Sylvan, Inc.

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Sylvan, Inc.

333 Main Street
P.O. Box 249
Saxonburg, Pennsylvania 16056-0249
U.S.A.
(412) 352-7520
Fax: (412) 352-7550

Public Company
Incorporated: 1989
Employees: 900
Sales: $79.1 million (1996)
Stock Exchanges: NASDAQ
SICs: 0182 Food Crops Grown Under Cover

Sylvan, Inc. is a global player in the mushroom industry, with operations devoted both to growing fresh mushrooms and to supplying mushroom spawn (the equivalent of seed) to other mushroom growers. Starting with two mushroom farms and one domestic spawn laboratory in 1989, Sylvan has sought to lessen its dependence on the highly competitive business of growing fresh mushrooms by becoming an international supplier of spawn to other mushroom growers. It has also developed complementary biotechnology products related to growing mushrooms. By 1996 approximately 30 percent of the company’s operating income was derived from international spawn operations. Along the way, the company closed the largest mushroom-growing facility in the United States and acquired spawn production facilities abroad, first in France and England, then in Mexico, South America, and other international markets.

First Incorporated in 1989

The company was first incorporated in Delaware as Sylvan Foods Holdings, Inc. (SFHI) on March 27, 1989, for the purpose of acquiring all of the outstanding capital stock of Myco-Sci, Inc. The acquisition was made through SFHI’s wholly owned subsidiary, Sylvan Foods, Inc., which was merged with Myco-Sci, Inc. effective April 4, 1989, and the name of Myco-Sci, Inc., the surviving corporation, was changed to Sylvan Foods, Inc. SFHI directly held all of the stock of Sylvan Foods and at this time had no other material assets or operations. Its principal offices were located in Worthington, Pennsylvania, about 50 miles northeast of Pittsburgh.

The acquisition of Myco-Sci, Inc. cost $33.4 million. The purchase price and acquisition costs were financed by a $22 million bank term loan, $5 million contributed by The Prospect Group, and the remainder with cash. This leveraged buyout resulted in a heavy debt burden for Sylvan. The Prospect Group, an investment firm, became the majority owner by virtue of its $5 million equity investment.

Myco-Sci, Sylvan’s Predecessor

Myco-Sci, the predecessor of Sylvan Foods, was originally established as Butler County Mushroom Farms, Inc., in West Winfield, Pennsylvania, in 1937, where it used an abandoned limestone mine to grow mushrooms. By 1963, Butler had acquired a larger limestone mine in Worthington, Pennsylvania, and began to produce mushrooms there in 1966. By the early 1970s, Butler was the dominant producer of fresh mushrooms in the United States. Pennsylvania was the mushroom-growing center of the nation, in part because it was conveniently located near the largest U.S. market for mushrooms on the East Coast.

With increased competition, though, Butler found itself losing fresh mushroom market share to its major domestic competitors in the 1970s. The company began to implement alternative production and marketing strategies, one of which was to take advantage of a largely untapped market in the southeastern United States. In 1981 Butler participated in the creation of a modern above-ground mushroom-growing operation in northern Florida called Quincy Corporation.

At the same time Butler also patented its recently developed spawn production technology and constructed a facility near Kittanning, Pennsylvania, to produce spawn for the U.S. mushroom industry as well as to produce other types of fungi. In a 1984 corporate reorganization, the spawn production unit became an independent subsidiary and was named Sylvan Spawn Laboratory, Inc., and Butler became a wholly owned subsidiary of Myco-Sci. In 1987 Butler changed its name to Moonlight Mushrooms, Inc. By that time it had closed its West Winfield underground mushroom farm and expanded the capacity of its more efficient underground farm at Worthington.

During the 1980s Quincy was able to take advantage of certain technological innovations to improve crop yields and quality. By having more pounds of fresh mushrooms available, it increased its market share and became a major producer in the Southeast. By the end of the decade it was producing about 18 million pounds annually, compared to some 50 million pounds produced at the underground farm in Worthington. In 1991 Sylvan Foods expanded capacity at the Quincy facility by 25 percent and installed technologically advanced equipment to improve productivity there.

At the end of the 1980s Sylvan Spawn Laboratory was the second largest producer of spawn in the United States. It established a modern mushroom research and development facility in West Winfield, Pennsylvania.

When Sylvan Foods acquired Myco-Sci in 1989, the company’s two mushroom farms in Pennsylvania and Florida were producing 67 million pounds of mushrooms, of which approximately 61 million pounds were of fresh quality. Sylvan Spawn Laboratory had increased its net sales by an average of more than 30 percent per year for three years prior to the acquisition.

Sylvan Foods Goes Public

In February 1990, The Prospect Group, which was a majority owner of Sylvan Foods, approved a plan of liquidation to sell or distribute its assets. On August 20, 1990, Sylvan Foods became a public company as a result of the liquidation of The Prospect Group, which involved distributing shares of Sylvan Foods to Prospect’s shareholders. Sylvan’s financial success had made it an excellent candidate to be a publicly held company.

