<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 10, 1997
REGISTRATION NO. 333-38389
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PENWEST PHARMACEUTICALS CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
WASHINGTON 2834 91-1513032
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
2981 ROUTE 22
PATTERSON, NY 12563-9970
(914) 878-3414
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
TOD R. HAMACHEK
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
PENWEST PHARMACEUTICALS CO.
2981 ROUTE 22
PATTERSON, NY 12563-9970
(914) 878-3414
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
COPIES TO:
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<S> <C> <C>
STEVEN D. SINGER, ESQ. EDMUND O. BELSHEIM, JR., ESQ. LESLIE E. DAVIS, ESQ.
HALE AND DORR LLP PENWEST PHARMACEUTICALS CO. TESTA, HURWITZ & THIBEAULT, LLP
60 STATE STREET 2981 ROUTE 22 HIGH STREET TOWER
BOSTON, MA 02109 PATTERSON, NY 12563-9970 125 HIGH STREET
(617) 526-6000 (914) 878-3414 BOSTON, MA 02110
(617) 248-7000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER 10, 1997
[PENWEST PHARMACEUTICALS CO. LOGO] PENWEST PHARMACEUTICALS CO.
2,500,000 SHARES
COMMON STOCK
All of the 2,500,000 shares of Common Stock offered hereby are being sold
by Penwest Pharmaceuticals Co. ("Penwest" or the "Company"), which is a
wholly-owned subsidiary of Penford Corporation (previously known as PENWEST,
LTD., "Penford"). Prior to this offering, there has been no public market for
the Common Stock of the Company. It is currently estimated that the initial
public offering price will be between $10.00 and $12.00 per share. See
"Underwriting" for information relating to the method of determining the initial
public offering price.
Upon completion of this offering, Penford will own approximately 85.3%
(approximately 83.5% if the Underwriters' over-allotment option is exercised in
full) of the outstanding Common Stock of the Company. Penford has announced its
intent, subject to the satisfaction of certain conditions, to divest its
ownership interest in the Company by means of a tax-free distribution to its
shareholders, which is anticipated to occur in the second quarter of 1998. See
"Background of the Planned Spin-off," "Principal Shareholders" and "Arrangements
Between the Company and Penford."
-------------------------------------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 7.
-------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
===================================================================================================
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS COMPANY(1)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share................................. $ $ $
- ---------------------------------------------------------------------------------------------------
Total(2).................................. $ $ $
===================================================================================================
</TABLE>
(1) Before deducting expenses payable by the Company, estimated at $1,000,000.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 375,000 shares of Common Stock solely to cover
over-allotments, if any. See "Underwriting." If such option is exercised in
full, the total Price to Public, Underwriting Discounts and Commissions, and
Proceeds to Company will be $ , $ and $ ,
respectively.
-------------------------------------------------------
The Common Stock is offered by the Underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to reject any order
in whole or in part. It is expected that delivery of such shares will be made
through the offices of BancAmerica Robertson Stephens, San Francisco,
California, on or about , 1997.
BANCAMERICA ROBERTSON STEPHENS SBC WARBURG DILLON READ INC.
The date of this Prospectus is , 1997
<PAGE> 3
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission,
Washington, D.C. 20549 (the "Commission"), a Registration Statement on Form S-1
(including all amendments and exhibits thereto, the "Registration Statement")
under the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the Common Stock offered hereby. This Prospectus, which constitutes
part of the Registration Statement, does not contain all the information set
forth in the Registration Statement and the exhibits and schedules thereto,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock, reference is hereby made to the Registration Statement including
exhibits, schedules and reports filed as a part thereof. Statements contained in
this Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement are not necessarily complete, and in each
instance reference is made to the copy of such document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. The Registration Statement, including the exhibits and
schedules thereto, may be inspected without charge at the principal office of
the Commission in Washington, D.C., and copies of all or any part of which may
be inspected and copied at the public reference facilities maintained by the
Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at
the Commission's Regional Offices located at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and 7 World Trade Center, 13th
Floor, New York, New York 10048. Copies of such material can also be obtained at
prescribed rates by mail from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549. In addition, the Commission
maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, OR
OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS OR THEIR AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN
THE COMMON STOCK OF THE COMPANY ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH
RULE 103 OF REGULATION M UNDER THE SECURITIES EXCHANGE ACT OF 1934. SEE
"UNDERWRITING."
2
<PAGE> 4
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER
TO, OR SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR
SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
THE DATE HEREOF.
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Additional Information................................................................ 2
Summary............................................................................... 4
Background of the Planned Spin-off.................................................... 6
Risk Factors.......................................................................... 7
Use of Proceeds....................................................................... 19
Dividend Policy....................................................................... 19
Capitalization........................................................................ 20
Dilution.............................................................................. 21
Selected Financial Data............................................................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations.......................................................................... 23
Business.............................................................................. 27
Management............................................................................ 50
Certain Transactions.................................................................. 59
Principal Shareholder................................................................. 60
Arrangements Between the Company and Penford.......................................... 62
Description of Capital Stock.......................................................... 67
Shares Eligible for Future Sale....................................................... 69
Underwriting.......................................................................... 71
Legal Matters......................................................................... 73
Experts............................................................................... 73
Index to Financial Statements......................................................... F-1
</TABLE>
------------------------
The Company was incorporated under the name Edward Mendell Co., Inc. in the
State of Washington in February 1991 as a wholly-owned subsidiary of Penford
(formerly known as PENWEST, LTD.) and has changed its name to Penwest
Pharmaceuticals Co. The Company's executive offices are located at 2981 Route
22, Patterson, NY 12563-9970. The Company's telephone number is (914) 878-3414.
TIMERx(R), EMCOCEL(R), EXPLOTAB(R), EMDEX(R), EMCOMPRESS(R) and CANDEX(R)
are registered trademarks of the Company, and PROSOLV SMCC(TM) is a trademark of
the Company. Other tradenames and trademarks appearing in this Prospectus are
the property of their respective owners.
3
<PAGE> 5
SUMMARY
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from the
results discussed in the forward-looking statements as a result of certain
factors, including those set forth under "Risk Factors" and elsewhere in this
Prospectus.
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Financial Statements and Notes
thereto, appearing elsewhere in this Prospectus.
THE COMPANY
Penwest is engaged in the research, development and commercialization of
novel drug delivery technologies. Based on its extensive experience in
developing and manufacturing tabletting ingredients for the pharmaceutical
industry, the Company has developed its proprietary TIMERx(R) controlled release
drug delivery technology, which is applicable to a broad range of orally
administered drugs. The Company has applied TIMERx technology to the development
of oral formulations of generic versions of controlled release drugs and branded
controlled release versions of immediate release drugs. Each of these
formulations has been developed under a collaborative arrangement with a
pharmaceutical company. In October 1997, the Company's collaborator, Leiras OY,
a Finnish subsidiary of Schering AG ("Leiras"), received marketing approval in
Finland for Cystrin CR(R) (oxybutynin) for the treatment of urinary
incontinence. In May 1997, the Company's collaborator, Mylan Pharmaceuticals
Inc. ("Mylan"), filed an Abbreviated New Drug Application ("ANDA") with the U.S.
Food and Drug Administration (the "FDA") for the first generic version of the 30
mg dosage strength of Procardia XL(R) (nifedipine), a leading cardiovascular
drug for angina and hypertension.
The TIMERx drug delivery system is a hydrophilic matrix consisting primarily
of two natural polysaccharides, xanthan and locust bean gums, in the presence of
dextrose. The TIMERx system can precisely control the release of the active drug
ingredient in a tablet by varying the relative proportion of the gums, the
tablet coating and the tablet manufacturing process. The Company believes that
the TIMERx controlled release system is a major advancement in oral drug
delivery because it is applicable to a wide range of soluble and insoluble drugs
of varying dosages, it offers drug developers a flexible pharmacokinetic
profile, it is easy to scale up to commercial batch levels with consistent
reproducibility, and controlled release drugs based on the TIMERx controlled
release system can be manufactured cost effectively using existing equipment.
Penwest's strategy is to establish collaborations with leading
pharmaceutical companies to develop oral controlled release drugs. The Company
believes that this strategy will create significant operating, marketing and
financial advantages for the Company and will accelerate product development and
commercialization. The Company currently has six generic controlled release
products under development with three collaborators, Mylan, Kremers Urban
Development Company, the generics division of Schwarz Pharma, Inc. ("Kremers")
and Sanofi Winthrop International S.A. ("Sanofi"). All these products are
currently in full-scale bioequivalence studies or clinical trials. Additionally,
the Company has recently entered into a strategic alliance with Endo
Pharmaceuticals Inc., formerly a division of Dupont Merck Pharmaceuticals
("Endo"), to develop jointly Numorphan TRx, a branded oral controlled release
version of the narcotic analgesic oxymorphone.
The Company is also an established manufacturer and distributor of
excipients to the pharmaceutical and nutritional industries. Excipients are the
inactive ingredients in tablets and capsules that enable tabletting of active
drug ingredients by enhancing binding, lubrication and disintegration
properties. The Company recently introduced ProSolv, a patented combination of
microcrystalline cellulose ("MCC") and colloidal silicon dioxide, which the
Company believes offers improvements over competing excipients in wet
granulation and direct compression, the most common processes of manufacturing
tabletted products in the pharmaceutical industry. In addition to ProSolv, the
Company markets a broad line of 27 other excipient products. Revenues from the
excipients business were $25.0 million for the year ended December 31, 1996.
SEPARATION FROM PENFORD
The Company is a wholly-owned subsidiary of Penford (formerly known as
PENWEST, LTD.). Penford has announced its intent, subject to the satisfaction of
certain conditions, to divest its ownership interest in the Company by means of
a tax-free distribution to its shareholders, which is anticipated to occur in
the second quarter of 1998 (the "Spin-off"). Such conditions include receipt of
a private letter ruling from the Internal Revenue Service ("IRS") or a written
opinion from Ernst & Young LLP to the effect that, among other things, the
Spin-off will qualify as a tax-free distribution. The Company and Penford will,
prior to the completion of this offering, enter into agreements that govern
various interim and ongoing relationships. See "Arrangements Between the Company
and Penford."
4
<PAGE> 6
THE OFFERING
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<S> <C>
Common Stock Offered by the Company.......... 2,500,000 shares
Common Stock Outstanding after the Offering.. 17,038,282 shares(1)
Use of Proceeds.............................. For construction and equipping of a TIMERx
manufacturing facility, expansion of
existing laboratory facilities, working
capital and other general corporate
purposes. See "Use of Proceeds."
Proposed Nasdaq National Market Symbol....... PPCO
</TABLE>
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................. $23,146 $25,089 $26,089 $19,958 $20,787
Cost of product sales.................... 15,910 17,267 18,690 14,033 14,660
------- ------- ------- ------- -------
Gross profit........................... 7,236 7,822 7,399 5,925 6,127
Selling, general and administrative
expenses............................... 7,021 7,676 6,776 5,264 5,747
Research and development expenses........ 2,322 2,719 3,723 2,636 2,994
Net loss................................. $(2,629) $(3,252) $(3,864) $(2,461) $(3,175)
======= ======= ======= ======= =======
Net loss per share....................... $ (0.18) $ (0.22) $ (0.27) $ (0.17) $ (0.22)
======= ======= ======= ======= =======
Weighted average shares outstanding...... 14,538 14,538 14,538 14,538 14,538
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------------
ACTUAL AS ADJUSTED(2)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................... $ 1,088 $ 25,663
Working capital.................................................... (27,885) 34,193
Total assets....................................................... 37,380 61,955
Accumulated deficit................................................ (15,508) (15,508)
Shareholders' equity (deficit)..................................... (8,078) 54,000
</TABLE>
- ---------------
(1) Excludes 715,000 shares of Common Stock issuable upon the exercise of
options to be granted to certain employees and directors on the date of this
Prospectus at an exercise price equal to the initial public offering price.
Also excludes an aggregate of 3,085,000 shares reserved for future grants or
purchases pursuant to the Company's 1997 Equity Incentive Plan and 1997
Employee Stock Purchase Plan. See "Management -- Employee Benefit Plans" and
Note 13 of Notes to Consolidated Financial Statements.
(2) As adjusted to reflect (i) the sale of the 2,500,000 shares of Common Stock
offered by the Company hereby at an assumed initial public offering price of
$11.00 per share and the receipt of the estimated net proceeds therefrom and
(ii) the contribution by Penford to the capital of the Company, effective
upon the closing of this offering, of the outstanding intercompany
indebtedness of the Company to Penford as of the date of the closing of this
offering (the "Penford Capital Contribution"). The intercompany indebtedness
was $37,503,000 as of September 30, 1997. See "Use of Proceeds" and Note 6
of Notes to Consolidated Financial Statements.
Unless otherwise indicated, all information contained in this Prospectus
assumes no exercise of the Underwriters' over-allotment option, and reflects a
2,907.66-for-1 stock split of the shares of Common Stock effected on October 8,
1997.
5
<PAGE> 7
BACKGROUND OF THE PLANNED SPIN-OFF
Prior to this offering, Penford owned 100% of the Company's outstanding
common stock, par value $0.001 per share (the "Common Stock"). Upon completion
of this offering, Penford will own 85.3% (approximately 83.5% if the
Underwriter's over-allotment option is exercised in full) of the Common Stock.
BACKGROUND OF THIS OFFERING AND THE SPIN-OFF
In October 1997, Penford announced its intent, subject to the satisfaction
of certain conditions, to divest its ownership interest in the Company by means
of the Spin-off, which is anticipated to occur in the second quarter of 1998. By
effecting the Spin-off, Penford would separate its pharmaceutical business from
its specialty chemical business for the paper and food industries. The Board of
Directors of Penford (the "Penford Board") intends to conduct the Spin-off
because it believes that the Spin-off will: (i) permit the managements of
Penford and Penwest to focus on their respective core businesses without regard
to the corporate objectives and policies of the other company; (ii) improve the
near-term earnings of Penford by eliminating from Penford's results of
operations the expenses associated with developing Penwest's TIMERx controlled
release technologies; (iii) permit the financial community to focus separately
on Penford and Penwest and their respective business opportunities; and (iv)
enable Penwest to have greater access to capital to finance its business. The
Company and Penford have entered into or will, on or prior to the completion of
this offering, enter into agreements that govern various interim and ongoing
relationships. See "Arrangements Between the Company and Penford."
CONDITIONS TO THE SPIN-OFF
The Penford Board currently intends to effect the Spin-off in the second
quarter of 1998. Under the Separation Agreement between Penford and Penwest, the
Penford Board has the sole discretion to determine the date of consummation of
the Spin-off at any time on or after April 1, 1998 and prior to the date six
months after the closing of this offering. Following the date six months after
the closing of this offering, the Penford Board will be obligated to effect the
Spin-off as promptly as practicable, subject to the satisfaction, or waiver by
the Penford Board, in its sole discretion, of certain conditions including: (i)
a private letter ruling from the IRS shall have been obtained and shall continue
in effect, or a written opinion from Ernst & Young LLP shall have been received,
to the effect that, among other things, the Spin-off will qualify as tax-free
for federal income tax purposes under Sections 355 and 368 of the Internal
Revenue Code of 1986, as amended (the "Code"), and such ruling or opinion shall
be in form and substance satisfactory to Penford; (ii) any material governmental
approvals and consents necessary to consummate the Spin-off shall have been
obtained and shall be in full force and effect; (iii) no order, injunction or
decree issued by any court or agency of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Spin-off shall be in
effect, and no other event outside the control of Penford shall have occurred or
failed to occur that prevents the consummation of the Spin-off; and (iv) no
material adverse change shall have occurred with respect to the business or
financial condition of Penford or Penwest that would, in the reasonable judgment
of the Penford Board, make the approval of the Spin-off inadvisable.
6
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing shares of the Common Stock offered hereby.
CONTROL BY PENFORD PENDING THE SPIN-OFF; UNCERTAINTY OF THE SPIN-OFF
Upon completion of this offering, Penford will own approximately 85.3%
(approximately 83.5% if the Underwriters' over-allotment option is exercised in
full) of the outstanding Common Stock of Penwest. Penford has announced its
intent, subject to the satisfaction of certain conditions, to divest its
ownership interest in the Company by means of a tax-free distribution to its
shareholders, which the Company anticipates will occur in the second quarter of
1998. If the Spin-off occurs, the Company will no longer be a subsidiary of
Penford.
So long as Penford owns a majority of the outstanding Common Stock, it will
have the ability to elect all the members of the Board of Directors of the
Company (the "Board") and otherwise control the management and affairs of the
Company, including any determinations with respect to acquisitions,
dispositions, borrowings, issuances of Common Stock or other securities of the
Company or the declaration and payment of any dividends on the Common Stock.
Three of the Company's directors will continue to serve as directors of Penford
following this offering. Two of these individuals have informed the Company they
intend to resign from the Penford Board upon completion of the Spin-off. The
ability of Penford to control the Company could have an adverse effect on the
market price for shares of Common Stock. See "Principal Shareholders" and
"Shares Eligible for Future Sale."
There can be no assurance as to whether or when the conditions to the
Spin-off will be satisfied or the Spin-off will occur. Such conditions include
receipt of a favorable tax ruling from the IRS or an opinion from Ernst & Young
LLP to the effect that the Spin-off will be tax-free. Penford has not determined
what action, if any, it would take if such conditions are not satisfied. If the
Spin-off does not occur, Penford may maintain ownership of the Company as a
consolidated subsidiary or sell all or a portion of its ownership interest in
the Company through a public offering or private sale. The occurrence of any of
these events could have a material adverse effect on the Company's business,
financial condition and results of operations and could materially adversely
affect the trading market for the Common Stock.
POSSIBILITY OF SUBSTANTIAL SALES OF COMMON STOCK
The Spin-off and future sales of substantial amounts of Common Stock
(including shares issued upon the exercise of options) in the public market or
the availability of such shares for sale, could have a material adverse effect
on the market price of the Common Stock and on the Company's ability to raise
any necessary capital to fund its future operations.
Upon completion of this offering, the Company will have 17,038,282 shares
of Common Stock outstanding. Of these shares, the 2,500,000 shares offered
hereby will generally be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The remaining 14,538,282 shares of Common Stock outstanding upon the
consummation of this offering will be shares of Common Stock held by Penford and
will be "restricted securities," as that term is defined in Rule 144,
promulgated under the Securities Act ("Rule 144"), that may be sold only if
registered under the Securities Act or in accordance with an applicable
exemption from registration.
The Company anticipates that the Spin-off will occur in the second quarter
of 1998. If the Spin-off occurs as planned, an aggregate of approximately
14,538,282 shares of Common Stock will be distributed to the shareholders of
Penford. Substantially all such shares would be eligible for immediate resale in
the public market. The Company is unable to predict whether substantial amounts
of Common Stock will be sold in the open market in anticipation of, or
following, the Spin-off. Sales of
7
<PAGE> 9
substantial amounts of Common Stock in the public market, or the perception that
such sales might occur, whether as a result of the Spin-off or otherwise, could
materially adversely affect the market price of the Common Stock. See "Shares
Eligible for Future Sale."
Pursuant to the Underwriting Agreement (as defined below), the Company has
agreed, subject to limited exceptions, not to sell, offer, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock (or any securities convertible into or exchangeable for, or any
right to purchase or acquire, Common Stock) for a period of 180 days after the
date of this Prospectus without the prior written consent of BancAmerica
Robertson Stephens. Similarly, Penford and the officers and directors of the
Company have agreed, subject to limited exceptions (including, with respect to
Penford, the Spin-off), not to sell, offer, contract to sell, pledge, grant any
option to purchase or otherwise dispose of any shares of Common Stock (or any
securities convertible into or exchangeable for, or any right to purchase or
acquire, Common Stock) for a period of 180 days after the date of this
Prospectus without the prior written consent of BancAmerica Robertson Stephens.
None of the shares of Common Stock distributed pursuant to the Spin-off (other
than shares distributed to the Company's "affiliates") will be subject to any
contractual restriction on sale or disposition pursuant to the Underwriting
Agreement or otherwise.
CERTAIN RISKS AND LITIGATION RELATING TO NIFEDIPINE XL
In May 1997, one of the Company's collaborators, Mylan, filed an ANDA with
the FDA for the 30 mg dosage strength of Nifedipine XL, a generic version of
Procardia XL, a controlled release formulation of nifedipine. Nifedipine XL is
the first product using the Company's TIMERx controlled release technology for
which an ANDA has been filed in the United States.
In an ANDA filing, the FDA generally requires data demonstrating that the
drug formulation is bioequivalent to the branded drug. In addition, under the
Drug Price Competition and Patent Restoration Act of 1984 (the "Waxman-Hatch
Act"), when an applicant files an ANDA for a generic version of a brand name
product covered by an unexpired patent listed with the FDA, the applicant must
certify to the FDA that such patent will not be infringed by the applicant's
product or that such patent is invalid or unenforceable. Notice of such
certification must be given to the patent holder and the sponsor of the New Drug
Application ("NDA") for the brand name product.
Bayer AG ("Bayer") and ALZA Corporation ("ALZA") own patents listed for
Procardia XL, and Pfizer Inc. ("Pfizer") holds the NDA and markets the product.
In connection with the ANDA filing, Mylan certified in May 1997 to the FDA that
Nifedipine XL does not infringe these Bayer or ALZA patents and notified Bayer,
ALZA and Pfizer of such certification. Bayer and Pfizer sued Mylan in the United
States District Court for the Western District of Pennsylvania, alleging that
Nifedipine XL infringes Bayer's patent. The Company has been informed by Mylan
that ALZA does not believe that the notice given to it complied with the
requirements of the Waxman-Hatch Act, and there can be no assurance that ALZA
will not sue Mylan for patent infringement or take any other actions with
respect to such notice. Mylan has advised the Company that it intends to contest
vigorously the allegations made in the lawsuit. However, there can be no
assurance that Mylan will prevail in this litigation or that it will continue to
contest the lawsuit. An unfavorable outcome or protracted litigation for Mylan
would materially adversely affect the Company's business, financial condition
and results of operations. Delays in the commercialization of Nifedipine XL
could also occur because the FDA will not grant final marketing approval of
Nifedipine XL until a final judgment on the patent suit is rendered in favor of
Mylan by the district court, or in the event of an appeal, by the court of
appeals, or until 30 months (or such longer or shorter period as the court may
determine) have elapsed from the date of Mylan's certification, whichever is
sooner.
In 1993, Pfizer filed a "citizen's petition" with the FDA, claiming that
its Procardia XL formulation constituted a unique delivery system and that a
drug with a different release mechanism such as the TIMERx controlled release
system cannot be considered the same dosage form and approved in an ANDA as
bioequivalent to Procardia XL. In August 1997, the FDA rejected Pfizer's
citizen's petition.
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In July 1997, Pfizer also sued the FDA in the District Court of the District of
Columbia, claiming that the FDA's acceptance of Mylan's ANDA filing for
Nifedipine XL was contrary to law, based primarily on the arguments stated in
its citizen's petition. Mylan and the Company have intervened as defendants in
this suit. There can be no assurance that the FDA, Mylan and the Company will
prevail in this litigation. An outcome adverse to Mylan and the Company would
result in Mylan being required to file a suitability petition in order to
continue the ANDA or to file an NDA with respect to Nifedipine XL, each of which
would be expensive and time consuming. An adverse outcome also would result in
Nifedipine XL becoming ineligible for an "AB" rating from the FDA. Failure to
obtain an AB rating from the FDA would indicate that for certain purposes
Nifedipine XL would not be deemed to be therapeutically equivalent to the
referenced branded drug, would not be fully substitutable for the referenced
branded drug and would not be relied upon by Medicaid and Medicare formularies
for reimbursement. Any such failure would have a material adverse effect on the
Company's business, financial condition and results of operations. If any of
such events occur, Mylan may terminate its efforts with respect to Nifedipine
XL, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
There can be no assurance that Pfizer will not seek to protect its
marketing exclusivity with respect to Procardia XL by pursuing additional
regulatory initiatives and lawsuits.
Most of the controlled release products that the Company is developing with
its collaborators are generic versions of brand name controlled release products
that are covered by one or more patents. The Company expects its collaborators
will file ANDAs for such product candidates. There can be no assurance that if
ANDAs are filed for any of such products, the holders of the patents covering
the brand name product or the holders of the NDA with respect to the brand name
product will not sue or undertake regulatory initiatives to preserve marketing
exclusivity. Any significant delay in obtaining FDA approval to market the
Company's product candidates as a result of litigation, as well as the expense
of such litigation, whether or not the Company or its collaborators are
successful, could have a material adverse effect on the Company's business,
financial condition and results of operations.
The FDA is reviewing an inactive ingredient contained in the TIMERx
delivery system in order to determine the allowable amount for inclusion in the
FDA's Inactive Ingredients Guide. In connection with this review, the FDA has
requested that Mylan provide data from published literature regarding the
toxicity of such ingredient. If such data are not acceptable to the FDA, it
could require that additional data, including animal toxicity or other data, be
developed and submitted to determine the highest allowable amount. If the amount
of such ingredient, or any other ingredient, in a specified product exceeds the
highest amount approved in the Inactive Ingredients Guide, the Company would
likely be required to reformulate such product in order to be able to seek
approval through the ANDA process. Reformulation of a product would likely
require new bioequivalence studies. If reformulation were not possible, then new
clinical studies and an NDA filing for such product would likely be required for
FDA approval of such product. Any of such events could materially adversely
affect the Company's collaborative arrangements where ANDA filings had been made
or were contemplated, which would have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition to filing an ANDA with respect to the 30 mg dosage strength of
Nifedipine XL, Mylan is conducting full scale bioequivalence studies of the 60
mg and 90 mg dosage strengths of Nifedipine XL. There can be no assurance that
Mylan will file ANDAs with respect to the 60 mg and 90 mg dosage strengths or
that, if Mylan does file such ANDAs, they will be the first ANDAs filed with
respect to such dosage strengths. Under the Waxman-Hatch Act, an applicant who
files the first ANDA with a certification of patent invalidity or
non-infringement with respect to a product may be entitled to receive, if such
ANDA is approved by the FDA, 180-day marketing exclusivity (a 180-day delay in
approval of other ANDAs for the same drug) from the FDA. However, there can be
no assurance that the FDA will not approve an ANDA filed by another applicant
with respect to a different dosage
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strength prior to or during Mylan's 180-day marketing exclusivity period, if
obtained, for the 30 mg dosage strength of Nifedipine XL. See
"Business -- Government Regulation" and "-- Litigation."
DEPENDENCE ON COLLABORATIVE AGREEMENTS
The Company intends to develop and commercialize its TIMERx controlled
release products in collaboration with pharmaceutical companies. To date, the
Company has entered into collaborative agreements with Mylan, Leiras, Kremers,
Sanofi and Endo. The Company is particularly dependent on its collaboration with
Mylan, which covers three of the Company's products under development. Under its
current collaborative agreements, the Company's collaborators are generally
responsible for conducting full scale bioequivalence studies and clinical
trials, preparing and submitting all regulatory applications and submissions and
manufacturing, marketing and selling the TIMERx controlled release products.
There can be no assurance that the Company will be able to maintain
existing collaborative arrangements or establish new collaborative arrangements
on acceptable terms, if at all, or that any collaborative arrangements will be
commercially successful. To the extent that the Company is not able to maintain
or establish such arrangements, the Company would be required to undertake
product development and commercialization activities at its own expense, which
would increase the Company's capital requirements or require the Company to
limit the scope of its development and commercialization activities. Moreover,
the Company has limited or no experience in conducting full scale bioequivalence
studies and clinical trials, preparing and submitting regulatory applications
and manufacturing and marketing controlled release products. There can be no
assurance that it could be successful in performing these activities and any
failure to perform such activities could have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company cannot control the amount and timing of resources that its
collaborative partners devote to the Company's programs or potential products,
which may vary because of factors unrelated to the potential products. If any of
the Company's collaborators breach or terminate their agreements with the
Company or otherwise fail to conduct their collaborative activities in a timely
manner, the preclinical and/or clinical development and/or commercialization of
product candidates will be delayed, and the Company would be required to devote
additional resources to product development and commercialization or terminate
certain development programs. Also, these relationships generally may be
terminated at the discretion of the Company's collaborators, in some cases with
only limited notice to the Company. For instance, Mylan may terminate its
agreements with the Company at any time upon 90 days' prior written notice under
specified circumstances. The termination of collaborative arrangements could
have a material adverse effect on the Company's business, financial condition
and results of operations. There also can be no assurance that disputes will not
arise with respect to the ownership of rights to any technology developed with
third parties. These and other possible disagreements with collaborators could
lead to delays in the development or commercialization of product candidates or
could result in litigation or arbitration, which could be time consuming and
expensive and could have a material adverse effect on the Company's business,
financial condition and results of operations.
In addition, Penwest's collaborators may develop, either alone or with
others, products that compete with the development and marketing of the
Company's potential products. Competing products of the Company's collaborators
may result in their withdrawal of support with respect to their products under
development using the Company's controlled release technology, which could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "Business -- Collaborative Arrangements."
UNCERTAINTY OF COMMERCIALIZATION OF TIMERX CONTROLLED RELEASE PRODUCTS
Products using the Company's TIMERx controlled release technology are in
various stages of development. None of these products has been commercialized,
and the period required to achieve
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commercialization is uncertain and may be lengthy, if commercialization is
achieved at all. Two products using TIMERx technology have been the subject of
regulatory filings by the Company's collaborators. In October 1997, Leiras
received marketing approval in Finland for Cystrin CR for the treatment of
urinary incontinence. In May 1997, Mylan filed an ANDA with the FDA for the 30
mg dosage strength of Nifedipine XL, a generic version of Procardia XL, a
calcium channel blocker for treating hypertension. No regulatory approval to
market Nifedipine XL has been received, and there can be no assurance as to when
or if regulatory approval will be received. Moreover, other than Cystrin CR, no
product based on TIMERx technology has ever received regulatory approval for
commercial sale, and there can be no assurance that the results from
bioequivalence studies or clinical trials will justify such regulatory approval.
Except for milestone fees received for products under development, the Company
has not generated any revenues from controlled release products. There can be no
assurance that the Company's controlled release product development efforts will
be successfully completed, that required regulatory approvals will be obtained
or that approved products will be successfully manufactured or marketed. See
"Business -- TIMERx Product Development," "-- Collaborative Arrangements" and
"-- Government Regulation."
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company incurred net losses of approximately $2.6 million, $3.3 million
and $3.9 million during 1994, 1995 and 1996, respectively, and $2.5 million and
$3.2 million during the nine months ended September 30, 1996 and 1997,
respectively. As of September 30, 1997, the Company's accumulated deficit was
approximately $15.5 million. The Company expects net losses to continue at least
into 1999. A substantial portion of the Company's revenues have been generated
from the sales of the Company's pharmaceutical excipients. The Company's future
profitability will depend on several factors, including the successful
commercialization by the Company and its collaborators of the controlled release
products for which regulatory approval currently is pending or has recently been
obtained, the completion of the development of other pharmaceuticals using the
Company's TIMERx controlled release technology and, to a lesser extent, an
increase in sales of its pharmaceutical excipient products. There can be no
assurance that the Company will achieve profitability or that it will be able to
sustain any profitability on a quarterly basis, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
INTENSE COMPETITION; RISK OF TECHNOLOGICAL CHANGE
The pharmaceutical industry is highly competitive and is affected by new
technologies, governmental regulations, health care legislation, availability of
financing, litigation and other factors. Many of the Company's competitors have
longer operating histories and greater financial, marketing, legal and other
resources than the Company and certain of its collaborators. The Company expects
that it will be subject to competition from numerous other entities that
currently operate or intend to operate in the pharmaceutical industry, including
companies that engage in the development of controlled release technologies. The
Company's TIMERx business faces competition from numerous public and private
companies and their controlled release technologies, including ALZA's oral
osmotic pump (OROS(R)) technology, multiparticulate systems marketed by Elan
Corporation, plc ("Elan") and Biovail Corporation International, traditional
matrix systems marketed by Jago Pharma AG, a subsidiary of SkyePharma, plc, and
other controlled release technologies marketed and under development by Andrx
Corporation, among others.
The Company initially is concentrating its development efforts on generic
versions of controlled release pharmaceuticals. Typically, selling prices of
immediate release drugs have declined and profit margins have narrowed after
generic equivalents of such drugs are first introduced and the number of
competitive products has increased. Similarly, the success of generic versions
of controlled release products based on the Company's TIMERx technology will
depend, in large part, on the intensity of competition from currently marketed
drugs and technologies that compete with the branded controlled release
pharmaceuticals, as well as the timing of product approvals. Competition may
also arise
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from therapeutic products that are functionally equivalent but produced by other
methods. In addition, under several of the Company's collaborative arrangements,
the payments due to the Company with respect to the controlled release products
covered by such collaborative arrangements will be reduced in the event that
there are competing generic controlled release versions of such products.
The generic drug industry is characterized by frequent litigation between
generic drug companies and branded drug companies. Those companies with
significant financial resources will be more able to bring and defend any such
litigation. See "Business -- Litigation."
In its excipients business, the Company competes with a number of large
manufacturers and other distributors of excipient products, many of which have
substantially greater financial, marketing and other resources than the Company.
The Company's principal competitor in this market is FMC Corporation, which
markets its own line of MCC excipient products.
The pharmaceutical industry is characterized by rapid and substantial
technological change. There can be no assurance that any products incorporating
TIMERx technology will not be rendered obsolete or non-competitive by new drugs,
treatments or cures for the medical conditions the TIMERx-based products are
addressing. Any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Competition."
NEED FOR ADDITIONAL FUNDING; UNCERTAINTY OF ACCESS TO CAPITAL
The Company anticipates that its existing capital resources, together with
the net proceeds of this offering and interest earned thereon, will enable it to
maintain currently planned operations through at least 1999. However, this
expectation is based on the Company's current operating plan, which could change
as a result of many factors, and the Company could require additional funding
sooner than anticipated. The Company's requirements for additional capital could
be substantial and will depend on many factors, including the timing and amount
of payments received under existing and possible future collaborative
agreements; the structure of any future collaborative or development agreements;
the progress of the Company's collaborative and independent development
projects; revenues from the Company's excipients business, including from the
introduction of ProSolv; the costs to the Company of bioequivalence studies and
clinical trials for the Company's products; the prosecution, defense and
enforcement of patent claims and other intellectual property rights; and the
development of manufacturing, marketing and sales capabilities. Upon the closing
of this offering, the Company will have no credit facility or other committed
sources of capital. To the extent capital resources are insufficient to meet
future capital requirements, the Company will have to raise additional funds to
continue the development of its technologies. There can be no assurance that
such funds will be available on favorable terms, if at all. To the extent that
additional capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities could result in dilution to the
Company's shareholders. If adequate funds are not available, the Company may be
required to curtail operations significantly or to obtain funds through entering
into collaboration agreements on unfavorable terms. The Company's inability to
raise capital would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
UNCERTAINTIES RELATING TO PATENTS AND PROPRIETARY RIGHTS
The Company believes that patent and trade secret protection of its drug
delivery technologies is important to its business and that its success will
depend, in part, on its ability to maintain existing patent protection, obtain
additional patents, maintain trade secret protection and operate without
infringing on the rights of others. Penwest has been issued 19 U.S. patents and
40 foreign patents relating to its controlled release drug delivery and
excipient technologies. In addition, Penwest has filed 12 U.S. patent
applications and corresponding foreign patent applications relating to its
controlled release drug delivery technology. The issuance of a patent is not
conclusive as to its validity or as to the
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enforceable scope of the claims of the patent. There can be no assurance that
the Company's patents or any future patents will prevent other companies from
developing similar or functionally equivalent products or from successfully
challenging the validity of the Company's patents. Furthermore, there can be no
assurance that (i) any of the Company's future processes or products will be
patentable; (ii) any pending or additional patents will be issued in any or all
appropriate jurisdictions; (iii) the Company's processes or products will not
infringe upon the patents of third parties; or (iv) the Company will have the
resources to defend against charges of patent infringement or protect its own
patent rights against third parties. The inability of the Company to protect its
patent rights or infringement by the Company of the patent or proprietary rights
of others could have a material adverse effect on the Company's business,
financial condition and results of operations.
There exists substantial patent litigation in the pharmaceutical,
biomedical and biotechnology industries. Patent litigation generally involves
complex legal and factual questions, and the outcome frequently is difficult to
predict. An unfavorable outcome in any patent litigation affecting the Company
could cause the Company to pay substantial damages, alter its products or
processes, obtain licenses and/or cease certain activities. Even if the outcome
is favorable to the Company, the Company could incur substantial litigation
costs. Although the legal costs of defending litigation relating to a patent
infringement claim (unless such claim relates to TIMERx) are generally the
contractual responsibility of the Company's collaborators, the Company could
nonetheless incur significant unreimbursed costs in participating and assisting
in the litigation.
In 1994, the Boots Company PLC ("Boots") filed in the European Patent
Office (the "EPO") an opposition to a patent granted by the EPO to the Company
relating to its TIMERx technology. In June 1996, the EPO dismissed Boots'
opposition, leaving intact all claims included in the patent. Boots has appealed
this decision to the EPO Board of Appeals. There can be no assurance that the
Company will prevail in this matter. An unfavorable outcome could materially
adversely affect the Company's business, financial condition and results of
operations.
The Company's collaborator Mylan is involved in patent litigation with
respect to Nifedipine XL. For a discussion of such patent litigation, see
"Business -- Litigation."
Penwest also relies on trade secrets and proprietary knowledge, which it
generally seeks to protect by confidentiality and non-disclosure agreements with
employees, consultants, licensees and pharmaceutical companies. There can be no
assurance, however, that these agreements have or in all cases will be obtained,
that these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known by others, any of which could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Patents and Proprietary Rights."
GOVERNMENT REGULATION; NO ASSURANCE OF REGULATORY APPROVAL
The development, clinical testing, manufacture, marketing and sale of
pharmaceutical products are subject to extensive federal, state and local
regulation in the United States. The Company cannot predict the extent to which
it may be affected by legislative and regulatory actions and developments
concerning various aspects of its operations, its products and the health care
field generally. Virtually all new prescription drugs, and many new
over-the-counter drugs, must be approved by the FDA before they can be
introduced onto the market in the United States. These approvals are based on
manufacturing, chemistry and control data, as well as safety and efficacy
studies and/or bioequivalence studies. The generation of the required data is
regulated by the FDA and can be time-consuming and expensive without assurance
that the results will be adequate to justify approval.
After submission of a marketing application, in the form of an NDA or an
ANDA, there can be substantial delays in obtaining FDA approval, including the
need to generate and submit additional data. Data submitted to the FDA is often
susceptible to varying interpretations that could delay, limit or prevent
regulatory approval. Also, delays or rejections may be encountered during any
stage of the regulatory approval process based upon the failure of clinical data
to demonstrate compliance with, or
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upon the failure of the product to meet, the FDA's requirements for safety,
efficacy and quality; and those requirements may become more stringent due to
changes in regulatory agency policy or the adoption of new regulations. While
the U.S. Food, Drug and Cosmetic Act provides for a 180-day review period, the
FDA commonly takes one to two years to grant final approval to a marketing
application (NDA or ANDA). Further, the terms of approval of any marketing
application, including the labeling content, may be more restrictive than the
Company desires and could affect the marketability of products incorporating the
Company's controlled release technology.
Most of the controlled release products that the Company is developing with
its collaborators are generic versions of brand name controlled release
products, which require the filing of ANDAs. Certain ANDA procedures for generic
versions of controlled release products are the subject of petitions filed by
brand name drug manufacturers, which seek changes from the FDA in the approval
process for generic drugs. These requested changes include, among other things,
tighter standards for certain bioequivalence studies and disallowance of the use
by a generic drug manufacturer in its ANDA of proprietary data submitted by the
original manufacturer as part of an original new drug application. The Company
is unable to predict at this time whether the FDA will make any changes to its
ANDA procedures as a result of such petitions or any future petitions filed by
brand name drug manufacturers or the effect that such changes may have on the
Company. Any changes in FDA regulations which make ANDA approvals more difficult
could have a material adverse effect on the Company's business, financial
condition and results of operations.
The FDA also has the authority to revoke or suspend approvals of previously
approved products for cause, to debar companies and individuals from
participating in the drug-approval process, to request recalls of allegedly
violative products, to seize allegedly violative products, to obtain injunctions
to close manufacturing plants allegedly not operating in conformity with current
Good Manufacturing Practices ("cGMPs") and to stop shipments of allegedly
violative products. Such delays or FDA actions could have a material adverse
effect on the Company's business, financial condition and results of operations.
The FDA may seek to subject to pre-clearance requirements products currently
being marketed without FDA approval and there can be no assurance that the
Company or its third-party manufacturers or collaborators will be able to obtain
approval for such products within the time period specified by the FDA.
In May 1997, one of the Company's collaborators, Mylan, filed an ANDA with
the FDA for the 30 mg dosage strength of Nifedipine XL, a generic version of
Procordia XL. In addition, the Company expects that its collaborators will file
marketing applications for other products using the TIMERx controlled release
delivery system. There can be no assurance that approvals can be obtained, or be
obtained in a timely manner, for such applications or for other applications
that may be filed in the future. See "Business -- Government Regulation."
LIMITED MANUFACTURING CAPABILITY; DEPENDENCE ON SOLE SOURCE SUPPLIERS
The Company lacks commercial-scale facilities to manufacture its TIMERx
material in accordance with cGMP requirements prescribed by the FDA. To date,
the Company has relied on a large third-party pharmaceutical company for the
bulk manufacture of its TIMERx material for delivery to its collaborators under
an agreement that expires in June 1998. Although the Company intends to use a
portion of the proceeds of this offering to build a manufacturing facility for
its TIMERx material, the Company expects to continue to be dependent on
third-party manufacturers until its facility is fully operational and in
compliance with cGMP regulations. The Company believes that there are a limited
number of manufacturers that operate under cGMP regulations capable of
manufacturing the Company's products. In the event that the Company is unable to
obtain contract manufacturing, or obtain such manufacturing on commercially
reasonable terms, it may not be able to commercialize its products as planned.
There can be no assurance that third parties upon which the Company relies for
supply of its TIMERx materials will perform and any failures by third parties
may delay development or the submission of products for regulatory approval,
impair the Company's collaborators' ability to commercialize products as planned
and deliver products on a timely basis, or otherwise impair the
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Company's competitive position, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
In order for the Company to develop its own manufacturing capabilities for
TIMERx material, it will need to complete the construction and qualification of
a manufacturing facility, recruit qualified personnel and acquire or lease the
requisite equipment. There can be no assurance that the Company will be able to
successfully develop such manufacturing capabilities on a cost effective and
timely basis, if at all.
The manufacture of any products by the Company (both TIMERx material and
excipients) is subject to regulation by the FDA and comparable agencies in
foreign countries. Delay in complying or failure to comply with such
manufacturing requirements could materially adversely affect the marketing of
the Company's products and the Company's business, financial condition and
results of operations.
The Company's TIMERx drug delivery system is a hydrophilic matrix
consisting primarily of two natural polysaccharides, xanthan and locust bean
gums, in the presence of dextrose. The Company purchases these gums from a sole
source supplier. Most of the Company's excipients are manufactured from wood
pulp, which the Company also purchases from a sole source supplier. Although the
Company has qualified alternate suppliers with respect to these materials, there
can be no assurance that interruptions in supplies will not occur in the future
or that the Company will not have to obtain substitute suppliers. Any of these
events could have a material adverse effect on the Company's ability to
manufacture bulk TIMERx for delivery to its collaborators or manufacture its
excipients, which could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Manufacturing."
RELATIONSHIP WITH PENFORD; CONFLICTS OF INTEREST
Conflicts of interest may arise between the Company and Penford in a number
of areas relating to their past and ongoing relationships, including the
manufacture of certain excipients, tax and employee benefit matters, indemnity
arrangements, registration rights, sales or distributions by Penford of its
shares of Common Stock and the exercise by Penford of its ability to control the
management and affairs of the Company. Although Penford has advised the Company
that it does not currently intend to engage in the business of developing,
marketing and commercializing drug delivery products except through its
ownership of Common Stock and contractual relationships with the Company, other
than the agreement by Penford not to distribute certain products to the
pharmaceutical and nutritional industries (excluding food products), there are
no contractual or other restrictions on Penford's ability to engage in such
activities. Accordingly, circumstances could arise in which Penford would
compete with the Company.
In anticipation of this offering, and in view of Penford's intention to
undertake the Spin-off, the Company and Penford have entered into a number of
agreements, which will become effective upon the closing of this offering, for
the purpose of defining certain relationships between them. As a result of
Penford's ownership interest in the Company, the terms of such agreements were
not the result of arm's-length negotiations. Notwithstanding any tax allocation
agreement entered into between the Company and Penford, under federal income tax
law, each member of a consolidated group for federal income tax purposes is also
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. Similar rules may apply under state income tax
laws. If Penford or members of its consolidated tax group (other than the
Company and its subsidiaries) do not comply with the provisions of any such tax
allocation agreement and the Company is required to make payments in respect of
the tax liabilities allocated to Penford thereunder, such payments could
adversely affect the business, financial condition and results of operations of
the Company.
Three of the eight current directors of the Company are also directors of
Penford. Two of these individuals have informed the Company they intend to
resign from Penford's Board of Directors upon completion of the Spin-off, which
is expected to occur in the second quarter of 1998. Directors of the
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Company who are also directors of Penford may have conflicts of interest with
respect to matters potentially or actually involving or affecting the Company
and Penford such as acquisitions, financings and other corporate opportunities
that may be suitable for the Company and Penford. To the extent that such
opportunities arise, such directors may consult with their legal advisors and
make a determination after consideration of a number of factors, including
whether such opportunity is presented to any such director in his capacity as a
director of the Company, whether such opportunity is within the Company's line
of business or consistent with its strategic objectives and whether the Company
will be able to undertake or benefit from such opportunity. In addition,
determinations may be made by the Board, when appropriate, by the vote of the
disinterested directors only. Notwithstanding the foregoing, there can be no
assurance that conflicts will be resolved in favor of the Company. See
"Arrangements Between the Company and Penford."
NO ASSURANCE OF ADEQUATE THIRD-PARTY REIMBURSEMENT
The commercialization of the controlled release product candidates under
development by the Company and its collaborators depends in part on the extent
to which reimbursement for the cost of such products will be available from
government health administration authorities, private health insurers and other
third party payors, such as health maintenance organizations and managed care
organizations. The generic versions of controlled release products being
developed by the Company and its collaborators may be assigned an AB rating if
the FDA considers the product to be therapeutically equivalent to the branded
controlled release drug. Failure to obtain an AB rating from the FDA would
indicate that for certain purposes the drug would not be deemed to be
therapeutically equivalent, would not be fully substitutable for the branded
controlled release drug and would not be relied upon by Medicaid and Medicare
formularies for reimbursement.
Third party payors are attempting to control costs by limiting the level of
reimbursement for medical products, including pharmaceuticals. Cost control
initiatives could decrease the price that the Company or any of its
collaborators receives for their drugs and have a material adverse affect on the
Company's business, financial condition and results of operations. Further, to
the extent that cost control initiatives have a material adverse effect on the
Company's collaborators, the Company's ability to commercialize its products and
to realize royalties may be adversely affected. Moreover, health care reform has
been, and may continue to be, an area of national and state focus, which could
result in the adoption of measures that adversely affect the pricing of
pharmaceuticals or the amount of reimbursement available from third party
payors. There can be no assurance that changes in health care reimbursement laws
or policies will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Pricing and
Third-Party Reimbursement."
RISK OF PRODUCT LIABILITY CLAIMS; NO ASSURANCE OF ADEQUATE INSURANCE
Testing, manufacturing, marketing and selling pharmaceutical products
entail a risk of product liability. The Company faces the risk of product
liability claims in the event that the use of its products is alleged to have
resulted in harm to a patient or subject. Such risks exist even with respect to
those products that are manufactured in licensed and regulated facilities or
that otherwise possess regulatory approval for commercial sale. Product
liability insurance coverage is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. Until the Spin-off, the
Company will be covered by primary product liability insurance maintained by
Penford in the amount of $1.0 million per occurrence and $2.0 million annually
in the aggregate on a claims-made basis and by umbrella liability insurance in
excess of $5.0 million which can also be used for product liability insurance.
There can be no assurance that this coverage is adequate to cover potential
liability claims or that Penwest will be able to obtain comparable coverage
following the Spin-off. Furthermore, this coverage may not be adequate as the
Company develops additional products. As the Company receives regulatory
approvals for products under development, there can be no assurance that
additional liability insurance coverage for any such products will be available
in the future on acceptable terms, if
16
<PAGE> 18
at all. The Company's business, financial condition and results of operations
could be materially adversely affected by the assertion of a product liability
claim. See "Business -- Product Liability Insurance."
INTERNATIONAL OPERATIONS AND CURRENCY EXCHANGE RATE FLUCTUATIONS
The Company's business is conducted internationally and may be affected by
fluctuations in currency exchange rates, as well as by governmental controls and
other risks associated with international sales (such as export licenses,
collectibility of accounts receivable, trade restrictions and changes in
tariffs). The Company's international subsidiaries transact a substantial
portion of their sales and purchases in European currencies other than their
functional currency, which can result in the Company having gains or losses from
currency exchange rate fluctuations. There can be no assurance that exchange
rate fluctuations or other risks associated with international operations will
not have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and Note 12 of Notes to
Consolidated Financial Statements.
DEPENDENCE ON KEY PERSONNEL
The Company's success is dependent on the Company's attracting and
retaining highly skilled scientific, managerial and business development
personnel. The loss of services of any of these key personnel could materially
adversely affect the Company. The Company's business expansion plans require
additional, highly skilled employees, particularly highly skilled scientific
personnel. Competition for qualified personnel is intense. There can be no
assurance that the Company will be successful in hiring or retaining the
personnel it requires. See "Management."
RISKS ASSOCIATED WITH HAZARDOUS MATERIALS
The Company's research and development involves the controlled use of
hazardous materials and chemicals. Although the Company believes that its safety
procedures for handling and disposing of such materials comply with the
standards prescribed by state and federal regulations, the risk of accidental
contamination or injury from these materials cannot be completely eliminated. In
the event of such an accident, the Company could be held liable for any damages
that result and any such liability could exceed the resources of the Company and
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Business -- Government Regulation."
NO PRIOR PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POTENTIAL
VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock and there can be no assurance that an active public market for the Common
Stock will develop or that the price at which the Common Stock will trade will
not be lower than the initial public offering price. The initial public offering
price will be determined through negotiations between the Company and the
Underwriters. See "Underwriting."
The market prices for securities of pharmaceutical, biopharmaceutical and
biotechnology companies have historically been highly volatile. The market from
time to time experiences significant price and volume fluctuations that are
unrelated to the operating performance of particular companies. In addition,
factors such as fluctuations in the Company's operating results, future sales of
Common Stock, announcements of technological innovations or new therapeutic
products by the Company or its competitors, announcements regarding
collaborative agreements, clinical trial results, government regulation,
developments in patent or other proprietary rights, public concern as to the
safety of drugs developed by the Company or others, changes in reimbursement
policies, comments made by securities analysts and general market conditions can
have an adverse effect on the market price of the Common Stock. In particular,
the realization of any of the risks described in these "Risk Factors,"
17
<PAGE> 19
including the possibility of substantial sales of Common Stock as a result of
the Spin-off, could have a significant and adverse impact on such market price.
DILUTION; ABSENCE OF DIVIDENDS
The public offering price is substantially higher than the net tangible
book value per share of the Company's Common Stock. Investors purchasing shares
of Common Stock in this offering will therefore incur immediate, substantial
dilution of approximately $7.95 per share. See "Dilution." The Company has not
paid any dividends on its Common Stock since inception and does not anticipate
paying any cash dividends in the foreseeable future. See "Dividend Policy."
ANTI-TAKEOVER EFFECTS OF WASHINGTON LAW AND CERTAIN CHARTER PROVISIONS
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock and to determine the price, rights, preferences and
privileges of those shares without any further vote or action by the Company's
shareholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. While the Company has no present intention to
issue shares of Preferred Stock, such issuance, while providing desirable
flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to
acquire a majority of the outstanding voting stock of the Company. In addition,
the Company is subject to the anti-takeover provisions of Chapter 23B.19 of the
Washington Business Corporation Act, which prohibits the Company from engaging
in a "business combination" with an "interested shareholder" for a period of
three years after the date of the transaction in which the person became an
interested shareholder, unless the business combination is approved in a
prescribed manner. The application of Chapter 23B.19 could have the effect of
delaying or preventing a change of control of the Company. The Company's Amended
and Restated Articles of Incorporation provide for staggered terms for the
members of the Board of Directors. The staggered Board of Directors and certain
other provisions of the Company's Amended and Restated Articles of Incorporation
and Amended and Restated Bylaws may have the effect of delaying or preventing a
change of control of the Company, which could adversely affect the market price
of the Company's Common Stock. See "Description of Capital Stock -- Washington
Law and Certain Charter and Bylaw Provisions."
18
<PAGE> 20
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby (2,875,000 if the Underwriters' over-allotment
option is exercised in full) at an assumed initial public offering price of
$11.00 per share, after deducting estimated underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$24,575,000 ($28,411,250 if the Underwriters' over-allotment option is exercised
in full).
The Company anticipates that approximately $15.0 million of the net
proceeds will be used for the construction and equipping of a TIMERx
manufacturing facility and expansion of existing laboratory facilities. The
balance of the net proceeds will be used for working capital and other general
corporate purposes. Although the Company may use a portion of the net proceeds
to acquire or license products or technologies complementary to those of the
Company, there are no current plans or commitments to do so.
The amounts actually expended for each purpose and the timing of such
expenditures will depend upon numerous factors, including: the timing and amount
of payments received under existing and possible future collaborative
agreements; the structure of any future collaborative or development agreements;
the progress of the Company's collaborative and independent development
projects; financing alternatives; revenues from the Company's excipients
business, including from the introduction of ProSolv; the costs to the Company
of bioequivalence studies and clinical trials for the Company's products; the
prosecution, defense and enforcement of patent claims and other intellectual
property rights; the defense of other litigation; and the development of
manufacturing, marketing and sales capabilities.
Pending such uses, the Company intends to invest the net proceeds of this
offering in short-term, interest-bearing, investment-grade securities.
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Stock. The Company
presently intends to retain earnings, if any, for use in the operation of its
business, and therefore does not anticipate paying any cash dividends in the
foreseeable future.
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 1997, and as adjusted to give effect to the sale of the 2,500,000
shares of Common Stock by the Company offered hereby based upon an assumed
initial public offering price of $11.00 per share and the application of the
estimated net proceeds therefrom and the Penford Capital Contribution. This
table should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the Financial Statements
and Notes thereto appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(in thousands)
<S> <C> <C>
Payable to Penford(1)................................................. $ 37,503 $ --
======= ========
Shareholders' equity (deficit):
Common stock, par value $0.001; 39,000,000 shares authorized;
14,538,282 shares issued and outstanding actual, and 17,038,282
shares issued and outstanding, as adjusted(2)...................... 15 17
Additional paid-in capital............................................ 8,075 70,151
Accumulated deficit................................................... (15,508) (15,508)
Cumulative translation adjustment..................................... (660) (660)
------- --------
Total shareholders' equity (deficit)............................... (8,078) 54,000
------- --------
Total capitalization............................................ $ 29,425 $ 54,000
======= ========
</TABLE>
- ---------------
(1) Represents the intercompany advances from Penford to fund Penwest's
operations, capital expenditures and the original acquisition of the
Company's predecessor, which will be contributed to the capital of Penwest
upon the closing of this offering.
(2) Excludes 715,000 shares of Common Stock issuable upon the exercise of
options to be granted to certain employees and directors on the date of this
Prospectus at an exercise price equal to the initial public offering price.
Also excludes an aggregate of 3,085,000 shares reserved for future grants or
purchases pursuant to the Company's 1997 Equity Incentive Plan and 1997
Employee Stock Purchase Plan. See "Management -- Employee Benefit Plans" and
Note 13 of Notes to Consolidated Financial Statements.
20
<PAGE> 22
DILUTION
The net tangible book value (deficit) of the Company as of September 30,
1997 was ($10,117,000) or ($0.70) per share of Common Stock ($27,386,000 or
$1.88 per share of Common Stock, adjusted for the Penford Capital Contribution).
Net tangible book value per share represents the amount of the Company's total
tangible assets less total liabilities, divided by the total number of shares of
Common Stock outstanding at September 30, 1997. After giving effect to the sale
by the Company of 2,500,000 shares of Common Stock offered hereby at an assumed
initial public offering price of $11.00 per share, after deducting the estimated
underwriting discounts and commissions and estimated offering expenses payable
by the Company, and after giving effect to the Penford Capital Contribution, the
adjusted net tangible book value of the Company as of September 30, 1997 would
have been $51,961,000 or $3.05 per share. This represents an immediate increase
in net tangible book value of $1.17 per share to the existing shareholder after
giving effect to the Penford Capital Contribution and an immediate dilution in
net tangible book value of $7.95 per share to purchasers of shares of Common
Stock in this offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price............................... $11.00
Net tangible book value as of September 30, 1997.................. $ (0.70)
Increase attributable to the Penford Capital Contribution......... 2.58
Increase attributable to this offering............................ 1.17
------
Adjusted net tangible book value after this offering and after
giving effect to the Penford Capital Contribution................. 3.05
------
Dilution to new investors........................................... $ 7.95
======
</TABLE>
The following table summarizes, as of September 30, 1997, the difference
between the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid by Penford after
giving effect to the contribution of the amount due to parent and affiliates and
by new investors before deducting the estimated underwriting discounts and
commissions and estimated offering expenses payable by the Company at the
assumed initial public offering price of $11.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------ ------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Penford.............. 14,538,282 85.3% $45,593,000 62.4% $ 3.14
New investors........ 2,500,000 14.7 27,500,000 37.6 11.00
------ ----- ------- -----
Total.......... 17,038,282 100.0% $73,093,000 100.0%
====== ===== ======= =====
</TABLE>
The foregoing table assumes no exercise of options to purchase 715,000
shares of Common Stock to be granted to certain employees and directors on the
date of this Prospectus at an exercise price equal to the initial public
offering price. In addition to the shares reserved for issuance upon exercise of
these options, the Company has reserved an additional 3,085,000 shares of Common
Stock for future grants or purchases pursuant to the Company's 1997 Equity
Incentive Plan and 1997 Employee Stock Purchase Plan. See
"Management -- Employee Benefit Plans" and Note 13 of Notes to Consolidated
Financial Statements.
21
<PAGE> 23
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1994,
1995 and 1996 and the nine-month period ended September 30, 1997 and the balance
sheet data as of December 31, 1995 and 1996 and September 30, 1997 are derived
from the consolidated financial statements of the Company which have been
audited by Ernst & Young LLP, independent auditors. The statement of operations
data for the years ended December 31, 1992 and 1993 and the nine month period
ended September 30, 1996 and the balance sheet data as of December 31, 1992,
1993 and 1994 are derived from unaudited consolidated financial statements. The
unaudited consolidated financial statements include all adjustments, consisting
of normal recurring accruals, which the Company considers necessary for a fair
presentation of the financial position and results of operations for these
periods. Operating results for the nine-month period ended September 30, 1997
are not necessarily indicative of the results that may be expected for the
entire year ending December 31, 1997. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Consolidated Financial Statements, related
Notes thereto, and other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 19,406 $ 21,355 $ 23,146 $ 25,089 $ 26,089 $ 19,958 20,787
Cost of product sales.... 13,114 13,708 15,910 17,267 18,690 14,033 14,660
----- ----- ----- ----- ----- ----- -----
Gross profit........ 6,292 7,647 7,236 7,822 7,399 5,925 6,127
Selling, general and
administrative
expenses............... 5,024 6,383 7,021 7,676 6,776 5,264 5,747
Research and development
expenses............... 553 1,255 2,322 2,719 3,723 2,636 2,994
Net income (loss)........ $ 339 $ 8 $ (2,629) $ (3,252) $ (3,864) $ (2,461) $ (3,175)
===== ===== ===== ===== ===== ===== =====
Net income (loss) per
share.................. $ 0.02 $ 0.00 $ (0.18) $ (0.22) $ (0.27) $ (0.17) $ (0.22)
===== ===== ===== ===== ===== ===== =====
Weighted average shares
outstanding............ 14,538 14,538 14,538 14,538 14,538 14,538 14,538
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- -------------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash
equivalents............ -- $ 347 $ 668 $ 290 $ 695 $ 1,088
Working capital.......... $ (6,226) (12,321) (14,592) (19,461) (23,362) (27,885)
Total assets............. 19,961 25,430 27,000 31,671 35,083 37,380
Accumulated deficit...... (2,596) (2,588) (5,217) (8,469) (12,333) (15,508)
Total shareholder's
equity (deficit)....... 5,576 5,011 2,641 (477) (4,412) (8,078)
</TABLE>
22
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth under "Risk Factors" and elsewhere in
this Prospectus.
OVERVIEW
Since 1991, Penwest has been engaged in the research, development and
commercialization of novel drug delivery technologies, including the development
of its TIMERx controlled release drug delivery technology. The Company also
develops, manufactures, distributes and sells excipients to the pharmaceutical
and nutritional industries. Penwest was incorporated under the name Edward
Mendell Co., Inc. in the State of Washington in 1991 following Penford's
acquisition of substantially all the assets of its predecessor company.
The Company's principal development focus to date has been the development
of controlled release drugs based on the TIMERx technology. In October 1997, the
Company's collaborator, Leiras, received marketing approval in Finland for
Cystrin CR, a TIMERx formulation for the treatment of urinary incontinence. In
May 1997, the Company's collaborator, Mylan, filed an ANDA with the FDA for the
30 mg dosage strength of Nifedipine XL, the first generic version of Procardia
XL. Subsequent to the filing of Mylan's ANDA, Bayer and Pfizer sued Mylan
alleging patent infringement and Pfizer sued the FDA claiming that the FDA's
acceptance of Mylan's ANDA filing was contrary to law. There can be no assurance
that Mylan or the FDA will prevail in these matters or that they will continue
to contest these matters. An unfavorable outcome or protracted litigation with
respect to either of these matters would have a material adverse effect on the
Company's business, financial condition and results of operations.
