aggregate outstanding balance available to the company may not initially exceed $55.0 million. This aggregate outstanding balance will decline over the life of the agreement as follows: Maximum Aggregate Period Beginning Outstanding Balance ---------------- ------------------- August 6, 2003 $50.0 million August 6, 2004 45.0 million Outstanding borrowings under the agreement bear interest at either the Prime Rate or LIBOR (plus an applicable margin) at the company's option. On July 1, 2001, the company had outstanding borrowings under the agreement of $36.9 million. The revolving credit loans mature on August 5, 2005. The agreement provides for the maintenance of various financial covenants and includes limitations as to incurring additional indebtedness and the granting of security interests to third parties. Obligations under the agreement are guaranteed by certain wholly owned subsidiaries of the company. The company has a French-franc denominated loan of 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 1, 2001, a term loan amounting to 1.8 million Dutch guilders was outstanding under this agreement. 9 10 3. COMPREHENSIVE INCOME: Comprehensive income consisted of the following:
Three Months Ended Six Months Ended (in thousands) July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000 ------------ ------------ ------------ ------------ Net income $1,372 $1,296 $ 2,548 $ 2,710 Other comprehensive income: Foreign currency translation adjustments (783) (116) (3,717) (2,078) Unrealized gains (losses) on derivatives designated and qualified as cash flow hedges, net of tax 107 -- (94) -- ------ ------ ------- ------- $ 696 $1,180 $(1,263) $ 632 ====== ====== ======= =======
The components of accumulated other comprehensive income consisted of the following:
(in thousands) July 1, 2001 December 31, 2000 ------------ ----------------- Foreign currency translation adjustments $(13,625) $ (9,908) Unrealized losses on derivatives designated and qualified as cash flow hedges, net of tax (94) -- -------- -------- Total accumulated other comprehensive income $(13,719) $ (9,908) ======== ========
On January 1, 2001, SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," was adopted by the company, resulting in the recording of current assets of $68,000, long-term assets of $272,000, current liabilities of $66,000, long-term liabilities of $190,000 and a decrease in accumulated other comprehensive income of $56,000. Floating-to-fixed interest rate swap agreements, designated as cash flow hedges, hedge the company's floating rate debt and mature at various times through August 2007. The fair value of these contracts is recorded in the balance sheet, with the offset to accumulated other comprehensive loss, net of tax. Based upon interest rates at July 1, 2001, the company expects to recognize net current liabilities of $36,000 into earnings in the next 12 months, related to derivative instruments. 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, fungal nutritional supplements and disease-control agents. During the quarter and six months ended July 1, 2001, 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 December 31, 2000 financial statements. 10 11
Three Spawn Fresh Total Months Products Mushrooms Reportable Ended Segment Segment Segments ----- ------- ------- -------- (in thousands) Total revenues 2001 $15,364 $ 6,031 $21,395 2000 15,723 5,338 21,061 Intersegment revenues 2001 321 -- 321 2000 321 -- 321 Operating income 2001 2,681 826 3,507 2000 2,983 554 3,537
Six Spawn Fresh Total Months Products Mushrooms Reportable Ended Segment Segment Segments ----- ------- ------- -------- (in thousands) Total revenues 2001 $30,990 $11,592 $42,582 2000 32,424 11,434 43,858 Intersegment revenues 2001 628 -- 628 2000 660 -- 660 Operating income 2001 5,578 1,344 6,922 2000 6,231 1,255 7,486
Reconciliation to Consolidated Financial Data:
Three Months Ended Six Months Ended (in thousands) July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000 ------------ ------------ ------------ ------------ Total revenues for reportable segments $21,395 $21,061 $42,582 $43,858 Elimination of intersegment revenues (321) (321) (628) (660) ------- ------- ------- ------- Total consolidated revenues $21,074 $20,740 $41,954 $43,198 ======= ======= ======= ======= Total operating income for reportable segments $ 3,507 $ 3,537 $ 6,922 $ 7,486 Unallocated corporate expenses (941) (953) (1,933) (2,145) Interest expense, net (625) (682) (1,243) (1,335) Other income (expense) 41 (20) (6) (72) ------- ------- ------- ------- Consolidated income before income taxes $ 1,982 $ 1,882 $ 3,740 $ 3,934 ======= ======= ======= =======
11 12 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS SYLVAN INC. AND SUBSIDIARIES RESULTS OF OPERATIONS (Three Months Ended July 1, 2001 and July 2, 2000) CONSOLIDATED REVIEW Net Sales (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $21,074 $20,740 2 Net sales for the three months ended July 1, 2001 increased by 2% to $21.1 million, as compared with $20.7 million for the three months ended July 2, 2000, due principally to three factors. First, Quincy Farms experienced a $0.7 million increase in sales due to a 7% increase in the number of pounds sold and a 5% higher price per pound. Second, sales of disease-control agents and fungal nutritional supplements increased by $0.6 million during the current quarter, as compared with the corresponding 2000 quarter. Third, at July 1, 2001, the U.S. dollar was approximately 