UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 11-K
[X] ANNUAL REPORT PURSUANT TO SECTION 15 (d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to ________________
COMMISSION FILE NUMBER 000-23467
A. Full title of the Plan:
PENWEST PHARMACEUTICALS CO.
SAVINGS PLAN
B. Name of issuer of the securities held pursuant to the Plan and the address of
its principal executive office:
PENWEST PHARMACEUTICALS CO.
39 OLD RIDGEBURY ROAD, SUITE 11
DANBURY, CT 06810-5120
Penwest Pharmaceuticals Co.
Savings Plan
Audited Financial Statements and Supplemental Schedule
Years ended December 31, 2002 and 2001
INDEX
Report of Independent Auditors....................................................... 1
Audited Financial Statements
Statements of Net Assets Available for Benefits...................................... 2
Statements of Changes in Net Assets Available for Benefits........................... 3
Notes to Financial Statements........................................................ 4
Supplemental Schedule
Schedule H, line 4(i)-Schedule of Assets (Held at End of Year)....................... 9
Report of Independent Auditors
Board of Directors
Penwest Pharmaceuticals Co. Savings Plan
We have audited the accompanying statements of net assets available for benefits
of the Penwest Pharmaceuticals Co. Savings Plan as of December 31, 2002 and
2001, and the related statements of changes in net assets available for benefits
for the years then ended. These financial statements are the responsibility of
the Plan's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for benefits of the Plan at
December 31, 2002 and 2001, and the changes in its net assets available for
benefits for the years then ended, in conformity with accounting principles
generally accepted in the United States.
Our audits were performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedule of assets
(held at end of year) as of December 31, 2002, is presented for purposes of
additional analysis and is not a required part of the financial statements but
is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in our audits of the financial statements and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
/s/ Ernst & Young LLP
Stamford, Connecticut
June 23, 2003
1
Penwest Pharmaceuticals Co. Savings Plan
Statements of Net Assets Available for Benefits
DECEMBER 31,
2002 2001
-------------------------
ASSETS
Investments:
Short Term Investments $3,776,034 $2,082,348
Penwest Pharmaceuticals Co. Common Stock 2,082,238 2,972,392
Participants' Loans 55,566 67,982
---------- ----------
5,913,838 5,122,722
Receivables:
Employer's contribution -- 68,584
Participants' contributions -- 14,717
Accrued income -- 6,763
Open trade receivables -- 2,245,205
---------- ----------
Total receivables -- 2,335,269
---------- ----------
Total assets 5,913,838 7,457,991
LIABILITIES
Fees payable -- 16,083
---------- ----------
Total liabilities -- 16,083
---------- ----------
Net assets available for benefits $5,913,838 $7,441,908
========== ==========
See accompanying notes.
2
Penwest Pharmaceuticals Co. Savings Plan
Statements of Changes in Net Assets Available for Benefits
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001
----------------------------
ADDITIONS
Investment income:
Net (depreciation) appreciation in fair
value of investments $(2,031,462) $ 938,077
Interest and dividends 83,310 67,114
----------------------------
(1,948,152) 1,005,191
Contributions:
Participants 525,261 432,901
Rollover contributions 82,732 --
Employer 296,121 226,690
----------------------------
904,114 659,591
Net (decrease) increase (1,044,038) 1,664,782
DEDUCTIONS
Benefits paid directly to participants 476,051 530,122
Administrative expenses 7,981 96,384
----------------------------
Total deductions 484,032 626,506
Net (decrease) increase in net assets
available for benefits (1,528,070) 1,038,276
Net assets available for benefits:
Beginning of year 7,441,908 6,403,632
----------------------------
End of year $ 5,913,838 $ 7,441,908
============================
See accompanying notes.
3
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements
1. DESCRIPTION OF THE PLAN
The following description of the Penwest Pharmaceuticals Co. (the "Company" or
the "Employer") Savings Plan (the "Plan") provides only general information.
Participants should refer to the Summary Plan Description for a more complete
description of the Plan's provisions. Copies are available from the Plan's
Administrative Committee.
