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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1995
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 Number 0-11488
PENWEST, LTD.
(Exact name of registrant as specified in its charter)
Washington 91-1221360
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777-108th Avenue N.E., Suite 2390
Bellevue, Washington 98004-5193
(Address of principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(206) 462-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange of which registered
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.00 par value
Common Stock Purchase Rights
Indicate by 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 at least the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(continued)
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of October 24, 1995 was approximately $171 million. The number
of shares of the Registrant's Common Stock (the Registrant's only outstanding
class of stock) outstanding (net of treasury stock) as of October 24, 1995 was
6,769,896.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to the 1996 Annual Meeting
of Shareholders is incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1: BUSINESS
A) GENERAL:
PENWEST, LTD. (PENWEST) was incorporated in September 1983 and commenced
operations on March 1, 1984.
PENWEST consists of the following business units:
- Penford Products Co. (specialty carbohydrate chemicals for
papermaking) - The history of Penford Products Co. can be
traced to 1894. Penford Products Co. operates as a
wholly-owned subsidiary of PENWEST.
- Penwest Pharmaceutical Group (pharmaceutical excipients and
controlled release technology) - In March 1991, PENWEST
purchased the net assets of Edward Mendell Co., Inc. (Mendell)
which manufactures and distributes pharmaceutical excipients.
Mendell was founded in 1946 and is a wholly-owned subsidiary
of PENWEST. The Company established TIMERx Technologies to
focus on the development of controlled release technology.
TIMERx Technologies is a division of PENWEST.
- Penwest Foods Co. (specialty food ingredient products) - In
September 1991, Penwest Foods Co. was organized to manufacture
and market specialty carbohydrate-based food ingredients and
agricultural nutrients formerly sold by Penford Products Co.
Penwest Foods Co. is a division of PENWEST.
- Pacific Cogeneration, Inc. - This entity was incorporated in
1981 and was a wholly-owned subsidiary of PENWEST. The Company
sold the assets of Pacific Cogeneration to third parties
during the second quarter of fiscal 1995.
B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
PENWEST's single business segment is developing, manufacturing and marketing
carbohydrate-based specialty chemicals. The Company operates in three market
lines: carbohydrate-based specialty chemicals used in paper manufacturing,
pharmaceutical excipients and controlled release technology, and food ingredient
products. The Company's cogeneration business was not of sufficient size to
constitute a separate reportable industry segment.
C) DESCRIPTION OF BUSINESS:
BUSINESS UNITS:
1. SPECIALTY CHEMICALS: PENFORD PRODUCTS CO. (PENFORD), the core business of
PENWEST, develops, manufactures and markets carbohydrate-based specialty
chemical starches for papermaking. These starches are principally ethylated
(chemically modified with ethylene oxide) and cationic (carrying a positive
electrical charge) starches. Ethylated starches are used in coatings and as
binders, providing strength and printability to fine white, magazine and catalog
paper. Cationic starches are used at the "wet-end" of the paper machine,
providing strong internal bonding of paper fibers. In addition, starch
copolymers, a patented combination of synthetic and natural carbohydrate
chemistry, are used in coating and binder applications in various segments of
the paper industry. Penford's products, in general, are designed to improve
strength, quality and runnability of coated and uncoated paper.
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Specialty chemicals, principally corn-based ethylated and cationic starches and
starch copolymers, are produced at the Company's Cedar Rapids, Iowa facility.
Potato-based cationic starches are produced at the Company's Idaho Falls, Idaho
facility.
Penford also sells specialty starch products to the domestic textile industry
for warp sizing, which is a fiber bonding process for yarn and finished fabric,
and for fabric sizing, which provides body and stiffness to textiles.
Specialty chemical brand names of Penford for the paper industry include, among
others, Penford(R) Gums, PENSIZE and the Apollo(R) series.
Penford's specialty chemicals for the paper industry are manufactured by a
process known as corn wet milling, which is the process by which the various
parts of corn are separated, refined and modified.
The corn, after it is removed from the cob and cleaned, is placed in warm
steepwater treated with sulfur dioxide, which causes the corn to swell and
soften. The softened kernels pass through a mill which separates the corn's germ
from its endosperm. Water is added, producing a thick slurry.
The germ is then separated from the slurry. After the germ has been washed and
dried, the crude corn oil contained in the germ is removed and refined, yielding
a fine quality salad and cooking oil, or a raw material for corn oil margarines.
Germ meal is used in animal feed. The remaining mixture of hull and endosperm is
then processed. Hull particles are screened out for animal feed, while the finer
particles of gluten and starch pass through. The corn oil, germ meal and hull
particles are all sold as by-products.
The water slurry of starch and gluten is separated. The starch, which is more
than 99 percent pure, is washed a third time to remove small quantities of
solubles. Modified starches are created by adding chemical reagents and
catalysts to the pure starch slurry. The modified starch is then filtered and
dried and is ready for shipping.
2. PHARMACEUTICALS GROUP: MENDELL manufactures and supplies pharmaceutical
excipients. Pharmaceutical excipients are the non-active ingredients in tablet
and capsule prescription pharmaceuticals, over-the-counter drugs and vitamins.
The products include binders, lubricants, fillers and disintegrants. The
products provide bulk for concentrated medicines, ease of manufacture, product
integrity and disintegration which aids release of the active drug in the body.
Mendell's primary product, Emcocel(R), is made from wood pulp, a cellulosic
carbohydrate.
Mendell operates facilities at Patterson, New York, Nastola, Finland, and Cedar
Rapids, Iowa.
Pharmaceutical excipients' brand names include, among others, EMCOCEL(R),
EXPLOTAB(R), EMCOMPRESS(R) and EMDEX(R).
TIMERx TECHNOLOGIES is engaged in the development of controlled release
technology for pharmaceuticals. Its principal product is currently included in
several drug formulation development projects with licensees. These projects are
in different phases of development. All development work is subject to FDA
approval. There is no assurance that such trials will be successful or that such
approval, if and when applied for, will be obtained. TIMERx Technologies
operates at facilities in Patterson, New York.
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3. SPECIALTY FOOD INGREDIENT PRODUCTS: PENWEST FOODS CO. develops, manufactures
and markets specialty food ingredients to the food and confectionery industries.
These ingredients include food grade potato starch products as well as dextrose
based products such as specialty maltodextrins and specialty dried corn syrup
solids.
Penwest Foods Co., headquartered in Englewood, Colorado, maintains manufacturing
facilities at Cedar Rapids, Iowa for the dextrose and agricultural nutrient
based products and at Richland, Washington for the food grade potato starches.
Penwest Foods Co.'s product brand names include, among others, CanTab(R),
CarriDex(TM), and PenPlus. Sales were less than 10% of the Company's
consolidated total sales for the fiscal year ended August 31, 1995.
4. COGENERATION: PACIFIC COGENERATION, INC. owned and operated a cogeneration
facility adjacent to Canada Malting Co.'s malting plant at Vancouver,
Washington. This cogeneration facility consisted of a natural gas fired turbine,
an electric generator and boilers. The heat output of this cogeneration facility
was sold to the malting plant and the electrical energy was sold to a local
public utility district. The Company sold the assets of Pacific Cogeneration,
Inc. to third parties during the second quarter of fiscal 1995. The Company
recognized a pre-tax gain of $899,000 on the sale of these assets. Sales were
less than 2% of the Company's consolidated total sales for the fiscal year ended
August 31, 1995.
