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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
-------------------- -----------------------
Commission File Number 0-11488
Penford Corporation (formerly PENWEST, LTD.)
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Washington 91-1221360
------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777-108th Avenue N.E., Suite 2390
Bellevue, Washington 98004-5193
---------------------------------------- ----------
(Address of principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code:
(425) 462-6000
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange of which registered
------------------- -----------------------------------------
None None
---- ----
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.00 par value
Common Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
(continued)
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of October 17, 1997 was approximately $298 million. The
number of shares of the Registrant's Common Stock (the Registrant's only
outstanding class of stock) outstanding (net of treasury stock) as of October
17, 1997 was 7,269,141.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to the 1998 Annual Meeting
of Shareholders is incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1: BUSINESS
a) GENERAL:
Penford Corporation (Penford or the Company) was incorporated under the name
PENWEST, LTD. in September 1983 and commenced operations on March 1, 1984. In
connection with the plan described below, PENWEST, LTD. changed its name to
Penford Corporation.
Penford consists of the following business units:
- Penford Products Co. (specialty carbohydrate chemicals for
papermaking) - The history of Penford Products Co. can be traced
to 1894. Penford Products Co. operates as a wholly-owned
subsidiary of Penford.
- Penwest Pharmaceuticals Co. (controlled release technology and
pharmaceutical excipients) - In March 1991, Penford purchased the
net assets of Edward Mendell Co., Inc. (Mendell). In connection
with the plan discussed below, Mendell changed its name to Penwest
Pharmaceuticals Co. (Penwest). Penwest is a wholly-owned
subsidiary of Penford.
- Penford Food Ingredients Co. (specialty food ingredient products)
- In September 1991, Penford Food Ingredients Co. (formerly
Penwest Foods Co.) was established to manufacture and market
specialty carbohydrate-based food ingredients. Penford Food
Ingredients is a division of Penford Products Co.
On October 9, 1997, Penford announced a two stage plan designed to foster the
growth potential of its pharmaceuticals business and separately, its paper and
food ingredients businesses. Under the first stage of the plan, Penwest
Pharmaceuticals Co. would sell up to 20% of its common stock through an initial
public offering. Under the second stage of the plan, Penford would effect a
tax-free spin-off to its shareholders of its remaining ownership of Penwest
common shares, contingent upon satisfying certain conditions, including receipt
of a tax ruling from the Internal Revenue Service or a written opinion from
Ernst & Young LLP to the effect that, among other things, the spin-off will
qualify as a tax-free distribution. The spin-off is anticipated to occur in
the second quarter of calendar 1998. If the spin-off occurs, Penwest will no
longer be a subsidiary of Penford.
On October 21, 1997, Penwest filed a registration statement with the Securities
and Exchange Commission for an initial public offering of 2,500,000 shares of
common stock (approximately 15% of its outstanding common stock). The estimated
initial public offering price is between $10.00 to $12.00 per share. An option
will be granted to the underwriters to purchase up to 375,000 additional shares
for the purpose of covering over-allotments, if any. Penford and Penwest have
entered into a Separation Agreement setting forth the agreement of the parties
with respect to the principal corporate transactions required to effect the
separation of Penford's pharmaceutical business from its paper and food
ingredients businesses, the initial public offering and the spin-off, and
certain other agreements governing the relationship of the parties prior to and
after the spin-off. Penford and Penwest will, prior to the completion of the
initial public offering, also enter into other agreements that govern various
interim and ongoing relationships.
b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS:
The Company's single business segment is developing, manufacturing and
marketing carbohydrate-based specialty chemicals. These carbohydrate- based
specialty chemicals are marketed and sold to three industries: paper,
pharmaceuticals and food.
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c) DESCRIPTION OF BUSINESS:
BUSINESS UNITS
1. SPECIALTY CHEMICALS: PENFORD PRODUCTS CO. (PENFORD PRODUCTS) develops,
manufactures and markets carbohydrate-based specialty chemical starches for
papermaking. These starches are principally ethylated (chemically modified
with ethylene oxide) and cationic (carrying a positive electrical charge)
starches. Ethylated starches are used in coatings and as binders, providing
strength and printability to fine white, magazine and catalog paper. Cationic
starches are used at the "wet-end" of the paper machine, providing strong
internal bonding of paper fibers. In addition, Penford Products' starch
copolymers, a patented combination of synthetic and natural carbohydrate
chemistry, are used in coating and binder applications in various segments of
the paper industry. Starches produced by Penford Products are designed to
improve the strength, quality and runnability of coated and uncoated paper.
Penford Products' corn-based ethylated and cationic starches and starch
copolymers are produced at its Cedar Rapids, Iowa facility. Penford Products'
potato-based cationic starches are produced at its Idaho Falls, Idaho facility.
Penford Products also sells specialty starch products to the domestic textile
industry for warp sizing, which is a fiber bonding process for yarn and
finished fabric, and for fabric sizing, which provides body and stiffness to
textiles.
Specialty chemical brand names of Penford Products for the paper industry
include, among others, Penford(R) Gums, PENSIZE(R) and the Apollo(R) series.
Penford Products' specialty chemicals for the paper industry are manufactured
by a process known as corn wet milling, which is the process by which the
various parts of corn are separated, refined and modified.
The corn, after it is removed from the cob and cleaned, is placed in warm
steepwater treated with sulfur dioxide, which causes the corn to swell and
soften. The softened kernels pass through a mill which separates the corn's
germ from its endosperm which contains the starch found in finished products.
Water is added, producing a thick slurry.
The germ is then separated from the slurry. After the germ has been washed and
dried, the crude corn oil contained in the germ is removed and refined,
yielding a fine quality salad and cooking oil, or a raw material for corn oil
margarines. Germ meal is used in animal feed. The remaining mixture of hull
and endosperm is then processed. Hull particles are screened out for animal
feed, while the finer particles of gluten and starch pass through. The corn
oil, germ meal and hull particles are all sold as by-products.
The water slurry of starch and gluten is separated. The starch, which is more
than 99 percent pure, is washed a third time to remove small quantities of
solubles. Modified starches are created by adding chemical reagents and
catalysts to the pure starch slurry. The modified starch is then filtered and
dried and is ready for shipping.
2. PHARMACEUTICALS: PENWEST PHARMACEUTICALS CO. (Penwest) is engaged in the
research, development and commercialization of novel drug delivery
technologies. Penwest has developed its proprietary TIMERx (R) controlled
release drug delivery technology. Penwest has applied TIMERx technology to
the development of oral formulations of generic versions of controlled release
drugs and branded controlled release versions of immediate release drugs.
Each of these formulations has been developed under a collaborative arrangement
with a pharmaceutical company. These formulations are in various stages of
development and are subject to regulatory approval. Except for Cystrin CR(R)
(described below), no product based on TIMERx technology has ever received
regulatory approval for commercial sale. There can be no assurance that
Penwest'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.
In October 1997, Penwest's collaborator, Leiras OY, a Finnish subsidiary of
Schering AG, received marketing approval in Finland for Cystrin CR(R) for the
treatment of urinary incontinence.
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In May 1997, Penwest's collaborator, Mylan Pharmaceuticals Inc. (Mylan), filed
an abbreviated new drug application (ANDA) with the U.S. Food and Drug
Administration (FDA) for the first generic version of the 30 mg dosage strength
of Procardia XL(R), a leading cardiovascular drug for angina and hypertension.
Penwest also manufactures and distributes 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. Penwest's largest selling
excipient product is EMCOCEL(R), a tabletting binder. In fiscal 1997, Penwest
introduced PROSOLV SMCC(TM), which Penwest believes represents a new class of
high functionality binders. Other excipient brand names include EMCOMPRESS(R),
EMDEX(R), EXPLOTAB(R) and PRUV(R).
Penwest operates facilities at Patterson, New York, Nastola, Finland, and Cedar
Rapids, Iowa.
3. SPECIALTY FOOD INGREDIENT PRODUCTS: PENFORD FOOD INGREDIENTS CO. (PFI)
develops, manufactures and markets specialty food ingredients to the food and
confectionery industries. These ingredients include food grade potato and
tapioca starch products as well as dextrose-based products such as specialty
dried corn syrup. PFI is the only North American producer of food grade potato
and tapioca starches.
PFI, headquartered in Englewood, Colorado, maintains manufacturing facilities at
Richland, Washington and Plover, Wisconsin for the food grade potato and tapioca
starches, and at Cedar Rapids, Iowa for the dextrose products. Penford Food
Ingredients' product brand names include CanTab(R), CarriDex(TM) and PenPlus(R).
RAW MATERIALS
Corn: The Penford Products corn wet milling plant is located in Cedar Rapids,
Iowa, the middle of the U.S. corn belt. Accordingly, the plant has truck and
rail delivered corn available throughout the year from a large number of corn
dealers and farmers at prices related to the major U.S. grain markets. The
cost of the corn to be purchased for fixed price business is generally hedged
by entering into futures contracts.
Cellulose Wood Pulp: Penwest's facilities at Nastola, Finland and Cedar
Rapids, Iowa use high-grade dissolving wood pulp (cellulose) as their primary
raw material to manufacture microcrystalline cellulose (EMCOCEL(R)). Penwest's
supplier of cellulose is located in North America.
Xanthan and Locust Bean Gums: Penwest's TIMERx drug delivery system consists
primarily of two natural polysaccharides, xanthan and locust bean gums.
Penwest purchases these gums from a sole source supplier.
Potato Starch: The Idaho Falls, Idaho facility of Penford Products and the
Richland, Washington facility of Penford Food Ingredients use co-products from
potato processors that contain the starch used as the primary raw material to
manufacture modified potato starches for papermaking and food applications.
Suppliers of the raw material are located in North America, primarily in the
northwest and midwest.
Chemicals: The principal chemical used in modifying starch is ethylene oxide,
a petrochemical derivative. Ethylene oxide is a commodity chemical, subject to
price fluctuations due to market conditions.
Corn, cellulose, xanthan and locust bean gums, potato starch and ethylene oxide
are not generally subject to availability constraints.
Approximately half of total manufacturing costs are the costs of corn,
cellulose, xanthan and locust bean gums, potato starch and chemicals. The
remaining portion consists primarily of utility and labor costs.
PATENTS, TRADEMARKS AND TRADENAMES
The Company owns several patents, trademarks, and tradenames. Penwest has been
issued 17 U.S. patents and 40 foreign patents relating to its controlled
release drug delivery technology. These patents
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expire between 2008 and 2015. There can be no assurance that these patents
will prevent other companies from developing similar or functionally equivalent
products or from successfully challenging the validity of these patents.
Further, there can be no assurance that the Company's processes or products
will not infringe the patents of third parties.
RESEARCH AND DEVELOPMENT
Company-sponsored research and development costs of $8,057,000, $7,297,000 and
$6,773,000 in fiscal 1997, 1996 and 1995, respectively, were charged to expense
as incurred.
ENVIRONMENTAL MATTERS
The Company has adopted a Policy on Environmental Matters and has implemented a
comprehensive corporate-wide environmental management program. The program is
managed by the Corporate Director of Environmental, Health and Safety and is
intended to ensure the Company's business is conducted in a safe and fiscally
responsible manner that protects and preserves the health and safety of Company
employees, the communities surrounding the Company's plants and the
environment. The Company continues to monitor environmental legislation and
regulations which may affect its operations.
WORKING CAPITAL
Working capital requirements of the Company are financed through operating cash
flow, unsecured lines of credit, and an unsecured $35 million credit agreement.
There was $20.3 million outstanding under the credit agreement at August 31,
1997. The Company also had uncommitted lines of credit totaling $15 million
under which $6.0 million was outstanding at fiscal year end.
PRINCIPAL CUSTOMERS
The Company sells to approximately ninety major customers. Two customers,
Georgia Pacific and Mead Paper, accounted for approximately 15% and 10%,
respectively, of total sales in fiscal 1997.
COMPETITION
The Company competes with approximately five other companies that manufacture
corn wet milling products, none of which is dominant in the ethylated starch
business. Although Penford Products is one of the smaller corn wet millers, it
is one of the major producers of specialty ethylated starches. Quality,
service and price are the major competitive factors for Penford Products.
The Company competes with numerous other companies that manufacture or
distribute pharmaceutical excipients. Penwest's principal competitor in this
market is FMC Corporation. Penwest has the second largest market share in
sales of its primary excipient product, EMCOCEL(R), or microcrystalline
cellulose. Quality, service and price are the major competitive factors for
Mendell.
The Company competes with numerous other companies in developing controlled
release drug delivery systems for the pharmaceutical industry. Development
expertise and proprietary technology are the major competitive factors for
Penwest's controlled release drug delivery business.
The Company competes with approximately four other companies that manufacture
specialty food ingredients, all of whom have larger market shares. Application
expertise, quality, service and price are the major competitive factors for
Penford Food Ingredients.
EMPLOYEES
At October 17, 1997, Penford and its subsidiaries had 533 employees. Penford's
specialty chemical and food ingredients operations, pharmaceuticals operations
and executive office employed 398, 118 and 17 persons, respectively.
Approximately 40% of the employees are represented by unions. Management
believes its employee relations are good, with the most recent collective
bargaining agreement completed in July, 1997.
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METHODS OF DISTRIBUTION
Penford Products, Penford Food Ingredients and Penwest use a direct sales force
to market their products in North America.
Penwest uses a combination of direct sales and distributors to market its
excipient products outside North America. Pursuant to Penwest's collaborative
agreements, Penwest's collaborators have responsibility for the marketing and
distribution of controlled release pharmaceuticals using TIMERx technology.
Penford Products' customers may purchase products through fixed-price contracts
or formula-priced contracts for periods covering three months to five years or
on a spot basis. Sales are approximately equally divided between fixed and
formula price business with a remaining 10% consisting of spot sales. Products
are shipped in either a bulk or bagged format.
D) FOREIGN OPERATIONS AND EXPORT SALES:
Penwest has a facility in Nastola, Finland. This operation is not significant
to the consolidated Company. Sales from this facility were less than 5% of the
Company's total sales in fiscal 1997. Export sales have accounted for less than
10% of the Company's total sales during each of the last three fiscal years.
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ITEM 2: PROPERTIES (MAJOR)
Registrant's executive offices, which are leased, are located at Suite 2390,
777-108th Avenue N.E., Bellevue, Washington 98004-5193. The Registrant's
mailing address is, P.O. Box 1688, Bellevue, Washington 98009-1688. Other
facilities are as follows:
<TABLE>
<CAPTION>
Bldg. Area Land Area Owned/ Function of
(Sq. Ft.) (Acres) Leased Facility
--------- ------- ------ --------
SPECIALTY CHEMICALS AND FOOD INGREDIENTS
- ----------------------------------------
<S> <C> <C> <C> <C>
Cedar Rapids, Iowa 707,000 29 Owned Manufacture
of corn starch
products
Englewood, Colorado 45,000 3 Leased -- Expires Offices and
April 2000, with research
renewal option laboratories
Idaho Falls, Idaho 31,000 6 Owned Manufacture of
industrial potato
starch products
Richland, Washington 16,000 3 Leased -- Expires Manufacture of
November 2014, food - grade potato
with renewal optionstarch products
Plover, Wisconsin 54,000 9 Owned Warehouse and
collection of raw
material
The corn wet milling operation in Cedar Rapids, Iowa has operating capacity,
measured in bushels ground, of 72,000 bushels per day. The grind operates
continuously except for periodic maintenance.
PHARMACEUTICAL EXCIPIENTS
- -------------------------
Patterson, New York 55,000 15 Owned Warehouse, offices
and research laboratories
Nastola, Finland 15,000 2 Leased -- Manufacture of
2 years notice pharmaceutical
required excipients
Cedar Rapids, Iowa 35,000 1 Owned Manufacture of pharmaceutical
excipients
</TABLE>
All major properties are owned. Production facilities are well maintained and
in good condition. The capacities of the plants are suitable and generally
sufficient to meet current production requirements. Penford is continually
undertaking a process of expanding and improving its property, plant and
equipment.
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ITEM 3: LEGAL PROCEEDINGS
In May 1997, one of Penwest's collaborators, Mylan, filed an ANDA with the FDA
for the 30 mg dosage strength of Nifedipine XL, a generic version of Procardia
XL. Bayer AG (Bayer) and ALZA Corporation (ALZA) own patents listed for
Procardia XL (the last of which expires in 2010), and Pfizer Inc. (Pfizer)
holds the new drug application 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. Penwest 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," which governs the filing of ANDAs. Mylan has advised the
Company that it intends to contest vigorously the allegations made in the
lawsuit. 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 Penwest have
intervened as defendants in this suit. An outcome adverse to Mylan and Penwest
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 and would not be relied upon by Medicaid and
Medicare formularies for reimbursement. If any of such events occur, Mylan may
terminate its efforts with respect to Nifedipine XL.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter of
fiscal 1997.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C> <C>
Tod R. Hamachek 51 President and
Chief Executive Officer
of Registrant 1985 - current
President and Chief Operating
Officer of Registrant 1983 - 1985
Jeffrey T. Cook 41 Vice President-Finance and
Chief Financial Officer of
Registrant 1991 - current
Treasurer of Registrant 1988 - 1991
Edmund O. Belsheim, Jr. 45 Vice President-Corporate Development
and General Counsel and Corporate
Secretary of Registrant 1996 - current
Member, Bogle & Gates P.L.L.C. 1986 - 1996
Robert G. Widmaier, Ph.D. 49 Vice President-Technical
Director and Chief Innovation
Officer of Registrant 1990 - current
Vice President-Technical
Director of Registrant 1988 -1990
Francis C. Rydzewski 47 Vice President of Registrant
and President and General
Manager, Penford Products Co.,
a wholly-owned subsidiary of
Registrant 1996 - current
Executive Vice President of
Operations, Penford Products Co.,
a wholly-owned subsidiary of
Registrant 1995 - 1996
Global Business Director,
Air Products 1972 - 1995
John V. Talley, Jr. 41 Vice President of Registrant
and President and General
Manager, Penwest Pharmaceuticals
Co., a wholly-owned
subsidiary of Registrant 1993 - current
Vice President of Marketing,
Sterling Drug 1992 - 1993
Vice President - Marketing,
Hospital Products Division
Sterling Drug 1989 - 1992
</TABLE>
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<TABLE>
<S> <C> <C> <C>
Gregory C. Horn 49 Vice President of Registrant
and President and General
Manager, Penford Food Ingredients Co. 1995 - current
Vice President of Marketing,
Penford Products Co. 1993 - 1994
Vice President and General
Manager, Sarah Lee
Corporation 1992 - 1993
Vice President and General
Manager, Churchill
Industries 1990 - 1993
</TABLE>
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER
MATTERS
Penford common stock, $1.00 par value, trades on the Nasdaq National Market
under the symbol "PENW". On October 17, 1997, there were 1,134 shareholders of
record. The high and low closing bid prices of the Company's common stock
during the last two fiscal years are set forth below. The quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
MARKET PRICE
HIGH LOW
---- ---
<S> <C> <C>
1996/1997
Quarter Ended November 30 $20.00 $17.50
Quarter Ended February 28 $20.25 $17.00
Quarter Ended May 31 $20.00 $18.25
Quarter Ended August 31 $34.50 $18.75
1995/1996
Quarter Ended November 30 $26.50 $24.00
Quarter Ended February 29 $25.75 $16.00
Quarter Ended May 31 $18.75 $18.00
Quarter Ended August 31 $20.00 $18.00
</TABLE>
During each quarter in fiscal years 1997 and 1996, a $0.05 per share cash
dividend was declared. The Company anticipates that it will continue to pay
such quarterly dividends in the foreseeable future.
