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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 29, 1996
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _____________ to ____________
COMMISSION FILE NO. 0-18339
SYLVAN INC.
(Exact name of registrant as specified in its charter)
NEVADA 25-1603408
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
828 SOUTH PIKE ROAD, SARVER, PA 16055
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (412) 295-3910
Securities registered pursuant to Name of each exchange on
Section 12(b) of the Act: which registered:
Title of each class
-------------------
None Not applicable
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $.001 PER SHARE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of the
registrant at March 12, 1997 was approximately $63,183,928. On such date, the
last sale price of registrant's common stock was $12.00 per share. Solely for
purposes of this calculation, shares beneficially owned by directors and
executive officers have been excluded. However, such exclusion is not intended
to be, nor is it to be deemed, a determination or an admission by the
registrant that such directors and officers are, in fact, affiliates of the
registrant.
Indicated below is the number of shares outstanding of each of the registrant's
classes of common stock as of March 12, 1997.
Outstanding on
Class March 12, 1997
----- --------------
COMMON STOCK, PAR VALUE $.001 PER SHARE 6,392,200
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K into which
Document the Document is Incorporated
-------- ----------------------------
DEFINITIVE PROXY STATEMENT TO SHAREHOLDERS PART III, ITEMS 10, 11, 12 AND 13
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PART I
ITEM 1. BUSINESS
Sylvan Inc. ("Sylvan," the "Company") is the successor to the business of a
Pennsylvania corporation which was chartered in 1937 and consists of a number
of subsidiaries which are engaged in the production and distribution of
mushroom spawn and fresh mushrooms. The Company was organized as a Delaware
corporation on March 27, 1989, under the name of Sylvan Foods Holdings, Inc.
The Company became a Securities and Exchange Commission registrant in August
1990 pursuant to the irrevocable distribution by the Company's then majority
shareholder, The Prospect Group, Inc., of the shares which it owned to its
shareholders. The Company changed its name to Sylvan Inc. in July 1994 in
conjunction with the change of its state of incorporation to Nevada from
Delaware. The Company's principal executive offices are at 828 South Pike Road,
Sarver, PA 16055.
Sylvan is the leading worldwide producer of mushroom spawn (the equivalent of
seed for mushrooms) and is a major distributor of a variety of other
value-added products for use by mushroom growers. It is also a producer of
fresh mushrooms for sale to retailers, distributors and processors of mushroom
products in the United States. Its growth strategy calls for devoting increased
capital and management resources to supplying spawn and other related products
and services to suitable markets throughout the world.
Spawn Operations: Spawn is produced by a process wherein carefully maintained
mushroom cultures are introduced into selected nutrient media to produce
inoculum suitable for commercial spawn production. The inoculum is then
combined with a sterile, grain-based substrate in a manner which promotes the
colonization of the mushroom cultures throughout the substrate. The resulting
culture-enriched substrate is measured into sterilized containers and the
filled containers are incubated in environmentally controlled growing rooms.
Once the incubation is complete, the containers are refrigerated until they are
shipped to customers who then initiate their crop production cycle by adding
this seed-like material to the composted growing medium from which the
mushrooms grow.
The Company conducts its operations principally through subsidiaries in the
United States, Europe and Australia and is a leading producer and distributor
of mushroom spawn and various spawn-related products in each of the markets in
which it has a presence. End-stage spawn production in most of the Company's
manufacturing facilities takes place in unique pressure vessels in highly
automated plants which are operated pursuant to rigorous quality-control
procedures. Plants are located in the United States, England, the Netherlands,
France and Australia and one is under construction near Budapest, Hungary.
Sylvan's English, Dutch and Australian plants function under arrangements
whereby certain prominent mushroom growers in each respective country possess
minority ownership of the operating company.
In the third quarter of 1996, the Company completed the construction of a
state-of-the-art spawn inoculum production plant in Kittanning, Pennsylvania.
It incorporates the industry's most advanced inoculum production techniques and
is capable of supplying all of the Company's inoculum requirements.
The Company's investment in biotechnical research has resulted in refinements
of techniques for genetic analysis of mushroom strains and its research
programs have produced some such strains with commercial suitability. Another
successful product is Sylvan Casing Inoculum ("CI"), a mushroom production
additive which is applied to the top layer of the medium from which the
mushrooms grow. It enables
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mushroom farmers to get more crops per year from their investment in raw
materials and equipment by shortening the mushroom growing cycle and reducing a
crop's exposure to disease. In addition to these spawn-related products, Sylvan
has distribution rights for products manufactured by others such as crop
nutritional supplements and pest control agents which are targeted for use by
mushroom growers.
Other Biological Products: Sylvan's production experience and research
capabilities may lend themselves to a variety of commercially viable microbial
production applications. The Company collaborates with several chemical,
biotechnological and pharmaceutical companies for the purpose of evaluating and
promoting these capabilities.
Mushroom Operations: Sylvan operates a mushroom farm located in Quincy,
Florida, which is one of the most modern and efficient mushroom production
operations in North America. It serves a strategic role for Sylvan as a
resource for production process innovations and as a showcase facility to
demonstrate the successful use of Sylvan products. The facility includes an
advanced computer-controlled production system with which compost is processed
more efficiently than with conventional systems. This system contributes to
lower per pound production costs and improved product quality. The mushrooms
produced there are sold to supermarkets, food processors and distributors in
the mideastern and southeastern United States and are marketed under the
registered trademark "Prime."
Mushrooms are grown indoors in a continuous production process which employs a
temperature- and humidity-controlled environment. Compost that is produced from
a carefully formulated and monitored mixture of hay or straw, water and various
organic supplements is pasteurized and spawn is then added to it. The spawn
colonizes the compost and, after about four to five weeks, grows into
harvestable mushrooms which are typically packaged and shipped to users.
PERSONNEL
On December 29, 1996, Sylvan had approximately 900 full-time employees, of whom
about 670 were engaged in production activities and 230 in supervision, sales
and administration. On December 31, 1995, Sylvan had approximately 930
full-time employees, of whom about 740 were engaged in production activities
and 190 in supervision, sales and administration.
The employees of the Company's French subsidiary are subject to a national,
industry-wide collective bargaining agreement. On March 14, 1996, the Company
experienced a partial-day work stoppage in connection with a labor organizing
effort at its Quincy, Florida, mushroom operation. Employees at that operation
are not subject to a collective bargaining agreement. Management believes that
its employee relations are good.
INFORMATION AS TO INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
Sylvan is engaged principally in one line of business: the production and
marketing of mushroom spawn, spawn-related products and fresh mushrooms. The
Company maintains a significant presence in the North American, European and
Australian spawn markets and possesses an opportunity to penetrate spawn
markets throughout the world.
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The segment data set forth below reflect operations for the 1996, 1995 and 1994
fiscal years.
(In $000's) 1996 1995 1994
---- ---- ----
Sales to unaffiliated customers:
North America 47,539 47,087 42,568
International 31,572 28,664 27,271
Operating profit:
North America 5,707 8,369 8,321
International 4,928 3,485 2,832
Identifiable assets:
North America 37,166 35,210 35,823
International 49,746 46,574 38,669
COMPETITIVE CONDITIONS
No single customer accounted for 10% or more of Sylvan's consolidated net sales
in 1996.
Spawn and Spawn-Related Products: Sylvan believes that there are seven firms in
the United States and three firms in Canada which produce and market almost all
of the spawn used by North American mushroom growers. Sylvan's principal North
American competitors are Campbell Soup Company, Lambert Spawn Company and J. B.
Swayne Spawn Company. Sylvan believes that its principal European competitors
are Italspawn and International Spawn. In addition, numerous smaller spawn
producers operate in the United States, Canada and in almost every European
country. Sylvan competes in the spawn market with strict quality, consistency
and reliability standards and through its availability of broad-based,
post-sale product support services to mushroom growers. Sylvan has, and is
further developing, the network by which it distributes its products and
services throughout the world.
Mushrooms: Sylvan believes that the top two producers of mushrooms in the
United States, in order of size, are Campbell's Fresh, Inc. (a division of
Campbell Soup Company) and Monterey Mushrooms, Inc. Sylvan's production levels
are comparable to those of a group of six to eight regional producers of
substantial size. The balance of the U.S. industry is fragmented, comprised of
about 200 small producers throughout the country. Quality, supply, consistency
and price are the principal competitive factors in the mushroom business.
Although Sylvan and its competitors have established brand names, competition
is principally at the grocery retailer or wholesaler level, rather than at the
consumer level. Non-North American competition is characterized primarily by
the importation into the United States and Canada of processed mushroom
products. However, processed mushrooms are not a material factor in Sylvan's
current operations because Sylvan competes primarily in the fresh mushroom
market. Due to the fragility of fresh mushrooms, Sylvan believes the fresh
mushroom market in the United States to be relatively safe from direct
non-North American competition. Fresh mushrooms have limited shelf life,
which, together with the relatively high cost of refrigerated transportation,
causes markets to be regional in nature. However, for the same reasons,
imbalances in supply and demand, from time to time, can and do induce price
changes.
