<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 17, 1998
REGISTRATION NO.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10/A
AMENDMENT NO. 1
TO REGISTRATION STATEMENT ON 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)
------------------------
<TABLE>
<S> <C>
WASHINGTON 91-1513032
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
<TABLE>
<S> <C>
2981 ROUTE 22, 12563-9970
PATTERSON, NY (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
</TABLE>
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
PREFERRED STOCK PURCHASE RIGHTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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
ITEM ITEM CAPTION CAPTION IN INFORMATION STATEMENT
- ---- ------------ --------------------------------
<C> <S> <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
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> 3
[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,
<TABLE>
<S> <C>
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.
</TABLE>
<PAGE> 4
SUBJECT TO COMPLETION, DATED JULY 17, 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 (including the
associated preferred stock purchase rights, "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 has been 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> 5
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> 6
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.................................................... 30
Management.................................................. 53
Certain Transactions........................................ 61
Security Ownership of Certain Beneficial Owners and
Management................................................ 62
Arrangements Between the Company and Penford................ 64
Description of Capital Stock................................ 67
Indemnification of Directors and Officers................... 70
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> 7
- --------------------------------------------------------------------------------
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 five 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
- --------------------------------------------------------------------------------
4
<PAGE> 8
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
5
<PAGE> 9
- --------------------------------------------------------------------------------
THE DISTRIBUTION
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 has been 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.
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
- --------------------------------------------------------------------------------
6
<PAGE> 10
- --------------------------------------------------------------------------------
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, Certain
Charter Provisions and
Rights Agreement............ Certain provisions under the Washington
Business Corporation Act, the Amended and
Restated Articles of Incorporation of the
Company, and amended, the Amended and Restated
Bylaws of the Company and the Rights Agreement
(the "Rights Agreement") dated as of
, 1998 between the Company and
[ ], as Rights Agent (the "Rights
Agent") 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.
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."
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7
<PAGE> 11
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------ -------
(UNAUDITED)
<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
<PAGE> 12
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
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<PAGE> 13
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 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
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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 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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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
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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.
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
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development and/or commercialization of product candidates will be delayed, and
the Company would be required to devote additional resources to product
development and commercialization or terminate certain development programs.
Also, these relationships generally may be terminated at the discretion of the
Company's collaborators, in some cases with only limited notice to the Company.
For instance, Mylan may terminate its agreements with the Company at any time
upon 90 days prior written notice under specified circumstances. The termination
of collaborative arrangements could have a material adverse effect on the
Company's business, financial condition and results of operations. There also
can be no assurance that disputes will not arise with respect to the ownership
of rights to any technology developed with third parties. These and other
possible disagreements with collaborators could lead to delays in the
development or commercialization of product candidates or could result in
litigation or arbitration, which could be time consuming and expensive and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, 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 and Ditropan CR which received
regulatory approval for commercial sale in the Netherlands, Austria and Ireland
in June 1998, 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."
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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 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
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capital. The Credit Facility contains a number of non-financial covenants that
are applicable to Penwest. Any breach of these covenants by the Company would
constitute a default by the Company under the Credit Facility. In addition, the
Credit Facility provides that a breach by Penford of its guarantee of the
Company's indebtedness under the Credit Facility or the occurrence of an event
of default under any credit agreement with Penford under which the lender is
either the sole or a participating 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 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 provides that the
maximum amount available to Penwest under the Credit Facility (initially $15.0
million) will be reduced by the amount of any net proceeds from any financing
conducted by the Company and that the Company will repay any outstanding amounts
under the Credit Facility in excess of the new maximum amount. 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
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.
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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 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
17
<PAGE> 21
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
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
18
<PAGE> 22
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.
The Credit Facility contains a number of non-financial covenants that are
applicable to Penwest, including without limitation, restrictions on the
incurrence of additional debt and on the payment of dividends. Any breach of
these covenants by the Company would constitute a default by the Company under
the Credit Facility. In addition, the Credit Facility provides that a breach by
Penford of its guarantee of the Company's indebtedness under the Credit Facility
or the occurrence of an event of default under any credit agreement with Penford
under which the lender is either the sole or a participating lender, including
without limitation, an event of default arising from the failure of Penford to
satisfy certain financial covenants requiring, among other things, the
maintenance of a minimum net worth and of certain financial ratios, 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."
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
19
<PAGE> 23
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 proprietary rights, public concern as to the
safety of drugs developed by the Company or others, changes
20
<PAGE> 24
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, CERTAIN CHARTER PROVISIONS AND RIGHTS
AGREEMENT
The Company's Amended and Restated Articles of Incorporation, as amended,
the Company's Amended and Restated Bylaws, certain provisions of the Washington
Business Corporation Act and the Rights Agreement contain several provisions
that could make more difficult a change of control of Penwest in a transaction
not approved by the Board. 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. While the Company has no present intention to
issue shares of Preferred Stock other than in connection with the Rights
Agreement, 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
21
<PAGE> 25
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 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."
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> 26
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 1997 1998
------- ------- ------- ------- ------- ------- -------
(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) $ (0.35) $ (0.66) $ (0.08) $ (0.18)
======= ======= ======= ======= ======= ======= =======
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:
Cash 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> 27
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.
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<PAGE> 28
Except for Cystrin CR, which received marketing approval in Finland in
October 1997, and Ditropan CR, which received marketing approval in the
Netherlands, Austria and Ireland in June 1998, 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.
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
25
<PAGE> 29
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.
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.
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<PAGE> 30
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 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.
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<PAGE> 31
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 provides that the
maximum amount available to Penwest under the Credit Facility (initially $15.0
million) will be reduced by the amount of any net proceeds from any financing
conducted by the Company and that the Company will repay any outstanding amounts
under the Credit Facility in excess of the new maximum amount. 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 $12.0 million, primarily in
1999 and 2000. However, either the Company or Endo may terminate the agreement
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 August 31, 2000, all
outstanding amounts under the Credit Facility will become automatically due and
payable. Borrowings under the Credit Facility bear interest at a rate equal to
LIBOR, plus 1.25%. The Credit Facility contains a number of non-financial
covenants that are applicable to Penwest, including without limitation,
restrictions on the incurrence of additional debt and on the payment of
dividends. Any breach of these covenants by the Company would constitute a
default by the Company under the Credit Facility. In addition, the Credit
Facility provides that a breach by Penford of its guarantee of the Company's
indebtedness under the Credit Facility or the occurrence of a default under any
credit agreement with Penford under which the lender is either the sole or a
participating lender, including without limitation, an event of default arising
from the failure of Penford to satisfy certain financial conditions requiring,
among other things, the maintenance of a minimum net worth and of certain
financial ratios, 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
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<PAGE> 32
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
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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.
[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
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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 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
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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.
- 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,
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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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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.
<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 Approved/Registration/ Synthelabo
(oxybutynin) Incontinence Clinical Studies(3)(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)
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. Synthelabo received
marketing approval for Ditropan CR in the Netherlands, Austria and Ireland
in June 1998.
(4) Registration/Clinical Studies indicates that the product is in registration
in specific countries 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. Synthelabo
received marketing approval in the Netherlands, Austria and Ireland for Ditropan
CR in June 1998.
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
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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."
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.
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.
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
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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 royalties on the sale of the products covered by
such collaborative arrangements and payments for the purchase of formulated
TIMERx material. Assuming that
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all milestones are achieved under its collaborative arrangements, the Company
would be entitled to receive up to an aggregate of $10.4 million in upfront fees
and milestone payments under its 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 August 1996, the Company entered into a product development and supply
agreement with Kremers with respect to the development of a generic version of
Covera HS (verapamil hydrochloride), based on the
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Company's TIMERx technologies. Kremers is the generics division of the
research-based pharmaceutical company, Schwarz Pharma Inc.
Under the product development and supply agreement, the Company is
responsible for formulating Covera HS and for manufacturing and supplying TIMERx
material to Kremers for use in Covera HS, and Kremers is responsible for
conducting bioequivalence studies, preparing all regulatory applications and
submissions and manufacturing and marketing Covera HS in the United States,
Canada and Mexico.
The 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 the product development and supply agreement if,
due to changed circumstances, Kremers reasonably determines that the potential
commercial viability of Covera HS 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 Covera HS 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 Covera HS in the
United States, Kremers may terminate the product development and supply
agreement 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 Covera HS 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 agreement and is entitled to additional milestone payments upon the
continued development of Covera HS. The Company also is entitled to royalties on
the sale of Covera HS. However, both milestone payments and the royalties
otherwise due under the product development and supply agreement may be reduced
in the event that there are competing generic controlled release formulations of
Covera HS on the market and available for retail sale.
In addition, Kremers has agreed that, during the term of the product
development and supply agreement, it will purchase formulated TIMERx material
for use in Covera HS exclusively from the Company at specified prices. These
prices will be reduced in the event that there are competing generic versions of
Covera HS on the market and available for retail sale.
The Company is also a party to a product development and supply agreement
with Kremers with respect to the development of a generic version of Cardizem CD
(diltiazem) based on the Company's TIMERx technologies. The terms of this
agreement are substantially similar to the product development and supply
agreement entered into by the Company with respect to Covera HS. On July 9,
1998, Kremers notified the Company that it was exercising its right to terminate
the Cardizem CD product development and supply agreement effective as of August
20, 1998. Kremers based this termination on its determination that, due to a
significant change of circumstances since the execution of the product
development and supply agreement, including without limitation the filing of
competing ANDAs with respect to three different generic versions of Cardizem CD,
the potential commercial viability of the product did not justify the use of
best efforts by Kremers under the agreement.
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
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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.
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
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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 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),
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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.
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
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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.
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.
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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 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
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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.
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
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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 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.
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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 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,
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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.
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
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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.
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
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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.
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.
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<PAGE> 55
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> 56
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> 57
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.
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<PAGE> 58
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 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.
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<PAGE> 59
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.
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
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<PAGE> 60
purchase shares of Penford common stock have been granted to the Named Executive
Officers since December 31, 1997.
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
--------------------------- VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED IN-THE-MONEY
SHARES OF OPTIONS AS OF 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 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
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<PAGE> 61
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.
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.
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<PAGE> 62
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
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such employee's regular pay) to be deducted by the Company from such pay during
an Offering Period. On the last day of such Offering Period, the employee is
deemed to have exercised the option, at the option exercise price, to the extent
of accumulated payroll deductions. Under the terms of the Purchase Plan, the
option price is an amount equal to 85% of the fair market value per share of the
Common Stock on either the first day or the last day of each Offering Period,
whichever is lower. In no event may an employee purchase in any one Offering
Period a number of shares which is more than the number determined by dividing
$12,500 by the closing price of a share of Common Stock on the commencement date
of each Offering Period. The Compensation Committee may, at its discretion,
choose an Offering Period of 12 months or less for each of the offerings and
choose a different Offering Period for each offering.
If an employee is not a participant on the last day of an Offering Period,
such employee is not entitled to exercise any option, and the amount of such
employee's accumulated payroll deductions will be refunded without interest. An
employee's rights under the Purchase Plan terminate upon voluntary withdrawal
from the Purchase Plan at any time, or when such employee ceases employment for
any reason.
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 average of the high and low
trading prices of the Penford common stock on the Nasdaq National Market on the
Distribution Date and then dividing the result by the average of the high and
low trading prices 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 average of the high and low trading prices 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 average of
the high and low trading prices 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.
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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."
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<PAGE> 65
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
NUMBER OUTSTANDING SHARES
NAME(1) 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.
(3) Share ownership based on Schedule 13G/A filed with the Commission on
February 10, 1998.
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(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.
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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 average of the high and low trading prices of
the Penford common stock on the Nasdaq National Market on the Distribution Date
and then dividing the result by the average of the high and low trading prices
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 average of the high and low trading prices 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 average of the high and low trading prices
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
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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.
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 ending
August 31, 2000, 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
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<PAGE> 69
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.
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 provides that the breach by Penford of
its guarantee of the Company's indebtedness under the Credit Facility or the
occurrence of an event of default under any credit agreement with Penford under
which the lender is either the sole or participating lender, including without
limitation, an event or default arising from the failure of Penford to satisfy
certain financial covenants requiring, among other things, the maintenance of a
minimum net worth and of certain financial ratios, 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."
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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
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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 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.
RIGHTS AGREEMENT
On June 25, 1998, the Board declared a dividend of one right for each
outstanding share of the Common Stock (the "Right") to shareholders of record at
the close of business on July [ ], 1998 (the "Record Date"). Each Right
entitles the registered holder to purchase from the Company one one-thousandth
of a share of Series A Junior Participating Preferred Stock, $.001 par value per
share (the "Series A Preferred Stock"), at a purchase price of $60 in cash
("Purchase Price"), subject to adjustment. The description and terms of the
Rights are set forth in a Rights Agreement, and the following description of the
Rights does not purport to be complete and is qualified in its entirety by
reference to the Rights Agreement.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock and a "Rights
Distribution Date" will occur upon the earlier of (i) 10 business days (or such
later date as may be determined by the Board) following the later of (a) a
public announcement that a person or group of affiliated or associated persons
(a "Rights Acquiring Person") has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of Common Stock or
(b) the first
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date on which an executive officer of the Company has actual knowledge that a
Rights Acquiring Person has become such (the "Stock Acquisition Date"), or (ii)
10 business days (or such later date as may be determined by the Board)
following the commencement of a tender offer or exchange offer that would result
in a person or group beneficially owning 15% or more of such outstanding shares
of Common Stock. Until the Rights Distribution Date (or earlier redemption or
expiration of the Rights), (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred only with such Common Stock certificates,
(ii) new Common Stock certificates issued after the Record Date will contain a
notation incorporating the Rights Agreement by reference and (iii) the surrender
for transfer of any certificates for Common Stock outstanding, even without such
notation, will also constitute the transfer of the Rights associated with the
Common Stock represented by such certificate.
The Rights are not exercisable until the Rights Distribution Date and will
expire upon the close of business on July [ ], 2008 (the "Final Expiration
Date") unless earlier redeemed or exchanged as described below. As soon as
practicable after the Rights Distribution Date, separate Rights Certificates
will be mailed to holders of record of the Common Stock as of the close of
business on the Rights Distribution Date and, thereafter, the separate Rights
Certificates alone will represent the Rights. Except as otherwise determined by
the Board, and except for shares of Common Stock issued upon exercise,
conversion or exchange of then outstanding options, convertible or exchangeable
securities or other contingent obligations to issue shares, only shares of
Common Stock issued prior to the Rights Distribution Date will be issued with
Rights.
In the event that any Person becomes a Rights Acquiring Person, unless the
event causing the 15% threshold to be crossed is a Permitted Offer (as defined
in the Rights Agreement), then, promptly following the first occurrence of such
event, each holder of a Right (except as provided below and in Section 7(e) of
the Rights Agreement) shall thereafter have the right to receive, upon exercise,
that number of shares of Common Stock of the Company (or, in certain
circumstances, cash, property or other securities of the Company) which equals
the exercise price of the Right divided by 50% of the current market price (as
defined in the Rights Agreement) per share of Common Stock at the date of the
occurrence of such event. However, Rights are not exercisable following such
event until such time as the Rights are no longer redeemable by the Company as
described below. Notwithstanding any of the foregoing, following the occurrence
of such event, all Rights that are, or (under certain circumstances specified in
the Rights Agreement) were, beneficially owned by any Rights Acquiring Person
will be null and void. The event summarized in this paragraph is referred to as
a "Section 11(a)(ii) Event."
In the event that, at any time after any Person becomes a Rights Acquiring
Person, (i) the Company is consolidated with, or merged with and into, another
entity and the Company is not the surviving entity of such consolidation or
merger (other than a consolidation or merger which follows a Permitted Offer) or
if the Company is the surviving entity, but shares of its outstanding Common
Stock are changed or exchanged for stock or securities (of any other person) or
cash or any other property, or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, that number of shares of common stock of the
acquiring company which equals the exercise price of the Right divided by 50% of
the current market price of such common stock at the date of the occurrence of
the event. The events summarized in this paragraph are referred to as "Section
13 Events." A Section 11(a)(ii) Event and Section 13 Events are collectively
referred to as "Triggering Events."
At any time after the occurrence of a Section 11(a)(ii) Event, subject to
certain conditions, the Board may exchange the Rights (other than Rights owned
by such Rights Acquiring Person which have become void), in whole or in part, at
an exchange ratio of one share of Common Stock, or one one-thousandth of a share
of Series A Preferred Stock (or of a share of a class or series of the Company's
preferred stock having equivalent rights, preferences and privileges), per Right
(subject to adjustment).
The Purchase Price payable, and the number of units of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A Preferred Stock, (ii) if holders of the Series A Preferred Stock are
granted certain rights or warrants to
69
<PAGE> 73
subscribe for Series A Preferred Stock or convertible securities at less than
the then-current market price of the Series A Preferred Stock, or (iii) upon the
distribution to holders of the Series A Preferred Stock of evidences of
indebtedness or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings) or of subscription rights or warrants (other than
those referred to above). The number of Rights associated with each share of
Common Stock is also subject to adjustment in the event of a stock split of the
Common Stock or a stock dividend on the Common Stock payable in Common Stock or
subdivisions, consolidations or combinations of the Common Stock occurring, in
any such case, prior to the Rights Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Series A Preferred Stock (other than fractions
which are integral multiples of one one-thousandth of a share of Series A
Preferred Stock) will be issued and, in lieu thereof, an adjustment in cash will
be made based on the market price of the Series A Preferred Stock on the last
trading date prior to the date of exercise.
Series A Preferred Stock purchasable upon exercise of the Rights will not
be redeemable. Each share of Series A Preferred Stock will be entitled to
receive, when, as and if declared by the Board, a minimum preferential quarterly
dividend payment of $10 per share or, if greater, an aggregate dividend of 1,000
times the dividend declared per share of Common Stock. In the event of
liquidation, the holders of the Series A Preferred Stock will be entitled to a
minimum preferential liquidation payment of $1,000 per share and will be
entitled to an aggregate payment of 1,000 times the payment made per share of
Common Stock. Each share of Series A Preferred Stock will have 1,000 votes,
voting together with the Common Stock. In the event of any merger, consolidation
or other transaction in which Common Stock is changed or exchanged, each share
of Series A Preferred Stock will be entitled to receive 1,000 times the amount
received per share of Common Stock. These rights are protected by customary
antidilution provisions. Because of the nature of the Series A Preferred Stock's
dividend, liquidation and voting rights, the value of one one-thousandth of a
share of Series A Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Common Stock.
At any time prior to the earlier of (i) the tenth Business Day (or such
later date as may be determined by the Board) after the Stock Acquisition Date,
or (ii) the Final Expiration Date, the Company may redeem the Rights in whole,
but not in part, at a price of $.001 per Right (the "Redemption Price"), payable
in cash or stock, provided, however, that if a majority of the Board is
comprised of persons elected at a meeting of shareholders who were not nominated
by the Board in office immediately prior to such meeting, then the Rights may
not be redeemed for a period of 90 days after such election if such redemption
is reasonably likely to have the purpose or effect of allowing any person to
become a Rights Acquiring Person or otherwise facilitating the occurrence of a
Triggering Event or a transaction with a Rights Acquiring Person. Immediately
upon the action of the Board ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price. The Rights may also be redeemable following certain other
circumstances specified in the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a shareholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to shareholders or to the Company, shareholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
Subject to certain exceptions, any of the provisions of the Rights
Agreement may be amended by the Board prior to such time as the Rights are no
longer redeemable.
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
70
<PAGE> 74
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.
71
<PAGE> 75
PENWEST PHARMACEUTICALS CO.
INDEX TO FINANCIAL STATEMENTS
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)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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
</TABLE>
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996 AND FOR THE
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<S> <C>
Report of Ernst & Young LLP................................. F-9
Financial Statements
Consolidated Balance Sheets............................... F-10
Consolidated Statements of Operations..................... F-11
Consolidated Statements of Shareholder's Equity
(Deficit).............................................. F-12
Consolidated Statements of Cash Flows..................... F-13
Notes to Consolidated Financial Statements................ F-14
</TABLE>
F-1
<PAGE> 76
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> 77
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> 78
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> 79
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.
F-5
<PAGE> 80
PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-6
<PAGE> 81
PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-7
<PAGE> 82
PENWEST PHARMACEUTICALS CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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-8
<PAGE> 83
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-9
<PAGE> 84
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-10
<PAGE> 85
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-11
<PAGE> 86
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-12
<PAGE> 87
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-13
<PAGE> 88
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:
<TABLE>
<S> <C>
Buildings................................................... 20-25 years
Machinery and equipment..................................... 10-12 years
Office furniture and equipment.............................. 5-10 years
</TABLE>
F-14
<PAGE> 89
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
F-15
<PAGE> 90
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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-16
<PAGE> 91
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-17
<PAGE> 92
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-18
<PAGE> 93
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-19
<PAGE> 94
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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,
F-20
<PAGE> 95
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
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>
F-21
<PAGE> 96
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-22
<PAGE> 97
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-23
<PAGE> 98
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 August 1996, the Company entered into a product development and supply
agreement with Kremers Urban Development Company ("Kremers") with respect to the
development of a generic version of Covera HS (verapamil hydrochloride), based
on the Company's TIMERx technology. Under the product development and supply
agreement, the Company is responsible for formulating Covera HS and for
manufacturing and supplying TIMERx material to Kremers for use in Covera HS, and
Kremers is responsible for conducting bioequivalence studies, preparing all
regulatory applications and submissions and manufacturing and marketing Covera
HS in the United States, Canada and Mexico. The Company has received
non-refundable milestone payments under the product development and supply
agreement and is entitled to additional milestone payments upon the continued
development of Covera HS. The Company also is entitled to royalties on the sale
of Covera HS. However, both milestone payments and the royalties otherwise due
under the product development and supply agreement may be reduced in the event
that there are competing generic controlled release formulations of Covera HS on
the market and available for retail sale. In addition, Kremers has agreed that,
during the term of the product development and supply agreement, it will
purchase formulated TIMERx material for use in Covera HS exclusively from the
Company at specified prices. These prices will be reduced in the event that
there are competing generic versions of Covera HS 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 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.
F-24
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PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
F-25
<PAGE> 100
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
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<PAGE> 101
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-27
<PAGE> 102
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<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.
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
F-28
<PAGE> 103
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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
F-29
<PAGE> 104
PENWEST PHARMACEUTICALS CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-30
<PAGE> 105
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:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
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.
3.4 -- Designation of Rights and Preference of Series A Junior
Participating Preferred Stock of the Company filed on July
17, 1998.
4.1* -- Specimen certificate representing the Common Stock.
4.2 -- Form of Rights Agreement dated as of , 1998
between the Company and the Rights Agent.
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 -- [Intentionally Omitted]
+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.
</TABLE>
II-1
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
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 Term Credit Facility dated July 2, 1998 by and
between the Company and the Bank of Nova Scotia.
21.1* -- Subsidiaries.
27.1** -- Financial Data Schedule (December 31, 1997).
27.2** -- Financial Data Schedule (March 31, 1998).
</TABLE>
- ---------------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-38389).
** Previously filed.
*** To be filed by amendment.
+ Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Commission.
II-2
<PAGE> 107
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.
By: /s/ TOD R. HAMACHEK
------------------------------------
Tod R. Hamachek
Chairman of the Board and
Chief Executive Officer
Date: July 17, 1998
II-3
<PAGE> 108
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> 109
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> <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> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
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.
3.4 -- Designation of Rights and Preference of Series A Junior
Participating Preferred Stock of the Company filed on July
17, 1998.
4.1* -- Specimen certificate representing the Common Stock.
4.2 -- Form of Rights Agreement dated as of , 1998
between the Company and the Rights Agent.
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 -- [Intentionally Omitted]
+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.
</TABLE>
<PAGE> 111
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <C> <S>
+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 Term Credit Facility dated July 2, 1998 by and
between the Company and the Bank of Nova Scotia.
21.1* -- Subsidiaries.
27.1** -- Financial Data Schedule (December 31, 1997).
27.2** -- Financial Data Schedule (March 31, 1998).
</TABLE>
- ---------------
* Incorporated by reference to Exhibits to the Registrant's Registration
Statement on Form S-1 (File No. 333-38389).
** Previously filed.
*** 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.
-4-
<PAGE> 5
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;
-5-
<PAGE> 6
(c) any contract or agreement entered into by Penford or
Penwest that relates primarily to the Pharmaceutical Business;
(d) any contract or agreement entered into by Penford or
Penwest with any federal, state and local government that relates primarily to
the Pharmaceutical Business;
(e) any contract or agreement that is otherwise expressly
contemplated pursuant to this Agreement or any of the Ancillary Agreements to be
assigned to Penwest; and
(f) any guarantee, indemnity, representation, warranty or
other Liability of Penford in respect of any other Penwest Contract, any Penwest
Liability or the Pharmaceutical Business.
PENWEST EMPLOYEES: Penwest Employees include Penwest's current
employees and any other employees who are hired by Penwest prior to the
Distribution Date.
PENWEST 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.
-6-
<PAGE> 7
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.
-7-
<PAGE> 8
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.
-8-
<PAGE> 9
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.
-9-
<PAGE> 10
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
-10-
<PAGE> 11
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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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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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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(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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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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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
-24-
<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:
-------------------------------
-25-
<PAGE> 1
EXHIBIT 3.4
ARTICLES OF AMENDMENT
OF
PENWEST PHARMACEUTICALS CO.
Pursuant to RCW 23B.06.020, the undersigned corporation adopts the
following Articles of Amendment to its Amended and Restated Articles of
Incorporation, as amended (the "Articles of Incorporation"):
FIRST: The name of the corporation is Penwest Pharmaceuticals Co.
(the "Corporation").
SECOND: The Articles of Incorporation are hereby amended to establish
a series of Preferred Stock, as set forth in the Designation
of Rights and Preferences of Series A Junior Participating
Preferred Stock (the "Amendment"), attached hereto as
EXHIBIT A.
THIRD: The foregoing Amendment was duly adopted by the Board of
Directors of the Corporation on June 25, 1998 without
shareholder action, pursuant to RCW 23B.06.020.
PENWEST PHARMACEUTICALS CO.
Date: June 28, 1998 By: Tod R. Hamachek
------- --------------------------
Name: Tod R. Hamachek
Title: Chairman and Chief Executive Officer
<PAGE> 2
EXHIBIT A
DESIGNATION OF RIGHTS AND PREFERENCES
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
PENWEST PHARMACEUTICALS CO.
