Back to GetFilings.com
1
UNITED STATES
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, 1996
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]
Page 1
2
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 16, 1996 was approximately $125 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 16, 1996 was
6,851,257.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to the 1997 Annual Meeting
of Shareholders is incorporated by reference into Part III of this Form 10-K.
Page 2
3
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 Pharmaceuticals 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. In 1991, 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 established to manufacture and market
specialty carbohydrate-based food ingredients. Penwest Foods Co. is a
division of PENWEST.
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.
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, Penford's 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.
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(R) and the Apollo(R) series.
Page 3
4
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: 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 disintegrates. 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 develops 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 regulatory approval. TIMERx
Technologies operates at its facility in Patterson, New York.
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 dried corn syrup solids.
Penwest Foods Co., headquartered in Englewood, Colorado, maintains manufacturing
facilities at Richland, Washington for the food grade potato starches, and at
Cedar Rapids, Iowa for the dextrose. Penwest Foods Co.'s product brand names
include, among others, CanTab(R), CarriDex(TM), and PenPlus(R).
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 for fixed price business 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(R)). 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.
Page 4
5
Corn, cellulose and ethylene oxide are not generally subject to availability
constraints.
Approximately 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 $7,297,000, $6,773,000 and
$6,346,000 in fiscal 1996, 1995 and 1994, respectively, were charged to expense
as incurred.
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 Corporate Director of Environmental, Health and Safety and is
intended to ensure the Company's business is conducted 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.
WORKING CAPITAL
Working capital requirements of PENWEST are financed through operating cash
flow, unsecured lines of credit, and an unsecured $35 million credit agreement.
There was $15.3 million outstanding under the credit agreement at August 31,
1996. The Company also had additional uncommitted lines of credit totalling $10
million under which $5.9 million was outstanding at fiscal year end.
PRINCIPAL CUSTOMERS
PENWEST sells to approximately ninety major customers. One customer, Georgia
Pacific, accounted for approximately 14% of total sales in fiscal 1996. No
customers accounted for greater than 10% of total sales in prior periods.
COMPETITION
PENWEST competes with approximately five 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. Mendell has the widest breadth of products in the
industry, and has the second largest market share in sales of its primary
product, Emocel(R), or microcrystalline cellulose. Quality, service and price
are the major competitive factors for Mendell.
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.
PENWEST competes with approximately four other companies that 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.
Page 5
6
EMPLOYEES
At October 16, 1996, PENWEST and its subsidiaries had 520 employees. PENWEST's
specialty chemical and food ingredient operations, pharmaceuticals group and
executive office employed 387, 115 and 18 people, respectively. Approximately
40% of the employees are represented by unions. Management believes its employee
relations are good.
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 or
formula-priced contracts for periods covering three months to five years or on a
spot basis. Sales are approximately equally divided between fixed and formula
price business with a remaining 10% consisting of spot sales. 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 consolidated Company. Sales from this facility were less than 5% of the
Company's total sales in fiscal 1996. Export sales have accounted for less than
10% of the Company's total sales during each of the last three fiscal years.
Page 6
7
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. The Registrant's mailing
address is, P.O. Box 1688, Bellevue, Washington 98009-1688. 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
industrial potato
starch products
Richland, Washington 16,000 2 Leased -- Expires Manufacture of
November 2014, food - grade potato
with renewal option starch 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 55,000 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
All 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.
Page 7
8
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 1996.
Page 8
9
EXECUTIVE OFFICERS OF THE REGISTRANT
Name Age Title
---- --- -----
Tod R. Hamachek 50 President and
Chief Executive Officer
of Registrant 1985 - current
President and Chief Operating
Officer of Registrant 1983 - 1985
Jeffrey T. Cook 40 Vice President-Finance and
Chief Financial Officer of
Registrant 1991 - current
Treasurer of Registrant 1988 - 1991
Edmund O. Belsheim, Jr. 44 Vice President-Corporate Development
and General Counsel of Registrant 1996 - current
Member, Bogle & Gates P.L.L.C. 1986 - 1996
Robert G. Widmaier, Ph.D. 48 Vice President-Technical
Director and Chief Innovation
Officer of Registrant 1990 - current
Vice President-Technical
Director of Registrant 1988 -1990
Jennifer L. Good 31 Corporate Director of Finance and
Corporate Secretary of Registrant 1996 - current
Corporate Controller
of Registrant 1993 - 1996
Manager, Ernst and Young 1987 - 1993
Francis C. Rydzewski 46 Vice President of Registrant
and President and General
Manager, Penford Products Co.,
a wholly-owned subsidiary of
Registrant 1996 - current
Executive Vice President of
Operations, Penford Products Co.,
a wholly-owned subsidiary of
Registrant 1995 - 1996
Global Business Director,
Air Products 1972 - 1995
John V. Talley, Jr. 40 Vice President of Registrant
and President and General
Manager, Penwest Pharmaceuticals
Group, 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
Page 9
10
Gregory C. Horn 48 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
Page 10
11
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
PENWEST common stock, $1.00 par value, trades on the Nasdaq National Market
under the symbol "PENW". On October 16, 1996, there were 1,257 shareholders 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 represent actual transactions.