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SEASONALITY
Spawn and spawn-related products sales are not seasonal, except to the extent
that the sales of spawn and most spawn-related products correlate to a mushroom
grower's expectations of consumer demand for mushrooms. Since mushrooms are
grown indoors, mushroom production is not particularly sensitive to many of the
problems normally associated with agricultural crops, such as production
seasonality and dependence on weather. However, mushrooms are susceptible to
bacterial, fungal and viral contamination which can reduce yields and affect
sales and earnings for periods of weeks or months. In addition, mushroom prices
are adversely impacted by the increased availability of a variety of other
fresh fruits and vegetables during the summer months.
RESEARCH
In 1996, Sylvan's research and development expenditures totaled $2.0 million,
as compared with $2.1 million in 1995 and $1.9 million in 1994. These
expenditures were focused on renegotiating reliability improvements, fungal
breeding, process enhancements and the development of new products. The Company
also utilizes contracted research efforts for specific studies which may be
useful, but fall outside of the scope of its expertise or capabilities. None of
these projects currently constitute a material proportion of the Company's
ongoing business.
PATENTS
The Company holds a U.S. patent and several non-U.S. patents which cover a
process and apparatus for the cultivation of cells on solid substrates. The
process and apparatus are used in conjunction with laboratory and technical
know-how for the production of mushroom spawn and are the means by which most
of Sylvan's spawn products are generated. The U.S. patent was issued in 1980
and the foreign patents were issued in various years from 1982 to 1986. Sylvan
is also the holder of a U.S. patent, issued in 1991, on a hybridized variety of
mushroom, the sale of which does not represent a significant part of the
Company's business. In addition, Sylvan was granted a patent in 1994 relating
to a technology and process which facilitates mushroom breeding and appears to
be capable of enhancing the Company's strain development and improvement
efforts.
The Company is the holder of a U.S. patent and several non-U.S. patents for a
sterilizable container for use in mushroom spawn production. The U.S. patent
was issued in 1977 and the non-U.S. patents were issued in various years from
1976 through 1979. It is also the holder of several Swiss patents which embody
a process for commercially producing spawn and spawn-related products and for
the use of a variety of nutrient substrates as incubation material for spawn.
The patented process is not currently employed by the Company. During 1996, the
Company acquired a process patent, which was issued in 1988, and certain
know-how related to compost supplement production.
The Company does not believe that its ability to maintain or improve its
competitive position is dependent upon its patents.
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ENVIRONMENTAL MATTERS
Certain phases of the mushroom production process create discharges of
conventional pollutants and other organic materials. Expenditures will
routinely be required in order to enable the Company's Quincy subsidiary to
comply with existing and future environmental laws and regulations.
The Company believes that the sale of the assets of its Moonlight Mushrooms,
Inc. subsidiary in May 1994 relieved it of the responsibility for compliance
with a Consent Order and Agreement with the Pennsylvania Department of
Environmental Resources ("DER") to which it was subject at the time.
FINANCIAL INFORMATION
Information regarding Sylvan's financial performance is set forth herein
beginning on page S-1.
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ITEM 2. PROPERTIES
Constructed in 1981 and expanded in 1990, the Company operates a 43,000 square
foot spawn production facility located in Kittanning, Pennsylvania and leases
40,000 square feet at a former mushroom farm located near Cabot, Pennsylvania,
for certain product quality maintenance activities. Also located in Kittanning
is the Company's 14,000 square foot inoculum production facility which opened
in the fall of 1996. The plant is capable of supplying the inoculum
requirements of all of the Company's spawn plants and a facility of the same
size and with the same capabilities is to be constructed in 1997 near the
Langeais, France spawn plant. A 22,000 square foot quality control farm is
under construction in Kittanning which, when completed in the spring of 1997,
will replace the leased property in Cabot. The Company also operates a 49,000
square foot state-of-the-art spawn plant in Dayton, Nevada, which commenced
commercial production in January 1993.
The Company's European operations include a modern 100,000 square foot spawn
plant located in Langeais, France. In addition, some of Sylvan's spawn cultures
maintenance and research operations are based in a 22,000 square foot facility
which it leases in Gossau-Zurich, Switzerland. A 74,000 square foot spawn plant
is operated in Yaxley, Peterborough, England, and is owned by White Queen Ltd.,
of which Sylvan is a 55% owner. Also at the site is White Queen's 1,500 square
foot agricultural chemical warehouse.
The Company and two Dutch companies which are active in the mushroom business
operate a 46,000 square foot spawn plant in Horst, the Netherlands. It
commenced commercial production in January 1995. In addition, the Company has a
14,000 square foot spawn plant in Windsor, Australia, which opened in the
middle of 1996. In 1995, the Company acquired property near Budapest, Hungary,
upon which a 26,000 square foot spawn plant is now being constructed and should
be in production by early summer.
Constructed in 1981 and expanded in 1991, the Company's mushroom farm in
Florida includes an efficient, largely state-of-the-art mushroom growing
facility of 300,000 square feet for its compost preparation, mushroom growing,
packaging and warehousing operations, and for maintenance and administrative
activities.
Incorporated into all of the Company's plants are cold storage areas and the
Company leases cold storage facilities in Verona, Italy; Poznan, Poland and
Kennett Square, Pennsylvania. In addition, some of the Company's distributors
maintain product inventories in cold storage.
ITEM 3. 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
No matters were submitted to a vote of security holders in the last quarter of
the 1996 fiscal year.
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EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Position
---- --- --------
Dennis C. Zensen 58 Chairman of the Board,
President and Chief Executive Officer
of Sylvan
Richard F. Lazzarini, Jr. 46 Director of Sylvan; President of Quincy
William P. Mooney 46 Chief Financial Officer of Sylvan
Fred Y. Bennitt 52 Secretary/Treasurer of Sylvan
Monir K. Elzalaki 41 President of Sylvan America
Michael A. Walton 47 Manager of European Operations
There is no arrangement or understanding between any executive officer and any
other person pursuant to which he was selected as an officer. The executive
officers of Sylvan were designated at the meeting of the Board of Directors
which was held on May 16, 1996. No family relationship exists among the
Company's officers and directors.
Biographical Information
The following sets forth the periods during which the executive officers of
Sylvan and its subsidiaries have served as such and a brief account of the
business experience of such persons during the past five years.
Mr. Zensen was elected chairman of Sylvan in July 1990 and has served as a
director, president and chief executive officer of Sylvan since April 1989. He
was president and chief executive officer of Quincy Corporation ("Quincy"), the
Company's Florida based mushroom farm from 1982 through 1991.
Mr. Lazzarini joined Quincy in February 1988 as general manager. He served as
executive vice president and chief operating officer of Quincy from April 1989
until July 1990 when he was elected president of Quincy and a director of
Sylvan.
Mr. Mooney became Sylvan's chief financial officer in November 1990. From
January 1989 until March 1990, he served as president and chief executive
officer of Leahy Records Management, Inc., Leahy Business Archives and Leahy
Properties, Inc., which are document management and information
storage/retrieval companies.
Mr. Bennitt joined Moonlight in July 1971. He has served as
secretary/treasurer of Sylvan since April 1989.
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Mr. Elzalaki was named president of the Company's Pennsylvania spawn production
subsidiary in March 1992 and president of the Company's Nevada spawn production
subsidiary in December 1992 at the time of its creation. He joined the
Pennsylvania company as its director of sales and marketing in April 1990 and
served as vice president and general manager from September 1990 until his
appointment as president.
Mr. Walton was named manager of Sylvan's European operations in 1995. He joined
Sylvan in connection with the acquisition of Hauser Champignonkulturen AG
("Hauser") in June 1992. At the time he was serving as managing director of
Hauser's U.K. subsidiaries, which included White Queen Limited and E. Hauser
(England) Limited. He continued in that capacity until his present appointment.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
Sylvan's Common Stock trades on The Nasdaq Stock Market under the symbol
"SYLN." Set forth below are the high and low sales prices for Sylvan's Common
Stock for 1996 and 1995, as reported by The Nasdaq Stock Market.
1996 High Price Low Price
---- ---------- ---------
1st Qtr. 13 11 5/8
2nd Qtr. 14 3/8 11 7/8
3rd Qtr. 13 3/8 9 3/4
4th Qtr. 13 3/8 10 1/2
1995 High Price Low Price
---- ---------- ---------
1st Qtr. 12 10 1/8
2nd Qtr. 12 10 1/2
3rd Qtr. 12 10 5/8
4th Qtr. 12 10 3/8
(b) Holders of Common Equity
At year-end 1996, there were about 3,000 shareholders of record of Sylvan
Common Stock.
(c) Dividends
Sylvan has never paid cash dividends and currently has a policy of retaining
its earnings to fund operations and expansion. The loan agreement referenced in
Item 1 of this report contains financial covenants which permit, but limit, the
payment of dividends by Sylvan during its term.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a Five-Year Summary of Operations and Other Related Data
with respect to Sylvan.
