<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 22, 1998
REGISTRATION NO.__________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
-----------------------
FORM 10
-----------------------
GENERAL FORM FOR REGISTRATION OF
SECURITIES PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
-----------------------
PENWEST PHARMACEUTICALS CO.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
-----------------------
WASHINGTON 91-1513032
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2981 ROUTE 22, PATTERSON, NY 12563-9970
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 878-3414
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES TO BE REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
<PAGE> 2
PENWEST PHARMACEUTICALS CO.
PART I
INFORMATION INCLUDED IN INFORMATION STATEMENT
CROSS-REFERENCE SHEET BETWEEN INFORMATION STATEMENT
AND ITEMS OF FORM 10
<TABLE>
<CAPTION>
Form 10 Caption in
Item Item Caption Information Statement
- ---- ------------ ---------------------
<S> <C> <C>
1. Business.................................. Summary--The Company and --Summary
Financial Data; Risk Factors; Selected Financial
Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Business; Index to Financial Statements
2. Financial Information..................... Summary--Summary Financial Data;
Capitalization; Selected Financial Data;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Index to Financial Statements
3. Properties................................ Business--Facilities
4. Security Ownership of Certain
Beneficial Owners and Management.......... Security Ownership of Certain Beneficial Owners
and Management
5. Directors and Executive
Officers.................................. Management
6. Executive Compensation.................... Management--Executive Compensation and --
Employee Benefit Plans
7. Certain Relationship and Related
Transactions.............................. Summary--The Distribution; Risk Factors--
Relationship with Penford; Conflicts of Interest;
Management's Discussion and Analysis of
Financial Condition and Results of Operations;
Certain Transactions; Arrangements between the
Company and Penford.
8. Legal Proceedings......................... Risk Factors--Certain Risks and Litigation
Relating to Nifedipine XL; Business--Litigation
9. Market Price of and Dividends on the
Registrant's Common Equity and Related
Shareholder Matters....................... The Distribution--Listing and Trading of Penwest
Common Stock; Risk Factors--No Prior Public Market;
Potential Volatility of Stock Price and -- Absence
of Dividends; Dividend Policy; Description of Capital
Stock
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
10. Recent Sales of Unregistered
Securities................................ None
11 Description of Registrant's Securities
to be Registered.......................... Description of Capital Stock
12. Indemnification of Directors and Officers. Indemnification of Directors and Officers
13. Financial Statements and Supplementary
Data...................................... Index to Financial Statements
14. Changes in and Disagreements With
Accountants on Accounting and Financial
Disclosure................................ Not Applicable
</TABLE>
<PAGE> 4
[Penford Letterhead] [Penwest Letterhead]
[ ] [ ], 1998
Dear Penford Corporation Shareholders:
We are pleased to announce that the Board of Directors of Penford
Corporation ("Penford") has authorized the distribution (the "Distribution") by
Penford of all the shares of common stock of Penwest Pharmaceuticals Co.
("Penwest"), a wholly-owned subsidiary of Penford, to the holders of Penford
common stock.
If you are a shareholder of record of Penford common stock at the close of
business on [ ] [ ], 1998, you will receive three shares of Penwest common stock
for every two shares of Penford common stock you own (and a cash payment for any
fractional share of Penwest common stock you are entitled to receive). You will
receive your Penwest stock certificates (and cash payment for fractional shares,
if any) in a separate mailing shortly after [ ] [ ], 1998.
Penwest's common stock will be listed and traded on the Nasdaq National
Market, and its stock symbol will be "PPCO".
Penwest is engaged in the research, development and commercialization of
novel drug delivery technologies and is an established manufacturer and
distributor of excipients, the inactive ingredients used in binding,
disintegrating and lubricating tabletted pharmaceutical and nutritional
products. By effecting the Distribution, Penford will separate Penwest's
pharmaceutical business from Penford's specialty carbohydrate-based chemical
business for the paper and food industries. The Penford Board of Directors
believes that the Distribution is in the best interests of Penford and Penford's
shareholders because the Distribution, among other things, 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
technologies; (iii) permit the financial community to focus separately on
Penford and Penwest and their respective business opportunities; (iv) provide
Penwest with the opportunity to obtain greater access to capital to finance its
business; and (v) enhance the ability of Penwest to attract, retain and motivate
its employees by offering economic incentives and rewards tied more directly to
Penwest's performance.
As discussed in more detail in the accompanying Information Statement,
Penford has obtained a private letter ruling from the Internal Revenue Service
to the effect that, among other things, the Distribution qualifies as tax-free
under Sections 355 and 368 of the Internal Revenue Code of 1986, as amended, and
the receipt of shares of Penwest common stock in the Distribution will not
result in the recognition of income, gain or loss to Penford's shareholders for
federal income tax purposes. In addition, the aggregate basis of your Penford
common stock and Penwest common stock (including the fractional shares, if any)
will be the same as the aggregate basis in your Penford common stock before the
Distribution, and will be allocated in proportion to the fair market value of
each. We will send you additional information to help you allocate your tax
basis between your Penford and Penwest common stock.
The Information Statement, which is being distributed to all owners of
Penford common stock in connection with the Distribution, describes the
transaction in detail and contains important information about Penwest,
including financial statements and other financial information. Shareholders are
encouraged to read this material carefully.
Holders of Penford common stock are not required to take any action to
participate in the Distribution. Penford is not soliciting your proxy because
shareholder approval of the Distribution is not required.
Very truly yours,
N. Stewart Rogers Tod R. Hamachek
Chairman of the Board of Directors Chairman of the Board of Directors
Penford Corporation and Chief Executive Officer
Penwest Pharmaceuticals Co.
<PAGE> 5
Subject to Completion, dated June 22, 1998
INFORMATION STATEMENT
PENWEST PHARMACEUTICALS CO.
Common Stock
(Par Value, $.001 per Share)
----------------------------
This Information Statement is being furnished to the shareholders of
Penford Corporation, a Washington corporation ("Penford"), in connection with
the distribution (the "Distribution") by Penford to holders of record of Penford
common stock on _____ [ ], 1998 (the "Record Date"), of all the outstanding
shares of common stock, par value $.001 per share ("Common Stock"), of its
wholly-owned subsidiary, Penwest Pharmaceuticals Co., a Washington corporation
("Penwest" or the "Company"). Such shares of Common Stock will be distributed by
Penford to its shareholders of record on the basis of three shares of Common
Stock for every two shares of Penford common stock owned on the Record Date.
Following the Distribution, Penford will own no shares of Common Stock. The
Distribution will be effected on ___ [ ], 1998 (the "Distribution Date").
Certificates representing the shares of Common Stock will be mailed to
shareholders on the Distribution Date or as soon thereafter as practicable.
No consideration will be required to be paid by Penford shareholders for
the shares of Common Stock to be received by them in the Distribution, nor will
they be required to surrender or exchange shares of Penford common stock in
order to receive Penwest Common Stock. Penford has obtained a private letter
ruling from the Internal Revenue Service (the "IRS") to the effect that, among
other things, the Distribution qualifies as tax-free under Sections 355 and 368
of the Internal Revenue Code of 1986, as amended, and the receipt of shares of
Common Stock in the Distribution will not result in the recognition of income,
gain, or loss to Penford shareholders for federal income tax purposes. See "The
Distribution -- Federal Income Tax Considerations of the Distribution." Neither
Penford nor Penwest will receive any cash or other proceeds from the
distribution of the Common Stock.
There is no current public trading market for the Common Stock, although it
is expected that a "when-issued" trading market will develop on or about the
Record Date. Application will be made to list the shares of Common Stock on the
Nasdaq National Market under the symbol "PPCO."
IN REVIEWING THIS INFORMATION STATEMENT, YOU SHOULD CAREFULLY CONSIDER THE
MATTERS DESCRIBED UNDER THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 12.
----------------------------
NO VOTE OF SHAREHOLDERS IS REQUIRED IN CONNECTION WITH THE DISTRIBUTION.
NO PROXIES ARE BEING SOLICITED AND YOU ARE NOT REQUESTED TO TAKE
ANY ACTION WITH RESPECT TO YOUR SHARES.
----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
INFORMATION STATEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS INFORMATION STATEMENT IS ___________, 1998.
<PAGE> 6
ADDITIONAL INFORMATION
Penwest has filed a registration statement on Form 10 with the Securities
and Exchange Commission (the "Commission") to register the shares of Common
Stock to be issued on the Distribution Date under the Securities Exchange Act of
1934, as amended (the "Exchange Act"). This Information Statement does not
contain all the information set forth in the registration statement and the
exhibits and schedules thereto, as certain items are omitted in accordance with
the rules and regulations of the Commission. Reference is made to such
registration statement and the exhibits and schedules thereto, 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 7 World Trade Center, 13th Floor,
New York, New York 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also can be obtained at prescribed rates
from the Public Reference Section of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549. In addition, Penwest is required to file electronic
versions of such material with the Commission through the Commission's
Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. The Commission
maintains a World Wide Web site at http://www.sec.gov that contains reports,
proxy and information statements, and other information regarding registrants
that file electronically with the Commission. Statements contained herein
concerning the provisions of any document 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 or otherwise filed with the Commission.
Each such statement is qualified in its entirety by such reference.
Following the Distribution, Penwest will be required to comply with the
reporting requirements of the Exchange Act and will file annual, quarterly and
other reports with the Commission. Penwest will also be subject to the proxy
solicitation requirements of the Exchange Act and will furnish holders of Common
Stock annual reports containing consolidated financial statements prepared in
accordance with generally accepted accounting principles and audited and
reported on, with an opinion expressed, by an independent public accounting
firm.
2
<PAGE> 7
No person is authorized to give any information or to make any
representations other than those contained in this Information Statement, and if
given or made, such information or representations must not be relied upon as
having been authorized. This Information Statement does not constitute an offer
to sell or a solicitation of any offer to buy any securities. This Information
Statement presents information concerning Penwest believed by Penwest to be
accurate as of the date set forth on the cover hereof. This Information
Statement presents information concerning Penford believed by Penford to be
accurate as of the date set forth on the cover hereof. Changes may occur in the
presented information after that date. Neither Penwest nor Penford plans to
update said information except in the course of fulfilling their respective
normal public reporting and disclosure obligations.
This Information Statement contains forward-looking statements that
involve risks and uncertainties. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects," "intends" and similar expressions
are intended to identify forward-looking statements. There are a number of
important factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. The factors
that could cause or contribute to such differences include without limitation
those discussed in "Risk Factors" herein, as well as those discussed elsewhere
in this Information Statement.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Additional Information...................................................... 2
Summary..................................................................... 4
The Distribution............................................................ 9
Risk Factors................................................................ 12
Dividend Policy............................................................. 22
Selected Financial Data..................................................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................. 24
Business.................................................................... 29
Management.................................................................. 51
Certain Transactions........................................................ 59
Security Ownership of Certain Beneficial Owners and Management.............. 60
Arrangements Between the Company and Penford................................ 62
Description of Capital Stock................................................ 65
Indemnification of Directors and Officers................................... 66
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 Information
Statement are the property of their respective owners.
3
<PAGE> 8
================================================================================
SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Financial Statements and the
Notes thereto, appearing elsewhere in this Information Statement.
Unless otherwise indicated, all information contained in this Information
Statement reflects a 0.76-for-1 reverse stock split of the shares of Common
Stock effected on June 19, 1998.
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 is applying its TIMERx technology to the
development of oral formulations of branded controlled release versions of
immediate release drugs and generic versions of controlled release drugs. Each
of the formulations developed to date has been developed under a collaborative
arrangement with a pharmaceutical company. 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 urge urinary
incontinence in October 1997 and began marketing the product in Finland in
January 1998. 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 combining primarily
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
pharmaceutical manufacturing equipment.
The Company'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, and none of
these products has received regulatory approval for commercial sale.
Additionally, the Company has 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, and a license agreement with
Synthelabo Groupe ("Synthelabo") covering a branded oral controlled release
version of oxybutynin intended to be marketed in Europe under the tradename
Ditropan CR, Ditropan XL or Dridase. The Company is also conducting early stage
development activities with respect to various additional controlled release
formulations.
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
Company's excipients business were $26.0 million for the year ended December 31,
1997 and $7.8 million for the three months ended March 31, 1998.
4
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<PAGE> 9
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<TABLE>
THE DISTRIBUTION
<S> <C>
Distributing Company................... Penford Corporation. As used in this Information Statement, the
term "Penford" refers to Penford Corporation and its subsidiaries
(other then Penwest), unless the context requires otherwise.
Distributed Company.................... Penwest Pharmaceuticals Co. As used in this Information
Statement, the term "the Company" or "Penwest" refers to
Penwest Pharmaceuticals Co. and its subsidiaries, unless the
context requires otherwise.
Common Stock to be Distributed......... Approximately 11.05 million shares, which constitutes 100% of
the Common Stock outstanding on the Record Date. Immediately
after the Distribution, Penford will own no shares of Common
Stock.
Distribution........................... On the Distribution Date or as soon thereafter as practicable, the
Distribution Agent (as defined below) will begin distributing
certificates representing Common Stock to the shareholders of
Penford. Penford shareholders will not be required to make any
payment or to take any other action to receive Common Stock.
Distribution Ratio..................... Three shares of Common Stock for every two shares of Penford
common stock.
Record Date............................ [ ], 1998.
Distribution Date...................... [ ], 1998.
Distribution Agent..................... ChaseMellon Shareholder Services.
Fractional Share Interests............. No certificates representing fractional shares of Common Stock
will be issued. Penford shareholders entitled to receive less than a
full share of Common Stock will receive cash in lieu of such
fractional share. See " The Distribution -- Manner of Effecting
the Distribution."
Trading Market and Symbol.............. Application will be made to list the shares of Common Stock on
the Nasdaq National Market under the symbol "PPCO." There is
no current public trading market for the Common Stock, although
it is expected that a "when-issued" trading market will develop on
or about the Record Date.
</TABLE>
5
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<PAGE> 10
<TABLE>
<S> <C>
Reasons for the Distribution........... The Penford Board of Directors believes that the Distribution is in
the best interests of Penford and Penford's shareholders because
the Distribution, among other things, will: (i) permit the
managements of Penford and the Company 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 the
Company's technologies; (iii) permit the financial community to
focus separately on Penford and the Company and their respective
business opportunities; (iv) provide the Company with the
opportunity to obtain greater access to capital to finance its
business; and (v) enhance the ability of the Company to attract,
retain and motivate its employees by offering economic incentives
and rewards tied more directly to the Company's performance.
See "The Distribution -- Background of the Distribution."
Tax Consequences....................... Penford has obtained a private letter ruling from the IRS to the
effect that, among other things, the Distribution qualifies as
tax-free under Sections 355 and 368 of the Internal Revenue Code
of 1986, as amended (the "Code"), and the receipt of shares of
Common Stock in the Distribution will not result in the
recognition of income, gain or loss to Penford shareholders for
federal income tax purposes. Any cash payment received by a
Penford shareholder in lieu of fractional shares will not be tax-free
to the Penford shareholder. See "The Distribution -- Federal
Income Tax Consequences of the Distribution."
Relationship with Penford after the
Distribution........................... As a result of the Distribution, the Company will cease to be a
subsidiary of or otherwise affiliated with Penford and will
thereafter operate as an independent, publicly held company. In
connection with the Distribution, Penford and the Company have
entered into or will enter into certain agreements, including but
not limited to, the Separation and Distribution Agreement, the Tax
Allocation Agreement, the Services Agreement, the Employee
Benefits Agreement and the Excipient Supply Agreement. In
addition, Penford has agreed to guarantee the Company's
indebtedness under a $15.0 million credit facility to which the
Company is a party (the "Credit Facility"). See "The Distribution
-- Background of the Distribution" and "Arrangements Between
The Company and Penford."
Anti-Takeover Effects of Washington
Law and Certain Charter Provisions..... Certain provisions under the Washington Business Corporation
Act, the Restated Articles of Incorporation and the Bylaws of the
Company could make more difficult the acquisition and control of
the Company by means of a tender offer, open market purchase, a
proxy contest or otherwise.
</TABLE>
6
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<PAGE> 11
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<TABLE>
<S> <C>
Dividend Policy........................ The Company currently does not intend to pay cash dividends on
the Common Stock. The Company is prohibited from paying
dividends on the Common Stock under the Credit Facility. See
"Risk Factors -- Absence of Dividends."
Risk Factors........................... The shares of Common Stock to be issued in the Distribution
involve a high degree of risk. Shareholders should carefully
consider the matters discussed under the section entitled "Risk
Factors."
</TABLE>
7
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<PAGE> 12
SUMMARY FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
YEAR ENDED DECEMBER 31, (UNAUDITED)
------- -------- ------- ------- -------
1995 1996 1997 1997 1998
------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ......................................... $25,089 $26,089 $26,941 $ 6,970 $ 7,786
Cost of product sales ............................ 17,267 18,690 19,929 4,891 5,836
------- ------- ------- ------- -------
Gross profit ................................. 7,822 7,399 7,012 2,079 1,950
Selling, general and administrative .............. 7,676 6,776 8,708 2,044 2,357
IPO transaction costs ............................ -- -- 1,367 -- --
Research and product development ................ 2,719 3,723 4,109 851 1,285
Net loss ......................................... $(3,252) $(3,864) $(7,316) $ (832) (2,030)
======= ======= ======= ======= =======
Basic and diluted net loss per share ............. $ (0.29) $ (0.35) $ (0.66) $ (0.08) $ (0.18)
======= ======= ======= ======= =======
Weighted average shares of common
stock outstanding .............................. 11,055 11,055 11,055 11,055 11,055
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------------
ACTUAL AS ADJUSTED(1)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................ $ 723 $ 723
Working capital.......................................................... (35,545) 9,072
Total assets............................................................. 37,695 37,695
Accumulated deficit...................................................... (21,679) (21,679)
Shareholders' equity (deficit)........................................... (14,403) 30,214
</TABLE>
- ----------
(1) As adjusted to reflect the contribution by Penford to the capital of the
Company, effective immediately prior to the Distribution Date, of the
outstanding intercompany indebtedness of the Company to Penford (the
"Penford Capital Contribution"). The intercompany indebtedness was
$44,617,000 as of March 31, 1998. See Note 6 of Notes to Consolidated
Financial Statements.
8
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<PAGE> 13
THE DISTRIBUTION
BACKGROUND OF THE DISTRIBUTION
In May 1998, Penford announced its intent, subject to the satisfaction of
certain conditions, to divest its ownership interest in the Company by means of
the Distribution. By effecting the Distribution, Penford would separate its
pharmaceutical business from its specialty carbohydrate-based chemical business
for the paper and food industries. The Board of Directors of Penford (the
"Penford Board") believes that the Distribution is in the best interests of
Penford and Penford's shareholders because the Distribution, among other things,
will: (i) permit the managements of Penford and the Company 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 the Company's technologies; (iii) permit the financial community to
focus separately on Penford and the Company and their respective business
opportunities; (iv) provide the Company with the opportunity to obtain greater
access to capital to finance its business; and (v) enhance the ability of the
Company to attract, retain and motivate its employees by offering economic
incentives and rewards tied more directly to Penwest's performance.
The Company believes that there are a number of risks and uncertainties
associated with the Distribution, including risks related to the Company's
inability to access the resources of Penford following the Distribution. For a
discussion of these risks and uncertainties, see "Risk Factors -- Possibility of
Substantial Sales of Common Stock," "-- History of Losses; Uncertainty of Future
Profitability," "-- Need for Additional Funding; Uncertainty of Access to
Capital," "-- Relationship with Penford; Conflicts of Interest" and "-- Risk of
Product Liability Claims; No Assurance of Adequate Insurance."
The Company and Penford have entered into or will, on or prior to the
completion of this Distribution, enter into agreements that govern various
interim and ongoing relationships. These agreements include (i) a Separation and
Distribution 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 specialty carbohydrate-based chemical
business and the Distribution, including without limitation Penford's agreement
to guarantee the Company's indebtedness under the Credit Facility, (ii) a
Services Agreement pursuant to which Penford will continue on an interim basis
to provide specified services to the Company, (iii) a Tax Allocation Agreement
relating to, among other things, the allocation of tax liability between the
Company and Penford in connection with the Distribution, (iv) an Excipient
Supply Agreement pursuant to which Penford will manufacture and supply
exclusively to the Company, and the Company will purchase exclusively from
Penford, subject to certain exceptions, all the Company's requirements for two
excipients marketed by the Company, and (v) an Employee Benefits Agreement
setting forth the parties' agreements as to the continuation of certain Penford
benefits arrangements for the employees of the Company.
MANNER OF EFFECTING THE DISTRIBUTION
The general terms and conditions relating to the Distribution will be set
forth in the Separation and Distribution Agreement and the Tax Allocation
Agreement.
Under the terms and conditions of the Separation and Distribution Agreement,
Penford will effect the Distribution on the Distribution Date by providing for
the delivery of the Common Stock held by Penford to the Distribution Agent for
distribution to the owners of record of Penford common stock on the Record Date.
The Distribution will be made on the basis of three shares of Common Stock for
every two shares of Penford Common Stock outstanding on the Record Date. The
shares of Common Stock will be fully paid and nonassessable, and the owners
thereof will not be entitled to preemptive rights. See "Description of Capital
Stock." Certificates representing Common Stock will be mailed to Penford
shareholders on the Distribution Date or as soon thereafter as practicable.
No certificates or scrip representing fractional shares of Penwest Common
Stock will be issued to Penford shareholders as part of the Distribution. The
Distribution Agent will aggregate fractional shares into whole shares and sell
them in the open market at then prevailing prices on behalf of shareholders who
otherwise would be entitled to receive fractional shares, and such shareholders
will receive instead a cash payment in the amount of their pro rata share of the
total proceeds, net of selling expenses. See "The Distribution -- Federal Income
Tax Consequences of the Distribution." Such sales are expected to be made as
soon as practicable after
9
<PAGE> 14
the Record Date. NONE OF PENFORD, PENWEST OR THE DISTRIBUTION AGENT WILL
GUARANTEE ANY MINIMUM SALE PRICE FOR THE SHARES OF COMMON STOCK, AND NO INTEREST
WILL BE PAID ON THE PROCEEDS.
After the Distribution, holders of Penford common stock will continue to
hold their shares of Penford common stock and, if such shareholders were
shareholders of record on the Record Date, they will have also received shares
of Penwest Common Stock. No holder of Penford common stock will be required to
pay any cash or other consideration for the shares of Common Stock received in
the Distribution or to surrender or exchange shares of Penford common stock in
order to receive shares of Common Stock. The Distribution will not affect the
number of, or the rights attached to, outstanding shares of Penford common
stock.
After the Distribution, Penford will own no shares of Common Stock and the
Company will operate as an independent, publicly owned corporation.
FEDERAL INCOME TAX CONSEQUENCES OF THE DISTRIBUTION
Penford has obtained a private letter ruling from the IRS to the effect
that, among other things, the Distribution will qualify as tax-free under
Sections 355 and 368 of the Code, and, in general, that for federal income tax
purposes:
(1) No gain or loss will be recognized by or be includable in the
income of a holder of Penford common stock solely as a result of the receipt
of Common Stock in the Distribution.
(2) No gain or loss will be recognized by Penford or its subsidiaries
upon the Distribution.
(3) The aggregate tax basis of the Penford common stock and the Common
Stock held by a shareholder immediately after the Distribution will be the
same as the tax basis of Penford common stock held by such shareholder
immediately prior to the Distribution and will be allocated (based upon
relative market values on the Distribution Date) between such Penford common
stock and the Common Stock received by such shareholder in the Distribution.
(4) Assuming that the Penford common stock is held as a capital asset,
the holding period for the Common Stock received in the Distribution by a
holder of Penford common stock will include the period during which such
Penford common stock was held.
(5) A holder of Penford common stock who receives cash in lieu of a
fractional share of Common Stock will be treated as if such fractional share
had been received by the shareholder as part of the Distribution and then
redeemed from the shareholder by the Company. Such shareholder will
recognize gain or loss equal to the difference between the cash so received
and the portion of the tax basis in the Penford common stock that is
allocable to such fractional share. Such gain or loss will be capital gain
or loss, provided that such fractional share was held by the shareholder as
a capital asset at the time of the Distribution.
The Distribution, although tax-free as of the Distribution Date, like other
tax-free distributions, could be rendered taxable as a result of subsequent
actions or events. For a description of subsequent actions or events that could
render the Distribution taxable, see "Risk Factors -- Risk of Loss of "Tax-Free"
Treatment of Distribution." If the Distribution were rendered taxable as a
result of subsequent actions or events (i) a corporate-level taxable gain would
be recognized by the group of corporations of which Penford is the parent,
generally equal to the amount by which the fair market value of the Common Stock
distributed in the Distribution exceeded Penford's basis therein, (ii) both
Penford, as parent of that group, and Penwest, as a former member of that group,
would be severally liable for the corporate-level tax on such gain and (iii)
each holder of Penford common stock who receives shares of Common Stock in the
Distribution would be treated as having received a taxable dividend in an amount
equal to the fair market value of the Common Stock received (assuming that
Penford had sufficient current or accumulated "earnings and profits"). Under the
Tax Allocation Agreement, each of Penford and Penwest has agreed to indemnify
the other for certain taxes incurred with respect to the Distribution (and
related transactions) as a result of certain post-Distribution actions. These
indemnification obligations do not extend to shareholders of Penford.
THE SUMMARY OF FEDERAL INCOME TAX CONSEQUENCES SET FORTH ABOVE IS FOR GENERAL
INFORMATION ONLY AND DOES NOT PURPORT TO COVER ALL FEDERAL INCOME TAX
CONSEQUENCES THAT MAY APPLY TO ALL CATEGORIES OF SHAREHOLDERS. ALL SHAREHOLDERS
SHOULD CONSULT THEIR TAX
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ADVISORS AS THE PARTICULAR TAX CONSEQUENCES OF THE DISTRIBUTION TO THEM,
INCLUDING THE APPLICABILITY AND EFFECT OF STATE, LOCAL AND FOREIGN LAWS.
LISTING AND TRADING OF PENWEST COMMON STOCK
Prior to the Distribution, there has been no public market for the Common
Stock. There can be no assurance regarding the prices at which the Common Stock
will trade before or after the Distribution Date.
Application has been made to list the Common Stock on the Nasdaq National
Market under the symbol "PPCO." Based on the number of holders of record of
Penford common stock as of __________, 1998, Penwest is expected to initially
have approximately ____ shareholders of record on the Distribution Date. The
transfer agent and registrar for the Common Stock will be ChaseMellon
Shareholder Services.