At the time of its liquidation, The Prospect Group held a 53.1 percent ownership interest in Sylvan Foods and distributed some 2.7 million shares of Sylvan to Prospect shareholders. Several individuals who were principals in The Prospect Group also controlled another investment firm, The Noel Group. When The Prospect Group was liquidated, it delivered shares of Sylvan Foods to individuals at Noel, so that Noel and/or its principals started off with a 5.3 percent stake in Sylvan Foods at the time it went public.

When it became a public company in 1990, Sylvan Foods had three wholly owned operating subsidiaries: Moonlight Mushrooms, Inc., Quincy Corporation, and Sylvan Spawn Laboratory, Inc. Sylvan Foods’ capital structure was highly leveraged. As a result of the loan agreement in connection with the acquisition of Myco-Sci, Sylvan was required to prepay the loans in an amount equal to 75 percent of Sylvan’s free cash flow after taxes, debt service, operating expenses, and capital expenditures. The payments were to be made annually from 1990 through 1995. As collateral for the loan, Sylvan granted the bank a security interest in all of its assets and a pledge of all of the capital stock of its subsidiaries.

Early 1990s Acquisitions

On October 31, 1991, Sylvan Foods acquired Somycel S.A. (France) and Darlington Mushrooms Laboratories Ltd. (England) for approximately $18 million. Somycel was the former French unit of H.J. Heinz Co. Ltd. that made mushroom spawn. The French company was Europe’s leading spawn producer and was well established in the mushroom spawn market in Europe, which was twice as large as the American market. One attractive characteristic of Somycel was its strong research tradition of producing disease-resistant strains of mushroom spawn.

The purchase of Somycel made Sylvan Foods the leading provider of spawn worldwide. The deal was financed through more than $10 million in bank loans and subordinated debt. An additional $7.3 million came from the sale of one million shares of Sylvan Foods common stock to The Noel Group. Sylvan executives also sold 250,000 shares they held to Noel, giving Noel control of 25.2 percent, or 1.53 million shares, of Sylvan. The Noel Group was a closely held investment banking firm that was founded in 1969. It invested in equity securities in small-to-medium sized companies in various fields. At this time Sylvan expanded its board of directors from five to six members. The new seat was filled by Noel managing director Donald Pascal, giving Noel three seats on Sylvan’s board. The other two Noel seats were held by Samuel Pryor and Gilbert Lamphere, who was formerly chairman, president, and CEO of The Prospect Group.

Company Perspectives:

Sylvan, Inc. is a key global supplier of products for mushroom growers. The company is the world’s leading producer and distributor of spawn, the mushroom equivalent of seed. Sylvan has differentiated its spawn products through research, proprietary production technology and dedicated service. Its products include spawn for the Agaricus mushroom and for other species, in particular Pleurotus and Shiitake. Sylvan also sells a variety of related products to mushroom growers. The company is an important U.S. producer of fresh mushrooms at Quincy Farms, its modern facility near Tallahassee, Florida.

Sylvan distributes its spawn products primarily in North America, Europe, Australia and South America. It is expanding to markets in Asia. The company operates U.S. spawn production facilities in Pennsylvania and Nevada. It has international spawn plants in France, England, the Netherlands and Australia. In addition, Sylvan is constructing a new spawn plant in Hungary.

Sylvan Foods continued its expansion into the European spawn market in 1992 with the acquisition of Hauser Champignonkulturen AG for approximately $3.8 million. During the year Sylvan Foods reorganized its growing spawn operations, decentralizing them into specific geographic markets. New spawn products were introduced into Central and South America and into Southeast Asia. The company also completed a 49,000-square-foot state-of-the art spawn plant in Dayton, Nevada, which began commercial production in January 1993.

Labor Troubles Spell End for Moonlight Mushrooms

Labor disputes at Moonlight Mushrooms led to a shutdown of the Worthington underground mushroom farm in 1993. It was the largest in the United States, producing about 50 million tons of mushrooms a year. It employed about 1,000 people and also provided income to farmers who grew hay and straw used in the farm. The mushrooms were grown in some 120 miles of underground tunnels.

In October 1993, workers represented by the United Steel-workers overwhelmingly rejected the wage and benefit concessions requested by Moonlight. The contract proposal was made to workers after Moonlight filed a 60-day plant closing notice that called for a shutdown by January 31, 1994. The rejected proposal called for wage cuts of 50 cents an hour, with pickers’ wages—the single largest group of employees—falling to $7.48 an hour. It also limited Moonlight’s company contribution for health care, meaning that employees who were paying $78 a month for family coverage would have seen their bills increase to $208 per month.

Steps to halt operations were taken immediately following the union vote and included halting deliveries of raw materials for making compost. The closing of the subsidiary removed 45 to 50 million pounds of mushrooms a year from the market. Total U.S. production of mushrooms was estimated to be about 750 million pounds. In dollar volume, mushrooms were the largest vegetable crop in Pennsylvania, and the state was the largest U.S. producer of common and cultivable exotic mushrooms. In May 1994 Sylvan Foods sold substantially all of the assets of its Moonlight Mushrooms, Inc., subsidiary to an investment group based in western Pennsylvania for an undisclosed amount. The farm eventually reopened as a nonunion farm.