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FIVE-YEAR SUMMARY OF OPERATING AND OTHER RELATED DATA
(In Millions Except Share Data)
----------------------------- Fiscal Year Ended --------------------------------
1996 1995 1994 (b) 1993 1992
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales $79.1 $75.8 $69.8 $105.3 $106.9
Operating income 10.6 11.9 11.2 3.2 8.3
Net income (loss) available
to Common Stock 7.8 6.5 6.4 (8.7)(c) 4.6
Net income (loss) per Common share 1.21(a) 1.02 1.01 (1.40) 0.75
Weighted average shares 6,442,469 6,332,141 6,278,956 6,229,365 6,192,994
BALANCE SHEET DATA:
Total assets $86.9 $81.8 $74.5 $74.0 $85.2
Long-term debt, other
long-term liabilities and
cumulative preferred stock 34.5 35.6 35.9 24.8 41.3
Shareholders' equity 41.2 33.6 24.7 15.9 28.3
Working capital 13.0 10.6 9.0 (8.6) 10.9
Cash dividends per Common share -- -- -- -- --
- ---------------------
(a) See Notes 1 and 6 to the December 29, 1996 Consolidated Financial
Statements regarding the settlement of certain postretirement medical and
other benefit obligations.
(b) See Note 2 to the January 1, 1995 Consolidated Financial Statements
regarding the closure and sale of Moonlight Mushrooms, Inc.
(c) Reflects the cumulative catch-up adjustment occasioned by Sylvan's adoption
of SFAS No. 106, "Employers Accounting for Postretirement Benefits Other
Than Pensions," as of January 4, 1993.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
Sylvan evaluates its liquidity and capital resources position by reviewing its
cash position, its operating cash flow trends, its credit availability and its
capital expenditure requirements. During 1996, the Company increased its credit
availability by renegotiating and amending the amount, structure, pricing and
terms of its borrowing arrangements. The new $45 million borrowing arrangement
converted previous term debt to revolving credit, reduced amortization
requirements and increased the revolving availability by $20 million. The
revolving credit available will decrease in 1998 and subsequent years. At
December 29, 1996, unused credit was $21 million.
Net cash provided by operations was $6.4 million for 1996, paced by net income
of $7.8 million. Approximately $1.3 million of the net income resulted from a
nonrecurring litigation settlement gain. The October 1996 settlement required a
one-time lump-sum cash payment of $1.2 million by Sylvan to extinguish
postretirement medical benefits liabilities of more than $3.1 million. This,
coupled with increased investment in inventory and accounts receivable of $1.8
million, resulted in a $1.1 million decline in net cash provided by operations,
as compared with 1995. Net cash flow from operations was also below the 1994
level of $8.9 million, an amount which included nonrecurring items (including
an asset sale of and a nonrecurring benefit from the final collection of trade
accounts receivable from the Company's former Moonlight Mushrooms, Inc.
subsidiary).
In 1996, the Company's income from its spawn products made an increased
contribution to Sylvan's total income, consistent with higher sales for those
products and the Company's ongoing investment in spawn production assets.
During 1996, spawn product income was enhanced by higher capacity utilization
at the Netherlands plant and the renovation and expansion of the United Kingdom
plant, as well as the startup of the new Australian plant. Production cutbacks
in the Company's fresh mushroom operations, due to soft market conditions and a
labor-organizing effort, resulted in significantly lower operating income
levels there. The organizing effort caused a partial-day work stoppage during
March 1996, and some continuing, sporadic picketing of customers' retail
stores. Competitive conditions throughout the U.S. fresh mushroom industry are
likely to continue through some, or all, of 1997, resulting in an increasing
dependence on spawn product income and income derived from international
operations. The Company is evaluating a number of options which could improve
income contributions from its fresh mushroom business, including leasing or
selling some of the assets it utilizes in the latter stages of mushroom
growing. The alternatives are not expected to require material additional
capital expenditures.
Working capital requirements in 1996 were higher than in 1995. Trade accounts
receivable increased by $1.3 million, or 15%, as the Company increased the
proportions of its international sales and its spawn products, both of which
have longer normal trade credit terms than mushroom products. As measured by
days of sales outstanding, accounts receivable increased to 48 days for 1996
from 43 days in 1995. Inventory levels increased by $0.5 million, or 8%, but
remained at 59 days when expressed as days of inventory held. Cash declined by
$1.2 million and continued to be predominantly held in foreign currencies (80%)
in anticipation of capital investment outside of the United States. The Company
does not maintain a foreign currency hedging program to manage translation
risk, although it does occasionally use forward foreign exchange contracts for
larger, known cross-currency transactions. There were no forward currency
positions taken in 1996.
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Capital expenditures for 1996 were $10.0 million, as compared with the $7.1
million reported for 1995, and the $7.5 million reported for 1994. The
principal projects included a new inoculum production facility in Pennsylvania
($2.4 million), a spawn plant in Australia ($2.3 million) and work in progress
on the construction of a spawn plant in Hungary ($1.8 million). In addition,
capital expenditures for fresh mushroom operations were approximately $1.8
million. Management believes that less than half of its 1996 capital
expenditures were related to replacement projects. For 1994, 1995 and 1996,
capital expenditures totaled $24.6 million, of which more than 80% was directed
to spawn product operations expansion. The Company expects that for 1997,
capital expenditures will be in the $8 million to $10 million range and focused
on spawn product operations outside of the United States. Funding for these
investments will come from a combination of internally generated funds and from
borrowings under the Company's long-term revolving credit facility.
Since the closing of the Company's Moonlight Mushrooms, Inc. subsidiary in
1993, an aggressive effort has been made to settle various Moonlight employee
benefit liabilities. Settlement efforts generally involve negotiated agreements
which result in lump-sum cash payments which reduce or terminate future payment
obligations. During 1996, in addition to an ongoing multi-year effort to settle
self-insured workers' compensation claims, the Company made a one-time cash
payment of $1.2 million as a settlement of Moonlight's postretirement medical
benefit litigation relating to certain retirees eligible for these benefits.
The settlement will reduce cash outlays for future years, with an expected $0.4
million benefit in 1997. Additionally, the Company will benefit from a lower
annual imputed interest expense due to the liability reduction. Cash outlays
for self-insured workers' compensation liabilities are expected to decline to
approximately $0.5 million in 1997. These expenditures were $1.9 million in
1996, $4.5 million in 1995 and $2.0 million in 1994. The reduced cash
requirements for employee benefit liabilities improve the Company's ability to
internally generate funds needed for capital expenditures.
Sylvan does not pay a dividend on its Common Stock. Dividend payments are
permitted, but subject to limitations under the terms of the Company's credit
agreement.
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RESULTS OF OPERATIONS
--------------------- Fiscal Year Ended ------------------
(In millions) Dec. 29, 1996 Dec. 31, 1995 Jan. 1, 1995
------------- ------------- ------------
NET SALES $ 79.1 $ 75.8 $ 69.8
OPERATING COSTS AND EXPENSES:
Cost of sales 45.3 42.3 38.4
Selling and administrative 16.9 15.1 14.6
Research and development 2.0 2.1 1.9
Depreciation 4.3 4.0 3.4
Noncash interest cost of employee benefits - - 0.4 0.3
------- ------- --------
68.5 63.9 58.6
OPERATING INCOME 10.6 11.9 11.2
INTEREST EXPENSE, net 2.1 2.8 2.0
OTHER INCOME 2.2 - - 1.7
------- ------- --------
INCOME BEFORE INCOME TAXES 10.7 9.1 10.9
------- ------- --------
PROVISION FOR INCOME TAXES 2.9 2.6 4.5
------- ------- --------
NET INCOME $ 7.8 $ 6.5 $ 6.4
======= ======= =======
NET SALES
Sales increased by 4.4% to $79.1 million for 1996, from $75.8 million for 1995.
Unit shipments of spawn products in 1996 increased by 15% over 1995, with sales
gains reported in all sales territories. In addition, the unit growth rate
exceeded the 12% rate reported for 1995, as compared with 1994. Percentage
growth gains were strongest in France, where unit shipments declined in 1995
from the prior year, and in South America, Mexico and Eastern Europe. Spawn
products pricing trended upward slightly in Europe in 1996, as measured in
local currency, but was approximately equal to the 1995 level after adjusting
for a nearly 3% decline due to year-over-year changes in foreign currency
translation rates. Pricing in North American markets declined by approximately
3% for the year, reflecting higher utilization of volume price discounting
programs. In 1996, a larger proportion of North American sales was made to
customers who qualified for higher discount levels, as compared with 1995, and
this trend is likely to continue through 1997 as the Company's larger customers
maintain or expand production levels in an effort to offset a generally weak
fresh mushroom pricing environment. No changes were made to Sylvan's published
price list in North America in 1996, following a price increase in January
1995. The Company's products are typically priced above competitors' prices in
each selling territory. U.S. Department of Agriculture's crop reports, which
measure U.S. industry activity in pounds of mushrooms sold, showed a decrease
of 2.8% for the crop year ended June 30, 1994, an increase of 3.9% for the year
ended June 30, 1995, and a decrease of 0.3% for the year ended June 30, 1996.
Sales of specialty
13
15
products, which include compost nutritional supplements and disease control
agents, increased by 14% with growth in both North American and European
markets. This growth rate exceeds the 10% increase reported in 1995, as
compared with 1994. The Company expects to increase its emphasis on compost
supplements in North America in 1997 and may add its proprietary supplement
formulation to the product line.
