<PAGE> 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 February 28, 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)
<TABLE>
<S> <C>
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)
</TABLE>
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
-------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of April 4, 1997.
<TABLE>
<S> <C>
Class Outstanding
----- -----------
Common stock, par value $1.00 6,883,499
</TABLE>
1
<PAGE> 2
PENWEST, LTD. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
February 28, 1997 and August 31, 1996 3
Condensed Consolidated Statements of Income
Three Months Ended February 28, 1997
and February 29, 1996 4
Condensed Consolidated Statements of Income
Six Months Ended February 28, 1997 and
February 29, 1996 4
Condensed Consolidated Statements of Cash Flow
Six Months Ended February 28, 1997 and
February 29, 1996 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
SIGNATURES 10
INDEX TO EXHIBITS 11-13
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 Financial Statements
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
<TABLE>
<CAPTION>
February 28, August 31,
1997 1996
--------------- -----------
<S> <C> <C>
ASSETS
------
Current assets:
Trade accounts receivable $ 27,586 $ 26,766
Inventories:
Raw materials 5,584 6,170
Work in progress 911 685
Finished goods 12,821 13,676
-------- --------
19,316 20,531
Prepaid expenses and other 5,478 5,354
-------- --------
Total current assets 52,380 52,651
Net property, plant and equipment 129,012 121,173
Deferred income taxes 10,990 9,940
Cash value of life insurance 12,497 11,432
Other assets 7,344 7,322
-------- --------
Total assets $212,223 $202,518
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Bank overdraft, net $ 1,398 $ 847
Accounts payable 12,566 10,344
Accrued liabilities 4,623 7,943
Current portion of long-term debt 5,955 4,127
-------- --------
Total current liabilities 24,542 23,261
Long-term debt 66,056 62,636
Other postretirement benefits 10,211 10,306
Other liabilities 8,163 7,197
Deferred income taxes 22,518 20,980
Shareholders' equity:
Common stock 8,716 8,677
Additional paid-in capital 14,035 13,633
Retained earnings 90,617 88,640
Treasury stock (30,637) (30,637)
Note receivable from PENWEST Savings and
Stock Ownership Plan (1,135) (1,742)
Cumulative translation adjustment (863) (433)
-------- --------
Total shareholders' equity 80,733 78,138
-------- --------
Total liabilities and
shareholders' equity $212,223 $202,518
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended February 28/29 Ended February 28/29
-------------------- --------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Sales $48,327 $46,313 $97,637 $91,936
Cost of sales 36,083 35,184 74,538 68,640
------- ------- ------- --------
Gross margin 12,244 11,129 23,099 23,296
Operating expenses 9,170 8,558 17,807 17,125
------- ------- ------- --------
Income from operations 3,074 2,571 5,292 6,171
Other income 1,200
Interest expense, net (1,279) (1,254) (2,576) (2,307)
------- ------- ------- --------
Income before income taxes 1,795 1,317 3,916 3,864
Income taxes 539 409 1,253 1,208
------- ------- ------- --------
Net income $ 1,256 $ 908 $ 2,663 $ 2,656
======= ======= ======= =======
Weighted average common shares and
equivalents outstanding 7,013,463 7,012,949 7,003,261 6,993,377
Earnings per common share $ 0.18 $ 0.13 $ 0.38 $ 0.38
========= ======== ========= =========
Dividends declared per common share $ 0.05 $ 0.05 $ 0.10 $ 0.10
========= ======== ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
PENWEST, LTD. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in Thousands)
<TABLE>
<CAPTION>
Six Months
Ended February 28/29
--------------------
1997 1996
---- ----
<S> <C> <C>
Operating Activities:
Net income $ 2,663 $ 2,656
Adjustments to reconcile net income to net cash
from operating activities:
Depreciation and amortization 5,803 5,616
Deferred income taxes 488 598
Change in operating assets and liabilities:
Trade receivables (820) (2,961)
Inventories 1,215 (2,693)
Accounts payable and other (696) 5,349
------- --------
Net cash flow from operating activities 8,653 8,565
Investing Activities:
Additions to property, plant and equipment (13,563) (8,145)
Other 512 89
------- --------
Net cash used by investing activities (13,051) (8,056)
Financing Activities:
Proceeds from unsecured line of credit 42,655 20,282
Payments on unsecured line of credit (38,915) (20,282)
Proceeds from long-term debt 5,000 15,250
Payments on long-term debt (3,492) (16,635)
Exercise of stock options 441 842
Purchase of life insurance for officers' benefit plans (1,158) (2,501)
Payment of dividends (684) (676)
------- --------
Net cash from (used by) financing activities 3,847 (3,720)
------- --------
Net decrease in cash and cash equivalents (551) (3,211)
Cash and cash equivalents (bank overdraft) at
beginning of period ( 847) 5,334
------- --------
Cash and cash equivalents (bank overdraft) at end of period ($1,398) $ 2,123
======= ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
PENWEST, LTD. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 for
the interim periods presented have been included. Operating results
for the three and six month periods ended February 28, 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 that 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 that
is included in other income for the six months ended February 28,
1997.
