<PAGE> 1
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
Period from September 1, 1998 to December 31, 1998
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.
2981 ROUTE 22
PATTERSON, NEW YORK 12563-9970
<PAGE> 2
Penwest Pharmaceuticals Co.
Savings Plan
Audited Financial Statements and Supplemental Schedules
Period from September 1, 1998 (date of
inception) to December 31, 1998
INDEX
Report of Independent Auditors ............................................ 1
Audited Financial Statements
Statement of Net Assets Available for Benefits ............................ 2
Statement of Changes in Net Assets Available for Benefits ................. 3
Notes to Financial Statements ............................................. 4
Supplemental Schedules
Line 27a - Schedule of Assets Held for Investment Purposes ................ 9
Line 27d - Schedule of Reportable Transactions ............................ 10
<PAGE> 3
Report of Independent Auditors
Audit Committee
Penwest Pharmaceuticals Co. Savings Plan
We have audited the accompanying statement of net assets available for benefits
of the Penwest Pharmaceuticals Co. Savings Plan as of December 31, 1998, and the
related statement of changes in net assets available for benefits for the period
from September 1, 1998 (date of inception) to December 31, 1998. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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, 1998, and the changes in its net assets available for benefits for
the period from September 1, 1998 (date of inception) to December 31, 1998, in
conformity with generally accepted accounting principles.
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedules of assets
held for investment purposes as of December 31, 1998, and reportable
transactions for the period from September 1, 1998 (date of inception) to
December 31, 1998, are presented for purposes of additional analysis and are not
a required part of the financial statements but are 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. These
supplemental schedules are the responsibility of the Plan's management. The Fund
Information in the statement of net assets available for benefits and the
statement of changes in net assets available for benefits is presented for
purpose of additional analysis rather than to present the net assets available
for benefits and changes in net assets available for benefits of each fund. The
supplemental schedules and Fund Information have been subjected to the auditing
procedures applied in our audit of the financial statements and, in our opinion,
are fairly stated in all material respects in relation to the financial
statements taken as a whole.
/s/ Ernst & Young LLP
June 25, 1999
1
<PAGE> 4
Penwest Pharmaceuticals Co. Savings Plan
Statement of Net Assets Available for Benefits, With Fund Information
December 31, 1998
<TABLE>
<CAPTION>
FUND INFORMATION
--------------------------------------------------------------------------
TACTICAL
INCOME BALANCED ASSET DIVERSIFIED PENWEST
STABILITY GROWTH ALLOCATION EQUITY STOCK
FUND FUND FUND FUND FUND
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments, at fair value:
Mutual funds $53,209 $609,450 $264,168 $332,603
Penwest Pharmaceuticals Co. common stock $1,091,557
Penford Corporation common stock
Short-term investments 20,133
Participant loans
----------------------------------------------------------------------
Total investments 53,209 609,450 264,168 332,603 1,111,690
Receivables:
Employer's contribution 2,317 12,911 4,772 11,268 28,280
Participants' contributions 512 3,073 1,307 2,786 5,863
Accrued income 253 80
----------------------------------------------------------------------
Total receivables 3,082 15,984 6,079 14,054 34,223
----------------------------------------------------------------------
Total assets 56,291 625,434 270,247 346,657 1,145,913
----------------------------------------------------------------------
LIABILITIES
Fees payable 243 2,960 1,002 1,002 3,111
Other payables 3,116 1,307 2,789
----------------------------------------------------------------------
Net assets available for benefits $56,048 $619,358 $267,938 $342,866 $1,142,802
======================================================================
</TABLE>
<TABLE>
<CAPTION>
FUND INFORMATION
--------------------------------------------------
PENFORD
CORPORATION LOAN
STOCK FUND FUND TOTAL
--------------------------------------------------
<S> <C> <C> <C>
ASSETS
Investments, at fair value:
Mutual funds $15,003 $1,274,433
Penwest Pharmaceuticals Co. common stock 1,091,557
Penford Corporation common stock $1,550,124 1,550,124
Short-term investments 21,551 41,684
Participant loans 20,931 20,931
--------------------------------------------
Total investments 1,571,675 35,934 3,978,729
Receivables:
Employer's contribution 59,548
Participants contributions (13,541)
Accrued income 86 25 444
--------------------------------------------
Total receivables 86 (13,516) 59,992
--------------------------------------------
Total assets 1,571,761 22,418 4,038,721
LIABILITIES
Fees payable 4,000 29 12,347
Other payables 1,292 8,504
--------------------------------------------
Net assets available for benefits $1,567,761 $21,097 $4,017,870
============================================
</TABLE>
See accompanying notes.