The Company is a party to collaborative agreements with Mylan, Leiras,
Kremers, Sanofi and Endo with respect to the development and commercialization
of TIMERx controlled release products. Under these collaborative agreements, the
Company's collaborators are generally responsible for conducting full scale
bioequivalence studies and clinical trials, preparing and submitting all
regulatory applications and submissions and manufacturing, marketing and selling
the TIMERx controlled release products. There can be no assurance that the
Company's collaborations will be commercially successful. The Company cannot
control the amount and timing of resources which its collaborators devote to the
Company's programs or potential products. If any of the Company's collaborators
breach or terminate their agreements with the Company or otherwise fail to
conduct their collaborative activities in a timely manner, the development and
commercialization of product candidates would either be terminated or delayed,
or the Company would be required to undertake product development and
commercialization activities on its own and at its own expense, which would
increase the Company's capital requirements or require the Company to limit the
scope of its development and commercialization activities.
Except for Cystrin CR, which received marketing approval in Finland, no
product based on TIMERx technology has ever received regulatory approval for
commercial sale. Virtually all the TIMERx revenues generated to date have been
milestone fees received for products under development. There can be no
assurance that the Company's controlled release product development efforts will
be successfully completed, that required regulatory approvals will be obtained
or that approved products will be successfully manufactured or marketed.
The Company has incurred net losses since 1994. As of September 30, 1997,
the Company's accumulated deficit was approximately $15.5 million. The Company
expects net losses to continue at least into 1999. A substantial portion of the
Company's revenues to date have been generated from the sales of the Company's
pharmaceutical excipients. The Company's future profitability will depend on
23
<PAGE> 25
several factors, including the successful commercialization of TIMERx controlled
release products, and, to a lesser extent, an increase in sales of its
pharmaceutical excipients products. There can be no assurance that the Company
will achieve profitability or that it will be able to sustain any profitability
on a quarterly basis, if at all.
The Company's results of operations may fluctuate from quarter to quarter
depending on the volume and timing of orders of the Company's pharmaceutical
excipients and on variations in payments under the Company's collaborative
agreements including payments upon the achievement of specified milestones. The
Company's quarterly operating results may also fluctuate depending on other
factors, including variations in gross margins of the Company's products, the
mix of products sold, competition, regulatory actions, litigation and currency
exchange rate fluctuations.
The Company's business is conducted internationally and may be affected by
fluctuations in currency exchange rates, as well as by governmental controls and
other risks associated with international sales (such as export licenses,
collectibility of accounts receivable, trade restrictions and changes in
tariffs). The Company's international subsidiaries transact a substantial
portion of their sales and purchases in European currencies other than their
functional currency, which can result in the Company having gains or losses from
currency exchange rate fluctuations. The Company does not use derivatives to
hedge the impact of fluctuations in foreign currencies. See Note 12 of Notes to
Consolidated Financial Statements.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 1997 and 1996
Total revenues increased by 4.2% for the nine months ended September 30,
1997 to $20.8 million from $20.0 million for the nine months ended September 30,
1996. Product sales increased to $19.9 million for the nine months ended
September 30, 1997 from $19.1 million for the nine months ended September 30,
1996, primarily due to an increase in North American sales of EMCOCEL, one of
the Company's core excipient products, which increase was partially offset by a
decrease in average selling price for some excipients in Europe due to
competitive pricing pressures in European excipient operations. Licensing
revenues relating to the TIMERx drug delivery system increased to $911,000 for
the nine months ended September 30, 1997 from $850,000 for the nine months ended
September 30, 1996 due to the achievement of additional development milestones
during the 1997 period.
Gross profit increased to $6.1 million or 29.5% of total revenues for the
nine months ended September 30, 1997 from $5.9 million or 29.7% of total
revenues for the nine months ended September 30, 1996. The decrease in gross
profit percentage was due to a change in product mix and pricing pressure in the
Company's European excipients operations, which were offset in part by a slight
increase in licensing revenues.
Selling, general and administrative expenses increased by 9.2% for the nine
months ended September 30, 1997 to $5.7 million from $5.3 million for the nine
months ended September 30, 1996. This increase was primarily due to additional
general and administrative expenses associated with increased business
development efforts with respect to the Company's TIMERx business.
Research and development expenses increased by 13.6% for the nine months
ended September 30, 1997 to $3.0 million from $2.6 million for the nine months
ended September 30, 1996. This increase was due to increased spending in the
development of the TIMERx drug delivery system and its applications as well as
increased spending on developing high performance excipients such as ProSolv.
For the nine months ended September 30, 1997 and 1996, respectively, the
Company did not record a benefit for federal or state taxes because net
operating losses were utilized by Penford in the year they were generated, and
the Company was not compensated by Penford for these losses. In addition, the
Company's provision for income taxes includes foreign taxes and federal and
state deferred tax liabilities that exceed deferred tax assets.
24
<PAGE> 26
Years Ended December 31, 1996 and 1995
Total revenues increased by 4.0% in 1996 to $26.1 million from $25.1
million in 1995. Product sales equalled $25.0 million in 1996 and in 1995.
Licensing revenues relating to the TIMERx drug delivery system increased to $1.1
million in 1996 from $100,000 in 1995 due to the achievement of additional
development milestones during the 1996 period.
Gross profit decreased to $7.4 million or 28.4% of total revenues in 1996
from $7.8 million or 31.2% of total revenues in 1995. Gross margins in 1996
decreased due to higher unit costs with respect to EMCOCEL, which were partially
offset by an increase in licensing revenues. These higher unit costs resulted
from the underutilization of a new manufacturing plant opened in late 1993 to
produce EMCOCEL.
Selling, general and administrative expenses decreased by 11.7% in 1996 to
$6.8 million from $7.7 million in 1995. This decrease was due to reduced
property taxes on the Patterson facility and a reduction in professional
services.
Research and development expenses increased by 36.9% in 1996 to $3.7
million from $2.7 million in 1995. This increase was attributable primarily to
the hiring of additional research and development personnel in connection with
the development of the TIMERx drug delivery system and its applications.
For 1996 and 1995, the Company did not record a benefit for federal or
state taxes because net operating losses were utilized by Penford in the year
they were generated, and the Company was not compensated for these losses. In
addition, the Company's provision for income taxes includes foreign taxes and
federal and state deferred tax liabilities that exceed deferred tax assets.
Years Ended December 31, 1995 and 1994
Total revenues increased by 8.4% in 1995 to $25.1 million from $23.1
million in 1994. This increase was primarily due to growth in sales of the
Company's excipient products including the EMCOCEL and EXPLOTAB products.
Gross profit increased to $7.8 million or 31.2% of total revenues in 1995
from $7.2 million or 31.3% of total revenues in 1994. This change in gross
profit was primarily attributable to the increase in excipient product sales and
a change in product mix.
Selling, general and administrative expenses increased by 9.3% in 1995 to
$7.7 million from $7.0 million in 1994. This increase was primarily due to
additional staffing associated with the commencement of several development
programs related to the TIMERx drug delivery technology.
Research and development expenses increased by 17.1% in 1995 to $2.7
million from $2.3 million in 1994. This increase was due to additional staffing
and generation of clinical data to support the development of the TIMERx drug
delivery technology.
For 1995 and 1994, the Company did not record a benefit for federal or
state taxes because net operating losses were utilized by Penford in the year
they were generated, and the Company was not compensated for these losses. In
addition, the Company's provision for income taxes includes foreign taxes and
federal and state deferred tax liabilities that exceed deferred tax assets.
LIQUIDITY AND CAPITAL RESOURCES
Since its incorporation, the Company has received intercompany advances
from Penford to fund Penwest's operations, capital expenditures and the original
acquisition of the Company's predecessor, which equalled $37.5 million as of
September 30, 1997. Penford intends to continue to provide advances to Penwest
until the closing of this offering. After the closing of this offering, Penford
will no longer provide any financial support to the Company. Penford has agreed
that it will contribute the outstanding intercompany indebtedness to the capital
of Penwest as of the closing of this offering.
25
<PAGE> 27
As of September 30, 1997, Penwest had cash and cash equivalents of $1.1
million. Following the closing of this offering the Company will have no credit
facility or other committed sources of capital. In addition, the Company will
have no indebtedness to either third or related parties.
The Company anticipates that its existing capital resources, together with
the net proceeds of this offering and interest earned thereon, will enable it to
maintain its currently planned operations through at least 1999. The Company
expects negative cash flow and net losses to continue at least into 1999 because
the Company will require substantial funds for product development efforts with
collaborators as well as a $15.0 million investment in the planned new
manufacturing and laboratory space in Patterson, New York to support the growth
of the TIMERx technology which investment is anticipated to be made in 1998 and
1999.
The Company's requirements for additional capital could be substantial and
will depend on many factors, including the timing and amount of payments
received under existing and possible future collaborative agreements; the
progress of the Company's collaborative and independent development projects;
financing alternatives; revenues from the Company's excipients business,
including from the introduction of ProSolv; the costs to the Company of
bioequivalence studies and clinical trials for the Company's products; the
prosecution, defense and enforcement of patent claims and other intellectual
property rights; the defense of other litigation; and the development of
manufacturing, marketing and sales capabilities. To the extent capital resources
are insufficient to meet future capital requirements, the Company will have to
raise additional funds to continue the development of its technologies. There
can be no assurance that such funds will be available on favorable terms, if at
all. To the extent that additional capital is raised through the sale of equity
or convertible debt securities, the issuance of such securities could result in
dilution to the Company's shareholders. If adequate funds are not available, the
Company may be required to curtail operations significantly or to obtain funds
through entering into collaboration agreements on unfavorable terms. The
Company's inability to raise capital would have a material adverse effect on the
Company's business, financial condition and results of operations.
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<PAGE> 28
BUSINESS
Penwest is engaged in the research, development and commercialization of
novel drug delivery technologies. Based on its extensive experience in
developing and manufacturing tabletting ingredients for the pharmaceutical
industry, the Company has developed its proprietary TIMERx controlled release
drug delivery technology, which is applicable to a broad range of orally
administered drugs. The Company has applied TIMERx technology to the development
of oral formulations of generic versions of controlled release drugs and branded
controlled release versions of immediate release drugs. Each of these
formulations has been developed under a collaborative arrangement with a
pharmaceutical company. In October 1997, the Company's collaborator, Leiras,
received marketing approval in Finland for Cystrin CR (oxybutynin) for the
treatment of urinary incontinence. In May 1997, the Company's collaborator,
Mylan, filed an ANDA with the FDA for the first generic version of the 30 mg
dosage strength of Procardia XL (nifedipine), a leading cardiovascular drug for
angina and hypertension. The Company is also an established manufacturer and
distributor of excipients to the pharmaceutical and nutritional industries.
DRUG DELIVERY OVERVIEW
Drug delivery technology is a critical component in the formulation of
pharmaceutical products. The formulation of a pharmaceutical product involves
selecting, combining and processing active and inactive ingredients. Drug
delivery technology is used to create or design a system that delivers a drug to
the body in a safe and efficacious manner. These drug delivery systems control
the dissolution, absorption and stability of the finished dosage form and
thereby enhance its safety and therapeutic effectiveness. Although there are
several routes of drug administration used in pharmaceutical products, oral
delivery (principally tablets and capsules) is the preferred delivery route due
to ease of manufacture and administration, as well as enhanced patient
compliance.
Oral Immediate Release Formulations
Oral drugs have traditionally been delivered through "immediate release"
formulations, which release all the active drug substance into the bloodstream
shortly after the patient takes the medication. Immediate release formulations
are beneficial for certain conditions where rapid concentration of the active
ingredient in the bloodstream is required, such as in acute pain relief.
However, immediate release formulations of certain drugs can cause side effects
due to toxicity associated with excessively high concentrations of the active
substance in the bloodstream. In addition, certain immediate release
pharmaceuticals have relatively short half-lives (the time required for half of
the drug to be eliminated from the body), requiring frequent dosing and rigorous
patient compliance in order to achieve successful outcomes.
Oral Controlled Release Formulations
Oral controlled release formulations are designed to alleviate the problems
associated with certain immediate release formulations by extending the period
over which the active ingredient is released into the bloodstream. This permits
the drug to be administered less frequently, enhancing patient compliance.
Controlled release drug delivery systems are typically designed to modulate peak
drug levels in order to reduce side effects such as toxicity associated with
immediate release pharmaceuticals.
In certain cases, a controlled release drug can reduce the total amount of
drug required because it is delivered over an extended period or at the
therapeutically beneficial time or site. The reduction in the total amount of
the active drug substance administered can result in diminished acute toxicity
or toxicity associated with chronic dosing and decrease or eliminate systemic
side effects. Controlled release systems can also improve drug bioavailability
(the relative amount of the active drug substance in the bloodstream). For
example, in drugs that have a narrow window for absorption, these systems can
enhance bioavailability by localizing the release of the active drug substance
in certain regions of the gastrointestinal tract. In addition, controlled
release systems can be designed to coordinate the release of the active drug
substance to coincide with the body's natural (circadian) rhythms when they are
associated with certain disease states, such as diabetes and myocardial
infarction.
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The following chart compares the concentration of the active drug substance
in the bloodstream for a hypothetical drug over a period of time delivered with
an immediate release delivery system and a controlled release delivery system.
[Chart comparing the concentration of the active drug substance in the
bloodstream (x axis) over a period of 30 hours (y axis) delivered with an
immediate release delivery system and a controlled release delivery system]
The controlled release system represented in the chart modulates the
release of the active drug substance which prevents the concentration of the
active drug substance at toxic levels and extends the period during which an
effective dose is provided to the body.
The usefulness of a number of types of drugs can be improved by a
controlled release delivery system. Drugs with short half-lives often require
frequent administration and are therefore candidates for controlled release
formulation. In addition, controlled release systems can be used for drugs with
a long half-life but with a narrow therapeutic index (the median toxic dose
divided by the median therapeutic dose).
The utilization of controlled release technologies also offers potential
benefits to the developers of pharmaceutical products. For instance, a drug
developer can continue to benefit from an established immediate release product
which is losing patent protection, by creating a controlled release version of
the immediate release product and then seeking patent protection for the
reformulated product based on the delivery system. By reformulating a product, a
drug developer can, in effect, develop a new product without many of the risks
and costs typically associated with the discovery and development of new drugs
such as new chemical entities ("NCEs"). While the development of a new drug
based on an NCE generally takes approximately 15 years from discovery to
regulatory approval and costs approximately $300 to $600 million, the
development and regulatory approval of a controlled release version of an
immediate release product generally takes between approximately five to seven
years and costs less than $50 million. Furthermore, under the Waxman-Hatch Act,
a drug developer can under certain circumstances obtain a three-year or
five-year period of marketing exclusivity for a controlled released product
approved under an NDA by the FDA.
Oral Controlled Release Delivery Systems
To date, drug developers have principally applied controlled release
technologies to oral and transdermal (across the skin) routes of administration.
The transdermal route of administration has not been widely commercialized
because most drugs cannot be absorbed through the skin in a sufficient
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<PAGE> 30
therapeutic dose. Due to the limited applicability of this technology and
because oral delivery is the most prevalent and preferred route for delivery of
drugs to patients, most of the recent advances in controlled release drug
delivery technologies have focused on oral delivery. Three principal types of
oral controlled release systems are currently utilized.
Oral Osmotic Pump (OROS). The OROS drug delivery system was developed by
ALZA in the early 1980s. It consists of the active drug substance housed in a
reservoir, surrounded by a semi-permeable membrane and formulated into a tablet.
A drug portal for release of the active drug substance is created by a
laser-drilled hole in the tablet. Water from the gastrointestinal tract
permeates the semi-permeable membrane at a controlled rate, and the osmotic
pressure of this water forces the release of the active drug substance through
the drug portal.
The Company believes that each new drug which utilizes the OROS system
requires extensive and time consuming development. In addition, specialized
manufacturing equipment may be required to produce OROS-based products. Because
of the complexities inherent in the manufacturing process, the Company believes
that products formulated with the OROS system are more likely to suffer from
batch variability and validation difficulties, and the scale-up from the
laboratory to production can be difficult and expensive. Despite these
disadvantages, the OROS system has been used in several commercially successful
pharmaceutical products, including Procardia XL.
Multiparticulate Systems. Multiparticulate systems have been used in
commercially successful drugs since the 1960s. These systems consist of small
particles containing active drug substance and excipients that are coated with a
polymer to control the rate of release of the active drug substance. These small
particles are either compressed into tablets or packed into a capsule. The
active drug substance is released over time by diffusion from the particles.
The Company believes that scale-up from the laboratory to commercial-scale
production of formulations using a multiparticulate system can be lengthy,
costly and difficult. Multiparticulate systems require investment in specialized
equipment and the development of specialized solvents and solvent recovery
systems for the coatings of each small particle. The Company believes that the
major difficulty encountered in the production of multiparticulate systems is
that the size and thickness of the coating of each particle often differ, which
results in undesired variability in the release of the drug. Consequently, the
Company believes the manufacturers of drugs using multiparticulate systems often
have difficulties with reproducibility and content uniformity and experience
high batch failure rates. Multiparticulate systems have also demonstrated
limited applicability with insoluble active drug substances.
Traditional Matrix Systems. Traditional matrix systems consist of an
active drug substance, rate-controlling polymers and gel-forming excipients
mixed together and compressed in a manner similar to conventional immediate
release tablets. The matrix forms a gel after ingestion, and the active drug
substance is released over time by diffusion through the matrix.
Products using traditional matrix systems generally have low manufacturing
costs as they are manufactured in the same manner as conventional tablets.
However, the rate-controlling polymers used in such systems are not compatible
with the physical and chemical properties of a wide range of drugs. The
inconsistency of these polymers, as well as their limited drug carrying
capacity, often limits their duration to 12 hours or less, such that more
frequent dosing is often required to obtain efficacy. The usefulness of the
traditional matrix systems is also limited because these systems are difficult
to use with insoluble active drug substances.
Notwithstanding the shortcomings of existing controlled release
technologies, approximately 60 oral controlled release prescription drugs are
marketed currently. Sales of these products in the United States in 1996 were
approximately $6.0 billion.
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TIMERX CONTROLLED RELEASE TECHNOLOGY
The Company has developed the TIMERx delivery system, a novel drug delivery
technology, to address the limitations of currently available oral controlled
release delivery systems. The TIMERx system has evolved from the Company's
extensive experience in developing, manufacturing and marketing tabletting
ingredients for use in the pharmaceutical industry. The Company believes that
the TIMERx system is a major advancement in oral drug delivery that represents
the first easily-manufactured oral controlled release drug delivery system that
is applicable to a wide variety of drug classes, including soluble drugs,
insoluble drugs and drugs with a narrow therapeutic index. The Company intends
to utilize the TIMERx system to formulate generic versions of controlled release
drugs, controlled release formulations of currently-marketed immediate release
drugs and NCEs.
The TIMERx drug delivery system is a hydrophilic matrix consisting
primarily of two natural polysaccharides, xanthan and locust bean gums, in the
presence of dextrose. The physical interaction between these components works to
form a strong, binding gel in the presence of water. Drug release is controlled
by the rate of water penetration from the gastrointestinal tract into the TIMERx
gum matrix, which expands to form a gel and subsequently releases the active
drug substance. The TIMERx system can precisely control the release of the
active drug substance in a tablet by varying the proportion of the gums, the
tablet coating and the tablet manufacturing process. Drugs using TIMERx
technology are formulated by combining the active drug substance, the TIMERx
drug delivery system and additional excipients and compressing such materials
into a tablet.
The Company believes that the TIMERx controlled release system has several
advantages over other oral controlled release systems.
- Broad Applicability as a Drug Delivery System. The TIMERx system is
adaptable to a wide range of drugs with different physical and chemical
properties. For instance, the TIMERx system can be used to deliver both
low dose (less than 5 mg) and high dose (greater than 500 mg) drugs as
well as water soluble and insoluble drugs. Because of the high affinity
of xanthan and locust bean gums, the TIMERx system permits a formulation
with a high drug to gum ratio, which permits tablets to include a higher
dosage of the active drug substance.
- Flexible Pharmacokinetic Profile. The Company formulates the TIMERx
material to optimize the desired kinetic profile of the active drug
substance. In this manner, the TIMERx system can be designed to enhance
the therapeutic effect of the active drug substance. Depending on the
desired release profile, the Company can formulate the drug to be
released in the body (i) at a constant amount or linear rate over time,
(ii) at a decreasing amount over time where the rate is dependent on drug
concentration, or (iii) at a varied release rate.
- Ease of Manufacture. Drugs formulated using the TIMERx system are
designed for production on standard pharmaceutical processing equipment.
The TIMERx technology is easily and reproducibly scaled-up in a
commercial manufacturing environment often utilizing the direct
compression tabletting process.
- Cost-Effective System. The TIMERx system is a cost-effective drug
delivery system. It involves fewer and less complex ingredients than
other systems and does not require the manufacturer to purchase
specialized equipment. The Company believes that drug formulations using
the TIMERx system can be developed more rapidly than drugs formulated
with alternative controlled delivery systems and that the time to scale
up to commercial quantities is minimized.
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PENWEST STRATEGY
Penwest's objective is to become a leader in the discovery, development and
commercialization of innovative drug delivery technologies for the
pharmaceutical industry. The Company's strategy consists of the following
principal elements:
Apply TIMERx Technology to Generic Versions of Controlled Release
Pharmaceuticals. The Company's principal focus to date has been the application
of its TIMERx technology to the development of generic versions of controlled
release drugs. The Company has focused its development efforts on these drugs in
order to accelerate the commercialization of the TIMERx delivery system, since
generic drugs are regulated through the less expensive and abbreviated ANDA
regulatory process applicable to generic drugs. In selecting generic controlled
release pharmaceutical candidates to develop, the Company targets high sales
volume, technically-complex controlled release pharmaceuticals. The Company
believes these drug candidates are difficult to replicate and, as a result,
TIMERx versions may have limited competition from other formulations.
Create Innovative Controlled Release Versions of Immediate Release
Pharmaceuticals. The Company has also focused on the application of its TIMERx
technology to the development of controlled release formulations of immediate
release drugs, which will be marketed as brand name pharmaceuticals. In
developing these controlled release formulations, the Company intends to seek
collaborations with developers of the immediate release drugs or with
pharmaceutical companies having a market presence in the applicable therapeutic
area. The development of these controlled release drugs is subject to the NDA
approval process, although the Company and its collaborators may be permitted to
rely on existing safety and efficacy data with respect to the immediate release
drug in submitting the NDA.
Apply TIMERx Technology to the Development of New Chemical Entities. The
Company believes that its TIMERx technology may be applicable to the development
of products containing NCEs by pharmaceutical companies. The development of such
NCEs is subject to the full NDA approval process, including conducting
preclinical studies, filing an Investigational New Drug ("IND") application,
conducting clinical trials and submitting an NDA.
Establish Collaborations for Development, Manufacture and Marketing. The
Company has existing collaborative agreements with Mylan, Leiras, Kremers,
Sanofi and Endo and intends to enter into additional collaborative agreements
with respect to other pharmaceuticals. The Company's existing and potential
future collaborations enable the Company to secure additional financial support
for its research and development activities, to obtain access to the clinical,
manufacturing and regulatory resources and expertise of its collaborators and to
rely on them for the sales and marketing, distribution and promotion of
TIMERx-based controlled release drugs on a worldwide basis.
Expand Pharmaceutical Excipients Business. The Company's excipients
business provides financial support for the development of the Company's TIMERx
drug delivery system. In order to expand the Company's excipients business, the
Company intends to develop new excipients, such as ProSolv, its recently
introduced MCC excipient for pharmaceutical and nutritional companies. In
addition to selling ProSolv as a bulk excipient, the Company intends to pursue
selected licensing opportunities for ProSolv with pharmaceutical companies that
are developing new drug candidates.
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TIMERX PRODUCT DEVELOPMENT
The following table provides information relating to the therapeutic area,
the development status and the collaborator for each product under development
utilizing the Company's TIMERx technology and is qualified by reference to the
more detailed descriptions included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
BRAND NAME THERAPEUTIC DEVELOPMENT
(COMPOUND) AREA STATUS COLLABORATOR (5)
- ------------------------------ -------------- --------------- ----------------
<S> <C> <C> <C>
GENERIC CONTROLLED RELEASE (1)
Procardia XL Hypertension, ANDA filed (3) Mylan
(nifedipine) Angina
Adalat CC Hypertension Bioequivalence Mylan
(nifedipine) Studies
Adalat LA Hypertension, Clinical/ Sanofi
(nifedipine) Angina Bioequivalence
Studies
Cardizem CD Hypertension, Bioequivalence Kremers
(diltiazem) Angina Studies
Glucotrol XL Diabetes Bioequivalence Mylan
(glipizide) Studies
Covera HS Hypertension, Bioequivalence Kremers
(verapamil Angina Studies
hydrochloride)
BRANDED CONTROLLED RELEASE (2)
Cystrin CR Urinary Approved (4) Leiras
(oxybutynin) Incontinence
Numorphan TRx Pain Relief Formulation Endo
(oxymorphone)
</TABLE>
- ---------------
(1) Generic versions of controlled release products are developed in three basic
stages:
Formulation. Involves the utilization or adaptation of drug delivery
technologies to the product candidate and evaluation in in vitro dissolution
studies.
Bioequivalence Studies. (a) Pilot bioequivalence studies involve testing in
10 to 15 human subjects to determine if the formulation yields a blood level
comparable to the existing controlled release drug; (b) Full scale
bioequivalence studies involve the manufacture of at least 10% of the
intended commercial lot size and the analysis of plasma concentrations of
the drug in 24 or more human subjects under fasting conditions and multiple
dose conditions and 18 or more human subjects under fed conditions to
determine whether the rate and extent of the absorption of the drug are
substantially equivalent to that of the existing drug.
ANDA Filing. An ANDA is submitted to the FDA with results of bioequivalence
studies and other data such as in vitro specifications for the formulation,
stability data, analytical data, methods validation and manufacturing
procedures and controls. See "Business -- Government Regulation."
(2) Controlled release formulations of immediate release products are subject to
the NDA regulatory process. To the extent that the controlled release
product is an extension of an FDA-approved immediate release version of the
same chemical entity, the Company's collaborators may be permitted to rely
on existing clinical data as to the safety and efficacy of the chemical
entity in filing NDAs. See "Business -- Government Regulation."
(3) Mylan has filed an ANDA for the 30 mg dosage strength of Nifedipine XL and
is conducting full scale bioequivalence studies of the 60 and 90 mg dosage
strengths of Nifedipine XL.
(4) In October 1997, Leiras received marketing approval for Cystrin CR in
Finland.
(5) The Company's collaborators typically provide research and development
support and are responsible for conducting full scale bioequivalence studies
or clinical trials, obtaining regulatory approvals and manufacturing,
marketing and selling the product. There can be no assurance that the
results obtained in bioequivalence studies or preclinical studies will be
obtained in full scale bioequivalence studies and other late stage clinical
studies or that the Company or its collaborators will receive regulatory
approvals to continue clinical studies of such products or to market any
such products. See "Business -- Collaborative Arrangements."
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Generic Controlled Release Pharmaceuticals
Generic controlled release pharmaceuticals are therapeutic equivalents of
brand name drugs for which patents or marketing exclusivity rights have expired.
Generic controlled release pharmaceuticals are typically difficult to replicate
because of: (i) formulation complexity; (ii) analytical complexity; and/or (iii)
manufacturing complexity. The Company believes that such generic controlled
release pharmaceuticals are less likely to suffer the same price erosion as
other generic pharmaceuticals because of the difficulty in replicating
controlled release pharmaceuticals and the resulting limits on competition.
When developing generic pharmaceuticals, the drug developer is required to
demonstrate that the generic product candidate will exhibit in vivo release and
absorption characteristics equivalent to those of the branded pharmaceutical
without infringing on any unexpired patents. During the formulation of generic
pharmaceuticals, drug developers create their own version of the branded drug by
using or adapting drug delivery technologies to the product candidate.
The Company currently has development programs relating to the following
generic controlled release pharmaceuticals:
Nifedipine XL. The Company and Mylan are currently developing Nifedipine
XL, a generic version of Procardia XL incorporating TIMERx technology. Procardia
XL is a once-a-day controlled release formulation of nifedipine, a calcium
channel blocking agent indicated for hypertension, vasospastic angina and
chronic stable angina, which uses the OROS delivery system. Procardia XL is
marketed in three dosage strengths (30 mg, 60 mg and 90 mg) by the Pratt
Pharmaceuticals division of Pfizer and had sales in the United States in 1996 of
approximately $950 million.
In May 1997, Mylan's ANDA for Nifedipine XL (30 mg) was accepted by the FDA
for review. This was the first generic version of Procardia XL accepted by the
FDA for review. Mylan is currently conducting full scale bioequivalence studies
of the 60 mg and 90 mg dosage strengths of Nifedipine XL. The Company is aware
of a number of other companies that are developing generic formulations of
Procardia XL. For a description of certain litigation regarding the Mylan ANDA
filing, see "Business -- Litigation."
Nifedipine CC. The Company and Mylan are currently developing a generic
version of Adalat CC(R) incorporating TIMERx technology. Adalat CC is a
once-a-day controlled release formulation of nifedipine, a calcium channel
blocking agent indicated for hypertension. Adalat CC is marketed in three dosage
strengths (30 mg, 60 mg and 90 mg) by Bayer and had sales in the United States
in 1996 of approximately $250 million. Mylan is conducting full scale
bioequivalence studies of the 30 mg dosage strength of Nifedipine CC. Elan
recently filed an ANDA for a generic version of the 30 mg strength of Adalat CC.
The Company is also aware of a number of other companies that are developing
generic formulations of Adalat CC.
Nifedipine LA. The Company and Sanofi are currently developing a generic
version of Adalat LA(R) (a drug marketed in Europe that is equivalent to
Procardia XL) incorporating TIMERx technology. Adalat LA is a once-a-day
controlled release formulation of nifedipine, a calcium channel blocking agent
indicated for hypertension, vasospastic angina and chronic stable angina, which
uses the OROS delivery system. Adalat LA is marketed in two dosage strengths (30
mg and 60 mg) by Bayer in Europe and had sales in Europe in 1996 of
approximately $340 million. Sanofi is conducting full scale bioequivalence
studies and certain clinical trials in the United Kingdom of the 30 mg dosage
strength of Nifedipine LA.
Diltiazem CD. The Company and Kremers are currently developing a generic
version of Cardizem CD(R) incorporating TIMERx technology. Cardizem CD is a
once-a-day controlled release formulation of diltiazem hydrochloride, a calcium
channel blocking agent indicated for hypertension, vasospastic angina and
chronic stable angina, which uses a multiparticulate drug delivery system.
Cardizem CD is marketed in four dosage strengths (120 mg, 180 mg, 240 mg and 300
mg) by Hoechst Marion Roussel, Inc. and had sales in the United States in 1996
of approximately $730 million. Kremers
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is currently conducting full scale bioequivalence studies of the 240 mg version
of Diltiazem CD. The Company is aware of three competitors which have filed
ANDAs with respect to generic formulations of Cardizem CD, one of which has been
tentatively approved by the FDA pending the outcome of patent litigation.
Glipizide XL. The Company and Mylan are currently developing a generic
version of Glucotrol XL(R) incorporating TIMERx technology. Glucotrol XL is a
once-a-day controlled release formulation of glipizide, a blood-glucose lowering
agent indicated as an adjunct to diet for the control of hyperglycemia in
diabetes patients, which uses the OROS delivery system. Glucotrol XL is marketed
in 5 mg and 10 mg dosage strengths by the Pratt Pharmaceuticals division of
Pfizer and had sales in the United States in 1996 of approximately $127 million.
Mylan is conducting full scale bioequivalence studies of the 5 mg and 10 mg
dosage strengths of Glipizide XL. The Company is aware of a number of other
companies that are developing generic formulations of Glucotrol XL.
Verapamil HS. The Company and Kremers are currently developing a generic
version of Covera HS(R) incorporating TIMERx technology. Covera HS is a
once-a-day controlled release formulation of verapamil hydrochloride, a calcium
channel blocking agent indicated for the management of hypertension and angina,
which uses the OROS delivery system. Covera HS is marketed in two dosage
strengths (180 mg and 240 mg) by G. D. Searle & Co. and had sales in the United
States in 1996 of approximately $18 million. Kremers is conducting full scale
bioequivalence studies of the 180 mg and 240 mg dosage strengths of Verapamil
HS. The Company is aware of a number of other companies that are developing
generic formulations of Covera HS.
Branded Controlled Release Pharmaceuticals
The Company is applying its TIMERx technology to the development of
controlled release formulations of immediate release pharmaceuticals. The
Company currently has development programs relating to the following:
Cystrin CR. The Company and Leiras are currently developing a controlled
release formulation of Cystrin(R) incorporating TIMERx technology. Cystrin is a
twice-a-day immediate release version of the anticholinergic drug oxybutynin
indicated for the treatment of urinary incontinence. Oxybutynin is marketed in
Europe by Leiras under the trademark Cystrin and by Hoechst Marion Roussel, Inc.
under the name Ditropan(R). These products had worldwide sales in 1996 of
approximately $160 million. In October 1997, Leiras received marketing approval
in Finland for Cystrin CR. The Company has been advised that Leiras intends to
seek distributors for Cystrin CR in other countries when and if marketing
approval is obtained in such countries.
Numorphan TRx. The Company and Endo are currently developing a controlled
release formulation of Numorphan(R) incorporating TIMERx technology. Numorphan
is a parenteral and suppository dosage form of oxymorphone, a narcotic analgesic
for the treatment of moderate to severe pain. Numorphan is marketed by Endo and
had sales in the United States in 1996 of approximately $10 million. Numorphan
TRx, if successfully developed, would represent the first oral controlled
release version of Numorphan and would compete in the severe analgesic market
with products such as MS Contin and Oxycontin, which had sales in the United
States in 1996 of approximately $170 million. The Company is currently in the
process of developing a TIMERx formulation and has not yet conducted any
clinical studies.
PHARMACEUTICAL EXCIPIENTS
The Company sells 29 excipient products which are used in the manufacture
of tablets by pharmaceutical and nutritional companies worldwide. The Company's
product line is broadly classified into three distinct categories: binders,
disintegrants and lubricants. Binders, working in conjunction with other
products, are the primary tablet-forming component of excipients. Disintegrants
function to help make a tablet fall apart when consumed by drawing water into
the dosage form, a necessary precursor to dissolution and ultimately absorption
of the drug. Lubricants help facilitate the ease of
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<PAGE> 36
manufacture of drugs so that they emerge from a tabletting machine with the
desired physical characteristics.
The Company's excipients are sold to the brand prescription, generic
prescription, over-the-counter market and nutritional markets. In 1996, the
Company sold bulk excipients to more than 300 customers, including some of the
leading pharmaceutical companies in the world such as the Perrigo Company,
Bristol-Myers Squibb Company, McNeil Consumer Products Company and SmithKline
Beecham, plc ("SmithKline"), in more than 40 countries.
The Company engages in innovative product development to develop new high
performance excipients. In October 1996, the Company introduced ProSolv, which
the Company believes represents a new class of high functionality binders.
ProSolv, the first new MCC product in the pharmaceutical industry in 35 years,
is a patented product that combines MCC and colloidal silicon dioxide. MCC has
historically been one of the most popular excipients used in tabletting
operations. However, MCC has demonstrated certain disadvantages with respect to
the manufacture of tablets using the wet granulation method, a widely used
method of tablet preparation. One of the disadvantages of this method is that
when MCC is wetted or comes in contact with moisture during tablet
manufacturing, MCC loses 30-50% of its compactability. To counteract this loss,
additional MCC is required to be added to the formulation, which increases the
size and the cost of the tablet. In contrast, ProSolv's properties enable it to
be used without losing compactability when wetted or placed in contact with
moisture.
The benefits of ProSolv are maintained irrespective of the method of tablet
manufacture. ProSolv can be used by manufacturers to produce harder tablets and
can enable manufacturers to reduce the amount of binders used in the tablet,
thereby reducing the size and cost of the tablet. Additionally, ProSolv can be
used to manufacture tablets with difficult active ingredients which otherwise
may not have been manufactured.
In addition to ProSolv, the principal excipient product lines currently
marketed by Penwest include the following:
EMCOCEL(R), the Company's largest selling product, is a tabletting binder
used in pharmaceutical formulations worldwide. EMCOCEL is utilized in a number
of products including Centrum vitamins, several store brand ibuprofen products
and many prescription pharmaceuticals.
EMCOMPRESS(R), or dicalcium phosphate, is a binder marketed by the Company
under an exclusive worldwide distribution agreement with the manufacturer
Albright and Wilson Americas Inc. The distribution agreement expires on December
31, 1999, subject to automatic extension on an annual basis unless either party
gives the other party 12 months notice of its desire to terminate the agreement.
EMCOMPRESS is frequently used in vitamin formulations as it serves as an
additional source of dietary calcium.
EMDEX(R), or dextrates, is a binder that is used as a directly compressible
excipient in both chewable and non-chewable tablets. EMDEX is odorless with a
sweet taste caused by its sugar composition. EMDEX is used in, among other
things, chewable antacid tablets and vitamins. EMDEX is manufactured by Penford
and will continue to be supplied by Penford to the Company following the
completion of this offering. See "Arrangements Between the Company and Penford."
EXPLOTAB(R), or sodium starch glycolate, is the principal disintegrant
marketed by the Company. EXPLOTAB is distributed by Penwest under an exclusive
worldwide distribution agreement with the manufacturer, Roquette America, Inc.
The distribution agreement is automatically renewable on an annual basis unless
either party gives the other party 12 months notice of its desire to terminate
the agreement. EXPLOTAB is used in a number of products and is an essential
component of the Tylenol family of products.
PRUV(R), or sodium stearyl fumarate, is the principal lubricant marketed by
the Company. PRUV is marketed under an exclusive worldwide distribution
agreement with the manufacturer, Astra Pharmaceutical Production AB. The
distribution agreement is automatically renewable on an annual basis
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unless either party gives the other party 12 months notice of its desire to
terminate the agreement. PRUV is used in several prescription pharmaceuticals.
The Company had revenues from the sale of pharmaceutical excipients in
1994, 1995 and 1996 of $23.1 million, $25.0 million and $25.0 million,
respectively.
COLLABORATIVE ARRANGEMENTS
The Company has entered into collaborative arrangements with five
pharmaceutical companies to facilitate and expedite the commercialization of its
TIMERx drug delivery technology.
Mylan Pharmaceuticals Inc.
In August 1994, August 1995 and March 1996, the Company entered into
product development and supply agreements with Mylan with respect to the
development of generic versions of Procardia XL (nifedipine), Adalat CC
(nifedipine) and Glucotrol XL (glipizide), based on the Company's TIMERx
technologies (the "Mylan Products"). Mylan is one of the leading generic
pharmaceutical companies in the United States.
Under these product development and supply agreements, the Company is
responsible for the formulation, manufacture and supply of TIMERx material for
use in the Mylan Products, and Mylan is responsible for conducting all
bioequivalence studies, preparing all regulatory applications and submissions
and manufacturing and marketing the Mylan Products in the United States, Canada
and Mexico. Each product development and supply agreement is terminable by
either party upon 90 days prior written notice at any time (i) prior to the
submission of the ANDA for the product covered by such agreement if such party
reasonably determines that no further development efforts are likely to lead to
the successful development of such product and (ii) prior to approval by the FDA
of such ANDA if such party reasonably determines that such ANDA is not likely to
be approved. Following approval of the ANDA, the product development and supply
agreement will extend for a term of 20 years from the date on which the ANDA is
approved, subject to earlier termination by either party upon specified
circumstances.
The Company has received milestone payments under each of the product
development and supply agreements and is entitled to additional milestone
payments under such agreements upon the continued development of the Mylan
Products. The Company is also entitled to royalties on the sale of each Mylan
Product, which royalties will be reduced with respect to such Mylan Product if
there are on the market and available for retail sale any other generic
controlled release formulations of the drug of which such Mylan Product is a
generic controlled release formulation. In addition, Mylan has agreed that
during the term of the product development and supply agreements it will
purchase formulated TIMERx material for use in the Mylan Products exclusively
from the Company at specified prices.
Penwest and Mylan also entered into a sales and distribution agreement in
January 1997 (the "Mylan Distribution Agreement") with respect to Nifedipine XL
pursuant to which Mylan agreed to manufacture and supply Nifedipine XL to
Penwest for distribution by Penwest and one or more distributors (as to which
the Company and Mylan must mutually agree) in certain specified European and
Latin American countries. This agreement expires in January 2007, subject to
automatic extension on an annual basis. Under this agreement, the Company has
agreed to purchase Nifedipine XL exclusively from Mylan at specified prices or
to pay Mylan 50% of any royalties received by the Company from its distributors
if Mylan licenses its manufacturing technology to the Company for use by the
Company's distributors instead of manufacturing the product for distribution.
Under this agreement, Mylan is entitled to 50% of any royalties or milestone
payments received by the Company under the Company's product development and
supply agreement with Sanofi described below.
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Kremers Urban Development Company
In May 1996 and August 1996, the Company entered into product development
and supply agreements with Kremers with respect to the development of generic
versions of Cardizem CD (diltiazem) and Covera HS (verapamil hydrochloride),
respectively (the "Kremers Products"), based on the Company's TIMERx
technologies. Kremers is the generics division of the research-based
pharmaceutical company, Schwarz Pharma Inc.
Under these product development and supply agreements, the Company is
responsible for formulating the Kremers Products and for manufacturing and
supplying TIMERx material to Kremers for use in the Kremers Products, and
Kremers is responsible for conducting bioequivalence studies, preparing all
regulatory applications and submissions and manufacturing and marketing the
Kremers Products in the United States, Canada and Mexico.
Each product development and supply agreement is terminable by either party
upon 30 days prior written notice at any time (i) prior to the successful
completion of specified bioequivalence studies if such party reasonably
determines that no further development efforts are likely to lead to the
successful development of the product covered by such product development and
supply agreement and (ii) prior to the approval by the FDA (or equivalent
regulatory authority) of the ANDA (or equivalent regulatory filing) for such
product if such party reasonably determines that the ANDA or equivalent filing
is not likely to be approved by the FDA (or equivalent regulatory authority). In
addition, Kremers may terminate each product development and supply agreement
if, due to changed circumstances, Kremers reasonably determines that the
potential commercial viability of the product covered by the product development
and supply agreement will not justify the use of best efforts by Kremers.
Following approval of the ANDA (or other regulatory filing), the product
development and supply agreement will extend with respect to each country
covered by such agreement for a term of 20 years from the date (the "Kremers
Approval Date") on which the Kremers Product covered by such agreement is
approved for commercial sale by the FDA (or equivalent regulatory authority)
pursuant to an ANDA (or equivalent regulatory filing) in such country, subject
to earlier termination by either party upon specified circumstances. At any time
following the Kremers Approval Date for commercial sale of a Kremers Product in
the United States, Kremers may terminate the product development and supply
agreement with respect to such Kremers Product for any reason upon at least 120
days prior written notice, whereupon the Company would have a paid-up license to
Kremers's rights in such Kremers Product and related data and regulatory
filings.
The Company has received milestone payments under the product development
and supply agreements and is entitled to additional milestone payments upon the
continued development of the Kremers Products. The Company also is entitled to
royalties on the sale of the Kremers Products. However, both milestone payments
and the royalties otherwise due under the product development and supply
agreements may be reduced in the event that there are competing generic
controlled release formulations of Covera HS or Cardizem CD, as may be
applicable, on the market and available for retail sale.
In addition, Kremers has agreed that, during the term of the product
development and supply agreements, it will purchase formulated TIMERx material
for use in the Kremers Products exclusively from the Company at specified
prices. These prices will be reduced in the event that there are competing
generic versions of Covera HS and/or Cardizem CD, as may be applicable, on the
market and available for retail sale.
The Company is aware of at least three generic versions of Cardizem CD for
which ANDAs have been filed. One of these ANDAs has been tentatively approved by
the FDA, pending the outcome of patent litigation. The existence of these
generic drugs will result in the reduction of any payments to be received by the
Company under the product development and supply agreement covering the generic
version of Cardizem CD.
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Sanofi Winthrop International S.A.
In February 1997, the Company entered into a product development and supply
agreement with Sanofi with respect to the development of a generic version of
Adalat LA based on the Company's TIMERx technology (the "Sanofi Product"), a
drug that is identical to Procardia XL. Sanofi is a research-based international
pharmaceutical company, based in Paris, France, which has a European
infrastructure from which to develop, register and market prescription
pharmaceuticals.
Under the product development and supply agreement, the Company is
responsible for conducting pilot bioequivalence studies of the Sanofi Product
and for manufacturing and supplying TIMERx material to Sanofi, and Sanofi is
responsible for conducting all full scale bioequivalence studies, preparing all
regulatory applications and submissions and manufacturing and marketing the
Sanofi Product in specified countries in Europe and in South Korea.
The product development and supply agreement expires with respect to each
specified country on the 10th, 13th, 16th or 19th anniversary of the date on
which the Sanofi Product is approved by the relevant regulatory authority in
such country for commercial sale if notice is provided by either party prior to
any of such anniversary dates that the agreement will expire with respect to
such country on such anniversary date. The agreement is also subject to earlier
termination by either party under specified circumstances.
The Company is entitled to milestone payments under the product development
and supply agreement upon the continued development of the Sanofi Product. The
Company is also entitled to royalties upon the sale of the Sanofi Product. One
half of such payments will be paid to Mylan in accordance with the Mylan
Distribution Agreement. In addition, Sanofi has agreed that, during the term of
the product development and supply agreement, it will purchase formulated TIMERx
material for use in the Sanofi Product exclusively from the Company at specified
prices.
Leiras OY
In July 1992, the Company entered into an agreement with Leiras with
respect to the development and commercialization of Cystrin CR, a controlled
release formulation of Cystrin based on the Company's TIMERx technology. In May
1995, the Company entered into a second agreement with Leiras clarifying certain
matters with respect to the collaboration. Leiras is a Finnish subsidiary of
Schering AG. Leiras is developing products focused in the areas of reproductive
health care, urology, oncology and inhalation technology.
Under the agreements, the Company is responsible for the development and
formulation of Cystrin CR and for manufacturing and supplying TIMERx material to
Leiras for use in the manufacture of Cystrin CR, and Leiras is responsible for
preparing all regulatory applications and submissions and manufacturing and
marketing Cystrin CR on a worldwide basis. Leiras has the right to appoint
distributors for marketing and distribution in specified territories, subject in
certain circumstances to the approval of the Company.
The agreements terminate upon the expiration of the TIMERx patents licensed
to Leiras (which will occur in the year 2014), subject to earlier termination by
either party under specified circumstances. Leiras has also agreed to pay the
Company royalties on the sale of Cystrin CR and to purchase formulated TIMERx
material exclusively from the Company at specified prices.
Endo Pharmaceuticals Inc.
In September 1997, the Company entered into a strategic alliance agreement
with Endo with respect to the development of controlled release formulations of
oxymorphone based on the Company's TIMERx technology (the "Endo Products"). Endo
is a research-based and generic pharmaceutical company formed from a management
buyout of a division of DuPont Merck Pharmaceuticals ("Dupont Merck"). Endo has
a broad product line including 25 drugs in the generic product division and 12
established (formerly DuPont Merck) brand products, including Percodan and
Percocet. Endo
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is registered with the U.S. Drug Enforcement Administration as a developer,
manufacturer and marketer of controlled narcotic substances.
Under the strategic alliance agreement, the responsibilities of the Company
and Endo with respect to any Endo Product will be determined by a committee
comprised of an equal number of members from each of the Company and Endo (the
"Alliance Committee"). However, the Company expects that it will formulate each
drug candidate and that Endo will conduct all clinical studies and prepare and
file all regulatory applications and submissions. In addition, under the
agreement, the Company has agreed to manufacture and supply TIMERx material to
Endo, and Endo has agreed to manufacture and market the Endo Products in the
United States. The manufacture and marketing of Endo Products outside of the
United States may be conducted by the Company, Endo or a third party, as
determined by the Alliance Committee.
The strategic alliance agreement is terminable with respect to an Endo
Product by either party upon 30 days prior written notice at any time (i) prior
to the completion of development activities with respect to such Endo Product if
such party determines that further development efforts are not likely to lead to
the successful development of such Endo Product and (ii) prior to obtaining
approval by the FDA (or equivalent regulatory authority) of an NDA (or
equivalent regulatory filing) with respect to such Endo Product if such party
determines that further efforts are not likely to lead to such approval,
although the non-terminating party would have the right to continue the
agreement with respect to such Endo Product for a specified period and the
royalties that might otherwise have been payable to the terminating party would
be reduced. Following regulatory approval of the marketing and sale of such Endo
Product, the term of the strategic alliance agreement will extend for up to 20
years from the date of such regulatory approval, subject to earlier termination
under specified circumstances.
The Company and Endo have agreed to share the costs involved in the
development and commercialization of the Endo Products and that the party
marketing the Endo Products (which the Company expects will be Endo) will pay
the other party royalties equal to 50% of net marketing revenues after
fully-burdened costs (although this percentage will decrease as the total U.S.
marketing revenues from an Endo Product increase), subject to each party's right
to terminate its participation with respect to any Endo Product described above.
Endo will purchase formulated TIMERx material for use in the Endo Products
exclusively from the Company at specified prices. Such prices will be reflected
in the determination of fully-burdened costs.
RESEARCH AND DEVELOPMENT
The Company conducts research and development activities with respect to
additional applications of TIMERx technology, advances in the TIMERx technology
and additional novel excipients such as ProSolv. The Company is also conducting
research and development with respect to controlled release delivery of
therapeutic substances to the respiratory tract through the use of dry powder
aerosol delivery systems and has recently received a U.S. patent relating to
such technology. The Company believes that this technology, which utilizes the
same polysaccharide materials as the Company's TIMERx technology, may be
appropriate for the delivery of peptide and protein drugs, which are often
poorly absorbed from the gastrointestinal tract. The Company expects that it
will seek to enter into collaborations to develop such new TIMERx applications
or technologies.
The Company's research and development expenses in 1994, 1995 and 1996 were
$2.3 million, $2.7 million and $3.7 million, respectively. These expenses do not
include amounts incurred by the Company's collaborators in connection with the
development of products under the collaboration agreements such as expenses for
full scale bioequivalence studies performed by the collaborators.
MANUFACTURING
The Company currently has a laboratory and pilot manufacturing facility
covering approximately 55,000 square feet contiguous to its executive offices in
Patterson, New York. However, the Company
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lacks commercial-scale facilities to manufacture its TIMERx material in
accordance with cGMP requirements prescribed by the FDA. As a result, to date,
the Company has relied on a large third-party pharmaceutical company, Boehringer
Ingelheim Pharmaceuticals, Inc., for the bulk manufacture of its TIMERx material
for delivery to its collaborators under an agreement that expires in June 1998.
The Company anticipates using approximately $15.0 million from the proceeds of
this offering for the construction of manufacturing facilities in Patterson, New
York for the manufacture of bulk TIMERx, as well as expanded laboratory space.
The Company is also increasing its inventory of TIMERx material.
Although the Company intends to use a portion of the proceeds of this
offering to build a manufacturing facility for its TIMERx material, the Company
expects to continue to be dependent on third-party manufacturers until its
facility is fully operational and in compliance with cGMP. The Company believes
that there are a limited number of manufacturers that operate under cGMP
regulations capable of manufacturing the Company's products. In the event that
the Company is unable to obtain contract manufacturing, or obtain such
manufacturing on commercially reasonable terms, it may not be able to
commercialize its products as planned. There can be no assurance that third
parties depended upon by the Company will perform and any failures by third
parties may delay development or the submission of products for regulatory
approval, impair the Company's collaborators' ability to commercialize products
as planned and deliver products on a timely basis, or otherwise impair the
Company's competitive position, which could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's TIMERx drug delivery system is a hydrophilic matrix
consisting primarily of two natural polysaccharides, xanthan and locust bean
gums, in the presence of dextrose. The Company purchases these gums from a sole
source supplier. Although the Company has qualified alternate suppliers with
respect to these gums and to date the Company has not experienced difficulty
acquiring these materials, there can be no assurance that interruptions in
supplies will not occur in the future or that the Company will not have to
obtain substitute suppliers. Any of these events could have a material adverse
effect on the Company's ability to manufacture bulk TIMERx for delivery to its
collaborators, which could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company currently has two cGMP-approved manufacturing facilities for
its MCC products, including EMCOCEL and ProSolv. These facilities are located in
Cedar Rapids, Iowa and Nastola, Finland and cover approximately 35,000 square
feet and 15,000 square feet, respectively. The Company's MCC products are
primarily made from wood pulp. Although the Company obtains wood pulp primarily
from a single supplier, wood pulp is widely available from a number of
suppliers.
All manufacturing operations of the Company are subject to federal, state
and local laws and regulations governing the use, manufacture, storage, handling
and disposal of certain materials and waste products.
MARKETING AND DISTRIBUTION
Pursuant to the Company's collaborative agreements, the Company's
collaborators have responsibility for the marketing and distribution of any
controlled release pharmaceuticals developed based on the Company's TIMERx
technology. Because the Company does not plan on developing any of such
pharmaceuticals without a collaborator, the Company has not developed and does
not intend to develop any sales force with respect to such products. As a
result, the Company is substantially dependent on the efforts of its
collaborators to market the products. In selecting a collaborator for a drug
candidate, some of the factors the Company considers include the collaborator's
market presence in the therapeutic area targeted by the drug candidate and the
collaborator's sales force and distribution network.
The Company has an in-house sales force of nine employees who market the
Company's excipients in the United States. This sales force focuses primarily on
pharmaceutical and nutritional
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companies. The Company also markets its excipients worldwide through the use of
distributors located in over 40 countries. The Company typically sells its
excipients to its largest customers under three-year supply agreements.
COMPETITION
The pharmaceutical industry is highly competitive and is affected by new
technologies, governmental regulations, health care legislation, availability of
financing, litigation and other factors. Many of the Company's competitors have
longer operating histories and greater financial, marketing, legal and other
resources than the Company and certain of its collaborators. The Company expects
that it will be subject to competition from numerous other entities that
currently operate or intend to operate in the pharmaceutical industry, including
companies that engage in the development of controlled release technologies. The
Company's TIMERx business faces competition from numerous public and private
companies and their controlled release technologies, including ALZA's OROS
technology, multiparticulate systems marketed by Elan and Biovail Corporation
International, traditional matrix systems marketed by Jago Pharma AG, a
subsidiary of SkyePharma, plc, and other controlled release technologies
marketed and under development by Andrx Corporation, among others.
The Company initially is concentrating its development efforts on generic
versions of controlled release pharmaceuticals. Typically, selling prices of
immediate release drugs have declined and profit margins have narrowed after
generic equivalents of such drugs are first introduced and the number of
competitive products has increased. Similarly, the success of generic versions
of controlled release products based on the Company's TIMERx technology will
depend, in large part, on the intensity of competition from currently marketed
drugs and technologies that compete with the branded pharmaceutical, as well as
the timing of product approvals. However, the Company believes that generic
versions of controlled release pharmaceuticals based on TIMERx technology are
less likely to suffer the same degree of price erosion as other generic
pharmaceuticals because the formulation, analytical and manufacturing complexity
of the generic versions may be difficult for other companies to replicate, which
could limit competition. Competition may also arise from therapeutic products
that are functionally equivalent but produced by other methods. In addition,
under several of the Company's collaborative arrangements, the payments due to
the Company with respect to the controlled release products covered by such
collaborative arrangements will be reduced in the event that there are competing
generic controlled release versions of such products.
The generic drug industry is characterized by frequent litigation between
generic drug companies and branded drug companies. Those companies with
significant financial resources will be more able to bring and to defend any
such litigation. See "Business -- Litigation."
In its excipients business, the Company competes with a number of large
manufacturers and other distributors of excipient products, many of which have
substantially greater financial, marketing and other resources than the Company.
The Company's principal competitor in this market is FMC Corporation, which
markets its own line of MCC excipient products.
The pharmaceutical industry is characterized by rapid and substantial
technological change. There can be no assurance that any products incorporating
TIMERx technology will not be rendered obsolete or non-competitive by new drugs,
treatments or cures for the medical conditions the TIMERx-based products are
addressing. Any of the foregoing could have a material adverse effect on the
Company's business, financial condition and results of operations.
PATENTS AND PROPRIETARY RIGHTS
Penwest believes that patent and trade secret protection, particularly of
its drug delivery technology, is important to its business and that its success
will depend in part on its ability to maintain existing patent protection,
obtain additional patents, maintain trade secret protection and operate without
infringing the proprietary rights of others.
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Penwest has been issued 17 U.S. patents and 40 foreign patents relating to
its controlled release drug delivery technology. In addition, Penwest has filed
12 U.S. patent applications and various corresponding foreign patent
applications relating to its controlled release drug delivery technology. The
U.S. patents issued to the Company cover the Company's TIMERx technology,
including the combination of the xanthan and locust bean gums, the oral solid
dosage form of TIMERx and the method of preparation, as well as the application
(and combination) of TIMERx technology to various active drug substances,
including both method of treatment and methods of preparation. All these patents
expire between 2008 and 2015.
Penwest has also been issued two U.S. patents and four U.S. patent
applications have been allowed relating to its excipient technology. The U.S.
patents and the four allowed U.S. patent applications cover ProSolv and other
augmented MCC excipient products. The U.S. patents and the four allowed U.S.
patent applications, if issued, will expire no later than January 9, 2015.
The issuance of a patent is not conclusive as to its validity or as to the
enforceable scope of the claims of the patent. There is no assurance that the
Company's patents or any future patents will prevent other companies from
developing non-infringing similar or functionally equivalent products or from
successfully challenging the validity of the Company's patents. Furthermore,
there is no assurance that (i) any of the Company's future processes or products
will be patentable; (ii) any pending or additional patents will be issued in any
or all appropriate jurisdictions; (iii) the Company's processes or products will
not infringe upon the patents of third parties; or (iv) the Company will have
the resources to defend against charges of infringement by or protect its own
patent rights against third parties. The inability of the Company to protect its
patent rights or infringement by the Company of the patent or proprietary rights
of others could have a material adverse effect on the Company's business,
financial condition and results of operations.
Penwest also relies on trade secrets and proprietary knowledge, which it
generally seeks to protect by confidentiality and non-disclosure agreements with
employees, consultants, licensees and pharmaceutical companies. There can be no
assurance, however, that these agreements have or in all cases will be obtained,
that these agreements will not be breached, that the Company will have adequate
remedies for any breach or that the Company's trade secrets will not otherwise
become known by competitors.
There has been substantial litigation in the pharmaceutical, biomedical and
biotechnology industries with respect to the manufacture, use and sale of new
products that are the subject of conflicting patent rights. Most of the
controlled release products that the Company is developing with its
collaborators are generic versions of brand name controlled release products
that are covered by one or more patents. Under the Waxman-Hatch Act when an
applicant files an ANDA with the FDA for a generic version of a brand name
product covered by an unexpired patent listed with the FDA, the applicant must
certify to the FDA that such patent will not be infringed by the applicant's
product or that such patent is invalid or unenforceable. Notice of such
certification must be given to the patent holder and the sponsor of the NDA for
the brand name product. If a patent infringement lawsuit is filed within 45 days
of the receipt of such notice, the FDA will conduct a substantive review of the
ANDA, but will not grant final marketing approval of the generic product until a
final judgment on the patent suit is rendered in favor of the applicant or until
30 months (or such longer or shorter period as a court may determine) have
elapsed from the date of the certification, whichever is sooner. Should a patent
holder commence a lawsuit with respect to alleged patent infringement by the
Company or its collaborators, the uncertainties inherent in patent litigation
make the outcome of such litigation difficult to predict. To date, one such
action has been commenced against one of the Company's collaborators and it is
anticipated that additional actions will be filed as the Company's collaborators
file additional ANDAs. The Company evaluates the probability of patent
infringement litigation with respect to its collaborators' ANDA submissions on a
case by case basis. The delay in obtaining FDA approval to market the Company's
product candidates as a result of litigation, as well as the expense of such
litigation, whether or not the Company is successful could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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In May 1997, the Company's collaborator, Mylan, filed an ANDA with the FDA
for a generic version of Procardia XL, a controlled release formulation of
nifedipine. For a discussion of the litigation resulting from such filing, see
"Business -- Litigation."
In 1994, Boots filed in the EPO an opposition to a patent granted by the
European Patent Office ("EPO") to the Company relating to its TIMERx technology.
In June 1996, the EPO dismissed Boots' opposition, leaving intact all claims
included in the patent. Boots has appealed this decision to the EPO Board of
Appeals. There can be no assurance that the Company will prevail in this matter.
An unfavorable outcome could have a material adverse effect on the Company's
business, financial condition and results of operations.
GOVERNMENT REGULATION
FDA Regulation of Pharmaceutical Products
All pharmaceutical manufacturers are subject to extensive regulation by the
federal government, principally the FDA, and, to a lesser extent, by state and
local governments. The Federal Food, Drug and Cosmetic Act (the "FDCA") and
other federal statutes and regulations govern or influence the development,
testing, manufacture, safety, labeling, storage, record keeping, approval,
advertising, promotion, sale and distribution of prescription products.
Pharmaceutical manufacturers are also subject to certain record keeping and
reporting requirements, establishment registration, product listing and FDA
inspections.
Drugs can be approved by the FDA based on three types of marketing
applications: a new drug application ("NDA"), an abbreviated new drug
application ("ANDA") or an abbreviated antibiotic drug application ("AADA"). A
full NDA must include complete reports of preclinical, clinical and other
studies to prove adequately that the product is safe and effective for its
intended use. The FDCA also provides for NDA submissions that may rely in whole
or in part on publicly available clinical and other data on safety and efficacy
under section 505(b)(2) of the FDCA. These types of NDAs may be appropriate for
certain drugs containing previously approved active ingredients but differing
with regard to other characteristics such as indications for use, dosage form or
method of delivery.
As an initial step in the FDA regulatory approval process for an NDA,
preclinical studies are typically conducted in animal models to assess the
drug's efficacy and to identify potential safety problems. The results of these
studies must be submitted to the FDA as part of an Investigational New Drug
("IND") application, which must be reviewed by the FDA before proposed clinical
testing can begin. Typically clinical testing involves a three-phase process.
Phase I trials are conducted with a small number of subjects and are designed to
provide information about both product safety and the expected dose of the drug.