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ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended August 31
------------------------------------------------------------------------------
(Thousands of dollars except per share data) 1997 1996 1995 1994 1993
- ------------------------------------------- --------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Operating Data:
Sales $ 196,634 $ 194,474 $ 174,200 $ 158,787 $ 135,517
Gross margin percentage 25.7% 24.0% 27.5% 25.9% 26.4%
Income from operations $ 13,970 $ 12,308 $ 14,973 $ 10,894 $ 9,110
Other income $ 1,200(1) $ $ 899(2)
Net income $ 6,625 $ 5,052 $ 7,217 $ 6,120 $ 6,315
Earnings per share $ 0.93 $ 0.72 $ 1.03 $ 0.86 $ 0.88
Dividends declared per share $ 0.20 $ 0.20 $ 0.20 $ 0.20 $ 0.20
Average shares and
equivalents outstanding 7,131,725 7,007,340 7,018,970 7,110,953 7,175,855
Balance Sheet Data:
Net property, plant and equipment $ 130,374 $ 121,173 $ 111,440 $ 99,973 $ 96,250
Long-term debt 61,791 62,636 58,628 42,897 46,998
Shareholders' equity 89,101 78,138 71,982 67,165 62,490
Capital expenditures 21,493 21,472 23,019 13,259 31,266
Total assets 215,929 202,518 186,760 164,357 157,966
</TABLE>
(1) Represents a pretax gain of $1.2 million related to the sale of Southern
California air emission credits.
(2) Represents a pretax gain of $899,000 related to the sale of assets of
Pacific Cogeneration, Inc.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Recent Developments
On October 9, 1997, Penford announced a two stage plan designed to foster the
growth potential of its pharmaceuticals business and separately, its paper and
food ingredients businesses. Under the first stage of the plan, Penwest
Pharmaceuticals Co. would sell up to 20% of its common stock through an initial
public offering. Under the second stage of the plan, Penford would effect a
tax-free spin-off to its shareholders of its remaining ownership of Penwest
common shares, contingent upon satisfying certain conditions, including receipt
of a tax ruling from the Internal Revenue Service or a written opinion from
Ernst & Young LLP to the effect that, among other things, the spin-off will
qualify as a tax-free distribution. The spin-off is anticipated to occur in
the second quarter of calendar 1998. If the spin-off occurs, Penwest will no
longer be a subsidiary of Penford.
On October 21, 1997, Penwest filed a registration statement with the Securities
and Exchange Commission for an initial public offering of 2,500,000 shares of
common stock (approximately 15% of its outstanding common stock). The estimated
initial public offering price is between $10.00 to $12.00 per share. An option
will be granted to the underwriters to purchase up to 375,000 additional shares
for the purpose of covering over-allotments, if any. Penford and Penwest have
entered into a Separation Agreement setting forth the agreement of the parties
with respect to the principal corporate transactions required to effect the
separation of Penford's pharmaceutical business from its paper and food
ingredients businesses, the initial public offering and the spin-off, and
certain other agreements governing the relationship of the parties prior to and
after the spin-off. Penford and Penwest will, prior to the completion of the
initial public offering, also enter into other agreements that govern various
interim and ongoing relationships.
Penwest will retain the proceeds from the planned initial public offering. In
addition, Penford will forgive all intercompany advances as of the closing of
the offering. As of August 31, 1997, the intercompany balance approximated
$35.2 million. Had the proposed plan been effected as of August 31, 1997, it is
estimated that consolidated assets and shareholders' equity of Penford would
have reflected a reduction of approximately $35.0 to $40.0 million, representing
the net effects of the proposed distribution.
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Comparison of Fiscal 1997 to 1996 Results of Operations
Sales increased $2.2 million or 1.1% in fiscal 1997. The increase reflects
higher volumes in each of the Company's divisions. The sales increase is
partially offset by lower corn prices in 1997. Corn is a key component in
Penford Products' paper chemical products, and changes in corn costs are
generally passed through to customers. During 1997, corn prices generally
trended down from the historical highs of late fiscal 1996. During 1997,
Penford Products increased shipments of corn-based products by 6.0%, reflecting
increased marketing efforts to certain key customers. Penford Food Ingredients
volume increased by 31.0% primarily as a result of new customers for its french
fry coating products. Penwest excipient sales were up slightly from 1996.
Gross margin was 25.7% in 1997 compared to 24.0% in 1996. The increase
reflects higher volumes primarily at Penford Products and Penford Food
Ingredients, better corn pricing and the impact of manufacturing efficiencies
implemented during the year.
Operating expenses increased $2.1 million or 6.2%. General and administrative
costs rose by $1.4 million primarily for company-wide information technology
support and to build the infrastructure to support anticipated growth for the
pharmaceuticals operations. Research and development expenses increased
$700,000 or 10.4% , primarily due to increased spending at Penwest. These
costs reflect an increased R&D headcount and greater expenditures for
bioequivalence studies in the drug formulation development area at Penwest
Pharmaceuticals. Consolidated R&D expenditures will be reduced significantly
if the planned spin-off of Penwest is completed.
Other income of $1.2 million represents a gain on the sale of Southern
California air emission credits.
Interest expense increased $222,000 or 4.4%, primarily due to higher
outstanding debt balances. The effective tax rate was 33.2% in fiscal 1997
compared to 32.5% in the prior year. The effective rate is lower than the
statutory rate primarily due to tax credits and the effects of the Company's
foreign sales corporation.
Comparison of Fiscal 1996 to 1995 Results of Operations
Sales increased $20.3 million, or 11.7%, during fiscal 1996. The increase in
sales reflected higher demand for the Company's core business. The increase
was also due to unusually high corn costs, a key component used in pricing
Penford Products' paper chemical products. Changes in corn costs are generally
passed through to customers. During the year, Penford Products signed several
multi-year contracts to sell products to customers representing significant
volumes. Penwest increased sales volumes for EMCOCEL(R) during fiscal 1996 by
17%. This increase was primarily attributable to two new large customers.
Potato starch volumes at Penford Food Ingredients increased by 75% in 1996 due
to rapidly increasing demand for these starches for french fry coatings.
Gross margins were 24.1% in 1996 compared with 27.5% in 1995. The decrease in
gross margin is primarily due to the historically high price of corn which
affected margins several ways. First, certain of the Company's sales are based
on a recent average of published corn prices. Consequently, in periods of
rapidly escalating prices, the Company is not able to recover the full amount
of the increase in raw material costs under such contracts. Particularly in
the fourth quarter, the Company's margin on fixed
Page 15
<PAGE> 16
price sales contracts was also negatively impacted by the high price of cash
corn relative to the futures market driven by a severe supply/demand imbalance.
Due to the short supply of corn, the market cash price reflected a high premium
that had to be absorbed by the Company on its fixed price business. Lastly,
lower margin dollars on higher unit sales prices also adversely impacted the
gross margin percentage. The corn situation did improve in October as the new
crop was harvested.
In addition to the impact of corn, competitive and market factors put pressure
on product pricing in the renewal of customer sales contracts making it
difficult to maintain prior years gross margin levels.
Operating expenses increased $1.6 million, or 4.8%. Research and development
(R&D) expenses increased $524,000, or 7.7%, as a result of greater development
spending at Penwest.
Other income in 1995 reflects a gain on the sale of assets of the Companys
subsidiary, Pacific Cogeneration, Inc. of $899,000.
Net interest expense remained consistent with the prior year. The effective
tax rate was 32.5% in fiscal 1996, compared with 35.0% in fiscal 1995. The
reduction in the tax rate reflects a reduction in state taxes and an increased
benefit from the Company's foreign sales corporation.
Liquidity and Capital Resources
The Company had working capital of $30.2 million at August 31, 1997. The
Company has an unsecured $35 million credit agreement under which there was
$20.3 million outstanding at the end of fiscal 1997. The Company also has $15
million of uncommitted lines with various banks that are used for overnight
borrowings. These lines were used throughout the year, and there was $6.0
million outstanding at the end of fiscal 1997.
Operating cash flow was $20.2 million, $12.9 million and $16.3 million in
fiscal 1997, 1996 and 1995, respectively.
Subsequent to the proposed spin-off, Penford Corporation will retain all rights
and obligations under its various short and long-term borrowing arrangements,
including amounts available under the credit agreement and uncommitted lines.
Capital expenditures amounted to $21.5 million in fiscal 1997 compared to $21.5
million in fiscal 1996 and $23.0 million in fiscal 1995. Capital expansion has
been funded from operating cash flows and borrowings under uncommitted lines.
Significant capital projects during fiscal 1997 included capacity expansion at
the Penford Food Ingredients' facility in Richland, Washington and the
completion a new corn unloading facility for Penford Products in Cedar Rapids,
Iowa. The remainder of the expenditures were for various improvements to
manufacturing facilities.
Planned capital expenditures in fiscal 1998 will primarily be directed to
upgrades and modernization of certain Penford Products machinery and equipment
and the expansion of processing capabilities at Penford Food Ingredients.
Assuming completion of the proposed spin-off, capital expenditures in 1998
should be no greater than in fiscal 1997. The Company expects to fund capital
expenditures from operating cash flows and from uncommitted lines of credit.
Page 16
<PAGE> 17
The Company commenced paying a quarterly cash dividend of $0.05 per share with
the quarter ended February 28, 1992, and has paid such dividend each quarter
thereafter. The Board of Directors reviews the dividend policy on a periodic
basis.
In April 1994, the Board of Directors authorized a stock repurchase program for
the purchase of up to 500,000 shares of the outstanding common stock of the
Company. The Company did not repurchase any of its common stock during fiscal
1997.
Page 17
<PAGE> 18
Forward-looking Statements
The above discussion contains forward-looking statements concerning the proposed
public offering and spin-off of Penwest and the anticipated activities and
results of Penford. There are a variety of factors which could cause actual
events to differ materially from those projected in the forward-looking
statements, including without limitation, the risks that the public offering or
the spin-off may not be completed as the result of future developments in
Penford's or Penwest's business or conditions in the securities markets, failure
to obtain necessary government rulings or approvals or third party consents or
agreements or other unforeseen developments; competition; product development
risk; patents and intellectual property matters (including patent infringement
litigation, including the patent infringement suit brought by Bayer and Pfizer
against Mylan (and described herein under Item 3: Legal Proceedings);
dependence on collaborators; regulatory and manufacturing issues including the
difficulties of obtaining FDA or other regulatory approvals; changes in raw
material prices; or other unforeseen developments in the industries in which
Penford operates. Accordingly, there can be no assurance that the public
offering or spin-off will be completed, or that future activities or results
as described will be as anticipated.
The registration statement filed by Penwest with the Securities and Exchange
Commission has not yet become effective. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. The discussion included herein shall not constitute an offer to sell
or a solicitation of an offer to buy nor shall there be any sale of these
securities in any state or jurisdiction, in which such offer, solicitation or
sale would be unlawful prior to registration or qualification under the
securities laws of any such state or jurisdiction.
Page 18
<PAGE> 19
ITEM 8: PENFORD CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31
(Thousands of dollars) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 176
Trade accounts receivable 27,181 $ 26,766
Inventories 21,835 20,531
Prepaid expenses and other 5,179 5,354
--------- ---------
Total current assets 54,371 52,651
Property, plant and equipment:
Land 4,834 4,014
Plant and equipment 210,037 185,499
Construction in progress 8,492 12,791
Less accumulated depreciation (92,989) (81,131)
--------- ---------
Net property, plant and equipment 130,374 121,173
Deferred income taxes 11,007 9,940
Restricted cash value of life insurance 12,691 11,432
Other assets 7,486 7,322
--------- ---------
$ 215,929 $ 202,518
========= =========
Liabilities and shareholders' equity
Current liabilities:
Bank overdraft, net $ 847
Accounts payable $ 10,089 10,344
Accrued liabilities 8,157 7,943
Current portion of long-term debt 5,955 4,127
--------- ---------
Total current liabilities 24,201 23,261
Long-term debt 61,791 62,636
Other postretirement benefits 10,294 10,306
Deferred income taxes 22,136 20,980
Other liabilities 8,406 7,197
Commitments and Contingencies
Shareholders' equity:
Common stock, par value $1.00 per share,
authorized 29,000,000 shares, issued 9,093,251
shares in 1997 and 8,677,165 in 1996, including
treasury shares 9,093 8,677
Additional paid-in capital 18,466 13,633
Retained earnings 93,854 88,640
Treasury stock, at cost, 1,830,735 shares in 1997
and 1,832,752 in 1996 (30,604) (30,637)
Note receivable from Savings
and Stock Ownership Plan (639) (1,742)
Cumulative translation adjustment (1,069) (433)
--------- ---------
Total shareholders' equity 89,101 78,138
--------- ---------
$ 215,929 $ 202,518
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 19
<PAGE> 20
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended August 31
(Thousands of dollars except per share data) 1997 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Sales $ 196,634 $ 194,474 $ 174,200
Cost of sales 146,081 147,711 126,341
----------- ----------- -----------
Gross margin 50,553 46,763 47,859
Operating expenses 36,583 34,455 32,886
----------- ----------- -----------
Income from operations 13,970 12,308 14,973
Other income 1,200 899
Investment income 72 277 418
Interest expense (5,323) (5,101) (5,183)
----------- ----------- -----------
Income before income taxes 9,919 7,484 11,107
Income taxes 3,294 2,432 3,890
----------- ----------- -----------
Net income $ 6,625 $ 5,052 $ 7,217
=========== =========== ===========
Weighted average common shares and
equivalents outstanding 7,131,725 7,007,340 7,018,970
=========== =========== ===========
Earnings per share $ 0.93 $ 0.72 $ 1.03
=========== =========== ===========
Dividends declared per share $ 0.20 $ 0.20 $ 0.20
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 20
<PAGE> 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31
(Thousands of dollars) 1997 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 6,625 $ 5,052 $ 7,217
Adjustments to reconcile net income
to net cash from operating activities
Depreciation 12,436 11,739 10,375
Deferred income taxes 89 1,174 1,504
Gain on sale of assets (899)
Stock compensation expense related to non-
employee director stock options 246
Change in operating assets and liabilities
Receivables (415) (2,823) (3,195)
Inventories (1,304) (7,902) 2,525
Accounts payable and other 2,545 5,670 (1,181)
-------- -------- --------
Net cash from operating activities 20,222 12,910 16,346
Investing activities:
Acquisitions of fixed assets, net (21,493) (21,472) (23,019)
Proceeds from sale of assets 2,500
Other 152 1,158 (530)
-------- -------- --------
Net cash used by investing activities (21,341) (20,314) (21,049)
Financing activities:
Proceeds from unsecured line of credit 87,875 60,847 41,305
Payments on unsecured line of credit (87,765) (54,962) (41,305)
Proceeds from long-term debt 5,000 15,250 20,000
Payments on long-term debt (4,127) (17,270) (4,100)
Issuance (purchase) of treasury stock 37 (1,310)
Exercise of stock options 3,671 876 75
Purchase of life insurance for officers'
benefit plans (1,158) (2,501) (2,501)
Payment of dividends (1,391) (1,017) (1,360)
Other (132)
-------- -------- --------
Net cash from financing activities 2,142 1,223 10,672
-------- -------- --------
Net increase (decrease) in cash 1,023 (6,181) 5,969
Cash (bank overdrafts) and cash
equivalents at beginning of year (847) 5,334 (635)
-------- -------- --------
Cash (bank overdrafts) and cash
equivalents at end of year $ 176 $ (847) $ 5,334
======== ======== ========
Supplemental disclosure of cash flow
information
Cash paid during the year for:
Interest $ 5,924 $ 5,392 $ 4,976
Income taxes $ 1,273 $ 1,317 $ 2,052
</TABLE>
The accompanying notes are an integral part of these statements.
Page 21
<PAGE> 22
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Note Receive-
able from Total
Additional Savings & Cumulative Share-
Common Paid-In Retained Treasury Stock Translation holders'
(Thousands of dollars) Stock Capital Earnings Stock Ownership Plan Adjustment Equity
-------- -------- -------- -------- -------------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balances, September 1, 1994 $ 8,577 $ 12,489 $ 79,128 $(29,327) $ (3,340) $ (362) $ 67,165
Net income 7,217 7,217
Exercise of stock options 14 61 75
Purchase of treasury stock (1,310) (1,310)
Savings and Stock Ownership
Plan activity 362 362
Translation loss (131) (131)
Dividends declared (1,396) (1,396)
-------- -------- -------- -------- -------- -------- --------
Balances, August 31, 1995 8,591 12,550 84,949 (30,637) (2,978) (493) 71,982
Net income 5,052 5,052
Exercise of stock options 86 790 876
Tax benefit of stock option
exercises 293 293
Savings and Stock Ownership
Plan activity 1,236 1,236
Translation gain 60 60
Dividends declared (1,361) (1,361)
-------- -------- -------- -------- -------- -------- --------
Balances, August 31, 1996 8,677 13,633 88,640 (30,637) (1,742) (433) 78,138
Net income 6,625 6,625
Exercise of stock options 416 3,255 3,671
Tax benefit of stock option
exercises 1,328 1,328
Stock compensation expense
related to non-employee
director stock options 246 246
Savings and Stock Ownership
Plan activity 4 33 1,103 1,140
Translation loss (636) (636)
Dividends declared (1,411) (1,411)
-------- -------- -------- -------- -------- -------- --------
Balances, August 31, 1997 $ 9,093 $ 18,466 $ 93,854 $(30,604) $ (639) (1,069) $ 89,101
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 22
<PAGE> 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
On October 9, 1997, Penford Corporation (formerly PENWEST, LTD.) announced a
plan to establish its pharmaceutical operations as a separate, publicly owned
company. In connection with the plan, PENWEST, LTD. changed its name to Penford
Corporation (See Note L).
