Back to GetFilings.com
1
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 28, 1997
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)
333 MAIN STREET, P.O. BOX 249, SAXONBURG, PA 16056-0249
-------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (724) 352-7520
828 SOUTH PIKE ROAD, SARVER, PA 16055
-------------------------------------
(Former address -- changed since last report)
Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on which registered:
Title of each class Not applicable
-------------------
None
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 10, 1998 was approximately $79,970,000. On such date, the
last sale price of registrant's common stock was $14.50 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 10, 1998.
Outstanding on
Class March 10, 1998
----- -------------
COMMON STOCK, PAR VALUE $.001 PER SHARE 6,454,244
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
2
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 333 Main Street, P.O. Box 249, Saxonburg, PA
16056-0249.
Sylvan is the leading worldwide producer of mushroom spawn (the equivalent of
seed for mushrooms). It also participates in the mushroom industry as a major
distributor of a variety of other value-added products and services for use by
mushroom growers and it is 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 its spawn and related value-added 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 specific 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 specialized pressure vessels in plants
which are operated pursuant to rigorous quality-control procedures. Plants are
located in the United States, England, the Netherlands, France, Australia and
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.
The Company also operates a state-of-the-art spawn inoculum production plant in
Kittanning, Pennsylvania, which incorporates the industry's most advanced
production techniques and is capable of supplying all of the Company's inoculum
requirements. A similar inoculum production plant is under construction in
France and will replace the inoculum production operations being conducted at
the Company's Langeais facility. In addition, in the third quarter of 1997, the
Company commenced the production of nutritional supplements for mushroom compost
at a plant in Des Moines, Iowa.
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 strains which possess commercial suitability. Another
successful product is Sylvan Casing Inoculum ("CI"), a mushroom production
additive which is applied to
1
3
the top layer of mushroom compost. It enables 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,
Sylvan has distribution rights for products manufactured by others, such as 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 and Compost 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, produced from a
carefully formulated and monitored mixture of hay or straw, water and various
organic supplements, is pasteurized and spawn is 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 28, 1997, Sylvan had approximately 910 full-time employees, of whom
about 685 were engaged in production activities and 225 in supervision, sales
and administration. 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.
The employees of the Company's French subsidiary are subject to a national,
industry-wide collective bargaining agreement. The remainder of the Company's
workforce is not subject to collective bargaining arrangements although one U.S.
facility experienced a labor organizing effort in 1996. (See information
provided in Item 3, Legal Proceedings, on page 5 hereof.) Management believes
that its employee relations are good.
INFORMATION AS TO INDUSTRY SEGMENTS AND FOREIGN OPERATIONS
Sylvan is principally engaged 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.
2
4
The segment data set forth below reflect operations for the 1997, 1996 and 1995
fiscal years.
(In $000's) 1997 1996 1995
---- ---- ----
Sales to unaffiliated customers:
North America 48,544 47,539 47,087
International 33,016 31,572 28,664
Operating profit:
North America 4,745 5,707 8,369
International 6,728 4,928 3,485
Identifiable assets:
North America 38,316 37,166 35,210
International 55,364 49,746 46,574
COMPETITIVE CONDITIONS
No single customer accounted for 10% or more of Sylvan's consolidated net sales
in 1997.
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 North American
competitors include Lambert Spawn Company and J.B. Swayne Spawn Company. In
addition, Campbell's Fresh Inc. (a division of Campbell Soup Company) and
Amycel, Inc. (a division of Monterey Mushrooms, Inc.) are major U.S. spawn
producers, but much of their production is consumed by their mushroom production
affiliates. 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 and Compost: Sylvan believes that the top two producers of mushrooms
in the United States, in order of size, are Campbell's Fresh, Inc. 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 of supply and demand, from time to time, can and do induce
price changes.
3
5
SEASONALITY
Spawn and spawn-related product sales are not seasonal, except to the extent
that they 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 typically softened by the increased
availability of a variety of other fresh fruits and vegetables during the summer
months.
RESEARCH
In 1997, Sylvan's research and development expenditures totaled $1.5 million, as
compared with $2.0 million in 1996 and $2.1 million in 1995. These expenditures
were focused on strain 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 commercially
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 of 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
expires in August 1998 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
patents in 1994, 1996 and 1997 relating to a technology and process which
facilitate mushroom breeding and may be capable of enhancing the Company's
strain development and improvement efforts. The Company also holds a process
patent that was issued in 1988, relating to the production of its compost
nutritional supplements.
The Company holds 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 process is not
currently employed by the Company.
The Company does not believe that its ability to maintain or improve its
competitive position is dependent upon its patents.
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 to which it was subject at the time.
4
6
FINANCIAL INFORMATION
Information regarding Sylvan's financial performance is set forth herein
beginning on page F-1.
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
are the Company's 14,000 square foot inoculum production plant which opened in
1996 and a 22,000 square foot quality assurance facility which opened in 1997.
Another inoculum production plant of a size similar to the Pennsylvania plant is
under construction near the Company's Langeais, France, spawn plant. The Company
also operates a 49,000 square foot spawn plant in Dayton, Nevada, which
commenced commercial production in January 1993 and it leases a 12,000 square
foot facility in Des Moines, Iowa, in which it produces compost nutritional
supplements.
The Company's European operations include a 100,000 square foot spawn plant
located in Langeais, France. In addition, various spawn culture maintenance and
research operations are carried out in the Langeais facility and in a 22,000
square foot plant 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 a 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, 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 1996 and a 26,000
square foot spawn plant near Budapest, Hungary, which opened in 1997.
Constructed in 1981 and expanded in 1991, the Company's mushroom farm in Florida
is an efficient state-of-the-art mushroom growing facility of 300,000 square
feet in which its compost preparation, mushroom growing, packaging, warehousing,
maintenance and administrative activities are conducted.
Incorporated into most of the Company's plants are cold storage areas and the
Company leases cold storage facilities to support its sales operations in Italy,
Poland, Turkey, South Africa and Eastern Pennsylvania. In addition, some of the
Company's distributors maintain product inventories in cold storage.
ITEM 3. LEGAL PROCEEDINGS
The Company's Quincy Corporation subsidiary was served with a complaint filed in
the Circuit Court of the Second Judicial Circuit of Florida for Gadsden County.
The complaint seeks compensation, including loss of earnings, for a group of
approximately 56 former Quincy employees who allege that they were illegally
terminated in March 1996 as a result of their participation in collective
bargaining activities. The Company believes that the complaint and its claims
are without merit and that the outcome will not have a material adverse effect
on the Company's financial performance.