------------------------------
RESOLVED: That pursuant to the authority granted to and vested in the
Board of Directors of the Corporation (hereinafter called the "Board") in
accordance with the provisions of the Amended and Restated Articles of
Incorporation, as amended, the Board hereby creates a series of Preferred Stock,
$.001 par value per share (the "Preferred Stock"), of the Corporation and hereby
states the designation and number of shares, and fixes the relative rights,
preferences and limitations thereof as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be one hundred thousand (100,000). Such number of shares may be
increased or decreased by resolution of the Board prior to issuance; PROVIDED,
that no decrease shall reduce the number of shares of Series A Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any series
of Preferred Stock (or any similar stock) ranking prior and superior to the
Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of Common Stock, par
value $.001 per share (the "Common Stock"), of the Corporation, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board out of funds of the Corporation legally available for the payment of
dividends, quarterly dividends payable in cash on the last day of each fiscal
quarter of the Corporation in each year (each such date
<PAGE> 3
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Stock, in an amount per share (rounded
to the nearest cent) equal to the greater of (a) $10 or (b) subject to the
provision for adjustment hereinafter set forth, 1,000 times the aggregate per
share amount of all cash dividends, and 1,000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions, other
than a dividend payable in shares of Common Stock or a subdivision of the
outstanding shares of Common Stock (by reclassification or otherwise), declared
on the Common Stock since the immediately preceding Quarterly Dividend Payment
Date or, with respect to the first Quarterly Dividend Payment Date, since the
first issuance of any share or fraction of a share of Series A Preferred Stock.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event. In
the event the Corporation shall at any time declare or pay any dividend on the
Series A Preferred Stock payable in shares of Series A Preferred Stock, or
effect a subdivision, combination or consolidation of the outstanding shares of
Series A Preferred Stock (by reclassification or otherwise than by payment of a
dividend in shares of Series A Preferred Stock) into a greater or lesser number
of shares of Series A Preferred Stock, then in each such case the amount to
which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event under clause (b) of the first sentence of this Section 2(A)
shall be adjusted by multiplying such amount by a fraction, the numerator of
which is the number of shares of Series A Preferred Stock that were outstanding
immediately prior to such event and the denominator of which is the number of
shares of Series A Preferred Stock outstanding immediately after such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock) and the Corporation
shall pay such dividend or distribution on the Series A Preferred Stock before
the dividend or distribution declared on the Common Stock is paid or set apart;
provided that, in the event no dividend or distribution shall have been declared
on the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $10
per share on the Series A
2
<PAGE> 4
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares, unless the date of issue of such
shares is prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue from the date
of issue of such shares, or unless the date of issue is a Quarterly Dividend
Payment Date or is a date after the record date for the determination of holders
of shares of Series A Preferred Stock entitled to receive a quarterly dividend
and before such Quarterly Dividend Payment Date, in either of which events such
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on the shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board may fix a record date for the determination of holders of
shares of Series A Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than 60 days
prior to the date fixed for the payment thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such
3
<PAGE> 5
event shall be adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Series A Preferred Stock that were
outstanding immediately prior to such event and the denominator of which is the
number of shares of Series A Preferred Stock outstanding immediately after such
event.
(B) Except as otherwise provided herein, in the Certificate of
Incorporation or by law, the holders of shares of Series A Preferred Stock and
the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock
shall be in arrears in an amount equal to six quarterly dividends thereon, the
holders of the Series A Preferred Stock, voting as a separate series from all
other series of Preferred Stock and classes of capital stock, shall be entitled
to elect two members of the Board in addition to any Directors elected by any
other series, class or classes of securities and the authorized number of
Directors will automatically be increased by two. Promptly thereafter, the Board
of the Corporation shall, as soon as may be practicable, call a special meeting
of holders of Series A Preferred Stock for the purpose of electing such members
of the Board. Such special meeting shall in any event be held within 45 days of
the occurrence of such arrearage.
(ii) During any period when the holders of Series A Preferred
Stock, voting as a separate series, shall be entitled and shall have exercised
their right to elect two Directors, then, and during such time as such right
continues, (a) the then authorized number of Directors shall be increased by
two, and the holders of Series A Preferred Stock, voting as a separate series,
shall be entitled to elect the additional Directors so provided for, and (b)
each such additional Director shall not be a member of any existing class of the
Board, but shall serve until the next annual meeting of stockholders for the
election of Directors, or until his successor shall be elected and shall
qualify, or until his right to hold such office terminates pursuant to the
provisions of this Section 3(C).
(iii) A Director elected pursuant to the terms hereof may be
removed with or without cause by the holders of Series A Preferred Stock
entitled to vote in an election of such Director.
(iv) If, during any interval between annual meetings of
stockholders for the election of Directors and while the holders of Series A
Preferred Stock shall be entitled to elect two Directors, there is no such
Director in office by reason of resignation, death or removal, then, promptly
thereafter, the Board shall call a special meeting of the holders of Series A
Preferred Stock for the purpose of filling such vacancy and such vacancy shall
be filled at such special meeting. Such special meeting shall in any event be
held within 45 days of the occurrence of such vacancy.
4
<PAGE> 6
(v) At such time as the arrearage is fully cured, and all
dividends accumulated and unpaid on any shares of Series A Preferred Stock
outstanding are paid, and, in addition thereto, at least one regular dividend
has been paid subsequent to curing such arrearage, the term of office of any
Director elected pursuant to this Section 3(C), or his successor, shall
automatically terminate, and the authorized number of Directors shall
automatically decrease by two, the rights of the holders of the shares of the
Series A Preferred Stock to vote as provided in this Section 3(C) shall cease,
subject to renewal from time to time upon the same terms and conditions, and the
holders of shares of the Series A Preferred Stock shall have only the limited
voting rights elsewhere herein set forth.
(D) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in Section 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on shares of Series A Preferred Stock outstanding shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other distributions,
on any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other distributions,
on any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
parity stock on which dividends are payable or in arrears in proportion to the
total amounts to which the holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for consideration
shares of any stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise acquire shares of any
such junior stock in exchange for shares of any stock of the Corporation ranking
junior (either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Preferred Stock; or
5
<PAGE> 7
(iv) redeem or purchase or otherwise acquire for consideration
any shares of Series A Preferred Stock, or any shares of stock ranking on a
parity with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board) to all
holders of such shares upon such terms as the Board, after consideration of the
respective annual dividend rates and other relative rights and preferences of
the respective series and classes, shall determine in good faith will result in
fair and equitable treatment among the respective series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received $1000 per share, plus
an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, provided that the holders
of shares of Series A Preferred Stock shall be entitled to receive an aggregate
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount to be distributed per share to holders
of shares of Common Stock, or (2) to the holders of shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.
(B) Neither the consolidation, merger or other business combination
of the Corporation with or into any other corporation nor the sale, lease,
exchange or conveyance of all or any part of the property, assets or business of
the Corporation
6
<PAGE> 8
shall be deemed to be a liquidation, dissolution or winding up of the
Corporation for purposes of this Section 6.
(C) In the event the Corporation shall at any time declare or pay any
dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision, combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the proviso
in clause (1) of paragraph (A) of this Section 6 shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of paragraph (A) of this Section 6 shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Series A Preferred Stock that were outstanding immediately
prior to such event and the denominator of which is the number of shares of
Series A Preferred Stock outstanding immediately after such event.
Section 7. CONSOLIDATION, MERGER, ETC. Notwithstanding anything to the
contrary contained herein, in case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each share of Series A
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged. In the event the Corporation
shall at any time declare or pay any dividend on the Common Stock payable in
shares of Common Stock, or effect a subdivision, combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the amount set forth in the
preceding sentence with respect to the exchange or change of shares of Series A
Preferred Stock shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of
7
<PAGE> 9
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the amount set forth in the first
sentence of this Section 7 with respect to the exchange or change of shares of
Series A Preferred Stock shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Series A Preferred
Stock that were outstanding immediately prior to such event and the denominator
of which is the number of shares of Series A Preferred Stock outstanding
immediately after such event.
Section 8. NO REDEMPTION. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. RANK. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Preferred Stock issued either before or after the
issuance of the Series A Preferred Stock, unless the terms of any such series
shall provide otherwise.
Section 10. AMENDMENT. At such time as any shares of Series A Preferred
Stock are outstanding, the Certificate of Incorporation, as amended, of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and have the benefit of all other rights of holders
of Series A Preferred Stock.
8
<PAGE> 1
EXHIBIT 4.2
- --------------------------------------------------------------------------------
PENWEST PHARMACEUTICALS CO.
AND
[_____________________]
RIGHTS AGENT
----------------------
RIGHTS AGREEMENT
DATED AS OF JULY __, 1998
- --------------------------------------------------------------------------------
<PAGE> 2
RIGHTS AGREEMENT
RIGHTS AGREEMENT, dated as of July __, 1998 (the "Agreement"), between
Penwest Pharmaceuticals Co., a Washington corporation (the "Company"), and
_____________________________________, as Rights Agent (the "Rights Agent").
W I T N E S S E T H
WHEREAS, on June 25, 1998 the Board of Directors of the Company (the
"Board") authorized and declared a dividend distribution of one Right for each
share of Common Stock (as hereinafter defined) of the Company outstanding at the
close of business on July [__], 1998 (the "Record Date"), and authorized the
issuance of one Right (as such number may hereinafter be adjusted pursuant to
the provisions of Section 11(p) hereof) for each share of Common Stock of the
Company issued between the Record Date (whether originally issued or delivered
from the Company's treasury) and the earlier of the Distribution Date or the
Expiration Date, each Right initially representing the right to purchase one
one-thousandth of a share of Series A Junior Participating Preferred Stock of
the Company having the rights, powers and preferences set forth in the form of
Certificate of Designations attached hereto as EXHIBIT A, upon the terms and
subject to the conditions hereinafter set forth (the "Rights");
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereby agree as follows:
Section 1. CERTAIN DEFINITIONS. For purposes of this Agreement, the
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person who or
which, together with all Affiliates and Associates of such Person, shall be the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding,
but shall not include (i) the Company, (ii) any Subsidiary of the Company, (iii)
any employee benefit plan of the Company or of any Subsidiary of the Company, or
any Person organized, appointed or established by the Company for or pursuant to
the terms of any such plan, (iv) any such Person who becomes the beneficial
owner of 15% or more of the shares of Common Stock then outstanding as a result
of a reduction in the number of shares of Common Stock outstanding due to the
repurchase of shares of Common Stock by the Company unless and until such
person, after becoming aware that such Person has become the Beneficial Owner of
15% or more of the then outstanding shares of Common Stock, acquires beneficial
ownership of additional shares of Common Stock representing 1% or more of the
shares of Common Stock then outstanding or (v) an Exempted Person.
Notwithstanding the foregoing, if the Board determines in good faith that a
Person who would otherwise be an "Acquiring Person," as defined pursuant to the
foregoing
<PAGE> 3
provisions of this paragraph (a), has become such inadvertently, and such Person
divests as promptly as practicable a sufficient number of shares of Common Stock
so that such Person would no longer be an "Acquiring Person," as defined
pursuant to the foregoing provisions of this paragraph (a), then such Person
shall not be deemed to be an "Acquiring Person" for any purposes of this
Agreement unless and until such Person shall again become an "Acquiring Person."
(b) "Act" shall mean the Securities Act of 1933, as
amended.
(c) "Affiliate" and "Associate" shall have the respective
meanings ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as amended and in effect
on the date of this Agreement (the "Exchange Act").
(d) A Person shall be deemed the "Beneficial Owner" of,
and shall be deemed to "beneficially own," any securities:
(i) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, beneficially owns or has the
right to acquire (whether such right is exercisable immediately or only
after the passage of time) pursuant to any agreement, arrangement or
understanding (other than customary agreements with and between
underwriters and selling group members with respect to a bona fide
public offering of securities), whether or not in writing, or upon the
exercise of conversion rights, exchange rights, other rights, warrants
or options, or otherwise; PROVIDED, HOWEVER, that a Person shall not be
deemed the "Beneficial Owner" of, or to "beneficially own," (A)
securities tendered pursuant to a tender or exchange offer made by such
Person or any of such Person's Affiliates or Associates until such
tendered securities are accepted for purchase or exchange, or (B)
securities issuable upon exercise of Rights at any time prior to the
occurrence of a Triggering Event, or (C) securities issuable upon
exercise of Rights from and after the occurrence of a Triggering Event
which Rights were acquired by such Person or any of such Person's
Affiliates or Associates prior to the Distribution Date or pursuant to
Section 3(a) or Section 22 hereof (the "Original Rights") or pursuant
to Section 11(i) hereof in connection with an adjustment made with
respect to any Original Rights;
(ii) which such Person or any of such Person's Affiliates
or Associates, directly or indirectly, has the right to vote or dispose
of or has "beneficial ownership" of (as determined pursuant to Rule
13d-3 of the General Rules and Regulations under the Exchange Act, or
any comparable or successor rule), including pursuant to any agreement,
arrangement or understanding (other than customary agreements with and
between underwriters and selling group
2
<PAGE> 4
members with respect to a bona fide public offering of securities),
whether or not in writing; PROVIDED, HOWEVER, that a Person shall not
be deemed the "Beneficial Owner" of, or to "beneficially own," any
security under this subparagraph (ii) as a result of an agreement,
arrangement or understanding to vote such security if such agreement,
arrangement or understanding: (A) arises solely from a revocable proxy
given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the applicable provisions of the
General Rules and Regulations under the Exchange Act, and (B) is not
then reportable by such Person on Schedule 13D under the Exchange Act
(or any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly,
by any other Person (or any Affiliate or Associate thereof) with which
such Person (or any of such Person's Affiliates or Associates) has any
agreement, arrangement or understanding (other than customary
agreements with and between underwriters and selling group members with
respect to a bona fide public offering of securities) whether or not in
writing, for the purpose of acquiring, holding, voting (except pursuant
to a revocable proxy as described in the proviso to subparagraph (ii)
of this paragraph (d)) or disposing of any voting securities of the
Company.
For all purposes of this Agreement, any calculation of the number of
shares of Common Stock outstanding at any particular time, including for
purposes of determining the particular percentage of such outstanding shares of
Common Stock of which any Person is the Beneficial Owner, shall be made in
accordance with the last sentence of Rule 13d-3(d)(l)(i) of the General Rules
and Regulations under the Exchange Act.
(e) "Business Day" shall mean any day other than a
Saturday, Sunday or a day on which banking institutions in the State of New York
are authorized or obligated by law or executive order to close.
(f) "Close of business" on any given date shall mean 5:00
p.m., Boston time, on such date; PROVIDED, HOWEVER, that if such date is not a
Business Day it shall mean 5:00 p.m., New York time, on the next succeeding
Business Day.
(g) "Common Stock" shall mean the common stock, $.001 par
value, of the Company, except that "Common Stock" when used with reference to
any Person other than the Company shall mean the capital stock of such Person
with the greatest voting power, or the equity securities or other equity
interest having power to control or direct the management, of such Person.
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(h) "Common stock equivalents" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(i) "Continuing Director" shall mean any member of the
Board, while such person is a member of the Board, who is not an Acquiring
Person, or an Affiliate or Associate of an Acquiring Person, or a representative
or nominee of an Acquiring Person or of any such Affiliate or Associate, and who
either (i) was a member of the Board prior to the time that any Person became an
Acquiring Person (other than pursuant to a Permitted Offer) or (ii) subsequently
became a member of the Board, and whose nomination for election or election to
the Board was recommended or approved by a majority of the Continuing Directors
then on the Board.
(j) "Current market price" shall have the meaning set
forth in Section 11(d)(i) hereof.
(k) "Current Value" shall have the meaning set forth in
Section 11(a)(iii) hereof.
(l) "Distribution Date" shall have the meaning set forth
in Section 3(a) hereof.
(m) "Exchange Act" shall have the meaning set forth in
Section 1(c) hereof.
(n) "Exempted Person" shall mean Penford Corporation, a
Washington corporation ("Penford"), unless and until such time as Penford
distributes to the Penford stockholders shares of Common Stock owned of record
by Penford, at which time Penford shall cease to be an Exempted Person.
(o) "Expiration Date" shall have the meaning set forth in
Section 7(a) hereof.
(p) "Final Expiration Date" shall mean the close of
business on July __, 2008.
(q) "Permitted Offer" shall mean a tender offer or an
exchange offer for all outstanding shares of Common Stock at a price and on
terms determined, prior to the consummation of such tender offer or exchange
offer, by at least a majority of the members of the Board (provided, that at the
time of such approval of the Board there are then in office not less than two
Continuing Directors and such offer is approved by a majority of the Continuing
Directors then in office), after receiving advice from a nationally recognized
investment banking firm selected by the Board, to be (a) at a price
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that is fair to stockholders (taking into account all factors which such members
of the Board deem relevant including, without limitation, prices which could
reasonably be achieved if the Company or its assets were sold on an orderly
basis designed to realize maximum value) and (b) otherwise in the best interests
of the Company and its stockholders.
(r) "Person" shall mean any individual, firm,
corporation, partnership, trust, association, limited liability company or other
entity.
(s) "Preferred Stock" shall mean shares of Series A
Junior Participating Preferred Stock, $.001 par value, of the Company having the
rights and preferences set forth in the form of Certificate of Designations
attached to this Agreement as EXHIBIT A and, to the extent that there is not a
sufficient number of shares of Series A Junior Participating Preferred Stock
authorized to permit the full exercise of the Rights, any other series of
Preferred Stock, $.001 par value, of the Company designated for such purpose
containing terms substantially similar to the terms of the Series A Junior
Participating Preferred Stock.
(t) "Principal Party" shall have the meaning set forth in
Section 13(b) hereof.
(u) "Purchase Price" shall have the meaning set forth in
Section 4(a) hereof.
(v) "Record Date" shall have the meaning set forth in the
WHEREAS clause at the beginning of the Agreement.
(w) "Redemption Date" shall have the meaning set forth in
Section 7(a) hereof.
(x) "Redemption Price" shall have the meaning set forth
in Section 23(a) hereof.
(y) "Rights" shall have the meaning set forth in the
WHEREAS clause at the beginning of the Agreement.
(z) "Rights Certificates" shall have the meaning set
forth in Section 3(a) hereof.
(aa) "Section 11(a)(ii) Event" shall mean an acquisition
of Common Stock described in the first sentence of Section 11(a)(ii) hereof.
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(bb) "Section 11(a)(ii) Trigger Date" shall have the
meaning set forth in Section 11(a)(iii) hereof.
(cc) "Section 13 Event" shall mean any event described in
clauses (x), (y) or (z) of Section 13(a) hereof.
(dd) "Spread" shall have the meaning set forth in Section
11(a)(iii) hereof.
(ee) "Stock Acquisition Date" shall mean the later of (i)
the first date of public announcement (which, for purposes of this definition,
shall include, without limitation, a report filed pursuant to Section 13(d)
under the Exchange Act) by the Company or an Acquiring Person that an Acquiring
Person has become such or (ii) the first date on which an executive officer of
the Company has actual knowledge that an Acquiring Person has become such.
(ff) "Subsidiary" shall mean, with reference to any
Person, any corporation of which an amount of voting securities sufficient to
elect at least a majority of the directors of such corporation is beneficially
owned, directly or indirectly, by such Person, or otherwise controlled by such
Person.
(gg) "Substitution Period" shall have the meaning set
forth in Section 11(a)(iii) hereof.
(hh) "Trading Day" shall have the meaning set forth in
Section 11(d)(i) hereof.
(ii) "Triggering Event" shall mean any Section 11(a)(ii)
Event or any Section 13 Event.
Section 2. APPOINTMENT OF RIGHTS AGENT. The Company hereby appoints the
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date also
be the holders of the Common Stock) in accordance with the terms and conditions
hereof, and the Rights Agent hereby accepts such appointment. The Company may
from time to time appoint such Co-Rights Agents as it may deem necessary or
desirable upon ten (10) days' prior written notice to the Rights Agent. The
Rights Agent shall have no duty to supervise, and shall in no event be liable
for, the acts or omissions of any such co-Rights Agent.
Section 3. ISSUANCE OF RIGHTS.
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(a) Until the earlier of (i) the close of business on the
tenth Business Day (or such later date as may be determined by the Board) after
the Stock Acquisition Date (or, if the tenth Business Day after the Stock
Acquisition Date occurs before the Record Date, the close of business on the
Record Date), or (ii) the close of business on the tenth Business Day (or such
later date as may be determined by action of the Board) after the date that a
tender or exchange offer by any Person (other than the Company, any Subsidiary
of the Company, any employee benefit plan of the Company or of any Subsidiary of
the Company, or any Person organized, appointed or established by the Company
for or pursuant to the terms of any such plan) is first published or sent or
given within the meaning of Rule 14d-2(a) of the General Rules and Regulations
under the Exchange Act, if upon consummation thereof, such Person would be the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding,
in either instance other than pursuant to a Permitted Offer (the earlier of (i)
and (ii) being herein referred to as the "Distribution Date"), (x) the Rights
will be evidenced by the certificates for the Common Stock registered in the
names of the holders of the Common Stock (which certificates for Common Stock
shall be deemed also to be certificates for Rights) and not by separate
certificates, and (y) the Rights will be transferable only in connection with
the transfer of the underlying shares of Common Stock (including a transfer to
the Company). As soon as practicable after the Distribution Date, the Rights
Agent will send by first-class, insured, postage prepaid mail, to each record
holder of the Common Stock as of the close of business on the Distribution Date,
at the address of such holder shown on the records of the Company, one or more
rights certificates, in substantially the form of EXHIBIT B hereto (the "Rights
Certificates"), evidencing one Right for each share of Common Stock so held,
subject to adjustment as provided herein. In the event that an adjustment in the
number of Rights per share of Common Stock has been made pursuant to Section
11(p) hereof, at the time of distribution of the Right Certificates, the Company
shall make the necessary and appropriate rounding adjustments (in accordance
with Section 14(a) hereof) so that Rights Certificates representing only whole
numbers of Rights are distributed and cash is paid in lieu of any fractional
Rights. As of and after the Distribution Date, the Rights will be evidenced
solely by such Rights Certificates.
(b) As promptly as practicable following the Record Date,
the Company will send a copy of a Summary of Rights to Purchase Preferred Stock,
in substantially the form attached hereto as EXHIBIT C, by first-class, postage
prepaid mail, to each record holder of the Common Stock as of the close of
business on the Record Date, at the address of such holder shown on the records
of the Company. With respect to certificates for the Common Stock outstanding as
of the close of business on the Record Date, until the Distribution Date, the
Rights will be evidenced by such certificates for the Common Stock and the
registered holders of the Common Stock shall also be the registered holders of
the associated Rights.
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(c) Rights shall be issued (i) in respect of all shares
of Common Stock that are issued (either as an original issuance or from the
Company's treasury) after the Record Date but prior to the earlier of the
Distribution Date or the Expiration Date and (ii) in connection with the
issuance or sale of Common Stock following the Distribution Date and prior to
the Expiration Date upon the exercise of stock options, or upon the exercise,
conversion or exchange of securities, granted or issued by the Company prior to
the Distribution Date. Certificates representing such shares of Common Stock
(including, without limitation, certificates issued upon transfer or exchange of
Common Stock) shall also be deemed to be certificates for Rights, and shall bear
the following legend:
This certificate also evidences and entitles the holder hereof
to certain Rights as set forth in the Rights Agreement between Penwest
Pharmaceuticals Co. (the "Company") and _______________________
________________ (the "Rights Agent") dated as of July __, 1998, as the
same may be amended, restated or renewed from time to time (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal offices of
the Company. Under certain circumstances, as set forth in the Rights
Agreement, such Rights will be evidenced by separate certificates and
will no longer be evidenced by this certificate. The Company will mail
to the holder of this certificate a copy of the Rights Agreement, as in
effect on the date of mailing, without charge promptly after receipt of
a written request therefor. Under certain circumstances set forth in
the Rights Agreement, Rights issued to, or held by, any Person who is,
was or becomes an Acquiring Person or any Affiliate or Associates
thereof (as such terms are defined in the Rights Agreement), whether
currently held by or on behalf of such Person or by any subsequent
holder, may become null and void.
With respect to such certificates containing the foregoing legend, until the
earlier of (i) the Distribution Date or (ii) the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights.
(d) Until the earlier of the Distribution Date or the
Expiration Date, the transfer of any certificates representing shares of Common
Stock in respect of which Rights have been issued shall also constitute the
transfer of the Rights associated with such shares of Common Stock. In the event
that the Company purchases or acquires any shares of Common Stock after the
Record Date but prior to the Distribution Date, any Rights associated with such
shares of Common Stock shall be deemed cancelled
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<PAGE> 10
and retired so that the Company shall not be entitled to exercise any Rights
associated with the shares of Common Stock which are no longer outstanding.
Section 4. FORM OF RIGHTS CERTIFICATES.
(a) The Rights Certificates (and the forms of election to
purchase, certification and assignment to be printed on the reverse thereof)
shall each be substantially in the form set forth in EXHIBIT B hereto and may
have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law or with any rule or regulation made pursuant
thereto or with any rule or regulation of any stock exchange or over-the-counter
market on which the Rights may from time to time be listed, or to conform to
usage. Subject to the provisions of Section 11 and Section 22 hereof, the Rights
Certificates, whenever distributed, shall entitle the holders thereof to
purchase such number of one one-thousandths of a share of Preferred Stock as
shall be set forth therein at the price set forth therein (such exercise price
per one one-thousandth of a share, the "Purchase Price"), but the amount and
type of securities purchasable upon the exercise of each Right and the Purchase
Price thereof shall be subject to adjustment as provided herein.
(b) Any Rights Certificate issued pursuant to Section 3,
Section 11(i) or Section 22 hereof that represents Rights beneficially owned by
persons known to be: (i) an Acquiring Person or any Associate or Affiliate of an
Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee after the Acquiring Person
becomes such, or (iii) a transferee of an Acquiring Person (or of any such
Associate or Affiliate) who becomes a transferee prior to or concurrently with
the Acquiring Person becoming such and receives such Rights pursuant to either
(A) a transfer (whether or not for consideration) from the Acquiring Person to
holders of equity interests in such Acquiring Person or to any Person with whom
such Acquiring Person has any continuing agreement, arrangement or understanding
(whether or not in writing) regarding the transferred Rights or (B) a transfer
which the Board has determined is part of a plan, arrangement or understanding
(whether or not in writing) that has as a primary purpose or effect avoidance of
Section 7(e) hereof, and any Rights Certificate issued pursuant to Section 6 or
Section 11 hereof upon transfer, exchange, replacement or adjustment of any
other Rights Certificate referred to in this sentence, shall contain (to the
extent feasible) the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person or
an Affiliate or Associate of an Acquiring Person (as such terms are
defined in
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the Rights Agreement). Accordingly, this Rights Certificate and the
Rights represented hereby may become null and void in the circumstances
specified in Section 7(e) of such Agreement.
Section 5. COUNTERSIGNATURE AND REGISTRATION.