Phase II trials are designed to provide additional information on dosing and
preliminary evidence of product efficacy. Phase III trials are large scale
studies designed to provide statistical evidence of efficacy and safety in
humans. The results of the preclinical testing and clinical trials of a
pharmaceutical product are then submitted to the FDA in the form of an NDA, or
for a biological product in the form of a Product License Application ("PLA"),
for approval to commence commercial sales. Preparing such applications involves
considerable data collection, verification, analysis and expense. In responding
to an NDA or PLA, the FDA may grant marketing approval, request additional
information or deny the application if it determines that the application does
not satisfy its regulatory approval criteria.
This regulatory process can require many years and the expenditure of
substantial resources. Data obtained from preclinical testing and clinical
trials are subject to varying interpretations, which can delay, limit or prevent
FDA approval. In addition, changes in FDA approval policies or requirements may
occur or new regulations may be promulgated which may result in delay or failure
to receive FDA approval.
Abbreviated applications, ANDAs for non-antibiotic drugs and AADAs for
antibiotic drugs, may be submitted for generic versions of brand name
prescription drugs ("Listed Drugs") where the
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generic drug is the "same" as the Listed Drug with respect to active
ingredient(s) and route of administration, dosage form, strength, and conditions
of use recommended in the labeling. ANDAs may also be submitted for generic
drugs that differ with regard to certain changes from a Listed Drug if the FDA
has approved a petition from a prospective applicant permitting the submission
of an ANDA for the changed product.
Rather than safety and efficacy studies, the FDA requires data
demonstrating that the ANDA or AADA drug formulation is bioequivalent to the
Listed Drug. The FDA also requires labeling, chemistry and manufacturing
information. FDA regulations define bioequivalence as the absence of a
significant difference in the rate and the extent to which the active ingredient
becomes available at the site of drug action when administered at the same molar
dose under similar conditions in an appropriately designed study. If the
approved generic drug is both bioequivalent and pharmaceutically equivalent to
the Listed Drug, the agency will assign a code to the product in an FDA
publication entitled "Approved Drug Products With Therapeutic Equivalence
Evaluation." These codes will indicate whether the FDA considers the product to
be therapeutically equivalent to the Listed Drug. The codes will be considered
by third parties in determining whether the generic drug is therapeutically
equivalent and fully substitutable for the Listed Drug and are relied upon by
Medicaid and Medicare formularies for reimbursement.
The Company's collaborator, Mylan, has filed an ANDA with the FDA for the
30 mg dosage strength of a generic version of Procardia XL, and the Company
expects that its collaborators will file additional ANDAs and/or AADAs to obtain
approval to market other generic controlled release products. There can be no
assurance that ANDAs or AADAs will be suitable or available for such products,
or that such products will receive FDA approval on a timely basis.
Certain ANDA procedures for generic versions of controlled release products
are the subject of petitions filed by brand name drug manufacturers, which seek
changes from the FDA in the approval process for generic drugs. These requested
changes include, among other things, tighter standards for certain
bioequivalence studies and disallowance of the use by a generic drug
manufacturer in its ANDA of proprietary data submitted by the original
manufacturer as part of an original new drug application. The Company is unable
to predict at this time whether the FDA will make any changes to its ANDA
procedures as a result of such petitions or any future petitions filed by brand
name drug manufacturers or the effect that such changes may have on the Company.
Any changes in FDA regulations which make ANDA approvals more difficult could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Some products containing the Company's TIMERx formulation, such as
controlled release formulations of approved immediate release drugs, will
require the filing of an NDA. The FDA will not accept ANDAs or AADAs when the
delivery system or duration of drug availability differs significantly from the
Listed Drug. However, the Company may be able to rely on existing publicly
available safety and efficacy data to support section 505(b)(2) NDAs for
controlled release products when such data exists for an approved immediate
release version of the same chemical entity. However, there can be no assurance
that the FDA will accept such section 505(b)(2) NDAs, or that the Company will
be able to obtain publicly available data that is useful. The section 505(b)(2)
NDA process is a highly uncertain avenue to approval because the FDA's policies
on section 505(b)(2) NDAs have not yet been fully developed. There can be no
assurance that an application submitted under section 505(b)(2) will be
approved, or will be approved in a timely manner.
Sponsors of ANDAs and section 505(b)(2) NDAs must include, as part of their
applications, certifications with respect to certain patents on Listed Drugs
that may result in significant delays in obtaining FDA approvals. Sponsors who
believe that patents that are listed in an FDA publication entitled "Approved
Drug Products With Therapeutic Equivalence Evaluations" are invalid,
unenforceable, or not infringed, must notify the patent owner. If the patent
owner initiates an infringement lawsuit against the sponsor within 45 days of
the notice, the FDA's final approval of the ANDA or section 505(b)(2) NDA may be
delayed for a period of thirty months or longer. This delay may also
44
<PAGE> 46
apply to other ANDAs or 505(b)(2) NDAs for the same Listed Drug. Moreover, the
approval of an ANDA involved in such a patent lawsuit may under certain
circumstances require a further delay in the final approval of other ANDAs for
the same Listed Drug for an additional 180 days. In addition, recent court
decisions have raised the possibility that, under some circumstances, ANDAs
other than the first ANDA for a Listed Drug may be delayed indefinitely and
thereby effectively denied approval if the drug that is the subject of the first
ANDA is not brought to market.
ANDAs and section 505(b)(2) NDAs are also subject to so-called market
exclusivity provisions that delay the submission or final approval of the
applications. The submission of ANDAs and section 505(b)(2) NDAs may be delayed
for five years after approval of the Listed Drug if the Listed Drug contains a
new active molecular entity. The final approval of ANDAs and section 505(b)(2)
NDAs may also be delayed for three years where the Listed Drug or a modification
of the Listed Drug was approved based on new clinical investigations. The
three-year marketing exclusivity period would potentially be applicable to
Listed Drugs with novel drug delivery systems.
Sponsors of generic drug applications affected by patents may also be
adversely affected by patent term extensions provided under the FDCA to
compensate for patent protection lost due to time taken in conducting FDA
required clinical studies or during FDA review of data submissions. Patent term
extensions may not exceed five additional years nor may the total period of
patent protection following FDA marketing approval be extended beyond 14 years.
In addition, by virtue of the Uruguay Round Agreements Act of 1994 that ratified
the General Agreement on Tariffs and Trade ("GATT"), certain brand name drug
patent terms have been extended to 20 years from the date of filing of the
pertinent patent applications (which can be longer than the former 17-year
patent term starting from the date of patent issuance). Patent term extensions
may delay the ability of the Company and its collaborators to use the Company's
proprietary technology in the future, market new controlled release products,
file section 505(b)(2) NDAs referencing approved products, or file ANDAs and
AADAs based on Listed Drugs when those approved products or Listed Drugs have
acquired patent term extensions.
Manufacturers of marketed drugs must conform to the FDA's cGMP standard or
risk sanctions such as the suspension of manufacturing or the seizure of drug
products and the refusal to approve additional marketing applications. The FDA
conducts periodic inspections to implement these rules. There can be no
assurance that a manufacturer's facility will be found to be in compliance with
cGMP or other regulatory requirements. Failure to comply could result in
significant delays in the development, testing and approval of products
manufactured at such facility, as well as increased costs.
Noncompliance with applicable requirements can also result in total or
partial injunctions against production and/or distribution, refusal of the
government to enter into supply contracts or to approve NDAs, ANDAs or AADAs,
criminal prosecution and product recalls. The FDA also has the authority to
revoke for cause drug approvals previously granted.
FDA Regulation of Excipients
Products sold for use as excipients in finished drug products are subject
to regulation by the FDA with regard to labeling, product integrity and
manufacturing. The FDA will not approve a drug for marketing without adequate
assurances that the excipients are safe for use in the product. The FDA presumes
certain excipients that are present in approved drug products currently marketed
for human use to be safe. These excipients are listed by the FDA in a document
known as the Inactive Ingredient Guide, or "IIG." While the FDA does not
ordinarily require applicants for NDAs, ANDAs or AADAs to submit data
demonstrating the safety of excipients listed in the IIG, it may require
evidence of safety in certain circumstances, such as when evidence is required
to demonstrate that such excipients interact safely with other components of a
drug product. For excipients not listed in the IIG, the FDA will generally
require data, which may include clinical data, demonstrating the safety of the
excipient for use in the product at issue. In the case of generic drug products
approved based on bioequivalence to a reference drug, the FDA may in some cases
(e.g. products for parenteral, ophthalmic, otic or topical use) require
excipients that are identical to the excipients in the reference drug. There can
be no assurance that the FDA will not require new clinical safety data to
approve an application for a
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<PAGE> 47
product with a Penwest excipient or that the FDA will approve such an
application even if such clinical data are submitted.
Foreign Regulatory Approval
Whether or not FDA approval has been obtained, approval of a pharmaceutical
product by comparable governmental regulatory authorities in foreign countries
must be obtained prior to the commencement of clinical trials and subsequent
marketing of such product in such countries. The approval procedure varies from
country to country, and the time required may be longer or shorter than that
required for FDA approval.
Under European Community ("EC") law, either of two approval procedures may
apply to the Company's products: a centralized procedure, administered by the
EMEA (the European Medicines Evaluation Agency); or a decentralized procedure,
which requires approval by the medicines agency in each EC Member State where
the Company's products will be marketed. The centralized procedure is mandatory
for certain biotechnology products and available at the applicant's option for
certain other products. Although the decentralized procedure requires approval
by the medicines agency in each EC Member State where the products will be
marketed, there is a mutual recognition procedure under which the holder of
marketing approval from one EC Member State may submit an application to one or
more other EC Member States, including a certification to the effect that the
application is identical to the application which was originally approved or
setting forth the differences between the two applications. Within 90 days of
such application, each EC Member State will be required to determine whether to
recognize the prior approval.
Whichever procedure is used, the safety, efficacy and quality of the
Company's products must be demonstrated according to demanding criteria under EC
law and extensive nonclinical tests and clinical trials are likely to be
required. In addition to premarket approval requirements, national laws in EC
Member States will govern clinical trials of the Company's products, adherence
to good manufacturing practice, advertising and promotion and other matters. In
certain EC Member States, pricing or reimbursement approval may be a legal or
practical precondition to marketing.
A procedure for abridged applications for generic products also exists in
the EC. The general effect of the abridged application procedure is to give
scope for the emergence of generic competition once patent protection has
expired and the original product has been on the market for at least six or ten
years. Independent of any patent protection, under the abridged procedure, new
products benefit in principle from a basic six or ten year period of protection
(commencing with the date of first authorization in the EC) from abridged
applications for a marketing authorization. The period of protection in respect
of products derived from certain biotechnological processes or other high-
technology medicinal products viewed by the competent authorities as
representing a significant innovation is ten years. Further, each EC Member
State has discretion to extend the basic six-year period of protection to a
ten-year period to all products marketed in its territory. Certain EC Member
States have exercised such discretion. The protection does not prevent another
company from making a full application supported by all necessary
pharmacological, toxicological and clinical data within the period of
protection. Abridged applications can be made principally for medicinal products
which are essentially similar to medicinal products which have been authorized
for either six or ten years. Under the abridged application procedure, the
applicant is not required to provide the results of pharmacological and
toxicological tests or the results of clinical trials. For such abridged
applications, all data concerning manufacturing quality and bioavailability are
required. The applicant submitting the abridged application generally must
provide evidence or information that the drug product subject to this
application is essentially similar to that of the referenced product in that it
has the same qualitative and quantitative composition with respect to the active
ingredient and the same dosage form, and is similar in bioavailability as the
referenced drug.
The Company's European excipients manufacturing operations are subject to a
variety of laws and regulations, including environmental and good manufacturing
practices regulations.
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<PAGE> 48
Other Regulations
The Company is governed by federal, state and local laws of general
applicability, such as laws regulating working conditions and environmental
protection. Certain drugs that the Company is developing are subject to
regulations under the Controlled Substances Act and related statutes.
PRICING AND THIRD-PARTY REIMBURSEMENT
The commercialization of the controlled release product candidates under
development by the Company and its collaborators depends in part on the extent
to which reimbursement for the cost of such products will be available from
government health administration authorities, private health insurers and other
third party payors, such as health maintenance organizations and managed care
organizations. The generic versions of controlled release products being
developed by the Company and its collaborators may be assigned an AB rating if
the FDA considers the product to be therapeutically equivalent to the branded
controlled release drug. Failure to obtain an AB rating from the FDA would
indicate that for certain purposes the drug would not be deemed to be
therapeutically equivalent, would not be fully substitutable for the branded
controlled release drug and would not be relied upon by Medicaid and Medicare
formularies for reimbursement.
Third-party payors are attempting to control costs by limiting the level of
reimbursement for medical products, including pharmaceuticals. Cost control
initiatives could decrease the price that the Company or any of its
collaborators receives for their drugs and have a material adverse effect on the
Company's business, financial condition and results of operations. Further, to
the extent that cost control initiatives have a material adverse effect on the
Company's collaborators, the Company's ability to commercialize its products and
to realize royalties may be adversely affected. Moreover, health care reform has
been, and may continue to be, an area of national and state focus, which could
result in the adoption of measures that adversely affect the pricing of
pharmaceuticals or the amount of reimbursement available from third party
payors. The Company's business, financial condition and results of operations
could be materially adversely affected if adequate coverage and reimbursement
levels are not provided by government and other third-party payors for the
products of the Company and its collaborators.
PRODUCT LIABILITY INSURANCE
The design, development, and manufacture of the Company's products involve
an inherent risk of product liability claims. The Company faces the risk of
product liability claims in the event that the use of its products is alleged to
have resulted in harm to a patient or subject. Such risks exist even with
respect to those products that are manufactured in licensed and regulated
facilities or that otherwise possess regulatory approval for commercial sale.
Until the Spin-off, the Company will be covered by primary product liability
insurance maintained by Penford in the amount of $1.0 million per occurrence and
$2.0 million annually in the aggregate on a claims-made basis and by umbrella
liability insurance in excess of $5.0 million which can also be used for product
liability insurance. The Company believes that its product liability insurance
is adequate for its current operations, and will seek to increase its coverage
prior to the commercial introduction of its controlled release product
candidates. There can be no assurance that the coverage limits of the Company's
insurance will be sufficient to offset potential claims or that Penwest will be
able to obtain comparable coverage following the Spin-off. Product liability
insurance is expensive and difficult to procure and may not be available in the
future on acceptable terms or in sufficient amounts, if available at all.
However, since some of the Company's collaborators require the Company to
maintain product liability insurance coverage as a condition to doing business
with the Company, the Company intends to take all reasonable steps necessary to
maintain such insurance coverage. A successful claim against the Company in
excess of its insurance coverage could have a material adverse effect upon the
Company's business, financial condition and results of operations.
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<PAGE> 49
LITIGATION
In May 1997, one of the Company's collaborators, Mylan, filed an ANDA with
the FDA for the 30 mg dosage strength of Nifedipine XL, a generic version of
Procardia XL, a controlled release formulation of nifedipine. Bayer and ALZA own
patents listed for Procardia XL (the last of which expires in 2010), and Pfizer
holds the NDA and markets the product. In connection with the ANDA filing, Mylan
certified to the FDA that Nifedipine XL does not infringe these Bayer or ALZA
patents and notified Bayer, ALZA and Pfizer of such certification. Bayer and
Pfizer sued Mylan in the United States District Court for the Western District
of Pennsylvania, alleging that Mylan's product infringes Bayer's patent. The
Company has been informed by Mylan that ALZA does not believe that the notice
given to it complied with the requirements of the Waxman-Hatch Act, and there
can be no assurance that ALZA will not sue Mylan for patent infringement or take
any other actions with respect to such notice. Mylan has advised the Company
that it intends to contest vigorously the allegations made in the lawsuit.
However, there can be no assurance that Mylan will prevail in this litigation or
that it will continue to contest the lawsuit. An unfavorable outcome or
protracted litigation for Mylan would materially adversely affect the Company's
business, financial condition and results of operations. Delays in the
commercialization of Nifedipine XL could occur because the FDA will not grant
final marketing approval of Nifedipine XL until a final judgment on the patent
suit is rendered in favor of Mylan by the district court, or in the event of an
appeal, by the court of appeals, or until 30 months (or such longer or shorter
period as the court may determine) have elapsed from the date of Mylan's
certification, whichever is sooner.
In 1993, Pfizer filed a "citizen's petition" with the FDA, claiming that
its Procardia XL formulation constituted a unique delivery system and that a
drug with a different release mechanism such as the TIMERx controlled release
system cannot be considered the same dosage form and approved in an ANDA as
bioequivalent to Procardia XL. In August 1997, the FDA rejected Pfizer's
citizen's petition. In July 1997, Pfizer also sued the FDA in the District Court
of the District of Columbia, claiming that the FDA's acceptance of Mylan's ANDA
filing for Nifedipine XL was contrary to law, based primarily on the arguments
stated in its citizen's petition. Mylan and the Company have intervened as
defendants in this suit. There can be no assurance that the FDA, Mylan and the
Company will prevail in this litigation. An outcome adverse to Mylan and the
Company would result in Mylan being required to file a suitability petition in
order to maintain the ANDA filing or to file an NDA with respect to Nifedipine
XL, each of which would be expensive and time consuming. An adverse outcome also
would result in Nifedipine XL becoming ineligible for an "AB" rating from the
FDA. Failure to obtain an AB rating from the FDA would indicate that for certain
purposes Nifedipine XL would not be deemed to be therapeutically equivalent to
the referenced branded drug, would not be fully substitutable for the referenced
branded drug and would not be relied upon by Medicaid and Medicare formularies
for reimbursement. Any such failure would have a material adverse effect on the
Company's business, financial condition and results of operations. If any of
such events occur, Mylan may terminate its efforts with respect to Nifedipine
XL, which would have a material adverse effect on the Company's business,
financial condition and results of operations.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
For financial information about the Company's foreign and domestic
operations and export sales, see Note 12 of Notes to Consolidated Financial
Statements.
FACILITIES
The Company's executive, administrative, research, small-scale production
and warehouse facilities, comprising approximately 55,000 square feet, currently
are located in a single facility on a 15 acre site owned by the Company in
Patterson, New York. The Company currently plans to use approximately $15
million from the proceeds of this offering for the construction of facilities
for the manufacture of formulated TIMERx material, as well as expanded
laboratory space, at its Patterson, New York facility.
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<PAGE> 50
The Company owns a facility in Cedar Rapids, Iowa where it manufactures and
packages pharmaceutical excipients. The facility is a 35,000 square foot
building containing manufacturing and administrative space. The Company also
manufactures pharmaceutical excipients in a 15,000 square foot facility leased
by the Company in Nastola, Finland, which lease renews annually with a two-year
notification of termination period for either party.
The Company believes that all of its present facilities are well maintained
and in good operating condition.
EMPLOYEES
As of September 30, 1997, the Company employed 118 persons, of which 73
were involved in research and development, administration and sales and
marketing activities in Patterson, New York, 20 were involved in manufacturing
operations at the Company's facility in Nastola, Finland, 19 were involved in
manufacturing operations at the Company's facility in Cedar Rapids, Iowa and six
were involved in sales activities in the Company's European sales offices.
Other than the Company's employees in Finland who are covered by a national
collective bargaining agreement, none of the Company's employees are covered by
collective bargaining agreements. The Company considers its employee relations
to be good.
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<PAGE> 51
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
October 15, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------
<S> <C> <C>
Tod R. Hamachek(1).................... 51 Chairman of the Board and Chief Executive Officer
John V. Talley, Jr.................... 41 President, Chief Operating Officer and Director
Anand R. Baichwal, Ph.D............... 42 Senior Vice President, Research and Development
Edmund O. Belsheim, Jr................ 45 Senior Vice President, Corporate Development,
General Counsel and Secretary
Stephen J. Berte, Jr.................. 42 Vice President, Marketing and Sales
Jennifer L. Good...................... 32 Vice President, Finance and Chief Financial
Officer
Paul K. Wotton, Ph.D.................. 37 Vice President, Business Development
Paul E. Freiman(1)(3)................. 63 Director
Jere E. Goyan, Ph.D.(2)............... 67 Director
Rolf H. Henel(2)...................... 60 Director
Robert J. Hennessey(1)(3)............. 55 Director
N. Stewart Rogers(2)(3)............... 67 Director
W. Leigh Thompson, M.D., Ph.D.(2)..... 59 Director
</TABLE>
- ---------------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Tod R. Hamachek was named Chairman of the Board of Directors and Chief
Executive Officer of the Company on October 8, 1997. Mr. Hamachek has served as
President and Chief Executive Officer of Penford since 1985, but will resign
from these positions effective upon the closing of this offering. He has also
served as a director of Penford since 1983 but will resign from this position
effective upon the date of the Spin-off. Mr. Hamachek is a director of DEKALB
Genetics Corporation and Northwest Natural Gas Company.
John V. Talley, Jr. has served as President of the Company since December
1993 and was named Chief Operating Officer and a director of the Company on
October 8, 1997. Mr. Talley has served as a Vice President of Penford since 1993
but will resign from that position effective upon the closing of this offering.
Prior to joining the Company, Mr. Talley served in a variety of positions at
Sterling Drug from 1979 to 1993, including Vice President of Marketing from 1992
to 1993 and Vice President, Marketing of the Hospital Products Division from
1989 to 1992. From 1979 to 1989, Mr. Talley served in the New Product
Development and Marketing Department of Sanofi where he was responsible for the
marketing of prescription drugs in the United States.
Dr. Anand R. Baichwal has served as Senior Vice President, Research and
Development of the Company since January 1997, after serving in a variety of
positions for the Company since 1987, including Vice President, Technology from
1994 to 1997, Vice President, Research and Development from 1993 to 1994,
Director of Commercial Development from 1991 to 1993 and Director of Research
and Development and Technical Affairs from 1987 to 1991. Dr. Baichwal is a
co-inventor of the TIMERx technology. See "Certain Transactions."
Edmund O. Belsheim, Jr. was named Senior Vice President, Corporate
Development, General Counsel and Secretary of the Company on October 8, 1997.
Mr. Belsheim has served as Vice President, Corporate Development and General
Counsel of Penford since September 1996 and as Secretary of
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<PAGE> 52
Penford since March 1997, but will resign from these positions effective upon
the closing of this offering. Prior to joining Penford, Mr. Belsheim was a
member of the law firm Bogle & Gates P.L.L.C. from 1986 to 1996.
Stephen J. Berte, Jr. has served as Vice President, Marketing and Sales of
the Company since January 1995. Prior to joining the Company, Mr. Berte served
in a variety of positions at Sanofi, including Senior Director of New Product
Development from 1992 to 1995, Director of Marketing from 1990 to 1992, Senior
Product Manager from 1989 to 1990, Product Manager from 1988 to 1989 and
Assistant Project Manager for injectable drugs from 1987 to 1988.
Jennifer L. Good has served as Vice President, Finance of the Company since
March 1997 and was named Chief Financial Officer of the Company on October 8,
1997. Prior to joining the Company, Ms. Good served as Corporate Director of
Finance and Secretary of Penford from 1996 to March 1997 and as Corporate
Controller of Penford from 1993 to 1996. From 1987 to 1993, Ms. Good was
employed by Ernst & Young LLP as an audit manager.
Dr. Paul K. Wotton has served as Vice President, Business Development of
the Company, since November 1994, after serving in a variety of positions for
the Company since 1989, including Director of Business Development from 1993 to
1994 and Product Manager (Europe) from 1991 to 1993. Prior to joining the
Company, Dr. Wotton served as a Project Manager at Abbott Laboratories, a
pharmaceutical company ("Abbott"), from 1987 to 1989 and as a Research
Pharmacist at Merck and Co., Inc. ("Merck"), a pharmaceutical company, from 1985
to 1987.
Paul E. Freiman became a director of the Company on October 8, 1997. Mr.
Freiman has served as a director of Penford since April 1996 but will resign
from this position effective upon the date of the Spin-off. Mr. Freiman has
served as President of Neurobiological Technologies, Inc., a biotechnology
company, since May 1997 and as Chairman of the Board of Digital Gene
Technologies, a biotechnology company, since February 1995. From 1990 to 1995,
Mr. Freiman served as Chairman and Chief Executive Officer of Syntex
Corporation, a pharmaceutical company.
Dr. Jere E. Goyan became a director of the Company on October 8, 1997. Dr.
Goyan has been the President and Chief Operating Officer of Alteon Corporation
("Alteon"), a biopharmaceutical company, since April 1993. Dr. Goyan also served
as the Acting Chief Executive Officer of Alteon from June 1993 to February 1994
and as Senior Vice President, Research and Development of Alteon from January
1993 through April 1993. Dr. Goyan is Professor Emeritus of Pharmacy and
Pharmaceutical Chemistry and Dean Emeritus of the School of Pharmacy, University
of California, San Francisco ("UCSF"). He has been on the faculty of the School
of Pharmacy at UCSF since 1963. He took a leave of absence from 1979 to 1981 to
serve as Commissioner of Food and Drugs of the FDA. Dr. Goyan is a director of
ATRIX Laboratories, Inc., Emisphere Technologies, Inc. and SciClone
Pharmaceuticals, Inc., each a biopharmaceutical firm, and Boehringer Ingelheim
Pharmaceuticals, Inc., a pharmaceutical company.
Rolf H. Henel became a director of the Company on October 8, 1997. Mr.
Henel has served as Executive Director of Performance Effectiveness Corp., a
consulting firm for the pharmaceutical industry, since June 1995 and as a
partner of Naimark & Associates P.C., a consulting firm for the healthcare
industry, since September 1990. From 1978 to 1993, Mr. Henel served in a variety
of positions at American Cyanamid Co., a pharmaceutical company, most recently
as President of Lederle International, a division of American Cyanamid Co. Mr.
Henel is a director of SciClone Pharmaceuticals, Inc.
Robert J. Hennessey became a director of the Company on October 8, 1997.
Mr. Hennessey has served as Chairman of the Board and Chief Executive Officer of
Genome Therapeutics Corp., a biotechnology company, since March 1993. From 1990
to 1993, Mr. Hennessey served as the President of Hennessey & Associates Ltd., a
strategic consulting firm to biotechnology and healthcare companies. Prior to
1990, Mr. Hennessey held a variety of management positions at Merck, SmithKline,
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<PAGE> 53
Abbott and Sterling Drug. Mr. Hennessey is also a director of Virus Research
Institute, Inc., a biotechnology company.
N. Stewart Rogers became a director of the Company on October 8, 1997. Mr.
Rogers has served as Chairman of the Board of Directors of Penford since 1990
and as a director of Penford since 1983. Mr. Rogers is also a director of Fluke
Corporation, an electronic test instrument manufacturer, Royal Pakhoed N.V. (The
Netherlands), a chemical logistics and distribution company, U.S. Bancorp, a
bank holding company and VWR Scientific Products Corporation, a laboratory
supply company.
Dr. W. Leigh Thompson became a director of the Company on October 8, 1997.
Dr. Thompson has served as Chief Executive Officer of Profound Quality
Resources, Ltd., a consulting firm for the pharmaceutical industry, since 1995.
From 1993 to 1994, Dr. Thompson served as Chief Scientific Officer of Eli Lilly
and Company, a pharmaceutical company, and prior to that in a variety of
positions at Eli Lilly and Company since 1982, including Executive Vice
President of Lilly Research Laboratories.
BOARD OF DIRECTORS' COMMITTEES AND OTHER INFORMATION
Each officer of the Company is elected by the Board of Directors on an
annual basis and serves until his or her successor has been duly elected and
qualified. There are no family relationships among any of the executive officers
or directors of the Company.
The Board of Directors is divided into three classes, each of whose members
serves for a staggered three-year term. The Board consists of three Class I
directors (Mr. Freiman, Mr. Henel and Mr. Rogers), three Class II directors (Dr.
Goyan, Mr. Talley and Dr. Thompson) and two Class III directors (Mr. Hamachek
and Mr. Hennessey). At each annual meeting of shareholders, a class of directors
is elected for a three-year term to succeed the directors of the same class
whose term is then expiring. The terms of the Class I directors, Class II
directors and Class III directors expire at the annual meeting of shareholders
to be held in 1998, 1999 and 2000, respectively. It is Penwest's policy that
when the Chairman of the Board and the Chief Executive Officer is the same
person, the Board of Directors will appoint one of its members as a Lead
Director to chair meetings of the Board and for certain other purposes. Mr.
Freiman has been appointed Lead Director.
The Board of Directors has established a Compensation Committee, an Audit
Committee and an Executive Committee. The Compensation Committee makes
recommendations to the Board with respect to the compensation of directors and
executive officers of the Company. The Compensation Committee also supervises
the Company's employee benefit plans. The Compensation Committee consists of
Messrs. Freiman, Hennessey and Rogers.
The Audit Committee recommends to the Board the selection of the
independent auditors, reviews the proposed scope of the independent audit,
reviews the annual financial statements and the independent auditor's report,
reviews the independent auditor's recommendations relating to accounting,
internal controls and other matters, and reviews internal controls and
accounting procedures with management. The Audit Committee consists of Messrs.
Henel and Rogers and Drs. Goyan and Thompson.
The Executive Committee exercises all powers and authority of the Board
with certain exceptions as provided under Washington law. The Executive
Committee consists of Messrs. Freiman, Hamachek and Hennessey.
DIRECTOR COMPENSATION
In connection with this offering, options to purchase 10,000 shares of
Common Stock (11,000 shares in the case of the Lead Director) will be granted to
each non-employee director under the Company's 1997 Equity Incentive Plan (the
"1997 Plan") upon the date on which the initial public offering price is
determined (the "Pricing Date") at the initial public offering price. It is
contemplated that each non-employee director will also receive an annual grant
of stock options under the
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<PAGE> 54
Company's 1997 Plan to purchase 7,000 shares of Common Stock (8,000 shares in
the case of the Lead Director) at an exercise price equal to the closing price
of the Common Stock on the date of grant. All options granted to non-employee
directors will first become exercisable six months after their grant date. These
options will become exercisable in full upon a change in control of Penwest (as
defined).
Each non-employee director will be reimbursed for his expenses incurred in
connection with his attendance at Board and committee meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Freiman, Hennessey and Rogers, none of whom are employees of the Company.
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<PAGE> 55
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company or
Penford in the year ended December 31, 1996 to the Company's Chief Executive
Officer and to the Company's other executive officers whose annual salary and
bonus exceeded $100,000 (collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
SECURITIES
ANNUAL COMPENSATION OF PENFORD
--------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS OPTIONS(5) COMPENSATION(6)
- ---------------------------------------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C>
Tod R. Hamachek(2)...................... $340,000(4) $123,636 96,000 $19,702
Chairman of the Board and Chief
Executive Officer
John V. Talley, Jr. .................... 180,000(4) 58,183 19,000 8,403
President and Chief Operating Officer
Stephen J. Berte, Jr. .................. 119,000 17,927 10,000 4,745
Vice President, Marketing and Sales
Paul K. Wotton, Ph.D. .................. 107,000 25,000 6,000 6,298
Vice President, Business Development
Anand R. Baichwal, Ph.D.(3)............. 96,000 19,000 6,000 6,101
Senior Vice President, Research and
Development
</TABLE>
- ---------------
(1) In accordance with the rules of the Commission, this table and the stock
option grant table and the stock option exercise table which follow present
information concerning the Company's Chief Executive Officer and its four
other most highly compensated executive officers whose total annual salary
and bonus exceeded $100,000 (determined by reference to total annual salary
and bonus earned by such officers) for the year ended December 31, 1996.
Edmund O. Belsheim, Jr., who joined Penford as Vice President, Corporate
Development and General Counsel in September 1996, currently receives an
annual salary of $190,000 per year. During the year ended December 31, 1996,
pursuant to Penford's 1994 Stock Option Plan, Mr. Belsheim was granted stock
options to purchase an aggregate of 53,000 shares of common stock of Penford
at a weighted average exercise price of $18.33 per share.
(2) Mr. Hamachek earned the compensation set forth above for services rendered
to Penford in his capacity as President and Chief Executive Officer of
Penford.
(3) For a discussion of certain other amounts payable to Dr. Baichwal, see
"Certain Transactions."
(4) Includes $20,000 and $4,733 as to which Messrs. Hamachek and Talley,
respectively, elected to defer payment.
(5) Represents options to purchase common stock of Penford granted to the Named
Executive Officers in 1996.
(6) Represents Penford's matching and profit sharing contributions under the
Penford Savings and Stock Ownership Plan and premiums paid on behalf of the
Named Executive Officers for supplemental life and disability insurance
plans.
54
<PAGE> 56
Option Grants
The following table sets forth certain information concerning grants of
stock options to purchase shares of common stock of Penford made during the year
ended December 31, 1996 by Penford to the Named Executive Officers. No options
to purchase shares of Penwest's Common Stock were issued during the year ended
December 31, 1996.
OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
NUMBER OF TOTAL VALUE AT ASSUMED
SECURITIES OPTIONS ANNUAL RATES OF STOCK
OF PENFORD GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES OR BASE FOR OPTION TERM(4)
OPTIONS BY PENFORD PRICE PER EXPIRATION ---------------------
NAME GRANTED(1) IN 1996 SHARE DATE(3) 5% 10%
- ------------------------------ ---------- ------------ --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Tod R. Hamachek............... 46,000 12.57% $ 18.50 10/23/06 $535,194 $1,356,239
50,000(2) 13.66 17.50 12/12/06 550,288 1,394,488
John V. Talley, Jr. .......... 19,000 5.19 18.50 10/23/06 221,058 560,186
Steven J. Berte, Jr. ......... 5,000 1.37 18.25 06/25/06 57,387 145,425
5,000 1.37 17.00 12/20/06 53,457 135,465
Paul K. Wotton................ 1,000 0.27 18.25 06/25/06 11,477 29,085
5,000 1.37 17.00 12/20/06 53,457 135,465
Anand R. Baichwal............. 1,000 0.27 18.25 06/25/06 11,477 29,085
5,000 1.37 17.00 12/20/06 53,457 135,465
</TABLE>
- ---------------
(1) Except as noted in note (2) below, these stock options are either
exercisable in four or five equal annual installments commencing on the
first anniversary of the date of grant of the options.
(2) These stock options are exercisable with respect to 20,000 of such shares
and become exercisable with respect to 10,000 of such shares in four equal
annual installments commencing on the first anniversary of the date of grant
of the options, and with respect to 20,000 of such shares on the date on
which the closing price of the common stock of Penford has equaled or
exceeded $38.00 for each of the 20 consecutive trading days immediately
preceding such date.
(3) The expiration date of an option is the tenth anniversary of the date on
which the option was originally granted.
(4) The amounts shown on this table represent hypothetical gains that could be
achieved for the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock appreciation of 5% and
10%, compounded annually from the date the respective options were granted
to their expiration date. The gains shown are net of the option exercise
price, but do not include deductions for taxes or other expenses associated
with the exercise and do not represent the Company's estimate or projection
of the future price of the common stock of Penford. Actual gains, if any, on
stock option exercises will depend on the future performance of the common
stock of Penford, the optionholders' continued employment through the option
period with either Penford or the Company, and the date on which the options
are exercised.
The Company has approved the grant of stock options to purchase an
aggregate of 654,000 shares of Common Stock to its employees and officers,
effective upon the Pricing Date, at an exercise price equal to the initial
public offering price, of which options to purchase 180,000 shares, 105,000
shares, 30,000 shares, 51,000 shares, 78,000 shares and 75,000 shares were
granted to Mr. Hamachek, Mr. Talley, Mr. Berte, Dr. Wotton, Dr. Baichwal and Mr.
Belsheim, respectively. These options will be exercisable in four equal annual
installments commencing on the first anniversary of the Pricing Date and will
become exercisable in full upon a change in control of Penwest (as defined).
55
<PAGE> 57
Stock Options Held as of Year-End
The following table sets forth certain information concerning each exercise
of a stock option to purchase common stock of Penford during the year ended
December 31, 1996 by a Named Executive Officer, and the number and value of
unexercised stock options to purchase shares of common stock of Penford held by
each of the Named Executive Officers as of December 31, 1996. No Named Executive
Officer held any stock options to purchase shares of Penwest's Common Stock as
of December 31, 1996.
AGGREGATE OPTION EXERCISES IN 1996
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER NUMBER OF SECURITIES OF
OF SHARES PENFORD UNDERLYING VALUE OF UNEXERCISED
OF PENFORD UNEXERCISED OPTIONS AS OF IN-THE-MONEY OPTIONS AS OF
ACQUIRED DECEMBER 31, 1996(#) DECEMBER 31, 1996($)(1)
ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ---------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tod R. Hamachek............ 32,242 $376,264 225,000 96,000 $ 1,950,075 $ --
John V. Talley, Jr......... -- -- 6,000 63,000 -- --
Stephen J. Berte, Jr....... -- -- -- 10,000 -- 2,500
Paul K. Wotton............. -- -- 2,000 14,000 -- 2,500
Anand R. Baichwal.......... -- -- 2,000 14,000 -- 2,500
</TABLE>
- ---------------
(1) Value is based on the difference between the option exercise price and the
fair market value of shares of common stock of Penford as of December 31,
1996 ($17.50 per share as quoted on the Nasdaq National Market).
Penford Retirement Plan
Penford has a defined benefit retirement plan (the "Retirement Plan"). The
table below shows the estimated annual benefits payable on retirement under the
Retirement Plan to persons in the specified compensation and years of service
classifications. The retirement benefits shown are based upon retirement at age
65 and the payments of a single-life annuity to the employee using current
average Social Security wage base amounts and are not subject to any deduction
for Social Security or other offset amounts. With certain exceptions, the Code
restricts to an aggregate amount of $120,000 (subject to cost of living
adjustments) the annual pension that may be paid by an employer from a plan
which is qualified under the Code. The Code also limits the covered compensation
which may be used to determine benefits to $150,000. The Board of Directors of
Penford has established supplemental benefits for certain highly compensated
employees to whom this limit applies or will apply in the future, so that these
employees will obtain the benefit of the formula that would have applied in the
absence of the limitation. Named Executive Officers entitled to receive
supplemental benefits as of December 31, 1996 were Messrs. Hamachek and Talley.
RETIREMENT BENEFITS
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------------
COVERED COMPENSATION(1) 20 25 30 35
- ------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
$200,000.................................. $ 57,070 $ 71,337 $ 85,604 $ 99,872
300,000.................................. 87,070 108,837 130,604 152,372
400,000.................................. 117,070 146,337 175,604 204,872
500,000.................................. 147,070 183,837 220,604 257,372
600,000.................................. 177,070 221,337 265,604 309,872
700,000.................................. 207,070 258,837 310,604 362,372
800,000.................................. 237,070 296,337 355,604 414,872
900,000.................................. 267,070 333,837 400,604 467,372
</TABLE>
- ---------------
(1) Represents the highest average annual earnings during five consecutive
calendar years of service.
Compensation of Named Executive Officers covered by the Retirement Plan
includes salaries and bonuses as shown in the salary and bonus columns of the
Summary Compensation Table.
56
<PAGE> 58
As of December 31, 1996, the approximate years of credited service (rounded
to the nearest year) under the Retirement Plan of the Named Executive Officers
were: Mr. Hamachek, 12, Mr. Talley, 3, Mr. Berte, 3, Dr. Wotton, 7, and Dr.
Baichwal, 9.
Under the Employee Benefits Agreement between Penford and Penwest, Penford
will freeze all benefits of employees of Penwest under this plan as of the
closing of this offering and will distribute to each employee on the date of the
Spin-off his or her fully vested interest in the form of a lump sum payment or
an annuity. See "Arrangements Between the Company and Penford."
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan
The Company's 1997 Plan was adopted by the Company in October 1997. The
1997 Plan provides for the grant of incentive stock options, nonstatutory stock
options, restricted stock awards and other stock-based awards, including the
grant of securities convertible into Common Stock and the grant of stock
appreciation rights (collectively "Awards"). A total of 3,500,000 shares of
Common Stock may be issued pursuant to Awards granted under the 1997 Plan.
Optionees receive the right to purchase a specified number of shares of
Common Stock at a specified option price and subject to such other terms and
conditions as are specified in connection with the option grant. Awards may be
granted at an exercise price which may be less than, equal to or greater than
the fair market value of the Common Stock on the date of grant subject to the
limitations described below. Incentive stock options may not be granted at an
exercise price less than the fair market value of the Common Stock on the date
of grant (or less than 110% of the fair market value in the case of incentive
stock options granted to optionees holding more than 10% of the voting power of
the Company). Options may not be granted for a term in excess of ten years. The
1997 Plan permits the Board to determine the manner of payment of the exercise
price of options, including through payment by cash, check or in connection with
a "cashless exercise" through a broker, by surrender to the Company of shares of
Common Stock, by delivery to the Company of a promissory note, or any
combination of the foregoing.
Restricted stock Awards entitle recipients to acquire shares of Common
Stock, subject to the right of the Company to repurchase all or part of such
shares from the recipient in the event that the conditions specified in the
applicable Award are not satisfied prior to the end of the applicable
restriction period established for such Award.
Under the 1997 Plan, the Board has the right to grant other Awards based
upon the Common Stock having such terms and conditions as the Board may
determine, including the grant of securities convertible into Common Stock and
the grant of stock appreciation rights.
Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries are eligible to be granted Awards under the 1997 Plan. However,
incentive stock options may only be granted to employees. The maximum number of
shares with respect to which an Award may be granted to any participant under
the 1997 Plan may not exceed 500,000 shares per calendar year.
As of the date of adoption of the 1997 Plan, all the Company's employees
were eligible to receive Awards under the 1997 Plan. The granting of Awards
under the 1997 Plan is discretionary, and the Company cannot now determine the
number or type of Awards to be granted in the future to any particular person or
group.
The 1997 Plan is administered by the Board of Directors. The Board has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the 1997 Plan and to interpret the provisions of the 1997
Plan. Pursuant to the terms of the 1997 Plan, the Board of Directors may
delegate authority under the 1997 Plan to one or more committees of the Board,
and subject to certain limitations, to one or more executive officers of the
Company. The Board has authorized the Compensation Committee to administer
certain aspects of the 1997 Plan, including the granting of
57
<PAGE> 59
options to executive officers. Subject to any applicable limitations contained
in the 1997 Plan, the Board of Directors, the Compensation Committee or any
other committee or executive officer to whom the Board delegates authority, as
the case may be, selects the recipients of Awards and determines (i) the number
of shares of Common Stock covered by options and the dates upon which such
options become exercisable, (ii) the exercise price of options, (iii) the
duration of options, and (iv) the number of shares of Common Stock subject to
any restricted stock or other stock-based Awards and the terms and conditions of
such Awards, including conditions for repurchase, issue price and repurchase
price.
The Board of Directors is required to make appropriate adjustments in
connection with the 1997 Plan and any outstanding Awards to reflect stock
dividends, stock splits and certain other events. In the event of a merger,
liquidation or other Acquisition Event (as defined in the 1997 Plan), the Board
of Directors is authorized to provide for outstanding options or other
stock-based Awards to be assumed or substituted for, to accelerate the Awards to
make them fully exercisable prior to consummation of the Acquisition Event or to
provide for a cash out of the value of any outstanding options. If any Award
expires or is terminated, surrendered, canceled or forfeited, the unused shares
of Common Stock covered by such Award will again be available for grant under
the 1997 Plan.
The Company has approved the grant of stock options to purchase an
aggregate of 715,000 shares of Common Stock to its employees, officers and
directors, effective upon the Pricing Date, at an exercise price equal to the
public offering price. See "Management -- Director Compensation" and
"-- Executive Compensation -- Option Grants."
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Company in October 1997. The Purchase Plan authorizes the
issuance of up to a total of 300,000 shares of Common Stock to participating
employees at a discount from fair market value. The Purchase Plan is intended to
qualify as an employee stock purchase plan within Section 423 of the Code.
All employees of the Company, including directors of the Company who are
employees and all employees of any designated subsidiaries, whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year, are eligible to participate in the Purchase Plan. Employees who
would immediately after the grant own 5% or more of the total combined voting
power or value of the stock of the Company or any subsidiary are not eligible to
participate. Following this offering, all the Company's full-time employees as
of the date of adoption of the Purchase Plan will be eligible to participate in
the Purchase Plan.
On the first day of a designated payroll deduction period (the "Offering
Period"), the Company will grant to each eligible employee who has elected to
participate in the Purchase Plan an option to purchase shares of Common Stock as
follows: the employee may authorize an amount (a whole percentage from 1% to 10%
of such employee's regular pay) to be deducted by the Company from such pay
during an Offering Period. On the last day of such Offering Period, the employee
is deemed to have exercised the option, at the option exercise price, to the
extent of accumulated payroll deductions. Under the terms of the Purchase Plan,
the option price is an amount equal to 85% of the fair market value per share of
the Common Stock on either the first day or the last day of each Offering
Period, whichever is lower. In no event may an employee purchase in any one
Offering Period a number of shares which is more than the number determined by
dividing $12,500 by the closing price of a share of Common Stock on the
commencement date of each Offering Period. The Compensation Committee may, at
its discretion, choose an Offering Period of 12 months or less for each of the
offerings and choose a different Offering Period for each offering.
If an employee is not a participant on the last day of an Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded without interest. An
employee's rights under the Purchase Plan terminate upon voluntary withdrawal
from the Purchase Plan at any time, or when such employee ceases employment for
any reason.
58
<PAGE> 60
CERTAIN TRANSACTIONS
Since January 1, 1994, the Company has not engaged in any transactions with
the directors or officers of the Company or Penford except as described below.
Under a Recognition and Incentive Agreement (as amended, the "Baichwal
Agreement") with Anand Baichwal, the Company's Senior Vice President, Research
and Development, the Company is obligated to pay to Dr. Baichwal on an annual
basis in arrears (i) one-half of one percent of the Company's Net Sales (as
defined in the Baichwal Agreement) of TIMERx Material (as defined in the
Baichwal Agreement) to third parties, (ii) one-half of one percent of royalties
received by the Company under licenses, collaborations or other exploitation
agreements with third parties with respect to the sale, license, use or
exploitation by such third parties of products based on or incorporating the
TIMERx Material, and (iii) one-half of one percent of payments made in lieu of
such Net Sales or royalties and received by the Company. Such payments cease in
the event that Dr. Baichwal's employment is terminated for cause. The Baichwal
Agreement also contains non-competition and non-solicitation provisions which
expire two years after the termination of his employment.
For a description of the stock options granted to the directors and
officers of the Company, see "Management -- Director Compensation" and
"Management -- Executive Compensation."
For a description of the Company's arrangements with Penford, see
"Arrangements between the Company and Penford."
59
<PAGE> 61
PRINCIPAL SHAREHOLDER
Prior to this offering, all outstanding shares of Common Stock will be
owned by Penford. Penford's address is 777 108th Avenue N.E., Suite 2390,
Bellevue, WA 98004. Upon completion of this offering, Penford will own
approximately 85.3% (approximately 83.5% if the Underwriters over-allotment
option is exercised in full) of the outstanding Common Stock. See "Risk
Factors -- Control by Penford Pending the Spin-off; Uncertainty of the
Spin-off," "Risk Factors -- Relationship with Penford; Conflicts of Interest"
and "Arrangements between the Company and Penford."
Penford has announced its intent, subject to the satisfaction of certain
conditions, to divest its ownership interest in the Company through the
Spin-off, which is anticipated to occur in the second quarter of 1998. See
"Background of the Planned Spin-off" and "Risk Factors -- Control by Penford
Pending the Spin-off; Uncertainty of the Spin-off."
The Company has approved the grant of stock options to purchase an
aggregate of 654,000 shares of Common Stock to its employees and officers,
effective upon the Pricing Date, at an exercise price equal to the initial
public offering price, of which options to purchase 180,000 shares, 105,000
shares, 30,000 shares, 51,000 shares, 78,000 shares and 75,000 shares were
granted to Mr. Hamachek, Mr. Talley, Mr. Berte, Dr. Wotton, Dr. Baichwal and Mr.
Belsheim, respectively. Options to purchase 10,000 shares of Common Stock
(11,000 shares in the case of the Lead Director) will also be granted to each
non-employee director upon the Pricing Date at an exercise price equal to the
initial public offering price. No director or executive officer of the Company
beneficially owned any shares of Common Stock as of September 30, 1997. See
"Management -- Director Compensation" and "-- Executive Compensation -- Option
Grants."
The following table sets forth certain information regarding the beneficial
ownership of the common stock of Penford as of September 30, 1997, with respect
to (i) each director and Named Executive Officer of the Company and (ii) all
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PENFORD
---------------------------------------
PERCENTAGE OF
OUTSTANDING SHARES
NAME (1) NUMBER OF SHARES BENEFICIALLY OWNED
- --------------------------------------------------------- ---------------- ------------------
<S> <C> <C>
Directors
Tod R. Hamachek.......................................... 367,421(2) 5.03%
Paul E. Freiman.......................................... 3,178(3) *
Jere E. Goyan............................................ -- --
Rolf H. Henel............................................ 1,000 *
Robert J. Hennessey...................................... -- --
N. Stewart Rogers........................................ 153,005(4) 2.10
John V. Talley, Jr....................................... 13,001(5) *
W. Leigh Thompson........................................ -- --
Other Named Executive Officers
Anand R. Baichwal........................................ 6,480(6) *
Steven J. Berte, Jr...................................... 1,888(7) *
Paul K. Wotton........................................... 5,933(8) *
All directors and executive officers as a group
(13 persons)........................................... 579,948(9) 7.88%
</TABLE>
- ---------------
* Less than 1%
(1) Except as reflected in the footnotes to this table, shares of Common Stock
of Penwest and Penford beneficially owned consist of shares owned by the
indicated person, and all share ownership involves sole voting and
investment power. Amounts shown in the above table and the following
60
<PAGE> 62
notes include shares issuable within the 60-day period following September
30, 1997 pursuant to the exercise of options.
(2) Includes 31,500 shares subject to outstanding options held by Mr. Hamachek,
which are exercisable within the 60-day period following September 30, 1997.
(3) Includes 2,192 shares subject to outstanding options held by Mr. Freiman,
which are exercisable within the 60-day period following September 30, 1997.
(4) Includes 11,538 shares held in irrevocable trusts for which Mr. Rogers has
sole voting power, as well as 19,521 shares subject to outstanding options
held by Mr. Rogers, which are exercisable within the 60-day period following
September 30, 1997.
(5) Includes 10,750 shares subject to outstanding stock options held by Mr.
Talley, which are exercisable within the 60-day period following September
30, 1997.
(6) Includes 4,200 shares subject to outstanding stock options held by Dr.
Baichwal, which are exercisable within the 60-day period following September
30, 1997.
(7) Includes 1,000 shares subject to outstanding stock options held by Mr.
Berte, which are exercisable within the 60-day period following September
30, 1997.
(8) Includes 4,200 shares subject to outstanding stock options held by Dr.
Wotton, which are exercisable within the 60-day period following September
30, 1997.
(9) Includes an aggregate of 91,943 shares subject to outstanding stock options
which are exercisable within the 60-day period following September 30, 1997.
61
<PAGE> 63
ARRANGEMENTS BETWEEN THE COMPANY AND PENFORD
The Company is currently a wholly-owned subsidiary of Penford. Upon
completion of this offering, Penford will own approximately 85.3% (approximately
83.5% if the Underwriters' over-allotment option is exercised in full) of the
outstanding Common Stock. Penford has announced its intent, subject to the
satisfaction of certain conditions, including receipt of either a favorable tax
ruling from the IRS or a written opinion from Ernst & Young LLP, to divest its
ownership interest in the Company through the Spin-off, which is anticipated to
occur in the second quarter of 1998. See "Background of the Planned Spin-off "
and "Risk Factors -- Control by Penford Pending the Spin-off; Uncertainty of the
Spin-off."
In anticipation of this offering, and in view of Penford's intention to
undertake the Spin-off, the Company and Penford have entered into a number of
agreements, which will become effective upon the closing of this offering, for
the purpose of defining certain relationships between them. As a result of
Penford's ownership interest in the Company, the terms of such agreements were
not the result of arm's-length negotiation. However, the Company believes the
terms of these agreements approximate fair market value. See "Risk
Factors -- Relationship with Penford; Conflicts of Interest."
The following discussion of agreements between the Company and Penford is
qualified in its entirety by reference to the forms of such agreements, which
have been filed as exhibits to the Registration Statement of which this
Prospectus is a part.
Separation Agreement
The Company and Penford have entered into a separation agreement (the
"Separation Agreement") setting forth the agreement of the parties with respect
to the principal corporate transactions required to effect the separation of
Penford's pharmaceutical business from its food and paper businesses, this
offering and the Spin-off, and certain other agreements governing the
relationship of the parties both prior to and after the Spin-off.
Asset Transfer. In connection with the separation of the pharmaceutical
business, Penford has agreed to assign to the Company, to the extent not
previously assigned, its rights, title and interest in any assets related to the
pharmaceutical business, and Penwest has agreed to assume, to the extent not
previously assumed, all Penford's liabilities relating to the pharmaceutical
business. As part of this assignment, Penford will assign to Penwest its rights
in the agreements entered into with the Company's collaborators, as well as
certain trademarks of Penford. Penford also has agreed to contribute to the
capital of Penwest all existing remaining intercompany indebtedness of Penwest
($37.5 million as of September 30, 1997).
Offering. Penford has agreed to undertake certain obligations with respect
to this offering, subject to specified conditions precedent. One of these
conditions is that, immediately following this offering, Penford shall "control"
Penwest within the meaning of Sections 355 and 368 of the Code in order to
permit the Spin-off to qualify as a tax-free distribution for federal income tax
purposes under Section 355 of the Code.
Spin-off. Penwest and Penford have agreed that the Board of Directors of
Penford will have the sole discretion to determine the date of consummation of
the Spin-off at any time on or after April 1, 1998 and prior to the date six
months after the closing of this offering. Following the date six months after
the closing of this offering, Penford will be obligated to consummate the
Spin-off as promptly as practicable following the date on which the conditions
described below are either satisfied or waived. In addition, in the event that
Penford obtains and relies upon a private letter ruling from the IRS and the
other conditions described below are either satisfied or waived, Penford will
effect the Spin-off prior to the later of (i) six months from the closing of
this offering and (ii) three months from the date of the private letter ruling.
Penford and Penwest have agreed to use their reasonable best efforts to
cause all conditions to be satisfied and to effect the Spin-off including: (i) a
private letter ruling from the IRS shall have been
62
<PAGE> 64
obtained, and shall continue in effect, or a written opinion from Ernst & Young
LLP shall have been received, to the effect that, among other things, the
Spin-off will qualify as tax-free for federal income tax purposes under Sections
355 and 368 of the Code, and such ruling or opinion shall be in form and
substance satisfactory to Penford; (ii) any material governmental approvals and
consents necessary to consummate the Spin-off shall have been obtained and shall
be in full force and effect; (iii) no order, injunction or decree issued by any
court or agency of competent jurisdiction or other legal restraint or
prohibition preventing the consummation of the Spin-off shall be in effect, and
no other event outside the control of Penford shall have occurred or failed to
occur that prevents the consummation of the Spin-off; and (iv) no material
adverse change shall have occurred with respect to the business or financial
condition of Penford or Penwest which would, in the reasonable judgment of the
Penford Board, make the approval of the Spin-off inadvisable.
Treatment of Options. Penford and Penwest have also agreed that at the
time of the Spin-off the stock options to purchase the common stock of Penford
will be adjusted to reflect the Spin-off. In this regard, Penford has agreed to
(i) amend its stock plans to provide that, for purposes of such stock plans, the
term employee shall include employees of Penwest, (ii) amend each stock option
held by a Penwest employee to provide that the option will continue to vest for
so long as the Penwest employee remains an employee of Penwest, (iii) adjust the
exercise price of each stock option then outstanding by multiplying the exercise
price of the stock option by a fraction, the numerator of which shall equal the
amount determined by multiplying (a) Penford's fully diluted shares outstanding
(including shares issuable upon exercise of outstanding stock options) by (b)
the fair market value of the Penford common stock as of the Spin-off (as
determined in the manner specified in the Separation Agreement) (the "Penford
Market Capitalization"), and the denominator of which shall equal the sum of (x)
the Penford Market Capitalization and (y) the amount determined by multiplying
Penwest's fully diluted shares outstanding (including shares issuable upon
exercise of outstanding stock options), by the fair market value of the Common
Stock of Penwest as of the Spin-off (as determined in the manner specified in
the Separation Agreement) (the "Penwest Market Capitalization"), and (iv) adjust
the number of shares of common stock of Penford issuable upon exercise of each
stock option then outstanding by multiplying the number of shares of common
stock of Penford issuable under the stock option by a fraction, the numerator of
which shall equal the sum of the Penford Market Capitalization and the Penwest
Market Capitalization, and the denominator of which shall equal the Penford
Market Capitalization.
Registration Rights. Penwest has agreed that if Penford has not received a
favorable private letter ruling from the IRS or a written opinion from Ernst &
Young LLP with respect to the Spin-off by September 30, 1998, Penford will have
the right, exercisable at any time after September 30, 1998, to cause Penwest to
use its reasonable best efforts to register the shares of Penwest Common Stock
held by Penford for resale under the Securities Act, subject to certain
conditions and limitations. Penwest has also agreed that if it files a
registration statement for the sale of securities on a form in which the Common
Stock held by Penford may be included, it will include shares of Common Stock
held by Penford in such registration statement.
Indemnification. Penwest has agreed to indemnify Penford from and against
any liabilities arising out of (i) the employment of individuals by Penwest,
(ii) the pharmaceutical business and the use of the assets transferred to
Penwest, (iii) purchase orders, accounts payable, accrued compensation and other
liabilities which relate to the pharmaceutical business and the assets
transferred to Penwest, and (iv) any misstatement or omission of a material fact
in any documents or filings prepared by Penwest for purposes of compliance or
qualification under applicable securities laws in connection with this offering
or the Spin-off, including this Prospectus (the "SEC filings"). Penford has
agreed to indemnify Penwest from and against all liabilities arising out of (i)
the business of Penford and the liabilities not assumed by Penwest and (ii) any
misstatement or omission of a material fact with respect to Penford based on
information supplied by Penford in the SEC filings.
Sharing of Utilities. Penford has agreed that Penwest will be entitled to
use and consume at Penwest's Cedar Rapids facility certain utilities consisting
of natural gas, electricity and steam from
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Penford's Cedar Rapids facility. Penwest will reimburse Penford for such
consumption based on Penford's total cost for such utilities and Penwest's
fraction of the total consumption.
Non-Competition and Non-Solicitation. Penford has agreed that, during the
period ending upon the later of (a) five years from the date of the Separation
Agreement and (b) the expiration or termination of the Excipient Supply
Agreement to be entered into between Penford and Penwest, it shall not (i)
manufacture, market, sell or distribute for inclusion in any pharmaceutical or
nutritional product (excluding any food product) any product having the same or
substantially the same form, composition or application as EMDEX or CANDEX or
any similar sugar-based product or (ii) recruit or solicit any employee of
Penwest, without the consent of Penwest. Penwest has agreed that during the same
period, it will not (i) manufacture, market, sell or distribute for inclusion in
any foods product any product having the same or substantially the same form,
composition or applications as EMDEX or CANDEX or any similar sugar-based
product or (ii) recruit or solicit any employee of Penford, without the consent
of Penford.
Services Agreement
The Company and Penford have entered into a services agreement (the
"Services Agreement") pursuant to which Penford will continue on an interim
basis to provide or otherwise make available to the Company, upon the Company's
reasonable request, certain accounting and audit, finance and treasury, tax,
financial and human resources services, provide for certain insurance coverage
and arrange for administration of insurance and risk management and employee
benefit programs. Prior to the Spin-off, the Company will pay the direct costs
of these services. On or after the Spin-off, the Company will pay the direct
costs of these services, plus a percentage negotiated by and mutually agreeable
to Penwest and Penford. To the extent that such direct costs cannot be
separately measured, the Company will pay a portion of the total cost determined
on a reasonable basis selected by Penford and approved by the Company. The
initial term of the Services Agreement will expire on the date of the Spin-off
and will be extended automatically for successive one-year terms unless either
party provides written notice of its election not to renew the Services
Agreement at least 90 days prior to the expiration of the initial or any renewal
term.
Tax Allocation Agreement
The Company and Penford have entered into a tax allocation agreement (the
"Tax Allocation Agreement") providing for (i) the allocation of payments of
taxes for periods during which the Company and Penford (or any of its affiliates
other than the Company and its subsidiaries) are included in the same
consolidated group for federal income tax purposes or the same consolidated,
combined or unitary returns for state, local or foreign tax purposes, (ii) the
allocation of any taxes payable if the Spin-off fails to qualify as tax-free
under Sections 355 and 368 of the Code, (iii) the allocation of responsibility
for the filing of tax returns, (iv) the conduct of tax audits and the handling
of tax controversies and (v) various related matters. Under the Tax Allocation
Agreement, Penwest will be responsible for any tax liabilities (including
interest and penalties) imposed on it and will indemnify Penford for any tax
liabilities (including interest and penalties) imposed on Penford that are
directly related to the failure of the Spin-off to qualify as tax-free under
Sections 355 and 368 of the Code as a result of (i) the inaccuracy of certain
representations and covenants made by Penwest in the Tax Allocation Agreement or
(ii) the participation by Penwest in certain acts set forth in the Tax
Allocation Agreement that occur after the Spin-off. For periods during which the
Company is included in Penford's consolidated federal income tax returns or
state consolidated, combined or unitary tax returns (which periods are expected
to include the period between this offering and the Spin-off), the Company will
be required to pay to or entitled to receive from Penford its allocable portion
of the consolidated federal income and state tax liability or credits, other
than credits related to net operating losses. The Company will be directly
responsible for separate state, local and foreign tax returns and related
liabilities for itself and its subsidiaries for all periods.
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Excipient Supply Agreement
The Company and Penford have entered into a supply agreement (the "Supply
Agreement") pursuant to which Penford will manufacture and supply exclusively to
Penwest, and Penwest will purchase exclusively from Penford, subject to certain
exceptions, all Penwest's requirements for EMDEX and CANDEX, two sugar-based
excipients marketed by the Company. Penwest will purchase such excipients at
specified prices, which will be subject to adjustment on a semi-annual basis.
The initial term of the Supply Agreement will expire on December 31, 2003,
unless earlier terminated by Penwest or Penford upon one year's prior written
notice, and will be extended automatically for successive one-year terms unless
either party provides written notice of its election not to renew the Supply
Agreement at least 90 days prior to the expiration of the initial or any renewal
term.