Penford Corporation (Penford or the Company) is in the business of developing,
manufacturing and marketing chemically modified carbohydrate-based specialty
chemicals. The Company operates in three market lines: carbohydrate-based
specialty chemicals used in paper manufacturing, pharmaceutical excipients and
controlled release technology, and food ingredient products. Customers are
primarily manufacturers in the paper industry, makers of prescription
pharmaceuticals, over-the-counter drugs and vitamins, and processors in the food
industry. Sales of the Company's products are generated using a combination of
direct sales and distributor agreements.
Basis of Presentation
The consolidated financial statements include Penford and its wholly-owned
subsidiaries. Material intercompany balances and transactions have been
eliminated. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Certain amounts in the financial statements for prior years have been
reclassified to conform with the current year presentation. These
reclassifications had no effect on previously reported results of operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less
than three months when purchased to be cash equivalents.
Cash equivalents consist of money market funds, short-term deposits, and
commercial paper. Amounts reported in the balance sheets represent cost which
approximates market value.
Penford's cash management system includes a cash overdraft feature for
uncleared checks in the disbursing accounts. Cash in the accompanying balance
sheets represents the net amounts available to the disbursing accounts.
Uncleared checks of $1,446,000 and $2,177,000 are netted against cash at August
31, 1997 and 1996, respectively.
Page 23
<PAGE> 24
Concentration of Credit Risk and Financial Instruments
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains an allowance for doubtful
accounts which management believes is sufficient to cover potential credit
losses. The carrying value of financial instruments including cash,
receivables, and payables approximates market value at August 31, 1997. The
fair market value of long-term debt is approximately $69.9 million at
August 31, 1997 with a carrying value of $67.7 million. The carrying value of
long-term debt approximated market value at August 31, 1996. The fair value of
fixed rate, long-term debt is estimated using discounted cash flow analyses,
based on the Company's current incremental borrowing rates for similar types
of borrowings.
Penford Products' two largest customers individually accounted for
approximately 15% and 10% of sales in fiscal 1997 and one customer represented
approximately 14% of sales in fiscal 1996. No customers accounted for greater
than 10% of total sales in years prior to 1996.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for
maintenance and repairs are expensed as incurred. The Company uses the
straight-line method to compute depreciation assuming average useful lives of
three to forty years for financial reporting purposes. For income tax
purposes, the Company generally uses accelerated depreciation methods.
Interest is capitalized on major construction projects while in progress.
Interest of $724,000, $300,000 and $209,000 was capitalized in 1997,1996 and
1995, respectively.
Foreign Currencies
Monetary assets and liabilities of the Company's foreign operations are
translated into U.S. dollars at year-end exchange rates and revenue and
expenses are translated at average exchange rates. Non-monetary assets and
liabilities are converted at historical rates. In each instance, the
functional currency is the local currency. Realized gains and losses from
foreign currency transactions are included in the statements of income.
Income Taxes
The provision for income taxes includes federal and state taxes currently
payable and deferred income taxes arising from temporary differences between
financial and income tax reporting methods. Deferred taxes have been recorded
using the liability method in recognition of these temporary differences.
Revenue Recognition
Sales revenue is recorded upon shipment of product.
Page 24
<PAGE> 25
Research and Development
Research and development costs of $8,057,000, $7,297,000 and $6,773,000 in
1997, 1996 and 1995, respectively, were charged to expense as incurred.
Earnings Per Common Share
Earnings per common share were computed by dividing net income by the weighted
average number of common shares and dilutive common share equivalents
outstanding during the fiscal year. Outstanding stock options and stock
appreciation rights are considered to be common share equivalents.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, Earnings per Share, which is required to be adopted in the
second quarter of fiscal 1998. At that time, the Company will be required to
change the method currently used to compute earnings per share and to restate
all prior periods. Under the new requirements for calculating primary earnings
per share, the dilutive effect of stock options will be excluded. The impact
is expected to result in increases of $0.02 , $0.02 and $0.04 to primary
earnings per share for the fiscal years ended August 31, 1997, 1996 and 1995,
respectively. The impact of Statement 128 on the calculation of fully diluted
earnings per share is not expected to be material.
Stock Compensation
In October 1995, the FASB issued Statement No. 123, "Accounting for Stock-Based
Compensation." The Statement is effective for fiscal years beginning after
December 15, 1995 and requires stock-based compensation expense to be measured
using either the intrinsic-value method as prescribed by Accounting Principles
Board ("APB") No. 25 or the fair-value method described in Statement No. 123.
The Company has adopted Statement No. 123 in fiscal 1997 using the
intrinsic-value method, which has no effect on the Company's financial position
or results of operations (see Note E).
Recent Accounting Standards
The FASB has recently issued Statement No. 130 on Comprehensive Income and
Statement No. 131 regarding disclosures of Business Segment Information. The
aforementioned standards will require additional financial statement disclosure
for all periods presented, but will not impact the Company's reported financial
position or results of operations. The new standards will be adopted in fiscal
1999.
Page 25
<PAGE> 26
NOTE B
INVENTORIES
Inventories are stated at the lower of cost or market. Cost, which includes
material, labor and manufacturing overhead costs, is determined by the
first-in, first-out (FIFO) method.
The Company generally follows a policy of hedging corn purchases related to
fixed price sales contracts and certain anticipated corn purchases to minimize
price risk due to market fluctuations and risk of crop failure. The
instruments used are principally readily marketable exchange traded futures
contracts which are designated as hedges. The changes in market value of such
contracts have a high correlation to the price changes of the hedged commodity.
Also, the underlying commodity can be delivered against such contracts. Gains
or losses arising from open and closed hedging transactions are included in
inventory as a cost of raw materials and reflected in the statements of income
when the product is sold.
Components of inventory are as follows:
<TABLE>
<CAPTION>
August 31 (Thousands of dollars) 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Raw materials, supplies and other $ 6,624 $ 6,170
Work in progress 886 685
Finished goods 14,325 13,676
------- -------
Total inventories $21,835 $20,531
======= =======
</TABLE>
Page 26
<PAGE> 27
NOTE C
DEBT
<TABLE>
<CAPTION>
August 31 (Thousands of dollars) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured credit agreement, maturity in fiscal 2000, 6.44%
interest rate at August 31, 1997 $20,250 $15,250
Private placement, 7.93% interest rate, semiannual interest-only
payments with principal payments beginning in fiscal 1997, final
maturity in fiscal 2003 17,143 20,000
Private placement, 7.59% interest rate, semiannual interest-only
payments on $10 million principal with payment in fiscal 1999,
and 8.35% interest rate, semi-annual interest-only payments on
$10 million principal with payment in fiscal 2007 20,000 20,000
Unsecured note, 9.4% interest rate, due in quarterly installments
through December 1999 2,100 2,940
Note payable, 7.01% interest rate, quarterly
principal and interest payments through October 1997 2,258 2,688
Lines of credit, average interest rate of 6.2% at August 31, 1997 5,995 5,885
------- -------
67,746 66,763
Less current portion 5,955 4,127
------- -------
Net long-term debt $61,791 $62,636
======= =======
</TABLE>
Maturities of long-term debt for the fiscal years ending August 31, 1998
through 2002, and thereafter, are as follows (thousands of dollars):
<TABLE>
<S> <C>
1998 $5,955
1999 19,693
2000 23,527
2001 2,857
2002 2,857
Thereafter 12,857
---------
$ 67,746
=========
</TABLE>
The unsecured credit agreement is a $35 million facility involving four banks.
There was $20.3 million outstanding at fiscal year end, and borrowings mature
on December 30, 1999. Borrowing rates available to the Company under the
agreement are based on prime rate or the interbank offered rate depending on
the selection of borrowing options.
The unsecured credit agreement, the private placements, and other notes
include, among other terms, various limitations on long-term indebtedness,
minimum net worth and working capital ratios, and restrictions on Penford's
ability to purchase or redeem its own stock. The unsecured credit agreement
also requires the Company to maintain a minimum fixed charge coverage ratio.
The Company has uncommitted lines of credit aggregating $15 million, which
provide for financing at various floating rates of which $6.0 million was
outstanding at August 31, 1997.
Page 27
<PAGE> 28
The Company enters into interest rate swap agreements to modify the interest
characteristics of its outstanding debt. These agreements involve the exchange
of interest payment streams without an exchange of the underlying principal
amount. Net amounts paid or received are reflected as adjustments to interest
expense. The fair values of the swap agreements are not recognized in the
financial statements. In the event of default by a counterparty, the risk in
these transactions is the cost of replacing the interest rate contract at
current market rates. Management continually monitors the credit ratings of
its counterparties, and believes the risk of incurring such losses is remote,
and that if incurred, such losses would be immaterial. At August 31, 1997,
approximately $25 million of the Company's outstanding debt was subject to
interest rate swap agreements. Of this amount, $15 million involves floating
rate to fixed rate swaps which effectively fix rates at approximately 9.0% and
$10 million involves fixed rate to floating rate swaps, with the floating rate
approximating 6.3% at August 31, 1997.
The Company has hedged the interest rate risk on $8.9 million of its long-term
debt using Treasury note futures. The cost of the hedge has been deferred and
will be recognized as a component of interest expense over the life of the
debt. The hedge results in an effective interest rate on the related long-term
debt of approximately 9.5%.
NOTE D
LEASES
Certain of the Company's property, plant, and equipment is leased under
operating leases ranging from one to fifteen years with renewal options.
Rental expense under operating leases was $4,418,000, $4,482,000 and $3,202,000
for fiscal years ended August 31, 1997, 1996 and 1995, respectively. Future
minimum lease payments as of August 31, 1997 for noncancellable operating
leases having initial lease terms of more than one year are as follows
(thousands of dollars):
<TABLE>
<CAPTION>
Years ending August 31 Operating Leases
- ---------------------- ----------------
<S> <C>
1998 $ 4,043
1999 3,668
2000 2,423
2001 1,597
2002 1,365
Thereafter 8,109
---------
Total minimum lease payments $ 21,205
=========
</TABLE>
Page 28
<PAGE> 29
NOTE E:
STOCK OPTIONS
The Company has two stock option plans for which 1,500,000 shares of Common
Stock have been authorized for grants of options: the 1994 Stock Option Plan
(the "1994 Plan") and the Stock Option Plan for Non-Employee Directors (the
"Directors' Plan"). The 1994 Plan replaced the 1984 Stock Option Plan (143,000
shares outstanding at August 31, 1997) which expired in February 1994, and
provides for the granting of stock options at the fair market value of the
Company's Common Stock on the date of grant. Either incentive stock options or
non-qualified stock options are 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% of each year and expire 10
years and 10 days from the date of grant.
The Directors' Plan provides for the granting of non-qualified stock options at
75% of the fair market value of the Company's Common Stock on the date of grant
for annual retainers and meeting fees in lieu of cash compensation at each
Director's annual election. Options granted under the Directors' Plan vest six
months after the grant date and expire at the earlier of ten years after the
date of grant or three years after the date the non-employee director ceases to
be a member of the Board. In addition, non-employee directors receive
restricted stock under a restricted stock plan every three years. The
restricted stock may be sold or otherwise transferred at the rate of 33.3%
each year.
Effective September 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," using
the intrinsic-value method prescribed by APB Opinion No. 25, as allowed for in
the Statement. Accordingly, no compensation expense has been recognized for
the stock-based compensation plans other than for the Directors' Plan and
restricted stock awards. Had compensation cost been recognized based on the
fair value at the date of grant for options awarded in 1997 and 1996 under the
Plans, pro forma amounts of the Company's net income and net income per share
would have been as follows:
<TABLE>
<CAPTION>
In Thousands, except per share data Fiscal 1997 Fiscal 1996
----------- -----------
<S> <C> <C>
Net income - as reported $ 6,625 $ 5,052
Net income - pro forma $ 5,689 $ 4,696
Net income per share, primary - as reported $ 0.93 $ 0.72
Net income per share, primary - pro forma $ 0.80 $ 0.67
</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 for employees and 3.0 years for non- employee directors; 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 fiscal years
1997 and 1996 was $9.46 and $10.57, respectively. The weighted average fair
value of options granted under the Directors' Plan during fiscal years 1997 and
1996 was $9.29 and $11.66, respectively. The effect of applying Statement No.
123 for providing pro forma disclosures for fiscal years 1997 and 1996 is not
likely to be representative of the effects in future years
Page 29
<PAGE> 30
because the amounts above reflect only the options granted in 1997 and 1996
that vest over four to five years, and additional grants are made annually.
Changes in stock options for the three years ended August 31 follow:
<TABLE>
<CAPTION>
Wtd. Average
Shares Option Price Range Exercise Price
------ ------------------ --------------
<S> <C> <C> <C>
Fiscal 1995
Balance, September 1, 1994 615,859 $ 3.31 - 27.50 $ 11.22
Granted 271,000 20.75 - 22.75 21.02
Exercised (13,600) 3.31 - 22.60 5.43
Cancelled (25,800) 19.13 19.13
--------
Balance, August 31, 1995 847,459 3 31 - 27.50 14.66
--------
Options Exercisable 401,159 3.31 - 27.50 9.72
Fiscal 1996
Granted 117,944 $ 18.25 - 24.75 $ 19.30
Exercised (77,917) 5.59 - 22.63 9.17
Cancelled (38,300) 22.50 - 27.50 23.90
--------
Balance, August 31, 1996 849,186 5.83 - 24.75 15.08
--------
Options Exercisable 454,692 5.83 - 24.75 10.86
Fiscal 1997
Granted 332,848 $ 13.13 - 18.75 $ 17.44
Exercised (409,242) 5.83 - 22.75 8.66
Cancelled (22,800) 18.25 - 21.00 20.29
--------
Balance, August 31, 1997 749,992 13.13 - 24.75 19.47
--------
Options Exercisable 199,625 13.13 - 24.75 19.00
Shares available for future grant 890,808
</TABLE>
The following table summarizes information concerning outstanding and
exercisable options as of August 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------ ---------------------------
Wtd. Avg.
Remaining Wtd. Avg Wtd.Avg.
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Options Life Price Options Price
--------------- ------- ---- ----- ------- -----
<S> <C> <C> <C> <C> <C>
$ 13.13 - 17.00 100,339 8.89 $ 14.95 53,455 $ 13.79
17.01 - 21.00 514,253 8.38 19.28 84,020 18.99
21.01 - 24.75 135,400 4.90 23.53 62,150 23.50
------- -------
749,992 199,625
======= =======
</TABLE>
Stock appreciation rights (SARs) to certain officers of the Company that were
granted in December 1986 and fully vested as of August 31, 1996 were fully
exercised during the first half of fiscal 1997. As a result of appreciation
(depreciation) of Penford stock, compensation expense was charged (credited)
for $(28,000), $(451,000) and $78,000 in 1997, 1996 and 1995, respectively.
Page 30
<PAGE> 31
NOTE F
INCOME TAXES
Income tax expense consists of the following:
<TABLE>
<CAPTION>
Year Ended August 31
(Thousands of dollars) 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current
Federal $2,487 $1,091 $2,102
Foreign 409 80 4
State 309 87 232
------ ------ ------
3,205 1,258 2,338
Deferred
Federal 85 1,108 1,459
State 4 66 93
------ ------ ------
89 1,174 1,552
------ ------ ------
Total provision $3,294 $2,432 $3,890
====== ====== ======
</TABLE>
A reconciliation of the statutory federal tax to the actual provision is as
follows:
<TABLE>
<CAPTION>
Year Ended August 31
(Thousands of dollars) 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 34% 34% 34%
Statutory tax $ 3,372 $ 2,545 $ 3,776
State taxes, net of federal benefit 238 101 215
Tax credits, including research and
development credits (322) (313)
Tax advantaged investment income (36) (47)
Foreign sales corporation (244) (238) (232)
Other 250 60 491
------- ------- -------
Total provision $ 3,294 $ 2,432 $ 3,890
======= ======= =======
</TABLE>
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
August 31
(Thousands of dollars) 1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit $ 3,506 $ 3,257
Research and development credit 947 592
Postretirement benefits 3,706 3,660
Provisions for accrued expenses 1,780 2,431
Other 1,068
------- ------
Total deferred tax assets 11,007 9,940
Deferred tax liabilities:
Depreciation 19,830 19,453
Other 2,306 1,527
------ ------
Total deferred tax liabilities 22,136 20,980
------- ------
Net deferred tax liabilities $11,129 $11,040
======= =======
</TABLE>
Page 31
<PAGE> 32
NOTE G
PENSION AND OTHER EMPLOYEE BENEFITS
Penford maintains two noncontributory defined benefit pension plans that cover
substantially all employees.
Benefits under the plan for hourly employees are primarily related to years of
service. Benefits for salaried employees are primarily related to years of
credited service and final average five-year earnings. Employees generally
become eligible to participate in the plans after attaining age 21 and benefits
normally become vested after five years of credited service.
The Company's funding policy is to contribute amounts to the plans sufficient
to meet or exceed the minimum requirements of the Employee Retirement Income
Security Act of 1974.
Assumptions used in the measurement of the projected benefit obligation
included a discount rate of 7.5% in 1997 and 8.0% in 1996, and a rate of
increase in compensation levels of 4.0% in 1997 and 5.0% in 1996 for the
salaried employees. The expected long-term rate of return on plan assets is
assumed to be 10.0% for 1997 and 9.0% for 1996 and 1995. Changes in the
assumptions used in the measurement of the projected benefit obligation had the
effect of reducing pension expense by $268,000 in 1997.
Net periodic pension expense consisted of the following (in thousands):
<TABLE>
<CAPTION>
Year Ended August 31
1997 1996 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost of benefits earned during the year $ 632 $ 709 $ 603
Interest cost on projected benefit obligation 1,466 1,426 1,363
Actual return on plan assets (6,036) (2,278) (2,599)
Net amortization and deferral 4,246 892 1,480
------- ------- -------
Net pension expense $ 308 $ 749 $ 847
======= ======= =======
</TABLE>
The following table sets forth the funded status of both pension plans (in
thousands):
<TABLE>
<CAPTION>
August 31
1997 1996
- ----------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of projected obligation,
based on service to date and current salary levels:
Vested $ 19,059 $ 17,089
Nonvested 963 529
-------- --------
Accumulated benefit obligation 20,022 17,618
Effect of projected salary increases 1,186 1,676
-------- --------
Projected benefit obligation 21,208 19,294
Plan assets at fair market value 24,639 19,931
-------- --------
Plan assets in excess of projected benefit obligation 3,431 637
Unrecognized actuarial net gain (5,216) (1,634)
Balance of unrecognized net obligation at
transition being amortized over 15 years 882 1,010
Unrecognized prior service cost 1,118 510
-------- --------
Net pension asset $ 215 $ 523
======== ========
</TABLE>
Assets of the pension plans are invested in units of common trust funds managed
by Frank Russell Trust Company. The common trust funds own stocks, bonds and
real estate.