RAW MATERIALS
Corn: The Penford corn wet milling plant is located at Cedar Rapids, Iowa, in
the middle of the U.S. corn belt. Accordingly, the plant has truck and
rail-delivered corn available throughout the year from a large number of corn
dealers and farmers at prices related to the principal U.S. grain markets. The
cost of the corn to be purchased is generally hedged by entering into futures
contracts.
Cellulose Wood Pulp: Mendell's facilities at Nastola, Finland and Cedar Rapids,
Iowa use high-grade dissolving wood pulp (cellulose) as their primary raw
material to manufacture microcrystalline cellulose (EMCOCEL). Mendell's
suppliers of cellulose are located in North America.
Chemicals: The principal chemical used in modifying starch is ethylene oxide, a
petrochemical derivative. Ethylene oxide is a commodity chemical, subject to
price fluctuations due to market conditions.
Corn, cellulose and ethylene oxide are not generally subject to availability
constraints.
About one-half of total manufacturing costs are the costs of corn, cellulose,
and chemicals. The remaining portion consists primarily of utility and labor
costs.
PATENTS, TRADEMARKS AND TRADENAMES
PENWEST owns several patents, trademarks and tradenames, none of which is
considered material to current operations.
RESEARCH AND DEVELOPMENT
Company sponsored research and development costs of $6,773,000, $6,346,000 and
$5,662,000 in fiscal 1995, 1994 and 1993, respectively, were charged to expense
as incurred.
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ENVIRONMENTAL MATTERS
The Company has adopted a Policy on Environmental Matters and has implemented a
comprehensive corporate-wide environmental management program. The program is
managed by the Director of Environmental Health and Safety and is intended to
carry out the policy's goal of conducting the Company's business in a safe and
fiscally responsible manner that protects and preserves the health and safety of
Company employees, the communities surrounding the Company's plants and the
environment. The Company continues to monitor environmental legislation and
regulations which may affect its operations. No material capital expenditures
were incurred for environmental control in fiscal 1995, 1994 or 1993.
WORKING CAPITAL
Working capital requirements of PENWEST are financed through cash resources,
operating cash flow and an unsecured revolving line of credit of $15 million
with four participating banks. There were no borrowings outstanding under the
revolving line of credit during fiscal year 1995. The Company did have overnight
borrowings during the year under additional uncommitted lines of credit, but
there were no related outstanding balances at fiscal year end.
PRINCIPAL CUSTOMERS
PENWEST sells to approximately ninety major customers. No single customer
accounted for more than 10% of total sales.
COMPETITION
PENWEST competes with approximately eight other companies that manufacture corn
wet milling products, none of which is dominant in the ethylated starch
business. Although Penford is one of the smaller corn wet millers, it is one of
the major producers of specialty ethylated starches. Quality, service and price
are the major competitive factors for Penford.
PENWEST competes with approximately five other companies that manufacture
pharmaceutical excipients, three of whom have larger market shares. Mendell is
one of the major producers of microcrystalline cellulose. Quality, service and
price are the major competitive factors for Mendell.
PENWEST competes with approximately four other companies which manufacture
specialty food ingredients, all of whom have larger market shares. Application
expertise, quality, service, and price are the major competitive factors for
Penwest Foods Co.
PENWEST competes with numerous other companies in developing controlled release
drug delivery systems for the pharmaceutical industry, a few of whom have larger
market shares. Development expertise and proprietary technology are the major
competitive factors for TIMERx Technologies.
EMPLOYEES
At October 24, 1995, PENWEST and its subsidiaries had 514 employees. PENWEST's
specialty chemical and food ingredient operations, pharmaceuticals group and
executive office employed 400, 101 and 13 people, respectively. Approximately
40% of the employees are represented by unions. Management believes its employee
relations are good.
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METHODS OF DISTRIBUTION
Penford, Penwest Foods Co. and Mendell use a direct sales force to market their
products in North America.
Mendell uses a combination of direct sales and distributors in Europe.
Penford customers may purchase products through fixed-price contracts for
periods covering three months to one year or on a spot basis. Sales are
approximately equally divided between the two methods. Products are shipped in
either a bulk or bagged format.
D) FOREIGN OPERATIONS AND EXPORT SALES:
Mendell has a facility in Nastola, Finland. This operation is not significant to
the Company taken as a whole. Sales from this facility were less than 5% of the
Company's total sales in fiscal 1995. Export sales have accounted for less than
10% of the Company's total sales during each of the last three fiscal years.
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ITEM 2: PROPERTIES (MAJOR)
Registrant's executive offices, which are leased, are located at Suite 2390,
777-108th Avenue N.E., Bellevue, Washington 98004- 5193. Other facilities are as
follows:
Bldg. Area Land Area Owned/ Function of
(Sq. Ft.) (Acres) Leased Facility
--------- ------- ------ --------
SPECIALTY CHEMICALS AND FOOD INGREDIENTS
Cedar Rapids, Iowa 707,000 29 Owned Manufacture
of corn starch
products
Englewood, Colorado 45,000 3 Leased -- Expires Offices and
April 2000, with research
renewal option laboratories
Idaho Falls, Idaho 31,000 6 Owned Manufacture of
potato starch
products
Richland, Washington 16,000 2 Leased -- Expires Manufacture of
November 2014, potato starch
with renewal option products
The corn wet milling operation in Cedar Rapids, Iowa has operating capacity,
measured in bushels ground, of 65,000 bushels per day. The grind operates
continuously except for periodic maintenance.
PHARMACEUTICAL EXCIPIENTS
Patterson, New York 40,000 15 Owned Warehouse and
offices
Nastola, Finland 15,000 2 Leased -- Manufacture of
2 years notice pharmaceutical
required. excipients
Cedar Rapids, Iowa 35,000 1 Owned Manufacture of pharmaceutical
excipients
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All of the major properties are owned. Production facilities are well maintained
and in good condition. The capacities of the plants are suitable and generally
sufficient to meet current production requirements. PENWEST is continually
undertaking a process of expanding and improving its property, plant and
equipment.
ITEM 3: LEGAL PROCEEDINGS
There are no material legal actions pending either for or against PENWEST and
its subsidiaries.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter of
fiscal 1995.
