<PAGE>   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 JANUARY 2, 2000

                                       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
  incorporation or organization)                            Identification No.)


 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


 Securities registered pursuant to    Name of each exchange on which registered:
     Section 12(b) of the Act:                      Not applicable
       Title of each class
       -------------------
              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. [X]

The aggregate market value of voting stock held by non-affiliates of the
registrant at March 2, 2000 was approximately $45,804,600. On that date, the
last sale price of registrant's common stock was $9.50 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 2, 2000.

                                                               Outstanding on
                     Class                                      March 2, 2000
                                                                -------------
    COMMON STOCK, PAR VALUE $.001 PER SHARE                       5,673,836


                       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


<PAGE>   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 principally in the production and distribution
of mushroom spawn, spawn-related products 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 of
the company that 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 operates in two reportable business segments. It is the leading worldwide
producer of mushroom spawn (the equivalent of seed for mushrooms) and a major
distributor of a variety of other value-added products and services for use by
mushroom growers. The company is also an important U.S. producer of fresh
mushrooms. Its growth strategy calls for devoting increased capital and
management resources to supplying its spawn and related products and services to
suitable markets throughout the world.

Spawn Operations: Spawn products accounted for 68% of the company's total sales
in 1999 and 90% of its operating income. Spawn is produced by a process whereby
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 that 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 through subsidiaries in the United States,
Europe, Australia and South Africa, 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
that are operated pursuant to rigorous quality-control standards. Three plants
are located in the United States and one each in England, Ireland, the
Netherlands, France, Hungary, Australia and South Africa. Sylvan's Irish, 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 two state-of-the-art spawn inoculum production plants.
These facilities, located in Kittanning, Pennsylvania, and Langeais, France,
incorporate the industry's most advanced production techniques and each is
capable of supplying all of the company's inoculum requirements. In addition,
the company produces nutritional supplements for mushroom compost at a plant in
Des Moines, Iowa. The value of backlog orders for spawn products is
insignificant.

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 that possess commercial suitability. Another
successful product is Sylvan's casing inoculum (CI), a mushroom production
additive that is applied to 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 disease-control agents, that are
targeted for use by mushroom growers.

Sylvan's production experience and research capabilities lend themselves to a
variety of commercially viable microbial production applications. It is
supplying a Japanese company with dried Agaricus mushrooms for use in a beverage
that is marketed in the Far East and it collaborates, from time to time, with
chemical, biotechnological and pharmaceutical companies for the purpose of
evaluating and promoting its capabilities beyond the mushroom industry. The
value of backlog orders for biological products is insignificant.



                                       1
<PAGE>   3

Fresh Mushroom Operations: The mushroom segment of Sylvan's business accounted
for 32% of the company's total sales in 1999 and 10% of its operating income.
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. The facility includes an advanced computer-controlled production
system with which compost is processed more efficiently than with conventional
systems. The mushrooms produced in 1999 were sold to supermarkets, food
processors and distributors principally in the mid-eastern and southeastern
United States. Beginning in 2000, Quincy's mushrooms will be sold to a leading
U.S. mushroom marketing organization that will package and distribute them
throughout the eastern United States.

Mushrooms are grown indoors in a continuous production process that 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 that are packaged and shipped to customers. The value of
backlog orders for mushroom products is insignificant.

PERSONNEL

On January 2, 2000, Sylvan had approximately 995 full-time employees, of whom
about 730 were engaged in production activities and 265 in supervision, sales
and administration. On January 3, 1999, Sylvan had approximately 925 full-time
employees, of whom about 695 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. In addition, harvesting and
packaging employees of its Quincy subsidiary are subject to a collective
bargaining agreement with the United Farm Workers. The remainder of the
company's workforce is not subject to collective bargaining arrangements.
Management believes that its employee relations are good.

FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS

The amounts of revenue, operating income and asset-related expenditures
attributable to each of the company's industry segments are set forth in Note 9
of the consolidated financial statements that are filed as part of this annual
report.

FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES

The amounts of revenue and long-lived assets attributable to each of the
company's geographic areas are set forth in Note 9 of the company's consolidated
financial statements that are filed as part of this annual report.

COMPETITIVE CONDITIONS

No single customer accounted for 10% or more of Sylvan's consolidated net sales
in 1999.

Spawn and Spawn-Related Products: Sylvan believes that there are seven firms in
the United States and three firms in Canada that produce and market almost all
of the spawn used by North American mushroom growers. Among these firms,
Sylvan's principal North American competitor is Lambert Spawn Company. In
addition, Money's Mushrooms Ltd. (a Canadian-based mushroom and spawn producer)
and Amycel, Inc. (a division of Monterey Mushrooms, Inc.) are major spawn
producers in the United States, but much of their production is consumed by
their mushroom production affiliates. Sylvan believes that its principal
European competitors are Italspawn and Le Lion. 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.

Fresh Mushrooms: Sylvan believes that the top two producers of mushrooms in the
United States, in order of size, are Money's Mushrooms Ltd. and Monterey
Mushrooms, Inc. Sylvan's production levels are comparable to those of a group of



                                       2
<PAGE>   4

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. Competition outside of
North America is characterized primarily by the importation of processed
mushroom products into the United States and Canada. However, processed
mushrooms are not a material factor in Sylvan's current operations because
Sylvan's mushrooms compete primarily in the fresh mushroom market. Due to the
fragility of fresh mushrooms, Sylvan believes that the fresh mushroom market in
the United States is somewhat protected 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 fluctuations.

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
that 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 1999, Sylvan's research and development expenditures totaled $1.6 million, as
compared with $1.7 million in 1998 and $1.5 million in 1997. These expenditures
were focused on improving the consistency, reliability and customer satisfaction
for the company's existing products and for the development of new products. The
company also utilizes contracted research efforts for specific studies that 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 does not believe that its ability to maintain or improve its
competitive position is dependent upon its patents. However, the company holds
several non-U.S. patents that cover a process and apparatus for the cultivation
of cells on solid substrates. The patents were issued in various years from 1982
to 1986. In addition, Sylvan was granted patents in 1994, 1996 and 1997 for
several mushroom strains and for technologies and processes that facilitate
mushroom breeding and may be capable of enhancing the company's strain
development and improvement efforts. The company also holds two process patents
relating to the production of its compost nutritional supplements. They were
issued in 1988 and 1991.

The company holds several Swiss patents that embody a process for commercially
producing spawn and spawn-related products and using a variety of nutrient
substrates as incubation material for spawn. The process is not currently
employed by the company.

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.


                                       3
<PAGE>   5


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. Also located
in Kittanning are the company's 14,000 square foot inoculum production plant
that opened in 1996, and a 22,000 square foot quality assurance facility that
opened in 1997. The company also operates a 49,000 square foot spawn plant in
Dayton, Nevada that commenced commercial production in January 1993, and a
27,000 square foot plant in Kennett Square, Pennsylvania that was constructed in
the 1960's and upgraded in 1991, which the company acquired in 1999. In
addition, it leases a 12,000 square foot facility in Des Moines, Iowa, in which
it produces compost nutritional supplements, and 40,000 square feet at a former
mushroom farm located near Cabot, Pennsylvania for various bioproducts
production and research operations.

The company's European operations in Langeais, France include a 100,000 square
foot spawn production plant, which the company acquired in 1991, and an inoculum
production plant, which opened in 1998, of a size similar to the Kittanning,
Pennsylvania inoculum production plant mentioned above. In addition, various
spawn culture maintenance and research operations are carried out in the
Langeais inoculum production facility. A 74,000 square foot spawn plant is
operated in Yaxley, Peterborough, England. Also at the site is a 1,500 square
foot storage area for pest-control agents and related products marketed by the
company.

The company operates a 56,000 square foot spawn plant in Horst, the Netherlands
that commenced commercial production in January 1995. In addition, the company
has a 14,000 square foot spawn plant in Windsor, Australia that opened in 1996;
and a 16,000 square foot spawn plant near Budapest, Hungary that opened in 1997.
The company also acquired a 27,000 square foot spawn plant in Navan, Ireland in
1998. In 1999, construction of a 15,500 square foot spawn plant was completed in
Pretoria, South Africa, where commercial production commenced during the third
quarter.

The company's 300,000 square foot fresh mushroom operation in Florida was
constructed in 1981 and expanded in 1991.

The company owns its inoculum production plants, mushroom farm and the spawn
plants in the United States, England, France, Hungary and South Africa. The
company and its joint venture partners own the spawn plants in the Netherlands,
Australia and Ireland. Incorporated into most of the company's plants are cold
storage areas and the company leases several small cold storage facilities to
support its sales operations in some of its North American and overseas market
areas. The spawn plants in England, Ireland and the Netherlands are the only
properties that have been mortgaged. The mortgages collateralize various
construction loans.

ITEM 3.  LEGAL PROCEEDINGS

There are no material pending legal proceedings to which Sylvan or any of its
subsidiaries is a party, or of which any of their property is subject, other
than ordinary, routine litigation incidental to their respective businesses.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters were submitted to a vote of security holders in the last quarter of
the 1999 fiscal year.

EXECUTIVE OFFICERS OF THE REGISTRANT

The following is a list of the names and ages 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


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<PAGE>   6

family relationship exists among the company's officers and directors. The
annual appointment of officers is scheduled to occur on June 6, 2000 at the
organizational meeting of the board of directors, following the annual meeting
of shareholders.

<TABLE>
<CAPTION>
           Name                                     Age                             Position
           ----                                     ---                             --------
<S>                                                 <C>                <C>
      Dennis C. Zensen                               61                Chairman of the Board,
                                                                       President and Chief Executive Officer of Sylvan

      Donald A. Smith                                38                Chief Financial Officer of Sylvan

      Fred Y. Bennitt                                55                Secretary/Treasurer of Sylvan

      Monir K. Elzalaki                              44                President of Sylvan America, Inc.

      Gregory J. Verhagen                            39                President of Quincy Farms

      Gary D. Walker                                 52                President of Sylvan Bioproducts, Inc.

      Michael A. Walton                              50                Managing Director of Sylvan's European Operations
</TABLE>


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.

Mr. Smith was appointed chief financial officer of Sylvan in December 1998. He
joined the company in 1996 as manager of financial planning and analysis and was
named corporate controller in October 1997. Prior to that, he served as chief
financial officer of the company's Sylvan America, Inc. subsidiary from 1994 to
1996 and as controller of the company's former Moonlight Mushrooms, Inc.
subsidiary from 1989 through 1993.

Mr. Bennitt 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. Verhagen was appointed president of the company's Quincy Farms subsidiary in
January 2000, having served as Quincy's general manager since May 1999. For the
four years prior to that time, he served in various senior management positions
for Money's Mushrooms Ltd.

Mr. Walker was appointed president of Sylvan Bioproducts in 1998, after serving
as manager and developer of the company's bioproducts business since the
beginning of 1994. He joined Sylvan in 1992 as president of its Moonlight
subsidiary until Moonlight closed in December 1993.

