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UNITED STATES
Securities and Exchange Commission
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
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THE SECURITIES EXCHANGE ACT OF 1934
For quarterly period ended February 29, 1996
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.
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(Exact name of registrant as specified in its charter)
Washington 91-1221360
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(State of Incorporation) (I.R.S. Employer
Identification No.)
777-108th Avenue N.E., Suite 2390, Bellevue, WA 98004-5193
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(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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of March 31, 1996.
Class Outstanding
----- -----------
Common stock, par value $1.00 6,844,413
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PENWEST, LTD. AND SUBSIDIARIES
INDEX
Page No.
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets
February 29, 1996 and August 31, 1995 3
Condensed Consolidated Statements of Income
Three Months Ended February 29, 1996
and February 28, 1995 4
Condensed Consolidated Statements of Income
Six Months Ended February 29, 1996 and
February 28, 1995 4
Condensed Consolidated Statements of Cash Flow
Six Months Ended February 29, 1996 and
February 28, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 7-8
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 9-11
SIGNATURES 12
INDEX TO EXHIBITS 13-14
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
February 29, August 31,
1996 1995
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 2,123 $ 5,334
Receivables 26,904 23,943
Inventories:
Raw materials, supplies and other 5,423 3,828
Work in progress 472 483
Finished goods 11,007 9,898
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16,902 14,209
Prepaid expenses and other 3,031 5,447
--------- -----------
Total current assets 48,960 48,933
Property, plant and equipment, net 113,969 111,440
Deferred income taxes 9,932 9,927
Other assets 18,658 16,460
--------- ----------
Total assets $ 191,519 $186,760
========= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,103 $ 8,749
Accrued liabilities 6,608 6,728
Current portion of long-term debt 1,270 4,270
---------- ----------
Total current liabilities 18,981 19,747
Long-term debt 60,243 58,628
Other postretirement benefits 9,937 10,155
Deferred income taxes and other 26,851 26,248
Shareholders' equity:
Common stock 8,677 8,591
Additional paid-in capital 13,306 12,550
Retained earnings 86,940 84,949
Treasury stock (30,637) (30,637)
Note receivable from PENWEST Savings and
Stock Ownership Plan (2,279) (2,978)
Cumulative translation adjustment (500) (493)
---------- ------------
Total shareholders' equity 75,507 71,982
--------- ----------
Total liabilities and
shareholders' equity $ 191,519 $186,760
========= ========
See accompanying notes to condensed consolidated financial statements.
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PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
(Unaudited)
Three Months Six Months
Ended February 29/28 Ended February 29/28
--------------------------------- ---------------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
Sales $ 46,313 $ 42,429 $ 91,936 $ 85,199
Cost of sales 35,184 30,517 68,640 62,044
----------- ----------- ----------- -----------
Gross margin 11,129 11,912 23,296 23,155
Operating expenses 8,558 8,408 17,125 15,936
----------- ----------- ----------- -----------
Income from operations 2,571 3,504 6,171 7,219
Interest expense, net (1,254) (1,063) (2,307) (2,105)
Other 899 899
----------- ----------- ----------- -----------
Income before taxes 1,317 3,340 3,864 6,013
Income taxes 409 1,187 1,208 2,103
----------- ----------- ----------- -----------
Net income $ 908 $ 2,153 $ 2,656 $ 3,910
=========== =========== =========== ===========
Weighted average common shares and
equivalents outstanding 7,012,949 7,025,975 6,993,377 7,084,538
Earnings per common share $ 0.13 $ 0.31 $ 0.38 $ 0.55
=========== =========== =========== ===========
Dividends declared per common share $ 0.05 $ 0.05 $ 0.10 $ 0.10
=========== =========== =========== ===========
See accompanying notes to condensed consolidated financial statements.
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PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in Thousands)
(Unaudited)
Six Months
Ended February 29/28
---------------------------
1996 1995
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Operating Activities:
Net income $ 2,656 $ 3,910
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 5,616 5,051
Deferred income taxes 598 375
Gain on the sale of assets -- (899)
Change in operating assets and liabilities:
Receivables (2,961) (925)
Inventories (2,693) 4,243
Accounts payable and other 5,349 3,316
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Net cash flow from operating activities 8,565 15,071
Investing Activities:
Additions to plant and equipment (8,145) (13,983)
Proceeds from sale of assets 2,500
Other 89 (99)
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Net cash used by investing activities (8,056) (11,582)
Financing Activities:
Proceeds from unsecured line of credit 20,282 9,040
Payments from unsecured line of credit (20,282) (9,040)
Proceeds of long-term debt 15,250 20,000
Payments on long-term debt (16,635) (1,965)
Purchase of treasury stock -- (1,310)
Exercise of stock options 842 22
Purchase of life insurance for officers' benefit plan (2,501) (2,501)
Payment of dividends (676) (683)
Other -- 709
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Net cash from (used by) financing activities (3,720) 14,272
-------- --------
Net increase (decrease) in cash and cash equivalents (3,211) 17,761
Cash and cash equivalents (bank overdraft) at
beginning of period 5,334 (635)
-------- --------
Cash and cash equivalents at end of period $ 2,123 $ 17,126
======== ========
See accompanying notes to condensed consolidated financial statements.