The Company expects that a "when-issued" trading market will develop on or
about the Record Date. A "when-issued" trading market occurs when trading of
shares begins prior to the time stock certificates are actually available or
issued.
Shares of Common Stock distributed to Penford's shareholders will be freely
transferable except for shares received by persons who may be deemed to be
"affiliates" of Penwest under the Securities Act of 1933, as amended (the
"Securities Act"). Persons who may be deemed to be affiliates of Penwest after
the Distribution generally include individuals or entities that control, are
controlled by, or are under common control with Penwest, and include the
directors and executive officers of Penwest. All the shares of Common Stock held
by affiliates of Penwest may generally only be resold (i) in compliance with the
applicable provisions of Rule 144 under the Securities Act, (ii) under an
effective registration statement under the Securities Act, or (iii) pursuant to
an exemption from the registration requirements of the Securities Act. Under
Rule 144, an affiliate is entitled to sell, within any three-month period, a
number of shares of Common Stock that does not exceed the greater of 1% of the
then outstanding shares of Common Stock or the average weekly trading volume of
the Common Stock during the four calendar weeks preceding the date on which
notice of such sale was filed under Rule 144, provided certain requirements
concerning availability of public information, manner of sale and notice of sale
are satisfied.
After the Distribution, the approximate number of shares of Penwest Common
Stock issued and outstanding will be 11.05 million of which approximately
704,152 shares will be held by affiliates and subject to the resale requirements
of Rule 144 of the Securities Act. It is anticipated that prior to the
Distribution Date, Penwest will file with the Commission Registration Statements
on Form S-8 to register under the Securities Act shares of Common Stock which
are issuable pursuant to the Company's 1997 Equity Incentive Plan, 1997 Employee
Stock Purchase Plan and 1998 Spinoff Option Plan. See "Management -- Employee
Benefit Plans."
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<PAGE> 16
RISK FACTORS
Holders of Penford common stock should be aware that the Distribution and
ownership of Common Stock involve certain risks, including those described
below, which could adversely affect the value of their holdings. Neither Penford
nor the Company makes, nor is any other person authorized to make, any
representations as to the future market value of the Common Stock.
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 owner 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") is the sponsor of 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. 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 the law, based primarily on the
arguments stated in its citizen's petition. Mylan and the Company intervened as
defendants in this suit. In April 1998, the District Court of the District of
Columbia rejected Pfizer's claim, and in May 1998, Pfizer appealed the District
Court's decision. There can be no assurance that the FDA, Mylan and the Company
will prevail in this litigation. An outcome in this litigation 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 pursue additional regulatory
initiatives and lawsuits with respect to Procardia XL and Nifedipine XL.
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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 owners of the patents covering the
brand name product or the sponsors 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.
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,
however, that Mylan will file ANDAs with respect to the 60 mg and 90 mg dosage
strengths or that these formulations would be otherwise approvable by the FDA.
The Company is aware that Biovail Corporation International ("Biovail") has
filed an ANDA with respect to a 60 mg dosage strength generic version of
Procardia XL. 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, a
180-day marketing exclusivity (a 180-day delay in approval of other ANDAs for
the same drug) from the FDA. There can be no assurance that the FDA will not
approve Biovail's ANDA or another ANDA filed by another applicant with respect
to a different dosage 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, Synthelabo 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.
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In addition, the Company'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. Except for Cystrin CR, which is being marketed in
Finland, none of the Company's TIMERx controlled release products have been
commercialized, and the period required to achieve commercialization is
uncertain and may be lengthy, if commercialization is achieved at all. Although
in May 1997, Mylan filed an ANDA with the FDA for the 30 mg dosage strength of
Nifedipine XL, 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. Substantially all the revenues from controlled
release products 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. See "Business -- TIMERx Product
Development," "-- Collaborative Arrangements" and "-- Government Regulation."
HISTORY OF LOSSES; UNCERTAINTY OF FUTURE PROFITABILITY
The Company incurred net losses of approximately $3.3 million, $3.9 million
and $7.3 million during 1995, 1996 and 1997, respectively, and $832,000 and $2.0
million during the three months ended March 31, 1997 and 1998, respectively. As
of March 31, 1998, the Company's accumulated deficit was approximately $21.7
million. The Company expects net losses to continue at least into late 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, traditional matrix systems marketed by
SkyePharma, plc and other controlled release technologies marketed and under
development by Andrx Corporation, among others.
The Company initially is concentrating a significant portion of 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 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
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<PAGE> 19
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 funds available under the Credit Facility and internally generated funds,
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 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
Distribution Date, the Company will have no committed sources of capital other
than the Credit Facility. There can be no assurance that the Company will be
able to access the Credit Facility at such times as it desires or needs capital.
The Credit Facility contains a number of financial covenants that relate to
Penford (and not Penwest) and certain other covenants that are applicable to
both Penford and Penwest. Any breach of these covenants by Penford or the
Company, or a default by Penford with respect to any material indebtedness or a
change of control of Penford without the lender's consent, would constitute a
default by the Company under the Credit Facility. Accordingly, the Company will
be substantially dependent on Penford in order to access and maintain the Credit
Facility. Any default under the Credit Facility would 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
Operation -- Liquidity and Capital Resources."
To the extent capital resources are insufficient to meet future
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. The Credit Facility restricts the
incurrence of additional indebtedness by the Company and requires that the
proceeds from any financing conducted by the Company be used to pay down any
outstanding amounts under the Credit Facility. 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 unable to
comply with its obligations under its collaborative agreements, which could
result in the termination of such collaborative agreements. In addition, 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
"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. The Company has been issued 23 U.S. patents
and 42 foreign patents and three U.S. patent applications have been allowed
relating to its controlled release drug delivery and excipient technologies. In
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<PAGE> 20
addition, the Company has filed 11 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 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.
Substantial patent litigation exists in the pharmaceutical industry. 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."
The Company 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. All new prescription drugs must be approved by the FDA before
they can be introduced into 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 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
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<PAGE> 21
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 that 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
Procardia XL. There can be no assurance that approvals can be obtained, or be
obtained in a timely manner, for such ANDA or for any other applications for
regulatory approval that may be filed. See "Business -- Government Regulation."
LIMITED MANUFACTURING CAPABILITY; DEPENDENCE ON SOLE SOURCE SUPPLIERS
The Company does not have 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,
Boehringer Ingelheim Pharmaceuticals, Inc. ("Boehringer Ingelheim"), for the
bulk manufacture of its TIMERx material for delivery to its collaborators under
an agreement that expired in June 1998. The Company is seeking to contract with
another third-party manufacturer to manufacture TIMERx material. The Company
believes that there are a limited number of manufacturers that operate under
cGMP regulations capable of manufacturing the Company's products. Boehringer
Ingelheim has advised the Company that it will continue to manufacture TIMERx
material for the Company on the terms set forth in the current agreement until
such time as the Company contracts with another manufacturer, but Boehringer
Ingelheim is not obligated to continue to manufacture TIMERx material, and there
can be no assurance as to how long Boehringer Ingelheim will continue to
manufacture TIMERx material. 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 Company's
competitive position, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
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 combining
primarily 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.
Although the Company has qualified alternate suppliers with respect to these
17
<PAGE> 22
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 to 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 and the guaranty by Penford of the Company's indebtedness under the
Credit Facility. 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 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 Distribution, the Company and Penford have entered
into a number of agreements, which will become effective on or before the
Distribution Date, 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 the 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 the 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.
In connection with Penford's guaranty of the Company's indebtedness under
the Credit Facility, the Credit Facility contains a number of financial
covenants that relate to Penford (and not Penwest), including requirements that
Penford maintain certain levels of financial performance, including without
limitation the maintenance of a minimum net worth and the maintenance of certain
financial ratios. The Credit Facility also contains certain covenants applicable
to both Penford and Penwest, including restrictions on the incurrence of
additional debt and on the payment of dividends. Any breach of these covenants
by Penford or the Company, or a default by Penford with respect to any material
indebtedness or a change of control of Penford without the consent of the
lender, would constitute a default by the Company under the Credit Facility.
Accordingly, the Company will be substantially dependent on Penford in order to
access and maintain the Credit Facility. Any default by the Company under the
Credit Facility would have a material adverse effect on the Company's business,
financial condition and results of operations.
Three of the seven current directors of the Company are also directors of
Penford. Tod R. Hamachek, the Company's Chairman and Chief Executive Officer,
has informed the Company that he intends to resign from the Penford Board upon
completion of the Distribution, and Paul E. Freiman has informed the Company
that he intends to resign from the Penford Board at its next annual meeting of
shareholders. N. Stewart Rogers, the Chairman of Penford, will remain on the
Penwest Board pursuant to Penford's rights under the Separation and Distribution
Agreement. Any 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 either of
such directors 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. Mr. Hamachek may also have a conflict of interest
as a result of a loan extended to him by Penford. See "Management -- Executive
Compensation." In addition, determinations may be made by the Company's Board of
Directors, 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."
18
<PAGE> 23
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 receive 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. 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. The Company is currently 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 the Company will be able to obtain comparable coverage following
the Distribution. 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 and
results of operations could be materially adversely affected by the assertion of
a product liability claim. See "Business -- Product Liability Insurance."
NO PRIOR PUBLIC MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to the Distribution, there has been no public market for the Penwest
Common Stock, although it is expected that a "when-issued" trading market will
develop on or about the Record Date. There can be no assurance regarding the
prices at which the Common Stock will trade before or after the Distribution
Date.
As a result of the Distribution, all the shares of Common Stock outstanding
will be distributed to the shareholders of Penford. Substantially all such
shares will 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 following the Distribution. Sales of substantial amounts of
Common Stock in the public market, or the perception that such sales might
occur, whether as a result of the Distribution or otherwise, could materially
adversely affect the market price of the Common Stock.
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
19
<PAGE> 24
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" could have a significant and adverse
impact on such market price.
ABSENCE OF DIVIDENDS
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. The
Company is prohibited from paying dividends on the Common Stock under the Credit
Facility. See "Dividend Policy."
ANTI-TAKEOVER EFFECTS OF WASHINGTON LAW AND CERTAIN CHARTER PROVISIONS
The Board 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. 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 prohibit 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. The staggered Board 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."
RISK OF LOSS OF "TAX-FREE" TREATMENT OF DISTRIBUTION
Penwest has received a private letter ruling from the IRS to the effect
that, among other things, the Distribution qualifies as tax-free under Sections
355 and 368 of the Code and that the receipt of shares of Common Stock in the
Distribution will not result in the recognition of income, gain or loss to
Penford's shareholders for federal income tax purposes. See "The Distribution --
Certain Federal Income Tax Consequences of the Distribution." The continuing
validity of any such ruling is subject to certain factual representations and
assumptions. Neither Penford nor Penwest is aware of any facts or circumstances
which should cause such representations and assumptions to be untrue. Although
the Tax Allocation Agreement provides that neither Penford nor Penwest is to
take any action inconsistent with, nor fail to take any action required by, the
private letter ruling unless required to do so by law or the other party has
given its prior written consent or, in certain circumstances, a supplemental
ruling permitting such action is obtained, any of the following acts potentially
could render the Distribution taxable: (i) the transfer by Penford or Penwest of
a material portion of its assets (other than a transfer of assets in the
ordinary course of business); (ii) the merger of Penford or Penwest with or into
another corporation in a transaction that does not qualify as a tax-free
reorganization under Section 368 of the Code; (iii) the discontinuance by
Penford or Penwest or a material portion of its historical business activities;
(iv) the conversion (or redemption or exchange) of the Common Stock distributed
in the Distribution into or for any other stock, security, property, or cash;
(v) the issuance of additional shares of stock by Penwest pursuant to
negotiations, agreements, plans, or arrangements entered into before the
Distribution; (vi) transfers of stock of Penford and/or Penwest by shareholders
of sufficient quantity to cause the historic shareholders of Penford not to be
considered to have maintained sufficient "continuity of proprietary interest" in
one or both of the companies; and (vii) the acquisition of a 50% or greater
interest in Penford and/or Penwest pursuant to a plan (or deemed to be pursuant
to a plan) in existence on the Distribution Date. If the Distribution were
rendered taxable as a result of such an act, then (x) the corporate-level
taxable gain would be recognized by the consolidated group of which Penford is
the parent (see "The Distribution -- Federal Income Tax Consequences of the
Distribution"), (y) each of Penford and Penwest, as a former member of that
group, would be severally liable for the corporate-level tax on such gain when
such gain becomes taxable under the consolidated return regulations, and (z)
except in the case of an acquisition described in clause (vii) of the preceding
sentence, each holder of common stock who received shares of Common Stock in the
Distribution would be treated as having received a taxable dividend in an amount
equal to the fair market value
20
<PAGE> 25
of the Common Stock received (assuming that Penford had sufficient current or
accumulated "earnings and profits"). Penford and Penwest have agreed to
indemnify each other with respect to any tax liability resulting from their
respective failures to comply with such provisions. These indemnification
obligations do not extend to shareholders of Penford. See "Arrangements Between
the Company and Penford -- Tax Allocation Agreement."
21
<PAGE> 26
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. The Company is prohibited from paying dividends on its
Common Stock under the Credit Facility.
22
<PAGE> 27
SELECTED FINANCIAL DATA
The statement of operations data for the years ended December 31, 1994,
1995, 1996 and 1997 and the balance sheet data as of December 31, 1995, 1996 and
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 year ended December 31, 1993 and the three month
periods ended March 31, 1997 and 1998 and the balance sheet data as of December
31, 1993 and 1994 and March 31, 1998 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 three-month
period ended March 31, 1998 are not necessarily indicative of the results that
may be expected for the entire year ending December 31, 1998. 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 Information Statement.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------------------------- ---------------------
1993 1994 1995 1996 1997 1998 1997
------- -------- -------- ------- -------- -------- --------
(in thousands, except for per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues .......................... $21,355 $ 23,146 $ 25,089 $26,089 $ 26,941 $ 6,970 $ 7,786
Cost of product sales ............. 13,708 15,910 17,267 $18,690 $ 19,929 4,891 5,836
------- -------- -------- ------- -------- -------- --------
Gross profit ...................... 7,647 7,236 7,822 7,399 7,012 2,079 1,950
Selling, general and
administrative .................. 6,383 7,021 7,676 6,776 8,708 2,044 2,357
IPO transaction costs ............. -- -- -- -- 1,367 -- --
Research and product development .. 1,255 2,322 2,719 3,723 4,109 851 1,285
Net income (loss) ................. $ 8 $ (2,629) $ (3,252) $(3,864) $ (7,316) $ (832) $ 2,030
======= ======== ======== ======= ======== ======== ========
Net income (loss) per share ....... $ 0.00 $ (0.24) $ (0.29) $ (6.35) $ (0.66) $ (0.18) $ (0.08)
======= ======== ======== ======= ======== ======== ========
Weighted average shares outstanding 11,055 11,055 11,055 11,055 11,055 11,055 11,055
======= ======== ======== ======= ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1998
-------------------------------------------------------- ----------------------
AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(1)
-------- -------- -------- -------- -------- -------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Sash and cash equivalents............ $ 347 $ 668 $ 290 $ 695 $ 938 $ 723 $ 723
Working capital...................... (12,321) (14,592) (19,461) (23,362) (33,433) (35,545) 9,072
Total assets......................... 25,430 27,000 31,671 35,083 37,436 37,695 37,695
Accumulated deficit.................. (2,588) (5,217) (8,469) (12,333) (19,649) (21,679) (21,679)
Total shareholder's equity (deficit). 5,011 2,641 (477) (4,412) (12,297) (14,403) 30,214
</TABLE>
- ----------
(1) As adjusted to reflect the Penford Capital Contribution. See Note 6 of Notes
to Consolidated Financial Statements.
23
<PAGE> 28
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 Information Statement.
OVERVIEW
Since 1991, the Company 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 markets excipients to the pharmaceutical
and nutritional industries. The Company 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. The Company's
collaborator, Leiras, received marketing approval in Finland for Cystrin CR, a
TIMERx formulation for the treatment of urge urinary incontinence, in October
1997 and began marketing the product in Finland in January 1998. 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. Pfizer's claim against the FDA was
rejected by a district court in April 1998 and in May 1998 Pfizer appealed the
district court's decision. 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, Synthelabo 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.
Under most of these collaborative agreements, the Company has received
upfront fees and milestone payments. In connection with the receipt of certain
upfront fees, the Company was required to perform pilot bioequivalence studies
and only recognized such fees upon delivery of the results of such studies to
the collaborators. In addition, under most of these collaborative agreements,
the Company is entitled to receive additional milestone payments, royalties on
the sale of the products covered by such collaborative agreements and payments
for the purchase of formulated TIMERx material. Because the timing and the
amount of each of these payments are dependent on the continued development and
commercialization of the products covered by such agreements, as to which the
Company has limited control, there can be no assurance as to the timing of
receipt of some or all of these payments or as to the amount of payments to be
received by the Company.
Except for Cystrin CR, which received marketing approval in Finland in
October 1997, no product based on TIMERx technology has ever received regulatory
approval for commercial sale. Substantially 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.
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<PAGE> 29
The Company has incurred net losses since 1994. As of March 31, 1998, the
Company's accumulated deficit was approximately $21.7 million. The Company
expects net losses to continue at least into late 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 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.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Total revenues increased by 11.7% for the three months ended March 31, 1998
to $7.8 million from $7.0 million for the three months ended March 31, 1997.
Product sales increased to $7.8 million for the three months ended March 31,
1998 from $6.6 million for the three months ended March 31, 1997 representing an
increase of 16.8%. The increase in product sales was primarily due to increased
sales in North America of EMCOCEL, one of the Company's principal excipient
products. Royalties and licensing fees relating to the TIMERx drug delivery
system decreased to $25,000 for the three months ended March 31, 1998 from
$325,000 for the three months ended March 31, 1997 due to the timing of when
development milestones were earned.
Gross profit decreased to $2.0 million or 25.0% of total revenues for the
three months ended March 31, 1998 from $2.1 million or 29.8% of total revenues
for the three months ended March 31, 1997. The decrease in gross profit
percentage was primarily due to the decrease in licensing fees for the period
and, to a lesser extent, a change in product mix.
Selling, general and administrative expenses increased by 15.3% for the
three months ended March 31, 1998 to $2.4 million from $2.0 million for the
three months ended March 31, 1997. This increase was primarily due to relocation
expenses associated with the hiring of additional employees required for the
Company to operate as a stand-alone entity, depreciation on a new computer
system and higher compensation expenses related to the employment of additional
employees in 1998.
Research and development expenses increased by 51.0% for the three months
ended March 31, 1998 to $1.3 million from $851,000 for the three months ended
March 31, 1997. This increase was due to increased spending under the Company's
collaboration with Endo and increased spending related to the development of
other TIMERx controlled release products.
For the three months ended March 31, 1998 and 1997, 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, which will
reverse when losses are not expected to be available.
25
<PAGE> 30
Years Ended December 31, 1997 and 1996
Total revenues increased by 3.3% in 1997 to $26.9 million from $26.1 million
in 1996. Product sales increased to $26.0 million in 1997 from $25.0 million in
1996, primarily due to an increase in the second half of 1997 in North American
sales of EMCOCEL. These increased sales were partially offset by a decrease in
average selling price for some excipients in Europe due to competitive pricing
pressures. Royalties and licensing fees relating to the TIMERx drug delivery
system decreased to $911,000 in 1997 from $1.1 million in 1996 due to the timing
of when development milestones were earned.
Gross profit decreased to $7.0 million or 26.0% of total revenues in 1997
from $7.4 million or 28.4% of total revenues in 1996. This decrease in gross
profit was primarily attributable to a change in product mix, some inventory
write-offs of excipient products in the fourth quarter of 1997 and the decrease
in royalties and licensing fees in 1997.
Selling, general and administrative expenses increased by 28.5% in 1997 to
$8.7 million from $6.8 million in 1996. This increase was primarily due to
additional general and administrative expenses associated with increased
business development efforts, employee benefit consulting associated with the
Distribution, higher incentive compensation expenses and a property tax refund
that was recorded in 1996.
In October 1997, Penford's Board of Directors approved the sale of
approximately 20% of the Company's Common Stock in an initial public offering
(the "IPO"). The IPO was initially intended to be completed during December
1997. Due to market conditions, the IPO was initially postponed and during May
1998, after further evaluation of the market opportunities, Penford's Board of
Directors decided to distribute 100% of the Common Stock to Penford's
shareholders and forego the IPO at such time. Based on this decision, the
Company wrote-off approximately $1.4 million of transaction costs, principally
legal, accounting and printing, associated with the preparation for the IPO
during the year ended December 31, 1997.
Research and development expenses increased by 10.4% in 1997 to $4.1 million
from $3.7 million in 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 1997 and 1996, 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,
which will reverse when losses are not expected to be available.
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 a property tax
refund recorded 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
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<PAGE> 31
provision for income taxes includes foreign taxes and federal and state deferred
tax liabilities that exceed deferred tax assets, which will reverse when
losses are not expected to be available.
LIQUIDITY AND CAPITAL RESOURCES
Since its incorporation, the Company has received intercompany advances from
Penford to fund the Company's operations, capital expenditures and the original
acquisition of the Company's predecessor, which equalled $44.6 million as of
March 31, 1998. Penford intends to continue to provide advances to the Company
until the Distribution Date. Penford has agreed that it will contribute the
outstanding intercompany indebtedness to the capital of the Company as of the
Distribution Date. In addition, Penford has agreed to guarantee the Company's
indebtedness under the Credit Facility. In no other respects will Penford
provide financial support to the Company after the Distribution.
As of March 31, 1998, the Company had cash and cash equivalents of $723,000.
Following the Distribution Date, the Company will have no committed sources of
capital other than the Credit Facility and no indebtedness to any third or
related parties other than under the Credit Facility.
The Company had negative cash flow from operations in each of the periods
presented primarily due to net losses for the period as well as increasing
inventory levels. Inventory has increased as the Company began manufacturing
TIMERx inventory in 1995 for a variety of uses. These uses include the supply of
the drug delivery system for use in connection with products that are complete
and awaiting regulatory approval or completion of the commercialization efforts
where regulatory approval has been obtained, and the supply of the drug delivery
system to pharmaceutical companies for use in their development efforts or in
connection with new or existing collaborative arrangements. In all these cases,
the Company receives revenue from the supply of the TIMERx inventory.
Additionally, the Company has alternative uses of the TIMERx inventory for other
drugs which the Company may research and formulate for commercialization. The
Company will continue to build inventories until the drugs under development are
commercialized. Funds expended for the acquisition of fixed assets were
primarily related to the expansion of the Company's manufacturing facilities and
laboratory space as well as the purchase of equipment used principally for
research and development efforts. The payable to Penford increased to fund the
operations and capital needs of the Company.
The Company anticipates that its existing capital resources, together with
the funds available under the Credit Facility and internally generated funds,
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 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
Distribution Date, the Company will have no committed sources of capital other
than the Credit Facility. There can be no assurance that the Company will be
able to access the Credit Facility at such times as it desires or needs capital.
To the extent capital resources are insufficient to meet future
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. The Credit Facility restricts the
incurrence of additional indebtedness by the Company. 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
unable to comply with its obligations under its collaborative agreements, which
could result in the termination of such collaborative agreements. In addition,
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.
Under the Company's strategic alliance agreement with Endo, the Company
expects to expend through development approximately $7.5 million, primarily in
1998 and 1999. However, either the Company or Endo may terminate the agreement
27
<PAGE> 32
upon 30 days prior written notice, at which time the Company's funding
obligations would cease. See "Business -- Collaborative Arrangements -- Endo
Pharmaceuticals Inc."
The Credit Facility is a revolving loan facility with a maximum principal
amount of $15.0 million of unsecured financing. On the second anniversary of the
execution of the Credit Facility, all outstanding amounts under the Credit
Facility will become automatically due and payable, although the Company will be
required to use the proceeds of any financing conducted by the Company prior to
such date to pay down any outstanding amounts under the Credit Facility at such
time. Borrowings under the Credit Facility bear interest at a rate equal to
LIBOR, plus 1.25%. Penford has guaranteed the Company's indebtedness under the
Credit Facility. In connection with such guaranty, the Credit Facility contains
a number of financial covenants that relate to Penford (and not Penwest),
including requirements that Penford maintain certain levels of financial
performance, including without limitation the maintenance of a minimum net worth
and the maintenance of certain financial ratios. The Credit Facility also
contains certain covenants applicable to both Penford and Penwest, including
restrictions on the incurrence of additional debt and the payment of dividends.
Any breach of these covenants by Penford or the Company, or a default by Penford
with respect to any material indebtedness or a change of control of Penford
without the lender's consent, would constitute a default by the Company under
the Credit Facility. Accordingly, the Company will be substantially dependent on
Penford in order to access and maintain the Credit Facility. Any default under
the Credit Facility would have a material adverse effect on the Company's
business, financial condition and results of operations.
YEAR 2000
The Company has undergone a review of its domestic information systems,
including consideration of issues associated with the Year 2000. Due to the
recent addition of a new integrated computer system that is Year 2000 compliant,
other Year 2000 expenditures are not expected to be material. Also, the Company
has initiated a review of potential Year 2000 matters at its European
manufacturing facility and communications with its significant suppliers and
customers to determine the extent to which the Company is vulnerable to those
third parties' failure to remediate their own Year 2000 issues. There can be no
assurance that the systems of other companies or the Company's European
manufacturing facility will be converted on a timely basis and will not have a
corresponding adverse effect on the Company's results of operations or cash
flows.
COMMON EUROPEAN CURRENCY
The Treaty on European Economic and Monetary Union (the "Maastricht Treaty")
provides for the introduction of a single European currency, the Euro, in
substitution for the national currencies of the member states of the European
Union that adopt the Euro. In May 1998, the European Council determined (i) the
11 member states that met the requirement for the Monetary Union, and (ii) the
currency exchange rates among the currencies for the member states joining the
Monetary Union. The transitory period for the Monetary Union starts on January
1, 1999. According to Council Resolution of July 7, 1997, the introduction of
the Euro will be made in three steps: (i) a transitory period from January 1,
1999 to December 31, 2001, in which current accounts may be opened and financial
statements may be drawn in Euros, and local currencies and Euros will coexist;
(ii) from January 1, 2002 to June 30, 2002, in which local currencies will be
exchanged for Euros; and (iii) from July 1, 2002 in which local currencies will
disappear. Although there can be no assurance that a single European currency
will be adopted or, if adopted, on what time schedule and with what success,
substantial transitional costs could result as the Company redesigns its
software systems to reflect the adoption of the new currency. In addition, there
can be no assurance as to the effect of the adoption of the Euro on the
Company's payment obligations under commercial agreements in such currencies.