Page 32
<PAGE> 33
Savings And Stock Ownership Plan
The Company has a savings investment plan. The savings component, available to
all employees, matches 75% of the employee's contribution up to 6% of the
employee's pay, in the form of Penford common stock. During 1997,
approximately 54,435 shares of stock were earned by plan participants. The
savings component expense of the plan was $877,000, $722,000 and $520,000 for
fiscal years 1997, 1996 and 1995, respectively. Compensation expense is
recorded by the Company at the market value of shares contributed to the Plan.
The plan also includes an annual profit-sharing component that is awarded by
the Board of Directors based on achievement of predetermined corporate goals.
This feature of the plan is available to all employees who meet the eligibility
requirements of the plan. The profit-sharing expense, which reflects the
market value of shares released by the plan to participants was $212,000,
$514,000 and $402,000 for the fiscal years 1997, 1996 and 1995, respectively.
The plan initially acquired the Penford common stock by issuing a note to the
Company. The note is reflected as a reduction of shareholders' equity and is
amortized ratably over the note term which expires in December 1999. The
shares held by the plan are considered outstanding for purposes of calculating
earnings per share. Dividends on shares held by the plan are allocated to
participant accounts.
Supplemental Executive Retirement Plan
The Company sponsors a Supplemental Executive Retirement Plan (SERP), a
non-qualified plan, which covers certain employees. For 1997, 1996 and 1995,
the net pension expense accrued for the SERP was $622,000, $950,000 and
$856,000 respectively.
Health Care And Life Insurance Benefits
The Company offers health care and life insurance benefits to most active
employees. Costs incurred to provide these benefits are charged to expense
when paid. Health care and life insurance expense was $2,778,000, $2,632,000
and $2,501,000 in 1997, 1996 and 1995, respectively.
NOTE H
OTHER POSTRETIREMENT BENEFITS
Penford maintains two postretirement benefit plans that cover substantially all
salaried and hourly retirees.
Benefits under the plan for hourly employees include medical coverage,
prescription drug coverage, and, to a certain grandfathered group, life
insurance. Hourly participants contribute to the cost of the benefits based on
a pension credit formula. Benefits under the plan for salaried employees
include medical coverage and vision coverage. Salaried participants
contribute, for the most part, 100% of the premiums. Presently the Company
funds the current benefits on a cash basis and therefore there are no plan
assets.
Page 33
<PAGE> 34
The following table sets forth the plan's status (in thousands of dollars):
Accumulated postretirement benefit obligation:
<TABLE>
<CAPTION>
August 31, 1997 August 31, 1996
--------------- ---------------
<S> <C> <C>
Retirees $ 3,752 $ 3,838
Fully eligible active plan participants 621 589
Other active plan participants 2,415 2,093
------- -------
Accumulated post retirement benefit obligation 6,788 6,520
Unrecognized actuarial net gain 3,506 3,786
------- -------
Accrued postretirement benefit obligation $10,294 $10,306
======= =======
</TABLE>
Net periodic postretirement benefit costs include the following components:
<TABLE>
<CAPTION>
Year Ended August 31
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Service cost -- benefits earned during the
period $ 210 $ 238 $ 186
Interest cost on accumulated postretirement
benefit obligations 470 475 402
Net amortization and deferral (364) (298) (229)
----- ----- -----
Postretirement benefit expense $ 316 $ 415 $ 359
===== ===== =====
</TABLE>
Future benefit costs were estimated assuming medical costs would increase at a
9.5% annual rate for fiscal 1997, decreasing by one half of a percent ratably
over the next eight years to a rate of 5.5%. A 1% increase in this annual
trend rate would have increased the accumulated postretirement benefit
obligation at August 31, 1997 by $1.1 million, with an increase of $128,000 in
the annual 1997 postretirement benefit expense. The weighted average discount
rate used to estimate the accumulated postretirement obligation was 7.5% and
8.0% in 1997 and 1996, respectively. The change in discount rate had the
impact of decreasing the accumulated postretirement benefit obligation by
$343,000.
Page 34
<PAGE> 35
NOTE I
SHAREHOLDERS' EQUITY
Unissued Preferred Stock
There are 1,000,000 shares of $1.00 par value preferred stock authorized for
issue; however, none are outstanding.
Common Stock Purchase Rights
On June 16, 1988, Penford distributed a dividend of one right (Right) for each
outstanding share of Penford common stock. In May 1997 the Company amended its
Shareholder Rights Plan. When exercisable, each Right will entitle its holder
to buy one share of Penford's common stock at $100 per share. The Rights will
become exercisable if a purchaser acquires 15% of Penford's common stock or
makes an offer to acquire common stock. In the event that a purchaser acquires
15% of the common stock of Penford, each Right shall entitle the holder, other
than the acquirer, to purchase one share of common stock of Penford for one
half of the market price of the common stock. In the event that Penford is
acquired in a merger or transfers 50% or more of its assets or earnings to any
one entity, each Right entitles the holder to purchase common stock of the
surviving or purchasing company having a market value of twice the exercise
price of the Right. The Rights may be redeemed by Penford at a price of $0.01
per Right, and expire in June 2008.
NOTE J
OTHER EVENTS
Sale of Air Credits
In November 1996 the Company sold certain Southern California air emission
credits and recognized a gain on the sale of $1.2 million, which is reflected as
other income.
Pacific Cogeneration, Inc.
In fiscal 1995 the Company sold the assets of its subsidiary, Pacific
Cogeneration, Inc. and recognized a gain on the sale of $899,000 which is
reflected as other income.
NOTE K
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 1997 First Second Third Fourth
(Thousands of dollars except per share data) Quarter* Quarter Quarter Quarter Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $49,310 $48,327 $49,993 $49,004 $196,634
Gross margin 10,810 12,198 13,994 13,551 50,553
Income from operations 2,220 3,073 4,176 4,501 13,970
Net income 1,407 1,256 1,812 2,150 6,625
Earnings per common share $ 0.20 $ 0.18 $ 0.26 $ 0.29 $ 0.93
Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20
</TABLE>
* First quarter results include a gain of $800,000 after-tax, or $0.11 per
share, from the sale of Southern California air emission credits.
Page 35
<PAGE> 36
<TABLE>
<CAPTION>
Fiscal 1996 First Second Third Fourth
(Thousands of dollars except per share data) Quarter Quarter Quarter Quarter Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 45,624 $ 46,313 $ 49,106 $ 53,431 $194,474
Gross margin 12,168 11,129 11,541 11,925 46,763
Income from operations 3,601 2,571 2,748 3,388 12,308
Net income 1,748 908 1,030 1,366 5,052
Earnings per common share $ 0.25 $ 0.13 $ 0.15 $ 0.20 $ 0.72
Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20
</TABLE>
NOTE L
SUBSEQUENT EVENT
On October 9, 1997, Penford announced a two stage plan designed to foster the
growth potential of its pharmaceuticals business and separately, its paper and
food ingredients businesses. Under the first stage of the plan, Penwest
Pharmaceuticals Co. (Penwest) would sell up to 20% of its common stock through
an initial public offering. Under the second stage of the plan, Penford would
effect a tax-free spin-off to its shareholders of its remaining ownership of
Penwest common shares, contingent upon satisfying certain conditions, including
receipt of a tax ruling from the Internal Revenue Service or a written opinion
from Ernst & Young LLP to the effect that, among other things, the spin-off will
qualify as a tax-free distribution. The spin-off is anticipated to occur in the
second quarter of calendar 1998. If the spin-off occurs, Penwest will no longer
be a subsidiary of Penford.
On October 21, 1997, Penwest filed a registration statement with the Securities
and Exchange Commission for an initial public offering of 2,500,000 shares of
common stock (approximately 15% of its outstanding common stock). The estimated
initial public offering price is between $10.00 to $12.00 per share. An option
will be granted to the underwriters to purchase up to 375,000 additional shares
for the purpose of covering over-allotments, if any. Penford and Penwest have
entered into a Separation Agreement setting forth the agreement of the parties
with respect to the principal corporate transactions required to effect the
separation of Penford's pharmaceutical business from its paper and food
ingredients businesses, the initial public offering and the spin-off, and
certain other agreements governing the relationship of the parties prior to and
after the spin-off. Penford and Penwest will, prior to the completion of the
initial public offering, also enter into other agreements that govern various
interim and ongoing relationships.
Penwest will retain the proceeds from the planned initial public offering. In
addition, Penford will forgive all intercompany advances as of the closing of
the offering. As of August 31, 1997, the intercompany balance approximated
$35.2 million. Had the proposed plan been effected as of August 31, 1997, it is
estimated that consolidated assets and shareholders' equity of Penford would
have reflected a reduction of approximately $35.0 to $40.0 million, representing
the net effects of the proposed distribution.
Summarized financial data of Penwest is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Sales $ 26,530 $ 26,456 $ 24,537
Loss from operations (2,970) (2,562) (1,233)
Identifiable assets 38,583 35,316 33,580
</TABLE>
Page 36
<PAGE> 37
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Penford Corporation.
We have audited the accompanying consolidated balance sheets of Penford
Corporation (formerly PENWEST, LTD.) as of August 31, 1997 and 1996, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended August 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Penford
Corporation (formerly PENWEST, LTD.) at August 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for each of the three
years in the period ended August 31, 1997, in conformity with generally accepted
accounting principles.
Seattle, Washington
October 17, 1997 ERNST & YOUNG LLP
Page 37
<PAGE> 38
REPORT OF MANAGEMENT
The management of Penford Corporation has prepared and is responsible for the
integrity and fairness of the financial statements and other financial
information presented in this annual report. The statements have been prepared
in accordance with generally accepted accounting principles and, to the extent
appropriate, include amounts based on management's judgment and/or estimates.
In order to fulfill its responsibilities for these financial statements and
information, management maintains accounting systems and related internal
controls. These controls are designed to provide reasonable assurance that
transactions are properly authorized and recorded, that assets are safeguarded,
and that financial records are reliably maintained.
Ernst & Young LLP, independent auditors, is retained to audit the Company's
consolidated financial statements. Their accompanying report is based on an
audit conducted in accordance with generally accepted auditing standards,
including a review of internal accounting controls and tests of accounting
procedures and records to the extent necessary to support their audit.
The Audit Committee of the Board of Directors, which is composed solely of
outside directors, meets periodically with management and with the independent
auditors to review the quality of financial reporting, the operation and
development of the internal control systems, and the results of independent
audits.
The independent auditors periodically meet with the Audit Committee without the
presence of management.
Tod R. Hamachek
President and
Chief Executive Officer
Jeffrey T. Cook
Vice President, Finance and
Chief Financial Officer
Page 38
<PAGE> 39
ITEM 9: CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information set forth under "Election of Directors" in the Company's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference.
Information regarding executive officers of the Company is set forth in Part I
above and incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under "Executive Compensation" in the Company's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under "Security Ownership of Certain Beneficial
Owners and Management" in the Company's definitive Proxy Statement for the 1998
Annual Meeting of Shareholders is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions of
the Company set forth under "Change-in-Control Arrangements" in the Company's
definitive Proxy Statement for the 1998 Annual Meeting of Shareholders is
incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated balance sheets as of August 31, 1997 and 1996
and the related statements of income, cash flows and
shareholders' equity for each of the three years in the period
ended August 31, 1997 and the report of independent auditors
are included in Part II, Item 8.
(a) (2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange
Commission are omitted because they are not applicable or
because the information is presented in the financial
statements or notes thereto.
Page 39
<PAGE> 40
(a) (3) Exhibits
See list of Exhibits on page 42. This list includes a subset
containing each management contract, compensatory plan, or
arrangement required to be filed as an exhibit to this report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the
period covered by this report.
Page 40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Penford Corporation
Date: November 25, 1997 /s/ TOD R. HAMACHEK
------------------ ----------------------------------------
Tod R. Hamachek, President and
Chief Executive Officer
Principal Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: November 25, 1997 /s/ TOD R. HAMACHEK
------------------ ---------------------------------------
Tod R. Hamachek, President and
Chief Executive Officer (Principal
Executive Officer)
Date: November 25, 1997 /s/ JEFFREY T. COOK
------------------ ---------------------------------------
Jeffrey T. Cook, Chief Financial Office
(Principal Financial Officer)
Directors
Richard E. Engebrecht*
Paul E. Freiman*
Tod R. Hamachek*
Paul H. Hatfield By /s/ JEFFREY T. COOK
Harry Mullikin* ----------------------------------
Sally G. Narodick* Attorney-in-Fact*
William G. Parzybok, Jr.* Power of Attorney Dated
N. Stewart Rogers*
William K. Street* Date October 28, 1997
---------------------------------
Page 41
<PAGE> 42
INDEX TO EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission, are incorporated by reference.
Exhibit No. Item
(3.1) Restated Articles of Incorporation of Registrant (filed as an
Exhibit to Registrant's Form 10-K for fiscal year ended August
31, 1995)
3.2 Articles of Amendment to Restated Articles of Incorporation of
Registrant
3.3 Bylaws of Registrant as amended and restated as of October 20,
1997
(4.1) Amended and Restated Rights Agreement dated as of April 30, 1997
(filed as an Exhibit to Registrant's Amendment to Registration
Statement on Form 8-A/A dated May 5, 1997)
(10.1) Senior Note Agreement among Penford Corporation as Borrower
and Mutual of Omaha and Affiliates as lenders, dated
November 1, 1992 (filed as an Exhibit to Registrant's Form 10-Q
for the quarter ended February 28, 1993)
(10.2) Term Loan Agreement among Penford Products Co., and Penford
Corporation as Borrowers, and Wells Fargo Bank (formerly First
Interstate Bank of Washington, N.A.) as Lender, dated September
27, 1990 (Registrant agrees to furnish a copy of this instrument
to the Commission on request)
(10.3) Loan Agreement among Penford Corporation as Borrower and
Seattle-First National Bank as Lender, dated December 1, 1989
(Registrant agrees to furnish a copy of this instrument to the
Commission on request)
(10.4) Penford Corporation Supplemental Executive Retirement Plan,
dated March 19, 1990 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1991)
(10.5) Penford Corporation Supplemental Survivor Benefit Plan, dated
January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1991)
(10.6) Penford Corporation Deferred Compensation Plan, dated January
15, 1991 (filed as an Exhibit to Registrant's Form 10-K for the
fiscal year ended August 31, 1991)
(10.7) Change of Control Agreements with Messrs. Hamachek, Cook,
Widmaier, Talley, Horn, Rydzewski and Belsheim (a representative
copy of these agreements is filed as an exhibit to Registrant's
Form 10-K for the fiscal year ended August 31, 1995)
Page 42
<PAGE> 43
(10.8) Penford Corporation 1993 Non-Employee Director Restricted Stock
Plan (filed as an Exhibit to Registrant's Form 10-Q for the
quarter ended November 30, 1993)
(10.9) Note Agreement dated as of October 1, 1994 among Penford
Corporation, Principal Mutual Life Insurance Company and TMG
Life Insurance Company (filed as an Exhibit to Registrant's Form
10-Q for the quarter ended February 28, 1995)
(10.10) Penford Corporation 1994 Stock Option Plan as amended and
restated as of January 21, 1997 (filed on Form S-8 dated March
17, 1997)
(10.11) Credit Agreement dated as of December 22, 1995 among Penford
Corporation, and its subsidiaries, Bank of America National
Trust and Savings Association, ABN-AMRO Bank, N.V., The Bank of
Nova Scotia, and Seattle-First National Bank (filed as an
Exhibit to Registrant's Form 10-Q for the quarter ended February
29, 1996)
(10.12) Amendment to Credit Agreement dated as of May 7, 1997 among
Penford Corporation, and its subsidiaries, Bank of America
National Trust and Savings Association, ABN-AMRO Bank, N.V., The
Bank of Nova Scotia, and Seattle-First National Bank (filed as
an Exhibit to the Registrant's Form 10-Q for the quarter ended
May 31, 1997)
(10.13) Penford Corporation Stock Option Plan for Non-Employee Directors
(filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended May 31, 1996)
10.14 Separation Agreement dated as of November 10, 1997 between
Registrant and Penwest Pharmaceuticals Co.
11 Statement Regarding Computation of Per-Share Earnings
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
Page 43
<PAGE> 44
SUBSET OF THE INDEX TO EXHIBITS
Executive Compensation Plans and Arrangements.
This subset of the index to exhibits includes a subset containing each
management contract, compensatory plan, or arrangement required to be filed as
an exhibit to this Report.
Exhibit No. Item
(10.4) Penford Corporation Supplemental Executive Retirement Plan,
dated March 19, 1990 (filed as an Exhibit to Registrant's Form
10-K for the fiscal year ended August 31, 1991, Commission File
No. 0-11488)
(10.5) Penford Corporation Supplemental Survivor Benefit Plan, dated
January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1991, Commission File No.
0-11488)
(10.6) Penford Corporation Deferred Compensation Plan, dated January
15, 1991 (filed as an Exhibit to Registrant's Form 10-K for the
fiscal year ended August 31, 1991, Commission File No. 0-11488)
(10.7) Agreements relating to compensation in the event of a change in
control of the corporation between the Corporation and Messrs.
Hamachek, Cook, Widmaier, Talley, Horn, and Rydzewski (a
representative copy of these agreements filed as an Exhibit to
Registrant's Form 10-K for the fiscal year ended August 31,
1995, Commission File No. 0-11488)
(10.8) Penford Corporation 1993 Non-Employee Director Restricted Stock
Plan. (Filed as an Exhibit to Registrant's Form 10-Q for the
quarter ended November 30, 1993, Commission File Number 0-11488)
(10.10) Penford Corporation 1994 Stock Option Plan as amended and
restated as of January 21, 1997 (filed on Form S-8, No.
33-58799, dated March 17, 1997)
(10.13) Penford Corporation Stock Option Plan for Non-Employee Directors
(filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended May 31, 1996, Commission File Number 0-11488)
Page 44
<PAGE> 1
EXHIBIT 3.2
ARTICLES OF AMENDMENT
OF
PENWEST, LTD.
Pursuant to RCW 23B.10.060, the undersigned corporation adopts the
following Articles of Amendment to its Restated Articles of Incorporation:
FIRST: The name of the corporation is PENWEST, LTD. (the
"Corporation").
SECOND: The Restated Articles of Incorporation are hereby
amended as follows:
Article I is hereby deleted in its entirety and replaced with a new
Article I to read as follows:
ARTICLE I
NAME
The name of the corporation (the "Corporation") is Penford
Corporation.
THIRD: The foregoing amendment was adopted by the Board of
Directors of the Corporation on October 8, 1997 in accordance with the
provisions of RCW 23B.10.020. Shareholders action was not required.