Mr. Walton was named managing director of Sylvan's European operations in 1995.
He joined Sylvan in connection with its acquisition of Hauser Champignonkulturen
AG (Hauser) in June 1992. At the time, he was serving as managing director of
Hauser's UK subsidiaries and continued in that capacity until his present
appointment.



                                       5
<PAGE>   7


                                     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(R) under the symbol
"SYLN." Set forth below are the high and low sales prices for Sylvan's common
stock for 1999 and 1998, as reported by The Nasdaq Stock Market(R).

                  1999                High Price              Low Price
                  ----                ----------              ---------
                 1st Qtr.               15                      9 3/4
                 2nd Qtr.               11 13/16                9 5/8
                 3rd Qtr.               13                      9 7/8
                 4th Qtr.               11 1/8                  7 7/8

                  1998                High Price              Low Price
                  ----                ----------              ---------
                 1st Qtr.               15 7/8                 11 3/4
                 2nd Qtr.               18 3/4                 13 3/4
                 3rd Qtr.               16 3/8                 13 1/2
                 4th Qtr.               16 3/8                 12 5/8

(b)  Holders of Common Equity

At year-end 1999, there were approximately 2,000 shareholders of record of
Sylvan common stock.

(c)  Dividends

Sylvan has never paid cash dividends and currently has a policy of retaining its
earnings to fund operations, expansion and the purchase of treasury shares. 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 are a Five-Year Summary of Selected Financial Data and Quarterly
Results of Operations with respect to Sylvan.



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<PAGE>   8
                  FIVE-YEAR SUMMARY OF SELECTED FINANCIAL DATA


<TABLE>
<CAPTION>
                                                                             Fiscal Year Ended
                                             ---------------------------------------------------------------------------------
(In millions except share data)                   1999             1998             1997              1996             1995
==============================================================================================================================
<S>                                            <C>             <C>              <C>              <C>             <C>
INCOME STATEMENT DATA:
  Net sales                                    $     89.6       $     89.6       $     81.6       $     79.1      $      75.8
  Operating income                                   10.6             11.1             11.5             10.6             11.9
  Net income                                          6.1              6.3              6.5              7.8              6.5
  Net income per common share - basic                1.00             0.98             1.01             1.23 (a)         1.04
  Net income per common share - diluted              1.00             0.97             1.01             1.23 (a)         1.04
  Weighted average shares - basic               6,112,007        6,440,287        6,395,971        6,344,609        6,225,995
  Weighted average shares - diluted             6,130,694        6,533,740        6,406,544        6,354,379        6,251,015

BALANCE SHEET DATA:
  Total assets                                 $    109.5       $    102.6       $     93.7       $     86.9      $      81.8
  Long-term debt and other
    long-term liabilities                            51.8             38.4             36.4             34.3             35.6
  Shareholders' equity                               47.2             50.3             44.0             41.2             33.6
  Working capital                                    22.8             18.9             16.9             12.7             10.6
  Net cash provided by operations                    13.0             10.2             10.4              6.4              7.4
  Cash dividends per common share                      --               --               --               --               --
</TABLE>

---------------------------
(a)    See Notes 1 and 6 to the December 29, 1996 Consolidated Financial
       Statements regarding the settlement of certain postretirement medical and
       other benefit obligations.


                         QUARTERLY RESULTS OF OPERATIONS

<TABLE>
<CAPTION>
                                                         First         Second          Third          Fourth
(Unaudited, in thousands except share data)             Quarter        Quarter        Quarter        Quarter
==============================================================================================================
<S>                                                   <C>            <C>            <C>             <C>
1999:
  Net sales                                           $   22,115     $   21,305     $   22,222      $   23,969
  Gross profit                                             9,167          8,740          9,174          10,038
  Net income                                               1,271          1,320          1,502           2,035
  Net income per common share - basic                       0.20           0.21           0.25            0.35
  Net income per common share - diluted                     0.20           0.21           0.25            0.35
  Weighted average shares - basic                      6,360,284      6,269,388      6,021,483       5,796,873
  Weighted average shares - diluted                    6,388,075      6,290,613      6,048,062       5,800,590

1998:
  Net sales                                           $   21,988     $   20,971     $   22,316      $   24,280
  Gross profit                                             9,529          8,765          8,936           9,576
  Net income                                               1,933          1,480          1,307           1,617
  Net income per common share - basic                       0.30           0.23           0.20            0.25
  Net income per common share - diluted                     0.30           0.23           0.20            0.25
  Weighted average shares - basic                      6,450,771      6,460,989      6,448,245       6,403,939
  Weighted average shares - diluted                    6,539,391      6,575,834      6,528,630       6,485,460
</TABLE>




                                       7
<PAGE>   9


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
         AND FINANCIAL CONDITION


<TABLE>
<CAPTION>
RESULTS OF OPERATIONS
(In millions)                                                    ------------------ Fiscal  Year Ended ------------------

                                                                 Jan. 2, 2000          Jan. 3, 1999         Dec. 28, 1997
                                                                 ------------          ------------         -------------
<S>                                                                  <C>                    <C>                  <C>
      NET SALES                                                      $89.6                  $89.6                $81.6

      OPERATING COSTS AND EXPENSES:
        Cost of sales                                                 52.5                   52.8                 47.3
        Selling and administrative                                    19.5                   18.7                 16.7
        Research and development                                       1.6                    1.7                  1.5
        Depreciation                                                   5.5                    5.3                  4.6
                                                                     -----                  -----                -----
                                                                      79.1                   78.5                 70.1
                                                                     -----                  -----                -----

      OPERATING INCOME                                                10.5                   11.1                 11.5

      INTEREST EXPENSE, NET                                            2.2                    2.2                  2.1

      OTHER INCOME (EXPENSE)                                            --                   (0.1)                  --
                                                                     -----                  -----                -----

      INCOME BEFORE INCOME TAXES                                       8.3                    8.8                  9.4

      PROVISION FOR INCOME TAXES                                       2.1                    2.3                  2.7
                                                                     -----                  -----                -----

      INCOME BEFORE MINORITY INTEREST IN
        INCOME OF CONSOLIDATED SUBSIDIARIES                            6.2                    6.5                  6.7
                                                                     -----                  -----                -----

      MINORITY INTEREST IN INCOME OF
        CONSOLIDATED SUBSIDIARIES                                      0.1                    0.2                  0.2
                                                                     -----                  -----                -----
      NET INCOME                                                     $ 6.1                  $ 6.3                $ 6.5
                                                                     =====                  =====                =====


SELECTED SEGMENT INFORMATION
(In millions)

      SPAWN AND SPAWN-RELATED PRODUCTS
        Sales (less intersegment sales)                              $60.4                  $58.8                $51.4
        Operating expenses                                            47.5                   45.9                 39.0
        Operating income                                              12.9                   12.9                 12.4

      FRESH MUSHROOMS
        Sales                                                         29.2                   30.7                 30.2
        Operating expenses                                            27.8                   29.6                 27.3
        Operating income                                               1.4                    1.1                  2.9
</TABLE>


                                       8
<PAGE>   10


                              RESULTS OF OPERATIONS
                          COMPARISON OF 1999 WITH 1998

NET SALES

The 1999 consolidated net sales were $89.6 million, virtually equal to the 1998
net sales. International sales increased to 50% of total net sales from 48% in
1998. Increases in international sales expose the company to larger currency
translation fluctuations. During 1999, the U.S. dollar strengthened by 14% on
average against the company's major foreign trading currencies. This 1999
strengthening had the effect of reducing net sales by $3.3 million.

Spawn and Spawn-Related Products: Net sales of spawn and spawn-related products
increased by 3% to $60.4 million when compared with net sales of $58.8 million
for 1998. Part of this increase was due to higher sales from Sylvan's
bioproducts division. The strengthening of the U.S. dollar continued to mask
Sylvan's overseas sales growth. All of the company's $3.3 million currency
effect was within the spawn and spawn-related products segment. Overall spawn
product sales volume increased by 5%, with a 2% increase in the Americas and a
7% increase in the company's overseas markets. Average spawn selling prices were
1% lower in the Americas in 1999 versus 1998, primarily due to the continued
consolidation of the North American mushroom industry. The overseas average
selling price decreased by 5% when compared with 1998, due to the strengthening
of the U.S. dollar. Overseas local selling prices increased modestly over the
prior-year levels. Sales of nutritional supplements and disease-control agents
for 1999 were essentially equal to 1998 levels, and accounted for 13% of the
company's total net sales.

Fresh Mushrooms: Net mushroom sales decreased by 5% to $29.2 million when
compared with the $30.7 million for 1998. This decrease was the result of
production inefficiencies, primarily during the first half of 1999, which
reduced total pounds sold for the full-year 1999 by 4%. The average selling
price per pound for 1999 decreased by 1% when compared with 1998. The percentage
of total pounds sold to the fresh market in 1999 was 91%, slightly lower than
the 92% in 1998. This percentage calculation fluctuates with variations in
quality, availability of supply and other competitive conditions. Production
inefficiencies in 1999 also reduced the quality of Quincy's mushrooms, which
contributed to the lower fresh market percentage. In response to increasingly
competitive market conditions, Quincy's January 2000 agreement with a unit of
Modern Mushroom Farms, Inc. to market 100% of Quincy's production is expected to
strengthen its position. Quincy will sell its harvested mushrooms to Modern and
Modern will package, distribute and market that product. When including the
Sylvan production, Modern will market more than 85 million pounds of mushrooms
annually (about 12% of the U.S. fresh market) in 23 states.

The United States Department of Agriculture reported a 6% increase in fresh
mushroom sales in the United States for the 1998-99 season, reflecting a 5%
increase in pounds sold. Average selling prices were comparable with the prior
year. The USDA crop reports also indicated that sales of processed mushrooms
increased by 15% in the 1998-99 period over the 1997-98 period.

COST OF SALES

Expressed as a percentage of sales, the company's cost of sales was 58.6% for
1999, as compared with 58.9% for 1998. The 1999 decrease was caused primarily by
improved production efficiencies in the fresh mushroom business.

Spawn and Spawn-Related Products: The cost of sales percentage for 1999 was
49.5%, as compared with 48.8% for 1998. The increase was due primarily to a
decreasing margin on sales of nutritional supplements and disease-control
agents. Sylvan benefited from the opening of additional production capacity in
South Africa, which eliminated the need to ship spawn from the Netherlands. The
South African facility began production in the third quarter of 1999. Discard
percentages in both North America and Europe were comparable with 1998. Sylvan's
Australian facility experienced substantial improvement in its production
discard rate due to the replacement of its blender in the first quarter of 1999.

Fresh Mushrooms: The fresh mushroom cost of sales percentage was 75.2% for 1999,
as compared with 76.4% for 1998. The decrease was due to production efficiency
improvements that occurred primarily in the second half of 1999. The
efficiencies contributed to production yield improvements, spreading a cost
structure that is primarily fixed in nature over more pounds.