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<PAGE> 33
BUSINESS
The Company 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 is applying its TIMERx technology to the
development of oral formulations of branded controlled release versions of
immediate release drugs and generic versions of controlled release drugs. Each
of the formulations developed to date has been developed under a collaborative
arrangement with a pharmaceutical company. The Company's collaborator, Leiras,
received marketing approval in Finland for Cystrin CR (oxybutynin) for the
treatment of urge urinary incontinence in October 1997 and began marketing the
product in Finland in January 1998. 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.
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.
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<PAGE> 34
[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
that 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
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
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<PAGE> 35
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 1997 were
approximately $7.0 billion.
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 combining primarily
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 cost-effective direct
compression tabletting process.
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<PAGE> 36
- 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.
PENWEST STRATEGY
The Company'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:
Create Innovative Branded Controlled Release Versions of Immediate Release
Pharmaceuticals. The Company is 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 Generic Versions of Controlled Release
Pharmaceuticals. The Company is also focused on 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.
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, Synthelabo 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 is pursuing
selected licensing opportunities for ProSolv with pharmaceutical companies that
are developing new drug candidates.
The achievement of the Company's strategy is subject to various risks and
uncertainties. In particular, there can be no assurance that the Company's
capital resources will be sufficient to fully implement its strategy. The costs
of implementing the Company's strategy are difficult to predict and will depend
on numerous factors. If the Company's capital resources are insufficient to
fully implement its strategy, the Company may be required to modify its
strategy. See "Risk Factors" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE> 37
TIMERX PRODUCT DEVELOPMENT
The following table provides information relating to the therapeutic area,
the development status and the collaborator for each of the principal products
under development utilizing the Company's TIMERx technology and is qualified by
reference to the more detailed descriptions included elsewhere in this
Information Statement. The Company is also conducting early stage development
activities with respect to various additional controlled release formulations.
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<TABLE>
<CAPTION>
BRAND NAME THERAPEUTIC DEVELOPMENT
(COMPOUND) AREA STATUS COLLABORATOR (1)
- ------------------------------- --------------------------- ------------------------ --------------------------
<S> <C> <C> <C>
BRANDED CONTROLLED RELEASE (2)
Cystrin CR Urge Urinary Approved (3) Leiras
(oxybutynin) Incontinence
Ditropan CR Urge Urinary Registration/Clinical Synthelabo
(oxybutynin) Incontinence Studies (4)
Numorphan TRx Pain Relief Formulation Endo
(oxymorphone)
GENERIC CONTROLLED RELEASE (5)
Procardia XL Hypertension, ANDA filed (6) Mylan
(nifedipine) Angina
Adalat CC Hypertension Bioequivalence Mylan
(nifedipine) Studies
Adalat LA Hypertension, Registration/Clinical Sanofi
(nifedipine) Angina Studies (4)
Cardizem CD Hypertension, Bioequivalence Kremers
(diltiazem) Angina Studies
Glucotrol XL Diabetes Bioequivalence Mylan
(glipizide) Studies
Covera HS Hypertension, Bioequivalence Kremers
(verapamil hydrochloride) Angina Studies
</TABLE>
- ----------
(1) 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."
(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) Leiras received marketing approval for Cystrin CR in Finland in October 1997
and began marketing the product in January 1998.
(4) Registration/Clinical Studies indicates that the product is in registration
and the Company's collaborator may be continuing to conduct clinical studies
of the product.
(5) 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."
(6) 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.
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Branded Controlled Release Pharmaceuticals
The Company is applying its TIMERx technology to the development of
controlled release formulations of immediate release pharmaceuticals. The
Company's principal branded controlled release pharmaceuticals in development
are as follows:
Cystrin CR. The Company and Leiras have developed a controlled release
formulation of Cystrin(R) incorporating TIMERx technology, which is being
marketed in Finland by Leiras under the tradename Cystrin CR. Leiras received
marketing approval in Finland for Cystrin CR in October 1997 and began marketing
the product in Finland in January 1998. Cystrin is a two to three times-a-day
immediate release version of the anticholinergic drug oxybutynin indicated for
the treatment of urge urinary incontinence. Oxybutynin is marketed in Europe by
Leiras under the trademark Cystrin and by Synthelabo under the tradename
Ditropan(R). These products had worldwide sales in 1997 of approximately $100
million.
Ditropan CR. The Company and Leiras licensed the marketing rights to a
controlled release formulation of Cystrin incorporating TIMERx technology to
Synthelabo in December 1997. Subject to regulatory approval, Synthelabo will
market the product throughout Europe under the tradename Ditropan CR.
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 1997 of approximately $300 million. The Company is currently in the
process of developing TIMERx-based formulations and no clinical studies on such
formulations have been conducted to date.
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's principal generic controlled release pharmaceuticals in
development are as follows:
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 1997 of approximately $785
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
that Biovail filed an ANDA for the 60 mg dosage strength of a generic version of
Procardia XL and is aware of a number of other companies that are developing
generic versions of Procardia XL. For a description of certain litigation
regarding the Mylan ANDA filing, see "Business -- Litigation."
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Nifedipine CC. The Company and Mylan are currently developing Nifedipine CC,
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 1997 of approximately $366 million. Mylan is conducting full scale
bioequivalence studies of the 30 mg dosage strength of Nifedipine CC. Warner
Chilcott and Biovail have filed ANDAs for generic versions of Adalat CC.
Nifedipine LA. The Company and Sanofi are currently developing Nifedipine
LA, a generic version of Adalat LA(R) (a drug marketed in Europe that utilizes
the same controlled release technology as 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 1997 of approximately $340 million. Sanofi
is conducting certain confirmatory clinical trials of Nifedipine LA in the
United Kingdom and is analyzing the results of such trials.
Diltiazem CD. The Company and Kremers are currently developing Diltiazem CD,
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 1997
of approximately $165 million. Kremers 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 Glipizide XL, 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 1997 of approximately
$165 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 Verapamil HS,
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 1997 of approximately $17 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.
PHARMACEUTICAL EXCIPIENTS
The Company sells 28 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 manufacture of drugs so that
they emerge from a tabletting machine with the desired physical characteristics.
The Company's excipients are sold to the prescription, over-the-counter and
nutritional markets. In 1997, 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-Meyers Squibb Company, McNeil Consumer
Products Company and SmithKline Beecham, plc ("SmithKline"), in more than 40
countries.
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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 the Company include the following:
EMCOCEL(R), or microcrystalline cellulose (MCC), 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 Distribution. 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 the Company 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 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 1995,
1996 and 1997 of $25.0 million, $25.0 million and $26.0 million, respectively,
and in the three months ended March 31, 1997 of $7.8 million.
COLLABORATIVE ARRANGEMENTS
The Company has entered into collaborative arrangements with six
pharmaceutical companies to facilitate and expedite the commercialization of its
TIMERx drug delivery technology.
Under most of these collaborative arrangements, the Company has received
upfront fees and milestone payments and is entitled to receive additional
milestone payments. In addition, under all the collaborative arrangements, the
Company is entitled to receive
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royalties on the sale of the products covered by such collaborative arrangements
and payments for the purchase of formulated TIMERx material. Assuming that all
milestones are achieved under these collaborative arrangements, the Company
would be entitled to receive up to an aggregate of $11.5 million in upfront fees
and milestone payments under these collaborative arrangements, of which $2.1
million have been received to date. There can be no assurance that future
milestone payments will be received.
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, including termination by the Company if Mylan fails to meet
minimum sales volume requirements and termination by either party upon a
material breach by the other party of the agreement. If the Company does not
satisfy its obligations under any of these agreements, the Company will be in
breach of such agreement and Mylan will be entitled to terminate such agreement.
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. The Company is aware of one ANDA filed
for the 60 mg dosage strength of a generic version of Procardia XL and two ANDAs
filed for the 30 mg dosage strength of a generic version of Adalat CC. 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.
The Company 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 the
Company for distribution by the Company 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.
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.
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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, including
upon a material breach of the agreement by a party or upon the bankruptcy of a
party. In addition, 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. If the Company does not satisfy
its obligations under either of these agreements, the Company will be in breach
of such agreement and Kremers will be entitled to terminate such agreement.
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.
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 utilizes the same controlled release technology as 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 and clinical studies,
preparing all regulatory applications and submissions and manufacturing and
marketing the Sanofi Product in specified countries in Europe and in South
Korea.
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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, including termination
by the Company if Sanofi fails to meet minimum sales volume requirements and
termination by either party upon a material breach of the agreement by the other
party. If the Company does not satisfy its obligations under the agreement, the
Company will be in breach of the agreement and Sanofi will be entitled to
terminate the agreement.
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 transfer its
rights and responsibilities under the agreements and its related product rights
for specified territories, subject in certain circumstances to the approval of
the Company. Pursuant to this right, Leiras, with the Company's consent,
transferred to Synthelabo its marketing rights to this controlled release
formulation for Europe.
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, including upon a material breach of
the agreement by a party or upon the bankruptcy of a party. If the Company does
not satisfy its obligations under either of these agreements, the Company will
be in breach of such agreement and Leiras will be entitled to terminate such
agreement. 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.
Synthelabo Groupe
In December 1997, pursuant to a related transfer by Leiras to Synthelabo of
Leiras' rights and responsibilities under Leiras' agreements with the Company,
the Company entered into a license agreement and a supply agreement with
Synthelabo with respect to the manufacturing and marketing in Europe of the
controlled release formulation of oxybutynin developed by the Company and
Leiras, which is expected to be marketed under the tradename Ditropan CR.
Synthelabo is one of the largest pharmaceutical companies in France and focuses
primarily in three core therapeutic fields: central nervous system,
cardiovascular and internal medicine.
Under the agreements, the Company is responsible for manufacturing and
supplying TIMERx material to Synthelabo for use in the manufacture of Ditropan
CR, and Synthelabo is responsible for preparing all regulatory applications and
submissions and manufacturing and marketing Ditropan CR for sale in Europe
(although Synthelabo may contract initially with Leiras for the manufacture of
the product until it receives regulatory approval to manufacture the product).
The agreements terminate upon the expiration of the TIMERx patents licensed
to Synthelabo (which will occur in the year 2014), subject to earlier
termination by either party under specified circumstances, including upon a
material breach of the
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agreement by a party or upon the bankruptcy of a party. If the Company does not
satisfy its obligations under either of these agreements, the Company will be in
breach of such agreement and Synthelabo will be entitled to terminate such
agreement. Synthelabo has agreed to pay the Company royalties on the sale of the
product 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 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, including failure to launch full-scale marketing
of such Endo Product when required or material breach of the agreement by a
party.
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.
If the Company does not satisfy its funding and other obligations under the
agreement, the Company will be in breach of the agreement and Endo will be
entitled to terminate the agreement. 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.
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The Company's research and development expenses in 1995, 1996, 1997 and the
three months ended March 31, 1998 were $2.7 million, $3.7 million, $4.1 million
and $1.3 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 does not have 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. ("Boehringer Ingelheim"), for the bulk manufacture of its
TIMERx material for delivery to its collaborators under an agreement that
expired in June 1998.
The Company is seeking to contract with another third-party manufacturer to
manufacture TIMERx material. The Company believes that there are a limited
number of manufacturers that operate under cGMP regulations capable of
manufacturing the Company's products. Boehringer Ingelheim has advised the
Company that it will continue to manufacture TIMERx material for the Company on
the terms set forth in the current agreement until such time as the Company
contracts with another manufacturer, but Boehringer Ingelheim is not obligated
to continue to manufacture TIMERx material and there can be no assurance as to
how long Boehringer Ingelheim will continue to manufacture TIMERx material. 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 material 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 combining
primarily 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 two suppliers, 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.
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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 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 multi-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, traditional
matrix systems marketed by SkyePharma, plc and other controlled release
technologies marketed and under development by Andrx Corporation, among others.
The Company initially is concentrating a significant portion of 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
The Company 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.
The Company has been issued 18 U.S. patents and 42 foreign patents and one
U.S. patent application has been allowed relating to its controlled release drug
delivery technology. In addition, the Company has filed nine 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 and the allowed U.S. patent application cover the Company's TIMERx
technology, including the combination of the
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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 and the allowed U.S. patent
application, if issued, will expire between 2008 and 2015.
The Company has also been issued five U.S. patents and two U.S. patent
applications have been allowed relating to its excipient technology. In
addition, the Company has filed two U.S. patent applications relating to its
excipient technology. The U.S. patents and the two allowed U.S. patent
applications cover ProSolv and other augmented MCC excipient products. The U.S.
patents and the two 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.
The Company 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 industry 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 owner
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 owner 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.
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 European Patent Office ("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 have a material adverse effect on the Company's
business, financial condition and results of operations.
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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 a license application under the Public Health Service
Act. 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 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.
ANDAs may be submitted for generic versions of brand name drugs ("Listed
Drugs") where the 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 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 to obtain approval to market
other generic
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controlled release products. There can be no assurance that ANDAs 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 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, with the exception of
applications for certain antibiotic drugs, 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 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.
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
strength prior to or during such 180-day marketing exclusivity period. For
example, although Mylan has filed an ANDA for the 30 mg dosage strength of a
generic version of Procardia XL, there can be no assurance that the ANDA filing
by Biovail for the 60 mg dosage strength of a generic version of Procardia XL
will not be approved prior to or during Mylan's 180-day marketing exclusivity
period, if obtained for its ANDA.
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 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
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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 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 biologics
applications, criminal prosecution and product recalls. The FDA also has the
authority to revoke for cause drug or biological 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 or ANDAs 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 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 Union ("EU") 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 EU 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 EU Member State where the products will be
marketed, there is a mutual recognition procedure under which the holder of
marketing approval from one EU Member State may submit an application to one or
more other EU 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 EU Member State will be required to determine whether to
recognize the prior approval.
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Whichever procedure is used, the safety, efficacy and quality of the
Company's products must be demonstrated according to demanding criteria under EU
law and extensive nonclinical tests and clinical trials are likely to be
required. In addition to premarket approval requirements, national laws in EU
Member States will govern clinical trials of the Company's products, adherence
to good manufacturing practice, advertising and promotion and other matters. In
certain EU 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 EU. 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 EU) 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 EU 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 EU 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.
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.
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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.
The Company is currently 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 the Company will
be able to obtain comparable coverage following the Distribution. 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.
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
is the sponsor of 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 intervened as defendants
in this suit. In April 1998 the District Court of the District of Columbia
rejected Pfizer's claim, and in May 1998, Pfizer appealed the District Court's
decision. There can be no assurance that the FDA, Mylan and the Company will
prevail in this litigation. An outcome in this litigation 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.
49
<PAGE> 54
There can be no assurance that Pfizer or others will not pursue additional
regulatory initiatives and lawsuits with respect to Procardia XL and Nifedipine
XL.
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 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 its present facilities are well maintained and
in good operating condition.
EMPLOYEES
As of March 31, 1998, the Company employed 120 persons, of which 75 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> 55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as
of the Distribution Date will be as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Tod R. Hamachek(1).................. 52 Chairman of the Board and Chief Executive Officer
John V. Talley, Jr.................. 42 President, Chief Operating Officer and Director
Anand R. Baichwal, Ph.D............. 43 Senior Vice President, Research and Development
Stephen J. Berte, Jr................ 43 Vice President, Marketing and Sales
Jennifer L. Good.................... 33 Vice President, Finance, Chief Financial
Officer and Secretary
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) 56 Director
N. Stewart Rogers(2)(3)............. 68 Director
</TABLE>
- ----------
(1) Member of Executive Committee.
(2) Member of Audit Committee.
(3) Member of Compensation Committee.
Tod R. Hamachek has served as Chairman of the Board and Chief Executive
Officer of the Company since October 1997. Mr. Hamachek has served as President
and Chief Executive Officer of Penford since 1985 and as director of Penford
since 1983, but will resign from these positions effective upon the Distribution
Date. 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 Distribution Date. Prior
to joining the Company, Mr. Talley served in a variety of positions at Sanofi
from 1989 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 Sterling Drug 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."
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.
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<PAGE> 56
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 has served as a director of the Company since October 1997
and as a director of Penford since April 1996, but will resign as a director of
Penford at its next annual meeting of shareholders. 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. Mr. Freiman is a director of Calypte Biomedical
Corporation, a biotechnology company.
Dr. Jere E. Goyan has served as a director of the Company since October
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 United
States (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 has served as a director of the Company since October 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 1994. 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 has served as a director of the Company since October
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, Abbott and Sterling Drug. Mr. Hennessey is also a director
of Virus Research Institute, Inc., a biotechnology company.
N. Stewart Rogers has served as a director of the Company since October 1997
and as Chairman of the Penford Board 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, and VWR Scientific Products Corporation, a
laboratory supply company.
BOARD OF DIRECTORS' COMMITTEES AND OTHER INFORMATION
Each officer of the Company is elected by the Board 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 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), two Class II directors (Dr. Goyan and Mr.
Talley) 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
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<PAGE> 57
and Class III directors expire at the annual meeting of shareholders to be held
in 2001, 1999 and 2000, respectively. It is the Company's policy that when the
Chairman of the Board and the Chief Executive Officer is the same person, the
Board 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.
Under the terms of the Separation and Distribution Agreement, the Company
has agreed that during the period during which Penford's guaranty of the Credit
Facility is effective, and subject to the exercise by the Board of Directors of
Penwest of its fiduciary duties, Penwest will use its reasonable best efforts to
assure that at least one person designated by Penford is elected to serve on the
Board of Directors of the Company. The initial director designated by Penford is
Mr. Rogers.
The Board 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 Dr.
Goyan.
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
Each non-employee director of the Company is paid an annual retainer of
$7,500 ($14,500 in the case of the Lead Director) and is paid $1,500 for
personal or telephone attendance at a Board or committee meeting. Each director
may elect to receive these fees in the form of stock options under the Company's
1997 Equity Incentive Plan (the "1997 Plan"), which options, if elected, will be
granted as of the date such fees are earned to purchase the number of shares of
Common Stock determined by dividing the amount of the fees earned by 25% of the
fair market value of one share of Common Stock on the grant date. The exercise
price of such options will equal 75% of the fair market value of one share of
Common Stock In addition, each non-employee director is reimbursed for expenses
in connection with attendance at Board and committee meetings.
Non-employee directors will also be granted annual options under the 1997
Plan to purchase 7,000 shares of Common Stock on September 1 of each year
commencing in 1998. All such options will vest on the first anniversary of the
date of grant. However, the exercisability of these options will be accelerated
upon the occurrence of a change in control of the Company. The exercise price of
all such options granted will equal the fair market value of one share of Common
Stock.
Upon the Distribution Date with respect to the Company's then non-employee
directors and upon the date of the initial election of any non-employee director
thereafter, each non-employee director will receive the right to receive up to
7,500 shares of Common Stock under the 1997 Plan on the earlier of (i) the date
four years from the date of grant or (ii) the date upon which such director
ceases to be a director by reason of death, permanent disability, resignation or
retirement. The right to receive these shares will vest in four equal annual
installments commencing upon the first anniversary of the date of grant.
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> 58
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by the Company or
Penford in the year ended December 31, 1997 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>
ANNUAL COMPENSATION
------------------- ALL OTHER
NAME AND PRINCIPAL POSITION(1) SALARY BONUS COMPENSATION(2)
- ------------------------------ -------- -------- ---------------
<S> <C> <C> <C>
Tod R. Hamachek(3)(4)......................... $340,000 $453,934 $19,352
Chairman of the Board and Chief
Executive Officer
Edmund O. Belsheim, Jr.(3)(5)................. 190,000 156,104 10,768
Senior Vice President, Corporate
Development and General Counsel
John V. Talley, Jr............................ 188,846 103,896 10,611
President and Chief Operating Officer
Anand R. Baichwal, Ph.D.(6)................... 114,269 39,827 8,642
Senior Vice President, Research and
Development
Stephen J. Berte, Jr.......................... 122,076 31,481 7,062
Vice President, Marketing and Sales
</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, 1997.
(2) 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.
(3) Messrs. Hamachek and Belsheim earned the compensation set forth above for
services rendered to Penford in their capacities as President and Chief
Executive Officer of Penford and Vice President, Corporate Development and
General Counsel of Penford, respectively.
(4) In February 1998, in connection with Mr. Hamachek's relocation from
Penford's Washington office to Penwest's New York office, Penford loaned
$1,215,000 to Mr. Hamachek, which loan was secured by Mr. Hamachek's home in
Washington. Such loan bears interest at a rate equal to Penford's then
current borrowing rate. All outstanding principal and accrued interest under
such loan must be repaid by Mr. Hamachek upon the sale of his home in
Washington. As of May 31, 1998, existing indebtedness under the loan
equalled $1,234,399.
(5) Mr. Belsheim has advised the Company that he will resign as Senior Vice
President, Corporate Development and General Counsel as of the Distribution
Date.
(6) For a discussion of certain other amounts payable to Dr. Baichwal, see
"Certain Transactions."
Option Grants
No options to purchase shares of common stock of Penford or Penwest Common
Stock were granted to the Named Executive Officers during the fiscal year ended
December 31, 1997. In addition, no options to purchase shares of Penford common
stock have been granted to the Named Executive Officers since December 31, 1997.
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<PAGE> 59
The Company intends to grant stock options under the 1997 Plan to purchase
an aggregate of 1,010,000 shares of Common Stock to its employees and officers,
following the Distribution Date, at an exercise price equal to the fair market
value of the Common Stock as of the date of grant, of which it is expected
options to purchase 300,000 shares, 175,000 shares, 75,000 shares and 130,000
shares would be granted to Mr. Hamachek, Mr. Talley, Mr. Berte and Dr. Baichwal,
respectively. These options will be exercisable in four equal annual
installments commencing on the first anniversary of the Distribution Date and
will become exercisable in full upon a change in control of the Company (as
defined).
Stock options will also be granted to employees of the Company, including
Mr. Hamachek, Mr. Talley, Mr. Berte and Dr. Baichwal, under the Company's 1998
Spinoff Option Plan. See "Employee Benefit Plans -- 1998 Spinoff Option Plan,"
and "Arrangements between the Company and Penford -- Separation and Distribution
Agreement -- Treatment of Options."
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, 1997 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, 1997. No Named Executive
Officer held any stock options to purchase shares of the Company's Common Stock
as of December 31, 1997.
AGGREGATE OPTION EXERCISES IN 1997
AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES OF PENFORD
NUMBER OF UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OF OPTIONS AS OF MONEY OPTIONS AS OF
PENFORD DECEMBER 31, 1997(#) DECEMBER 31, 1997($)(1)
ACQUIRED ON VALUE --------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Tod R. Hamachek................ 225,000 $2,118,825 34,000 62,000 $583,500 $1,250,500
Edmund O. Belsheim, Jr......... -- -- 13,250 39,750 220,813 662,437
John V. Talley, Jr............. -- -- 12,750 56,250 176,375 819,625
Anand R. Baichwal.............. -- -- 5,200 10,800 77,350 169,400
Stephen J. Berte, Jr........... -- -- 2,000 8,000 34,750 139,000
</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,
1997 ($35 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 Penford Board has
established supplemental benefits for certain highly
55
<PAGE> 60
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, 1997 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 $ 57,569 $ 71,961 $ 86,353 $100,745
300,000 87,569 109,461 131,353 153,245
400,000 117,569 146,961 176,353 205,745
500,000 147,569 184,461 221,353 258,245
600,000 177,569 221,961 266,353 310,745
700,000 207,569 259,461 311,353 363,245
800,000 237,569 296,961 356,353 415,745
900,000 267,569 334,461 401,353 468,245
</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.
As of December 31, 1997, the approximate years of credited service (rounded
to the nearest year) under the Retirement Plan of the Named Executive Officers
were: Mr. Hamachek, 14, Mr. Belsheim, 1, Mr. Talley, 4, Dr. Baichwal, 10, and
Mr. Berte, 3.
Under the Employee Benefits Agreement between Penford and the Company,
Penford will freeze all benefit accruals of employees of the Company under this
plan as of the Distribution Date and will thereafter distribute to each employee
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 2,660,000 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.
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<PAGE> 61
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 380,000 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. 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 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 options to executive officers. Subject to any
applicable limitations contained in the 1997 Plan, the Board, 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 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 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 intends to grant stock options under the 1997 Plan to purchase
an aggregate of 1,010,000 shares of Common Stock to its employees and officers
following the Distribution Date, at an exercise price equal to the fair market
value of the Common Stock as of the date of grant. See "Management -- 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 228,000 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 Distribution, 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
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<PAGE> 62
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.
1998 Spinoff Option Plan
The Company's 1998 Spinoff Option Plan (the "Spinoff Plan") was adopted by
the Company in June 1998. The Spinoff Plan provides for the grant of stock
options to employees of Penwest who hold options to purchase Penford common
stock as of the Distribution Date.
Such Penwest employees held, as of May 31, 1998, options to purchase an
aggregate of 253,500 shares of Penford common stock under Penford's stock option
plans (the "Penford Options"). Generally, under such plans, outstanding vested
options may be exercised during the 90-day or one-year period following
termination of employment and unvested options lapse upon termination of
employment. As of the Distribution Date, the Penwest employees will cease to be
deemed employees of Penford under the terms of Penford's stock option plans.
As a result, as of the Distribution Date, options to purchase shares of
Common Stock will be granted to the Company's employees under the Spinoff Plan
in replacement of the outstanding Penford Options. The exercise price and the
number of replacement options will be calculated so as to preserve the Penford
Options' approximate value as of the Distribution Date. To accomplish this, (i)
the number of shares of Common Stock covered by options under the Spinoff Plan
will be determined by multiplying the number of shares of Penford common stock
subject to each outstanding Penford Option by the closing price of the Penford
common stock on the Nasdaq National Market on the Distribution Date and then
dividing the result by the closing price of the Common Stock on the Nasdaq
National Market on the trading day immediately following the Distribution Date,
and (ii) the exercise price of such options will be determined by multiplying
the exercise price of the Penford Option by the closing price of the Common
Stock on the Nasdaq National Market on the trading day immediately following the
Distribution Date and then dividing the result by the closing price of the
Penford common stock on the Nasdaq National Market on the Distribution Date.
Fractions will be rounded to the next highest share and next lowest cent,
respectively. Substantially all other terms and conditions of the Penford
Options will be reflected in the replacement options, including the continuation
of the remaining portions of their original vesting schedules and their ten-year
terms.
The Spinoff Plan will be administered by the Board. The Board has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the Spinoff Plan and to interpret the provisions of the
Spinoff Plan. The Board is required to make appropriate adjustments in
connection with the Spinoff Plan and any outstanding options 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 Spinoff Plan), the
Board is authorized to provide for outstanding options to be assumed or
substituted for, to accelerate the vesting of the options 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. The Board may not grant any
additional options under the Spinoff Plan. If any option expires or is
terminated, surrendered, canceled or forfeited, the unused shares of Common
Stock covered by such option will cease to again be available for grant under
the Spinoff Plan.