PENWEST, LTD.
Date: October 10, 1997 By: /s/ EDMUND O. BELSHEIM, JR.
--------------------------------
Name: Edmund O. Belsheim, Jr.
Title: Vice President
<PAGE> 1
EXHIBIT 3.3
AMENDED AND RESTATED
BYLAWS
OF
PENFORD CORPORATION
(A Washington Corporation)
(Amended as of October 20, 1997)
ARTICLE I
CAPITAL STOCK
1.1 Stock Certificates
Stock certificates of the Corporation shall be in such form as
the Board of Directors may from time to time prescribe. Every stock certificate
shall be signed by two officers designated by the Board of Directors and sealed
with the corporate seal. All certificates shall be countersigned by a transfer
agent and a registrar of the Corporation. Any and all signatures on any such
certificate and the corporate seal upon any such certificate may be a facsimile.
In case any officer, transfer agent, or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent, or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent, or registrar at the date of issue.
1.2 Transfer of Shares
The shares of stock of the Corporation shall be transferable on
its books, or other appropriate records, kept for such purpose, by the holder
thereof in person or by such holder's duly authorized attorney upon surrender
and cancellation of such holder's certificates, properly endorsed, accompanied
by authority to transfer. Upon surrender, as above provided, of a stock
certificate, one or more new stock certificates for such aggregate number of
shares of stock as equals the aggregate number of shares represented by the
surrendered stock certificate shall be issued to the parties entitled thereto.
1.3 Holders of Stock of Record
The Corporation shall be entitled to treat the holder of record
of any share or shares of stock of the Corporation as the holder in fact
thereof, and shall not be bound to recognize any claim to, or interest in, such
shares on the part of any other person, whether or not the Corporation shall
have express or other notice thereof.
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1.4 Rules and Regulations Concerning the Issue, Transfer, and
Registration of Stock Certificates
The Board of Directors of the Corporation shall have the power
and authority to make all such rules and regulations as the Board may deem
proper or expedient concerning the issue, transfer, and registration of stock
certificates for shares of stock of the Corporation. The Board of Directors
shall have the power and authority to appoint from time to time one, or more
than one, transfer agent, and one, or more than one, registrar of transfers, and
may require all stock certificates for shares of stock of the Corporation to be
properly countersigned, and/or otherwise properly authenticated, by such
transfer agent or registrar.
1.5 Rules and Regulations Concerning Lost and Destroyed
Certificate
A new certificate or certificates of stock may be issued in place
of any certificate or certificates of stock theretofore issued by the
Corporation and alleged to have been lost or destroyed, upon delivery to the
Secretary of the Corporation or any authorized transfer agent of the Corporation
of a written claim in the form of an affidavit stating all pertinent facts
relating to the alleged loss or destruction of such certificate or certificates
together with an open penalty indemnity bond, approved as provided below,
written by a surety company approved by an executive officer of the Corporation
and indemnifying against any claim that may be made against the Corporation for
or in respect of the shares of stock represented by the certificate or
certificates alleged to have been lost or destroyed. The penalty of such bond
shall be unlimited as to time and amount and such bond must be approved by an
executive officer of the Corporation. The Board of Directors may, in the
discretion of a majority of the Board, however, direct the issuance of a
certificate or certificates in place of any certificate or certificates alleged
to have been lost or destroyed upon such lesser conditions or security.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 Place of Meetings of Shareholders
The annual meetings of shareholders of the Corporation shall be
held at such place as the Board of Directors may from time to time designate.
The time and place of the meeting shall be stated in the notice to shareholders.
2.2 Annual Meetings of Shareholders -- Time -- Business
The annual meeting of shareholders of the Corporation for the
election of directors and for the transaction of any such other business as
properly may be submitted to such annual meeting shall be held at the hour and
on the date designated by the Board of Directors or the Executive Committee of
the Board of Directors, such date to be within 180 days of the end of the fiscal
year.
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Any and all business pertaining to the affairs of the Corporation
may be transacted at any such annual meeting of shareholders or at any
adjournment thereof, except only to the extent otherwise expressly proscribed by
law.
2.3 Special Meetings of Shareholders
Special meetings of the shareholders of the Corporation may be
called at any time by the Board of Directors.
2.4 Quorum at Shareholders' Meetings
The holders of record of a majority of the issued and outstanding
shares of the stock of the Corporation present in person or represented by proxy
at any shareholders' meeting and entitled to vote thereat shall constitute a
quorum for the transaction of business at any such meeting, except as may
otherwise be provided by law; but if there be less than a quorum present at any
such meeting, the holders of a majority of the shares so present or represented
at such meeting may adjourn the meeting from time to time.
2.5 Notice of Annual or Special Meetings of Shareholders
Written notice stating the place, day, and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called shall be given by or at the direction of the Board of
Directors, the Chairman of the Board of Directors, the President, the Secretary,
or an Assistant Secretary to each shareholder entitled to notice of or to vote
at the meeting not less than 10 nor more than 60 days before the meeting, except
that notice of a meeting to act on an amendment to the Articles of
Incorporation, a plan of merger or share exchange, the sale, lease, exchange, or
other disposition of all or substantially all of the Corporation's assets other
than in the regular course of business, or the dissolution of the Corporation
shall be given not less than 20 nor more than 60 days before such meeting. Such
notice may be transmitted by mail, private carrier, personal delivery,
telegraph, teletype, or communications equipment which transmits a facsimile of
the notice to like equipment which receives and reproduces such notice. If these
forms of written notice are impractical in the view of the Board of Directors,
the Chairman of the Board of Directors, the President, the Secretary, or an
Assistant Secretary, written notice may be transmitted by an advertisement in a
newspaper of general circulation in the area of the Corporation's principal
office. If such notice is mailed, it shall be deemed effective when deposited in
the official government mail, first-class postage prepaid, properly addressed to
the shareholder at such shareholder's address as it appears in the Corporation's
current record of shareholders. Notice given in any other manner shall be deemed
effective when dispatched to the shareholder's address, telephone number, or
other number appearing on the records of the Corporation. Any notice given by
publication as herein provided shall be deemed effective five days after first
publication.
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<PAGE> 4
2.6 Voting List of Shareholders and Fixing of Record Date
for Voting and For Other Purposes
At least 10 days before each meeting of shareholders, an
alphabetical list of the shareholders entitled to notice of such meeting shall
be made, arranged by voting group and by each class or series of shares therein,
with the address of and number of shares held by each shareholder. This record
shall be kept at the principal office of the Corporation for 10 days prior to
such meeting, and shall be kept open at such meeting, for the inspection of any
shareholder or any shareholder's agent.
For the purpose of determining shareholders entitled to (a)
notice of or to vote at any meeting of shareholders or any adjournment thereof,
or (b) to receive payment of any dividend, or in order to make a determination
of shareholders for any other purpose, the Board of Directors may fix a future
date as the record date for any such determination. Such record date shall be
not more than 70 days, and in case of a meeting of shareholders not less than 10
days, prior to the date on which the particular action requiring such
determination is to be taken. If no record date is fixed for the determination
of shareholders entitled to notice of or to vote at a meeting, the record date
shall be the day immediately preceding the date on which notice of the meeting
is first given to shareholders. Such a determination shall apply to any
adjournment of the meeting unless the Board of Directors fixes a new record
date, which it shall do if the meeting is adjourned to a date more than 120 days
after the date fixed for the original meeting. If no record date is set for the
determination of shareholders entitled to receive payment of any stock dividend
or distribution (other than one involving a purchase, redemption, or other
acquisition of the Corporation's shares), the record date shall be the date the
Board of Directors authorizes the stock dividend or distribution.
2.7 Officers of Meetings of Shareholders
The President of the Corporation (or in his or her absence, the
Chairman of the Board of Directors of the Corporation) may call any meeting of
shareholders to order and shall be the Chairman thereof. If the Chairman of the
Board of Directors and the President are absent from any such meeting, then a
Vice President of the Corporation shall be the Chairman thereof and shall
preside at such meeting. The Secretary of the Corporation, if present at any
meeting of its shareholders, shall act as the Secretary of such meeting. If the
Secretary is absent from any such meeting, the Chairman of such meeting may
appoint a Secretary for the meeting.
2.8 Proper Business for Shareholders' Meetings
At any annual or special meeting of the shareholders of the
Corporation, only business properly brought before the meeting may be
transacted. To be properly brought before an annual or special meeting, business
or other proposals must be (i) specified in the notice of the meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (ii)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors, or (iii) otherwise properly brought before the meeting by a
shareholder. For business to be properly
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<PAGE> 5
brought before an annual meeting by a shareholder, written notice thereof must
have been received by the Secretary of the Corporation from such shareholder not
less than 120 days prior to the date corresponding to the date on which the
Corporation mailed its proxy statement in connection with its previous year's
annual meeting of shareholders. For business to be properly brought before a
special meeting by a shareholder, or in the event the date of the annual meeting
has been changed by more than 30 calendar days from the date contemplated at the
time of the previous year's proxy statement, notice by the shareholder to be
timely must be received by the Secretary of the Corporation not later than the
close of business on the 10th day following the earlier of the day on which
notice of the date of the scheduled meeting was mailed or the day on which
public disclosure of such date was made.
Any such notice shall set forth as to each matter the shareholder
proposes to bring before the meeting (i) a brief description of the business
desired to be brought before the meeting, the reasons for conducting such
business at the meeting, and the language of the proposal, (ii) the name and
address of the shareholder proposing such business, (iii) a representation that
the shareholder is a holder of record of stock of the Corporation entitled to
vote at such meeting, and (iv) any material interest of the shareholder in such
business. Any such notice to the Corporation shall also comply with all
applicable provisions of Regulation 14A under the Securities Exchange Act of
1934. No business shall be conducted at any meeting of shareholders except in
accordance with this Section, and the Chairman of any meeting of shareholders
and the Board of Directors may refuse to permit any business to be brought
before the meeting without compliance with the foregoing procedures.
ARTICLE III
DIRECTORS
3.1 Number of Directors
The authorized number of directors of the Corporation shall be
not less than seven, nor more than fifteen. The Board of Directors, by
resolution, shall fix the number of directors to constitute the whole Board of
Directors of the Corporation, within the above limits, which number shall
prevail until a resolution is adopted by the Board of Directors prescribing a
different number of directors to be the authorized number of directors of the
Corporation.
3.2 Qualifications of Directors
Directors need not be shareholders of the Corporation or
residents of the State of Washington. Each director of the Corporation shall be
eligible to serve as a director until the annual meeting of shareholders
immediately following such director's 72nd birthday.
3.3 Election of Directors -- Terms of Office
The shareholders shall, at their annual meeting held each year,
elect the class of directors of the Corporation as set forth in the Articles of
Incorporation of the Corporation.
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<PAGE> 6
3.4 Nominations of Directors for Election
Nominations for the election of directors may be made by the
Board of Directors or a committee appointed by the Board of Directors or, if the
shareholders are, at the time, entitled to cumulate their votes in the election
of directors in accordance with Article IX of the Articles of Incorporation of
the Corporation, by a majority of the "Disinterested Directors" or by any
shareholder who is the "Beneficial Owner" of one percent or more of the
outstanding shares of "voting stock" of the Corporation as said terms are
defined in the Articles of Incorporation in accordance with the following
procedures. However, any such one percent shareholder at the time may nominate
one or more persons for election as directors at a meeting only if written
notice of such shareholder's intent to make such nomination or nominations has
been given, either by personal delivery or by United States mail, postage
prepaid, to the Secretary of the Corporation in accordance with the following
procedures: For a nomination to be properly submitted before an annual meeting
by a shareholder, written notice thereof must have been received by the
Secretary of the Corporation from such shareholder not less than 120 days prior
to the date corresponding to the date on which the Corporation mailed its proxy
statement in connection with its previous year's annual meeting of shareholders.
For a nomination to be properly submitted before a special meeting by a
shareholder, or in the event the date of the annual meeting has been changed by
more than 30 calendar days from the date contemplated at the time of the
previous year's proxy statement, notice by the shareholder to be timely must be
received by the Secretary of the Corporation not later than the close of
business on the 10th day following the earlier of the day on which notice of the
date of the scheduled meeting was mailed or the day on which public disclosure
of such date was made.
Each such notice to the Secretary shall set forth: (i) the name
and address of record of the shareholder who intends to make the nomination;
(ii) a representation that the shareholder is a holder of record of shares of
the Corporation entitled to vote at such meeting and intends to appear in person
or by proxy at the meeting to nominate the person or persons specified in the
notice; (iii) the name, age, business and residence addresses, and principal
occupation or employment of each nominee; (iv) a description of all arrangements
or understandings between the shareholder and each nominee and any other person
or persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the shareholder; (v) such other information
regarding each nominee proposed by such shareholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission; and (vi) the consent of each nominee to
serve as a director of the Corporation if so elected. The Corporation may
require any proposed nominee to furnish such other information as may reasonably
be required by the Corporation to determine the eligibility of such proposed
nominee to serve as a director of the Corporation. The presiding officer of the
meeting may, if the facts warrant, determine that a nomination was not made in
accordance with the foregoing procedure, and if such officer should so
determine, such officer shall so declare to the meeting and the defective
nomination shall be disregarded.
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3.5 Failure to Elect Directors at Annual Meeting of the
Shareholders
If the class of directors of the Corporation to be elected at the
annual meeting shall not be elected as herein provided at the annual meeting in
any year of the shareholders of the Corporation, or at any adjournment of such
annual meeting, then, in such event, the Corporation shall not for that reason
be dissolved, but its directors at the time shall be deemed lawful directors of
the Corporation for all purposes, and shall continue to hold office as directors
until their successors, respectively, are duly elected and qualified.
3.6 Authority of the Board of Directors
The business of the Corporation shall be managed by its Board of
Directors, and such Board shall have and exercise full powers and authority in
the management, control, regulation, and conduct of the property, interests,
business transactions and affairs of the Corporation; provided, however, that
the Executive Committee of the Board of Directors of the Corporation may
exercise the power and authority of such Board pursuant but subject to (a) the
limitations in Section 23B.08.250 of the Washington Business Corporation Act and
(b) restrictions imposed by the Board of Directors pursuant to Article IV
hereof. If the position, Chairman of the Board, is not designated as an office
of the Corporation, then the Board may from time to time elect one of its
members to act as Chairman.
3.7 Action by the Board of Directors or Any of Its Committees
Without a Meeting
Any action required or permitted to be taken at any meeting of
the Board of Directors or of the Executive Committee or of any other committee
of said Board may be taken without a meeting if a written consent describing the
action taken is signed by all members of the Board or of such committee, as the
case may be, and such written consent is filed with the minutes of said Board or
of said committee. Action taken by such written consent is effective when the
last director signs the consent, unless the consent specifies a later effective
date.
3.8 Regular Meetings of the Board of Directors
Meetings of the Board of Directors of the Corporation may be held
at its corporate offices, or at such other place or places as may be authorized
by such Board. Such Board shall also fix the time or times of such regular
meetings. No notice of any regularly scheduled meeting need be given. The
Chairman of the Board or the President may change the time and place of any
regular meeting by giving reasonable notice thereof, in writing or by telephone,
not later than 24 hours before the time originally fixed for such meeting. The
Chairman of the Board shall act as Chairman of the meetings, but in his or her
absence, the President shall act as Chairman. The Secretary of the Corporation
shall act as Secretary of the meetings, but in his or her absence, the Chairman
of the meeting shall appoint a Secretary of the meeting.
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3.9 Special Meetings of the Board of Directors
Meetings of the Board of Directors of the Corporation may be held
from time to time on written call thereof by the Chairman of the Board of
Directors or the President made at any time at his or her own instance and
discretion or on call thereof made by such number of its directors as equals a
majority of its whole Board of Directors at the time. Any special meeting of the
Board of Directors may be held at such time or at such place designated in said
call. The time, place, and purpose of any special meeting of the Board of
Directors to be held pursuant to call and notice shall be stated both in the
call and the notice thereof, and no business other than that stated in such
notice shall be transacted, or acted upon, at such special meeting. Reasonable
notice of a special meeting shall be given in writing or by telephone by the
person or persons calling the meeting, not later than 72 hours prior to the time
set for the meeting; provided that the minimum notice period shall be 48 hours
in the event of a tender or exchange offer to purchase securities of the
Corporation. Any special meeting of the Board of Directors may be held at any
time without previous call, or previous notice thereof, if all directors of the
Corporation either attend such meeting, or consent in writing thereto, or if
each director not present at such meeting waives notice thereof. Any and all
business and matters pertaining to the affairs of the Corporation may be
considered, transacted, and acted on at any special meeting so held without
previous call or previous notice.
3.10 Quorum of Directors
A majority of the members of the Board of Directors as
constituted for the time being shall constitute a quorum for the transaction of
business, but less than a quorum may adjourn any meeting from time to time until
a quorum is present and without further notice being given.
3.11 Waiver of Notice of Meetings of the Board of Directors
Any director of the Corporation may waive in writing at any time
any such notice of any meeting of the Board of Directors of the Corporation as
may be provided by the Washington Business Corporation Act or by these Bylaws to
be given; and a written waiver thereof signed by any director entitled to such
notice, whether before or after the time stated therein, shall be deemed
equivalent to such notice legally given to such director. Attendance at any
meeting of the Board of Directors of the Corporation by a director shall
constitute waiver of notice of such meeting, unless such director at the
beginning of the meeting, or promptly upon such director's arrival, objects to
holding the meeting or transacting business thereat and does not thereafter vote
for or assent to action taken at the meeting.
3.12 Fees to the Directors for Attending Meetings of the Board
of Directors
The directors of the Corporation shall be entitled, as directors,
to receive an annual fee for service as directors and an attendance fee for
meetings of the Board of Directors and for meetings of committees of the Board
of Directors. Said fees shall be payable in the
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amounts and under provisions prescribed from time to time by resolution of the
Board of Directors, and the Corporation is hereby authorized to pay such fees to
each of its directors; provided, however, that no director of the Corporation
shall be entitled to said fee if at the time he or she is otherwise employed by
the Corporation at a regular monthly or annual salary as a full time employee.
3.13 Meeting by Telephone
Members of the Board of Directors or any committee designated by
these Bylaws or appointed by the Board of Directors may participate in a meeting
of such Board or committee by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other at the same time, and participation by such means
shall constitute presence at a meeting.
ARTICLE IV
COMMITTEES OF THE BOARD OF DIRECTORS
4.1 Creation of Committees
The Board of Directors, by resolution adopted by the greater of a
majority of the directors then in office and the number of directors required to
take action in accordance with these Bylaws, may create one or more committees,
including an Executive Committee, and appoint members to such committee from its
own members. Each committee must have two or more members, who shall serve at
the pleasure of the Board of Directors.
