1
UNITED STATES
Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 1995
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. 0-11488
PENWEST, LTD.
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1221360
- - --------------------------------------------------------------------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)
777-108th Avenue N.E., Suite 2390, Bellevue, WA 98004-5193
- - --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number (206) 462-6000
Indicate by a 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 the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1995.
Class Outstanding
----- -----------
Common stock, par value $1.00 6,751,675
Page 1 of 69 pages.
Exhibit Index appears
on page 11.
2
PENWEST, LTD. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets 3
February 28, 1995 and August 31, 1994
Condensed Consolidated Statements of Income 4
Three Months Ended February 28, 1995
and February 28, 1994
Condensed Consolidated Statements of Income 4
Six months ended February 28, 1995 and
February 28, 1994
Condensed Consolidated Statements of Cash Flow 5
Six Months Ended February 28, 1995 and
February 28, 1994
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of 7-8
Financial Condition and Results of Operations
PART II - OTHER INFORMATION
Item 4 - Submission of Matters to a Vote of Security-Holders 9
Item 6 - Exhibits and Reports on Form 8-K 9
SIGNATURES 10
2
3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
February 28, August 31,
1995 1994
------------ ---------
(Unaudited)
ASSETS
------
Current assets:
Cash and cash equivalents $ 17,126
Receivables 21,673 $ 20,748
Inventories:
Raw materials 4,131 6,074
Work in progress 530 622
Finished goods 7,831 10,038
-------- --------
12,492 16,734
Other current assets 3,736 4,593
-------- --------
Total current assets 55,027 42,075
Property, plant and equipment, net 107,972 99,973
Deferred income taxes 9,566 9,545
Other non-current assets 15,904 12,764
-------- --------
Total assets $188,469 $164,357
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Bank overdraft, net $ 635
Accounts payable $ 10,208 8,131
Current portion of long-term debt 4,185 4,100
Accrued liabilities 8,858 7,847
-------- --------
Total current liabilities 23,251 20,713
Long-term debt 60,848 42,897
Other postretirement benefit 9,894 10,102
Deferred income taxes and other 24,433 23,480
Shareholders' equity:
Common stock 8,583 8,577
Additional paid-in capital 12,505 12,489
Retained earnings 82,354 79,128
Treasury stock (30,637) (29,327)
Note receivable from PENWEST Savings and
Stock Ownership Plan (2,630) (3,340)
Cumulative translation adjustment (132) (362)
-------- --------
Total shareholders' equity 70,043 67,165
-------- --------
Total liabilities and
shareholders' equity $188,469 $164,357
======== ========
See accompanying notes to condensed consolidated financial statements.
3
4
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
Three Months Six Months
Ended February 28 Ended February 28
----------------- -----------------
1995 1994 1995 1994
---- ---- ---- ----
Sales $42,429 $35,837 $85,199 $73,654
Cost of sales 30,517 27,113 62,044 54,944
------- ------- ------- -------
Gross margin 11,912 8,724 23,155 18,710
Operating expenses 8,408 7,046 15,936 14,434
------- ------- ------- -------
Income from operations 3,504 1,678 7,219 4,276
Investment income 160 195 161 423
Interest expense (1,223) (816) (2,266) (1,673)
Other 899 899
------- ------- ------- -------
Income before taxes 3,340 1,057 6,013 3,026
Income taxes 1,187 194 2,103 402
------- ------- ------- -------
Net income $ 2,153 $ 863 $ 3,910 $ 2,624
======= ======= ======= =======
Weighted average common shares and
equivalents outstanding 7,025,975 7,100,000 7,084,538 7,103,914
Earnings per common share $0.31 $0.12 $0.55 $0.37
===== ===== ===== =====
Dividends declared per common share $0.05 $0.05 $0.10 $0.10
===== ===== ===== =====
See accompanying notes to condensed consolidated financial statements.