5
7
There are no other 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 1997 fiscal year.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following is a list of the names and ages of all of the executive officers
in the Company indicating the positions and offices with the Company held by
each person and each such person's most recent principal employment. There is no
arrangement or understanding between any executive officer and any other person
pursuant to which he was selected as an officer and no family relationship
exists among the Company's officers and directors. The annual appointment of
officers is scheduled to occur on May 6, 1998 at the organizational meeting of
the Board of Directors, which follows the Annual Meeting of Shareholders.
Name Age Position
---- --- --------
Dennis C. Zensen 59 Chairman of the Board,
President and Chief Executive Officer
of Sylvan
Richard F. Lazzarini, Jr. 47 Director of Sylvan; President of Quincy
William P. Mooney 47 Chief Financial Officer of Sylvan
Fred Y. Bennitt 53 Secretary/Treasurer of Sylvan
Monir K. Elzalaki 42 President of Sylvan America
Michael A. Walton 48 Manager of European Operations
Biographical Information
- ------------------------
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 to July 1990.
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.
6
8
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 the Company's former Moonlight Mushrooms, Inc. subsidiary in
July 1971. He has served as secretary/treasurer of Sylvan since April 1989.
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 Ltd. and E. Hauser
(England) Limited. He continued in that capacity until his present appointment.
7
9
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(SM) under the symbol
"SYLN." Set forth below are the high and low sales prices for Sylvan's common
stock for 1997 and 1996, as reported by The Nasdaq Stock Market(SM).
1997 High Price Low Price
---- ---------- ---------
1st Qtr. 13-1/4 11-1/2
2nd Qtr. 12-1/4 9
3rd Qtr. 15-3/8 10-1/2
4th Qtr. 15-5/8 12-1/4
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
(b) Holders of Common Equity
At year-end 1997, there were about 2,500 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 Company's revolving credit
agreement contains financial covenants which permit, but limit, the payment of
dividends by Sylvan.
ITEM 6. SELECTED FINANCIAL DATA
Set forth below is a Five-Year Summary of Operating and Other Related Data with
respect to Sylvan.
8
10
FIVE-YEAR SUMMARY OF OPERATING AND OTHER RELATED DATA
(In Millions Except Share Data)
-------------------------------Fiscal Year Ended----------------------
1997 1996 1995 1994 (c) 1993
- -------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA:
Net sales $81.6 $79.1 $75.8 $69.8 $105.3
Operating income 11.5 10.6 11.9 11.2 3.2
Net income (loss) 6.5 7.8 6.5 6.4 (8.7) (d)
Net income (loss) per common
share - diluted 1.01 1.23 (b) 1.04 1.02 (1.40)
Net income (loss) per common
share - basic 1.01 1.23 (b) 1.04 1.03 (1.41)
Weighted average shares - diluted (a) 6,406,544 6,354,379 6,251,015 6,223,499 6,204,497
Weighted average shares - basic (a) 6,395,971 6,344,609 6,225,995 6,198,171 6,187,730
BALANCE SHEET DATA:
Total assets $93.7 $86.9 $81.8 $74.5 $74.0
Long-term debt and other
long-term liabilities 36.4 34.3 35.6 35.9 24.8
Shareholders' equity 44.0 41.2 33.6 24.7 15.9
Working capital 16.9 12.7 10.6 9.0 (8.6)
Cash dividends per common share
-- -- -- -- --
- ---------------------
(a) Computation of weighted average number of shares outstanding restated to
conform with the provisions of SFAS No. 128, "Earnings per Share," adopted
by the Company December 28, 1997.
(b) See Notes 1 and 6 to the December 29, 1996 Consolidated Financial Statements
regarding the settlement of certain postretirement medical and other benefit
obligations.
(c) See Note 2 to the January 1, 1995 Consolidated Financial Statements
regarding the closure and sale of Moonlight Mushrooms, Inc.
(d) 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.
9
11
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 comparing its
investment requirements with its cash position, operating cash flow trends and
credit availability. During 1997, the Company increased its year-end cash
position above the 1996 level and also increased its net cash provided by
operations above both the 1996 and 1995 levels. Available credit under the
Company's $45.0 million revolving credit arrangement was $17.1 million as of
December 28, 1997. The arrangement provides for a reduction of the total credit
amount over a four-year period, with the first reduction to $40 million
effective June 1, 1998.
Net cash provided by operations was $10.4 million for 1997, as compared with
$6.4 million for 1996 and $7.4 million for 1995. Sylvan's net investment in
working capital (defined as the period-to-period change in the difference
between current assets and current liabilities) increased by $4.2 million in
1997 from the 1996 level. The principal contributors to this change were a $1.5
million increase in inventories and accounts receivable and a $1.6 million
reduction in current accounts payable, accrued expenses and employee benefit
payments. Net cash provided by operations for 1996 included a one-time lump-sum
payment of $1.2 million to extinguish certain liabilities connected with
postretirement medical benefits.
Working capital increases occurred in both North America and international
operations. Trade accounts receivables, as measured by days' sales outstanding,
increased to 50 from 48 in 1996 and from 43 in 1995. The increase is
attributable primarily to higher North American spawn products accounts
receivable due to longer average collection periods. Management increased the
allowance for doubtful accounts related to some of these receivables. Inventory,
excluding the impact of the French acquisition in December, increased to support
the higher sales activity of international operations. The $602,000 increase
follows increases of $518,000 in 1996 and $836,000 in 1995. When expressed as
days' inventory held, 1997 inventory increased to 62 compared with 59 for both
1996 and 1995.
Operating income attributed to the Company's fresh mushroom sales increased in
1997 over the 1996 level, as market conditions in the U.S. mushroom industry
improved during the fourth quarter of 1997. However, this income did not reach
the 1995 operating income level for this operation. Income from operations for
international spawn and spawn-related products continued to contribute both a
higher dollar equivalent amount and a higher percentage of revenue in 1997.
Management anticipates that in 1998 and future years, income from operations
attributable to the international segment will continue to increase as a
percentage of the total. North American spawn unit sales decreased in 1997 due
to the competitive market factors and, accordingly, achieved lower income from
operations.
Cash flows used for capital expenditures and acquisitions were $11.6 million for
1997, as compared with $10.0 million for 1996 and $7.1 million for 1995. Major
overseas capital expenditures included completion of a spawn production facility
in Hungary ($1.2 million) and the construction of additional spawn production
capacity in the Netherlands ($1.1 million). In North America, major projects
included the completion of a Pennsylvania quality assurance facility ($0.6
million), the acquisition of production equipment for compost nutritional
supplements in Iowa ($0.7 million), and construction of a portobello mushroom
production operation in Florida ($0.4 million). Replacement projects represented
less than half of total capital expenditures. Total capital expenditures for
1998 are expected to be in the $7 million to $10 million range, highlighted by
the construction of a new inoculum production and quality assurance facility in
France. The Company is continuing to assess its requirements for additional
capital investments as it addresses
10
12
the increased international demand for Sylvan products. The revolving credit
arrangement combined with net operating cash flows are expected to be sufficient
for funding 1998 capital expenditures.