4.2 Authority of Committees
Each committee shall have and may exercise the authority of the
Board of Directors to the extent provided in the resolution of the Board
creating the committee and any subsequent resolutions pertaining thereto, except
that no committee shall have the authority to: (1) authorize or approve a
distribution except according to a general formula or method prescribed by the
Board, (2) approve or propose to shareholders actions or proposals required by
the Washington Business Corporation Act to be approved by shareholders, (3) fill
vacancies on the Board or on any committee, (4) adopt, amend, or repeal Bylaws,
(5) amend the Articles of Incorporation, (6) approve a plan of merger not
requiring shareholder approval, or (7) authorize or approve the issuance or sale
or contract for sale of shares, or determine the designation and relative
rights, preferences, and limitations of a class or series of shares, except that
the Board may authorize a committee or a senior executive officer of the
Corporation to do so within limits specifically prescribed by the Board.
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ARTICLE V
OFFICERS AND THEIR POWERS AND DUTIES
5.1 Authorized Officers
The officers of the Corporation shall consist of a President, one
or more Vice Presidents (who may be designated as Vice Presidents, Senior Vice
Presidents or Executive Vice Presidents), and a Secretary. The Corporation may
have such additional officers (hereinafter in these Bylaws sometimes referred to
as "additional officers") as its Board of Directors may deem necessary for its
business and may appoint from time to time. The Board of Directors may designate
one of the officers as the chief financial officer of the Corporation.
The Board of Directors at any meeting of the Board may fill a
vacancy in any office.
The officers of the Corporation shall be elected at the first
Board of Director's meeting held after the annual election of directors and they
shall serve until the next annual election of officers, subject to the right of
the Board of Directors to remove any officer at any time.
The Board of Directors, by resolution duly adopted at any meeting
thereof duly held, may authorize and direct that any office of the Corporation,
except the offices of President and Secretary, may be left unfilled for any such
period of time as the Board may fix in such resolution.
5.2 Qualifications of Officers
No officer of the Corporation need be a shareholder therein. No
officer of the Corporation, except the President, need be a director.
5.3 Powers and Duties of Officers
The respective officers of the Corporation, subject, always, to
control by its Board of Directors, shall have such power and authority and
perform such duties in the management and conduct of its property, business, and
affairs, as from time to time may be prescribed with respect to such officers,
respectively, by and under any Section of these Bylaws, by resolution of the
Board of Directors, or by the President.
The Board of Directors may by appointment designate either the
Chairman, if an officer of the Corporation, or the President as the Chief
Executive Officer of the Corporation and either of said officers as the Chief
Operating Officer of the Corporation.
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5.4 Powers and Duties of the Chief Executive Officer and the
Chief Operating Officer
The Chief Executive Officer of the Corporation shall have general
charge and supervision of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors and of the Executive Committee
are carried out. The Chief Executive Officer shall designate the duties of all
officers of the Corporation, which designations shall be subject to review by
the Board of Directors; provided, however, that the specific duties assigned to
the Chief Executive Officer, the Chief Operating Officer, and the Secretary
shall not be changed except by amendment to these Bylaws and/or by resolution of
the Board of Directors, as appropriate.
The Chief Operating Officer of the Corporation shall have general
supervisory authority and responsibility for the day to day operations of the
Corporation.
In the event of the death of either of the Chief Executive
Officer or the Chief Operating Officer or the permanent disability preventing
such officer from performing his or her duties, all officers normally reporting
to such deceased or disabled officer shall report to the Executive Committee.
The Chairman of the Board shall call a meeting of the Board to be held within 20
days of the date of such death or disability for the purpose of electing a new
Chief Executive Officer or Chief Operating Officer, as the case may be.
Either the Chief Executive Officer or the Chief Operating Officer
may sign in the name of the Corporation all instruments required to be signed by
the Corporation in the ordinary course of its business. Each such officer shall
perform such other duties as may be assigned to such officer by the Board of
Directors or by these Bylaws.
5.5 Compensation to Officers
The Board of Directors shall have authority (a) to fix the
compensation, whether in the form of salary or otherwise, of all officers and
employees of the Corporation, either specifically or by formula applicable to
particular classes of officers or employees, and (b) to authorize officers of
the Corporation to fix the compensation of subordinate employees. The Board of
Directors shall have authority to appoint a Compensation Committee and may
delegate to such committee authority to review the compensation of all employees
of the Corporation, and its subsidiaries. The Compensation Committee may also be
authorized to make recommendations to the Board with respect to compensation of
the corporate officers.
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ARTICLE VI
MISCELLANEOUS
6.1 Corporate Seal
The corporate seal of the Corporation shall be a seal consisting
of two concentric circles, in the outer of which circles shall appear and be
inscribed the following words: "PENFORD CORPORATION WASHINGTON", and in the
inner of which circles shall appear and be inscribed the following words and
figures: "CORPORATE SEAL 1997"; and such seal, as impressed on the margin
thereof, shall be the corporate seal of the Corporation; provided, however, that
at any time, and from time to time, such seal may be altered or a new corporate
seal for the Corporation may be authorized and adopted, at the pleasure of its
Board of Directors, by resolution duly adopted by such Board at any meeting
thereof duly held.
6.2 Fiscal Year
The fiscal year of the Corporation shall begin on September 1 and
end on August 31 of each year.
6.3 Amendments
These Bylaws may be amended, altered, or repealed, in whole or in
part, or new Bylaws may be made for the Corporation from time to time by the
affirmative vote of the majority of its whole Board of Directors at any meeting
of such Board duly held, subject to the right and power of the shareholders of
the Corporation to change or repeal such Bylaws.
6.4 Severability
In the event that any provision of these Bylaws is determined by
a court to require the Corporation to do or to fail to do an act which is in
violation of applicable law, such provision shall be limited or modified in its
application to the minimum extent necessary to avoid a violation of law, and, as
so limited or modified, such provision and the balance of these Bylaws shall
remain in full force and effect.
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EXHIBIT 10.14
SEPARATION AGREEMENT
THIS SEPARATION AGREEMENT (the "Agreement") is made as of the 10th day
of November, 1997 (the "Effective Date"), between PENFORD CORPORATION, a
Washington corporation (previously known as PENWEST, LTD.) ("Penford"), and
PENWEST PHARMACEUTICALS CO., a Washington corporation ("Penwest").
RECITALS
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, it is the intention of Penford to contribute to Penwest
certain assets and to assign certain liabilities, to transfer certain technology
to Penwest and to make other arrangements to establish Penwest as a separate
enterprise for the purpose of engaging in research, development and marketing of
novel drug delivery technologies and sale and distribution of pharmaceutical
excipients (the "Pharmaceutical Business");
WHEREAS, Penford and Penwest have determined that it is necessary and
desirable, on the terms and conditions contemplated hereby (i) to cause Penwest
to offer and sell for its own account in the IPO (as defined below) a limited
number of shares of Penwest Common Stock (as defined below), and (ii) for
Penford to distribute to shareholders of Penford the outstanding shares of
Penwest Common Stock held by Penford following the IPO;
WHEREAS, the Distribution (as defined below) is intended to qualify as
a tax-free spin-off under Sections 355 and 368 of the Code (as defined below);
and
WHEREAS, Penford and Penwest have further determined that it is
necessary and desirable to set forth the principal corporate transactions
required to effect the Separation (as defined below), the IPO and the
Distribution and to set forth other agreements that will govern certain other
matters following the Separation, IPO and Distribution;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
1.1 GENERAL. As used in this Agreement and the Exhibits hereto, the
following terms shall have the following meanings:
ACTION: any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
AFFILIATE: affiliate of any Person means a Person that controls, is
controlled by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and polices of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.
AGENT: the distribution agent to be appointed by Penford to distribute
to the shareholders of Penford the shares of Penwest Common Stock held by
Penford pursuant to the Distribution.
ANCILLARY AGREEMENTS: all of the agreements, instruments,
understandings, assignments or other arrangements entered into in connection
with the transactions contemplated hereby, including, without limitation, the
Excipient Supply Agreement, the Services Agreement, the Tax Allocation
Agreement, the Employee Benefits Agreement and the Trademark Assignment.
CLOSING DATE: the first time any shares of Penwest Common Stock are
sold to the Underwriters pursuant to the IPO in accordance with the terms of the
Underwriting Agreement to be entered into between Penwest and the Underwriters.
CODE: the Internal Revenue Code of 1986, as amended.
COLLABORATIVE AGREEMENTS: include the following agreements:
(a) Product Development and Supply Agreement between Penwest,
Ltd., a Washington corporation ("Penwest, Ltd.") and Mylan
Pharmaceuticals, Inc., a West Virginia corporation ("Mylan") dated
August 17, 1994.
(b) Sales and Distribution Agreement between Penwest, Ltd. and
Mylan dated January 3, 1997.
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(c) Product Development and Supply Agreement between Penwest,
Ltd. and Mylan dated August 3, 1995.
(d) Product Development and Supply Agreement between Penwest,
Ltd. and Mylan dated March 22, 1996.
(e) Custom Blending Agreement between Boehringer Ingelheim
Pharmaceuticals, Inc. and Penwest, Ltd. dated November 23, 1994.
(f) Product Development and Supply Agreement between TIMERx
Technologies, a Washington corporation ("TIMERx Technologies") and
Kremers Urban Development Company ("Kremers") dated August 30,
1996.
(g) Product Development and Supply Agreement between TIMERx
Technologies and Kremers dated May 31, 1996.
(h) Heads of Agreement and Development Agreement between TIMERx
Technologies and Schwarz dated September 20, 1995.
(i) Product Development, License and Supply Agreement between
TIMERx Technologies and Sanofi Winthrop International S.A., a
company incorporated under the laws of France dated February 28,
1997, as amended.
(j) The Agreement between Edward Mendell Co., Inc. and Leiras OY
dated July 27, 1992.
(k) Letter of Consent between TIMERx Technologies and Leiras OY
dated May 26, 1995.
(l) Letter of Agreement between TIMERx Technologies and Leiras OY
dated May 26, 1995.
(m) Strategic Alliance Agreement between Penwest Pharmaceuticals
Group and Endo Pharmaceuticals Inc., dated September 17, 1997.
COMMISSION: the Securities and Exchange Commission.
CONVEYANCE AND ASSUMPTION INSTRUMENTS: collectively, the various
agreements, instruments and other documents entered into or to be entered into
to effect the transfer, prior to the Closing Date and in the manner contemplated
by this Agreement or any other agreement or document contemplated by this
Agreement or otherwise, of Penwest Assets to Penwest (including, without
limitation, the
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intellectual property rights and other assets described in the Registration
Statement) and the assumption of Penwest Liabilities by Penwest, in both cases
relating to the business of Penwest as described in the Registration Statement.
DISTRIBUTION: the distribution by Penford on a pro rata basis to
holders of Penford Common Stock of all of the outstanding shares of Penwest
Common Stock owned by Penford on the Distribution Date as set forth in Article
IV.
DISTRIBUTION DATE: the date determined pursuant to Section 4.1 on which
the Distribution occurs provided that such date shall occur on or after April 1,
1998.
EMPLOYEE BENEFITS AGREEMENT: the Employee Benefits Agreement between
Penford and Penwest providing for, among other things, participation by Penwest
Employees in certain of the Penford employee benefit plans from the effective
date of the Employee Benefits Agreement through December 31, 1997.
EXCIPIENT SUPPLY AGREEMENT: the Excipient Supply Agreement between
Penford and Penwest pursuant to which Penford will manufacture and supply
exclusively to Penwest, and Penwest will purchase exclusively from Penford, all
of Penwest's requirements for EMDEX and CANDEX.
EMDEX/CANDEX: sugar based (Dextrate) binders.
EXCHANGE ACT: the Securities Exchange Act of 1934, as amended.
GOVERNMENTAL APPROVALS: any notices, reports or other filings to be
made, or any consents, registrations, approvals, permits or authorizations to be
obtained from any Governmental Authority.
GOVERNMENTAL AUTHORITY: any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.
IPO: the initial public offering by Penwest of shares of Penwest Common
Stock pursuant to the Registration Statement.
LIABILITIES: any and all debts, liabilities and obligations, absolute
or contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising (unless otherwise specified in
this Agreement), including all costs and expenses relating thereto, and those
debts, liabilities and obligations arising under any law, rule, regulation,
Action, threatened Action, order or consent decree of any Governmental Authority
or any award of any arbitrator of any kind, and those arising under any
contract, commitment or undertaking.
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PENFORD COMMON STOCK: the Common Stock, par value $1.00 per share, of
Penford.
PENFORD MARKET CAPITALIZATION: the number of Penford's fully diluted
shares outstanding (shares of Penford Common Stock outstanding, plus shares of
Penford Common Stock issuable upon exercise of outstanding stock options)
multiplied by the fair market value of Penford Common Stock (which shall equal
the weighted average of the last reported price of Penford Common Stock on the
Nasdaq National Market on the date on which the Penford Common Stock is first
traded on the Nasdaq National Market at a price that does not reflect the value
of the Penwest Common Stock held by Penford as set by the Nasdaq National Market
(the "X Date") and the nineteen (19) trading days immediately following the X
Date.
PENWEST ASSETS:
(a) any and all assets that are expressly contemplated by the
Penwest Contracts or this Agreement or any other agreement or document
contemplated by this Agreement (or any Schedule hereto or thereto) as assets to
be transferred to Penwest;
(b) any assets reflected in Penwest's balance sheet dated
September 30, 1997 as assets of Penwest, subject to any dispositions of such
assets subsequent to the date of such balance sheet; and
(c) any and all assets owned or held immediately prior to the
Closing Date by Penford that are used primarily in the Pharmaceutical Business.
The intention of this clause (c) is only to rectify any inadvertent omission of
transfer or conveyance of any assets that, had the parties given specific
consideration to such asset as of the date hereof, would have otherwise been
classified as a Penwest Asset. No asset shall be deemed to be a Penwest Asset
solely as a result of this clause (c) if such asset is within the category or
type of asset expressly covered by the subject matter of an Ancillary Agreement.
PENWEST COMMON STOCK: the Common Stock, par value $0.001 per share, of
Penwest.
PENWEST CONTRACTS: the following contracts and agreements to which
Penford is a party or by which its assets are bound, whether or not in writing:
(a) any supply or vendor contracts or agreements that relate
primarily to the Pharmaceutical Business;
(b) the Collaborative Agreements;
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(c) any contract or agreement entered into by Penford or Penwest
that relates primarily to the Pharmaceutical Business;
(d) any contract or agreement entered into by Penford or Penwest
with any federal, state and local government that relates primarily to the
Pharmaceutical Business;
(e) any contract or agreement that is otherwise expressly
contemplated pursuant to this Agreement or any of the Ancillary Agreements to be
assigned to Penwest; and
(f) any guarantee, indemnity, representation, warranty or other
Liability of Penford in respect of any other Penwest Contract, any Penwest
Liability or the Pharmaceutical Business.
PENWEST EMPLOYEES: Penwest Employees include Penwest's current
employees and any other employees who are hired by Penwest prior to the
Distribution Date.
PENWEST MARKET CAPITALIZATION: the number of Penwest's fully diluted
shares outstanding (shares of Penwest Common Stock outstanding, plus shares of
Penwest Common Stock issuable upon exercise outstanding stock options)
multiplied by the fair market value of the Penwest Common Stock (which shall
equal the weighted average of the last reported price of Penwest Common Stock on
the Nasdaq National Market on the X Date and the nineteen (19) trading days
immediately following such X Date.
PENWEST LIABILITIES:
(a) any and all Liabilities that are expressly contemplated by
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise (or the Schedules hereto or thereto) as Liabilities to be assumed
by Penwest;
(b) all Liabilities (other than taxes based on, or measured by
reference to, net income), including any Liabilities related to Penwest
Employees and product Liabilities, primarily relating to, arising out of or
resulting from:
(i) the operation of the Pharmaceutical Business, as
conducted at any time prior to, on or after the Closing Date (including any
Liability relating to, arising out of or resulting from any act or failure to
act or any statement made by any director, officer, employee, agent or
representatives (whether or not such act or failure to act or statement is or
was within such Person's authority); or
(ii) any Penwest Assets (including any Penwest Contracts);
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in any such case whether arising before, on or after the Closing Date;
(c) all Liabilities, excluding any intercompany indebtedness
forgiven pursuant to Section 2.5 of this Agreement, reflected as liabilities or
obligations of Penwest in its balance sheet, subject to any discharge of such
Liabilities subsequent to the date of such balance sheet.
PERSON: an individual, a general or limited partnership, a corporation,
a trust, a joint venture, an unincorporated organization, a limited liability
entity, any other entity and any Governmental Authority.
PROSPECTUS: each preliminary, final or supplemental prospectus forming
a part of the Registration Statement.
RECORD DATE: the close of business on the date to be determined by the
Penford Board of Directors as the record date for determining shareholders of
Penford entitled to receive shares of Penwest Common Stock.
REGISTRATION STATEMENT: Registration Statement on Form S-1 to be filed
under the Securities Act, pursuant to which 2,875,000 shares of Penwest Common
Stock to be issued in the IPO will be registered, together with all amendments
thereto.
SECURITIES ACT: the Securities Act of 1933, as amended.
SEPARATION: the transfer of the Penwest Assets to Penwest and the
assumption by Penwest of the Penwest Liabilities, all as more fully described in
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise.
SERVICES AGREEMENT: the Services Agreement between Penford and Penwest
providing for, among other things, the provision by Penford to Penwest of
certain administrative and other services on a transitional basis.
SUBSIDIARY: Subsidiary of any Person means any corporation or other
organization whether incorporated or unincorporated of which at least a majority
of the securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the board of directors or other performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more
of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided, however, that no Person that is not directly or indirectly
wholly-owned by any other Person shall be a Subsidiary of such other Person
unless such other Person controls, or has the right, power or ability to
control, that Person.
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TAX ALLOCATION AGREEMENT: the Tax Allocation Agreement between Penford
and Penwest, providing for, among other things, the allocation of liabilities
with respect to federal, state and local income taxes and the procedures for
filing returns with respect to such taxes.
TRADEMARK ASSIGNMENT: the Trademark Assignment between Penford and
Penwest, providing for, among other things the assignment by Penford to Penwest
of certain trademarks and related rights.
UNDERWRITERS: the managing underwriters for the IPO.
UNDERWRITING AGREEMENT: the underwriting agreement to be entered into
between Penwest and the Underwriters with respect to the IPO.