(a) The Rights Certificates shall be executed on behalf
of the Company by its Chairman of the Board, President or any Vice President,
either manually or by facsimile signature, and shall have affixed thereto the
Company's seal or a facsimile thereof, which shall be attested by the Secretary
or an Assistant Secretary of the Company, either manually or by facsimile
signature. The Rights Certificates shall be manually countersigned by the Rights
Agent and shall not be valid for any purpose unless so countersigned. In case
any officer of the Company who shall have signed any of the Rights Certificates
shall cease to be such officer of the Company before countersignature by the
Rights Agent and issuance and delivery by the Company, such Rights Certificates,
nevertheless, may be countersigned by the Rights Agent and issued and delivered
by the Company with the same force and effect as though the person who signed
such Rights Certificates had not ceased to be such officer of the Company; and
any Rights Certificates may be signed on behalf of the Company by any person
who, at the actual date of the execution of such Rights Certificate, shall be a
proper officer of the Company to sign such Rights Certificate, although at the
date of the execution of this Rights Agreement any such person was not such an
officer.
(b) Following the Distribution Date, the Rights Agent
shall keep or cause to be kept, at its office designated as the appropriate
place for surrender of Rights Certificates upon exercise or transfer, books for
registration and transfer of the Rights Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Rights
Certificates, the number of Rights evidenced on its face by each of the Rights
Certificates, the Certificate number and the date of each of the Rights
Certificates.
Section 6. TRANSFER, SPLIT UP, COMBINATION AND EXCHANGE OF RIGHTS
CERTIFICATES; MUTILATED, DESTROYED, LOST OR STOLEN RIGHTS CERTIFICATES.
(a) Subject to the provisions of Section 4(b), Section
7(e) and Section 14 hereof, at any time after the close of business on the
Distribution Date, and at or prior to the close of business on the Expiration
Date, any Rights Certificate or Certificates (other than Rights Certificates
representing Rights that have become void pursuant to Section 7(e) hereof or
that have been exchanged pursuant to Section 24 hereof) may be transferred,
split up, combined or exchanged for another Rights Certificate or Certificates,
entitling the registered holder to purchase a like number of one one-thousandths
of a share of Preferred Stock (or, following a Triggering Event, Common
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<PAGE> 12
Stock, other securities, cash or other assets, as the case may be) as the Rights
Certificate or Certificates surrendered then entitled such holder (or former
holder in the case of a transfer) to purchase. Any registered holder desiring to
transfer, split up, combine or exchange any Rights Certificate or Certificates
shall make such request in writing delivered to the Rights Agent, and shall
surrender the Rights Certificate or Certificates to be transferred, split up,
combined or exchanged, with the form of assignment and certificate appropriately
executed, at the office of the Rights Agent designated for such purpose. Neither
the Rights Agent nor the Company shall be obligated to take any action
whatsoever with respect to the transfer of any such surrendered Rights
Certificate until the registered holder shall have completed and signed the
certificate contained in the form of assignment on the reverse side of such
Rights Certificate and shall have provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request. Thereupon the Rights
Agent shall, subject to Section 4(b), Section 7(e) and Section 14 hereof,
countersign and deliver to the Person entitled thereto a Rights Certificate or
Rights Certificates, as the case may be, as so requested. The Company may
require payment of a sum sufficient to cover any tax or governmental charge that
may be imposed in connection with any transfer, split up, combination or
exchange of Rights Certificates.
(b) Upon receipt by the Company and the Rights Agent of
evidence reasonably satisfactory to them of the loss, theft, destruction or
mutilation of a Rights Certificate, and, in case of loss, theft or destruction,
of indemnity or security reasonably satisfactory to them, and reimbursement to
the Company and the Rights Agent of all reasonable expenses incidental thereto,
and upon surrender to the Rights Agent and cancellation of the Rights
Certificate if mutilated, the Company will execute and deliver a new Rights
Certificate of like tenor to the Rights Agent for countersignature and delivery
to the registered owner in lieu of the Rights Certificate so lost, stolen,
destroyed or mutilated.
Section 7. EXERCISE OF RIGHTS; PURCHASE PRICE; EXPIRATION DATE OF
RIGHTS.
(a) Subject to Section 7(e) hereof, the registered holder
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein including, without limitation, the restrictions on
exercisability set forth in Section 9(c), Section 11(a)(iii) and Section 23
hereof) in whole or in part at any time after the Distribution Date upon
surrender of the Rights Certificate, with the form of election to purchase and
the certificate on the reverse side thereof duly executed, to the Rights Agent
at the office of the Rights Agent designated for such purpose, together with
payment of the aggregate Purchase Price with respect to the total number of one
one-thousandths of a share (or other shares, securities, cash or other assets,
as the case may be) as to which such surrendered Rights are then exercisable, at
or prior to the earliest
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of (i) the Final Expiration Date, (ii) the time at which the Rights expire as
provided in Section 13(d) hereof, (iii) the time at which the Rights are
redeemed as provided in Section 23 hereof (the "Redemption Date") or (iv) the
time at which such Rights are exchanged as provided in Section 24 hereof (the
earliest of (i), (ii), (iii) and (iv) being herein referred to as the
"Expiration Date").
(b) The Purchase Price for each one one-thousandth of a
share of Preferred Stock pursuant to the exercise of a Right shall initially be
$60 and shall be subject to adjustment from time to time as provided in Sections
11 and 13(a) hereof and shall be payable in accordance with paragraph (c) below.
(c) Upon receipt of a Rights Certificate representing
exercisable Rights, with the form of election to purchase and the certificate
duly executed, accompanied by payment, with respect to each Right so exercised,
of the Purchase Price per one one-thousandth of a share of Preferred Stock (or
other shares, securities, cash or other assets, as the case may be) to be
purchased as set forth below and an amount equal to any applicable transfer tax,
the Rights Agent shall, subject to Section 20(k) hereof, thereupon promptly (i)
(A) requisition from any transfer agent of the shares of Preferred Stock (or
make available, if the Rights Agent is the transfer agent for such shares)
certificates for the total number of one one-thousandths of a share of Preferred
Stock to be purchased and the Company hereby authorizes its transfer agent to
comply with such requests, or (B) if the Company shall have elected to deposit
the total number of shares of Preferred Stock issuable upon exercise of the
Rights hereunder with a depositary agent, requisition from the depositary agent
depositary receipts representing such number of one one-thousandths of a share
of Preferred Stock as are to be purchased (in which case certificates for the
shares of Preferred Stock represented by such receipts shall be deposited by the
transfer agent with the depositary agent) and the Company hereby directs the
depositary agent to comply with such requests, (ii) requisition from the Company
the amount of cash, if any, to be paid in lieu of fractional shares in
accordance with Section 14 hereof, (iii) after receipt of such certificates or
depositary receipts, cause the same to be delivered to or upon the order of the
registered holder of such Rights Certificate, registered in such name or names
as may be designated by such holder, and (iv) after receipt thereof, deliver
such cash, if any, to or upon the order of the registered holder of such Rights
Certificate. The payment of the Purchase Price (as such amount may be reduced
pursuant to Section 11(a)(iii) hereof) may be made in cash or by certified bank
check or money order payable to the order of the Company. In the event that the
Company is obligated to issue other securities (including Common Stock) of the
Company, pay cash and/or distribute other property pursuant to Section 11(a)
hereof, the Company shall make all arrangements necessary so that such other
securities, cash and/or other property are available for distribution by the
Rights Agent, if and when appropriate.
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(d) In case the registered holder of any Rights
Certificate shall exercise less than all the Rights evidenced thereby, a new
Rights Certificate evidencing Rights equivalent to the Rights remaining
unexercised shall be issued by the Rights Agent and delivered to, or upon the
order of, the registered holder of such Rights Certificate, registered in such
name or names as may be designated by such holder, subject to the provisions of
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the
contrary, from and after the first occurrence of a Section 11(a)(ii) Event, any
Rights beneficially owned by (i) an Acquiring Person or an Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any such Associate or Affiliate) who becomes a transferee after the Acquiring
Person becomes such, or (iii) a transferee of an Acquiring Person (or of any
such Associate or Affiliate) who becomes a transferee prior to or concurrently
with the Acquiring Person becoming such and receives such Rights pursuant to
either (A) a transfer (whether or not for consideration) from the Acquiring
Person to holders of equity interests in such Acquiring Person or to any Person
with whom the Acquiring Person has any continuing agreement, arrangement or
understanding (whether or not in writing) regarding the transferred Rights or
(B) a transfer which the Board has determined is part of a plan, arrangement or
understanding (whether or not in writing) that has as a primary purpose or
effect avoidance of this Section 7(e), shall become null and void without any
further action and no holder of such Rights shall have any rights whatsoever
with respect to such Rights, whether under any provision of this Agreement or
otherwise. The Company shall use all reasonable efforts to insure that the
provisions of this Section 7(e) and Section 4(b) hereof are complied with, but
shall have no liability to any holder of Rights Certificates or other Person as
a result of its failure to make any determinations with respect to an Acquiring
Person or its Affiliates, Associates or transferees hereunder.
(f) Notwithstanding anything in this Agreement to the
contrary, neither the Rights Agent nor the Company shall be obligated to
undertake any action with respect to a registered holder upon the occurrence of
any purported transfer or exercise as set forth in this Section 7 unless such
registered holder shall have (i) completed and signed the certificate following
the form of assignment or election to purchase set forth on the reverse side of
the Rights Certificate surrendered for such assignment or exercise, and (ii)
provided such additional evidence of the identity of the Beneficial Owner (or
former Beneficial Owner) or Affiliates or Associates thereof as the Company
shall reasonably request.
Section 8. CANCELLATION AND DESTRUCTION OF RIGHTS CERTIFICATES. All
Rights Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for cancellation or in cancelled form,
or, if surrendered to the Rights
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Agent, shall be cancelled by it, and no Rights Certificates shall be issued in
lieu thereof except as expressly permitted by any of the provisions of this
Agreement. The Company shall deliver to the Rights Agent for cancellation and
retirement, and the Rights Agent shall so cancel and retire, any other Rights
Certificate purchased or acquired by the Company otherwise than upon the
exercise thereof. The Rights Agent shall deliver all cancelled Rights
Certificates to the Company, or shall, at the written request of the Company,
destroy such cancelled Rights Certificates, and in such case shall deliver a
certificate of destruction thereof to the Company.
Section 9. RESERVATION AND AVAILABILITY OF CAPITAL STOCK.
(a) The Company covenants and agrees that it will cause
to be reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of a Triggering Event, out of its
authorized and unissued shares of Common Stock and/or other securities or out of
its authorized and issued shares held in its treasury), the number of shares of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock and/or other securities) that, as provided in this Agreement including
Section 11(a)(iii) hereof, will be sufficient to permit the exercise in full of
all outstanding Rights.
(b) So long as the shares of Preferred Stock (and,
following the occurrence of a Triggering Event, Common Stock and/or other
securities) issuable and deliverable upon the exercise of the Rights may be
listed on any national securities exchange or automated quotation system, the
Company shall use its best efforts to cause, from and after such time as the
Rights become exercisable, all shares reserved for such issuance to be so listed
upon official notice of issuance upon such exercise.
(c) The Company shall use its best efforts to (i) file,
as soon as practicable following the earliest date after the first occurrence of
a Section 11(a)(ii) Event on which the consideration to be delivered by the
Company upon exercise of the Rights has been determined in accordance with
Section 11(a)(iii) hereof, or as soon as is required by law following the
Distribution Date, as the case may be, a registration statement under the Act,
with respect to the securities purchasable upon exercise of the Rights on an
appropriate form, (ii) cause such registration statement to become effective as
soon as practicable after such filing, and (iii) cause such registration
statement to remain effective (with a prospectus at all times meeting the
requirements of the Act) until the earlier of (A) the date as of which the
Rights are no longer exercisable for such securities, and (B) the Expiration
Date. The Company will also take such action as may be appropriate under, or to
ensure compliance with, the securities or "blue sky" laws of the various states
in connection with the exercisability of the Rights. The Company may temporarily
suspend, for a period of time not to exceed ninety (90) days after the date set
forth in clause (i) of the first sentence of this Section 9(c), the
exercisability of
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the Rights in order to prepare and file such registration statement and permit
it to become effective. Upon any such suspension, the Company shall issue a
public announcement stating that the exercisability of the Rights has been
temporarily suspended, as well as a public announcement at such time as the
suspension is no longer in effect. Notwithstanding any provision of this
Agreement to the contrary, the Rights shall not be exercisable in any
jurisdiction unless the requisite registration or qualification in such
jurisdiction shall have been effected or obtained.
(d) The Company covenants and agrees that it will take
all such action as may be necessary to ensure that all one one-thousandths of a
share of Preferred Stock (and, following the occurrence of a Triggering Event,
Common Stock and/or other securities) delivered upon exercise of Rights shall,
at the time of delivery of the certificates for such shares (subject to payment
of the Purchase Price), be duly and validly authorized and issued and fully paid
and nonassessable.
(e) The Company further covenants and agrees that it will
pay when due and payable any and all federal and state transfer taxes and
charges that may be payable in respect of the issuance or delivery of the Rights
Certificates and of any certificates for a number of one one-thousandths of a
share of Preferred Stock (or Common Stock and/or other securities, as the case
may be) upon the exercise of Rights. The Company shall not, however, be required
(i) to pay any transfer tax that may be payable in respect of any transfer or
delivery of Rights Certificates to a Person other than, or the issuance or
delivery of a number of one one-thousandths of a share of Preferred Stock (or
Common Stock and/or other securities, as the case may be) in respect of a name
other than that of, the registered holder of the Rights Certificate evidencing
Rights surrendered for exercise or (ii) to issue or deliver any certificates for
a number of one one-thousandths of a share of Preferred Stock (or Common Stock
and/or other securities, as the case may be) in a name other than that of the
registered holder upon the exercise of any Rights until such tax shall have been
paid (any such tax being payable by the holder of such Rights Certificate at the
time of surrender) or until it has been established to the Company's
satisfaction that no such tax is due.
Section 10. PREFERRED STOCK RECORD DATE. Each Person in whose name any
certificate for a number of one one-thousandths of a share of Preferred Stock
(or Common Stock and/or other securities, as the case may be) is issued upon the
exercise of Rights shall for all purposes be deemed to have become the holder of
record of such fractional shares of Preferred Stock (or Common Stock and/or
other securities, as the case may be) represented thereby on, and such
certificate shall be dated, the date upon which the Rights Certificate
evidencing such Rights was duly surrendered and payment of the Purchase Price
(and all applicable transfer taxes) was made; PROVIDED, HOWEVER, that if the
date of such surrender and payment is a date upon which the Preferred Stock (or
Common Stock and/or other securities, as the case may be) transfer books of the
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<PAGE> 17
Company are closed, such Person shall be deemed to have become the record holder
of such shares (fractional or otherwise) on, and such certificate shall be
dated, the next succeeding Business Day on which the Preferred Stock (or Common
Stock and/or other securities, as the case may be) transfer books of the Company
are open. Prior to the exercise of the Rights evidenced thereby, the holder of a
Rights Certificate, as such, shall not be entitled to any rights of a
stockholder of the Company with respect to securities for which the Rights shall
be exercisable, including, without limitation, the right to vote, to receive
dividends or other distributions or to exercise any preemptive rights, and shall
not be entitled to receive any notice of any proceedings of the Company, except
as provided herein.
Section 11. ADJUSTMENT OF PURCHASE PRICE, NUMBER AND KIND OF SHARES OR
NUMBER OF RIGHTS. The Purchase Price, the number and kind of shares covered by
each Right and the number of Rights outstanding are subject to adjustment from
time to time as provided in this Section 11.
(a)(i) In the event the Company shall at any time after the
date of this Agreement (A) declare a dividend on the Preferred Stock
payable in shares of Preferred Stock, (B) subdivide the outstanding
Preferred Stock, (C) combine the outstanding Preferred Stock into a
smaller number of shares, or (D) issue any shares of its capital stock
in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger in which
the Company is the continuing or surviving corporation), except as
otherwise provided in this Section 11(a) and Section 7(e) hereof, the
Purchase Price in effect at the time of the record date for such
dividend or of the effective date of such subdivision, combination or
reclassification, and the number and kind of shares of Preferred Stock
or capital stock, as the case may be, issuable on such date, shall be
proportionately adjusted so that the holder of any Right exercised
after such time shall be entitled to receive, upon payment of the
Purchase Price then in effect, the aggregate number and kind of shares
of Preferred Stock or capital stock, as the case may be, which, if such
Right had been exercised immediately prior to such date and at a time
when the Preferred Stock transfer books of the Company were open, he
would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification.
If an event occurs that would require an adjustment under both this
Section 11(a)(i) and Section 11(a)(ii) hereof, the adjustment provided
for in this Section 11(a)(i) shall be in addition to, and shall be made
prior to, any adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to Section 24 of this Agreement, in the event
that any Person, alone or together with its Affiliates or Associates,
becomes an Acquiring Person (other than pursuant to a Permitted Offer),
then, promptly following the
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<PAGE> 18
first occurrence of such event, proper provision shall be made so that
each holder of a Right (except as provided below and in Section 7(e)
hereof) shall thereafter have the right to receive (subject to the last
sentence of Section 23(a)), upon exercise thereof at the then current
Purchase Price in accordance with the terms of this Agreement, in lieu
of a number of one one- thousandths of a share of Preferred Stock, such
number of shares of Common Stock of the Company that equals the result
obtained by (x) multiplying the then current Purchase Price by the then
number of one one-thousandths of a share of Preferred Stock for which a
Right was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event, and (y) dividing that product (which,
following such first occurrence, shall thereafter be referred to as the
"Purchase Price" for each Right and for all purposes of this Agreement)
by 50% of the current market price (determined pursuant to Section
11(d) hereof) per share of Common Stock on the date of such first
occurrence (such number of shares, the "Adjustment Shares").
(iii) In the event that the number of shares of Common
Stock that are authorized by the Company's Certificate of Incorporation
but not outstanding or reserved for issuance for purposes other than
upon exercise of the Rights are not sufficient to permit the exercise
in full of the Rights in accordance with the foregoing subparagraph
(ii) of this Section 11(a), the Company shall: (A) determine the excess
of (1) the value of the Adjustment Shares issuable upon the exercise of
a Right (the "Current Value") over (2) the Purchase Price (such excess,
the "Spread"), and (B) with respect to each Right, make adequate
provision to substitute for the Adjustment Shares, upon payment of the
applicable Purchase Price, (1) cash, (2) a reduction in the Purchase
Price, (3) Common Stock or other equity securities of the Company
(including, without limitation, shares, or units of shares, of
preferred stock which the Board has deemed to have the same value as
shares of Common Stock (such shares of preferred stock, "common stock
equivalents")), (4) debt securities of the Company, (5) other assets,
or (6) any combination of the foregoing, having an aggregate value
equal to the Current Value, where such aggregate value has been
determined by the Board based upon the advice of a nationally
recognized investment banking firm selected by the Board; PROVIDED,
HOWEVER, if the Company shall not have made adequate provision to
deliver value pursuant to clause (B) above within thirty (30) days
following the later of (x) the first occurrence of a Section 11(a)(ii)
Event and (y) the date on which the Company's right of redemption
pursuant to Section 23(a) expires (the later of (x) and (y) being
referred to herein as the "Section 11(a)(ii) Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise
of a Right and without requiring payment of the Purchase Price, shares
of Common Stock (to the extent available) and then, if necessary, cash,
which shares and/or cash have an aggregate value equal to the Spread.
If the Board shall determine in good faith that it is likely that
sufficient additional
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<PAGE> 19
shares of Common Stock could be authorized for issuance upon exercise
in full of the Rights, the thirty (30) day period set forth above may
be extended to the extent necessary, but not more than ninety (90) days
after the Section 11(a)(ii) Trigger Date, in order that the Company may
seek shareholder approval for the authorization of such additional
shares (such period, as it may be extended, the "Substitution Period").
To the extent that the Company determines that some action need be
taken pursuant to the first and/or second sentences of this Section
11(a)(iii), the Company (x) shall provide, subject to Section 7(e)
hereof, that such action shall apply uniformly to all outstanding
Rights, and (y) may suspend the exercisability of the Rights until the
expiration of the Substitution Period in order to seek any
authorization of additional shares and/or to decide the appropriate
form of distribution to be made pursuant to such first sentence and to
determine the value thereof. In the event of any such suspension, the
Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended, as well as
a public announcement at such time as the suspension is no longer in
effect. For purposes of this Section 11(a)(iii), the value of the
Common Stock shall be the current market price (as determined pursuant
to Section 11(d) hereof) per share of the Common Stock on the Section
11(a)(ii) Trigger Date and the value of any "common stock equivalent"
shall be deemed to have the same value as the Common Stock on such
date.
(b) In case the Company shall fix a record date for the
issuance of rights, options or warrants to all holders of Preferred Stock
entitling them to subscribe for or purchase (for a period expiring within
forty-five (45) calendar days after such record date) Preferred Stock (or shares
having the same rights, privileges and preferences as the shares of Preferred
Stock ("equivalent preferred stock")) or securities convertible into Preferred
Stock or equivalent preferred stock at a price per share of Preferred Stock or
per share of equivalent preferred stock (or having a conversion price per share,
if a security convertible into Preferred Stock or equivalent preferred stock)
less than the current market price (as determined pursuant to Section 11(d)
hereof) per share of Preferred Stock on such record date, the Purchase Price to
be in effect after such record date shall be determined by multiplying the
Purchase Price in effect immediately prior to such record date by a fraction,
the numerator of which shall be the number of shares of Preferred Stock
outstanding on such record date, plus the number of shares of Preferred Stock
which the aggregate offering price of the total number of shares of Preferred
Stock and/or equivalent preferred stock so to be offered (and/or the aggregate
initial conversion price of the convertible securities so to be offered) would
purchase at such current market price, and the denominator of which shall be the
number of shares of Preferred Stock outstanding on such record date, plus the
number of additional shares of Preferred Stock and/or equivalent preferred stock
to be offered for subscription or purchase (or into which the convertible
securities so to be offered are
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<PAGE> 20
initially convertible). In case such subscription price may be paid by delivery
of consideration part or all of which may be in a form other than cash, the
value of such consideration shall be as determined in good faith by the Board,
whose determination shall be described in a statement filed with the Rights
Agent and shall be conclusive for all purposes. Shares of Preferred Stock owned
by or held for the account of the Company shall not be deemed outstanding for
the purpose of any such computation. Such adjustment shall be made successively
whenever such a record date is fixed, and in the event that such rights, options
or warrants are not so issued, the Purchase Price shall be adjusted to be the
Purchase Price which would then be in effect if such record date had not been
fixed.
(c) In case the Company shall fix a record date for a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing corporation) of evidences of indebtedness, cash (other than a regular
quarterly cash dividend out of the earnings or retained earnings of the
Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock) or
subscription rights or warrants (excluding those referred to in Section 11(b)
hereof), the Purchase Price to be in effect after such record date shall be
determined by multiplying the Purchase Price in effect immediately prior to such
record date by a fraction, the numerator of which shall be the current market
price (as determined pursuant to Section 11(d) hereof) per share of Preferred
Stock on such record date, less the fair market value (as determined in good
faith by the Board, whose determination shall be described in a statement filed
with the Rights Agent and shall be conclusive for all purposes) of the portion
of the cash, assets or evidences of indebtedness so to be distributed or of such
subscription rights or warrants applicable to a share of Preferred Stock and the
denominator of which shall be such current market price (as determined pursuant
to Section 11(d) hereof) per share of Preferred Stock on such record date. Such
adjustments shall be made successively whenever such a record date is fixed, and
in the event that such distribution is not so made, the Purchase Price shall be
adjusted to be the Purchase Price which would have been in effect if such record
date had not been fixed.
(d)(i) For the purpose of any computation hereunder, other
than computations made pursuant to Section 11(a)(iii) hereof, the
"current market price" per share of Common Stock on any date shall be
deemed to be the average of the daily closing prices per share of such
Common Stock for the thirty (30) consecutive Trading Days (as such term
is hereinafter defined) immediately prior to such date, and for
purposes of computations made pursuant to Section 11(a)(iii) hereof,
the "current market price" per share of Common Stock on any date shall
be deemed to be the average of the daily closing prices per share of
such Common Stock for the ten (10) consecutive Trading Days
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<PAGE> 21
immediately following such date; PROVIDED, HOWEVER, that in the event
that the current market price per share of the Common Stock is
determined during a period following the announcement by the issuer of
such Common Stock of (A) a dividend or distribution on such Common
Stock payable in shares of such Common Stock or securities convertible
into shares of such Common Stock (other than the Rights), or (B) any
subdivision, combination or reclassification of such Common Stock, and
prior to the expiration of the requisite thirty (30) Trading Day or ten
(10) Trading Day period, as set forth above, after the ex-dividend date
for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such
case, the "current market price" shall be properly adjusted to take
into account ex-dividend trading. The closing price for each day shall
be the last sale price, regular way, or, in case no such sale takes
place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the principal national securities exchange on
which the shares of Common Stock are listed or admitted to trading or,
if the shares of Common Stock are not listed or admitted to trading on
any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and the low asked prices in the
over-the-counter market, as reported by The Nasdaq Stock Market, Inc.
("Nasdaq") or such other system then in use, or, if on any such date
the shares of Common Stock are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock selected
by the Board. If on any such date no market maker is making a market in
the Common Stock, the fair value of such shares on such date as
determined in good faith by the Board shall be used. The term "Trading
Day" shall mean a day on which Nasdaq or any national securities
exchange on which the shares of Common Stock are listed or admitted to
trading is open for the transaction of business or, if the shares of
Common Stock are not listed or admitted to trading on Nasdaq or any
national securities exchange, a Business Day. If the Common Stock is
not publicly held or not so listed or traded, "current market price"
per share shall mean the fair value per share as determined in good
faith by the Board, whose determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all
purposes.
(ii) For the purpose of any computation hereunder, the
"current market price" per share of Preferred Stock shall be determined
in the same manner as set forth above for the Common Stock in clause
(i) of this Section 11(d) (other than the last sentence thereof). If
the current market price per share of Preferred Stock cannot be
determined in the manner provided above or if the Preferred Stock is
not publicly held or listed or traded in a manner described in clause
(i) of this
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<PAGE> 22
Section 11(d), the "current market price" per share of Preferred Stock
shall be conclusively deemed to be an amount equal to 1,000 (as such
number may be appropriately adjusted for such events as stock splits,
stock dividends and recapitalizations with respect to the Common Stock
occurring after the date of this Agreement) multiplied by the current
market price per share of the Common Stock. If neither the Common Stock
nor the Preferred Stock is publicly held or so listed or traded,
"current market price" per share of the Preferred Stock shall mean the
fair value per share as determined in good faith by the Board, whose
determination shall be described in a statement filed with the Rights
Agent and shall be conclusive for all purposes. For all purposes of
this Agreement, the "current market price" of one one-thousandth of a
share of Preferred Stock shall be equal to the "current market price"
of one share of Preferred Stock divided by 1,000.