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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 29, 1996 are not
necessarily indicative of the results that may be expected for the year
ending August 31, 1996. 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, 1995.
2. DEBT
On December 22, 1995, the Company completed an unsecured $35 million
credit agreement with four banks expiring on December 30, 1998 under
which there were $15.3 million outstanding at quarter end. Borrowing
rates available to the Company under the agreement are based on prime
rate or the interbank offered rate depending on the selection of
borrowing options. The agreement replaced an unsecured term agreement
which at December 22, 1995, had $15.3 million of borrowings
outstanding and an unsecured $15 million revolving line of credit
under which there were no outstanding borrowings at December 22, 1995.
The new debt agreement contains, among other terms, certain
restrictions related to limitations on indebtedness and minimum net
worth, which are similar to restrictions on previously existing debt.
In addition, the Company is required to maintain a minimum fixed charge
coverage ratio.
3. INCOME TAXES
The effective tax rate for the six-month period ended February 29, 1996
was 31% compared to the statutory rate of 34%. The effective rate was
lower than the statutory rate due to state tax refunds received by the
Company.
4. SALE OF COGENERATION ASSETS
During the second quarter of fiscal year 1995, the Company completed a
sale of the turbine and the boilers constituting the assets of its
cogeneration facility in Vancouver, Washington. A pretax gain on the
sale of $899,000 was recorded in such second quarter and is shown as
other income.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
PENWEST maintains a highly liquid position. Liquidity at February 29, 1996
consisted of the following: cash and cash equivalents of $2.1 million, working
capital of approximately $30.0 million, and several uncommitted lines of credit
with various banks aggregating $15 million that may be used for overnight
borrowings under which there were no borrowings outstanding. On December 22,
1995, the Company completed a new $35 million credit agreement with four banks,
replacing both an unsecured term agreement which had $15.3 million outstanding
and a $15 million revolving credit agreement under which there were no
borrowings outstanding at December 22, 1995.
Cash flow from operations for the six months ended February 29, 1996 was $8.6
million compared to $15.3 million in the corresponding period a year ago. The
decrease is primarily due to increases in receivables and inventories, and lower
profitability. The Company used operating cash flow and short-term borrowings to
finance capital expenditures during the first six months of the year.
The Board of Directors declared a $0.05 per share dividend which was paid on
March 1, 1996, to shareholders of record as of February 16, 1996.
Capital Resources
Additions to property, plant and equipment during the six months ended February
29, 1996 were $8.1 million. Second quarter additions of $5.3 million were
directed primarily to ongoing operating enhancements at Penford Products Co. in
Cedar Rapids, Iowa.
Results of Operations
Net income was $908,000, or $0.13 per share, for the second quarter compared to
net income of $2.2 million, or $0.31 per share, for the corresponding period a
year ago. The prior year period included a non-recurring gain of $899,000, or
$593,000 on an after tax basis, from the sale of the assets of Pacific
Cogeneration Inc. Net income for the six months was $2.7 million, or $0.38 per
share, compared with $3.9 million, or $0.55 per share, in the year earlier
period.
Sales increased in the second quarter and the first six months of fiscal year
1996 to $46.3 million and $91.9 million, respectively, representing a 9.2% and
7.9% increase, respectively, from the corresponding periods a year ago. Most of
the second quarter increase is due to acutely higher corn costs, a key component
used in pricing Penford's paper chemical products, which are generally passed
through to customers. Sales volumes at Penford were down from a year ago
primarily due to a sharp drop in production by the paper industry. Lower
production in the paper industry led to reduced shipments to existing customers
during the quarter and delayed shipments of new business. Even with sharp
reductions in output by the paper industry, our customers' finished goods
inventory levels remain high because of soft end-user demand for paper. Penwest
Pharmaceuticals Group experienced continued volume growth and posted record
revenues for the quarter. Although shipments were down
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from the first quarter resulting from seasonal downtime, Penwest Foods' revenues
increased over the same period a year ago primarily due to higher volumes of its
line of starch-based coatings for french fries.