3. Income Taxes
The effective tax rate for the three and six month periods ended
February 28, 1997 were 30% and 32%, respectively, compared to the
statutory rate of 34%. The effective tax rate in the similar prior
year periods was 31%. The effective rate was lower than the statutory
rate due to state tax refunds received by the Company in fiscal 1996
and 1997.
6
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
At February 28, 1997, PENWEST had working capital of $27.8 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
$9.6 million outstanding. The Company used operating cash flow and debt to
finance capital expenditures and operating activities during the first six
months of the fiscal year. Cash flow from operations for the six months ended
February 28, 1997 was $8.7 million compared to $8.6 million in the
corresponding period a year ago.
The Company paid dividends of $0.05 per share on December 6, 1996 and March 7,
1997.
Capital Resources
Additions to property, plant and equipment during the six months ended February
28, 1997 were $13.6 million. Second quarter additions of $5.1 million were
primarily for capacity expansion at Penwest Foods' facility in Richland,
Washington and ongoing improvements at Penford Products' facility in Cedar
Rapids, Iowa.
Results of Operations
Net income was $1.3 million, or $0.18 per share, for the second quarter
compared to net income of $908,000, or $0.13 per share, for the corresponding
period a year ago. Net income for the six months was $2.7 million, or $0.38
per share, which is unchanged from the comparable 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 the remaining 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 second quarter and the first six months of fiscal year
1997 to $48.3 million and $97.6 million, respectively, representing increases
of 4.3% and 6.2%, respectively, from the corresponding periods a year ago. The
increases were primarily due to higher volumes at Penford and Penwest Foods.
Sales volume increases of Penford Gums, Penford's family of hydroxyethylated
starches, were attributable to stronger demand from our paper industry
customers as well as market share improvement. Corn costs, a key component
used in pricing Penford's paper chemical products, decreased significantly in
the second quarter as compared to the same quarter a year ago, partially
offsetting the volume increases reflected in total sales. Penwest Foods' sales
increased as a result of stronger demand for its food grade potato starches.
Gross margin in the second quarter improved to 25.3% from 24.0% in the
corresponding period a year earlier primarily as a result of decreased corn
prices and improved operating effectiveness. Volume gains on Penford's starch
copolymer products, a higher gross margin product, also had a positive impact.
7
<PAGE> 8
Operating expenses in the second quarter rose $612,000, or 7.2%, as compared to
the prior year period. For the six month period ended February 26, 1997,
operating expenses increased 4.0%. The increase in operating expenses is
primarily due to increased investment at Penwest Pharmaceuticals Group.
Net interest expense for the first half of fiscal year 1997 was $2.6 million
compared to $2.3 million for the corresponding period a year ago. The increase
reflects lower investment income and higher debt levels throughout the current
year.
Recent Development
On February 19, 1997, Penwest Pharmaceuticals Group and Leiras OY, a subsidiary
of Schering AG, announced that a Product License Application (the equivalent
of a U.S. New Drug Application) had been submitted in Europe for a controlled
release tablet version of Leiras' anti- incontinence drug, Oxybutynin, marketed
as Cystrin(R). This controlled release version of Cystrin uses PPG's patented
TIMERx(R) controlled release delivery system. This submission is the first
regulatory filing for the TIMERx(R) technology.
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, and regulatory and manufacturing issues.
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
Form 10-Q for the fiscal quarter ended November 30, 1996, on file with the
Securities and Exchange Commission.
8
<PAGE> 9
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 21, 1997.
(b) The following directors were elected to serve a term of three
years: Paul E. Freiman, Paul H. Hatfield, Harry Mullikin, and N.
Stewart Rogers. The board is comprised of those elected this year
and the following directors completing their terms: Richard E.
Engebrecht, Tod R. Hamachek, Sally G. Narodick, William G.