MARKET PRICE
HIGH LOW
------ ------
1995/1996
Quarter Ended November 30 $26.50 $24.00
Quarter Ended February 29 $25.75 $16.00
Quarter Ended May 31 $18.75 $18.00
Quarter Ended August 31 $20.00 $18.00
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
During each quarter in fiscal years 1996 and 1995, a $0.05 per share cash
dividend was declared. The Company anticipates that it will continue to pay such
quarterly dividends in the foreseeable future.
Page 11
12
ITEM 6: SELECTED FINANCIAL DATA
Year Ended August 31
------------------------------------------------------------------------
(Thousands of dollars except per share data) 1996 1995(2) 1994 1993 1992(1)
- ------------------------------------------------------------------------------------------------------------------------
Operating Data:
Sales $ 194,474 $ 174,200 $ 158,787 $ 135,517 $ 125,952
Gross margin percentage 24.1% 27.5% 25.9% 26.4% 26.8%
Income from operations $ 12,308 $ 14,973 $ 10,894 $ 9,110 $ 10,466
Net income $ 5,052 $ 7,217 $ 6,120 $ 6,315 $ 7,505
Earnings per share $ 0.72 $ 1.03 $ 0.86 $ 0.88 $ 1.01
Dividends declared per share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.15
Average shares and
equivalents outstanding 7,007,340 7,018,970 7,110,953 7,175,855 7,461,439
Balance Sheet Data:
Net property, plant and equipment $ 121,173 $ 111,440 $ 99,973 $ 96,250 $ 73,742
Long-term debt 62,636 58,628 42,897 46,998 30,877
Shareholders' equity 78,138 71,982 67,165 62,490 61,447
Capital expenditures 21,472 23,019 13,259 31,266 19,450
Total assets 202,518 186,760 164,357 157,966 130,641
(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." The cumulative effect of this change resulted in a reduction
of deferred taxes and an increase in equity of $1,560,000, or $0.15 per
share.
(2) Fiscal year 1995 results include a pretax gain of $899,000 related to the
sale of assets of Pacific Cogeneration, Inc.
Page 12
13
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Comparison of Fiscal 1996 to 1995 Results of Operations
Sales increased $20.3 million, or 11.7%, during fiscal 1996. The increase in
sales reflects higher demand for the Company's core business. The increase is
also due to unusually high corn costs, a key component used in pricing Penford's
paper chemical products. Changes in corn costs are generally passed through to
customers. During the year, Penford signed several multi-year contracts to sell
products to customers representing significant volumes. Mendell increased sales
volumes for Emcocel(R) during the year by 17%. This increase is primarily
attributable to two new large customers. Potato starch volumes at Penwest Foods
increased by 75% due to rapidly increasing demand for these starches for french
fry coatings. For fiscal 1996 Penwest Foods was near breakeven.
Gross margins were 24.1% in 1996 compared with 27.5% in 1995. The decrease in
gross margin is primarily due to the historically high price of corn which
affected margins several ways. First, certain of the Company's sales are based
on a recent average of published corn prices. Consequently, in periods of
rapidly escalating prices, the Company is not able to recover the full amount of
the increase in raw material costs under such contracts. Particularly in the
fourth quarter, the Company's margin on fixed price sales contracts was also
negatively impacted by the high price of cash corn relative to the futures
market driven by a severe supply/demand imbalance. Due to the short supply of
corn, the market cash price reflected a high premium that had to be absorbed by
the Company on its fixed price business. Lastly, lower margin dollars on higher
unit sales prices also adversely impacted the gross margin percentage. The corn
situation did improve in October as the new crop was harvested.