(e) Anything herein to the contrary notwithstanding, no
adjustment in the Purchase Price shall be required unless such adjustment would
require an increase or decrease of at least one percent (1%) in the Purchase
Price; PROVIDED, HOWEVER, that any adjustments which by reason of this Section
11(e) are not required to be made shall be carried forward and taken into
account in any subsequent adjustment. All calculations under this Section 11
shall be made to the nearest cent or to the nearest ten-millionth of a share of
Preferred Stock, or hundred-thousandth of a share of Common Stock or other
security, as the case may be. Notwithstanding the first sentence of this Section
11(e), any adjustment required by this Section 11 shall be made no later than
the earlier of (i) three (3) years from the date of the transaction which
mandates such adjustment, or (ii) the Expiration Date.
(f) If as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a) hereof, the holder of any Right thereafter
exercised shall become entitled to receive any securities other than Preferred
Stock, thereafter the number of such other securities so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 hereof with respect to the Preferred
Stock shall apply on like terms to any such other securities; PROVIDED, HOWEVER,
that the Company shall not be liable for its inability to reserve and keep
available for issuance upon exercise of the Rights pursuant to Section 11(a)(ii)
a number of shares of Common Stock greater than the number then authorized by
the Company's Certificate of Incorporation but not outstanding or reserved for
other purposes.
(g) All Rights originally issued by the Company
subsequent to any adjustment made to the Purchase Price hereunder shall evidence
the right to purchase,
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<PAGE> 23
at the adjusted Purchase Price, the number of one one-thousandths of a share of
Preferred Stock purchasable from time to time hereunder upon exercise of the
Rights, all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election
as provided in Section 11(i), upon each adjustment of the Purchase Price as a
result of the calculations made in Sections 11(b) and (c), each Right
outstanding immediately prior to the making of such adjustment shall thereafter
evidence the right to purchase, at the adjusted Purchase Price, that number of
one one-thousandths of a share of Preferred Stock (calculated to the nearest
ten-millionth) obtained by (i) multiplying (x) the number of one one-thousandths
of a share covered by a Right immediately prior to this adjustment, by (y) the
Purchase Price in effect immediately prior to such adjustment of the Purchase
Price, and (ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any
adjustment of the Purchase Price to adjust the number of Rights, in lieu of any
adjustment in the number of one one-thousandths of a share of Preferred Stock
purchasable upon the exercise of a Right. Each of the Rights outstanding after
the adjustment in the number of Rights shall be exercisable for the number of
one one-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest one-hundred- thousandth) obtained by dividing
the Purchase Price in effect immediately prior to adjustment of the Purchase
Price by the Purchase Price in effect immediately after adjustment of the
Purchase Price. The Company shall make a public announcement of its election to
adjust the number of Rights, indicating the record date for the adjustment, and,
if known at the time, the amount of the adjustment to be made. This record date
may be the date on which the Purchase Price is adjusted or any day thereafter,
but, if the Rights Certificates have been issued, shall be at least ten (10)
days later than the date of the public announcement. If Rights Certificates have
been issued, upon each adjustment of the number of Rights pursuant to this
Section 11(i), the Company shall, as promptly as practicable, cause to be
distributed to holders of record of Rights Certificates on such record date
Rights Certificates evidencing, subject to Section 14 hereof, the additional
Rights to which such holders shall be entitled as a result of such adjustment,
or, at the option of the Company, shall cause to be distributed to such holders
of record in substitution and replacement for the Rights Certificates held by
such holders prior to the date of adjustment, and upon surrender thereof, if
required by the Company, new Rights Certificates evidencing all the Rights to
which such holders shall be entitled after such adjustment. Rights Certificates
so to be distributed shall be issued, executed and countersigned in the manner
provided for herein (and may bear, at the option of the Company, the adjusted
Purchase Price) and shall be registered in the names of the
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<PAGE> 24
holders of record of Rights Certificates on the record date specified in the
public announcement.
(j) Irrespective of any adjustment or change in the
Purchase Price or the number of one one-thousandths of a share of Preferred
Stock issuable upon the exercise of the Rights, the Rights Certificates
theretofore and thereafter issued may continue to express the Purchase Price per
one one-thousandth of a share and the number of one one-thousandths of a share
which were expressed in the initial Rights Certificates issued hereunder.
(k) Before taking any action that would cause an
adjustment reducing the Purchase Price below the then stated value, if any, of
the number of one one-thousandths of a share of Preferred Stock issuable upon
exercise of the Rights, the Company shall take any corporate action which may,
in the opinion of its counsel, be necessary in order that the Company may
validly and legally issue such number of one one-thousandths of a share of fully
paid and nonassessable Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require
that an adjustment in the Purchase Price be made effective as of a record date
for a specified event, the Company may elect to defer until the occurrence of
such event the issuance to the holder of any Right exercised after such record
date the number of one one-thousandths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
over and above the number of one one-thousandths of a share of Preferred Stock
and other capital stock or securities of the Company, if any, issuable upon such
exercise on the basis of the Purchase Price in effect prior to such adjustment;
PROVIDED, HOWEVER, that the Company shall deliver to such holder a due bill or
other appropriate instrument evidencing such holder's right to receive such
additional shares (fractional or otherwise) or securities upon the occurrence of
the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary
notwithstanding, the Company shall be entitled to make such reductions in the
Purchase Price, in addition to those adjustments expressly required by this
Section 11, as and to the extent that in their good faith judgment the Board
shall determine to be advisable in order that any (i) consolidation or
subdivision of the Preferred Stock, (ii) issuance wholly for cash of any shares
of Preferred Stock at less than the current market price, (iii) issuance wholly
for cash of shares of Preferred Stock or securities which by their terms are
convertible into or exchangeable for shares of Preferred Stock, (iv) stock
dividends or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to holders of its Preferred Stock
shall not be taxable to such stockholders.
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<PAGE> 25
(n) The Company covenants and agrees that it shall not,
at any time after the Distribution Date, (i) consolidate with any other Person
(other than a Subsidiary of the Company in a transaction that complies with
Section 11(o) hereof), (ii) merge with or into any other Person (other than a
Subsidiary of the Company in a transaction which complies with Section 11(o)
hereof), or (iii) sell or transfer (or permit any Subsidiary to sell or
transfer), in one transaction, or a series of related transactions, assets or
earning power aggregating more than 50% of the assets or earning power of the
Company and its Subsidiaries (taken as a whole) to any other Person or Persons
(other than the Company and/or any of its Subsidiaries in one or more
transactions each of which complies with Section 11(o) hereof), if (x) at the
time of or immediately after such consolidation, merger or sale there are any
rights, warrants or other instruments or securities outstanding or agreements in
effect that would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights or (y) prior to, simultaneously with or
immediately after such consolidation, merger or sale, the shareholders of the
Person who constitutes, or would constitute, the "Principal Party" for purposes
of Section 13(a) hereof shall have received a distribution of Rights previously
owned by such Person or any of its Affiliates and Associates. The Company shall
not consummate any such consolidation, merger, sale or transfer unless prior
thereto the Company and such other Person shall have executed and delivered to
the Rights Agent a supplemental agreement evidencing compliance with this
Section 11(n).
(o) The Company covenants and agrees that, after the
Distribution Date, it will not, except as permitted by Section 23, Section 24 or
Section 27 hereof, take (or permit any Subsidiary to take) any action if at the
time such action is taken it is reasonably foreseeable that such action will
diminish substantially or otherwise eliminate the benefits intended to be
afforded by the Rights.
(p) Anything in this Agreement to the contrary
notwithstanding, in the event that the Company shall at any time after the
Record Date and prior to the Distribution Date (i) declare or pay any dividend
on the outstanding shares of Common Stock payable in shares of Common Stock,
(ii) subdivide the outstanding shares of Common Stock, or (iii) combine the
outstanding shares of Common Stock into a smaller number of shares, the number
of Rights associated with each share of Common Stock then outstanding, or issued
or delivered thereafter but prior to the Distribution Date, shall be
proportionately adjusted so that the number of Rights thereafter associated with
each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction, the numerator of
which shall be the number of shares of Common Stock outstanding immediately
prior to the occurrence of such event and the denominator of which shall be the
number of shares of Common Stock outstanding immediately following the
occurrence of such event.
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<PAGE> 26
Section 12. CERTIFICATE OF ADJUSTED PURCHASE PRICE OR NUMBER OF SHARES.
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent, and with each transfer agent for the
Preferred Stock and the Common Stock, a copy of such certificate, and (c) mail a
brief summary thereof to each holder of a Rights Certificate (or, if prior to
the Distribution Date, to each holder of a certificate representing shares of
Common Stock) in accordance with Section 26 hereof. The Rights Agent shall be
fully protected in relying on any such certificate and on any adjustment therein
contained and shall not be deemed to have knowledge of any adjustment unless and
until it shall have received such certificate.
Section 13. CONSOLIDATION, MERGER OR SALE OR TRANSFER OF ASSETS OR
EARNING POWER.
(a) In the event that, at any time after a Person has
become an Acquiring Person, (x) the Company shall consolidate with, or merge
with and into, any other Person (other than a Subsidiary of the Company in a
transaction that complies with Section 11(o) hereof), and the Company shall not
be the continuing or surviving corporation of such consolidation or merger, (y)
any Person (other than a Subsidiary of the Company in a transaction that
complies with Section 11(o) hereof) shall consolidate with, or merge with or
into, the Company, and the Company shall be the continuing or surviving
corporation of such consolidation or merger and, in connection with such
consolidation or merger, all or part of the outstanding shares of Common Stock
shall be changed into or exchanged for stock or other securities of any other
Person or cash or any other property, or (z) the Company shall sell or otherwise
transfer (or one or more of its Subsidiaries shall sell or otherwise transfer),
in one transaction or a series of related transactions, assets or earning power
aggregating more than 50% of the assets or earning power of the Company and its
Subsidiaries (taken as a whole) to any Person or Persons (other than the Company
or any Subsidiary of the Company in one or more transactions each of which
complies with Section 11(o) hereof), then, and in each such case and except as
contemplated by Section 13(d) hereof, proper provision shall be made so that:
(i) each holder of a Right, except as provided in Section 7(e) hereof, shall
thereafter have the right to receive, upon the exercise thereof at the then
current Purchase Price in accordance with the terms of this Agreement, such
number of validly authorized and issued, fully paid, non-assessable and freely
tradeable shares of Common Stock of the Principal Party (as such term is
hereinafter defined), not subject to any liens, encumbrances, rights of first
refusal or other adverse claims, as shall be equal to the result obtained by (1)
multiplying the then current Purchase Price by the number of one one-thousandths
of a share of Preferred Stock for which a Right is exercisable immediately prior
to the first occurrence of a Section 13 Event (or, if a Section 11(a)(ii) Event
has occurred prior to the first occurrence of a Section 13 Event, multiplying
the number of such one one-thousandths of a share for which a Right was
exercisable
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immediately prior to the first occurrence of a Section 11(a)(ii) Event by the
Purchase Price in effect immediately prior to such first occurrence), and (2)
dividing that product (which, following the first occurrence of a Section 13
Event, shall be referred to as the "Purchase Price" for each Right and for all
purposes of this Agreement) by 50% of the current market price (determined
pursuant to Section 11(d)(i) hereof) per share of the Common Stock of such
Principal Party on the date of consummation of such Section 13 Event; (ii) such
Principal Party shall thereafter be liable for, and shall assume, by virtue of
such Section 13 Event, all the obligations and duties of the Company pursuant to
this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to
such Principal Party, it being specifically intended that, subject to clause (v)
below, the provisions of Section 11 hereof shall apply only to such Principal
Party following the first occurrence of a Section 13 Event; (iv) such Principal
Party shall take such steps (including, but not limited to, the reservation of a
sufficient number of shares of its Common Stock) in connection with the
consummation of any such transaction as may be necessary to assure that the
provisions hereof shall thereafter be applicable, as nearly as reasonably may
be, in relation to its shares of Common Stock thereafter deliverable upon the
exercise of the Rights; and (v) the provisions of Section 11(a)(ii) hereof shall
be of no effect following the first occurrence of any Section 13 Event.
(b) "Principal Party" shall mean
(i) in the case of any transaction described in
clause (x) or (y) of the first sentence of Section 13(a), the Person
that is the issuer of any securities into which shares of Common Stock
of the Company are converted in such merger or consolidation, and if no
securities are so issued, the Person that is the other party to such
merger or consolidation; and
(ii) in the case of any transaction described in
clause (z) of the first sentence of Section 13(a), the Person that is
the party receiving the greatest portion of the assets or earning power
transferred pursuant to such transaction or transactions;
PROVIDED, HOWEVER, that in any such case, (1) if the Common Stock of such Person
is not at such time and has not been continuously over the preceding twelve (12)
month period registered under Section 12 of the Exchange Act, and such Person is
a direct or indirect Subsidiary of another Person the Common Stock of which is
and has been so registered, "Principal Party" shall refer to such other Person;
(2) in case such Person is a Subsidiary, directly or indirectly, of more than
one Person, the Common Stocks of two or more of which are and have been so
registered, "Principal Party" shall refer to whichever of such Persons is the
issuer of the Common Stock having the greatest aggregate market value; and (3)
in case such Person is owned, directly or indirectly, by a joint venture formed
by two or more Persons that are not owned, directly or
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indirectly, by the same Person, the rules set forth in (1) and (2) above shall
apply to each of the chains of ownership having an interest in such joint
venture as if such party were a "Subsidiary" of both or all of such joint
ventures and the Principal Parties in each such chain shall bear the obligations
set forth in this Section 13 in the same ratio as their direct or indirect
interests in such Person bear to the total of such interests.
(c) The Company shall not consummate any such
consolidation, merger, sale or transfer unless the Principal Party shall have a
sufficient number of authorized shares of its Common Stock which have not been
issued or reserved for issuance to permit the exercise in full of the Rights in
accordance with this Section 13 and unless prior thereto the Company and such
Principal Party shall have executed and delivered to the Rights Agent a
supplemental agreement providing for the terms set forth in paragraphs (a) and
(b) of this Section 13 and further providing that, as soon as practicable after
the date of any consolidation, merger or sale of assets mentioned in paragraph
(a) of this Section 13, the Principal Party will
(i) prepare and file a registration statement
under the Act, with respect to the Rights and the securities
purchasable upon exercise of the Rights on an appropriate form, and
will use its best efforts to cause such registration statement to (A)
become effective as soon as practicable after such filing and (B)
remain effective (with a prospectus at all times meeting the
requirements of the Act) until the Expiration Date;
(ii) use its best efforts to qualify or register
the Rights and the securities purchasable upon exercise of the Rights
under the blue sky laws of such jurisdictions as may be necessary or
appropriate; and
(iii) deliver to holders of the Rights historical
financial statements for the Principal Party and each of its Affiliates
that comply in all respects with the requirements for registration on
Form 10 under the Exchange Act.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers. In the event that a Section 13 Event
shall occur at any time after the occurrence of a Section 11(a)(ii) Event, the
Rights which have not theretofore been exercised shall thereafter become
exercisable in the manner described in Section 13(a).
(d) Notwithstanding anything in this Agreement to the
contrary, Section 13 shall not be applicable to a transaction described in
subparagraphs (x) and (y) of Section 13(a) if (i) such transaction is
consummated with a Person or Persons (or a wholly owned subsidiary of any such
Person or Persons) who acquired shares of
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Common Stock pursuant to a Permitted Offer, (ii) the price per share of Common
Stock paid in such transaction is not less than the price per share of Common
Stock paid to all holders of shares of Common Stock whose shares were purchased
pursuant to such Permitted Offer, and (iii) the form of consideration paid in
such transaction is the same as the form of consideration paid pursuant to such
Permitted Offer. Upon consummation of any such transaction contemplated by this
Section 13(d), all Rights hereunder shall expire.
Section 14. FRACTIONAL RIGHTS AND FRACTIONAL SHARES.
(a) The Company shall not be required to issue fractions
of Rights, except prior to the Distribution Date as provided in Section 11(i) or
(p) hereof, or to distribute Rights Certificates that evidence fractional
Rights. In lieu of such fractional Rights, there shall be paid to the registered
holders of the Rights Certificates with regard to which such fractional Rights
would otherwise be issuable, an amount in cash equal to the same fraction of the
current market value of a whole Right. For purposes of this Section 14(a), the
current market value of a whole Right shall be the closing price of the Rights
for the Trading Day immediately prior to the date on which such fractional
Rights would have been otherwise issuable. The closing price of the Rights for
any day shall be the last sale price, regular way, or, in case no such sale
takes place on such day, the average of the closing bid and asked prices,
regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the principal national securities exchange on which the Rights are
listed or admitted to trading, or if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price or, if not so
quoted, the average of the high bid and the low asked prices in the
over-the-counter market, as reported by Nasdaq or such other system then in use
or, if on any such date the Rights are not quoted by any such organization, the
average of the closing bid and asked prices as furnished by a professional
market maker making a market in the Rights selected by the Board. If on any such
date no such market maker is making a market in the Rights, the fair value of
the Rights on such date as determined in good faith by the Board shall be used.
(b) The Company shall not be required to issue fractions
of shares of Preferred Stock (other than fractions which are integral multiples
of one one-thousandth of a share of Preferred Stock) upon exercise of the Rights
or to distribute certificates that evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock), the Company shall pay to the registered holders of
Rights Certificates at the time such Rights are exercised as herein provided an
amount in cash equal to the same fraction of the current market value of
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one one-thousandth of a share of Preferred Stock. For purposes of this Section
14(b), the current market value of one one-thousandth of a share of Preferred
Stock shall be one one-thousandth of the closing price of a share of Preferred
Stock (as determined pursuant to Section 11(d)(ii) hereof) for the Trading Day
immediately prior to the date of such exercise.
(c) Following the occurrence of a Triggering Event, the
Company shall not be required to issue fractions of shares of Common Stock upon
exercise of the Rights or to distribute certificates which evidence fractional
shares of Common Stock. In lieu of fractional shares of Common Stock, the
Company shall pay to the registered holders of Rights Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market price of one (1) share of Common Stock (as
determined pursuant to Section 11(d)(i) hereof) for the Trading Day immediately
prior to the date of such exercise.
(d) The holder of a Right by the acceptance of the Rights
expressly waives his right to receive any fractional Rights or any fractional
shares upon exercise of a Right, except as permitted by this Section 14.
Section 15. RIGHTS OF ACTION. All rights of action in respect of this
Agreement, except the rights of action expressly given to the Rights Agent in
Section 18 hereof, are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of the
Common Stock); and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of the Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of the Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and shall be entitled to specific performance
of the obligations hereunder and injunctive relief against actual or threatened
violations of the obligations hereunder of any Person subject to this Agreement.
Section 16. AGREEMENT OF RIGHTS HOLDERS. Every holder of a Right by
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be
transferable only in connection with the transfer of Common Stock;
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(b) after the Distribution Date, the Rights Certificates
are transferable only on the registry books of the Rights Agent if surrendered
at the office of the Rights Agent designated for such purposes, duly endorsed or
accompanied by a proper instrument of transfer and with the appropriate forms
and certificates duly completed and fully executed;
(c) subject to Section 6(a) and Section 7(f) hereof, the
Company and the Rights Agent may deem and treat the person in whose name a
Rights Certificate (or, prior to the Distribution Date, the associated Common
Stock certificate) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Rights Certificates or the associated Common Stock certificate made by anyone
other than the Company or the Rights Agent) for all purposes whatsoever, and
neither the Company nor the Rights Agent, subject to the last sentence of
Section 7(e) hereof, shall be required to be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the
contrary, neither the Company nor the Rights Agent shall have any liability to
any holder of a Right or other Person as a result of its inability to perform
any of its obligations under this Agreement by reason of any preliminary or
permanent injunction or other order, decree or ruling issued by a court of
competent jurisdiction or by a governmental, regulatory or administrative agency
or commission, or any statute, rule, regulation or executive order promulgated
or enacted by any governmental authority, prohibiting or otherwise restraining
performance of such obligation; PROVIDED, HOWEVER, the Company must use its best
efforts to prevent the issuance of any such order, decree or ruling and to have
any such order, decree or ruling lifted or otherwise overturned as soon as
possible.
Section 17. RIGHTS CERTIFICATE HOLDER NOT DEEMED A STOCKHOLDER. No
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the number of one
one-thousandths of a share of Preferred Stock or any other securities of the
Company which may at any time be issuable on the exercise of the Rights
represented thereby, nor shall anything contained herein or in any Rights
Certificate be construed to confer upon the holder of any Rights Certificate, as
such, any of the rights of a stockholder of the Company or any right to vote for
the election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in Section 25 hereof), or to receive dividends or subscription rights,
or otherwise, until the Right or Rights evidenced by such Rights Certificate
shall have been exercised in accordance with the provisions hereof.
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Section 18. CONCERNING THE RIGHTS AGENT.
(a) The Company agrees to pay to the Rights Agent
reasonable compensation for all services rendered by it hereunder and, from time
to time, on demand of the Rights Agent, its reasonable expenses and counsel fees
and disbursements and other disbursements incurred in the administration and
execution of this Agreement and the exercise and performance of its duties
hereunder. The Company shall indemnify the Rights Agent for, and hold it
harmless against, any loss, liability, claim or expense ("Loss") arising out of
or in connection with its duties under this Agreement, including the costs and
expenses of defending itself against any Loss, unless such Loss shall have been
determined by a court of competent jurisdiction to be a result of the Rights
Agent's gross negligence, bad faith or willful misconduct. The obligations
of the Company under this section shall survive the termination of this
Agreement.
(b) The Rights Agent shall be protected and shall incur
no liability for or in respect of any action taken, suffered or omitted by it in
connection with its administration of this Agreement in reliance upon any Rights
Certificate or certificate for Common Stock or for other securities of the
Company, instrument of assignment or transfer, power of attorney, endorsement,
affidavit, letter, notice, direction, consent, certificate, statement, or other
paper or document believed by it to be genuine and to be signed, executed and,
where necessary, verified or acknowledged, by the proper Person or Persons, or
otherwise upon the advice of counsel as set forth in Section 20 hereof.
Section 19. MERGER OR CONSOLIDATION OR CHANGE OF NAME OF RIGHTS AGENT.
(a) Any corporation into which the Rights Agent or any
successor Rights Agent may be merged or with which it may be consolidated, or
any corporation resulting from any merger or consolidation to which the Rights
Agent or any successor Rights Agent shall be a party, or any corporation
succeeding to the corporate trust or stock transfer business of the Rights Agent
or any successor Rights Agent, shall be the successor to the Rights Agent under
this Agreement without the execution or filing of any paper or any further act
on the part of any of the parties hereto; PROVIDED, HOWEVER, that such
corporation would be eligible for appointment as a successor Rights Agent under
the provisions of Section 21 hereof. In case at the time such successor Rights
Agent shall succeed to the agency created by this Agreement, any of the Rights
Certificates shall have been countersigned but not delivered, any such successor
Rights Agent may adopt the countersignature of a predecessor Rights Agent and
deliver such Rights Certificates so countersigned; and in case at that time any
of the Rights
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Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
(b) In case at any time the name of the Rights Agent
shall be changed and at such time any of the Rights Certificates shall have been
countersigned but not delivered, the Rights Agent may adopt the countersignature
under its prior name and deliver Rights Certificates so countersigned; and in
case at that time any of the Rights Certificates shall not have been
countersigned, the Rights Agent may countersign such Rights Certificates either
in its prior name or in its changed name; and in all such cases such Rights
Certificates shall have the full force provided in the Rights Certificates and
in this Agreement.
Section 20. DUTIES OF RIGHTS AGENT. The Rights Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who
may be legal counsel for the Company), and the opinion of such counsel shall be
full and complete authorization and protection to the Rights Agent as to any
action taken or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this
Agreement the Rights Agent shall deem it necessary or desirable that any fact or
matter (including, without limitation, the identity of any Acquiring Person and
the determination of "current market price") be proved or established by the
Company prior to taking or suffering any action hereunder, such fact or matter
(unless other evidence in respect thereof be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by
the Chairman of the Board, the President, any Vice President, the Treasurer, any
Assistant Treasurer, the Secretary or any Assistant Secretary of the Company and
delivered to the Rights Agent; and such certificate shall be full authorization
to the Rights Agent for any action taken or suffered in good faith by it under
the provisions of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for
its own gross negligence, bad faith or willful misconduct. In no case, however,
will the Rights Agent be liable for special, indirect, incidental or
consequential loss or damages of any kind whatsoever (including but not limited
to lost profits), even if the Rights Agent has been advised of the possibility
of such damages.
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(d) The Rights Agent shall not be liable for or by reason
of any of the statements of fact or recitals contained in this Agreement or in
the Rights Certificates or be required to verify the same (except as to its
countersignature on such Rights Certificates), but all such statements and
recitals are and shall be deemed to have been made by the Company only.
(e) The Rights Agent shall not be under any
responsibility in respect of the validity of this Agreement or the execution and
delivery hereof (except the due execution hereof by the Rights Agent) or in
respect of the validity or execution of any Rights Certificate (except its
countersignature thereof); nor shall it be responsible for any breach by the
Company of any covenant or condition contained in this Agreement or in any
Rights Certificate; nor shall it be responsible for any adjustment required
under the provisions of Section 11, Section 13 or Section 24 hereof or
responsible for the manner, method or amount of any such adjustment or the
ascertaining of the existence of facts that would require any such adjustment
(except with respect to the exercise of Rights evidenced by Rights Certificates
after receipt of a certificate describing any such adjustment, delivered
pursuant to Section 12); nor shall it by any act hereunder be deemed to make any
representation or warranty as to the authorization or reservation of any shares
of Common Stock or Preferred Stock to be issued pursuant to this Agreement or
any Rights Certificate or as to whether any shares of Common Stock or Preferred
Stock will, when so issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute,
acknowledge and deliver or cause to be performed, executed, acknowledged and
delivered all such further and other acts, instruments and assurances as may
reasonably be required by the Rights Agent for the carrying out or performing by
the Rights Agent of the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to
accept instructions with respect to the performance of its duties hereunder from
the Chairman of the Board, the President, any Vice President, the Secretary, any
Assistant Secretary, the Treasurer or any Assistant Treasurer of the Company,
and to apply to such officers for advice or instructions in connection with its
duties, and it shall not be liable for any action taken or suffered to be taken
by it in good faith in accordance with instructions of any such officer. Any
application by the Rights Agent for written instructions from the Company may,
at the option of the Rights Agent, set forth in writing any action proposed to
be taken or omitted by the Rights Agent with respect to its duties or
obligations under this Rights Agreement and the date on and/or after which such
action shall be taken or omitted and the Rights Agent shall not be liable for
any action taken or omitted in accordance with a proposal included in any such
application on or after the date specified therein (which date shall not be less
than five Business Days
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after the date any such officer actually receives such application, unless any
such officer shall have consented in writing to an earlier date) unless, prior
to taking or omitting any such action, the Rights Agent has received written
instructions in response to such application specifying the action to be taken
or omitted.
