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 quarterly period ended May 31, 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 June 30, 1994. Class Outstanding ----- ----------- Common stock, par value $1.00 6,752,875 2 PENWEST, LTD. AND SUBSIDIARIES INDEX Page No. -------- PART I - FINANCIAL INFORMATION Item 1 - Financial Statements (Unaudited) Condensed Consolidated Balance Sheets 3 May 31, 1995 and August 31, 1994 Condensed Consolidated Statements of Income 4 Three Months Ended May 31, 1995 and May 31, 1994 Condensed Consolidated Statements of Income 4 Nine Months Ended May 31, 1995 and May 31, 1994 Condensed Consolidated Statements of Cash Flow 5 Nine Months Ended May 31, 1995 and May 31, 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 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) May 31, August 31, 1995 1994 ----------- ---------- (Unaudited) ASSETS ------ Current assets: Cash and cash equivalents $ 9,920 Receivables 22,955 $ 20,748 Inventories: Raw materials 3,348 6,074 Work in progress 526 622 Finished goods 10,554 10,038 -------- -------- 14,428 16,734 Other current assets 5,528 4,593 -------- -------- Total current assets 52,831 42,075 Property, plant and equipment, net 111,556 99,973 Deferred income taxes 9,571 9,545 Other non-current assets 19,216 12,764 -------- -------- Total assets $193,174 $164,357 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ Current liabilities: Bank overdraft, net $ 635 Accounts payable $ 10,796 8,131 Current portion of long-term debt 4,270 4,100 Accrued liabilities 9,966 7,847 -------- -------- Total current liabilities 25,032 20,713 Long-term debt 61,600 42,897 Other postretirement benefit 9,907 10,102 Deferred income taxes and other 24,916 23,480 Shareholders' equity: Common stock 8,586 8,577 Additional paid-in capital 12,545 12,489 Retained earnings 83,846 79,128 Treasury stock (30,637) (29,327) Note receivable from PENWEST Savings and Stock Ownership Plan (2,561) (3,340) Cumulative translation adjustment (60) (362) --------- -------- Total shareholders' equity 71,719 67,165 -------- -------- Total liabilities and shareholders' equity $193,174 $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 Nine Months Ended May 31 Ended May 31 ------------ ------------ 1995 1994 1995 1994 ---- ---- ---- ---- Sales $43,618 $41,347 $128,818 $115,000 Cost of sales 31,153 30,297 93,197 85,240 ------- ------- -------- -------- Gross margin 12,465 11,050 35,621 29,760 Operating expenses 8,240 7,783 24,177 22,218 ------- ------- -------- -------- Income from operations 4,225 3,267 11,444 7,542 Investment income 201 262 362 685 Interest expense (1,327) (915) (3,593) (2,588) Other 899 ------- ------- -------- -------- Income before taxes 3,099 2,614 9,112 5,639 Income taxes 1,099 840 3,202 1,241 ------- ------- -------- -------- Net income $ 2,000 $ 1,774 $ 5,910 $ 4,398 ======= ======= ======== ======== Weighted average common shares and equivalents outstanding 6,957,557 7,080,354 7,057,445 7,095,807 Earnings per common share $ 0.29 $ 0.25 $ 0.84 $ 0.62 ====== ====== ====== ====== Dividends declared per common share $ 0.05 $ 0.05 $ 0.15 $ 0.15 ====== ====== ====== ====== See accompanying notes to condensed consolidated financial statements. 4 5 PENWEST, LTD. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW (Dollars in Thousands) (Unaudited) Nine Months Ended May 31 ------------ 1995 1994 ---- ---- Operating Activities: Net income $ 5,910 $ 4,398 Adjustments to reconcile net income to net cash from operating activities: Depreciation and amortization 7,597 7,492 Deferred income taxes 793 2,146 Gain on the sale of assets (899) Foreign currency translation 103 Change in operating assets and liabilities: Receivables (2,207) (4,734) Inventories 2,306 (3,767) Accounts payable and other 4,629 (385) ------- ------- Net cash flow from operating activities 18,129 5,253 Investing Activities: Additions to plant and equipment (20,117) (9,151) Proceeds from sale of assets 2,500 Other (3,530) 324 ------- ------- Net cash used by investing activities (21,147) (8,827) Financing Activities: Payments on long-term debt (7,512) (13,823) Proceeds of long-term debt 26,045 16,825 Purchase of treasury stock (1,310) (1,277) Exercise of stock options 43 52 Purchase of life insurance for officer's benefit plan (2,501) (1,343) Payment of dividend (1,192) (1,029) ------- ------- Net cash from (used by) financing activities 13,573 (595) ------- ------- Net increase in cash and equivalents 10,555 (4,169) Cash and cash equivalents (bank overdraft) at beginning of period (635) 5,477 ------- ------- Cash and cash equivalents at end of period $ 9,920 $ 1,308 ======= ======= 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 nine month periods ended May 31, 1995 are not necessarily indicative of the results that may be expected for the year ending August 31, 1995. Certain prior year amounts have been reclassified to conform to the 1995 classification. 