2
<PAGE> 5
Penwest Pharmaceuticals Co. Savings Plan
Statement of Changes in Net Assets Available for Benefits,
With Fund Information
Period from September 1, 1998 (date of inception) to December 31, 1998
FUND INFORMATION
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCOME BALANCED TACTICAL ASSET DIVERSIFIED PENWEST PENFORD
STABILITY GROWTH ALLOCATION EQUITY STOCK CORPORATION
FUND FUND FUND FUND FUND STOCK FUND
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Additions to assets attributed to:
Investment income
Net appreciation (depreciation)
in fair value of investments $ 95,020 $ 44,733 $ 65,943 $(293,714) $391,875
Interest and dividends $1,004 525 4,734
Contributions:
Participants 5,728 28,025 13,035 26,549 54,870
Employer 3,216 16,519 6,151 13,951 35,093
------------------------------------------------------------------------------------
8,944 44,544 19,186 40,500 89,963
------------------------------------------------------------------------------------
Total additions 9,948 139,564 63,919 106,443 (203,226) 396,609
------------------------------------------------------------------------------------
Deductions from assets attributed to:
Benefits paid to participants 1,105 27,441 6,442 8,824 14,213 22,491
Administrative expenses 243 2,960 1,002 1,002 3,110 4,001
------------------------------------------------------------------------------------
Total deductions 1,348 30,401 7,444 9,826 17,323 26,492
------------------------------------------------------------------------------------
Net increase (decrease) prior to
transfers 8,600 109,163 56,475 96,617 (220,549) 370,117
Transfers from Penford
Corporation Savings and Stock
ownership Plan 55,034 515,166 197,067 260,592 1,210,673 1,336,538
Interfund transfers (7,586) (4,971) 14,396 (14,343) 152,678 (138,894)
====================================================================================
Net increase and assets available
for benefits at end of year $56,048 $619,358 $267,938 $342,866 $1,142,802 $1,567,761
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
FUND INFORMATION
------------------------
LOAN
FUND TOTAL
------------------------
<S> <C> <C>
Additions to assets attributed to:
Investment income
Net appreciation (depreciation)
in fair value of investments $ 303,857
Interest and dividends $ 697 6,960
Contributions:
Participants 128,207
Employer 74,930
---------------------
203,137
---------------------
Total additions 697 513,954
---------------------
Deductions from assets attributed to:
Benefits paid to participants (4,860) 75,656
Administrative expenses 29 12,347
---------------------
Total deductions (4,831) 88,003
---------------------
Net increase (decrease) prior to
transfers 5,528 425,951
Transfers from Penford
Corporation Savings and Stock
ownership Plan 16,849 3,591,919
Interfund transfers (1,280)
----------------------
Net increase and assets available
for benefits at end of year $21,097 $4,017,870
======================
</TABLE>
See accompanying notes.
3
<PAGE> 6
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 "Penwest Plan" or 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.
GENERAL
On August 31, 1998 the Company's former parent, Penford Corporation ("Penford"),
distributed to its shareholders all of the shares of the Company's common stock.
Upon the completion of this transaction, effective September 1, 1998, the
Company and Penford entered into an Employee Benefits Agreement. Among other
provisions, the agreement established a separate defined contribution plan for
employees of the Company. During the period from September 1, 1998 to December
31, 1998, the Penford Corporation Savings and Stock Ownership Plan (the "Penford
Plan") transferred approximately $3.6 million to the Frank Russell Trust
Company, the trustee, of the newly established Penwest Plan. Employees of the
Company were able to participate in the Penwest Plan to the extent they were
eligible to participate in the Penford Plan and received credit for all
eligibility, vesting, and benefit accrual service, for all service credited for
such purposes under the Penford Plan. Penford paid all costs related to the
separation of the Penford Plan and the Company paid all costs related to the
formation of the Penwest Plan.
The Plan is a defined contribution plan covering all U.S. employees of the
Company who have completed three months of service, including part-time
employees. Effective January 1, 1999, the Plan was amended to provide that an
employee is eligible to participate in the Plan after attaining age 18 and
completing three months of service, as defined. 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 of 75% of the first 6% of base
compensation that a participant contributes to the Plan. Additional amounts may
be contributed at the discretion of the Company's Board of Directors to each
participant who is employed on the last day of the Plan year.