58
<PAGE> 63
CERTAIN TRANSACTIONS
Since January 1, 1995, 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 and other securities 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> 64
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Penford will own all of the outstanding shares of Common Stock until the
Distribution. Following the completion of the Distribution, Penford will own no
shares of Common Stock.
The following table sets forth certain information regarding the Penford
beneficial ownership of the Common Stock expected to be received on the
Distribution Date by (i) each person who is expected by the Company to
beneficially own five percent or more shares of Common Stock, (ii) each director
and Named Executive Officer of the Company and (iii) all directors and executive
officers of the Company as a group. The information set forth below is based on
certain information known to the Company with respect to such person's
beneficial ownership of shares of common stock of Penford as of May 31, 1998.
The table assumes the beneficial ownership of common stock of Penford as of May
31, 1998 will not change before the Record Date.
<TABLE>
<CAPTION>
PERCENTAGE OF
OUTSTANDING SHARES
NAME (1) NUMBER OF SHARES BENEFICIALLY OWNED
- -------- ---------------- --------------------
<S> <C> <C>
5% Stockholders
David L. Babson & Co., Inc.......................... 747,750(2) 6.76%
One Memorial Drive
Cambridge, MA 02142
Wellington Management............................... 732,180(3) 6.66
75 State Street
Boston, MA 02109
Tod R. Hamachek..................................... 554,776(4) 5.01
2981 Route 22
Patterson, NY 12563-9970
Other Directors
Paul E. Freiman..................................... 6,621 *
Jere E. Goyan....................................... -- *
Rolf H. Henel....................................... 3,000 *
Robert J. Hennessey................................. -- *
N. Stewart Rogers................................... 223,420(6) 2.02
John V. Talley, Jr.................................. 23,053(7) *
Other Named Executive Officers
Anand R. Baichwal................................... 14,934(8) *
Edmund O. Belsheim, Jr.,............................ 33,654(9) *
Steven J. Berte, Jr................................. 4,712(10) *
All directors and executive officers as a group
(12 persons).................................... 877,621(11) 7.50
</TABLE>
- ----------
* Less than 1%.
(1) Except as reflected in the footnotes to this table, shares of Common Stock
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 notes include shares issuable within the
60-day period following May 31, 1998 pursuant to the exercise of options to
purchase shares of Penford common stock, which for purposes of this table,
have been assumed to be exercised prior to the Record Date.
(2) Share ownership based on Schedule 13G filed with the Commission on
January 20, 1998.
60
<PAGE> 65
(3) Share ownership based on Schedule 13G/A filed with the Commission on
February 10, 1998.
(4) Includes 51,000 shares subject to outstanding options held by Mr. Hamachek,
which are exercisable within the 60-day period following May 31, 1998.
(5) Includes 5,142 shares subject to outstanding stock options held by Mr.
Freiman, which are exercisable within the 60-day period following May 31,
1998.
(6) Includes 180,000 shares held in a Grantor Annuity Trust for which Mr.
Rogers has sole voting power, as well as 40,501 shares subject to
outstanding stock options held by Mr. Rogers, which are exercisable within
the 60-day period following May 31, 1998.
(7) Includes 19,125 shares subject to outstanding stock options held by Mr.
Talley, which are exercisable within the 60-day period following May 31,
1998.
(8) Includes 11,100 shares subject to outstanding stock options held by Dr.
Baichwal, which are exercisable within the 60-day period following May 31,
1998.
(9) Includes 33,000 shares subject to outstanding stock options held by Mr.
Belsheim, which are exercisable within the 60-day period following May 31,
1998.
(10) Includes 3,000 shares subject to outstanding stock options held by Mr.
Berte which are exercisable within the 60-day period following May 31,
1998.
(11) Includes an aggregate of 173,519 shares subject to outstanding stock
options which are exercisable within the 60-day period following May 31,
1998.
61
<PAGE> 66
ARRANGEMENTS BETWEEN THE COMPANY AND PENFORD
In anticipation of the Distribution, the Company and Penford have entered or
will enter into a number of agreements, which will become effective on or before
the Distribution Date, 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
summarizes the material items of the agreements and 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 Information Statement is a part.
Separation and Distribution Agreement
The Company and Penford have entered into a Separation and Distribution
Agreement (the "Separation and Distribution 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, the Distribution, and certain other agreements
governing the relationship of the parties both prior to and after the
Distribution.
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 the Company has agreed to assume, to the extent not
previously assumed, all of Penford's liabilities relating to the pharmaceutical
business. Penford will assign to the Company its rights in the agreements
entered into with the Company's collaborators. Penford also has agreed to
contribute to the capital of the Company all existing remaining intercompany
indebtedness of the Company ($44.6 million as of March 31, 1998).
Treatment of Options. Penford and the Company have also agreed that at the
time of the Distribution the stock options to purchase the common stock of
Penford will be adjusted to reflect the Distribution. Options to purchase
Penford common stock not held by employees of the Company will be adjusted so
that the number of shares subject to such options and the exercise price of such
options will preserve the approximate value of such options immediately prior to
the Distribution Date. To accomplish this, (i) the number of shares of Common
Stock covered by options under the Spinoff Plan will be determined by
multiplying the number of shares of Penford common stock subject to each
outstanding Penford Option by the closing price of the Penford common stock on
the Nasdaq National Market on the Distribution Date and then dividing the result
by the closing price of the Common Stock on the Nasdaq National Market on the
trading day immediately following the Distribution Date, and (ii) the exercise
price of such options will be determined by multiplying the exercise price of
the Penford Option by the closing price of the Common Stock on the Nasdaq
National Market on the trading day immediately following the Distribution Date
and then dividing the result by the closing price of the Penford common stock on
the Nasdaq National Market on the Distribution Date.
Options to purchase Penford common stock held by employees of the Company
will also be adjusted through the grant of replacement options under the Spinoff
Plan. See "Management -- Employee Benefit Plans -- 1998 Spinoff Option Plan" for
the terms of such replacement options and the method by which the number of
shares of Common Stock covered by such options and the exercise price of such
options will be adjusted in the replacement options.
Indemnification. The Company has agreed to indemnify Penford from and
against any liabilities arising out of (i) the employment of individuals by the
Company, (ii) the pharmaceutical business and the use of the assets transferred
to the Company, (iii) purchase orders, accounts payable, accrued compensation
and other liabilities which relate to the pharmaceutical business and the assets
transferred to the Company, and (iv) any misstatement or omission of a material
fact in any documents or filings prepared by the Company for purposes of
compliance or qualification under applicable securities laws in connection with
this Distribution, including this Information Statement (the "SEC filings").
Penford has agreed to indemnify the Company from and against all liabilities
arising out of (i) the business of Penford and the liabilities not assumed by
the Company and (ii) any misstatement or omission of a material fact with
respect to Penford based on information supplied by Penford in the SEC filings.
62
<PAGE> 67
Sharing of Utilities. Penford has agreed that the Company will be entitled
to use and consume at the Company's Cedar Rapids facility certain utilities
consisting of natural gas, electricity and steam from Penford's Cedar Rapids
facility. The Company will reimburse Penford for such consumption based on
Penford's total cost for such utilities and the Company's fraction of the total
consumption.
Non-Competition and Non-Solicitation. Penford has agreed that, during the
period ending upon the later of (a) November 3, 2002 or (b) the expiration or
termination of the Excipient Supply Agreement to be entered into between Penford
and the Company, 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 the Company, without the consent of the
Company. The Company 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.
Guaranty of Credit Facility. Penford has agreed that, for a period of up to
two years, it will guarantee the Company's indebtedness under the Credit
Facility. In connection with such guaranty, the Company has agreed that during
the effectiveness of such guaranty, and subject to the exercise by the Board of
Directors of Penwest of its fiduciary duties, Penwest will use its reasonable
best efforts to assure that at least one person designated by Penford is elected
to serve on the Penwest Board.
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. The Company will pay 110% of the direct costs of these
services. 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 first anniversary of the Distribution Date
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 any taxes
payable if the Distribution fails to qualify as tax-free under Sections 355 and
368 of the Code, and (ii) various related matters. Under the Tax Allocation
Agreement, the Company 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 Distribution 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 the Company in the Tax Allocation
Agreement or (ii) the participation by the Company in certain acts set forth in
the Tax Allocation Agreement that occur after the Distribution.
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
the Company, and the Company will purchase exclusively from Penford, subject to
certain exceptions, all the Company's requirements for EMDEX and CANDEX, two
sugar-based excipients marketed by the Company. The Company will purchase such
excipients at specified prices, which will be subject to adjustment on an annual
basis. The initial term of the Supply Agreement will expire on December 31,
2003, unless earlier terminated by the Company 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. Revenues from the sale of EMDEX and CANDEX represented less than
10% of the Company's total revenues for the three months ended March 31, 1998
and each of the three years ended December 31, 1997.
63
<PAGE> 68
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
termination, as of the Distribution Date, of participation of the Company
employees under certain of Penford's welfare, retirement and other benefit plans
and sets forth the manner in which the assets and liabilities under certain of
such plans will be transferred to the Company. Under the Benefits Agreement, the
Company 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 the
manufacture of certain excipients, tax and employee benefit matters, indemnity
arrangements and the guaranty by Penford of the Company's indebtedness under the
Credit Facility.
In connection with Penford's guaranty of the Company's indebtedness under
the Credit Facility, the Credit Facility contains a number of financial
covenants that relate to Penford (and not Penwest), including requirements that
Penford maintain certain levels of financial performance, including without
limitation the maintenance of a minimum net worth and the maintenance of
certain financial ratios. The Credit Facility also contains certain covenants
applicable to both Penford and Penwest, including restrictions on the incurrence
of additional debt and on the payment of dividends. Any breach of these
covenants by Penford or the Company, or a default by Penford with respect to any
material indebtedness or a change of control of Penford without the consent of
the lender, would constitute a default by the Company under the Credit Facility.
Accordingly, the Company will be substantially dependent on Penford in order to
access and maintain the Credit Facility. Any default by the Company under the
Credit Facility would have a material adverse effect on the Company's business,
financial condition and results of operations.
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 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 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. Mr. Hamachek may have a conflict of interest as a result of a
loan advanced to him by Penford. See "Management --Executive Compensation." 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."
64
<PAGE> 69
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company immediately prior to the
Distribution will consist 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").
The following summary of certain provisions of the Common Stock and the
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 Information Statement 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 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 Board 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 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
other than in connection with the adoption of a shareholder rights plan, which
the Company may consider adopting.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is ChaseMellon
Shareholder Services.
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 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 Exchange Act.
The Restated Articles provide for the division of the Board 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
65
<PAGE> 70
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, 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 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 shareholders 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. 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.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Washington Business Corporation Act and the Company's Amended and
Restated Bylaws provide for indemnification of the Company's directors and
officers for liabilities and expenses that they may incur in such capacities. In
general, under the Company's Amended and Restated Bylaws, 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
Company, and with respect to any criminal action or proceeding, actions that the
indemnitee had no reasonable cause to believe were unlawful. The officers and
directors of the Company are currently covered under director and officer
liability insurance maintained by Penford. The Company expects to obtain its own
director and officer liability insurance prior to or effective on the
Distribution.
66
<PAGE> 71
PENWEST PHARMACEUTICALS CO.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
AS OF MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997 AND FOR THE
THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND MARCH 31, 1998 (UNAUDITED)
PAGE
----
Financial Statements
Consolidated Balance Sheets ............................................ F-2
Consolidated Statements of Operations .................................. F-3
Condensed Consolidated Statements of Cash Flows ........................ F-4
Notes to Condensed Consolidated Financial Statements ................... F-5
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
Report of Ernst & Young LLP ................................................ F-8
Financial Statements
Consolidated Balance Sheets ............................................ F-9
Consolidated Statements of Operations .................................. F-10
Consolidated Statements of Shareholder's Equity (Deficit) .............. F-11
Consolidated Statements of Cash Flows .................................. F-12
Notes to Consolidated Financial Statements ............................. F-13
</TABLE>
F-1
<PAGE> 72
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
------------ ---------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 938 $ 723
Trade accounts receivable, net 3,005 3,713
Inventories:
Raw materials and other 1,545 1,091
Finished goods 7,146 6,246
-------- --------
8,691 7,337
Prepaid expenses and other current assets 358 1,319
-------- --------
Total current assets 12,992 13,092
Fixed assets, net 22,311 22,363
Other assets 2,133 2,240
-------- --------
Total assets $ 37,436 $ 37,695
======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 3,410 $ 3,440
Taxes payable 361 580
Payable to Penford 42,654 44,617
-------- --------
Total current liabilities 46,425 48,637
Deferred taxes 2,967 3,175
Other long-term liabilities 341 286
-------- --------
Total liabilities 49,733 52,098
Shareholder's deficit
Common stock, par value $.001,
authorized 39,000,000 shares,
issued and outstanding 11,055,462 shares 11 11
Additional paid-in capital 8,079 8,079
Accumulated deficit (19,649) (21,679)
Cumulative translation adjustment (738) (814)
-------- --------
Total shareholder's deficit (12,297) (14,403)
-------- --------
Total liabilities and shareholder's deficit $ 37,436 $ 37,695
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE> 73
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months
Ended March 31
---------------------
1997 1998
-------- --------
(unaudited)
<S> <C> <C>
Revenues
Product sales $ 6,645 $ 7,761
Royalties and licensing fees 325 25
-------- --------
Total revenues 6,970 7,786
Cost of product sales 4,891 5,836
-------- --------
Gross profit 2,079 1,950
Operating expenses
Selling, general and administrative 2,044 2,357
Research and product development 851 1,285
-------- --------
Total operating expenses 2,895 3,642
-------- --------
Loss before income taxes (816) (1,692)
Income tax expense 16 338
-------- --------
Net loss $ (832) $ (2,030)
======== ========
Basic and diluted loss per share $ (0.08) $ (0.18)
======== ========
Weighted average shares of common stock outstanding 11,055 11,055
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE> 74
PENWEST PHARMACEUTICALS CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months
Ended March 31
----------------------
1997 1998
-------- --------
<S> <C> <C>
Net cash used in operating activities $(1,738) $(1,184)
Net cash used in investing activities:
Acquisitions of fixed assets, net (78) (668)
Other (301) (282)
------- -------
Net cash used in investing activities (379) (950)
Cash provided by financing activities:
Increase in payable to Penford 2,550 1,934
Effect of exchange rate changes on cash (71) (15)
------- -------
Net increase (decrease) in cash and cash equivalents 362 (215)
Cash and cash equivalents at beginning of period 695 938
------- -------
Cash and cash equivalents at end of period $ 1,057 $ 723
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE> 75
PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for a fair presentation for the interim periods presented have
been included. Operating results for the three month period ended March 31,
1998 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1998. For further information, refer to the
consolidated financial statements and footnotes thereto included elsewhere
in this report on Form 10.
2. INCOME TAXES
The effective tax rate for the quarter ended March 31, 1998 was 20%. The
effective rate is higher than the federal statutory rate of a 34% benefit
due primarily to the effect of tax benefits utilized by Penford Corporation
for which Penwest is not reimbursed, temporary differences resulting from
accelerated depreciation reversing when losses are not expected to be
available and foreign income taxes.
3. EARNINGS PER COMMON SHARE
During the first quarter of 1998, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings per Share."
Statement No. 128 replaced the previous requirement to report primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share reflects only the weighted average common shares
outstanding. Diluted earnings per share reflects weighted average common
shares outstanding and the effect, if any, of dilutive common stock
equivalent shares. SFAS No. 128 does not impact the Company's net loss per
share.
4. COMPREHENSIVE LOSS
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130 "Reporting Comprehensive Income". Statement No. 130
establishes new rules for the reporting and display of comprehensive income
(loss) and its components; however, the adoption of this Statement had no
impact on the Company's net loss or shareholder's deficit.
The components of comprehensive loss, for the three-month periods ended
March 31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------
1997 1998
-------- --------
(in thousands of dollars)
<S> <C> <C>
Net loss $ (832) $(2,030)
Foreign currency translation adjustments (268) (76)
------- -------
Comprehensive loss $(1,100) $(2,106)
======= =======
</TABLE>
Accumulated other comprehensive loss equals the amount included in
shareholder's deficit for cumulative translation adjustment which is the
only component of other comprehensive loss included in the Company's
financial statements.
5. 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. Bayer AG ("Bayer") and ALZA Corporation ("ALZA") own patents
listed for Procardia XL (the last of which expires in 2010), and Pfizer
Inc. ("Pfizer") is the sponsor of the New Drug Application ("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, 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
F-5
<PAGE> 76
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
intervened as defendants in this suit. In April 1998 the District Court of
the District of Columbia rejected Pfizer's claim, and in May 1998, Pfizer
appealed the District Court's decision. There can be no assurance that the
FDA, Mylan and the Company will prevail in this litigation. An outcome in
this litigation 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,
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.
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.
Substantial patent litigation exists in the pharmaceutical industry.
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 Distribution, 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
Distribution. 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.
6. SUBSEQUENT EVENTS
Distribution
On May 19, 1998, the Board of Directors of Penford announced a plan to
effect a tax-free Distribution to its shareholders of 100% of Penwest's
common stock. The Distribution is 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. As a condition
to the Distribution, the Company will obtain a $15 million credit facility
("Credit Facility") which Penford has agreed to guarantee. The Credit
Facility is expected to be a revolving loan facility with a maximum
principal amount of $15 million of unsecured financing. The proceeds may be
used to fund working capital and for general corporate purposes, including
capital expenditures. On the second anniversary of the execution of the
Credit Facility all outstanding amounts under the Credit Facility will
become automatically due and payable, although the Company will be required
to use the proceeds of any financing conducted by the Company prior to such
date to pay down any outstanding amounts under the Credit Facility at
such time. Borrowings under the Credit Facility are expected to bear
interest at a rate equal to LIBOR, plus 1.25%. The Credit Facility is
expected to contain a number of financial covenants that relate to Penford
(and not Penwest), including requirements that Penford maintain certain
levels of financial performance and maintain certain financial ratios. The
Credit Facility is also expected to contain certain covenants applicable to
both Penford and Penwest including restrictions on the incurrence of
additional debt and the payment of dividends. Any breach of these covenants
by Penford or the Company, or a default by Penford with respect to any
material indebtedness or a change of control of Penford without the
lender's consent, would constitute a default by the Company under the
Credit Facility. Accordingly, the Company will be substantially dependent
on Penford in order to access and maintain the Credit Facility. Any default
under the Credit Facility would have a material adverse effect on the
Company's business, financial condition and results of operation.
On June 19, 1998, the Company effected a 0.76-for-1 reverse stock split of
its common stock. Accordingly, all share and per share data have been
retroactively adjusted to give effect to the reverse stock split.
The Company and Penford have entered into or will, on or prior to the
completion of this Distribution, enter into agreements that govern various
interim and ongoing relationships. These agreements include (i) a
Separation and Distribution 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
specialty carbohydrate-based chemical business and the Distribution,
including without limitation Penford's agreement to guarantee the Company's
indebtedness under the Credit Facility; (ii) a Services Agreement pursuant
to which Penford will continue on an interim basis to provide specified
services to the Company until June 30, 1998 or until Penwest does not need
the services, of which costs will be charged to the Company on an actual or
allocated basis, plus a specified profit percentage; (iii) a Tax Allocation
Agreement relating to, among other things, the allocation of tax liability
between the Company and Penford in connection with the
F-6
<PAGE> 77
Distribution all pre-distribution liabilities are the responsibility of
Penford and all post distribution liabilities are those of the respective
entities; (iv) an Excipient Supply Agreement pursuant to which Penford will
manufacture and supply exclusively to the Company, and the Company will
purchase exclusively from Penford, subject to certain exceptions, all the
Company's requirements for two excipients marketed by the Company under
pricing and quantity terms that the Company believes approximate fair
market value; and (v) an Employee Benefits Agreement setting forth the
parties' agreements as to the continuation of certain Penford benefits
arrangements for the employees of the Company. Subsequent to the
Distribution, no terminating liabilities will be incurred by Penwest
related to the Penford defined benefit plan.
F-7
<PAGE> 78
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
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholder's equity (deficit) and cash flows for each of the three
years in the period ended December 31, 1997. 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 December 31, 1997 and 1996, and the consolidated results
of its operations and its cash flows for the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Stamford, Connecticut
June 5, 1998,
except for the information describing
the 0.76-for-1 reverse stock split
in Note 13, as to which the date is
June 19, 1998.
F-8
<PAGE> 79
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 695 $ 938
Trade accounts receivable, net of allowance for doubtful
accounts of $237 and $337 ............................ 4,680 3,005
Inventories ............................................ 7,555 8,691
Prepaid expenses and other current assets .............. 72 358
-------- --------
Total current assets .............................. 13,002 12,992
Fixed assets, net ........................................ 20,336 22,311
Other assets ............................................. 1,745 2,133
-------- --------
Total assets ...................................... $ 35,083 $ 37,436
======== ========
LIABILITIES AND SHAREHOLDER'S DEFICIT
Current liabilities:
Accounts payable and accrued expenses .................. $ 3,376 $ 3,410
Taxes payable .......................................... 454 361
Payable to Penford ..................................... 32,534 42,654
-------- --------
Total current liabilities ......................... 36,364 46,425
Deferred taxes ........................................... 3,071 2,967
Other long-term liabilities .............................. 60 341
-------- --------
Total liabilities ................................. 39,495 49,733
Shareholder's deficit
Common stock, par value $.001, authorized 39,000,000
shares, issued and outstanding 11,055,462 shares .... 11 11
Additional paid in capital ............................. 8,079 8,079
Accumulated deficit .................................... (12,333) (19,649)
Cumulative translation adjustment ...................... (169) (738)
-------- --------
Total shareholder's deficit ....................... (4,412) (12,297)
-------- --------
Total liabilities and shareholder's deficit ....... $ 35,083 $ 37,436
======== ========
</TABLE>
See accompanying notes.
F-9
<PAGE> 80
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
-------- -------- ---------
<S> <C> <C> <C>
Revenues
Product sales ............................ $ 24,989 $ 25,007 $ 26,030
Royalties and licensing fees ............. 100 1,082 911
-------- -------- --------
Total revenues ........................ 25,089 26,089 26,941
Cost of product sales ...................... 17,267 18,690 19,929
-------- -------- --------
Gross profit .......................... 7,822 7,399 7,012
Operating expenses
Selling, general and administrative ...... 7,676 6,776 8,708
IPO transaction costs .................... 1,367
Research and product development ......... 2,719 3,723 4,109
-------- -------- --------
Total operating expenses .............. 10,395 10,499 14,184
-------- -------- --------
Loss before income taxes ................... (2,573) (3,100) (7,172)
Income tax expense ......................... 679 764 144
-------- -------- --------
Net loss ................................... $ (3,252) $ (3,864) $ (7,316)
======== ======== ========
Basic and diluted net loss per share ....... $ (0.29) $ (0.35) $ (0.66)
======== ======== ========
Weighted average shares of common stock
outstanding .............................. 11,055 11,055 11,055
======== ======== ========
</TABLE>
See accompanying notes.
F-10
<PAGE> 81
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, 1995 before stock
splits ................................. 5 $ 5 $8,085 $ (5,217) $(232) $ 2,641
Stock splits ........................ 11,050 6 (6)
------ --- ------ -------- ----- --------
Balances, January 1, 1995 after stock
splits ............................... 11,055 11 8,079 (5,217) (232) 2,641
Net loss ............................... (3,252) (3,252)
Translation adjustment ................. 134 134
------ --- ------ -------- ----- --------
Balances, December 31, 1995 ............ 11,055 11 8,079 (8,469) (98) (477)
Net loss ............................... (3,864) (3,864)
Translation adjustment ................. (71) (71)
------ --- ------ -------- ----- --------
Balances, December 31, 1996 ............ 11,055 11 8,079 (12,333) (169) (4,412)
Net loss ............................... (7,316) (7,316)
Translation adjustment ................. (569) (569)
------ --- ------ -------- ----- --------
Balances, December 31, 1997 ............ 11,055 $11 $8,079 $(19,649) $(738) $(12,297)
====== === ====== ======== ===== ========
</TABLE>
See accompanying notes.
F-11
<PAGE> 82
PENWEST PHARMACEUTICALS CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Cash used in operating activities:
Net loss ..................................................... $(3,252) $(3,864) $(7,316)
Adjustments to reconcile net loss to
Net cash used in operating activities:
Depreciation ............................................... 1,724 2,190 2,047
Amortization ............................................... 282 207 157
Deferred income taxes ...................................... 455 546 (104)
Changes in operating assets:
Accounts receivable ........................................ (1,647) 470 1,805
Inventories ................................................ (1,079) (3,218) (1,135)
Accounts payable and other ................................. 396 224 (345)
------- ------- -------
Net cash used in operating Activities ........................ (3,121) (3,445) (4,891)
Net cash used in investing activities:
Acquisitions of fixed assets, net .......................... (3,990) (2,322) (4,023)
Other ...................................................... (87) (657) (833)
------- ------- -------
Net cash used in investing Activities ........................ (4,077) (2,979) (4,856)
Cash provided by financing activities:
Increase in payable to Penford ............................. 6,787 6,823 10,120
Effect of exchange rate changes on
Cash ....................................................... 33 6 (130)
------- ------- -------
Net increase (decrease) in cash and cash equivalents ......... (378) 405 243
Cash and cash equivalents at beginning of year ............... 668 290 695
------- ------- -------
Cash and cash equivalents at end of year ..................... $ 290 $ 695 $ 938
======= ======= =======
</TABLE>
See accompanying notes.
F-12
<PAGE> 83
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 a
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 successful completion of
development efforts and of obtaining 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). Management believes the amounts
allocated are reasonable and approximate the cost of obtaining the service from
an unrelated third party.
Certain amounts in the financial statements for prior years have been
reclassified to conform with the current year presentation. These
reclassifications had no effect on previously reported results of operations.
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
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.
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:
Buildings.................................................... 20-25 years
Machinery and equipment...................................... 10-12 years
Office furniture and equipment............................... 5-10 years
F-13
<PAGE> 84
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
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. Foreign transaction gains and losses
were not significant in each of the years in the three year period ended
December 31, 1997.
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, except that the Company is not compensated for tax
losses that are utilized by Penford. See Note 8.