In addition to customary expenditures for property, plant and equipment, the
Company acquired Tartarin S.A. in December 1997 for $3.9 million and repurchased
34,200 shares of Sylvan common stock at an average price of $11.07. The Company
obtained modifications to its revolving credit agreement to accommodate these
transactions. The stock repurchase plan was announced in May 1997 and permits
the expenditure of up to $6.0 million for shares. Management expects to continue
the repurchase program during 1998, subject to price and share availability
conditions that make such transactions financially beneficial.
The cash outlays for liabilities relating to the 1993 closure of a former Sylvan
subsidiary continue to decrease. The Company paid $0.5 million in self-insured
workers' compensation, as compared with $1.9 million for 1996 and $4.5 million
for 1995. Payments for postretirement medical benefits totaled $0.1 million for
1997. The Company made a one-time cash payment of $1.2 million in 1996 as part
of a negotiated settlement to eliminate most of its postretirement medical
benefit liability. Sylvan anticipates cash outlays of $0.3 million for
self-insured workers' compensation and $0.1 million for postretirement medical
benefits in 1998.
The Company operates on a worldwide basis and consequently is subject to foreign
currency translation risks. The Company has not maintained a foreign
currency-hedging program to manage translation risk, although it does
occasionally use forward foreign exchange contracts for larger, known
cross-currency transactions. As the Company continues its expansion into Eastern
Europe and Asia, it will periodically evaluate currency risk management tools.
Sylvan does not pay a dividend on its common stock. Dividend payments, although
permitted, are limited under the terms of the Company's revolving credit
agreement.
11
13
RESULTS OF OPERATIONS
---------------------Fiscal Year Ended-------------------
(In millions) Dec. 28, 1997 Dec. 29, 1996 Dec. 31, 1995
------------- ------------- -------------
Net Sales $ 81.6 $ 79.1 $ 75.8
Operating Costs and Expenses:
Cost of sales 47.3 45.3 42.3
Selling and administrative 16.7 16.9 15.5
Research and development 1.5 2.0 2.1
Depreciation 4.6 4.3 4.0
--- --- ---
70.1 68.5 63.9
Operating Income 11.5 10.6 11.9
Interest Expense, net 2.1 2.1 2.8
Other Income (Expense) -- 2.3 (0.1)
---- --- -----
Income before Income Taxes 9.4 10.8 9.0
Provision for Income Taxes 2.7 2.9 2.6
--- --- ---
Income before Minority Interest in
Income of Consolidated Subsidiaries 6.7 7.9 6.4
--- --- ---
Minority Interest in Income of
Consolidated Subsidiaries 0.2 0.1 (0.1)
--- --- -----
Net Income $ 6.5 $ 7.8 $ 6.5
------- ------- ------
NET SALES
Net sales totaled $81.6 million in 1997, a 3.1% increase as compared with 1996
levels. This increase was due to higher unit volume shipments of spawn products
and mushrooms. Total unit spawn shipments for 1997 increased by 5.2% over 1996,
paced by a 12.0% gain in Europe and an 8.7% gain in Australia. North American
unit spawn volume decreased by 3.6%, as compared with 1996 levels, due largely
to reduced U.S. production of mushrooms grown for use in processed foods. U.S.
Department of Agriculture crop reports, which describe industry activity,
reflected a 7.4% decrease in the sales volume of U.S.-produced processed
mushrooms for the crop year ended June 30, 1997, which follows a 3.7% decline
for the period ended June 30, 1996. The reports also indicated that fresh
mushroom sales volume increased by 0.9% and 3.1%, respectively, for the same
periods. Unit sales of spawn products have increased more rapidly in
international markets than in North American markets for each of the past three
years. Sylvan's North American mushroom sales increased by 5.0% in 1997 over the
1996 period, due to higher unit volume. Average selling prices for mushroom
products were unchanged in 1997 as compared with 1996. By volume, 94.2% of these
mushrooms were sold for use as fresh produce in 1997, as compared with 92.3% in
1996 and 87.0% in 1995. These percentages fluctuate according to variations in
quality, availability of supply and competitive market practices.
12
14
Sales of disease control agents and compost nutritional supplements in 1997
increased by 13.3% over the 1996 level and 28.9% over the 1995 level.
Contributing to the increase were strong market share gains for an insecticide
for which the Company is the exclusive North American distributor. North
American compost nutritional supplement sales were reduced slightly as the
Company introduced its proprietary supplement product in 1997. Extensive field
trials and product sampling programs had the short-term effect of displacing
existing sales. The Company expects that the 1998 sales of disease control
agents and compost nutritional supplements will increase significantly,
primarily due to the 1997 year-end acquisition of Tartarin S.A., a French
distributor of these products. For the fiscal years ended 1997, 1996 and 1995,
sales of disease control agents and compost nutritional supplements occurred
primarily in North America and in the United Kingdom.
International sales of all of the Company's products accounted for 40.5% of
total sales for 1997, 39.9% for 1996 and 37.8% for 1995. International sales
increased by 4.6% in 1997 from 1996 levels, resulting from higher demand for our
spawn products in Europe and developing markets worldwide. The increasing
international sales proportion subjects the Company's revenue to currency
translation rate fluctuations. In 1997, these fluctuations reduced the Company's
average U.S. dollar equivalent selling prices by approximately 12.4%, as
compared with the currency translation rates used for 1996. Local currency
prices in key European markets, such as the Netherlands, France, and the United
Kingdom, changed by less than 1%.
COST OF SALES
The Company's cost of sales, expressed as a percentage of sales, increased to
57.9% for 1997 from 57.2% for 1996 and 55.8% for 1995. Contributing to the 1997
increase was approximately $150,000 in product and product testing costs
associated with the Company's startup of compost nutritional supplement
production in Iowa. In addition, cost of sales for mushroom products increased
to 72% of mushroom product sales in 1997 from 70.3% in 1996, contributing more
than 0.8% to the overall cost of sales percentage.