4
<PAGE> 7
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
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
shall be used to reduce subsequent employer contributions.
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, the participant is
fully vested.
INVESTMENT OPTIONS
Upon enrollment in the Plan, a participant may direct employer and participant
contributions among any of the five current investment options. The Penford
Corporation stock fund includes account balances transferred from the Penford
Plan and is not an investment option for current or future contributions to the
Plan.
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 either a lump sum payment or in installment payments.
5
<PAGE> 8
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
1. DESCRIPTION OF THE PLAN (CONTINUED)
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. Loan transactions are
treated as transfers between the investment fund and the loan fund. Loans bear
interest at a rate determined by the Plan's Administrative Committee. Interest
rates on outstanding loans as of December 31, 1998 range from 9.5% to 9.75%.
Loan terms 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
The Plan pays record keeping and investment management expenses. The Company
pays all other expenses of the Plan.
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. SIGNIFICANT ACCOUNTING POLICIES
VALUATION OF INVESTMENTS
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. and Penford Corporation 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
balances, which approximate fair value.
Purchases and sales of investments are recorded on the trade dates. Interest
income is recorded on the accrual basis.
6
<PAGE> 9
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates that affect the
amounts reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
3. INVESTMENTS
The fair values of individual investments that represent 5% or more of the
Plan's net assets available for benefits are as follows:
<TABLE>
<CAPTION>
December 31, 1998
-----------------
<S> <C>
Frank Russell Trust Company Funds:
Balanced Growth Fund - 29,635 shares $ 609,450
Tactical Asset Allocation Fund - 9,655 shares 264,168
Diversified Equity Fund - 11,601 shares 332,603
Penwest Pharmaceuticals Co. common stock - 174,649 shares 1,091,557
Penford Corporation common stock - 96,883 shares 1,550,124
</TABLE>
7
<PAGE> 10
Penwest Pharmaceuticals Co. Savings Plan
Notes to Financial Statements (continued)
4. INCOME TAX STATUS
The Plan has not received, but intends to apply for, a determination letter from
the Internal Revenue Service stating that the Plan is qualified under Section
401(a) of the Internal Revenue Code. However, the Plan administrator and the
Plan's legal counsel believe that the Plan is qualified and therefore, the
related trust is tax exempt.
5. YEAR 2000 (UNAUDITED)
The Company has determined that it will be necessary to take certain steps in
order to ensure the Plan's information systems are prepared to handle year 2000
dates. The Company is taking a two phase approach. The first phase addresses
internal systems that must be modified or replaced to function properly. Both
internal and external resources are being utilized to replace or modify existing
software applications, as necessary, and test the software and equipment for the
year 2000 modifications. The Company anticipates substantially completing this
phase of the project by September 1999. Estimated costs associated with
modifying software and equipment are not significant and will be paid by the
Company.
For the second phase of the project, Plan management established formal
communications with its primary third party service provider to determine that
they have developed a plan to address its own year 2000 issues as it relates to
the Plan's operations. The Plan's primary third party service provider has
indicated that all mission-critical internal systems are on track to be year
2000 ready by June 30, 1999. The Company does not presently believe that the
year 2000 issue will pose significant operational problems. However, if
modification of data processing systems of either the Plan, the Company, or its
service providers are not completed timely, the year 2000 problem could have a
material impact on the operations of the Plan.
Plan management has not yet developed a contingency plan for dealing with
operational problems and costs that would be reasonably likely to result from
failure by the Company or certain third party service providers to achieve year
2000 compliance on a timely basis. The Company currently plans to complete its
analysis of the problems and costs associated with the failure to achieve Year
2000 compliance and to establish a contingency plan in the event of such failure
by August 1999.
The Plan's primary third party service provider has indicated that contingency
plans for mission critical processes have been or are being developed and that
testing of the plans will occur through September 1999.
8
<PAGE> 11
Penwest Pharmaceuticals Co. Savings Plan
Line 27a - Schedule of Assets Held for Investment Purposes
(EIN: 91-1513032, PN: 001)
December 31, 1998
<TABLE>
<CAPTION>
DESCRIPTION OF INVESTMENT
INCLUDING MATURITY RATE,
IDENTITY OF ISSUE, BORROWER, RATE OF INTEREST, CURRENT
LESSOR, OR SIMILAR PARTY PAR OR MATURITY VALUE COST VALUE
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
* Frank Russell Trust Company Income Stability Fund
53,209 shares $ 53,209 $ 53,209
Balanced Growth Fund
29,635 shares 408,739 609,450
Tactical Asset Allocation Fund
9,655 shares 182,113 264,168
Diversified Equity Fund
11,601 shares 244,116 332,603
Penwest Pharmaceuticals Co.