Revenue Recognition
Royalties and licensing fees include milestone fees related to licensing
agreements for TIMERx with various collaborators and will include royalties when
earned. To date there have been no royalties recognized as the first
commercialized product using the TIMERx technology was launched for sale in
Finland in January 1998. Milestone payments are derived from reaching
development milestones with collaborators and are recognized as achieved in
accordance with the contract terms. These milestone payments are not subject to
forfeiture.
The Company receives certain nonrefundable payments upon the signing of
collaborative agreements. Up-front payments related specifically to the
achievement of certain milestones are recognized as those milestones are
achieved in accordance with the agreement. Up-front payments related solely to
the signing of agreements where additional services are not required are
recognized upon signing. Up-front payments that obligate the Company to perform
specific functions or services over the licensing term are recognized over the
term of the agreement.
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.
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 0.76-for-1 reverse stock split and the
2,907.66-for-1 stock split of the common stock of the Company (see Note 13).
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share. Statement 128 replaced the calculation of primary and fully
diluted earnings per share with basic and diluted earnings per share. Unlike
primary earnings per share, basic earnings per share excludes any dilutive
effects of options, warrants and convertible securities. Diluted earnings per
share is very similar to the previously reported fully diluted earnings per
share. All earnings per share amounts for all periods have been
F-14
<PAGE> 85
presented, and where appropriate, restated to conform to the Statement 128
requirements. The Company does not have any common stock equivalents. Therefore,
there is no difference between basic and diluted loss per share.
Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income". Statement 130 establishes new rules
for the reporting and display of comprehensive income and its components;
however, adoption in 1998 will have no impact on the Company's net loss or
shareholder's deficit. Statement 130 requires unrealized gains or losses on the
Company's foreign currency translation adjustments, which currently are reported
in shareholder's deficit, to be included in other comprehensive income and the
disclosure of total comprehensive income. If the Company adopted Statement 130
for the year ended December 31, 1997, the total of other comprehensive income
items and total comprehensive loss (which includes the net loss) would be
$569,000 and $7,885,000, respectively, and would be displayed separately.
Segment Reporting
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which is effective for years beginning
after December 15, 1997. Statement 131 establishes standards for the way that
public business enterprises report information about operating segments in
interim and annual financial reports. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The Statement is effective for financial statements for fiscal years beginning
after December 15, 1997, and therefore the Company will adopt the new
requirements retroactively in 1998. Management has not completed its review of
Statement 131, but does not anticipate that the adoption of this statement will
have a significant effect on the Company's reported segments.
Long-Lived Assets
In March 1995, the Financial Accounting Standards Board 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.
F-15
<PAGE> 86
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,
------------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.................................... $1,745 $1,545
Finished products................................ 5,810 7,146
------ ------
Total inventories............................ $7,555 $8,691
====== ======
</TABLE>
Included in inventories are approximately $1,742,000 and $3,096,000 of
TIMERx raw materials and bulk TIMERx as of December 31, 1996 and 1997,
respectively. The ability to continue to sell TIMERx related inventory is
dependent, in part, upon the commercialization of products by third parties
utilizing bulk TIMERx and the continued use by the Company and third parties of
the TIMERx related inventory in existing and new research efforts. Although
third parties have products in various stages of development, and the first
commercial product was launched for sale in Finland in January 1998, the period
required to achieve commercialization of other products 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 bulk manufacture of TIMERx material for delivery to its collaborators under
an agreement that expired in June 1998. The Company is seeking to contract with
another third-party manufacturer to manufacture TIMERx material. There are a
limited number of third party manufacturers capable of producing the TIMERx
material. The Company's current third-party manufacturer has advised the Company
that it will continue to manufacture TIMERx material on the terms set forth in
the current agreement until such time as the Company contracts with another
manufacturer, but it is not obligated to continue to manufacture TIMERx
material and there can be no assurance as to how long it will continue to
manufacture TIMERx material. 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 Company's competitive position, which could have a material
adverse effect on the Company's business, financial condition, cash flows and
results of operations.
The Company's TIMERx drug delivery system is a hydrophilic matrix combining
primarily 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.
F-16
<PAGE> 87
4. FIXED ASSETS
Fixed assets, at cost, summarized by major categories, consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Buildings and equipment.......................... $26,513 $27,787
Land............................................. 696 696
Construction in progress......................... 1,160 3,750
------- ------
28,369 32,233
Less: accumulated depreciation................... 8,033 9,922
------- ------
$20,336 $22,311
======= ======
</TABLE>
5. OTHER ASSETS
Other assets, net of accumulated amortization, consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------ ------
(IN THOUSANDS)
<S> <C> <C>
Patents, net of accumulated amortization of
$162 and $249.................................. $1,443 $1,888
Goodwill, net of accumulated amortization of
$238 and $295.................................. 302 245
------ ------
$1,745 $2,133
====== ======
</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 December 31, 1995, 1996 and 1997.
Patents include costs to secure and defend patents on technology developed
by the Company and secure trademarks. Patents are amortized over their useful
lives of 17 to 20 years. Amortization expense of $48,000, $66,000 and $87,000
was recorded in the years ended December 31, 1995, 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
asset's carrying value is in excess of related discounted cash flows.
6. TRANSACTIONS WITH PENFORD
The Payable to Penford consists solely of advances. These advances were
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. Average balances for the years
ended December 31, 1995, 1996 and 1997 were $22,100,000, $29,123,000 and
$37,594,000, respectively. Penford has indicated that it intends to continue to
provide advances until the Distribution is completed and the Company has a
credit facility, at which time Penford intends to contribute the outstanding
payable to Penford to the Company (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 $609,000, $634,000, and $367,000 for the years ended
December 31, 1995, 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 and
represent the approximate costs the Company would have incurred on a stand-alone
basis.
F-17
<PAGE> 88
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 fees approximate the
actual costs of services provided and represent the approximate costs the
Company would have incurred on a stand-alone basis. Included in selling, general
and administrative expenses is a management fee of $404,000, $391,000 and
$601,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
Penford Stock Option Plan
Certain of the Company's employees participate in Penford's 1994 Stock
Option Plan (the "1994 Plan") for which 1,000,000 shares of common stock have
been authorized for grants of options by Penford. The 1994 Plan provides for the
granting of stock options at the fair market value of the common stock on the
date of grant. Either incentive stock options or non-qualified stock options may
be granted under the 1994 Plan. The incentive stock options generally vest over
five years at the rate of 20% each year and expire 10 years from the date of
grant. The non-qualified stock options generally vest over four years at the
rate of 25% each year and expire 10 years and 10 days from the date of grant.
The Company has elected to follow Accounting Principals Board Opinion (APB)
No. 25 "Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its employee stock options. Under APB No. 25, the Company does
not recognize compensation expense for Penford options granted to employees of
Penwest, since the exercise price of the options granted is equal to the market
value of the Parent's common stock at the date of grant. Statement of Financial
Accounting Standard No. 123 "Accounting for Stock Based Compensation" requires
the Company to disclose the pro forma impact on net loss and loss per share as
if compensation expense associated with employee stock options granted to
employees of Penwest had been calculated under the fair value method of
Statement No. 123 for employee stock options granted to employees of Penwest
subsequent to December 31, 1994.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------------------
1995 1996 1997
-------- -------- --------
IN THOUSANDS, EXCEPT PER SHARE DATA
<S> <C> <C> <C>
Net loss-- as reported ................................. $(3,252) $(3,864) $(7,316)
Net loss-- pro forma ................................... (3,396) (4,123) (7,766)
Net loss per share, basic and diluted-- as reported .... (0.29) (0.35) (0.66)
Net loss per share, basic and diluted-- pro forma ...... $ (0.31) $ (0.37) $ (0.70)
</TABLE>
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions: risk-free
interest rates of 5.6% to 6.1%; expected option life of each vesting increment
of 2.8 years; expected volatility of 49%; and expected dividends of $0.20 per
share. The weighted average fair value of options granted under the 1994 Plan
during the years ended December 31, 1995, 1996 and 1997 was $13.02, $9.30, and
$9.67, respectively. The effect of applying Statement No. 123 for providing pro
forma disclosures for the years ended December 31, 1995, 1996 and 1997, is not
likely to be representative of the effects in future years because the amounts
above reflect only the options granted in 1995, 1996 and 1997 that vest over
four to five years. No additional Penford shares were granted to Company
employees subsequent to December 31, 1997.
F-18
<PAGE> 89
Changes in Penford stock options granted to employees of Penwest for the
three years ended December 31, 1995, 1996, and 1997 are as follows:
<TABLE>
<CAPTION>
OPTION PRICE WTD. AVERAGE
SHARES RANGE EXERCISE PRICE
-------- ---------------- --------------
<S> <C> <C> <C>
1995
Balance, January 1, 1995 ..... 14,000 $20.13 -- $22.75 $22.00
Granted ...................... 71,000 21.00 -- 24.50 21.30
Exercised .................... --
Cancelled .................... --
-------
Balance, December 31, 1995 ... 85,000 20.13 -- 24.50 21.41
=======
Options Exercisable .......... 5,000 20.13 -- 24.50 22.00
1996
Granted ...................... 80,500 17.00 -- 18.25 17.71
Exercised .................... --
Cancelled .................... --
-------
Balance, December 31, 1996 ... 165,500 17.00 -- 24.50 19.61
=======
Option Exercisable ........... 14,600 20.13 -- 24.50 21.86
1997
Granted ...................... 1,000 18.25 18.25
Exercised .................... (600) 18.25 18.25
Cancelled .................... (1,800) 18.25 18.25
-------
Balance, September 30, 1997 .. 164,100 17.00 -- 24.50 19.62
=======
Options Exercisable .......... 40,050 $17.00 -- $24.50 $20.15
</TABLE>
At December 31, 1997, the weighted average remaining contractual life of
options outstanding approximates 7.9 years.
7. COMMITMENTS
Leases
The Company's manufacturing facility in Finland is leased under a two-year
operating lease which includes renewal options with annual rental expense of
$188,000 plus additional charges determined on a month-to-month basis for
equipment and warehouse usage. In addition, certain of the Company's property,
plant and equipment is leased under operating leases ranging from one to fifteen
years and includes periodic escalation clauses based on rental market conditions
as well as insurance rent payments. Rental expense under operating leases was
$210,000, $216,000 and $283,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Future minimum lease payments as of December 31, 1997 for
noncancellable operating leases having initial lease terms of more than one year
are as follows:
<TABLE>
<CAPTION>
Operating Leases
(in thousands)
----------------
<S> <C>
1998 $ 264
1999 260
2000 69
2001 61
2002 58
Thereafter 532
------
Total minimum lease payments $1,244
======
</TABLE>
F-19
<PAGE> 90
8. INCOME TAXES
The provision (benefit) for federal, state and foreign income taxes
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Federal:
Deferred ............................ $386 $423 $ (81)
Foreign:
Current ............................. 223 217 247
State:
Current ............................. 1 1 1
Deferred ............................ 69 123 (23)
---- ---- -----
$679 $764 $ 144
==== ==== =====
</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,
-------------------------
1995 1996 1997
---- ---- -----
<S> <C> <C> <C>
Statutory tax rate..................... (34)% (34)% (34)%
Tax benefit utilized by Penford........ 56 55 36
Foreign taxes.......................... 1 2 --
State taxes, net of federal benefit.... 2 2 --
Other.................................. 1 -- --
--- --- ---
26% 25% 2%
=== === ===
</TABLE>
The components of deferred federal and state income tax assets and
liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
---- -----
<S> <C> <C>
Receivable allowance.......................... $ (107) $ (135)
Inventory reserves and basis differences...... (115) (249)
------ ------
(222) (384)
Accelerated depreciation and amortization..... 3,293 3,351
------ ------
Deferred tax liability........................ $3,071 $2,967
====== ======
</TABLE>
The Company has made payments for foreign income taxes of approximately
$223,000, $217,000, and $181,000 for the years ended December 31, 1995, 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. As a result of
Penford fully utilizing all of the Company's tax losses, the Company does not
possess any net operating loss carryforwards. Although the Company is not
compensated for tax losses that are utilized by Penford, if such tax losses
remained with the Company they would have been fully offset by a valuation
allowance due to the Company's history of operating losses and the Company's
inability to offset the losses against recorded deferred tax liabilities due to
uncertainties related to the availability of the losses when the temporary
differences are expected to reverse. As a result, the provision as calculated
approximates that which would have been recorded if calculated on a stand-alone
basis. Through December 31, 1997, Penford has utilized approximately $20,623,000
of federal net operating loss carryforwards that the Company would have had
outstanding were it a stand-alone entity of which approximately $3,393,000,
$4,503,000, $5,084,000 and $7,643,000 would have expired in 2009, 2010, 2011 and
2012, respectively. 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-20
<PAGE> 91
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 $2,230,000 as of December 31, 1995, 1996
and 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 $606,000,
$801,000, and $757,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
9. PENSION AND OTHER EMPLOYEE BENEFITS
Pension Plan
Penwest participates in a noncontributory defined benefit pension plan (the
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. In addition to the employees of the Company, employees of
Penford and its other subsidiaries participate in the Plan. The Company has
accounted for its involvement in the overall Plan as a participant in a
multiemployer pension plan. Under this method, the Company recognizes as net
periodic pension cost its allocated contribution for the period. The Company
recognizes a liability to the Parent for any contributions due and unpaid.
Under the terms of the Employee Benefits Agreement between Penford and
Penwest, Penford will freeze all benefits of employees of Penwest under the Plan
as of the Distribution and will distribute to each employee his or her fully
vested interest in the form of a lump sum payment or an annuity (see Note 13).
Based upon the terms of the agreement there will be no termination gains or
losses as a result of the freezing of Plan benefits, the termination of the
right of employees of the Company to participate in the Plan or the subsequent
distribution. The Company plans to adopt a defined contribution plan and
employees of Penwest will be eligible to participate in such defined
contribution plan.
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 $73,000, $74,000 and $66,000 was recorded for the years
ended December 31, 1995, 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 $110,000, $147,000 and
$161,000 for 1995, 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 $80,000, $38,000 and $95,000 for 1995, 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 1995, 1996 and 1997, the net expense for the SERP
incurred by Penwest was $32,000, $35,000 and $22,000, 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
F-21
<PAGE> 92
charged to expense when incurred. Health care and life insurance expense was
$244,000, $212,000, and $343,000 in 1995, 1996 and 1997, respectively.
10. LICENSING AGREEMENTS
The Company has entered into collaborative arrangements with six
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 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 utilizes the same controlled
release technology as Nifedipine 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
F-22
<PAGE> 93
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 Oy
("Leiras") with respect to the development and commercialization of Cystrin CR,
a controlled release formulation of oxybutynin 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 transfer its
rights and responsibilities under the agreements and its related product rights
for specified territories, subject in certain circumstances to the approval of
the Company. Pursuant to this right, Leiras, with the Company's consent,
transferred to Synthelabo its marketing rights to this controlled release
formulation for Europe. 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 December 1997, pursuant to a related transfer by Leiras to Synthelabo
Groupe ("Synthelabo") of Leiras' rights and responsibilities under Leiras'
agreements with the Company, the Company entered into a license agreement and a
supply agreement with Synthelabo with respect to the manufacturing and marketing
in Europe of the controlled release formulation of oxybutynin developed by the
Company and Leiras, which is expected to be marketed under the tradename
Ditropan CR. Synthelabo is one of the largest pharmaceutical companies in France
and focuses primarily in three core therapeutic fields: central nervous system,
cardiovascular and internal medicine. Under the agreements, the Company is
responsible for manufacturing and supplying TIMERx material to Synthelabo for
use in the manufacture of Ditropan CR, and Synthelabo is responsible for
preparing all regulatory applications and submissions and manufacturing and
marketing Ditropan CR for sale in Europe (although Synthelabo may contract
initially with Leiras for the manufacture of the product until it receives
regulatory approval to manufacture the product). Synthelabo has agreed to pay
the Company royalties on the sale of the product 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. Under the Company's strategic alliance agreement with
Endo, the Company expects to incur expenses of approximately $7.5 million,
primarily in 1998 and 1999.
Royalties and licensing fees revenue consist solely of payments received
under TIMERx collaborative agreements. Included in royalties and licensing
revenue are approximately $100,000, $1,082,000, and $50,000 for the years ended
December 31, 1995, 1996 and 1997, respectively, of payments received upon the
signing of collaborative agreements. These up-front payments relate principally
to the performance of pilot bioequivalence studies and have been recognized upon
the delivery of the results of such studies to the collaborators. In addition,
approximately $861,000 of non-refundable milestone payments were recognized as
the milestones were achieved during the year ended December 31, 1997.
Approximately $1,844,000, $2,819,000 and $3,075,000 for the years ended December
31, 1995, 1996 and 1997, respectively, of research and development expense
principally related to applications
F-23
<PAGE> 94
of TIMERx technology to products covered by the Company's collaborative
agreements. Since the collaborative agreements can be terminated by either
party, the costs associated with such agreements could be discontinued by the
Company. Such costs are typically incurred prior to the receipt of milestones,
royalties and other payments.
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") own patents listed for
Procardia XL (the last of which expires in 2010), and Pfizer Inc. ("Pfizer") is
the sponsor of the New Drug Application ("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, 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 intervened as defendants
in this suit. In April 1998 the District Court of the District of Columbia
rejected Pfizer's claim, and in May 1998, Pfizer appealed the District Court's
decision. There can be no assurance that the FDA, Mylan and the Company will
prevail in this litigation. An outcome in this litigation 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, 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.
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.
Substantial patent litigation exists in the pharmaceutical industry. 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
F-24
<PAGE> 95
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 Distribution,
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 Distribution. 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 Bodenheim, 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. 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>
DECEMBER 31, 1997
Total Revenues ................ $24,818 $6,463 $(4,340) $26,941
Operating Profit (Loss) ....... (7,929) 757 (7,172)
Identifiable Assets ........... 32,813 5,967 (1,344) 37,436
Export Sales .................. 1,616 286 1,902
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 .................. 1,473 283 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 .................. 1,602 263 1,865
</TABLE>
Segment information for operations in Finland, Germany and the United
Kingdom are included under the caption "Europe." Total revenues, operating
profit (loss) and identifiable assets in Europe are principally from the Finnish
operations. None of the revenues, operating profit (loss) or identifiable assets
of the operations in Germany or the United Kingdom, individually or in the
aggregate, exceed 10% of total revenues, operating profit (loss) or identifiable
assets of the Company. North American export sales consist principally of sales
to Europe and South America. European export sales consist principally of sales
from Europe to other international countries.
F-25
<PAGE> 96
13. SUBSEQUENT EVENTS
Distribution
On May 19, 1998, the Board of Directors of Penford announced a plan to
effect a tax-free Distribution to its shareholders of 100% of Penwest's common
stock. The Distribution is 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. As a condition to the Distribution,
the Company will obtain a $15 million credit facility ("Credit Facility") which
Penford has agreed to guarantee. The Credit Facility is expected to be a
revolving loan facility with a maximum principal amount of $15 million of
unsecured financing. The proceeds may be used to fund working capital and for
general corporate purposes, including capital expenditures. On the second
anniversary of the execution of the Credit Facility all outstanding amounts
under the Credit Facility will become automatically due and payable, although
the Company will be required to use the proceeds of any financing conducted by
the Company prior to such date to pay down, any outstanding amounts under the
Credit Facility at such time. Borrowing under the Credit Facility are expected
to bear interest at a rate equal to LIBOR, plus 1.25%. The Credit Facility is
expected to contain a number of financial covenants that relate to Penford (and
not Penwest), including requirements that Penford maintain certain levels of
financial performance and maintain certain financial ratios. The Credit Facility
is also expected to contain certain covenants applicable to both Penford and
Penwest including restrictions on the incurrence of additional debt and the
payment of dividends. Any breach of the covenants by Penford or the Company, or
a default by Penford with respect to any material indebtedness or a change of
control of Penford without the lender's consent, would constitute a default by
the Company under the Credit Facility. Accordingly, the Company will be
substantially dependent on Penford in order to access and maintain the Credit
Facility. Any default under the Credit Facility would have a material adverse
effect on the Company's business, financial condition and results of operation.
Prior to deciding to distribute 100% of the Company's common stock to
Penford's shareholders, in October 1997, Penford's Board of Directors approved
the sale of approximately 20% of the Company's Common Stock in an initial public
offering ("IPO"). The IPO was initially intended to be completed during December
1997. Due to market conditions, the IPO was initially postponed and during May
1998, after further evaluation of the market opportunities, Penford's Board of
Directors decided to distribute 100% of the Company's common stock to Penford's
shareholders and forego the IPO at such time. Based on this decision, the
Company wrote-off approximately $1.4 million of transaction costs, principally
legal, accounting and printing, associated with the IPO during the year ended
December 31, 1997.
On October 20, 1997, the Company effected a 2,907.66-for-1 stock split
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. On June 19, 1998, the Company
effected a 0.76-for-1 reverse stock split, reducing the outstanding shares to
11,055,462 shares of common stock. Accordingly, all share and per share data
have been retroactively adjusted to give effect to the stock split and reverse
stock split.
The Company and Penford have entered into or will, on or prior to the
completion of this Distribution, enter into agreements that govern various
interim and ongoing relationships. These agreements include (i) a Separation and
Distribution 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 specialty carbohydrate-based chemical
business and the Distribution, including without limitation Penford's agreement
to guarantee the Company's indebtedness under the Credit Facility; (ii) a
Services Agreement pursuant to which Penford will continue on an interim basis
to provide specified services to the Company until June 30, 1998 or until
Penwest does not need the services, of which costs will be charged to the
Company on an actual or allocated basis, at 110% of the cost; (iii) a Tax
Allocation Agreement relating to, among other things, the allocation of tax
liability between the Company and Penford in connection with the Distribution
and that all pre-distribution liabilities are the responsibility of Penford and
all post distribution liabilities are those of the respective entities; (iv) an
Excipient Supply Agreement pursuant to which Penford will manufacture and supply
exclusively to the Company, and the Company will purchase exclusively from
Penford, subject to certain exceptions, all the Company's requirements for two
excipients marketed by the Company under pricing and quantity terms that the
Company believes approximate fair market value; and (v) an Employee Benefits
Agreement setting forth the parties' agreements as to the continuation of
certain Penford benefits arrangements for the employees of the Company.
Subsequent to the Distribution, no terminating liabilities will be incurred by
Penwest related to the Penford defined benefit plan.
F-26
<PAGE> 97
Stock Plans
In October 1997, 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 employees,
directors, officers, consultants or advisors of the Company. There are 2,660,000
shares available for grant under the terms of the Plan. These options are to be
granted at prices equal to the fair market value of the Company's 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. The Company intends to grant stock options under
the 1997 Plan to purchase an aggregate of 1,010,000 shares of Common Stock to
its employees and officers following the Distribution date at an exercise price
equal to the fair market value on the date of grant. 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 228,000 shares available under the Employee Stock Purchase Plan.
At the time of the Distribution the outstanding stock options held by
employees of the Company to purchase the common stock of Penford will be
replaced by Penwest options. The Company adopted a 1998 Spin-off Option Plan
effective upon the Distribution under which employees of Penwest will be granted
these options. There will be no additional grants under this Plan. The exercise
price and the number of shares subject to the Penwest options will be calculated
so as to preserve the approximate value of the Penford options by ensuring that
the ratio of exercise price per option to the market value per share remains
unchanged and that the aggregate intrinsic value of the Penwest options is not
greater than the aggregate intrinsic value of the Penford options. The changes
in the stock options to purchase the common stock of Penwest will not result in
additional compensation expense. Substantially all other terms and conditions of
the Penford options will be reflected in the Penwest options, including the
continuation of the remaining portions of their original vesting schedules and
their 10-year terms.
F-27
<PAGE> 98
PART II
INFORMATION NOT REQUIRED IN INFORMATION STATEMENT
ITEM 15. FINANCIAL STATEMENT SCHEDULES AND EXHIBITS.
(A) 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.
(B) Exhibits:
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 -- Form of Separation and Distribution Agreement dated June
__, 1998 between the Registrant and Penford Corporation
("Penford").
3.1* -- Amended and Restated Articles of Incorporation.
3.2 -- Articles of Amendment to the Amended and Restated
Articles of Incorporation filed on June 19, 1998.
3.3* -- Amended and Restated Bylaws of the Registrant.
4.1* -- Specimen certificate representing the Common Stock.
8.1** -- Tax Private Letter Revenue Ruling dated __________, 1998
issued by the Internal Revenue Service.
+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** -- 1998 Spinoff Option Plan.
<PAGE> 99
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.
+10.19 -- License Agreement dated December 17, 1997 between
Synthelabo and the Registrant.
+10.20 -- Supply Agreement dated December 17, 1997 by and between
Synthelabo and the Registrant.
10.21** -- Revolving Loan Facility.
21.1* -- Subsidiaries.
27.1 -- Financial Data Schedule (December 31, 1997).
27.2 -- Financial Data Schedule (March 31, 1998).
- ----------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-38389).
** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE> 100
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Registrant has duly caused this Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENWEST PHARMACEUTICALS CO.
Date: June 19, 1998 By: /s/ Tod R. Hamachek
-----------------------------
Tod R. Hamachek
Chairman of the Board and
Chief Executive Officer
<PAGE> 101
REPORT OF INDEPENDENT AUDITORS ON SCHEDULE
We have audited the consolidated financial statements of Penwest
Pharmaceuticals Co. as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997, and have issued our report thereon
dated June 5, 1998, except for information describing the 0.76-for-1 reverse
stock split in Note 13, as to which the date is June 19, 1998, included
elsewhere in this Form 10. Our audits also included the financial statement
schedule listed in Item 15(a) of this Form 10. 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
June 5, 1998
S-1
<PAGE> 102
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
PENWEST PHARMACEUTICALS CO.
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO CHARGED TO OTHER
BEGINNING OF COSTS AND ACCOUNTS DEDUCTIONS BALANCE AT
PERIOD EXPENSES DESCRIBE DESCRIBE END OF PERIOD
------------ ---------- ---------------- ---------- -------------
<S> <C> <C> <C>
Year ended December 31, 1997
Allowance for Doubtful Accounts..................... $ 237 $ 100 -- -- $ 337
====== ===== ==== === ======
Year ended December 31, 1996
Allowance for Doubtful Accounts..................... $ 200 $ 37 -- -- $ 237
====== ===== ==== === ======
Year ended December 31, 1995
Allowance for Doubtful Accounts..................... $ 187 $ 28 -- (15)(a) $ 200
====== ===== ==== === ======
</TABLE>
- ----------
(a) Write-off of bad debts
S-2
<PAGE> 103
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
------- -----------
2.1 -- Form of Separation and Distribution Agreement dated June
__, 1998 between the Registrant and Penford Corporation
("Penford").