Effective January 1, 2002, the Plan changed its service providers from Frank
Russell Trust Company to CIGNA Retirement & Investment Services. In anticipation
of the transfer of the Plan's assets to the new service provider, all equity
investments of the Plan, except for the Penwest Pharmaceuticals Co. common stock
were liquidated as of December 31, 2001. Therefore, at December 31, 2001, Plan
investments consisted of Penwest Pharmaceuticals Co. common stock, short term
investments and participant loans. The open trade receivables of $2,245,205 at
December 31, 2001, presented in the Statements of Net Assets Available for
Benefits, represents the proceeds from the liquidated investments which did not
settle until January 2002.
GENERAL
The Plan is a defined contribution plan covering all U.S. employees of the
Company, including part-time employees. An employee is eligible to participate
in the Plan after attaining age 18 and completing three months of service, as
defined in the Plan. The Plan is subject to the provisions of the Employee
Retirement Income Security Act of 1974 ("ERISA"), as amended.
CONTRIBUTIONS
Participants may contribute from 1% up to 12% of pre-tax compensation as defined
in the Plan agreement. The Company may make quarterly employer matching
contributions as defined in the Plan agreement, in an amount equal to a
percentage of each participant's pre-tax contributions to the Plan up to 6% of
earnings. Additional amounts may be contributed at the discretion of the
Company's Board of Directors to be allocated to the accounts of the participants
who are employed on the last day of the Plan Year.
PARTICIPANT ACCOUNTS
Individual accounts are maintained for all Plan participants. These accounts
reflect participants' contributions and related Company matching and
discretionary contributions, if any, to the Plan and allocations of earnings or
losses on the Plan's investments. Allocations are based on participant account
balances. As of the end of each Plan year, forfeitures of nonvested amounts are
first used to restore any forfeitures for returning employees who previously
worked for the Company within a five year period, and any remaining amounts are
used to reduce subsequent employer contributions.
4
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
VESTING
Participants are immediately vested in their contributions, as well as any
earnings thereon. Vesting in the Employer contribution portion of their
accounts, as well as any earnings thereon is based on years of credited service
and vest in accordance with the following schedule:
CREDITED SERVICE % VESTED
- ------------------ --------
Less than one year 0%
One year 25%
Two years 50%
Three years 75%
Four years or more 100%
In the event of disability, attainment of age 65, or death of a participant, the
related Employer contributions and earnings thereon become fully vested.
INVESTMENT OPTIONS
All of the Plan's investment programs are fully participant directed. Upon
enrollment in the Plan, a participant may direct Employer and participant
contributions among any of the Plan's current investment options. The Penford
Corporation stock fund included account balances transferred from the Penford
Plan in connection with the Company's former parent, Penford Corporation's
distribution to its shareholders of all of the shares of the Company's common
stock effective September 1, 1998. The Plan did not permit additional
investments to be made by participants into the Penford Corporation stock fund.
In November 2001, in anticipation of the change of the Plan's service providers
(see Note 1), the Plan's Administrative Committee made the decision to liquidate
the Penford Corporation stock fund. All remaining shares of Penford Corporation
common stock held by the Plan were sold in December 2001.
PAYMENT OF BENEFITS
Upon termination, permanent disability, or death, 100% of the value of the
participant's vested account may be paid to the participant or the participant's
beneficiary in a lump sum payment.
PARTICIPANT LOANS
Participants may, in the event of financial hardship as defined in the Plan,
borrow from their fund accounts a minimum of $1,000 up to a maximum of $50,000
or 50% of their vested account balance, whichever is less. Loans bear interest
at a rate determined by the Plan's Administrative Committee.
5
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
PARTICIPANT LOANS (CONTINUED)
Interest rates on outstanding loans as of December 31, 2002 and 2001 range from
5.0% to 9.5%. Loan terms generally range from 1 to 5 years but may be increased
if the loan is used for the purchase of a primary residence. The loans are
secured by the balance in the participant's account.
EXPENSES
In 2001, prior to the change in service provider (Note 1), the Plan paid
investment management, transaction-related and recordkeeping expenses, and the
Company paid all other expenses of the Plan. Effective January 1, 2002, the
investment management expenses are charged to the Plan's underlying investment
funds and the Plan paid transaction and account-based expenses. The Company paid
all other expenses of the Plan, including administration, recordkeeping and
trust service charges.