Employee Benefits Agreement
The Company and Penford have entered into an employee benefits agreement
(the "Benefits Agreement") setting forth the parties' agreements as to the
continuation of certain Penford pension and benefits arrangements for the
employees of Penwest following this offering. Under the Benefits Agreement,
Penford has agreed that the employees of Penwest will continue to be covered by
Penford's Savings and Stock Ownership Plan, health plan (medical, dental and
vision) and flexible benefits plan (pretax payment of health plan premiums,
medical reimbursement account and dependent care account) until December 31,
1997. In connection with the continuation of these plans, Penwest will reimburse
Penford for any costs and expenses paid by Penford with respect to continued
participation in such plans by employees of Penwest following this offering. The
Benefits Agreement also provides for the termination, as of the closing of this
offering, of participation of Penwest employees under certain of Penford's other
welfare and retirement plans and sets forth the manner in which the assets and
liabilities under certain of such plans will be transferred to Penwest. Finally,
under the Benefits Agreement, Penwest has agreed to establish for its employees
a set of benefit plans similar to those provided by Penford with the exception
of Penford's defined benefit plan.
Conflicts of interest may arise between the Company and Penford in a number
of areas relating to their past and ongoing relationships, including tax and
employee benefit matters, indemnity arrangements, registration rights, sales or
distributions by Penford of its remaining shares of Common Stock and the
exercise by Penford of its ability to control the management and affairs of the
Company.
The Company and Penford may enter into amendments to the terms of the
foregoing agreements or new material transactions and agreements in the future.
The Company has been advised by Penford that it intends that the terms of any
future amendments, transactions and agreements between the Company and Penford
or its affiliates will approximate fair market value. The Board of Directors of
Penwest will utilize such procedures in evaluating the terms and provisions of
any material transactions between the Company and Penford or its affiliates as
the Board may deem appropriate in light of its fiduciary duties under state law.
Depending on the nature and size of the particular transaction, in any such
evaluation, the Board of Directors of Penwest may rely on management's
statements and opinions and may or may not utilize outside experts or
consultants or obtain independent appraisals or opinions.
Directors of the Company who are also directors of Penford may have
conflicts of interest with respect to matters potentially or actually involving
or affecting the Company and Penford, such as acquisitions, financings and other
corporate opportunities that may be suitable for the Company and Penford. To the
extent that such opportunities arise, such directors may consult with their
legal advisors and make a determination after consideration of a number of
factors, including whether such opportunity is presented to any such director in
his or her capacity as a director of the Company, whether such opportunity is
within the Company's line of business or consistent with its strategic
objectives and whether the Company will be able to undertake or benefit from
such opportunity. In addition, determinations may be made by the Board, when
appropriate, by the vote of the disinterested directors only. Notwithstanding
the foregoing, there can be no assurance that conflicts will be resolved in
favor of the Company. See "Risk Factors -- Relationship with Penford; Conflicts
of Interest."
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So long as the Company remains a subsidiary of Penford, the directors and
officers of the Company will, subject to certain limitations, be indemnified by
Penford and insured under insurance policies maintained by Penford against
liability for actions taken or omitted to be taken in their capacities as
directors and officers of the Company, including actions or omissions that may
be alleged to constitute breaches of the fiduciary duties owed by such persons
to the Company and its shareholders. It is contemplated that, prior to the
Spin-off, the Company will obtain insurance coverage for its directors and
officers in respect of such matters. See "Risk Factors -- Relationship with
Penford; Conflicts of Interest."
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 39,000,000 shares
of Common Stock, $0.001 par value per share, and 1,000,000 shares of Preferred
Stock, $0.001 par value per share ("Preferred Stock"). Prior to this offering,
there was outstanding 14,538,282 shares of Common Stock which were held of
record by one stockholder, Penford. Immediately after this offering, 17,038,282
shares of Common Stock will be outstanding.
The following summary of certain provisions of the Common Stock and
Preferred Stock does not purport to be complete and is subject to, and qualified
in its entirety by, the provisions of the Company's Amended and Restated
Articles of Incorporation (the "Restated Articles"), which are included as an
exhibit to the Registration Statement of which this Prospectus is a part, and by
the provisions of applicable law.
COMMON STOCK
Holders of Common Stock are entitled to receive dividends as may from time
to time be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of any outstanding class
or series of Preferred Stock, and to one vote per share on all matters on which
the holders of Common Stock are entitled to vote. Such holders do not have any
cumulative voting rights or preemptive, conversion, redemption or sinking fund
rights. In the event of a liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share equally and ratably in the
Company's assets, if any, remaining after the payment of all liabilities of the
Company and the liquidation preference of any outstanding class or series of
Preferred Stock. The outstanding shares of Common Stock are, and the shares of
Common Stock offered hereby will be, when issued and paid for, fully paid and
nonassessable. The rights, preferences and privileges of holders of Common Stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of Preferred Stock that the Company may issue in the
future.
PREFERRED STOCK
The Company's Board of Directors has the authority to issue up to 1,000,000
shares of Preferred Stock in one or more series and to fix the number of shares
constituting any such series and the preferences, limitations and relative
rights, including dividend rights, dividend rate, voting rights, terms of
redemption, redemption price or prices, conversion rights and liquidation
preferences of the shares constituting any series, without any further vote or
action by the Company's shareholders. The issuance of Preferred Stock by the
Board of Directors could adversely affect the rights of holders of Common Stock.
The potential issuance of Preferred Stock may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage bids
for the Common Stock at a premium over the market price of the Common Stock and
may adversely affect the market price of, and the voting and other rights of the
holders of, the Common Stock. The Company has no current plans to issue any
shares of Preferred Stock.
WASHINGTON LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
The laws of Washington, where the Company is incorporated, restrict certain
transactions between Washington corporations and certain significant
shareholders. Chapter 23B.19 of the Washington Business Corporation Act
prohibits a "target corporation," with certain exceptions, from engaging in any
"significant business transaction" with a person or group of persons which has
acquired 10% or more of the voting securities of the target corporation (an
"acquiring person") for five years after such acquisition unless the transaction
or such acquisition is approved by a majority of the members of the target
corporation's board of directors prior to acquisition. Significant business
transactions include, among others, a merger, share exchange or consolidation
with, disposition of assets to, or issuance or redemption of stock to or from,
the acquiring person, or a reclassification of securities that has the effect of
increasing the proportionate share of the outstanding securities held by
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<PAGE> 69
the acquiring person. After the five-year period, a significant business
transaction may take place if it complies with certain fair price provisions of
the statute. A target corporation includes every Washington corporation that has
a class of voting stock registered pursuant to Section 12 or 15 of the
Securities Exchange Act of 1934, as amended.
The Restated Articles provide for the division of the Board of Directors
into three classes as nearly equal in size as possible with staggered three-year
terms. In addition, the Restated Articles provide that directors may be removed
only for cause by the affirmative vote of the holders of two-thirds of the
shares of capital stock of the Company entitled to vote. Under the Restated
Articles, any vacancy on the Board of Directors, however occurring, including a
vacancy resulting from an enlargement of the Board, may only be filled by vote
of a majority of the directors then in office. The classification of the Board
of Directors and the limitations on the removal of directors and filling of
vacancies could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of the
Company.
The Company's Amended and Restated Bylaws (the "Restated Bylaws") provide
that any action required or permitted to be taken by the stockholders of the
Company at an annual meeting or special meeting of shareholders may only be
taken if it is properly brought before such meeting and that any such action may
also be taken without a meeting by written consent if all the shareholders
entitled to vote with respect to such action so consent. The Restated Articles
provide that special meetings of the shareholders may be called by the President
of the Company, the Chairman of the Board or the Board of Directors. Under the
Restated Bylaws, in order for any matter to be considered "properly brought"
before a meeting, a shareholder must comply with certain requirements regarding
advance notice to the Company. The foregoing provisions could have the effect of
delaying until the next shareholders meeting shareholder actions which are
favored by the holders of a majority of the outstanding voting securities of the
Company. These provisions may also discourage another person or entity from
making a tender offer for the Company's Common Stock, because such person or
entity, even if it acquired a majority of the outstanding voting securities of
the Company, would be able to take action as a shareholder (such as electing new
directors or approving a merger) only at a duly called shareholders meeting, and
not by written consent.
The laws of Washington provide generally that the affirmative vote of a
majority of the shares entitled to vote on any matter is required to amend a
corporation's articles of incorporation or bylaws, unless a corporation's
articles of incorporation or bylaws, as the case may be, require a greater
percentage. The Restated Articles and the Restated Bylaws require the
affirmative vote of the holders of at least two-thirds of the shares of capital
stock of the Company issued and outstanding and entitled to vote to amend or
repeal any of the provisions described in the prior two paragraphs.
The Restated Articles contain certain provisions relating to the
elimination of personal liability of directors to the Company or its
shareholders for monetary damages to the full extent permitted by Washington
law. In addition, the Restated Bylaws contain provisions to indemnify the
Company's directors and officers to the fullest extent permitted by Washington
law.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
17,038,282 shares of Common Stock. Of these shares, the 2,500,000 shares sold in
this offering (plus any shares issued upon exercise of the Underwriters'
over-allotment option) will be freely tradeable without restriction under the
Securities Act, unless purchased or held by "affiliates" of the Company as that
term is defined under the Securities Act. The remaining 14,538,282 shares of
Common Stock outstanding upon the consummation of this offering will be shares
of Common Stock held by Penford and will be "restricted securities," as that
term is defined in Rule 144, that may be sold only if registered under the
Securities Act or in accordance with an applicable exemption from registration,
such as Rule 144.
Although the shares held by Penford may not be sold by Penford absent
registration under the Securities Act or an exemption from such registration,
Penford has advised the Company that it contemplates effecting the Spin-off
without registration under the Securities Act and that the shares distributed
pursuant thereto would thereafter be freely tradeable by persons other than
"affiliates" of the Company without restriction or registration under the
Securities Act.
Pursuant to the Underwriting Agreement, the Company has agreed, subject to
limited exceptions, not to offer, sell or otherwise dispose of any shares of
Common Stock for a period of 180 days after the date of this Prospectus without
the prior written consent of BancAmerica Robertson Stephens. Similarly, Penford
and the officers and directors of the Company have agreed, subject to limited
exceptions (including, with respect to Penford, the Spin-off), not to sell,
offer, contract to sell, pledge, grant an option to purchase or otherwise
dispose of any shares of Common Stock (or any securities convertible into, or
exchangeable for, or any rights to purchase or acquire, shares of Common Stock)
held by such holders, acquired by such holder after the date hereof or which may
be deemed to be beneficially owned by such holder for a period of 180 days after
the date of this Prospectus without the prior written consent of BancAmerica
Robertson Stephens. None of the shares of Common Stock distributed pursuant to
the Spin-off (other than shares distributed to the Company's "affiliates") will
be subject to any contractual restriction on sale or disposition pursuant to the
Underwriting Agreement or otherwise.
In general, under Rule 144, as currently in effect, beginning 90 days after
the effective date of the registration statement of which this Prospectus is a
part (the "Effective Date"), a person (or persons whose shares are aggregated)
who has beneficially owned "restricted securities" for at least one year would
be entitled to sell within any three-month period a number of shares that does
not exceed the greater of: (i) one percent of the number of shares of Common
Stock then outstanding (which will equal approximately 170,383 shares
immediately after this offering); or (ii) the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the filing of a Form
144 with respect to such sale. Sales under Rule 144 are also subject to certain
manner of sale provisions and notice requirements and to the availability of
current public information about the Company. Under Rule 144(k), a person who is
not deemed to have been an affiliate of the Company at any time during the 90
days preceding a sale, and who has beneficially owned the shares proposed to be
sold for at least two years, is entitled to sell such shares without complying
with the manner of sale, public information, volume limitation or notice
provisions of Rule 144.
In the event any person who is deemed to be an "affiliate" of the Company
for purposes of Rule 144 purchases Common Stock pursuant to this offering,
receives shares of Common Stock in the Spin-off or purchases shares of Common
Stock in a registered offering effected by Penford, the shares held by such
person will not be subject to any holding period requirement and may be sold in
the open market in reliance upon Rule 144, subject to the volume limitations and
lockup arrangements described above. Shares properly sold in reliance upon Rule
144 to persons who are not "affiliates" of the Company are thereafter freely
tradeable without restriction or registration under the Securities Act.
Penford has not determined what action, if any, it would take if it did not
receive a favorable tax ruling or written opinion from Ernst & Young LLP with
respect to the Spin-off. If the Spin-off does not
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occur, Penford may sell all or a portion of its ownership interest in the
Company through a public offering or a private sale. In order to enable Penford
to sell its ownership interest in a public offering in such event, the Company
has agreed to give Penford the right to cause the Company to register the Common
Stock owned by it under the Securities Act, in which event Penford would be able
to sell or otherwise distribute such shares upon the effectiveness of any such
registration and such shares would thereafter be freely tradeable by the
purchasers thereof, other than "affiliates" of the Company, without restriction
or registration under the Securities Act.
The Company intends to file registration statements on Form S-8 under the
Securities Act at least 90 days after the Effective Date to register shares of
Common Stock reserved for issuance under the 1997 Plan and the Purchase Plan.
Such registration statements will become effective immediately upon filing.
Prior to this offering, there has been no public market for the Common
Stock of the Company and no predictions can be made as to the effect, if any,
that market sales of shares of Common Stock prevailing from time to time may
have on the market price of the Common Stock. Nevertheless, the Spin-off and
future sales of significant numbers of shares of the Common Stock in the public
market or the perception that such future sales could occur, could adversely
affect the market price of the Common Stock offered hereby and could impair the
Company's future ability to raise capital through an offering of its equity
securities.
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UNDERWRITING
The Underwriters named below, acting through their representatives,
BancAmerica Robertson Stephens and SBC Warburg Dillon Read Inc. (the
"Representatives"), have severally agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company the number of shares
of Common Stock set forth opposite their respective names below. The
Underwriters are committed to purchase and pay for all such shares, if any are
purchased.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
--------------------------------------------------------------------- ----------------
<S> <C>
BancAmerica Robertson Stephens.......................................
SBC Warburg Dillon Read Inc..........................................
-------
Total......................................................
=======
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price, less a concession of not more than $ per share,
of which $ per share may be reallowed to other dealers. After the
initial public offering, the public offering price, concession and reallowances
to dealers may be reduced by the Representatives.
The Company has granted to the Underwriters an option, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
additional 375,000 shares of Common Stock at the same price per share as the
Company will receive for the 2,500,000 shares that the Underwriters have agreed
to purchase. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage of such additional shares that the number of shares of Common Stock
to be purchased by it shown in the above table represents as a percentage of the
2,500,000 shares offered hereby. If purchased, such additional shares will be
sold by the Underwriters on the same terms as those on which the 2,500,000
shares are being sold. The Company will be obligated, pursuant to such option,
to sell shares to the Underwriters to the extent such option is exercised. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of shares of Common Stock offered hereby.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company and Penford against certain civil liabilities,
including liabilities under the Securities Act and liability arising from
breaches of representations and warranties contained in the Underwriting
Agreement.
Each officer, director and the sole shareholder of the Company, together
holding approximately 14,538,282 shares of Common Stock, have agreed with the
Representatives that, until 180 days from the date of this Prospectus, subject
to certain limited exceptions (including, with respect to Penford, the
Spin-off), they will not, directly or indirectly, sell, offer, contract to sell,
pledge, grant any option to purchase or otherwise dispose of any shares of
Common Stock (or any securities convertible into, or exchangeable for, or any
rights to purchase or acquire, shares of Common Stock), held by such holders,
acquired by such holder after the date hereof or which may be deemed to be
beneficially owned by such holder, without the prior written consent of
BancAmerica Robertson Stephens.
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BancAmerica Robertson Stephens may, in its sole discretion without notice,
release all or any portion of the securities subject to the lock-up agreements.
In addition, the Company has agreed that, until 180 days from the date of this
Prospectus, the Company will not, without the prior written consent of
BancAmerica Robertson Stephens, subject to certain limited exceptions, sell or
otherwise dispose of, any shares of Common Stock, any options or warrants to
purchase any shares of Common Stock (or any securities convertible into,
exercisable for or exchangeable for shares of Common Stock) other than the
Company's sale of shares in this offering, the issuance of Common Stock upon the
exercise of outstanding options, or the Company's grant of options and issuance
of stock under existing employee stock option or stock purchase plans. See
"Shares Eligible for Future Sale."
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with this offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price for the
Common Stock will be determined through negotiations between the Company and the
Representatives. The material factors to be considered in such negotiations are
prevailing market conditions, certain financial information of the Company in
recent periods, market valuations of other companies that the Company and the
Representatives believe to be comparable to the Company, estimates of the
business potential of the Company, the present state of the Company's
development, the Company's management and other factors deemed relevant. The
estimated initial public offering price range set forth on the cover of this
preliminary prospectus is subject to change as a result of market conditions and
other factors. There can be no assurance that an active or orderly trading
market will develop for the Common Stock or that the Common Stock will trade in
the public market subsequent to this offering at or above the initial trading
price. See "Risk Factors -- Possibility of Substantial Sales of Common Stock,"
"Risk Factors -- No Prior Public Market; Determination of Public Offering Price;
Potential Volatility of Stock Price" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
McFarland Dewey & Co. ("McFarland Dewey") has been retained by Penford
since 1996 to identify and evaluate strategic options available to it. As part
of McFarland Dewey's compensation in respect of such services, Penwest has
agreed to pay McFarland Dewey $300,000 upon the closing of this offering.
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LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Edmund O. Belsheim, Jr., its general counsel. Certain
legal matters in connection with this offering will be passed upon for the
Company by Hale and Dorr LLP, Boston, Massachusetts. Certain legal matters in
connection with this offering will be passed upon for the Underwriters by Testa,
Hurwitz & Thibeault, LLP, Boston, Massachusetts.
EXPERTS
The financial statements and related schedule of the Company at September
30, 1997, and for the nine-month period ended September 30, 1997 as well as at
December 31, 1996 and 1995, and for each of the three years in the period ended
December 31, 1996, appearing in this Prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
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PENWEST PHARMACEUTICALS CO.
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Ernst & Young LLP........................................................... F-2
Financial Statements
Consolidated Balance Sheets......................................................... F-3
Consolidated Statements of Operations............................................... F-4
Consolidated Statements of Shareholder's Equity (Deficit)........................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 76
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors
Penwest Pharmaceuticals Co.
We have audited the accompanying consolidated balance sheets of Penwest
Pharmaceuticals Co., (formerly known as Edward Mendell Co., Inc.), as of
September 30, 1997 and December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholder's equity (deficit) and cash flows for the
nine-month period ended September 30, 1997, and each of the three years in the
period ended December 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Penwest
Pharmaceuticals Co. at September 30, 1997 and December 31, 1996 and 1995, and
the consolidated results of its operations and its cash flows for the nine-month
period ended September 30, 1997, and each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Stamford, Connecticut
October 11, 1997
F-2
<PAGE> 77
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER
-------------------- 30,
1995 1996 1997
------- -------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 290 $ 695 $ 1,088
Trade accounts receivable, net of allowance for doubtful
accounts of $200, $237 and $237...................... 5,157 4,680 4,813
Inventories............................................. 4,337 7,555 7,661
Prepaid expenses and other current assets............... 295 72 204
------- -------- --------
Total current assets............................... 10,079 13,002 13,766
Fixed assets, net......................................... 20,203 20,336 21,575
Other assets.............................................. 1,389 1,745 2,039
------- -------- --------
Total assets....................................... $31,671 $ 35,083 $ 37,380
======= ======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses................... $ 3,455 $ 3,810 $ 3,865
Taxes payable........................................... 374 454 283
Payable to Penford...................................... 25,711 32,100 37,503
------- -------- --------
Total current liabilities.......................... 29,540 36,364 41,651
Deferred taxes............................................ 2,525 3,071 3,470
Other long-term liabilities............................... 83 60 337
------- -------- --------
Total liabilities.................................. 32,148 39,495 45,458
Shareholder's deficit
Common stock, par value $.001, authorized 39,000,000
shares, issued and outstanding 14,538,282 shares
(Note 13)............................................ 15 15 15
Additional paid in capital.............................. 8,075 8,075 8,075
Accumulated deficit..................................... (8,469) (12,333) (15,508)
Cumulative translation adjustment....................... (98) (169) (660)
------- -------- --------
Total shareholder's deficit........................ (477) (4,412) (8,078)
------- -------- --------
Total liabilities and shareholder's deficit........ $31,671 $ 35,083 $ 37,380
======= ======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 78
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1994 1995 1996 1997
------- ------- ------- 1996 -------
-------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues
Product sales.......................... $23,146 $24,989 $25,007 $19,108 $19,876
Royalties and licensing fees........... 100 1,082 850 911
------- ------- ------- ------- -------
Total revenues...................... 23,146 25,089 26,089 19,958 20,787
Cost of product sales.................... 15,910 17,267 18,690 14,033 14,660
------- ------- ------- ------- -------
Gross profit........................ 7,236 7,822 7,399 5,925 6,127
Operating expenses
Selling, general and administrative.... 7,021 7,676 6,776 5,264 5,747
Research and product development....... 2,322 2,719 3,723 2,636 2,994
------- ------- ------- ------- -------
Total operating expenses............ 9,343 10,395 10,499 7,900 8,741
------- ------- ------- ------- -------
Loss before income taxes................. (2,107) (2,573) (3,100) (1,975) (2,614)
Income tax expense (Note 8).............. 522 679 764 486 561
------- ------- ------- ------- -------
Net loss................................. $(2,629) $(3,252) $(3,864) $(2,461) $(3,175)
======= ======= ======= ======= =======
Net loss per share....................... $ (0.18) $ (0.22) $ (0.27) $ (0.17) $ (0.22)
======= ======= ======= ======= =======
Weighted average shares of common stock
outstanding............................ 14,538 14,538 14,538 14,538 14,538
</TABLE>
See accompanying notes.
F-4
<PAGE> 79
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED STATEMENTS OF SHAREHOLDER'S EQUITY (DEFICIT)
(in thousands)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE
---------------- PAID-IN ACCUMULATED TRANSLATION
SHARES AMOUNT CAPITAL DEFICIT ADJUSTMENT TOTAL
------ ------ ------- ----------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1994 before stock
split.................................... 5 $ 5 $ 8,085 $ (2,588) $ (491) $ 5,011
Stock split (Note 13)...................... 14,533 10 (10)
------ --- ------ -------- ----- -------
Balances, January 1, 1994 after stock
split.................................... 14,538 15 8,075 (2,588) (491) 5,011
Net loss................................... (2,629) (2,629)
Translation adjustment..................... 259 259
------ --- ------ -------- ----- -------
Balances, December 31, 1994................ 14,538 15 8,075 (5,217) (232) 2,641
Net loss................................... (3,252) (3,252)
Translation adjustment..................... 134 134
------ --- ------ -------- ----- -------
Balances, December 31, 1995................ 14,538 15 8,075 (8,469) (98) (477)
Net loss................................... (3,864) (3,864)
Translation adjustment..................... (71) (71)
------ --- ------ -------- ----- -------
Balances, December 31, 1996................ 14,538 15 8,075 (12,333) (169) (4,412)
Net loss................................... (3,175) (3,175)
Translation adjustment..................... (491) (491)
------ --- ------ -------- ----- -------
Balances, September 30, 1997............... 14,538 $ 15 $ 8,075 $ (15,508) $ (660) $(8,078)
====== === ====== ======== ===== =======
</TABLE>
See accompanying notes.
F-5
<PAGE> 80
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------ ---------------------
1994 1995 1996 1996 1997
------- ------------ ------- ----------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash used in operating activities:
Net loss............................... $(2,629) $ (3,252) $(3,864) $(2,461) $(3,175)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation......................... 1,408 1,724 2,190 1,601 1,713
Amortization......................... 337 282 207 156 115
Deferred income taxes................ 470 455 546 341 428
Changes in operating assets:
Accounts receivables................. (236) (1,647) 470 518 (22)
Inventories.......................... (622) (1,079) (3,218) (3,212) (105)
Prepaid expenses and other current
assets............................ (58) (123) 193 152 (295)
Accounts payable and accrued
expenses.......................... 383 519 464 248 19
------- ------- ------- ------- -------
Net cash used in operating
activities........................... (947) (3,121) (3,012) (2,657) (1,322)
Net cash (used in) provided by
investing activities:
Acquisitions of fixed assets, net.... (1,926) (3,990) (2,322) (1,857) (2,953)
Other................................ 68 (87) (657) (605) (625)
------- ------- ------- ------- -------
Net cash used in investing
activities........................... (1,858) (4,077) (2,979) (2,462) (3,578)
Cash provided by financing activities:
Increase in payable to Penford....... 3,073 6,787 6,390 5,562 5,403
Effect of exchange rate changes on
cash................................. 53 33 6 (4) (110)
------- ------- ------- ------- -------
Net increase (decrease) in cash and
cash equivalents..................... 321 (378) 405 439 393
Cash and cash equivalents at beginning
of year.............................. 347 668 290 290 695
------- ------- ------- ------- -------
Cash and cash equivalents at end of
year................................. $ 668 $ 290 $ 695 $ 729 $ 1,088
======= ======= ======= ======= =======
</TABLE>
See accompanying notes.
F-6
<PAGE> 81
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Information for the nine-month period ended September 30, 1996 is unaudited
1. BUSINESS
Penwest Pharmaceuticals Co. and subsidiaries ("Penwest" or the "Company"),
formerly known as Edward Mendell Co., Inc. is a wholly-owned subsidiary of
Penford Corporation ("Penford"). The Company is engaged in the research,
development, and commercialization of novel drug delivery products and
technologies. The Company has developed TIMERx proprietary controlled release
drug delivery technology. The Company also manufactures and distributes
pharmaceutical excipients, the inactive ingredients in tablets and capsules. The
Company has manufacturing facilities in Iowa and Finland and has customers
primarily throughout North America and Europe.
The Company is subject to the risks and uncertainties associated with an
early-stage drug delivery company. These risks and uncertainties include, but
are not limited to, a history of net losses, technological changes, dependence
on collaborators and key personnel, no assurance of regulatory approval,
compliance with government regulations, patent infringement litigation and
competition from current and potential competitors, some with greater resources
than the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements include the accounts of
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. In addition, the consolidated financial statements include various
costs allocated by Penford (see Notes 6 and 9). Although management believes the
amounts allocated are reasonable and approximate the cost of obtaining the
service from an unrelated third party, the actual costs could differ.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered cash equivalents.
Credit Risk and Fair Value of Financial Instruments
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company's excipient revenues and its
royalties and licensing fees are derived from major pharmaceutical companies
that have significant cash resources. 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, and payables, approximates market value.
F-7
<PAGE> 82
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
Fixed Assets
Property and equipment are recorded at cost and depreciated by the
straight-line method over their estimated useful lives. Estimated useful lives
by class of assets are as follows:
<TABLE>
<S> <C>
Buildings...................................... 20-25 years
Machinery and equipment........................ 10-12 years
Office furniture and equipment................. 5-10 years
</TABLE>
Property and equipment of the Company are reviewed for impairment whenever
events or circumstances indicate that the asset's undiscounted expected cash
flows are not sufficient to recover its carrying amount. The Company measures an
impairment loss by comparing the fair value of the asset to its carrying amount.
Fair value of an asset is calculated as the present value of expected future
cash flows.
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. For each of the foreign operations,
the functional currency is the local currency. Translation adjustments are
disclosed and accumulated in a separate component of consolidated shareholder's
deficit. Realized gains and losses from foreign currency transactions are
reflected in the consolidated statement of operations. The change in the
cumulative translation adjustment from December 31, 1995 to September 30, 1996
was $21,000.
Income Taxes
The Company's results of operations are included in the tax returns of
Penford. Deferred income tax expense and related income tax assets and
liabilities are reflected as if the Company were an independent entity, in
accordance with FAS 109. The Company is not compensated for tax losses that are
utilized by Penford.
Revenue Recognition
Royalties and licensing fees include royalty revenues and milestone fees
related to licensing agreements for TIMERx with various collaborators. To date
there have been no royalties recognized as there are no products currently
commercialized using the TIMERx technology. Milestone payments are derived from
reaching development milestones with collaborators and are recognized as
achieved in accordance with the contract terms. These milestones payments are
not subject to forfeiture.
Product sales revenues are recognized when goods are shipped.
Advertising Costs
Advertising costs are accounted for as expenses in the period in which they
are incurred.
Research and Development
Research and development expenses consist of costs related to products
being developed internally as well as costs related to products subject to
licensing agreements. Research and development costs are charged to expense as
incurred.
F-8
<PAGE> 83
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
Per Share Data
Earnings per common share are computed based on the weighted average number
of common shares and dilutive common stock equivalents outstanding during the
period after giving effect to the October 8, 1997 2,907.66-for-1 stock split
(see Note 13).
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share."
The statement is effective for fiscal years ending after December 15, 1997,
including interim periods, and requires public companies to present basic
earnings per share and, if applicable, diluted earnings per share. The Company
will adopt Statement No. 128 in 1997. The statement will not impact the
Company's earnings per share as disclosed.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," which requires 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 121 also addresses
the accounting for long-lived assets that are expected to be disposed. The
Company adopted Statement 121 in the first quarter of 1996 with no impact on
financial position or results of operations.
Interim Consolidated Financial Statements
The unaudited interim consolidated statements of operations and cash flows
for the nine month period ended September 30, 1996 have been prepared on the
same basis as the annual audited consolidated financial statements included
herein. In the opinion of management, such interim financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the results for such periods.
The operating results for the nine month period ended September 30, 1997
are not necessarily indicative of the operating results to be expected for the
full year ending December 31, 1997 or for any future period.
3. INVENTORIES
Inventories, which consist of raw materials, pharmaceutical excipients
manufactured by the Company, pharmaceutical excipients held for distribution,
and manufactured bulk TIMERx, are stated at the lower of cost (first-in,
first-out) or market. Cost includes material, labor and manufacturing overhead
costs.
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(in thousands)
<S> <C> <C> <C>
Raw materials............................... $1,150 $1,745 $ 1,561
Finished products........................... 3,187 5,810 6,100
------- ------- -------
Total inventories...................... $4,337 $7,555 $ 7,661
======= ======= =======
</TABLE>
Included in inventories are approximately $1,220,000, $1,742,000 and
$2,671,000 of TIMERx raw materials and bulk TIMERx as of December 31, 1995 and
1996 and September 30, 1997, respectively.
F-9
<PAGE> 84
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
The ability to continue to sell TIMERx related inventory is dependent, in part,
upon the commercialization of products by third parties utilizing bulk TIMERx.
Although third parties have products in various stages of development, none of
these products have been commercialized and the period required to achieve
commercialization is uncertain if achieved at all. The manufactured bulk TIMERx
does not have a predetermined shelf life.
The Company has relied on a large third-party pharmaceutical company for
the manufacture of its TIMERx products. There are a limited number of third
party manufacturers capable of producing the Company's TIMERx products.
The Company's TIMERx drug delivery system is a hydrophilic matrix
consisting primarily of two natural polysaccharides, xanthan and locust bean
gums, in the presence of dextrose. The Company purchases these gums from a sole
source supplier. Most of the Company's excipients are manufactured from wood
pulp, which the Company also purchases from a sole source supplier. Although the
Company has qualified alternate suppliers with respect to these materials, there
can be no assurance that interruptions in supplies will not occur in the future
or that the Company will not have to obtain substitute suppliers. Any of these
events could have a material adverse effect on the Company's ability to
manufacture bulk TIMERx for delivery to its collaborators or manufacture its
excipients, which could have a material adverse effect on the Company's results
of operations, cash flows and financial position.
4. FIXED ASSETS
Fixed assets, at cost, summarized by major categories, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
(in thousands)
<S> <C> <C> <C>
Buildings and equipment................... $24,682 $26,513 $27,718
Land...................................... 675 696 696
Construction in progress.................. 873 1,160 2,597
------- ------- -------
26,230 28,369 31,011
Less: accumulated depreciation............ 6,027 8,033 9,436
------- ------- -------
$20,203 $20,336 $21,575
======= ======= =======
</TABLE>
5. OTHER ASSETS
Other assets, net of accumulated amortization, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
(in thousands)
<S> <C> <C> <C>
Patents, net of accumulated amortization of
$96, $162 and $225........................ $1,030 $1,443 $ 1,780
Goodwill, net of accumulated amortization of
$181, $238 and $281....................... 359 302 259
------ ------ ------
$1,389 $1,745 $ 2,039
====== ====== ======
</TABLE>
Goodwill is being amortized over ten years and was recorded upon the
acquisition of the Company by Penford. Amortization expense approximated $57,000
for each of the years ended
F-10
<PAGE> 85
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
December 31, 1994, 1995 and 1996, and $43,000 for each of the nine month periods
ended September 30, 1996 and 1997.
Patents include costs to secure patents and trademarks on technology
developed by the Company. Patents are amortized over their useful lives of 17 to
20 years. Amortization expense of $20,000, $48,000 and $66,000 was recorded in
the years ended December 31, 1994, 1995 and 1996, respectively, and $49,000 and
$63,000 for the nine month periods ended September 30, 1996 and 1997,
respectively.
Recorded intangibles are evaluated for potential impairment whenever events
or circumstances indicate that the undiscounted cash flows are not sufficient to
recover their carrying amounts. An impairment loss is recorded to the extent the
assets carrying value is in excess of related discounted cash flows.
6. PAYABLE TO PENFORD
The Payable to Penford was generated primarily from the initial acquisition
of the Company, the addition of a microcrystalline cellulose plant and the
funding of operations. The Payable to Penford is a non-interest-bearing
obligation. Penford has indicated that it intends to continue to provide
advances until the offering is completed (see Note 13). The Company also
participates in pension and other employee benefit plans sponsored by Penford
and purchases inventory from a wholly-owned subsidiary of Penford. The inventory
purchases amounted to approximately $771,000, $609,000, and $634,000 for the
years ended December 31, 1994, 1995 and 1996, respectively and $462,000 and
$311,000 for the nine month periods ended September 30, 1996 and 1997,
respectively. The Company believes the terms of its employee benefit and
inventory purchase transactions approximate those that would be reached with a
third party in an arms length transaction.
Penford allocates executive office salaries, bonuses and legal fees to the
Company in the form of a management fee. The costs making up the management fee
are allocated to the Company based upon its pro-rata portion of Penford's
consolidated revenue. The Company believes the management fee approximates the
actual costs of services provided. Included in selling, general and
administrative expenses is a management fee of $438,000, $404,000 and $391,000
for the years ended December 31, 1994, 1995 and 1996, respectively and $295,000
and $433,000 for the nine month periods ended September 30, 1996 and 1997,
respectively.
7. COMMITMENTS
Leases
The Company's manufacturing facility in Finland is leased under a two-year
operating lease with annual rental expense of $188,000 and renewal options.
Rental expense under this operating lease, including additional charges
determined on a month-to-month basis for equipment and warehouse usage, was
$186,000, $210,000 and $216,000 for the years ended December 31, 1994, 1995, and
1996, respectively and $162,000, and $162,000 for the nine month periods ended
September 30, 1996 and 1997.
F-11
<PAGE> 86
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
8. INCOME TAXES
The provision for federal, state and foreign income taxes consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------- --------------------
1994 1995 1996 1996 1997
---- ---- ---- ----------- ----
(Unaudited)
<S> <C> <C> <C> <C> <C>
Federal:
Deferred....................................... $364 $386 $423 $ 266 $338
Foreign:
Current........................................ 51 223 217 144 132
State:
Current........................................ 1 1 1 1 1
Deferred....................................... 106 69 123 75 90
--- --- --- --- ---
$522 $679 $764 $ 486 $561
=== === === === ===
</TABLE>
The reconciliation between the statutory tax rate and those reflected in
the Company's income tax provision is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Statutory tax rate........................................ (34)% (34)% (34)% (34)%
Tax benefit utilized by Penford........................... 55 56 55 53
Foreign taxes............................................. -- 1 2 --
State taxes, net of federal benefit....................... 3 2 2 2
Other..................................................... 1 1 -- 1
--- --- --- ---
25% 26% 25% 22%
=== === === ===
</TABLE>
The provision for income takes for the nine month period ended September
30, 1996 is based on the effective rate for the year ended December 31, 1996.
The components of deferred federal and state income tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Receivable allowance................................ $ (95) $ (107) $ (92)
Inventory reserves.................................. (74) (115) (126)
----- ----- -----
(169) (222) (218)
Accelerated depreciation and amortization........... 2,694 3,293 3,688
----- ----- -----
Deferred tax liability.............................. $2,525 $3,071 $ 3,470
===== ===== =====
</TABLE>
The Company has made payments for foreign income taxes of approximately
$51,000, $223,000 and $217,000 for the years ended December 31, 1994, 1995 and
1996, respectively, and $144,000 and $132,000 for the nine month periods ended
September 30, 1996 and 1997, respectively.
The Company is included in the consolidated federal and state tax returns
of Penford. In accordance with the Company's tax sharing agreement, the Company
is not compensated for tax losses that are utilized by Penford and the provision
is calculated on a separate return basis. In addition, Penford is liable for any
federal, state or foreign tax adjustments assessed against the Company for
periods through the date of the distribution.
F-12
<PAGE> 87
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
The Company's policy is to permanently reinvest foreign earnings.
Accumulated foreign earnings, for which no deferred taxes have been provided,
amounted to $1,499,000, $1,793,000 and $2,088,000 as of December 31, 1995 and
1996 and September 30, 1997, respectively. If such earnings were to be
repatriated, the income tax effect would not be significant.
Included in the loss before income taxes is foreign income of $125,000,
$606,000 and $801,000 for the years ended December 31, 1994, 1995 and 1996,
respectively, and $387,000 for the nine-month period ended September 30, 1997.
9. PENSION AND OTHER EMPLOYEE BENEFITS
Pension Plan
Penwest participates in a noncontributory defined benefit pension plan that
covers substantially all employees. The plan is sponsored by its Parent and
costs are allocated based upon actual costs incurred for the Company's
employees.
Benefits for 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 become vested after
five years of credited service.
Pension expense of $70,000, $73,000 and $74,000 was recorded for the years
ended December 31, 1994, 1995 and 1996, respectively. Pension expense of $55,000
and $43,000 was recorded for the nine month periods ended September 30, 1996 and
1997, respectively.
Savings and Stock Ownership Plan
The Company's employees participate in Penford's Savings and Stock
Ownership Plan and costs are charged to the Company based upon actual costs
incurred for the Company's employees. Seventy-five percent (75%) of employee's
contributions are matched up to 6% of the employee's pay, in the form of Penford
common stock. The Company's expense under the plan was $89,000, $110,000 and
$147,000 for 1994, 1995, and 1996, respectively and $112,000 and $118,000 for
the nine month periods ended September 30, 1996 and 1997, respectively.
The Plan also includes an annual profit-sharing component that is awarded
by Penford's 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 related to the
Company's employees was $37,000, $80,000 and $38,000 for 1994, 1995 and 1996,
respectively, and $28,000 and $44,000 for the nine month periods ended September
30, 1996 and 1997, respectively.
Supplemental Executive Retirement Plan
Penford sponsors a Supplemental Executive Retirement Plan (SERP), a
nonqualified plan, which covers certain key employees including certain
employees of Penwest. For 1994, 1995, and 1996, the net expense for the SERP
incurred by Penwest was $9,000, $32,000 and $35,000, respectively, and $30,000
and $15,000 for the nine month periods ended September 30, 1996 and 1997,
respectively. The allocated costs represent the costs attributable to the
Company's employees.
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
incurred. Health care and life
F-13
<PAGE> 88
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
insurance expense was $262,000, $244,000 and $212,000 in 1994, 1995, and 1996,
respectively, and $133,000 and $229,000 for the nine month periods ended
September 30, 1996 and 1997, respectively.
10. LICENSING AGREEMENTS
The Company has entered into collaborative arrangements with five
pharmaceutical companies to facilitate and expedite the commercialization of its
TIMERx drug delivery technology.
In August 1994, August 1995 and March 1996, the Company entered into
product development and supply agreements with Mylan Pharmaceuticals, Inc.
("Mylan") with respect to the development of generic versions of Procardia XL
(nifedipine), Adalat CC (nifedipine) and Glucotrol XL (glipizide), based on the
Company's TIMERx technologies (the "Mylan Products"). Under these product
development and supply agreements, the Company is responsible for the
formulation, manufacture and supply of TIMERx material for use in the Mylan
Products, and Mylan is responsible for conducting all bioequivalence studies,
preparing all regulatory applications and submissions and manufacturing and
marketing the Mylan Products in the United States, Canada and Mexico. The
Company has received non-refundable milestone payments under each of the product
development and supply agreements and is entitled to additional milestone
payments under such agreements upon the continued development of the Mylan
Products. The Company is also entitled to royalties on the sale of each Mylan
Product, which royalties will be reduced with respect to such Mylan Product if
there are on the market and available for retail sale any other generic
controlled release formulations of the drug of which such Mylan Product is a
generic controlled release formulation. In addition, Mylan has agreed that
during the term of the product development and supply agreements it will
purchase formulated TIMERx material for use in the Mylan Products exclusively
from the Company at specified prices.
Penwest and Mylan also entered into a sales and distribution agreement in
January 1997 (the "Mylan Distribution Agreement") with respect to Nifedipine XL
pursuant to which Mylan agreed to manufacture and supply Nifedipine XL to
Penwest for distribution by Penwest and one or more distributors (as to which
the Company and Mylan must mutually agree) in certain specified European and
Latin American countries. Under this agreement, the Company has agreed to
purchase Nifedipine XL exclusively from Mylan at specified prices or to pay
Mylan 50% of any royalties received by the Company from its distributors if
Mylan licenses its manufacturing technology to the Company for use by the
Company's distributors instead of manufacturing the product for distribution.
Under this agreement, Mylan is entitled to 50% of any royalties or milestone
payments received by the Company under the Company's product development and
supply agreement with Sanofi described below.
In May 1996 and August 1996, the Company entered into product development
and supply agreements with Kremers Urban Development Company ("Kremers") with
respect to the development of generic versions of Cardizem CD (diltiazem) and
Covera HS (verapamil hydrochloride), respectively (the "Kremers Products"),
based on the Company's TIMERx technology. Under these product development and
supply agreements, the Company is responsible for formulating the Kremers
Products and for manufacturing and supplying TIMERx material to Kremers for use
in the Kremers Products, and Kremers is responsible for conducting
bioequivalence studies, preparing all regulatory applications and submissions
and manufacturing and marketing the Kremers Products in the United States,
Canada and Mexico. The Company has received non-refundable milestone payments
under the product development and supply agreements and is entitled to
additional milestone payments upon the continued development of the Kremers
Products. The Company also is entitled to royalties on the sale of the Kremers
Products. However, both milestone payments and the royalties otherwise due under
the product development and supply agreements may be reduced in the event that
there are competing generic controlled release formulations of Covera HS or
Cardizem CD, as may be
F-14
<PAGE> 89
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
applicable, on the market and available for retail sale. In addition, Kremers
has agreed that, during the term of the product development and supply
agreements, it will purchase formulated TIMERx material for use in the Kremers
Products exclusively from the Company at specified prices. These prices will be
reduced in the event that there are competing generic versions of Covera HS
and/or Cardizem CD, as may be applicable, on the market and available for retail
sale.
In February 1997, the Company entered into a product development and supply
agreement with Sanofi Winthrop International S.A. ("Sanofi") with respect to the
development of a generic version of Adalat LA based on the Company's TIMERx
technology (the "Sanofi Product"), a drug that is identical to Procardia XL.
Under the product development and supply agreement, the Company is responsible
for conducting pilot bioequivalence studies of the Sanofi Product and for
manufacturing and supplying TIMERx material to Sanofi, and Sanofi is responsible
for conducting all full scale bioequivalence studies, preparing all regulatory
applications and submissions and manufacturing and marketing the Sanofi Product
in specified countries in Europe and in South Korea. The Company is entitled to
non-refundable milestone payments under the product development and supply
agreement upon the continued development of the Sanofi Product. The Company is
also entitled to royalties upon the sale of the Sanofi Product. One half of such
payments will be paid to Mylan in accordance with the Mylan Distribution
Agreement. In addition, Sanofi has agreed that, during the term of the product
development and supply agreement, it will purchase formulated TIMERx material
for use in the Sanofi Product exclusively from the Company at specified prices.
In July 1992, the Company entered into an agreement with Leiras or
("Leiras") with respect to the development and commercialization of Cystrin CR,
a controlled release formulation of Cystrin based on the Company's TIMERx
technology. In May 1995, the Company entered into a second agreement with Leiras
clarifying certain matters with respect to the collaboration. Leiras is a
Finnish subsidiary of Schering AG. Leiras is developing products focused in the
areas of reproductive health care, urology, oncology and inhalation technology.
Under the agreements, the Company is responsible for the development and
formulation of Cystrin CR and for manufacturing and supplying TIMERx material to
Leiras for use in the manufacture of Cystrin CR, and Leiras is responsible for
preparing all regulatory applications and submissions and manufacturing and
marketing Cystrin CR on a worldwide basis. Leiras has the right to appoint
distributors for marketing and distribution in specified territories, subject in
certain circumstances to the approval of the Company. Leiras has also agreed to
pay the Company royalties on the sale of Cystrin CR and to purchase formulated
TIMERx material exclusively from the Company at specified prices.
In September 1997, the Company entered into a strategic alliance agreement
with Endo Pharmaceuticals, Inc. ("Endo") with respect to the development of
controlled release formulations of oxymorphone based on the Company's TIMERx
technology (the "Endo Products"). Under the agreement, the Company has agreed to
manufacture and supply TIMERx material to Endo, and Endo has agreed to
manufacture and market the Endo Products in the United States. The manufacture
and marketing of Endo Products outside of the United States may be conducted by
the Company, Endo or a third party, as determined by a committee comprised of an
equal number of members from each of the Company and Endo. The Company and Endo
have agreed to share the costs involved in the development and commercialization
of the Endo Products and that the party marketing the Endo Products (which the
Company expects will be Endo) will pay the other party royalties equal to 50% of
their respective net marketing revenues after fully-burdened costs (although
this percentage will decrease as the total U.S. marketing revenues from an Endo
Product increase), subject to each party's right to terminate its participation
with respect to any Endo Product described above. Endo will purchase formulated
TIMERx material for use in the Endo Products exclusively from the Company at
specified prices. Such prices will be reflected in the determination of
fully-burdened costs.
F-15
<PAGE> 90
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
11. CONTINGENCIES
In May 1997, one of the Company's collaborators, Mylan, filed an
Abbreviated New Drug Application ("ANDA") with the U.S. Food and Drug
Administration ("FDA") for the 30 mg dosage strength of Nifedipine XL, a generic
version of Procardia XL, a controlled release formulation of nifedipine. See
Note 10 for a description of the Company's collaborative agreements with Mylan.
Bayer AG ("Bayer") and ALZA Corporation ("ALZA") hold patents relating to
Procardia XL, and Pfizer Inc. ("Pfizer") holds the New Drug Application ("NDA")
and markets the product. In connection with the ANDA filing, Mylan certified in
May 1997 to the FDA that Nifedipine XL does not infringe the Bayer or ALZA
patents and notified Bayer, ALZA and Pfizer of such certification. Bayer and
Pfizer sued Mylan in the United States District Court for the Western District
of Pennsylvania, alleging that Nifedipine XL infringes Bayer's patent. ALZA has
informed Mylan that ALZA does not believe that the notice given to it complied
with the requirements of the Waxman-Hatch Act, and there can be no assurance
that ALZA will not sue Mylan for patent infringement or take any other actions
with respect to such notice. Mylan has advised the Company that it intends to
contest vigorously the allegations made in the lawsuit. However, there can be no
assurance that Mylan will prevail in this litigation or that it will continue to
contest the lawsuit. An unfavorable outcome or protracted litigation for Mylan
would materially adversely affect the Company's business, financial condition,
cash flows and results of operations. Delays in the commercialization of
Nifedipine XL could also occur because the FDA will not grant final marketing
approval of Nifedipine XL until a final judgment on the patent suit is rendered
in favor of Mylan by the district court, or in the event of an appeal, by the
court of appeals, or until 30 months (or such longer or shorter period as the
court may determine) have elapsed from the date of Mylan's certification,
whichever is sooner.
In 1993, Pfizer filed a "citizen's petition" with the FDA, claiming that
its Procardia XL formulation constituted a unique delivery system and that a
drug with a different release mechanism such as the TIMERx controlled release
system cannot be considered the same dosage form and approved in an ANDA as
bioequivalent to Procardia XL. In August 1997, the FDA rejected Pfizer's
citizen's petition. In July 1997, Pfizer also sued the FDA in the District Court
of the District of Columbia, claiming that the FDA's acceptance of Mylan's ANDA
filing for Nifedipine XL was contrary to law, based primarily on the arguments
stated in its citizen's petition. Mylan and the Company have intervened as
defendants in this suit. There can be no assurance that the FDA, Mylan and the
Company will prevail in this litigation. An outcome adverse to Mylan and the
Company would result in Mylan being required to file a suitability petition in
order to continue the ANDA or to file an NDA with respect to Nifedipine XL, each
of which would be expensive and time consuming. An adverse outcome would also
result in Nifedipine XL becoming ineligible for an "AB" rating from the FDA.
Failure to obtain an AB rating from the FDA would indicate that for certain
purposes Nifedipine XL would not be deemed to be therapeutically equivalent to
the referenced branded drugs would not be fully substitutable for the referenced
branded drug and would not be relied upon by Medicaid and Medicare formularies
for reimbursement. Any such failure would have a material adverse effect on the
Company's business, financial condition, cash flows and results of operations.
If any of such events occur, Mylan may terminate its efforts with respect to
Nifedipine XL, which would have a material adverse effect on the Company's
business, financial condition, cash flows and results of operations.
The FDA is reviewing an inactive ingredient contained in the TIMERx
delivery system in order to determine the allowable amount for inclusion in the
FDA's Inactive Ingredients Guide. In connection with this review, the FDA has
requested that Mylan provide data from published literature regarding the
toxicity of such ingredient. If such data are not acceptable to the FDA, it
could require that additional data, including animal toxicity or other data, be
developed and submitted to determine the highest allowable amount. If the amount
of such ingredient, or any other ingredient, in a specified
F-16
<PAGE> 91
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
product exceeds the highest amount approved in the Inactive Ingredients Guide,
the Company would likely be required to reformulate such product in order to be
able to seek approval through the ANDA process. Reformulation of a product would
likely require new bioequivalence studies. If reformulation were not possible,
then new clinical studies and an NDA filing for such product would likely be
required for FDA approval of such product. Any of such events could materially
adversely affect the Company's collaborative arrangements where ANDA filings had
been made or were contemplated, which would have a material adverse effect on
the Company's business, financial condition and results of operations.
In 1994, the Boots Company PLC ("Boots") filed in the European Patent
Office (the "EPO") an opposition to a patent granted by the EPO to the Company
relating to its TIMERx technology. In June 1996, the EPO dismissed Boots'
opposition, leaving intact all claims included in the patent. Boots has appealed
this decision to the EPO Board of Appeals. There can be no assurance that the
Company will prevail in this matter. An unfavorable outcome could materially
adversely affect the Company's business, financial condition, cash flows and
results of operations.
There exists substantial patent litigation in the pharmaceutical,
biomedical and biotechnology industries. Patent litigation generally involves
complex legal and factual questions, and the outcome frequently is difficult to
predict. An unfavorable outcome in any patent litigation affecting the Company
could cause the Company to pay substantial damages, alter its products or
processes, obtain licenses and/or cease certain activities. Even if the outcome
is favorable to the Company, the Company could incur substantial litigation
costs. Although the legal costs of defending litigation relating to a patent
infringement claim (unless such claim relates to TIMERx) are generally the
contractual responsibility of the Company's collaborators, the Company could
nonetheless incur significant unreimbursed costs in participating and assisting
in the litigation.
Testing, manufacturing, marketing and selling pharmaceutical products
entail a risk of product liability. The Company faces the risk of product
liability claims in the event that the use of its products is alleged to have
resulted in harm to a patient or subject. Such risks exist even with respect to
those products that are manufactured in licensed and regulated facilities or
that otherwise possess regulatory approval for commercial sale. Product
liability insurance coverage is expensive, difficult to obtain and may not be
available in the future on acceptable terms, if at all. Until the Spin-off, the
Company will be covered by primary product liability insurance maintained by
Penford in the amount of $1.0 million per occurrence and $2.0 million annually
in the aggregate on a claims-made basis and by umbrella liability insurance in
excess of $5.0 million which can also be used for product liability insurance.
There can be no assurance that this coverage is adequate to cover potential
liability claims or that Penwest will be able to obtain comparable coverage
following the Spin-off. Furthermore, this coverage may not be adequate as the
Company develops additional products. As the Company receives regulatory
approvals for products under development, there can be no assurance that
additional liability insurance coverage for any such products will be available
in the future on acceptable terms, if at all. The Company's business, financial
condition, cash flows and results of operations could be materially adversely
affected by the assertion of a product liability claim.
12. GEOGRAPHIC INFORMATION
The Company, which operates in one business segment as a drug delivery
company, conducts its business primarily in North America and Europe. The
European operations consist of a manufacturing facility in Nastola, Finland and
sales offices in Reigate, England and Uetersen, Germany. None of the European
locations, other than Finland, is individually significant. Intercompany sales
include a profit component for the selling company. Intercompany sales and
profits are eliminated in consolidation.
F-17
<PAGE> 92
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
Corporate operating expenses are not allocated to the European operations.
Operating profit represents gross profit less selling, general and
administrative expenses and, for North America, research and development
expense.
<TABLE>
<CAPTION>
NORTH
AMERICA EUROPE ELIMINATIONS TOTAL
-------- ------- ------------ -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SEPTEMBER 30, 1997
Total Revenues..................................... $ 19,718 $ 4,525 $ (3,456) $20,787
Operating Profit (Loss)............................ (2,652) 38 -- (2,614)
Identifiable Assets................................ 32,359 6,336 (1,315) 37,380
Export Sales....................................... 1,212
DECEMBER 31, 1996
Total Revenues..................................... 25,400 6,917 (6,228) 26,089
Operating Profit (Loss)............................ (2,985) 488 (603) (3,100)
Identifiable Assets................................ 30,014 6,611 (1,542) 35,083
Export Sales....................................... 1,756
DECEMBER 31, 1995
Total Revenues..................................... 22,253 7,509 (4,673) 25,089
Operating Profit (Loss)............................ (2,695) 180 (58) (2,573)
Identifiable Assets................................ 29,420 4,108 (1,857) 31,671
Export Sales....................................... 1,865
DECEMBER 31, 1994
Total Revenues..................................... 21,813 5,897 (4,564) 23,146
Operating Profit (Loss)............................ (1,746) (361) -- (2,107)
Identifiable Assets................................ 24,514 2,865 (1,949) 25,430
Export Sales....................................... 1,947
</TABLE>
13. SUBSEQUENT EVENTS
Registration Statement
On October 8, 1997, the Board of Directors of Penford authorized the sale
of up to 20% of Penwest, through an initial public offering of Penwest's stock.
In contemplation of the Company's initial public offering, a 2907.66-for-1
stock split occurred on October 8, 1997, transforming the Company's capital
structure from 50,000 shares, $1.00 par value per share, of common stock
authorized and 5,000 shares of common stock outstanding to 39,000,000 shares,
$.001 par value per share, of common stock authorized and 14,538,282 shares of
common stock outstanding and 1,000,000 shares of preferred stock, $.001 par
value per share, authorized, that may be issued by the Board in one or more
series. Accordingly, all share and per share data have been retroactively
adjusted to give effect to the stock split.
The Company expects to file a Registration Statement with the Securities
and Exchange Commission to permit the Company to sell shares of its common stock
to the public. In connection with the proposed public offering, the Board
authorized the issuance and sale by the Company of up to 2,500,000 shares of
common stock, plus up to an additional 375,000 shares to cover over-allotments.
F-18
<PAGE> 93
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information for the nine-month period ended September 30, 1996 is unaudited
The Parent has announced its intent, subject to the satisfaction of certain
conditions, including receipt of a favorable tax ruling from the Internal
Revenue Service or a written opinion from Ernst & Young LLP, to divest its
ownership interest in the Company by means of a tax-free distribution to its
shareholders, which is anticipated to occur for the second quarter of 1998.
In anticipation of the offering and Penford's announced intention to divest
its ownership interest in the Company, the Company and Penford have entered into
a number of agreements which will become effective upon the closing of the
offering. Those agreements include: a service agreement under which Penford will
continue to provide on an interim basis, certain general corporate services
(including accounting, audit, treasury, financial and human resources, insurance
and tax) which will be charged to the Company on an actual or allocated basis
prior to the Spin-off and on an actual or allocated basis, plus specified
percentage negotiated by and mutually agreeable to Penford and Penwest; a tax
allocation agreement wherein for as long as the Company participates in the
consolidated tax returns, calculated on a separate return basis, of Penford, the
Company will be required to pay to or be entitled to receive from Penford its
allocable portion of consolidated federal or state income tax liability or
credits, other than credits related to net operating losses; an excipients
supply agreement under which Penford will manufacture and supply exclusively to
Penwest all of the Company's EMDEX and CANDEX requirements under pricing and
quantity terms that the Company believes approximate fair market value; and an
employee benefits agreement under which Penford will enable employees of the
Company to continue to be covered under Penford's long-term disability insurance
and group life insurance policies until Penford's divestiture of the Company's
stock and under Penford's Savings and Stock Ownership plan and medical, dental,
vision and flexible benefits plans until December 31, 1997, under all of which
the Company will be charged actual costs incurred by Penford for the Company's
employees. Subsequent to the closing of the Offering no terminating liabilities
will be incurred by Penwest related to employee benefits, including the Penford
defined benefit plan.
Stock Plans
In contemplation of the initial public offering of the Company's stock, the
Company adopted the 1997 Equity Incentive Plan (the "Plan") under which the
Board of Directors or its compensation committee is authorized to grant stock
options, stock appreciation rights, restricted stock, deferred stock,
performance units, or any combination thereof, to directors, employees,
directors, officers, consultants or advisors of the Company. There are 3,500,000
shares are available for grant under the terms of the Plan. These options are to
be granted at prices equal to the fair market value of common stock at the date
of grant and vest over a period not to exceed four years. Options granted under
the Plan must be exercised within ten years of grant, unless a shorter period is
designated at the time of grant. No options can be awarded under the Plan after
ten years. In connection with the offering, options to purchase 715,000 shares
of common stock at the initial public offering price were granted. In addition,
the Company adopted the 1997 Employee Stock Purchase Plan which will enable
employees of the Company to purchase stock at 85% of market value as defined in
the plan. There are 300,000 shares available under the Plan.
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock
Based Compensation," which is effective for the Company's 1997 financial
statements. Statement No. 123 allows companies to either account for stock-based
compensation under the new provisions of Statement No. 123 or under the
provisions of APB No. 25, but requires pro forma disclosure in the footnotes to
the financial statements as if the measurement provisions of Statement No. 123
had been adopted. The Company intends to continue accounting for its stock-based
compensation in accordance with the provisions of APB No. 25. As such, the
adoption of Statement No. 123 has not impacted the results of operations of the
Company.
F-19
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the Registrant's expenses in connection with
the issuance and distribution of the securities being registered. Except for the
SEC Registration Fee, the NASD Filing Fee and the Nasdaq National Market Listing
Fee, the amounts listed below are estimates:
<TABLE>
<S> <C>
Registration fee......................................................... $ 10,455
NASD filing fee.......................................................... 3,950
Nasdaq National Market listing fee....................................... 50,000
Printing and engraving expenses.......................................... 105,000
Legal fees and expenses.................................................. 200,000
Accounting fees and expenses............................................. 300,000
Blue Sky fees and expenses (including legal fees)........................ 10,000
Transfer agent and registrar fees and expenses........................... 2,500
Financial adviser fee.................................................... 300,000
Miscellaneous............................................................ 18,095
-------
Total.......................................................... $1,000,000
=======
</TABLE>
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Washington Business Corporation Act and the Registrant's Amended and
Restated Bylaws provide for indemnification of the Registrant's directors and
officers for liabilities and expenses that they may incur in such capacities. In
general, directors and officers are indemnified with respect to actions taken in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the Registrant, and with respect to any criminal action or
proceeding, actions that the indemnitee had no reasonable cause to believe were
unlawful. Reference is made to the Registrant's Amended and Restated Bylaws
filed as Exhibits 3.2 hereto. The officers and directors of the Registrant are
currently covered under director and officer liability insurance maintained by
Penford Corporation, the parent of the Registrant. The Registrant expects to
obtain its own director and officer liability insurance prior to or effective on
the Spin-off.
In addition, the Underwriting Agreement, the form of which is filed as
Exhibit 1.1 hereto, contains provisions for indemnification by the Underwriters
of the Registrant and its officers, directors and controlling stockholders
against certain liabilities under the Securities Act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
No securities of the Registrant have been issued during the three years
preceding the date of this Registration Statement.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------------------
<S> <C> <C>
1.1 -- Form of Underwriting Agreement.
3.1* -- Amended and Restated Articles of Incorporation.
3.2* -- Amended and Restated Bylaws of the Company.
4.1** -- Specimen certificate representing the Common Stock.
</TABLE>
II-1
<PAGE> 95
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- --------------------------------------------------------------------------------
<S> <C> <C>
5.1** -- Opinion of Edmund O. Belsheim, Jr.
+10.1* -- Product Development and Supply Agreement dated August 17, 1994 by and between
the Registrant and Mylan Pharmaceuticals Inc. ("Mylan").
+10.2* -- Product Development and Supply Agreement dated August 3, 1995 by and between the
Registrant and Mylan.
+10.3* -- Product Development and Supply Agreement dated March 22, 1996 by and between the
Registrant and Mylan.
+10.4* -- Sales and Distribution Agreement dated January 3, 1997 by and between the
Registrant and Mylan.
+10.5* -- Product Development and Supply Agreement dated May 31, 1996 by and between the
Registrant and Kremers Urban Development Company.
+10.6* -- Product Development and Supply Agreement dated August 30, 1996 by and between
the Registrant and Kremers Urban Development Company.