4
5
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in Thousands)
(Unaudited)
Six Months
Ended February 28
-----------------
1995 1994
---- ----
Operating Activities:
Net income $ 3,910 $ 2,624
Adjustments to reconcile net income to net cash
from operations:
Depreciation and amortization 5,051 4,988
Deferred income taxes 375 1,597
Gain on the sale of assets (899)
Foreign currency translation 230 76
Change in operating assets and liabilities:
Receivables (925) (3,515)
Inventories 4,243 1,036
Accounts payable and other 3,316 936
-------- -------
Net cash flow from operating activities 15,301 4,588
Investing Activities:
Additions to plant and equipment (13,983) (5,300)
Proceeds from sale of assets 2,500
Other (329) 462
-------- -------
Net cash used by investing activities (11,812) (4,838)
Financing Activities:
Payments on long-term debt (6,855) (1,915)
Proceeds of long-term debt 24,890
Purchase of treasury stock (1,310) (509)
Exercise of stock options 22 49
Purchase of life insurance for officer's benefit plan (2,501) (1,343)
Payment of dividends (683) (686)
Other 709 641
-------- -------
Net cash from (used by) financing activities 14,272 (3,763)
-------- -------
Net increase (decrease) in cash and cash equivalents 17,761 (4,013)
Cash and equivalents (bank overdraft) at beginning of period (635) 5,477
-------- -------
Cash and equivalents at end of period $ 17,126 $ 1,464
======== =======
See accompanying notes to condensed consolidated financial statements.
5
6
PENWEST, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions
to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation for
the interim periods presented have been included. Operating results
for the three and six month periods ended February 28, 1995 are not
necessarily indicative of the results that may be expected for the
year ending August 31, 1995. For further information, refer to the
consolidated financial statements and footnotes thereto included in
PENWEST's annual report on Form 10-K for the fiscal year ended August
31, 1994.
2. DEBT
On December 15, 1994 the Company received the proceeds from a $20
million private placement of debt. The debt has an average fixed
interest rate of 7.97%, with $10 million due on December 15, 1998, and
$10 million due on December 15, 2006. The interest rate on the $10
million due on December 15, 1998 was swapped to a LIBOR-based floating
rate. The new debt agreement includes certain restrictions related to
limitations on indebtedness, minimum net worth and working capital
ratios, which are similar to restrictions on previously existing debt.
3. SALE OF COGENERATION ASSETS
On December 31, 1994, the power and thermal contracts at the Company's
cogeneration facility in Vancouver, Washington expired. The Company
completed a sale of the turbine and the boilers constituting the
assets of the facility upon expiration of the contracts. A pretax
gain on was recorded in the second quarter of $899,000 and is shown as
other income.
4. INCOME TAXES
The effective tax rate for the second quarter of fiscal 1994 was 18%
compared to the statutory rate of 34%. The effective rate is lower
than the statutory rate due to tax refunds received by the Company.
5. CURTAILMENT OF POSTRETIREMENT HEALTH BENEFIT
During the second quarter of fiscal 1994, the Company curtailed
certain previously accrued postretirement health benefits for salaried
employees. The Company previously paid a portion of the health
insurance premiums for salaried retirees, but discontinued payment for
eligible salaried employees retiring after May 15, 1994. As a result,
there was a $900,000 reduction of operating expenses recorded.
6
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
PENWEST's cash and cash equivalents were 9% of total assets at quarter end.
Long-term debt consists of borrowings under private placements of debt ($40
million), an unsecured term loan agreement ($17.5 million), and two unsecured
notes ($4.2 million and $3.3 million.) In addition, $15 million of an
unsecured revolving line of credit was unused and available at February 28,
1995.
Cash flow from operations for the six months ended February 28, 1995 was $15.2
million compared to $5.2 million in the corresponding period a year ago. The
increase is primarily due to improved profitability, a decrease in inventory
levels and an increase in accounts payable.
Working capital increased to $31.8 million at February 28, 1995 from $21.9
million at August 31, 1994 primarily the result of the cash proceeds from the
$20 million private placement of debt in December 1994.
The Board of Directors declared a $0.05 per share dividend which was paid on
March 3, 1995, to shareholders of record as of February 17, 1995.
In April 1994, the Board of Directors authorized a stock repurchase program for
the purchase of up to 500,000 shares of the outstanding common stock of the
Company. The Company purchased 40,000 shares for $725,000 during the second
quarter.
Capital Resources
Additions to property, plant and equipment during the six months ended February
28, 1995 were $13.9 million. The additions were primarily for the completion
of the expansion of the Penwest Foods' facility in Richland, Washington, and
capacity conversion at Penford Products.
Results of Operations
Net income was $2.2 million, or $0.31 per share for the second quarter,
compared to net income of $863,000 or $0.12 per share for the corresponding
period a year ago. Earnings from operations for this year's quarter were $0.23
per share compared with $0.04 per share in the corresponding period a year ago.