PLAN TERMINATION
Although the Company has not expressed any intent to do so, it has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of Plan termination,
participants will become 100% vested in their accounts.
2. SUMMARY OF ACCOUNTING POLICIES
INVESTMENT VALUATION
The Plan's investments are stated at fair value. Mutual funds are valued at
quoted market prices which represent the net asset values of shares held by the
Plan at year-end. Penwest Pharmaceuticals Co. common stock is valued at the last
reported sales price on the last business day of the year. The participant loans
are valued at their outstanding principal balances, which approximate fair
value.
Purchases and sales of investments are recorded on the trade dates. Interest
income is recorded on the accrual basis.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
6
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
3. INVESTMENTS
Individual investments that represent 5% or more of the Plan's net assets
available for benefits are as follows:
DECEMBER 31,
2002 2001
-----------------------
Connecticut General Life Insurance Company Funds:
Guaranteed Income Fund - 61,819 shares $ 1,615,601 $ --
Alliance Balanced Shares Fund - Class A - 22,497 shares 314,674 --
Balanced/Dresdner RCM Fund - 105,019 shares 830,201 --
S&P 500(R)Index Fund - 10,425 shares 513,660 --
Penwest Pharmaceuticals Co. common stock - 196,438
and 148,249 shares, respectively 2,082,238 2,972,392
Frank Russell Trust Company Funds:
Short-Term Investment Fund - 2,082,348 shares 2,082,348
During 2002 and 2001, the Plan's investments including gains and losses on
investments bought and sold, as well as held during the year (depreciated)
appreciated in value as follows:
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001
-----------------------
Connecticut General Life Insurance Company Funds:
Core Bond Fund $ 2,714 $ --
TimesSquare High Grade Bond Fund 2,017 --
Alliance Balanced Shares Fund - Class A (48,362) --
Balanced/Dresdner RCM Fund (101,103) --
CIGNA Lifetime20 Fund (222) --
CIGNA Lifetime30 Fund (945) --
CIGNA Lifetime40 Fund (739) --
CIGNA Lifetime60 Fund (264) --
Alliance Growth & Income Fund - Class A (3,823) --
S&P 500(R)Index Fund (154,196) --
Fidelity Advisor Equity Growth Account (22,631) --
Oakmark Select Fund - Class II (8,337) --
Mid Cap Growth/Artisan Partners (6,180) --
Small Cap Value/TCW Fund (3,798) --
7
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
3. INVESTMENTS (CONTINUED)
Small Cap Growth/TimesSquare Fund (1,018) --
Lazard International Equity Account (296) --
American Century International Growth Account (4,513) --
International Growth/Putnam Fund (1,218) --
Penwest Pharmaceuticals Co. common stock (1,678,548) 1,332,466
Frank Russell Trust Company Funds:
Global Aggressive Balanced Fund -- (53,191)
Tactical Asset Allocation Fund -- (31,796)
Global Equity Fund -- (87,417)
Penford Corporation common stock -- (221,985)
-----------------------
$(2,031,462) $ 938,077
=======================
4. INCOME TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated November 27, 2001, stating that the Plan is qualified under Section 401(a)
of the Internal Revenue code (the "Code") and, therefore, the related trust is
exempt from taxation. Once qualified, the Plan is required to operate in
conformity with the Code to maintain its qualification. The plan administrator
believes the Plan is being operated in compliance with the applicable
requirements of the Code and, therefore, believes that the Plan is qualified and
the related trust is tax exempt.
5. SUBSEQUENT EVENTS
On February 27, 2003, in connection with the Company's sale of substantially all
of the assets used in its excipient business, the employees of the excipient
business were terminated from the Company's employment and were no longer active
participants, as defined in the Plan. This constituted a partial plan
termination and therefore, all such employees of the excipient business with
unvested Company match funds became immediately and fully vested on such date.
In addition, these former employees were required to, by a specified date, elect
one of several options for their existing account balances (unless their account
balance was less than $5,000, in which case a full cash distribution was paid
out). Options included a rollover distribution into an IRA or another eligible
retirement account, taking a lump sum distribution or electing to remain a
participant in the Plan in a deferred status. Through June 22, 2003,
approximately $2.0 million in such termination distributions were paid out of
the Plan.