+10.7* -- Product Development, License and Supply Agreement dated February 28, 1997 by and
between the Registrant and Sanofi Winthrop International S.A., as amended.
+10.8* -- Agreement dated May 26, 1995 by and between the Registrant and Leiras OY.
+10.9* -- Agreement dated July 27, 1992 by and between the Registrant and Leiras OY.
+10.10* -- Strategic Alliance Agreement dated as of September 17, 1997 by and between the
Registrant and Endo Pharmaceuticals Inc.
10.11* -- 1997 Equity Incentive Plan.
10.12* -- 1997 Employee Stock Purchase Plan.
10.13 -- Form of Separation Agreement to be entered into between the Registrant and
Penford Corporation ("Penford").
10.14 -- Form of Excipient Supply Agreement to be entered into between the Registrant and
Penford.
10.15 -- Form of Services Agreement to be entered into between the Registrant and
Penford.
10.16 -- Form of Tax Allocation Agreement to be entered into between the Registrant and
Penford.
10.17 -- Form of Employee Benefits Agreement to be entered into between the Registrant
and Penford.
10.18 -- Recognition and Incentive Agreement dated as of May 14, 1990 between the
Registrant and Anand Baichwal, as amended.
21.1* -- Subsidiaries.
23.1 -- Consent of Ernst & Young LLP.
23.2** -- Consent of Edmund O. Belsheim, Jr. (included in Exhibit 5.1).
24.1* -- Power of Attorney.
27.1* -- Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commissioner.
(B) Financial Statements Schedules:
Schedule II -- Valuation and Qualifying Accounts
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.
II-2
<PAGE> 96
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 14 above, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement certificates
in such denominations and registered in such names as required by the
underwriters to permit prompt delivery to each purchaser; (2) that for purposes
of determining any liability under the Securities Act, the information omitted
from the form of prospectus filed as part of a registration statement in
reliance upon Rule 430A and contained in the form of prospectus filed by the
registrant pursuant to Rule 424(b)(2) or (3) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (3) that for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and this offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 97
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Patterson, New York, on November 10,
1997.
PENWEST PHARMACEUTICALS CO.
By: /s/ JOHN V. TALLEY, JR.
------------------------------------
John V. Talley, Jr.
President and Chief Operating
Officer
POWER OF ATTORNEY AND SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE(S) DATE
- ------------------------------------------ ------------------------------ -----------------
<C> <S> <C>
* Chairman, Chief Executive November 10, 1997
- ------------------------------------------ Officer and Director
Tod R. Hamachek (Principal Executive
Officer)
* Vice President, Finance and November 10, 1997
- ------------------------------------------ Chief Financial Officer
Jennifer L. Good (Principal Financial and
Accounting Officer)
* Director November 10, 1997
- ------------------------------------------
Paul E. Freiman
* Director November 10, 1997
- ------------------------------------------
Jere E. Goyan, Ph.D.
* Director November 10, 1997
- ------------------------------------------
Rolf H. Henel
* Director November 10, 1997
- ------------------------------------------
Robert J. Hennessey
* Director November 10, 1997
- ------------------------------------------
N. Stewart Rogers
/s/ JOHN V. TALLEY, JR. Director November 10, 1997
- ------------------------------------------
John V. Talley, Jr.
* Director November 10, 1997
- ------------------------------------------
W. Leigh Thompson, Ph.D., M.D.
</TABLE>
*By: /s/ JOHN V. TALLEY, JR.
---------------------------------
John V. Talley, Jr.
Attorney-in-fact
II-4
<PAGE> 98
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
We have audited the consolidated financial statements of Penwest
Pharmaceuticals Co. as of September 30, 1997 and December 31, 1996 and 1995, and
for the nine-month period ended September 30, 1997, and each of the three years
in the period ended December 31, 1996, and have issued our report thereon dated
October 11, 1997, included elsewhere in this Registration Statement. Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Stamford, Connecticut
October 11, 1997
S-1
<PAGE> 99
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
PENWEST PHARMACEUTICALS CO.
SEPTEMBER 30, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND CHARGED TO OTHER DEDUCTIONS BALANCE AT
PERIOD EXPENSES ACCOUNTS DESCRIBE DESCRIBE END OF PERIOD
------------ ---------- ----------------- ------------------- -----------------
<S> <C> <C> <C> <C> <C>
Nine month period ended September
30, 1997
Allowance for Doubtful Accounts.... $237 $ 0 -- -- $ 237
==== === === ==== ====
Year ended December 31, 1996
Allowance for Doubtful Accounts.... $200 $ 37 -- -- $ 237
==== === === ==== ====
Year ended December 31, 1995
Allowance for Doubtful Accounts.... $187 $ 28 -- (15)(1) $ 200
==== === === ==== ====
Year ended December 31, 1994
Allowance for Doubtful Accounts.... $198 $ 55 -- (66)(1) $ 187
==== === === ==== ====
</TABLE>
- ---------------
(1) Write-off of bad debts
S-2
<PAGE> 100
EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- --------------------------------------------------------------------- ------------
<S> <C> <C> <C>
1.1 -- Form of Underwriting Agreement. .....................................
3.1* -- Amended and Restated Articles of Incorporation. .....................
3.2* -- Amended and Restated Bylaws of the Company. .........................
4.1** -- Specimen certificate representing the Common Stock. .................
5.1** -- Opinion of Edmund O. Belsheim, Jr. ..................................
+10.1* -- Product Development and Supply Agreement dated August 17, 1994 by and
between the Registrant and Mylan Pharmaceuticals Inc. ("Mylan"). ....
+10.2* -- Product Development and Supply Agreement dated August 3, 1995 by and
between the Registrant and Mylan. ...................................
+10.3* -- Product Development and Supply Agreement dated March 22, 1996 by and
between the Registrant and Mylan. ...................................
+10.4* -- Sales and Distribution Agreement dated January 3, 1997 by and between
the Registrant and Mylan. ...........................................
+10.5* -- Product Development and Supply Agreement dated May 31, 1996 by and
between the Registrant and Kremers Urban Development Company. .......
+10.6* -- Product Development and Supply Agreement dated August 30, 1996 by and
between the Registrant and Kremers Urban Development Company. .......
+10.7* -- Product Development, License and Supply Agreement dated February 28,
1997 by and between the Registrant and Sanofi Winthrop International
S.A., as amended. ...................................................
+10.8* -- Agreement dated May 26, 1995 by and between the Registrant and
Leiras OY. ..........................................................
+10.9* -- Agreement dated July 27, 1992 by and between the Registrant and
Leiras OY. ..........................................................
+10.10* -- Strategic Alliance Agreement dated as of September 17, 1997 by and
between the Registrant and Endo Pharmaceuticals Inc. ................
10.11* -- 1997 Equity Incentive Plan. .........................................
10.12* -- 1997 Employee Stock Purchase Plan. ..................................
10.13 -- Form of Separation Agreement to be entered into between the
Registrant and Penford Corporation ("Penford"). .....................
10.14 -- Form of Excipient Supply Agreement to be entered into between the
Registrant and Penford. .............................................
10.15 -- Form of Services Agreement to be entered into between the Registrant
and Penford. ........................................................
10.16 -- Form of Tax Allocation Agreement to be entered into between the
Registrant and Penford. .............................................
10.17 -- Form of Employee Benefits Agreement to be entered into between the
Registrant and Penford. .............................................
10.18 -- Recognition and Incentive Agreement dated as of May 14, 1990 between
the Registrant and Anand Baichwal, as amended. ......................
</TABLE>
<PAGE> 101
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGE
- ------- --------------------------------------------------------------------- ------------
<S> <C> <C> <C>
21.1* -- Subsidiaries. .......................................................
23.1 -- Consent of Ernst & Young LLP. .......................................
23.2** -- Consent of Edmund O. Belsheim, Jr. (included in Exhibit 5.1). .......
24.1* -- Power of Attorney. ..................................................
27.1* -- Financial Data Schedule. ............................................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commissioner.
<PAGE> 1
EXHIBIT 1.1
Draft Dated 11/10/97
2,500,000 SHARES(1)
PENWEST PHARMACEUTICALS CO.
COMMON STOCK
UNDERWRITING AGREEMENT
______________, 1997
BANCAMERICA ROBERTSON STEPHENS
SBC WARBURG DILLON READ INC.
As Representatives of the several Underwriters
c/o BancAmerica Robertson Stephens
555 California Street
Suite 2600
San Francisco, California 94104
Ladies/Gentlemen:
Penwest Pharmaceuticals Co., a Washington corporation (the "Company"),
and Penford Corporation, a Washington corporation (hereinafter referred to as
either "Penford" or the "Principal Stockholder"), address you as the
Representatives of each of the persons, firms and corporations listed in
Schedule A hereto (herein collectively called the "Underwriters") and hereby
confirms their agreement with the several Underwriters as follows:
1. Description of Shares. The Company proposes to issue and sell
2,500,000 shares of its authorized and unissued Common Stock, $.001 par value
per share (the "Firm Shares"), to the several Underwriters. The Company also
proposes to grant to the Underwriters an option to purchase up to 375,000
additional shares of the Company's Common Stock, $.001 par value per share (the
"Option Shares"), as provided in Section 7 hereof. As used in this Agreement,
the term "Shares" shall include the Firm Shares and the Option Shares. All
shares of Common Stock, $.001 par value per share, of the Company to be
outstanding after giving effect to the sales contemplated hereby, including the
Shares, are hereinafter referred to as "Common Stock."
- ----------
(1) Plus an option to purchase up to 375,000 additional shares from the Company
to cover over-allotments.
<PAGE> 2
-2-
2. Representations, Warranties and Agreements of the Company and the
Principal Stockholder.
(a) The Company and the Principal Stockholder jointly and severally
represent and warrant to, and agree with, each Underwriter that:
(i) A registration statement on Form S-1 (File No. 333-38389) with
respect to the Shares, including a prospectus subject to completion, has been
prepared by the Company in conformity with the requirements of the Securities
Act of 1933, as amended (the "Act"), and the applicable rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") under the Act and has been filed with the Commission; such
amendments to such registration statement, such amended prospectuses subject to
completion and such abbreviated registration statements pursuant to Rule 462(b)
of the Rules and Regulations as may have been required prior to the date hereof
have been similarly prepared and filed with the Commission; and the Company will
file such additional amendments to such registration statement, such amended
prospectuses subject to completion and such abbreviated registration statements
as may hereafter be required. Copies of such registration statement and
amendments, of each related prospectus subject to completion (the "Preliminary
Prospectuses") and of any abbreviated registration statement pursuant to Rule
462(b) of the Rules and Regulations have been delivered to you or your counsel
and, to the extent applicable, were identical to the electronically transmitted
copies thereof filed with the Commission pursuant to the Commission's Electronic
Data Gathering, Analysis and Retrieval System ("EDGAR"), except to the extent
permitted by Regulation S-T.
If the registration statement relating to the Shares has been
declared effective under the Act by the Commission, the Company will prepare and
promptly file with the Commission the information omitted from the registration
statement pursuant to Rule 430A(a) or, if BancAmerica Robertson Stephens, on
behalf of the several Underwriters, shall agree to the utilization of Rule 434
of the Rules and Regulations, the information required to be included in any
term sheet filed pursuant to Rule 434(b) or (c), as applicable, of the Rules and
Regulations pursuant to subparagraph (1), (4) or (7) of Rule 424(b) of the Rules
and Regulations or as part of a post-effective amendment to the registration
statement (including a final form of prospectus). If the registration statement
relating to the Shares has not been declared effective under the Act by the
Commission, the Company will prepare and promptly file an amendment to the
registration statement, including a final form of prospectus, or, if BancAmerica
Robertson Stephens, on behalf of the several Underwriters, shall agree to the
utilization of Rule 434 of the Rules and Regulations, the information required
to be included in any term sheet filed pursuant to Rule 434(b) or (c), as
applicable, of the Rules and Regulations. The term "Registration Statement" as
used in this Agreement shall mean such registration statement, including
financial statements, schedules and exhibits, in the form in which it became or
becomes, as the case may be, effective (including, if the Company omitted
information from the registration statement pursuant to Rule 430A(a) or files a
term sheet pursuant to Rule 434 of the Rules and Regulations, the information
deemed to be a part of the registration statement at the time it became
effective pursuant to Rule 430A(b) or Rule 434(d) of the Rules and Regulations)
and, in the event of any amendment thereto or the filing of any abbreviated
registration statement pursuant to Rule 462(b)
<PAGE> 3
-3-
of the Rules and Regulations relating thereto after the effective date of such
registration statement, shall also mean (from and after the effectiveness of
such amendment or the filing of such abbreviated registration statement) such
registration statement as so amended, together with any such abbreviated
registration statement. The term "Prospectus" as used in this Agreement shall
mean the prospectus relating to the Shares as included in such Registration
Statement at the time it becomes effective (including, if the Company omitted
information from the Registration Statement pursuant to Rule 430A(a) of the
Rules and Regulations, the information deemed to be a part of the Registration
Statement at the time it became effective pursuant to Rule 430A(b) of the Rules
and Regulations); provided, however, that if in reliance on Rule 434 of the
Rules and Regulations and with the consent of BancAmerica Robertson Stephens, on
behalf of the several Underwriters, the Company shall have provided to the
Underwriters a term sheet pursuant to Rule 434(b) or (c), as applicable, prior
to the time that a confirmation is sent or given for purposes of Section
2(10)(a) of the Act, the term "Prospectus" shall mean the "prospectus subject to
completion" (as defined in Rule 434(g) of the Rules and Regulations) last
provided to the Underwriters by the Company and circulated by the Underwriters
to all prospective purchasers of the Shares (including the information deemed to
be a part of the Registration Statement at the time it became effective pursuant
to Rule 434(d) of the Rules and Regulations). Notwithstanding the foregoing, if
any revised prospectus shall be provided to the Underwriters by the Company for
use in connection with the offering of the Shares that differs from the
prospectus referred to in the immediately preceding sentence (whether or not
such revised prospectus is required to be filed with the Commission pursuant to
Rule 424(b) of the Rules and Regulations), the term "Prospectus" shall refer to
such revised prospectus from and after the time it is first provided to the
Underwriters for such use. If in reliance on Rule 434 of the Rules and
Regulations and with the consent of BancAmerica Robertson Stephens, on behalf of
the several Underwriters, the Company shall have provided to the Underwriters a
term sheet pursuant to Rule 434(b) or (c), as applicable, prior to the time that
a confirmation is sent or given for purposes of Section 2(10)(a) of the Act, the
Prospectus and the term sheet, together, will not be materially different from
the prospectus in the Registration Statement. For purposes of this Agreement,
all references to the Registration Statement, any Preliminary Prospectus, the
Prospectus, or any amendment or supplement to any of the foregoing shall be
deemed to include the respective copies thereof filed with the Commission
pursuant to EDGAR.
(ii) The Commission has not issued any order preventing or
suspending the use of any Preliminary Prospectus or instituted proceedings for
that purpose, and each such Preliminary Prospectus has conformed in all material
respects to the requirements of the Act and the Rules and Regulations and, as of
its date, has not included any untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; and at the time
the Registration Statement became or becomes, as the case may be, effective and
at all times subsequent thereto up to and on the Closing Date (hereinafter
defined) and on any later date on which Option Shares are to be purchased, (a)
the Registration Statement and the Prospectus, and any amendments or supplements
thereto, contained and will contain all material information required to be
included therein by the Act and the Rules and Regulations and will in all
material respects conform to the requirements of the Act and the Rules and
Regulations, (b) the Registration Statement, and any amendments or supplements
thereto, did not and will not include any untrue statement of a
<PAGE> 4
-4-
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (c) the Prospectus,
and any amendments or supplements thereto, did not and will not include any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under which
they were made, not misleading; provided, however, that none of the
representations and warranties contained in this subparagraph (ii) shall apply
to information contained in or omitted from the Registration Statement or
Prospectus, or any amendment or supplement thereto, in reliance upon, and in
conformity with, written information relating to any Underwriter furnished to
the Company by such Underwriter specifically for use in the preparation thereof.
(iii) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation with full power and authority
(corporate and other) to own, lease and operate its properties and conduct its
business as described in the Prospectus; the Company owns all of the outstanding
capital stock of its subsidiaries free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; each of the Company and its
subsidiaries is duly qualified to do business as a foreign corporation and is in
good standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries considered as one
enterprise; no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification; each of the Company and its subsidiaries
is in possession of and operating in compliance in all material respects with
all authorizations, licenses, approvals, certificates, consents, orders and
permits from state, federal and other regulatory authorities including, without
limitation, the United States Food and Drug Administration (the "FDA"), which
are material to the conduct of its business, all of which are valid and in full
force and effect; there is no FDA, enforcement action pending or, to the
Company's knowledge, threatened against the Company or any of its subsidiaries;
the Company and its subsidiaries are conducting their business in compliance
with all the laws, rules and regulations of the jurisdictions in which they are
conducting business, including, without limitation, the FDA, except where
failure to be so in compliance would not have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise and, except as
described in the Prospectus, know of no grounds that could cause the FDA or any
foreign regulatory authority to suspend or restrict the Company's current and
planned activities, as described in the Prospectus; neither the Company nor any
of its subsidiaries is in violation of, or in default in the performance or
observance of, (1) its charter or bylaws, (2) any obligation, agreement,
covenant or condition contained in any bond, debenture, note or other evidence
of indebtedness, or in any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which its properties may be
bound and/or (3) any law, order, rule, regulation, writ, injunction, judgment or
decree of any court, government or governmental agency or body, domestic or
foreign, having jurisdiction over the Company or any of its subsidiaries or over
their respective properties of which it has knowledge, except for such
violations or defaults that would not reasonably be expected to have,
<PAGE> 5
-5-
individually or in the aggregate, a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise. The Company does not own or
control, directly or indirectly, any corporation, association or other entity
other than those subsidiaries listed in Exhibit 21 to the Registration
Statement.
(iv) The Company has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by the Company and is
a valid and binding agreement on the part of the Company, enforceable against
the Company in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement hereof
may be limited by applicable bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or by
general equitable principles; the performance by the Company of this Agreement
and the consummation by the Company of the transactions herein contemplated will
not result in a breach or violation of any of the terms and provisions of, or
constitute a default under, (1) any bond, debenture, note or other evidence of
indebtedness, or under any lease, contract, indenture, mortgage, deed of trust,
loan agreement, joint venture or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which it or any of its
subsidiaries or any of their respective properties may be bound, (2) the charter
or bylaws of the Company or any of its subsidiaries or (3) any law, order, rule,
regulation, writ, injunction, judgment or decree of any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties, except
for such breaches, violations or defaults that would not reasonably be expected
to have, individually or in the aggregate, a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise. No consent, approval,
authorization or order of or qualification with any court, government or
governmental agency or body, domestic or foreign, having jurisdiction over the
Company or any of its subsidiaries or over their respective properties is
required for the execution and delivery of this Agreement and the consummation
by the Company of the transactions herein contemplated, except such as may be
required under the Act, under the Securities Exchange Act of 1934, as amended
(the "Exchange Act") (if applicable), under state or other securities or Blue
Sky laws, or under the rules and regulations of the National Association of
Securities Dealers, Inc. (the "NASD"), all of which requirements have been
satisfied in all material respects.
(v) Except as disclosed in the Registration Statement and the
Prospectus, there is not any pending or, to the Company's knowledge, threatened
action, suit, claim or proceeding against the Company, any of its subsidiaries,
any of their respective properties, assets or rights or any of their respective
officers before any court, government or governmental agency or body, domestic
or foreign, having jurisdiction over the Company or any of its subsidiaries,
over their respective properties or over their respective officers or otherwise
which (1) is reasonably likely to result in any material adverse change in the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise or might materially
and adversely affect their properties, assets or rights, (2) seeks to prohibit
or has a reasonably foreseeable possibility of preventing consummation of the
transactions contemplated
<PAGE> 6
-6-
hereby or (3) is required to be disclosed in the Registration Statement or
Prospectus and is not so disclosed; and there are no agreements, contracts,
leases or documents of the Company or any of its subsidiaries of a character
required to be described or referred to in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration Statement by the Act
or the Rules and Regulations which have not been accurately described in all
material respects in the Registration Statement or Prospectus or filed as
exhibits to the Registration Statement.
(vi) All outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all federal and state
securities laws, and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities, and
the authorized and outstanding capital stock of the Company is as set forth in
the Prospectus under the caption "Capitalization" and conforms in all material
respects to the statements relating thereto contained in the Registration
Statement and the Prospectus (and such statements correctly state in all
material respects the substance of the instruments defining the capitalization
of the Company); the Firm Shares and the Option Shares have been duly authorized
for issuance and sale to the Underwriters pursuant to this Agreement and, when
issued and delivered by the Company against payment therefor in accordance with
the terms of this Agreement, will be duly and validly issued and fully paid and
nonassessable, and will be sold free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest; and no preemptive right,
co-sale right, registration right, right of first refusal or other similar right
of stockholders exists with respect to any of the Firm Shares or Option Shares
or the issuance and sale thereof. No further approval or authorization of any
stockholder, the Board of Directors of the Company or others is required for the
issuance and sale or transfer of the Shares except as may be required under the
Act or under state or other securities or Blue Sky laws or pursuant to the rules
and regulations of the NASD. All issued and outstanding shares of capital stock
of each subsidiary of the Company have been duly authorized and validly issued
and are fully paid and nonassessable, and were not issued in violation of or
subject to any preemptive right, or other rights to subscribe for or purchase
shares and are owned by the Company or one of its subsidiaries free and clear of
any pledge, lien, security interest, encumbrance, claim or equitable interest.
Except as disclosed in or contemplated by the Prospectus and the financial
statements of the Company, and the related notes thereto, included in the
Prospectus, as of the respective dates set forth in the Registration Statement
and Prospectus, neither the Company nor any subsidiary has outstanding options
to purchase, or any preemptive rights or other rights to subscribe for or to
purchase, any securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such options,
rights, convertible securities or obligations. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the options
or other rights granted thereunder, set forth in the Prospectus accurately and
fairly presents the information required to be shown with respect to such plans,
arrangements, options and rights.
(vii) Ernst & Young LLP, which has examined the consolidated
financial statements of the Company, together with the related schedules and
notes, as of December 31, 1995 and 1996 and for each of the years in the three
(3) years ended December 31, 1996 and the audited consolidated balance sheet of
the Company as of September 30, 1997 and the related
<PAGE> 7
-7-
statements of operations, stockholders' equity and cash flows of the Company for
the nine month period then ended, filed with the Commission as a part of the
Registration Statement, which are included in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations; the
audited consolidated financial statements of the Company, together with the
related schedules and notes, and the unaudited consolidated financial
information, forming part of the Registration Statement and Prospectus, fairly
present the financial position and the results of operations of the Company and
its subsidiaries at the respective dates and for the respective periods to which
they apply; and all audited consolidated financial statements of the Company,
together with the related schedules and notes, and the unaudited consolidated
financial information, filed with the Commission as part of the Registration
Statement, have been prepared in accordance with generally accepted accounting
principles consistently applied throughout the periods involved except as may be
otherwise stated therein. The selected and summary financial and statistical
data included in the Registration Statement present fairly the information shown
therein and have been compiled on a basis consistent with the audited financial
statements presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(viii) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (1) any material adverse change in the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiaries considered
as one enterprise excluding the continued incurrence of losses by the Company in
the ordinary course of business, (2) any transaction that is material to the
Company and its subsidiaries considered as one enterprise, except transactions
entered into in the ordinary course of business, (3) any obligation, direct or
contingent, that is material to the Company and its subsidiaries considered as
one enterprise, incurred by the Company or any of its subsidiaries, except
obligations incurred in the ordinary course of business, (4) any change in the
capital stock or outstanding indebtedness of the Company or any of its
subsidiaries that is material to the Company and its subsidiaries considered as
one enterprise, except as described in the Registration Statement and
Prospectus, (5) any dividend or distribution of any kind declared, paid or made
on the capital stock of the Company or any of its subsidiaries, except as
described in the Registration Statement and Prospectus or (6) any loss or damage
(whether or not insured) to the property of the Company or any of its
subsidiaries which has been sustained or will have been sustained which has a
material adverse effect on the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries considered as one
enterprise.
(ix) Except as set forth in the Registration Statement and
Prospectus, (1) each of the Company and its subsidiaries has good and marketable
title to all properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest, other than such as would not
have a material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiaries considered
as one enterprise, (2) the agreements to which the Company or any of its
subsidiaries is a party described in the Registration Statement and Prospectus
are valid agreements, enforceable by the Company and its subsidiaries (as
applicable), except as the enforcement thereof may be limited by applicable
bankruptcy,
<PAGE> 8
-8-
insolvency, reorganization, moratorium or other similar laws relating to or
affecting creditors' rights generally or by general equitable principles (and
with respect to this Agreement, except as rights to indemnification hereunder
may be limited by applicable law) and, to the Company's knowledge, the other
contracting party or parties thereto are not in material breach or material
default under any of such agreements and (3) each of the Company and its
subsidiaries has valid and enforceable leases for all properties described in
the Registration Statement and Prospectus as leased by it, except as the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles. Except as set
forth in the Registration Statement and Prospectus, the Company owns or leases
all such properties as are necessary to its operations as now conducted or as
proposed to be conducted.
(x) Penford, the Company and the Company's subsidiaries have
timely filed all necessary federal, state and foreign income and franchise tax
returns and have paid all taxes shown thereon as due, and there is no tax
deficiency that has been or, to Penford's and the Company's knowledge, is
reasonably likely to be asserted against Penford, the Company or any of the
Company's subsidiaries that might have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise; and all tax
liabilities of the Company and its subsidiaries are adequately provided for on
the books of the Company and its subsidiaries.
(xi) The Company and it subsidiaries maintain insurance, or
are covered by insurance maintained by Penford, with insurers of recognized
financial responsibility of the types and in the amounts generally deemed
adequate for their businesses, including, but not limited to, insurance covering
product liability and real and personal property owned or leased by the Company
or its subsidiaries against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is in full
force and effect; neither the Company nor any subsidiary has ever been refused
any insurance coverage sought or applied for; and neither the Company nor any
subsidiary has any reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to obtain
similar coverage from similar insurers as may be necessary to continue its
business at a cost that would not materially, and adversely affect the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise.
(xii) To the Company's knowledge, no labor disturbance by the
employees of the Company or any of its subsidiaries exists or is imminent; and
the Company is not aware of any existing or imminent labor disturbance by the
employees of any of its principal suppliers, subcontractors, authorized dealers
or international distributors that is reasonably likely to result in a material
adverse change in the condition (financial or otherwise), earnings, operations
or business of the Company and its subsidiaries considered as one enterprise.
Except as disclosed in the Registration Statement and the Prospectus, no
collective bargaining agreement exists with any of the Company's employees and,
to the best of the Company's knowledge, no such agreement is imminent.
<PAGE> 9
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(xiii) Each of the Company and its subsidiaries owns or
possesses adequate rights to use all patents, patent rights, patent
applications, inventions, trade secrets, know-how, trademarks, trademark
applications, service marks, service mark applications, trade names or
copyrights or other intellectual property rights (collectively, "Intellectual
Property") which are necessary to conduct its businesses as now, or as proposed
to be, conducted by it as described in the Registration Statement and
Prospectus; no material Intellectual Property rights will expire by their terms
within five years from the date of this Agreement;neither the Company nor any of
its subsidiaries has received any notice of, and has no knowledge of, any
infringement of or conflict with asserted rights of the Company and its
subsidiaries by others with respect to any Intellectual Property (except as
disclosed in the Prospectus); neither the Company nor any of its subsidiaries
has received any notice of, and has no knowledge of, any infringement of or
conflict with asserted rights of others with respect to any Intellectual
Property which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, might have a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise (except as disclosed
in the Prospectus); and to the knowledge of the Company, none of the patents
owned by the Company are unenforceable or invalid. The Company has duly and
properly filed or caused to be filed with the United States Patent and Trademark
Office (the "PTO") and applicable foreign and international patent authorities
all patent applications described or referred to in the Prospectus, and believes
it has complied with the PTO's duty of candor and disclosure for each of the
United States patent and patent applications described or referred to in the
Prospectus; the Company is unaware of any facts which would preclude the grant
of a patent from each of the patent applications described or referred to in the
Prospectus; the Company has no knowledge of any facts which would preclude it
from having clear title to its patents and patent applications referenced in the
Prospectus; and neither the Company nor any of its subsidiaries has terminated
or breached and is in violation of any material agreement covering its
Intellectual Property rights. The Company and its subsidiaries have obtained
written confidentiality and non-disclosure agreements from all of its employees
and collaborative partners acknowledging and protecting the Company's
proprietary information.
(xiv) The Common Stock has been approved for quotation on The
Nasdaq National Market, subject to official notice of issuance.
(xv) The Company has been advised concerning the Investment
Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations
thereunder, and has in the past conducted, and intends in the future to conduct,
its affairs in such a manner as to ensure that it will not become an "investment
company" or a company "controlled" by an "investment company" within the meaning
of the 1940 Act and such rules and regulations.
(xvi) The Company has not distributed and will not distribute
prior to the later of (1) the Closing Date, or any date on which Option Shares
are to be purchased, as the case may be, and (2) completion of the distribution
of the Shares, any offering material in connection with the offering and sale of
the Shares other than any Preliminary Prospectuses, the Prospectus, the
Registration Statement and other materials, if any, permitted by the Act.
<PAGE> 10
-10-
(xvii) Neither the Company nor any of its subsidiaries has at
any time during the last five (5) years (1) made any unlawful contribution to
any candidate for foreign office or failed to disclose fully any contribution in
violation of law, or (2) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or quasi-public
duties, other than payments required or permitted by the laws of the United
States or any jurisdiction thereof.
(xviii) The Company has not taken and will not take, directly
or indirectly, any action designed to or that might reasonably be expected to
cause or result in stabilization or manipulation of the price of the Common
Stock to facilitate the sale or resale of the Shares.
(xix) (1) Penford and each officer and director of the Company
have each agreed in writing that such person will not, directly or indirectly,
without the prior written consent of BancAmerica Robertson Stephens, sell,
offer, contract to sell, pledge, grant any option to purchase or otherwise
dispose of (collectively, a "Disposition") any shares of Common Stock (or any
securities convertible into or exchangeable for, or any rights to purchase or
acquire, Common Stock) held by such person, acquired by such person after the
date of the lock-up letter agreement (collectively, the "Lock-Up Agreements") or
which may be deemed to be beneficially owned by such person pursuant to the
Rules and Regulations promulgated under the Act (the "Lock-Up Shares"), for a
period commencing on the date of the execution of the Lock-Up Agreement and
ending 180 days after the date appearing on the final Prospectus related to this
offering (the "Lock-Up Period"). The foregoing restriction has been expressly
agreed to preclude the holder of Lock-Up Shares from engaging in any hedging or
other transaction which is designed to or reasonably expected to lead to or
result in a Disposition of Lock-Up Shares during the Lock-Up Period, even if
such Lock-Up Shares would be disposed of by someone other than such holder. Such
prohibited hedging or other transactions would include, without limitation, any
short sale (whether or not against the box) or any purchase, sale or grant of
any right (including, without limitation, any put or call option) with respect
to any Lock-Up Shares or with respect to any security (other than a broad-based
market basket or index) that includes, relates to or derives any significant
part of its value from Lock-Up Shares. Notwithstanding the foregoing, such
person may transfer any or all of the Lock-Up Shares (i) as a bona fide gift or
gifts or (ii) as a distribution to shareholders of such person; provided,
however, that in the case of (i) above it shall be a condition to the transfer
that the transferee execute an agreement stating that the transferee is
receiving and holding the Lock-Up Shares subject to the foregoing restrictions
and that there be no further transfer of such Lock-Up Shares except in
accordance with the aforesaid Lock-Up Agreements. Such person has also agreed to
notify BancAmerica Robertson Stephens in writing prior to any transfer of
Lock-Up Shares. Furthermore, such person has also agreed and consented to the
entry of stop transfer instructions with the Company's transfer agent against
the transfer of the Lock-Up Shares held by such person except in compliance with
this restriction. The Company has provided to counsel for the Underwriters true,
accurate and complete copies of all of the Lock-Up Agreements presently in
effect or effected hereby. The Company hereby represents and warrants that it
will not release Penford or any of its officers or directors from any Lock-Up
Agreements currently existing or hereafter effected without the prior written
consent of BancAmerica Robertson Stephens.
<PAGE> 11
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(2) Each holder of an option to purchase Common Stock is
either subject to a Lock-Up Agreement, or will execute a Lock-Up Agreement
before receiving any shares of Common Stock from the Company during the Lock-Up
Period. The Company hereby represents and warrants that during the Lock-Up
Period, it will obtain an executed Lock-Up Agreement from each person who wishes
to exercise an option to purchase Common Stock prior to the issuance of such
Common Stock.
(xx) Except as set forth in the Registration Statement and
Prospectus, (1) to the Company's knowledge, the Company is in compliance in all
material respects with all rules, laws and regulations relating to the use,
treatment, storage and disposal of toxic substances and protection of health or
the environment ("Environmental Laws") which are applicable to its business, (2)
the Company has received no notice from any governmental authority or third
party of an asserted claim under Environmental Laws, which claim is required to
be disclosed in the Registration Statement and the Prospectus, (3) the Company
will not be required to make future material capital expenditures to comply with
Environmental Laws, except as may be required in the construction of its new
facilities and (4) no property which is owned, leased or occupied by the Company
has been designated as a Superfund site pursuant to the Comprehensive Response,
Compensation, and Liability Act of 1980, as amended (42 U.S.C. Section 9601, et
seq), or otherwise designated as a contaminated site under applicable state or
local law.
(xxi) The Company and each of its subsidiaries maintain a
system of internal accounting controls sufficient to provide reasonable
assurances that (1) transactions are executed in accordance with management's
general or specific authorizations, (2) transactions are recorded as necessary
to permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets, (3)
access to assets is permitted only in accordance with management's general or
specific authorization and (4) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate action is
taken with respect to any differences.
(xxii) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or guarantees
of indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(xxiii) Each of the Separation Agreement, the Services
Agreement, the Employee Benefits Agreement, the Excipient Supply Agreement, the
Tax Allocation Agreement and the Trademark Assignment between Penford and the
Company (hereinafter referred to as the "Intercompany Agreements") to which the
Company is a party has been duly and validly authorized, executed and delivered
by the Company and is the valid and binding agreement of the Company enforceable
against the Company in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as to the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles.
<PAGE> 12
-12-
The execution, delivery and performance of each of the Intercompany Agreements
to which the Company is a party by the Company, the consummation of the
transactions therein contemplated and compliance by the Company with the terms
thereof do not and will not result in a violation of, or constitute a default
under, (i) any bond, debenture, note or other evidence of indebtedness, or under
any lease, contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company is a party or by
which its properties may be bound, (ii) the charter or bylaws of the Company, or
(iii) any law, order, rule, regulation, writ, injunction, judgment or decree of
any court, government or governmental agency or body, domestic or foreign,
having jurisdiction over the Company or over its properties, except for such
violations or defaults that would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the Company and
its subsidiaries considered as one enterprise. The execution, delivery and
performance of each of the Intercompany Agreements to which the Company is a
party by the Company, the consummation of the transactions therein contemplated
and compliance by the Company with the terms thereof will not result in the
creation or imposition of any lien, charge, claim or encumbrance upon any
property or asset of the Company which would be material to the Company. No
consent, approval, authorization or order of any court, governmental agency or
body or financial institution is required in connection with the consummation by
the Company of the transactions contemplated by the Intercompany Agreements to
which the Company is a party, except for such consents, approvals,
authorizations or orders that have been obtained.
Where any of the foregoing representations and warranties is made to
the Company's knowledge, the Principal Stockholder's representations and
warranties are also made to the knowledge of the Principal Stockholder.
(b) The Principal Stockholder represents and warrants to and agrees with
each Underwriter that:
(i) Penford has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation with full power and authority (corporate and other) to own, lease
and operate its properties and conduct its business as presently conducted;
Penford is duly qualified to do business as a foreign corporation and is in good
standing in each jurisdiction in which the ownership or leasing of its
properties or the conduct of its business requires such qualification, except
where the failure to be so qualified or be in good standing would not have a
material adverse effect on the condition (financial or otherwise), earnings,
operations or business of Penford and its subsidiaries considered as one
enterprise; and no proceeding has been instituted in any such jurisdiction,
revoking, limiting or curtailing, or seeking to revoke, limit or curtail, such
power and authority or qualification.
(ii) Penford has full legal right, power and authority to
enter into this Agreement and perform the transactions contemplated hereby. This
Agreement has been duly authorized, executed and delivered by Penford and is a
valid and binding agreement on the part of Penford, enforceable against Penford
in accordance with its terms, except as rights to indemnification hereunder may
be limited by applicable law and except as the enforcement
<PAGE> 13
-13-
hereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles; the performance by Penford of this
Agreement and the consummation by Penford of the transactions herein
contemplated will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (1) any bond, debenture, note or
other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which Penford is a party or by which its properties may be bound,
(2) the charter or bylaws of Penford or (3) any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over Penford or over
its properties, except for such breaches, violations or defaults that would not
reasonably be expected to have, individually or in the aggregate, a material
adverse effect on the condition (financial or otherwise), earnings, operations
or business of Penford and its subsidiaries considered as one enterprise. No
consent, approval, authorization or order of or qualification with any court,
government or governmental agency or body, domestic or foreign, having
jurisdiction over Penford or over its properties is required for the execution
and delivery by Penford of this Agreement and the consummation by Penford of the
transactions herein contemplated, except such as may be required under the Act,
under the Exchange Act (if applicable), under state or other securities or Blue
Sky laws, or under the rules and regulations of the NASD, all of which
requirements have been satisfied in all material respects.
(iii) Penford owns, and will own as of each Closing Date (as
defined herein), of record and beneficially, the number of shares of Common
Stock of the Company set forth in the Prospectus, free and clear of any liens,
encumbrances, claims or restrictions. Immediately prior to the first Closing
Date, such number of shares will equal 100% of the issued and outstanding shares
of Common Stock of the Company.
(iv) The transfer by Penford to the Company of certain assets,
as described in the Registration Statement and Prospectus, has been completed by
all required corporate and other action. Each of the Intercompany Agreements to
which Penford is a party has been duly and validly authorized, executed and
delivered by Penford and is the valid and binding agreement of Penford
enforceable against Penford in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as to the
enforcement thereof may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting creditors'
rights generally or by general equitable principles. The execution, delivery and
performance of each of the Intercompany Agreements to which Penford is a party
by Penford, the consummation of the transactions therein contemplated and
compliance by Penford with the terms thereof do not and will not result in a
violation of, or constitute a default under, (i) any bond, debenture, note or
other evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other agreement or
instrument to which Penford is a party or by which its properties may be bound,
(ii) the charter or bylaws of Penford or (iii) any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government or governmental
agency or body, domestic or foreign, having jurisdiction over Penford or over
its properties, except for such violations or defaults that would not reasonably
be expected to have, individually or in the
<PAGE> 14
-14-
aggregate, a material adverse effect on the condition (financial or otherwise),
earnings, operations or business of Penford and its subsidiaries considered as
one enterprise or of the Company and its subsidiaries considered as one
enterprise. The execution, delivery and performance of each of the Intercompany
Agreements to which Penford is a party by Penford, the consummation of the
transactions therein contemplated and compliance by Penford with the terms
thereof will not result in the creation or imposition of any lien, charge, claim
or encumbrance upon any property or asset of Penford which would be material to
Penford. No consent, approval, authorization or order of any court, governmental
agency or body or financial institution is required in connection with the
consummation by Penford of the transactions contemplated by the Intercompany
Agreements to which Penford is a party, except for such consents, approvals,
authorizations or orders that have been obtained.
3. Purchase, Sale and Delivery of Shares. On the basis of the
representations, warranties and agreements herein contained, but subject to the
terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and each Underwriter agrees, severally and not jointly, to
purchase from the Company, at a purchase price of $_____ per share, the
respective number of Firm Shares as hereinafter set forth. The obligation of
each Underwriter to the Company shall be to purchase from the Company that
number of Firm Shares which is set forth opposite the name of such Underwriter
in Schedule A hereto (subject to adjustment as provided in Section 10).
Delivery of definitive certificates for the Firm Shares to be purchased
by the Underwriters pursuant to this Section 3 shall be made against payment of
the purchase price therefor by the several Underwriters by wire transfer in
immediately available funds or certified or official bank check or checks
payable to the order of the Company , at the offices of Hale and Dorr LLP, 60
State Street, Boston, Massachusetts 02109 (or at such other place as may be
agreed upon among the Representatives and the Company), at 7:00 A.M., San
Francisco time (a) on the third (3rd) full business day following the first day
that Shares are traded, (b) if this Agreement is executed and delivered after
1:30 P.M., San Francisco time, the fourth (4th) full business day following the
day that this Agreement is executed and delivered or (c) at such other time and
date not later than seven (7) full business days following the first day that
Shares are traded as the Representatives and the Company may determine (or at
such time and date to which payment and delivery shall have been postponed
pursuant to Section 10 hereof), such time and date of payment and delivery being
herein called the "Closing Date" provided, however, that if the Company has not
made available to the Representatives copies of the Prospectus within the time
provided in Section 4(d) hereof, the Representatives may, in their sole
discretion, postpone the Closing Date until no later than two (2) full business
days following delivery of copies of the Prospectus to the Representatives. The
certificates for the Firm Shares to be so delivered will be made available to
you at such office or such other location including, without limitation, in New
York City, as you may reasonably request for checking at least one (1) full
business day prior to the Closing Date and will be in such names and
denominations as you may request, such request to be made at least two (2) full
business days prior to the Closing Date. If the Representatives so elect,
delivery of the Firm Shares may be made by credit through full fast transfer to
the accounts at The Depository Trust Company designated by the Representatives.
<PAGE> 15
-15-
It is understood that you, individually, and not as the Representatives
of the several Underwriters, may (but shall not be obligated to) make payment of
the purchase price on behalf of any Underwriter or Underwriters whose check or
checks shall not have been received by you prior to the Closing Date for the
Firm Shares to be purchased by such Underwriter or Underwriters. Any such
payment by you shall not relieve any such Underwriter or Underwriters of any of
its or their obligations hereunder.
After the Registration Statement becomes effective, the several
Underwriters intend to make an initial public offering (as such term is
described in Section 11 hereof) of the Firm Shares (and, if applicable, the
Option Shares) at an initial public offering price of $____ per share. After the
initial public offering, the several Underwriters may, in their discretion, vary
the initial public offering price.
The information set forth in the last paragraph on the front cover page
(insofar as such information relates to the Underwriters), the last two
paragraphs on the inside front cover page of the Prospectus concerning
stabilization and over-allotment by the Underwriters, and under the first,
second, sixth and seventh paragraphs under the caption "Underwriting" in any
Preliminary Prospectus and in the Final Prospectus constitutes the only
information furnished by the Underwriters to the Company for inclusion in any
Preliminary Prospectus, the Prospectus or the Registration Statement, and you,
on behalf of the respective Underwriters, represent and warrant to the Company
that the statements made therein do not include any untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
4. Further Agreements of the Company and Penford. (i) The Company agrees
with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement and any amendment thereof, if not effective at the time
and date that this Agreement is executed and delivered by the parties hereto, to
become effective as promptly as possible; the Company will use its best efforts
to cause any abbreviated registration statement pursuant to Rule 462(b) of the
Rules and Regulations as may be required subsequent to the date the Registration
Statement is declared effective to become effective as promptly as possible; the
Company will notify you, promptly after it shall receive notice thereof, of the
time when the Registration Statement, any subsequent amendment to the
Registration Statement or any abbreviated registration statement has become
effective or any supplement to the Prospectus has been filed; if the Company
omitted information from the Registration Statement at the time it was
originally declared effective in reliance upon Rule 430A(a) of the Rules and
Regulations, the Company will provide evidence satisfactory to you that the
Prospectus contains such information and has been filed, within the time period
prescribed, with the Commission pursuant to subparagraph (1) or (4) of Rule
424(b) of the Rules and Regulations or as part of a post-effective amendment to
such Registration Statement as originally declared effective which is declared
effective by the Commission; if the Company files a term sheet pursuant to Rule
434 of the Rules and Regulations, the Company will provide evidence satisfactory
to you that the Prospectus and term sheet meeting the requirements of Rule
434(b) or (c), as applicable, of the Rules and Regulations, have been filed,
<PAGE> 16
-16-
within the time period prescribed, with the Commission pursuant to subparagraph
(7) of Rule 424(b) of the Rules and Regulations, if for any reason the filing of
the final form of Prospectus is required under Rule 424(b)(3) of the Rules and
Regulations, it will provide evidence satisfactory to you that the Prospectus
contains such information and has been filed with the Commission within the time
period prescribed; it will notify you promptly of any request by the Commission
for the amending or supplementing of the Registration Statement or the
Prospectus or for additional information; promptly upon your request, it will
prepare and file with the Commission any amendments or supplements to the
Registration Statement or Prospectus which, in the opinion of counsel for the
several Underwriters ("Underwriters' Counsel"), may be necessary or advisable in
connection with the distribution of the Shares by the Underwriters; it will
promptly prepare and file with the Commission, and promptly notify you of the
filing of, any amendments or supplements to the Registration Statement or
Prospectus which may be necessary to correct any statements or omissions, if, at
any time when a prospectus relating to the Shares is required to be delivered
under the Act, any event shall have occurred as a result of which the Prospectus
or any other prospectus relating to the Shares as then in effect would include
any untrue statement of a material fact or omit to state a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading; in case any Underwriter is required
to deliver a prospectus nine (9) months or more after the effective date of the
Registration Statement in connection with the sale of the Shares, it will
prepare promptly upon request, but at the expense of such Underwriter, such
amendment or amendments to the Registration Statement and such prospectus or
prospectuses as may be necessary to permit compliance with the requirements of
Section 10(a)(3) of the Act; and it will file no amendment or supplement to the
Registration Statement or Prospectus which shall not previously have been
submitted to you a reasonable time prior to the proposed filing thereof or to
which you shall reasonably object in writing, subject, however, to compliance
with the Act and the Rules and Regulations, and the provisions of this
Agreement.
(b) The Company will advise you, promptly after it shall
receive notice or obtain knowledge, of the issuance of any stop order by the
Commission suspending the effectiveness of the Registration Statement or of the
initiation or threat of any proceeding for that purpose; and it will promptly
use its best efforts to prevent the issuance of any stop order or to obtain its
withdrawal at the earliest possible moment if such stop order should be issued.
(c) The Company will use its best efforts to qualify the
Shares for offering and sale under the securities laws of such jurisdictions as
you may designate and to continue such qualifications in effect for so long as
may be required for purposes of the distribution of the Shares, except that the
Company shall not be required in connection therewith or as a condition thereof
to qualify as a foreign corporation or to execute a general consent to service
of process in any jurisdiction in which it is not otherwise required to be so
qualified or to so execute a general consent to service of process. In each
jurisdiction in which the Shares shall have been qualified as above provided,
the Company will make and file such statements and reports in each year as are
or may be required by the laws of such jurisdiction.
(d) The Company will furnish to you, as soon as available,
and, in the case of the Prospectus and any term sheet or abbreviated term sheet
under Rule 434, in no event later
<PAGE> 17
-17-
than the first (1st) full business day following the first day that Shares are
traded, copies of the Registration Statement (three of which will be signed and
which will include all exhibits), each Preliminary Prospectus, the Prospectus
and any amendments or supplements to such documents, including any prospectus
prepared to permit compliance with Section 10(a)(3) of the Act, all in such
quantities as you may from time to time reasonably request. Notwithstanding the
foregoing, if BancAmerica Robertson Stephens, on behalf of the several
Underwriters, shall agree to the utilization of Rule 434 of the Rules and
Regulations, the Company shall provide to you copies of a Preliminary Prospectus
updated in all respects through the date specified by you in such quantities as
you may from time to time reasonably request. To the extent applicable, such
documents shall be identical to the electronically transmitted copies thereof
filed with the Commission pursuant to EDGAR, except to the extent permitted by
Regulation S-T.
(e) The Company will make generally available to its
securityholders as soon as practicable, but in any event not later than the
ninety (90) days following the end of the fiscal quarter first occurring after
the first anniversary of the effective date of the Registration Statement, an
earnings statement (which will be in reasonable detail but need not be audited)
complying with the provisions of Section 11(a) of the Act and covering a twelve
(12) month period beginning after the effective date of the Registration
Statement. To the extent applicable, such reports or documents shall be
identical to the electronically transmitted copies thereof filed with the
Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(f) During a period of five (5) years after the date hereof,
the Company will furnish to its stockholders as soon as practicable after the
end of each respective period, annual reports (including financial statements
audited by independent certified public accountants) and unaudited quarterly
reports of operations for each of the first three quarters of the fiscal year,
and will furnish to you and the other several Underwriters hereunder, upon
request (i) concurrently with furnishing such reports to its stockholders,
statements of operations of the Company for each of the first three (3) quarters
in the form furnished to the Company's stockholders, (ii) concurrently with
furnishing to its stockholders, a balance sheet of the Company as of the end of
such fiscal year, together with statements of operations, of stockholders'
equity, and of cash flows of the Company for such fiscal year, accompanied by a
copy of the certificate or report thereon of independent certified public
accountants, (iii) as soon as they are available, copies of all reports
(financial or other) mailed to stockholders, (iv) as soon as they are available,
copies of all reports and financial statements furnished to or filed with the
Commission, any securities exchange or the NASD, (v) every material press
release in respect of the Company or its affairs which was generally released to
stockholders or prepared by the Company or any of its subsidiaries, and (vi) any
additional information of a public nature concerning the Company or its
subsidiaries, or its business which you may reasonably request; provided, that
the Company will not be required to disclose information that has not been
previously disclosed in a press release or other information filed with the
Commission. During such five (5) year period, if the Company shall have active
subsidiaries, the foregoing financial statements shall be on a consolidated
basis to the extent that the accounts of the Company and its subsidiaries are
consolidated, and shall be accompanied by similar financial statements for any
significant subsidiary which is not so consolidated.
<PAGE> 18
-18-
(g) The Company will apply the net proceeds from the sale of
the Shares being sold by it in the manner set forth under the caption "Use of
Proceeds" in the Prospectus.
(h) The Company will maintain a transfer agent and, if
necessary under the jurisdiction of incorporation of the Company, a registrar
(which may be the same entity as the transfer agent) for its Common Stock.
(i) If the transactions contemplated hereby are not
consummated by reason of any failure, refusal or inability on the part of the
Company to perform any agreement on its part to be performed hereunder or to
fulfill any condition of the Underwriters' obligations hereunder, or if the
Company shall terminate this Agreement pursuant to Section 11(a) hereof, or if
the Underwriters shall terminate this Agreement pursuant to Section 11(b)(i),
the Company will reimburse the several Underwriters for all out-of-pocket
expenses (including fees and disbursements of Underwriters' Counsel) incurred by
the Underwriters in investigating or preparing to market or marketing the
Shares. The Company will in no event be liable to any of the several
Underwriters for damages on account of anticipated profits from the sale of the
Shares.
(j) If at any time during the ninety (90) day period after the
Registration Statement becomes effective, any rumor, publication or event
relating to or affecting the Company shall occur as a result of which in your
opinion the market price of the Common Stock has been or is likely to be
materially affected (regardless of whether such rumor, publication or event
necessitates a supplement to or amendment of the Prospectus), the Company will,
after written notice from you advising the Company to the effect set forth
above, forthwith prepare, consult with you concerning the substance of and
disseminate a press release or other public statement, reasonably satisfactory
to you, responding to or commenting on such rumor, publication or event.
(k) During the Lock-Up Period, the Company will not, without
the prior written consent of BancAmerica Robertson Stephens, effect the
Disposition of, directly or indirectly, any securities other than (i) the sale
of the Firm Shares and the Option Shares hereunder, (ii) the Company's issuance
of options or Common Stock under the Company's 1997 Equity Incentive Plan and
1997 Employee Stock Purchase Plan (the "Option Plans") or (iii) the issuance of
Common Stock upon the exercise of stock options issued under the Option Plans by
directors, employees, or consultants of the Company, provided, however, that
during the Lock-Up Period, the Company will obtain an executed Lock-Up Agreement
from each person who wishes to exercise an option to purchase Common Stock prior
to the issuance of such Common Stock.
(l) During the ninety (90) day period after the Registration
Statement becomes effective, the Company shall not file or cause to become
effective any registration statement relating to any securities of the Company,
including a registration statement registering shares under the Option Plans or
other employee benefit plan, without the prior written consent of BancAmerica
Robertson Stephens.
<PAGE> 19
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(m) The Company agrees that it will not consent to any direct
or indirect waiver, amendment, modification or change to any of the terms,
conditions or provisions of Article IV of that certain Separation Agreement
dated __________________, 1997, the form of which has been filed as Exhibit
10.13 of the Registration Statement, without the prior written consent of
BancAmerica Robertson Stephens.
(ii) Penford agrees with the several Underwriters that:
(a) Penford will not effect a distribution to its shareholders
of Common Stock of the Company (the "Spin-off"), as contemplated in the
Intercompany Agreements, before April 1, 1998. Subject to the foregoing, Penford
also agrees to send the Representatives a written notice at least five (5)
business days before the Board of Directors of Penford announces the record date
for the Spin-off, which notice shall set forth the record date and pay date
relevant to completion of such Spin-off. In the event that the record date is
changed for any reason Penford agrees to send the Representatives a written
notice at least five (5) business days before any new record date is announced
by its Board with respect to the Spin-off.
5. Expenses.
(a) Each of the Company and Penford agrees with each
Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with the preparation, printing and filing of the
Registration Statement (including financial statements, schedules and
exhibits), Preliminary Prospectuses and the Prospectus and any
amendments or supplements thereto; the printing of this Agreement, the
Agreement Among Underwriters, the Selected Dealer Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and Power of Attorney, and any instruments
related to any of the foregoing; the issuance and delivery of the
Shares hereunder to the several Underwriters, including transfer taxes,
if any, the cost of all certificates representing the Shares and
transfer agents' and registrars' fees; the fees and disbursements of
counsel for the Company; all fees and other charges of the Company's
independent certified public accountants; the cost of furnishing to the
several Underwriters copies of the Registration Statement (including
appropriate exhibits), Preliminary Prospectus and the Prospectus, and
any amendments or supplements to any of the foregoing; NASD filing fees
and the cost of qualifying the Shares under the laws of such
jurisdictions as you may designate (including filing fees and fees and
disbursements of Underwriters' Counsel in connection with such NASD
filings and Blue Sky qualifications); and all other expenses directly
incurred by the Company in connection with the performance of their
obligations hereunder.
(ii) In addition to their other obligations under Section 8(a)
hereof, the Company and, subject to Section 8(f) hereof, Penford each
agrees that, as an interim measure during the pendency of any claim,
action, investigation, inquiry or other
<PAGE> 20
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proceeding described in Section 8(a) hereof, it will reimburse the
Underwriters on a monthly basis for all reasonable legal or other
expenses incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to the
propriety and enforceability of their obligation to reimburse the
Underwriters for such expenses and the possibility that such payments
might later be held to have been improper by a court of competent
jurisdiction. To the extent that any such interim reimbursement payment
is so held to have been improper, the Underwriters shall promptly return
such payment to the Company together with interest, compounded daily,
determined on the basis of the prime rate (or other commercial lending
rate for borrowers of the highest credit standing) listed from time to
time in The Wall Street Journal which represents the base rate on
corporate loans posted by a substantial majority of the nation's thirty
(30) largest banks (the "Prime Rate"). Any such interim reimbursement
payments which are not made to the Underwriters within thirty (30) days
of a request for reimbursement shall bear interest at the Prime Rate from
the date of such request.
(b) In addition to their other obligations under Section 8(b)
hereof, the Underwriters severally and not jointly agree that, as an interim
measure during the pendency of any claim, action, investigation, inquiry or
other proceeding described in Section 8(b) hereof, they will reimburse the
Company and Penford (to the extent indemnification is provided for by Penford in
Section 8(a)) on a monthly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the
Underwriters' obligation to reimburse the Company and Penford for such expenses
and the possibility that such payments might later be held to have been improper
by a court of competent jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been improper, the Company and Penford
shall promptly return such payment to the Underwriters together with interest,
compounded daily, determined on the basis of the Prime Rate. Any such interim
reimbursement payments which are not made to the Company and Penford within
thirty (30) days of a request for reimbursement shall bear interest at the Prime
Rate from the date of such request.
(c) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set forth in Sections
5(a)(ii) and 5(b) hereof, including the amounts of any requested reimbursement
payments, the method of determining such amounts and the basis on which such
amounts shall be apportioned among the reimbursing parties, shall be settled by
arbitration conducted under the provisions of the Constitution and Rules of the
Board of Governors of the New York Stock Exchange, Inc. or pursuant to the Code
of Arbitration Procedure of the NASD. Any such arbitration must be commenced by
service of a written demand for arbitration or a written notice of intention to
arbitrate, therein electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an arbitration tribunal
in such demand or notice, then the party responding to said demand or notice is
authorized to do so. Any such arbitration will be limited to the operation of
the interim reimbursement provisions contained in Sections 5(a)(ii) and 5(b)
hereof and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for expenses which is created
<PAGE> 21
-21-
by the provisions of Sections 8(a) and 8(b) hereof or the obligation to
contribute to expenses which is created by the provisions of Section 8(d)
hereof.
6. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Shares as provided herein shall
be subject to the accuracy, as of the date hereof and the Closing Date and any
later date on which Option Shares are to be purchased, as the case may be, of
the representations and warranties of the Company and the Principal Stockholder
herein, to the performance by the Company of its obligations hereunder and to
the following additional conditions:
(a) The Registration Statement shall have become effective not
later than 2:00 P.M., San Francisco time, on the date of this Agreement or such
later date as shall be consented to in writing by you; and no stop order
suspending the effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been initiated or, to the knowledge of the Company
or any Underwriter, threatened by the Commission, and any request of the
Commission for additional information (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been complied with to the
reasonable satisfaction of Underwriters' Counsel.
(b) All corporate proceedings and other legal matters in
connection with this Agreement, the form of Registration Statement and the
Prospectus, and the registration, authorization, issue, sale and delivery of the
Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and
such counsel shall have been furnished with such papers and information as they
may reasonably have requested to enable them to pass upon the matters referred
to in this Section.
(c) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date, or any later date on which Option Shares are to
be purchased, as the case may be, there shall not have been any change in the
condition (financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise from that set forth in
the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse and that makes it, in your sole judgment, impracticable or
inadvisable to proceed with the initial public offering of the Shares as
contemplated by the Prospectus; and
(d) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the
following opinion of the in-house counsel for the Company and Penford, Edmund O.
Belsheim, Jr., dated the Closing Date or such later date on which Option Shares
are purchased, addressed to the Underwriters and with reproduced copies or
signed counterparts thereof for each of the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation. Penford has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation;
<PAGE> 22
-22-
(ii) The Company has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus. Penford has the corporate
power and authority to own, lease and operate its properties and to
conduct its business as presently conducted;
(iii) The Company is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction, if
any, in which the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where the failure
to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries considered
as one enterprise. To such counsel's knowledge, the Company does not
own or control, directly or indirectly, any corporation, association or
other entity, other than Mendell UK Ltd., Edward Mendell Finland OY and
Edward Mendell GmbH;
(iv) The Company has the corporate power and
authority to enter into this Agreement and to issue, sell and deliver
to the Underwriters the Shares to be issued and sold by it hereunder;
(v) Penford has the corporate power and authority to
enter into this Agreement;
(vi) The issued and outstanding shares of capital
stock of the Company have been duly and validly issued and are fully
paid and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right, except as described in the Registration Statement and
Prospectus;
(vii) To such counsel's knowledge, the Company owns
all of the outstanding capital stock of its Significant Subsidiaries
(as such term is defined in such opinion) free and clear of any pledge,
lien, security interest, encumbrance, claim or equitable interest;
(viii) The Firm Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, will be
duly and validly issued and fully paid and nonassessable, and, to such
counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right;
(ix) This Agreement has been duly authorized by all
necessary corporate action on the part of Penford and the Company, and
has been duly executed and delivered by Penford and the Company;
<PAGE> 23
-23-
(x) Each of the Intercompany Agreements has been duly
authorized by all necessary corporate action on the part of Penford and
the Company, as the case may be, and has been duly executed and
delivered by Penford and the Company, as the case may be, and is a
valid and binding agreement of Penford and the Company, as the case may
be, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as to the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(x) The form of certificate evidencing the Common
Stock filed as an exhibit to the Registration Statement complies with
Washington law;
(xi) The performance by the Company of this Agreement
and the Intercompany Agreements and the consummation of the
transactions herein and therein contemplated will not result in any
violation of the Company's charter or bylaws;
(xii) The performance by Penford of this Agreement
and the consummation by Penford of the transactions herein contemplated
(other than performance of Penford's indemnification obligations
hereunder, concerning which no opinion need be expressed) will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, (1) any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument known to such counsel to which Penford is a
party or by which its properties are bound, (2) the charter or bylaws
of Penford or (3) any applicable statute, rule or regulation known to
such counsel (other than state or federal securities laws and
regulations) or, to such counsel's knowledge, any order, writ,
injunction, judgment or decree of any court, government or governmental
agency or body having jurisdiction over Penford or over its properties
or operations, except for such breaches, violations or defaults that
would not reasonably be expected to have, individually or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), earnings, operations or business of Penford and its
subsidiaries considered as one enterprise or the Company and its
subsidiaries considered as one enterprise;
(xiii) The performance by Penford of the Intercompany
Agreements and the consummation by Penford of the transactions therein
contemplated (other than performance of Penford's indemnification
obligations thereunder, concerning which no opinion need be expressed)
will not result in a breach or violation of any of the terms and
provisions of, or constitute a default under, (1) any bond, debenture,
note or other evidence of indebtedness, or under any lease, contract,
indenture, mortgage, deed of trust, loan agreement, joint venture or
other agreement or instrument known to such counsel to which Penford is
a party or by which its properties are bound, (2) the charter or bylaws
of Penford or (3) any applicable statute, rule or regulation known to
such counsel (other than state or federal securities laws or tax laws
and regulations thereunder) or, to such counsel's knowledge, any order,
writ, injunction, judgment or decree of any court,
<PAGE> 24
-24-
government or governmental agency or body having jurisdiction over
Penford or over its properties or operations, except for such breaches,
violations or defaults that would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of
Penford and its subsidiaries considered as one enterprise; and
(xiv) To such counsel's knowledge, the Company is not
presently (a) in material violation of its charter or bylaws or (b) in
material breach of any order, writ, injunction, judgment or decree of
any court or governmental agency or body having jurisdiction over the
Company or over any of its properties.