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EXECUTIVE OFFICERS OF THE REGISTRANT (1) (2) (3) (4)
Name Age Title
---- --- -----
Tod R. Hamachek 49 President and
Chief Executive Officer
of Registrant 1985 - current
President and Chief Operating
Officer of Registrant 1983 - 1985
Franklin E. Olsen, Jr. 62 Vice President-Employee
Relations of Registrant 1984 - 1995
Jeffrey T. Cook 39 Vice President-Finance and
Chief Financial Officer of
Registrant 1991 - current
Treasurer of Registrant 1988-1991
Robert G. Widmaier, Ph.D. 47 Vice President-Technical
Director and Chief Innovation
Officer of Registrant 1990 - current
Vice President-Technical
Director of Registrant 1988 -1990
H. Thomas Reed 60 Vice President of Registrant
and President and General
Manager, Penford Products
Co., a wholly-owned
subsidiary of Registrant 1985 - current
John V. Talley, Jr. 39 Vice President of Registrant
and President and General
Manager, Edward Mendell
Co., Inc., a wholly-owned
subsidiary of Registrant 1993 - current
Vice President of Marketing,
Sanofi Winthrop Pharma-
ceuticals 1992 - 1993
Vice President - Marketing,
Hospital Products Division
Sanofi Winthrop Pharma-
ceuticals 1989 - 1992
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Gregory C. Horn 47 Vice President of Registrant
and President and General
Manager, Penwest Foods Co. 1995 - current
Vice President of Marketing,
Penford Products Co. 1993 - 1994
Vice President and General
Manager, Sarah Lee
Corporation 1992 - 1993
Vice President and General
Manager, Churchill
Industries 1990 - 1993
(1) As of October 25, 1995
(2) With the exception of Mr. Talley and Mr. Horn, all executive officers
of the Registrant have held an executive position with the Registrant,
or a subsidiary of the Registrant, for a period exceeding five years.
(3) Officers are appointed annually by the Board of Directors of the
Company to serve for a period of one year and serve at the discretion
of the Board. No arrangement or understanding exists between any
officer and any other person pursuant to which he was selected as an
officer.
(4) Mr. Olsen retired as an executive officer of the Company effective
August 31, 1995.
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
PENWEST common stock, $1.00 par value, trades on the Nasdaq Stock Market under
the symbol "PENW". On October 25, 1995, there were 1,415 stockholders of record.
The high and low closing bid prices of the Company's common shares during the
last two fiscal years are set forth below. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
reflect actual transactions.
MARKET PRICE
HIGH LOW
---- ---
1994/95
Quarter Ended November 30 $25.50 $21.00
Quarter Ended February 28 $23.00 $17.50
Quarter Ended May 31 $23.25 $20.50
Quarter Ended August 31 $26.25 $21.25
1993/94
Quarter Ended November 30 $22.50 $19.75
Quarter Ended February 28 $23.50 $19.50
Quarter Ended May 31 $23.25 $17.75
Quarter Ended August 31 $25.75 $18.25
During each quarter in fiscal years 1995 and 1994, a $0.05 per share cash
dividend was declared and paid. The Company anticipates that it will continue to
pay such quarterly dividends in the foreseeable future.
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ITEM 6: SELECTED FINANCIAL DATA
Year Ended August 31
---------------------------------------------------------------------------------------
(Thousands of dollars except per share data) 1995 1994 1993 1992(1) 1991(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Data:
Net sales $174,200 $158,787 $135,517 $125,952 $110,910
Gross margin percentage 27.5% 25.9% 26.4% 26.8% 29.0%
Income from operations 14,973 10,894 9,110 10,466 12,515
Net income 7,217 6,120 6,315 7,505 8,813
Earnings per share $1.03 $0.86 $0.88 $1.01 $1.17
Dividend declared per share $0.20 $0.20 $0.20 $0.15 --
Average shares outstanding 7,018,970 7,110,953 7,175,855 7,461,439 7,558,910
Balance Sheet Data:
Property, plant and equipment (net) 111,440 99,973 96,250 73,742 61,223
Long-term debt 58,628 42,897 46,998 30,877 31,550
Shareholders' equity 71,982 67,165 62,490 61,447 60,081
Capital expenditures 23,019 13,259 31,266 19,450 14,006
Total assets 186,760 164,357 157,966 130,641 120,488
(1) During fiscal year 1992, the Company adopted FASB Statement No. 106
"Employer's Accounting for Post-Retirement Benefits Other Than Pensions."
This change increased the annual pre-tax post-retirement benefit expense by
$800,000 and decreased equity by $5,900,000 (net of tax). Also, during
fiscal year 1992, the Company adopted FASB Statement No. 109 "Accounting
for Income Taxes." This change resulted in a reduction of deferred taxes
and an increase in equity of $1,560,000.
(2) During fiscal year 1991, the Company purchased the net assets of Edward
Mendell Co., Inc. for $8,090,000. Results of operations for six months have
been included in the consolidated financial data.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Fiscal 1995 to 1994 Results of Operations
Sales increased $15.4 million, or 9.7 percent, during fiscal 1995. The increase
reflects higher demand for hydroxyethylated (HES) corn starches from paper
industry customers as new customers converted to Penford Gums. During the year,
Penford converted the single largest customer in its history. As a result,
Penford is near production capacity. The improvement in the paper industry has
also benefited Penford.
Also contributing to the increase were higher sales of industrial potato
starches to the paper industry. The Company's Idaho Falls potato starch plant
capacity was essentially sold out by year-end. Sales of microcrystalline
cellulose (MCC) to pharmaceutical industry customers were up sharply as
PENWEST's Cedar Rapids MCC plant's gained new customers and its operating
results reached break-even. Specialty food-grade potato starches sold by Penwest
Foods Co. (PFC) gained 107 percent, reflecting new product activity and the
addition of major new customers. However, PFC was not profitable in 1995.
Gross margins were 27.5% in 1995 compared with 25.9% in 1994. Higher gross
margins reflected renegotiated sales contracts with key customers, a shift at
Penford to higher margin products, the achievement of break-even at Mendell's
Cedar Rapids MCC plant and reduced losses at Penwest Foods. Operating margins
grew from 6.9% to 8.6%, a gain of 24.6%. The 1995 margins were depressed by
power interruptions and higher corn costs at Penford Product Co.'s Cedar Rapids
plant. High heat and humidity in Iowa placed exceptional demand on the local
electrical utility, which interrupted service to some of its industrial
customers, including Penford. The plant experienced ten blackouts during the
fourth quarter. This resulted in fewer units being produced and therefore a
higher per unit cost. Since Penford does not maintain much inventory, most of
the impact was recorded during the fourth quarter.
In December 1994 the Company sold the assets of its cogeneration facility,
recording a pre-tax gain of $899,000 (8 cents per share after tax) in the second
quarter. The gain effectively offset earnings the facility would have provided
in fiscal 1995. The turbine from the facility was sold to IES Utilities, Inc.
and in the fourth quarter of fiscal 1996, the Company expects to begin receiving
a portion of its thermal needs in Cedar Rapids from that turbine under a thermal
supply agreement with IES Utilities, Inc. This agreement should generate a
savings that will approximate the earnings from the Company's cogeneration
facility prior to the sale.
Operating expenses increased $2.7 million, or 9.0%. Operating expenses in 1994
were reduced by $900,000 as the result of the curtailment of postretirement
health benefits previously accrued. Research and development expenses increased
$427,000, or 6.7%, as a result of greater development spending at Penwest
Pharmaceuticals Group. The Company expects to continue R & D investments at
approximately 3.5 to 4% of sales.
Net interest expense increased $2.0 million reflecting a greater debt level,
higher interest rates and a lower investment portfolio.
The effective tax rate was 35.0% in fiscal 1995, compared with 24.3% in the
prior year when PENWEST recorded a federal tax benefit relating to research and
development expenditures.
