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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
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 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.
(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)
(206) 462-6000
(Registrant's telephone number, including area code.)
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 July 8, 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 3
May 31, 1996 and August 31, 1995
Condensed Consolidated Statements of Income 4
Three Months Ended May 31, 1996
and May 31, 1995
Condensed Consolidated Statements of Income 4
Nine Months Ended May 31, 1996 and
May 31, 1995
Condensed Consolidated Statements of Cash Flow 5
Nine Months Ended May 31, 1996 and
May 31, 1995
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 9-10
SIGNATURES 11
INDEX TO EXHIBITS 12-13
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PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
May 31, August 31,
1996 1995
----------- ----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,171 $ 5,334
Trade Accounts Receivable 26,728 23,943
Inventories:
Raw materials, supplies and other 5,101 3,828
Work in progress 629 483
Finished goods 11,751 9,898
--------- ---------
17,481 14,209
Prepaid expenses and other 4,318 5,447
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Total current assets 49,698 48,933
Property, plant and equipment, net 117,372 111,440
Deferred income taxes 9,934 9,927
Other assets 18,703 16,460
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Total assets $ 195,707 $ 186,760
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 10,760 $ 8,749
Accrued liabilities 7,158 6,728
Current portion of long-term debt 1,270 4,270
--------- ---------
Total current liabilities 19,188 19,747
Long-term debt 62,760 58,628
Other postretirement benefits 9,943 10,155
Deferred income taxes and other 27,338 26,248
Shareholders' equity:
Common stock 8,677 8,591
Additional paid-in capital 13,306 12,550
Retained earnings 87,628 84,949
Treasury stock (30,637) (30,637)
Note receivable from PENWEST Savings and
Stock Ownership Plan (1,932) (2,978)
Cumulative translation adjustment (564) (493)
--------- ---------
Total shareholders' equity 76,478 71,982
--------- ---------
Total liabilities and
shareholders' equity $ 195,707 $ 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 Nine Months
Ended May 31 Ended May 31
------------ ------------
1996 1995 1996 1995
---- ---- ---- ----
Sales $ 49,106 $ 43,618 $ 141,042 $ 128,818
Cost of sales 37,565 31,153 106,206 93,197
----------- ----------- ----------- -----------
Gross margin 11,541 12,465 34,836 35,621
Operating expenses 8,793 8,240 25,918 24,177
----------- ----------- ----------- -----------
Income from operations 2,748 4,225 8,918 11,444
Interest expense, net (1,188) (1,126) (3,496) (3,231)
Other 899
----------- ----------- ----------- -----------
Income before taxes 1,560 3,099 5,422 9,112
Income taxes 530 1,099 1,738 3,202
----------- ----------- ----------- -----------
Net income $ 1,030 $ 2,000 $ 3,684 $ 5,910
=========== =========== =========== ===========
Weighted average common shares and
equivalents outstanding 6,985,805 6,957,557 7,065,365 7,057,445
Earnings per common share $ 0.15 $ 0.29 $ 0.52 $ 0.84
=========== =========== =========== ===========
Dividends declared per common share $ 0.05 $ 0.05 $ 0.15 $ 0.15
=========== =========== =========== ===========
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)
Nine Months
Ended May 31
------------
1996 1995
---- ----
Operating Activities:
Net income $ 3,684 $ 5,910
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 8,684 7,597
Deferred income taxes 1,083 793
Gain on the sale of assets (899)
Change in operating assets and liabilities:
Receivables (2,785) (2,207)
Inventories (3,272) 2,306
Accounts payable and other 4,616 4,629
-------- --------
Net cash flow from operating activities 12,010 18,129
Investing Activities:
Additions to plant and equipment (14,616) (20,117)
Proceeds from sale of assets 2,500
Other (13) (3,530)
-------- --------
Net cash used by investing activities (14,629) (21,147)
Financing Activities:
Proceeds from unsecured line of credit 36,627 14,470
Payments on unsecured line of credit (33,792) (13,315)
Proceeds of long-term debt 15,250 20,000
Payments on long-term debt (16,953) (2,622)
Purchase of treasury stock (1,310)
Exercise of stock options 842 43
Purchase of life insurance for officers' benefit plan (2,501) (2,501)
Payment of dividends (1,017) (1,192)
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Net cash from (used by) financing activities (1,544) 13,573
-------- --------
Net increase (decrease) in cash and equivalents (4,163) 10,555
Cash and cash equivalents (bank overdraft) at
beginning of period 5,334 (635)
-------- --------
Cash and cash equivalents at end of period $ 1,171 $ 9,920
======== ========
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 nine month periods ended May 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending
August 31, 1996. Certain prior year amounts have been reclassified to
conform to the 1996 classification. For further information, refer to
the consolidated financial statements and footnotes thereto included in
PENWEST, LTD.'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 was $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
was no outstanding borrowings at December 22, 1995. The agreement
contains certain provisions related to limitations on indebtedness and
minimum net worth and requires the company to maintain a minimum fixed
charge coverage ratio.
3. INCOME TAXES
The effective tax rate for the nine-month period ended May 31, 1996 was
32% 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.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY
PENWEST maintains a highly liquid position which at May 31, 1996 consisted of
the following: cash and cash equivalents of $1.2 million, working capital of
$30.5 million, $20 million remaining available under an unsecured revolving
credit agreement, and several uncommitted lines of credit aggregating $15
million with various banks that may be used for overnight borrowings under which
there was $2.8 million outstanding.