The Company's fresh mushroom operation reported reduced net sales. Unit volume,
as measured by pounds sold, in 1996 declined by 10% from 1995 and 4% from the
1994 level. Average selling price per pound increased by 3% from 1995, but was
2% lower than the 1994 level. Average selling price is subject to fluctuations
based on prices and relative mix between the higher-priced fresh mushroom
channel and the lower-priced distribution channels to food processors. During
1996, the Company's mushroom operation increased its percentage of pounds sold
to the fresh distribution channel to 92%, an improvement from 87% for 1995 and
90% for 1994. On a percentage of total revenue basis, mushroom sales were 37%
of total revenues in 1996--the lowest percentage in the Company's history. On a
comparative basis, mushroom sales were 41% of 1995 total revenues and 44% of
1994 total revenues.
International sales continue to represent an increasing proportion of the
Company's total revenues. In 1996, international sales represented 40% of total
sales, as compared with 38% for 1995 and 39% for 1994. Because these revenues
are normally denominated in foreign currency, due to the global expansion of
its spawn operations, an increasing proportion of the Company's revenue is
subject to currency translation rate fluctuations. The Company expects that it
will continue to increase the proportion of its revenues which are not billed
in U.S. dollars.
COST OF SALES
The Company realized improved efficiencies in its European spawn production
facilities during 1996. In contrast, production cutbacks in its fresh mushroom
operation were not offset by a corresponding reduction of fixed expenses, and
this resulted in increased unit production costs in this area. Consequently,
the overall cost of sales expressed as a percentage of sales was 57.2% in 1996,
up from the 55.8% reported for 1995 and 55.0% for 1994.
Spawn product cost of sales was 50.9% of sales for 1996, as compared with 50.6%
for 1995. Included in these costs were approximately $200,000 of nonrecurring
expenses associated with the closing of the Growmaster production line in the
United Kingdom in the fourth quarter of 1996. The Growmaster product was
replaced by CI, a similar casing inoculum product with a production consistency
more reliable than Growmaster's. Additionally, spawn product cost of sales for
the second half of 1996 included increased quality control testing expenses.
After adjusting for these differences, spawn cost of sales for 1996 was 50.2%,
as compared with 50.6% for 1995. Production results as measured by discarded
production percentages were lowered by 23.0% from the 1995 level, and were
17.0% lower than the 1994 level. Raw material costs in the aggregate remained
stable as increases in grain substrate costs were offset primarily by
reductions in packaging costs.
Mushroom product cost of sales was adversely affected by a production cutback.
Fixed cost components in production and packaging operations resulted in a unit
cost increase of approximately 11%, compared with 1995 results. Compost raw
material costs were essentially unchanged, as lower-cost ingredients were
substituted to offset a price increase in cottonseed hulls, a compost
component. Packaging costs declined by approximately 7% from 1995, after a 6%
increase from 1994, but this savings was offset by a
14
16
more than $140,000 increase in propane energy costs. Labor costs increased
approximately 11%, of which half is attributable to a wage rate increase.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses increased by $1.8 million, or 12%, in 1996
as compared with 1995. Expressed as a percentage of sales, selling and
administrative expenses were 21.3% for 1996, 20.0% for 1995 and 20.9% for 1994.
The change was due to increased market development expense, higher professional
fees associated with a labor-organizing effort and higher U.S. employee medical
benefit expenses. Management expects that it will continue to aggressively
pursue market development opportunities in Asia, Mexico and South America. For
1997, expenses related to the development of these markets are expected to
outpace related revenue.
RESEARCH AND DEVELOPMENT
Expenditures for research and development in 1996 were 2.6% of sales, as
compared with 2.8% in 1995 and 2.7% in 1994. During 1996, the principal focus
of the Company's research effort was directed at improving the consistency and
reliability of existing products and processes. The Company also increased its
spending in technologies relating to compost nutritional supplements in
anticipation of a near-term proprietary product introduction. Research
personnel continued experiments to evaluate products manufactured by others,
which could be distributed through the Company's existing sales and marketing
organization. Contract research for exotic spawn development was performed in
both Eastern Europe and in China.
INTEREST EXPENSE
Net interest expense for 1996 declined by $656,000, or 24%, from 1995's level,
due to lower general interest rates, partial-year benefit from better pricing
from the Company's lenders and higher interest income. At year-end 1996,
approximately 73% of the Company's debt was subject to variable interest rates
linked to a Eurodollar borrowing base. The Company has a fixed-for-variable
interest rate swap contract arrangement with its banks. In 1994, the Company
entered into three of these swap agreements, each in the amount of $5 million,
with terms and rates varying for one, two and three years. During 1996, the
second of the three swap agreements expired, with a single $5 million contract
remaining until November 1997. During 1996, variable rates remained below the
fixed swap rate and resulted in the Company incurring expense of approximately
$200,000 to fulfill its obligation. The effect of these swap agreements was to
increase the Company's effective interest rate by 70 basis points.
OTHER INCOME
Other income increased by $2.1 million in 1996, as compared with 1995, due to
the nonrecurring gain of $1.9 million from the negotiated settlement of certain
postretirement medical benefit obligations. Excluding this item, other income
for 1996 was $231,000, as compared with $40,000 in 1995 and $684,000 in 1994
after excluding the $1.0 million nonrecurring gain from asset sales in that
year. The principal differences from 1995 include a $23,000 foreign currency
gain (compared with a $153,000 currency loss in 1995) and an insurance recovery
of $34,000.
15
17
INCOME TAXES
The Company's effective income tax rate for 1996 was 27%, as compared with 29%
for 1995 and 42% for 1994. As in 1995, the lower rate reflects the increasing
proportion of taxable income generated outside of the United States in
jurisdictions where the Company utilizes tax-advantaged financing structures.
As foreign earnings continue to increase, the Company expects that its overall
effective rate will increase in jurisdictions outside of those where the
Company has tax-advantaged financing structures, and thus, the overall
effective income tax rate will increase.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required is set forth as Exhibits beginning on page S-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
16
18
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The information required by this item is set forth under the caption "Election
of Directors" in Sylvan's definitive Proxy Statement to be filed pursuant to
Regulation 14A and is incorporated herein by reference.
(b) Identification of Executive Officers
The information required by this item is set forth in Part I of this Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is set forth under the caption
"Management Compensation and Benefit Plans" in Sylvan's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is set forth under the caption "Security
Ownership of Certain Beneficial Owners and Management" in Sylvan's definitive
Proxy Statement to be filed pursuant to Regulation 14A and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is set forth under the caption
"Transactions with the Company" in Sylvan's definitive Proxy Statement to be
filed pursuant to Regulation 14A and is incorporated herein by reference.
17
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) AND (2). FINANCIAL STATEMENTS AND SCHEDULES
The financial statements and financial statement schedule listed in the
accompanying Index to Financial Statements, Schedules and Exhibits are
filed as part of this annual report.
(3). EXHIBITS REQUIRED BY ITEM 601 OF REGULATION S-K
3.1 Restated Certificate of Incorporation -- previously filed as
Exhibit 3.2 on April 27, 1990 with the Company's Form 8 Amendment
to its Form 10 Registration Statement which was filed on March 25,
1990 and is incorporated herein by reference
3.2 Bylaws -- previously filed as Exhibit 3.2 on March 28, 1991 with
the Company's Form 10-K Annual Report for the fiscal year ended
December 30, 1990 and are incorporated herein by reference
10.1 Compensation Plans and Arrangements -- previously filed as (i)
Exhibit 10.3 on April 2, 1993 with the Company's Form 10-K Annual
Report for the fiscal year ended January 2, 1994 and (ii) Exhibit
10.1 on March 29, 1995 with the Company's Form 10-K Annual Report
for the fiscal year ended January 1, 1995 and are incorporated
herein by reference
10.2 Material Contracts -- (i) Revolving Credit Agreement dated as of
June 1, 1996 among Sylvan Inc., Sylvan Foods (Netherlands) B.V.,
Mellon Bank, N.A., individually and as issuing bank and as agent,
and ABNoAMRO Bank N.V., Pittsburgh Branch -- previously filed on
August 2, 1996 as Exhibit 10 with the Company's Form 10-Q Quarterly
Report for the period ended June 30, 1996 and is incorporated herein
by reference and (ii) Index of Exhibits to Revolving Credit
Agreement
11.1 Statement Re Computation of Primary Earnings (Loss) Per Share of
Common Stock
11.2 Statement Re Computation of Fully Diluted Earnings (Loss) Per Share
of Common Stock
13.1 Annual Report to Security Holders for the year ended December 29,
1996 -- to be filed by amendment to this Form 10-K as soon as
practicable
22.1 Subsidiaries of the Registrant
(b) REPORTS ON FORM 8-K
None
18
20
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 12th day of March,
1997.