                                       9
<PAGE>   11

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses were 21.7% of net sales for 1999, as
compared with 20.9% for 1998. The higher 1999 percentage was due to higher
levels of bad debt expense, the resumption of executive bonus payments, and the
full-year inclusion of the 1998 acquisition of International Mushrooms Ltd. The
company recorded a nonrecurring expense of $0.6 million in 1998 to reflect the
settlement of two lawsuits.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses decreased by 8% in 1999 to $1.6 million, as
compared with $1.7 million for 1998. Most of the decrease was due to the
consolidation of some R&D functions within the company's European operations.

DEPRECIATION EXPENSE

The 1999 depreciation expense increased by 5% to $5.5 million, as compared with
the $5.3 million reported for 1998. The increase was a result of capital
expenditures that totaled $7.7 million in 1999 and $8.2 million in 1998,
diminished by the strengthening of the U.S. dollar.

INTEREST EXPENSE

Net interest expense for both 1999 and 1998 was $2.2 million. Sylvan had higher
levels of average borrowing in 1999; however, the average effective interest
rate decreased to 6.4%, as compared with 6.8% for 1998.

INCOME TAX EXPENSE

The company's effective income tax rate for 1999 and 1998 was 26%. A higher
effective tax rate is expected for 2000 because a larger portion of the
company's taxable income is expected from U.S. operating units.


                              RESULTS OF OPERATIONS
                          COMPARISON OF 1998 WITH 1997

NET SALES

Consolidated net sales for 1998 were $89.6 million, a 10% increase when compared
with 1997 net sales of $81.6 million. International sales increased as a
percentage of total net sales, climbing to 48% in 1998, compared with 46% for
1997. Although higher international sales exposed the company to larger currency
translation fluctuations, the 1997 to 1998 currency translation difference was
minimal. During 1998, the U.S. dollar weakened 2% on average against the
company's major foreign trading currencies.

Spawn and Spawn-Related Products: Net sales of spawn and spawn-related products
were $58.8 million in 1998, a 15% increase when compared with net sales of $51.4
million for 1997. The 1998 increase was due primarily to two factors. The first
factor was a 5% increase in the volume of spawn products shipped in 1998 over
the 1997 total. Europe recorded an 11% increase from 1997 to 1998, Australia a
14% increase and the Americas a 2% decrease. Average spawn selling prices were
2% higher in the Americas in 1998 versus 1997, due to the implementation of a
price increase during the second quarter of 1998. European spawn selling prices
were essentially the same as in 1997. The average spawn selling price in
Australia decreased by 12% when translated to U.S. dollars, as the impact of a
second-quarter price increase was more than offset by an unfavorable currency
rate movement with respect to the Australian dollar. The second factor
contributing to sales increases in 1998 was a 76% increase in the sales of
nutritional supplements and disease-control agents from 1997 levels. Sylvan's
acquisition of Tartarin S.A. in December 1997 and sales gains in the Americas
accounted for most of this increase. Nutritional supplements and disease-control
agents accounted for 13% of the company's total 1998 net sales.



                                       10
<PAGE>   12

Fresh Mushrooms: Sylvan's net mushroom sales increased in 1998 to $30.7 million,
due primarily to a 1% increase in pounds sold. Net mushroom sales were 2% higher
in 1998, when compared with 1997's net sales of $30.2 million. The average
selling price per pound for 1998 increased by 0.5% when compared with 1997. The
percentage of total pounds sold to the fresh market in 1998 was 92%, which was
lower than the 94% in 1997. These percentages fluctuate with variations in
quality, availability of supply and other competitive conditions. Production
difficulties in 1998 reduced the quality and the supply of Quincy's mushrooms,
which contributed to the lower fresh market percentage. Increased competition in
Quincy's southeastern U.S. market area added to the decline.

U.S. industry activity as a whole, as described in Department of Agriculture
crop reports, experienced an 11% increase in fresh mushroom sales in 1997-98,
reflecting a 12% increase in pounds sold and a 1% decrease in the average
selling price, when compared with 1996-97. The USDA crop reports also indicated
that sales of processed mushrooms decreased by 17% in the 1997-98 period from
the 1996-97 period.

COST OF SALES

The company's cost of sales, expressed as a percentage of sales, was 58.9% for
1998 and 57.9% for 1997. The 1998 increase was caused primarily by higher
production costs in the fresh mushroom business.

Spawn and Spawn-Related Products: The cost of sales percentage for 1998 was
48.8%, as compared with 48.7% for 1997. This increase was due primarily to
increases in the proportion of sales of nutritional supplements and
disease-control agents, which have a higher cost of sales percentage than spawn
products. In 1998, Sylvan benefited from additional European spawn production
capacity, which eliminated the need to ship spawn from the company's U.S.
production facilities to accommodate the strong demand from European markets.
Discard percentages in North America were at historically low levels due to
improvements in inoculum quality. Overseas discard rates were comparable to
prior years with the exception of the Australia operation. The company decided
to replace the Australian plant's blender in the first half of 1999 in order to
rectify production problems.

Fresh Mushrooms: The fresh mushroom cost of sales percentage was 76.4% for 1998,
as compared with 72.4% for 1997. The 1998 increase was due to various production
inefficiencies in the second half of the year. These inefficiencies contributed
to production yield reductions, spreading a cost structure that is primarily
fixed in nature over fewer pounds.

SELLING AND ADMINISTRATIVE EXPENSES

Selling and administrative expenses were 20.9% of net sales for 1998, as
compared with 20.5% for 1997. The company recorded a nonrecurring expense of
$0.6 million in 1998 to reflect the tentative settlement of two lawsuits. Fees
for legal services were also higher than in prior years, due primarily to the
lawsuits. Selling expenses were higher as the company implemented an expansion
into Eastern European and Asian markets. This expansion continued into 1999.
Certain noncash expenses related to pension and other postretirement benefits
were lower in 1998 when compared with 1997. In addition, bonus payments were
reduced in 1998 from the levels paid in 1997. Currency translation rates did not
have a material effect on selling and administrative expenses for 1998.

RESEARCH AND DEVELOPMENT EXPENSES

Research and development expenses increased by 14% in 1998 to $1.7 million, when
compared with $1.5 million for 1997.

DEPRECIATION EXPENSE

Depreciation expense was $5.3 million in 1998, a 14% increase over the $4.6
million reported for 1997. The 1998 increase was a result of capital
expenditures that totaled $8.2 million in 1998 and $7.6 million in 1997.
Additionally, the second-quarter 1998 acquisition of International Mushrooms
Ltd. added to the depreciation expense.


                                       11
<PAGE>   13


INTEREST EXPENSE

Net interest expense for 1998 was $2.2 million, as compared with $2.1 million
for 1997. The increase resulted from higher average borrowings for 1998, in
spite of a lower average effective borrowing rate of 6.8%, as compared with 6.9%
for 1997.

OTHER INCOME (EXPENSE)

The company reported a net $0.1 million other expense total for 1998, which was
comparable to the less than $0.1 million income reported in 1997.

INCOME TAX EXPENSE

The company's effective income tax rate for 1998 was 26%, compared with 29% for
1997. The 1998 decrease resulted from the contribution of a higher portion of
the company's taxable income from European operating units, as compared with the
previous year's contribution.


                         LIQUIDITY AND CAPITAL RESOURCES

Sylvan evaluates its liquidity and capital resources position by comparing its
investment opportunities with its cash position, operating cash flow trends and
credit availability. Available credit under the company's $55.0 million
revolving credit agreement was $15.6 million as of January 2, 2000. The
arrangement provides for a reduction of the total credit amount over a six-year
period, with the first reduction to $50 million effective August 6, 2003.

Net cash provided by operating activities was $13.0 million in 1999, as compared
with $10.2 million in 1998 and $10.4 million in 1997. 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 $3.9 million in
1999, as compared with the 1998 level. Three primary factors account for this
increase. First, the company's operations, particularly in Europe, provided an
increase in cash balances of $1.1 million. Second, during 1999, $0.7 million of
cash was provided due to timing changes in the funding of certain employee
benefits. This increase is in contrast to the use of cash of $1.5 million in
1998 and $0.8 million in 1997 for employee benefits. Third, the company had cash
provided from tax refunds in several tax jurisdictions. Offsetting these three
primary factors, the company had a $0.2 million increase in its accounts
receivable, a $0.6 million increase in its inventories, a $0.4 million increase
in its prepaid and other assets and a $0.9 million decrease in accounts payable,
accrued expenses and other liabilities.

During most of 1999, Sylvan experienced an overall lower level of accounts
receivable on a year-over-year basis due to an increased focus on timely
collections of accounts receivable. However, particularly strong fourth-quarter
1999 holiday sales at Quincy accounted for the $0.2 million increase over 1998.
During 1998, accounts receivable decreased by $1.6 million as compared with
1997, due mostly to the collection of receivables by the company's Tartarin
subsidiary that was acquired in late 1997. Inventory levels increased slightly
between 1998 and 1999 due primarily to increased finished goods and supplies
held within the U.S. spawn operations. When expressed as days of inventory held,
1999 inventory was 69 days, compared with 68 days in 1998 and 62 days in 1997.
Prepaid expenses and other assets increased by $0.4 million in 1999 and $0.8
million in 1998 as compared with prior years, due primarily to the company's
French subsidiaries carrying increased receivables related to interest and
value-added taxes. Trade accounts payable, accrued expenses and other
liabilities decreased by $0.9 million in 1999 as compared with 1998. Most of
this decrease was due to litigation settlements during the second quarter of
1999. Accounts payable and accrued liabilities decreased by $1.3 million in
1998, primarily as a result of Tartarin's settlement of trade payables.

Cash used in investing activities totaled $12.2 million in 1999, compared with
$9.8 million in 1998 and $11.6 million in 1997. In November 1999, the company
acquired most of the assets of the Swayne spawn company of Kennett Square,
Pennsylvania for $4.6 million. Capital expenditures totaled $7.7 million in
1999, $8.2 million in 1998 and $7.6 million in 1997. Major capital expenditures
for 1999 included plant modifications and the installation of blender technology
at its facility in Ireland, continued construction and completion of a spawn
production facility in South Africa, a replacement blender in its Australian
plant, upgrading chilling equipment at Quincy, cold storage capacity enlargement
in the Netherlands and additional



                                       12
<PAGE>   14

equipment for the company's bioproducts operation. Replacement capital
expenditures represented less than 50% of the total. Capital expenditures in
2000 are expected to total between $6 million and $10 million for existing
operations, with additional expenditures as required for any acquisitions or new
initiatives. During 1999, the company purchased 716,900 shares of Sylvan common
stock at an average price of $10.95 per share. By comparison, 109,425 shares
were purchased during 1998 at an average price of $13.94 per share. Management
expects to continue the purchase program during 2000, subject to price and share
availability conditions that make such purchases financially beneficial and
appropriate.

Term debt and revolving credit obligations increased by $8.9 million in 1999,
compared with increases of $1.1 million and $3.3 million in 1998 and 1997,
respectively. Most of the increase in 1999 related to the acquisition of Swayne
and the purchase of Sylvan stock, offset by the positive cash flows of
operations after capital additions. The company routinely assesses its
requirements for additional capital investments as it experiences continued
growth in the company's international operations. The revolving credit facility
and net operating cash flows are expected to provide sufficient funding for
projected 2000 expenditures.