The earnings per share for the current quarter included a non-recurring gain of
$593,000, or $0.08 per share (after tax), from the sale of the assets of
Pacific Cogeneration. In the year-earlier period, earnings included $585,000
(after tax), or $0.08 per share, from the curtailment of future postretirement
health benefits previously accrued for salaried employees.
Sales increased in the second quarter and the first six months of fiscal year
1995 to $42.4 million and $85.2 million, respectively, representing an 18.4%
and 15.7% increase respectively, from the corresponding periods a year ago.
The increase is due to increased volumes across all three of PENWEST's basic
businesses. Penford Products increased volumes from a year ago primarily due
to the improving economic conditions in the paper industry. Penwest
Pharmaceuticals Group continued to grow volumes out of its microcrystalline
cellulose plant in Cedar Rapids. Overall sales of excipients were a record
during the quarter ended February 28, 1995. Penwest Foods also grew volumes
over a year ago. The gross margin for the three month period increased to 28%
compared to 24.3% last
7
8
year. The improvement in overall gross margins is primarily the result of
improving margins at Penwest Foods due to increasing potato starch volumes and
an improved product mix at Penford.
Operating expenses in the second quarter rose $1.4 million, or 19.3%. The
curtailment of postretirement health benefits in the previous year which was
recorded as a $900,000 reduction of operating expenses accounted for a
substantial portion of the increase. The remaining increase related primarily
to increased investment in research and development, especially in
pharmaceuticals.
Net interest expense for the second quarter of fiscal 1995 was $1.1 million
compared to $621,000 for the corresponding period a year ago. The increase
reflects higher debt levels and overall higher interest rates.
8
9
PART II - OTHER INFORMATION
Item 4 Submission Of Matters To A Vote Of Security Holders
(a) The annual meeting of shareholders of PENWEST was
held on January 24, 1995.
(b) The following directors were elected to serve a term
of three years: Tod R. Hamachek, Sally G. Narodick,
and James H. Wiborg. The board is comprised of
those elected this year and the following directors
completing their terms: Richard E. Engebrecht,
William G. Parzybok, Jr., William K. Street, C.
Calvert Knudsen, Harry Mullikin, N. Stewart Rogers,
and Paul H. Hatfield.
(c) The following matters were voted upon at the meeting:
1. For the election of directors:
For % Withheld %
--- - -------- -
Tod R. Hamachek 5,582,418 82.18% 166,480 2.45%
Sally G. Narodick 5,584,990 82.22% 163,908 2.41%
James H. Wiborg 5,587,379 82.25% 161,519 2.38%
2. Approval of PENWEST, LTD. 1994 Stock Option
Plan.
For Against Abstain Non-Vote
--- ------- ------- --------
4,486,219 215,637 144,647 902,395
3. Approve a change in the Company's state of
incorporation from Delaware to Washington
through a merger of the Company into its
wholly-owned Washington subsidiary.
For Against Abstain Non-Vote
--- ------- ------- --------
4,567,099 171,149 130,890 879,760
4. Ratification of selection of Ernst & Young
LLP as independent auditors of the Company.
For Against Abstain
--- ------- -------
5,610,311 12,914 125,673
(d) Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibit 10.8 Note Agreement dated as of October 1,
1994 among PENWEST, LTD., Principal Mutual Life
Insurance Company and TMG Life Insurance Company.
Exhibit 11 Statement re: Computation of earnings per
share
(b) No reports on Form 8-K were filed during the quarter
for which this report is filed.
9
10
SIGNATURES
Pursuant to the requirements 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.
PENWEST, LTD.
----------------------------------
(Registrant)
04/10/95 /s/ TOD R. HAMACHEK
- - ---------------- ----------------------------------
Date Tod R. Hamachek
President and
Chief Executive Officer
04/10/95 /s/ JEFFREY T. COOK
- - ---------------- ----------------------------------
Date Jeffrey T. Cook
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer)
10
11
EXHIBIT INDEX
Exhibit Page
- - ------- ----
10.8 Note Agreement dated as of October 1, 1994 12
among PENWEST, LTD., Principal Mutual Life
Insurance Company and TMG Life Insurance
Company
11 Statement re: Computation of earnings per share 69
11