8% stronger, when measured against the company's applicable foreign currencies, than at the end of the second quarter of 2000. The effect of this strengthening decreased sales for the current quarter by approximately $1.1 million, when compared with the second quarter of 2000. International sales were 46% of total sales, as compared with 45% for the quarter ended July 2, 2000. Operating Costs and Expenses (in thousands) 2001 2000 % Change ---- ---- -------- Cost of sales $12,194 $11,511 6 Selling, administration, research and development 5,005 5,257 (5) Depreciation 1,309 1,388 (6) The company's cost of sales, expressed as a percentage of net sales, was 57.9% for the second quarter of 2001, as compared with 55.5% for the second quarter of 2000. The fresh mushrooms segment improved its cost of sales percentage, while the spawn and spawn products segment cost of sales percentage increased. Selling, administration, research and development expenses decreased to $5.0 million, or 23.7% of net sales, as compared with $5.3 million, or 25.3%, for the corresponding 2000 period. Interest Expense The company's net interest expense for the second quarter of 2001 was $625,000, 8% lower than for the corresponding 2000 quarter. This decrease resulted from lower average interest rates during the second quarter of 2001, when compared with the prior year second quarter. The effective rate for the current quarter was 6.4%, as compared with 6.8% for the second quarter of 2000. The current quarter interest expense included a charge of $0.1 million related to ineffective interest rate hedge transactions. Income Tax Expense The effective income tax rate was 30% for the second quarter of 2001, as compared with 29% for the corresponding 2000 quarter. 12 13 BUSINESS SEGMENTS Spawn and Spawn-Related Products (in thousands) 2001 2000 % Change ---- ---- -------- Net sales, including intersegment $15,364 $15,723 (2) Operating expenses 12,683 12,740 -- Operating income 2,681 2,983 (10) Net sales of spawn and spawn-related products were $15.4 million for the current quarter, a 2% decrease, as compared with the corresponding 2000 quarter. Spawn products sales volume decreased by 5%, with a 19% decrease in the Americas countered by a 7% increase in overseas markets. Approximately one-half of the Americas' decrease was related to the reduction of sales to a customer that filed for bankruptcy protection during the fourth quarter of 2000 and closed five of its eight U.S. farms. In addition, the Americas also experienced increased competition in the eastern United States during the quarter ended July 1, 2001. The overseas U.S. dollar equivalent selling price was 7% lower during the current quarter, as compared with the corresponding quarter of 2000, due to the strengthening of the U.S. dollar, which was somewhat offset by local currency price increases. The selling price in the Americas decreased by 1% during the current quarter, as compared with the corresponding quarter of 2000. Sales of disease-control agents and fungal nutritional supplements, which accounted for 18% of the consolidated net sales for the second quarter of 2001, were 18% higher than for the second quarter of 2000. Operating expenses were $12.7 million for both the July 1, 2001 and July 2, 2000 quarters. Within operating expenses, cost of sales was 54.3% of net sales, as compared with 50.6% for the corresponding 2000 quarter. Beginning in the first quarter of 2001, and continuing into the second quarter, spawn production was transitioned from the company's higher-cost, more labor-intensive Kennett Square, Pennsylvania facility to the other two U.S. spawn production operations. Temporary inefficiencies arising out of this production transition increased the cost to produce at the Kennett Square facility. This, combined with a 19% decrease in sales volumes in the Americas, accounted for most of the increase in the cost of sales percentage. The Kennett Square facility began bioproducts production during the second quarter of 2001 and will undergo continued conversion through the remainder of 2001, which is expected to improve production efficiencies. The remaining operating expenses decreased by 9% to $4.7 million. This decrease was due to the continued strengthening of the U.S. dollar. Operating income, as a percentage of net sales, was 17% for the second quarter of 2001, as compared with 19% for the quarter ended July 2, 2000. Operating income was negatively impacted by the strengthening of the U.S. dollar, with an effect of $35,000. Fresh Mushrooms (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $ 6,031 $ 5,338 13 Operating expenses 5,205 4,784 9 Operating income 826 554 49 Net sales of fresh mushrooms increased during the current quarter to $6.0 million, as compared with $5.3 million for the corresponding period of 2000. This increase was due to a 7% increase in the number of pounds sold and a 5% higher price per pound. Quincy experienced an increase in its yield per square foot and an improvement in the quality of its mushrooms. In addition, the first two satellite farms commenced operations during the quarter. The fresh mushrooms cost of sales was $3.8 million, or 63.8% of net sales, for the quarter ended July 1, 2001, as compared with $3.5 million, or 66.5%, for the quarter ended July 2, 2000. The $0.3 million increase in the cost of sales on a quarter-over-quarter basis was due to higher production salaries ($0.2 million) and utilities ($0.1 million). The cost of sales, as a percentage of