In addition to the impact of corn, competitive and market factors put pressure
on product pricing in the renewal of customer sales contracts making it
difficult to maintain prior years gross margin levels.
Operating expenses increased $1.6 million, or 4.8%. Research and development
(R&D) expenses increased $524,000, or 7.7%, as a result of greater development
spending at Penwest Pharmaceuticals Group. The Company expects to continue R&D
investments at approximately 3.5% to 4.0% of sales.
Net interest expense remained consistent with the prior year. The effective tax
rate was 32.5% in fiscal 1996, compared with 35.0% in the prior year. The
reduction in the tax rate reflects a reduction in state taxes and an increased
benefit from the Company's foreign sales corporation.
Page 13
14
Comparison of Fiscal 1995 to 1994 Results of Operations
Sales increased $15.4 million, or 9.7%, 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 to Penford Gums(R).
As a result, Penford was near production capacity. A temporary improvement in
the paper industry 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 gained new customers and its operating results
reached break-even. Specialty food-grade potato starches sold by Penwest Foods
Co. (PFC) increased by 107%, 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, although higher than
1994, were lower than expected as a result of 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 in the second quarter. The gain effectively
offset earnings the facility would have provided in fiscal 1995.
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.
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.
Page 14
15
Liquidity and Capital Resources
PENWEST has strong liquidity and capital resources available. The Company had
working capital of $29.4 million at August 31, 1996. The Company has an
unsecured $35 million credit agreement under which there was $15.3 million
outstanding at year end. The Company also has $10 million of uncommitted lines
with various banks that are used for overnight borrowings. These lines were used
throughout the year, and there was $5.9 million outstanding at year end.
Operating cash flow was $12.9 million, $16.3 million and $12.2 million in fiscal
1996, 1995, and 1994, respectively. The decrease in fiscal 1996 was primarily
due to lower net income and increases in receivables and inventory mostly
related to the high cost of corn.
Capital expenditures amounted to $21.5 million in fiscal 1996 compared to $23.0
million in fiscal 1995 and $13.3 million in fiscal 1994. Expenditures have been
funded from operations, cash, and borrowings under uncommitted lines.
Significant capital projects during fiscal 1996 included the completion of the
expansion of the Penwest Foods' facility in Richland, Washington and a new corn
unloading facility for Penford in Cedar Rapids, Iowa. The remainder of the
expenditures were for various improvements to manufacturing facilities.
Capital expenditures in fiscal 1997 should be comparable to expenditures in
fiscal 1996. The only significant approved project is a $6 million capacity
expansion project at Penwest Foods. The remainder is for various improvements to
manufacturing facilities. The Company expects to fund these capital expenditures
from operations, and the uncommitted lines of credit.
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 did not repurchase any of its stock during fiscal 1996.
Page 15
16
ITEM 8: PENWEST, LTD. CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
August 31
(Thousands of dollars) 1996 1995
- ----------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 5,334
Trade accounts receivable $ 26,766 23,943
Inventories 22,111 14,209
Prepaid expenses and other 3,774 5,447
--------- ---------
Total current assets 52,651 48,933
Property, plant and equipment:
Land 4,014 3,359
Plant and equipment 185,499 175,533
Construction in progress 12,791 3,371
Less accumulated depreciation (81,131) (70,823)
--------- ---------
Net property, plant and equipment 121,173 111,440
Deferred income taxes 9,940 9,927
Cash value of life insurance 11,432 8,807
Other assets 7,322 7,653
--------- ---------
$ 202,518 $ 186,760
========= =========
Liabilities and shareholders' equity
Current liabilities:
Bank overdraft, net $ 847
Accounts payable 10,344 $ 8,749
Accrued liabilities 7,943 6,728
Current portion of long-term debt 4,127 4,270
--------- ---------
Total current liabilities 23,261 19,747
Long-term debt 62,636 58,628
Other postretirement benefits 10,306 10,155
Deferred income taxes and other 28,177 26,248
Commitments and Contingencies
Shareholders' equity:
Common stock, par value $1.00 per share,
authorized 29,000,000 shares, issued 8,677,165
shares in 1996 and 8,591,027 in 1995, including
treasury shares 8,677 8,591
Additional paid-in capital 13,633 12,550
Retained earnings 88,640 84,949
Treasury stock, at cost, 1,832,752 shares in 1996
and 1995 (30,637) (30,637)
Note receivable from PENWEST Savings
and Stock Ownership Plan (1,742) (2,978)
Cumulative translation adjustment (433) (493)
--------- ---------
Total shareholders' equity 78,138 71,982
--------- ---------
$ 202,518 $ 186,760
========= =========
The accompanying notes are an integral part of these statements.