The gross margin for the three-month period ended February 29, 1996 was 24.0%
compared to 28.1% in the corresponding period a year ago. Lower volumes of
Penford's high end starches and the negative effect of a rapidly rising corn
market contributing approximately the same gross margin dollars on higher sales
dollars resulted in a lower gross margin percentage.
Operating expenses in the second quarter rose $150,000, or 1.8%. For the year
operating expenses are up 7.5% which is primarily due to increased investment in
research and development especially in the Penwest Pharmaceuticals Group.
Net interest expense for the second quarter of fiscal year 1996 was $1.3 million
compared to $1.1 million for the corresponding period a year ago. The increase
reflects lower capitalized interest and lower investment income throughout the
current quarter.
Forward-looking Statements
Penford's net corn costs have continued to rise subsequent to the end of the
second quarter and are expected to negatively impact gross margins on fixed
sales contracts in the foreseeable future. Price increases for byproduct sales,
which are netted against the cost of corn, have not kept up with the increases
in corn cost. Conditions in the corn market are such that the changes in the
value of the Company's futures contracts have not completely offset rising net
corn costs on its fixed price contracts. These are unusual market conditions and
the Company continues to pursue ways to better protect its margins on fixed
sales contracts.
If the paper industry rebounds later this calendar year, stronger starch sales
volume could result from the resumption of alkaline-based conversions, and from
a rebound in demand stimulated by reductions in our customers' inventories and
recent lower paper prices. Gross margin percentages are also anticipated to
improve if the paper industry strengthens and corn costs recede from historical
highs.
The above discussion contains forward-looking statements. There are certain
important factors that could cause results to differ materially from those
anticipated by the statements made above. These factors include, but are not
limited to, the market price of corn and corn byproducts, the economic condition
of the paper industry, and competition. Additional information on these and
other factors which could affect the Company's financial results is included in
the Company's 1995 Annual Report to Shareholders, its Form 10-K for the fiscal
year ended August 31, 1995, and its Form 10-Q for the fiscal quarter ended
November 30, 1995, on file with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
Item 4 Submission Of Matters To A Vote Of Security Holders
(a) The annual meeting of shareholders of PENWEST, LTD. was held on
January 23, 1996.
(b) The following directors were elected to serve a term of three
years:
Richard E. Engebrecht, William G. Parzybok, Jr., and William K.
Street. The board is comprised of those elected this year and the
following directors completing their terms: Harry Mullikin, N.
Stewart Rogers, Paul H. Hatfield, Tod R. Hamachek, Sally G.
Narodick, and James H. Wiborg.
(c) The following matters were voted upon at the meeting:
1. For the election of directors:
For % Withheld %
--- - -------- -
Richard E. Engebrecht 5,873,660 98.37% 97,058 1.63%
William G. Parzybok, Jr. 5,909,966 98.98% 60,752 1.02%
William K. Street 5,871,586 98.34% 99,132 1.66%
2. Approval of the PENWEST, LTD. Stock Option Plan for
Non-Employee Directors.
For Against Abstain Non-Vote
--- ------- ------- --------
3,657,802 1,337,417 279,896 695,603
3. Approval of an amendment to the PENWEST, LTD. 1994 Stock
Option Plan.
For Against Abstain Non-Vote
--- ------- ------- --------
5,493,193 312,103 92,156 73,266
4. Ratification of selection of Ernst & Young LLP as
independent auditors of the Company.
For Against Abstain
--- ------- -------
5,915,075 24,581 31,062
(d) Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Restated Articles of Incorporation of Registrant
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3.2 Bylaws of Registrant as amended and restated as of
June 27, 1995
4.1 PENWEST, LTD. Common Stock Purchase Rights, dated
June 3, 1988 (filed on Form 8-A dated June 3, 1988)
10.1 Senior Note Agreement among PENWEST, LTD. as Borrower
and Mutual of Omaha and Affiliates as lenders, dated
November 1, 1992 (filed as an Exhibit to Registrant's
Form 10-Q for the quarter ended February 28, 1993)
10.2 Term Loan Agreement among Penford Products Co., and
PENWEST, LTD. as Borrowers, and First Interstate Bank
of Washington, N.A. as Lender, dated September 27,
1990 (Registrant agrees to furnish a copy of this
instrument to the Commission on request)
10.3 Loan Agreement among PENWEST, LTD. as Borrower and
Seattle-First National Bank as Lender, dated December
1, 1989 (Registrant agrees to furnish a copy of this
instrument to the Commission on request)
10.4 PENWEST, LTD. Supplemental Executive Retirement Plan,
dated March 19, 1990 (filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended
August 31, 1991)
10.5 PENWEST, LTD. Supplemental Survivor Benefit Plan,
dated January 15, 1991 (filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended
August 31, 1991)
10.6 PENWEST, LTD. Deferred Compensation Plan, dated
January 15, 1991 (filed as an Exhibit to Registrant's
Form 10-K for the fiscal year ended August 31, 1991)
10.7 Change of Control Agreements with Messrs. Hamachek,
Reed, Cook, Widmaier, Schmelzer, Talley, Horn and
Rydzewski (a representative copy of these agreements
is filed as an exhibit to Registrant's Form 10-K for
the fiscal year ended August 31, 1995.)