Sylvan currently does not pay a dividend on its common stock. Management may, in
the future, propose dividend payments after evaluating Sylvan's current and
projected liquidity and financing arrangements, subject to net worth covenants
contained in its revolving credit agreement.

YEAR 2000 ISSUES

Sylvan did not experience any material Year 2000 production, distribution or
information systems problems and it does not anticipate that there will be any
with respect to it, its suppliers or its customers. No financial losses have
been incurred. The total cost of Sylvan's Year 2000 compliance efforts was
approximately $70,000. Most of these expenditures related to computer system
installations and software upgrades.

EURO CURRENCY

A single currency, the Euro, was introduced in Europe on January 1, 1999. Of the
15 member countries of the European Union, 11 agreed to adopt the Euro as their
legal currency on that date. Fixed conversion rates between the existing
currencies of these 11 countries and the Euro were established as of that date.
The existing currencies are scheduled to remain legal tender as denominations of
the Euro until at least January 1, 2002. During this transition period, parties
may settle transactions using either the Euro or a participating country's legal
currency. Currently, Sylvan does not believe that the conversion to the Euro
will have a material impact on its business or financial condition.


ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The company is exposed to market risk from changes in foreign currency exchange
rates and interest rates. In order to manage this risk, the company enters into
various contracts and options. A discussion of accounting policies for
derivative instruments is included in Note 1 to Sylvan's consolidated financial
statements that are filed herewith and further disclosure is provided in Note
11.

Foreign Currency Exchange Rate Risk: Note 9 of the consolidated financial
statements sets forth revenues for three years based on the location of the
company's customers. Sylvan has foreign currency exposures related to buying,
selling, and financing in currencies other than the U.S. dollar. This exposes
the company's future earnings, assets, liabilities, cash flow and financial
instruments that are denominated in foreign currencies.

Sylvan believes that its most significant financial instrument rate exposure
relates to its activities in the Netherlands. As of January 2, 2000, the net
fair value liability of Dutch guilder denominated financial instruments was
approximately $7.2 million. The potential fair value loss of a hypothetical 10%
adverse change in the currency exchange rate would be approximately $720,000.

Interest Rate Risk: The company is subject to market risk from exposure to
changes in interest rates based on its financing practices. This risk is managed
by entering into a variety of financial instruments to maintain a desired level
of exposure.



                                       13
<PAGE>   15

The net fair value liability at January 2, 2000 of all financial instruments
subject to interest rate exposures was approximately $39.4 million. The table
below provides information about the company's financial instruments that are
sensitive to interest rates. For debt obligations, the table presents principal
cash flow and related weighted average interest rates according to their
expected maturity dates. For interest rate swaps, the table presents notional
amounts and weighted average interest rates according to their expected maturity
dates. Weighted average interest rates are based on the LIBOR rate in effect at
the reporting date. No future rate assumptions have been made.

<TABLE>
<CAPTION>
                                     Expected Maturity Date for Periods Ended December 31,
                               -----------------------------------------------------------------------
                               2000        2001         2002         2003         2004      Thereafter    Total     Fair Value
                               ----        ----         ----         ----         ----      ----------    -----     ----------
<S>                           <C>         <C>         <C>           <C>          <C>         <C>         <C>         <C>
(In thousands)

Liabilities
Long-term debt
   Fixed rate                   $418        $440       $2,508       $  121         $468      $   623     $ 4,578     $ 4,578
   Average interest rate        8.29%       5.86%        7.16%        6.94%        7.02%        8.55%
   Variable rate                  --          --           --           --           --      $39,384     $39,384     $39,384
   Average interest rate          --          --           --           --           --         6.88%
Interest rate swaps
   Fixed to variable              --          --           --       $5,000           --      $10,000     $15,000     $   613
   Average pay rate                                                   5.02%                     5.78%       5.53%
   Average receive rate                                               6.16%                     6.16%
</TABLE>


FORWARD-LOOKING AND CAUTIONARY STATEMENTS

From time to time in this report, references are made to expectations regarding
future performance of the company. 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 exchange risks with respect to the Euro and existing
              currencies used in the company's markets;
         o    the loss of key executives or other employees of the company; and
         o    failure to achieve production yield and quality expectations from
              time to time.


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


                                       14
<PAGE>   16

                                    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.


                                       15
<PAGE>   17


                                    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

         3.3      Articles of Incorporation of S. F. Nevada, Inc. - previously
                  filed as Exhibit 3.3 on November 12, 1999 with the company's
                  Form 10-Q Quarterly Report for the period ended October 3,
                  1999 and incorporated herein by reference

         3.4      Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods
                  Holdings, Inc. with exhibit - previously filed as Exhibit 3.4
                  on November 12, 1999 with the company's Form 10-Q Quarterly
                  Report for the period ended October 3, 1999 and incorporated
                  herein by reference

         3.5      Bylaws - previously filed as Exhibit 3.5 on November 12, 1999
                  with the company's Form 10-Q Quarterly Report for the period
                  ended October 3, 1999 and incorporated herein by reference

                  Compensation Plans and Arrangements

         10.1.2   Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan,
                  previously filed as Exhibit 3.3.2 on April 2, 1993 with the
                  company's Form 10-K Annual Report for the fiscal year ended
                  January 3, 1993 and incorporated herein by reference

         10.1.3   Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for
                  Nonemployee Directors, previously filed on April 1, 1994 with
                  the company's Form 10-K Annual Report for fiscal year ended
                  January 2, 1994 and incorporated herein by reference

         10.12    Sylvan Inc. 1990 Stock Option Plan (amended and restated),
                  previously filed on November 12, 1999 with the company's Form
                  10-Q Quarterly Report for the period ended October 3, 1999 and
                  incorporated herein by reference

                  Material Contracts

         10.2.1   Revolving Credit Agreement, dated as of August 6, 1998, by and
                  among Sylvan Inc., a Nevada corporation, Sylvan Foods
                  (Netherlands) B.V., a Dutch corporation, as Borrowers, the
                  Banks party thereto from time to time and Mellon Bank, N.A., a
                  national banking association, as issuing bank and as agent for
                  the Banks thereunder, together with various annexes, exhibits
                  and schedules and various related documents, previously filed
                  as Exhibits 10.1 through 10.10 on November 10, 1998 with
                  Sylvan's Form 10-Q Quarterly Report for the period ended
                  September 27, 1998 and incorporated herein by reference

         10.2.11  Index of Other Exhibits to the Revolving Credit Agreement,
                  previously filed as Exhibit 10.11 with Sylvan's Form 10-Q
                  Quarterly Report for the period ended September 27, 1998 and
                  incorporated herein by reference

         10.3.1   Collective Bargaining Agreement, dated July 20, 1999, between
                  Quincy Corporation and the United Farm Workers of America,
                  AFL-CIO, previously filed as Exhibit 10 on August 9, 1999 with
                  the company's Form 10-Q Quarterly Report for the period ended
                  July 4, 1999 and incorporated herein by reference

         10.4.1   Asset Purchase Agreement, dated November 30, 1999, by, between
                  and among J. B. Swayne Spawn Company, John B. Swayne, III and
                  Worthington Holdings, Inc.



                                       16
<PAGE>   18

         10.4.2   Index of Exhibits to the Asset Purchase Agreement referenced
                  above

         10.5.1   Agreement, dated January 14, 2000, by and between C And C
                  Carriage Mushroom Co., t/a Modern Sales Company, and Quincy
                  Corporation

         10.5.2   Index of Exhibits to the C And C Agreement referenced above

         11       Statement re computation of per share earnings is not required
                  because the relevant computation can be clearly determined
                  from the material contained in the financial statements
                  included herein

         21       Subsidiaries of the Registrant

         27       Financial Data Schedule

(b)      REPORTS ON FORM 8-K

None


                                       17
<PAGE>   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 7th day of March
2000.


                                          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.

<TABLE>
<CAPTION>
           Signature                                 Title                                  Date
           ---------                                 -----                                  ----
<S>                                         <C>                                         <C>

/s/ DENNIS C. ZENSEN                        Chairman of the Board of                    March 7, 2000
--------------------------------------      Directors, President and                    -------------
Dennis C. Zensen                            Chief Executive Officer
                                            (Principal Executive Officer)


/s/ DONALD A. SMITH                         Chief Financial Officer                     March 7, 2000
--------------------------------------      (Principal Financial and                    -------------
Donald A. Smith                             Accounting Officer)


/s/ WILLIAM L. BENNETT                      Director                                    March 7, 2000
--------------------------------------                                                  -------------
William L. Bennett


/s/ MONIR K. ELZALAKI                       President, Sylvan America, Inc.             March 7, 2000
--------------------------------------      Director                                    -------------
Monir K. Elzalaki


/s/ VIRGIL H. JURGENSMEYER                  Director                                    March 7, 2000
--------------------------------------                                                  -------------
Virgil H. Jurgensmeyer


/s/ DONALD T. PASCAL                        Director                                    March 7, 2000
--------------------------------------                                                  -------------
Donald T. Pascal
</TABLE>


                                       18
<PAGE>   20



              INDEX TO FINANCIAL STATEMENTS, SCHEDULES AND EXHIBITS


<TABLE>
<CAPTION>
Exhibit No.                          Description                                                            Page No.
-----------                          -----------                                                            --------
<S>           <C>                                                                                           <C>
              Consent of Independent Public Accountants                                                        F-1

              Report of Independent Public Accountants                                                         F-2

              Consolidated Balance Sheets at January 2, 2000 and January 3, 1999                               F-3

              Consolidated Statements of Income for the Years Ended
              January 2, 2000, January 3, 1999, and December 28, 1997                                          F-5

              Consolidated Statements of Changes in Shareholders' Equity
              for the Years Ended January 2, 2000, January 3, 1999, and
              December 28, 1997                                                                                F-6

              Consolidated Statements of Cash Flows for the Years Ended
              January 2, 2000, January 3, 1999, and December 28, 1997                                          F-7

              Notes to Consolidated Financial Statements                                                       F-8

              Schedule II - Valuation and Qualifying Accounts for the Years
              Ended January 2, 2000, January 3, 1999, and December 28, 1997                                    F-22

              Report of Independent Public Accountants on Financial Statement
              Schedule                                                                                         F-23

   3.3        Articles of Incorporation of S. F. Nevada, Inc.                                                  (a)

   3.4        Articles of Merger of S. F. Nevada, Inc. and Sylvan Foods Holdings, Inc. with exhibit            (a)

   3.5        Bylaws                                                                                           (a)

   10.12      Sylvan Inc. 1990 Stock Option Plan, as amended and restated                                      (a)

   10.1.2     Sylvan Foods, Inc. Target Benefit Annuity Purchase Plan                                          (b)

   10.1.3     Sylvan Foods Holdings, Inc. 1993 Stock Option Plan for Nonemployee Directors                     (c)

   10.2.1     Revolving Credit Agreement, dated as of August 6, 1998, by and among Sylvan Inc.,
              a Nevada corporation, and Sylvan Foods (Netherlands) B.V., a Dutch
              corporation, as Borrowers; the Banks party thereto from time to time and Mellon
              Bank, N.A., a national banking association, as issuing bank and as agent for the
              Banks thereunder, together with various annexes, exhibits, and schedules                         (d)