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Comparison of Fiscal 1994 to 1993 Results of Operations
Sales increased $23.3 million, or 17.2%, during fiscal 1994. The gain was
generated from additional volumes due to the specialty ethylated starch capacity
expansion in late fiscal 1993 at Penford's Cedar Rapids plant, as well as
greater utilization of existing oxidized starch capacity. Penford also had
increased sales of its potato starch and corn cationic products. Mendell sales
of microcrystalline cellulose (MCC) increased due to additional capacity that
was brought on line in August 1993. Sales at Penwest Foods Co. (PFC) increased
significantly during the year; however, PFC continued to record operating
losses.
Gross margins were 25.9% for fiscal 1994 compared to 26.4% for fiscal 1993. The
gross margins in fiscal 1994 were affected by a change in the volume mix with an
increase in the sales of oxidized starches, which yield lower margins. Margins
at Penford in the prior year were negatively affected by approximately $425,000
of expenses related to flooding in the Midwest. Margins at Mendell declined
during the year primarily due to increased expenses at the new MCC plant in
Cedar Rapids.
Operating expenses increased $3,537,000, or 13.3%, due to increased research and
development, an increase in operating expenses at PFC, and higher expenses
associated with a stock appreciation rights program. This increase at PFC was
due to its growth and a continued investment in its business.
Research and development expenses increased $684,000, or 12.1% in fiscal 1994
due to an increase at both Mendell and TIMERx Technologies.
Net interest expense increased $1.3 million in fiscal 1994 due to lower
capitalized interest in the current year, higher interest rates, and a lower
investment portfolio.
The effective tax rate was 24.3% in fiscal 1994 compared to 17.3% in fiscal
1993. The effective rate in 1994 is lower than the statutory rate primarily due
to a federal tax benefit recorded during the first quarter related to research
and development tax credits. The effective tax rate for 1993 was less than the
statutory rate due to certain tax refunds and credits received by the Company.
PENWEST's core business was strong in fiscal 1994. The specialty paper chemical
products continued to grow at double-digit rates. Although there was some
improvement in the Company's largest customer base, the paper industry, many of
the large paper companies were still in the early stages of recovery which made
the environment difficult to increase sales and prices. The starch copolymer
family of products continued to make progress during fiscal 1994 and operated at
break-even.
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Liquidity and Capital Resources
PENWEST has strong liquidity and capital resources. The Company had $5.3 million
in cash and cash equivalents at year-end and working capital of $29.2 million.
The Company has a $15 million revolving credit agreement. There were no
borrowings under this agreement during the fiscal year. The Company also has
several uncommitted lines with various banks that are used for overnight
borrowings. These lines were used throughout the year, however, there were no
outstanding balances at year-end.
Operating cash flow was $16.3 million, $12.2 million, and $17.8 million in
fiscal 1995, 1994, and 1993, respectively. The improvement in fiscal 1995 was
primarily due to an improvement in operating income and by changes in working
capital components.
Capital expenditures amounted to $23.0 million in fiscal 1995 compared to $13.3
million in fiscal 1994 and were $31.3 million in fiscal 1993. Expenditures have
been funded from operations, cash, a private placement of debt, and borrowings
under uncommitted lines. The significant capital expenditures during fiscal 1995
were for the completion of expansion of the Penwest Foods facility in Richland,
Washington, the completion of new laboratory facilities for Penwest
Pharmaceuticals Group, and capacity expansion at Penford Products. The remainder
of the expenditures was for various improvements to manufacturing facilities.
Capital expenditures in fiscal 1996 should be lower than fiscal 1995. The only
significant planned project is a $6 million capacity expansion project at
Penford Products. The Company expects to fund these capital expenditures from
operations and cash.
The Company commenced paying a quarterly cash dividend of $0.05 per share with
the quarter ended February 28, 1992, and has paid such dividend each quarter
thereafter. The Board of Directors reviews the dividend policy on a periodic
basis.
In April 1994, the Board of Directors authorized a stock repurchase program for
the purchase of up to 500,000 shares of the outstanding common stock of the
Company. The Company repurchased 66,000 shares of its stock during fiscal 1995
for $1,310,000.
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ITEM 8: PENWEST, LTD. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
CONSOLIDATED BALANCE SHEETS
August 31
(Thousands of dollars) 1995 1994
- -----------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,334
Trade accounts receivable 23,943 $ 20,748
Inventories 14,209 16,734
Prepaid expenses and other 5,447 4,593
--------- ---------
Total current assets 48,933 42,075
Property, plant and equipment:
Land 3,359 3,089
Plant and equipment 175,533 162,570
Construction in progress 3,371 6,611
Less accumulated depreciation (70,823) (72,297)
--------- ---------
Net property, plant and equipment 111,440 99,973
Deferred income taxes 9,927 9,545
Other assets 16,460 12,764
--------- ---------
$ 186,760 $ 164,357
========= =========
Liabilities and shareholders' equity
Current liabilities:
Bank overdraft, net $ 635
Accounts payable $ 8,749 8,131
Accrued liabilities 6,728 7,847
Current portion of long-term debt 4,270 4,100
--------- ---------
Total current liabilities 19,747 20,713
Long-term debt 58,628 42,897
Other post retirement benefits 10,155 10,102
Deferred income taxes and other 26,248 23,480
Shareholders' equity:
Common stock, par value $1.00 per share,
authorized 29,000,000 shares, issued 8,591,027
shares in 1995 and 8,577,427 in 1994, including
treasury shares 8,591 8,577
Additional paid-in capital 12,550 12,489
Retained earnings 84,949 79,128
Treasury stock, at cost, 1,832,752 shares in 1995
and 1,766,752 shares in 1994 (30,637) (29,327)
Note receivable from PENWEST Savings
and Stock Ownership Plan (2,978) (3,340)
Cumulative translation adjustment (493) (362)
--------- ---------
Total shareholders' equity 71,982 67,165
--------- ---------
$ 186,760 $ 164,357
========= =========
The accompanying notes are an integral part of these statements.
Page 17
18
CONSOLIDATED STATEMENTS OF INCOME
Year Ended August 31
(Thousands of dollars except per share data) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------
Sales $ 174,200 $ 158,787 $ 135,517
Cost of sales 126,341 117,734 99,785
----------- ----------- -----------
Gross margin 47,859 41,053 35,732
Operating expenses 32,886 30,159 26,622
----------- ----------- -----------
Income from operations 14,973 10,894 9,110
Other income 899
Investment income 418 636 1,016
Interest expense (5,183) (3,444) (2,489)
----------- ----------- -----------
Income before income taxes 11,107 8,086 7,637
Income taxes 3,890 1,966 1,322
----------- ----------- -----------
Net income $ 7,217 $ 6,120 $ 6,315
=========== =========== ===========
Weighted average common shares and
equivalents outstanding 7,018,970 7,110,953 7,175,855
=========== =========== ===========
Earnings per share $ 1.03 $ 0.86 $ 0.88
=========== =========== ===========
Dividends declared per share $ 0.20 $ 0.20 $ 0.20
=========== =========== ===========
The accompanying notes are an integral part of these statements.