Page 16
17
CONSOLIDATED STATEMENTS OF INCOME
Year Ended August 31
(Thousands of dollars except per share data) 1996 1995 1994
- -------------------------------------------------------------------------------------------
Sales $ 194,474 $ 174,200 $ 158,787
Cost of sales 147,711 126,341 117,734
----------- ----------- -----------
Gross margin 46,763 47,859 41,053
Operating expenses 34,455 32,886 30,159
----------- ----------- -----------
Income from operations 12,308 14,973 10,894
Other income 899
Investment income 277 418 636
Interest expense (5,101) (5,183) (3,444)
----------- ----------- -----------
Income before income taxes 7,484 11,107 8,086
Income taxes 2,432 3,890 1,966
----------- ----------- -----------
Net income $ 5,052 $ 7,217 $ 6,120
=========== =========== ===========
Weighted average common shares and
equivalents outstanding 7,007,340 7,018,970 7,110,953
=========== =========== ===========
Earnings per share $ 0.72 $ 1.03 $ 0.86
=========== =========== ===========
Dividends declared per share $ 0.20 $ 0.20 $ 0.20
=========== =========== ===========
The accompanying notes are an integral part of these statements.
Page 17
18
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31
(Thousands of dollars) 1996 1995 1994
- ----------------------------------------------------------------------------------
Operating activities:
Net income $ 5,052 $ 7,217 $ 6,120
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 11,739 10,375 10,343
Deferred income taxes 1,174 1,504 2,676
Gain on sale of assets (899)
Change in operating assets and liabilities
Receivables (2,823) (3,195) (4,743)
Inventories (7,902) 2,525 (6,520)
Accounts payable and other 5,670 (1,181) 4,349
-------- -------- --------
Net cash from operating activities 12,910 16,346 12,225
Investing activities:
Additions to property, plant and equipment (21,472) (23,019) (13,259)
Proceeds from sale of assets 2,500
Other 1,158 (530) 1,594
-------- -------- --------
Net cash used by investing activities (20,314) (21,049) (11,665)
Financing activities:
Proceeds from unsecured line of credit 60,847 41,305 30,605
Payments on unsecured line of credit (54,962) (41,305) (30,605)
Proceeds from long-term debt 15,250 20,000
Payments on long-term debt (17,270) (4,100) (3,880)
Purchase of treasury stock (1,310) (1,277)
Exercise of stock options 876 75 100
Purchase of life insurance for officers'
benefit plans (2,501) (2,501) (1,343)
Payment of dividends (1,017) (1,360) (1,371)
Other (132) 1,099
-------- -------- --------
Net cash from (used by) financing
activities 1,223 10,672 (6,672)
-------- -------- --------
Net increase (decrease) in cash (6,181) 5,969 (6,112)
Cash (bank overdrafts) and cash
equivalents at beginning of year 5,334 (635) 5,477
-------- -------- --------
Cash (bank overdrafts) and cash
equivalents at end of year $ (847) $ 5,334 $ (635)
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Interest $ 5,392 $ 4,976 $ 3,478
Income taxes $ 1,317 $ 2,052 $ 2,909
The accompanying notes are an integral part of these statements.
Page 18
19
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Note Receive-
able from
PENWEST
Additional Savings & Cumulative Share-
Common Paid-In Retained Treasury Stock Translation holders'
(Thousands of dollars) Stock Capital Earnings Stock Ownership Plan Adjustment Equity
- -----------------------------------------------------------------------------------------------------------------------------------
Balances, September 1, 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
Net income 5,052 5,052
Exercise of stock options 86 790 876
Tax benefit of stock option
exercises 293 293
Savings and Stock Ownership
Plan activity 1,236 1,236
Translation gain 60 60
Dividends declared (1,361) (1,361)
-------- -------- -------- -------- -------- -------- --------
Balances, August 31, 1996 $ 8,677 $ 13,633 $ 88,640 $(30,637) $ (1,742) $ (433) $ 78,138
======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
Page 19
20
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. The Company operates in three
market lines: carbohydrate-based specialty chemicals used in paper
manufacturing, pharmaceutical and controlled release technology, and food
ingredient products. Customers are primarily manufacturers in the paper
industry, makers of prescription pharmaceuticals, over-the-counter drugs and
vitamins, and processors in the food industry. Sales of the Company's products
are generated using a combination of direct sales and distributor agreements.