   10.2.2     Revolving Credit Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
              amount of $25,000,000                                                                            (d)

   10.2.3     Revolving Credit Note, dated August 6, 1998, payable to ABN AMRO Bank,
              Pittsburgh Branch, in the amount of $25,000,000                                                  (d)
</TABLE>



                                       19
<PAGE>   21


<TABLE>
<CAPTION>
Exhibit No.                          Description                                                            Page No.
-----------                          -----------                                                            --------
<S>           <C>                                                                                           <C>
   10.2.4     Promissory Note, dated August 6, 1998, payable to Mellon Bank, N.A. in the
              amount of $5,000,000                                                                             (d)

   10.2.5     Mellon Global Cash Management ABS Agreement, dated August 6, 1998, by and
              between Sylvan Inc. and Mellon Bank, N.A.                                                        (d)

   10.2.6     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan Inc. and Mellon Bank, N.A.                                                                (d)

   10.2.7     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan Foods, Inc. and Mellon Bank, N.A.                                                         (d)

   10.2.8     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan America, Inc. (a Pennsylvania corporation) and Mellon Bank, N.A.                          (d)

   10.2.9     Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Sylvan America, Inc. (a Nevada corporation) and Mellon Bank, N.A.                                (d)

   10.2.10    Guaranty and Suretyship Agreement, dated August 6, 1998, by and between
              Quincy Corporation and Mellon Bank, N.A.                                                         (d)

   10.2.11    Index of Other Exhibits to the Revolving Credit Agreement referenced in Exhibit 10.2.1           (d)

   10.3.1     Collective Bargaining Agreement, dated July 20, 1999, between Quincy Corporation
              and the United Farm Workers of America, AFL-CIO                                                  (e)

   10.4.1     Asset Purchase Agreement, dated November 30, 1999, by, between and among
              J.B. Swayne Spawn Company, John B. Swayne, III and Worthington Holdings, Inc.                    E-3

   10.4.2     Index of Exhibits to the Asset Purchase Agreement referenced in Exhibit 10.4.1                   E-20

   10.5.1     Agreement, dated January 14, 2000, by and between C And C Carriage Mushroom Co.,
              t/a Modern Sales Company and Quincy Corporation                                                  E-22

   10.5.2     Index of Exhibits to the Agreement referenced in Exhibit 10.5.1                                  E-69

   21         Subsidiaries of the Registrant                                                                   E-70
</TABLE>

------------------

         (a)  This exhibit was previously filed on November 12, 1999 with the
              company's Form 10-Q Quarterly Report for the period ended
              October 3, 1999 and is incorporated herein by reference.
         (b)  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.
         (c)  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.
         (d)  This exhibit was previously filed on November 10, 1998 as one of
              Exhibits 10-1 through 10-11 with the company's Form 10-Q Quarterly
              Report for the period ended September 27, 1998 and is incorporated
              herein by reference.
         (e)  This exhibit was previously filed on August 9, 1999 as Exhibit 10
              with the company's Form 10-Q Quarterly Report for the period ended
              July 4, 1999.


                                       20
<PAGE>   22
                               ARTHUR ANDERSEN LLP

                    CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the incorporation by
reference in Sylvan Inc.'s Form 10-K of our reports dated February 4, 2000
included or incorporated by reference in 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 Nonemployees Directors. It should be noted
that we have not audited any financial statements of the Company subsequent to
January 2, 2000 or performed any audit procedures subsequent to the date of our
report.

                                                  /s/ ARTHUR ANDERSEN LLP


Pittsburgh, Pennsylvania,
   March 27, 2000



                                      F-1
<PAGE>   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 Subsidiaries as of January 2, 2000 and January 3, 1999,
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
January 2, 2000. 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 auditing standards generally accepted
in the United States. 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 January 2, 2000 and January 3, 1999, and the results of their
operations and their cash flows for each of the three fiscal years in the period
ended January 2, 2000, in conformity with accounting principles generally
accepted in the United States.

/s/ Arthur Andersen LLP

Pittsburgh, Pennsylvania,
  February 4, 2000



                                      F-2
<PAGE>   24


                          SYLVAN INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS

                                 (In Thousands)


                                     ASSETS

<TABLE>
<CAPTION>
                                                                                  January 2,         January 3,
                                                                                    2000               1999
                                                                                  ---------          ---------
<S>                                                                               <C>                <C>
CURRENT ASSETS:
     Cash and cash equivalents                                                     $  7,601           $  6,497
     Trade accounts receivable, net of allowance for
       doubtful accounts of $826 and $710, respectively                              12,347             12,630
     Inventories                                                                     10,110              9,820
     Prepaid income taxes and other expenses                                          1,537              1,459
     Other current assets                                                             1,121              1,505
     Deferred income tax benefit                                                        500                856
                                                                                   --------           --------
                  Total current assets                                               33,216             32,767
                                                                                   --------           --------

PROPERTY, PLANT AND EQUIPMENT:
     Land and improvements                                                            3,028              3,016
     Buildings                                                                       35,007             32,384
     Equipment                                                                       48,605             47,168
                                                                                   --------           --------
                                                                                     86,640             82,568

     Less- Accumulated depreciation                                                 (32,391)           (29,129)
                                                                                   --------           --------
                  Total property, plant and equipment, net                           54,249             53,439
                                                                                   --------           --------

INTANGIBLE ASSETS, net of accumulated
     amortization of $3,906 and $3,249, respectively                                 12,797             12,218

OTHER ASSETS, net of accumulated amortization of $316
     and $272, respectively                                                           9,233              4,126
                                                                                   --------           --------

TOTAL ASSETS                                                                       $109,495           $102,550
                                                                                   ========           ========
</TABLE>


         The accompanying notes to consolidated financial statements
                   are an integral part of these statements.

                                      F-3
<PAGE>   25


                          SYLVAN INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS

                        (In Thousands Except Share Data)


                      LIABILITIES AND SHAREHOLDERS' EQUITY


<TABLE>
<CAPTION>
                                                                 January 2,         January 3,
                                                                   2000                1999
                                                                 ---------          ---------
<S>                                                              <C>                <C>
CURRENT LIABILITIES:
     Current portion of long-term debt                            $    418           $    825
     Accounts payable - trade                                        4,647              5,341
     Accrued salaries, wages and employee benefits                   2,970              2,504
     Other accrued liabilities                                       1,703              2,150
     Income taxes payable                                              697              3,041
                                                                  --------           --------

                  Total current liabilities                         10,435             13,861
                                                                  --------           --------

LONG-TERM AND REVOLVING-TERM DEBT                                   43,544             34,586
                                                                  --------           --------

OTHER LONG-TERM LIABILITIES:
     Other employee benefits                                         1,053              1,054
     Other                                                           5,826              1,437
                                                                  --------           --------
                  Total other long-term liabilities                  6,879              2,491
                                                                  --------           --------

MINORITY INTEREST                                                    1,413              1,348

SHAREHOLDERS' EQUITY:
     Common stock, voting, par value $.001, 10,000,000
       shares authorized, 6,671,601 and 6,637,201 shares
       issued in 1999 and 1998, respectively                             7                  7
     Additional paid-in capital                                     16,801             16,443
     Retained earnings                                              47,785             41,657
     Less-Treasury stock, at cost, 966,765 and 249,865
       shares in 1999 and 1998, respectively                       (10,166)            (2,318)
                                                                  --------           --------
                                                                    54,427             55,789

     Cumulative translation adjustment                              (7,203)            (2,122)
     Pension adjustment                                                 --             (3,403)
                                                                  --------           --------
     Accumulated other comprehensive deficit                        (7,203)            (5,525)
                                                                  --------           --------
                  Total shareholders' equity                        47,224             50,264
                                                                  --------           --------

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY                        $109,495           $102,550
                                                                  ========           ========
</TABLE>



           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.


                                      F-4
<PAGE>   26

                          SYLVAN INC. AND SUBSIDIARIES


                        CONSOLIDATED STATEMENTS OF INCOME

                        (In Thousands Except Share Data)


<TABLE>
<CAPTION>
                                                  1999                 1998                 1997
                                               ----------           ----------           ----------
<S>                                            <C>                  <C>                  <C>
NET SALES                                      $   89,611           $   89,555           $   81,560
                                               ----------           ----------           ----------

OPERATING COSTS AND EXPENSES:
     Cost of sales                                 52,492               52,749               47,256
     Selling and administrative                    19,474               18,710               16,719
     Research and development                       1,583                1,717                1,506
     Depreciation                                   5,506                5,268                4,606
                                               ----------           ----------           ----------

                                                   79,055               78,444               70,087
                                               ----------           ----------           ----------

OPERATING INCOME                                   10,556               11,111               11,473

INTEREST EXPENSE, net                               2,231                2,170                2,058

OTHER INCOME (EXPENSE)                                 (1)                (116)                  31
                                               ----------           ----------           ----------

INCOME BEFORE INCOME TAXES                          8,324                8,825                9,446
                                               ----------           ----------           ----------

PROVISION FOR INCOME TAXES:
       Current                                      1,823                1,935                2,626
       Deferred                                       308                  344                  113
                                               ----------           ----------           ----------
                                                    2,131                2,279                2,739

INCOME BEFORE MINORITY INTEREST IN
  INCOME OF CONSOLIDATED SUBSIDIARIES               6,193                6,546                6,707
                                               ----------           ----------           ----------

MINORITY INTEREST IN INCOME OF
  CONSOLIDATED SUBSIDIARIES                            65                  209                  225
                                               ----------           ----------           ----------

NET INCOME                                     $    6,128           $    6,337           $    6,482
                                               ==========           ==========           ==========

WEIGHTED AVERAGE NUMBER OF COMMON
   SHARES                                       6,112,007            6,440,287            6,395,971
                                               ==========           ==========           ==========
WEIGHTED AVERAGE NUMBER OF COMMON
   AND COMMON EQUIVALENT SHARES                 6,130,694            6,533,740            6,406,544
                                               ==========           ==========           ==========

NET INCOME PER SHARE - BASIC                   $     1.00           $     0.98           $     1.01
                                               ==========           ==========           ==========
NET INCOME PER SHARE - DILUTED                 $     1.00           $     0.97           $     1.01
                                               ==========           ==========           ==========
</TABLE>





           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.