Page 18
19
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31
(Thousands of dollars) 1995 1994 1993
- ----------------------------------------------------------------------------------------------
Operating activities:
Net income $ 7,217 $ 6,120 $ 6,315
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 10,375 10,343 9,414
Deferred income taxes 1,504 2,676 2,891
Gain on sale of assets (899)
Change in operating assets and liabilities
Receivables (3,195) (4,743) (2,941)
Inventories 2,525 (6,520) (367)
Accounts payable and other (1,181) 4,349 2,523
-------- -------- --------
Net cash from operating activities 16,346 12,225 17,835
Investing activities:
Additions to property, plant and equipment (23,019) (13,259) (31,266)
Proceeds from sale of assets 2,500
Other (530) 1,594 (815)
-------- -------- --------
Net cash used by investing activities (21,049) (11,665) (32,081)
Financing activities:
Proceeds from unsecured line of credit 41,305 30,605
Payments on unsecured line of credit (41,305) (30,605)
Proceeds from long-term debt 20,000 20,000
Payments on long-term debt (4,100) (3,880) (673)
Purchase of treasury stock (1,310) (1,277) (5,085)
Purchase of life insurance for officers'
benefit plans (2,501) (1,343) (1,343)
Payment of dividends (1,360) (1,371) (1,394)
Other (57) 1,199 489
-------- -------- --------
Net cash from (used by) financing
activities 10,672 (6,672) 11,994
-------- -------- --------
Net increase (decrease) in cash 5,969 (6,112) (2,252)
Cash, (bank overdrafts) and cash
equivalents at beginning of year (635) 5,477 7,729
-------- -------- --------
Cash (bank overdrafts) and cash
equivalents at end of year $ 5,334 $ (635) $ 5,477
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Interest $ 4,976 $ 3,478 $ 2,341
Income taxes $ 2,052 $ 2,909 $ 3,005
The accompanying notes are an integral part of these statements.
Page 19
20
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Note Receiv-
able from
PENWEST Total
Additional Savings & Cumulative Share-
Common Paid-In Retained Treasury Stock Own- Translation holders'
(Thousands of dollars) Stock Capital Earnings Stock ership Plan Adjustment Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, September 1, 1992 $ 8,540 $ 12,332 $ 68,994 $(22,965) $ (5,319) $ (135) $ 61,447
Net income 6,315 6,315
Exercise of stock options 23 71 94
Purchase of treasury stock (5,085) (5,085)
Savings and Stock Ownership
Plan activity 1,014 1,014
Pension plan minimum
liability 450 450
Translation loss (361) (361)
Dividends declared (1,384) (1,384)
-------- -------- -------- -------- -------- -------- --------
Balances, August 31, 1993 8,563 12,403 74,375 (28,050) (4,305) (496) 62,490
Net income 6,120 6,120
Exercise of stock options 14 86 100
Purchase of treasury stock (1,277) (1,277)
Savings and Stock Ownership
Plan activity 965 965
Translation gain 134 134
Dividends declared (1,367) (1,367)
-------- -------- -------- -------- -------- -------- --------
Balances, August 31, 1994 8,577 12,489 79,128 (29,327) (3,340) (362) 67,165
Net income 7,217 7,217
Exercise of stock options 14 61 75
Purchase of treasury stock (1,310) (1,310)
Savings and Stock Ownership
Plan activity 362 362
Translation loss (131) (131)
Dividends declared (1,396) (1,396)
-------- -------- -------- -------- -------- -------- --------
Balances, August 31, 1995 $ 8,591 $ 12,550 $ 84,949 $(30,637) $ (2,978) $ (493) $ 71,982
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
Page 20
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
PENWEST's business is developing, manufacturing and marketing chemically
modified carbohydrate-based specialty chemicals. No single customer accounts for
more than 10% of sales.
The consolidated financial statements include PENWEST and its wholly-owned
subsidiaries. Material intercompany balances and transactions have been
eliminated.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.
Cash equivalents consist of money market funds, short-term deposits, and
commercial paper. Amounts reported in the balance sheet represent cost which
approximates market value.
PENWEST's cash management system includes a cash overdraft feature for uncleared
checks in the disbursing accounts. Cash in the accompanying balance sheets
represents the net amounts available to the disbursing accounts. Uncleared
checks in excess of $1,581,000 are netted against cash at August 31, 1995.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for maintenance
and repairs are expensed as incurred. The Company uses the straight-line method
to compute depreciation assuming average useful lives of three to forty years
for financial reporting purposes. For income tax purposes, the Company generally
uses accelerated depreciation methods.
Interest is capitalized on major construction projects while in progress.
Interest of $209,000, $51,000 and $985,000 was capitalized in 1995, 1994, and
1993, respectively.
Foreign Currencies
Monetary assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at year-end exchange rates and revenue and expenses
are translated at average exchange rates. Non-monetary assets and liabilities
are converted at historical rates. In each instance, the functional currency is
the U.S. dollar. Realized gains and losses from foreign currency transactions
are reflected in the income statement.
Income Taxes
Deferred income taxes are provided on temporary differences between financial
and income tax reporting methods.
Revenue Recognition
Sales revenue is recorded upon shipment of product.
Page 21
22
Earnings Per Share
Earnings per common share were computed by dividing net income by the weighted
average number of common shares and dilutive common share equivalents
outstanding during the fiscal year. Outstanding stock options and stock
appreciation rights are considered to be common share equivalents.
Research and Development
Research and development costs of $6,773,000, $6,346,000 and $5,662,000 in 1995,
1994, and 1993, respectively, were charged to expense as incurred.
Reclassifications
Certain prior year amounts have been reclassified to conform with current year
presentation.
NOTE B
INVENTORIES
Inventories are stated at the lower of cost or market. Cost, which includes
material, labor and manufacturing overhead costs, is determined by the first-in,
first-out (FIFO) method.
The Company generally follows a policy of hedging corn purchases, related to
fixed price sales contracts and certain anticipated corn purchases to minimize
price risk due to market fluctuations and risk of crop failure. The instruments
used are principally readily marketable exchange traded futures contracts which
are designated as hedges. The changes in market value of such contracts have a
high correlation to the price changes of the hedged commodity. Also, the
underlying commodity can be delivered against such contracts. To obtain a proper
matching of revenue and expense, gains or losses arising from open and closed
hedging transactions are included in inventory as a cost of the commodities and
reflected in the income statements when the product is sold.
Components of inventory are as follows:
August 31 (Thousands of dollars) 1995 1994
- --------------------------------------------------------------------------------
Raw materials, supplies and other $ 3,828 $ 6,074
Work in progress 483 622
Finished goods 9,898 10,038
------- -------
Total inventories $14,209 $16,734
======= =======
Page 22
23
NOTE C
DEBT
August 31 (Thousands of dollars) 1995 1994
- ------------------------------------------------------------------------------------------------------------
Unsecured term agreement, quarterly principal payments,
final maturity in 2000, 6.50% interest rate at year-end $16,000 $19,000
Private placement, 7.93% interest rate, semiannual interest-only
payments with principal payments beginning in 1996, final
maturity in 2005 20,000 20,000
Private placement, 7.97% interest rate, semiannual interest-only
payments with two equal principal payments, one in 1998 and
one in 2006 20,000
Unsecured note, 9.4% interest rate, due in quarterly installments
through 2000 3,780 4,450
Note payable, 8.49% interest rate, quarterly
principal and interest payments through October 1997 3,118 3,547
------- -------
62,898 46,997
Less current portion 4,270 4,100
------- -------
Net long-term debt $58,628 $42,897
======= =======
Maturities of long-term debt for the fiscal years ending August 31, 1996 through
2000 are as follows (thousands of dollars):
1996 $4,270
1997 7,127
1998 8,955
1999 16,697
2000 6,277
The Company has an unsecured term loan agreement of $16 million with four banks
which expires on November 30, 2000. Borrowing rates available to the Company
under the term agreement are at prime rate or less depending on the selection of
borrowing options.