One customer accounted for approximately 14% of sales in fiscal 1996. No
customers accounted for greater than 10% of total sales in prior years.
Basis of Presentation
The consolidated financial statements include PENWEST and its wholly-owned
subsidiaries. Material intercompany balances and transactions have been
eliminated. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Certain amounts in the financial statements for prior years have been
reclassified to conform with current year presentation. These reclassifications
had no effect on previously reported results of operations.
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 sheets 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 of $2,177,000 are netted against cash at August 31, 1996 and are reported
as bank overdrafts.
Concentration of Credit Risk and Financial Instruments
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains an allowance for doubtful
accounts which management believes is sufficient to cover potential credit
losses. The carrying value of financial instruments, which includes cash,
receivables, payables, and long-term debt approximates market value at August
31, 1996. One customer accounted for approximately 14% of sales in 1996.
Page 20
21
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.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed of,"
requiring impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement No. 121 also addresses accounting for long-lived
assets that are expected to be disposed. The Company adopted this Statement in
fiscal 1996 with no impact on financial position or results of operations.
Interest is capitalized on major construction projects while in progress.
Interest of $300,000, $209,000, and $51,000 was capitalized in 1996, 1995, and
1994, 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 local currency. Realized gains and losses from foreign currency transactions
are reflected in the statement of income.
Income Taxes
The provision for income taxes includes federal and state taxes currently
payable and deferred income taxes arising from temporary differences between
financial and income tax reporting methods. Deferred taxes have been recorded
using the liability method in recognition of these temporary differences.
Revenue Recognition
Sales revenue is recorded upon shipment of product.
Research and Development
Research and development costs of $7,297,000, $6,773,000 and $6,346,000 in 1996,
1995, and 1994, respectively, were charged to expense as incurred.
Earnings Per Common 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.
Page 21
22
Stock Compensation
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock Based
Compensation." The Statement is effective for fiscal years beginning after
December 15, 1995 and requires stock-based compensation expense to be measured
using either the intrinsic-value method as prescribed by Accounting Principles
Board ("APB") No. 25 or the fair-value method described in Statement No. 123.
Companies choosing the intrinsic-value method will be required to disclose the
pro-forma impact of the fair-value method on net income and earnings per share.
The Company will adopt Statement No. 123 in fiscal 1997 using the intrinsic
value method; there will be no effect of adopting the Statement on the Company's
financial position or results of operations.
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. Gains or losses
arising from open and closed hedging transactions are included in inventory as a
cost of raw materials and reflected in the income statements when the product is
sold.
Components of inventory are as follows:
August 31 (Thousands of dollars) 1996 1995
- ---------------------------------------------------------------------------
Raw materials, supplies and other $ 7,750 $ 3,828
Work in progress 685 483
Finished goods 13,676 9,898
------- -------
Total inventories $22,111 $14,209
======= =======
Page 22
23
NOTE C
DEBT
August 31 (Thousands of dollars) 1996 1995
- ----------------------------------------------------------------------------------------
Unsecured credit agreement, maturity in 1998, 6.19%
interest rate at year-end $15,250 $16,000
Private placement, 7.93% interest rate, semiannual interest-only
payments with principal payments beginning in fiscal 1997, final
maturity in 2002 20,000 20,000
Private placement, 7.59% interest rate, semiannual interest-only
payments on $10 million principal with payment in fiscal 1999,
and 8.35% interest rate, semi-annual interest-only payments on
$10 million principal with payment in fiscal 2007 20,000 20,000
Unsecured note, 9.4% interest rate, due in quarterly installments
through December 1999 2,940 3,780
Note payable, 8.49% interest rate, quarterly
principal and interest payments through October 1997 2,688 3,118
Lines of credit, average interest rate of 5.8% 5,885
------- -------
66,763 62,898
Less current portion 4,127 4,270
------- -------
Net long-term debt $62,636 $58,628
======= =======
Maturities of long-term debt for the fiscal years ending August 31, 1997 through
2001, and thereafter, are as follows (thousands of dollars):
1997 $ 4,127
1998 5,955
1999 34,832
2000 3,277
2001 2,857
Thereafter 15,715
-------
$66,763
=======
On December 22, 1995, the Company completed an unsecured $35 million credit
agreement with four banks expiring on December 30, 1998 under which there was
$15.3 million outstanding at fiscal year end. Borrowing rates available to the
Company under the agreement are based on prime rate or the interbank offered
rate depending on the selection of borrowing options. The agreement replaced an
unsecured term agreement which at December 22, 1995, had $15.3 million of
borrowings outstanding and an unsecured $15 million revolving line of credit
under which there was no outstanding borrowings at December 22, 1995.
