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Two groups of investors are battling for control of Sylvan Inc., Saxonburg, Butler County, the largest producer of the seed used to grow mushrooms.

The battle pits a group of mushroom industry veterans and a group of Wall Street financiers who have steadily increased their stake in the company.

Whoever gains control of Sylvan, according to one competitor, could attempt to corner the market for spawn, which is essential to growing mushrooms.

"Without a doubt, they've been trying to corner the spawn market for years. They have been successful in certain areas, and I have no reason to want them to succeed," said Ernie Leone, president of Mushroom Central Supply Co. and Beta Spawn Co., in Toughkenamon, Chester County.

In November 1999, Sylvan acquired J.B. Swayne Co., a mushroom spawn producer in the Kennett Square area of Chester County, near Philadelphia, which remains the predominant mushroom-growing region in Pennsylvania, the nation's largest mushroom-producing state.

The industry veterans vying for control of Sylvan includes its two top managers -- Chief Executive Dennis C. Zensen and Chief Financial Officer Donald A. Smith. It also includes two of Sylvan's major customers: Virgil Jurgensmeyer, a Sylvan director and principal partner of J-M Farms, Inc., a mushroom producer based in Miami, Okla., and Roger H. Claypoole, president of WWF Mushrooms, which is the general partner of Creekside Mushrooms Ltd., of Worthington, Armstong County.

Creekside sells its mushrooms under the familar Moonlight brand name and boasts of the world's largest mushroom-growing facility and the only underground mushroom farm in the United States.

The Wall Street financiers are led by Warren G. Lichtenstein, who controls New Jersey-based investment fund Steel Partners II.

Another major investor is Wynnefield Partners SmallCap Value Fund. Steel Partners II and Wynnefield together own about 31.5 percent of Sylvan stock, according to Securities and Exchange Commission filings.

"For the past 15 years, the dominant ownership has not been local. They (Zensen's buyout group) want to return the company to its roots," said attorney Charles C. Cohen, of Pittsburgh-based Cohen & Grigsby, spokesman for the group.

Last month, Zensen's group offered to buy all of Sylvan's stock for $11 a share in cash, a deal that values the company at $56.4 million. Sylvan's board set up a committee of independent directors to assess the offer. Sylvan subsequently postponed its annual shareholders' meeting indefinitely.

Their offer followed moves by Lichtenstein's group a year ago to begin buying Sylvan stock and calling for the company's management to take action to increase shareholder value. Lichtenstein could not be reached for comment.

Last month, Steel Partners asked Sylvan for access to confidential information so Steel Partners can determine whether it wants to make a competing offer for the company, according to filings. Wynnefield Capital Inc. is not participating in that endeavor, Sylvan said.

Wynnefield Capital, headed by Nelson Obus, told Sylvan it would not agree to the buyout proposal, and would not vote in favor of Zensen's offer of $11 a share. But in a letter to Sylvan, Obus said Wynnefield supports "any other offer received by the committee" to hike shareholder value. Obus could not be reached for comment.

"This (Sylvan) is an interesting agricultural firm. It's an industry that most people don't research. We don't hear much about spawn or mushrooms, but it (Zensen's offer) would be a nice premium for shareholders," said John J. Licata, a market strategist who follows the company for Brokerage America in New York.

Sylvan is a worldwide producer and distributor of products for the mushroom industry, specializing in spawn, the equivalent of seed for mushrooms. Sylvan employs about 850. In addition to its headquarters in Saxonburg, Sylvan operates a spawn production plant in Kittanning. Sylvan's second business segment is fresh mushrooms, which is produces at its Quincy Farms unit near Tallahassee, Fla.

Recently, Sylvan's stock has traded as high as $11.50 on May 5, and as low as $8.85 on March 20. Last year, Sylvan reported net income of $4.7 million, down roughly 20 percent from $5.8 million the previous year. Spawn products accounted for about 71 percent of the company's sales in 2002, and 79 percent of its operating income. Fresh mushrooms accounted for 29 percent of sales and 21 percent of its operating income. Sales in 2002 were $88.2 million, up from $85.9 million for 2001.

Pennsylvania is the nation's leading mushroom producer, growing about 52 percent of the roughly 800 million pounds of mushrooms produced annually, says Laura Phelps, president of the American Mushroom Institute, a trade group headquartered in Washington, D.C.

Phelps said Sylvan is the largest producer of spawn. There are only a few major domestic spawn producing companies, a group that includes Amycel, a subsidiary of California-based Montery Mushrooms Inc., and L.F. Lambert Spawn Co., based in Coatesville, Chester County. Representatives of both companies declined to comment on Sylvan's situation.

Ownership change is nothing new for Sylvan, which traces its lineage to 1937, when it was known as the Butler County Mushroom Farm Inc. The company started out as a fresh mushroom grower and several years later, decided to make its own mushroom seed, forming Sylvan Food Holdings Inc. as a subsidiary. The newly created Sylvan supplied seed to its parent and other growers across the country.

In 1988, the business was sold to a group composed partly of former management that included Zensen and Claypoole.

The deal also introduced New York-based Prospect Group, which provided significant financing and in turn, gave them the lion's share of ownership that eventually opened the door for large shareholders to acquire stock in the mushroom company.

In August 1994, Sylvan Foods Holdings Inc. changed its name to Sylvan Inc., a new corporate name reflecting increased focus on supplying spawn and related services to the mushroom industry.

Claypoole gained control of Creekside Mushrooms Inc. in May 1994, after Sylvan sold substantially all of the assets of its Moonlight Mushrooms Inc. subsidiary to Buffalo Valley Ltd., an investment group that he headed. That followed Sylvan's move in October 1993 to close the Moonlight operation after failure to reach agreement on a new contract with the United Steelworkers union, a move that dislocated about 965 workers from their jobs.

Today, Creekside is a major producer, growing about 25 million pounds of mushrooms last year, one of only 10 U.S. producers to grow more than 20 million pounds annually. There are 126 mushroom growers in the United States. Creekside's numbers are contrasted by Watsonville, Calif.-based Monterey Mushrooms, which operates seven mushroom farms and produces up to 200 million pounds of mushroom annually.

Creekside remains linked to Sylvan as a spawn customer.

Attorney Cohen said seeds of the Zensen buyout offer were planted by Claypoole and Jurgensmeyer, who approached Zensen and asked whether it would make sense to buy out Sylvan's stock and return the company to private ownership.

"They both rely heavily on Sylvan's (spawn) product and technical support ... . He (Zensen) thought it was a good idea," Cohen said.

Zensen had wearied over disagreements with outsiders unhappy over the lack of movement of the company's stock. Cohen said the buyout proposal gained a sense of urgency after Claypoole and Jurgensmeyer expressed concern over the "threat" from outside investors that they were going to move to dismiss current management and run Sylvan themselves.

Observers say a buyout would enable the six-member buyout group -- which includes Sylvan officers, mushroom producers and customers -- to preserve its stake in Sylvan and keep it as a viable business partner.

The Zensen buyout group also includes The Snyder Associated Companies Inc., a family-owned, Kittanning-based holding company that has interests in mining, manufacturing, oil and gas industries. Snyder Associated also is a principal investor in Creekside Mushrooms. The final member is the Chas. A. Neal & Co., a Miami, Okla.-based corporation that invests in oil and gas exploration and production.

None of the investor group could be reached for comment.

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