net sales, decreased during the quarter ended July 1, 2001, as compared with the quarter ended July 2, 2000. This was primarily due to the combination of higher 13 14 market prices and increased production yields, which reduced the average cost per pound. Fresh mushrooms operating income for the quarter ended July 1, 2001 was $0.8 million, or 14% of net sales, and was 49% greater than for the corresponding period of 2000. Operating income for the quarter ended July 2, 2000 was $0.6 million, or 10% of net sales. RESULTS OF OPERATIONS (Six Months Ended July 1, 2001 and July 2, 2000) CONSOLIDATED REVIEW Net Sales (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $41,954 $43,198 (3) Net sales for the six months ended July 1, 2001 were $42.0 million, a 3% decrease when compared with the $43.2 million for the corresponding 2000 period. At July 1, 2001, the U.S. dollar was approximately 8% stronger, when measured against the company's applicable foreign currencies, than at July 2, 2000. The effect of this strengthening was a decrease in sales for the six months ended July 1, 2001 of approximately $2.2 million, when compared with the first six months of 2000. International sales for the current six-month period were 48% of total sales, as compared with 47% for the six months ended July 2, 2000. Sales of disease-control agents and fungal nutritional supplements increased by $0.8 million during the six months ended July 1, 2001, as compared with the corresponding period of 2000. Operating Costs and Expenses (in thousands) 2001 2000 % Change ---- ---- -------- Cost of sales $24,105 $23,787 1 Selling, administration, research and development 10,174 11,322 (10) Depreciation 2,686 2,748 (2) The company's cost of sales, expressed as a percentage of net sales, was 57.5% for the first six months of 2001, as compared with 55.1% for the corresponding 2000 period. Improved margins at Quincy were more than offset by lower margins in the spawn and spawn products segment. Selling, administration, research and development expenses decreased to $10.2 million, or 24.3% of net sales, as compared with $11.3 million, or 26.2%, for the corresponding 2000 period. Approximately one-third of this decrease related to three items recorded in the spawn segment during the first quarter of 2000. The strengthening of the U.S. dollar had the effect of decreasing selling, administration, research and development expenses by $0.3 million during the six months ended July 1, 2001, as compared with the six months ended July 2, 2000. Interest Expense The company's net interest expense for the six months ended July 1, 2001 was $1.2 million, 7% lower than the corresponding six-month period of 2000. This decrease resulted from lower interest rates. The effective borrowing rate for the current period was 6.5%, as compared with 6.7% for the first six months of 2000. The interest expense for 2001 included a charge of $0.1 million related to ineffective interest rate hedge transactions. Income Tax Expense The effective income tax rate was 30% for the first six months of 2001, as compared with 29% for the corresponding 2000 period. 14 15 BUSINESS SEGMENTS Spawn and Spawn-Related Products (in thousands) 2001 2000 % Change ---- ---- -------- Net sales, including intersegment $30,990 $32,424 (4) Operating expenses 25,412 26,193 (3) Operating income 5,578 6,231 (10) Net sales of spawn and spawn-related products were $31.0 million for the six months ended July 1, 2001; a 4% decrease, as compared with $32.4 million for the six months ended July 2, 2000. Spawn product sales volume decreased by 5%, with a 16% decrease in the Americas and a 4% increase in overseas markets. Approximately one-half of the Americas' decrease was related to the reduction of sales to a customer that filed for bankruptcy protection during the fourth quarter of 2000 and closed five of its eight U.S. farms. In addition, the Americas also experienced increased competition in the eastern United States during the first six months of 2001. The overseas U.S. dollar equivalent selling price was 8% lower during the six months ended July 1, 2001, as compared with the corresponding period of 2000, due to the strengthening of the U.S. dollar. The selling price in the Americas decreased by less than 1% for the six-month period of 2001, as compared with the corresponding period of 2000. Sales of disease-control agents and fungal nutritional supplements, which accounted for 16% of the consolidated net sales for the six months of 2001, were 13% higher than for the six months ended July 2, 2000. Operating expenses were $25.4 million for the six months ended July 1, 2001 and $26.2 million for the six months ended July 2, 2000. Within operating expenses, cost of sales was 53.1% of net sales, as compared with 50.1% for the corresponding 2000 period. Beginning in the first quarter of 2001, and continuing into the second quarter, spawn production was transitioned from the company's higher-cost, more labor-intensive Kennett Square, Pennsylvania facility to the other two U.S. spawn production operations. Temporary inefficiencies arising out of this production transition increased the cost to produce at the Kennett Square facility. This, combined with a 16% decrease in sales volumes in the Americas, accounted for most of the increase in the cost of sales percentages. The company also experienced increased sales of disease-control agents and fungal nutritional supplements, which have a lower margin than mushroom spawn. The remaining