The unsecured revolving line of credit agreement, the private placements, and
other notes 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 unsecured credit
agreement also requires the Company to maintain a minimum fixed charge coverage
ratio.
Page 23
24
The Company has uncommitted lines of credit aggregating $10 million, which
provide for financing at various floating rates of which $5.9 million was
outstanding at August 31, 1996.
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. Management continually monitors the credit ratings of its
counterparties, and believes the risk of incurring such losses is remote, and
that if incurred, such losses would be immaterial. At August 31, 1996,
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, 1996.
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 results in an effective interest rate on the related 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 $4,482,000, $3,202,000 and $2,787,000 for
fiscal years ended August 31, 1996, 1995, and 1994, respectively. Future minimum
lease payments as of August 31, 1996 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
- ---------------------- ----------------
1997 $ 3,951
1998 3,379
1999 3,016
2000 1,683
2001 800
Thereafter 6,110
-------
Total minimum lease payments $18,939
=======
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:
1996 Option
1996 1995 1994 Price Range
- -------------------------------------------------------------------------------------
Outstanding at beginning of year 847,459 615,859 590,809 $ 3.31 - $27.50
Granted 74,500 271,000 59,000 18.25 - 24.75
Exercised (77,917) (13,600) (13,950) 5.59 - 22.63
Cancelled (38,300) (25,800) (20,000) 22.50 - 27.50
------- ------- -------
Outstanding at end of year 805,742 847,459 615,859 5.83 - 24.75
------- ======= =======
Exercisable at end of year 454,692 401,159 299,109 5.83 - 24.75
======= ======= =======
At August 31, 1996, 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, 1996. As a result of
appreciation (depreciation) of PENWEST stock of the SARs, compensation expense
was charged (credited) for $(451,000), $78,000 and $342,000 in 1996, 1995, and
1994 respectively.
Page 25
26
NOTE F
INCOME TAXES
Income tax expense consists of the following:
Year Ended August 31
(Thousands of dollars) 1996 1995 1994
- -------------------------------------------------------------------------------
Current
Federal $1,091 $ 2,102 $ (904)
Foreign 80 4 138
State 87 232 56
------ ------- -------
1,258 2,338 (710)
Deferred
Federal 1,108 1,459 2,253
State 66 93 423
------ ------- -------
1,174 1,552 2,676
------ ------- -------
Total provision $2,432 $ 3,890 $ 1,966
====== ======= =======
A reconciliation of the statutory federal tax to the actual provision is as
follows:
Year Ended August 31
(Thousands of dollars) 1996 1995 1994
- ------------------------------------------------------------------------------
Statutory tax rate 34% 34% 34%
Statutory tax $ 2,545 $ 3,776 $ 2,749
State taxes, net of federal benefit 101 215 316
Tax credits, including research and
development credits (313) (1,095)
Tax advantaged investment income (36) (47)
Foreign sales corporation (238) (232) (172)
Other 60 491 168
------- ------- -------
Total provision $ 2,432 $ 3,890 $ 1,966
======= ======= =======
The significant components of deferred tax assets and liabilities are as
follows:
August 31
(Thousands of dollars) 1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit $ 3,257 $ 2,725
Research and development credit 592 622
Postretirement benefits 3,660 3,691
Provisions for accrued expenses 2,431 2,366
Other 523
------- -------
Total deferred tax assets 9,940 9,927
Deferred tax liabilities:
Depreciation 19,453 17,650
Other 1,527 2,143
------- -------
Total deferred tax liabilities 20,980 19,793
------- -------
Net deferred tax liabilities $11,040 $ 9,866
======= =======
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 1996
and 1995 included a discount rate of 8.0% and 7.5%, respectively, and a rate of
increase in compensation levels of 5.0% in 1996 and 6.0% in 1995 for the
salaried employees. The expected long-term rate of return on plan assets is
assumed to be 9.0% for 1996 and 1995.