ARTICLE II
THE SEPARATION
2.1 TRANSFER OF ASSETS AND ASSUMPTION OF LIABILITIES.
(a) Penford hereby assigns, transfers, conveys and delivers to
Penwest, and Penwest hereby accepts from Penford, all of Penford's right, title
and interest in all Penwest Assets.
(b) Penwest hereby assumes and agrees faithfully to perform and
fulfill all the Penwest Liabilities, in accordance with their respective terms.
Penwest shall be responsible for all Penwest Liabilities, regardless of when or
where such liabilities arose or arise, or whether the facts on which they are
based occurred prior to or subsequent to the date hereof, regardless of where or
against whom such liabilities are asserted or determined (including any Penwest
Liabilities arising out of claims made by Penford's or Penwest's respective
shareholders, directors, officers, employees, agents, Subsidiaries or Affiliates
against Penford or Penwest) or whether asserted or determined prior to the date
hereof.
(c) In the event that any time or from time to time (whether
prior to or after the Distribution Date), any party hereto, shall receive or
otherwise possess any asset that is allocated to any other Person pursuant to
this Agreement or any Ancillary Agreement, such party shall promptly transfer,
or cause to be transferred, such asset to the Person so entitled thereto. Prior
to any such transfer, the Person receiving or possessing such asset shall hold
such asset in trust for any such other Person.
2.2 TERMINATION OF AGREEMENTS. Except as otherwise provided or
contemplated in this Agreement, Penwest and Penford hereby terminate any and all
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agreements, arrangements, commitments or understandings, whether or not in
writing, between Penwest and Penford, effective as of the Closing Date;
provided, however, to the extent any such agreement, arrangement, commitment or
understanding is inconsistent with any Ancillary Agreement such termination
shall be effective as of the date of effectiveness of the applicable Ancillary
Agreement. No such terminated agreement, arrangement, commitment or
understanding (including any provision thereof which purports to survive
termination) shall be of any further force or effect after the Closing Date (or,
to the extent contemplated by the proviso to the immediately preceding sentence,
after the effective date of the applicable Ancillary Agreement). Each party
shall, at the reasonable request of any other party, take, or cause to be taken,
such other actions as may be necessary to effect the foregoing.
2.3 DOCUMENTS RELATING TO OTHER TRANSFERS OF ASSETS AND ASSUMPTION OF
LIABILITIES. In furtherance of the assignment, transfer and conveyance of
Penwest Assets and the assumption of Penwest Liabilities set forth in Section
2.1(a) and (b), simultaneously with the execution and delivery hereof or as
promptly as practicable thereafter, (i) each of Penford and Penwest shall
execute and deliver such bills of sale, stock powers, certificates of titles,
assignments of contracts and other instruments of transfer, conveyance and
assignment as and to the extent necessary to evidence the transfer, conveyance
and assignment of all of Penford's right, title and interest in and to the
Penwest Assets to Penwest and (ii) Penwest shall execute and deliver to Penford
such bills of sale, stock powers, certificates of title, assumptions of
contracts and other instruments of assumption as and to the extent necessary to
evidence the valid and effective assumption of the Penwest Liabilities by
Penwest.
2.4 ANCILLARY AGREEMENTS. Each of Penford and Penwest will execute and
deliver all Ancillary Agreements to which it is a party which agreement will
become effective upon the Closing Date, including but not limited to:
(a) the Excipient Supply Agreement;
(b) the Services Agreement;
(c) the Tax Allocation Agreement;
(d) the Employee Benefits Agreement; and
(e) the Trademark Assignment.
2.5 FORGIVENESS OF INTERCOMPANY DEBT. Effective immediately prior to
the Closing Date, Penford hereby forgives all existing remaining intercompany
indebtedness owed by Penwest to Penford in order to provide an appropriate
level of working capital and equity at Penwest as it is established as a
separate stand alone company. Each of Penford and Penwest shall execute any
documents and instruments necessary or appropriate to confirm such loan
forgiveness. Penford and Penwest agree that Penford shall treat the loan
forgiveness as a contribution to the capital of Penwest in constructive
exchange for Penwest Common Stock, provided that no additional
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shares of Penwest Common Stock shall be issued or issuable in connection with or
as a result of such contributions.
2.6 CONSENTS. Each party hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document contemplated
by this Agreement or otherwise, representing or warranting in any way that the
obtaining of any consents or approvals, the execution and delivery of any
agreements or the making of any filings or applications contemplated by this
Agreement will satisfy the provisions of any or all applicable agreements or the
requirements of any or all applicable laws or judgments, it being agreed and
understood that the party to which any assets were or are transferred shall bear
the economic and legal risk that any necessary consents or approvals are not
obtained or that any requirements of laws or judgments are not complied with.
Notwithstanding the foregoing, the parties shall use reasonable best efforts to
obtain all consents and approvals, to enter into all agreements and to make all
filings and applications which may be required for the consummation of the
transactions contemplated by this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, including, without limitation, all
applicable regulatory filings or consents under federal or state laws and all
necessary consents, approvals, agreements, filings and applications.
2.7 REPRESENTATIONS OR WARRANTIES. Each of the parties hereto
understands and agrees that no party hereto is, in this Agreement or in any
other agreement or document contemplated by this Agreement or otherwise, making
any representations or warranties with respect to any assets of such party,
except that Penford represents and warrants to the best of its knowledge that
the delivery of all Penwest Assets transferred or being transferred to Penwest
pursuant to this Agreement or any other Conveyance and Assumption Instruments
has vested or will vest good title to such assets in Penwest free and clear of
all material liens, mortgages, pledges, security interests, restrictions, prior
assignments, encumbrances and claims of any kind or nature whatsoever affecting
such assets.
2.8 COLLABORATIVE AGREEMENTS. In the event that any transfer of
Penford's rights to Penwest under any of the Collaborative Agreements would
violate or is found to violate the terms of, or result in the loss of rights or
imposition of penalty under, any Collaborative Agreement covered thereby, or
would not be effective subsequent to the Distribution Date, such transfer shall
be deemed null and void and, in lieu thereof, (i) Penford shall retain all
rights and fulfill any obligations, at Penwest's expense, it may have to any
third party under any such Collaborative Agreement, it being understood that to
the extent practicable, Penwest shall fulfill such obligations on Penford's
behalf, (ii) Penford shall pay over to Penwest any royalty or other payments it
may receive from any third party pursuant to any such Collaborative Agreement
and (iii) at the request and expense of Penwest Penford shall use all reasonable
best efforts to arrange for the grant by the applicable third party of
comparable rights to Penwest.
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ARTICLE III
THE IPO AND ACTIONS PENDING THE IPO
3.1 TRANSACTIONS PRIOR TO THE IPO.
(a) Subject to the conditions specified in Section 3.3, Penford
and Penwest shall use their reasonable best efforts to consummate the IPO. Such
actions shall include, but not necessarily be limited to, those specified in
this Section 3.1.
(b) Penwest shall file the Registration Statement, and such
amendments or supplements thereto, as may be necessary in order to cause the
same to become and remain effective as required by law or by the Underwriters,
including, but not limited to, filing such amendments to the Registration
Statement as may be required by the Underwriting Agreement, the Commission or
federal or state securities laws. Penford and Penwest shall also cooperate in
preparing, filing with the Commission and causing to become effective a
registration statement registering the Penwest Common Stock under the Exchange
Act, and any registration statements or amendments thereof which are required to
reflect the establishment of, or amendments to, any employee benefit and other
plans necessary or appropriate in connection with the Separation, the IPO, the
Distribution or the other transactions contemplated by this Agreement or any
other agreement or document contemplated by this Agreement or otherwise.
(c) Penwest and Penford shall enter into the Underwriting
Agreement, in form and substance reasonably satisfactory to them and shall
comply with its obligations thereunder.
(d) Penford and Penwest shall consult with each other and the
Underwriters regarding the timing, pricing and other material matters with
respect to the IPO.
(e) Penwest shall use its reasonable best efforts to take all
such action as may be necessary or appropriate under state securities and blue
sky laws of the United States (and any comparable laws under any foreign
jurisdictions) in connection with the IPO.
(f) Penwest shall prepare, file and use reasonable best efforts
to seek to make effective, an application for listing of the Penwest Common
Stock issued in the IPO on the Nasdaq National Market, subject to official
notice of issuance.
(g) Penwest shall participate in the preparation of materials and
presentations as the Underwriters shall deem necessary or desirable.
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(h) Penwest shall pay all third party costs, fees and expenses
relating to the IPO, all of the reimbursable expenses of the Underwriters
pursuant to the Underwriting Agreement, and all of the costs of producing,
printing, mailing and otherwise distributing the Prospectus, and shall reimburse
Penford for any such costs, fees and expenses to the extent paid by Penford.
3.2 PROCEEDS OF THE IPO. The IPO will be a primary offering of Penwest
Common Stock and the net proceeds of the IPO will be retained by Penwest.
3.3 CONDITIONS PRECEDENT TO CONSUMMATION OF THE IPO. As soon as
practicable after the date of this Agreement, the parties hereto shall use their
reasonable best efforts to satisfy the following conditions to the consummation
of the IPO. The obligations of the parties to consummate the IPO shall be
conditioned on the satisfaction of the following conditions:
(a) The Registration Statement shall have been filed and declared
effective by the Commission, and there shall be no stop-order in effect with
respect thereto.
(b) The actions and filings with regard to state securities and
blue sky laws of the United States shall have been taken and, where applicable,
have become effective or been accepted.
(c) The Penwest Common Stock to be issued in the IPO shall have
been accepted for listing on the Nasdaq National Market, subject to official
notice of issuance.
(d) Penwest and Penford shall have entered into the Underwriting
Agreement and all conditions to the obligations of Penwest and the Underwriters
shall have been satisfied or waived.
(e) Immediately following the IPO, Penford shall "control"
Penwest within the meaning of Sections 355 and 368 of the Code, and all other
conditions to permit the Distribution to qualify as a tax-free distribution to
Penford, Penwest and Penford's shareholders shall, to the extent applicable as
of the time of the IPO, be satisfied and there shall be no event or condition
that is likely to cause any of such conditions not to be satisfied as of the
time of the Distribution or thereafter.
(f) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Separation or the IPO or any of the other transactions
contemplated by this Agreement or any other agreement or document contemplated
by this Agreement or otherwise shall be in effect.
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(g) Such other actions as the parties hereto may, based upon the
advice of counsel, reasonably request to be taken prior to the Separation and
the IPO in order to assure the successful completion of the Separation and the
IPO and the other transactions contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise shall have
been taken.
(h) This Agreement shall not have been terminated.
(i) A pricing committee of Penford directors designated by the
Board of Directors of Penford shall have determined that the terms of the IPO
are acceptable to Penford.
ARTICLE IV
THE DISTRIBUTION
4.1 THE DISTRIBUTION.
(a) Subject to Section 4.3 hereof, on or prior to the
Distribution Date, Penford will deliver to the Agent for the benefit of holders
of record of Penford Common Stock on the Record Date, a single stock
certificate, endorsed by Penford in blank, representing all of the outstanding
shares of Penwest Common Stock then owned by Penford, and shall cause the
transfer agent for the shares of Penford Common Stock to instruct the Agent to
distribute on the Distribution Date the appropriate number of such shares of
Penwest Common Stock to each such holder or designated transferee or transferees
of such holder.
(b) Subject to Section 4.4 hereof, each holder of Penford Common
Stock on the Record Date (or such holder's designated transferee or transferees)
shall be entitled to receive, in the Distribution, a number of shares of Penwest
Common Stock equal to the number of outstanding shares of Penwest Common Stock
owned by Penford on the Record Date multiplied by a fraction, the numerator of
which is the number of shares of Penford Common Stock held by such holder on the
Record Date, and the denominator of which is the number of shares of Penford
Common Stock outstanding on the Record Date.
(c) Penwest and Penford, as the case may be, will provide to the
Agent all share certificates and any information required in order to complete
the Distribution on the basis specified above.
4.2 ACTIONS PRIOR TO THE DISTRIBUTION.
(a) Penford and Penwest shall prepare and mail, prior to the
Distribution Date, to the holders of Penford Common Stock, such information
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concerning Penwest, its business, operations and management, the Distribution
and such other matters as Penford and Penwest shall reasonably determine and as
may be required by law. Penford and Penwest, as may be appropriate, will prepare
and to the extent required under applicable law, will file with the Commission
any such documentation which Penford determines are necessary or desirable to
effectuate the Distribution and Penford and Penwest shall each use its
reasonable best efforts to obtain all necessary approvals from the Commission
with respect thereto.
(b) In addition to their respective obligations under Section
4.2(a) above, Penford and Penwest shall take all other actions as may be
necessary or appropriate under the securities or blue sky laws of the United
States in connection with the Distribution.
(c) Penford and Penwest shall use their reasonable best efforts
to cause the conditions set forth in Section 4.3 to be satisfied and to effect
the Distribution on the Distribution Date.
(d) Penwest shall prepare and file, and shall use its reasonable
best efforts to have approved, an application for the listing of the Penwest
Common Stock to be distributed in the Distribution on the Nasdaq National
Market.
4.3 CONDITIONS TO DISTRIBUTION. Penford shall have the sole discretion
to determine the date of consummation of the Distribution at any time prior to
the date six months after the Closing Date. Following the date six months after
the Closing Date, Penford shall be obligated to effect the Distribution as
promptly as practicable, subject to the satisfaction, or waiver by the Penford
Board of Directors in its sole discretion, of the conditions set forth below.
(a) A private letter ruling from the Internal Revenue Service
(the "Private Letter Ruling") shall have been obtained, and shall continue in
effect, or a written opinion from Ernst & Young LLP shall have been delivered,
in either case to the effect that, among other things, the Distribution will
qualify as a tax-free distribution for federal income tax purposes under
Sections 355 and 368 of the Code, and such ruling or opinion shall be in form
and substance satisfactory to Penford in its sole discretion.
(b) Any material Governmental Approvals and consents necessary to
consummate the Distribution shall have been obtained and shall be in full force
and effect.
(c) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect and no other event outside
the
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control of Penford shall have occurred or failed to occur that prevents the
consummation of the Distribution.
(d) The transactions contemplated hereby shall be in compliance
with applicable federal and state securities laws.
(e) Each of Penwest and Penford shall have received such
consents, and shall have received executed copies of such agreements or
amendments of agreements, as they shall deem necessary in connection with the
completion of the transactions contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.
(f) All action and other documents and instruments deemed
necessary or advisable in connection with the transactions contemplated hereby
shall have been taken or executed, as the case may be, in form and substance
satisfactory to Penford and Penwest.
(g) No material adverse change shall have occurred with respect
to the business or financial condition of Penford since August 31, 1997, or
Penwest since September 30, 1997, which would, in the reasonable judgment of the
Penford Board of Directors, make approval of the Distribution inadvisable.
The foregoing conditions are for the sole benefit of Penford and shall not give
rise to or create any duty on the part of Penford or the Penford Board of
Directors to waive or not waive any such condition.
4.4 FRACTIONAL SHARES. As soon as practicable after the Distribution
Date, Penford shall direct the Agent to determine the number of whole shares and
fractional shares of Penwest Common Stock allocable to each holder of record of
Penford Common Stock as of the Record Date, to aggregate all such fractional
shares and sell the whole shares obtained thereby in open-market transactions in
the Agent's sole discretion as to when, how, through which broker-dealer and at
what price to make such sales, and to cause to be distributed to each such
holder or for the benefit of each such holder, in lieu of any fractional share,
such holder's ratable share of the proceeds of such sale, after making
appropriate deductions of the amount required to be withheld for federal income
tax purposes and after deducting an amount equal to all brokerage charges,
commissions and transfer taxes attributed to such sale. Penford and the Agent
shall use their reasonable best efforts to aggregate the shares of Penford
Common Stock that may be held by any holder of record thereof through more than
one account in determining the fractional share allocable to such holder.
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ARTICLE V
ACKNOWLEDGEMENT OF MATERIAL FACTS
5.1 ORGANIZATION. Penford and Penwest acknowledge that each is duly
organized, validly existing and in good standing under the laws of the State of
Washington, with requisite corporate power to own their properties and assets
and to carry on their respective businesses as presently conducted or
contemplated.
ARTICLE VI
MISCELLANEOUS LIABILITIES AND INDEMNIFICATION
6.1 PENWEST LIABILITIES; INDEMNIFICATION. Penwest shall indemnify,
defend and hold harmless Penford from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):
(a) the employment of Penwest Employees;
(b) the business of Penwest and the Penwest Assets;
(c) purchase orders, accounts payable, accrued compensation and
other accrued Penwest Liabilities and other agreements which relate to the
business of Penwest and the Penwest Assets; and
(d) any misstatement or omission of a material fact other than
misstatements or omissions with respect to Penford based on information supplied
in writing by Penford in any documents or filings prepared for purposes of
compliance or qualification under applicable securities laws in connection with
the Separation, IPO or Distribution and related transactions, including, without
limitation, the Registration Statement.
6.2 PENFORD LIABILITIES; INDEMNIFICATION. Penford shall indemnify,
defend and hold harmless Penwest from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):
(a) the business of Penford and the Liabilities not assumed by
Penwest under the terms of this Agreement or any other agreement or document
contemplated by this Agreement; and
(b) any misstatement or omission of a material fact with respect
to Penford based on information supplied in writing by Penford in any documents
or filings prepared for purposes of compliance or qualification under applicable
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securities laws in connection with the Separation, IPO or Distribution and
related transactions, including, without limitation, the Registration Statement.
6.3 PROCEDURES FOR INDEMNIFICATION OF THIRD PARTY CLAIMS.
(a) If any Person entitled to indemnification hereunder (an
"Indemnitee") shall receive notice or otherwise learn of the assertion by a
Person (including any Governmental Authority) of any claim or of the
commencement by any such Person of any Action (collectively, a "Third Party
Claim") with respect to which any party (an "Indemnifying Party") may be
obligated to provide indemnification to such Indemnitee pursuant to Section 6.1
or 6.2, or any other Section of this Agreement or any other agreement or
document contemplated by this Agreement or otherwise, such Indemnitee shall give
such Indemnifying Party written notice thereof within twenty (20) days after
becoming aware of such Third Party Claim. Any such notice shall describe the
Third Party Claim in reasonable detail. Notwithstanding the foregoing, the
failure of any Indemnitee or other Person to give notice as provided in this
Section 6.3(a) shall not relieve the Indemnifying Party of its obligations under
this Article VI, except to the extent that such Indemnifying Party is actually
prejudiced by such failure to give notice.
(b) An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days
after the receipt of notice from an Indemnitee in accordance with Section 6.3(a)
(or sooner, if the nature of such Third Party Claim so requires), the
Indemnifying Party shall notify the Indemnitee of its election whether the
Indemnifying Party will assume responsibility for defending such Third Party
Claim, which election shall specify any reservations or exceptions. After notice
from an Indemnifying Party to an Indemnitee of its election to assume the
defense of a Third Party Claim, such Indemnitee shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnitee except as set forth in Section 6.3(c).
