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 May 31, 1997
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)
(425) 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 3, 1997.
Class Outstanding
----- -----------
Common stock, par value $1.00 7,260,316
1
2
PENWEST, LTD. AND SUBSIDIARIES
INDEX
-----
Page No.
--------
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
May 31, 1997 and August 31, 1996
Condensed Consolidated Statements of Income 4
Three Months and Nine Months Ended May 31, 1997
and May 31, 1996
Condensed Consolidated Statements of Cash Flow 5
Nine Months Ended May 31, 1997 and
May 31, 1996
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
INDEX TO EXHIBITS 11-12
2
3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
May 31, 1997 August 31, 1996
------------ ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 182
Trade accounts receivable 27,134 $ 26,766
Inventories:
Raw materials 6,463 6,170
Work in progress 905 685
Finished goods 14,124 13,676
--------- ---------
21,492 20,531
Prepaid expenses and other 5,965 5,354
--------- ---------
Total current assets 54,773 52,651
Net property, plant and equipment 130,327 121,173
Deferred income taxes 10,999 9,940
Cash value of life insurance 12,497 11,432
Other assets 7,339 7,322
--------- ---------
Total assets $ 215,935 $ 202,518
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank overdraft, net $ 847
Accounts payable $ 12,966 10,344
Accrued liabilities 4,978 7,943
Current portion of long-term debt 6,062 4,127
--------- ---------
Total current liabilities 24,006 23,261
Long-term debt 63,661 62,636
Other postretirement benefits 10,298 10,306
Other liabilities 8,383 7,197
Deferred income taxes 22,797 20,980
Shareholders' equity:
Common stock 9,091 8,677
Additional paid-in capital 18,171 13,633
Retained earnings 92,066 88,640
Treasury stock (30,637) (30,637)
Note receivable from PENWEST Savings and
Stock Ownership Plan (986) (1,742)
Cumulative translation adjustment (915) (433)
--------- ---------
Total shareholders' equity 86,790 78,138
--------- ---------
Total liabilities and shareholders' equity $ 215,935 $ 202,518
========= =========
See accompanying notes to condensed consolidated financial statements.
3
4
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except share and per share data)
Three Months Ended May 31 Nine Months Ended May 31
------------------------- ------------------------
1997 1996 1997 1996
---- ---- ---- ----
Sales $ 49,993 $ 49,106 $ 147,630 $ 141,042
Cost of sales 35,952 37,565 110,490 106,206
----------- ----------- ----------- -----------
Gross margin 14,041 11,541 37,140 34,836
Operating expenses 9,865 8,793 27,671 25,918
----------- ----------- ----------- -----------
Income from operations 4,176 2,748 9,469 8,918
Other income 1,200
Interest expense, net (1,431) (1,188) (4,008) (3,496)
----------- ----------- ----------- -----------
Income before income taxes 2,745 1,560 6,661 5,422
Income taxes 933 530 2,186 1,738
----------- ----------- ----------- -----------
Net income $ 1,812 $ 1,030 $ 4,475 $ 3,684
=========== =========== =========== ===========
Weighted average common shares and
equivalents outstanding 7,033,535 6,985,805 7,021,230 7,065,365
Earnings per common share $ 0.26 $ 0.15 $ 0.64 $ 0.52
=========== =========== =========== ===========
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)
Nine Months Ended May 31
------------------------
1997 1996
---- ----
Operating Activities:
Net income $ 4,475 $ 3,684
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 9,043 8,684
Deferred income taxes 758 1,083
Change in operating assets and liabilities:
Trade receivables (423) (2,785)
Inventories (961) (3,272)
Accounts payable and other 1,196 4,616
-------- --------
Net cash flow from operating activities 14,088 12,010
Investing Activities:
Additions to property, plant and equipment (18,074) (14,616)
Other 617 (13)
-------- --------
Net cash used by investing activities (17,457) (14,629)
Financing Activities:
Proceeds from unsecured line of credit 68,555 36,627
Payments on unsecured line of credit (66,785) (33,792)
Proceeds of long-term debt 5,000 15,250
Payments on long-term debt (3,810) (16,953)
Exercise of stock options 3,624 842
Purchase of life insurance for officers' benefit plan (1,158) (2,501)
Payment of dividends (1,028) (1,017)
-------- --------
Net cash from (used by) financing activities 4,398 (1,544)
-------- --------
Net increase (decrease) in cash and equivalents 1,029 (4,163)
-------- --------
Cash and cash equivalents (bank overdraft) at
beginning of period (847) 5,334
-------- --------
Cash and cash equivalents at end of period $ 182 $ 1,171
======== ========
See accompanying notes to condensed consolidated financial statements.
5
6
PENWEST, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
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 of the
interim periods presented have been included. Operating results for the
three and nine month periods ended May 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending
August 31, 1997. 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, 1996.
Certain prior year amounts have been reclassified to conform with
current year presentation. These reclassifications had no effect on
previously reported results of operations.
2. OTHER INCOME
During the first quarter of fiscal 1997, the Company sold its remaining
Southern California air credits related to the operations of Great
Western Malting Co., a division of the Company sold in 1989. The sale
of the credits resulted in a pretax gain of $1.2 million, which is
included in other income for the nine months ended May 31, 1997.
3. INCOME TAXES
The effective tax rate for the quarter ended May 31, 1997 was 34%. The
effective tax rate for the nine-month period ended May 31, 1997 was 33%
compared to the statutory rate of 34%. The effective rate over nine
months was lower than the statutory rate due to state tax refunds
received by the Company during the second quarter of fiscal 1997.
4. EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted
on February 28, 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to
restate all prior periods. Under the new requirements for calculating
primary earnings per share, the dilutive effect of stock options will
be excluded. The impact is expected to result in no effect to primary
earnings per share for the fiscal quarter ending May 31, 1997 and a
$0.01 increase to primary earnings per share for the nine months ended
May 31, 1997. The impact of Statement 128 on the calculation of fully
diluted earnings per share is not expected to be material.
6
7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
At May 31, 1997, PENWEST had working capital of $30.8 million, a $35.0 million
unsecured credit agreement under which there was $20.3 million outstanding, and
several uncommitted lines of credit aggregating $15.0 million with two banks
that may be used for overnight borrowings under which there was $7.7 million
outstanding. Cash flow from operations for the nine month period was $14.1
million compared to $12.0 million in the corresponding period a year ago. The
Company used operating cash flow and debt to finance capital expenditures and
operating activities during the nine months ended May 31, 1997.
The Company paid quarterly dividends of $0.05 per share on December 6, 1996,
March 7, 1997, and June 5, 1997.
Capital Resources
Third quarter and year-to-date additions to property, plant and equipment of
$4.5 million and $18.1 million, respectively, were primarily for projects
related to capacity expansion at Penwest Foods' facility in Richland, Washington
and various ongoing improvements at Penford Products' facility in Cedar Rapids,
Iowa.
Results of Operations
Net income was $1.8 million, or $0.26 per share, for the third quarter compared
to net income of $1.0 million, or $0.15 per share, for the corresponding period
a year ago. Net income for nine months of the fiscal year was $4.5 million, or
$0.64 per share, compared with $3.7 million, or $0.52 per share, in the prior
year period. The first quarter of fiscal year 1997 included other income of $1.2
million representing $800,000 after tax, or $0.11 per share, from the sale of
Southern California air credits related to the operations of Great Western
Malting Co., a division of the Company sold in 1989.
Sales increased in the third quarter and the first nine months of fiscal year
1997 to $50.0 million and $147.6 million, respectively, representing increases
of 1.8% and 4.7%, respectively, from the corresponding periods a year ago. The
third quarter increase is primarily due to higher sales volumes of manufactured
products at Penford Products and Penwest Foods. Penford Products, accounting for
approximately 75% of all revenues, operated at near capacity levels. The volume
increases reflected in total sales were partially offset by lower corn costs, a
key component used in pricing the sales of Penford's paper chemical products.
The gross margin for the three month period ended May 31, 1997 was 28.1%
compared to 23.5% in the corresponding period a year ago and 25.2% and 24.7% for
the nine months ended May 31, 1997 and 1996, respectively. The improvement in
gross margin is due, in part, to a decline in corn prices compared to last year.
The effect of more volume moving through the Penford and Penwest Foods
manufacturing facilities and the increase in sales volume of Penford's starch
copolymer products also positively affected the gross margin percentage.
7
8
Operating expenses in the third quarter rose $1.1 million, or 12.2%, compared to
the same period in the previous year. For the fiscal year, operating expenses
have increased $1.8 million, or 6.8%. These increases are primarily due to
increased investment in research and development at Penwest Pharmaceuticals as
well as higher selling and performance-based incentive expenses.
Net interest expense for the third quarter of fiscal 1997 was $1.4 million
compared to $1.9 million for the corresponding period a year ago. For the year,
net interest expense was $4.0 million compared to $3.5 million a year ago mainly
reflecting lower amounts of capitalized interest.
Recent Development
On June 11, 1997, Penwest Pharmaceuticals and its licensee, Mylan Laboratories
Inc., announced that a Paragraph IV Abbreviated New Drug Application (ANDA) had
been filed with the U.S. Food and Drug Administration (FDA) for controlled
release nifedipine tablets incorporating Penwest Pharmaceuticals' patented
TIMERx(R) controlled release delivery system. The filing was made by Mylan and
represents the first generic alternative to Procardia XL, a calcium channel
blocker for treating hypertension with a U.S. market of approximately $950
million in 1996.
Forward-looking Statements
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 by-products, the economic
condition of the paper industry, competition, product development risks, patent
and intellectual property matters (including the possibility of patent
infringement litigation), dependence on collaborative partners, and regulatory
and manufacturing issues (including the difficulty of predicting FDA approvals).
Additional information on these and other factors which could affect the
Company's financial results is included in the Company's 1996 Annual Report to
Shareholders, its Form 10-K for the fiscal year ended August 31, 1996, and its
Forms 10-Q for the fiscal quarters ended November 30, 1996 and February 28,
1997, on file with the Securities and Exchange Commission.
8
9
PART II - OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
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.
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)
July 11, 1997 /s/ Tod R. Hamachek
- ------------- -------------------------------------------
Date Tod R. Hamchek
President and
Chief Executive Officer (Principal
Executive Officer)
July 11, 1997 /s/ Jeffrey T. Cook
- ------------- -------------------------------------------
Date Jeffrey T. Cook
Vice President, Finance and
Chief Financial Officer (Principal
Financial Officer)
10
11
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) Amended and Restated Rights Agreement dated as of April 30,
1997 (filed as an Exhibit to Registrant's Amendment to
Registration Statement on Form 8-A/A dated May 5, 1997)
(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 Wells Fargo
Bank (formerly 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, Talley, Horn,
Rydzewski and Belsheim (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)
11
12
(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 21, 1997 (filed on Form S-8 dated
March 17, 1997)
(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 Amendment to Credit Agreement dated as of May 7, 1997 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
(10.13) PENWEST, LTD. Stock Option Plan for Non-Employee Directors
(filed as an Exhibit to the Registrant's Form 10-Q for the quarter
ended May 31, 1996)
11 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
12