Spawn product cost of sales was 50.8% of sales for 1997, as compared with 50.9%
for 1996 and 50.6% for 1995. The cost of sales percentage would have been 50.5%
if the start-up costs associated with compost nutritional supplements were
excluded. Higher utilization rates of all of the Company's overseas production
facilities and lower product discard rates reduced their overall production
costs. North American production facilities improved their discard rates, but
experienced lower production levels in concert with lower unit sales.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses were 20.5% of net sales in 1997, lower than
the 21.4% of net sales reported for 1996 and equal to the percentage reported in
1995. Contributing to the lower spending level was a reduction in employee
benefit costs in the Company's North American businesses. During the fourth
quarter of 1996, unusually high medical costs were incurred under a self-insured
medical plan. This level of expense did not occur in 1997 and the Company
replaced the self-insured plan with a fully insured plan. In addition, certain
noncash expenses related to pension and other postretirement benefits were lower
in 1997 than in 1996 and are expected to decline further in 1998. Nearly
one-third of the Company's selling and administrative expenses are denominated
in foreign currencies. Changes in foreign currency translation rates had the
effect of reducing the U.S. dollar equivalent expense levels in 1997, as
compared with 1996. Expressed in local currencies, spending levels increased by
approximately 10%. Market development costs increased in connection with the
Company's efforts to expand operations in Mexico, South America, Central and
Eastern Europe, Asia and South Africa.
13
15
RESEARCH AND DEVELOPMENT EXPENSES
In 1997, the Company's research and development expenses declined by $525,000 to
1.85% of net sales, lower than both the 2.6% of net sales for 1996 and the 2.8%
of net sales for 1995. A portion of the reduction stems from the Company's
successful development of a proprietary compost nutritional supplement product
that was introduced commercially in the second half of 1997. Research and
development expenses for these products prior to their introduction represented
a portion of prior-year research and development expenses.
INTEREST EXPENSE
Net interest expense for 1997 was $2.1 million, 2% below the 1996 level and 25%
below the 1995 level. The reductions in net interest expense reflect interest
rate declines in general and, for the period beginning in June 1996, a lower
interest rate margin, or mark-up above the applicable base rates, on the
Company's borrowings. For the quarter ended December 28, 1997, the Company's
average effective borrowing rate was 6.65%, as compared with 7.69% for the
comparable year-ago period. For the 1997 twelve-month period ended December 28,
1997, the Company's average borrowing rate was 6.91%, as compared with 7.87% for
the 1996 year and 9.40% for the 1995 year. At year-end 1997, approximately 45%
of the Company's debt was subject to interest rates fixed for one year or more.
This compares with 16% for 1996 and 35% for 1995. Approximately 86% of the
Company's gross interest expense for 1997 was denominated in U.S. dollars; the
remaining 14% was primarily denominated in Dutch guilders.
DEPRECIATION EXPENSE
Depreciation expense increased in 1997 by 8.1% to $4.6 million, reflecting the
$10.0 million of capital expenditures which the Company made during 1996. This
compounds on a 7.4% increase from 1995 to 1996, reflecting the $7.1 million in
capital expenditures made in 1995. Since many of the Company's capital projects
have been overseas, some of the depreciation expense increase has been mitigated
by foreign currency translation rate fluctuations. Approximately 43% of the 1997
depreciation expense was related to foreign currency denominated assets, as
compared with 44% in 1996.
OTHER INCOME
Other income in 1997 declined by $2.2 million from the 1996 level, which
included a nonrecurring gain of $1.9 million from the negotiated settlement of
certain postretirement medical benefits. Excluding this item, the decline was
$200,000 and related in large part to foreign currency gains and losses. During
1997, realized foreign currency losses totaled $110,000, as compared with a
currency gain of $23,000 during 1996.
INCOME TAXES
The Company's effective income tax rate for 1997 was 29%, compared with the 27%
reported for 1996 and equal to the 29% reported for 1995. For the 1997
twelve-month period, the Company was subject to income tax rate increases in
France. The Company expects that the higher rates in France will continue and
that improving levels of profitability in certain foreign jurisdictions will
result in income tax rate increases for 1998 and for future years.
14
16
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," characterized by such words as
"anticipates," "expects," "expected," or "will," are based on currently
available competitive, financial and economic data and the Company's operating
plans, but they are inherently uncertain. Investors must recognize that events
could turn out to be significantly different from what is expected. The
following factors, among others, in some cases have affected and in the future
could affect the Company's financial performance and could cause actual results
to differ materially from those expressed or implied in such forward-looking
statements:
o pricing or product initiatives of the Company's competitors;
o changes in currency and exchange risks;
o changes in a specific country's or region's political or economic
conditions; and
o the loss of key executives or other employees of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required is set forth as Exhibits beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
15
17
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.
16
18
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 ABN-AMRO 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 - previously filed on March 25, 1997 as Exhibit 10.2.1
with the Company's Form 10-K Annual Report for the fiscal year
ended December 29, 1996 and is incorporated herein by reference and
(iii) Amendment No. 1 to Revolving Credit Agreement dated as of
June 27, 1997 among Sylvan Inc., Sylvan Foods (Netherlands) B.V.,
Mellon Bank, N.A., individually and as issuing bank and as agent,
and ABN-AMRO Bank N.V., Pittsburgh Branch previously filed on
August 1, 1997 as Exhibit 10 with the Company's Form 10-Q Quarterly
Report for the period ended June 29, 1997 and is incorporated
herein by reference and (iv) Amendment No. 2 to Revolving Credit
Agreement dated as of December 11, 1997 among Sylvan Inc., Sylvan
Foods (Netherlands) B.V., Mellon Bank, N.A., individually and as
issuing bank and as agent, and ABN-AMRO Bank N.V., Pittsburgh
Branch
13.1 Annual Report to Security Holders for the year ended December 28,
1997 -- to be filed by amendment to this Form 10-K as soon as
practicable
21 Subsidiaries of the Registrant
(B) REPORTS ON FORM 8-K
None
17
19
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 10th day of March,
1998.
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 10, 1998
- ------------------------------------------ Directors, President and ---------------------
Dennis C. Zensen Chief Executive Officer
(Principal Executive Officer)
/s/ WILLIAM P. MOONEY Chief Financial Officer March 10, 1998
- ------------------------------------------ (Principal Financial and ---------------------
William P. Mooney Accounting Officer)
/s/ WILLIAM L. BENNETT Director March 10, 1998
- ------------------------------------------ ---------------------
William L. Bennett
/s/ VIRGIL H. JURGENSMEYER Director March 10, 1998
- ----------------------------------------- ---------------------
Virgil H. Jurgensmeyer
/s/ RICHARD F. LAZZARINI, JR. President, Quincy Corporation March 10, 1998
- ------------------------------------------ Director ---------------------
Richard F. Lazzarini, Jr.
/s/ DONALD T. PASCAL Director March 10, 1998
- ------------------------------------------ ---------------------
Donald T. Pascal
18
20
INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS
Exhibit No. Description Page No.