3.1* -- Amended and Restated Articles of Incorporation.
3.2 -- Articles of Amendment to the Amended and Restated
Articles of Incorporation filed on June 19, 1998.
3.3* -- Amended and Restated Bylaws of the Registrant.
4.1* -- Specimen certificate representing the Common Stock.
8.1** -- Tax Private Letter Revenue Ruling dated __________, 1998
issued by the Internal Revenue Service.
+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** -- 1998 Spinoff Option Plan.
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.
+10.19 -- License Agreement dated December 17, 1997 between
Synthelabo and the Registrant.
+10.20 -- Supply Agreement dated December 17, 1997 by and between
Synthelabo and the Registrant.
10.21* -- Revolving Loan Facility.
21.1* -- Subsidiaries.
27.1 -- Financial Data Schedule (December 31, 1997).
27.2 -- Financial Data Schedule (March 31, 1998).
- ----------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-38389).
** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
<PAGE> 1
Exhibit 2.1
SEPARATION AND DISTRIBUTION AGREEMENT
THIS SEPARATION AND DISTRIBUTION AGREEMENT (the "Agreement") is made as
of the ___ day of June, 1998 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, for Penford to
distribute to shareholders of Penford the outstanding shares of Penwest Common
Stock held by Penford;
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);
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) and the Distribution and to
set forth other agreements that will govern certain other matters following the
Separation and Distribution; and
WHEREAS, Penford and Penwest are parties to that certain Separation
Agreement dated as of November 3, 1997 (the "Separation Agreement"), which shall
be canceled and superseded by this Separation and Distribution Agreement, with
effect as of November 3, 1997 (the "Effective Date");
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.
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.
(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.
-2-
<PAGE> 3
(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 Distribution 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 intellectual property rights and other assets described in the
Information Statement) and the assumption of Penwest Liabilities by Penwest, in
both cases relating to the business of Penwest as described in the Information
Statement.
-3-
<PAGE> 4
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: August 31, 1998, or such other date as may be set by
the Board of Directors of Penford in its sole discretion.
EFFECTIVE DATE: November 3, 1997.
EMPLOYEE BENEFITS AGREEMENT: the Employee Benefits Agreement between
Penford and Penwest.
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.
EX-DIVIDEND DATE: The trading day 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.
EXISTING PENFORD OPTIONS: Options to acquire shares of Penford Common
Stock held by employees of Penford and/or its Subsidiaries.
EMDEX/CANDEX: sugar based (Dextrate) binders.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.
FORM 10: General Form for Registration of Securities on Form 10,
including the Information Statement, pursuant to which all the outstanding
Penwest's Common Stock will be registered under the Exchange Act, together with
all amendments thereto.
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.
INFORMATION STATEMENT: The Information Statement portion of the
Form 10.
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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.
PENFORD COMMON STOCK: the Common Stock, par value $1.00 per share, of
Penford.
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
August 31, 1998 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 Distribution 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, including any associated rights that may be attached to the Common
Stock from time to time.
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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(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 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 Distribution 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);
in any such case whether arising before, on or after the Distribution 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.
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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.
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.
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.
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.
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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
agreements, arrangements, commitments or understandings, whether or not in
writing, between Penwest and Penford, effective as of the Distribution 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 Distribution 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.
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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, including but not
limited to:
(a) the Excipient Supply Agreement, which will become
effective as of the Distribution Date;
(b) the Services Agreement, which will become effective
as of the Distribution Date;
(c) the Tax Allocation Agreement, which will become
effective as of the Distribution Date;
(d) the Employee Benefits Agreement, which will become
effective as of the Distribution Date; and
(e) the Trademark Assignment, which became effective as
of the Effective Date.
2.5 FORGIVENESS OF INTERCOMPANY DEBT. Effective immediately prior
to the Distribution Date (but except for any indebtedness of Penwest to Penford
incurred in connection with an acquisition by Penwest of certain rights relating
to the PRUV product from Astra Production Chemicals AB, if any such acquisition
as approved in concept by the Board of Directors of Penford on March 4, 1998 (as
amended by resolution on May 18, 1998), occurs prior to the Distribution 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 shares of Penwest Common Stock shall be issued or issuable in
connection with or as a result of such contributions.
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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.
2.9 FINANCING AND GUARANTY. Prior to the date on which the
Commission declares the Form 10 to be effective, Penwest and Penford will use
their reasonable
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best efforts to execute and deliver loan documents relating to certain bank
financing on terms approved by their Boards of Directors on June 22, 1998 and
June 25, 1998, respectively, including but not limited to Penford's providing
its guaranty of certain indebtedness of Penwest for a period before and after
the Distribution Date as so approved by the Penford Board which guaranty shall
be set forth in such loan documents (the "Guaranty").
ARTICLE III
THE DISTRIBUTION
3.1 THE DISTRIBUTION.
(a) Following the completion of the actions and the
occurrence of the events set forth in Section 3.2 hereof, or the mutual
agreement of Penford and Penwest that one or more of such actions need not be
completed or one or more of such events need not occur prior to the
Distribution, and provided that this Agreement shall not have been terminated at
Penford's election pursuant to Section 8.2, 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 3.3 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.
3.2 ACTIONS AND EVENTS PRIOR TO THE DISTRIBUTION.
(a) Penwest shall prepare and file the Form 10, and such
amendments or supplements thereto, as may be necessary in order to cause the
same
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to become and remain effective as required by law, including, but not limited
to, filing such amendments to the Form 10 as may be required by the Commission
or federal or state securities laws. The Form 10 shall have become effective on
or prior to the Distribution Date, and there shall be no stop-order in effect
with respect thereto.
(b) Penford and Penwest shall cooperate in preparing,
filing with the appropriate Governmental Authority any documents or statements
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 Distribution or the other transactions contemplated by this
Agreement or any other agreement or document contemplated by this Agreement or
otherwise.
(c) Penford and Penwest shall prepare and mail, prior to
the Record Date, to the holders of Penford Common Stock, the Information
Statement and such other information 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.
(d) 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 and such actions and filings,
where applicable, shall have become effective or been accepted.
(e) 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.
(f) 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.
(g) Any material Governmental Approvals and consents
necessary to consummate the Distribution shall have been obtained and shall be
in full force and effect.
(h) 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.
(i) The transactions contemplated hereby shall be in
compliance with applicable federal and state securities laws.
(j) 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.
(k) 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.
3.3 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.
ARTICLE IV
ACKNOWLEDGEMENT OF MATERIAL FACTS
4.1 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.
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ARTICLE V
MISCELLANEOUS LIABILITIES AND INDEMNIFICATION
5.1 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 or the Distribution and related transactions, including,
without limitation, the Form 10.
5.2 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 securities laws in connection with the Separation or the Distribution
and related transactions, including, without limitation, the Form 10.
5.3 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 5.1
or 5.2, or any other
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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 5.3(a) shall not
relieve the Indemnifying Party of its obligations under this Article V, 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
5.3(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 5.3(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 5.3(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.
(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.
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5.4 TAX LIABILITIES. Notwithstanding the provisions of Sections
5.1 and 5.2, 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.
5.5 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 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.
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5.6 REMEDIES CUMULATIVE. The remedies provided in this Article V
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 VI
ACCESS TO INFORMATION AND SERVICES
6.1 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.
6.2 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 VI 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.
6.3 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.
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6.4 REIMBURSEMENT. Except to the extent otherwise contemplated by
any Ancillary Agreement, a party providing information to the other party under
this Article VI 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.
6.5 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 Distribution 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.
6.6 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 VII
COVENANTS
7.1 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.
7.2 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 effectiveness thereof.
7.3 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.
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(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 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 7.3(a). The charges will be due when billed and
shall be paid no later than thirty (30) days from the date of billing.
7.4 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 sugarbased 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 sugarbased product.
(b) For a period of five years from the Effective Date,
neither Penford nor any of its Affiliates shall directly or indirectly recruit
or solicit any employee of Penwest or any of its Affiliates, or induce or
attempt to induce any employee of Penwest or any of its Affiliates to terminate
his or her employment with, or otherwise cease his or her relationship with,
Penwest or any of its Affiliates. For a period of five years from the Effective
Date, neither Penwest nor any of its Affiliates shall directly or indirectly
recruit or solicit any employee of Penford or any of its Affiliates, or induce
or attempt to induce any employee of Penford or any of its Affiliates to
terminate his or her employment with, or otherwise cease his or her relationship
with, Penford or any of its Affiliates.
(c) If any restriction set forth in Sections 7.4 (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 7.4 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
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<PAGE> 20
Penwest agree that any breach of this Section 7.4 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.
7.5 STOCK OPTIONS.
(a) Each Existing Penford Option, vested and unvested,
that is outstanding at the Distribution Date will be adjusted as of the
Distribution Date to provide in exchange therefor new options to acquire Penford
Common Stock ("Adjusted Penford Options") to option holders other than option
holders that will be employed by Penwest as of the Distribution Date ("Penwest
Option Holders"), and separately, new options to acquire Penwest Common Stock
("Penwest Options") to Penwest Option Holders. The adjustment will be made by
using the per share closing price of Penford Common Stock on the trading day
immediately prior to the Ex-Dividend Date (the "Penford Pre-Distribution Price")
and the per share closing prices of Penford Common Stock and Penwest Common
Stock on the Ex-Dividend Date (the "Penford Post-Distribution Price" and
"Penwest Post-Distribution Price", respectively), all as reported by the Nasdaq
National Market.
(b) The per share exercise price under each Adjusted
Penford Option will be determined by multiplying the per share exercise price
under the option holder's applicable Existing Penford Option by the Penford
Post-Distribution Price and then dividing the result by the Penford
Pre-Distribution Price. The number of shares of Penford Common Stock to be
covered by such Adjusted Penford Option will be determined by multiplying the
number of shares covered by such Existing Penford Option by the Penford
Pre-Distribution Price and then dividing the result by the Penford
Post-Distribution Price.
(c) The per share exercise price under each Penwest
Option will be determined by multiplying the per share exercise price under the
option holder's applicable Existing Penford Option by the Penwest
Post-Distribution Price and then dividing the result by the Penford
Pre-Distribution Price. The number of shares of Penwest Common Stock to be
covered by such Penwest Option will be determined by multiplying the number of
shares covered by such Existing Penford Option by the Penford Pre-Distribution
Price and then dividing the result by the Penwest Post- Distribution Price.
(d) The boards of directors of both Penford and Penwest,
or their respective compensation committees authorized by such board of
directors, retain the authority to modify the foregoing adjustment procedure if,
in their respective judgments, the closing prices as described above reflect
significant disruptive market
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<PAGE> 21
events that are independent, determinable, and verifiable effects of events
other than the Distribution.
(e) All other terms and conditions of the Existing
Penford Options pursuant to the stock option plans under which the options were
originally granted will continue to apply to the Adjusted Penford Options and to
the Penwest Options, including the continuation of the remaining portions of
their original vesting schedules and ten-year terms.
7.6 REPRESENTATIVE ON PENWEST BOARD OF DIRECTORS. During any and
all periods in which the Guaranty is effective, and subject to the exercise by
the Board of Directors of Penwest of its fiduciary duties Penwest will use its
reasonable best efforts to assure that at least one person designated by Penford
is elected and retained to serve as a director on the Board of Directors of
Penwest, including, but not limited to, the inclusion of such person in any
slate of nominees for submission to the shareholders of Penwest (unless such
person is already serving on the Penwest Board in a directorship that is
continuing and not subject to re-election at that time), and the prompt election
by the Penwest Board of such a person to fill any vacancy on the Board created
by the departure or removal from the Board of any person previously so
designated by Penford for such service. The initial such person designated by
Penford for service as a director of Penwest is N. Stewart Rogers. Penford may
from time to time designate a different person in replacement of Mr. Rogers or
his successor, whenever his or her directorship becomes subject to re-election,
or should he or she leave the Penwest Board for any reason. Upon the date on
which the Guaranty ceases to be effective, the rights provided under this
Section 7.6 shall terminate and the Penford designee shall resign from the
Penwest Board.
7.7 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 Penwest to take any action or reach any
understandings which may violate any applicable laws.
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<PAGE> 22
(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.
ARTICLE VIII
TERMINATION
8.1 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.
8.2 TERMINATION BY PENFORD. Prior to the Record Date, Penford may
terminate this Agreement at its election if its Board of Directors determines
that the consummation of the Distribution would, in light of the circumstances
at the time, not be in the best interests of the shareholders of Penford.
8.3 OTHER TERMINATION. This Agreement shall terminate if the
Distribution Date shall not have occurred on or prior to December 31, 1999.
8.4 EFFECT OF TERMINATION. In the event of any termination of this
Agreement, no party to this Agreement (or any of its directors or officers)
shall have any Liability or further obligation to any other party.
ARTICLE IX
MISCELLANEOUS
9.1 GOVERNING LAW. This Agreement shall be governed by the laws of
the State of Washington.
9.2 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.
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<PAGE> 23
9.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
9.4 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.
9.5 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.
9.6 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: Prior to the Distribution Date to The
Chief Financial Officer,
thereafter to The President
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The Chief Executive Officer
9.7 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 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.
9.8 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 Distribution or any of
the other transactions contemplated hereby and prior to making any filings with
any Governmental Authority with respect thereto.
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<PAGE> 24
9.9 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 Distribution is consummated, all third party fees, costs and
expenses paid or incurred in connection with the Distribution will be paid by
Penford.
9.10 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.
9.11 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 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
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<PAGE> 25
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.
9.12 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.
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
EXHIBIT 3.2
ARTICLES OF AMENDMENT
OF
PENWEST PHARMACEUTICALS CO.
Pursuant to RCW 23B.10.060, the undersigned corporation adopts the
following Articles of Amendment to its Amended and Restated Articles of
Incorporation (the "Articles of Incorporation"):
FIRST: The name of the corporation is Penwest Pharmaceuticals Co. (the
"Corporation").
SECOND: The Articles of Incorporation are hereby amended as follows:
1. ARTICLE 4 is hereby amended by replacing the first paragraph
thereof with the following paragraphs:
"Upon June 19, 1998, which is the date the Articles of Amendment
effecting this provision were filed with the Secretary of State
of Washington (the "Effective Date"), a 0.76-for-1 reverse
stock split of the Corporation's common stock shall become
effective, pursuant to which each 100 shares of common stock
outstanding and held of record by each shareholder of the
Corporation immediately prior to the Effective Date, shall,
upon the Effective Date, automatically and without any further
action by the Corporation or the holder of any such shares, be
reclassified and combined into 76 shares of common stock.
After giving effect to the foregoing reverse stock split, the
total number of shares of all classes of stock which the
Corporation shall have the authority to issue is 40,000,000
shares, consisting of 39,000,000 shares of common stock, par
value $0.001 per share, and 1,000,000 shares of preferred
stock, par value $0.001 per share."
THIRD: The Amendment provides for a reverse stock split of shares of
the Corporation's common stock, and the provisions for implementing the
amendment are as follows: each 100 shares shall automatically be reclassified
and combined into 76 shares of common stock, with the same per share par value
of $0.001. No fractional shares of common stock shall be issued as a result of
such reclassification and combination. In lieu of any fractional shares to
which the
<PAGE> 2
shareholders would otherwise be entitled, the Corporation shall pay cash equal
to such fraction multiplied by the then fair market value of the common stock
as determined by the Board of Directors of the Corporation.
FOURTH: The foregoing amendment was adopted by the Board of Directors
of the Corporation on June 10, 1998, without shareholder action.
FIFTH and SIXTH: Pursuant to RCW 23B.10.020(4), shareholder action with
regard to the amendment of the Articles of Incorporation of the Corporation was
not required.
PENWEST PHARMACEUTICALS CO.
Date: June 18, 1998 By: /s/ Tod R. Hamachek
------------------- ---------------------
Its: President and Chief
Executive Officer
---------------------
<PAGE> 1
Exhibit 10.14
EXCIPIENT SUPPLY AGREEMENT
This EXCIPIENT SUPPLY AGREEMENT (the "Agreement") is made as of the ___
day of ________________, 1998 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(R) and CANDEX(R) (sugar
based tabletting binders hereinafter referred to as "Pharmaceutical Excipients")
in bulk form; and
WHEREAS, this Agreement is entered into pursuant to the Separation and
Distribution Agreement dated as of June __, 1998 between Penford and Penwest
(the "Separation and Distribution 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 Distribution Date (as defined in the
Separation and Distribution Agreement) (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 by the required date for receipt of the
shipment.
(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
forty-five (45) 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 forty-five (45)
days. Such replacement quantity shall be provided by
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<PAGE> 4
Penford at 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 during the period
from the Effective Date through December 31, 1999 shall be $0.33 per pound.
Beginning on January 1, 2000, 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
Exhibit 10.15
SERVICES AGREEMENT
THIS AGREEMENT is made as of _______________, 1998 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 and
Distribution Agreement dated as of June __, 1998 between Penford and Penwest
(the "Separation and Distribution Agreement") (All capitalized terms used and
not otherwise defined herein shall have the meanings set forth in the Separation
and Distribution 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 Distribution Date (as defined in
the Separation and Distribution Agreement) (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 Penford will charge Penwest 110% of
the costs actually incurred (including overhead and general administrative
expenses). 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 June 30, 1999. 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 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,
3
<PAGE> 4
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: Prior to the Distribution Date, to The
Chief Financial Officer, thereafter to
The President
4
<PAGE> 5
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The Chief Executive Officer
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:
--------------------------------
<PAGE> 1
Exhibit 10.16
TAX ALLOCATION AGREEMENT
THIS TAX ALLOCATION AGREEMENT (the "Agreement") is made as of
____________, 1998, 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 ("Penwest" and, together with its subsidiaries existing immediately
following the Distribution, the "Penwest Group").
WHEREAS, Parent and Penwest have entered into the Separation and
Distribution 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 and Distribution 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 and Distribution
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
<PAGE> 2
and convincing evidence that the Post-Distribution Act did not cause the failure
to 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 1998 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 1998.
(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 and Distribution Agreement.
(g) "Separation and Distribution Agreement" means the
Separation and Distribution Agreement dated June ___, 1998 between Parent and
Penwest providing for the Distribution.
(h) "Distribution Date" has the meaning set forth in the
Separation and Distribution 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
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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 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; and
(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.
(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;
(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
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(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.
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
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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 member of the Parent Group which were not
reimbursed by Penwest pursuant to this Agreement.
4. WINDFALLS.
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(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 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
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<PAGE> 7
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 and Distribution 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; 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.
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<PAGE> 8
(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,
shareholders of Parent owning stock two years prior to the Distribution Date
will continue to hold at least 50% of the stock of Penwest two years after 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 to employees and consultants of Penwest upon the exercise of stock
options or otherwise under the Company's 1997 Equity Incentive Plan, 1997
Employee Stock Purchase Plan or 1998 Spinoff Option Plan.
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<PAGE> 9
(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.
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,
shareholders of Parent owning stock two years prior to the Distribution Date
will continue to hold at least 50% of the stock of Parent two years after 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 transfer or
cessation of a substantial portion of the business of Parent or other
substantial change in the business of Parent 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 an 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:
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(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 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
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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 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
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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.
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 and
Distribution Agreement, the provisions of this Agreement shall control and to
such extent shall be deemed to supersede such conflicting provisions under the
Separation and Distribution Agreement.
(b) The parties acknowledge that pursuant hereto any and
all existing tax sharing agreements or arrangements binding or benefiting
Penwest shall
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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:
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Title:
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PENWEST PHARMACEUTICALS CO.
By:
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Title:
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<PAGE> 1
Exhibit 10.17
EMPLOYEE BENEFITS AGREEMENT
This Agreement is made on ________________, 1998 (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, to effect the separation of its pharmaceutical division,
Penford intends as of a date certain (the "Distribution Date") to distribute to
its shareholders, in a pro-rata distribution of a dividend (the "Distribution")
all shares of Penwest common stock held by Penford;
WHEREAS, the current employees of Penwest are participants in some of
Penford's employee benefit plans and certain employees of Penford are expected
to become employees of Penwest as of the Distribution Date;
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 (all of such
employees being referred to herein as the "Penwest Employees"); and
WHEREAS, the Agreement is entered into pursuant to the Separation and
Distribution Agreement dated as of [____________] between Penford and Penwest
(the "Separation and Distribution 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 Distribution Date, Penwest Employees shall cease to
be eligible to actively participate in the following employee benefit plans
offered by Penford:
(a) the Penford Corporation Supplemental Executive
Retirement Plan (the "Penford SERP");
(b) the Penford Corporation Deferred Compensation Plan ;
(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");
(d) the Penford Corporation Savings and Stock Ownership
Plan (the "Penford 401(k) Plan");
1
<PAGE> 2
1.2 TERMINATION OF COVERAGE FOR PENWEST EMPLOYEES UNDER THE
PENFORD CORPORATION HEALTH AND FLEX PLANS
Pursuant to prior agreement between Penford and Penwest and appropriate
Board action by Penford, effective midnight on December 31, 1997, Penwest
Employees ceased to be covered under the Penford health and cafeteria plans, as
set forth in exhibit 2 ("Penford Health/Flex Plans") and Penford has no further
obligation to cover the Penwest Employees under such plans; provided, however,
that nothing in this section 1.2 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 was filed, or is filed, until after December 31, 1997.
1.3 TERMINATION OF COVERAGE OF PENWEST EMPLOYEES UNDER THE PENFORD
CORPORATION RETIREMENT PLAN
(a) Effective as of the Distribution Date, Penford shall
amend the retirement plan sponsored by Penford (the "Penford Retirement Plan")
to freeze all benefits accrued in the Penford Retirement Plan for all Penwest
Employees and to permit the distribution of the accrued benefits of Penwest
employees. After the Distribution Date and the receipt of approval by the
Internal Revenue Service of such amendments, a Penwest Employee may elect 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.
(b) It is contemplated that Penford will amend the
Penford Retirement Plan to provide enhanced pension plan benefits to certain
older participants who were Penwest Employees and are identified by the Penford
Retirement Plan Administrative Committee ("Administrative 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 Administrative Committee.
1.4 NOTICE TO ADMINISTRATORS AND INSURERS
To the extent required, Penford agrees to inform, on or prior to the
Distribution Date, all relevant third party administrators and insurance
carriers, that coverage of the Penwest Employees in the Penford Welfare Plans
ceases as of the Distribution Date.
1.5 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.
SECTION 2 - ESTABLISHMENT OF PENWEST EMPLOYEE BENEFIT PLANS
2.1 ESTABLISHMENT OF PENWEST SAVINGS AND STOCK OWNERSHIP PLAN
(a) Effective as of the Distribution Date, 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 on the
Distribution Date, 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.
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(b) As soon as practicable following the Distribution
Date 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 in the individual accounts of Penwest
Employees in the Penford 401(k) Plan ("First Transfer of Account Balances").
Accounts in the name of such Penwest Employees will be maintained under the
Penford 401(k) Plan (although these accounts will show a $0 account balance
following the First Transfer of Account Balances) until the allocation of profit
sharing contributions to the accounts of participants in the Penford 401(k) Plan
for the fiscal year ending 8/31/98 ("Profit Sharing Allocation"). Following the
Profit Sharing Allocation, 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 remaining assets and liabilities in the individual
accounts of Penwest Employees in the Penford 401(k) Plan ("Second Transfer of
Account Balances").
(c) As of the date of the First Transfer of Account
Balances, 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, except for claims relating to account balances resulting from the
Profit Sharing Allocation. As of the date of the Second Transfer of Account
Balances, Penwest and the Penwest 401(k) Plan shall assume all liabilities for
accrued benefits under the Penford 401(k) Plan for the Penwest Employees,
including claims relating to account balances resulting from the Profit Sharing
Allocation, and the Penford 401(k) Plan shall be relieved of all such
liabilities.
(d) The Penwest 401(k) Plan shall provide the following:
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 the Distribution Date, 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 Distribution 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, after he becomes an employee of Penwest, and to Jack V. Talley, Jr.
(the "Transferring Executives").
(b) As of the Distribution Date, Penwest and the Penwest
SERP and DC Plans shall assume all liabilities for all accrued benefits under
the Penford SERP and Penford Corporation 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 Corporation Deferred
Compensation Plan to transfer to the trustee of the Penwest SERP and DC Plans
all accounts in the Penford SERP and the Penford Corporation Deferred
Compensation Plan of the Transferring Executives.
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(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 Penford Corporation 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 or before the Distribution 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, life insurance
policies sufficient to cover the accrued benefits (as of the date of transfer)
of the Transferring Executives under the Penford SERP and to cover the account
balances of the Transferring Executives in the Penford Corporation Deferred
Compensation Plan ("Transferred Policies"). Penwest will be responsible for any
premium payments with respect to the Transferred Policies which become due after
the date of transfer of the Transferred Policies.
2.3 PENWEST WELFARE PLANS
Effective upon the Distribution 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 Distribution 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 adopted the Penwest
Health/Flex Plans substantially identical in all material features to the
Penford Health/Flex Plans, which plans are listed on Exhibit 2. As of the
Distribution Date, Tod Hamachek will be covered under the Penwest Health/Flex
Plans, and will cease to be covered by the Penford Health/Flex Plans.
2.5 COBRA
Pursuant to prior agreement between Penford and Penwest, acknowledged
and ratified herein, effective January 1, 1998, Penwest assumed 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 (and any qualified beneficiaries with respect to
such employee), whether or not such continuation requirements arose under the
Penford Health/Flex Plans, and Penford has no further obligation or liability
for any requirements to provide continuation of health care coverage to any
Penwest Employees.
2.6 COOPERATION
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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.
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
Penford Welfare Plans; 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 benefit plans; any claims under the Penford benefit 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, 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 by or on behalf of Penwest Employees
who retire or otherwise terminate employment with Penwest after January 1, 1998.
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:
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Penford Corporation
777 - 108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: Susan M. Iverson
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: Jennifer L. Good
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.
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:
--------------------------------
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PENWEST PHARMACEUTICALS CO.