(h) The Rights Agent and any stockholder, director,
officer or employee of the Rights Agent may buy, sell or deal in any of the
Rights or other securities of the Company or become pecuniarily interested in
any transaction in which the Company may be interested, or contract with or lend
money to the Company or otherwise act as fully and freely as though it were not
Rights Agent under this Agreement. Nothing herein shall preclude the Rights
Agent from acting in any other capacity for the Company or for any other legal
entity.
(i) The Rights Agent may execute and exercise any of the
rights or powers hereby vested in it or perform any duty hereunder either itself
or by or through its attorneys or agents, and the Rights Agent shall not be
answerable or accountable for any act, default, neglect or misconduct of any
such attorneys or agents or for any loss to the Company resulting from any such
act, default, neglect or misconduct; PROVIDED, HOWEVER, reasonable care was
exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the
Rights Agent to expend or risk its own funds or otherwise incur any financial
liability in the performance of any of its duties hereunder or in the exercise
of its rights if there shall be reasonable grounds for believing that repayment
of such funds or adequate indemnification against such risk or liability is not
reasonably assured to it.
(k) If, with respect to any Rights Certificate
surrendered to the Rights Agent for exercise or transfer, the certificate
attached to the form of assignment or form of election to purchase, as the case
may be, has not been completed, the Company and the Rights Agent will deem the
beneficial owner of the rights evidenced by such Rights Certificate to be an
Acquiring Person or an Affiliate or Associate thereof and such assignment or
election to purchase will not be honored.
Section 21. CHANGE OF RIGHTS AGENT. The Rights Agent or any successor
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company, and to each
transfer agent of the Common Stock and Preferred Stock, by registered or
certified mail, and to the holders of the Rights Certificates by first-class
mail. The Company may remove the Rights Agent or any successor Rights Agent upon
thirty (30) days' notice in writing, mailed to the Rights Agent or successor
Rights Agent, as the case may be, and to each transfer agent of the Common Stock
and Preferred Stock, by registered or certified mail, and to
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the holders of the Rights Certificates by first-class mail. If the Rights Agent
shall resign or be removed or shall otherwise become incapable of acting, the
Company shall appoint a successor to the Rights Agent. If the Company shall fail
to make such appointment within a period of thirty (30) days after giving notice
of such removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Rights Certificate (who shall, with such notice, submit his Rights Certificate
for inspection by the Company), then any registered holder of any Rights
Certificate may apply to any court of competent jurisdiction for the appointment
of a new Rights Agent. Any successor Rights Agent, whether appointed by the
Company or by such a court, shall be (a) a corporation organized and doing
business under the laws of the United States (or of any state of the United
States) in good standing, which is authorized under such laws to exercise
corporate trust or stock transfer powers and is subject to supervision or
examination by federal or state authority and which has at the time of its
appointment as Rights Agent a combined capital and surplus of at least
$50,000,000 or (b) an affiliate of a corporation described in clause (a) of this
sentence. After appointment, the successor Rights Agent shall be vested with the
same powers, rights, duties and responsibilities as if it had been originally
named as Rights Agent without further act or deed; but the predecessor Rights
Agent shall deliver and transfer to the successor Rights Agent any property at
the time held by it hereunder, and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Not later than the effective
date of any such appointment, the Company shall file notice thereof in writing
with the predecessor Rights Agent and each transfer agent of the Common Stock
and the Preferred Stock, and mail a notice thereof in writing to the registered
holders of the Rights Certificates. Failure to give any notice provided for in
this Section 21, however, or any defect therein, shall not affect the legality
or validity of the resignation or removal of the Rights Agent or the appointment
of the successor Rights Agent, as the case may be.
Section 22. ISSUANCE OF NEW RIGHTS CERTIFICATES. Notwithstanding any of
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Rights Certificates evidencing Rights in such form
as may be approved by its Board to reflect any adjustment or change in the
Purchase Price and the number or kind or class of shares or other securities or
property purchasable under the Rights Certificates made in accordance with the
provisions of this Agreement. In addition, in connection with the issuance or
sale of shares of Common Stock following the Distribution Date and prior to the
redemption or expiration of the Rights, the Company (a) shall, with respect to
shares of Common Stock so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, or upon the exercise,
conversion or exchange of securities issued by the Company prior to the
Distribution Date, and (b) may, in any other case, if deemed necessary or
appropriate by the Board, issue Rights Certificates representing the appropriate
number of Rights in
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connection with such issuance or sale; PROVIDED, however, that (i) no such
Rights Certificate shall be issued if, and to the extent that, the Company shall
be advised by counsel that such issuance would create a significant risk of
material adverse tax consequences to the Company or the Person to whom such
Rights Certificate would be issued, and (ii) no such Rights Certificate shall be
issued if, and to the extent that, appropriate adjustment shall otherwise have
been made in lieu of the issuance thereof.
Section 23. REDEMPTION AND TERMINATION.
(a) The Board may, at its option, at any time prior to
the earlier of (i) the close of business on the tenth Business Day (or such
later date as may be determined by the Board pursuant to clause (i) of the first
sentence of Section 3(a) with respect to the Distribution Date) following the
Stock Acquisition Date (or, if the Stock Acquisition Date shall have occurred
prior to the Record Date, the close of business on the tenth Business Day
following the Record Date) or (ii) the Final Expiration Date, redeem all but not
less than all the then outstanding Rights at a redemption price of $.001 per
Right, as such amount may be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
redemption price being hereinafter referred to as the "Redemption Price"). The
redemption of the Rights by the Board may be made effective at such time, on
such basis and with such conditions as the Board in its sole discretion may
establish. The Company may, at its option, pay the Redemption Price in cash,
shares of Common Stock (based on the "current market price," as defined in
Section 11(d)(i) hereof, of the Common Stock at the time of redemption) or any
other form of consideration, or any combination of any of the foregoing, deemed
appropriate by the Board. Notwithstanding anything contained in this Agreement
to the contrary, the Rights shall not be exercisable after the first occurrence
of a Section 11(a)(ii) Event until such time as the Company's right of
redemption hereunder has expired.
(b) Immediately upon the action of the Board ordering the
redemption of the Rights, evidence of which shall have been filed with the
Rights Agent and without any further action and without any notice, the right to
exercise the Rights shall terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price for each Right so held.
Promptly after the action of the Board ordering the redemption of the Rights,
the Company shall give notice of such redemption to the Rights Agent and the
holders of the then outstanding Rights by mailing such notice to all such
holders at each holder's last address as it appears upon the registry books of
the Rights Agent or, prior to the Distribution Date, on the registry books of
the Transfer Agent for the Common Stock. Any notice which is mailed in the
manner herein provided shall be deemed given, whether or not the holder receives
the notice. Each such notice of redemption will state the method by which the
payment of the Redemption Price will be made.
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(c) Notwithstanding the provisions of Section 23(a)
hereof, in the event that a majority of the Board is elected by shareholder
action by written consent, or is comprised of persons elected at a meeting of
stockholders who were not nominated by the Board in office immediately prior to
such meeting, then for a period of ninety (90) days following the effectiveness
of such election, the Rights shall not be redeemed if such redemption is
reasonably likely to have the purpose or effect of allowing any Person to become
an Acquiring Person or otherwise facilitating the occurrence of a Triggering
Event or a transaction with an Acquiring Person.
(d) The Company may, at its option, discharge all of its
obligations with respect to the Rights by (i) issuing a press release announcing
the manner of redemption of the Rights in accordance with this Agreement and
(ii) mailing payment of the Redemption Price to the registered holders of the
Rights at their last addresses as they appear on the registry books of the
Rights Agent or, prior to the Distribution Date, on the registry books of the
Transfer Agent of the Common Shares, and upon such action, all outstanding
Rights and Right Certificates shall be null and void without any further action
by the Company.
Section 24. EXCHANGE.
(a) The Board may, at its option, at any time after a
Section 11(a)(ii) Event, exchange all or part of the then outstanding and
exercisable Rights (which (i) shall not include Rights that have become void
pursuant to the provisions of Section 7(e) hereof, and (ii) shall include,
without limitation, any Rights issued after the Distribution Date) for shares of
Common Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio"). Notwithstanding the foregoing,
the Board shall not be empowered to effect such exchange at any time after any
Person (other than the Company, any Subsidiary of the Company, any employee
benefit plan of the Company or any such Subsidiary, or any entity holding Common
Stock for or pursuant to the terms of any such plan), together with all
Affiliates and Associates of such Person, becomes the Beneficial Owner of 50% or
more of the shares of Common Stock then outstanding.
(b) Immediately upon the action of the Board ordering the
exchange of any Rights pursuant to subsection (a) of this Section 24, evidence
of which shall have been filed with the Rights Agent, and without any further
action and without any notice, the right to exercise such Rights shall terminate
and the only right thereafter of a holder of such Rights shall be to receive
that number of shares of Common Stock equal to the number of such Rights held by
such holder multiplied by the Exchange Ratio. The Company shall promptly give
public notice of any such exchange; PROVIDED,
37
<PAGE> 39
HOWEVER, that the failure to give, or any defect in, such notice shall not
affect the validity of such exchange. The Company promptly shall mail a notice
of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of exchange shall state the
method by which the exchange of shares of Common Stock for Rights will be
effected and, in the event of any partial exchange, the number of Rights which
will be exchanged. Any partial exchange shall be effected pro rata based on the
number of Rights (other than Rights which have become void pursuant to the
provisions of Section 7(e) hereof) held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the
Company, at its option, may substitute Preferred Stock (or equivalent preferred
stock, as such term is defined in Section 11(b) hereof) for shares of Common
Stock exchangeable for Rights, at the initial rate of one one-thousandth of a
share of Preferred Stock (or equivalent preferred stock) for each share of
Common Stock, as appropriately adjusted to reflect adjustments in the voting
rights of the Preferred Stock pursuant to Section 3(A) of the Certificate of
Designations attached hereto as EXHIBIT A, so that the fraction of a share of
Preferred Stock (or equivalent preferred stock) delivered in lieu of each share
of Common Stock shall have the same voting rights as one share of Common Stock.
(d) In the event that there shall not be sufficient
shares of Common Stock or Preferred Stock issued but not outstanding or
authorized but unissued to permit any exchange of Rights as contemplated in
accordance with this Section 24, the Company shall take all such action as may
be necessary to authorize additional shares of Common Stock or Preferred Stock
for issuance upon exchange of the Rights.
(e) The Company shall not be required to issue fractions
of shares of Common Stock or to distribute certificates which evidence
fractional shares of Common Stock. In lieu of such fractional shares of Common
Stock, there shall be paid to the registered holders of the Right Certificates
with regard to which such fractional shares of Common Stock would otherwise be
issuable, an amount in cash equal to the same fraction of the current market
value of a whole share of Common Stock. For the purposes of this subsection (e),
the current market value of a whole share of Common Stock shall be the closing
price per share of Common Stock (as determined pursuant to the second sentence
of Section 11(d)(i) hereof) for the Trading Day immediately prior to the date of
exchange pursuant to this Section 24.
Section 25. NOTICE OF CERTAIN EVENTS.
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<PAGE> 40
(a) In case the Company shall propose, at any time after
the Distribution Date, (i) to pay any dividend payable in stock of any class to
the holders of Preferred Stock or to make any other distribution to the holders
of Preferred Stock (other than a regular quarterly cash dividend out of earnings
or retained earnings of the Company), or (ii) to offer to the holders of
Preferred Stock rights or warrants to subscribe for or to purchase any
additional shares of Preferred Stock or shares of stock of any class or any
other securities, rights or options, or (iii) to effect any reclassification of
its Preferred Stock (other than a reclassification involving only the
subdivision of outstanding shares of Preferred Stock), or (iv) to effect any
consolidation or merger into or with any other Person (other than a Subsidiary
of the Company in a transaction which complies with Section 11(o) hereof), or to
effect any sale or other transfer (or to permit one or more of its Subsidiaries
to effect any sale or other transfer), in one transaction or a series of related
transactions, of more than 50% of the assets or earning power of the Company and
its Subsidiaries (taken as a whole) to any other Person or Persons (other than
the Company and/or any of its Subsidiaries in one or more transactions each of
which complies with Section 11(o) hereof), or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Rights Certificate, to the extent feasible and in
accordance with Section 26 hereof, a notice of such proposed action, which shall
specify the record date for the purposes of such stock dividend, distribution of
rights or warrants, or the date on which such reclassification, consolidation,
merger, sale, transfer, liquidation, dissolution, or winding up is to take place
and the date of participation therein by the holders of the shares of Preferred
Stock, if any such date is to be fixed, and such notice shall be so given in the
case of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Preferred
Stock, whichever shall be the earlier.
(b) In case a Section 11(a)(ii) Event shall occur, then,
in any such case, (i) the Company shall as soon as practicable thereafter give
to each holder of a Rights Certificate, to the extent feasible and in accordance
with Section 26 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Section 11(a)(ii) hereof, and (ii) all references in the preceding paragraph to
Preferred Stock shall be deemed thereafter to refer also to Common Stock and/or,
if appropriate, other securities.
Section 26. NOTICES. Notices or demands authorized by this Agreement to
be given or made by the Rights Agent or by the holder of any Rights Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage
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<PAGE> 41
prepaid, addressed (until another address is filed in writing with the Rights
Agent) as follows:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NJ 12563-9970
Attention: Chief Executive Officer
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Jay E. Bothwick, Esq.
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Rights
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, addressed (until another address is
filed in writing with the Company) as follows:
______________________
______________________
______________________
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Rights Certificate (or, if
prior to the Distribution Date, to the holder of certificates representing
shares of Common Stock) shall be sufficiently given or made if sent by
first-class mail, postage prepaid, addressed to such holder at the address of
such holder as shown on the registry books of the Company.
Section 27. SUPPLEMENTS AND AMENDMENTS. Except as provided in the
penultimate sentence of this Section 27, for so long as the Rights are then
redeemable, the Company may, in its sole and absolute discretion, and the Rights
Agent shall, if the Company so directs, supplement or amend any provision of
this Agreement in any respect without the approval of any holders of the Rights.
At any time when the Rights are no longer redeemable, except as provided in the
penultimate sentence of this Section 27, the Company may, by approval of a
majority of the members of the Board (provided, that at the time of such
approval of the Board there are then in office not less
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<PAGE> 42
than two Continuing Directors and such supplement or amendment is approved by a
majority of the Continuing Directors then in office), and the Rights Agent
shall, if the Company so directs, supplement or amend this Agreement without the
approval of any holders of Rights in order (i) to cure any ambiguity or (ii) to
correct or supplement any provision contained herein which may be defective or
inconsistent with any other provisions herein, PROVIDED that no such supplement
or amendment shall adversely affect the interests of the holders of Rights as
such (other than an Acquiring Person or an Affiliate or Associate of an
Acquiring Person). Upon the delivery of a certificate from an appropriate
officer of the Company which states that the proposed supplement or amendment is
in compliance with the terms of this Section 27, the Rights Agent shall execute
such supplement or amendment. Notwithstanding anything contained in this
Agreement to the contrary, no supplement or amendment shall be made which
changes the Redemption Price. Prior to the Distribution Date, the interests of
the holders of Rights shall be deemed coincident with the interests of the
holders of Common Stock.
Section 28. SUCCESSORS. All the covenants and provisions of this
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. ACTIONS BY THE BOARD OF DIRECTORS, ETC. The Board shall
have the exclusive power and authority to administer this Agreement and to
exercise all rights and powers specifically granted to the Board or to the
Company, or as may be necessary or advisable in the administration of this
Agreement, including, without limitation, the right and power to (i) interpret
the provisions of this Agreement, and (ii) make all determinations deemed
necessary or advisable for the administration of this Agreement (including a
determination to redeem or not redeem the Rights or to amend this Agreement).
All such actions, calculations, interpretations and determinations (including,
for purposes of clause (y) below, all omissions with respect to the foregoing)
which are done or made by the Board in good faith, shall (x) be final,
conclusive and binding on the Company, the Rights Agent, the holders of the
Rights and all other parties, and (y) not subject the Board to any liability to
the holders of the Rights.
Section 30. BENEFITS OF THIS AGREEMENT. Nothing in this Agreement shall
be construed to give to any Person other than the Company, the Rights Agent and
the registered holders of the Rights Certificates (and, prior to the
Distribution Date, registered holders of the Common Stock) any legal or
equitable right, remedy or claim under this Agreement; but this Agreement shall
be for the sole and exclusive benefit of the Company, the Rights Agent and the
registered holders of the Rights Certificates (and, prior to the Distribution
Date, registered holders of the Common Stock).
Section 31. SEVERABILITY. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid,
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<PAGE> 43
void or unenforceable, the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated; provided, however, that
notwithstanding anything in this Agreement to the contrary, if any such term,
provision, covenant or restriction is held by such court or authority to be
invalid, void or unenforceable and the Board determines in its good faith
judgment that severing the invalid, void or unenforceable language from this
Agreement would adversely affect the purpose or effect of this Agreement, the
right of redemption set forth in Section 23 hereof shall be reinstated and shall
not expire until the close of business on the tenth day following the date of
such determination by the Board.
Section 32. GOVERNING LAW. This Agreement, each Right and each Rights
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Washington and for all purposes shall be governed by and
construed in accordance with the laws of the State of Washington applicable to
contracts made and to be performed entirely within the State of Washington.
Section 33. COUNTERPARTS. This Agreement may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
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<PAGE> 44
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed and their respective corporate seals to be
hereunto affixed and attested, all as of the day and year first above written.
Attest: PENWEST PHARMACEUTICALS CO.
By: By:
----------------------------- ------------------------------------
Name: Name:
Title: Title:
Attest: ____________________________
By: By:
----------------------------- ------------------------------------
Name: Name:
Title: Title:
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<PAGE> 45
EXHIBIT A
DESIGNATION OF RIGHTS AND PREFERENCES
OF
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
OF
PENWEST PHARMACEUTICALS CO.
----------
RESOLVED: That pursuant to the authority granted to and vested in the
Board of Directors of the Corporation (hereinafter called the "Board") in
accordance with the provisions of the Amended and Restated Articles of
Incorporation, as amended, the Board hereby creates a series of Preferred Stock,
$.001 par value per share (the "Preferred Stock"), of the Corporation and hereby
states the designation and number of shares, and fixes the relative rights,
preferences and limitations thereof as follows:
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK:
Section 1. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series A Junior Participating Preferred Stock" (the "Series A
Preferred Stock") and the number of shares constituting the Series A Preferred
Stock shall be one hundred thousand (100,000). Such number of shares may be
increased or decreased by resolution of the Board prior to issuance; PROVIDED,
that no decrease shall reduce the number of shares of Series A Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series A Preferred Stock.
Section 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the rights of the holders of any shares of any
series of Preferred Stock (or any similar stock) ranking prior and superior to
the Series A Preferred Stock with respect to dividends, the holders of shares of
Series A Preferred Stock, in preference to the holders of Common Stock, par
value $.001 per share (the "Common Stock"), of the Corporation, and of any other
junior stock, shall be entitled to receive, when, as and if declared by the
Board out of funds of the Corporation legally
<PAGE> 46
available for the payment of dividends, quarterly dividends payable in cash on
the last day of each fiscal quarter of the Corporation in each year (each such
date being referred to herein as a "Quarterly Dividend Payment Date"),
commencing on the first Quarterly Dividend Payment Date after the first issuance
of a share or fraction of a share of Series A Preferred Stock, in an amount per
share (rounded to the nearest cent) equal to the greater of (a) $10 or (b)
subject to the provision for adjustment hereinafter set forth, 1,000 times the
aggregate per share amount of all cash dividends, and 1,000 times the aggregate
per share amount (payable in kind) of all non-cash dividends or other
distributions, other than a dividend payable in shares of Common Stock or a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date or, with respect to the first Quarterly Dividend
Payment Date, since the first issuance of any share or fraction of a share of
Series A Preferred Stock. In the event the Corporation shall at any time declare
or pay any dividend on the Common Stock payable in shares of Common Stock, or
effect a subdivision, combination or consolidation of the outstanding shares of
Common Stock (by reclassification or otherwise than by payment of a dividend in
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under clause (b)
of the preceding sentence shall be adjusted by multiplying such amount by a
fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event. In the event the Corporation shall at any time declare or pay any
dividend on the Series A Preferred Stock payable in shares of Series A Preferred
Stock, or effect a subdivision, combination or consolidation of the outstanding
shares of Series A Preferred Stock (by reclassification or otherwise than by
payment of a dividend in shares of Series A Preferred Stock) into a greater or
lesser number of shares of Series A Preferred Stock, then in each such case the
amount to which holders of shares of Series A Preferred Stock were entitled
immediately prior to such event under clause (b) of the first sentence of this
Section 2(A) shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Series A Preferred Stock that were
outstanding immediately prior to such event and the denominator of which is the
number of shares of Series A Preferred Stock outstanding immediately after such
event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in paragraph (A) of this Section
immediately after it declares a dividend or distribution on the Common Stock
(other than a dividend payable in shares of Common Stock) and the Corporation
shall pay such dividend or distribution on the Series A Preferred Stock before
the dividend or distribution declared on the Common Stock is paid or set apart;
provided that, in the event no dividend or
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<PAGE> 47
distribution shall have been declared on the Common Stock during the period
between any Quarterly Dividend Payment Date and the next subsequent Quarterly
Dividend Payment Date, a dividend of $10 per share on the Series A Preferred
Stock shall nevertheless be payable on such subsequent Quarterly Dividend
Payment Date.
(C) Dividends shall begin to accrue and be cumulative on
outstanding shares of Series A Preferred Stock from the Quarterly Dividend
Payment Date next preceding the date of issue of such shares, unless the date of
issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of shares of Series A Preferred Stock entitled to
receive a quarterly dividend and before such Quarterly Dividend Payment Date, in
either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series A Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board may fix a record date
for the determination of holders of shares of Series A Preferred Stock entitled
to receive payment of a dividend or distribution declared thereon, which record
date shall be not more than 60 days prior to the date fixed for the payment
thereof.
Section 3. VOTING RIGHTS. The holders of shares of Series A Preferred
Stock shall have the following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Corporation.
In the event the Corporation shall at any time declare or pay any dividend on
the Common Stock payable in shares of Common Stock, or effect a subdivision,
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the number of votes per share to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event shall be adjusted
by multiplying such number by a fraction, the numerator of which is the number
of shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
3
<PAGE> 48
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the number of votes per share to which
holders of shares of Series A Preferred Stock were entitled immediately prior to
such event shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Series A Preferred Stock that were
outstanding immediately prior to such event and the denominator of which is the
number of shares of Series A Preferred Stock outstanding immediately after such
event.
(B) Except as otherwise provided herein, in the Certificate of
Incorporation or by law, the holders of shares of Series A Preferred Stock and
the holders of shares of Common Stock and any other capital stock of the
Corporation having general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(C) (i) If at any time dividends on any Series A Preferred
Stock shall be in arrears in an amount equal to six quarterly dividends thereon,
the holders of the Series A Preferred Stock, voting as a separate series from
all other series of Preferred Stock and classes of capital stock, shall be
entitled to elect two members of the Board in addition to any Directors elected
by any other series, class or classes of securities and the authorized number of
Directors will automatically be increased by two. Promptly thereafter, the Board
of the Corporation shall, as soon as may be practicable, call a special meeting
of holders of Series A Preferred Stock for the purpose of electing such members
of the Board. Such special meeting shall in any event be held within 45 days of
the occurrence of such arrearage.
(ii) During any period when the holders of Series A
Preferred Stock, voting as a separate series, shall be entitled and shall have
exercised their right to elect two Directors, then, and during such time as such
right continues, (a) the then authorized number of Directors shall be increased
by two, and the holders of Series A Preferred Stock, voting as a separate
series, shall be entitled to elect the additional Directors so provided for, and
(b) each such additional Director shall not be a member of any existing class of
the Board, but shall serve until the next annual meeting of stockholders for the
election of Directors, or until his successor shall be elected and shall
qualify, or until his right to hold such office terminates pursuant to the
provisions of this Section 3(C).
(iii) A Director elected pursuant to the terms hereof may
be removed with or without cause by the holders of Series A Preferred Stock
entitled to vote in an election of such Director.
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<PAGE> 49
(iv) If, during any interval between annual meetings of
stockholders for the election of Directors and while the holders of Series A
Preferred Stock shall be entitled to elect two Directors, there is no such
Director in office by reason of resignation, death or removal, then, promptly
thereafter, the Board shall call a special meeting of the holders of Series A
Preferred Stock for the purpose of filling such vacancy and such vacancy shall
be filled at such special meeting. Such special meeting shall in any event be
held within 45 days of the occurrence of such vacancy.
(v) At such time as the arrearage is fully cured, and all
dividends accumulated and unpaid on any shares of Series A Preferred Stock
outstanding are paid, and, in addition thereto, at least one regular dividend
has been paid subsequent to curing such arrearage, the term of office of any
Director elected pursuant to this Section 3(C), or his successor, shall
automatically terminate, and the authorized number of Directors shall
automatically decrease by two, the rights of the holders of the shares of the
Series A Preferred Stock to vote as provided in this Section 3(C) shall cease,
subject to renewal from time to time upon the same terms and conditions, and the
holders of shares of the Series A Preferred Stock shall have only the limited
voting rights elsewhere herein set forth.
(D) Except as set forth herein, or as otherwise provided by law,
holders of Series A Preferred Stock shall have no special voting rights and
their consent shall not be required (except to the extent they are entitled to
vote with holders of Common Stock as set forth herein) for taking any corporate
action.
Section 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on shares of Series A Preferred Stock
outstanding shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends, or make any other
distributions, on any shares of stock ranking junior (either as to dividends or
upon liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends, or make any other
distributions, on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except dividends paid ratably on the Series A Preferred Stock
and all such parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are then
entitled;
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<PAGE> 50
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock,
provided that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of any stock of
the Corporation ranking junior (either as to dividends or upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem or purchase or otherwise acquire for
consideration any shares of Series A Preferred Stock, or any shares of stock
ranking on a parity with the Series A Preferred Stock, except in accordance with
a purchase offer made in writing or by publication (as determined by the Board)
to all holders of such shares upon such terms as the Board, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good faith
will result in fair and equitable treatment among the respective series or
classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under paragraph (A) of
this Section 4, purchase or otherwise acquire such shares at such time and in
such manner.