- ----------- ----------- --------
Consent of Independent Public Accountants F-1
Report of Independent Public Accountants F-2
Consolidated Balance Sheets at December 28, 1997, and December 29, 1996 F-3
Consolidated Statements of Income for the Years Ended
December 28, 1997, December 29, 1996, and December 31, 1995 F-5
Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 28, 1997, December 29, 1996, and December 31, 1995 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 28, 1997, December 29, 1996, and December 31, 1995 F-7
Notes to Consolidated Financial Statements F-8
Schedule II - Valuation and Qualifying Accounts for the Years
Ended December 28, 1997, December 29, 1996, and December 31, 1995 F-22
Report of Independent Public Accountants on Financial Statement Schedule F-23
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)
10.2.1 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 ABN-AMRO Bank N.V., Pittsburgh Branch (e)
10.2.2 Index to Exhibits to Revolving Credit Agreement referred to Exhibit 10.2.1 (f)
10.2.3 Amendment No. 1 to Revolving Credit Agreement dated as of June 27, 1997
among Sylvan Inc., Sylvan Foods (Netherlands) B.V., Mellon Bank, N.A.,
individually and as issuing bank and as agent, and ABN-AMRO Bank N.V.,
Pittsburgh Branch (g)
19
21
10.2.4 Amendment No. 2 to Revolving Credit Agreement dated as of December 11, 1997 E-
among Sylvan Inc., Sylvan Foods (Netherlands) B.V., Mellon Bank, N.A.,
individually and as issuing bank and as agent, and ABN-AMRO Bank N.V.,
Pittsburgh Branch
21 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
that 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.
(f) This exhibit was previously filed on March 25, 1997 as Exhibit
10.2.1. with the Company's 10-K Annual Report for fiscal year
ended December 29, 1996 and is incorporated herein by reference.
(g) This exhibit was previously filed on August 1, 1997 as Exhibit 10
with the Company's Form 10-Q Quarterly Report for the period ended
June 29, 1997 and is incorporated herein by reference.
20
22
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports, included or incorporated by reference in this Form 10-K, 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 prospectus
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 28, 1997 or performed any audit procedures
subsequent to the date of our report.
/s/ ARTHUR ANDERSEN LLP
-----------------------
Arthur Andersen LLP
Pittsburgh, Pennsylvania,
March 12, 1998
F-1
23
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 28, 1997,
and December 29, 1996, 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 28, 1997. 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 28, 1997, and December 29, 1996, and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended December 28, 1997, in conformity with generally accepted accounting
principles.
Arthur Andersen LLP
Pittsburgh, Pennsylvania
February 6, 1998
F-2
24
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED BALANCE SHEETS
(In Thousands)
ASSETS
December 28, 1997 December 29, 1996
-------------------- --------------------
CURRENT ASSETS:
Cash and cash equivalents $5,567 $ 4,220
Trade accounts receivable (less allowance
for doubtful accounts of $812 and
$1,031, respectively) 13,435 10,336
Inventories (Note 3) 8,723 7,367
Prepaid income taxes and other expenses 1,107 967
Other current assets 685 738
Deferred income tax benefit 686 509
-------- --------
Total current assets 30,203 24,137
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Land and improvements 2,999 3,000
Buildings 27,590 25,672
Equipment 40,363 39,293
-------- --------
70,952 67,965
Less - Accumulated depreciation (23,324) (20,260)
-------- --------
Total property, plant and
equipment, net 47,628 47,705
-------- --------
INTANGIBLE ASSETS, net of accumulated
amortization of $2,647 and $2,255,
respectively 11,466 10,093
OTHER ASSETS, net of accumulated amortization
of $1,473 and $1,213, respectively 4,383 4,977
-------- --------
TOTAL ASSETS $ 93,680 $ 86,912
======== ========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-3
25
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 28, 1997 December 29, 1996
------------------ --------------------
CURRENT LIABILITIES:
Current portion of long-term debt (Note 4) $ 448 $ 523
Accounts payable - trade 5,643 3,484
Accrued salaries, wages and other
employee benefits (Note 5) 3,323 3,179
Other accrued liabilities 1,434 2,214
Income taxes payable 2,416 1,993
---------- ---------
Total current liabilities 13,264 11,393
---------- ---------
LONG-TERM AND REVOLVING-TERM DEBT (Note 4) 32,690 30,168
---------- ---------
OTHER LONG-TERM LIABILITIES:
Other employee benefits (Note 7) 1,767 2,218
Other 1,054 1,208
---------- ---------
Total other long-term liabilities 2,821 3,426
---------- ---------
MINORITY INTEREST 914 685
SHAREHOLDERS' EQUITY:
Common stock, voting, par value $.001, 10,000,000 shares authorized,
6,589,784 and 6,480,092 shares issued and 6,449,344 and
6,373,867 shares outstanding in 1997 and 1996, respectively 7 6
Common capital contributed in excess of par 15,638 14,377
Retained earnings 35,320 28,838
---------- ---------
50,965 43,221
Less- Treasury stock, at cost, 140,440 and 106,225
shares in 1997 and 1996, respectively (792) (414)
Cumulative translation adjustment (3,032) 961
Pension adjustment (Note 7) (3,150) (2,528)
---------- ---------
Total shareholders' equity 43,991 41,240
---------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 93,680 $ 86,912
========== =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-4
26
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands Except Share Data)
1997 1996 1995
------- ------- -------
NET SALES $81,560 $79,111 $75,751
------- ------- -------
OPERATING COSTS AND EXPENSES:
Cost of sales 47,256 45,262 42,295
Selling and administrative 16,719 16,922 15,525
Research and development 1,506 2,031 2,110
Depreciation 4,606 4,261 3,967
------- ------- -------
70,087 68,476 63,897
------- ------- -------
OPERATING INCOME 11,473 10,635 11,854
INTEREST EXPENSE, net 2,058 2,096 2,752
OTHER INCOME (EXPENSE) 31 2,273 (90)
------- ------- -------
INCOME BEFORE INCOME TAXES 9,446 10,812 9,012
------- ------- -------
PROVISION FOR INCOME TAXES (Note 6):
Current 2,626 991 1,299
Deferred 113 1,901 1,366
------- ------- -------
2,739 2,892 2,665
INCOME BEFORE MINORITY INTEREST IN
INCOME OF CONSOLIDATED SUBSIDIARIES 6,707 7,920 6,347
------- ------- -------
MINORITY INTEREST IN INCOME OF
CONSOLIDATED SUBSIDIARIES 225 101 (130)
------- ------- -------
NET INCOME $ 6,482 $ 7,819 $ 6,477
======= ======= =======
NET INCOME PER SHARE - DILUTED $ 1.01 $ 1.23 $ 1.04
NET INCOME PER SHARE - BASIC $ 1.01 $ 1.23 $ 1.04
======= ======= =======
WEIGHTED AVERAGE NUMBER OF COMMON
AND COMMON EQUIVALENT SHARES 6,406,544 6,354,379 6,251,015
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES 6,395,971 6,344,609 6,225,995
========= ========= =========
The accompanying notes to consolidated financial statements are an
integral part of these statements.