By /s/ DENNIS C. ZENSEN
-----------------------
Dennis C. Zensen
President and CEO
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ DENNIS C. ZENSEN Chairman of the Board of March 12, 1997
- ------------------------------ Directors, President and
Dennis C. Zensen Chief Executive Officer
(Principal Executive Officer)
/s/ WILLIAM P. MOONEY Chief Financial Officer March 18, 1997
- ------------------------------ (Principal Financial and
William P. Mooney Accounting Officer)
/s/ WILLIAM L. BENNETT Director March 14, 1997
- ------------------------------
William L. Bennett
/s/ VIRGIL H. JURGENSMEYER Director March 17, 1997
- ------------------------------
Virgil H. Jurgensmeyer
/s/ RICHARD F. LAZZARINI, JR. President, Quincy Corporation March 12, 1997
- ------------------------------ Director
Richard F. Lazzarini, Jr.
/s/ DONALD T. PASCAL Director March 13, 1997
- ------------------------------
Donald T. Pascal
19
21
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
Exhibit No. Description Page No.
- ----------- ------------ --------
Consent of Independent Public Accountants S-
Report of Independent Public Accountants S-
Consolidated Balance Sheets at December 29, 1996 and December 31, 1995 S-
Consolidated Statements of Income for the Years Ended
December 29, 1996, December 31, 1995 and January 1, 1995 S-
Consolidated Statements of Changes in Shareholders' Equity
for the Years Ended December 29, 1996, December 31, 1995 and
January 1, 1995 S-
Consolidated Statements of Cash Flows for the Years Ended
December 29, 1996, December 31, 1995 and January 1, 1995 S-
Notes to Consolidated Financial Statements S-
Schedule II - Valuation and Qualifying Accounts for the Years
Ended December 29, 1996, December 31, 1995 and January 1, 1995 S-
Report of Independent Public Accountants on Financial
Statement Schedules S-
3.1 Restated Certificate of Incorporation (a)
3.2 Bylaws (b)
10.1.1 Sylvan Foods Holdings, Inc. 1990 Stock Option Plan, as amended (c)
10.1.2 Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan (c)
10.1.3 Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for
Nonemployee Directors (d)
10.2 Revolving Credit Agreement dated as of June 1, 1996 among
Sylvan Inc., Sylvan Foods (Netherlands) B.V., Mellon Bank,
N.A., individually and as issuing bank and as agent, and
ABNoAMRO Bank N.V., Pittsburgh Branch (e)
20
22
10.2.1 Index of Exhibits to Revolving Credit Agreement referred to
in Exhibit 10.2 E-
11.1 Computation of Primary Earnings (Loss) Per Share of Common
Stock E-
11.2 Computation of Fully Diluted Earnings (Loss) Per Share of
Common Stock E-
22.1 Subsidiaries of the Registrant E-
- ------------------
(a) This exhibit was previously filed on April 27, 1990 with the
Company's Form 8 Amendment to its Form 10 Registration
Statement which was filed on March 25, 1990 and is incorporated
herein by reference.
(b) This exhibit was previously filed on March 28, 1991 with the
Company's Form 10-K Annual Report for the fiscal year ended
December 30, 1990 and is incorporated herein by reference.
(c) This exhibit was previously filed on April 2, 1993 with the
Company's Form 10-K Annual Report for the fiscal year ended
January 3, 1993 and is incorporated herein by reference.
(d) This exhibit was previously filed on April 1, 1994 with the
Company's Form 10-K Annual Report for fiscal year ended January
2, 1994 and is incorporated herein by reference.
(e) This exhibit was previously filed on August 2, 1996 as Exhibit
10 with the Company's Form 10-Q Quarterly Report for the period
ended June 30, 1996 and is incorporated herein by reference.
21
23
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in this Form 10-K of our reports dated February 7, 1997 included in
Sylvan Inc.'s Annual Report to Shareholders for the year ended December 29,
1996. We also consent to the incorporation by reference of our reports into the
Company's previously filed registration statements on Form S-8 (No. 33-46797
and No. 33-86332), including the prospectuses therein, relating to the
Company's 1990 Stock Option Plan and on Form S-8 (No. 33-83962), including the
prospectuses therein, relating to the Company's 1993 Stock Option Plan for
Nonemployee Directors. It should be noted that we have not audited any
financial statements of the Company subsequent to December 29, 1996 or
performed any audit procedures subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
-----------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania
March 19, 1997
24
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 29, 1996 AND DECEMBER 31, 1995
TOGETHER WITH REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
25
SYLVAN INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 29, 1996 AND DECEMBER 31, 1995
CONTENTS
Page
----
FINANCIAL STATEMENTS:
Report of Independent Public Accountants 1
Consolidated Balance Sheets 2
Consolidated Statements of Income 4
Consolidated Statements of Changes in Shareholders' Equity 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Sylvan Inc.:
We have audited the accompanying consolidated balance sheets of Sylvan Inc. (a
Nevada corporation and the Company) and Subsidiaries as of December 29, 1996,
and December 31, 1995, and the related consolidated statements of income,
changes in shareholders' equity and cash flows for each of the three fiscal
years in the period ended December 29, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Sylvan Inc. and
Subsidiaries as of December 29, 1996, and December 31, 1995, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 29, 1996, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
February 7, 1997
27
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
December 29, December 31,
1996 1995
------------ ------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,220 $ 5,375
Trade accounts receivable (less allowance
for doubtful accounts of $1,031 and
$1,088, respectively) 10,336 9,025
Inventories (Note 2) 7,367 6,849
Prepaid income taxes and other expenses 967 741
Other current assets 738 669
Deferred income tax benefit 509 493
------- -------
Total current assets 24,137 23,152
------- -------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 3,000 2,754
Buildings 25,672 22,455
Equipment 39,293 34,228
------- -------
67,965 59,437
Less- Accumulated depreciation (20,260) (16,945)
------- -------
Total property, plant and
equipment, net 47,705 42,492
------- -------
INTANGIBLE ASSETS, net of accumulated
amortization of $2,255 and $1,794,
respectively 10,093 10,754
OTHER ASSETS, net of accumulated amortization
of $1,213 and $997, respectively 4,977 5,386
------- -------
TOTAL ASSETS $86,912 $81,784
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
28
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 29, December 31,
1996 1995
------------ ------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 3) $ 523 $ 1,559
Accounts payable - trade 3,484 4,197
Accrued salaries, wages and other
employee benefits (Note 4) 3,179 4,030
Accrued interest 443 289
Other accrued liabilities 1,771 1,587
Income taxes payable 1,744 890
------- -------
Total current liabilities 11,144 12,552
------- -------
LONG-TERM AND REVOLVING-TERM DEBT (Note 3) 30,168 26,842
------- -------
OTHER LONG-TERM LIABILITIES:
Other employee benefits (Note 6) 2,218 6,710
Other 2,142 2,045
------- -------
Total other long-term liabilities 4,360 8,755
------- -------
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares authorized,
6,480,092 and 6,354,792 shares issued and 6,373,867 and 6,258,567 shares
outstanding in 1996 and 1995, respectively 6 6
Common capital contributed in excess of par 14,377 13,070
Retained earnings 28,838 21,019
------- -------
43,221 34,095
Less- Treasury stock, at cost, 106,225 and 96,225
shares in 1996 and 1995, respectively (414) (281)
Cumulative translation adjustment 961 2,800
Pension adjustment (Note 6) (2,528) (2,979)
------- -------
Total shareholders' equity 41, 240 33,635
------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $86,912 $81,784
======= =======
The accompanying notes to consolidated financial statements are an integral
part of these statements.
29
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share Data)
1996 1995 1994
---------- ---------- ----------
NET SALES $ 79,111 $ 75,751 $ 69,839
---------- ---------- ----------
OPERATING COSTS AND EXPENSES:
Cost of sales 45,262 42,295 38,427
Selling and administrative 16,890 15,124 14,630
Research and development 2,031 2,110 1,863
Depreciation 4,261 3,967 3,384
Noncash interest cost of employee
benefits (Note 6) 32 401 382
---------- ---------- ----------
68,476 63,897 58,686
---------- ---------- ----------
OPERATING INCOME 10,635 11,854 11,153
INTEREST EXPENSE, net 2,096 2,752 1,979
OTHER INCOME 2,172 40 1,739
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 10,711 9,142 10,913
---------- ---------- ----------
PROVISION FOR INCOME TAXES (Note 5):
Current 991 1,299 1,681
Deferred 1,901 1,366 2,875
---------- ---------- ----------
2,892 2,665 4,556
---------- ---------- ----------
NET INCOME $ 7,819 $ 6,477 $ 6,357
========== ========== ==========
NET INCOME PER SHARE $ 1.21 $ 1.02 $ 1.01
========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 6,442,469 6,332,141 6,278,956
========== ========== ==========
The accompanying notes to consolidated financial statements are an integral
part of these statements.