Name Changed to Sylvan, Inc., 1994

In his 1994 letter to shareholders, Chairman, President, and CEO Dennis C. Zensen explained, “On July 1, 1994, we changed the name of our company from Sylvan Foods Holdings, Inc., to Sylvan, Inc., because our research and production activities now focus on spawn and other technologically oriented fungal products.” At the same time the company changed its state of incorporation from Delaware to Nevada.

In 1994 Sylvan set record levels of earnings and return on sales. It reported net income of $6.4 million on net sales of $69.8 million. Net sales for 1993 were $105.3 million, but that included results from the discontinued Moonlight Mushrooms subsidiary. Pro forma net sales for 1993, restated to exclude Moonlight’s contribution, were $62.8 million. That meant 1994’s net sales showed an 11 percent increase over 1993’s adjusted net sales.

Sylvan attributed its improved profitability to its recent investments in research, people, and facilities. The company increased market share in most of its spawn markets, and for the last half of 1994 was sold out of its spawn due to strong demand. Sylvan claimed to be the spawn price leader in both North America and Europe. The company’s mushroom-growing operation, Quincy Farms, also had a good year in 1994.

For 1995 Sylvan reported slightly higher net income of $6.5 million on record net sales of $75.8 million. While spawn sales rose to record levels in the United States, the company noted that its European spawn operations were constrained by limited production capacity. The company was taking several steps to increase European capacity. Its first international start-up facility, located in Horst, the Netherlands, was gradually being brought up to full production levels. It completed the modernization and expansion of its Yaxley, England, spawn facility. A new spawn production plant was under construction near Budapest, Hungary, to serve established markets in Hungary as well as emerging markets in Turkey, Yugoslavia, and Eastern European countries. The Budapest plant would record its first sales in the third quarter of 1997.

Sales of nutritional supplements for mushrooms were down in 1995, reflecting changing grower preferences. Sylvan quickly introduced a competitive product for that market and began exploring other improved nutritional supplements. The company’s Casing Inoculum (CI), a product that accelerates mushroom growth, continued to show strong sales in 1995.

While Quincy Farms established new records in productivity, crop yields, and product quality in 1995, it failed to exceed its 1994 record level of profitability. Sylvan noted that soft demand for fresh mushrooms at the retail level resulted in a lower average price per pound for Quincy mushrooms. The company planned to expand Quincy’s geographical distribution to shift more of its product to the fresh market.

Sylvan’s operating results continued along the same lines in 1996, with strong international and domestic spawn sales offset somewhat by a soft market for fresh mushrooms. The company noted that spawn again accounted for a growing portion of Syl van’s total revenues, with net sales of spawn products increasing by 14 percent over 1995 levels. By expanding its spawn operations internationally—a new spawn production plant in Australia went onstream in mid-1996—Sylvan had truly become a global corporation. Sales outside North America had grown from $22.6 million in 1992 to $31.6 million in 1996, a 40 percent increase.

Sylvan’s aggressive investment in new and expanded facilities resulted in a new spawn inoculum facility being completed in Kittanning, Pennsylvania, in the second half of 1996. The inoculum produced there would supply other Sylvan spawn production plants around the world. A second inoculum facility was planned for Langeias in central France. Inoculum is the genetic material in the mushroom spore that gets propagated and scaled up multiple times to form a mushroom. Through research and development of inoculum, Sylvan is able to maintain the genetic stability of its mushroom strains to withstand bacterial, fungal, and viral contamination that can wipe out a grower’s crop.

Future Growth: International Spawn Markets

Since 1994 and earlier, Sylvan has supported its strategy of becoming a leading supplier of spawn products by investing heavily in new and expanded facilities as well as in research and development. It has engineered a shift from being primarily a mushroom grower to becoming a leading spawn supplier. In 1990, mushroom sales were about $65 million and spawn sales were only about $5 million. In 1996, mushroom sales accounted for 37 percent of total revenues, or approximately $29.3 million, the lowest in the company’s history. Sylvan claimed to hold leading market share in spawn in the United States, Canada, the Netherlands, the United Kingdom, Germany, Hungary, Scandinavia, and Australia. It looked for growth to come from such markets as Ireland, Italy, France, Eastern Europe, South America, and Asia.

Internationally, Sylvan’s long-term strategy recognized that Asia would eventually be the world’s largest spawn market. China, the world’s largest mushroom producer, was expected to become a major market for spawn products, once its method of mushroom growing evolved from a cottage industry to one that used more advanced techniques. It was SyIvan’s goal to be there first, once China’s mushroom growers adopted more up-to-date methods of growing.

Principal Subsidiaries

Quincy Corporation; Sylvan Spawn Laboratories, Inc.; Sylvan Foods S.A. (France); Sylvan Foods (U.K.) Ltd.; Sylvan Foods Netherlands B.V.; Sylvan Spawn Laboratory (Nevada), Inc.