F-5
27
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE THREE FISCAL YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996, AND DECEMBER 31, 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 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
Exercise of stock
options 109,692 1 1,261 - - - - 1,262
Purchase of
treasury stock - - - - (378) - - (378)
Current year
translation
adjustment - - - - - (3,993) - (3,993)
Increase in
pension adjustment - - - - - - (622) (622)
Net income - - - 6,482 - - - 6,482
--------- --- ------- ------- ----- ------- ------- -------
BALANCE, December 28, 1997 6,589,784 $ 7 $15,638 $35,320 $(792) $(3,032) $(3,150) $43,991
========= === ======= ======= ===== ======= ======= =======
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-6
28
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
1997 1996 1995
----------------- ----------------- -----------------
CASH FLOWS FROM OPERATIONS:
Net income $ 6,482 $ 7,819 $ 6,477
Adjustments to reconcile net income to
net cash provided by operations:
Depreciation 4,606 4,261 3,967
Amortization 631 677 699
Noncash interest cost of employee benefits (172) 32 401
Deferred income taxes (34) (55) (331)
Stock option compensation -- 158 317
Employee benefits (757) (5,376) (2,429)
Net gain on disposal of assets (40) (24) (32)
Trade accounts receivable (894) (1,311) (327)
Inventories (602) (518) (836)
Prepaid expenses (87) (295) 355
Other assets 1,442 393 (676)
Accounts payable, accrued expenses
and other liabilities (806) (972) (37)
Income taxes payable 423 1,103 75
Minority interest 225 485 (191)
----------------- ----------------- -----------------
Net cash provided by operations 10,417 6,377 7,432
----------------- ----------------- -----------------
CASH FLOWS FROM INVESTING:
Expenditures for property, plant and equipment (7,647) (9,980) (7,137)
Payment for acquisition, net of cash acquired (3,923) -- --
----------------- ----------------- -----------------
Net cash used in investing (11,570) (9,980) (7,137)
----------------- ----------------- -----------------
CASH FLOWS FROM FINANCING:
Principal payments on long-term debt (425) (5,579) (3,082)
Net proceeds from European bank loans -- -- 4,090
Net borrowings (repayments) under revolving
credit loan 3,734 8,346 (2,901)
Common stock transactions, net 746 815 234
----------------- ----------------- -----------------
Net cash provided by (used in) financing 4,055 3,582 (1,659)
----------------- ----------------- -----------------
EFFECT OF EXCHANGE RATES ON CASH (1,555) (1,134) 1,184
----------------- ----------------- -----------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 1,347 (1,155) (180)
CASH AND CASH EQUIVALENTS, beginning of period 4,220 5,375 5,555
----------------- ----------------- -----------------
CASH AND CASH EQUIVALENTS, end of period $ 5,567 $ 4,220 $ 5,375
================= ================= =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
Interest paid $ 2,352 $ 2,078 $ 2,658
Income taxes paid 2,038 2,022 818
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCIAL ACTIVITIES:
ACQUISITION OF BUSINESS
Fair value of assets acquired $ 5,619 $ -- $ --
Cash paid for the capital stock (3,923) -- --
================= ================= =================
Liabilities assumed $ 1,696 $ -- $ --
================= ================= =================
The accompanying notes to consolidated financial statements are an integral part of these statements.
F-7
29
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 1997, 1996 and 1995 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.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year
presentation.
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 $2.5 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.
F-8
30
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).
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 28, 1997, the Company had no
outstanding foreign currency exchange contracts.
F-9
31
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 these agreements with its banks
as counterparties. The agreements replace 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 counterparties make appropriate payments
to settle the difference between the floating rate LIBOR and the fixed rate
LIBOR. When the floating rate LIBOR exceeds the fixed rate LIBOR at the
beginning of a 90-day term, the counterparties 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
counterparties. Amounts receivable or payable under these swap agreements are
recorded as an adjustment to interest expense. The Company's swap agreements
outstanding as of December 28, 1997, are as follows:
Notional Amount Expiration Date Fixed Rate Term
- --------------------------- ---------------------------- ------------------ ----------------
$ 5,000,000 October 4, 1999 6.08% 2 years
5,000,000 October 29, 1999 6.03% 2 years
- ---------------------------
$ 10,000,000
===========================
Recent Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Comprehensive Income", and SFAS No.
131, "Disclosures about Segments of an Enterprise." These pronouncements are
effective beginning in fiscal 1998. SFAS No. 130 establishes standards for
reporting comprehensive income and SFAS No. 131 establishes standards for
reporting information about operating segments. The Company has not completed
the process of evaluating the impact that will result from adopting SFAS Nos.
130 and 131.
Earnings Per Common Share
During the fourth quarter of 1997, the Company adopted SFAS No. 128, "Earnings
per Share." Under SFAS No. 128, earnings per share are categorized as basic
earnings per share and diluted earnings per share. Basic earnings per share
includes only the weighted average common shares outstanding. Diluted earnings
per share includes the weighted average common shares outstanding and any
dilutive common stock equivalent shares. Treasury shares are treated as retired
for the purposes of the earnings per share calculation. All prior periods have
been restated to reflect this adoption.
The following table reflects the calculation of earnings per share under SFAS
No. 128 (in thousands except share data):
F-10
32
December 28, December 29, December 31,
1997 1996 1995
----------------- ----------------- -----------------
Basic Earnings Per Share:
Net income $ 6,482 $ 7,819 $ 6,477
Average shares outstanding 6,395,971 6,344,609 6,225,995
----------------- ----------------- -----------------
Earnings per share $ 1.01 $ 1.23 $ 1.04
Diluted Earnings Per Share:
Net income $ 6,482 $ 7,819 $ 6,477
Average shares outstanding 6,395,971 6,344,609 6,225,995
Stock options outstanding 10,573 9,770 25,020
----------------- ----------------- -----------------
Diluted average shares outstanding 6,406,544 6,354,379 6,251,015
----------------- ----------------- -----------------
Earnings per share $ 1.01 $ 1.23 $ 1.04
2. ACQUISITION:
In December 1997, the Company acquired all of the issued share capital of
Tartarin S.A., a French distributor of compost nutritional supplements and
disease control agents. The purchase price was $3.9 million. This acquisition
has been accounted for as a purchase transaction. As a result of purchase price
allocations, the purchase price exceeded the fair value of net assets acquired
by approximately $2.9 million which will be amortized over 20 years.