30
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995, AND
JANUARY 1, 1995
(In Thousands Except Share Data)
Common
Capital
Common Stock Contributed Cumulative Total
--------------------- in Excess Retained Treasury Translation Pension Shareholders'
Shares Amount of Par Earnings Stock Adjustment Adjustment Equity
----------- --------- ---------- ---------- ---------- ------------- ------------ ---------------
BALANCE, January 2, 1994 6,272,763 $ 6 $11,904 $ 8,185 $ (63) $(1,608) $(2,495) $15,929
Exercise of stock
options 25,530 -- 176 -- -- -- -- 176
Stock option
compensation
expense -- -- 317 -- -- -- -- 317
Purchase of
treasury stock -- -- -- -- (96) -- -- (96)
Current year
translation
adjustment -- -- -- -- -- 2,105 -- 2,105
Increase in
pension adjustment -- -- -- -- -- -- (75) (75)
Net income -- -- -- 6,357 -- -- -- 6,357
--------- ------- --------- ---------- ---------- ---------- ----------- -----------
BALANCE, January 1, 1995 6,298,293 6 12,397 14,542 (159) 497 (2,570) 24,713
Exercise of stock
options 56,499 -- 356 -- -- -- -- 356
Stock option
compensation
expense -- -- 317 -- -- -- -- 317
Purchase of
treasury stock -- -- -- -- (122) -- -- (122)
Current year
translation
adjustment -- -- -- -- -- 2,303 -- 2,303
Increase in
pension adjustment -- -- -- -- -- -- (409) (409)
Net income -- -- -- 6,477 -- -- -- 6,477
--------- ------- --------- ---------- ---------- ---------- ----------- -----------
BALANCE, December 31, 1995 6,354,792 6 13,070 21,019 (281) 2,800 (2,979) 33,635
Exercise of stock
options 125,300 -- 1,149 -- -- -- -- 1,149
Stock option
compensation
expense -- -- 158 -- -- -- -- 158
Purchase of
treasury stock -- -- -- -- (133) -- -- (133)
Current year
translation
adjustment -- -- -- -- -- (1,839) -- (1,839)
Decrease in
pension adjustment -- -- -- -- -- -- 451 451
Net income -- -- -- 7,819 -- -- -- 7,819
--------- ------- --------- ---------- ---------- ---------- ----------- -----------
BALANCE, December 29, 1996 6,480,092 $ 6 $14,377 $28,838 $(414) $ 961 $( 2,528) $41,240
--------- ------- --------- ---------- ---------- ---------- ----------- -----------
The accompanying notes to consolidated
financial statements are an integral part of these statements
31
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
1996 1995 1994
----------- ----------- -----------
CASH FLOWS FROM OPERATIONS:
Net income $7,819 $6,477 $6,357
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 4,261 3,967 3,384
Amortization 677 699 592
Noncash interest cost of employee benefits 32 401 382
Deferred income taxes (55) (331) 1,219
Stock option compensation 158 317 317
Employee benefits (5,376) (2,429) (461)
Net gain on disposal of assets (24) (32) (1,055)
Trade accounts receivable (1,311) (327) 1,362
Inventories (518) (836) (1,038)
Prepaid expenses (295) 355 137
Other assets 393 (676) -
Accounts payable, accrued expenses
and other liabilities (238) (228) (3,089)
Income taxes payable 854 75 815
------ ------ ------
Net cash provided by operations 6,377 7,432 8,922
------ ------ ------
CASH FLOWS FROM INVESTING:
Expenditures for property, plant and equipment (9,980) (7,137) (7,483)
Proceeds from disposal of assets held for sale -- -- 3,365
------ ------ ------
Net cash used in investing (9,980) (7,137) (4,118)
------ ------ ------
CASH FLOWS FROM FINANCING:
Principal payments on long-term debt (5,579) (3,082) (5,847)
Net proceeds from European bank loans -- 4,090 -
Net borrowings (repayments) under revolving
credit loan 8,346 (2,901) (368)
Common stock transactions, net 815 234 75
------ ------ ------
Net cash provided by (used in) financing 3,582 (1,659) (6,140)
------ ------ ------
EFFECT OF EXCHANGE RATES ON CASH (1,134) 1,184 1,133
------ ------ ------
NET DECREASE IN CASH AND
CASH EQUIVALENTS (1,155) (180) (203)
CASH AND CASH EQUIVALENTS, beginning of period 5,375 5,555 5,758
------ ------ ------
CASH AND CASH EQUIVALENTS, end of period $4,220 $5,375 $5,555
====== ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $2,078 $2,658 $1,680
Income taxes paid 2,022 818 608
The accompanying notes to consolidated financial statements are an
integral part of these statements.
32
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Accounting Period
The Company maintains its accounting records on a 52-53 week fiscal year ending
the Sunday nearest December 31. The 1996, 1995 and 1994 fiscal years were
52-week years.
Principles of Consolidation
The accounts of majority owned or controlled subsidiaries are included in the
Company's statements only for the period subsequent to their acquisition. All
material intercompany transactions and balances have been eliminated in
consolidation.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Cash and Cash Equivalents
All cash equivalents are stated at cost, which approximates market. The Company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents. In addition, included in other assets is
a pledged, interest-bearing cash balance of approximately $3.1 million
maintained by a U.S. bank.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or
market.
Property, Plant and Equipment
The Company's property, plant and equipment are stated at cost and are
depreciated using the straight-line method over their estimated useful lives.
Upon disposal of property items, the asset and related accumulated depreciation
accounts are relieved of the amounts recorded therein for such items and any
resulting gain or loss is reflected in income.
33
For financial reporting purposes, the Company considers its depreciable assets
to have the following useful lives:
Land improvements 10-20 years
Buildings 30-40 years
Equipment 2-15 years
Intangible Assets
Intangible assets consist of the excess of cost over net assets of acquired
companies and are being amortized over 30 years or less. Subsequent to its
acquisitions, the Company continually evaluates whether later events and
circumstances have occurred that indicate that the remaining estimated useful
life of goodwill may warrant revision or that the remaining balance of
intangible assets may not be recoverable. When factors indicate that intangible
assets should be evaluated for possible impairment, the Company will use an
estimate of the relevant undiscounted cash flows over the remaining life of the
goodwill in measuring whether the goodwill is recoverable. The Company's
evaluations have not resulted in any revision to goodwill or its related
amortization period.
Other Income
Included in other income for the year ended December 29, 1996, is the gain of
approximately $1.9 million from the settlement of litigation related to
postretirement medical benefits for hourly employees of its defunct Moonlight
Mushrooms, Inc. subsidiary ("Moonlight"). Included in other income for the year
ended January 1, 1995, is the recognition of a gain of approximately $1 million
on the sale of substantially all of the assets of Moonlight.
Research and Development
Research and development costs are expensed as incurred.
Foreign Currency Translation
The financial statements of all foreign operations are translated using the
standards established by Statement of Financial Accounting Standards (SFAS) No.
52, "Foreign Currency Translation."
Assets and liabilities of non-U.S. operations are translated into U.S. dollars
using year-end exchange rates, while revenues and expenses are translated at
the average exchange rates for the year. The resulting net translation
adjustments are recorded as a separate component of shareholders' equity.
Transaction gains and losses are reflected in income.
Foreign Currency Exchange Risk Management
The Company evaluates and hedges foreign currency exchange risk exposure on a
transaction-by-transaction basis. As of December 29, 1996, the Company had no
outstanding foreign currency exchange contracts.
34
Interest Rate Risk Management
The Company uses interest rate swap agreements to convert a portion of its
floating rate debt to a fixed rate basis, thus reducing the impact of interest
rate changes on future results. The Company has an agreement with a bank as
counterparty. The agreement replaces the floating (Euro-rate) LIBOR basis with
a 90-day fixed LIBOR basis as described in the table below. At the end of each
90-day period, the Company and its counterparty make appropriate payments to
settle the difference between the floating rate LIBOR and the fixed rate LIBOR.
When floating rate LIBOR exceeds the fixed rate LIBOR at the beginning of a
90-day term, the counterparty will pay the difference between the rates for the
appropriate notional amount to the Company. Conversely, when the fixed rate
exceeds the floating rate, the Company will pay its counterparty. Amounts
receivable or payable under these swap agreements are recorded as an adjustment
to interest expense. The Company's swap agreement is as follows:
Notional Amount Expiration Date Fixed Rate %
--------------------------- ---------------------------- ------------------
$5,000,000 November 28, 1997 7.63
===========================
2. INVENTORIES:
Inventories are summarized as follows (in thousands):
December 29, 1996 December 31, 1995
------------------- -------------------
Growing crops and compost material $3,759 $3,532
Stores and other supplies 1,634 1,690
Mushrooms and spawn on hand 1,974 1,627
------ ------
$7,367 $6,849
====== ======
3. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:
The Company has a Revolving Credit Agreement (the Agreement) with a commercial
bank (the Bank) which was amended and restated on June 1, 1996. It provides for
revolving credit loans on which the aggregate outstanding balance available to
the Company may not initially exceed $45.0 million, but this aggregate
outstanding balance will decline over the life of the Agreement as follows:
35
Maximum Aggregate
Period Beginning Outstanding Balance
- ------------------------- ------------------------
June 1, 1996 $45.0 million
June 1, 1998 40.0 million
June 1, 1999 35.0 million
June 1, 2001 25.0 million
June 1, 2002 20.0 million
Outstanding borrowings under the Agreement bear interest at either the Prime
Rate or LIBOR (plus an applicable margin), at the Company's option. The
revolving credit loans mature on May 31, 2003. On December 29, 1996, the
Company had outstanding borrowings under the Agreement of $24.0 million.
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. Spending for capital projects and
payment of dividends are subject to annual limitations. The Company has pledged
to the lending banks a security interest in the capital stock of its
subsidiaries.