Cash flow from operations for the nine months ended May 31, 1996 was $12.0
million compared to $18.1 million in the corresponding period a year ago. The
decrease is mostly attributed to increases in receivables and inventory
primarily related to the high cost of corn.
The Board of Directors declared a $0.05 per share dividend which was paid on
June 7, 1996, to shareholders of record as of May 24, 1996.
CAPITAL RESOURCES
Additions to property, plant and equipment during the nine months ended May 31,
1996 were $14.6 million. Third quarter and year to date additions were directed
primarily to ongoing enhancements at Penford Products Co. in Cedar Rapids, Iowa.
The Company used operating cash flow and short-term borrowings to finance
capital expenditures during the first nine months of the fiscal year.
RESULTS OF OPERATIONS
Net income was $1.0 million, or $0.15 per share for the third quarter, compared
to net income of $2.0 million or $0.29 per share for the corresponding period a
year ago. Net income for the nine months was $3.7 million, or $0.52 per share,
compared with $5.9 million, or $0.84 per share, in the year earlier period. The
prior year nine-month period included a non-recurring a gain of $899,000 from
the sale of the assets of Pacific Cogeneration, Inc.
Sales increased in the third quarter and the first nine months of fiscal year
1996 to $49.1 million and $141.0 million, respectively, representing a 12.6% and
9.5% increase respectively, from the corresponding periods a year ago. The third
quarter increase is primarily due to corn costs rising to historic highs, a key
component used in pricing Penford's paper chemical products. Changes in corn
costs are generally passed through to customers. Sales volumes at Penford were
slightly less than the corresponding period a year ago due to difficult paper
industry conditions. Penwest Pharmaceuticals Group sustained strong shipments of
its microcrystalline cellulose product line, and signed another drug development
contract for TIMERx. Penwest Foods showed strong volume and revenue improvement
over the corresponding quarter a year ago resulting from higher shipments of its
line of starch-based coatings for french fries.
The gross margin for the three month period ended May 31, 1996 was 23.5%
compared to 28.6% in the corresponding period a year ago and 24.7% and 27.7% for
the nine months ended May 31, 1996 and 1995 respectively. The average market
price of corn in 1996 has increased substantially compared to the prior year.
This rapidly rising corn market has negatively affected Penford's gross margin.
Certain of the Company's sales are based on a recent average of published corn
prices, and in periods of rapidly escalating prices, the Company's ability to
recover the increase in raw materials costs under the pricing
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provisions of these contracts lags the rising price of corn. The Company's
fixed price sales contracts were impacted by the high price of cash corn
relative to the futures market. Lower margin dollars on higher sales
prices also adversely impacted the gross margin percentage.
In addition, competitive and market factors, including the historic high price
of corn, put pressure on product pricing in the renewal of customer sales
contracts making it difficult to maintain historical gross margin levels.
Operating expenses in the third quarter rose $553,000, or 6.7% compared to the
same period in the previous year. For the year, operating expenses have
increased $1.7 million or 7.2%, primarily due to increased investment in
research and development at Penwest Pharmaceuticals.
Net interest expense for the third quarter of fiscal 1996 was $1.2 million
compared to $1.1 million for the corresponding period a year ago. The increase
reflects lower capitalized interest and lower investment income.
FORWARD-LOOKING STATEMENTS
Corn costs have continued to fluctuate subsequent to the end of the third
quarter and are expected to negatively impact earnings for the year. However,
the impact cannot be quantified at this time.
The Company is seeing signs of improvement in the paper industry. Volumes have
increased, and Penford has both renewed major existing customer contracts and
secured new ones.
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 affected by volatility
in the worldwide demand for feed grains and uncertain weather conditions, 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
Forms 10-Q for the fiscal quarters ended November 30, 1995 and February 29,
1996, on file with the Securities and Exchange Commission.
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PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
3.1 Restated Articles of Incorporation of Registrant
(filed as an Exhibit to Registrant's Form 10-K for
fiscal year ended August 31, 1995).
3.2 Bylaws of Registrant as amended and restated as of
June 27, 1995 (filed as an Exhibit to Registrant's
Form 10-K for the fiscal year ended August 31, 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
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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 as amended and
restated as of January 23, 1996.
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 (filed as an Exhibit to
Registrant's Form 10-Q for the quarter ended February
29, 1996)
10.12 PENWEST, LTD. Stock Option Plan for non-employee
directors.
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)
July 12, 1996 /s/ Tod R. Hamachek
- ------------------- ----------------------------------
Date Tod R. Hamachek
President and
Chief Executive Officer
July 12, 1996 /s/ Jeffrey T. Cook
- ------------------- ----------------------------------
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 (filed as an
Exhibit to Registrant's Form 10-K for fiscal year ended August
31, 1995)
(3.2) Bylaws of Registrant as amended and restated as of June 27,
1995 (filed as an Exhibit to Registrant's Form 10-K for the
fiscal year ended August 31, 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.)
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(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 as amended and restated as
of January 23, 1996
(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 (filed as an Exhibit to
Registrant's Form 10-Q for the quarter ended February 29, 1996)
10.12 PENWEST, LTD. Stock Option Plan for Non-Employee Directors
11 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
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