3. INVENTORIES:
Inventories are summarized as follows (in thousands):
December 28, 1997 December 29, 1996
------------------- -------------------
Growing crops and compost material $ 3,757 $ 3,759
Stores and other supplies 2,023 1,634
Mushrooms and spawn on hand 2,943 1,974
------------------- -------------------
$ 8,723 $ 7,367
=================== ===================
4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:
The Company entered into a Revolving Credit Agreement (the Agreement) with
certain commercial banks (the Banks) 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:
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
F-11
33
on May 31, 2003. On December 28, 1997, the Company had outstanding borrowings
under the Agreement of $27.9 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
Banks a security interest in the capital stock of its subsidiaries.
In 1995, the Company obtained Dutch guilder financing for the acquisition of
plant and machinery in the Netherlands. Loans outstanding under this agreement,
amounting to approximately $2.2 million, are repayable in quarterly installments
over periods between three and eighteen 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 $2.5 million. Interest is
payable based on a formula that utilizes a Paris Interbank Offer Rate plus an
applicable margin. Repayment is due in January 2000. The loan is supported by a
letter of credit.
The Company incurred approximately $2.1 million in gross interest expense during
1997 at a weighted average interest rate of 6.91%. The contractual principal
payments due under the Company's loan agreements are as follows (in thousands):
1998 $ 448
1999 545
2000 2,794
2001 64
Thereafter 29,287
-----------------
Total $ 33,138
=================
5. ACCRUED SALARIES, WAGES AND OTHER EMPLOYEE BENEFITS:
Accrued salaries, wages and other employee benefits are composed of the
following (in thousands):
December 28, December 29,
1997 1996
------------------ -----------------
Accrued compensation $ 2,153 $ 1,738
Accrued vacation 610 583
Accrued workers' compensation 300 477
Accrued medical benefits 176 297
Other 84 84
------------------ -----------------
$ 3,323 $ 3,179
================== =================
For periods prior to October 1993, the Company utilized a self-insured workers'
compensation insurance program. The liability for these claims amounts to
approximately $1.0 million and is calculated on a specific case analysis basis
which determines the expected cash payment stream associated with each injury.
F-12
34
6. 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 28, 1997 December 29, 1996 December 31, 1995
------------------------- -------------------------- --------------------------
Domestic $ 2,807 $ 5,783 $ 5,410
Foreign 6,639 5,029 3,602
------------------------- -------------------------- --------------------------
Total $ 9,446 $ 10,812 $ 9,012
========================= ========================== ==========================
The provision (benefit) for income taxes consists of the following (in
thousands):
Year Ended Year Ended Year Ended
December 28, 1997 December 29, 1996 December 31, 1995
------------------------- -------------------------- --------------------------
Current-
Federal $ 668 $ 11 $ 277
State 74 248 231
Foreign 1,884 732 791
Deferred-
Federal 113 1,901 1,366
State - - -
Foreign - - -
------------------------- -------------------------- --------------------------
$ 2,739 $ 2,892 $ 2,665
========================= ========================== ==========================
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):
F-13
35
Year Ended Year Ended Year Ended
December 28, 1997 December 29, 1996 December 31, 1995
------------------------ ------------------------- -------------------------
Income tax at U.S.
federal statutory
rate $ 3,212 $ 3,642 $ 3,108
State income taxes,
net of federal
income tax benefit 49 164 153
Foreign taxes at rates
other than
effective U.S. rates (382) (825) (444)
Net (permanent benefits)
nondeductible charges (22) (24) (99)
Tax credits - - (14)
Other, net (118) (65) (39)
------------------------ ------------------------- -------------------------
Total provision for
income taxes $ 2,739 $ 2,892 $ 2,665
======================== ========================= =========================
The sources of deferred income taxes consist of the following (in thousands):
Year Ended Year Ended Year Ended
December 28, 1997 December 29, 1996 December 31, 1995
------------------------ ------------------------- -------------------------
Workers' compensation $ 201 $ 66 $ 1,176
Depreciation 72 130 (14)
OPEB (36) 1,613 215
Other, net (124) 92 (11)
------------------------ ------------------------- -------------------------
$ 113 $ 1,901 $ 1,366
======================== ========================= =========================
Temporary differences which generate significant portions of the Company's
deferred tax assets and liabilities as of December 28, 1997, and December 29,
1996, were (in thousands):
December 28, 1997 December 29, 1996
-------------------------- -------------------------
Postretirement benefits other
than pensions $ (402) $ (405)
Depreciation 3,443 3,372
Workers' compensation (335) (536)
Net operating loss carryforwards (964) (1,207)
Other, net (501) (339)
-------------------------- -------------------------
Total 1,241 885
Less- Valuation allowance 964 1,207
-------------------------- -------------------------
Net deferred tax liability $ 2,205 $ 2,092
========================== =========================
F-14
36
Included in net deferred tax liabilities at December 28, 1997, are unrealized
tax benefits amounting to $1.0 million related to net operating loss
carryforwards. The realization of these tax benefits is contingent on future
taxable net income being generated by certain foreign operations. The life of
the carryforwards is determined by various foreign 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 deferred tax benefits relating to net operating loss
carryforwards to offset the deferred tax benefits that may not be realized.
7. 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 28, 1997, and December 29, 1996,
was $33.4 million and $30.1 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 6.50% in the year ended
December 28, 1997, and 7.25% in the year ended December 29, 1996. 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 28, December 29,
1997 1996
-------------------- --------------------
Projected benefit obligation for
service rendered to date $ (33,413) $ (30,144)
Fair value of plan assets 33,089 30,142
-------------------- --------------------
Projected benefit obligation in
excess of plan assets (324) (2)
-------------------- --------------------
Accrued pension liability $ (324) $ (2)
==================== ====================
F-15
37
Net pension cost (benefit) included the following components (in thousands):
Year Ended Year Ended Year Ended
December 28, 1997 December 29, 1996 December 31, 1995
---------------------- ---------------------- ----------------------
Interest cost on
projected benefit
obligation $ 2,100 $ 2,083 $ 2,151
Actual return on plan
assets (5,148) (2,542) (5,664)
Net amortization and
deferral 2,748 173 3,678
---------------------- ---------------------- ----------------------
Net periodic pension
cost (benefit) $ (300) $ (286) $ 165
====================== ====================== ======================
The accumulated postretirement benefit obligation related to the former
Moonlight operations as of December 28, 1997, and December 29, 1996, is
comprised of the following components (in thousands):
December 28, 1997 December 29, 1996
---------------------- ----------------------
Retirees $ 715 $ 800
Fully eligible active plan participants - -
---------------------- ----------------------
Accrued postretirement benefit obligation 715 800
Unrecognized prior service cost (73) (34)
Unrecognized net gain (293) (296)
---------------------- ----------------------
Total accrued postretirement obligation $ 1,081 $ 1,130
====================== ======================
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 made 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 28, 1997, represents
postretirement medical benefits of Moonlight's salaried retirees.