The Company has allocated $2.0 million of its credit capacity to support
stand-by letters of credit which the Company maintains in connection with the
self-insurance of its subsidiaries' workers' compensation claims.
In 1995, the Company obtained Dutch Guilder financing for the acquisition of
plant and machinery in the Netherlands. Loans outstanding under the agreement,
amounting to approximately $3.1 million, are repayable in quarterly
installments over periods between four and nineteen years. Interest is payable
with each installment at a fixed rate of between 8.35% and 8.55% until 2000,
after which the interest rate may vary. The Company has granted a security
interest over certain Dutch assets to secure these borrowings.
The Company has a French-franc-denominated loan of $2.9 million. Interest is
payable based on a formula that utilizes a Paris Interbank Offer Rate plus an
applicable margin. Repayment is due in January 1998. The loan is supported by
a letter of credit.
The Company incurred approximately $2.2 million in gross interest expense
during 1996 at a weighted average interest rate of 7.87%. The contractual
principal payments due under the Company's loan agreements are as follows (in
thousands):
1997 $ 523
1998 3,602
1999 595
2000 348
Thereafter 25,623
------------
Total $30,691
============
36
4. ACCRUED SALARIES, WAGES AND OTHER EMPLOYEE BENEFITS:
Accrued salaries, wages and other employee benefits are composed of the
following (in thousands):
December 29, December 31,
1996 1995
------------- -------------
Accrued compensation $1,738 $2,064
Accrued vacation 583 618
Accrued workers' compensation 477 600
Accrued medical benefits 297 533
Other 84 215
------------ -------------
$3,179 $4,030
============ =============
For periods prior to October 1993, the Company utilized a self-insured workers'
compensation insurance program. The liability for these claims of $1.6 million
is reflected in the current and noncurrent liability sections ($477,000 and
$1.1 million, respectively) of the accompanying consolidated balance sheets.
The liability is calculated on a specific case analysis which determines the
expected cash payment stream associated with each injury.
5. INCOME TAXES:
The Company files a consolidated U.S. federal income tax return with its wholly
owned U.S. subsidiaries. The Company does not provide for federal income taxes
on unremitted earnings of non-U.S. subsidiaries.
The amounts of income before income taxes attributable to domestic and foreign
operations are as follows (in thousands):
Year Ended Year Ended Year Ended
December 29, 1996 December 31, 1995 January 1, 1995
--------------------- --------------------- -------------------
Domestic $5,821 $5,540 $7,943
Foreign 4,890 3,602 2,970
--------------------- --------------------- -------------------
Total $10,711 $9,142 $10,913
===================== ===================== ===================
37
The provision (benefit) for income taxes consisted of the following
(in thousands):
Year Ended Year Ended Year Ended
December 29, 1996 December 31, 1995 January 1, 1995
------------------- ------------------- -----------------
Current-
Federal $11 $277 $(288)
State 248 231 396
Foreign 732 791 1,573
Deferred-
Federal 1,901 1,366 2,876
State -- -- (1)
Foreign -- -- --
------------------- ------------------- -----------------
$2,892 $2,665 $4,556
=================== =================== =================
A reconciliation between income taxes computed by applying the statutory U.S.
federal income tax rate to income before income taxes and the actual provision
for income taxes is as follows (in thousands):
Year Ended Year Ended Year Ended
December 29, 1996 December 31, 1995 January 1, 1995
------------------- ------------------- -----------------
Income tax at U.S.
federal statutory
rate $3,642 $3,108 $3,710
State income taxes,
net of federal
income tax benefit 164 153 261
Foreign taxes at rates
other than
effective U.S. rates (825) (444) 564
Net (permanent benefits)
nondeductible charges (24) (99) 58
Tax credits -- (14) (25)
Other, net (65) (39) (12)
------------------- ------------------- -----------------
Total provision for
income tax $2,892 $2,665 $4,556
=================== =================== =================
38
The sources of deferred income taxes consist of the following (in thousands):
Year Ended Year Ended Year Ended
December 29, 1996 December 31, 1995 January 1, 1995
------------------------- ------------------------- -------------------------
Workers' compensation $66 $1,176 $452
Depreciation 130 (14) 1,532
OPEB 1,613 215 (95)
Moonlight closure-related
costs -- 82 1,128
Other, net 92 (93) (141)
------------------------- ------------------------- -------------------------
$1,901 $1,366 $2,876
========================= ========================= =========================
Temporary differences which generate significant portions of the Company's
deferred tax assets and liabilities as of December 29, 1996, and December 31,
1995, were (in thousands):
-------------------------------------------------------
December 29, 1996 December 31, 1995
------------------------- -------------------------
Postretirement benefits other
than pensions $(405) $(2,018)
Depreciation 3,372 3,242
Workers' compensation (536) (602)
Net operating loss carryforwards (1,207) (1,017)
Other, net (339) (431)
------------------------- -------------------------
Total 885 (826)
Less- Valuation allowance 1,207 1,017
------------------------- -------------------------
Net deferred tax liability $2,092 $191
========================= =========================
Included in net deferred tax liabilities at December 29, 1996, are unrealized
tax benefits amounting to $1.2 million related to net operating loss
carryforwards. The realization of these tax benefits is contingent on future
taxable net income being generated in certain international operations. The
life of the carryforwards is determined by various international taxation
jurisdictions, and will expire over periods ranging from one year to an
indefinite period. The Company has recognized a valuation allowance that
reduces the carrying value of unrealized net tax benefits relating to net
operating loss carryforwards to offset the deferred tax benefits that may not
be realized.
39
6. EMPLOYEE BENEFITS:
The Company has a noncontributory defined benefit pension plan covering
substantially all of the former employees of Moonlight and certain employees of
Sylvan America, Inc., a wholly owned subsidiary of the Company. The Company's
funding policy is to contribute annually an amount that satisfies the minimum
funding requirement under the Employee Retirement Income Security Act and that
is also deductible for federal income tax purposes.
The accumulated benefit obligation at December 29, 1996, and December 31, 1995,
was $30.1 million and $29.9 million, respectively, all of which was fully
vested. The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligation was 7.25% for both the years
ended December 29, 1996, and December 31, 1995. The expected long-term rate of
return on assets was 9.0% for both years. The plan's assets consist primarily
of U.S. government obligations, temporary deposits, common stocks and corporate
obligations.
The plan's funded status and amounts recognized in the Company's consolidated
balance sheets are set forth in the following table (in thousands):
December 29, December 31,
1996 1995
-------------------- --------------------
Projected benefit obligation for
service rendered to date $(30,144) $(29,882)
Fair value of plan assets 30,142 29,472
-------------------- --------------------
Projected benefit obligation in
excess of plan assets (2) (409)
-------------------- --------------------
Accrued pension liability $ (2) $ (409)
==================== ====================
Net pension cost (benefit) included the following components (in thousands):
Year Ended Year Ended Year Ended
December 29, 1996 December 31, 1995 January 1, 1995
---------------------- ---------------------- ----------------------
Interest cost on
projected benefit
obligation $2,083 $2,151 $2,116
Actual return on plan
assets (2,542) (5,664) 632
Net amortization and
deferral 173 3,678 (2,724)
---------------------- ---------------------- ----------------------
Net periodic pension
cost (benefit) $ (286) $ 165 $ 24
====================== ====================== ======================
40
The accumulated postretirement benefit obligation relating to the former
Moonlight operations as of December 29, 1996, and December 31, 1995, is
comprised of the following components (in thousands):
December 29, 1996 December 31, 1995
---------------------- ----------------------
Retirees $ 800 $4,341
Fully eligible active plan participants -- --
---------------------- ----------------------
Accrued postretirement benefit obligation 800 4,341
Unrecognized prior service cost (34) (278)
Unrecognized net gain (296) (1,325)
---------------------- ----------------------
Total accrued postretirement obligation $1,130 $5,944
====================== ======================
On October 31, 1996, the Company negotiated a settlement related to
postretirement medical benefits for hourly retirees of its former Moonlight
subsidiary. Under the settlement, the Company agreed to make a $1.2 million
lump-sum payment to the United Steelworkers of America AFL-CIO-CLC (USWA) in
exchange for the USWA's release of certain employment and benefit-related
claims of the Moonlight hourly retirees for current and future periods, and the
assumption by the USWA of the administration of the applicable benefit
programs. A noncash gain of approximately $1.9 million resulted from the
settlement of liabilities for postretirement medical benefits that had been
recorded in the financial statements. The remaining liability as of December
29, 1996, represents postretirement medical benefits for Moonlight's salaried
retirees.
The net postretirement benefit cost included the following components (in
thousands):
Year Ended Year Ended
December 29, 1996 December 31, 1995
-------------------- --------------------
Service costs-
benefits earned during the period $ -- $ --
Interest cost on accumulated
postretirement benefit
obligation 181 328
Net amortization (42) (92)
-------------------- --------------------
$139 $236
==================== ====================
41
This obligation was calculated using the provisions of the medical and life
insurance plans together with the relevant actuarial assumptions and health
care cost trend rates projected at rates of 7.5% in 1996 through 1997 and
declining by approximately .375% each year thereafter to 5.25% in 2003 and
thereafter. The effect of a rate increase of 1% annually in these assumed cost
trends would increase the accumulated postretirement benefit obligation at
December 31, 1996, by $60,000 and would have increased the fiscal 1996
postretirement benefit expense by approximately 7.50%. A discount rate of 7.50%
was used to determine the 1996 net periodic postretirement benefit cost and
liability at December 29, 1996.