Section 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
purchased or otherwise acquired by the Corporation in any manner whatsoever
shall be retired and cancelled promptly after the acquisition thereof. All such
shares shall upon their cancellation become authorized but unissued shares of
Preferred Stock and may be reissued as part of a new series of Preferred Stock
subject to the conditions and restrictions on issuance set forth herein, in the
Certificate of Incorporation, or in any other Certificate of Designations
creating a series of Preferred Stock or any similar stock or as otherwise
required by law.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(A) Upon any liquidation, dissolution or winding up of the
Corporation, no distribution shall be made (1) to the holders of shares of stock
ranking junior (either as to dividends or upon liquidation, dissolution or
winding up) to the Series A Preferred Stock unless, prior thereto, the holders
of shares of Series A Preferred Stock shall have received $1000 per share, plus
an amount equal to accrued and unpaid dividends and distributions thereon,
whether or not declared, to the date of such payment, provided that the holders
of shares of Series A Preferred Stock shall be entitled to receive an aggregate
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount to be distributed per share to holders
6
<PAGE> 51
of shares of Common Stock, or (2) to the holders of shares of stock ranking on a
parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such parity stock in proportion to the total
amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up.
(B) Neither the consolidation, merger or other business
combination of the Corporation with or into any other corporation nor the sale,
lease, exchange or conveyance of all or any part of the property, assets or
business of the Corporation shall be deemed to be a liquidation, dissolution or
winding up of the Corporation for purposes of this Section 6.
(C) In the event the Corporation shall at any time declare or pay
any dividend on the Common Stock payable in shares of Common Stock, or effect a
subdivision, combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise than by payment of a dividend in shares
of Common Stock) into a greater or lesser number of shares of Common Stock, then
in each such case the aggregate amount to which holders of shares of Series A
Preferred Stock were entitled immediately prior to such event under the proviso
in clause (1) of paragraph (A) of this Section 6 shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event. In the event the Corporation shall
at any time declare or pay any dividend on the Series A Preferred Stock payable
in shares of Series A Preferred Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Series A Preferred Stock (by
reclassification or otherwise than by payment of a dividend in shares of Series
A Preferred Stock) into a greater or lesser number of shares of Series A
Preferred Stock, then in each such case the aggregate amount to which holders of
shares of Series A Preferred Stock were entitled immediately prior to such event
under the proviso in clause (1) of paragraph (A) of this Section 6 shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Series A Preferred Stock that were outstanding immediately
prior to such event and the denominator of which is the number of shares of
Series A Preferred Stock outstanding immediately after such event.
Section 7. CONSOLIDATION, MERGER, ETC. Notwithstanding anything to the
contrary contained herein, in case the Corporation shall enter into any
consolidation, merger, combination or other transaction in which the shares of
Common Stock are exchanged for or changed into other stock or securities, cash
and/or any other property, then in any such case each share of Series A
Preferred Stock shall at the same time be similarly exchanged or changed into an
amount per share, subject to the provision for adjustment hereinafter set forth,
equal to 1,000 times the aggregate amount of stock, securities, cash
7
<PAGE> 52
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Corporation shall at any time declare or pay any dividend on the Common Stock
payable in shares of Common Stock, or effect a subdivision, combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into a
greater or lesser number of shares of Common Stock, then in each such case the
amount set forth in the preceding sentence with respect to the exchange or
change of shares of Series A Preferred Stock shall be adjusted by multiplying
such amount by a fraction, the numerator of which is the number of shares of
Common Stock outstanding immediately after such event and the denominator of
which is the number of shares of Common Stock that were outstanding immediately
prior to such event. In the event the Corporation shall at any time declare or
pay any dividend on the Series A Preferred Stock payable in shares of Series A
Preferred Stock, or effect a subdivision, combination or consolidation of the
outstanding shares of Series A Preferred Stock (by reclassification or otherwise
than by payment of a dividend in shares of Series A Preferred Stock) into a
greater or lesser number of shares of Series A Preferred Stock, then in each
such case the amount set forth in the first sentence of this Section 7 with
respect to the exchange or change of shares of Series A Preferred Stock shall be
adjusted by multiplying such amount by a fraction, the numerator of which is the
number of shares of Series A Preferred Stock that were outstanding immediately
prior to such event and the denominator of which is the number of shares of
Series A Preferred Stock outstanding immediately after such event.
Section 8. NO REDEMPTION. The shares of Series A Preferred Stock shall
not be redeemable.
Section 9. RANK. The Series A Preferred Stock shall rank, with respect
to the payment of dividends and the distribution of assets, junior to all series
of any other class of the Preferred Stock issued either before or after the
issuance of the Series A Preferred Stock, unless the terms of any such series
shall provide otherwise.
Section 10. AMENDMENT. At such time as any shares of Series A Preferred
Stock are outstanding, the Certificate of Incorporation, as amended, of the
Corporation shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of at
least two-thirds of the outstanding shares of Series A Preferred Stock, voting
together as a single class.
Section 11. FRACTIONAL SHARES. Series A Preferred Stock may be issued
in fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares,
8
<PAGE> 53
to exercise voting rights, receive dividends, participate in distributions and
have the benefit of all other rights of holders of Series A Preferred Stock.
9
<PAGE> 54
EXHIBIT B
[Form of Rights Certificate]
Certificate No. R- ______ Rights
NOT EXERCISABLE AFTER JULY __, 2008 OR EARLIER IF REDEEMED OR EXCHANGED BY THE
COMPANY. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $.001 PER RIGHT AND TO EXCHANGE
ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. UNDER CERTAIN CIRCUMSTANCES,
RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON (AS SUCH TERM IS DEFINED IN THE
RIGHTS AGREEMENT) AND ANY SUBSEQUENT HOLDER OF SUCH RIGHTS MAY BECOME NULL AND
VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE
BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN
AFFILIATE OR ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE
RIGHTS AGREEMENT). ACCORDINGLY, THIS RIGHTS CERTIFICATE AND THE RIGHTS
REPRESENTED HEREBY MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN
SECTION 7(e) OF SUCH AGREEMENT.](1)
PENWEST PHARMACEUTICALS CO.
Rights Certificate
This certifies that ____________, or registered assigns, is the
registered owner of the number of Rights set forth above, each of which entitles
the owner thereof, subject to the terms, provisions and conditions of the Rights
Agreement, dated as of July __, 1998 (the "Rights Agreement"), between Penwest
Pharmaceuticals Co., a Washington corporation (the "Company"), and ___________
____________________________ (the "Rights Agent"), to purchase from the Company
after the Distribution Date (as such term is defined in the Rights Agreement)
and at any time prior to 5:00 p.m. (New York time) on July __, 2008 at the
office of the Rights Agent designated for such purpose, or its successors as
Rights Agent, one one-thousandth of a fully paid, non-assessable share of Series
A Junior Participating Preferred Stock (the "Preferred Stock") of the Company,
$.001 par value per share, at a purchase price of $60 in cash per one
one-thousandth of a share (the "Purchase Price"), upon presentation and
surrender of this Rights Certificate
- -------------------
(1) The portion of the legend in brackets shall be inserted only
if applicable and shall replace the preceding sentence.
Front Side of Rights Certificate
<PAGE> 55
with the Form of Election to Purchase and related Certificate duly executed. The
number of Rights evidenced by this Rights Certificate (and the number of one
one-thousandth of a share of Preferred Stock which may be purchased upon
exercise hereof) set forth above, and the Purchase Price set forth above, are
the number and Purchase Price as of the close of business on July __, 1998,
based on the Preferred Stock as constituted at such date. Capitalized terms used
herein and not otherwise defined herein shall have the meanings ascribed to such
terms in the Rights Agreement.
Upon the occurrence of a Section 11(a)(ii) Event, if the Rights
evidenced by this Rights Certificate are beneficially owned by (i) an Acquiring
Person or an Affiliate or Associate of any such Acquiring Person (as such terms
are defined in the Rights Agreement), (ii) a transferee of any such Acquiring
Person, Associate or Affiliate who becomes a transferee after the Acquiring
Person becomes an Acquiring Person, or (iii) under certain circumstances
specified in the Rights Agreement, a transferee of a person who, concurrently
with or after such transfer, became an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Purchase Price and the number
and kind of shares of Preferred Stock or other securities which may be purchased
upon the exercise of the Rights evidenced by this Rights Certificate are subject
to modification and adjustment upon the happening of certain events, including
Section 11(a)(ii) Events.
This Rights Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal offices of the
Company and are available upon written request to the Company.
This Rights Certificate, with or without other Rights Certificates,
upon surrender at the office of the Rights Agent designated for such purpose,
with the Form of Election and Certificate set forth on the reverse side duly
executed, may be exchanged for another Rights Certificate or Rights Certificates
of like tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of one one-thousandths of a share of Preferred Stock as the
Rights evidenced by the Rights Certificate or Rights Certificates surrendered
shall have entitled such holder to purchase. If this Rights
Front Side of Rights Certificate
2
<PAGE> 56
Certificate shall be exercised in part, the holder shall be entitled to receive
upon surrender hereof another Rights Certificate or Rights Certificates for the
number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Rights evidenced
by this Certificate may be redeemed by the Company at its option at a redemption
price of $.001 per Right at any time prior to the earlier of (i) the
Distribution Date and (ii) the Final Expiration Date.
Subject to the provisions of the Rights Agreement, the Company may, at
its option, at any time after a Section 11(a)(ii) Event, exchange all or part of
the Rights evidenced by this Certificate for shares of the Company's Common
Stock or for Preferred Stock (or shares of a class or series of the Company's
preferred stock having the same rights, privileges and preferences as the
Preferred Stock).
No fractional shares of Preferred Stock will be issued upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-thousandth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts), but
in lieu thereof a cash payment will be made, as provided in the Rights
Agreement.
No holder of this Rights Certificate, as such, shall be entitled to
vote or receive dividends or be deemed for any purpose the holder of shares of
Preferred Stock or of any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting stockholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Rights
Certificate shall have been exercised as provided in the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
Front Side of Rights Certificate
3
<PAGE> 57
WITNESS the facsimile signature of the proper officers of the Company
and its corporate seal.
Dated as of _______________
ATTEST: PENWEST PHARMACEUTICALS CO.
By:
- ---------------------------- -------------------------------
Secretay Title:
COUNTERSIGNED:
_____________________________
By:
------------------------
Authorized Signature
Front Side of Rights Certificate
4
<PAGE> 58
[Form of Reverse Side of Rights Certificate]
FORM OF ASSIGNMENT
(To be executed by the registered holder if
such holder desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED _____________________________________________ hereby
sells, assigns and transfers unto _____________________________________________
_______________________________________________________________________________
(Please print name and address of transferee)
_________________________________________________________________________ this
Rights Certificate, together with all right, title and interest therein, and
does hereby irrevocably constitute and appoint ______________________ Attorney,
to transfer the within Rights Certificate on the books of the within-named
Company, with full power of substitution.
Dated: _____________
---------------------------------
Signature
Signature Guaranteed:
Certificate
The undersigned hereby certifies that the Rights evidenced by this
Rights Certificate are not beneficially owned by, or being assigned to, an
Acquiring Person or an Affiliate or Associate thereof (as such terms are defined
pursuant to the Rights Agreement).
Dated: _____________
---------------------------------
Signature
Reverse Side of Rights Certificate
<PAGE> 59
Signature Guaranteed:
NOTICE
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
Reverse Side of Rights Certificate
2
<PAGE> 60
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to exercise
Rights represented by the Rights Certificate.)
To: ___________________________
The undersigned hereby irrevocably elects to exercise ___________
Rights represented by this Rights Certificate to purchase the shares of
Preferred Stock issuable upon the exercise of the Rights (or such other
securities of the Company or of any other person which may be issuable upon the
exercise of the Rights) and requests that certificates for such shares be issued
in the name of and delivered to:
Please insert social security
or other identifying number __________________________________________________
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number __________________________________________________
_______________________________________________________________________________
(Please print name and address)
_______________________________________________________________________________
Dated: _____________
---------------------------------
Signature
Signature Guaranteed:
Reverse Side of Rights Certificate
<PAGE> 61
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate [ ] are [ ]
are not being exercised by or on behalf of a Person who is or was an Acquiring
Person or an Affiliate or Associate thereof (as such terms are defined pursuant
to the Rights Agreement);
(2) after due inquiry and to the best knowledge of the
undersigned, the undersigned [ ] did [ ] did not acquire the Rights evidenced by
this Rights Certificate from any Person who is, was or became an Acquiring
Person or an Affiliate or Associate thereof.
Dated: _____________
---------------------------------
Signature
Signature Guaranteed:
NOTICE
The signature to the foregoing Election to Purchase and Certificate
must correspond to the name as written upon the face of this Rights Certificate
in every particular, without alteration or enlargement or any change whatsoever.
Reverse Side of Rights Certificate
<PAGE> 62
EXHIBIT C
SUMMARY OF RIGHTS TO
PURCHASE PREFERRED STOCK
On June 16, 1998, the Board of Directors of Penwest Pharmaceuticals Co.
(the "Company"), declared a dividend of one Right for each outstanding share of
the Company's Common Stock to stockholders of record at the close of business on
July __, 1998 (the "Record Date"). Each Right entitles the registered holder to
purchase from the Company one one-thousandth of a share of Series A Junior
Participating Preferred Stock, $.001 par value per share (the "Preferred
Stock"), at a Purchase Price of $60 in cash, subject to adjustment. The
description and terms of the Rights are set forth in a Rights Agreement dated as
of July __, 1998 (the "Rights Agreement") between the Company and ___________
____________________________, as Rights Agent.
Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights Certificates will
be distributed. The Rights will separate from the Common Stock and a
Distribution Date will occur upon the earlier of (i) 10 business days (or such
later date as may be determined by the Board of Directors of the Company)
following the later of (a) the first date of a public announcement that a person
or group of affiliated or associated persons (an "Acquiring Person") has
acquired, or obtained the right to acquire, beneficial ownership of 15% or more
of the outstanding shares of Common Stock or (b) the first date on which an
executive officer of the Company has actual knowledge that an Acquiring Person
has become such (the "Stock Acquisition Date"), or (ii) 10 business days (or
such later date as may be determined by the Board of Directors of the Company)
following the commencement of a tender offer or exchange offer that would result
in a person or group beneficially owning 15% or more of such outstanding shares
of Common Stock. Until the Distribution Date (or earlier redemption or
expiration of the rights), (i) the Rights will be evidenced by the Common Stock
certificates and will be transferred with and only with such Common Stock
certificates, (ii) new Common Stock certificates issued after the Record Date
will contain a notation incorporating the Rights Agreement by reference and
(iii) the surrender for transfer of any certificates for Common Stock
outstanding, even without such notation, will also constitute the transfer of
the Rights associated with the Common Stock represented by such certificate.
The Rights are not exercisable until the Distribution Date and will
expire upon the earliest of the close of business on July __, 2008 (the "Final
Expiration Date") unless earlier redeemed or exchanged as described below. As
soon as practicable after the
<PAGE> 63
EXHIBIT C
Distribution Date, separate Rights Certificates will be mailed to holders of
record of the Common Stock as of the close of business on the Distribution Date
and, thereafter, the separate Rights Certificates alone will represent the
Rights. Except as otherwise determined by the Board of Directors, and except for
shares of Common Stock issued upon exercise, conversion or exchange of then
outstanding options, convertible or exchangeable securities or other contingent
obligations to issue shares, only shares of Common Stock issued prior to the
Distribution Date will be issued with Rights.
In the event that any Person becomes an Acquiring Person, unless the
event causing the 15% threshold to be crossed is a Permitted Offer (as defined
in the Rights Agreement), then, promptly following the first occurrence of such
event, each holder of a Right (except as provided below and in Section 7(e) of
the Rights Agreement) shall thereafter have the right to receive, upon exercise,
that number of shares of Common Stock of the Company (or, in certain
circumstances, cash, property or other securities of the Company) which equals
the exercise price of the Right divided by 50% of the current market price (as
defined in the Rights Agreement) per share of Common Stock at the date of the
occurrence of such event. However, Rights are not exercisable following such
event until such time as the Rights are no longer redeemable by the Company as
described below. Notwithstanding any of the foregoing, following the occurrence
of such event, all Rights that are, or (under certain circumstances specified in
the Rights Agreement) were, beneficially owned by any Acquiring Person will be
null and void. The event summarized in this paragraph is referred to as a
"Section 11(a)(ii) Event."
In the event that, at any time after any Person becomes an Acquiring
Person, (i) the Company is consolidated with, or merged with and into, another
entity and the Company is not the surviving entity of such consolidation or
merger (other than a consolidation or merger which follows a Permitted Offer) or
if the Company is the surviving entity, but shares of its outstanding Common
Stock are changed or exchanged for stock or securities (of any other person) or
cash or any other property, or (ii) 50% or more of the Company's assets or
earning power is sold or transferred, each holder of a Right (except Rights
which previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, that number of shares of common stock of the
acquiring company which equals the exercise price of the Right divided by 50% of
the current market price of such common stock at the date of the occurrence of
the event. The events summarized in this paragraph are referred to as "Section
13 Events." A Section 11(a)(ii) Event and Section 13 Events are collectively
referred to as "Triggering Events."
2
<PAGE> 64
EXHIBIT C
At any time after the occurrence of a Section 11(a)(ii) Event, subject
to certain conditions, the Board of Directors of the Company may exchange the
Rights (other than Rights owned by such Acquiring Person which have become
void), in whole or in part, at an exchange ratio of one share of Common Stock,
or one one-thousandth of a share of Preferred Stock (or of a share of a class or
series of the Company's preferred stock having equivalent rights, preferences
and privileges), per Right (subject to adjustment).
The Purchase Price payable, and the number of units of Preferred Stock
or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Preferred Stock, (ii) if holders of the Preferred Stock are granted certain
rights or warrants to subscribe for Preferred Stock or convertible securities at
less than the then-current market price of the Preferred Stock, or (iii) upon
the distribution to holders of the Preferred Stock of evidences of indebtedness
or assets (excluding regular periodic cash dividends paid out of earnings or
retained earnings) or of subscription rights or warrants (other than those
referred to above). The number of Rights associated with each share of Common
Stock is also subject to adjustment in the event of a stock split of the Common
Stock or a stock dividend on the Common Stock payable in Common Stock or
subdivisions, consolidations or combinations of the Common Stock occurring, in
any such case, prior to the Distribution Date.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments amount to at least 1% of the Purchase
Price. No fractional shares of Preferred Stock (other than fractions which are
integral multiples of one one-thousandth of a share of Preferred Stock) will be
issued and, in lieu thereof, an adjustment in cash will be made based on the
market price of the Preferred Stock on the last trading date prior to the date
of exercise.
Preferred Stock purchasable upon exercise of the Rights will not be
redeemable. Each share of Preferred Stock will be entitled to receive, when, as
and if declared by the Board of Directors, a minimum preferential quarterly
dividend payment of $10 per share or, if greater, an aggregate dividend of 1,000
times the dividend declared per share of Common Stock. In the event of
liquidation, the holders of the Preferred Stock will be entitled to a minimum
preferential liquidation payment of $1,000 per share and will be entitled to an
aggregate payment of 1,000 times the payment made per share of Common Stock.
Each share of Preferred Stock will have 1,000 votes, voting together with the
Common Stock. In the event of any merger, consolidation or other transaction in
which Common Stock is changed or exchanged, each share of Preferred Stock will
be
3
<PAGE> 65
EXHIBIT C
entitled to receive 1,000 times the amount received per share of Common Stock.
These rights are protected by customary antidilution provisions. Because of the
nature of the Preferred Stock's dividend, liquidation and voting rights, the
value of one one-thousandth of a share of Preferred Stock purchasable upon
exercise of each Right should approximate the value of one share of Common
Stock.
At any time prior to the earlier of (i) the tenth Business Day (or such
later date as may be determined by the Board of Directors of the Company) after
the Stock Acquisition Date, or (ii) the Final Expiration Date, the Company may
redeem the Rights in whole, but not in part, at a price of $.001 per Right (the
"Redemption Price"), payable in cash or stock, provided, however, that if a
majority of the Board of Directors of the Company is comprised of persons
elected at a meeting of stockholders who were not nominated by the Board of
Directors in office immediately prior to such meeting, then the Rights may not
be redeemed for a period of 90 days after such election if such redemption is
reasonably likely to have the purpose or effect of allowing any person to become
an Acquiring Person or otherwise facilitating the occurrence of a Triggering
Event or a transaction with an Acquiring Person. Immediately upon the action of
the Board of Directors ordering redemption of the Rights, the Rights will
terminate and the only right of the holders of Rights will be to receive the
Redemption Price. The Rights may also be redeemable following certain other
circumstances specified in the Rights Agreement.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the right
to vote or to receive dividends. While the distribution of the Rights will not
be taxable to stockholders or to the Company, stockholders may, depending upon
the circumstances, recognize taxable income in the event that the Rights become
exercisable for Common Stock (or other consideration) of the Company or for
common stock of the acquiring company as set forth above.
Subject to certain exceptions, any of the provisions of the Rights
Agreement may be amended by the Board of Directors of the Company prior to such
time as the Rights are no longer redeemable.
A copy of the Rights Agreement has been filed with the Securities and
Exchange Commission as an exhibit to the Company's Registration Statement on
Form 10 dated July 17, 1998. A copy of the Rights Agreement is available free of
charge from the Company. This summary description of the Rights does not purport
to be complete
4
<PAGE> 66
EXHIBIT C
and is qualified in its entirety by reference to the Rights Agreement, which is
incorporated herein by reference.
5
<PAGE> 1
EXHIBIT 10.13
PENWEST PHARMACEUTICALS CO.
1998 SPINOFF OPTION PLAN
1. BACKGROUND AND PURPOSE
The 1998 Spinoff Option Plan (the "Plan") of Penwest Pharmaceuticals
Co., a Washington corporation (the "Company"), was adopted in connection with
the distribution by Penford Corporation, a Washington corporation ("Penford"),
of all of the shares of Common Stock of the Company to the shareholders of
Penford. Because as of the date of such distribution, the employees of the
Company will cease to be deemed employees of Penford, any options held by the
employees of the Company for the purchase of shares of common stock of Penford
will be subject to termination. This Plan is intended to enable the Company to
grant options for the purchase of the Company's Common Stock to those employees
who hold such Penford Options. Except where the context otherwise requires, the
term "Company" shall include any present or future subsidiary corporations of
Penwest Pharmaceuticals Co. as defined in Section 424(f) of the Internal Revenue
Code of 1986, as amended, and any regulations promulgated thereunder (the
"Code").
2. ELIGIBILITY
All of the Company's employees as of the date of the Distribution (the
"Distribution Date") are eligible to be granted options (each, an "Option")
under the Plan. Any person who has been granted an Option under the Plan shall
be deemed a "Participant".
3. ADMINISTRATION BY BOARD OF DIRECTORS.
The Plan will be administered by the Board of Directors of the Company
(the "Board"). The Board shall have authority to grant Options and to adopt,
amend and repeal such administrative rules, guidelines and practices relating to
the Plan as it shall deem advisable. The Board may correct any defect, supply
any omission or reconcile any inconsistency in the Plan or any Option in the
manner and to the extent it shall deem expedient to carry the Plan into effect
and it shall be the sole and final judge of such expediency. All decisions by
the Board shall be made in the Board's sole discretion and shall be final and
binding on all persons having or claiming any interest in the Plan or in any
Option. No director or person acting pursuant to the authority delegated by the
Board shall be liable for any action or determination relating to or under the
Plan made in good faith.
<PAGE> 2
4. STOCK AVAILABLE FOR OPTIONS
(a) NUMBER OF SHARES. Subject to adjustment under Section 4(c),
Options may be granted under the Plan for up to _______ shares of Common Stock.
If any Option expires or is terminated, surrendered or canceled without having
been fully exercised or is forfeited in whole or in part or results in any
Common Stock not being issued, the unused Common Stock covered by such Option
shall not be available for the grant of Options under the Plan. Shares issued
under the Plan may consist in whole or in part of authorized but unissued shares
or treasury shares.
(b) PER-PARTICIPANT LIMIT Subject to adjustment under Section 4(c),
for Options granted after the Common Stock is registered under the Exchange Act,
the maximum number of shares with respect to which an Option may be granted to
any Participant under the Plan shall be 500,000. The per-participant limit
described in this Section 4(b) shall be construed and applied consistently with
Section 162(m) of the Code.
(c) ADJUSTMENT TO COMMON STOCK. In the event of any stock split,
stock dividend, recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off or other similar change
in capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan and (ii) the number and class of security and exercise price per
share subject to each outstanding Option shall be appropriately adjusted by the
Company (or substituted Options may be granted, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(c) applies and Section 6(e)(1)
also applies to any event, Section 6(e)(1) shall be applicable to such event,
and this Section 4(c) shall not be applicable.
5. STOCK OPTIONS
(a) GENERAL. The Board may grant options to purchase Common Stock
(each, an "Option") and determine the number of shares of Common Stock to be
covered by each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. No Option granted hereunder shall be an "incentive stock
option" as defined in Section 422 of the Code.
(b) EXERCISE PRICE. The Board shall establish the exercise price at
the time each Option is granted and specify it in the applicable option
agreement.
- 2 -
<PAGE> 3
(c) DURATION OF OPTIONS. Each Option shall be exercisable at such
times and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
(d) EXERCISE OF OPTION. Options may be exercised only by delivery to
the Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(e) for the number of shares for
which the Option is exercised.
(e) PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise
of an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) to the extent permitted by the Board and explicitly
provided in an Option Agreement (i) by delivery of shares of Common Stock owned
by the Participant valued at their fair market value as determined by the Board
in good faith ("Fair Market Value"), which Common Stock was owned by the
Participant at least six months prior to such delivery, (ii) by delivery of a
promissory note of the Participant to the Company on terms determined by the
Board, or (iii) by payment of such other lawful consideration as the Board may
determine; or
(3) any combination of the above permitted forms of payment.
6. GENERAL PROVISIONS APPLICABLE TO OPTIONS
(a) TRANSFERABILITY OF OPTIONS. Except as the Board may otherwise
determine or provide in an Option, Options shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
(b) DOCUMENTATION. Each Option under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine. Each Option may
contain terms and conditions in addition to those set forth in the Plan.
(c) BOARD DISCRETION. Except as otherwise provided by the Plan, each
type of Option may be made alone or in addition or in relation to any other type
of Option. The terms of each type of Option need not be identical, and the Board
need not treat Participants uniformly.