operating expenses decreased by 10% to $9.6 million. This decrease was due to unusually high first quarter 2000 charges and the continued strengthening of the U.S. dollar. Operating income for the first six months of 2001 was $5.6 million, as compared with $6.2 million for the corresponding period of 2000. As a percentage of net sales, operating income was 18% for the first six months of 2001, as compared with 19% for the corresponding 2000 period. Operating income was negatively impacted by the strengthening of the U.S. dollar, with an effect of approximately $0.2 million. Fresh Mushrooms (in thousands) 2001 2000 % Change ---- ---- -------- Net sales $11,592 $11,434 1 Operating expenses 10,248 10,179 1 Operating income 1,344 1,255 7 Net sales of fresh mushrooms increased during the six months ended July 1, 2001 to $11.6 million, as compared with $11.4 million for the corresponding period of 2000. This increase was due to a 1% increase in the number of pounds sold. In addition, the first two satellite farms commenced operations during the quarter ended July 1, 2001. The fresh mushrooms cost of sales was $7.7 million, or 66.1% of net sales, for the six months ended July 1, 2001, as compared with $7.5 million, or 66.0%, for the six months ended July 2, 2000. Fresh mushrooms operating income for the six months ended July 1, 2001 was $1.3 million, or 11.6% of net sales, and was 7% 15 16 greater than for the corresponding period of 2000. Operating income for the six months ended July 2, 2000 was $1.3 million, or 11.0% of net sales. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities for the six months ended July 1, 2001 was $6.0 million, as compared with $5.9 million for the corresponding six-month period of 2000. Cash used by investing activities was $5.8 million for the six months ended July 1, 2001, as compared with $3.7 million used during the corresponding period of 2000. During 2001, approximately $2.7 million was expended on growth opportunities, including $1.3 million for the Quincy Farms satellite project, $1.1 million for the company's new Canadian spawn production facility and $0.3 million for the expansion of the company's Nevada spawn plant growing room. The remaining $3.1 million of maintenance capital expenditures included $0.8 million for chilling and other equipment for Quincy Farms, $0.6 million for cleanroom improvements and $0.3 million for production growing frames in France, and $0.1 million for Bioproducts research facilities. Approximately 75% of the company's total capital expenditures for the year occurred during the six months ended July 1, 2001. Capital expenditures in 2001 are expected to total between $7 million and $8 million for existing operations, of which approximately $4.0 million will be for maintenance capital, with additional expenditures as required for any acquisitions or new initiatives. The company routinely assesses its requirements for additional capital investments and 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 1, 2001. Term and revolving credit increased by $0.7 million during the six months ended July 1, 2001, as compared with a decrease of $2.7 million during the corresponding period of 2000. Most of this change related to funding requirements of a higher level of capital expenditures and increased U.S. federal income tax payments during 2001, which exceeded cash flows from operations. During the six months ended July 1, 2001, the company purchased 10,000 shares of Sylvan common stock at an average price of $10.19 per share. By comparison, 59,300 shares were purchased during the first six months of 2000 at an average price of $9.71 per share. Management expects to continue the share purchase program, subject to share availability and cost considerations. 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, a loss of a major customer, or changes in a specific country's or region's political or economic conditions. 16 17 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 December 31, 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Sylvan Inc.'s annual meeting of shareholders was held on June 8, 2001. At the meeting, the following individuals, constituting the full board, were elected directors of the company to serve for a term of one year, expiring in 2002. --------Number of Votes--------- For Withheld --- -------- William L. Bennett 5,302,052 14,900 Monir K. Elzalaki 5,126,352 190,600 Virgil H. Jurgensmeyer 5,298,158 18,794 Nelson Obus 5,301,559 15,393 Dennis C. Zensen 5,128,809 188,143 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 17 18 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 10.5.1 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 Form 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 Form 10-K Annual Report for the fiscal year ended January 2, 2000 and incorporated herein by reference 10.40 Collective Bargaining Agreement, dated January 21, 2001, between Quincy Corporation and the United Farm Workers of America, AFL-CIO, previously filed on March 23, 2001 with the company's Form 10-K Annual Report for the fiscal year ended December 31, 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 18 19 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: August 7, 2001 SYLVAN INC. ---------------------------- By: /s/ DONALD A. SMITH -------------------------------- Donald A. Smith Chief Financial Officer By: /s/ FRED Y. BENNITT -------------------------------- Fred Y. Bennitt Secretary/Treasurer 19 -----END PRIVACY-ENHANCED MESSAGE-----