Net periodic pension expense consisted of the following (in thousands):
Year Ended August 31
1996 1995 1994
- ----------------------------------------------------------------------------------
Service cost of benefits earned during the year $ 709 $ 603 $ 591
Interest cost on projected benefit obligation 1,426 1,363 1,256
Actual return on plan assets (2,278) (2,599) (842)
Net amortization and deferral 892 1,480 (253)
------- ------- -------
Net pension expense $ 749 $ 847 $ 752
======= ======= =======
The following table sets forth the funded status of both pension plans (in
thousands):
August 31
1996 1995
- -------------------------------------------------------------------------------------
Actuarial present value of projected obligation,
based on service to date and current salary levels:
Vested $ 17,089 $ 17,081
Nonvested 529 430
-------- --------
Accumulated benefit obligation 17,618 17,511
Effect of projected salary increases 1,676 2,052
-------- --------
Projected benefit obligation 19,294 19,563
Plan assets at fair market value 19,931 18,910
-------- --------
Projected benefit obligation less (greater) than plan assets 637 (653)
Unrecognized actuarial net loss (gain) (1,634) 254
Balance of unrecognized net obligation at
transition being amortized over 15 years 1,010 1,137
Unrecognized prior service cost 510 534
-------- --------
Net pension asset $ 523 $ 1,272
======== ========
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.
Page 27
28
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 40,929
unallocated shares of PENWEST common stock as of August 31, 1996, including
shares earned but not yet allocated. During 1996, approximately 65,406 shares of
stock were earned by plan participants. The savings component expense of the
plan was $722,000, $520,000 and $600,000 for fiscal years 1996, 1995, and 1994,
respectively. Compensation expense is recorded by the Company at 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 market
value of shares released by the plan to participants was $514,000, $402,000 and
$285,000 for the fiscal years 1996, 1995 and 1994, respectively.
The plan initially 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 purposes of calculating earnings
per share.
Supplemental Executive Retirement Plan
The Company sponsors a Supplemental Executive Retirement Plan (SERP), a
nonqualified plan, which covers certain employees. For 1996, 1995, and 1994, the
net pension expense accrued for the SERP was $950,000, $856,000 and $347,000
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 $2,632,000, $2,501,000 and
$2,649,000 in 1996, 1995, and 1994, 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 include
medical coverage and vision coverage. Salaried participants contribute, for the
most part, 100% of the premiums.
Postretirement benefit expense was $415,000, $359,000 and $834,000 for the years
ended August 31, 1996, 1995, and 1994, respectively. Presently the Company funds
the current benefits on a cash basis and therefore there are no plan assets.
Page 28
29
The following table sets forth the plan's status (in thousands of dollars):
Accumulated postretirement benefit obligation:
August 31, 1996 August 31, 1995
--------------- ---------------
Retirees $ 3,838 $ 4,119
Fully eligible active plan participants 589 311
Other active plan participants 2,093 2,190
------- -------
Accumulated post retirement benefit obligation 6,520 6,620
Unrecognized actuarial net gain 3,786 3,535
------- -------
Accrued postretirement benefit obligation $10,306 $10,155
======= =======
Net periodic postretirement benefit costs include the following components:
Year Ended August 31
1996 1995 1994
---- ---- ----
Service cost -- benefits earned during the
period $ 238 $ 186 $ 295
Interest cost on accumulated postretirement
benefit obligations 475 402 604
Net amortization and deferral (298) (229) (65)
----- ----- -----
$ 415 $ 359 $ 834
===== ===== =====
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, 1996 by $964,000, with an
increase of $142,000 in the annual 1996 postretirement benefit expense. The
weighted average discount rate used to estimate the accumulated postretirement
obligation was 8.0% in 1996 and 7.5% in 1995. The change in discount rate had
the impact of decreasing the accumulated post-retirement benefit obligation by
$343,000.
In 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 fiscal 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
$0.01 per Right, and they expire in June 1998.
NOTE J
PACIFIC COGENERATION, INC.
In fiscal 1995 the Company sold the assets of its subsidiary Pacific
Cogeneration, Inc. and recognized a gain on the sale of $899,000 which is
reflected as other income.