8
Penwest Pharmaceuticals Co. Savings Plan
Schedule H, line 4(i) - Schedule of Assets (Held at End of Year)
(EIN: 91-1513032, PN: 002)
December 31, 2002
DESCRIPTION OF INVESTMENT
INCLUDING MATURITY RATE,
IDENTITY OF ISSUE, BORROWER, RATE OF INTEREST,
LESSOR, OR SIMILAR PARTY PAR OR MATURITY VALUE CURRENT VALUE
- -----------------------------------------------------------------------------------------------
* Connecticut General Life Guaranteed Income Fund - 61,819 shares
Insurance Co. $ 1,615,601
* Connecticut General Life Core Bond Fund - 5,646 shares
Insurance Co. 74,656
* Connecticut General Life TimesSquare High Grade Bond Fund 5,614
Insurance Co. shares 74,797
* Connecticut General Life Alliance Balanced Shares Fund - Class A -
Insurance Co. 22,497 shares 314,674
* Connecticut General Life Balanced/Dresdner RCM Fund - 105,019
Insurance Co. shares 830,201
* Connecticut General Life CIGNA Lifetime20 Fund - 422 shares
Insurance Co. 4,317
* Connecticut General Life CIGNA Lifetime30 Fund - 2,133 shares
Insurance Co. 22,659
* Connecticut General Life CIGNA Lifetime40 Fund - 843 shares
Insurance Co. 8,954
* Connecticut General Life CIGNA Lifetime60 Fund - 1,209 shares
Insurance Co. 14,475
* Connecticut General Life Alliance Growth & Income Fund -
Insurance Co. Class A - 10,541 shares 28,719
* Connecticut General Life S&P 500(R)Index Fund - 10,425 shares
Insurance Co. 513,660
* Connecticut General Life Fidelity Advisor Equity Growth Account -
Insurance Co. 1,654 shares 94,747
* Connecticut General Life Oakmark Select Fund - Class II - 3,538
Insurance Co. shares 83,890
* Connecticut General Life Mid Cap Growth/Artisan Partners - 2,628
Insurance Co. shares 17,710
* Connecticut General Life Small Cap Value/TCW Fund - 3,224 shares
Insurance Co. 23,647
9
DESCRIPTION OF INVESTMENT
INCLUDING MATURITY RATE,
IDENTITY OF ISSUE, BORROWER, RATE OF INTEREST,
LESSOR, OR SIMILAR PARTY PAR OR MATURITY VALUE CURRENT VALUE
- -----------------------------------------------------------------------------------------------
* Connecticut General Life Small Cap Growth/TimesSquare Fund - 822
Insurance Co. shares 10,375
* Connecticut General Life Lazard International Equity Account -
Insurance Co. 677 shares 8,768
* Connecticut General Life American Century International Growth
Insurance Co. Account - 3,439 shares 25,832
* Connecticut General Life International Growth/Putnam Fund - 1,187
Insurance Co. shares 8,352
* CIGNA Financial Services, Inc. Penwest Pharmaceuticals Co.
common stock - 196,438 shares 2,082,238
* Participant Loans Interest rates ranging from 5.0% - 9.5%;
maturity dates through 2015 55,566
-------------
$ 5,913,838
=============
*Denotes party in interest to the Plan.
The cost column is not applicable as all of the Plan's investment programs are
fully participant directed.
10
SIGNATURES
The Plan. Pursuant to the requirements of the Securities Exchange Act
of 1934, the trustees (or other persons who administer the employee benefit
plan) have duly caused this annual report to be signed on its behalf by the
undersigned hereunto duly authorized.
Penwest Pharmaceuticals Co.
Savings Plan
June 26, 2003 By: /s/ Tod R. Hamachek
---------------------------------
Tod R. Hamachek
Chairman of the Board and
Chief Executive Officer -
Penwest Pharmaceuticals Co.
Savings Plan Administrative Committee
11
EXHIBIT INDEX
EXHIBIT 23.1 ............ Consent of Ernst & Young LLP.
EXHIBIT 99.1 ............ Certification of Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
EXHIBIT 99.2 ............ Certification of Principal Financial and Accounting Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.