Counsel rendering the foregoing opinion may rely as
to questions of fact upon representations or certificates of officers of the
Company and of government officials, in which case his opinion is to state that
he is so relying and that he has no knowledge of any material misstatement or
inaccuracy in any such representation or certificate. Copies of any
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(e) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the
following opinion of Hale and Dorr, LLP, counsel for the Company, dated the
Closing Date or such later date on which Option Shares are purchased, addressed
to the Underwriters and with reproduced copies or signed counterparts thereof
for each of the Underwriters, to the effect that:
(i) The authorized, issued and outstanding capital
stock of the Company is in all material respects as set forth in the
Prospectus under the caption "Capitalization" as of the dates stated
therein, and, to such counsel's knowledge, the issued and outstanding
shares of capital stock have not been issued in violation of or subject
to any preemptive right, co-sale right, registration right, right of
first refusal or other similar right, except as described in the
Registration Statement and Prospectus;
(ii) The Firm Shares or the Option Shares, as the
case may be, to be issued by the Company pursuant to the terms of this
Agreement have been duly authorized and, upon issuance and delivery
against payment therefor in accordance with the terms hereof, to such
counsel's knowledge, will not have been issued in violation of or
subject to any preemptive right, co-sale right, registration right,
right of first refusal or other similar right;
(iii) This Agreement has been duly authorized by all
necessary corporate action on the part of the Company, and has been
duly executed and delivered by the Company;
(iv) Each of the Intercompany Agreements has been
duly authorized by all necessary corporate action on the part of the
Company, and has been duly executed and delivered by the Company and is
a valid and binding agreement of the Company
<PAGE> 25
-25-
enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except
as to the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or affecting
creditors' rights generally or by general equitable principles;
(v) Such counsel has been orally advised by a member
of the staff of the Commission that the Registration Statement has
become effective under the Act and, to such counsel's knowledge, no
stop order suspending the effectiveness of the Registration Statement
has been issued and no proceedings for that purpose have been
instituted or are pending or threatened under the Act;
(vi) The Registration Statement and the Prospectus,
and each amendment or supplement thereto (other than the financial
statements (including supporting schedules) and financial and
statistical information derived therefrom as to which such counsel need
express no opinion), as of the effective date of the Registration
Statement, complied as to form in all material respects with the
requirements of the Act and the applicable Rules and Regulations;
(vii) The statements in the Prospectus under the
caption "Description of Capital Stock," to the extent that they
constitute summaries of matters of law or legal conclusions, have been
reviewed by such counsel and are in all material respects accurate and
complete statements or summaries of the matters set forth therein;
(viii) The description in the Registration Statement
and the Prospectus of the charter and bylaws of the Company and of
statutes are in all material respects accurate and fairly present in
all material respects the information required to be presented by the
Act and the applicable Rules and Regulations;
(ix) To such counsel's knowledge, there are no
agreements, contracts, leases or documents to which the Company or any
Significant Subsidiary is a party of a character required to be
described or referred to in the Registration Statement or Prospectus or
to be filed as an exhibit to the Registration Statement which are not
described or referred to therein or filed as required;
(x) The performance by the Company of this Agreement
and the consummation of the transactions herein contemplated (other
than performance of the Company's indemnification obligations
hereunder, concerning which no opinion need be expressed) will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, (1) any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument filed as an exhibit to the Registration
Statement to which either the Company or any Significant Subsidiary is
a party or by which the Company or any Significant Subsidiary or their
respective properties are bound or (2) any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any
order, writ or decree of any court,
<PAGE> 26
-26-
government or governmental agency or body having jurisdiction over the
Company or any Significant Subsidiary or over any of their respective
properties or operations, except for such breaches, violations or
defaults that would not reasonably be expected to have, individually or
in the aggregate, a material adverse effect on the condition (financial
or otherwise), earnings, operations or business of the Company and its
subsidiaries considered as one enterprise;
(xi) The performance by the Company of the
Intercompany Agreements and the consummation of the transactions
therein contemplated (other than performance of the Company's
indemnification obligations thereunder, concerning which no opinion
need be expressed) will not, to such counsel's knowledge, result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, (1) any bond, debenture, note or other
evidence of indebtedness, or under any lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument filed as an exhibit to the Registration
Statement to which either the Company or any Significant Subsidiary is
a party or by which the Company or any Significant Subsidiary or their
respective properties are bound or (2) any applicable statute, rule or
regulation known to such counsel or, to such counsel's knowledge, any
order, writ, injunction, judgment or decree of any court, government or
governmental agency or body having jurisdiction over the Company or any
Significant Subsidiary or over any of their respective properties or
operations, except for such breaches, violations or defaults that would
not reasonably be expected to have, individually or in the aggregate, a
material adverse effect on the condition (financial or otherwise),
earnings, operations or business of the Company and its subsidiaries
considered as one enterprise;
(xii) No consent, approval, authorization or order of
or qualification with any court, government or governmental agency or
body having jurisdiction over the Company or any of its subsidiaries or
over any of their respective properties or operations is necessary in
connection with the consummation by the Company of the transactions
herein contemplated, except such as have been obtained under the Act or
as may be required by the NASD or such as may be required under state
or other securities or Blue Sky laws in connection with the purchase
and the distribution of the Shares by the Underwriters as to which such
counsel need not express an opinion;
(xiii) To such counsel's knowledge, there are no
legal or governmental proceedings pending or threatened against the
Company or any of its subsidiaries of a character required to be
disclosed in the Registration Statement or the Prospectus by the Act or
the Rules and Regulations, other than those described therein;
(xiv) To such counsel's knowledge, neither the
Company nor any of its subsidiaries is presently in material breach of
any order, writ, injunction, judgment or decree of any court or
governmental agency or body having jurisdiction over the Company or any
of its subsidiaries or over any of its properties or operations; and
(xv) To such counsel's knowledge, except as set forth
in the
<PAGE> 27
-27-
Registration Statement and Prospectus, no holders of Common Stock or
other securities of the Company have registration rights with respect
to securities of the Company.
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, the Representatives, Underwriters' Counsel and the independent
certified public accountants of the Company, at which such conferences the
contents of the Registration Statement and the Prospectus and related matters
were discussed, and although such counsel is not passing upon, or assuming any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus, nothing has come to
the attention of such counsel which leads them to believe that, (i) the
Registration Statement, at the time the Registration Statement became effective
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or (ii) at the Closing Date or any later date on which the
Option Shares are to be purchased, as the case may be, the Prospectus and any
amendment or supplement thereto contained any untrue statement of a material
fact or omitted to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood in each case that such counsel need
not express a view as to the financial statements, including supporting
schedules and other financial and statistical information derived therefrom).
Counsel rendering the foregoing opinion may assume as to
questions of law not involving the laws of the United States or the Commonwealth
of Massachusetts that such laws are identical to the laws of the Commonwealth of
Massachusetts, in which case their opinion is to state that they are making such
assumption. Further, counsel rendering the foregoing opinion may rely upon
representations or certificates of officers of the Company and of government
officials, in which case their opinion is to state that they are so relying and
that they have no knowledge of any material misstatement or inaccuracy in any
such representation or certificate. Copies of any representation or certificate
so relied upon shall be delivered to you, as Representatives of the
Underwriters, and to Underwriters' Counsel.
(f) You shall have received on the Closing Date and on any later
date on which Option Shares are purchased, as the case may be, the following
opinion of Hannes & Snellman, counsel for Edward Mendell Finland OY ("Mendell
Finland"), dated the Closing Date or such later date on which Option Shares are
purchased, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) Mendell Finland has been duly incorporated and is
validly existing as a corporation under the laws of the jurisdiction of
its incorporation.
(ii) Mendell Finland has the corporate power and
authority to own, lease and operate its properties and to conduct its
business as described in the Prospectus.
(iii) Mendell Finland is duly qualified to do
business as a foreign corporation and is in good standing in each
jurisdiction, if any, in which the ownership or
<PAGE> 28
-28-
leasing of its properties or the conduct of its business requires such
qualification, except where the failure to be so qualified or be in
good standing would not have a material adverse effect on the condition
(financial or otherwise), earnings, operations or business of the
Company and its subsidiaries considered as one enterprise. To such
counsel's knowledge, Mendell Finland does not own or control, directly
or indirectly, any corporation, association or other entity.
(iv) The issued and outstanding shares of capital
stock of Mendell Finland have been duly and validly issued and are
fully paid and nonassessable, and, to such counsel's knowledge, have
not been issued in violation of or subject to any preemptive right,
co-sale right, registration right, right of first refusal or other
similar right.
(v) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened against Mendell
Finland.
(vi) To such counsel's knowledge, Mendell Finland is
not presently (a) in violation of its charter or bylaws, (b) breach of
any bond, debenture, note or other evidence of indebtedness, lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which
either Mendell Finland is a party or by which Mendell Finland or its
properties are bound or (c) in breach of any order, writ, injunction,
judgment or decree of any court or governmental agency or body having
jurisdiction over Mendell Finland or over any of its properties, except
for such violations or breaches that would not reasonably be expected
to have, individually or in the aggregate, a material adverse effect on
the condition (financial or otherwise), earnings, operations or
business of the Company and its subsidiaries considered as one
enterprise.
Counsel rendering the foregoing opinion may rely as to
questions of fact upon representations or certificates of officers of Mendell
Finland and of government officials, in which case their opinion is to state
that they are so relying and that they have no knowledge of any material
misstatement or inaccuracy in any such representation or certificate. Copies of
any representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(g) You shall have received on the Closing Date and on any
later date on which Option Shares are purchased, as the case may be, the
following opinion of , counsel for Mendell U.K. Ltd. ("Mendell
UK"), dated the Closing Date or such later date on which Option Shares are
purchased, addressed to the Underwriters and with reproduced copies or signed
counterparts thereof for each of the Underwriters, to the effect that:
(i) Mendell UK has been duly incorporated and is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation.
<PAGE> 29
-29-
(ii) Mendell UK has the corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus.
(iii) Mendell UK is duly qualified to do business as
a foreign corporation and is in good standing in each jurisdiction, if
any, in which the ownership or leasing of its properties or the conduct
of its business requires such qualification, except where the failure
to be so qualified or be in good standing would not have a material
adverse effect on the condition (financial or otherwise), earnings,
operations or business of the Company and its subsidiaries considered
as one enterprise. To such counsel's knowledge, Mendell UK does not own
or control, directly or indirectly, any corporation, association or
other entity.
(iv) The issued and outstanding shares of capital
stock of Mendell UK have been duly and validly issued and are fully
paid and nonassessable, and, to such counsel's knowledge, have not been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right.
(v) To such counsel's knowledge, there are no legal
or governmental proceedings pending or threatened against Mendell UK.
(vi) To such counsel's knowledge, Mendell UK is not
presently (a) in violation of its charter or bylaws, (b) breach of any
bond, debenture, note or other evidence of indebtedness, lease,
contract, indenture, mortgage, deed of trust, loan agreement, joint
venture or other agreement or instrument known to such counsel to which
either Mendell UK is a party or by which Mendell UK or its properties
are bound or (c)] in breach of any order, writ, injunction, judgment or
decree of any court or governmental agency or body having jurisdiction
over Mendell UK or over any of its properties, except for such
violations or breaches that would not reasonably be expected to have,
individually or in the aggregate, a material adverse effect on the
condition (financial or otherwise), earnings, operations or business of
the Company and its subsidiaries considered as one enterprise.
Counsel rendering the foregoing opinion may rely as to
questions of fact upon representations or certificates of officers of Mendell UK
and of government officials, in which case their opinion is to state that they
are so relying and that they have no knowledge of any material misstatement or
inaccuracy in any such representation or certificate. Copies of any
representation or certificate so relied upon shall be delivered to you, as
Representatives of the Underwriters, and to Underwriters' Counsel.
(h) You shall have received on the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, an opinion of Testa, Hurwitz & Thibeault, LLP, in form and substance
satisfactory to you, with respect to the sufficiency of all such corporate
proceedings and other legal matters relating to this Agreement and the
transactions contemplated hereby as you may reasonably require, and the Company
shall have furnished to such counsel such documents as they may have requested
for the purpose of
<PAGE> 30
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enabling them to pass upon such matters. The Underwriters' Counsel rendering the
foregoing opinion may rely as to questions of law not involving the laws of the
United States or the Commonwealth of Massachusetts upon the opinion of the
Company's in-house counsel referred to in Section 6(d) above.
(i) You shall have received on the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, a letter from Ernst & Young LLP addressed to the Company and the
Underwriters, dated the Closing Date or such later date on which Option Shares
are to be purchased, as the case may be, confirming that they are independent
certified public accountants with respect to the Company within the meaning of
the Act and the applicable published Rules and Regulations and based upon the
procedures described in such letter delivered to you concurrently with the
execution of this Agreement (herein called the "Original Letter"), but carried
out to a date not more than five (5) business days prior to the Closing Date or
such later date on which Option Shares are to be purchased, as the case may be,
(i) confirming, to the extent true, that the statements and conclusions set
forth in the Original Letter are accurate as of the Closing Date or such later
date on which Option Shares are to be purchased, as the case may be, and (ii)
setting forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in the
facts described in the Original Letter since the date of such letter, or to
reflect the availability of more recent financial statements, data or
information. The letter shall not disclose any change in the condition
(financial or otherwise), earnings, operations or business of the Company from
that set forth in the Registration Statement or Prospectus, which, in your sole
judgment, is material and adverse and that makes it, in your sole judgment,
impracticable or inadvisable to proceed with the initial public offering of the
Shares as contemplated by the Prospectus. The Original Letter from Ernst & Young
LLP shall be addressed to or for the use of the Underwriters in form and
substance satisfactory to the Underwriters and shall (i) represent, to the
extent true, that they are independent certified public accountants with respect
to the Company within the meaning of the Act and the applicable published Rules
and Regulations, (ii) set forth their opinion with respect to their examination
of the consolidated balance sheet of the Company as of December 31, 1995 and
1996, and related consolidated statements of operations, shareholders' equity
(deficit), and cash flows for the three years ended December 31, 1996 and the
consolidated balance sheet of the Company as of September 30, 1997 and the
related consolidated statements of operations, shareholders' equity (deficit)
and cash flows for the nine month period ended September 30, 1997, (iii) state
that Ernst & Young LLP has performed the procedure set out in Statement on
Auditing Standards No. 71 ("SAS 71") for a review of interim financial
information on the statements of operations and cash flow for the nine-month
period ended September 30, 1996 (the "Interim Financial Statements"), (iv) state
that in the course of such review, nothing came to their attention that leads
them to believe that any material modifications need to be made to the Interim
Financial Statements in order for them to be in compliance with generally
accepted accounting principles consistently applied across the periods
presented, and (v) address other matters agreed upon by Ernst & Young LLP and
you. In addition, you shall have received from Ernst & Young LLP a letter
addressed to the Company and made available to you for the use of the
Underwriters stating that their review of the Company's system of internal
accounting controls, to the extent they deemed necessary in establishing the
scope of their examination of the Company's consolidated financial statements as
of December 31, 1996, did not disclose any weaknesses in internal controls
<PAGE> 31
-31-
that they considered to be material weaknesses.
(j) You shall have received on the Closing Date and
on any later date on which Option Shares are to be purchased, as the case may
be, a certificate of the Company, dated the Closing Date or such later date on
which Option Shares are to be purchased, as the case may be, signed by the Chief
Executive Officer or Chief Operating Officer and Chief Financial Officer of the
Company, to the effect that, and you shall be reasonably satisfied that:
(i) The representations and warranties of the Company
in this Agreement are true and correct, as if made on and as of the Closing Date
or any later date on which Option Shares are to be purchased, as the case may
be, and the Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be;
(ii) No stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings for that purpose
have been instituted or are pending or, to such officer's knowledge, threatened
under the Act;
(iii) When the Registration Statement became
effective and at all times subsequent thereto up to the delivery of such
certificate, the Registration Statement and the Prospectus, and any amendments
or supplements thereto, contained all material information required to be
included therein by the Act and the Rules and Regulations and in all material
respects conformed to the requirements of the Act and the Rules and Regulations,
the Registration Statement, and any amendment or supplement thereto, did not and
does not include any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading, the Prospectus, and any amendment or supplement thereto,
did not and does not include any untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and, since the
effective date of the Registration Statement, there has occurred no event
required to be set forth in an amended or supplemented Prospectus which has not
been so set forth; and
(iv) Subsequent to the respective dates as of which
information is given in the Registration Statement and Prospectus, there has not
been (a) any material adverse change in the condition (financial or otherwise),
earnings, operations or business of the Company, (b) any transaction that is
material to the Company, except transactions entered into in the ordinary course
of business, (c) any obligation, direct or contingent, that is material to the
Company, incurred by the Company, except obligations incurred in the ordinary
course of business, (d) any change in the capital stock or outstanding
indebtedness of the Company that is material to the Company, (e) any dividend or
distribution of any kind declared, paid or made on the capital stock of the
Company, or (f) any loss or damage (whether or not insured) to the property of
the Company which has been sustained or will have been sustained which has a
material adverse effect on the
<PAGE> 32
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condition (financial or otherwise), earnings, operations or business of
the Company.
(k) You shall have received on the Closing Date and on any
later date on which Option Shares are to be purchased, as the case may be, a
certificate of Penford dated the Closing Date or such later date on which Option
Shares are to be purchased, as the case may be, signed by the Chief Executive
Officer and Chief Financial Officer of Penford, to the effect that, and you
shall be reasonably satisfied that:
(i) The representations and warranties of Penford in
this Agreement are true and correct, as if made on and as of the
Closing Date or any later date on which Option Shares are to be
purchased, as the case may be, and Penford has complied with all the
agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to the Closing Date or any later date on which
Option Shares are to be purchased, as the case may be;
(l) You shall have received on the Closing Date, and on any
later date on which Option Shares are to be purchased, the opinion of Steinberg,
Raskin & Davidson, P.C., patent counsel to the Company, dated the Closing Date
and such later date on which Option Shares are to be purchased, addressed to the
Underwriters and with reproduced copies or signed counterparts thereof for each
of the Underwriters, to the effect that they serve as patent counsel to the
Company with respect to the Company's Intellectual Property, including those
patents and patent applications referred to or described in the Prospectus, and
that:
(1) To the best of such counsel's knowledge, there are no
facts which would preclude the Company from having clear title to the
Company's U.S. patents and U.S. patent applications referred to or
described in the Registration Statement and the Prospectus and
identified in such opinion. To the best of such counsel's knowledge,
the Company has complied with required duty of candor and good faith in
dealing with the Patent and Trademark Office (the "Office"), including
the duty to disclose to the Office all information known to be material
to the patentability for each issued United States patent and will
continue to comply with the required duty of candor and good faith with
respect to currently pending U.S. patent applications. Such counsel has
no knowledge that the Company lacks any rights or licenses to use all
U.S. patents and know-how necessary to conduct the business now
conducted in the U.S. or proposed to be conducted by the Company in the
U.S. as described in the Prospectus, except as described in the
Registration Statement and the Prospectus. Such counsel has no
knowledge of any U.S. patent applications which, if issued, would limit
or prohibit the business now conducted or proposed to be conducted by
the Company as described in the Prospectus. Such counsel has no
knowledge of any facts which would form a basis for a finding that any
of the U.S. patents or U.S. patent applications owned or licensed by
the Company is unenforceable or invalid. Such counsel is not aware of
any U.S. patents of others which are or would be infringed by specific
products or processes referred to in the Prospectus as currently
marketed and/or sold in the U.S. or which are proposed to be marketed
and/or sold in the U.S. in such manner as to materially and adversely
affect the Company. Such counsel knows of no pending or threatened
action, suit, proceeding or claim by
<PAGE> 33
-33-
others that the Company is infringing any U.S. patent which could
result in any material adverse effect on the Company, except as
described in the Registration Statement and the Prospectus; and
(2) to the best of such counsel's knowledge, there are no U.S.
legal or governmental proceedings pending relating to U.S. patent
rights, other than U.S. Patent and Trademark Office review of pending
applications for patents, including the appeal proceedings, except as
described in the Registration Statement and the Prospectus, and, to the
best of such counsel's knowledge, no additional U.S. proceedings are
threatened or contemplated by U.S. governmental authorities or others.
In addition, such counsel shall state that although they have
not verified the accuracy or completeness of the statements contained in the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, or at
the Closing Date or at any later date on which Option Shares are purchased, as
the case may be, the Prospectus contained any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(m) You shall have received on the Closing Date, and on any
later date on which Option Shares are to be purchased, the opinion of Olsson,
Frank and Weeda P.C., special regulatory counsel to the Company, dated the
Closing Date and such later date on which Option Shares are to be purchased,
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that they serve as special
regulatory counsel to the Company, and that:
(i) The statements in the Registration Statement and
Prospectus under the captions "Risk Factors -- Government Regulation;
No Assurance of Regulatory Approval" and "Business -- Government
Regulation," insofar as such statements purport to summarize applicable
provisions of United States regulatory law, have been reviewed by such
counsel and are accurate and complete statements or summaries of the
matters set forth therein; and
(ii) There are no FDA enforcement actions pending against the
Company or any of its subsidiaries and, to such counsel's knowledge, no
such actions are threatened.
In addition, such counsel shall state that although they have
not verified the accuracy or completeness of the statements contained in the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, or at
the Closing Date or at any later date on which Option Shares are purchased, as
the case may be, the Prospectus contained any untrue statement of a material
fact or omitted to state a material fact necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
(n) You shall have received on the Closing Date, and on any
later date on
<PAGE> 34
-34-
which Option Shares are to be purchased, the opinion of Squire,
Sanders & Dempsey, special foreign regulatory counsel to the Company, dated the
Closing Date and such later date on which Option Shares are to be purchased,
addressed to the Underwriters and with reproduced copies or signed counterparts
thereof for each of the Underwriters, to the effect that they serve as special
foreign regulatory counsel to the Company, and that:
(i) The statements in the Registration Statement and
Prospectus under the captions "Risk Factors -- Government Regulation;
No Assurance of Regulatory Approval" and "Business -- Government
Regulation -- Foreign Regulatory Approval," insofar as such statements
purport to summarize applicable provisions of non-United States
regulatory law, have been reviewed by such counsel and are accurate and
complete statements or summaries of the matters set forth therein.
(o) The Company shall have obtained and delivered to you an
executed Lock-Up Agreement from Penford and each officer and director of the
Company.
(p) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request, including
certificates of officers of the Company as to the accuracy of the
representations and warranties of the Company herein, as to the performance by
the Company of its obligations hereunder and as to the other conditions
concurrent and precedent to the obligations of the Underwriters hereunder.
All such opinions, certificates, letters and documents will be
in compliance with the provisions hereof only if they are reasonably
satisfactory to Underwriters' Counsel. The Company will furnish you with such
number of conformed copies of such opinions, certificates, letters and documents
as you shall reasonably request.
7. Option Shares.
(a) On the basis of the representations, warranties
and agreements herein contained, but subject to the terms and conditions herein
set forth, the Company hereby grants to the several Underwriters, for the
purpose of covering over-allotments in connection with the distribution and sale
of the Firm Shares only, a nontransferable option to purchase up to an aggregate
of 375,000 Option Shares at the purchase price per share for the Firm Shares set
forth in Section 3 hereof. Such option may be exercised by the Representatives
on behalf of the several Underwriters on one (1) or more occasions in whole or
in part during the period of thirty (30) days after the date on which the Firm
Shares are initially offered to the public, by giving written notice to the
Company. The number of Option Shares to be purchased by each Underwriter upon
the exercise of such option shall be the same proportion of the total number of
Option Shares to be purchased by the several Underwriters pursuant to the
exercise of such option as the number of Firm Shares purchased by such
Underwriter (set forth in Schedule A hereto) bears to the total number of Firm
Shares purchased by the several Underwriters (set forth in Schedule A hereto),
adjusted by the Representatives in such manner as to avoid fractional shares.
<PAGE> 35
-35-
Delivery of definitive certificates for the Option Shares to
be purchased by the several Underwriters pursuant to the exercise of the option
granted by this Section 7 shall be made against payment of the purchase price
therefor by the several Underwriters by certified or official bank check or
checks drawn in next-day funds, payable to the order of the Company (and the
Company agrees not to deposit any such check in the bank on which it is drawn,
and not to take any other action with the purpose or effect of receiving
immediately available funds, until the business day following the date of its
delivery to the Company). In the event of any breach of the foregoing, the
Company shall reimburse the Underwriters for the interest lost and any other
expenses borne by them by reason of such breach. Such delivery and payment shall
take place at the offices of Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts 02109, or at such other place as may be agreed upon among the
Representatives and the Company (i) on the Closing Date, if written notice of
the exercise of such option is received by the Company at least two (2) full
business days prior to the Closing Date, or (ii) on a date which shall not be
later than the third (3rd) full business day following the date the Company
receives written notice of the exercise of such option, if such notice is
received by the Company less than two (2) full business days prior to the
Closing Date.
The certificates for the Option Shares to be so delivered will
be made available to you at such office or such other location including,
without limitation, in New York City, as you may reasonably request for checking
at least one (1) full business day prior to the date of payment and delivery and
will be in such names and denominations as you may request, such request to be
made at least two (2) full business days prior to such date of payment and
delivery. If the Representatives so elect, delivery of the Option Shares may be
made by credit through full fast transfer to the accounts at The Depository
Trust Company designated by the Representatives.
It is understood that you, individually, and not as the
Representatives of the several Underwriters, may (but shall not be obligated to)
make payment of the purchase price on behalf of any Underwriter or Underwriters
whose check or checks shall not have been received by you prior to the date of
payment and delivery for the Option Shares to be purchased by such Underwriter
or Underwriters. Any such payment by you shall not relieve any such Underwriter
or Underwriters of any of its or their obligations hereunder.
(b) Upon exercise of any option provided for in Section 7(a)
hereof, the obligations of the several Underwriters to purchase such Option
Shares will be subject (as of the date hereof and as of the date of payment and
delivery for such Option Shares) to the accuracy of and compliance with the
representations, warranties and agreements of the Company herein, to the
accuracy of the statements of the Company and officers of the Company made
pursuant to the provisions hereof, to the performance by the Company of its
obligations hereunder, to the conditions set forth in Section 7 hereof and to
the condition that all proceedings taken at or prior to the payment date in
connection with the sale and transfer of such Option Shares shall be reasonably
satisfactory in form and substance to you and to Underwriters' Counsel, and you
shall have been furnished with all such documents, certificates and opinions as
you may request in order to evidence the accuracy and completeness of any of the
representations, warranties or statements, the performance of any of the
covenants or agreements
<PAGE> 36
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of the Company or the satisfaction of any of the conditions herein contained.
8. Indemnification and Contribution.
(a) Subject to the provisions of paragraph (f) of
this Section 8, the Company and Penford, jointly and severally, agree to
indemnify and hold harmless each Underwriter against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter may become subject
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent underwriter" within the meaning of Rule 2720(a)(15) of
the Conduct Rules promulgated by the NASD), under the Act, the Exchange Act or
otherwise, specifically including, but not limited to, losses, claims, damages
or liabilities, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any breach of any
representation, warranty, agreement or covenant of the Company and Penford
herein contained, (ii) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement or any amendment or
supplement thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, or (iii) any untrue statement or alleged untrue
statement of any material fact contained in any Preliminary Prospectus or the
Prospectus or any amendment or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agree to reimburse each
Underwriter for any legal or other expenses reasonably incurred by it in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company and Penford shall not
be liable in any such case to the extent that any such loss, claim, damage,
liability or action arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in the
Registration Statement, such Preliminary Prospectus or the Prospectus, or any
such amendment or supplement thereto, in reliance upon, and in conformity with,
written information relating to any Underwriter furnished to the Company by such
Underwriter, directly or through you, specifically for use in the preparation
thereof and, provided further, that the indemnity agreement provided in this
Section 8(a) with respect to any Preliminary Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any losses, claims,
damages, liabilities or actions based upon any untrue statement or alleged
untrue statement of material fact or omission or alleged omission to state
therein a material fact purchased Shares, if a copy of the Prospectus in which
such untrue statement or alleged untrue statement or omission or alleged
omission was corrected had not been sent or given to such person within the time
required by the Act and the Rules and Regulations, unless such failure is the
result of noncompliance by the Company with Section 4(d) hereof. Notwithstanding
the foregoing, Penford shall not be required to pay any amount in respect of an
indemnification claim asserted hereunder (other than with respect to any claim
asserting a breach of the representations and warranties contained in Section
2(b) hereof) until the Underwriter seeking indemnification shall have first
submitted the claim to the Company in writing (the "Company Notice"), with a
copy of said claim to Penford, and such claim shall not have been satisfied
within 30 days of the Company's receipt of the Company Notice. If the Company
fails to pay the entire amount claimed in the Company Notice within the 30 day
period specified in the preceding sentence, the claiming Underwriter may so
notify Penford in writing.
<PAGE> 37
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Penford shall pay the claiming Underwriter the difference, if any, between (x)
the amount claimed in the Company Notice and (y) the aggregate amount paid by
the Company, within 10 days of receipt thereof. Penford may seek
cross-indemnification from the Company with respect any amounts paid by Penford
pursuant to the preceding sentence.
The indemnity agreement in this Section 8(a) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each person, if any, who controls any Underwriter within the meaning of the Act
or the Exchange Act. This indemnity agreement shall be in addition to any
liabilities which the Company and/or Penford may otherwise have.
(b) Each Underwriter, severally and not jointly,
agrees to indemnify and hold harmless the Company and Penford against any
losses, claims, damages or liabilities, joint or several, to which the Company
or Penford may become subject under the Act or otherwise, specifically
including, but not limited to, losses, claims, damages or liabilities, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon (i) any breach of any representation, warranty,
agreement or covenant of such Underwriter herein contained, (ii) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement or any amendment or supplement thereto, or the omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading, or (iii) any
untrue statement or alleged untrue statement of any material fact contained in
any Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto, or the omission or alleged omission to state therein a material fact
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in the case of subparagraphs (ii)
and (iii) of this Section 8(b) to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter, directly or through you, specifically for use
in the preparation thereof, and agrees to reimburse the Company or Penford for
any legal or other expenses reasonably incurred by the Company or Penford in
connection with investigating or defending any such loss, claim, damage,
liability or action.
The indemnity agreement in this Section 8(b) shall
extend upon the same terms and conditions to, and shall inure to the benefit of,
each officer of the Company who signed the Registration Statement and each
director of the Company, and each person, if any, who controls the Company
within the meaning of the Act or the Exchange Act. This indemnity agreement
shall be in addition to any liabilities which each Underwriter may otherwise
have.
(c) Promptly after receipt by an indemnified party
under this Section 8 of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against any
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have to
any indemnified party otherwise than under this Section 8. In case any such
action is brought against any indemnified party, and it notified the
indemnifying party of the commencement thereof, the indemnifying party will be
entitled to participate therein and, to the extent that it shall elect by
<PAGE> 38
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written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof,
with counsel reasonably satisfactory to such indemnified party; provided,
however, that if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, the indemnified party or parties shall have the right to
select separate counsel to assume such legal defenses and to otherwise
participate in the defense of such action on behalf of such indemnified party or
parties. Upon receipt of notice from the indemnifying party to such indemnified
party of the indemnifying party's election so to assume the defense of such
action and approval by the indemnified party of counsel, the indemnifying party
will not be liable to such indemnified party under this Section 8 for any legal
or other expenses subsequently incurred by such indemnified party in connection
with the defense thereof unless (i) the indemnified party shall have employed
separate counsel in accordance with the proviso to the next preceding sentence
(it being understood, however, that the indemnifying party shall not be liable
for the expenses of more than one separate counsel (together with appropriate
local counsel) approved by the indemnifying party representing all the
indemnified parties under Section 8(a) or 8(b) hereof who are parties to such
action), (ii) the indemnifying party shall not have employed counsel reasonably
satisfactory to the indemnified party to represent the indemnified party within
a reasonable time after notice of commencement of the action or (iii) the
indemnifying party has authorized the employment of counsel for the indemnified
party at the expense of the indemnifying party. In no event shall any
indemnifying party be liable in respect of any amounts paid in settlement of any
action unless the indemnifying party shall have approved the terms of such
settlement; provided that such consent shall not be unreasonably withheld. No
indemnifying party shall, without the prior written consent of the indemnified
party, effect any settlement of any pending or threatened proceeding in respect
of which any indemnified party is or could have been a party and indemnification
could have been sought hereunder by such indemnified party, unless such
settlement includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(d) In order to provide for just and equitable contribution in
any action in which a claim for indemnification is made pursuant to this Section
8 but it is judicially determined (by the entry of a final judgment or decree by
a court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 8 provides for
indemnification in such case, all the parties hereto shall contribute to the
aggregate losses, claims, damages or liabilities to which they may be subject
(after contribution from others) in such proportion so that the Underwriters
severally and not jointly are responsible pro rata for the portion represented
by the percentage that the underwriting discount bears to the initial public
offering price, and the Company and Penford are responsible for the remaining
portion, provided, however, that (i) no Underwriter shall be required to
contribute any amount in excess of the amount by which the underwriting discount
applicable to the Shares purchased by such Underwriter exceeds the amount of
damages which such Underwriter is otherwise required to pay and (ii) no person
guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who is not guilty of
such
<PAGE> 39
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fraudulent misrepresentation. The contribution agreement in this Section
8(d) shall extend upon the same terms and conditions to, and shall inure to the
benefit of, each person, if any, who controls any Underwriter or the Company
within the meaning of the Act or the Exchange Act and each officer of the
Company who signed the Registration Statement and each director of the Company.
(e) The parties to this Agreement hereby acknowledge that they
are sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 8, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 8 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
(f) Except for the liability of Penford under the
representations and warranties contained in Section 2(b) of this Agreement,
which liability shall not be limited, the liability of Penford under the
representations and warranties contained in Section 2(a) and under the
indemnification and contribution provisions contained in this Section 8 (except
with respect to any breach of representations and warranties contained in
Section 2(b) hereof) shall remain in full force and effect after the Closing
Date until the close of business on the Distribution Date (as such term is
defined in that certain Separation Agreement dated October __, 1997 by and
between Penford and the Company); provided, however, any liability regarding the
representations and warranties contained in Section 2(a) hereof and under the
indemnification and contribution provisions contained in this Section 8 in
respect of which indemnity or contribution may be sought under Section 8(a)
hereof shall survive such expiration pursuant to this paragraph (f), if notice
of the claim shall have been given to Penford prior to such expiration. The
remedies set forth herein are not exclusive of any other remedy conferred hereby
or by law or equity.
9. Representations, Warranties, Covenants and Agreements to Survive
Delivery. All representations, warranties, covenants and agreements of the
Company, Penford and the Underwriters herein or in certificates delivered
pursuant hereto, and the indemnity and contribution agreements contained in
Section 8 hereof shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of any Underwriter or any person
controlling any Underwriter within the meaning of the Act or the Exchange Act,
or by or on behalf of the Company or any of its officers, directors or
controlling persons within the meaning of the Act or the Exchange Act, and shall
survive the delivery of the Shares to the several Underwriters hereunder or
termination of this Agreement, except as provided in Section 8(f) of this
Agreement.
10. Substitution of Underwriters. If any Underwriter or Underwriters
shall fail to take up and pay for the number of Firm Shares agreed by such
Underwriter or Underwriters to be purchased hereunder upon tender of such Firm
Shares in accordance with the terms hereof, and if the aggregate number of Firm
Shares which such defaulting Underwriter or Underwriters so agreed but failed to
purchase does not exceed 10% of the Firm Shares, the remaining
<PAGE> 40
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Underwriters shall be obligated, severally in proportion to their respective
commitments hereunder, to take up and pay for the Firm Shares of such defaulting
Underwriter or Underwriters.
If any Underwriter or Underwriters so defaults and the
aggregate number of Firm Shares which such defaulting Underwriter or
Underwriters agreed but failed to take up and pay for exceeds 10% of the Firm
Shares, the remaining Underwriters shall have the right, but shall not be
obligated, to take up and pay for (in such proportions as may be agreed upon
among them) the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If such remaining Underwriters do not, at the
Closing Date, take up and pay for the Firm Shares which the defaulting
Underwriter or Underwriters so agreed but failed to purchase, the Closing Date
shall be postponed for twenty-four (24) hours to allow the several Underwriters
the privilege of substituting within twenty-four (24) hours (including
non-business hours) another underwriter or underwriters (which may include any
nondefaulting Underwriter) satisfactory to the Company. If no such underwriter
or underwriters shall have been substituted as aforesaid by such postponed
Closing Date, the Closing Date may, at the option of the Company, be postponed
for a further twenty-four (24) hours, if necessary, to allow the Company the
privilege of finding another underwriter or underwriters, satisfactory to you,
to purchase the Firm Shares which the defaulting Underwriter or Underwriters so
agreed but failed to purchase. If it shall be arranged for the remaining
Underwriters or substituted underwriter or underwriters to take up the Firm
Shares of the defaulting Underwriter or Underwriters as provided in this Section
10, (i) the Company shall have the right to postpone the time of delivery for a
period of not more than seven (7) full business days, in order to effect
whatever changes may thereby be made necessary in the Registration Statement or
the Prospectus, or in any other documents or arrangements, and the Company
agrees promptly to file any amendments to the Registration Statement,
supplements to the Prospectus or other such documents which may thereby be made
necessary, and (ii) the respective number of Firm Shares to be purchased by the
remaining Underwriters and substituted underwriter or underwriters shall be
taken as the basis of their underwriting obligation. If the remaining
Underwriters shall not take up and pay for all such Firm Shares so agreed to be
purchased by the defaulting Underwriter or Underwriters or substitute another
underwriter or underwriters as aforesaid and the Company shall not find or shall
not elect to seek another underwriter or underwriters for such Firm Shares as
aforesaid, then this Agreement shall terminate.
In the event of any termination of this Agreement pursuant to
the preceding paragraph of this Section 10, neither the Company shall be liable
to any Underwriter (except as provided in Sections 5 and 8 hereof) nor shall any
Underwriter (other than an Underwriter who shall have failed, otherwise than for
some reason permitted under this Agreement, to purchase the number of Firm
Shares agreed by such Underwriter to be purchased hereunder, which Underwriter
shall remain liable to the Company and the other Underwriters for damages, if
any, resulting from such default) be liable to the Company (except to the extent
provided in Sections 5 and 8 hereof).
The term "Underwriter" in this Agreement shall include any
person substituted for an Underwriter under this Section 10.
<PAGE> 41
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11. Effective Date of this Agreement and Termination.
(a) This Agreement shall become effective at the earlier of
(i) 6:30 A.M., San Francisco time, on the first full business day following the
effective date of the Registration Statement, or (ii) the time of the initial
public offering of any of the Shares by the Underwriters after the Registration
Statement becomes effective. The time of the initial public offering shall mean
the time of the release by you, for publication, of the first newspaper
advertisement relating to the Shares, or the time at which the Shares are first
generally offered by the Underwriters to the public by letter, telephone,
telegram or telecopy, whichever shall first occur. By giving notice as set forth
in Section 12 before the time this Agreement becomes effective, you, as
Representatives of the several Underwriters, or the Company, may prevent this
Agreement from becoming effective without liability of any party to any other
party, except as provided in Sections 4(i), 5 and 8 hereof.
(b) You, as Representatives of the several Underwriters, shall
have the right to terminate this Agreement by giving notice as hereinafter
specified at any time on or prior to the Closing Date or on or prior to any
later date on which Option Shares are to be purchased, as the case may be, (i)
if the Company shall have failed, refused or been unable to perform any
agreement on its part to be performed, or because any other condition of the
Underwriters' obligations hereunder required to be fulfilled is not fulfilled,
including, without limitation, any change in the condition (financial or
otherwise), earnings, operations or business of the Company from that set forth
in the Registration Statement or Prospectus, which, in your sole judgment, is
material and adverse, or (ii) if additional material governmental restrictions,
not in force and effect on the date hereof, shall have been imposed upon trading
in securities generally or minimum or maximum prices shall have been generally
established on the New York Stock Exchange or on the American Stock Exchange or
in the over the counter market by the NASD, or trading in securities generally
shall have been suspended on either such exchange or in the over the counter
market by the NASD, or if a banking moratorium shall have been declared by
federal, New York or California authorities, or (iii) if the Company shall have
sustained a loss by strike, fire, flood, earthquake, accident or other calamity
of such character as to interfere materially with the conduct of the business
and operations of the Company regardless of whether or not such loss shall have
been insured, or (iv) if there shall have been a material adverse change in the
general political or economic conditions or financial markets as in your
reasonable judgment makes it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Shares, or (v) if there shall have been an
outbreak or escalation of hostilities or of any other insurrection or armed
conflict or the declaration by the United States of a national emergency which,
in the reasonable opinion of the Representatives, makes it impracticable or
inadvisable to proceed with the initial public offering of the Shares as
contemplated by the Prospectus. In the event of termination pursuant to
subparagraph (i) above, the Company shall remain obligated to pay costs and
expenses pursuant to Sections 4(i), 5 and 8 hereof. Any termination pursuant to
any of subparagraphs (ii) through (v) above shall be without liability of any
party to any other party except as provided in Sections 5 and 8 hereof.
If you elect to prevent this Agreement from becoming effective
or to terminate
<PAGE> 42
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this Agreement as provided in this Section 11, you shall promptly notify the
Company by telephone, telecopy or telegram, in each case confirmed by letter. If
the Company shall elect to prevent this Agreement from becoming effective, the
Company shall promptly notify you by telephone, telecopy or telegram, in each
case, confirmed by letter.
12. Notices. All notices or communications hereunder, except as herein
otherwise specifically provided, shall be in writing and if sent to you shall be
mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to you c/o BancAmerica Robertson Stephens, 555 California
Street, Suite 2600, San Francisco, California 94104, telecopier number (415)
781-0278, Attention: General Counsel; if sent to the Company, such notice shall
be mailed, delivered, telegraphed (and confirmed by letter) or telecopied (and
confirmed by letter) to 2981 Route 22, Patterson, New York 12563-9970,
telecopier number (914) 878-3498, Attention: General Counsel; and if sent to
Penford, such notice shall be mailed, delivered, telegraphed (and confirmed by
letter) or telecopied (and confirmed by letter) to 777 108th Avenue N.E., Suite
2390, Bellevue, Washington 98004-5193, Attention: Chief Executive Officer.
13. Parties. This Agreement shall inure to the benefit of and be
binding upon the several Underwriters, the Company and Penford and their
respective executors, administrators, successors and assigns. Nothing expressed
or mentioned in this Agreement is intended or shall be construed to give any
person or entity, other than the parties hereto and their respective executors,
administrators, successors and assigns, and the controlling persons within the
meaning of the Act or the Exchange Act, officers and directors referred to in
Section 8 hereof, any legal or equitable right, remedy or claim in respect of
this Agreement or any provisions herein contained, this Agreement and all
conditions and provisions hereof being intended to be and being for the sole and
exclusive benefit of the parties hereto and their respective executors,
administrators, successors and assigns and said controlling persons and said
officers and directors, and for the benefit of no other person or entity. No
purchaser of any of the Shares from any Underwriter shall be construed a
successor or assign by reason merely of such purchase.
In all dealings with the Company and Penford under this
Agreement, you shall act on behalf of each of the several Underwriters, and the
Company and Penford shall be entitled to act and rely upon any statement,
request, notice or agreement made or given by you jointly or by BancAmerica
Robertson Stephens on behalf of you.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of California.
15. Counterparts. This Agreement may be signed in several counterparts,
each of which will constitute an original.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
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If the foregoing correctly sets forth the understanding among the
Company, Penford and the several Underwriters, please so indicate in the space
provided below for that purpose, whereupon this letter shall constitute a
binding agreement among the Company, Penford and the several Underwriters.
Very truly yours,
PENWEST PHARMACEUTICALS CO.
By: _____________________________
Name:
Title:
PENFORD CORPORATION
By: _____________________________
Name:
Title:
Accepted as of the date first above written:
BANCAMERICA ROBERTSON STEPHENS
SBC WARBURG DILLON READ INC.
On their behalf and on behalf of each of the several Underwriters named in
Schedule A hereto.
BANCAMERICA ROBERTSON STEPHENS
By: ____________________________________
Authorized Signatory
<PAGE> 44
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SCHEDULE A
Number of
Firm Shares
To Be
Underwriters Purchased
BancAmerica Robertson Stephens........................
SBC Warburg Dillon Read Inc...........................
[NAMES OF OTHER UNDERWRITERS]
---------------
Total......................................................
===============
<PAGE> 1
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT (the "Agreement") is made as of the ___ day
of _______, 1997 (the "Effective Date"), between PENFORD CORPORATION, a
Washington corporation (previously known as PENWEST, LTD.) ("Penford"), and
PENWEST PHARMACEUTICALS CO., a Washington corporation ("Penwest").
RECITALS
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, it is the intention of Penford to contribute to Penwest
certain assets and to assign certain liabilities, to transfer certain technology
to Penwest and to make other arrangements to establish Penwest as a separate
enterprise for the purpose of engaging in research, development and marketing of
novel drug delivery technologies and sale and distribution of pharmaceutical
excipients (the "Pharmaceutical Business");
WHEREAS, Penford and Penwest have determined that it is necessary and
desirable, on the terms and conditions contemplated hereby (i) to cause Penwest
to offer and sell for its own account in the IPO (as defined below) a limited
number of shares of Penwest Common Stock (as defined below), and (ii) for
Penford to distribute to shareholders of Penford the outstanding shares of
Penwest Common Stock held by Penford following the IPO;
WHEREAS, the Distribution (as defined below) is intended to qualify as
a tax-free spin-off under Sections 355 and 368 of the Code (as defined below);
and
WHEREAS, Penford and Penwest have further determined that it is
necessary and desirable to set forth the principal corporate transactions
required to effect the Separation (as defined below), the IPO and the
Distribution and to set forth other agreements that will govern certain other
matters following the Separation, IPO and Distribution;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
1.1 GENERAL. As used in this Agreement and the Exhibits hereto, the
following terms shall have the following meanings:
ACTION: any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
AFFILIATE: affiliate of any Person means a Person that controls, is
controlled by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and polices of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.
AGENT: the distribution agent to be appointed by Penford to distribute
to the shareholders of Penford the shares of Penwest Common Stock held by
Penford pursuant to the Distribution.
ANCILLARY AGREEMENTS: all of the agreements, instruments,
understandings, assignments or other arrangements entered into in connection
with the transactions contemplated hereby, including, without limitation, the
Excipient Supply Agreement, the Services Agreement, the Tax Allocation
Agreement, the Employee Benefits Agreement and the Trademark Assignment.
CLOSING DATE: the first time any shares of Penwest Common Stock are
sold to the Underwriters pursuant to the IPO in accordance with the terms of the
Underwriting Agreement to be entered into between Penwest and the Underwriters.
CODE: the Internal Revenue Code of 1986, as amended.
COLLABORATIVE AGREEMENTS: include the following agreements:
(a) Product Development and Supply Agreement between Penwest,
Ltd., a Washington corporation ("Penwest, Ltd.") and Mylan
Pharmaceuticals, Inc., a West Virginia corporation ("Mylan") dated
August 17, 1994.
(b) Sales and Distribution Agreement between Penwest, Ltd. and
Mylan dated January 3, 1997.
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<PAGE> 3
(c) Product Development and Supply Agreement between Penwest,
Ltd. and Mylan dated August 3, 1995.
(d) Product Development and Supply Agreement between Penwest,
Ltd. and Mylan dated March 22, 1996.
(e) Custom Blending Agreement between Boehringer Ingelheim
Pharmaceuticals, Inc. and Penwest, Ltd. dated November 23, 1994.
(f) Product Development and Supply Agreement between TIMERx
Technologies, a Washington corporation ("TIMERx Technologies") and
Kremers Urban Development Company ("Kremers") dated August 30,
1996.
(g) Product Development and Supply Agreement between TIMERx
Technologies and Kremers dated May 31, 1996.
(h) Heads of Agreement and Development Agreement between TIMERx
Technologies and Schwarz dated September 20, 1995.
(i) Product Development, License and Supply Agreement between
TIMERx Technologies and Sanofi Winthrop International S.A., a
company incorporated under the laws of France dated February 28,
1997, as amended.
(j) The Agreement between Edward Mendell Co., Inc. and Leiras OY
dated July 27, 1992.
(k) Letter of Consent between TIMERx Technologies and Leiras OY
dated May 26, 1995.
(l) Letter of Agreement between TIMERx Technologies and Leiras OY
dated May 26, 1995.
(m) Strategic Alliance Agreement between Penwest Pharmaceuticals
Group and Endo Pharmaceuticals Inc., dated September 17, 1997.
COMMISSION: the Securities and Exchange Commission.
CONVEYANCE AND ASSUMPTION INSTRUMENTS: collectively, the various
agreements, instruments and other documents entered into or to be entered into
to effect the transfer, prior to the Closing Date and in the manner contemplated
by this Agreement or any other agreement or document contemplated by this
Agreement or otherwise, of Penwest Assets to Penwest (including, without
limitation, the
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<PAGE> 4
intellectual property rights and other assets described in the Registration
Statement) and the assumption of Penwest Liabilities by Penwest, in both cases
relating to the business of Penwest as described in the Registration Statement.
DISTRIBUTION: the distribution by Penford on a pro rata basis to
holders of Penford Common Stock of all of the outstanding shares of Penwest
Common Stock owned by Penford on the Distribution Date as set forth in Article
IV.
DISTRIBUTION DATE: the date determined pursuant to Section 4.1 on which
the Distribution occurs provided that such date shall occur on or after April 1,
1998.
EMPLOYEE BENEFITS AGREEMENT: the Employee Benefits Agreement between
Penford and Penwest providing for, among other things, participation by Penwest
Employees in certain of the Penford employee benefit plans from the effective
date of the Employee Benefits Agreement through December 31, 1997.
EXCIPIENT SUPPLY AGREEMENT: the Excipient Supply Agreement between
Penford and Penwest pursuant to which Penford will manufacture and supply
exclusively to Penwest, and Penwest will purchase exclusively from Penford, all
of Penwest's requirements for EMDEX and CANDEX.
EMDEX/CANDEX: sugar based (Dextrate) binders.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.
GOVERNMENTAL APPROVALS: any notices, reports or other filings to be
made, or any consents, registrations, approvals, permits or authorizations to be
obtained from any Governmental Authority.
GOVERNMENTAL AUTHORITY: any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.
IPO: the initial public offering by Penwest of shares of Penwest Common
Stock pursuant to the Registration Statement.
LIABILITIES: any and all debts, liabilities and obligations, absolute
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising (unless otherwise specified in
this Agreement), including all costs and expenses relating thereto, and those
debts, liabilities and obligations arising under any law, rule, regulation,
Action, threatened Action, order or consent decree of any Governmental Authority
or any award of any arbitrator of any kind, and those arising under any
contract, commitment or undertaking.
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<PAGE> 5
PENFORD COMMON STOCK: the Common Stock, par value $1.00 per share, of
Penford.
PENFORD MARKET CAPITALIZATION: the number of Penford's fully diluted
shares outstanding (shares of Penford Common Stock outstanding, plus shares of
Penford Common Stock issuable upon exercise of outstanding stock options)
multiplied by the fair market value of Penford Common Stock (which shall equal
the weighted average of the last reported price of Penford Common Stock on the
Nasdaq National Market on the date on which the Penford Common Stock is first
traded on the Nasdaq National Market at a price that does not reflect the value
of the Penwest Common Stock held by Penford as set by the Nasdaq National Market
(the "X Date") and the nineteen (19) trading days immediately following the X
Date.
PENWEST ASSETS:
(a) any and all assets that are expressly contemplated by the
Penwest Contracts or this Agreement or any other agreement or document
contemplated by this Agreement (or any Schedule hereto or thereto) as assets to
be transferred to Penwest;
(b) any assets reflected in Penwest's balance sheet dated
September 30, 1997 as assets of Penwest, subject to any dispositions of such
assets subsequent to the date of such balance sheet; and
(c) any and all assets owned or held immediately prior to the
Closing Date by Penford that are used primarily in the Pharmaceutical Business.
The intention of this clause (c) is only to rectify any inadvertent omission of
transfer or conveyance of any assets that, had the parties given specific
consideration to such asset as of the date hereof, would have otherwise been
classified as a Penwest Asset. No asset shall be deemed to be a Penwest Asset
solely as a result of this clause (c) if such asset is within the category or
type of asset expressly covered by the subject matter of an Ancillary Agreement.
PENWEST COMMON STOCK: the Common Stock, par value $0.001 per share, of
Penwest.
PENWEST CONTRACTS: the following contracts and agreements to which
Penford is a party or by which its assets are bound, whether or not in writing:
(a) any supply or vendor contracts or agreements that relate
primarily to the Pharmaceutical Business;
(b) the Collaborative Agreements;
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<PAGE> 6
(c) any contract or agreement entered into by Penford or Penwest
that relates primarily to the Pharmaceutical Business;
(d) any contract or agreement entered into by Penford or Penwest
with any federal, state and local government that relates primarily to the
Pharmaceutical Business;
(e) any contract or agreement that is otherwise expressly
contemplated pursuant to this Agreement or any of the Ancillary Agreements to be
assigned to Penwest; and
(f) any guarantee, indemnity, representation, warranty or other
Liability of Penford in respect of any other Penwest Contract, any Penwest
Liability or the Pharmaceutical Business.
PENWEST EMPLOYEES: Penwest Employees include Penwest's current
employees and any other employees who are hired by Penwest prior to the
Distribution Date.
PENWEST MARKET CAPITALIZATION: the number of Penwest's fully diluted
shares outstanding (shares of Penwest Common Stock outstanding, plus shares of
Penwest Common Stock issuable upon exercise outstanding stock options)
multiplied by the fair market value of the Penwest Common Stock (which shall
equal the weighted average of the last reported price of Penwest Common Stock on
the Nasdaq National Market on the X Date and the nineteen (19) trading days
immediately following such X Date.
PENWEST LIABILITIES:
(a) any and all Liabilities that are expressly contemplated by
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise (or the Schedules hereto or thereto) as Liabilities to be assumed
by Penwest;
(b) all Liabilities (other than taxes based on, or measured by
reference to, net income), including any Liabilities related to Penwest
Employees and product Liabilities, primarily relating to, arising out of or
resulting from:
(i) the operation of the Pharmaceutical Business, as
conducted at any time prior to, on or after the Closing Date (including any
Liability relating to, arising out of or resulting from any act or failure to
act or any statement made by any director, officer, employee, agent or
representatives (whether or not such act or failure to act or statement is or
was within such Person's authority); or
(ii) any Penwest Assets (including any Penwest Contracts);
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<PAGE> 7
in any such case whether arising before, on or after the Closing Date;
(c) all Liabilities, excluding any intercompany indebtedness
forgiven pursuant to Section 2.5 of this Agreement, reflected as liabilities or
obligations of Penwest in its balance sheet, subject to any discharge of such
Liabilities subsequent to the date of such balance sheet.
PERSON: an individual, a general or limited partnership, a corporation,
a trust, a joint venture, an unincorporated organization, a limited liability
entity, any other entity and any Governmental Authority.
PROSPECTUS: each preliminary, final or supplemental prospectus forming
a part of the Registration Statement.
RECORD DATE: the close of business on the date to be determined by the
Penford Board of Directors as the record date for determining shareholders of
Penford entitled to receive shares of Penwest Common Stock.
REGISTRATION STATEMENT: Registration Statement on Form S-1 to be filed
under the Securities Act, pursuant to which 2,875,000 shares of Penwest Common
Stock to be issued in the IPO will be registered, together with all amendments
thereto.
SECURITIES ACT: the Securities Act of 1933, as amended.
SEPARATION: the transfer of the Penwest Assets to Penwest and the
assumption by Penwest of the Penwest Liabilities, all as more fully described in
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise.
SERVICES AGREEMENT: the Services Agreement between Penford and Penwest
providing for, among other things, the provision by Penford to Penwest of
certain administrative and other services on a transitional basis.
SUBSIDIARY: Subsidiary of any Person means any corporation or other
organization whether incorporated or unincorporated of which at least a majority
of the securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the board of directors or other performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more
of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided, however, that no Person that is not directly or indirectly
wholly-owned by any other Person shall be a Subsidiary of such other Person
unless such other Person controls, or has the right, power or ability to
control, that Person.
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<PAGE> 8
TAX ALLOCATION AGREEMENT: the Tax Allocation Agreement between Penford
and Penwest, providing for, among other things, the allocation of liabilities
with respect to federal, state and local income taxes and the procedures for
filing returns with respect to such taxes.
TRADEMARK ASSIGNMENT: the Trademark Assignment between Penford and
Penwest, providing for, among other things the assignment by Penford to Penwest
of certain trademarks and related rights.
UNDERWRITERS: the managing underwriters for the IPO.
UNDERWRITING AGREEMENT: the underwriting agreement to be entered into
between Penwest and the Underwriters with respect to the IPO.
ARTICLE II
THE SEPARATION
2.1 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES.
(a) Penford hereby assigns, transfers, conveys and delivers to
Penwest, and Penwest hereby accepts from Penford, all of Penford's right, title
and interest in all Penwest Assets.
(b) Penwest hereby assumes and agrees faithfully to perform and
fulfill all the Penwest Liabilities, in accordance with their respective terms.
Penwest shall be responsible for all Penwest Liabilities, regardless of when or
where such liabilities arose or arise, or whether the facts on which they are
based occurred prior to or subsequent to the date hereof, regardless of where or
against whom such liabilities are asserted or determined (including any Penwest
Liabilities arising out of claims made by Penford's or Penwest's respective
shareholders, directors, officers, employees, agents, Subsidiaries or Affiliates
against Penford or Penwest) or whether asserted or determined prior to the date
hereof.
(c) In the event that any time or from time to time (whether
prior to or after the Distribution Date), any party hereto, shall receive or
otherwise possess any asset that is allocated to any other Person pursuant to
this Agreement or any Ancillary Agreement, such party shall promptly transfer,
or cause to be transferred, such asset to the Person so entitled thereto. Prior
to any such transfer, the Person receiving or possessing such asset shall hold
such asset in trust for any such other Person.
2.2 TERMINATION OF AGREEMENTS. Except as otherwise provided or
contemplated in this Agreement, Penwest and Penford hereby terminate any and all
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<PAGE> 9
agreements, arrangements, commitments or understandings, whether or not in
writing, between Penwest and Penford, effective as of the Closing Date;
provided, however, to the extent any such agreement, arrangement, commitment or
understanding is inconsistent with any Ancillary Agreement such termination
shall be effective as of the date of effectiveness of the applicable Ancillary
Agreement. No such terminated agreement, arrangement, commitment or
understanding (including any provision thereof which purports to survive
termination) shall be of any further force or effect after the Closing Date (or,
to the extent contemplated by the proviso to the immediately preceding sentence,
after the effective date of the applicable Ancillary Agreement). Each party
shall, at the reasonable request of any other party, take, or cause to be taken,
such other actions as may be necessary to effect the foregoing.
2.3 DOCUMENTS RELATING TO OTHER TRANSFERS OF ASSETS AND ASSUMPTION OF
LIABILITIES. In furtherance of the assignment, transfer and conveyance of
Penwest Assets and the assumption of Penwest Liabilities set forth in Section
2.1(a) and (b), simultaneously with the execution and delivery hereof or as
promptly as practicable thereafter, (i) each of Penford and Penwest shall
execute and deliver such bills of sale, stock powers, certificates of titles,
assignments of contracts and other instruments of transfer, conveyance and
assignment as and to the extent necessary to evidence the transfer, conveyance
and assignment of all of Penford's right, title and interest in and to the
Penwest Assets to Penwest and (ii) Penwest shall execute and deliver to Penford
such bills of sale, stock powers, certificates of title, assumptions of
contracts and other instruments of assumption as and to the extent necessary to
evidence the valid and effective assumption of the Penwest Liabilities by
Penwest.
2.4 ANCILLARY AGREEMENTS. Each of Penford and Penwest will execute and
deliver all Ancillary Agreements to which it is a party which agreement will
become effective upon the Closing Date, including but not limited to:
(a) the Excipient Supply Agreement;
(b) the Services Agreement;
(c) the Tax Allocation Agreement;
(d) the Employee Benefits Agreement; and
(e) the Trademark Assignment.
2.5 FORGIVENESS OF INTERCOMPANY DEBT. Effective immediately prior to
the Closing Date, Penford hereby forgives all existing remaining intercompany
indebtedness owed by Penwest to Penford in order to provide an appropriate
level of working capital and equity at Penwest as it is established as a
separate stand alone company. Each of Penford and Penwest shall execute any
documents and instruments necessary or appropriate to confirm such loan
forgiveness. Penford and Penwest agree that Penford shall treat the loan
forgiveness as a contribution to the capital of Penwest in constructive
exchange for Penwest Common Stock, provided that no additional
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shares of Penwest Common Stock shall be issued or issuable in connection with or
as a result of such contributions.
2.6 CONSENTS. Each party hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document contemplated
by this Agreement or otherwise, representing or warranting in any way that the
obtaining of any consents or approvals, the execution and delivery of any
agreements or the making of any filings or applications contemplated by this
Agreement will satisfy the provisions of any or all applicable agreements or the
requirements of any or all applicable laws or judgments, it being agreed and
understood that the party to which any assets were or are transferred shall bear
the economic and legal risk that any necessary consents or approvals are not
obtained or that any requirements of laws or judgments are not complied with.
Notwithstanding the foregoing, the parties shall use reasonable best efforts to
obtain all consents and approvals, to enter into all agreements and to make all
filings and applications which may be required for the consummation of the
transactions contemplated by this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, including, without limitation, all
applicable regulatory filings or consents under federal or state laws and all
necessary consents, approvals, agreements, filings and applications.