The Company has an unsecured revolving line of credit of $15 million with four
banks which expires on April 15, 1997. Borrowing rates available to the Company
under the revolver are at prime rate or less depending on the selection of
borrowing options. Borrowings under the revolver can be converted, at the option
of PENWEST, to term notes due on the expiration date of the revolving line of
credit. At year-end, there were no outstanding borrowings under this agreement.
The unsecured term agreement, the private placements, and the unsecured
revolving line of credit include, among other terms, various limitations on
long-term indebtedness, minimum net worth and working capital ratios, and
restrictions on PENWEST's ability to purchase or redeem its own stock.
The Company has uncommitted lines of credit aggregating $15 million, which
provide for financing at various floating rates.
Page 23
24
The Company enters into interest rate swap agreements to modify the interest
characteristics of its outstanding debt. These agreements involve the exchange
of interest payment streams without an exchange of the underlying principal
amount. Net amounts paid or received are reflected as adjustments to interest
expense. The fair values of the swap agreements are not recognized in the
financial statements. In the event of default by a counterparty, the risk in
these transactions is the cost of replacing the interest rate contract at
current market rates. The Company continually monitors the credit ratings of its
counterparties. Management believes the risk of incurring losses is remote, and
that if incurred, such losses would be immaterial. At August 31, 1995,
approximately $25 million of the Company's outstanding debt was subject to
interest rate swap agreements. Of this amount, $15 million involves floating
rate to fixed rate swaps which effectively fix rates at approximately 9% and $10
million involves fixed rate to floating rate swaps, with the floating rate
approximating 6% at August 31, 1995.
The Company has hedged the interest rate risk on $8.9 million of its long-term
debt using Treasury note futures. The cost of the hedge has been deferred and
will be recognized as a component of interest expense over the life of the debt.
The hedge will result in an effective interest rate on the hedged portion of
long-term debt of approximately 9.5%.
NOTE D
LEASES
Certain of the Company's property, plant, and equipment is leased under
operating leases ranging from one to fifteen years with renewal options.
Rental expense under operating leases was $3,202,000, $2,787,000 and $2,066,000
for fiscal years ended August 31, 1995, 1994, and 1993, respectively.
Future lease payments as of August 31, 1995 for noncancellable operating leases
having initial lease terms of more than one year are as follows (thousands of
dollars):
Years ending August 31 Operating Leases
- ---------------------- ----------------
1996 $4,098
1997 2,814
1998 2,312
1999 1,951
2000 608
Thereafter 1,898
-------
Total minimum lease payments $13,681
=======
Page 24
25
NOTE E
STOCK OPTIONS
Under stock option plans, options have been granted to certain officers and key
employees to purchase PENWEST common stock. Changes in stock options for the
three years ended August 31 are as follows:
1995 Option
1995 1994 1993 Price Range
- ----------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 615,859 590,809 596,762 $ 3.313 - $27.50
Granted 271,000 59,000 27,000 20.750 - 22.75
Exercised (13,600) (13,950) (23,003) 3.313 - 22.6
Cancelled (25,800) (20,000) (9,950) 19.13
------- ------- ------
Outstanding at end of year 847,459 615,859 590,809 3.313 - 27.50
======= ======= ======= ===== =====
Exercisable at end of year 401,159 299,109 184,259 3.313 - 27.50
======= ======= ======= ===== =====
At August 31, 1995, 62,232 stock appreciation rights (SARs) were outstanding to
certain officers. The SARs were granted in December 1986 at the market price of
PENWEST stock and are fully vested as of August 31, 1995. As a result of
appreciation (depreciation) of PENWEST stock and vesting of the SARs,
compensation expense was charged (credited) for $78,000, $342,000 and ($303,000)
in 1995, 1994, and 1993 respectively.
Page 25
26
NOTE F
INCOME TAXES
Income tax expense consists of the following:
Year Ended August 31
(Thousands of dollars) 1995 1994 1993
- --------------------------------------------------------------------------------
Current
Federal $ 2,102 $ (904) $(1,731)
Foreign 4 138 213
State 232 56 (51)
------- ------- -------
2,338 (710) (1,569)
Deferred
Federal 1,459 2,253 2,808
State 93 423 83
------- ------- -------
1,552 2,676 2,891
------- ------- -------
Total provision $ 3,890 $ 1,966 $ 1,322
======= ======= =======
A reconciliation of the statutory federal tax to the actual provision is as
follows:
Year Ended August 31
(Thousands of dollars) 1995 1994 1993
- --------------------------------------------------------------------------------
Statutory tax rate 34% 34% 34%
Statutory tax $ 3,776 $ 2,749 $ 2,597
State taxes, net of federal benefit 215 164 77
Tax credits, including research and
development credits (313) (1,095) (1,503)
Tax advantaged investment income (47)
Other 259 148 151
------- ------- -------
Total provision $ 3,890 $ 1,966 $ 1,322
======= ======= =======
The significant components of deferred tax assets and liabilities are as
follows:
August 31
(Thousands of dollars) 1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit $ 2,725 $ 3,269
Research and development credit 622 300
Postretirement benefits 3,691 3,671
Provisions for accrued expenses 2,366 1,963
Other 523 342
------------------------
Total deferred tax assets 9,927 9,545
Deferred tax liabilities:
Depreciation 17,650 16,826
Other 2,143 926
------------------------
Total deferred tax liabilities 19,793 17,752
------------------------
Net deferred tax liabilities $ 9,866 $ 8,207
========================
Page 26
27
NOTE G
PENSION AND OTHER EMPLOYEE BENEFITS
PENWEST maintains two noncontributory defined benefit pension plans that cover
substantially all employees.
Benefits under the plan for hourly employees are primarily related to years of
service. Benefits for salaried employees are primarily related to years of
credited service and final average five-year earnings. Employees generally
become eligible to participate in the plans after attaining age 21 and benefits
normally become vested after five years of credited service.
The Company's funding policy is to contribute amounts to the plans sufficient to
meet or exceed the minimum requirements of the Employee Retirement Income
Security Act of 1974.
Assumptions used in the measurement of the projected benefit obligation in 1995
and 1994 included a discount rate of 7.5% and 8.0%, respectively, and a rate of
increase in compensation levels of 6.0% for the salaried employees. The change
in the discount rate had the impact of increasing the projected benefit
obligation by approximately $1.4 million. The expected long-term rate of return
on plan assets is assumed to be 8.0%.