Parzybok, Jr., and William K. Street.
(c) The following matters were voted upon at the meeting:
1. For the election of directors:
<TABLE>
<CAPTION>
For % Withheld %
--- - -------- -
<S> <C> <C> <C> <C>
Paul E. Freiman 5,808,883 99.48% 30,128 0.52%
Paul H. Hatfield 5,809,453 99.49% 29,558 0.51%
Harry Mullikin 5,766,722 98.76% 72,289 1.24%
N. Stewart Rogers 5,796,657 99.27% 42,354 0.73%
</TABLE>
2. Approval of amendments to the PENWEST, LTD. 1994 Stock Option
Plan.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C>
5,201,827 234,976 99,609 302,599
</TABLE>
3. Ratification of selection of Ernst & Young LLP as independent
auditors of the Company.
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
<S> <C> <C> <C>
5,802,842 16,443 19,726 0
</TABLE>
(d) Not applicable.
Item 6 Exhibits and Reports on Form 8-K.
(a) Exhibits:
<TABLE>
<S> <C>
11 Statement re: Computation of Earnings Per Share
27 Financial Data Schedule
</TABLE>
(b) No reports on Form 8-K were filed during the quarter for which
this report is filed.
9
<PAGE> 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)
April 10, 1997 /s/ Tod R. Hamachek
- -------------- ---------------------------------
Date Tod R. Hamachek
President and
Chief Executive Officer (Principal
Executive Officer)
April 10, 1997 /s/ Jeffrey T. Cook
- -------------- ---------------------------------
Date Jeffrey T. Cook
Vice President, Finance and Chief
Financial Officer (Principal
Financial Officer)
10
<PAGE> 11
INDEX TO EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission, are incorporated by reference.
<TABLE>
<CAPTION>
Exhibit No. Item
- ----------- ----
<S> <C>
(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 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)
</TABLE>
11
<PAGE> 12
<TABLE>
<S> <C>
(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) 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
</TABLE>
12
<PAGE> 1
Exhibit 11
PENWEST, LTD. AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
February 28/29 February 28/29
-------------- ----------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY:
- --------
Net income $1,256,000 $ 908,000 $2,663,000 $2,656,000
========== ========= ========== ==========
Weighted average number of
shares outstanding 6,883,499 6,770,927 6,867,378 6,700,196
Net effect of dilutive stock options 129,964 242,022 135,883 293,181
---------- ---------- ----------- ----------
Adjusted shares outstanding 7,013,463 7,012,949 7,003,261 6,993,377
========== ========== =========== ==========
Earnings per share $ 0.18 $ 0.13 $ 0.38 $ 0.38
========== ========== =========== ==========
FULLY DILUTED:
- --------------
Net income $1,256,000 $ 908,000 $2,663,000 $2,656,000
========== ========= ========== ==========
Weighted average number of
shares outstanding 6,883,499 6,770,927 6,867,378 6,700,196
Net effect of dilutive stock options 141,396 242,022 141,599 293,181
---------- ---------- ----------- ----------
Adjusted shares outstanding 7,024,895 7,012,949 7,008,977 6,993,377
========== ========== =========== ==========
Earnings per share $ 0.18 $ 0.13 $ 0.38 $ 0.38
========== ========== =========== ==========
</TABLE>
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AT FEBRUARY 28, 1997 (UNAUDITED), THE CONDENSED
CONSOLIDATED STATEMENTS OF INCOME AT FEBRUARY 28, 1997 (UNAUDITED), AND THE
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW AT FEBRUARY 28, 1997 (UNAUDITED),
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> FEB-28-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 27,586
<ALLOWANCES> 0
<INVENTORY> 19,316
<CURRENT-ASSETS> 52,380
<PP&E> 129,012
<DEPRECIATION> 0
<TOTAL-ASSETS> 212,223
<CURRENT-LIABILITIES> 24,542
<BONDS> 0
0
0
<COMMON> 8,716
<OTHER-SE> 72,017
<TOTAL-LIABILITY-AND-EQUITY> 212,223
<SALES> 48,327
<TOTAL-REVENUES> 48,327
<CGS> 36,083
<TOTAL-COSTS> 36,083
<OTHER-EXPENSES> 9,170
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,279
<INCOME-PRETAX> 1,795
<INCOME-TAX> 539
<INCOME-CONTINUING> 1,256
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,256
<EPS-PRIMARY> .18
<EPS-DILUTED> .18
</TABLE>