- 3 -
<PAGE> 4
(d) TERMINATION OF STATUS. The Board shall determine the effect on an
Option of the disability, death, retirement, authorized leave of absence or
other change in the employment or other status of a Participant and the extent
to which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Option.
(e) ACQUISITION EVENTS
(1) CONSEQUENCES OF ACQUISITION EVENTS. Upon the occurrence of
an Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall take any one or
more of the following actions with respect to then outstanding Options: (i)
provide that outstanding Options shall be assumed, or equivalent Options shall
be substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such Options substituted for Incentive Stock Options
shall satisfy, in the determination of the Board, the requirements of Section
424(a) of the Code; (ii) upon written notice to the Participants, provide that
all then unexercised Options will become exercisable in full as of a specified
time (the "Acceleration Time") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants between the Acceleration Time and the
consummation of such Acquisition Event; and (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive upon
consummation thereof a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price"), provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and each Participant shall receive, in exchange therefor, a cash payment equal
to the amount (if any) by which (A) the Acquisition Price multiplied by the
number of shares of Common Stock subject to such outstanding Options (whether or
not then exercisable), exceeds (B) the aggregate exercise price of such Options.
An "Acquisition Event" shall mean: (a) any merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto representing immediately thereafter (either by remaining
outstanding or by being converted into voting securities of the surviving or
acquiring entity) less than 60% of the combined voting power of the voting
securities of the Company or such surviving or acquiring entity outstanding
immediately after such merger or consolidation; (b) any sale of all or
substantially all of the assets of the Company; or (c) the complete liquidation
of the Company.
(2) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. The Board may
grant Options under the Plan in substitution for stock awards held by employees
of another corporation who become employees of the Company as a result of a
merger
- 4 -
<PAGE> 5
or consolidation of the employing corporation with the Company or the
acquisition by the Company of property or stock of the employing corporation.
The substitute Options shall be granted on such terms and conditions as the
Board considers appropriate in the circumstances.
(f) WITHHOLDING. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Options to such Participant no later than the
date of the event creating the tax liability. The Board may allow Participants
to satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Option creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) AMENDMENT OF OPTION. The Board may amend, modify or terminate any
outstanding Option, including but not limited to, substituting therefor another
Option of the same or a different type and changing the date of exercise or
realization, provided that the Participant's consent to such action shall be
required unless the Board determines that the action, taking into account any
related action, would not materially and adversely affect the Participant.
(h) CONDITIONS ON DELIVERY OF STOCK. The Company will not be
obligated to deliver any shares of Common Stock pursuant to the Plan or to
remove restrictions from shares previously delivered under the Plan until (i)
all conditions of the Option have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) ACCELERATION. The Board may at any time provide that any Options
shall become immediately exercisable in full or in part or free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be.
7. MISCELLANEOUS
(a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any
claim or right to be granted an Option, and the grant of an Option shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
- 5 -
<PAGE> 6
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Option.
(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Option, no Participant or Designated Beneficiary shall have any
rights as a stockholder with respect to any shares of Common Stock to be
distributed with respect to an Option until becoming the record holder of such
shares.
(c) EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective
on the date on which it is adopted by the Board, but no Option granted to a
Participant designated as subject to Section 162(m) by the Board shall become
exercisable, vested or realizable, as applicable to such Option, unless and
until the Plan has been approved by the Company's stockholders. No Options shall
be granted under the Plan after the completion of ten years from the earlier of
(i) the date on which the Plan was adopted by the Board or (ii) the date the
Plan was approved by the Company's stockholders, but Options previously granted
may extend beyond that date.
(d) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time, provided that no Option granted to a
Participant designated as subject to Section 162(m) by the Board after the date
of such amendment shall become exercisable, realizable or vested, as applicable
to such Option (to the extent that such amendment to the Plan was required to
grant such Option to a particular Participant), unless and until such amendment
shall have been approved by the Company's stockholders.
(e) STOCKHOLDER APPROVAL. For purposes of this Plan, stockholder
approval shall mean approval by a vote of the stockholders in accordance with
the requirements of Section 162(m) of the Code.
(f) GOVERNING LAW. The provisions of the Plan and all Options made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Washington, without regard to any applicable conflicts of law.
- 6 -
<PAGE> 1
EXHIBIT 10.21
July 2, 1998
Penwest Pharmaceuticals Co.,
a Washington corporation
2981 Route 22
Patterson, NY 12563-9970
Dear Sirs:
RE: Establishment of Revolving Term Credit Facility
In Favor of Penwest Pharmaceuticals Co.
-----------------------------------------------
The Bank of Nova Scotia (the "Bank") is pleased to advise that, subject
to your acceptance, the Bank will make available to Penwest Pharmaceuticals Co.,
a Washington corporation (such corporation being the "Borrower") the revolving
term credit facility described in this agreement (the "Credit Agreement") upon
the following terms and conditions:
CREDIT A revolving term credit (the "Credit") in the amount of
FACILITIES US$15,000,000 (the "Commitment Amount") under which are
available U.S. dollar advances (each availment thereunder
being an "Availment").
BOOKING Portland Branch
POINT 888 S.W. Fifth Avenue, Suite 750
Portland, Oregon 97204-2098
(the "Branch")
PURPOSES To fund working capital and general corporate purposes,
including capital expenditures.
CREDIT Commencing on the date that Penford Corporation, a Washington
AVAILMENTS corporation ("Penford"), ceases to own any of the common stock
of the Borrower, the Borrower may obtain U.S. dollar advances
under the Credit by the Borrower selecting in respect of each
such advance one of the interest options as follows:
<PAGE> 2
To: Penwest Pharmaceuticals Co. Page 2
- -- -------------------------- ------
(1) Base Rate Advances in a minimum amount of US$100,000
and in whole multiples of US$10,000: Alternate Base
Rate.
(2) LIBOR Advances in whole multiples of US$1,000,000: LIBO
Rates (Reserve Adjusted) for 1, 2, or 3 month LIBOR
Periods, plus 1.25% per annum.
A LIBOR Period for a LIBOR Advance may not extend beyond the
termination date of the Credit.
The Borrower may convert from a LIBOR Advance to a Base Rate
Advance (a "Base Rate Conversion") or from a Base Rate
Advance to a LIBOR Advance (a "LIBOR Conversion"); provided
that a Base Rate Conversion may only be made on the expiry
of the applicable LIBOR Period.
LIBOR Advances, LIBOR Conversions and renewals of LIBOR
Periods are offered subject to the availability to the Bank
of appropriate LIBO Rate quotations.
FACILITY FEE Upon the Borrower's execution of this Credit Agreement, the
Borrower shall pay in respect of the Credit a non-refundable
facility fee of US$60,000.
COMMITMENT FEE The Borrower shall pay, on the last Business Day of each
calendar quarter and on the final maturity of the Credit, a
commitment fee of 0.325% per annum, computed on the unused
portion of the Commitment Amount as it may be reduced from
time to time, calculated daily in arrears on the basis of a
360-day year for the actual number of days elapsed from the
date of the Borrower's execution of this Credit Agreement.
The Borrower shall be entitled to cancel all or any of the
unused portion of the Commitment Amount at such time without
penalty on not less than 30 days' written notice to the Bank
and upon payment of all accrued commitment fees to such date
of cancellation, whereupon the Commitment Amount shall be
permanently reduced accordingly.
MATURITY & The Credit shall revolve and may be drawn down until August
REDUCTION OF 31, 2000 when all amounts then outstanding or accrued in
COMMITMENT respect of such Credit shall be due and payable; PROVIDED,
AMOUNT HOWEVER, that prior to such maturity date, the Commitment
Amount shall be permanently reduced by the net proceeds
("Securities Proceeds") to the Borrower of any sale by the
Borrower or any subsidiary of the Borrower of securities (as
the term "securities" is defined in Section 2(1) of the
Securities Act of 1933, as amended), except the sale of
securities to plan participants pursuant to the Borrower's
401(k) plan or equity incentive plans. Reduction of the
Commitment Amount to zero
<PAGE> 3
To: Penwest Pharmaceuticals Co. Page 3
- -- -------------------------- ------
shall terminate the Credit, and all amounts then outstanding
or accrued in respect of the Credit shall be due and
payable. The Borrower shall give the Bank written notice of
the receipt of any Securities Proceeds on the Business Day
that the Borrower receives such Securities Proceeds.
CALCULATION DETERMINATION OF RATES. "Alternate Base Rate" means a
& PAYMENT variable interest rate per annum (as shall be in effect from
time to time) (rounded to the nearest 1/100 of 1%) equal to
the greater of: (a) the annual rate of interest announced
from time to time by the Bank in the United States through
the Branch as its "Base Rate"; and (b) the Federal Funds
Effective Rate plus 1/2 of 1% per annum. The "Federal Funds
Effective Rate" means, for any period, a fluctuating
interest rate per annum equal, for each day during such
period, to the weighted average of the rates on overnight
federal funds transactions with members of the Federal
Reserve System arranged by Federal Funds brokers as
published for such day (or, if such day is not a Business
Day, for the next preceding Business Day) by the Federal
Reserve Bank of New York or, for any day on which such rate
is not so published for such day by the Federal Reserve Bank
of New York, the average of the quotations for such day for
such transactions received by the Bank from three Federal
Funds brokers of recognized standing selected by the Bank.
If for any reason the Bank shall have determined (which
determination shall be conclusive, absent manifest error)
that it is unable to ascertain the Federal Funds Effective
Rate for any reason, including without limitation, the
inability or failure of the Bank to obtain sufficient bids
or publications in accordance with the terms hereof, the
rate announced by the Bank through the Branch as its "Base
Rate" shall be the Alternate Base Rate until the
circumstances giving rise to such inability no longer exist.
The Alternate Base Rate is not necessarily intended to be
the lowest rate of interest determined by the Bank in
connection with extensions of credit. Changes in the rate of
interest on any Advances maintained as Base Rate Advances
will take effect simultaneously with each change in the
Alternate Base Rate. The Bank will give notice promptly to
the Borrower of changes in the Alternate Base Rate.
The "LIBO Rate (Reserve Adjusted)" for each LIBOR Period
(being the applicable interest period chosen by the Borrower
for a LIBOR Advance) means a rate per annum (rounded
upwards, if necessary, to the nearest 1/16 of 1%) determined
pursuant to the following formula:
LIBO RATE
LIBO Rate = -------------------------------
(Reserve Adjusted) 1.00 - LIBOR Reserve Percentage
<PAGE> 4
To: Penwest Pharmaceuticals Co. Page 4
- -- -------------------------- ------
The LIBO Rate (Reserve Adjusted) for any LIBOR Period shall
be determined by the Bank on the basis of the LIBOR Reserve
Percentage in effect and the applicable LIBO Rate on the
second Business Day prior to the commencement of such LIBOR
Period. The "LIBO Rate" for each LIBOR Period means the rate
of interest per annum at which the Bank is offered deposits
by prime banks in the London interbank market, as at 11:00
a.m. (London, England time), on the second Business Day
prior to the commencement of such LIBOR Period, in an amount
of U.S. dollars similar to the amount of the applicable
LIBOR Advance for a deposit period comparable to such LIBOR
Period. "LIBOR Reserve Percentage" means, relative to any
LIBOR Period, the reserve percentage (expressed as a
decimal) equal to the maximum aggregate reserve requirements
(including all basic, emergency, supplemental, marginal and
other reserves and taking into account any transitional
adjustments or other scheduled changes in reserve
requirements) specified by the Board of Governors of the
Federal Reserve System and then applicable to assets or
liabilities consisting of and including "Eurocurrency
Liabilities", as currently defined in Regulation D of the
Board of Governors of the Federal Reserve System, having a
term approximately equal or comparable to such LIBOR Period.
INTEREST CALCULATION AND PAYMENT. Interest computed with
reference to the Alternate Base Rate shall accrue from day
to day for the actual number of days elapsed and shall be
calculated and payable monthly, not in advance, on the last
day of each calendar month, or on the next preceding
Business Day if the last day of the month is not a Business
Day. Interest computed with reference to a LIBO Rate
(Reserve Adjusted) shall accrue from day to day for the
actual number of days elapsed and shall be calculated and
payable at the end of the applicable LIBOR Period. Interest
computed with reference to the Alternate Base Rate shall be
calculated on the basis of a 365/366-day year, but interest
computed with reference to a LIBO Rate (Reserve Adjusted)
shall be calculated on the basis of a year of 360 days.
LIBOR PERIODS. The Borrower shall designate the LIBOR Period
to apply to each LIBOR Advance in its notice of any drawdown
of such advance, any LIBOR Conversion, and any renewal of an
existing LIBOR Period, provided that, upon failure of the
Borrower to give notice of any such designation, when
applicable, as required under this Credit Agreement, the
Bank may either convert the affected LIBOR Advance to a Base
Rate Advance or designate a substitute LIBOR Period which
will apply to such advance for the purpose of determining
the interest rate with respect to same.
DEFAULT OF PAYMENT. Amounts not paid when due in respect of
a Base Rate Advance shall bear interest at the rate
applicable thereto, plus 2% per annum.
<PAGE> 5
To: Penwest Pharmaceuticals Co. Page 5
- -- -------------------------- ------
Amounts not paid when due in respect of a LIBOR Advance may
be deemed a Base Rate Advance by the Bank and the Bank may
so convert such advance. Any other unpaid monetary
obligation of the Borrower arising under this Credit
Agreement shall be deemed to be an amount not paid when due
in respect of a Base Rate Advance, as applicable. Interest
payable under this paragraph shall accrue from day to day
for the actual number of days elapsed and shall be
calculated and payable upon demand. The rights of the Bank
under this paragraph shall continue to apply from the date
of such default for so long as such default shall continue,
both before and after demand and judgment.
REPAYMENTS The Borrower may make without penalty any repayment or
prepayment of a Base Rate Advance in a minimum amount of
US$100,000 and in a whole multiple of US$10,000. The
Borrower may make any repayment of a LIBOR Advance in a
minimum amount of US$1,000,000 and in a whole multiple of
US$1,000,000, but any repayment in respect of a LIBOR
Advance may be made only on the last day of the LIBOR Period
for such Advance. If at any time the sum of the aggregate
outstanding principal amount of all Availments exceeds the
Commitment Amount (as it may be reduced from time to time),
the Borrower shall immediately upon notice from the Bank
make a mandatory prepayment of the Availments in an
aggregate amount equal to such excess.
SECURITY As continuing security for the present and future
indebtedness and liability of the Borrower to the Bank
hereunder, the Borrower shall cause to be executed and
delivered in favor of the Bank irrevocable guarantees by
Penford and Penford subsidiary, Penford Products Co., a
Delaware corporation ("Penford Products"), in form and
substance satisfactory to the Bank (each a "Guarantee"), of
the Borrower's obligations under this Credit Agreement. Each
Guarantee shall include the guarantor's agreement to cause
to be executed and delivered in favor of the Bank an
irrevocable guarantee of the Borrower's obligations under
this Credit Agreement by any material subsidiary of the
guarantor hereafter formed, which guarantee shall also be in
form and substance satisfactory to the Bank. As used in this
Credit Agreement, a "material subsidiary" of Penford or
Penford Products shall mean a subsidiary which owns assets
with a value equal to ten percent (10%) or more of the value
of the consolidated assets of Penford and its subsidiaries.
<PAGE> 6
To: Penwest Pharmaceuticals Co. Page 6
- -- -------------------------- ------
REPRESEN- The Borrower represents and warrants that:
TATIONS AND
WARRANTIES
(1) the Borrower is a corporation duly incorporated and
organized and validly subsisting under the laws of
the state of Washington and is duly qualified,
registered or licensed in all jurisdictions where
such qualification, registration or licensing is
required; the Borrower has all requisite capacity,
power and authority to own, hold under license or
lease its properties, to carry on its business as now
conducted and to otherwise enter into, and carry out
the transactions contemplated by, this Credit
Agreement.
(2) all necessary action has been taken to authorize the
execution, delivery and performance of this Credit
Agreement by the Borrower, and this Credit Agreement
is a legal, valid and binding obligation of the
Borrower, enforceable against the Borrower by the
Bank in accordance with its terms; it is not contrary
to any contractual restriction binding on the
Borrower; and the Borrower's execution and delivery
of the same neither requires a third party consent
nor would entitle any third party to accelerate any
debt owing to it.
(3) the execution, delivery and performance of this
Credit Agreement and the consummation of the
transactions contemplated herein do not and will not
conflict with, result in any breach or violation of,
or constitute a default under, the terms, conditions
or provisions of any law, regulation, judgment,
decree or order binding on or applicable to the
Borrower or by which the Borrower benefits or to
which any of its property is subject or of any
material agreement, lease, license, permit or other
instrument to which the Borrower is a party or is
otherwise bound or by which the Borrower benefits or
to which any of its property is subject and do not
require the consent or approval of any other party or
any governmental body, agency or authority.
(4) except as set forth in a disclosure letter provided
to the Bank, there are no actions, suits, inquiries,
claims or proceedings (whether or not purportedly on
behalf of the Borrower) pending or threatened against
or affecting the Borrower before any government,
parliament, legislature, regulatory authority,
agency, commission, board or court or before any
private arbitrator, mediator or referee which in any
case or in the aggregate may result in any material
adverse change:
(i) in the condition, financial or otherwise, of
the Borrower or any of its assets; or
<PAGE> 7
To: Penwest Pharmaceuticals Co. Page 7
- -- -------------------------- ------
(ii) in the ability of the Borrower to perform
its obligations under this Credit Agreement,
or in the ability of the Bank to enforce any
of such obligations.
(5) the Borrower is not in violation of any mortgage,
franchise, license, judgment, decree, order, statute,
ordinance, rule or regulation relating in any way to
it, to the operation of its business or to its
property or assets and which would result in a
material adverse change in its condition, financial
or otherwise, and the Borrower has all necessary
licenses, permits and consents to operate its
businesses where they are currently being operated.
(6) no event has occurred which constitutes or which,
with giving of notice, lapse of time or both, would
constitute a material default under or in respect of
any material agreement or instrument in respect of
indebtedness to which the Borrower is a party or to
which any of its property or assets may be subject.
(7) the Borrower has not:
(i) admitted its inability to pay its debts
generally as they become due or failed to
pay its debts generally as they become due;
(ii) filed an assignment or petition in
bankruptcy or a petition to take advantage
of any insolvency statute;
(iii) made an assignment for the benefit of its
creditors;
(iv) consented to the appointment of a receiver
of the whole or any substantial part of its
assets;
(v) filed a petition or answer seeking a
reorganization, arrangement, adjustment or
composition under applicable bankruptcy laws
or any other applicable state or federal law
or statute; or
(vi) been adjudged by a court having jurisdiction
a bankrupt or insolvent, nor has a decree or
order of a court having jurisdiction been
entered for the appointment of a receiver,
liquidator, trustee or assignee in
bankruptcy with such decree or order having
remained in force and undischarged or
unstayed for a period of 60 days.
<PAGE> 8
To: Penwest Pharmaceuticals Co. Page 8
- -- -------------------------- ------
(8) any Employee Pension Benefits Plans, as defined in
the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), of the Borrower meet, as of the
date of this Credit Agreement, the minimum funding
standards of 29 U.S.C. ss. 1082 (Section 302 of
ERISA), and no Reportable Event or Prohibited
Transaction, as defined in ERISA, has occurred with
respect to any Employee Benefit Plan of the Borrower,
as defined in ERISA.
(9) The Borrower has conducted a comprehensive review and
assessment of the Borrower's computer applications
and made inquiry of the Borrower's key suppliers,
vendors and customers with respect to the "year 2000
problem" (that is, the risk that computer
applications may not be able to properly perform
date-sensitive functions after December 31, 1999)
and, based on that review and inquiry, the Borrower
does not believe the year 2000 problem will result in
a material adverse change in the financial condition
or business prospects of the Borrower.
All of the representations and warranties of the Borrower
contained herein shall survive the execution and delivery of
this Credit Agreement notwithstanding any investigation made
at any time by or on behalf of the Bank.
CONDITIONS TO INITIAL DRAWDOWN. The right of the Borrower to obtain the
UTILIZATION initial drawdown hereunder is subject to the conditions
precedent that the Bank has received, in form and substance
satisfactory to it:
(1) a duly certified resolution of the Board of Directors
of the Borrower authorizing the Borrower to execute,
deliver and perform its obligations under this Credit
Agreement and any other agreement or instrument
required by this Credit Agreement, together with
executed copies of such documentation;
(2) a certificate of a senior officer of the Borrower
setting forth the specimen signature of the
individual authorized to sign this Credit Agreement;
(3) a certificate of the Secretary of State of
Washington, dated within 30 days of the date of this
Credit Agreement, attesting to the continued
corporate existence of the Borrower in that state;
(4) a copy of the by-laws of the Borrower and all
amendments thereto, certified as a true copy by a
senior officer of the Borrower;
<PAGE> 9
To: Penwest Pharmaceuticals Co. Page 9
- -- -------------------------- ------
(5) a duly certified resolution of Penford authorizing
Penford to execute and deliver its Guarantee and to
perform its obligations under its Guarantee, together
with executed copies of such documentation;
(6) a certificate of a senior officer of Penford setting
forth the specimen signature of the individual
authorized to sign its Guarantee;
(7) a duly certified resolution of Penford Products
authorizing Penford Products to execute and deliver
its Guarantee and to perform its obligations under
its Guarantee, together with executed copies of such
documentation;
(8) a certificate of a senior officer of Penford Products
setting forth the specimen signature of the
individual authorized to sign its Guarantee;
(9) such supporting and other certificates and
documentation as the Bank may reasonably request;
(10) favorable opinions of counsel, in form and substance
satisfactory to the Bank, concerning the validity and
enforceability of agreements and instruments to be
delivered to the Bank with respect to the Credit and
concerning any other matter about which the Bank may
reasonably request an opinion of counsel;
AND, in addition, that:
(11) Penford and Penford Products shall have duly executed
and delivered their respective Guarantees;
(12) no Event of Default shall have occurred and be
continuing, and the Bank shall have received a
certificate of the Borrower so certifying to the
Bank.
(13) no material adverse change in the financial condition
or business prospects of the Borrower shall have
occurred since the preparation of the Borrower's
December 31, 1997 financial statements.
(14) no material adverse change in the financial condition
or business prospects of Penford shall have occurred
since the preparation of Penford's August 31, 1997
financial statements.
EACH UTILIZATION. The right of the Borrower to obtain at any
time any drawdown of an Availment (including the initial
drawdown) or any
<PAGE> 10
To: Penwest Pharmaceuticals Co. Page 10
- -- -------------------------- -------
conversion from one Availment to another or any renewal of a
LIBOR Period hereunder (each a "Utilization") is subject to
the further conditions precedent that at the time of such
Utilization:
(1) in the case where such Utilization is a drawdown, no
event or circumstance has occurred and is continuing,
or would result from the making of such Utilization,
which constitutes an Event of Default or would
constitute an Event of Default but for the
requirement that notice be given or time elapse, or
both, or, which when considered by itself or together
with other past or then existing events or
circumstances, constitutes or would constitute a
material adverse change in the business prospects or
financial condition of the Borrower; and
(2) the representations and warranties of the Borrower
contained in this Credit Agreement shall be true and
correct in all material respects at the date of such
Utilization as if such representations and warranties
were made on such date.
NOTICE The Borrower shall give to the Bank, through the Bank's
subsidiary, Scotiabanc, Inc., Suite 2700, 600 Peachtree
Street, N.E., Atlanta, Georgia 30308, three Business Days'
notice of each Utilization or repayment in respect of a LIBOR
Advance and same Business Day's notice of each Utilization or
repayment in respect of any other type of Availment. To be
deemed given on a Business Day, a notice must be delivered to
the Bank on or before 9:00 a.m., Portland, Oregon time, on the
Business Day. As used in this Credit Agreement, a "Business
Day" means any day other than a Saturday, or a Sunday, or a
day that banks are lawfully closed for business in Portland,
Oregon, Atlanta, Georgia, or New York, New York, or, if in
respect of a LIBOR Advance, any other day on which
transactions cannot be carried out by and between banks in the
London interbank market.
Any notice or communication shall be deemed to have been given
to a party hereunder when given in accordance with the
provisions of Exhibit A attached hereto. Each notice or
communication given by a party hereunder shall be binding on
it and shall not be revocable without the other party's
consent.
<PAGE> 11
To: Penwest Pharmaceuticals Co. Page 11
- -- -------------------------- -------
PAYMENTS All payments or disbursements made or required to be made
hereunder shall be in U.S. dollars in immediately available
funds as follows:
(1) in the case of disbursements to the Borrower, to such
account as the Borrower shall from time to time
designate in writing to the Bank;
(2) with respect to all amounts owed to the Bank, on the
due date, not later than 12:00 noon Portland, Oregon
time, by paying the Bank of Nova Scotia, New York
Agency, through the Fed Wire in Federal Funds using
ABA no. 026002532, for further credit to the Loan
Servicing Interbranch Account (Portland), Account No.
6102-32;
or in such other manner as any party may from time to time
notify the other.