                                      F-5
<PAGE>   27


                          SYLVAN INC. AND SUBSIDIARIES


           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

                        (In Thousands Except Share Data)


<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                                        Additional                                       Other           Total
                                             Common      Paid-In        Retained        Treasury     Comprehensive    Shareholders'
                                              Stock      Capital        Earnings         Stock          Deficit          Equity
                                             ------      --------       --------        --------        --------        --------
<S>                                         <C>          <C>           <C>             <C>           <C>              <C>
BALANCE, December 29, 1996                      $ 6       $14,377        $28,838        $   (414)        $(1,567)        $41,240

  Net income                                     --            --          6,482              --              --           6,482

  Foreign currency translation                   --            --             --              --          (3,993)         (3,993)
    adjustment
  Minimum pension liability adjustment           --            --             --              --            (622)           (622)
                                                ---       -------        -------        --------         -------         -------
    Comprehensive income                                                                                                   1,867

  Exercise of 109,692 stock options               1         1,261             --              --              --           1,262
  Purchase of treasury stock                     --            --             --            (378)             --            (378)
                                                ---       -------        -------        --------         -------         -------

BALANCE, December 28, 1997                        7        15,638         35,320            (792)         (6,182)         43,991

  Net income                                     --            --          6,337              --              --           6,337

  Foreign currency translation                   --            --             --              --             910             910
    adjustment
  Minimum pension liability adjustment           --            --             --              --            (253)           (253)
                                                ---       -------        -------        --------         -------         -------
    Comprehensive income                                                                                                   6,994

  Exercise of 47,417 stock options and
    stock option compensation expense            --           805             --              --              --             805
  Purchase of treasury stock                     --            --             --          (1,526)             --          (1,526)
                                                ---       -------        -------        --------         -------         -------

BALANCE, January 3, 1999                          7        16,443         41,657          (2,318)         (5,525)         50,264

  Net income                                     --            --          6,128              --              --           6,128

  Foreign currency translation                   --            --             --              --          (5,081)         (5,081)
    adjustment
  Minimum pension liability adjustment           --            --             --              --           3,403           3,403
                                                ---       -------        -------        --------         -------         -------
    Comprehensive income                                                                                                   4,450

  Exercise of 34,400 stock options               --           358             --              --              --             358
  Purchase of treasury stock                     --            --             --          (7,848)             --          (7,848)
                                                ---       -------        -------        --------         -------         -------

BALANCE, January 2, 2000                        $ 7       $16,801        $47,785        $(10,166)        $(7,203)        $47,224
                                                ===       =======        =======        ========         =======         =======
</TABLE>


           The accompanying notes to consolidated financial statements
                    are an integral part of these statements.


                                      F-6
<PAGE>   28




                          SYLVAN INC. AND SUBSIDIARIES


                      CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 (In Thousands)


<TABLE>
<CAPTION>
                                                                       1999            1998             1997
                                                                     --------        --------         --------
<S>                                                                  <C>             <C>              <C>
CASH FLOWS FROM OPERATIONS:
  Net income                                                          $ 6,128         $ 6,337         $  6,482
  Adjustments to reconcile net income to
    net cash provided by operations:
      Depreciation and amortization                                     6,226           6,107            5,237
      Employee benefits                                                   706          (1,488)            (757)
      Trade accounts receivable                                          (248)          1,557             (894)
      Inventories                                                        (562)           (757)            (602)
      Prepaid expenses and other assets                                  (427)           (810)           1,355
      Accounts payable, accrued expenses and other liabilities           (860)         (1,311)            (806)
      Minority interest                                                   111             302              225
      Other                                                             1,879             285              177
                                                                      -------         -------         --------

              Net cash provided by operations                          12,953          10,222           10,417
                                                                      -------         -------         --------

CASH FLOWS FROM INVESTING:
     Expenditures for property, plant and equipment                    (7,669)         (8,195)          (7,647)
     Payment for acquisition, net of cash acquired                     (4,574)         (1,619)          (3,923)
                                                                      -------         -------         --------

              Net cash used in investing                              (12,243)         (9,814)         (11,570)
                                                                      -------         -------         --------

CASH FLOWS FROM FINANCING:
     Principal payments on long-term debt                                (823)           (679)            (425)
     Net borrowings under revolving credit loan                         9,756           1,756            3,734
     Proceeds from exercise of stock options                              293             546            1,125
     Purchase of treasury shares                                       (7,848)         (1,525)            (379)
                                                                      -------         -------         --------

              Net cash provided by financing                            1,378              98            4,055
                                                                      -------         -------         --------

EFFECT OF EXCHANGE RATES ON CASH                                         (984)            424           (1,555)
                                                                      -------         -------         --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                               1,104             930            1,347

CASH AND CASH EQUIVALENTS, beginning of period                          6,497           5,567            4,220
                                                                      -------         -------         --------

CASH AND CASH EQUIVALENTS, end of period                              $ 7,601         $ 6,497         $  5,567
                                                                      =======         =======         ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW DATA:
     Interest paid                                                    $ 2,429         $ 1,964         $  2,352
     Income taxes paid                                                  1,190           2,478            2,038

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCIAL ACTIVITIES:
    ACQUISITION OF BUSINESSES:
     Fair value of assets acquired                                    $ 4,879         $ 4,492         $  5,619
     Cash paid for assets or capital stock                             (4,574)         (1,619)          (3,923)
                                                                      -------         -------         --------
        Liabilities assumed                                           $   305         $ 2,873         $  1,696
                                                                      =======         =======         ========
</TABLE>


           The accompanying notes to consolidated financial statements
                   are an integral part of these statements.



                                      F-7
<PAGE>   29


                          SYLVAN INC. AND SUBSIDIARIES


                   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 1999 and 1997 fiscal years were 52 weeks and
the 1998 fiscal year was 53 weeks.

Principles of Consolidation
---------------------------

The accounts of majority owned or controlled subsidiaries are included in the
company's statements only for the period subsequent to their acquisition. All
material intercompany transactions and balances have been eliminated in
consolidation.

Basis of Presentation
---------------------

The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.

Cash and Cash Equivalents
-------------------------

All cash equivalents are stated at cost, which approximates market. The company
considers all highly liquid investments purchased with a maturity of three
months or less to be cash equivalents. In addition, the company maintains a
French-franc denominated cash balance of approximately FF15.0 million with a
U.S. bank in support of a loan advanced by a European bank. This balance is
reported under "Other Assets" in the accompanying consolidated balance sheets.

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
<PAGE>   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
intangible assets in measuring whether the intangible assets are recoverable.
The company's evaluations have not resulted in any revision to intangible assets
or their related amortization periods.

Research and Development
------------------------

Research and development costs are expensed as incurred.

Earnings Per Common Share
-------------------------

Earnings per share were calculated using the weighted average number of shares
outstanding during the period and including the effect of stock options
outstanding.

The following table reflects the calculation of earnings per share (in thousands
except share data):


<TABLE>
<CAPTION>
                                                Year Ended        Year Ended         Year Ended
                                                 January 2,        January 3,       December 28,
                                                   2000              1999              1997
                                                ----------        ----------        ----------
<S>                                             <C>               <C>               <C>
Basic Earnings Per Share:
      Net income                                $    6,128        $    6,337        $    6,482
                                                ----------        ----------        ----------
      Average shares outstanding                 6,112,007         6,440,287         6,395,971
                                                ----------        ----------        ----------
      Earnings per share                        $     1.00        $     0.98        $     1.01
                                                ==========        ==========        ==========

 Diluted Earnings Per Share:
      Net income                                $    6,128        $    6,337        $    6,482
                                                ----------        ----------        ----------
      Average shares outstanding                 6,112,007         6,440,287         6,395,971
      Stock options outstanding                     18,687            93,453            10,573
                                                ----------        ----------        ----------
      Diluted average shares outstanding         6,130,694         6,533,740         6,406,544
                                                ----------        ----------        ----------
      Earnings per share                        $     1.00        $     0.97        $     1.01
                                                ==========        ==========        ==========
</TABLE>

Options to purchase approximately 570,000, 88,000 and 142,000 shares of common
stock for the fiscal years ended 1999, 1998 and 1997, respectively, were
outstanding, but were not included in the computation of diluted earnings per
share because the options' exercise prices were greater than the average market
price of the company's common shares for the respective years.


                                      F-9
<PAGE>   31

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 January 2, 2000, the company had no
outstanding foreign currency exchange contracts.

Highly Inflationary Currency
----------------------------

Beginning in 1998, the company categorized the Turkish economy as highly
inflationary and, therefore, the U.S. dollar is the functional currency. Turkish
operations are not material to the company as a whole.

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 contractual swap
agreements as of January 2, 2000 are as follows:


  Notional          Origination            Expiration           Fixed
   Amount               Date                  Date              Rate
 -----------       ---------------        ---------------       -----
 $10,000,000       August 25, 1998        August 25, 2007       5.78%
   5,000,000       October 4, 1999        October 4, 2002       5.02

On January 10, 2000, the company entered into an agreement with the counterparty
to the above-listed $10.0 million swap to reduce the fixed rate from 5.78% to
5.48% in exchange for a maximum floating rate LIBOR provision of 7.00%. This
agreement is effective February 25, 2000.



                                      F-10
<PAGE>   32


Effective January 13, 2000, the company entered into a new swap agreement with a
notional amount of $5.0 million and a fixed rate of 6.43%. This agreement
expires on December 29, 2000 unless it is extended by the counterparty to
December 31, 2001.

Recent Pronouncements
---------------------

In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. SFAS No. 133, as amended, is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. The company has
not completed the process of evaluating the impact that will result from
adopting SFAS No. 133.

2. ACQUISITIONS:

In November 1999, the company acquired most of the assets of the J. B. Swayne
Spawn Company of Kennett Square, Pennsylvania, a modern production facility that
distributes its product within North America. The purchase price was $4.6
million and an additional $250,000 may be paid as contingent consideration
within two years of the acquisition based on certain conditions. 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 $1.4 million and will be amortized over 20 years. This excess
purchase price may increase by the aforementioned contingent consideration, if
paid.

In May 1998, the company acquired 90% of the capital stock of International
Mushrooms Limited, a company incorporated in Ireland that produces and
distributes mushroom spawn. The purchase price was $1.6 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 $0.9 million, which will be amortized over 20 years.

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.

Had the acquisitions taken place at the beginning of 1999, 1998 and 1997,
respectively, the pro forma impact on sales, net income and diluted earnings per
share would not be materially different from the amounts reported.

3. INVENTORIES:

Inventories are summarized as follows (in thousands):

                                            January 2,         January 3,
                                               2000              1999
                                              -------           ------

     Growing crops and compost material       $ 5,021           $4,882
     Stores and other supplies                  1,794            1,632
     Mushrooms and spawn on hand                3,295            3,306
                                              -------           ------
                                              $10,110           $9,820
                                              =======           ======



                                      F-11
<PAGE>   33


4. LONG-TERM DEBT AND BORROWING ARRANGEMENTS:

The company has a Revolving Credit Agreement with two commercial banks, dated
August 6, 1998. It provides for revolving credit loans on which the aggregate
outstanding balance available to the company may not initially exceed $55.0
million. This aggregate outstanding balance will decline over the life of the
agreement as follows:

                                              Maximum Aggregate
                        Period Beginning     Outstanding Balance
                        ----------------     -------------------
                         August 6, 2003         $50.0 million
                         August 6, 2004          45.0 million

Outstanding borrowings under the agreement bear interest at either the Prime
Rate or LIBOR (plus an applicable margin), at the company's option. On January
2, 2000, the company had outstanding borrowings under the agreement of $39.4
million. The revolving credit loans mature on August 5, 2005. The company
intends to extend the terms of the revolving credit agreement or secure a
similar arrangement through August 2007, which is concurrent with the expiration
date of the longest-term interest rate swap.