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. INCOME TAXES The effective tax rate for the nine-month period ended May 31, 1994 was 22% compared to the statutory rate of 34%. The effective rate was lower due to a federal tax benefit related to research and development expenditures recorded during the first quarter of fiscal 1994. 3. 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. 4. 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 the sale was recorded in the second quarter of $899,000, or $0.08 per share, and is shown as other income. 6 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity PENWEST's cash and cash equivalents were 5.1% 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 ($4.0 million and $3.2 million). In addition, $15 million of an unsecured revolving line of credit was unused and available at May 31, 1995. Cash flow from operations for the nine months ended May 31, 1995 was $18.1 million compared to $5.3 million in the corresponding period a year ago. The increase is primarily due to improved profitability, a decrease in receivables and inventory levels and an increase in accounts payable. Working capital increased to $27.8 million at May 31, 1995 from $21.4 million at August 31, 1994 primarily the result of the cash proceeds from the $20 million private placement of debt funded in December 1994. The Board of Directors declared a $0.05 per share dividend which was paid on June 2, 1995, to shareholders of record as of May 19, 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 did not purchase any shares during the third quarter. Capital Resources Additions to property, plant and equipment during the nine months ended May 31, 1995 were $20.1 million. The additions were primarily for the completion of the expansion of the Penwest Foods' facility in Richland, Washington, a capacity conversion at Penford Products, and the completion of laboratory facilities for the Penwest Pharmaceuticals Group. Results of Operations Net income was $2.0 million, or $0.29 per share for the third quarter, compared to net income of $1.8 million or $0.25 per share for the corresponding period a year ago. The prior year period included approximately $0.03 per share of earnings from Pacific Cogeneration, a PENWEST subsidiary whose assets were sold earlier this fiscal year. Net income for the nine months was $5.9 million, or $0.84 per share, compared with $4.4 million, or $0.62 per share in the year earlier period. Sales increased in the third quarter and the first nine months of fiscal year 1995 to $43.6 million and $128.8 million, respectively, representing a 5.5% and 12.0% 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 and the conversion of alkaline-based chemistry in the paper industry. Penwest Pharmaceuticals Group continued to grow volumes out of its microcrystalline cellulose plant in Cedar Rapids. Penwest Foods also grew volumes over a year ago. The gross margin for the three month 7 8 period increased to 28.6% compared to 26.7% last year. The improvement in overall gross margins is primarily the result of improved volumes and product mix at Penford and improving margins at Penwest Foods due to increasing potato starch volumes. Operating expenses in the third quarter rose $457,000, or 5.9% compared to the same period in the previous year. The increase is primarily due to increased investment in research and development, especially in pharmaceuticals. Operating expenses for the nine months increased $2.0 million, or 8.8% over the same period of the previous year. Previous year operating expenses were impacted by the curtailment of postretirement health benefits which was recorded as a $900,000 reduction of operating expenses. The remaining current year increase is primarily due to increased spending on research and development. Net interest expense for the third quarter of fiscal 1995 was $1.1 million compared to $653,000 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 6 Exhibits and Reports on Form 8-K. (a) Exhibit 3.2 - Amended and Restated Bylaws Exhibit 11 - Statement re: Computation of earnings per share. Exhibit 27 - Financial Data Schedule (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) 7/14/95 /S/ TOD R. HAMACHECK - ----------------- --------------------------------------- Date Tod R. Hamachek President and Chief Executive Officer 7/14/95 /S/ JEFFREY T. COOK - ----------------- --------------------------------------- Date Jeffrey T. Cook Vice President, Finance 10 11 EXHIBIT INDEX EXHIBIT PAGE - ------- ---- 3.2 Amended and Restated Bylaws 11 Statement re: Computation of Earnings Per Share 27 Financial Data Schedule