NOTE K
QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1996 First Second Third Fourth
(Thousands of dollars except earnings per share data) Quarter Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------------------------
Sales $45,624 $46,313 $49,106 $53,431 $194,474
Gross margin 12,168 11,129 11,541 11,925 46,763
Income from operations 3,601 2,571 2,748 3,388 12,308
Net income 1,748 908 1,030 1,366 5,052
Earnings per common share $ 0.25 $ 0.13 $ 0.15 $ 0.20 $ 0.72
Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20
Page 30
31
Fiscal 1995 First Second Third Fourth
(Thousands of dollars except earnings per share data) Quarter Quarter(1) 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
(1) Fiscal year 1995 second quarter results include a pretax gain of $899,000
related to the sale of assets of Pacific Cogeneration, Inc.
Page 31
32
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, 1996 and 1995, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the three years in the period
ended August 31, 1996. 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, 1996 and 1995, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 1996, in conformity with generally accepted accounting principles.
Seattle, Washington ERNST & YOUNG, LLP
October 11, 1996
Page 32
33
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 periodically meet with the Audit Committee without the
presence of management.
/s/ Tod R. Hamachek
- ---------------------------------
Tod R. Hamachek
President and
Chief Executive Officer
/s/ Jeffrey T. Cook
- ---------------------------------
Jeffrey T. Cook
Vice President, Finance and
Chief Financial Officer
/s/ Jennifer L. Good
- ---------------------------------
Jennifer L. Good
Corporate Director of Finance and
Corporate Secretary
Page 33
34
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 1997 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 1997 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 1997 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 1997 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, 1996 and 1995 and
the related statements of income, cash flows and shareholders'
equity for each of the three years in the period ended August 31,
1996 and the report of independent auditors are included in Part II,
Item 8.
(a) (2) Financial Statement Schedules
(a) Selected 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
omitted because they are not applicable or because the information
is presented in the financial statements or notes thereto.
Page 34
35
(a) (3) Exhibits
See list of Exhibits on page 37. 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.
Page 35
36
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 25, 1996 /s/ 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 25, 1996 /s/ Tod R. Hamachek
----------------- --------------------------------------
Tod R. Hamachek, President and
Chief Executive Officer (Principal
Executive Officer)
Date: November 25, 1996 /s/ Jeffrey T. Cook
----------------- --------------------------------------
Jeffrey T. Cook, Chief Financial
Officer (Principal Financial Officer)
Date: November 25, 1996 /s/ Jennifer L. Good
----------------- --------------------------------------
Jennifer L. Good, Corporate Director
of Finance (Principal Accounting
Officer)
Directors
Richard E. Engebrecht
Paul E. Freiman
Tod R. Hamachek By /s/ Tod R. Hamachek
Paul H. Hatfield --------------------------
Harry Mullikin Attorney-in-Fact
Sally G. Narodick Power of Attorney Dated
William G. Parzybok, Jr.
N. Stewart Rogers Date October 22, 1996
William K. Street -------------------------
Page 36
37
INDEX TO EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission, are incorporated by reference.
Exhibit No. Item
- ----------- ----
(3.1) Restated Articles of Incorporation of Registrant (filed as an
Exhibit to Registrant's Form 10-K for fiscal year ended
August 31, 1995)
(3.2) Bylaws of Registrant as amended and restated as of June 27, 1995
(filed as an Exhibit to Registrant's Form 10-K for the fiscal year
ended August 31, 1995)
(4.1) 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 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 and Rydzewski (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)
Page 37
38
(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 23, 1996 (filed as an Exhibit to
Registrant's Form 10-Q for the quarter ended May 31, 1996)
(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 Regarding Computation of Per-Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
Page 38
39
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
- ----------- ----
(10.4) 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,
Commission File
No. 0-11488)
(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, Commission File No. 0-11488)
(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, Commission File No. 0-11488)
(10.7) Agreements relating to compensation in the event of a change in
control of the corporation between the corporation and Messrs.
Hamachek, Reed, Cook, Widmaier, Talley, Horn, and Rydzewski (a
representative copy of these agreements filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended August 31, 1995,
Commission File No. 0-11488)
(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,
Commission File Number 0-11488)
(10.10) PENWEST, LTD. 1994 Stock Option Plan as amended and restated as of
January 23, 1996 (filed as an Exhibit to Registrant's Form 10-Q
for the quarter ended May 31, 1996, Commission File No. 0-11488)
Page 39