The agreement provides for the maintenance of various financial covenants and
includes limitations as to incurring additional indebtedness and the granting of
security interests to third parties. Obligations under the agreement are
guaranteed by certain wholly owned subsidiaries of the company.

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 $1.1 million, are repayable in quarterly
installments. One loan matures in 2000 and the other loan will mature in fifteen
years. Interest is payable with each installment at a fixed rate of between
8.35% and 8.55% until April 1, 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 FF15.0 million. Interest is
payable based on a formula that utilizes a Paris Interbank Offer Rate plus an
applicable margin. Repayment is due in January 2002. The loan is supported by a
compensating cash balance maintained at a U.S. bank.

The company incurred approximately $2.3 million in gross interest expense during
1999, reflecting a weighted average interest rate of 6.38%. The contractual
principal payments due under the company's loan agreements are as follows (in
thousands):


                        2000               $   418
                        2001                   440
                        2002                 2,508
                        2003                   121
                        2004                   468
                        Thereafter          40,007
                                           -------
                        Total              $43,962
                                           =======




                                      F-12
<PAGE>   34


5. ACCRUED SALARIES, WAGES AND EMPLOYEE BENEFITS:

Accrued salaries, wages and employee benefits are composed of the following (in
thousands):

                              January 2, 2000   January 3, 1999
                              ---------------   ---------------

Accrued compensation              $2,028             $1,536
Accrued vacation                     673                713
Other                                269                255
                                  ------             ------
Total                             $2,970             $2,504
                                  ======             ======

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
             January 2, 2000     January 3, 1999    December 28, 1997
             ---------------     ---------------    -----------------

Domestic          $1,992             $2,417             $2,807
Foreign            6,332              6,408              6,639
                  ------             ------             ------
Total             $8,324             $8,825             $9,446
                  ======             ======             ======

The provision (benefit) for income taxes consists of the following (in
thousands):

                  Year Ended          Year Ended            Year Ended
                January 2, 2000     January 3, 1999     December 28, 1997
                ---------------     ---------------     -----------------

Current-
  Federal          $  388               $  150                $  668
  State              (112)                 (31)                   74
  Foreign           1,547                1,816                 1,884

Deferred-
  Federal             372                  354                   119
  State               (64)                 (10)                   (6)
  Foreign              --                   --                    --
                   ------               ------                ------
                   $2,131               $2,279                $2,739
                   ======               ======                ======



                                      F-13
<PAGE>   35


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):

<TABLE>
<CAPTION>
                                            Year Ended            Year Ended             Year Ended
                                         January 2, 2000        January 3, 1999       December 28, 1997
                                         ---------------        ---------------       -----------------
<S>                                      <C>                    <C>                   <C>
Income tax at U.S.
  federal statutory rate                    $2,830                  $3,000                  $3,212
State income taxes,
  net of federal
  income tax benefit                           (74)                    (21)                     49
Foreign taxes at rates
  other than
  effective U.S. rates                        (471)                   (490)                   (382)
Net (permanent benefits)
  nondeductible charges                        (34)                   (259)                    (22)
Reduction in state income tax
   valuation allowance
                                               (99)                     --                      --
Other, net                                     (21)                     49                    (118)
                                            ------                  ------                  ------

Total provision for
  income taxes                              $2,131                  $2,279                  $2,739
                                            ======                  ======                  ======
</TABLE>

Temporary differences which generate significant portions of the company's
deferred tax assets and liabilities as of January 2, 2000 and January 3, 1999
were (in thousands):

<TABLE>
<CAPTION>
                                                      January 2, 2000        January 3, 1999
                                                      ---------------        ---------------
<S>                                                   <C>                    <C>
Postretirement benefits other than pensions               $  (408)                $ (364)
Depreciation                                                3,606                  3,691
Prepaid pension asset                                       1,786                     --
Workers' compensation                                        (106)                  (109)
Net operating loss carryforwards                           (1,061)                  (610)
Other, net                                                   (479)                  (669)
                                                          -------                 ------
  Total                                                     3,338                  1,939

Less- Valuation allowance                                     962                    610
                                                          -------                 ------
Net deferred tax liability                                $ 4,300                 $2,549
                                                          =======                 ======
</TABLE>

Included in net deferred tax liabilities at January 2, 2000 are unrealized tax
benefits amounting to $1.1 million related to net operating loss carryforwards.
The realization of these tax benefits is contingent on future taxable net income
being generated by certain



                                      F-14
<PAGE>   36



foreign and domestic operations. The life of the carryforwards is determined by
various foreign and state taxation jurisdictions. Approximately $0.2 million of
the net operating losses has an indefinite carryforward period. The remaining
$0.9 million of net operating losses will expire between 2000 and 2008. 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. 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. In April
1999, the shareholders approved an amendment and restatement of the 1990 Plan to
provide for an increase to 1,700,000 in the number of shares of the company's
stock which are available for the granting of options. 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 these plans been determined in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," the
company's net income and earnings per share (EPS) would have been reduced to the
following pro forma amounts (in thousands, except per share data):

                                  Year Ended  Year Ended    Year Ended
                                     1999        1998          1997
                                   ----------  ----------   ----------
Net Income:      As Reported        $6,128      $6,337        $6,482
                 Pro Forma           5,500       5,938         6,224
Diluted EPS:     As Reported        $ 1.00      $ 0.97        $ 1.01
                 Pro Forma            0.90        0.91          0.97

The company's Board of Directors, through its Stock Option and Compensation
Committee (the Board) may grant options under the 1990 Plan. Grants under the
1993 Plan are nondiscretionary. The Board has granted options (net of
cancellations) for 1,315,083 shares through January 2, 2000, under the 1990 Plan
and 71,000 shares have been granted under the 1993 Plan. Under both plans, the
option exercise price typically equals the stock's market price on the 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 1999, 1998 and 1997, respectively: risk-free
interest rates of 5.85%, 5.08% and 5.87%; no expected dividend yields; expected
lives of 8.0 years; expected volatility of 32%, 31% and 29%.



                                      F-15
<PAGE>   37



A summary of the status of the company's stock option plans at January 2, 2000,
January 3, 1999, and December 28, 1997, and changes during the years then ended
is presented in the table and narrative below (shares in thousands):


<TABLE>
<CAPTION>
                                          1999                     1998                   1997
                                  ---------------------    ---------------------  ---------------------
                                               Weighted                 Weighted                Weighted
                                                Average                 Average                 Average
                                               Exercise                 Exercise                Exercise
                                  Shares        Price      Shares        Price    Shares         Price
                                  ------       --------    ------        -----    ------        --------
<S>                               <C>          <C>         <C>          <C>       <C>           <C>
Outstanding at beginning
   of year                          769         $11.69      614         $10.88      629         $10.36
Granted                             136           9.99      212          13.82      120          12.84
Exercised                           (34)          8.53      (47)         10.50     (110)         10.26
Forfeited                           (12)         12.62      (10)         12.88      (25)          9.55
                                    ---         ------      ---         ------     ----         ------
Outstanding at end of year          859          11.54      769          11.69      614          10.88
                                    ---         ------      ---         ------     ----         ------
Exercisable at end of year          556          11.27      462          10.60      395          10.26
Weighted average fair value
   of options granted                           $ 5.04                  $ 6.60                  $ 6.22
</TABLE>


The 859,275 options outstanding under both plans at January 2, 2000 have
exercise prices of between $8.75 and $15.00 per share, with a weighted average
exercise price of $11.54 and a weighted average remaining contractual life of
6.7 years. 556,241 of these options are exercisable. The remaining 303,034
options have exercise prices between $8.875 and $15.00 per share, with a
weighted average exercise price of $12.04 and a weighted average contractual
life of 9.0 years.

8. EMPLOYEE BENEFITS:

The company has a noncontributory defined benefit pension plan covering
substantially all of the former employees of a former operation and certain
employees of Sylvan Foods, Inc. and Sylvan America, Inc., wholly owned
subsidiaries 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 January 2, 2000 and January 3, 1999 was
$30.1 million and $33.9 million, respectively, all of which was fully vested.
The plan's assets consist primarily of U.S. government obligations, temporary
deposits, common stocks and corporate obligations.



                                      F-16
<PAGE>   38


The plan's funded status and amounts recognized in the company's consolidated
financial statements, together with certain accumulated postretirement medical
benefit obligations, are set forth in the following tables:


<TABLE>
<CAPTION>
                                                      Pension Benefits                            Other Benefits
                                             -------------------------------------       -------------------------------------
                                             January 2,  January 3,   December 28,       January 2,  January 3,  December 28,
            (in Thousands)                      2000        1999         1997              2000        1999         1997
                                             ----------  ----------   ------------       ----------  ----------  ------------
<S>                                          <C>         <C>          <C>                <C>         <C>         <C>
Change in benefit obligation:
  Benefit obligation at beginning of           $33,886    $33,413       $30,144           $   716     $   714      $   800
     year
  Interest cost                                  2,132      2,093         2,100                71          47           56
  Plan amendments                                   --         --            --                --          --          (42)
  Actuarial (gain) loss                         (3,595)       726         3,371               357          27          (11)
  Benefits paid                                 (2,314)    (2,346)       (2,202)             (100)        (72)         (89)
                                               -------    -------       -------           -------     -------      -------
  Benefit obligation at end of year            $30,109    $33,886       $33,413           $ 1,044     $   716      $   714
                                               =======    =======       =======           =======     =======      =======

Change in plan assets:
  Fair value of plan assets at
   beginning of year                           $33,867    $33,089       $30,142           $    --     $    --      $    --
  Actual return on plan assets                   2,809      3,124         5,149                --          --           --
  Employer contributions                            --         --            --               100          72           89
  Benefits paid                                 (2,314)    (2,346)       (2,202)             (100)        (72)         (89)
                                               -------    -------       -------           -------     -------      -------
  Fair value of plan assets at end of
     year                                      $34,362    $33,867       $33,089           $    --     $    --      $    --
                                               =======    =======       =======           =======     =======      =======

Reconciliation of funded status:
  Funded status                                $ 4,253    $   (19)      $  (324)          $(1,044)    $  (716)     $  (714)
  Unrecognized net actuarial (gain) or
   loss                                          1,003      4,704         4,451               100        (251)        (293)
  Unrecognized prior service cost                   --         --            --               (61)        (68)         (74)
                                               -------    -------       -------           -------     -------      -------
  Prepaid (accrued) benefit liability          $ 5,256    $ 4,685       $ 4,127           $(1,005)    $(1,035)     $(1,081)
                                               =======    =======       =======           =======     =======      =======

Weighted-average assumptions as of
 end of fiscal year:
  Discount rate                                  7.50%       6.50%         6.50%             7.50%       7.00%        7.00%
  Expected return on plan assets                 9.00%       9.00%         9.00%               --          --           --
  Rate of compensation increase                    --         --             --                --          --           --