By:
-----------------------------------
Title:
--------------------------------
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EXHIBIT 1
PENFORD WELFARE PLANS
UNUM INSURANCE COMPANY OF AMERICA
I. Group Life (Basic Life Insurance) and Accidental Death and
Dismemberment Insurance Plan
II. Supplemental Life Plan
III. Long-Term Disability Income Plan
IV. Group Travel Accident Insurance Plan
MANAGED HEALTH NETWORK
V. Employee Assistance Program
MCG NORTHWEST
VI. Supplemental Disability Plan
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EXHIBIT 2
PENFORD HEALTH/FLEX PLANS
BLUE CROSS BLUE SHIELD OF IOWA
VII. Medical Plan for Salaried Employees
ADVANCE PARADIGM
VIII. Prescription Drug Plan
DELTA DENTAL - USA
IX. Dental Plan for Salaried Employees
VISION SERVICE PLAN
X. Vision Plan for Salaried Employees
PENCHOICE FLEXIBLE BENEFITS PROGRAM
Pre-tax health plan premiums, medical reimbursement flexible spending account,
dependent care flexible spending
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<PAGE> 1
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
LICENSE AGREEMENT
This Agreement is dated the 17th day of December, 1997, and is made between
SYNTHELABO
22, Avenue Galilee
F-92352 LE PLESSIS ROBINSON CEDEX
FRANCE
Facsimile: _______________________
Attention: _______________________
(hereinafter called SYNTHELABO)
AND
PENWEST PHARMACEUTICALS CO.
2981 Route 22, Patterson
NEW YORK, 12563
U.S.A.
Facsimile: (914) 878-3420
Attention: _______________________
(hereinafter called PPC)
WHEREAS
A) PPC is the owner of TIMERx Controlled Release System and certain
patents pertaining thereto;
B) LEIRAS OY, Pansointie 45-47, 20210 TURKU - FINLAND (hereinafter
called "LEIRAS") has developed and is in possession of a medical
product containing Oxybutynin as active ingredient and called
Cystrin, and is the proprietor of valuable know-how, data, skills
and other information in relation thereto;
C) LEIRAS and PPC have cooperated in a "Development Programme"
whereby PPC developed a slow-release tablet/slow release tablet
formulation for LEIRAS' Cystrin product, adjusting the TIMERx
Controlled Release System and have cooperated in the development
and formulation of the Oxybutynin- TIMERx product, which
programme is now completed;
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D) SYNTHELABO has evaluated the said Controlled Release System and
has determined its interest to use it for manufacturing and
marketing the PRODUCT in certain territories;
E) PPC and LEIRAS have agreed that PPC shall grant certain licenses
to SYNTHELABO regarding the manufacture and marketing of the
PRODUCT in the TERRITORY stated herein. PPC and SYNTHELABO have,
concurrently with this Agreement entered into a Supply Agreement
regarding the sale by PPC to SYNTHELABO of the TIMERx required
for the production of the PRODUCT by SYNTHELABO (the "Supply
Agreement");
F) PPC and SYNTHELABO have agreed to enter into a License Agreement
for the said Controlled Release System and related PATENT RIGHTS;
NOW THEREFORE, in consideration of the premises and mutual covenants herein
contained, the parties hereto agree as follows:
1. DEFINITIONS
a) COMPOUND shall mean the bulk pharmaceutical compound known as
Oxybutynin and its pharmaceutically acceptable salts, enantiomers and
active metabolites;
b) PRODUCT shall mean the pharmaceutical dosage form containing 10mg of
COMPOUND; and corresponding with the specifications as defined in
ANNEX A attached hereto;
c) PATENT RIGHTS shall mean the different PATENTS and PATENT APPLICATIONS
covering TIMERx as more closely defined in ANNEX B attached hereto;
d) TERRITORY shall mean the nations listed in ANNEX C attached hereto;
e) PPC MANUFACTURING TECHNOLOGY means all required know-how, methods,
processes, techniques, trade secrets, specifications, technological
information and other data associated with PATENT RIGHTS and relating
to the manufacture and use of TIMERx Controlled Release System;
f) IMPROVEMENTS shall mean any additions to or modifications of PPC
MANUFACTURING TECHNOLOGY or the subject matter of PATENT RIGHTS,
whether patentable or unpatentable, made or acquired by either party
hereto which such party is free to use and disclose during the term of
this Agreement that are useful in the formulation and manufacture of
PRODUCT;
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<PAGE> 3
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
g) NET SALES shall mean the [**];
h) SUBSIDIARY shall mean any corporation or other business entity of
which at least fifty percent (50%) of the total voting rights is owned
by SYNTHELABO;
i) HEALTH REGISTRATION shall mean approval by all relevant regulatory
authorities in each nation in the TERRITORY for commercial sale of the
PRODUCT for administration in humans, pursuant to a product license
application or other applicable submissions submitted by or for
SYNTHELABO and/or LEIRAS.
2) GRANT OF LICENSE
A) Subject to the terms and conditions of this Agreement, PPC hereby
grants to SYNTHELABO and SYNTHELABO accepts an exclusive license to
use PATENT RIGHTS and PPC MANUFACTURING TECHNOLOGY for manufacturing,
promoting and selling the PRODUCT in the TERRITORY, provided however
that SYNTHELABO may freely grant sublicenses of such rights to its
Subsidiaries in the TERRITORY, it being understood that the present
license is also exclusive towards PPC or PPC's Subsidiaries, if any;
and provided further, however, that this license does not grant to
SYNTHELABO or its Subsidiaries any right to manufacture the TIMERx to
be used by SYNTHELABO in the manufacture of the PRODUCT unless and
until the contingent license in Section 2)B) becomes applicable in the
circumstances and during the period there described. SYNTHELABO
understands and agrees that a consistent source of the TIMERx from a
supplier with the know-how and rights to make it is essential to the
successful production of the PRODUCT, and accordingly agrees to
purchase all of its Subsidiaries' requirements of TIMERx from PPC
under the Supply Agreement during the term hereof, except only as
provided in Section 2)B). SYNTHELABO may, on a temporary basis
immediately following the Effective Date while SYNTHELABO is bringing
its own manufacturing capability into operation, contract with LEIRAS
for the manufacture by LEIRAS of the PRODUCT in LEIRAS's approved
facilities solely for sale to SYNTHELABO for resale under this License
Agreement; provided that this interim manufacturing shall be
considered to be performed by LEIRAS as a subcontractor/sublicensee to
SYNTHELABO. Accordingly, SYNTHELABO shall supply to LEIRAS all of the
TIMERx to be used in such manufacturing from the supplies to be
purchased by SYNTHELABO from PPC under the Supply Agreement.
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<PAGE> 4
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
B) If for any reason PPC fails, over a continuing period of [**] to
supply SYNTHELABO with its and its Subsidiaries' requirements of
TIMERx, PPC shall, AS SYNTHELABO'S SOLE AND EXCLUSIVE REMEDY FOR ANY
FAILURE TO SUPPLY TIMERx, grant SYNTHELABO a nonexclusive license to
manufacture TIMERx under the PPC Manufacturing Technology and make
knowledgeable personnel reasonably available, at SYNTHELABO'S expense
(as provided in Section 3)C)), to consult with SYNTHELABO, all to the
extent necessary to enable SYNTHELABO or its qualified Subsidiary to
produce TIMERx that would otherwise have been supplied by PPC under
the Supply Agreement for SYNTHELABO and its Subsidiaries in connection
with the production of the PRODUCT pursuant to this Agreement.
SYNTHELABO will be responsible for maintaining an inventory of TIMERx
sufficient to cover any delivery failures shorter than [**] in
duration. SYNTHELABO shall maintain PPC Manufacturing Technology
delivered to SYNTHELABO pursuant to this section, whether orally or in
writing, in strictest confidence and shall use such information and
technology only for the purpose of producing TIMERx for its own use
and the use of its Subsidiaries in connection with this Agreement and
within the scope of the license granted hereunder. SYNTHELABO
acknowledges that, in doing the foregoing, PPC will not be providing a
"turnkey" operation. Rather, PPC will only be required to make
reasonably available to SYNTHELABO the best standard of knowledge and
information then available to PPC and directly used in its or its
affiliates' or contractors' manufacture of TIMERx. In such event
SYNTHELABO shall pay to PPC US[**](or the then-current TIMERx price,
as such per-kilogram price may be adjusted over the life of the
Agreement in accordance with Appendix 3 to the Supply Agreement) per
kilogram of TIMERx produced and converted to PRODUCT by SYNTHELABO or
its Subsidiaries, less SYNTHELABO's or its relevant Subsidiary's
reasonable variable manufacturing costs including costs of materials
therefor. If PPC's non-delivery of the TIMERx resulted in whole or in
part from a temporary inability to produce and deliver the same, PPC
may, at its option and on at least 90 days' prior written notice to
SYNTHELABO, terminate the license to produce TIMERx hereunder and
reinstitute the Supply Agreement notwithstanding Clause 14.2 thereof,
once PPC or its alternative supplier, contractor or licensee is again
able and willing to supply TIMERx hereunder, during which 90-day
period SYNTHELABO will be entitled to exhaust its work in process and
any inventory of TIMERx.
3) DISCLOSURE OF PPC MANUFACTURING TECHNOLOGY
A) SYNTHELABO understands and agrees that no technology transfer or other
disclosures to SYNTHELABO will be required from PPC under this
Agreement, unless the circumstances described in Section 2)B) become
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<PAGE> 5
applicable and lead to the disclosures there provided for, or unless
PPC otherwise agrees in writing, and at its discretion.
B) SYNTHELABO shall treat and cause SYNTHELABO's Subsidiaries to treat
any and all PPC MANUFACTURING TECHNOLOGY and other information
received from PPC in connection with this Agreement (including all PPC
MANUFACTURING TECHNOLOGY and other information disclosed by PPC before
the execution of this Agreement) as confidential and not to be
disclosed to any other person, company or firm (except to the
competent authorities on a confidential basis as required in order to
obtain the HEALTH REGISTRATION, and except as far as necessary on a
confidential basis for carrying out pre-clinical and clinical trials),
except the following information:
a) information which at the time of disclosure by PPC is part of the
public knowledge;
b) information which after disclosure by PPC becomes part of the
public knowledge by publication or otherwise, except by breach of
this Agreement by SYNTHELABO or SYNTHELABO's Subsidiaries;
c) information which SYNTHELABO or SYNTHELABO's Subsidiaries can
establish by competent proof was in its possession at the time of
disclosure by PPC and was not acquired directly or indirectly
from PPC under a secrecy obligation; or
d) information which SYNTHELABO or SYNTHELABO's Subsidiaries
lawfully receive from a third party; provided, however, that such
information was not obtained by said third party directly or
indirectly from PPC under a secrecy obligation.
The obligations of confidentiality, non-use and non-disclosure of PPC
MANUFACTURING TECHNOLOGY and other information under this Agreement
shall expire five (5) years after expiration of the last-to-expire of
PATENT RIGHTS or fifteen (15) years after the date of this Agreement,
whichever occurs later.
C) If at any time and for any reason any personnel of PPC or any
contractors to PPC are requested by SYNTHELABO or LEIRAS to travel
outside the area of Patterson, N.Y. in whole or in part for the
benefit of SYNTHELABO, or to devote time in or outside the Patterson
area specifically to the needs of SYNTHELABO or to any technology
transfers called for hereunder, SYNTHELABO shall pay, or shall cause
LEIRAS to pay, PPC for all reasonable expenses associated with such
travel, plus a per diem fee equal to PPC's then-current charges for
such personnel.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
4) REPORTS
SYNTHELABO shall promptly render to PPC the following reports:
A) Quarterly reports on gross sales amount and NET SALES of PRODUCT in
terms of units and value, and the amount of samples distributed.
B) Quarterly reports on the quantity of PRODUCT held by SYNTHELABO's
Subsidiaries in inventory on hand.
C) Reports on the selling prices of PRODUCT in TERRITORY as they are
fixed or modified.
5) ROYALTY
A) In consideration of the license granted, the disclosure made and the
obligations undertaken by PPC under this Agreement, SYNTHELABO shall
pay to PPC or its nominee a Running Royalty at the rate of [**] based
on the NET SALES of PRODUCT sold by SYNTHELABO or SYNTHELABO's
Subsidiaries whether or not in a nation in which there are any
then-subsisting PATENT RIGHTS. Payments of the Running Royalty shall
be made within thirty (30) days after the end of each calendar quarter
expiring March 31, June 30, September 30 and December 31 for the
Running Royalty accruing during such calendar quarter.
B) All taxes levied on the income of PPC or its nominee arising from the
effect of this Agreement, including any withholding taxes on
royalties, shall be borne by PPC or its nominee, and SYNTHELABO or its
Subsidiaries shall secure proof of the payment thereof out of the
royalty, and shall deliver such proof to PPC.
C) All monies due to PPC under this Agreement shall be paid in United
States Dollars to PPC in Patterson, New York, USA. The rate of
exchange to be used shall be the average commercial rate of exchange
for the 30 days preceding the date of payment for the conversion of
local currency to United States Dollars as published by The Wall
Street Journal (or if it ceases to be published, a comparable
publication to be agreed upon by the parties) or, for those countries
for which such average exchange rate is not published by The Wall
Street Journal, the exchange rate fixed on the fifth day prior to the
date of payment as promulgated by the appropriate United States
governmental agency as mutually agreed upon by the parties.
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6) ACCOUNTING AND INSPECTION
SYNTHELABO shall keep, or cause to be kept, records of the sale of PRODUCT
under this Agreement. Such records shall be open to inspection, at any
reasonable time within three (3) years after the expiration of each
calendar quarter, by an independent certified public accountant retained
and paid by PPC and only rejectionable by SYNTHELABO or SYNTHELABO's
Subsidiaries for good cause, who shall report only the amount of NET SALES.
Any objection to the accuracy or completeness of the described statement or
the amount shall be filed in writing by PPC within said three (3) year
period, or such statement and amount shall be deemed true and correct as
between the parties hereto.
7) IMPROVEMENTS
If the license described in Section 2)B) becomes applicable under the
circumstances there described, such license will also cover rights in any
IMPROVEMENTS prior to that time incorporated by PPC into its manufacture of
the TIMERx for supply to SYNTHELABO under the Supply Agreement. Otherwise,
PPC shall not be required to license or to disclose to SYNTHELABO any of
its IMPROVEMENTS, except that: (i) the license under Section 2 shall
include rights in any after-acquired patents in the TERRITORY insofar as
the substance Oxybutynin in combination with TIMERx is concerned, and (ii)
if PPC should during the term of this Agreement undertake any further
development program specifically for and directed at improving the PRODUCT
in its specific formulation and dosage strength (but not including any
other programs or discoveries, even if the same could be useful for the
PRODUCT), it will, to the extent it may do so without breaching any
third-party rights or agreements or requiring any third-party royalties or
other payments, disclose to SYNTHELABO any useful IMPROVEMENTS discovered
by PPC in the course of such program and include the same under the
licenses of Section 2, provided, however, that (A) such IMPROVEMENTS will
only be those that do not require a recertification of the PRODUCT by any
governmental agency and (B) such license and disclosure shall, as to
IMPROVEMENTS to PPC MANUFACTURING TECHNOLOGY, be subject to the same
conditions and circumstances as to use and disclosure as set out in Section
2 for the other PPC MANUFACTURING TECHNOLOGY. If SYNTHELABO or its
Subsidiaries should during the term of this Agreement undertake any further
development program specifically for and directed at improving the PRODUCT
in its specific formulation and dosage strength (but not including any
other programs or discoveries, even if the same could be useful for the
PRODUCT), it and they will, to the extent it or they may do so without
breaching any third-party rights or agreements or requiring any third-party
royalties or other payments, disclose to PPC any useful IMPROVEMENTS
discovered in the course of such program, and shall give to PPC and its
affiliates and licensees the nonexclusive right to use any such IMPROVEMENT
free of any royalty or other compensation on any non-patentable or
patentable IMPROVEMENT.
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8) PATENTS
A) PPC agrees to be responsible for paying renewal fees to maintain the
PATENT RIGHTS in the TERRITORY.
B) PPC declares that at the date of execution of this Agreement and to
the best of its knowledge, with the exception of the pending challenge
to the PATENT RIGHTS brought by the Boots Company, there is no action
threatened or pending against PATENT RIGHTS.
C) Each party shall inform the other of any infringement and threatened
infringement by a third party of the PATENT RIGHTS in the TERRITORY.
In the event of such infringement, PPC will have the right to
institute proceedings against such infringer by any and all means
which PPC will find suitable for such purpose. Should PPC decide, at
its sole discretion, to institute legal proceedings against such
infringer, PPC shall have the right to select its own attorneys and
shall assume payment of all fees or costs in respect of such legal
proceedings or as much as it is necessary up to the conclusion of the
action or its various settlement or discharge as well as of all
damages, including interest, if awarded to the defending party, and
shall, if awarded to PPC, retain all profits, damages and other
recovery.
If PPC does not institute legal proceedings against such infringer
within 90 days of SYNTHELABO's request to do so, and if and to the
extent that such infringement involves a product with the active
ingredient Oxybutynin in the TERRITORY, SYNTHELABO or SYNTHELABO's
Subsidiaries will have the right to institute such proceedings at its
own cost and expenses. In such event, all damages, including interest,
if awarded to the defending party, shall be borne by SYNTHELABO or
SYNTHELABO's Subsidiaries and shall, if awarded to SYNTHELABO or
SYNTHELABO's Subsidiaries, be retained by it or them.
D) If SYNTHELABO or SYNTHELABO's Subsidiaries or PPC, by reason of its
exercise of the rights granted by PPC with respect to PATENT RIGHTS
and PPC MANUFACTURING TECHNOLOGY (but not to the extent by reason of
any other technology or rights, such as any rights derived from LEIRAS
or with respect to aspects of the PRODUCT contributed by LEIRAS or
SYNTHELABO), is informed or sued for alleged infringement of the
intellectual property or other proprietary rights vested in a third
party and relating to the PRODUCT, other than by the Boots Company
within the scope of its claims made in its pending challenge to the
PATENT RIGHTS, the party concerned shall give prompt notice of such
suit or information to the other party and PPC shall defend or settle
such suit with attorneys of its own choice and at its own cost.
SYNTHELABO or SYNTHELABO's Subsidiaries shall render PPC all necessary
assistance in defending such suit.
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All costs and damages awarded against SYNTHELABO or SYNTHELABO's
Subsidiaries in such a suit, excluding, however, any costs or losses
sustained by SYNTHELABO or SYNTHELABO's Subsidiaries in respect of
loss of revenue from sales of PRODUCT or abortive production costs,
shall be paid by PPC, provided that SYNTHELABO or SYNTHELABO's
Subsidiaries shall have given prompt notice in writing to PPC of any
claim of such alleged infringement as well as the bringing or the
threat of such bringing of any suit. SYNTHELABO or SYNTHELABO's
Subsidiaries shall permit PPC by counsel of PPC's choice to defend or
settle the claim or suit, and SYNTHELABO or SYNTHELABO's Subsidiaries
shall not defend or settle any such claim without prior written
consent of PPC.
SYNTHELABO shall provide to PPC and its suppliers similar defense and
indemnity for costs and damages if PPC or such suppliers are informed
or sued for alleged infringement of the intellectual property or other
proprietary rights vested in a third party (including without
limitation the Boots Company) and relating to the PRODUCT with respect
any other technology or rights, such as any rights derived from LEIRAS
or with respect to aspects of the PRODUCT contributed by LEIRAS or
SYNTHELABO.
E) The above referred obligations with respect to PATENT RIGHTS shall be
relinquished on the date of expiration of the last PATENT RIGHTS in
the TERRITORY, except pending cases or cases referring to the time
prior to the expiration of the PATENT RIGHTS.
9) TERM AND TERMINATION
A) The term of this Agreement, as it applies to any nation in the
European Union, shall be until the expiration of the last-to-expire of
the PATENT RIGHTS in that nation. In all nations not members of the
European Union, the term of this Agreement shall be until the
expiration of the last-to-expire of all of the PATENT RIGHTS in all
nations in the TERRITORY (including those in the European Union),
whether or not the PATENT RIGHTS in one or more (but less than all) of
such nations may have previously expired; provided, however, that this
Agreement will in any event terminate upon the termination or
expiration of the Supply Agreement, if it has not already done so,
except for a termination referred to in Section 14.2 of the Supply
Agreement, in which event this License Agreement will continue and the
terms of Section 2)B) will be applicable.
The term "expiration" of the Agreement as used in this Agreement shall
mean the end of the above-defined term of this Agreement only pursuant
to this Section 9-A.
B) Without prejudice to any remedy or claims it may have against the
other party for breach or non-performance of this Agreement, either
party shall be entitled
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to immediately terminate this Agreement by written notice if the other
party should violate any of the provisions or conditions of this
Agreement and if after having been given a written warning the other
party should fail to discontinue or should fail to make good such
violation within sixty (60) days after receipt of the warning.
C) In the event of insolvency, bankruptcy, liquidation or dissolution of
SYNTHELABO or appointment of a trustee or receiver for it, it shall
immediately notify PPC to that effect. In any such event, PPC so
notified shall have the right to terminate this Agreement at any time.
D) In the event of insolvency, bankruptcy, liquidation or dissolution of
PPC, the validity as well as the duration of the present contract
shall not be affected.
10) CONSEQUENCES OF TERMINATION
Upon termination by either party of this Agreement the rights and
obligations of such party shall cease with effect from the date of
termination save for confidentiality obligations and the obligation to pay
accrued royalties, all of which shall remain in full force and effect
provided that the termination by either party of this Agreement shall be
without prejudice to any accrued claims or rights of action that either
party may have against the other up to the date of such termination.
Following expiration of the full term of this Agreement in a nation or
nations, the license granted shall become non-exclusive and royalty-free in
that nation or those nations.
11) FORCE MAJEURE
If and to extent that either party is hindered or prevented by
circumstances not now foreseeable and not within its reasonable ability to
control from performing any of its obligations under this Agreement and
promptly so notifies the other party giving particulars of the
circumstances in question, then the party so affected shall be relieved of
liability to the other for failure to perform such obligations, but shall
nevertheless use all reasonable endeavours to resume full performance
thereof without avoidable delay.
12) NOTICES
12.1 Any notice to be given under this Agreement shall be in writing in
English and shall be deemed duly given if signed by or on behalf of a
duly authorized officer of the party giving notice and if left at or
sent by registered or recorded delivery post or by telex, telegram,
facsimile transmission or other means of telecommunication in
permanent written form to the address of the party set out above or
such other address as either party may from time to time notify to the
other. Any such notice or other communication shall be deemed to be
given
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12.1.1 at the time when the same is handed to or left at the address
of the party to be served;
12.1.2 by post on the day (not being a Sunday or public holiday) five
(5) days following the day of posting; and
12.1.3 in the case of a telegram, telex or facsimile transmission on
the next following day.
12.2 Notices shall be addressed to the parties under their above-mentioned
addresses.
12.3 In proving the giving of a notice it shall be sufficient to prove that the
notice was left or that the envelope containing the notice was properly
addressed and dispatched (as the case may be).
13) CHOICE OF LAW
This Agreement shall be governed by and interpreted in accordance with
English Law. All disputes, controversies, or differences which may arise
between the parties, out of or in relation to or in connection with this
Agreement or any breach thereof shall be finally settled by arbitration
held in London pursuant to the then obtaining Rules of the London Court of
International Arbitration, by which each party hereto agrees to be bound.
The arbitration language shall be English.
14) ASSIGNMENT
This Agreement may not be assigned or transferred by either party without
the prior written consent of the other. However, SYNTHELABO shall have the
right to assign or to transfer this Agreement or to grant a sub-license to
its Subsidiaries in the TERRITORY, and PPC shall have the right to assign
or transfer this Agreement to any of its affiliates or in connection with
any sale of all or substantially all assets of PPC related to the TIMERx
Controlled Release System.
15) NO IMPLIED WAIVER
A waiver by either party of any right under this Agreement in any one
instance shall not be deemed or construed to be a waiver of such right for
any similar instance in the future or of any subsequent breach hereof nor
shall it prevent a subsequent enforcement of that right.
16) SEVERABILITY
If any provision(s) of this Agreement are or become invalid, or are ruled
illegal or are deemed unenforceable under the current applicable law from
time to time in effect during the term hereof, it is the intention of the
parties that the remainder of this
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Agreement shall not be affected thereby. It is further the intention of the
parties that in lieu of each such provision which is invalid, illegal or
unenforceable, there be substituted or added as part of this Agreement a
provision which shall be as similar as possible in objectives as intended
by the parties.
17) SOLE UNDERSTANDING
No representations, warranties, conditions or other statements not
contained herein or in the Supply Agreement shall be binding on the parties
hereto, and no variation of the terms hereof shall be binding on the
parties unless made in writing by the authorized representatives of the
parties. This Agreement and the Supply Agreement and the documents referred
to herein together contain the entire agreement between the parties with
respect to their subject matter and supersede and replace all prior
agreements written or oral with respect thereto.
18) PARTNERSHIP
Nothing in this Agreement shall constitute a partnership between the
parties hereto.
19) HEADINGS
The Headings of Sections shall not affect their interpretation.
20) EXECUTION IN COUNTERPARTS
This Agreement shall be executed in two (2) counterparts both of which
shall be considered one and the same agreement and shall become a binding
agreement when the two (2) counterparts have been signed by authorized
representatives of the parties and delivered to the other party.
IN WITNESS WHEREOF the parties have caused this Agreement to be executed by
their duly authorized officers.
SYNTHELABO PENWEST PHARMACEUTICALS CO.
By /s/Marc Guy, Jr. By /s/John V. Talley
------------------------------ -----------------------------
Title VP Synthelabo Title President
--------------------------- ---------------------------
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ANNEX A
PRODUCT SPECIFICATIONS
[to be provided]
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
ANNEX B
PPC PATENT RIGHTS
To the Agreement between SYNTHELABO and PPC of December 17, 1997.
LIST OF PATENT AND PATENT APPLICATIONS COVERING TIMERx
1) US Patent No. 4,994,276, entitled "Directly Compressible Sustained Release
Excipient," issued February 19, 1991.
2) US Patent No. 5,128,143, entitled "Sustained Release Excipient and Tablet
Formulation," issued July 7, 1992.
3) US Patent No. 5,135,757, entitled "Compressible Sustained Release Solid
Dosage Forms," issued August 4, 1992.
4) European Patent Application, Publication No. 0360562 entitled "Directly
Compressible Sustained Release Excipient," filed Sept. 19, 1989, issued
July 28, 1993 as Pub. No. 0360562B1.
5) [**]
6) [**]
7) International (PCT) Patent Application No. PCT/US94/02926, filed March 18,
1994.
8) Ireland, IE, Publication No. 65170.
9) Hungary, HU, Publication No. 72981.