2.7 REPRESENTATIONS OR WARRANTIES. Each of the parties hereto
understands and agrees that no party hereto is, in this Agreement or in any
other agreement or document contemplated by this Agreement or otherwise, making
any representations or warranties with respect to any assets of such party,
except that Penford represents and warrants to the best of its knowledge that
the delivery of all Penwest Assets transferred or being transferred to Penwest
pursuant to this Agreement or any other Conveyance and Assumption Instruments
has vested or will vest good title to such assets in Penwest free and clear of
all material liens, mortgages, pledges, security interests, restrictions, prior
assignments, encumbrances and claims of any kind or nature whatsoever affecting
such assets.
2.8 COLLABORATIVE AGREEMENTS. In the event that any transfer of
Penford's rights to Penwest under any of the Collaborative Agreements would
violate or is found to violate the terms of, or result in the loss of rights or
imposition of penalty under, any Collaborative Agreement covered thereby, or
would not be effective subsequent to the Distribution Date, such transfer shall
be deemed null and void and, in lieu thereof, (i) Penford shall retain all
rights and fulfill any obligations, at Penwest's expense, it may have to any
third party under any such Collaborative Agreement, it being understood that to
the extent practicable, Penwest shall fulfill such obligations on Penford's
behalf, (ii) Penford shall pay over to Penwest any royalty or other payments it
may receive from any third party pursuant to any such Collaborative Agreement
and (iii) at the request and expense of Penwest Penford shall use all reasonable
best efforts to arrange for the grant by the applicable third party of
comparable rights to Penwest.
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ARTICLE III
THE IPO AND ACTIONS PENDING THE IPO
3.1 TRANSACTIONS PRIOR TO THE IPO.
(a) Subject to the conditions specified in Section 3.3, Penford
and Penwest shall use their reasonable best efforts to consummate the IPO. Such
actions shall include, but not necessarily be limited to, those specified in
this Section 3.1.
(b) Penwest shall file the Registration Statement, and such
amendments or supplements thereto, as may be necessary in order to cause the
same to become and remain effective as required by law or by the Underwriters,
including, but not limited to, filing such amendments to the Registration
Statement as may be required by the Underwriting Agreement, the Commission or
federal or state securities laws. Penford and Penwest shall also cooperate in
preparing, filing with the Commission and causing to become effective a
registration statement registering the Penwest Common Stock under the Exchange
Act, and any registration statements or amendments thereof which are required to
reflect the establishment of, or amendments to, any employee benefit and other
plans necessary or appropriate in connection with the Separation, the IPO, the
Distribution or the other transactions contemplated by this Agreement or any
other agreement or document contemplated by this Agreement or otherwise.
(c) Penwest and Penford shall enter into the Underwriting
Agreement, in form and substance reasonably satisfactory to them and shall
comply with its obligations thereunder.
(d) Penford and Penwest shall consult with each other and the
Underwriters regarding the timing, pricing and other material matters with
respect to the IPO.
(e) Penwest shall use its reasonable best efforts to take all
such action as may be necessary or appropriate under state securities and blue
sky laws of the United States (and any comparable laws under any foreign
jurisdictions) in connection with the IPO.
(f) Penwest shall prepare, file and use reasonable best efforts
to seek to make effective, an application for listing of the Penwest Common
Stock issued in the IPO on the Nasdaq National Market, subject to official
notice of issuance.
(g) Penwest shall participate in the preparation of materials and
presentations as the Underwriters shall deem necessary or desirable.
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(h) Penwest shall pay all third party costs, fees and expenses
relating to the IPO, all of the reimbursable expenses of the Underwriters
pursuant to the Underwriting Agreement, and all of the costs of producing,
printing, mailing and otherwise distributing the Prospectus, and shall reimburse
Penford for any such costs, fees and expenses to the extent paid by Penford.
3.2 PROCEEDS OF THE IPO. The IPO will be a primary offering of Penwest
Common Stock and the net proceeds of the IPO will be retained by Penwest.
3.3 CONDITIONS PRECEDENT TO CONSUMMATION OF THE IPO. As soon as
practicable after the date of this Agreement, the parties hereto shall use their
reasonable best efforts to satisfy the following conditions to the consummation
of the IPO. The obligations of the parties to consummate the IPO shall be
conditioned on the satisfaction of the following conditions:
(a) The Registration Statement shall have been filed and declared
effective by the Commission, and there shall be no stop-order in effect with
respect thereto.
(b) The actions and filings with regard to state securities and
blue sky laws of the United States shall have been taken and, where applicable,
have become effective or been accepted.
(c) The Penwest Common Stock to be issued in the IPO shall have
been accepted for listing on the Nasdaq National Market, subject to official
notice of issuance.
(d) Penwest and Penford shall have entered into the Underwriting
Agreement and all conditions to the obligations of Penwest and the Underwriters
shall have been satisfied or waived.
(e) Immediately following the IPO, Penford shall "control"
Penwest within the meaning of Sections 355 and 368 of the Code, and all other
conditions to permit the Distribution to qualify as a tax-free distribution to
Penford, Penwest and Penford's shareholders shall, to the extent applicable as
of the time of the IPO, be satisfied and there shall be no event or condition
that is likely to cause any of such conditions not to be satisfied as of the
time of the Distribution or thereafter.
(f) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Separation or the IPO or any of the other transactions
contemplated by this Agreement or any other agreement or document contemplated
by this Agreement or otherwise shall be in effect.
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(g) Such other actions as the parties hereto may, based upon the
advice of counsel, reasonably request to be taken prior to the Separation and
the IPO in order to assure the successful completion of the Separation and the
IPO and the other transactions contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise shall have
been taken.
(h) This Agreement shall not have been terminated.
(i) A pricing committee of Penford directors designated by the
Board of Directors of Penford shall have determined that the terms of the IPO
are acceptable to Penford.
ARTICLE IV
THE DISTRIBUTION
4.1 THE DISTRIBUTION.
(a) Subject to Section 4.3 hereof, on or prior to the
Distribution Date, Penford will deliver to the Agent for the benefit of holders
of record of Penford Common Stock on the Record Date, a single stock
certificate, endorsed by Penford in blank, representing all of the outstanding
shares of Penwest Common Stock then owned by Penford, and shall cause the
transfer agent for the shares of Penford Common Stock to instruct the Agent to
distribute on the Distribution Date the appropriate number of such shares of
Penwest Common Stock to each such holder or designated transferee or transferees
of such holder.
(b) Subject to Section 4.4 hereof, each holder of Penford Common
Stock on the Record Date (or such holder's designated transferee or transferees)
shall be entitled to receive, in the Distribution, a number of shares of Penwest
Common Stock equal to the number of outstanding shares of Penwest Common Stock
owned by Penford on the Record Date multiplied by a fraction, the numerator of
which is the number of shares of Penford Common Stock held by such holder on the
Record Date, and the denominator of which is the number of shares of Penford
Common Stock outstanding on the Record Date.
(c) Penwest and Penford, as the case may be, will provide to the
Agent all share certificates and any information required in order to complete
the Distribution on the basis specified above.
4.2 ACTIONS PRIOR TO THE DISTRIBUTION.
(a) Penford and Penwest shall prepare and mail, prior to the
Distribution Date, to the holders of Penford Common Stock, such information
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concerning Penwest, its business, operations and management, the Distribution
and such other matters as Penford and Penwest shall reasonably determine and as
may be required by law. Penford and Penwest, as may be appropriate, will prepare
and to the extent required under applicable law, will file with the Commission
any such documentation which Penford determines are necessary or desirable to
effectuate the Distribution and Penford and Penwest shall each use its
reasonable best efforts to obtain all necessary approvals from the Commission
with respect thereto.
(b) In addition to their respective obligations under Section
4.2(a) above, Penford and Penwest shall take all other actions as may be
necessary or appropriate under the securities or blue sky laws of the United
States in connection with the Distribution.
(c) Penford and Penwest shall use their reasonable best efforts
to cause the conditions set forth in Section 4.3 to be satisfied and to effect
the Distribution on the Distribution Date.
(d) Penwest shall prepare and file, and shall use its reasonable
best efforts to have approved, an application for the listing of the Penwest
Common Stock to be distributed in the Distribution on the Nasdaq National
Market.
4.3 CONDITIONS TO DISTRIBUTION. Penford shall have the sole discretion
to determine the date of consummation of the Distribution at any time prior to
the date six months after the Closing Date. Following the date six months after
the Closing Date, Penford shall be obligated to effect the Distribution as
promptly as practicable, subject to the satisfaction, or waiver by the Penford
Board of Directors in its sole discretion, of the conditions set forth below.
(a) A private letter ruling from the Internal Revenue Service
(the "Private Letter Ruling") shall have been obtained, and shall continue in
effect, or a written opinion from Ernst & Young LLP shall have been delivered,
in either case to the effect that, among other things, the Distribution will
qualify as a tax-free distribution for federal income tax purposes under
Sections 355 and 368 of the Code, and such ruling or opinion shall be in form
and substance satisfactory to Penford in its sole discretion.
(b) Any material Governmental Approvals and consents necessary to
consummate the Distribution shall have been obtained and shall be in full force
and effect.
(c) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect and no other event outside
the
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control of Penford shall have occurred or failed to occur that prevents the
consummation of the Distribution.
(d) The transactions contemplated hereby shall be in compliance
with applicable federal and state securities laws.
(e) Each of Penwest and Penford shall have received such
consents, and shall have received executed copies of such agreements or
amendments of agreements, as they shall deem necessary in connection with the
completion of the transactions contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.
(f) All action and other documents and instruments deemed
necessary or advisable in connection with the transactions contemplated hereby
shall have been taken or executed, as the case may be, in form and substance
satisfactory to Penford and Penwest.
(g) No material adverse change shall have occurred with respect
to the business or financial condition of Penford since August 31, 1997, or
Penwest since September 30, 1997, which would, in the reasonable judgment of the
Penford Board of Directors, make approval of the Distribution inadvisable.
The foregoing conditions are for the sole benefit of Penford and shall not give
rise to or create any duty on the part of Penford or the Penford Board of
Directors to waive or not waive any such condition.
4.4 FRACTIONAL SHARES. As soon as practicable after the Distribution
Date, Penford shall direct the Agent to determine the number of whole shares and
fractional shares of Penwest Common Stock allocable to each holder of record of
Penford Common Stock as of the Record Date, to aggregate all such fractional
shares and sell the whole shares obtained thereby in open-market transactions in
the Agent's sole discretion as to when, how, through which broker-dealer and at
what price to make such sales, and to cause to be distributed to each such
holder or for the benefit of each such holder, in lieu of any fractional share,
such holder's ratable share of the proceeds of such sale, after making
appropriate deductions of the amount required to be withheld for federal income
tax purposes and after deducting an amount equal to all brokerage charges,
commissions and transfer taxes attributed to such sale. Penford and the Agent
shall use their reasonable best efforts to aggregate the shares of Penford
Common Stock that may be held by any holder of record thereof through more than
one account in determining the fractional share allocable to such holder.
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ARTICLE V
ACKNOWLEDGEMENT OF MATERIAL FACTS
5.1 ORGANIZATION. Penford and Penwest acknowledge that each is duly
organized, validly existing and in good standing under the laws of the State of
Washington, with requisite corporate power to own their properties and assets
and to carry on their respective businesses as presently conducted or
contemplated.
ARTICLE VI
MISCELLANEOUS LIABILITIES AND INDEMNIFICATION
6.1 PENWEST LIABILITIES; INDEMNIFICATION. Penwest shall indemnify,
defend and hold harmless Penford from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):
(a) the employment of Penwest Employees;
(b) the business of Penwest and the Penwest Assets;
(c) purchase orders, accounts payable, accrued compensation and
other accrued Penwest Liabilities and other agreements which relate to the
business of Penwest and the Penwest Assets; and
(d) any misstatement or omission of a material fact other than
misstatements or omissions with respect to Penford based on information supplied
in writing by Penford in any documents or filings prepared for purposes of
compliance or qualification under applicable securities laws in connection with
the Separation, IPO or Distribution and related transactions, including, without
limitation, the Registration Statement.
6.2 PENFORD LIABILITIES; INDEMNIFICATION. Penford shall indemnify,
defend and hold harmless Penwest from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):
(a) the business of Penford and the Liabilities not assumed by
Penwest under the terms of this Agreement or any other agreement or document
contemplated by this Agreement; and
(b) any misstatement or omission of a material fact with respect
to Penford based on information supplied in writing by Penford in any documents
or filings prepared for purposes of compliance or qualification under applicable
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securities laws in connection with the Separation, IPO or Distribution and
related transactions, including, without limitation, the Registration Statement.
6.3 PROCEDURES FOR INDEMNIFICATION OF THIRD PARTY CLAIMS.
(a) If any Person entitled to indemnification hereunder (an
"Indemnitee") shall receive notice or otherwise learn of the assertion by a
Person (including any Governmental Authority) of any claim or of the
commencement by any such Person of any Action (collectively, a "Third Party
Claim") with respect to which any party (an "Indemnifying Party") may be
obligated to provide indemnification to such Indemnitee pursuant to Section 6.1
or 6.2, or any other Section of this Agreement or any other agreement or
document contemplated by this Agreement or otherwise, such Indemnitee shall give
such Indemnifying Party written notice thereof within twenty (20) days after
becoming aware of such Third Party Claim. Any such notice shall describe the
Third Party Claim in reasonable detail. Notwithstanding the foregoing, the
failure of any Indemnitee or other Person to give notice as provided in this
Section 6.3(a) shall not relieve the Indemnifying Party of its obligations under
this Article VI, except to the extent that such Indemnifying Party is actually
prejudiced by such failure to give notice.
(b) An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days
after the receipt of notice from an Indemnitee in accordance with Section 6.3(a)
(or sooner, if the nature of such Third Party Claim so requires), the
Indemnifying Party shall notify the Indemnitee of its election whether the
Indemnifying Party will assume responsibility for defending such Third Party
Claim, which election shall specify any reservations or exceptions. After notice
from an Indemnifying Party to an Indemnitee of its election to assume the
defense of a Third Party Claim, such Indemnitee shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnitee except as set forth in Section 6.3(c).
(c) If an Indemnifying Party elects not to assume responsibility
for defending a Third Party Claim, or fails to notify an Indemnitee of its
election as provided in Section 6.3(b), such Indemnitee may defend such Third
Party Claim at the cost and expense (including allocated costs of in-house
counsel and other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the
defense of the Third Party Claim in accordance with the terms of this Agreement,
no Indemnitee may settle or compromise any Third Party Claim without the consent
of the Indemnifying Party.
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(e) No Indemnifying Party shall consent to entry of any judgment
or enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.
6.4 TAX LIABILITIES. Notwithstanding the provisions of Sections 6.1
and 6.2, all tax Liabilities relating to the business of Penwest and the Penwest
Assets including, without limitation, income taxes, franchise taxes, sales
taxes, use taxes, payroll taxes and employment taxes, shall be assumed by the
party to whom the Liability has been allocated in the Tax Allocation Agreement.
6.5 ADDITIONAL MATTERS.
(a) Any claim on account of a Liability which does not result
from a Third Party Claim shall be asserted by written notice given by the
Indemnitee to the Indemnifying Party. Such Indemnifying Party shall have a
period of thirty (30) days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such thirty
(30)-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such thirty (30)-day period or rejects such claim in whole or in
part, such Indemnitee shall be free to pursue such remedies as may be available
to such party as contemplated by this Agreement.
(b) In the event of payment by or on behalf of any Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place of such
Indemnitee as to any events or circumstances in respect of which such Indemnitee
may have the right, defense or claim relating to such Third Party Claim against
any claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense (including allocated costs of
in-house counsel and other personnel) of such Indemnifying Party, in prosecuting
any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is
not a named defendant, if either the Indemnitee or Indemnifying Party shall so
request, the parties shall endeavor to substitute the Indemnifying Party for the
named defendant. If such substitution or addition cannot be achieved for any
reason or is not requested, the named defendant shall allow the Indemnifying
Party to manage the Action as set forth in this Section and the Indemnifying
Party shall fully indemnify the named defendant against all costs of defending
the Action (including court costs, sanctions imposed by a court, attorneys'
fees, experts' fees and all other
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external expenses, and the allocated costs of in-house counsel and other
personnel), the costs of any judgment or settlement, and the cost of any
interest or penalties relating to any judgment or settlement.
6.6 REMEDIES CUMULATIVE. The remedies provided in this Article VI
shall be cumulative and shall not preclude assertion by an Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
ARTICLE VII
ACCESS TO INFORMATION AND SERVICES
7.1 PROVISION OF CORPORATE RECORDS. Upon Penwest's request, Penford
shall arrange as soon as practicable following the Effective Date for the
delivery to Penwest of existing corporate records in the possession of Penford
relating to the business of Penwest or assets to be transferred to Penwest,
together with all active agreements and active litigation files relating to the
businesses of Penwest, except to the extent such items are already in the
possession of Penwest. Such records shall be the property of Penwest but shall
be available to Penford for review and duplication until Penford shall notify
Penwest in writing that such records are no longer of use to Penford.
7.2 ACCESS TO INFORMATION. From and after the Effective Date, Penford
shall afford to Penwest and its authorized accountants, counsel and other
designated representatives reasonable access (including using reasonable best
efforts to give access to persons or firms possessing information) and
duplicating rights during normal business hours to all records, books,
contracts, instruments, computer data and other data and information
(collectively, "Information") within Penford's possession relating to the
businesses of Penwest, insofar as such access is reasonably required by Penwest.
Penwest shall afford to Penford and its authorized accountants, counsel and
other designated representatives reasonable access (including using reasonable
best efforts to give access to persons or firms possessing Information) and
duplicating rights during normal business hours to Information within Penwest's
possession relating to the business of Penwest prior to the Distribution or to
the business of Penford, insofar as such access is reasonably required by
Penford. Information may be requested under this Article VII for, without
limitation, audit, accounting, claims, litigation and tax purposes, as well as
for purposes of fulfilling disclosure and reporting obligations and for
performing the transactions contemplated in this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.
7.3 PENWEST SECURITIES FILINGS. For a period of three years following
the Effective Date, each of Penwest and Penford shall provide to the other,
promptly following such time at which such documents shall be filed with the
Commission,
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copies of all documents which shall be filed by either Penwest or Penford, as
the case may be, with the Commission pursuant to the periodic and interim
reporting requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder.
7.4 PRODUCTION OF WITNESSES. At all times from and after the Effective
Date, each of Penford and Penwest shall use reasonable best efforts to make
available to the other, upon written request, its officers, directors, employees
and agents as witnesses to the extent that such persons may reasonably be
required, in connection with legal, administrative or other proceedings in which
the requesting party may from time to time be involved.
7.5 REIMBURSEMENT. Except to the extent otherwise contemplated by any
Ancillary Agreement, a party providing information to the other party under this
Article VII shall be entitled to receive from the recipient, upon the
presentation of invoices therefor, payments for such amounts, relating to
supplies, disbursements and other out-of-pocket expenses, as may be reasonably
incurred in providing such information.
7.6 RETENTION OF RECORDS. For a period of six (6) years following the
Effective Date, each of Penford and Penwest shall retain all Information
relating to the other as of the Effective Date, except as otherwise required by
law or set forth in an Ancillary Agreement or except to the extent that such
Information is in the public domain or in the possession of the other party.
7.7 CONFIDENTIALITY. Subject to any contrary requirement of law and
the right of each party to enforce its rights hereunder in any legal action,
each party shall keep strictly confidential, and shall cause its employees and
agents to keep strictly confidential, any Information of or concerning the other
party which it or any of its agents or employees may acquire pursuant to, or in
the course of performing its obligations under, any provisions of this Agreement
or any Ancillary Agreement; provided, however, that such obligation to maintain
confidentiality shall not apply to Information which (i) at the time of
disclosure was in the public domain or (ii) was received by the receiving party
from a third party who did not receive such Information from the disclosing
party under an obligation of confidentiality.
ARTICLE VIII
COVENANTS
8.1 NASDAQ NATIONAL MARKET LISTING. Penwest hereby agrees to use its
reasonable best efforts to effect and maintain the listing of the Penwest Common
Stock on the Nasdaq National Market.
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8.2 ANCILLARY AGREEMENTS. The parties agree that they shall comply
with and provide all services and take any and all actions required to be
provided or taken by the terms of any and all of the Ancillary Agreements
following the Closing Date.
8.3 SHARING OF UTILITIES
(a) Penford agrees that Penwest shall be entitled to use and
consume, in an amount reasonably required, at Penwest's Cedar Rapids facility
certain utilities consisting of natural gas, electricity and steam from
Penford's Cedar Rapids facility. Any material change in the provision of such
utilities shall require six (6) months prior notice.
(b) In connection with the sharing of utilities as described in
Section 8.3(a), Penwest will reimburse Penford for its consumption of such
utilities based on Penford's total cost (including maintenance) for each item
and Penwest's fraction of the total consumption.
(c) Penford will submit a monthly invoice to Penwest of all
amounts owed by Penwest to Penford with respect to utilities consumed by Penwest
pursuant to Section 8.3(a). The charges will be due when billed and shall be
paid no later than thirty (30) days from the date of billing.
8.4 NON-COMPETITION
(a) From the Effective Date to the longer of (i) five years or
(ii) the termination of the Excipient Supply Agreement, neither Penford nor any
of its Affiliates shall, directly or indirectly, manufacture, market, sell or
distribute for inclusion in any pharmaceutical or nutritional product (including
vitamins, minerals and cofactors, but excluding foods) any product having the
same or substantially the same form, composition or applications as EMDEX or
CANDEX or any similar sugar- based product. From the Effective Date to the
longer of (i) five years or (ii) the termination of the Excipient Supply
Agreement, neither Penwest nor any of its Affiliates shall, directly or
indirectly, manufacture, market, sell or distribute for inclusion in any foods
product any product having the same or substantially the same form, composition
or applications as EMDEX or CANDEX or any similar sugar- based product.
(b) For a period of five years from the Effective Date, Penford
shall not directly or indirectly recruit or solicit any employee of Penwest, or
induce or attempt to induce any employee of Penwest to terminate his or her
employment with, or otherwise cease his or her relationship with, Penwest. For a
period of five years from the Effective Date, Penwest shall not directly or
indirectly recruit or solicit any employee of Penford, or induce or attempt to
induce any employee of Penford to
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terminate his or her employment with, or otherwise cease his or her relationship
with, Penford.
(c) If any restriction set forth in Sections 8.4 (a) or (b) is
found by any court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable.
(d) The restrictions contained in this Section 8.4 are necessary
for the protection of the respective businesses and goodwill of Penwest and
Penford and are considered by Penford and Penwest to be reasonable for such
purpose. Penford and Penwest agree that any breach of this Section 8.4 is likely
to cause Penwest or Penford, as the case may be, substantial and irrevocable
damage and therefore, in the event of any such breach, Penwest or Penford, as
the case may be, in addition to such other remedies which may be available,
shall be entitled to specific performance and other injunctive relief.
8.5 STOCK OPTIONS.
Prior to the Distribution Date, Penford shall (i) amend its stock plans
to provide that, for purposes of such stock plans, the term employee shall
include all Penwest Employees as of the Record Date, (ii) amend each Penford
stock option held by a Penwest Employee as of the Record Date to provide that
the option will continue to vest for so long as the Penwest Employee remains an
employee of Penwest and (iii) effective as of the Distribution Date, make an
adjustment to the exercise price of each Penford stock option outstanding as of
the Record Date and make an adjustment to the number of shares of Penford Common
Stock under each Penford stock option outstanding as of the Record Date. The
adjustment to the exercise price of such stock option shall be applied by
multiplying the exercise price of the option by a fraction, the numerator of
which shall equal the Penford Market Capitalization and the denominator of which
shall equal the sum of the Penford Market Capitalization and the Penwest Market
Capitalization. The adjustment in the number of shares of Penford Common Stock
shall be applied by multiplying the number of shares of Penford Common Stock
under each Penford stock option as of the Record Date by a fraction, the
numerator of which shall equal the sum of the Penford Market Capitalization and
Penwest Market Capitalization and the denominator of which shall equal the
Penford Market Capitalization. Thus, a holder of an option to purchase one share
of Penford Common Stock at an exercise price of $10 per share shall have the
exercise price of the option reduced from $10 per share to $6.66 per share
(i.e., $10 x 200,000,000/300,000,000 = $6.66 and number of shares increased by
1.5 (i.e. 1 x 300,000,000/200,000,000 = 1.5)).
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8.6 REGISTRATION RIGHTS.
(a) REGISTRATION OF SHARES. In the event that the Distribution
has not occurred by September 30, 1998, upon the request of Penford, Penwest
shall file with the SEC, as promptly as practicable, a resale registration
statement (the "Resale Registration Statement"). Penford shall have the right to
request up to three Resale Registration Statements, provided that Penwest shall
have no obligation to file any such resale registration statement on or prior to
a ninety (90) day period following the filing of any other registration
statement by Penwest. Penwest shall use its reasonable best efforts to cause
each Resale Registration Statement to be declared effective by the SEC as soon
as practicable. If a Resale Registration Statement shall be withdrawn before
effectiveness, it shall not be counted against Penford's right to request three
registrations.
(b) LIMITATIONS ON REGISTRATION RIGHTS.
(i) Penwest may, by written notice to Penford, for a period
of up to 45 days from the date of written notice, delay the filing or
effectiveness of any of the Resale Registration Statements in the event that (1)
Penwest is engaged in any activity or transaction that Penwest desires to keep
confidential for business reasons, (2) the Penwest Board of Directors determines
in good faith that the disclosure of such information would be detrimental to
Penwest, and (3) the Penwest Board of Directors determines in good faith that
the public disclosure requirements imposed on Penwest under the Securities Act
in connection with any such Resale Registration Statement would require
disclosure of such activity or transaction.
(ii) If Penwest delays a Resale Registration Statement,
Penwest shall, as promptly as practicable following the termination of the
circumstances which entitled Penwest to do so, take such actions as may be
necessary to file or reinstate the effectiveness of a Resale Registration
Statement. If as a result thereof the prospectus included in a Resale
Registration Statement has been amended to comply with the requirements of the
Securities Act, Penwest shall enclose such revised prospectus with the notice to
Penford given pursuant to this paragraph (ii), and Penford shall make no offers
or sales of shares pursuant to a Resale Registration Statement other than by
means of such revised prospectus.
(c) REGISTRATION PROCEDURES.
(i) In connection with the filing by Penwest of a Resale
Registration Statement, Penwest shall furnish to Penford as many copies of the
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act as Penford shall reasonably request for the
purpose of effecting the plan of distribution set forth therein.
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<PAGE> 24
(ii) Penwest shall use its best efforts to register or
qualify the Penwest Common Stock covered by a Resale Registration Statement
under the securities laws of such states as Penford shall reasonably request;
provided, however, that Penwest shall not be required in connection with this
paragraph (ii) to qualify as a foreign corporation or execute a general consent
to service of process in any jurisdiction.
(iii) If Penwest has delivered preliminary or final
prospectuses to Penford and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, Penwest shall promptly
notify Penford and, if requested by Penwest, Penford shall immediately return
all prospectuses to Penwest. Penwest shall promptly provide Penford with revised
prospectuses.
(iv) At the request of Penford, Penwest shall sign an
underwriting agreement in customary form with managing underwriters selected by
Penford, and shall cooperate with such managing underwriters in all reasonable
respects to facilitate the distribution contemplated by Penford, including
without limitation making available the books, records and personnel of Penwest
for the purpose of the underwriters' "due diligence" and providing customary
legal opinions and auditors' comfort letters.
(v) Each of Penwest and Penford shall share in equal
amounts the expenses incurred by Penwest in complying with its obligations under
this Section 8.6, including all registration and filing fees, exchange listing
fees, fees and expenses of counsel for Penwest, and fees and expenses of
accountants for Penwest, but excluding (A) any brokerage fees, selling
commissions or underwriting discounts incurred by Penford in connection with
sales under a Resale Registration Statement and (B) the fees and expenses of any
counsel retained by Penford.
(d) If Penwest begins preparations to file a registration
statement for sale of securities on a form in which common stock held by Penford
may be included, Penwest shall notify Penford in writing at least thirty (30)
days before filing the registration statement and shall include therein any
Penwest Common Stock that Penford requested to be included.
(e) REQUIREMENTS OF PENFORD. Penwest shall not be required to
include any Penwest Common Stock owned by Penford in a Resale Registration
Statement unless:
(i) Penford furnishes to Penwest in writing such
information regarding Penford as Penwest may reasonably request in writing in
connection with the Resale Registration Statement or as shall be required in
connection therewith by the SEC or any state securities law authorities;
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<PAGE> 25
(ii) Penford shall have provided to Penwest its written
agreement:
(A) to indemnify Penwest and each of its directors and
officers against, and hold Penwest and each of its directors and officers
harmless from, any losses, claims, damages, expenses or liabilities (including
reasonable attorneys fees) to which Penwest or such directors and officers may
become subject by reason of any statement or omission in the Resale Registration
Statement made in reliance upon, or in conformity with, any written statement by
Penford furnished pursuant to this Section 8.6(e); and
(B) to report to Penwest sales made pursuant to the
Resale Registration Statement.
(f) Penwest agrees to indemnify and hold harmless Penford against
any losses, claims, damages, expenses or liabilities to which Penford may become
subject by reason of any untrue statements of a material fact contained in the
Resale Registration Statement or any omission to state therein a fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, expenses or liabilities arise
out of or are based upon information furnished to Penwest in writing by or on
behalf of Penford for use in the Resale Registration Statement. Penwest shall
have the right to assume the defense and settlement of any claim or suit for
which Penwest may be responsible for indemnification under this Section 8.6(f).
(g) ASSIGNMENT OF RIGHTS. Penford may not assign any of its
rights under this Section 8.6.
8.7 MUTUAL ASSURANCES.
(a) In addition to the actions specifically provided for
elsewhere in this Agreement or any other agreement or document contemplated by
this Agreement or otherwise, Penford and Penwest agree to cooperate with respect
to the implementation of this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, and to execute such further
documents and instruments as may be necessary to consummate and make effective
the transactions contemplated by this Agreement or any other agreement or
document contemplated by this Agreement or otherwise;
(b) Penford and Penwest shall arrange, attend and participate in
joint meetings with corporate collaborators, suppliers, customers and others to
the extent necessary to assure the orderly transition of the business and assets
contemplated hereby, provided that nothing herein shall be deemed to obligate
either Penford or
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Penwest to take any action or reach any understandings which may violate any
applicable laws.
(c) Penford and Penwest agree to take any reasonable actions
necessary in order for the Distribution to qualify as a tax-free distribution
pursuant to Sections 355 and 368 of the Code.
(d) Penford and Penwest agree that they shall not take any action
which could reasonably be expected to prevent the Distribution from qualifying
as a tax-free distribution within the meaning of Sections 355 and 368 of the
Code or any other transaction contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise which is
intended by the parties to be tax-free from failing so to qualify. Without
limiting the foregoing, after the Closing Date and on or prior to the
Distribution Date, Penwest shall not issue or grant, directly or indirectly, any
shares of Penwest Common Stock or any rights, warrants, options or other
securities to purchase or acquire (whether upon conversion, exchange or
otherwise) any shares of Penwest Common Stock (whether or not then exercisable,
convertible or exchangeable).
ARTICLE IX
TERMINATION
9.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of Penford and
Penwest.
9.2 OTHER TERMINATION. This Agreement shall terminate if the
Distribution Date shall not have occurred on or prior to December 31, 1998.
9.3 EFFECT OF TERMINATION.
(a) In the event of any termination of this Agreement prior to
the Closing Date, no party to this Agreement (or any of its directors or
officers) shall have any Liability or further obligation to any other party.
(b) In the event of any termination of this Agreement on or after
the Closing Date, only the provisions of Article IV will terminate and the other
provisions of this Agreement or any agreement or document contemplated by this
Agreement or otherwise shall remain in full force and effect.
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ARTICLE X
MISCELLANEOUS
10.1 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Washington.
10.2 CONSTRUCTION. Each provision of this Agreement shall be
interpreted in a manner to be effective and valid to the fullest extent
permissible under applicable law. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions of
this Agreement which shall remain in full force and effect.
10.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
10.4 EXHIBITS. Exhibits to this Agreement shall be deemed to be an
integral part hereof, and schedules or exhibits to such Exhibits shall be deemed
to be an integral part thereof.
10.5 AMENDMENTS; WAIVERS. This Agreement may be amended or modified
only in a writing executed on behalf of Penford and Penwest. No waiver shall
operate to waive any further or future act and no failure to object of
forbearance shall operate as a waiver.
10.6 NOTICES. Notices hereunder shall be effective if given in writing
and delivered or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777-108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: The President
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The President
10.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein
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<PAGE> 28
or in any exhibit or schedule hereto shall not be assignable, in whole or in
part, without the prior written consent of the parties hereto and any attempt to
effect any such assignment without such consent shall be void.
10.8 PUBLICITY. Prior to the Distribution, each of Penwest and Penford
shall consult with each other prior to issuing any press releases or otherwise
making public statements with respect to the IPO, the Distribution or any of the
other transactions contemplated hereby and prior to making any filings with any
Governmental Authority with respect thereto.
10.9 EXPENSES. Except as expressly set forth in this Agreement or in
any other agreement or document contemplated by this Agreement or otherwise,
whether or not the IPO or the Distribution is consummated, all third party fees,
costs and expenses paid or incurred in connection with the Distribution will be
paid by Penford.
10.10 HEADINGS. The article, section and paragraph headings contained
in this Agreement and in the Ancillary Agreements are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement or any Ancillary Agreement.
10.11 ARBITRATION. Any dispute, controversy or claim arising out of or
in connection with this Agreement or any of the Ancillary Agreements (including
any questions of fraud or questions concerning the validity and enforceability
of this Agreement or any of the Ancillary Agreements or any of the rights herein
and therein conveyed), shall be determined and settled by arbitration in
Seattle, Washington, pursuant to the rules then in effect of the American
Arbitration Association as modified by this paragraph. Any award rendered shall
be final and conclusive upon the parties and a judgment thereon may be entered
in any court having competent jurisdiction. The party submitting such dispute
shall give written notice to that effect to the other party, stating the dispute
to be arbitrated and the name and address of a person designated to act as
arbitrator on its behalf. Within fifteen (15) days after such notice, the other
party shall give written notice to the first party stating the name and address
of a person designated to act as an arbitrator on its behalf. In the event that
the second party shall fail to notify the first party of its designation of an
arbitrator within the time specified, then the first party shall request the
American Arbitration Association to appoint a second arbitrator. The two
arbitrators so chosen shall meet within fifteen (15) days after the second
arbitrator has been appointed to appoint a third arbitrator. If the two
arbitrators are unable to agree on the appointment of a third arbitrator within
such fifteen (15) day period, either party may request the American Arbitration
Association to appoint a third arbitrator. Each arbitrator appointed hereunder
shall be independent of the parties and either party may disqualify an
arbitrator who is or is affiliated with a supplier, customer or competitor of
either party without the consent of the other party. Each
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<PAGE> 29
arbitrator shall be reasonably knowledgeable regarding the area or areas in
dispute. The arbitrators shall follow substantive rules of law and the Federal
Rules of Evidence, require the parties to conduct discovery pursuant to the
rules then in effect under the Federal Rules of Civil Procedure in an
expeditious manner, cause testimony to be transcribed, and make an award
accompanied by findings of fact and a statement of reasons for the decision. All
costs and expenses, including attorney's fees, of all parties incurred in any
dispute which is determined and/or settled by arbitration pursuant to this
paragraph shall be borne by the party determined to be liable in respect of such
dispute; provided, however, that if complete liability is not assessed against
only one party, the parties shall share the total costs in proportion to their
respective amounts of liability so determined. Except where clearly prevented by
the area in dispute, both parties agree to continue performing their respective
obligations under this Agreement while the dispute is being resolved. Each
party, and the arbitrators, shall use their best efforts, subject to reasonable
prosecution of the arbitration, court order and disclosure required under
securities laws, to keep the subject matter of the arbitration and confidential
information of each party confidential, and the arbitrators are authorized to
impose such protective orders as they may deem appropriate for such purpose.
10.12 ENTIRE AGREEMENT. This Agreement contains the full understanding
of the parties with respect to the subject matter hereof and supersedes all
prior understandings and writings relating thereto. No waiver, alteration or
modification of any of the provisions hereof shall be binding unless made in
writing and signed by the parties.
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<PAGE> 30
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PENFORD CORPORATION
By: _______________________
Title:_____________________
PENWEST PHARMACEUTICALS CO.
By: ______________________
Title:_____________________
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<PAGE> 1
EXCIPIENT SUPPLY AGREEMENT
This EXCIPIENT SUPPLY AGREEMENT (the "Agreement") is made as of the ___
day of _____, 1997 (the "Effective Date") between PENFORD CORPORATION, a
Washington corporation (previously known as PENWEST, LTD.) ("Penford"), and
PENWEST PHARMACEUTICALS CO., a Washington corporation ("Penwest").
RECITALS:
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, Penford and Penwest wish to enter into an agreement describing
the terms and conditions upon which Penford will manufacture and supply to
Penwest, and Penwest will purchase from Penford, EMDEX and CANDEX (sugar based
tabletting binders hereinafter referred to as "Pharmaceutical Excipients") in
bulk form; and
WHEREAS, this Agreement is entered into pursuant to the Separation
Agreement dated as of ______________, 1997 between Penford and Penwest (the
"Separation Agreement");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
ARTICLE 1
SUPPLY OF PHARMACEUTICAL EXCIPIENTS
1.1 PURCHASES OF PHARMACEUTICAL EXCIPIENTS. Except as otherwise set
forth herein, commencing as of the Effective Date, Penwest shall purchase
exclusively from Penford, Penwest's requirements for Pharmaceutical Excipients.
Penford shall manufacture and sell Pharmaceutical Excipients to Penwest in bulk
form.
1.2 PRODUCTION PLANNING; FORECASTS.
(a) To facilitate Penford's planning for the supply of
Pharmaceutical Excipients, Penwest shall give Penford, at the beginning of every
calendar quarter, an estimate of its requirements of the Pharmaceutical
Excipients for the following twelve (12) months (the "Rolling Forecast"). The
Rolling Forecast shall specify the monthly estimate for the first six (6) months
of the forecast period and the quarterly estimate for the next six (6) months
based on calendar quarters.
<PAGE> 2
(b) Penwest shall furnish Penford firm written purchase orders
for its planned monthly requirements of Pharmaceutical Excipients no later than
thirty (30) days prior to the required date for receipt of the shipment. Such
firm purchase orders shall be equal to no less than eighty percent (80%) of the
monthly estimate contained in the Rolling Forecast. The form of purchase order
to be used by Penwest shall be agreed upon by the parties in advance of Penwest
submitting firm orders for Pharmaceutical Excipients.
(c) Penford shall deliver Pharmaceutical Excipients F.O.B.
Penford's place of manufacture.
(d) All invoices for Pharmaceutical Excipients shall be due and
payable within thirty (30) days from the date of invoice to Penwest, which date
of invoice shall not be earlier than the date of shipment.
(e) Penford shall inform Penwest as soon as possible regarding
any anticipated long-term or short-term supply problems.
1.3 INSPECTIONS. Throughout the period during which Penford is
responsible for the manufacture of Pharmaceutical Excipients for sale to
Penwest, Penwest shall have the right, on ten (10) days prior notice, to inspect
the manufacturing facility of Penford at which a Pharmaceutical Excipient is
being manufactured to assure compliance with (i) the terms and conditions of
this Agreement; (ii) current approved standards of Good Manufacturing Practice
(cGMP); and (iii) environmental laws and regulations; provided, however, that
such inspections (a) shall not be undertaken more frequently than once per
calendar year unless such inspection reveals a cause for further investigation,
and (b) shall be during normal business hours and not unreasonably interrupt the
operations of Penford.
ARTICLE 2
MANUFACTURING PRICE
2.1 PHARMACEUTICAL EXCIPIENT PRICE. The price at which Penford shall
sell Pharmaceutical Excipients to Penwest (the "Purchase Price") shall be as set
forth in EXHIBIT A.
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<PAGE> 3
ARTICLE 3
WARRANTY; COMPLAINTS
3.1 WARRANTY. Penford warrants that each Pharmaceutical Excipient,
when supplied by Penford to Penwest hereunder and through the product expiration
date thereafter, shall meet the product specifications for such Pharmaceutical
Excipient set forth on EXHIBIT B hereto, as such specifications may be modified
from time to time by mutual agreement of the parties (the "Specifications"). In
addition, Penford warrants that all Pharmaceutical Excipients delivered
hereunder shall be produced in accordance with cGMP and all applicable laws,
rules and regulations. Except as otherwise provided in this Agreement, Penford's
only liability for breach of this warranty shall be to replace, at its own
expense, the non-conforming Pharmaceutical Excipient as provided in Section
3.2(b). EXCEPT FOR THE CONTRACTUAL PROVISIONS EXPRESSLY SET FORTH IN THIS
AGREEMENT, PENFORD DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, WRITTEN OR
ORAL, WITH RESPECT TO PHARMACEUTICAL EXCIPIENTS, INCLUDING, BUT NOT LIMITED TO,
ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE.
In no event shall Penford be liable to Penwest for special, incidental, indirect
or consequential damages arising out of the manufacture, use or sale of any
Pharmaceutical Excipient whether based on contract, tort or any other legal
theory.
3.2 COMPLAINTS REGARDING PHARMACEUTICAL EXCIPIENTS. In the event
Penwest has a complaint with respect to a Pharmaceutical Excipient supplied to
Penwest, then:
(a) if Penwest's complaint concerns the quantity of such
Pharmaceutical Excipient, Penwest shall provide Penford written notice of its
complaint and provide sufficient evidence to substantiate the short quantity.
Upon receipt of such written notice and substantiating evidence, Penford shall
supply to Penwest as promptly as practicable, however in no event later than
sixty (60) days, the said short quantity of such Pharmaceutical Excipient. Such
replacement quantity shall be provided by Penford at no additional cost to
Penwest, assuming that Penwest has already paid for the agreed upon quantity;
(b) if Penwest's complaint concerns the quality of such
Pharmaceutical Excipient (non-compliance with the Specifications (as defined
below)), Penwest shall provide Penford written notice of its complaint and
provide sufficient analytical evidence, based on the use of assays reasonably
acceptable to Penford, to substantiate the impairment. Upon receipt of such
written notice and substantiating evidence, the impaired amount of
Pharmaceutical Excipients shall be replaced by Penford with an equal amount of
Pharmaceutical Excipients conforming with the Specifications (as defined below),
as promptly as practicable, however, in no event later than sixty (60) days.
Such replacement quantity shall be provided by Penford at
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<PAGE> 4
no additional cost to Penwest, assuming that Penwest has already paid for such
replacement quantity;
(c) should Penford disagree with the substantiating evidence
provided by Penwest, Penford shall supply the replacement quantity of
Pharmaceutical Excipients in accordance with the terms of paragraphs (a) and (b)
of this Section 3.2, and then both parties shall immediately and jointly carry
out the necessary analysis to verify whether Penwest's complaint is justified.
Should said analysis confirm the validity of the complaint by Penwest, then the
matter shall be deemed conclusively resolved. Should said analysis confirm the
invalidity of the complaint by Penwest, then Penford shall invoice Penwest for
the replacement quantity provided in accordance with the terms of this
Agreement;
(d) in the event that a disagreement concerning the quantity or
quality of a Pharmaceutical Excipient continues after the joint analyses by
Penwest and Penford, the matter shall be submitted to an independent laboratory
chosen by Penwest and reasonably acceptable to Penford. The findings of this
independent laboratory, based on the use of assays reasonably acceptable to both
Penford and Penwest, shall be final and binding on both Penford and Penwest and
the fees and expenses of this independent laboratory shall be paid by the
non-prevailing party; and
(e) this Section 3.2 sets forth Penwest's exclusive remedy for
any complaint described in this Section 3.2. In no event shall Penford be liable
for any special, incidental, indirect or consequential damages arising out of or
associated with any such complaint.
ARTICLE 4
PRODUCT LIABILITY INDEMNIFICATION
4.1 PRODUCT LIABILITY INDEMNIFICATION BY PENFORD. Penford agrees to
defend Penwest and its affiliates and sublicensees, at Penford's cost and
expense, and to indemnify and hold Penwest and its affiliates and sublicensees,
and their respective directors, officers, employees and agents (the "Penwest
Indemnified Parties") harmless from and against any losses, costs, damages, fees
or expenses arising out of any claim relating to personal injury from the
development, manufacture, importation, use, sale or other disposition of a
Pharmaceutical Excipient manufactured by or for Penford, to the extent that such
claim arises out of a failure by Penford to manufacture such Pharmaceutical
Excipient in conformity with the Specifications and other requirements set forth
in Section 3.1. In the event of any such claim against the Penwest Indemnified
Parties by any party, Penwest shall promptly notify Penford in writing of the
claim and Penford shall manage and control, at its sole expense, the defense of
the claim and its settlement. The Penwest Indemnified Parties shall cooperate
with Penford and may, at their option and expense, be represented in any
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<PAGE> 5
such action or proceeding. Penford shall not be liable for any litigation costs
or expenses incurred by the Penwest Indemnified Parties without Penford's
written authorization so long as Penford has assumed the defense thereof as
provided in this Section 4.1.
4.2 PRODUCT LIABILITY INDEMNIFICATION BY PENWEST. Penwest agrees to
defend Penford and its affiliates and sublicenses, at Penwest's cost and
expense, and to indemnify and hold Penford and its affiliates and sublicensees,
and their respective directors, officers, employees and agents (the "Penford
Indemnified Parties") harmless from and against any losses, costs, damages, fees
or expenses arising out of any claim relating to personal injury from the
development, manufacture, importation, use, sale or other disposition of any
Pharmaceutical Excipient sold by Penford to Penwest except to the extent that
such claim arises out of a failure by Penford to manufacture such Pharmaceutical
Excipient in accordance with the specifications and other requirements set forth
in Section 3.1. In the event of any such claim against the Penford Indemnified
Parties by any party, Penford shall promptly notify Penwest in writing of the
claim and Penwest shall manage and control, at its sole expense, the defense of
the claim and its settlement. The Penford Indemnified Parties shall cooperate
with Penwest and may, at their option and expense, be represented in any such
action or proceeding. Penwest shall not be liable for any litigation costs or
expenses incurred by the Penford Indemnified Parties without Penwest's written
authorization so long as Penwest has assumed the defense thereof as provided in
this Section 4.2.
ARTICLE 5
RIGHT OF PENWEST TO MANUFACTURE
5.1 DEFAULT EVENTS. With respect to each Pharmaceutical Excipient, in
the event that Penford (a) fails to provide Penwest with such Pharmaceutical
Excipient in accordance with the forecast and order procedures of Article 1
hereof and such failure results in a shortfall of twenty percent (20%) or more
for any single calendar quarter or between fifteen percent (15%) and twenty-five
percent (25%) for any two consecutive calendar quarters, or (b) supplies Penwest
with Pharmaceutical Excipients which fail on more than two occasions to conform
to the Specifications (and Penford is unable to remedy the nonconformity in
accordance with Article 3 hereof), then Penwest shall have the right to purchase
such Pharmaceutical Excipient from a bona fide third party supplier or
manufacturer of such Pharmaceutical Excipient.
5.2 COMPETITIVE BID OPTION. With respect to each Pharmaceutical
Excipient, in the event that Penwest can reasonably demonstrate to Penford that
a bona fide third party supplier has the documented capacity to manufacture such
Pharmaceutical Excipient of at least the same quality as the Pharmaceutical
Excipients manufactured by or for Penford, in at least the same quantity and at
a cost that is less than ninety percent (90%) of the Purchase Price for such
Pharmaceutical
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<PAGE> 6
Excipient currently charged Penwest by Penford, then Penford shall have sixty
(60) days in which to reduce its Purchase Price for such Pharmaceutical
Excipient to the price to be charged Penwest by such third party. If within such
sixty (60) day period, Penford fails to reduce its Purchase Price for such
Pharmaceutical Excipient to the price to be charged by such third party, then
Penwest shall have the right to purchase any and all amounts of such
Pharmaceutical Excipient from such third party. Penwest shall notify Penford in
writing of any decision by Penwest to acquire Pharmaceutical Excipients from
such bona fide third party, and this Agreement shall thereafter be terminable
with respect to such Pharmaceutical Excipient at any time at Penford's election.
5.3 COOPERATION BY PENFORD. In the event that Penwest chooses to
purchase any Pharmaceutical Excipients from a bona fide third party supplier
pursuant to Sections 5.1 and 5.2, Penford shall cooperate with such third party
supplier and shall make available, free of charge, any and all technology which
is necessary or required to enable the third party supplier selected by Penwest
to manufacture such Pharmaceutical Excipients. Subject to any contrary
requirement of law and the right of each party to enforce its rights hereunder
in any legal action, such bona fide third party supplier shall enter into a
confidentiality agreement in form and substance satisfactory to Penford to keep
strictly confidential, and shall cause its employees and agents to keep strictly
confidential, any information of or concerning Penford which it or any of its
agents or employees may acquire pursuant to, or in the course of performing its
obligations under, any excipient supply agreement entered into between Penwest
and such third party supplier; provided, however, that such obligation to
maintain confidentiality shall not apply to information which (i) at the time of
disclosure was in the public domain; (ii) was already independently in the
possession of such third party supplier at the time of disclosure, or (iii) was
received by such third party supplier from a third party who did not receive
such information from the disclosing party under an obligation of
confidentiality.
ARTICLE 6
TERMINATION
6.1 TERMINATION BY PENFORD. Without prejudice to any other rights it
may have hereunder or at law or in equity, Penford may terminate this Agreement
in the event of any of the following:
(a) upon a material breach of this Agreement by Penwest which, if
curable and not a payment default, is not cured by Penwest within ninety (90)
days of a written notice thereof by Penford or which, if a payment default, is
not cured within thirty (30) days of a written notice thereof by Penford; or
(b) upon written notice at least one year prior to such
termination.
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<PAGE> 7
6.2 TERMINATION BY PENWEST. Without prejudice to any other rights it
may have hereunder or at law or in equity, Penwest may terminate this Agreement
in the event of any of the following:
(a) upon a material breach of this Agreement by Penford which, if
curable, is not cured by Penford within ninety (90) days of a written notice
thereof by Penwest; or
(b) upon written notice at least one year prior to such
termination.
6.3 SURVIVAL OF OBLIGATIONS. Notwithstanding any termination of this
Agreement, (a) neither party shall be relieved of any obligation incurred prior
to such termination and (b) the obligations of the parties with respect to the
protection and nondisclosure of Confidential Information (Article 7), as well as
any other provisions which by their nature are intended to survive any such
termination, shall survive and continue to be enforceable.
ARTICLE 7
CONFIDENTIAL INFORMATION
7.1 CONFIDENTIALITY. Subject to any contrary requirement of law and
the right of each party to enforce its rights hereunder in any legal action,
each party shall keep strictly confidential, and shall cause its employees and
agents to keep strictly confidential, any information of or concerning the other
party which it or any of its agents or employees may acquire pursuant to, or in
the course of performing its obligations under, any provisions of this Agreement
or which it may have obtained from the other party before the commencement of
this Agreement that relates to the subject matter of this Agreement; provided,
however, that such obligation to maintain confidentiality shall not apply to
information which (i) at the time of disclosure was in the public domain; (ii)
was already independently in the possession of the receiving party at the time
of disclosure, or (iii) was received by the receiving party from a third party
who did not receive such information from the disclosing party under an
obligation of confidentiality.
ARTICLE 8
MISCELLANEOUS
8.1 TERM. The initial term of this Agreement shall commence on the
Effective Date and, subject to earlier termination pursuant to Article 6,
continue until December 31, 2003, and any subsequent renewal terms provided that
this Agreement shall automatically renew at the end of the initial term for
successive one year terms unless either party, at least ninety (90) days prior
to the expiration of the initial or renewal terms, provides written notice of
its election not to renew the term.
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<PAGE> 8
8.2 INDEPENDENT STATUS OF PARTIES. Each party shall act as an
independent contractor and shall not bind nor attempt to bind the other party to
any contract, or any performance of obligations outside of this Agreement.
Nothing contained or done under this Agreement shall be interpreted as
constituting either party the agent of the other in any sense of the term
whatsoever unless expressly so stated.
8.3 FORCE MAJEURE In the event of strikes, lock-outs or other
industrial disturbances, rebellions, mutinies, epidemics, landslides, lightning,
earthquakes, fires, storms, floods, sinking, drought, civil disturbances,
explosions, acts or decisions of duly constituted municipal, state or national
governmental authorities or of courts of law, as well as impossibility to obtain
equipment, supplies, fuel or other required materials, in spite of having acted
with reasonable diligence, or by reason of any other causes, which are not under
the control of the party requesting the abatement of performance, or causes due
to unexpected circumstances which may not be possible to eliminate or overcome
with due diligence by such party ("Force Majeure"), the parties agree that, if
either of them find themselves wholly or partially unable to fulfill their
respective obligations in this Agreement by reasons of Force Majeure, the party
affected will advise the other party in writing of its inability to perform
giving a detailed explanation of the occurrence of the event which excuses
performance as soon as possible after the cause or event has occurred. If said
notice is given, the performance of the party giving the notification, except
the payment of funds, shall be abated for so long as performance may be
prevented by such event of Force Majeure. Except for the payment of funds that
are due and payable, neither party shall be required to make up any performance
that was prevented by Force Majeure.
8.4 PUBLICITY. Each of Penwest and Penford shall consult with each
other prior to issuing any press releases or otherwise making public statements
with respect to any transactions contemplated hereby.
8.5 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Washington.
8.6 NOTICES. Notices hereunder shall be effective if given in writing
and delivered or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777-108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: The President
or to:
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<PAGE> 9
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The President
8.7 ENTIRE AGREEMENT. This Agreement contains the full understanding
of the parties with respect to the subject matter hereof and supersedes all
prior understandings and writings relating thereto. No waiver, alteration or
modification of any of the provisions hereof shall be binding unless made in
writing and signed by the parties.
8.8 HEADINGS. The article, section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
8.9 CONSTRUCTION. Each provision of this Agreement shall be
interpreted in a manner to be effective and valid to the fullest extent
permissible under applicable law. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions of
this Agreement which shall remain in full force and effect.
8.10 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein or in any exhibit or schedule hereto shall not be assignable,
in whole or in part, without the prior written consent of the parties hereto or
except in connection with a sale by a party of all or substantially all of its
assets and any attempt to effect any such assignment without such consent shall
be void.
8.11 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
8.12 AMENDMENTS; WAIVERS. This Agreement may be amended or modified
only in writing executed on behalf of Penford and Penwest. No waiver shall
operate to waive any further or future act and no failure to object of
forbearance shall operate as a waiver.
8.13 EXHIBITS. Exhibits to this Agreement shall be deemed to be an
integral part hereof, and schedules or exhibits to such Exhibits shall be deemed
to be an integral part thereof.
8.14 ARBITRATION. Any dispute, controversy or claim arising out of or
in connection with this Agreement (including any questions of fraud or questions
concerning the validity and enforceability of this Agreement or any of the
rights
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<PAGE> 10
herein), shall be determined and settled by arbitration in Seattle, Washington,
pursuant to the rules then in effect of the American Arbitration Association as
modified by this paragraph. Any award rendered shall be final and conclusive
upon the parties and a judgment thereon may be entered in any court having
competent jurisdiction. The party submitting such dispute shall give written
notice to that effect to the other party, stating the dispute to be arbitrated
and the name and address of a person designated to act as arbitrator on its
behalf. Within fifteen (15) days after such notice, the other party shall give
written notice to the first party stating the name and address of a person
designated to act as a substitute on its behalf. In the event that the second
party shall fail to notify the first party of its designation of an arbitrator
within the time specified, then the first party shall request the American
Arbitration Association to appoint a second arbitrator. The two arbitrators so
chosen shall meet within fifteen (15) days after the second arbitrator has been
appointed to appoint a third arbitrator. If the two arbitrators are unable to
agree on the appointment of a third arbitrator within such fifteen (15) day
period, either party may request the American Arbitration Association to appoint
a third arbitrator. Each arbitrator appointed hereunder shall be independent of
the parties and either party may disqualify an arbitrator who is or is
affiliated with a supplier, customer or competitor of either party without the
consent of the other party. Each arbitrator shall be reasonably knowledgeable
regarding the area or areas in dispute. The arbitrators shall follow substantive
rules of law and the Federal Rules of Evidence, require the parties to conduct
discovery pursuant to the rules then in effect under the Federal Rules of Civil
Procedure in an expeditious manner, cause testimony to be transcribed, and make
an award accompanied by findings of fact and a statement of reasons for the
decision. All costs and expenses, including attorney's fees, of all parties
incurred in any dispute which is determined and/or settled by arbitration
pursuant to this paragraph shall be borne by the party determined to be liable
in respect of such dispute; provided, however, that if complete liability is not
assessed against only one party, the parties shall share the total costs in
proportion to their respective amounts of liability so determined. Except where
clearly prevented by the area in dispute, both parties agree to continue
performing their respective obligations under this Agreement while the dispute
is being resolved. Each party, and the arbitrators, shall use their best
efforts, subject to reasonable prosecution of the arbitration, court order and
disclosure required under securities laws, to keep the subject matter of the
arbitration and confidential information of each party confidential, and the
arbitrators are authorized to impose such protective orders as they may deem
appropriate for such purpose.
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<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PENFORD CORPORATION
By: ______________________
Title: ___________________
PENWEST PHARMACEUTICALS CO.
By: ______________________
Title: ___________________
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<PAGE> 12
EXHIBIT A
The purchase price for the Pharmaceutical Excipients at the
commencement of the Excipient Supply Agreement and during the first year of this
Agreement shall be $0.33 per pound. Upon completion of the first year of this
Agreement, a new purchase price shall be negotiated in good faith by the parties
on an annual basis or for such other period of time as the parties may agree
upon. If the parties fail to reach agreement on a new purchase price, the then
current purchase price shall remain in effect, provided that either party shall
have the right to terminate this Agreement upon ninety (90) days prior written
notice.
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<PAGE> 1
SERVICES AGREEMENT
THIS AGREEMENT is made as of _______________, 1997 (the "Effective
Date") between PENFORD CORPORATION, a Washington corporation (previously known
as PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington
corporation ("Penwest").
RECITALS
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, Penford and Penwest recognize that it is advisable for Penford
to continue providing certain administrative and other services to Penwest until
Penwest has had a reasonable opportunity to evaluate its continued need for the
services and to investigate other sources of the services; and
WHEREAS, this Agreement is entered into pursuant to the Separation
Agreement dated as of ___________, 1997 between Penford and Penwest (the
"Separation Agreement") (All capitalized terms used and not otherwise defined
herein shall have the meanings set forth in the Separation Agreement);
NOW, THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
SECTION 1 - SERVICES
1.1 SERVICES. Beginning on the Effective Date, Penford, through its
corporate staff, will provide or otherwise make available to Penwest, upon the
reasonable request of Penwest, certain general corporate services, including but
not limited to accounting and audit, finance and treasury, tax, financial and
human resource services, and arrange for administration of insurance and risk
management and employee benefit programs. The services may include the
following:
(a) ACCOUNTING RELATED SERVICES. Provision of general financial
advice and services including, without limitation, assistance with respect to
matters such as raising of additional capital, cash management and financial
controls.
(b) TAX RELATED SERVICES. Preparation of Federal tax returns,
preparation of state and local tax returns (including income tax returns), tax
research and planning and assistance on tax audits (Federal, state and local) in
accordance with the terms of the Tax Allocation Agreement.
<PAGE> 2
(c) INSURANCE AND EMPLOYEE BENEFIT RELATED SERVICES. Provision of
liability, property, casualty, and other normal business insurance coverage
until the Distribution Date and thereafter assistance, if required, with respect
to arrangement of such insurance coverage. Assistance, if required, with respect
to support for product, worker safety and environmental programs (Penwest
acknowledges that principal responsibility for compliance rests with Penwest).
Administration of Penwest's employee participation in employee benefit plans and
insurance programs sponsored by Penford in accordance with the Employee Benefits
Agreement. Filing of all required reports under ERISA for employee benefit plans
sponsored by Penford.
(d) ADDITIONAL SERVICES. Services in addition to those enumerated
in subsections 1.1(a) through 1.1(c) above as may be agreed upon by Penford and
Penwest from time to time.
SECTION 2 - CHARGES AND PAYMENTS
2.1 CHARGES FOR GENERAL SERVICES. For performing general services of
the types described above in Section 1 (i) prior to the Distribution Date,
Penford will charge Penwest the costs actually incurred (including overhead and
general administrative expenses), and (ii) on or after the Distribution Date,
Penford will charge Penwest the costs actually incurred (including overhead and
general administrative expenses) plus a percentage negotiated by and mutually
agreeable to Penwest and Penford. To the extent such direct costs cannot be
separately measured, Penford shall charge Penwest for a portion of the total
cost determined according to a method reasonably selected by Penford and
approved by Penwest.
The charges for services pursuant to subsection 2.1 above will be
determined and payable no less frequently than on a quarterly basis. The charges
will be due when billed and shall be paid no later than thirty 30 days from the
date of billing.
2.2 CHARGES FOR THIRD-PARTY SERVICES. When services of the type
described above in Section 1 are provided, upon the mutual agreement of Penford
and Penwest, by outside providers or, in connection with the provision of such
services out-of-pocket costs are incurred such as travel, the cost thereof will
be paid by Penwest. To the extent that Penwest is billed by the provider
directly, Penwest shall pay the bill directly. If Penford is billed for such
services, Penford may pay the bill and charge Penwest the amount of the bill or
forward the bill to Penwest for payment by Penwest.
2.3 Penwest shall pay any sales, use or similar tax, excluding any
income tax or taxes levied with respect to gross receipts, payable by Penford or
Penwest with respect to amounts payable under this Agreement.
2
<PAGE> 3
SECTION 3 - GENERAL OBLIGATIONS
3.1 PENWEST'S DIRECTORS AND OFFICERS. Nothing contained herein will be
construed to relieve the directors or officers of Penwest from the performance
of their respective duties or to limit the exercise of their powers in
accordance with the Amended and Restated Articles of Incorporation or the
Amended and Restated Bylaws of Penwest or in accordance with any applicable
statute or regulation.