10.8 PENWEST, LTD. 1993 Non-Employee Director Restricted
Stock Plan (filed as an Exhibit to Registrant's Form
10-Q for the quarter ended November 30, 1993)
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10.9 Note Agreement dated as of October 1, 1994 among
PENWEST, LTD., Principal Mutual Life Insurance
Company and TMG Life Insurance Company (filed as an
Exhibit to Registrant's Form 10-Q for the quarter
ended February 28, 1995)
10.10 PENWEST, LTD. 1994 Stock Option Plan (filed as an
Exhibit to the Registration Statement dated April 25,
1995 on Form S-8, Commission File No. 33-58799)
10.11 Credit Agreement dated as of December 22, 1995 among
PENWEST, LTD., and its subsidiaries, Bank of America
National Trust and Savings Association, ABN-AMRO
Bank, N.V., The Bank of Nova Scotia, and
Seattle-First National Bank
11 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
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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)
April 12, 1996 /S/ Tod R. Hamachek
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Date Tod R. Hamachek
President and
Chief Executive Officer
April 12, 1996 /S/ Jeffrey T. Cook
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Date Jeffrey T. Cook
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer)
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INDEX TO EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission, are incorporated by reference.
Exhibit No. Item
(3.1) Restated Articles of Incorporation of Registrant
(3.2) Bylaws of Registrant as amended and restated as of
June 27, 1995
(4.1) PENWEST, LTD. Common Stock Purchase Rights, dated
June 3, 1988 (filed on Form 8-A dated June 3, 1988)
(10.1) Senior Note Agreement among PENWEST, LTD. as
Borrower and Mutual of Omaha and Affiliates as lenders,
dated November 1, 1992 (filed as an Exhibit to
Registrant's Form 10-Q for the quarter ended February
28, 1993)
(10.2) Term Loan Agreement among Penford Products Co.,
and PENWEST, LTD. as Borrowers, and First Interstate
Bank of Washington, N.A. as Lender, dated September
27, 1990 (Registrant agrees to furnish a copy of this
instrument to the Commission on request)
(10.3) Loan Agreement among PENWEST, LTD. as Borrower
and Seattle-First National Bank as Lender, dated December
1, 1989 (Registrant agrees to furnish a copy of this
instrument to the Commission on request)
(10.4) PENWEST, LTD. Supplemental Executive
Retirement Plan, dated March 19, 1990 (filed as
an Exhibit to Registrant's Form 10-K for the fiscal
year ended August 31, 1991)
(10.5) PENWEST, LTD. Supplemental Survivor Benefit
Plan, dated January 15, 1991 (filed as an Exhibit
to Registrant's Form 10-K for the fiscal year ended
August 31, 1991)
(10.6) PENWEST, LTD. Deferred Compensation Plan,
dated January 15, 1991 (filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended
August 31, 1991)
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(10.7) Change of Control Agreements with Messrs.
Hamachek, Reed, Cook, Widmaier, Schmelzer, Talley,
Horn and Rydzewski (a representative copy of these
agreements is filed as an exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1995)
(10.8) PENWEST, LTD. 1993 Non-Employee Director
Restricted Stock Plan (filed as an Exhibit to Registrant's
Form 10-Q for the quarter ended November 30, 1993)
(10.9) Note Agreement dated as of October 1, 1994 among PENWEST, LTD.,
Principal Mutual Life Insurance Company and TMG Life Insurance
Company (filed as an Exhibit to Registrant's Form 10-Q for the
quarter ended February 28, 1995)
(10.10) PENWEST, LTD. 1994 Stock Option Plan (filed as an
Exhibit to the Registration Statement dated April 25, 1995
on Form S-8, Commission File No. 33-58799)
10.11 Credit Agreement dated as of December 22, 1995 among
PENWEST, LTD., and its subsidiaries, Bank of America
National Trust and Savings Association, ABN-AMRO Bank,
N.V., The Bank of Nova Scotia, and Seattle-First National Bank
11 Statement Regarding Computation of Per Share Earnings
27 Financial Data Schedule
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