10) Finland, FI, Publication No. 9505215.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
ANNEX C
TERRITORY
[**]
15
<PAGE> 1
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SUPPLY AGREEMENT
BY AND BETWEEN
SYNTHELABO GROUPE, a French Company having its legal office at 22, Avenue
Galilee - 92350 Le Plessis-Robinson (France)
hereinafter referred to as SYNTHELABO
AND
PENWEST PHARMACEUTICALS CO., a Washington State corporation having its legal
office at 2981 Route 22, Patterson, New York 12563 (USA)
hereinafter referred to as PPC
WITNESSETH
WHEREAS,
A) LEIRAS OY, Pansointie 45-47, 20210 TURKU - FINLAND (hereinafter called
"LEIRAS") has developed and is in possession of a medical product
containing Oxybutynin as active ingredient and called Cystrin, and is the
proprietor of valuable know-how, data, skills and other information in
relation thereto.
B) PPC is the owner of TIMERx Controlled Release System and certain patents
pertaining thereto.
C) LEIRAS and PPC have cooperated in a "Development Programme" whereby PPC
developed a slow-release tablet/slow release tablet formulation for LEIRAS'
Cystrin product, adjusting the TIMERx Controlled Release System and have
cooperated in the development and formulation of the Oxybutynin-TIMERx
product, which programme is now completed.
D) PPC and LEIRAS agreed that PPC shall supply SYNTHELABO with the TIMERx
Controlled Release System to enable SYNTHELABO to manufacture the slow
release formulation of LEIRAS' Cystrin product, hereinafter the PRODUCT.
PPC and SYNTHELABO have, concurrently with this Agreement entered into a
License Agreement regarding the licensing to SYNTHELABO of certain rights
under certain
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PPC patents (the "PATENT RIGHTS") and other rights as they relate to the
manufacture and sale of the PRODUCT (the "License Agreement").
E) The parties also wish to enter into arrangements for the manufacture and
supply of above said product on the basis of the terms and conditions set
out below.
NOW THEREFORE, the parties agree as follows
ARTICLE 1: DEFINITIONS
The terms defined in this article shall, for all purposes of this Agreement,
have the meanings specified in this Article 1 (applicable both to the singular
and the plural forms).
1.1 AGREEMENT: shall mean this document and all attachments or exhibits.
1.2 SUBSIDIARY: shall mean any corporation or other business entity of which at
least fifty percent (50%) of the total voting rights is owned by
SYNTHELABO.
1.3 CALENDAR YEAR: shall mean each consecutive twelve-month period beginning
January 1st, and ending December 31st.
1.4 OXYBUTYNIN: shall mean Oxybutynin and its pharmaceutically acceptable
salts, enantiomers and active metabolites.
1.5 TIMERx: shall mean the slow-release system developed by PPC and whose
specifications are set out in the Appendix 1 hereinafter attached.
1.6 PRODUCT: shall mean the final slow-release tablet dosage form of LEIRAS'
Cystrin medical product with Oxybutynin as active ingredient using the
TIMERx Controlled Release System referred to in item C) in the WHEREAS
section of this Agreement and containing 10mg of Oxybutynin and
corresponding in all respects with the specifications as defined in
Appendix 1 attached hereto (which is the same as ANNEX A to the License
Agreement).
1.7 TERRITORY: shall mean the TERRITORY defined in ANNEX C to the License
Agreement.
1.8 PPC MANUFACTURING TECHNOLOGY: shall have the meaning defined in the License
Agreement.
1.9 HEALTH REGISTRATION: shall have the meaning defined in the License
Agreement.
References to Sections, Clauses, and Appendices, are to Sections, Clauses, and
Appendices of this Agreement, except where noted otherwise.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
ARTICLE 2: SUBJECT
2.1 SYNTHELABO entrusts PPC with the manufacture of the TIMERx.
2.2 PPC shall supply SYNTHELABO with such quantities of said TIMERx as the
latter shall order.
2.3 TIMERx shall be supplied in the form detailed in Appendix 1 hereinafter
attached.
2.4 The manufacturing operations are:
o reception, storage of raw materials and packaging, material of the
TIMERx,
o manufacturing and packaging of the TIMERx,
o control and/or identification of raw materials, packaging material,
o packing and storage of the TIMERx as defined in Appendix 4 hereinafter
attached.
ARTICLE 3: EXCLUSIVITY
SYNTHELABO understands and agrees that a consistent source of the TIMERx from a
supplier with the know-how and rights to make it is essential to the successful
production of the PRODUCT, and accordingly SYNTHELABO agrees to obtain all of
its and its Subsidiaries' requirements of supplies of the TIMERx from PPC
exclusively throughout the duration of this Agreement, except only as provided
in Clause 14.2 below and in Section 2)B) of the License Agreement.
ARTICLE 4: QUANTITIES - PLANNING
At least [**] before the end of each year, SYNTHELABO shall communicate to PPC
its annual forecasts for each of the [**].
ARTICLE 5: FORECASTS AND ORDERS
5.1 At least [**] before the end of each year, SYNTHELABO shall confirm the
forecast for the following year, such forecast being calculated, and being
shown to be calculated, on a month-by-month basis.
On the 10th of each month M, SYNTHELABO shall place with PPC its firm
orders for the month [**].
The minimum quantities of each TIMERx to be ordered on each occasion are
set out in Appendix 2 hereinafter.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
5.2 A firm order will be considered to have been accepted by PPC unless it
informs SYNTHELABO by courier, [**] of SYNTHELABO's order, of a change in
the delivery dates. Saturdays and Sundays are excluded in calculating this
[**] period.
5.3 While this Agreement remains in force, all orders for the months [**] and
all [**], shall correspond to delivery obligations for PPC and removal
obligations for SYNTHELABO.
ARTICLE 6: SUPPLY AND CONTROL
All the raw materials, packaging materials and packaging necessary for PPC to
manufacture the TIMERx will be supplied, controlled and identified (according to
Appendix 4) by PPC at its facilities in the course of its activities in
connection with this Agreement.
ARTICLE 7: STOCK
The raw materials and packaging materials shall be stored by PPC under its sole
responsibility, prior to delivery of the final PRODUCT.
PPC is also solely responsible for the safe storage of the TIMERx prior to
delivery of the final PRODUCT.
PPC therefore commits itself to storing in appropriate conditions the raw
materials, packaging materials and TIMERx, taking all necessary precautions to
ensure that the same do not suffer any damage, disintegration or alteration, in
accordance with Good Manufacturing Practices and the European Guide.
ARTICLE 8: MANUFACTURING AND TIMERx QUALITY
8.1 PPC or its contractor will manufacture and package the TIMERx in the
factory of Boehringer Ingelheim in Ridgefield, Connecticut, USA. No change
in the manufacturing factory will take place without written notice to
SYNTHELABO by PPC.
8.2 PPC undertakes to manufacture and package the TIMERx according to the PPC
MANUFACTURING TECHNOLOGY and the applicable specifications.
PPC undertakes to control raw materials, packaging materials and TIMERx
according to the techniques and instructions for analysis in accordance
with the specifications.
PPC shall follow the current Good Manufacturing Practices in effect in the
U.S. and the European Guide, especially the chapter 7 of this Guide.
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<PAGE> 5
PPC hereby warrants that the TIMERx sold or to be sold to SYNTHELABO
hereunder will meet, at the time of shipment and receipt by SYNTHELABO
thereof, the specifications attached hereto in Appendix 1 and incorporated
herein by this reference. PPC also warrants that (i) it will, at the time
of shipment and receipt thereof, have a good and marketable (subject,
however, to SYNTHELABO's obtaining any required health or other
governmental regulatory licenses or permissions) title to the TIMERx sold
to SYNTHELABO and (ii) all TIMERx sold hereunder shall, on the date of
shipment and receipt, not be adulterated or misbranded within the meaning
of the United States Federal Food, Drug and Cosmetic Act, as amended from
time to time, and not be an article which may not, under the provisions of
Section 404 or 505 of the said act, be introduced into interstate commerce.
All sales of TIMERx shall be F.O.B. Patterson, New York (Incoterms 1990).
8.3 SYNTHELABO or its representative (expressly designated by SYNTHELABO) has
the right to verify at any time that the manufacture of the TIMERx is being
carried out in the proper manner in accordance with GMP and the European
Guide, but shall not, in doing so, have any right to view or learn any
confidential portions of the PPC MANUFACTURING TECHNOLOGY (unless and until
Section 2)B) of the License Agreement becomes effective). To this end, PPC
agrees to allow SYNTHELABO or such designate to have access to the
manufacturing and control areas, to take samples and in general to inspect
the relevant manufacturing operations, no more often than once every year
(unless more frequent visits are required due to persistent quality
problems), and upon at least 90 days' prior written notice to PPC.
PPC shall allow personnel from SYNTHELABO's Department of Quality Assurance
to investigate PPC's production unit and control laboratory no more often
than once every year (unless more frequent visits are required due to
persistent quality problems), and provided that SYNTHELABO gives at least
90 days' advance written warning.
8.4 A Quality Agreement: SYNTHELABO may request PPC to sign a Quality Charter
and PPC shall not unreasonably refuse to sign.
8.5 PPC shall provide SYNTHELABO for each lot of TIMERx with the documents and
samples specified in Appendix 4.
SYNTHELABO reserves the right to reject any batch which does not conform to
the corresponding specifications in Appendix 1 or Appendix 4. In this
event, provided it has SYNTHELABO's written approval, PPC can then recover
at PPC's expense the relevant raw materials, packaging materials and added
value.
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Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SYNTHELABO will be considered to have accepted without reserve a given
batch if it has made no written objection [**] of the batch being delivered
by PPC.
8.6 In the event of the parties agreeing in writing that a batch does not
conform to the specifications, PPC shall at its own expense, [**] days
thereafter, either replace the relevant batch or use the recovered
materials to manufacture a replacement batch (as provided for in Article
8.5 above).
8.7 In the event of a dispute as to the acceptance of a batch, the parties
agree to discuss the problem with a view to finding an amicable solution.
To the extent that the dispute cannot be resolved amicably, the issue shall
be referred to an independent expert nominated by one party and to whom the
other party does not object.
If the parties are not able to agree on an expert within two (2) months of
a party's objection, an independent expert will be appointed under the
rules the London Court of Commercial Arbitration after request by one of
the parties.
The expert so appointed will determine whether or not the TIMERx concerned
conforms with the specifications (including without limitation the
applicable procedures for analytical control as set forth in the
specifications) and the other requirements set forth or referred to in this
Agreement, and whether the manufacturing conditions have been properly
followed, having particular regard to the file provided by PPC for each
TIMERx batch number.
The parties agree here and now to accept whatever conclusion is reached by
the expert. If the expert considers the TIMERx to be clearly defective, all
his fees and expenses will be paid for by PPC, which party shall also be
bound to reimburse whatever sums SYNTHELABO has already paid for the
defective batch.
If the expert considers the TIMERx to the clearly not defective, all his
fees and expenses will be paid for by SYNTHELABO.
The party taking in charge the destruction of the TIMERx will send to the
other party a certificate of destruction with the following:
o name of the TIMERx
o batch number
o quantity
o name of the company who has destroyed the TIMERx.
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8.8 PPC shall defend, indemnify and hold SYNTHELABO harmless from and against
all financial liability arising from any claim or action brought against
SYNTHELABO by a third party for personal harm resulting from a defect in
the TIMERx that causes it to be out of conformity with the applicable
specifications; provided that SYNTHELABO shall provide PPC with written
notice of any claim or action within ten (10) days of its receipt thereof,
and shall afford PPC the right to control the defense and settlement of
such claim or action. Additionally, SYNTHELABO shall provide reasonable
assistance to PPC in the defense of such claim or action.
8.9 Nevertheless, PPC declines all responsibility arising from the use of the
TIMERx otherwise than in accordance with the specifications of the Quality
Charter, and shall not be liable for any claim, loss or damage whatsoever
arising from such use. SYNTHELABO shall provide to PPC and its suppliers
defense and indemnity, on terms similar to those in Clause 8.8, for all
financial liability arising from any claim or action brought against PPC or
such suppliers by a third party resulting from any aspect of the PRODUCT or
its marketing or use that is not due to a defect in the TIMERx that causes
it to be out of conformity with the applicable specifications.
8.10 Each party shall take out insurance in accordance with industry standards
to cover all such risks and shall at the other party's request communicate
the details of such insurance coverage to such other party.
ARTICLE 9: DELIVERY CONDITIONS
9.1 TIMERx shall be delivered FOB Patterson N.Y., and SYNTHELABO shall arrange
for shipment at its risk and expense.
9.2 PPC will deliver the TIMERx packaged and labeled in accordance with
Appendix 4. Each delivery must be accompanied by the documents listed in
Appendix 4. It is agreed that the ownership of the TIMERx passes upon
delivery at the FOB point.
ARTICLE 10: PRICE
The sale price of the TIMERx, conditions of payment and formula for revision of
the price are defined in Appendix 3 hereafter.
ARTICLE 11: PERSONNEL FEES AND EXPENSES
If at any time and for any reason any personnel of PPC or any contractors to PPC
are requested by SYNTHELABO or LEIRAS to travel outside the area of Patterson,
N.Y. in whole or in part for the benefit of SYNTHELABO, or to devote time in or
outside the Patterson area specifically to the needs of SYNTHELABO or to any
technology transfers called for hereunder, SYNTHELABO shall pay, or shall cause
LEIRAS to pay, PPC for all reasonable expenses associated with such travel, plus
a per diem fee equal to PPC's then-current charges for such personnel.
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ARTICLE 12: REGULATORY COMPLIANCE
12.1 Each party agrees to make to the relevant Authorities such declarations as
are necessary to comply with pharmaceutical law, it being understood and
agreed that obtaining and maintaining all HEALTH REGISTRATION shall be the
responsibility of SYNTHELABO or LEIRAS, at its or their expense.
12.2. Any term of this Agreement that does not comply with the law regulating
the pharmaceutical profession must be modified accordingly within the
shortest possible time.
ARTICLE 13: TERM
13.1 This Agreement shall commence with effect from the date hereof and, unless
terminated earlier pursuant to Clause 13.2 or 14, shall continue until the
last effective and enforceable date of any of the patents listed in
Appendix 5 hereinafter attached which the parties anticipate will be March
4, 2014; provided, however, that this Agreement will in any event
terminate, on a nation by nation basis, upon the termination or expiration
of the License Agreement, if it has not already done so.
13.2 If one party (hereinafter called "the Defaulting Party"):
13.2.1. is in the material breach of its obligations under this Agreement,
or
13.2.2. becomes insolvent or enters into liquidation (other than as a party
of a scheme for solvent reconstruction or amalgamation) or makes
assignment for the benefit of its creditors generally or has a
receiver or administrative receiver appointed of all or any of its
assets or if any event analogous to the foregoing shall occur of
the Defaulting Party in any jurisdiction where that party is
resident or carries on business, or
13.2.3. is unable by reason of the events and circumstances referred to in
Clause 8 to perform its obligations hereunder for a continuous
period of six (6) months,
the other party may at any time thereafter by notice in writing to the
Defaulting Party require the Defaulting Party to withdraw from this
Agreement provided that, in the case of breach capable of remedy, the
Defaulting Party shall have sixty (60) days from the date of such notice to
remedy the breach and, if the breach is remedied within such period, the
notice shall not take effect.
ARTICLE 14: TERMINATION
14.1 In the event of one of the parties being in breach of this Agreement, the
non-defaulting party may give notice to the Defaulting Party of the breach
and indicate its
8
<PAGE> 9
intention to terminate the Agreement if the breach is not remedied within
sixty (60) days of the notice.
14.2 SYNTHELABO may terminate the Agreement and cause Section 2)B) of the
License Agreement to become applicable, as provided in such Section 2)B),
in the following circumstances:
a) PPC is prevented from providing the TIMERx to PPC by reason of legal,
administrative, regulatory or judicial decision lasting for more than
60 days,
c) repeated failure of PPC to meet the delivery dates such that PPC
fails, over a continuing period of sixty days, to supply SYNTHELABO
with its and its Subsidiaries' requirements of TIMERx, or
d) the quality of the TIMERx provided by PPC is persistently out of
conformance with the specifications, such that PPC fails, over a
continuing period of sixty days, to supply SYNTHELABO with its and its
Subsidiaries' requirements of TIMERx.
14.3 Termination of this Agreement in accordance with this article will not give
either party the right to any indemnity whatsoever from the other.
ARTICLE 15: FORCE MAJEURE
15.1 The term "Force Majeure" is understood to mean all acts or events that are
unforeseeable and unavoidable, or simply unavoidable, such as natural
disasters, fires, floods, explosions, riots, wars, emergency restrictions
imposed by military or civil authorities, strikes and lock-outs, shortages,
and in general, any circumstance which is beyond the control of the parties
and renders impossible the execution of this Agreement.
15.2 If either party is unable to perform this Agreement by reason of force
majeure, it shall notify the other party as soon as it becomes aware of the
act or event resulting of a force majeure, and in any event no later than
48 hours from such act or event.
15.3 The non-performing party must employ all its efforts to overcome its
default of performance and to assume its obligations under this Agreement
as quick as possible. Nevertheless, neither party should employ methods it
deems inappropriate in order to avoid or to end a strike.
15.4 No indemnity will be payable by one party to the other as a result of
non-performance due to force majeure.
9
<PAGE> 10
ARTICLE 16: ASSIGNMENT AND TRANSFER
This Agreement may not be assigned or transferred, in total or in part, by
either party without the prior written consent of the other. It is understood
that SYNTHELABO will assign its rights hereunder to one or more of its
Subsidiaries that own and operate approved and certified manufacturing
facilities in the TERRITORY. PPC will not unreasonably withhold its consent to
such assignments to such qualified Subsidiaries. It is also understood and
agreed that PPC shall have the right to assign or transfer this Agreement to any
of its affiliates or in connection with any sale of all or substantially all
assets of PPC related to the TIMERx Controlled Release System.
ARTICLE 17: JURISDICTION
This Agreement shall be governed by and interpreted in accordance with English
Law. All disputes, controversies, or differences which may arise between the
parties, out of or in relation to or in connection with this Agreement or any
breach thereof shall be finally settled by arbitration held in London pursuant
to the then obtaining Rules of the London Court of International Arbitration, by
which each party hereto agrees to be bound. The arbitration language shall be
English.
ARTICLE 18: NOTICES
18.1 Any notice to be given under this Agreement shall be in writing in English
and shall be deemed duly given if signed by or on behalf of a duly
authorized office of the party giving the notice and if left at or sent by
registered or recorded delivery post or by telex, telegram, facsimile
transmission or other means of telecommunication in permanent written form
to the address of the party set out above or such other address as either
party may from time to time notify to the other. Any such notice or other
communication shall be deemed to be given:
o at the time when the same is handed to or left at the address of the
party to be served,
o by post on the day (not being a Sunday or public holiday) five (5) days
following the day of posting,
o in the case of a telegram, telex or facsimile transmission in the next
following day.
18.2 Notices shall be addressed to the parties under their above-mentioned
addresses.
18.3 In proving the giving of notice, it shall be sufficient to prove that the
notice was left or that the envelope containing the notice was properly
addressed and dispatched (as the case may be).
10
<PAGE> 11
ARTICLE 19: NO IMPLIED WAIVER
A waiver by either party of any right under this Agreement in any one instance
shall not be deemed or construed to be a waiver of such right for any similar
instance in the future or of any subsequent breach hereof, nor shall it prevent
a subsequent enforcement of that right.
ARTICLE 20: SEVERABILITY
If any provision(s) of this Agreement are or become invalid, or are ruled
illegal or are deemed unenforceable under the current applicable law from time
to time in effect during the term hereof, it is the intention of the parties
that the remainder of this Agreement shall not be affected thereby. It is
further the intention of the parties that in lieu of each such provision which
is invalid, illegal or unenforceable, there will be substituted or added as part
of this Agreement a provision which shall be as similar as possible in
objectives as intended by the parties.
ARTICLE 21: SOLE UNDERSTANDING
No representations, warranties, conditions or other statements not contained
herein or in the License Agreement shall be binding on the parties hereto, and
no variation of the terms hereof shall be binding on the parties, unless made in
writing by the authorized representatives of the parties.
ARTICLE 22: PARTNERSHIP
Nothing in this Agreement shall constitute a partnership between the parties
hereto.
ARTICLE 23: HEADINGS
The Headings of Clauses shall not affect their interpretation.
ARTICLE 24: EXECUTION IN COUNTERPARTS
This Agreement shall be executed in two (2) counterparts, both of which shall be
considered one and same agreement and shall become a binding agreement when the
two (2) counterparts have been signed by authorized representatives of the
parties and delivered to the other party.
11
<PAGE> 12
IN WITNESS WHEREOF, the parties have cause this Agreement to be executed by
their duly authorized officers.
Made at
on
in two originals
SYNTHELABO GROUPE PENWEST PHARMACEUTICALS CO.
By /s/ Marc Guy, Jr. By /s/ John V. Talley
--------------------------------- ---------------------------
Title VP Synthelabo Title President
------------------------------ ------------------------
12
<PAGE> 13
SUPPLY AGREEMENT
----------------
BETWEEN SYNTHELABO AND PPC
APPENDIX 1
----------
PRODUCT SPECIFICATIONS
(This will include the specifications of TIMERx that were sent to Synthelabo.)
13
<PAGE> 14
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SUPPLY AGREEMENT
----------------
BETWEEN SYNTHELABO AND PPC
APPENDIX 2
----------
MINIMUM ORDER SIZE:
-------------------
[**]
14
<PAGE> 15
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
SUPPLY AGREEMENT
BETWEEN SYNTHELABO AND PPC
APPENDIX 3
PRICES AND REVISION OF PRICES
1) Except as provided in Section 2)B) of the License Agreement, SYNTHELABO
shall purchase directly from PPC all of its and its Subsidiaries'
requirements of TIMERx for the Product's manufacture, use or sale in the
Territory and PPC shall sell SYNTHELABO all of SYNTHELABO's and its
Subsidiaries' requirements of TIMERx for the said purpose. The price to be
charged by TIMERx to SYNTHELABO in fulfillment of such requirements shall
be USD [**], subject to increase [**]. Any price revision in excess of the
annual change in the US Pharmaceutical Producers Index, as published by the
US Bureau of Labor Statistics, will not be instituted unless the parties
have discussed the reasons and need for such increase and SYNTHELABO has
consented thereto, which consent will not be withheld unreasonably.
All monies due to PPC under this Agreement shall be paid in United States
Dollars to PPC in Patterson, New York, USA. The exchange rate between the
French franc and the US dollar is fixed by the parties at the effective
date of this Agreement at [**] French francs to one (1) US dollar. If at
any time during the term of this Agreement the value of the French franc
depreciates or appreciates, in comparison to the exchange rate fixed above,
by more than [**] and sustains that level for at least [**] days, the
parties will meet to renegotiate price terms acceptable to both parties, in
an attempt to agree on a price in USD whereby the parties will equally
share the burdens and benefits of the portion of such fluctuation in the
exchange rate in excess of [**]. If the value of the French franc
depreciates or appreciates by more than [**], and sustains that level for
at least [**] an adjustment will be made to the price in USD to reflect
that portion of such depreciation or appreciation that is in excess of
[**]. No adjustments will be made for fluctuations in the value of the
French franc of [**] or less, up or down, from the exchange rate fixed at
the effective date. This paragraph will be reviewed by the parties and
revised to the extent necessary to reflect the adoption by the European
Union (with France's participation) of the Euro currency.
2) Payment shall be made by SYNTHELABO within sixty (60) days of receipt of
the goods, unless otherwise agreed between the parties by bank transfer.
15
<PAGE> 16
SUPPLY AGREEMENT
----------------
BETWEEN SYNTHELABO AND PPC
APPENDIX 4
----------
TECHNICAL FILE
--------------
[List packaging and storage specifications and required documentation and
samples to be submitted with each delivered batch.]
16
<PAGE> 17
Confidential Materials omitted and filed separately with the
Securities and Exchange Commission. Asterisks denote omissions.
APPENDIX 5
PPC PATENT RIGHTS
To the Agreement between SYNTHELABO and PPC of December 17, 1997.
LIST OF PATENT AND PATENT APPLICATIONS COVERING TIMERx
1) US Patent No. 4,994,276, entitled "Directly Compressible Sustained Release
Excipient," issued February 19, 1991.
2) US Patent No. 5,128,143, entitled "Sustained Release Excipient and Tablet
Formulation," issued July 7, 1992.
3) US Patent No. 5,135,757, entitled "Compressible Sustained Release Solid
Dosage Forms," issued August 4, 1992.
4) European Patent Application, Publication No. 0360562 entitled "Directly
Compressible Sustained Release Excipient," filed Sept. 19, 1989, issued
July 28, 1993 as Pub. No. 0360562B1.
5) [**]
6) US Patent Application Serial No. 08,206,416, filed March 4, 1994, issued as
US Patent No. 5,399,359 on March 21, 1995, "CONTROLLED RELEASE OXYBUTYNIN
FORMULATIONS."
7) [**]
8) Ireland, IE, Publication No. 65170.
9) Hungary, HU, Publication No. 72981.
10) Finland, FI, Publication No. 9505215.
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT DECEMBER 31, 1997 AND THE CONSOLIDATED STATEMENTS
OF OPERATIONS, SHAREHOLDER'S EQUITY (DEFICIT) AND CASH FLOWS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 938
<SECURITIES> 0
<RECEIVABLES> 3,342
<ALLOWANCES> 337
<INVENTORY> 8,691
<CURRENT-ASSETS> 12,992
<PP&E> 32,233
<DEPRECIATION> 9,922
<TOTAL-ASSETS> 37,436
<CURRENT-LIABILITIES> 46,425
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (12,308)
<TOTAL-LIABILITY-AND-EQUITY> 37,436
<SALES> 26,030
<TOTAL-REVENUES> 26,941
<CGS> 19,929
<TOTAL-COSTS> 19,929
<OTHER-EXPENSES> 14,184
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,172)
<INCOME-TAX> 144
<INCOME-CONTINUING> (7,316)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,316)
<EPS-PRIMARY> (.66)
<EPS-DILUTED> (.66)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1998 AND THE CONSOLIDATED STATEMENT OF
OPERATIONS AND CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 723
<SECURITIES> 0
<RECEIVABLES> 4,050
<ALLOWANCES> 337
<INVENTORY> 7,337
<CURRENT-ASSETS> 13,092
<PP&E> 32,902
<DEPRECIATION> 10,539
<TOTAL-ASSETS> 37,695
<CURRENT-LIABILITIES> 48,637
<BONDS> 0
0
0
<COMMON> 11
<OTHER-SE> (14,414)
<TOTAL-LIABILITY-AND-EQUITY> 37,695
<SALES> 7,761
<TOTAL-REVENUES> 7,786
<CGS> 5,836
<TOTAL-COSTS> 5,836
<OTHER-EXPENSES> 3,642
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,692)
<INCOME-TAX> 338
<INCOME-CONTINUING> (2,030)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,030)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