Components of net periodic pension
 cost (income):
  Interest cost                                $ 2,132    $ 2,093       $ 2,100           $    71     $    47      $    56
  Expected return on plan assets                (2,755)    (2,689)       (2,426)               --          --           --
  Amortization of prior service cost                --         --            --                (6)         (6)          (2)
  Recognized net actuarial loss (gain)              52         37            26                 5         (15)         (14)
                                               -------    -------       -------           -------     -------      -------
  Net periodic benefit cost (income)           $  (571)   $  (559)      $  (300)          $    70     $    26      $    40
                                               =======    =======       =======           =======     =======      =======

Amounts recognized in the
 consolidated balance sheet consist
 of:
  Prepaid benefit cost                         $ 5,256    $    --       $    --           $    --     $    --      $    --
  Accrued benefit liability                         --        (19)         (324)           (1,005)     (1,035)      (1,081)
  Accumulated other comprehensive
   income                                           --      4,704         4,451                --          --           --
                                               -------    -------       -------           -------     -------      -------
  Net amount recognized at year-end            $ 5,256    $ 4,685       $ 4,127           $(1,005)    $(1,035)     $(1,081)
                                               =======    =======       =======           =======     =======      =======

  Other comprehensive income
   attributable to change in
   additional minimum liability
   recognition                                 $(4,704)   $   253       $   622           $    --     $    --      $    --
                                               =======    =======       =======           =======     =======      =======
</TABLE>


                                      F-17
<PAGE>   39


<TABLE>
<CAPTION>
                                                       Pension Benefits                              Other Benefits
                                           ------------------------------------------   ------------------------------------------
                                              January 2,     January 3,   December 28,      January 2,    January 3,   December 28,
             (in Thousands)                     2000           1999          1997             2000          1999          1997
                                           ------------------------------------------   ------------------------------------------
<S>                                           <C>            <C>           <C>              <C>            <C>          <C>
Additional year-end information for
 pension plans with accumulated benefit
 obligations in excess of plan assets:
    Projected benefit obligation                               $33,886       $33,413
    Accumulated benefit obligation                              33,886        33,413
    Fair value of plan assets                                   33,867        33,089

Assumed health care cost trend:
    Initial trend rate                                                                          7.34%         7.12%         7.50%
    Ultimate trend rate                                                                         5.00%         5.25%         5.25%
    Year ultimate trend reached                                                                  2005          2003          2003

A one-percentage-point change in the
 assumed health care cost trend rates
 would have the following effects:
</TABLE>

<TABLE>
<CAPTION>
                                                            One Percentage                    One Percentage
                                                            Point Increase                    Point Decrease
                                                         -----------------------------------------------------------
<S>                                                        <C>                                <C>
    Effect on total of service and interest
     cost components for 1999                                   $ 6                                $ (5)
    Effect on 1999 postretirement
     benefit obligation                                          89                                 (78)
</TABLE>

Additionally, during 1999 certain hourly-paid workers at the company's Quincy
Farms subsidiary became participants in a union-sponsored, collectively
bargained, multi-employer pension plan to which the company makes negotiated
contributions based generally on fixed amounts per hour per employee. Expense
recorded in connection with this plan for fiscal year 1999 was $33,000.

9. NATURE OF OPERATIONS AND BUSINESS SEGMENT INFORMATION:

Sylvan is a worldwide producer and distributor of mushroom products,
specializing in spawn (the equivalent of seed for mushrooms) and spawn-related
products and services, and is a major grower and marketer of fresh mushrooms in
the United States. The company has two reportable business segments: spawn
products, which includes spawn-related products and services, and fresh
mushrooms. Spawn-related products include casing inoculum, nutritional
supplements and disease-control agents. The fresh mushroom business segment is
comprised of a large, regional producer of fresh mushrooms.

The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The company evaluates the
performance of each segment based on profit or loss from operations. The company
accounts for intersegment sales at a transfer price that approximates an
arms-length sale to an unrelated third party.



                                      F-18
<PAGE>   40


The company's reportable segments are strategic business units that offer
different products and serve different customers. They are managed separately
since each business requires different technology, techniques and marketing
strategies.

<TABLE>
<CAPTION>
                                                       Spawn          Fresh           Total
                                                      Products       Mushroom       Reportable
(in Thousands)                                        Segment        Segment         Segments
--------------                             ----       -------        -------         --------
<S>                                        <C>        <C>           <C>             <C>
Total Revenues                             1999       $61,715        $29,176        $ 90,891
                                           1998        59,968         30,708          90,676
                                           1997        52,079         30,209          82,288

Intersegment Revenues                      1999       $ 1,280        $    --        $  1,280
                                           1998         1,121             --           1,121
                                           1997           728             --             728

Depreciation Expense                       1999       $ 3,824        $ 1,624        $  5,448
                                           1998         3,626          1,569           5,195
                                           1997         3,012          1,499           4,511

Operating Income                           1999       $12,930        $ 1,425        $ 14,355
                                           1998        12,850          1,107          13,957
                                           1997        12,425          2,867          15,292

Net Fixed Asset Expenditures               1999       $ 7,171        $   487        $  7,658
                                           1998         7,545            563           8,108
                                           1997         6,278          1,287           7,565

Assets                                     1999       $93,054        $23,385        $116,439
                                           1998        82,468         21,584         104,052
                                           1997        71,770         23,186          94,956
</TABLE>

                  Reconciliation to Consolidated Financial Data
                  ---------------------------------------------




<TABLE>
<CAPTION>
(in Thousands)                                            1999              1998             1997
                                                       ---------         ---------         --------
<S>                                                    <C>               <C>               <C>
Revenues:
Total for reportable segments                          $ 90,891          $ 90,676          $82,288
Elimination of intersegment revenues                     (1,280)           (1,121)            (728)
                                                       --------          --------          -------
Total consolidated revenues                            $ 89,611          $ 89,555          $81,560
                                                       ========          ========          =======

Depreciation Expense:
Total for reportable segments                          $  5,448          $  5,195          $ 4,511
Unallocated corporate expenses                               58                73               95
                                                       --------          --------          -------
Total consolidated depreciation expense                $  5,506          $  5,268          $ 4,606
                                                       ========          ========          =======

Operating Income:
Total for reportable segments                          $ 14,355          $ 13,957          $15,292
Unallocated corporate expenses                           (3,799)           (2,846)          (3,819)
                                                       --------          --------          -------
Total consolidated operating income                    $ 10,556          $ 11,111          $11,473
                                                       ========          ========          =======

Net Fixed Asset Expenditures:
Total for reportable segments                          $  7,658          $  8,108          $ 7,565
Unallocated corporate expenditures                           11                87               82
                                                       --------          --------          -------
Total consolidated net fixed asset
expenditures                                           $  7,669          $  8,195          $ 7,647
                                                       ========          ========          =======

Assets:
Total for reportable segments                          $116,439          $104,052          $94,956
Prepaid pension asset from former operation              (5,256)               --               --
Unallocated corporate assets                             (1,688)           (1,502)          (1,276)
                                                       --------          --------          -------
Total consolidated assets                              $109,495          $102,550          $93,680
                                                       ========          ========          =======
</TABLE>

                                      F-19
<PAGE>   41



          Geographic Analysis of Revenues Based on Location of Customer
          -------------------------------------------------------------


(in Thousands)             United                    Other Foreign
          United States    Kingdom      Netherlands    Countries        Total
          ---------------------------------------------------------------------

1999        $43,543        $ 8,875        $9,822        $27,371        $89,611
1998         46,012          9,838         9,768         23,937         89,555
1997         44,073         10,782         9,213         17,492         81,560


                  Geographic Analysis of Net Long-Lived Assets
                  --------------------------------------------


(in Thousands)                                      Other Foreign
          United States    France      Netherlands    Countries        Total
          ---------------------------------------------------------------------

1999        $25,669        $8,683        $5,624        $14,273        $54,249
1998         25,090         9,462         6,277         12,610         53,439
1997         26,581         6,087         5,548          9,412         47,628

No single customer accounted for 10% or more of Sylvan's sales during the years
ended January 2, 2000, January 3, 1999, or December 28, 1997. 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 and retailers 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 1999, 1998 and 1997, a nonemployee director's business
interests purchased spawn and spawn-related products at fair market value
totaling $659,000, $668,000 and $568,000, respectively, and purchased mushrooms
at fair market value totaling $83,000, $33,000 and $14,000, respectively, in
trading with the company's subsidiaries.

11.  DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS AND SIGNIFICANT GROUP
     CONCENTRATIONS OF CREDIT RISK:

The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value. Fair value is defined as the amount at which the instrument could be
exchanged in a transaction between willing parties.

Cash and Cash Equivalents
-------------------------

The carrying amount approximates fair value because of the short maturity of
these instruments.


                                      F-20
<PAGE>   42

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 benefit of $613,000 and
deficit of $549,000 as of January 2, 2000 and January 3, 1999, respectively.

12. SUBSEQUENT EVENT:

Effective January 16, 2000 Sylvan's Quincy Farms subsidiary entered into a
marketing agreement with C And C Carriage Mushroom Company (C And C) of
Avondale, Pennsylvania. The agreement provides for C And C to purchase all of
the mushrooms produced at the Quincy, Florida operation at a price, based on
product quality, which is adjusted annually to reflect current market
conditions. Under this agreement, Quincy Farms sold its packaging and
distribution-related assets to C And C. The initial term of the agreement is
five years with renewal options thereafter.





                                      F-21
<PAGE>   43
                                                                     Schedule II


                   SYLVAN INC. AND SUBSIDIARIES (THE COMPANY)

                        VALUATION AND QUALIFYING ACCOUNTS

              FOR THE YEARS ENDED JANUARY 2, 2000, JANUARY 3, 1999

                              AND DECEMBER 28, 1997

                                  (In Thousands)


<TABLE>
<CAPTION>
                                                          Additions
                                                    ---------------------
                                       Balance at   Charged to              Deductions                       Balance
                                       Beginning    Costs and                  from                          at End
Description                            of Period     Expenses  Recoveries    Reserves (a)      Other (b)    of Period
---------------------------------------------------------------------------------------------------------------------
<S>                                    <C>          <C>        <C>         <C>                <C>           <C>
Year ended January 2, 2000-
  Allowance for doubtful accounts        $  710        $524        $0          ($379)           ($ 29)        $826
                                         ======        ====        ==          ======           ======        ====
Year ended January 3, 1999-
  Allowance for doubtful accounts        $  812        $495        $0          ($526)           ($ 71)        $710
                                         ======        ====        ==          ======           ======        ====
Year ended December 28, 1997-
  Allowance for doubtful accounts        $1,031        $356        $0          ($418)(c)        ($157)        $812
                                         ======        ====        ==          ======           ======        ====
</TABLE>

(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.



                                      F-22
<PAGE>   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 auditing standards generally accepted in the
United States, the consolidated 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 4, 2000. Our audits were 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) 2 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 audits 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


Pittsburgh, Pennsylvania,
   February 4, 2000


                                      F-23