Stock Fund:
Penwest Pharmaceuticals Co.
common stock 174,649 shares 1,286,207 1,091,557
Short-term investments
20,133 shares 20,133 20,133
Penford Corporation Stock Fund:
Penford Corporation common
stock 96,883 shares 990,768 1,550,124
Short-term investments
21,551 shares 21,551 21,551
Loan Fund:
Short-term investments
15,003 shares 15,003 15,003
Participant loans
Interest at 9.5% - 9.75%; maturity 20,931
through 2012
-----------------------------
$3,221,839 $3,978,729
=============================
</TABLE>
*Denotes party-in-interest to the Plan.
9
<PAGE> 12
Penwest Pharmaceuticals Co. Savings Plan
Line 27d - Schedule of Reportable Transactions
(EIN: 91-1513032, PN: 001)
Period from September 1, 1998 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
CURRENT
VALUE OF
ASSET ON
PURCHASE SELLING COST OF TRANSACTION
IDENTITY OF PARTY INVOLVED DESCRIPTION OF ASSETS PRICE PRICE ASSET DATE
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Category (iii) - A series of
transactions in excess of 5%
of Plan assets
- ----------------------------
*Frank Russell Trust Company Balanced Growth Fund
6,431 shares $126,766 $87,761 $126,766
6,455 shares $126,031 126,031 126,031
Penford Corporation Stock Fund:
Penford Corporation
Common Stock
13,033 shares 193,874 135,390 193,874
12,715 shares 157,819 157,819 157,819
Short-term investments
131,965 shares 131,965 131,965 131,965
148,603 shares 148,603 148,603 148,603
</TABLE>
<TABLE>
<CAPTION>
NET GAIN
IDENTITY OF PARTY INVOLVED DESCRIPTION OF ASSETS OR (LOSS)
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Category (iii) - A series of
transactions in excess of 5%
of Plan assets
- ----------------------------
*Frank Russell Trust Company Balanced Growth Fund
6,431 shares $39,005
6,455 shares
Penford Corporation Stock Fund:
Penford Corporation
Common Stock
13,033 shares 58,484
12,715 shares
Short-term investments
131,965 shares
148,603 shares
</TABLE>
10
<PAGE> 13
Penwest Pharmaceuticals Co. Savings Plan
Line 27d - Schedule of Reportable Transactions (continued)
(EIN: 91-1513032, PN: 001)
Period from September 1, 1998 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
CURRENT
VALUE OF
ASSET ON
PURCHASE SELLING COST OF TRANSACTION NET GAIN
DENTITY OF PARTY INVOLVED DESCRIPTION OF ASSETS PRICE PRICE ASSET DATE OR (LOSS)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Category (iii) - A series of
transactions in excess of 5%
of Plan assets - Continued
- ----------------------------
*Frank Russell Trust Company Penwest Pharmaceuticals Co. Stock
Fund:
Penwest Pharmaceuticals Co.
Common Stock
3,214 shares $ 25,949 $ 23,649 $ 25,949 $ 2,300
33,525 shares $ 210,686 210,686 210,686
Short-term investments
237,381 shares 237,381 237,381 237,381
247,372 shares 247,372 247,372 247,372
</TABLE>
*Denotes party-in-interest to the Plan.
"Lease Rental" and "Expenses Incurred with Transaction" columns were not
applicable during 1998. There were no category (i), (ii) or (iv) reportable
transactions for the period from September 1, 1998 to December 31, 1998.
11
<PAGE> 14
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 28, 1999 By: /s/ Tod R. Hamachek
---------------------------------
Chairman of the Board and
Chief Executive Officer -
Penwest Pharmaceuticals Co.
Savings Plan Administrative Committee
<PAGE> 15
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement on
Form S-8 (No. 333-66739) pertaining to the Savings Plan of Penwest
Pharmaceuticals Co. of our report dated June 25, 1999, with respect to the
financial statements and schedules of Penwest Pharmaceuticals Co. Savings Plan
included in this Annual Report (Form 11-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Stamford, Connecticut
June 25, 1999