F-16
38
The net postretirement benefit cost includes the following components (in
thousands):
Year Ended Year Ended
December 28, 1997 December 29, 1996
-------------------- --------------------
Service costs-
benefits earned during the period $ - $ -
Interest cost on accumulated
postretirement benefit
obligation 56 181
Net amortization (16) (42)
-------------------- --------------------
$ 40 $ 139
==================== ====================
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 7.12% in 1997 through 1998 and declining
by approximately 0.375% 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 28, 1997,
by $56,000 and would have increased the fiscal 1997 postretirement benefit
expense by approximately 8.0%. Discount rates of 7.0% and 7.5% were used to
determine the 1997 and 1996 net periodic postretirement benefit cost and
liability, respectively.
8. STOCK OPTIONS:
In June 1991, the shareholders approved a stock option plan (the 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 1995. In June 1993, the
shareholders approved a stock option plan (the 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):
1997 1996 1995
----------------- ----------------- ---------------
Net Income: As Reported $ 6,482 $ 7,819 $ 6,477
Pro Forma 6,224 7,603 6,381
Diluted EPS: As Reported $ 1.01 $ 1.23 $ 1.04
Pro Forma 0.97 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 the future.
F-17
39
The Company's Board of Directors, through its Stock Option and Compensation
Committee (the 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 (net of cancellations) for 994,417 shares through December 28, 1997,
under the 1990 Plan, and 65,000 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 1997, 1996 and 1995, respectively: risk-free
interest rates of 5.87%, 6.47% and 6.34%; no expected dividend yields; expected
lives of 8.0, 6.3 and 6.8 years; expected volatility of 29%, 20% and 20%.
A summary of the status of the Company's stock option plans at December 28,
1997, 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):
1997 1996 1995
------------------------- -------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ------------ ---------- ------------ ---------- ------------
Outstanding at beginning
of year 629 $ 10.36 680 $ 9.78 571 $ 9.01
Granted 120 12.84 81 10.95 165 11.23
Exercised (110) 10.26 (125) 7.57 (56) 6.31
Forfeited (25) 9.55 (7) 10.38 - -
--------- ------------ ---------- ------------ ---------- ------------
Outstanding at end of year 614 10.88 629 10.36 680 9.78
--------- ------------ ---------- ------------ ---------- ------------
Exercisable at end of year 395 10.26 402 10.03 325 8.96
Weighted average fair value
of options granted $ 6.22 $ 4.08 $ 4.30
The 614,426 options outstanding under both plans at December 28, 1997, have
exercise prices of between $8.00 and $13.75 per share, with a weighted average
exercise price of $10.88 and a weighted average remaining contractual life of
7.1 years. 395,426 of these options are exercisable. The remaining 219,000
options have exercise prices between $10.31 and $12.88, with a weighted average
exercise price of $12.02 and a weighted average contractual life of 9.1 years.
9. NATURE OF OPERATIONS AND BUSINESS SEGMENT INFORMATION:
The Company is engaged in one line of business, the production of mushroom spawn
and mushrooms. 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 Europe and Australia.
F-18
40
(In Thousands)
----------------------------------------------------------------------
North America International Total
-------------------- -------------------- --------------------
1997:
Revenues $ 48,544 $ 33,016 $ 81,560
Corporate expenses 3,760 - 3,760
Income from operations 4,745 6,728 11,473
Identifiable assets 38,316 55,364 93,680
1996:
Revenues $ 47,539 $ 31,572 $ 79,111
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
No single customer accounted for 10% or more of Sylvan's sales during the years
ended December 28, 1997, December 29, 1996, or December 31, 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 experience with these entities compares
favorably with the Company's bad debt loss experience with its customer base as
a whole.
10. RELATED-PARTY TRANSACTIONS:
During fiscal years 1997 and 1996, a nonemployee director's business interests
purchased spawn at fair market value totaling $568,000 and $611,000,
respectively; purchased mushrooms at fair market value totaling $14,000 in 1997;
and sold mushrooms at fair market value totaling $111,000 in 1996 in trading
with the Company's subsidiaries.
F-19
41
11. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED):
1997
Three Months Ended
(In Thousands Except Share Data)
----------------------------------------------------------------------------------------
March 30, June 29, September 28, December 28,
1997 1997 1997 1997
----------------- --------------------- --------------------- -------------------
Net sales $ 19,913 $ 19,565 $ 20,540 $ 21,542
Gross profit 8,414 8,214 8,501 9,176
Net income 1,533 1,338 1,640 1,971
Diluted income per share $ 0.24 $ 0.21 $ 0.26 $ 0.30
Diluted weighted average
number of shares 6,396,979 6,385,455 6,386,091 6,472,021
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
Diluted income per share $ 0.30 $ 0.24 $ 0.22 $ 0.47
Diluted weighted average
number of shares 6,320,306 6,355,114 6,370,163 6,387,221
Basic quarterly average weighted number of shares in the first, second, third
and fourth quarters of 1997 were 6,388,006; 6,385,455; 6,367,794 and 6,442,630,
respectively. Basic earnings per share were $0.24; $0.21; $0.26 and $0.31,
respectively. Comparative basic quarterly average weighted number of shares in
1996 were 6,303,584; 6,332,391; 6,369,713 and 6,372,598, respectively. Basic
earnings per share were $0.30; $0.24; $0.22 and $0.47, respectively.
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).
F-20
42
12. 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.
Cash and Cash Equivalents
The carrying amount approximates fair value because of the short maturity of
these instruments.
Long-Term Debt
The fair value 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 deficits of $34,000 and
$98,000 as of December 28, 1997, and December 29, 1996, respectively.
F-21
43
Schedule II
SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 28, 1997, DECEMBER 29, 1996,
AND DECEMBER 31, 1995
(In Thousands)
----------Additions-----------
Balance at Charged to Deductions Balance
Beginning Costs and from at End
Description of Period Expenses Recoveries Reserves (a) Other (b) of Period
- --------------------------------------------------------------------------------------------------------------------------------
Year ended
December 28, 1997 -
Allowance for
doubtful accounts $1,031 $356 $0 ($418) (c) ($157) $812
======= ===== === ====== ====== ====
Year ended
December 29, 1996 -
Allowance for
doubtful accounts $1,088 $108 $11 ($120) ($56) $1,031
======= ===== ==== ====== ===== ======
Year ended
December 31, 1995 -
Allowance for
doubtful accounts $954 $81 $117 ($77) $13 $1,088
===== ==== ===== ===== ==== ======
- -------------------------------------
(a) Represents uncollected accounts charged against the allowance.
(b) Represents the effect of currency translation adjustments.
(c) Includes $268,000 set-off against related unrecoverable French trade
receivables.
44
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 6, 1998. 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 6, 1998