3.2 LIABILITIES. In furnishing Penwest with management advice and
other services as herein provided, neither Penford nor any of its officers,
directors, employees or agents shall be liable to Penwest or its creditors or
shareholders for errors of judgment or for anything except willful malfeasance,
bad faith or gross negligence in the performance of their duties or reckless
disregard of their obligations and duties under the terms of this Agreement. The
provisions of this Agreement are for the sole benefit of Penford and Penwest and
will not, except to the extent otherwise expressly stated herein, inure to the
benefits of any third party.
Penwest shall indemnify and hold harmless Penford and each of its
officers, directors, employees or agents against any claims of any kind arising
out of or relating to this Agreement or services provided hereunder, except for
claims caused by the willful malfeasance, bad faith or gross negligence of the
person seeking such indemnification.
3.3 TERM. The initial term of this Agreement shall begin on the date
of this Agreement and continue until the Distribution Date. This Agreement shall
automatically renew at the end of the initial term or any renewal term for
successive one-year-terms until terminated by either party upon written notice
to the other party at least ninety (90) days prior to the expiration of the
initial term or any renewal terms of this Agreement.
3.4 STANDARD OF CARE. Penford will use (and will cause its
subsidiaries to use) reasonable efforts in providing the scheduled services to
Penwest and will perform such services with the same degree of care, skill and
prudence customarily exercised for its own operations; provided, however, that
Penford shall not be required to devote full time and attention to the
performance of its duties under this Agreement, but shall devote only so much of
its time and attention as it deems reasonable or necessary to perform the
services required hereunder. To the extent possible, such services will be
substantially identical in nature and quality to the services currently provided
or otherwise made available by Penford to its wholly-owned subsidiaries and
their respective operating divisions. Penford has the right to reasonably
supplement, modify, substitute or otherwise alter such services from time to
time in a manner consistent with supplements, modifications, substitutions or
alterations made with respect to similar services provided or otherwise made
available by Penford to its wholly-owned subsidiaries and their respective
operating
3
<PAGE> 4
divisions. In providing such services, Penford will not be responsible for the
accuracy, completeness or timeliness of any advice or service or any return,
report, filing or other document which it provides, prepares or assists in
preparing, except to the extent that any inaccuracy, incompleteness or
untimeliness arises from Penford's gross negligence or willful misconduct.
Penford and Penwest will cooperate in planning the scope and timing of services
provided by Penford under this Agreement in order to minimize or eliminate
interference with the conduct of Penford's business activities. If such
interference is unavoidable, Penford will apportion, in its sole discretion, the
available services in a fair and reasonable manner. Notwithstanding anything set
forth in this Section 3.4 neither Penford nor any of its officers, directors,
employees or agents shall have any liability under this Agreement except to the
extent provided in Section 3.2.
3.5 INDEPENDENCE. All employees and representatives of Penford
providing the scheduled services to Penwest will be deemed for purposes of all
compensation and employee benefits to be employees or representatives of Penford
and not employees or representatives of Penwest. In performing such services,
such employees and representatives will be under the direction, control and
supervision of Penford (and not of Penwest) and Penford will have the sole right
to exercise all authority with respect to the employment (including termination
of employment), assignment and compensation of such employees and
representatives.
3.6 NON-EXCLUSIVITY. Nothing in this Agreement precludes Penwest from
obtaining the scheduled services, in whole or in part, from its own employees or
from providers other than Penford.
3.7 CONFIDENTIALITY. Penford agrees to hold, and to use its best
efforts to cause its employees and representatives to hold, in confidence all
confidential information concerning Penwest, furnished to or obtained by Penford
after the Effective Date in the course of providing the scheduled services, in a
manner consistent with Penford's standard policies with respect to the
preservation and disclosure of confidential information concerning Penford and
its subsidiaries and operating units.
SECTION 4 - MISCELLANEOUS
4.1 NOTICES. Notices hereunder shall be effective if given in writing
and delivered or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777-108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: The President
4
<PAGE> 5
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The President
4.2 APPLICABLE LAW. This Agreement shall be governed by and construed
under the laws of the State of Washington applicable to contracts made and to be
performed therein.
4.3 PARAGRAPH TITLES. The paragraph titles used in this Agreement are
for convenience of reference and will not be considered in the interpretation or
construction of any of the provisions thereof.
4.4 AMENDMENTS; WAIVERS. This Agreement may be amended or modified
only in writing executed on behalf of Penford and Penwest. No waiver shall
operate to waive any further or future act and no failure to object or
forbearance shall operate as a waiver.
4.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein or in any exhibit or schedule hereto shall not be assignable,
in whole or in part, without the prior written consent of the parties hereto and
any attempt to effect any such assignment without such consent shall be void.
4.6 ARBITRATION. Any dispute, controversy or claim arising out of or
in connection with this Agreement (including any questions of fraud or questions
concerning the validity and enforceability of this Agreement or any of the
rights herein), shall be determined and settled by arbitration in Seattle,
Washington pursuant to the rules then in effect of the American Arbitration
Association as modified by this paragraph. Any award rendered shall be final and
conclusive upon the parties and a judgment thereon may be entered in any court
having competent jurisdiction. The party submitting such dispute shall give
written notice to that effect to the other party, stating the dispute to be
arbitrated and the name and address of a person designated to act as arbitrator
on its behalf. Within fifteen (15) days after such notice, the other party shall
give written notice to the first party stating the name and address of a person
designated to act as a substitute on its behalf. In the event that the second
party shall fail to notify the first party of its designation of an arbitrator
within the time specified, then the first party shall request the American
Arbitration Association to appoint a second arbitrator. The two arbitrators so
chosen shall meet within fifteen (15) days after the second arbitrator has been
appointed to appoint a third arbitrator. If the two arbitrators are unable to
agree on the
5
<PAGE> 6
appointment of a third arbitrator within such fifteen (15) day period, either
party may request the American Arbitration Association to appoint a third
arbitrator. Each arbitrator appointed hereunder shall be independent of the
parties and either party may disqualify an arbitrator who is or is affiliated
with a supplier, customer or competitor of either party without the consent of
the other party. Each arbitrator shall be reasonably knowledgeable regarding the
area or areas in dispute. The arbitrators shall follow substantive rules of law
and the Federal Rules of Evidence, require the parties to conduct discovery
pursuant to the rules then in effect under the Federal Rules of Civil Procedure
in an expeditious manner, cause testimony to be transcribed, and make an award
accompanied by findings of fact and a statement of reasons for the decision. All
costs and expenses, including attorney's fees, of all parties incurred in any
dispute which is determined and/or settled by arbitration pursuant to this
paragraph shall be borne by the party determined to be liable in respect of such
dispute; provided, however, that if complete liability is not assessed against
only one party, the parties shall share the total costs in proportion to their
respective amounts of liability so determined. Except where clearly prevented by
the area in dispute, both parties agree to continue performing their respective
obligations under this Agreement while the dispute is being resolved. Each
party, and the arbitrators, shall use their best efforts, subject to reasonable
prosecution of the arbitration, court order and disclosure required under
securities laws, to keep the subject matter of the arbitration and confidential
information of each party confidential, and the arbitrators are authorized to
impose such protective orders as they may deem appropriate for such purpose.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their fully authorized officers as of the Effective Date.
PENFORD CORPORATION
By: _______________________
Title: ____________________
PENWEST PHARMACEUTICALS CO.
By: _______________________
Title: ____________________
7
<PAGE> 1
TAX ALLOCATION AGREEMENT
THIS TAX ALLOCATION AGREEMENT (the "Agreement") is made as of
____________, 1997, by and among Penford Corporation, a Washington corporation
("Parent" and, together with its subsidiaries existing immediately following the
Distribution, the "Parent Group"), and Penwest Pharmaceuticals Co., a Washington
corporation and a 82%-owned subsidiary of Parent ("Penwest" and, together with
its subsidiaries existing immediately following the Distribution, the "Penwest
Group").
WHEREAS, Parent and Penwest have entered into the Separation Agreement
(as defined below) providing for the distribution of all of the Penwest stock
owned by Parent to Parent's shareholders in accordance with the Separation
Agreement; and
WHEREAS, Parent and Penwest desire to set forth their agreement
regarding the allocation between the Parent Group and the Penwest Group of all
responsibilities, liabilities and benefits affecting Taxes (as defined below)
paid or payable by either of them for all taxable periods.
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereby agree as follows:
1. DEFINITIONS. Capitalized terms used herein and not otherwise
defined shall have the meanings given them in the Separation Agreement. As used
in this Agreement, the following terms shall have the following meanings:
(a) "Affiliate" of any person means any person, corporation,
partnership or other entity directly or indirectly controlling, controlled by or
under common control with such person.
(b) "Penwest" has the meaning set forth in the preamble hereto.
(c) "Penwest-Caused Taxes" means any liability for Taxes,
including interest and penalties, incurred by the Parent Group or the Penwest
Group arising from or attributable to any of the transactions that are directly
related to the Distribution failing to qualify under Code Sections 355 or 368
(or any comparable provisions of state law), but only if such failure (i) was
caused by an act that occurred after the Distribution and in which Penwest
participated or (ii) was otherwise attributable to one or more of the
representations contained in Section 8 hereof failing to be true as of the date
of this Agreement. For purposes of this definition, if any failure to so qualify
occurs and Penwest has participated in a Post- Distribution Act, such failure
shall be deemed to have been caused by Penwest's participation in the
Post-Distribution Act unless established to the contrary by clear and convincing
evidence that the Post-Distribution Act did not cause the failure to
<PAGE> 2
qualify under Code Sections 355 or 368. Penwest-Caused Taxes shall include any
increase in Taxes of the Parent Group or the Penwest Group for any period to the
extent such increase in Taxes would not have occurred but for the transactions
directly related to the Distribution failing to qualify under Sections 355 or
368 of the Code (or comparable provisions of state law). Thus, for example, if
the failure of any of the transactions to so qualify results in additional
income being realized by the Parent Group in its 1997 taxable year, but such
income is substantially offset by operating losses or net operating loss
carryovers (other than operating losses or net operating loss carryovers of the
Penwest Group), Penwest-Caused Taxes will include (to the extent the other
requirements of this definition are met) any increase in Taxes realized by any
member of the Parent Group in subsequent years to the extent such increase in
Taxes would not have been realized had the loss or loss carryovers not been used
in 1997.
(d) "Penwest Group" has the meaning set forth in the preamble
hereto.
(e) "Code" means the Internal Revenue Code of 1986, as amended
or, as the context may require, the Internal Revenue Code applicable to the
taxable year in question.
(f) "Distribution" has the meaning set forth in the Separation
Agreement.
(g) "Separation Agreement" means the Separation Agreement dated
_____________, 1997 between Parent and Penwest providing for the Distribution.
(h) "Distribution Date" has the meaning set forth in the
Separation Agreement.
(i) "Final Determination" shall mean the final resolution of
liability for any Tax for a taxable period, (i) by Internal Revenue Service Form
870 or 870-AD (or any successor forms thereto), on the date of acceptance by or
on behalf of the taxpayer, or by comparable form under the laws of other
jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves
(whether by its terms or by operation of law) the right of the taxpayer to file
a claim for refund and/or the right of the taxing authority to assert a further
deficiency shall not constitute a Final Determination; (ii) by a decision,
judgment, decree, or other order by a court of competent jurisdiction, which has
become final and unappealable; (iii) by a closing agreement or accepted offer in
compromise under Section 7121 or 7122 of the Code, or comparable agreements
under the laws of other jurisdictions; (iv) by any allowance of a refund or
credit in respect of an overpayment of Tax, but only after the expiration of all
periods during which such refund may be recovered (including by way of offset)
by the Tax imposing jurisdiction; or (v) by any other final
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<PAGE> 3
disposition, including by reason of the expiration of the applicable statute of
limitations or by mutual agreement of the parties.
(j) "Post-Distribution Act" means any event or transaction (or
the execution of an agreement, letter of intent or option providing for a
transaction) in which Penwest participates and in which any of the following
occurs:
(i) Penwest transfers (whether or not in liquidation) a
material portion of its assets (other than a transfer of assets in the
ordinary course of business) within one year following the Distribution
Date;
(ii) Penwest merges with another corporation within one year
following the Distribution Date;
(iii) Within two years of following the Distribution Date
Penwest discontinues a material portion of its historic business
activities;
(iv) Within one year following the Distribution Date Penwest
Common Stock distributed in the Distribution is converted into (or
redeemed or exchanged for) any other stock, any security, any property
or cash; and
(v) An issuance (or series of issuances) of stock in Penwest
within 6 months of the Distribution in an amount sufficient that such
issuance would have prevented Parent from having "control" (within the
meaning of Code Section 368(c)) of Penwest had such issuance (or
issuances) occurred immediately prior to the Distribution.
(k) "Post-Distribution Taxes" means any and all liability for
Taxes of the Penwest Group or the Parent Group, as appropriate, other than for
Pre-Distribution Taxes.
(l) "Pre-Distribution Taxes" means any and all Taxes of the
Parent Group or the Penwest Group for all periods that ended on or prior to the
Distribution Date. For purposes of computing the amount of Pre-Distribution
Taxes in the case of a Tax period that begins before and ends after the
Distribution Date, the amount of Taxes considered to have accrued with respect
to the portion of the Tax period that ended on the Distribution Date shall be
determined as follows:
(i) In the case of any ad valorem, personal property and
real property Taxes, an amount of such Tax for the entire Tax period
multiplied by a fraction the numerator of which is the number of days
in the portion of the Tax period ended on the Distribution Date and the
denominator of which is the number of days in the entire Tax period;
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(ii) In the case of any Tax other than ad valorem, personal
property and real property Taxes, the amount that would be payable if
the relevant Tax period ended on the Distribution Date; and
(iii) In the case of any withholding Tax, the amount of Taxes
required to be held which relates to any payment by any member of the
Parent Group or the Penwest Group on or before the Distribution Date.
Any credits relating to a Tax period that begins before and ends
after the Distribution Date shall be taken into account as though the relevant
Tax period ended on the Distribution Date.
(m) "Returns" means all returns, reports and information
statements (including all exhibits and schedules thereto) required to be filed
with a Taxing Authority with respect to any Taxes.
(n) "Taxes" means any income, alternative or add-on minimum tax,
gross income, gross receipts, sales, use, ad valorem, franchise, profits,
license, withholding, payroll, employment, environmental excise, severance,
stamp, transfer, recording occupation, premium, property, value added, windfall
profit tax, custom duty, or other tax of any kind whatsoever, together with any
interest and any penalty, addition to tax or additional amount imposed by any
governmental authority (a "Taxing Authority") responsible for the imposition of
any such tax (domestic or foreign).
2. OPERATIVE PROVISIONS.
(a) Parent shall indemnify Penwest against and be responsible for
all Post-Distribution Taxes attributable to any member of the Parent Group and
all Pre-Distribution Taxes other than Penwest-Caused Taxes.
(b) Penwest shall indemnify Parent against and shall be
responsible for all Post-Distribution Taxes attributable to any member of the
Penwest Group and all Penwest-Caused Taxes.
(c) With respect to the tax year of the Parent Consolidated Group
that includes the Distribution Date and the tax year of Penwest that commences
immediately following the Distribution Date, the Parent Consolidated Group shall
claim on its federal income tax returns the benefit of (i) the graduated tax
rates of Code Section 11, (ii) the $25,000 bracket amount in Code Section 38,
(iii) the $40,000 exemption amount and the $150,000 bracket amount in Section
55, and (iv) the $2,000,000 bracket amount in Section 59A and Penwest shall
claim none of such benefits.
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3. RETURNS; REFUNDS; CONTEST PROVISIONS.
(a) Parent shall have the obligation and the sole right and full
discretion to control (i) the preparation of all Returns with respect to
Pre-Distribution Taxes (including Penwest-Caused Taxes) and (ii) the defense,
settlement or compromise of any audit, examination, investigation suit, action
or other proceeding relating to Pre-Distribution Taxes other than Penwest-Caused
Taxes. Parent shall be entitled to all refunds of Pre-Distribution Taxes other
than Penwest-Caused Taxes paid or reimbursed by Penwest pursuant to this
Agreement. Notwithstanding the foregoing, in the event that Parent decides to
abandon the defense of, or settle or compromise any claim relating to any
Pre-Distribution Taxes and such claim may have an effect on Post-Distribution
Taxes, Parent shall notify Penwest of such decision and Penwest shall have ten
days to notify Parent that it assumes all liability with respect to the
Pre-Distribution Taxes under dispute and wishes to assume the defense of such
audit or other proceedings at its own expense. In the event that Parent timely
receives such notice from Penwest, it shall use all reasonable efforts to
cooperate so as to facilitate Penwest's handling of such proceedings.
(b) Except as otherwise provided for herein, Penwest shall have
the obligation and the sole right and full discretion to control (i) the
preparation of all Returns with respect to Post-Distribution Taxes attributable
to any member of the Penwest Group and (ii) the defense, settlement or
compromise of any audit, examination, investigation suit, action or other
proceeding relating to (A) Post-Distribution Taxes attributable to any member of
the Penwest Group and (B) any Penwest-Caused Taxes. Penwest shall have the right
to all refunds of Post-Distribution Taxes attributable to any member of the
Penwest Group and of Penwest-Caused Taxes paid (directly or indirectly) by any
member of the Penwest Group. Notwithstanding the foregoing, in the event that
Penwest decides to abandon the defense of, or settle or compromise any claim
relating to any Penwest-Caused Taxes, Penwest shall notify Parent of such
decision and Parent shall have ten days to notify Penwest that it assumes all
liability with respect to the Penwest-Caused Taxes under dispute and wishes to
assume the defense of such audit or other proceedings at its own expense. In the
event that Penwest timely receives such notice from Parent, it shall use all
reasonable efforts to cooperate so as to facilitate Parent's handling of such
proceedings.
(c) Except as otherwise provided for herein, Parent shall have
the obligation and the sole right and full discretion to control (i) the
preparation of all Returns with respect to Post-Distribution Taxes attributable
to any member of the Parent Group and (ii) the defense, settlement or compromise
of any audit, examination, investigation suit, action or other proceeding
relating to Post-Distribution Taxes attributable to any member of the Parent
Group. Parent shall have the right to all refunds of Post-Distribution Taxes
attributable to any member of the Parent Group and of Penwest-Caused Taxes paid
(directly or indirectly) by any
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<PAGE> 6
member of the Parent Group which were not reimbursed by Penwest pursuant to this
Agreement.
4. WINDFALLS.
(a) Parent shall promptly pay to Penwest the amount of any
incremental Tax savings generated by (i) a deduction, credit or exclusion that
(A) is actually realized by the Parent Group with respect to Pre-Distribution
Taxes and (B) relates to or is based on an item that is the basis for a similar
deduction, credit or exclusion taken on a Return with respect to
Post-Distribution Taxes of the Penwest Group that is denied, disallowed,
forfeited, or accelerated until prior to the Distribution Date or (ii) a
reduction in the amount of any gross income or revenue that (A) is actually
realized by the Parent Group with respect to Pre-Distribution Taxes and (B)
relates to, or is based on, a similar item of gross income or revenue that the
Penwest Group is required to include on a Return or otherwise required to
include in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise. Parent shall use reasonable best efforts
to realize any such incremental tax savings that may potentially be available.
(b) Penwest shall promptly pay to Parent the amount of any
incremental Tax savings generated by (i) a deduction, credit or exclusion that
(A) is actually realized by the Penwest Group with respect to its
Post-Distribution Taxes and (B) relates to or is based on an item that is the
basis for a similar deduction, credit or exclusion taken on a Return with
respect to Pre-Distribution Taxes other than Penwest-Caused Taxes that is
denied, disallowed, forfeited, or deferred until after the Distribution Date or
(ii) a reduction in the amount of any gross income or revenue that (A) is
actually realized by the Penwest Group with respect to Post-Distribution Taxes
and (B) relates to, or is based on, a similar item of gross income or revenue
that the Parent Group is required to include on a Return or otherwise required
to include in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise. Penwest shall use reasonable best
efforts to realize any such incremental tax savings that may potentially be
available.
5. AGENCY.
Penwest irrevocably designates Parent (and shall cause each member
of the Penwest Group to irrevocably designate Parent) as its agent and attorney
in fact (and shall execute any necessary powers of attorney) for the purpose of
taking any and all actions necessary or incidental to the filing of federal
income tax returns and state unitary or combined Returns for (i) any period
during which any member of the Penwest Group or any predecessor qualified to
file a consolidated, combined, unitary or similar Return with any member of the
Parent Group and (ii) any period ending on or before the Distribution Date.
Parent shall keep Penwest reasonably informed
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of, and shall reasonably consult with Penwest with respect to, all actions to be
taken on behalf of any member of the Penwest Group. Parent and Penwest will each
furnish the other any and all information which the other may reasonably request
in order to carry out the provisions of this Agreement to determine the amount
of any Tax liability.
6. CONSISTENT REPORTING.
(a) With respect to all taxable periods ending on or prior to
December 31, 2001, Penwest, each member of the Penwest Group and any future
Affiliates thereof shall file federal income tax and state income tax Returns in
a manner consistent with the Returns filed (or to be filed) in respect to
Pre-Distribution Taxes and in a manner consistent with the form of the
transactions contemplated by the Separation Agreement (the "Form") including
that the Distribution qualifies under Section 355 of the Code.
(b) To the extent there is an inconsistency or an apparent
inconsistency amongst the Returns relating to Pre-Distribution Taxes (including
after taking into account Returns to be filed after the Distribution Date)
and/or the Form, Penwest shall file Returns with respect to Post-Distribution
Taxes in the manner directed by Parent.
(c) Parent and Penwest agree to contest any proposed adjustment
by any Taxing Authority that is, in the sole judgement of Parent, inconsistent
with the provisions of this Section 6.
7. COVENANTS OF PENWEST AND PARENT RELATING TO ACTIONS AFTER THE
DISTRIBUTION DATE.
(a) Penwest shall, and shall cause each member of the Penwest
Group to refrain from participating in any Post-Distribution Act without the
prior written consent of Parent.
(b) Penwest and Parent shall cooperate (and shall cause each of
their Affiliates to cooperate) fully at such time and to the extent reasonably
requested by the other party in connection with the preparation and filing of
any Return or the conduct of any audit, dispute, proceeding, suit or action in
respect of Taxes or other Tax matters. Such cooperation shall include, without
limitation, (i) the retention and provision on demand of books, records,
documentation or other information relating to any Return until the expiration
of the applicable statute of limitation (giving effect to any extension, waiver,
or mitigation thereof) plus two years; (ii) the execution of any document that
may be necessary or reasonably helpful in connection with the filing of any
Return by any member of the Parent Group or the Penwest Group or in connection
with any audit, examination, investigation suit, action or other proceeding;
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<PAGE> 8
and (iii) the use of the parties' reasonable best efforts to obtain any
documentation from a governmental authority or a third party that may be
necessary or helpful in connection with the foregoing.
(c) Penwest and Parent shall cooperate (and shall cause each of
their Affiliates to cooperate) in causing the tax year end of Penwest to be
changed to December 31, effective for the year ended December 31, 1998 with
respect to any jurisdiction in which Penwest is not included in a consolidated
or combined group Tax Return for a Tax period which will end on the Distribution
Date.
8. PENWEST REPRESENTATIONS. Penwest hereby represents and warrants to
the Parent and each member of the Parent Group that the statements contained in
this Section 8 are true and correct in all material respects on the date hereof:
(a) To the best of Penwest's knowledge and belief, no part of its
stock being distributed in the Distribution will be received by a shareholder of
Parent in such shareholder's capacity as a creditor, employee or in any capacity
other than that of a shareholder of Parent.
(b) To the best of Penwest's knowledge and belief, immediately
following the Distribution, no person, group of related persons, or persons who
acted in concert pursuant to a prearranged plan or arrangement will own 50% or
greater of the stock of Parent or Penwest within five years of the Distribution
Date.
(c) Penwest has no plan or intention to liquidate Penwest, to
merge it with another corporation or to sell or otherwise dispose of the assets
of Penwest subsequent to the Distribution except in the ordinary course of
business.
(d) To the best of Penwest's knowledge and belief, no plan or
intention exists by the shareholders of Parent to sell, exchange, transfer by
gift, or otherwise dispose of any of their stock in Parent or Penwest subsequent
to the Distribution.
(e) Following the Distribution, each of Parent and Penwest will
operate as independent corporations except that certain administrative and other
common activities of the two corporations will be undertaken by common personnel
in accordance with the Ancillary Agreements. Payments made in connection with
all continuing transactions between, and services provided for, each of Parent
and Penwest will be for fair market value based on terms and conditions arrived
at by the Parties bargaining at arm's length.
(f) Penwest has no plan involving the issuance or transfer of
equity interests in Penwest following the Distribution other than issuances
pursuant to the
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exercise of stock options granted by Penwest to employees and consultants of
Penwest.
(g) Penwest has no plan or intention for the transfer or
cessation of a substantial portion of the business of Penwest or other
substantial change in the business of Penwest following the Distribution.
(h) Penwest has not made, and is not subject to, any binding
commitment and is not otherwise obligated or committed to undertake an offering
of Penwest stock following the Distribution.
9. PARENT REPRESENTATIONS. Parent hereby represents and warrants to
Penwest and each member of the Penwest Group that the statements contained in
this Section 9 are true and correct in all material respects on the date hereof:
(a) No part of the Penwest stock being distributed in the
Distribution will be received by a shareholder of Parent in such shareholder's
capacity as a creditor, employee or in any capacity other than that of a
shareholder of Parent.
(b) To the best of Parent's knowledge and belief, immediately
following the Distribution, no person, group of related persons, or persons who
acted in concert pursuant to a prearranged plan or arrangement will own 50% or
greater of the stock of Parent or Penwest within five years of the Distribution
Date.
(c) Parent has no plan or intention to liquidate Parent, to merge
it with another corporation or to sell or otherwise dispose of the assets of
Parent subsequent to the Distribution except in the ordinary course of business.
(d) To the best of Parent's knowledge and belief, no plan or
intention exists by the shareholders of Parent to sell, exchange, transfer by
gift, or otherwise dispose of any of their stock in Parent or Penwest subsequent
to the Distribution.
(e) Following the Distribution, each of Parent and Penwest will
operate as independent corporations except that certain administrative and other
common activities of the two corporations will be undertaken by common personnel
in accordance with the Ancillary Agreements. Payments made in connection with
all continuing transactions between, and services provided for, each of Parent
and Penwest will be for fair market value based on terms and conditions arrived
at by the Parties bargaining at arm's length.
(f) Parent has no plan or intention for the transferor cessation
of a substantial portion of the business of Parent or other substantial change
in the business of Parent following the Distribution.
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(g) To the best of Parent's knowledge and belief, Penwest has not
made, and is not subject to, any binding commitment and is not otherwise
obligated or committed to undertake an offering of Penwest stock following the
Distribution.
10. PAYMENTS. All payments to be made hereunder shall be made in
immediately available funds. Unless otherwise provided herein, any payment not
made when due hereunder shall bear interest from the due date at any annual rate
equal to the lowest prime rate as reported in the Wall Street Journal plus 2%,
compounded and adjusted monthly. For purposes of this Agreement, the following
payments shall be due at the following times:
(a) Payments due under Section 2 hereof shall be paid within 10
days of the receipt of notice from the party entitled to the payment indicating
the occurrence of the later of (i) a Final Determination relating to the item or
items giving rise to the Tax for which indemnification is made and (ii) actual
payment of the Tax giving rise to the claim for indemnification.
(b) In the case of any refunds of Taxes received by a party other
than the party entitled to such refunds pursuant to Section 3 hereof, the
recipient of the refund shall pay the amount of such refund to the other party
within five days of the receipt of such refund.
(c) Amounts payable pursuant to Section 4 hereof shall be paid
within five days of the later to occur of (i) a Final Determination relating to
the Tax item that gave rise to the windfall benefit and (ii) the actual receipt
of the windfall benefit.
11. ARBITRATION. Any dispute, controversy or claim arising out of or
in connection with this Agreement (including any questions of fraud or questions
concerning the validity and enforceability of this Agreement or any of the
rights herein and therein conveyed), shall be determined and settled by
arbitration in Seattle, Washington, pursuant to the rules then in effect of the
American Arbitration Association as modified by this paragraph. Any award
rendered shall be final and conclusive upon the parties and a judgment thereon
may be entered in any court having competent jurisdiction. The party submitting
such dispute shall give written notice to that effect to the other party,
stating the dispute to be arbitrated and the name and address of a person
designated to act as arbitrator on its behalf. Within fifteen (15) days after
such notice, the other party shall give written notice to the first party
stating the name and address of a person designated to act as an arbitrator on
its behalf. In the event that the second party shall fail to notify the first
party of its designation of an arbitrator within the time specified, then the
first party shall request the American Arbitration Association to appoint a
second arbitrator. The two arbitrators so chosen shall meet within fifteen (15)
days after the second arbitrator has been appointed to appoint a third
arbitrator. If the two arbitrators are unable to
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<PAGE> 11
agree on the appointment of a third arbitrator within such fifteen (15) day
period, either party may request the American Arbitration Association to appoint
a third arbitrator. Each arbitrator appointed hereunder shall be independent of
the parties and either party may disqualify an arbitrator who is or is
affiliated with a supplier, customer or competitor of either party without the
consent of the other party. Each arbitrator shall be reasonably knowledgeable
regarding the area or areas in dispute. The arbitrators shall follow substantive
rules of law and the Federal Rules of Evidence, require the parties to conduct
discovery pursuant to the rules then in effect under the Federal Rules of Civil
Procedure in an expeditious manner, cause testimony to be transcribed, and make
an award accompanied by findings of fact and a statement of reasons for the
decision. All costs and expenses, including attorney's fees, of all parties
incurred in any dispute which is determined and/or settled by arbitration
pursuant to this paragraph shall be borne by the party determined to be liable
in respect of such dispute; provided, however, that if complete liability is not
assessed against only one party, the parties shall share the total costs in
proportion to their respective amounts of liability so determined. Except where
clearly prevented by the area in dispute, both parties agree to continue
performing their respective obligations under this Agreement while the dispute
is being resolved. Each party, and the arbitrators, shall use their best
efforts, subject to reasonable prosecution of the arbitration, court order and
disclosure required under securities laws, to keep the subject matter of the
arbitration and confidential information of each party confidential, and the
arbitrators are authorized to impose such protective orders as they may deem
appropriate for such purpose.
12. COSTS AND EXPENSES. Except as expressly set forth in this
Agreement, each party shall bear its own costs and expenses incurred pursuant to
this Agreement regardless of the beneficiary of the items or services relating
to such costs and expenses.
13. TERMINATION AND SURVIVAL. Notwithstanding anything in this
Agreement to the contrary, this Agreement shall remain in effect and its
provisions shall survive for the full period of all applicable statutes of
limitation relating to the assessment of Taxes (giving effect to any extension,
waiver or mitigation thereof) plus two years.
14. AMENDMENTS; LIMITATION ON WAIVERS.
(a) Any provision of this Agreement may be amended if, and only
if, such amendment is in writing and signed by Parent and Penwest.
(b) The provisions of this Agreement may be waived only if the
waiver is in writing and signed by the party making the waiver. No delay or
omission in exercising any right under this Agreement will operate as a waiver
of the right on any further occasion. No waiver of any particular provision of
the Agreement will be treated as a waiver of any other provision, and no waiver
of any
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<PAGE> 12
rights will be deemed a continuing waiver of the same right with respect to
subsequent occurrences that give rise to it. All rights given by this Agreement
are cumulative to other rights provided for in this Agreement and to any other
rights available under applicable law.
15. GOVERNING LAW AND INTERPRETATION. This Agreement shall be governed
by, interpreted and enforced in accordance with the laws of the State of
Washington (regardless of the laws that might be applicable under principles of
conflict of law).
16. CONFIDENTIALITY. Each party shall hold and shall cause its
consultants and advisors to hold in strict confidence, unless compelled to
disclose by judicial or administrative process or, in the opinion of its
counsel, by other requirements of law, all information (other than any such
information relating solely to the business or affairs of such party) concerning
the other parties hereto furnished it by such other party or its representatives
pursuant to this Agreement (except to the extent that such information can be
shown to have been (a) previously known by the party to which it was furnished,
(b) in the public domain through no fault of such party, or (c) later lawfully
acquired from other sources by the party to which it was furnished), and each
party shall not release or disclose such information to any other person, except
its auditors, attorneys, financial advisors, bankers and other consultants and
advisors who shall be advised of the provisions of this Section 16. Each party
shall be deemed to have satisfied its obligation to hold confidential
information concerning or supplied by the other party if it exercises the same
care as it takes to preserve confidentiality for its own similar information.
17. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
18. ASSIGNMENTS AND THIRD PARTY BENEFIT. This Agreement and the terms
and provisions hereof shall be binding upon and shall inure to the benefit of,
the parties and their respective successors and assigns.
19. SEVERABILITY. If any term, provision, condition or covenant of
this Agreement, or the application thereof to any party or circumstance shall be
held by a court of competent jurisdiction to be invalid, unenforceable or void,
the remainder of this instrument, or the application of such term, provision,
condition or covenant to persons or circumstances other than those as to whom or
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
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20. MERGER OF PRIOR AGREEMENTS.
(a) This Agreement contains all of the terms and provisions and
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior written, oral or implied understandings,
representations and agreements of the parties relating to the subject matter of
this Agreement. Without limiting the foregoing, the parties acknowledge and
agree that in the event of any conflict or inconsistency between the provisions
of this Agreement and the provisions of the Separation Agreement, the provisions
of this Agreement shall control and to such extent shall be deemed to supersede
such conflicting provisions under the Separation Agreement.
(b) The parties acknowledge that pursuant hereto any and all
existing tax sharing agreements or arrangements binding or benefiting Penwest
shall be terminated as of the close of business on the Distribution Date, and
that after the Distribution Date this Agreement shall constitute the sole tax
sharing agreement among Parent and Penwest.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
PENFORD CORPORATION
By:________________________
Title:_____________________
PENWEST PHARMACEUTICALS CO.
By:________________________
Title:_____________________
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Exhibit 10.17
DRAFT - OCTOBER 17, 1997
EMPLOYEE BENEFITS AGREEMENT
This Agreement is made on _________, 1997 (the "Effective Date") between
PENFORD CORPORATION, a Washington corporation (previously known as PENWEST,
LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington corporation
(previously known as Edward Mendell Co., Inc.) ("Penwest").
RECITALS
WHEREAS, the Board of Directors of Penford has determined that it is in the
best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, the current employees of Penwest are participants in Penford's
employee benefit plans and certain employees of Penford are expected to become
employees of Penwest upon the consummation of the public offering of common
stock by Penwest;
WHEREAS, this Agreement sets forth the employment and employee benefit plan
arrangements that will apply to Penwest's current employees, and any other
employees who are hired by Penwest prior to the Distribution Date, as
hereinafter defined (all of such employees being referred to herein as the
"Penwest Employees"); and
WHEREAS, the Agreement is entered into pursuant to the Separation Agreement
dated as of [____________] between Penford and Penwest (the "Separation
Agreement");
NOW THEREFORE, in consideration of the mutual covenants and agreements made
herein, the parties hereto agree as follows:
SECTION 1 - TERMINATION OF COVERAGE OF PENWEST EMPLOYEES UNDER PENFORD PLANS
1.1 TERMINATION OF COVERAGE OF PENWEST EMPLOYEES UNDER CERTAIN PENFORD
PLANS
Effective as of the closing of the initial public offering (the "IPO Date")
by Penwest of shares of its common stock par value $0.001 per share ("Penwest
Common Stock"), Penwest Employees shall cease to be eligible to participate in
the following employee benefit plans offered by Penford:
(a) the Penford supplemental executive retirement plan (the "Penford
SERP");
(b) the Penford Deferred Compensation Plan ; and
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(c) certain Penford welfare plans (consisting of basic life insurance,
accidental death and dismemberment insurance, supplemental life insurance,
long-term disability, supplemental disability, business travel accident
insurance and employee assistance plan, as set forth in EXHIBIT 1 (the "Penford
Welfare Plans")).
1.2 TERMINATION OF COVERAGE OF PENWEST EMPLOYEES UNDER THE PENFORD
RETIREMENT PLAN
(a) Effective as of the IPO Date, Penford shall freeze all benefits accrued
in the retirement plan sponsored by Penford (the "Penford Retirement Plan") for
all Penwest Employees.
(b) Penford will amend the Penford Retirement Plan to permit Penwest
Employees to elect, after the earlier of: 1) the Distribution Date; or 2) such
time as Penwest ceases to be a member of the same controlled group of employers
within the meaning of Internal Revenue Code ("Code") Sections 414(b), and (c )
as Penford, to receive his or her fully vested interest under the Penford
Retirement Plan in the form of a lump sum cash payment or an annuity.
(c) It is contemplated that Penford will amend the Penford Retirement Plan
after the Distribution Date to provide enhanced pension plan benefits to certain
older participants who were Penwest Employees and are identified by the Penford
retirement plan committee ("Retirement Committee"), provided (i) that such
participants shall not be deemed to continue to accrue any benefits under the
Penford Retirement Plan as a result of such pension enhancement and (ii) that
the amount of any such enhancements is to be determined solely in the discretion
of the Retirement Committee.
1.3 TERMINATION OF COVERAGE FOR PENWEST EMPLOYEES UNDER THE PENFORD 401(K)
PLAN
Effective midnight of December 31, 1997, Penwest will cease to be a
participating Employer on the Penford savings and stock ownership plan (the
"Penford 401(k) Plan") and Penwest Employees will cease to accrue any benefits
under such plan.
1.4 TERMINATION OF COVERAGE FOR PENWEST EMPLOYEES UNDER THE PENFORD HEALTH
AND FLEX PLANS
Until midnight on December 31, 1997, Penford shall provide that the Penwest
Employees are covered by the health and cafeteria plans, as set forth in EXHIBIT
2, currently sponsored by Penford for its employees in accordance with the terms
and conditions of such plans and programs (the "Penford Health/Flex Plans").
After December 31, 1997, Penwest Employees shall cease to be covered under the
Penford Health/Flex Plans, and Penford shall have no further obligation to cover
the Penwest Employees under such plans; provided, however, that nothing in this
section 1.4 is intended to abrogate, discontinue or terminate stop loss coverage
under the policy maintained by Penford to the extent that it applies to medical
claims and expenses resulting from injury or illness to Penwest employees
incurred prior to January 1, 1998, but for which no claim is filed until after
January 1, 1998.
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1.5 NOTICE TO ADMINISTRATORS AND INSURERS
To the extent required, Penford agrees to inform, on or prior to the IPO
Date, all relevant third party administrators and insurance carriers of the
continued participation of the Penwest Employees in the Penford Health/Flex
Plans.
1.6 AMENDMENT AND TERMINATION OF PLANS
Nothing in this Agreement, including without limitation the agreement of
Penford and Penwest to maintain employee benefit plans or to make contributions
to such plans for any period, shall be construed as a limitation of the right of
Penford or Penwest to amend or terminate one or more of such plans in accordance
with the terms of this Agreement and applicable law.
1.7 REIMBURSEMENT
Penwest and Penford acknowledge that Penford will incur costs and expenses
related to the continued participation of the Penwest Employees in the Penford
Health/Flex Plan and that all such costs and expenses payable after the closing
of the IPO are the responsibility of Penwest. Accordingly, Penford and Penwest
agree that Penford will invoice Penwest for such costs and expenses monthly and
that Penwest shall make full payment of such invoice within 30 days following
receipt and verification thereof.
SECTION 2 - ESTABLISHMENT OF PENWEST EMPLOYEE BENEFIT PLANS
2.1 ESTABLISHMENT OF PENWEST SAVINGS AND STOCK OWNERSHIP PLAN
(a) Effective as of midnight on December 31, 1997, Penwest will cease to be
a participating Employer under the Penford 401(k) Plan and Penwest Employees
will cease to accrue any benefits under such plan. Effective January 1, 1998,
Penwest will establish a 401(k) retirement plan (the "Penwest 401(k) Plan")
substantially the same in all material features to the Penford 401(k) Plan as of
that date.
(b) As soon as practicable after January 1, 1998, (and the establishment of
the Penwest 401(k) Plan), Penford shall direct the trustee of the Penford 401(k)
Plan to transfer to the trustee of the Penwest 401(k) Plan (which shall accept
such transfer) all assets (including, but not limited to, loans) and liabilities
of the Penford 401(k) Plan relating to the Penwest Employees.
(c) As of January 1, 1997, Penwest and the Penwest 401(k) Plan shall assume
all liabilities for all accrued benefits under the Penford 401(k) Plan for the
Penwest Employees, and the Penford 401(k) Plan shall be relieved of all
liabilities for such benefits.
(d) The Penwest 401(k) Plan shall provide the following:
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1. that Penwest employees shall participate in the Penwest 401(k) Plan
to the extent that they were eligible to participate in the Penford 401(k) Plan
immediately prior to January 1, 1998, and shall receive credit for eligibility,
vesting, and benefit accrual service for all service credited for such purposes
under the Penford 401(k) Plan;
2. that the compensation paid by Penford to the Penwest Employees that
was recognized under the Penford 401(k) Plan shall be credited for all
applicable purposes under the Penwest 401(k) Plan; and
3. that with respect to any amounts transferred from the Penford
401(k) Plan, the Penwest 401(k) Plan will preserve any rights and features
protected under Section 411(d)(6) of the Internal Revenue Code ("Code").
2.2 ESTABLISHMENT OF PENWEST SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN AND
PENWEST DEFERRED COMPENSATION PLAN
(a) Effective upon the IPO Date, Penwest shall adopt, or cause to be
adopted, a supplemental executive retirement plan and a deferred compensation
plan (the "Penwest SERP and DC Plans") and establish a related grantor trust
(the "Penwest Rabbi Trust") to provide benefits to Tod R. Hamachek, Ed Belsheim,
and Jack V. Talley, Jr. after they become employees of Penwest (the
"Transferring Executives").
(b) As of the IPO Date, Penwest and the Penwest SERP and DC Plans shall
assume all liabilities for all accrued benefits under the Penford SERP and
Penford Deferred Compensation Plan for the Transferring Executives.
(c) As soon as practicable after receipt by Penford of (1) a copy of the
Penwest SERP and DC Plans and (2) certified resolutions of Penwest's Board of
Directors evidencing adoption of the Penwest SERP and DC Plans and the creation
of a the Penwest Rabbi Trust thereunder, Penford shall direct the trustees of
the Penford SERP and the Penford Deferred Compensation Plan to transfer to the
trustee of the Penwest SERP and DC Plans all accounts in the Penford SERP and
the Penford Deferred Compensation Plan of the Transferring Executives.
(d) Penwest and Penford shall take any and all action necessary to ensure
that participants in the Penwest SERP and DC Plans or the Penford SERP and
Deferred Compensation Plan shall not suffer any adverse federal income tax
consequences as a result of the transfer of liabilities to the Penwest SERP and
DC Plans.
(e) Effective as of the IPO Date, Penwest shall appoint Wells Fargo Bank as
trustee under the Penwest Rabbi Trust and Penford shall transfer, or cause to be
transferred, by a comparable rabbi trust established by Penford to the Penwest
Rabbi Trust any and all trust-owned life insurance policies held on a
Transferring Executive's life, provided that Penwest shall make any
contributions to the Penwest Rabbi Trust necessary under the law to ensure such
insurance policy transfer shall not violate the terms of the Penwest Rabbi Trust
or applicable law or regulations.
-4-
<PAGE> 5
2.3 PENWEST WELFARE PLANS
Effective upon the IPO Date, Penwest shall adopt, or cause to be adopted,
on a fully pooled basis, welfare plans ("Penwest Welfare Plans") substantially
identical in all material features to the corresponding plans offered by Penford
as of the IPO Date to its salaried employees, and set forth on Exhibit 1, as
follows:
(a) basic life insurance;
(b) basic accidental death and dismemberment insurance;
(c) supplemental life insurance;
(d) business travel accident insurance;
(e) employee assistance plan;
(f) long term disability;
(g) supplemental disability
2.4 PENWEST HEALTH/FLEX PLAN
Effective as of January 1, 1998, Penwest shall adopt, or cause to be
adopted, health and cafeteria plans (the "Penwest Health/Flex Plans")
substantially identical in all material features to the corresponding plans
offered by Penford as of January 1, 1998 to its salaried employees which are
listed on Exhibit 2.
2.5 COBRA
As of January 1, 1998, Penwest shall assume any and all liability and
responsibility for providing continuation of health care coverage under the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to any active
Penwest Employee on or after the IPO Date (and any qualified beneficiaries with
respect to such employee), whether or not such continuation requirements arose
under the Penford Health/Flex Plans, and Penford shall have no further
obligation or liability for any requirements to provide continuation of health
care coverage to any Penwest Employees.
2.6 COOPERATION
Penford and Penwest agree to provide each other with all records and
information necessary or useful to carry out their obligations under this
Agreement, and to cooperate in the filing of documents required by the transfer
of assets and liabilities described herein and to take any other actions
necessary or advisable to meet any statutory, regulatory or contractual
requirements under this Agreement.
-5-
<PAGE> 6
SECTION 3 - INDEMNIFICATION
3.1 INDEMNIFICATION
(a) Penwest agrees to indemnify and hold harmless Penford and its
affiliates, their officers, directors, employees, agents, and fiduciaries from
and against any and all costs, damages, losses, expenses (including reasonable
attorneys fees and costs) and other liabilities arising out of or related to the
Penford Welfare Plans, the Penford SERP, the Penford Deferred Compensation Plan,
the Penford 401(k) Plan, and the Penford Health/Flex Plans (collectively
referred to as the "Penford Benefit Plans") (other than the determination of the
amount, if any, of claims and accrued benefits payable from such plans) with
respect to the Penwest Employees and from any liability relating to any
applicable taxes or penalties arising from the failure of the Penwest 401(k)
Plan, to be qualified under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code") at the time of the asset transfer other than any failure
attributable to the terms or operation of the Penford 401(k) Plan prior to the
asset transfer.
(b) Penford agrees to indemnify and hold harmless Penwest and its
affiliates, their officers, directors, employees, agents, and fiduciaries from
and against any and all costs, damages, losses, expenses (including reasonable
attorneys fees and costs) and other liabilities arising out of or related to the
Penford Benefit Plans which are attributable to the determination of the amount
of any claims payable to Penwest Employees from the welfare plans carried by
Penford; the determination of the accrued benefits to be transferred to the
Penwest 401(k) Plan; the determination of book reserves or salary deduction
liabilities with respect to the Penwest Employees under and from the Penford
Plans; any claims under the Penford Plans which are not attributable to Penwest
Employees and assumed by Penwest under this Agreement; and any liability
relating to the applicable taxes or penalties arising from the failure of the
Penwest 401(k) Plan to be qualified under Section 401(a) of the Code due to the
terms or operation of the Penford 401(k) Plan prior to the date the assets are
transferred.
3.2 HEALTH AND WELFARE BENEFIT CLAIMS
Except as provided in Section 3.1, Penwest agrees that it shall assume and
be solely responsible for the following:
(a) all liabilities and obligations of Penford in connection with the
claims for benefits brought by or on behalf of Penwest Employees under the
Penford Welfare Plans and the Penford Health/Flex Plans, as well as applicable
workers' compensation and unemployment compensation benefits available to the
Penwest Employees, and Penford shall cease to have any such liabilities or
obligation related to such claims; and
(b) all liabilities and obligations of Penford in connection with claims
for post-employment health and welfare benefits (including but not limited to,
medical, dental, and vision benefits, severance pay, disability and life
insurance) made on or on behalf of Penwest Employees who retire or otherwise
terminate employment with Penwest after the Effective Date or after their date
of hire with Penwest if later.
-6-
<PAGE> 7
SECTION 4 - MISCELLANEOUS
4.1 NOTICES
Notices hereunder shall be effective if given in writing and delivered or
mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777 - 108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: Sue Iverson
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: Edmund O. Belsheim
4.2 AMENDMENTS; WAIVERS
This Agreement may be amended or modified only in writing executed on
behalf of Penford and Penwest. No waiver shall operate to waive any further or
future act and no failure to object or forbearance shall operate as a waiver.
4.3 NO THIRD PARTY BENEFICIARY
This Agreement is solely between Penford and Penwest, and nothing herein,
whether expressed or implied, shall confer any rights or remedies on any
employee of Penford or Penwest, any former employee of Penford, or any other
person.
4.4 ENTIRE AGREEMENT
This Agreement constitutes the sole and entire agreement and understanding
between the parties with respect to the matters covered hereby. Any amendment,
modification, or termination of this Agreement must be in writing and must be
signed by both parties.
4.5 GOVERNING LAW
This Agreement shall be governed by the laws of the State of Washington,
except to the extent preempted by the Employee Retirement Income Security Act of
1974, as amended.
-7-
<PAGE> 8
4.6 SUCCESSORS AND ASSIGNS
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns, provided that this
Agreement and the rights and obligations contained herein or in any exhibit or
schedule hereto shall not be assignable, in whole or in part, without the prior
written consent of the parties hereto and any attempt to effect any such
assignment without such consent shall be void.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their authorized representatives as of the Effective Date.
PENFORD CORPORATION
By:
----------------------------
Title:
-------------------------
PENWEST PHARMACEUTICALS CO.
By:
----------------------------
Title:
-------------------------
-8-
<PAGE> 1
EXHIBIT 10.18
14 May 1990
Dr. Anand Baichwal
3801 Cherry Hill Drive
Poughkeepsie, NY 12603
Re: Recognition and Incentive Agreement
Dear Dr. Baichwal,
In your work to date with our Company, you have made a substantial contribution
in being an inventor of our Directly Compressible Sustained Release System
(DCSR) which is covered under U.S. Patent Application No. 246,368, filed on
September 19, 1988 or other Applications stemming from Application 246,368 (the
Application). In recognition of this, and to give you incentive to continue to
contribute ideas, innovations and inventions to us, some of which are expected
to be covered by patent applications in the future (referred to generally as
"innovations") in the fields of excipient and sustained release technologies
(such fields being collectively referred to as "Fields of Interest"), we want to
establish an appropriate incentive framework for our ongoing relationship.
1. Incentive Compensation:
A subsidiary and/or division of Mendell will be established, Mendell Dynamics
(M.D.) to carry out all of our activities throughout the world relative to the
development and marketing of our sustained release technologies (the SR
Technologies). During the term of this Agreement, you will be entitled to
receive as Incentive Compensation one half of one percent (0.5%) of the net
sales of M.D., the sustained release technologies covered by the "Application"
in each of its fiscal years. For purposes of the foregoing, net sales shall mean
the aggregate selling price of all products sold by M.D., net of all discounts
and returns and all charges for freight, insurance, sales taxes, customs duties,
commissions and similar items. When due hereunder for any fiscal year, Incentive
Compensation shall be paid in cash to you within 120 days after the end of such
fiscal year.
2. Best Efforts, Inventions and Documentation:
During the term of this Agreement, you shall devote your best efforts to
assisting us in research and development for, and the implementation of, our
business in the Fields of Interest. During the course of your services to us
hereunder, you shall
<PAGE> 2
render to us such reports, oral or written, as our Company may request relative
to your activities on our behalf. During the term hereof while working for us,
all ideas, business concepts, discoveries, innovation, inventions and
improvements, together with any letters, memoranda or other documentation you
may conceive, develop, generate, implement or come in contact with, in the areas
of the Fields of Interest shall be our Company's property and you shall promptly
inform us of the same and make the same available to us and deliver to us all of
your documentation on the same upon our request. In the event any of your
services and activities heretofore rendered or rendered hereunder give rise to
an invention or idea in the Fields of Interest which may, in our Company's
judgment, be appropriately the subject of an application for patent, copyright,
trademark or trade name, you agree at our Company's request and expense to take
all such action, prepare and execute all such documents and take all such other
action as may in the opinion of our Company or its advisors be necessary or
desirable to secure property and other rights therein and to obtain the issuance
of any such patent, copyright, trademark or trade name in any jurisdiction on
behalf of our Company.
3. Confidentiality:
In connection with your previous ongoing work for us on matters relative to the
Fields of Interest, you confirm that you have been informed by us that it is our
Company's policy to maintain and safeguard as secret and confidential all
information relative to the Fields of Interest including but not limited to all
information relative to:
a) research, development, inventions, products, processes, designs and/or
concepts, including all hardware and software, used in connection with
our business or by you for us;
b) our customers, suppliers, employees and consultants;
c) our business generally including, but not limited to, our plans and our
marketing and financial affairs; and
d) all of the foregoing relative to all of our subsidiaries and affiliates
including the U.S. Company;
all such information, plus any and all of the foregoing relative to any
additional field which you and our Company agree to be the subject of our work
hereunder, being referred to herein as "Proprietary Information".
You further understand and acknowledge that such Proprietary Information is of
great importance to us. You also recognize that the services which have been and
will be performed by you are special and unique and also that by reason of your
2
<PAGE> 3
retention hereunder you have developed and will develop Proprietary Information
for our account and you have acquired and will acquire Proprietary Information
from us. You agree that you will not, directly or indirectly, (except where
authorized in writing by us) at any time during your retention hereunder or
after you cease to be retained by us hereunder divulge to any person, firm or
corporation or use, or cause or permit any of the same to use, any Proprietary
Information or any other information relative to the business or interests of
our Company which you know or should know is regarded as proprietary and
confidential and valuable by our Company (whether or not any of the foregoing
information is actually unique or novel or is actually known to others). You
agree that you will not in any way exploit, or permit the exploitation or use by
others, of any Proprietary Information, directly or indirectly, except in
connection with your work for us or otherwise as specifically authorized by us
in writing. You agree that upon termination of your services as provided herein
for any reason and upon our request you shall deliver up to us any and all
concepts, inventions, documents and writings which you may have in your
possession or under your control, including any notes, work papers, records,
memoranda, reports, data, drawings and the like, together with all other
materials relating to any Proprietary Information or the business of our Company
or to the work you have performed for us, all of which upon creation shall be
our exclusive property.
4. Non Competition:
You agree that during your term of employment with our Company hereunder, during
the term of any subsequent consulting relationship with our Company and for a
two-year period after the end of your employment with us or a subsequent
consulting relationship with us, as the case may be, you shall not, without our
prior written consent, directly or indirectly do any of the following:
(i) Engage in, be employed by or finance any business activity that is
competitive with the business which is being conducted by the
Company or any of its affiliates or subsidiaries or with any
business for which substantial planning is made by the Company or
any affiliate or subsidiary;
(ii) Direct, disrupt or otherwise interfere with any business
relationship of the Company or any affiliate or subsidiary with any
of the clients, customers or business contacts of the Company or any
affiliate or subsidiary;
(iii) Solicit for employment for his own or another's benefit (as
employee, partner, independent contractor or otherwise) any person
who has been employed by the Company or any of its affiliates or
subsidiaries within the two-year period prior to the date in
question.
3
<PAGE> 4
5. Termination:
This Agreement shall continue for the length of your employment with our Company
and, thereafter if so determined by our Company in its sole discretion, for any
additional period during which you are affiliated with the Company as a
consultant. This Agreement shall terminate at the end of your employment with
our Company or at the end of your consulting for the Company thereafter, as the
case may be. The terms of Paragraphs 2, 3, 4 and 6 of this Agreement, insofar as
is necessary to carry out the provisions hereof, shall survive and have full
force and effect after any such termination. Should this Agreement be terminated
as a result of termination of employment or of a consulting relationship with
the Company, as the case may be, during any fiscal year of M.D. for any reason
other than for cause, you shall be entitled to receive your Incentive
Compensation in respect of such year as provided in Section 1 hereof, but not in
respect of any additional year or period.
After termination of this Agreement other than for cause, you shall continue to
receive a royalty for each fiscal year beginning after such termination in the
amount of 0.5% of the net sales of products stemming from the "Application" and
sold by M.D., in each jurisdiction where the same are covered by an unexpired
patent issued pursuant to the Application.
6. Miscellaneous:
Any reference to our Company, unless the context otherwise requires, shall be
deemed to include our Company's subsidiaries and affiliated companies. This
Agreement may be amended only by written instrument, signed by both parties
hereto. This Agreement shall be construed, interpreted and governed in all
respects by the laws of the State of New York. The parties agree that in actions
hereunder judgments at law may not provide adequate relief and that equitable
relief including injunctions and decrees for specific performance may be
required. The parties agree to accept service of process by mail and to submit
in all respects to the venue and jurisdiction of all courts, both federal and
state, in the State of New York relative to all actions hereunder. The parties
agree that all judgments obtained in such courts, including all decrees for
injunctions and specific performance, in actions hereunder shall be fully
enforceable in such courts and in all other courts in the United States and
elsewhere having jurisdiction for this purpose. This Agreement constitutes the
entire Agreement between the parties as to the subject matter hereof and
entirely supersedes and replaces all prior agreements, written or oral,
regarding the subject matter hereof.
Please confirm that the foregoing correctly sets forth our agreement with
respect to the matters covered by signing the enclosed copy of this Agreement
and returning the same to us.
4
<PAGE> 5
Very truly yours,
Edward Mendell Co., Inc.
(the Company)
By: /s/ John F. Blanco
---------------------------
President
Confirmed and agreed to
as above written:
/s/ Anand Baichwal
- ---------------------------------
Anand Baichwal
5
<PAGE> 6
AMENDMENT TO RECOGNITION AND INCENTIVE AGREEMENT
This Agreement (the "Agreement"), made this 22nd day of October, 1997, is
entered into by Penwest Pharmaceuticals Co. (formerly Edward Mendell Co., Inc.),
a Washington corporation with its principal place of business at 2981 Route 22,
Patterson, NY 12563 (the "Company"), and Dr. Anand Baichwal, residing at 5
Kendall Drive, Wappingers Falls, NY 12590 ("Baichwal").
The Company and Baichwal are parties to a Recognition and Incentive
Agreement dated May 14, 1990, (the "Baichwal Agreement"). The Company and
Baichwal desire to amend the terms of the Baichwal Agreement as set forth below.
In consideration of these premises, the mutual covenants and promises contained
herein, and other good and valuable consideration, the receipt and sufficiency
of which are acknowledged, the parties hereto agree as follows:
I. Amendments to Baichwal Agreement
1. Incentive Compensation. The Baichwal Agreement is hereby
amended by deleting Section 1 in its entirety and inserting the following in
lieu thereof:
"1. Incentive Compensation:
Subject to the provisions of Section 5 of this Agreement,
during the term of this Agreement and thereafter, the Company shall
pay to Baichwal on an annual basis in arrears (i) one-half of one
percent (0.5%) of Net Sales of Material, (ii) one-half of one
percent (0.5%) of any royalties actually received by the Company
under any licenses, collaborations or other exploitation agreements
with third parties to which the Company is a party with respect to
the sale, license, use or exploitation by such third parties of
products based on or incorporating the Material, and (iii) one-half
of one percent (0.5%) of any payments made in lieu of any Net Sales
of Material or royalties contemplated by clauses (i) and (ii) above
and actually received by the Company (including payments received
for limiting, reducing or restricting the exploitation of the
Material). In no event shall Baichwal be entitled to any payments
pursuant to this Section 1 with respect of any payments received by
the Company which are characterized by the Company in good faith as
milestone payments. When due hereunder for any fiscal year,
Incentive Compensation shall be paid in cash to you within 120 days
after the end of such fiscal year.
For purposes of this Section 1, "Net Sales" shall mean gross
revenues actually received by the Company from or on account of
sales of Material, less (a) credits or allowances granted on account
of price
<PAGE> 7
adjustment, rejection or return of items previously sold for which
payment has been received by the Company, whether during the
specific period or not, rebates and discounts, (b) excises, sales
taxes, duties or other similar taxes imposed upon and paid by the
Company with respect to such sales (excluding income, gain, profit,
or other similar taxes levied with respect to sales or gross
receipts) and (c) separately itemized insurance and transportation
costs incurred by the Company in shipping products to independent
third parties and not reimbursed to the Company."
2. M.D. the Baichwal Agreement is hereby amended to provide that
all referenced to "M.D." in the Baichwal Agreement shall be changed to
refer to the Company.
3. Post-Termination Royalties. The Baichwal Agreement is hereby
amended by deleting the second paragraph of Section 5 in its entirety
and inserting the following in lieu thereof:
"After termination of this Agreement other than for cause, you
shall continue to be entitled to receive the incentive compensation
contemplated by Section 1 of this Agreement, provided that such
compensation shall only be due to you with respect to (i) Net Sales
of Material in any jurisdiction in which the Material sold is
covered by an unexpired patent issued pursuant to the Application,
(ii) royalties actually received by the Company with respect to the
sale, license, use, or exploitation by third parties of products
based on or incorporating the Material in any jurisdiction in which
the Material is covered by an unexpired patent issued pursuant to
the Application and (iii) payments made in lieu of such Net Sales or
Royalties and actually received by the Company."
4. Definitions
A. "Material" shall mean TIMERx material and any other
material based upon or referable to the sustained release technologies covered
by the Application.
B. For purposes of Section 1 and Section 5 of the Baichwal
Agreement, the term "Company" shall mean the Company and its direct and indirect
subsidiaries, its direct and indirect parents and its direct and indirect
affiliates, and its and their successors and assigns.
<PAGE> 8
II. Miscellaneous Provisions
1. The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit, or affect the scope
or substance of any section of this Agreement.
2. This Agreement shall be construed, interpreted, and enforced in
accordance with the laws of the State of New York, without giving effect to
conflict of laws provisions.
3. This Agreement constitutes the entire agreement between the
parties relating to the subject matter hereof and supersedes all prior
agreements and understandings, whether written or oral, relating to the
amendment or modification of the Baichwal Agreement.
4. In all respects other than as specifically provided in this
Agreement, the Baichwal Agreement is hereby ratified and affirmed.
5. This Agreement and the Baichwal Agreement shall be binding upon
and shall inure to the benefit of the Company and its successors and assigns and
Baichwal and his heirs and legal representatives.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
PENWEST PHARMACEUTICALS CO.
By: /s/ John V. Talley, Jr.
--------------------------------
Title: President
--------------------------------
/s/ Anand Baichwal
------------------------------------
Dr. Anand Baichwal
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Experts" and
"Selected Financial Data" and to the use of our reports dated October 11, 1997,
in the Registration Statement (Form S-1 No. 333-38389 Amendment No. 1) and
related Prospectus of Penwest Pharmaceuticals Co. for the registration of
2,875,000 shares of its common stock.
ERNST & YOUNG LLP
Stamford, Connecticut
November 7, 1997