Net periodic pension expense consisted of the following (in thousands):
Year Ended August 31
1995 1994 1993
- ---------------------------------------------------------------------------------------------
Service cost of benefits earned during the year $ 603 $ 591 $ 545
Interest cost on projected benefit obligation 1,363 1,256 1,245
Actual return on plan assets (2,599) (842) (2,449)
Net amortization and deferral 1,480 (253) 1,676
------- ------- -------
Net pension expense $ 847 $ 752 $ 1,017
======= ======= =======
The following table sets forth the funded status of both pension plans as of
August 31, 1995 and 1994 (in thousands):
August 31
1995 1994
- ------------------------------------------------------------------------------------
Actuarial present value of projected obligation,
based on service to date and current salary levels:
Vested $ 17,081 $ 15,521
Nonvested 430 387
-------- --------
Accumulated benefit obligation 17,511 15,908
Effect of projected salary increases 2,052 1,663
-------- --------
Projected benefit obligation 19,563 17,571
Plan assets at fair market value 18,910 15,977
-------- --------
Projected benefit obligation greater than plan assets (653) (1,594)
Unrecognized actuarial net loss 254 1,264
Balance of unrecognized net obligation at
transition being amortized over 15 years 1,137 577
Unrecognized prior service cost 534 472
Adjustment to record minimum liability (1,987)
-------- --------
Net pension asset (liability) $ 1,272 $ (1,268)
======== ========
Page 27
28
Assets of the pension plans are invested in units of common trust funds managed
by Frank Russell Trust Company. The common trust funds own stocks, bonds and
real estate.
Penwest Savings And Stock Ownership Plan
The Company has a savings investment plan. The savings component, available to
all employees, matches 75% of the employee's contribution up to 6% of the
employee's pay, in the form of PENWEST common stock. The plan held 113,271
unallocated shares of PENWEST common stock as of August 31, 1995, including
shares earned but not yet allocated. During 1995, approximately 52,630 shares of
stock were earned by plan participants. The savings component expense of the
plan was $520,000, $599,900 and $519,000 for fiscal years 1995, 1994, and 1993,
respectively. Compensation expense is recorded by the Company as the market
value of shares released.
The plan also includes an annual profit-sharing component that is awarded by the
Board of Directors based on achievement of predetermined corporate goals. This
feature of the plan is available to all employees who meet the eligibility
requirements of the plan. The profit sharing expense, which reflects the cost
basis of stock released by the plan to participants was $402,000, $285,000 and
$420,000 for the fiscal years 1995, 1994 and 1993, respectively.
The plan acquired the PENWEST common stock by issuing a note to the Company. The
note is reflected as a reduction of shareholders' equity and is amortized
ratably as stock is released to participants in the plan. The shares held by the
plan are considered outstanding for puposes of calculating earnings per share.
Supplemental Executive Retirement Plan
The Company established a Supplemental Executive Retirement Plan (SERP), a
nonqualified plan, which covers certain employees. For 1995, 1994, and 1993, the
net pension expense accrued for the SERP was $856,000, $347,000 and $283,000
respectively.
Health Care And Life Insurance Benefits
The Company offers health care and life insurance benefits to most active
employees. Costs incurred to provide these benefits are charged to expense when
paid. Health care and life insurance expense was $2,501,000, $2,649,000 and
$2,297,000 in 1995, 1994, and 1993, respectively.
NOTE H
OTHER POSTRETIREMENT BENEFITS
PENWEST maintains two postretirement benefit plans that cover substantially all
salaried and hourly retirees.
Benefits under the plan for hourly employees include medical coverage,
prescription drug coverage, and, to a certain grandfathered group, life
insurance. Hourly participants contribute to the cost of the benefits based on a
pension credit formula.
Benefits under the plan for salaried employees includes medical coverage and
vision coverage. Salaried participants contribute, for the most part, 100% of
the premiums.
Page 28
29
Postretirement benefit expense was $359,000, $834,000 and $1,088,000 for the
years ended August 31, 1995, 1994, and 1993, respectively. Presently the Company
funds the current benefits on a cash basis and therefore there are no plan
assets.
The following table sets forth the plan's funded status (in thousands of
dollars):
Accumulated postretirement benefit obligation:
Year Ended
August 31, 1995 August 31, 1994
--------------- ---------------
Retirees $ 4,119 $ 5,020
Fully eligible active plan participants 311 297
Other active plan participants 2,190 2,365
------- -------
Accumulated post-retirement benefit obligation 6,620 7,682
Unrecognized actuarial net gain 3,535 2,420
------- -------
Accrued postretirement benefit obligation $10,155 $10,102
======= =======
Net periodic postretirement benefit costs include the following components:
Year Ended August 31
1995 1994 1993
------- ------- -------
Service cost -- benefits earned during the period $ 186 $ 295 $ 288
Interest cost on accumulated postretirement benefit
obligations 402 604 800
Net amortization and deferral (229) (65)
------- ------- -------
$ 359 $ 834 $ 1,088
======= ======= =======
Future benefit costs were estimated assuming medical costs would increase at a
10% annual rate for fiscal 1996, then beginning in fiscal 1997, decreasing by
one half of a percent ratably over the next nine years to a rate of 5.5%. A 1%
increase in this annual trend rate would have increased the accumulated
postretirement benefit obligation at August 31, 1995 by $954,000, with an
increase of $105,000 in the annual 1995 postretirement benefit expense. The
weighted average discount rate used to estimate the accumulated postretirement
obligation was 7.5% in 1995 and 8.0% in 1994. The change in discount rate had
the impact of increasing the accumulated post-retirement benefit obligation by
$1.1 million.
During the second quarter of fiscal 1994, the Company curtailed postretirement
health benefits for salaried employees that had been previously accrued. The
Company formerly paid a portion of the health insurance premiums for salaried
retirees but no longer does so for eligible salaried employees retiring after
May 15, 1994. As a result, in the second quarter of 1994, there was a $900,000
reduction of operating expenses recorded.
Page 29
30
NOTE I
SHAREHOLDERS' EQUITY
UNISSUED PREFERRED STOCK
There are 1,000,000 shares of $1.00 par value preferred stock authorized for
issue; however, none are outstanding.
Common Stock Purchase Rights
On June 16, 1988, PENWEST distributed a dividend of one right (Right) for each
outstanding share of PENWEST common stock. In addition, previously outstanding
Rights were redeemed for $0.025 each. When exercisable, each Right will entitle
its holder to buy one share of PENWEST's common stock at $44.00 per share. The
Rights will become exercisable if a purchaser acquires 20% of PENWEST's common
stock or makes an offer to acquire common stock. In the event that a purchaser
acquires 20% of the common stock of PENWEST, each Right shall entitle the
holder, other than the acquirer, to purchase one share of common stock of
PENWEST for one half of the market price of the common stock. In the event that
PENWEST is acquired in a merger or transfers 50% or more of its assets or
earnings to any one entity, each Right entitles the holder to purchase common
stock of the surviving or purchasing company having a market value of twice the
exercise price of the Right. The Rights may be redeemed by PENWEST at a price of
$.01 per Right, and they expire in June 1998.
NOTE J
PACIFIC COGENERATION, INC.