COVENANTS Except for the transactions described in that certain Form 10
filed with the United States Securities and Exchange
Commission on June 22, 1998, or as otherwise permitted by the
Bank, which permission shall not be unreasonably withheld, the
Borrower hereby covenants, until the Borrower has fulfilled
all of its obligations under this Credit Agreement:
(1) not to permit a material change in the organizational
structure or operations of the Borrower;
(2) to promptly notify the Bank of the occurrence of any
event or circumstance which constitutes an Event of
Default, or would constitute an Event of Default but
for the requirement that notice be given or time
elapse or both, and to provide to the Bank a detailed
statement of the steps, if any, being taken to cure
or remedy such default;
(3) to maintain the Borrower's existence as a corporation
under the laws of the state of Washington and to have
the Borrower qualified and remain duly qualified to
carry on business and own property in each
jurisdiction in which such qualification is necessary
in view of the Borrower's business and operations;
(4) to conduct the Borrower's business in the ordinary
course and in such a manner so as to comply in all
material respects with all applicable laws and
regulations and so as to preserve and protect, to the
extent consistent with the conduct of the Borrower's
business in the ordinary course, the Borrower's
property and assets and the earnings, income
<PAGE> 12
To: Penwest Pharmaceuticals Co. Page 12
- -- -------------------------- -------
and profits therefrom; to perform all obligations
incidental to any trust imposed upon the Borrower by
statute and to ensure that any breaches of the said
obligations and the consequences of any such breach
shall be promptly remedied;
(5) to pay or cause to be paid all taxes, rates,
government fees and dues levied, assessed or imposed
upon the Borrower and upon its property or assets or
any part thereof, as and when the same become due and
payable, save and except when and so long as the
validity or amount of any such taxes, rates, fees,
dues, levies, assessments or imposts is being
contested in good faith by proper legal proceedings,
and shall deliver to the Bank, when requested, the
receipts and vouchers establishing such payment;
(6) to keep proper books of account and records covering
all of the Borrower's business and affairs on a
current basis and to permit a representative of the
Bank to inspect the Borrower's books of account,
records and documents and to make copies therefrom
during reasonable business hours and upon reasonable
notice;
(7) if the Borrower changes its name, to promptly notify
the Bank in writing of the details of such change;
(8) to promptly notify the Bank of any action, suit,
inquiry, claim or proceeding (collectively, a
"Proceeding"), whether or not purportedly on behalf
of the Borrower, commenced or threatened against or
affecting the Borrower before any government,
parliament, legislature, regulatory authority,
agency, commission, board or court or before any
private arbitrator, mediator or referee, if such
Proceeding would cause the aggregate potential
liability of the Borrower with respect to all
Proceedings pending against the Borrower to exceed
US$500,000, or if such Proceeding or the aggregate of
such Proceeding and all other Proceedings pending
against the Borrower might result in any material
adverse change:
(i) in the condition, financial or otherwise, of
the Borrower; or
(ii) in the ability of the Borrower to perform
its obligations under this Credit Agreement,
or in the ability of the Bank to enforce any
of such obligations;
(9) not to create, incur, assume or suffer to exist any
security interest, mortgage, pledge, hypothecation,
assignment, deposit arrangement,
<PAGE> 13
To: Penwest Pharmaceuticals Co. Page 13
- -- -------------------------- -------
encumbrance, lien (statutory or otherwise), charge
against or interest in property to secure payment of
a debt or performance of an obligation or other
priority or preferential arrangement of any kind or
nature whatsoever (collectively, "Liens") upon any of
its property, revenues or assets, whether now owned
or hereafter acquired, except:
(i) Liens for taxes, assessments or other
governmental charges or levies not at the
time delinquent or thereafter payable
without penalty or being diligently
contested in good faith by appropriate
proceedings and for which adequate reserves
in accordance with GAAP shall have been set
aside on its books;
(ii) Liens of carriers, warehousemen, mechanics,
materialmen and landlords incurred in the
ordinary course of business for sums not
overdue or being diligently contested in
good faith by appropriate proceedings and
for which adequate reserves in accordance
with GAAP shall have been set aside on its
books;
(iii) Liens incurred in the ordinary course of
business in connection with worker's
compensation, unemployment insurance or
other forms of governmental insurance or
benefits, or to secure performance of
tenders, statutory obligations, leases and
contracts (other than for borrowed money)
entered into in the ordinary course of
business or to secure obligations on surety
or appeal bonds;
(iv) judgment Liens in existence less than 30
days after the entry thereof or with respect
to which execution has been stayed or the
payment of which is covered in full (subject
to a customary deductible) by insurance
maintained with responsible insurance
companies; and
(v) Liens on property used or to be used by the
Borrower in the ordinary course of business,
securing payment of all or part of the
purchase price thereof, provided that such
Liens are limited to the property so
purchased and additions and improvements
thereto and proceeds thereof;
(10) not to create, incur, assume or suffer to exist or
otherwise become or be liable in respect of any
indebtedness, other than, without duplication, the
following:
<PAGE> 14
To: Penwest Pharmaceuticals Co. Page 14
- -- -------------------------- -------
(i) indebtedness in respect of the Credit; and
(ii) unsecured indebtedness incurred in the
ordinary course of business (including open
accounts extended by suppliers on normal
trade terms in connection with purchases of
goods and services and up to an aggregate of
US$2,000,000 of letters of credit
reimbursement liability, but excluding other
indebtedness incurred through the borrowing
of money or contingent liabilities)
including, without limitation, accrued
expenses, taxes payable, accrued
environmental liabilities, deferred
employment benefits and deferred income
taxes, to the extent incurred in the
ordinary course of business;
PROVIDED, HOWEVER, that no indebtedness otherwise
permitted by clauses (i) or (ii) shall be permitted
if, after giving effect to the incurrence thereof,
any Default shall have occurred and be continuing;
(11) not to purchase or develop any real property without
the prior written consent of the Bank;
(12) not to declare, pay or make any dividend or
distribution (in cash, property or obligations) on
any shares of any class of capital stock (now or
hereafter outstanding) of the Borrower or on any
warrants, options or other rights with respect to any
shares or any class of capital stock (now or
hereafter outstanding) of the Borrower (other than
dividends or distributions payable in its common
stock or warrants to purchase its common stock or
splitups or reclassifications of its stock into
additional or other shares of its common stock) or,
except as permitted in clause (20) below, to
repurchase any common stock or other equity
securities of the Borrower or its subsidiaries;
(13) not to make or assume any loan or make any advance of
money to any officer, director or employee of the
Borrower other than advances to employees for
expenses made in the ordinary course of business;
(14) not to liquidate or dissolve, consolidate with, or
merge into or with, any other corporation, or
purchase or otherwise acquire all or substantially
all of the assets of any Person (or of any division
thereof) except
(i) any subsidiary of the Borrower may liquidate
or dissolve voluntarily into, and may merge
with and into, the Borrower
<PAGE> 15
To: Penwest Pharmaceuticals Co. Page 15
- -- -------------------------- -------
or any other subsidiary of the Borrower so
long as, after giving effect thereto, the
Borrower is a surviving corporation, and the
assets or stock of any subsidiary of the
Borrower may be purchased or otherwise
acquired by the Borrower or any other
subsidiary of the Borrower; and
(ii) so long as no Event of Default has occurred
and is continuing or would occur after
giving effect thereto, the Borrower or any
of its subsidiaries may purchase all or
substantially all of the assets of any
Person, or acquire such Person by merger;
PROVIDED, HOWEVER, that after giving effect
to any such merger the Borrower or its
subsidiary party thereto is the surviving
corporation.
As used in this Credit Agreement, "Person" means any natural
person, corporation, partnership, limited liability company,
firm, association, or trust;
(15) not to sell, lease, contribute or otherwise convey,
or grant options, warrants or other rights with
respect to, any or all of its assets (including
accounts receivable and capital stock of
subsidiaries) to any Person, unless such sale,
transfer, lease, contribution or conveyance or grant
is made in the ordinary course of its business. For
purposes of this covenant, the license of the
intellectual property or other technology of the
Borrower as part of collaborations or otherwise shall
be deemed made in the ordinary course of business;
(16) not to enter into, or cause, suffer or permit to
exist any arrangement or contract with any of its
other Affiliates unless such arrangement or contract
is fair and equitable to the Borrower and is an
arrangement or contract of the kind which would be
entered into by a prudent Person in the position of
the Borrower with a Person which is not one of its
Affiliates. As used in this Credit Agreement,
"Affiliate" means any other Person which, directly or
indirectly, controls, is controlled by or is under
common control with the Borrower, other than Penford
or its subsidiaries. A Person shall be deemed to be
"controlled by" any other Person if such other Person
possesses, directly or indirectly, power (i) to vote
15% or more of the securities (on a fully diluted
basis) having ordinary voting power for the election
of directors or managing general partners; or (ii) to
direct or cause the direction of the management and
policies of such Person whether by contract or
otherwise;
<PAGE> 16
To: Penwest Pharmaceuticals Co. Page 16
- -- -------------------------- -------
(17) not to take part in any dissolution or reorganization
or in any similar proceeding or arrangement;
(18) not to use any part of the proceeds of the Credit to
purchase or carry "margin stock" as defined in
Regulation U of the Board of Governors of the Federal
Reserve System;
(19) not to purchase or redeem any of the capital stock of
the Borrower, except for the purchase of common stock
of the Borrower to be held in the Borrower's 401(k)
plan where the purchase price of such stock does not
exceed US$200,000 in the aggregate in any calendar
year;
(20) not to make, incur, assume or suffer to exist any
investment in any other Person, except:
(i) Cash Equivalent Investments;
(ii) in the ordinary course of business,
investments made in connection with the
establishment or maintenance by the Borrower
of research and development collaborations;
(iii) without duplication, investments permitted
as indebtedness pursuant to clause (10) of
this section;
(iv) in the ordinary course of business,
investments by the Borrower in any of its
subsidiaries, or by any such subsidiary in
any of its subsidiaries or any other
subsidiary, by way of contributions to
capital or loans or advances; and
(v) other investments in an aggregate amount at
any time not to exceed US$2,000,000 minus
any losses on such investments;
PROVIDED, HOWEVER, that no investment otherwise
permitted by clause (ii), (iii), or (iv) shall be
permitted to be made if, immediately before or after
giving effect thereto, any Event of Default shall
have occurred and be continuing. As used in this
Credit Agreement, "Cash Equivalent Investment" means,
at any time:
(i) any obligation, maturing not more than one
year after such time, issued or guaranteed
by the United States government;
<PAGE> 17
To: Penwest Pharmaceuticals Co. Page 17
- -- -------------------------- -------
(ii) municipal notes or note funds rated at the
time of purchase, SP-1/A-1 or SP-2/A-2 by
Standard & Poor's Ratings Group or VMIG1 or
VMIG2 by Moody's Investors Service, Inc.;
municipal bonds or bond funds rated at the
time of purchase, AAA or AA by Standard &
Poor's Ratings Group or Aaa or Aa by Moody's
Investors Service, Inc.; or money market
funds rated at the time of purchase, A-1 by
Standard & Poor's Ratings Group or P-1 by
Moody's Investors Service, Inc.;
(iii) commercial paper, maturing not more than
nine months from the date of issue, which is
issued by (x) a corporation (other than an
Affiliate of any Obligor) organized under
the laws of any state of the United States
or of the District of Columbia and rated at
least A-2 by Standard & Poor's Ratings Group
or at least P-2 by Moody's Investors
Service, Inc., or (y) the Bank; or
(iv) any certificate of deposit or bankers
acceptance, maturing not more than one year
after such time, which is issued by either
(i) a commercial banking institution that is
a member of the Federal Reserve System and
has a combined capital and surplus and
undivided profits of not less than
US$500,000,000, or (ii) the Bank.
EVENTS OF Upon the occurrence and continuation of any Event of Default,
DEFAULT the Bank may terminate the Credit and/or demand payment of all
indebtedness and liability outstanding and accrued thereunder
to the date of demand and proceed to take such steps as it
deems fit including proceedings to realize under any security
it holds in that respect.
An Event of Default shall occur if:
(1) the Borrower fails to pay any amount of principal,
interest, fees or other amounts within three Business
Days of when due under this Credit Agreement; or
(2) the Borrower breaches any of its covenants hereunder
and such breach of covenant (other than a covenant to
pay) continues for ten Business Days or more after
notice to remedy same; PROVIDED, HOWEVER, that in the
event that such breach cannot reasonably be
<PAGE> 18
To: Penwest Pharmaceuticals Co. Page 18
- -- -------------------------- -------
cured within ten Business Days after notice to remedy
same, the failure to cure such breach within the ten
Business Day cure period shall not constitute an
Event of Default if:
(i) substantial progress is made to cure such
breach within the ten Business Day cure
period;
(ii) cure is completed as soon as possible after
the ten Business Day cure period; and
(iii) the passage of the ten Business Day cure
period will not jeopardize the ability of
the Bank to collect all sums due or to
become due to the Bank; or
(3) the Borrower makes any representation or warranty
hereunder which is incorrect in any material respect
when made and a cure is not effected within ten
Business Days or more after notice to remedy same;
PROVIDED, HOWEVER, that in the event that such cure
cannot reasonably be effected within ten Business
Days after notice to remedy same, the failure to cure
within the ten Business Day cure period shall not
constitute an Event of Default if:
(i) substantial progress is made to effect a
cure within the ten Business Day cure
period;
(ii) cure is completed as soon as possible after
the ten Business Day cure period; and
(iii) the passage of the ten Business Day cure
period will not jeopardize the ability of
the Bank to collect all sums due or to
become due to the Bank; or
(4) the Borrower admits in writing its inability to pay
its debts generally; fails to pay a material amount
of any of its indebtedness when due and such failure
continues after any applicable grace period specified
in any agreement or instrument relating to such
indebtedness (PROVIDED, HOWEVER, that the failure to
pay indebtedness in connection with the Borrower's
purchase of goods or services in the ordinary course
of business shall, if the Borrower disputes such
indebtedness in good faith, not be an Event of
Default hereunder for a period of 45 days after the
expiration of the applicable grace period specified
in any agreement or instrument relating to such
indebtedness); permits any material default under any
agreement or instrument relating to its
<PAGE> 19
To: Penwest Pharmaceuticals Co. Page 19
- -- -------------------------- -------
indebtedness, or any other event, to occur and to
continue after any applicable grace period specified
in such agreement or instrument and the effect of
such default or event is to accelerate the maturity
of a material amount of such indebtedness; is the
subject of (i) a voluntary bankruptcy proceeding, or
(ii) an involuntary bankruptcy proceeding which is
not dismissed within 60 days; or, becomes subject to
any proceeding seeking liquidation, rearrangement,
relief of creditors or the appointment of a receiver
or trustee over, or any judgment or order which has
or might have a material and adverse effect on, any
substantial part of its property; or
(5) any course of action is undertaken by the Borrower
which is intended to result in, or would result (in
the reasonable opinion of the Bank) in the transfer
of all or substantially all of the assets of the
Borrower; or
(6) any person (as the term "person" is defined in the
Securities Exchange Act of 1934, as amended (the
"Exchange Act")), or two or more persons acting in
concert, acquires beneficial ownership (within the
meaning of Rule 13d-3 of the Securities and Exchange
Commission under the Exchange Act) of one-third (1/3)
or more of the outstanding shares of voting stock of
the Borrower; or
(7) the Borrower is dissolved; or
(8) Penford or Penford Products at any time breaches any
agreement, covenant or warranty under its Guarantee
and such breach is not cured within the time
specified for cure under the Guarantee or waived by
the Bank, or the Guarantee fails to remain in full
force and effect; or
(9) an event of default occurs and is continuing under
any credit agreement with Penford under which the
Bank is either the sole lender or a participating
lender, PROVIDED, HOWEVER, that in no event shall a
default caused solely by a change in control of
Penford be deemed an Event of Default under this
Credit Agreement; or
(10) a material Reportable Event or Prohibited
Transaction, as defined in ERISA, occurs and is
continuing or a material accumulated funding
deficiency is incurred within the meaning of ERISA,
or a material liability to the Pension Benefit
Guaranty Corporation occurs and is continuing which,
in the opinion of independent Certified Public
Accountants of recognized standing selected by the
Borrower, will
<PAGE> 20
To: Penwest Pharmaceuticals Co. Page 20
- -- -------------------------- -------
have a material adverse financial effect on the
financial condition of the Borrower.
GAAP Any accounting terms used and not specifically defined herein
shall be construed in accordance with Generally Accepted
Accounting Principles as established by the Financial
Accounting Standards Board ("GAAP"), consistently applied, and
except as may be otherwise provided herein all financial data
and statements submitted pursuant to this Credit Agreement
shall be prepared in accordance with such principles.
INDEMNITY If the introduction or implementation of or any change in or
PROVISIONS in the interpretation of, or any change in its application to
the Borrower of, any law or any regulation or guideline issued
by any central bank or other governmental authority (whether
or not having the force of law), including, without
limitation, any reserve or special deposit requirement or any
tax (other than tax on the Bank's general income) or any
capital requirement, has due to the Bank's compliance the
effect, directly or indirectly, of (i) increasing the cost to
the Bank of performing its obligations hereunder; (ii)
reducing any amount received or receivable by the Bank or its
effective return hereunder; or (iii) causing the Bank to make
any payment or to forgo any return based on any amount
received or receivable by the Bank hereunder, then upon demand
from time to time the Borrower shall pay such amount as shall
compensate the Bank for any such cost, reduction, payment or
foregone return. The Borrower shall further indemnify the Bank
for all costs, losses and expenses incurred by the Bank in
connection with the early termination of any LIBOR Period and
agrees that the Bank shall have no liability to the Borrower
for any reason in respect of any Availment other than on
account of the Bank's negligence or wilful misconduct. Any
certificate of the Bank in respect of the foregoing which
presents the calculations relied upon by the Bank in
reasonable detail will be conclusive and binding upon the
Borrower, except for manifest error, provided that the Bank
shall determine the amounts owing to it in good faith using
any reasonable averaging and attribution methods.
INDEMNITY FOR The Borrower hereby represents and warrants that the
ENVIRON- Borrower's businesses and assets and those of its
MENTAL subsidiaries are operated in material compliance with
HAZARDS applicable Environmental Laws and that no enforcement action
in respect thereof is threatened or pending, and the Borrower
covenants to and to cause its subsidiaries to continue to so
operate. If at any time the Bank has reasonable grounds for
believing that the Borrower or one of its subsidiaries is not
complying with applicable Environmental Laws then the Bank may
request that the Borrower permit the Bank to conduct
inspections, audits and appraisals of all or any of the
records, business and
<PAGE> 21
To: Penwest Pharmaceuticals Co. Page 21
- -- -------------------------- -------
assets of the Borrower and each of its subsidiaries, with the
Bank to be indemnified by the Borrower for reasonable costs
that it may incur with respect to such inspections, audits and
appraisals if any material violation of applicable
Environmental Laws is identified. The Borrower shall not
unreasonably withhold its consent to such inspections, audits
and appraisals, provided that negotiations between the
Borrower and the Bank have been conducted which have resulted
in the Bank and the Borrower reaching agreement as to what
constitute reasonable costs for such inspections, audits or
appraisals. If the Bank is required to expend any funds in
compliance with applicable Environmental Laws, or court orders
in respect thereof, the Borrower shall indemnify the Bank in
respect of such expenditures as if an advance had been made to
the Borrower under this Credit Agreement for such purpose. For
purposes of this Credit Agreement, "Environmental Laws" means
the Comprehensive Environmental Response, Compensation and
Liability Act of 1980 (42 U.S.C. ss. 9601 ET SEQ., as
amended), the Resource, Conservation and Recovery Act (42
U.S.C. ss. 6901 ET SEQ., as amended), and similar federal,
state, local and other statutes, ordinances, laws, rules and
regulations in connection with environmental conditions,
health and safety.
REPORTING The Borrower covenants to provide to the Branch, to the
attention of Corporate Banking:
(1) audited annual financial statements of the Borrower
within 120 days of each of its fiscal year-ends;
(2) unaudited quarterly financial statements of the
Borrower within 60 days of the end of each of the
first three quarters of each of the Borrower's fiscal
years;
(3) audited, annual, consolidated financial statements of
Penford within 120 days of the end of each of
Penford's fiscal years
(4) within 60 days of the end of each of the first three
quarters of each of the Borrower's fiscal years and
within 120 days of each of the Borrower's fiscal
year-ends, a certificate of a senior officer of the
Borrower that the officer has no knowledge of any
Event of Default, or of any event which, with notice
or lapse of time, would constitute an Event of
Default; and
(5) such other information as the Bank may reasonably
request.
WITHHOLDING All payments due hereunder shall be made free from any
TAXES & LEVIES withholding tax
<PAGE> 22
To: Penwest Pharmaceuticals Co. Page 22
- -- -------------------------- -------
or levy (such taxes and levies, other than taxes on the
general income of the Bank, being the "Taxes"). The Borrower
shall pay any Taxes in addition to such payments or shall
indemnify the Bank for amounts paid by the Bank in respect of
any Taxes and shall obtain and deliver to the Bank receipts in
respect thereof.
EXPENSES All reasonable fees and out-of-pocket expenses of the Bank,
including without limitation the Bank's reasonable attorney
fees, in respect of preparation and enforcement of this Credit
Agreement or any other agreement or instrument relating to the
Credit, inspection and investigation costs, and other like
administrative costs incurred during the currency of this
Credit Agreement will be for the account of the Borrower. In
the event litigation is commenced by a party hereto to enforce
or interpret any provision of this Credit Agreement, the
prevailing party in such litigation shall be entitled to
receive, in addition to all other sums and relief, its
reasonable costs and attorney fees, incurred both at and in
preparation for trial and any appeal or review, such amount to
be set by the court(s) before which the matter is heard. The
Borrower also agrees to pay any reasonable attorney fees
incurred by the Bank in connection with any bankruptcy or
similar proceedings wherein the Borrower is the debtor.
EVIDENCE OF The Borrower acknowledges that the actual recording of
INDEBTEDNESS interest, fees and other amounts due with respect to the
Credit under this Credit Agreement in an account of the
Borrower maintained by the Bank in respect thereof and
payments made under the Credit in accordance with this Credit
Agreement shall constitute, except for obvious error,
conclusive evidence of the Borrower's indebtedness and
liability from time to time under this Credit Agreement in
respect of the Credit; provided that the failure of the Bank
to record same in such account shall not affect the obligation
of the Borrower to pay or repay such indebtedness and
liability in accordance with this Credit Agreement.
USURY The provisions of this Credit Agreement shall be subject to
RESTRAINTS any applicable law, regulation, order, rule or direction
("Usury Restraint") which prohibits or restricts the charging,
receipt or retention of interest or other amounts at the rates
and amounts set forth herein (the "Stated Rate") in excess
(the "Excess") of the maximum rates or amount (the "Maximum
Rate") stipulated in the Usury Restraint. The provisions of
this Credit Agreement shall not require the payment or permit
the collection of interest in excess of the Maximum Rate from
time to time. If the Bank complies (whether or not required to
do so at law) with such Usury Restraint, then, to the extent
permitted by law, a subsequent reduction in the Stated Rate
below the Maximum Rate shall be deemed not to reduce the
Stated Rate below the
<PAGE> 23
To: Penwest Pharmaceuticals Co. Page 23
- -- -------------------------- -------
Maximum Rate until the total amount of interest and other
amounts earned and retained, measured by a dollar amount,
equals the amount of interest and other amounts which would
have been earned and retained hereunder, inclusive of the
Excess, measured by a dollar amount, if the Stated Rate had
not been held at the Maximum Rate or any amount had not been
refunded to the Borrower.
SEVERABILITY The invalidity or unenforceability of any particular provision
of this Credit Agreement shall not affect any other provision
herein and the Agreement shall be construed as if the invalid
or unenforceable provision had been omitted.
ASSIGNABILITY The Borrower may not assign this Credit Agreement. The Bank,
with the Guarantor's approval, which approval shall not be
unreasonably withheld, may assign or grant participation in
its rights and obligations hereunder, with each such assignee
or participant to be entitled to rely on the section headed
INDEMNITY PROVISIONS as set out above, PROVIDED, HOWEVER, that
no assignment or participation shall increase the liability of
the Borrower for Taxes, indemnity or any other amount payable
by the Borrower to the Bank hereunder over that for which the
Borrower would be obligated in the absence of such assignment
or participation. The Bank may also pledge its rights (but not
its obligation to make the advances under the Credit) under
this Credit Agreement and/or its advances hereunder to a
Federal Reserve Bank in support of borrowings made by the Bank
from such Federal Reserve Bank.
GOVERNING LAW This Credit Agreement shall be construed in accordance with
& JURISDICTION the law of the state of Oregon and for the purpose of any
legal actions or proceedings brought by the Bank in respect of
the same, the Borrower hereby irrevocably submits to the
non-exclusive jurisdiction of any state or federal court of
such state and acknowledge its competence and the convenience
and propriety of the venue and agree to be bound by any
judgment thereof and not to seek, and hereby waive, any review
of such judgments by the courts of any other jurisdiction. IN
ANY ACTION OR PROCEEDING RELATING TO THIS CREDIT AGREEMENT,
THE BORROWER WAIVES ANY AND ALL RIGHTS TO TRIAL THEREOF BY
JURY.
<PAGE> 24
To: Penwest Pharmaceuticals Co. Page 24
- -- -------------------------- -------
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US AFTER
OCTOBER 3, 1989, CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT FOR
PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE
ENFORCEABLE. THE TERM "US" MEANS THE BANK.
Please indicate your acceptance of this Credit Agreement by signing
and returning the enclosed duplicate copy of this letter on or before July 2,
1998.
Yours truly,
THE BANK OF NOVA SCOTIA
by: /s/ Patrik G. Norris
-----------------------------
Patrik G. Norris, Officer
Accepted this 2nd day of
July, 1998
Penwest Pharmaceuticals Co.,
a Washington corporation
By: /s/ Jennifer L. Good
-------------------------------------
Name: Jennifer L. Good
-------------------------------------
Title: VP Finance & Chief Financial Officer
-------------------------------------
<PAGE> 25
EXHIBIT A TO CREDIT AGREEMENT
NOTICE
Any notice or communication given under the Credit Agreement to which
this Exhibit is attached shall be deemed to have been given
(1) in the case of notice or communication to the Borrower, (i)
upon facsimile transmission to facsimile no. 914-878-3498
(confirming telephone no. 914-878-8381), Attention: Jennifer
L. Good, or to such other facsimile number of which the Bank
notifies the Borrower pursuant to this Exhibit; provided that
transmission is confirmed by the sender's facsimile machine,
or (ii) upon delivery in writing to the Borrower, Attention:
Jennifer L. Good, at its address as noted on page 1 of the
Credit Agreement, or at such other address of which the
Borrower notifies the Bank pursuant to this Exhibit;
(2) in the case of notice or communication to the Bank with
respect to administrative or operational issues, (i) upon
facsimile transmission to the Scotiabanc, Inc., facsimile no.
404-888-8998 (confirming telephone no. 404-877-1563),
Attention: Ms. Hilma Gabbidon, or to such other facsimile
number of which the Bank notifies the Borrower pursuant to
this Exhibit; provided that transmission is confirmed by the
sender's facsimile machine, or (ii) upon delivery in writing
to the Scotiabanc, Inc., Attention: Ms. Hilma Gabbidon, at
Suite 2700, 600 Peachtree Street, N.E., Atlanta, Georgia
30308, or at such other address of which the Bank notifies the
Borrower pursuant to this Exhibit; and
(3) in the case of notice or communication to the Bank with
respect to credit issues, (i) upon facsimile transmission to
the Branch, facsimile no. 503-222-5502 (confirming telephone
no. 503-222-3148), Attention: Patrik G. Norris, or to such
other facsimile number of which the Bank notifies the Borrower
pursuant to this Exhibit; provided that transmission is
confirmed by the sender's facsimile machine, or (ii) upon
delivery in writing to the Branch at its address as noted on
page 1 of the Credit Agreement or at such other address of
which the Bank notifies the Borrower pursuant to this Exhibit.
Notice or communication to the Scotiabanc, Inc. hereunder to be effective on a
certain Business Day must, unless otherwise provided in the Credit Agreement, be
given prior to 11:00 a.m. Atlanta, Georgia time on that Business Day. Notice or
communication to the Branch hereunder to be effective on a certain Business Day
must, unless otherwise provided in the Credit Agreement, be given prior to 11:00
a.m. Portland, Oregon time on that Business Day.