7. STOCK OPTIONS:
In June 1991, the shareholders approved a stock option plan ("1990 Plan") for
employees and others who perform substantial services for the Company covering
600,000 shares of common stock, and subsequently approved the use of an
additional 600,000 shares by the 1990 Plan in June 1994. In June 1993, the
shareholders approved a stock option plan ("1993 Plan") for nonemployee
directors of the Company, covering 100,000 shares of common stock. The Company
accounts for both plans under the Accounting Principles Board Opinion No. 25,
under which no compensation cost is recognized for options granted at fair
market value.
Had compensation cost for this plan been determined in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation", the Company's net income and
earnings per share would have been reduced to the following pro forma amounts
(in thousands, except per share data):
1996 1995
---- ----
Net Income: As Reported $7,819 $6,477
Pro Forma 7,603 6,381
Primary EPS: As Reported $1.21 $1.02
Pro Forma 1.17 1.01
The SFAS No. 123 method of accounting has not been applied to options granted
prior to January 1, 1995, as the resulting pro forma compensation cost may not
be representative of that to be expected in future years.
The Board, through its Stock Option and Compensation Committee ("Board"), may
grant options for up to 1.2 million shares under the 1990 Plan, and up to
100,000 shares under the 1993 Plan. The Board has granted options on 925,500
shares through December 29, 1996, under the 1990 Plan, and 63,000 shares under
the 1993 Plan. Under both plans, the option exercise price equals the stock's
market price on date of grant. The 1993 Plan options are exercisable six months
from the grant date, and expire ten years after the grant. The 1990 Plan
options are generally exercisable one year from the grant date in installments
over a period of three to four years and expire after ten years.
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants made in 1996 and 1995, respectively: risk-free
interest rates of 6.47% and 6.34%; no expected dividend yields; expected lives
of 6.3 and 6.8 years; expected volatility of 20%.
42
A summary of the status of the Company's stock option plans at December 29,
1996, and December 31, 1995, and changes during the years then ended is
presented in the table and narrative below (shares in thousands):
1996 1995
----------------------------- -------------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
---------- ---------------- --------- ----------------
Outstanding at beginning
of year 680 $9.78 571 $9.01
Granted 81 10.95 165 11.23
Exercised (125) 7.57 (56) 6.31
Forfeited (7) 10.38 -- --
Expired -- -- -- --
--------- -------- ------- -------
Outstanding at end of year 629 10.36 680 9.78
--------- -------- ------- -------
Exercisable at end of year 402 10.03 325 8.96
Weighted average fair value
of options granted 4.08 4.30
The 629,000 options outstanding under both plans at December 29, 1996 have
exercise prices between $8 and $13.75 per share, with a weighted average
exercise price of $10.36 and a weighted average remaining contractual life of
6.4 years. 402,000 of these options are exercisable. The remaining 227,000
options have exercise prices between $8.75 and $12.38, with a weighted average
exercise price of $10.95 and a weighted average contractual life of 8.6 years.
8. NATURE OF OPERATIONS AND BUSINESS SEGMENT INFORMATION:
The Company is engaged in one line of business, the production of mushrooms and
mushroom spawn. However, the Company markets its products worldwide.
Identifiable assets are those assets that are identified with operations in
each geographic area. The North American segment consists of the United States,
Canada and Mexico. The international business segment is composed primarily of
operations in Western Europe.
43
(In Thousands)
----------------------------------------------------------------------
North America International Total
-------------------- -------------------- --------------------
1996:
Revenues $47,539 $31,572 $79,711
Corporate expenses 3,882 -- 3,882
Income from operations 5,707 4,928 10,635
Identifiable assets 37,166 49,746 86,912
1995:
Revenues $47,087 $28,664 $75,751
Corporate expenses 3,342 1,136 4,478
Income from operations 8,369 3,485 11,854
Identifiable assets 35,210 46,574 81,784
1994:
Revenues $42,568 $27,271 $69,839
Corporate expenses 3,558 701 4,259
Income from operations 8,321 2,832 11,153
Identifiable assets 35,823 38,669 74,492
No single customer accounted for 10% or more of Sylvan's sales during the years
ended December 29, 1996, December 31, 1995, or January 1, 1995. The majority of
the Company's trade accounts receivable are from regional mushroom growers. The
remaining portion of the Company's trade accounts receivable is from a number
of produce wholesalers in major cities within its marketing regions. Many of
these customers are privately held businesses with limited capital resources;
however, the Company's bad debt loss experiences with these entities compare
favorably with the Company's bad debt loss experience on its customer base as a
whole.
9. RELATED PARTY TRANSACTIONS:
During fiscal years 1996 and 1995, a nonemployee director's business interests
purchased spawn at fair market value totaling $611,000 and $598,000,
respectively, and sold mushrooms at fair market value totaling $111,000 in
1996, in trading with the Company's subsidiaries.
44
10. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
1996
Three Months Ended
(In Thousands Except Share Data)
----------------------------------------------------------------------------------------
March 31, June 30, September 29, December 29,
1996 1996 1996 1996
----------------- --------------------- --------------------- -------------------
Net sales $20,137 $18,730 $19,728 $20,516
Gross profit 8,899 8,094 8,232 8,624
Net income 1,862 1,543 1,419 2,995
Net income per share $ .29 $ .24 $ .22 $ .46
Weighted average number
of shares 6,418,939 6,465,735 6,414,811 6,484,692
Net income for the three months ended December 29, 1996 includes an aftertax
net gain of approximately $1.3 million from the settlement of litigation
related to postretirement medical benefits of the Company's former Moonlight
subsidiary (see Note 1).
1995
Three Months Ended
(In Thousands Except Share Data)
----------------------------------------------------------------------------------------
April 2, July 2, October 1, December 31,
1995 1995 1995 1995
----------------- --------------------- --------------------- -------------------
Net sales $19,055 $18,085 $18,771 $19,840
Gross profit 8,368 7,986 8,190 8,912
Net income 1,650 1,437 1,613 1,777
Net income per share $ .26 $ .23 $ .25 $ .28
Weighted average number
of shares 6,332,265 6,336,662 6,342,164 6,338,524
11. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
AND SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK:
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value. Fair value is defined as the amount at which the instrument could
be exchanged in a transaction between willing parties.
45
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt
The fair values of the Company's long-term debt is estimated based on the
quoted market prices for the same or similar issues or on the current rates
offered to the Company for debt of the same remaining maturities. The Company
is satisfied that the stated value of its variably priced long-term debt
approximates fair market value.
Interest Rate Swaps
The fair value of these instruments is based on the difference between the
interest rates either received or paid on the notional amount of the underlying
liabilities. The calculation of fair value was computed on a net present value
basis as if the financial instruments were terminated on the balance sheet
date. A relationship spread was developed based on the difference between the
three-month LIBOR and quoted three-month treasuries. This spread was added to
the quoted treasury yield for the respective maturity period of the financial
instruments and used to compute the net present value. The negative or positive
fair value is an estimate of the amounts that the Company would either pay or
receive to cancel the contracts outstanding at the balance sheet date. The
instruments have no carrying value and had fair value deficit of $98,000 and
$324,000 as of December 29, 1996, and December 31, 1995, respectively.
46
SCHEDULE II
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 29, 1996, DECEMBER 31, 1995
AND JANUARY 1, 1995
(In Thousands)
----------Additions---------
Balance at Charged to Deductions Balance
Beginning Costs and from at End
Description of Period Expenses Recoveries Reserves Other of Period
- -------------------------------------------------------------------------------------------------- -------- ---------
Year ended
December 29,
1996-
Allowance for
doubtful
accounts $1,088 $108 $11 ($120)(a) ($56)(b) $1,031
====== ==== === ===== ==== ======
Year ended
December 31,
1995-
Allowance for
doubtful
accounts $954 $81 $117 ($77)(a) $13 (b) $1,088
==== === ==== ==== === ======
Year ended
January 1,
1995-
Allowance for
doubtful
accounts $903 $243 $17 ($181)(a) ($28)(c) $954
==== ==== === ===== ==== =====
(a) Represents uncollected accounts charged against the allowance
(b) Represents the effect of currency translation adjustments
(c) Represents a reclassification of reserves due to plant shutdown and the
effect of currency translation adjustments
47
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and
Shareholders of Sylvan Inc.:
We have audited in accordance with generally accepted auditing standards, the
financial statements included in Sylvan Inc.'s annual report to shareholders
incorporated by reference in this Form 10-K, and have issued our report thereon
dated February 7, 1997. Our audit was made for the purpose of forming an
opinion on those statements taken as a whole. The schedule listed in the index
in Item 14(a) of this Form 10-K is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the
audit of the basic financial statements and, in our opinion, fairly states in
all material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
------------------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
February 7, 1997