In December of 1994 the Company sold the assets of its subsidiary Pacific
Cogeneration, Inc. to third parties. The Company recognized a gain on the sale
of $899,000 which is reflected as other income in 1995.
NOTE K
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1995 First Second Third Fourth
(Thousands of dollars except earnings per share data) Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ 42,771 $ 42,429 $ 43,618 $ 45,382 $174,200
Gross margin 11,244 11,912 12,465 12,238 47,859
Income from operations 3,716 3,504 4,225 3,528 14,973
Net income 1,757 2,153 2,000 1,307 7,217
Earnings per common share $ 0.25 $ 0.31 $ 0.29 $ 0.19 $ 1.03
Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20
Fiscal 1994 First Second Third Fourth
(Thousands of dollars except earnings per share data) Quarter Quarter Quarter Quarter Total
- -----------------------------------------------------------------------------------------------------------------------------
Sales $ 37,817 $ 35,837 $ 41,347 $ 43,786 $158,787
Gross margin 9,987 8,724 11,050 11,292 41,053
Income from operations 2,599 1,678 3,267 3,350 10,894
Net income 1,761 863 1,774 1,722 6,120
Earnings per common share $ 0.25 $ 0.12 $ 0.25 $ 0.24 $ 0.86
Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20
Page 30
31
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors and Shareholders
PENWEST, LTD.
We have audited the accompanying consolidated balance sheets of PENWEST, LTD.
as of August 31, 1995 and 1994, and the related consolidated statements of
income, shareholders' equity, and cash flows for each of the three years in the
period ended August 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
PENWEST, LTD. at August 31, 1995 and 1994, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1995, in conformity with generally accepted accounting principles.
Seattle, Washington
October 12, 1995
Page 31
32
REPORT OF MANAGEMENT
The management of PENWEST, LTD. has prepared and is responsible for the
integrity and fairness of the financial statements and other financial
information presented in this annual report. The statements have been prepared
in accordance with generally accepted accounting principles and, to the extent
appropriate, include amounts based on management's judgment and/or estimates. In
order to fulfill its responsibilities for these financial statements and
information, management maintains accounting systems and related internal
controls. These controls are designed to provide reasonable assurance that
transactions are properly authorized and recorded, that assets are safeguarded,
and that financial records are reliably maintained.
Ernst & Young LLP, independent auditors, is retained to audit the Company's
consolidated financial statements. Their accompanying report is based on an
audit conducted in accordance with generally accepted auditing standards,
including a review of internal accounting controls and tests of accounting
procedures and records to the extent necessary to support their audit.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets periodically with management and with the independent
auditors to review the quality of financial reporting, the operation and
development of the internal control systems, and the results of independent
audits.
The independent auditors regularly meet with the Audit Committee without the
presence of any other parties.
Tod R. Hamachek
President and
Chief Executive Officer
Jeffrey T. Cook
Vice President, Finance and
Chief Financial Officer
Jennifer L. Good
Corporate Controller and
Corporate Secretary
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ITEM 9: CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information set forth under "Election of Directors" in the Company's
definitive Proxy Statement for the 1996 Annual Meeting of Shareholders is
incorporated herein by reference.
Information regarding executive officers of the Company is set forth in Part I
above and incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under "Executive Compensation" in the Company's
definitive Proxy Statement for the 1996 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive Proxy Statement for the 1996 Annual
Meeting of Shareholders is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions
of the Company set forth under "Change-in-Control Arrangements" in the
Company's definitive Proxy Statement for the 1996 Annual Meeting of
Shareholders is incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated balance sheets as of August 31, 1995 and 1994
and the related statements of income, cash flows and
shareholders' equity for each of the three years in the period
ended August 31, 1995 and the report of independent auditors
are included in Part II, Item 8.
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34
(a) (2) Financial Statement Schedules
(a) Quarterly financial information is included in Part II, Item
8.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable, and therefore have been omitted.
(a) (3) Exhibits
See list of Exhibits on page 36. This list includes a subset
containing each management contract, compensatory plan, or arrangement required
to be filed as an exhibit to this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
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35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Date November 29, 1995 Tod R. Hamachek
---------------------------------------------
Tod R. Hamachek, President and
Chief Executive Officer
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date November 29, 1995 Tod R. Hamachek
---------------------------------------------
Tod R. Hamachek, President and
Chief Executive Officer (Principal Executive
Officer)
Date November 29, 1995 Jeffrey T. Cook
---------------------------------------------
Jeffrey T. Cook, Chief Financial Officer
(Principal Financial Officer)
Date November 29, 1995 Jennifer L. Good
---------------------------------------------
Jennifer L. Good, Corporate Controller
(Principal Accounting Officer)
Directors
Richard E. Engebrecht
Tod R. Hamachek By Tod R. Hamachek
Paul H. Hatfield ------------------------------------------
C. Calvert Knudsen
Harry L. Mullikin Attorney-in-Fact
Sally G. Narodick Power of Attorney Dated
William G. Parzybok, Jr. October 24, 1995
N. Stewart Rogers Date October 24, 1995
William K. Street
James H. Wiborg
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36
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
(3.2) Bylaws of Registrant as amended and restated as of
June 27, 1995
(4.1) PENWEST, LTD. Common Stock Purchase Rights, dated
June 3, 1988 (filed on Form 8-A dated June 3, 1988)
(10.1) Unsecured Term Agreement among PENWEST, LTD.
and Penford Products Co. as Borrowers, and Seattle-
First National Bank, Continental Bank N.A., U.S.
Bank of Washington, National Association, and The
Bank of Nova Scotia as Lenders, dated as of November
9, 1990 (filed as an Exhibit to Registrant's Form 10-Q
for the quarter ended February 28, 1993)
(10.2) 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)
(10.3) 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)
(10.4) 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)
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37
(10.5) 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)
(10.6) 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)
(10.7) 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)
(10.8) Change of Control Agreements with Messrs.
Hamachek, Reed, Cook, Widmaier, Schmelzer, Talley,
Horn and Rydzewski (a representative copy of these
agreements is filed herewith)
(10.9) 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)
(10.10) 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)
(10.11) PENWEST, Ltd. 1994 Stock Option Plan (filed as an
Exhibit to the Registration Statement dated April 25,
1995 on Form S-8, Commission File No. 33-58799)
11 Statement Regarding Computation of Per Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
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SUBSET OF THE INDEX TO EXHIBITS
Executive Compensation Plans and Arrangements.
This subset of the index to exhibits includes a subset containing each
management contract, compensatory plan, or arrangement required to be filed as
an exhibit to this Report.
Exhibit No. Item
- ----------- ----
(10.5) 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, Commission File No. 0-11488)
(10.6) 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, Commission File No. 0-11488)
(10.7) 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,
Commission File No. 0-11488)
(10.8) Change of Control Agreements with Messrs.
Hamachek, Reed, Cook, Widmaier, Schmelzer, Talley,
Horn and Rydzewski (a representative copy of these
agreements is filed herewith)
(10.9) 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,
Commission File Number 0-11488.)
(10.11) PENWEST, LTD. 1994 Stock Option Plan (filed as an
Exhibit to the Registration Statement dated April 25,
1995 on Form S-8, Commission File No. 33-58799)
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