(c) If an Indemnifying Party elects not to assume responsibility
for defending a Third Party Claim, or fails to notify an Indemnitee of its
election as provided in Section 6.3(b), such Indemnitee may defend such Third
Party Claim at the cost and expense (including allocated costs of in-house
counsel and other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the
defense of the Third Party Claim in accordance with the terms of this Agreement,
no Indemnitee may settle or compromise any Third Party Claim without the consent
of the Indemnifying Party.
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(e) No Indemnifying Party shall consent to entry of any judgment
or enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.
6.4 TAX LIABILITIES. Notwithstanding the provisions of Sections 6.1
and 6.2, all tax Liabilities relating to the business of Penwest and the Penwest
Assets including, without limitation, income taxes, franchise taxes, sales
taxes, use taxes, payroll taxes and employment taxes, shall be assumed by the
party to whom the Liability has been allocated in the Tax Allocation Agreement.
6.5 ADDITIONAL MATTERS.
(a) Any claim on account of a Liability which does not result
from a Third Party Claim shall be asserted by written notice given by the
Indemnitee to the Indemnifying Party. Such Indemnifying Party shall have a
period of thirty (30) days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such thirty
(30)-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such thirty (30)-day period or rejects such claim in whole or in
part, such Indemnitee shall be free to pursue such remedies as may be available
to such party as contemplated by this Agreement.
(b) In the event of payment by or on behalf of any Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place of such
Indemnitee as to any events or circumstances in respect of which such Indemnitee
may have the right, defense or claim relating to such Third Party Claim against
any claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense (including allocated costs of
in-house counsel and other personnel) of such Indemnifying Party, in prosecuting
any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is
not a named defendant, if either the Indemnitee or Indemnifying Party shall so
request, the parties shall endeavor to substitute the Indemnifying Party for the
named defendant. If such substitution or addition cannot be achieved for any
reason or is not requested, the named defendant shall allow the Indemnifying
Party to manage the Action as set forth in this Section and the Indemnifying
Party shall fully indemnify the named defendant against all costs of defending
the Action (including court costs, sanctions imposed by a court, attorneys'
fees, experts' fees and all other
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external expenses, and the allocated costs of in-house counsel and other
personnel), the costs of any judgment or settlement, and the cost of any
interest or penalties relating to any judgment or settlement.
6.6 REMEDIES CUMULATIVE. The remedies provided in this Article VI
shall be cumulative and shall not preclude assertion by an Indemnitee of any
other rights or the seeking of any and all other remedies against any
Indemnifying Party.
ARTICLE VII
ACCESS TO INFORMATION AND SERVICES
7.1 PROVISION OF CORPORATE RECORDS. Upon Penwest's request, Penford
shall arrange as soon as practicable following the Effective Date for the
delivery to Penwest of existing corporate records in the possession of Penford
relating to the business of Penwest or assets to be transferred to Penwest,
together with all active agreements and active litigation files relating to the
businesses of Penwest, except to the extent such items are already in the
possession of Penwest. Such records shall be the property of Penwest but shall
be available to Penford for review and duplication until Penford shall notify
Penwest in writing that such records are no longer of use to Penford.
7.2 ACCESS TO INFORMATION. From and after the Effective Date, Penford
shall afford to Penwest and its authorized accountants, counsel and other
designated representatives reasonable access (including using reasonable best
efforts to give access to persons or firms possessing information) and
duplicating rights during normal business hours to all records, books,
contracts, instruments, computer data and other data and information
(collectively, "Information") within Penford's possession relating to the
businesses of Penwest, insofar as such access is reasonably required by Penwest.
Penwest shall afford to Penford and its authorized accountants, counsel and
other designated representatives reasonable access (including using reasonable
best efforts to give access to persons or firms possessing Information) and
duplicating rights during normal business hours to Information within Penwest's
possession relating to the business of Penwest prior to the Distribution or to
the business of Penford, insofar as such access is reasonably required by
Penford. Information may be requested under this Article VII for, without
limitation, audit, accounting, claims, litigation and tax purposes, as well as
for purposes of fulfilling disclosure and reporting obligations and for
performing the transactions contemplated in this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.
7.3 PENWEST SECURITIES FILINGS. For a period of three years following
the Effective Date, each of Penwest and Penford shall provide to the other,
promptly following such time at which such documents shall be filed with the
Commission,
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copies of all documents which shall be filed by either Penwest or Penford, as
the case may be, with the Commission pursuant to the periodic and interim
reporting requirements of the Exchange Act and the rules and regulations of the
Commission promulgated thereunder.
7.4 PRODUCTION OF WITNESSES. At all times from and after the Effective
Date, each of Penford and Penwest shall use reasonable best efforts to make
available to the other, upon written request, its officers, directors, employees
and agents as witnesses to the extent that such persons may reasonably be
required, in connection with legal, administrative or other proceedings in which
the requesting party may from time to time be involved.
7.5 REIMBURSEMENT. Except to the extent otherwise contemplated by any
Ancillary Agreement, a party providing information to the other party under this
Article VII shall be entitled to receive from the recipient, upon the
presentation of invoices therefor, payments for such amounts, relating to
supplies, disbursements and other out-of-pocket expenses, as may be reasonably
incurred in providing such information.
7.6 RETENTION OF RECORDS. For a period of six (6) years following the
Effective Date, each of Penford and Penwest shall retain all Information
relating to the other as of the Effective Date, except as otherwise required by
law or set forth in an Ancillary Agreement or except to the extent that such
Information is in the public domain or in the possession of the other party.
7.7 CONFIDENTIALITY. Subject to any contrary requirement of law and
the right of each party to enforce its rights hereunder in any legal action,
each party shall keep strictly confidential, and shall cause its employees and
agents to keep strictly confidential, any Information of or concerning the other
party which it or any of its agents or employees may acquire pursuant to, or in
the course of performing its obligations under, any provisions of this Agreement
or any Ancillary Agreement; provided, however, that such obligation to maintain
confidentiality shall not apply to Information which (i) at the time of
disclosure was in the public domain or (ii) was received by the receiving party
from a third party who did not receive such Information from the disclosing
party under an obligation of confidentiality.
ARTICLE VIII
COVENANTS
8.1 NASDAQ NATIONAL MARKET LISTING. Penwest hereby agrees to use its
reasonable best efforts to effect and maintain the listing of the Penwest Common
Stock on the Nasdaq National Market.
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8.2 ANCILLARY AGREEMENTS. The parties agree that they shall comply
with and provide all services and take any and all actions required to be
provided or taken by the terms of any and all of the Ancillary Agreements
following the Closing Date.
8.3 SHARING OF UTILITIES
(a) Penford agrees that Penwest shall be entitled to use and
consume, in an amount reasonably required, at Penwest's Cedar Rapids facility
certain utilities consisting of natural gas, electricity and steam from
Penford's Cedar Rapids facility. Any material change in the provision of such
utilities shall require six (6) months prior notice.
(b) In connection with the sharing of utilities as described in
Section 8.3(a), Penwest will reimburse Penford for its consumption of such
utilities based on Penford's total cost (including maintenance) for each item
and Penwest's fraction of the total consumption.
(c) Penford will submit a monthly invoice to Penwest of all
amounts owed by Penwest to Penford with respect to utilities consumed by Penwest
pursuant to Section 8.3(a). The charges will be due when billed and shall be
paid no later than thirty (30) days from the date of billing.
8.4 NON-COMPETITION
(a) From the Effective Date to the longer of (i) five years or
(ii) the termination of the Excipient Supply Agreement, neither Penford nor any
of its Affiliates shall, directly or indirectly, manufacture, market, sell or
distribute for inclusion in any pharmaceutical or nutritional product (including
vitamins, minerals and cofactors, but excluding foods) any product having the
same or substantially the same form, composition or applications as EMDEX or
CANDEX or any similar sugar- based product. From the Effective Date to the
longer of (i) five years or (ii) the termination of the Excipient Supply
Agreement, neither Penwest nor any of its Affiliates shall, directly or
indirectly, manufacture, market, sell or distribute for inclusion in any foods
product any product having the same or substantially the same form, composition
or applications as EMDEX or CANDEX or any similar sugar- based product.
(b) For a period of five years from the Effective Date, Penford
shall not directly or indirectly recruit or solicit any employee of Penwest, or
induce or attempt to induce any employee of Penwest to terminate his or her
employment with, or otherwise cease his or her relationship with, Penwest. For a
period of five years from the Effective Date, Penwest shall not directly or
indirectly recruit or solicit any employee of Penford, or induce or attempt to
induce any employee of Penford to
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terminate his or her employment with, or otherwise cease his or her relationship
with, Penford.
(c) If any restriction set forth in Sections 8.4 (a) or (b) is
found by any court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable.
(d) The restrictions contained in this Section 8.4 are necessary
for the protection of the respective businesses and goodwill of Penwest and
Penford and are considered by Penford and Penwest to be reasonable for such
purpose. Penford and Penwest agree that any breach of this Section 8.4 is likely
to cause Penwest or Penford, as the case may be, substantial and irrevocable
damage and therefore, in the event of any such breach, Penwest or Penford, as
the case may be, in addition to such other remedies which may be available,
shall be entitled to specific performance and other injunctive relief.
8.5 STOCK OPTIONS.
Prior to the Distribution Date, Penford shall (i) amend its stock plans
to provide that, for purposes of such stock plans, the term employee shall
include all Penwest Employees as of the Record Date, (ii) amend each Penford
stock option held by a Penwest Employee as of the Record Date to provide that
the option will continue to vest for so long as the Penwest Employee remains an
employee of Penwest and (iii) effective as of the Distribution Date, make an
adjustment to the exercise price of each Penford stock option outstanding as of
the Record Date and make an adjustment to the number of shares of Penford Common
Stock under each Penford stock option outstanding as of the Record Date. The
adjustment to the exercise price of such stock option shall be applied by
multiplying the exercise price of the option by a fraction, the numerator of
which shall equal the Penford Market Capitalization and the denominator of which
shall equal the sum of the Penford Market Capitalization and the Penwest Market
Capitalization. The adjustment in the number of shares of Penford Common Stock
shall be applied by multiplying the number of shares of Penford Common Stock
under each Penford stock option as of the Record Date by a fraction, the
numerator of which shall equal the sum of the Penford Market Capitalization and
Penwest Market Capitalization and the denominator of which shall equal the
Penford Market Capitalization. Thus, a holder of an option to purchase one share
of Penford Common Stock at an exercise price of $10 per share shall have the
exercise price of the option reduced from $10 per share to $6.66 per share
(i.e., $10 x 200,000,000/300,000,000 = $6.66 and number of shares increased by
1.5 (i.e. 1 x 300,000,000/200,000,000 = 1.5)).
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8.6 REGISTRATION RIGHTS.
(a) REGISTRATION OF SHARES. In the event that the Distribution
has not occurred by September 30, 1998, upon the request of Penford, Penwest
shall file with the SEC, as promptly as practicable, a resale registration
statement (the "Resale Registration Statement"). Penford shall have the right to
request up to three Resale Registration Statements, provided that Penwest shall
have no obligation to file any such resale registration statement on or prior to
a ninety (90) day period following the filing of any other registration
statement by Penwest. Penwest shall use its reasonable best efforts to cause
each Resale Registration Statement to be declared effective by the SEC as soon
as practicable. If a Resale Registration Statement shall be withdrawn before
effectiveness, it shall not be counted against Penford's right to request three
registrations.
(b) LIMITATIONS ON REGISTRATION RIGHTS.
(i) Penwest may, by written notice to Penford, for a period
of up to 45 days from the date of written notice, delay the filing or
effectiveness of any of the Resale Registration Statements in the event that (1)
Penwest is engaged in any activity or transaction that Penwest desires to keep
confidential for business reasons, (2) the Penwest Board of Directors determines
in good faith that the disclosure of such information would be detrimental to
Penwest, and (3) the Penwest Board of Directors determines in good faith that
the public disclosure requirements imposed on Penwest under the Securities Act
in connection with any such Resale Registration Statement would require
disclosure of such activity or transaction.
(ii) If Penwest delays a Resale Registration Statement,
Penwest shall, as promptly as practicable following the termination of the
circumstances which entitled Penwest to do so, take such actions as may be
necessary to file or reinstate the effectiveness of a Resale Registration
Statement. If as a result thereof the prospectus included in a Resale
Registration Statement has been amended to comply with the requirements of the
Securities Act, Penwest shall enclose such revised prospectus with the notice to
Penford given pursuant to this paragraph (ii), and Penford shall make no offers
or sales of shares pursuant to a Resale Registration Statement other than by
means of such revised prospectus.
(c) REGISTRATION PROCEDURES.
(i) In connection with the filing by Penwest of a Resale
Registration Statement, Penwest shall furnish to Penford as many copies of the
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act as Penford shall reasonably request for the
purpose of effecting the plan of distribution set forth therein.
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(ii) Penwest shall use its best efforts to register or
qualify the Penwest Common Stock covered by a Resale Registration Statement
under the securities laws of such states as Penford shall reasonably request;
provided, however, that Penwest shall not be required in connection with this
paragraph (ii) to qualify as a foreign corporation or execute a general consent
to service of process in any jurisdiction.
(iii) If Penwest has delivered preliminary or final
prospectuses to Penford and after having done so the prospectus is amended to
comply with the requirements of the Securities Act, Penwest shall promptly
notify Penford and, if requested by Penwest, Penford shall immediately return
all prospectuses to Penwest. Penwest shall promptly provide Penford with revised
prospectuses.
(iv) At the request of Penford, Penwest shall sign an
underwriting agreement in customary form with managing underwriters selected by
Penford, and shall cooperate with such managing underwriters in all reasonable
respects to facilitate the distribution contemplated by Penford, including
without limitation making available the books, records and personnel of Penwest
for the purpose of the underwriters' "due diligence" and providing customary
legal opinions and auditors' comfort letters.
(v) Each of Penwest and Penford shall share in equal
amounts the expenses incurred by Penwest in complying with its obligations under
this Section 8.6, including all registration and filing fees, exchange listing
fees, fees and expenses of counsel for Penwest, and fees and expenses of
accountants for Penwest, but excluding (A) any brokerage fees, selling
commissions or underwriting discounts incurred by Penford in connection with
sales under a Resale Registration Statement and (B) the fees and expenses of any
counsel retained by Penford.
(d) If Penwest begins preparations to file a registration
statement for sale of securities on a form in which common stock held by Penford
may be included, Penwest shall notify Penford in writing at least thirty (30)
days before filing the registration statement and shall include therein any
Penwest Common Stock that Penford requested to be included.
(e) REQUIREMENTS OF PENFORD. Penwest shall not be required to
include any Penwest Common Stock owned by Penford in a Resale Registration
Statement unless:
(i) Penford furnishes to Penwest in writing such
information regarding Penford as Penwest may reasonably request in writing in
connection with the Resale Registration Statement or as shall be required in
connection therewith by the SEC or any state securities law authorities;
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(ii) Penford shall have provided to Penwest its written
agreement:
(A) to indemnify Penwest and each of its directors and
officers against, and hold Penwest and each of its directors and officers
harmless from, any losses, claims, damages, expenses or liabilities (including
reasonable attorneys fees) to which Penwest or such directors and officers may
become subject by reason of any statement or omission in the Resale Registration
Statement made in reliance upon, or in conformity with, any written statement by
Penford furnished pursuant to this Section 8.6(e); and
(B) to report to Penwest sales made pursuant to the
Resale Registration Statement.
(f) Penwest agrees to indemnify and hold harmless Penford against
any losses, claims, damages, expenses or liabilities to which Penford may become
subject by reason of any untrue statements of a material fact contained in the
Resale Registration Statement or any omission to state therein a fact required
to be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages, expenses or liabilities arise
out of or are based upon information furnished to Penwest in writing by or on
behalf of Penford for use in the Resale Registration Statement. Penwest shall
have the right to assume the defense and settlement of any claim or suit for
which Penwest may be responsible for indemnification under this Section 8.6(f).
(g) ASSIGNMENT OF RIGHTS. Penford may not assign any of its
rights under this Section 8.6.
8.7 MUTUAL ASSURANCES.
(a) In addition to the actions specifically provided for
elsewhere in this Agreement or any other agreement or document contemplated by
this Agreement or otherwise, Penford and Penwest agree to cooperate with respect
to the implementation of this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, and to execute such further
documents and instruments as may be necessary to consummate and make effective
the transactions contemplated by this Agreement or any other agreement or
document contemplated by this Agreement or otherwise;
(b) Penford and Penwest shall arrange, attend and participate in
joint meetings with corporate collaborators, suppliers, customers and others to
the extent necessary to assure the orderly transition of the business and assets
contemplated hereby, provided that nothing herein shall be deemed to obligate
either Penford or
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Penwest to take any action or reach any understandings which may violate any
applicable laws.
(c) Penford and Penwest agree to take any reasonable actions
necessary in order for the Distribution to qualify as a tax-free distribution
pursuant to Sections 355 and 368 of the Code.
(d) Penford and Penwest agree that they shall not take any action
which could reasonably be expected to prevent the Distribution from qualifying
as a tax-free distribution within the meaning of Sections 355 and 368 of the
Code or any other transaction contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise which is
intended by the parties to be tax-free from failing so to qualify. Without
limiting the foregoing, after the Closing Date and on or prior to the
Distribution Date, Penwest shall not issue or grant, directly or indirectly, any
shares of Penwest Common Stock or any rights, warrants, options or other
securities to purchase or acquire (whether upon conversion, exchange or
otherwise) any shares of Penwest Common Stock (whether or not then exercisable,
convertible or exchangeable).
ARTICLE IX
TERMINATION
9.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of Penford and
Penwest.
9.2 OTHER TERMINATION. This Agreement shall terminate if the
Distribution Date shall not have occurred on or prior to December 31, 1998.
9.3 EFFECT OF TERMINATION.
(a) In the event of any termination of this Agreement prior to
the Closing Date, no party to this Agreement (or any of its directors or
officers) shall have any Liability or further obligation to any other party.
(b) In the event of any termination of this Agreement on or after
the Closing Date, only the provisions of Article IV will terminate and the other
provisions of this Agreement or any agreement or document contemplated by this
Agreement or otherwise shall remain in full force and effect.
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ARTICLE X
MISCELLANEOUS
10.1 GOVERNING LAW. This Agreement shall be governed by the laws of the
State of Washington.
10.2 CONSTRUCTION. Each provision of this Agreement shall be
interpreted in a manner to be effective and valid to the fullest extent
permissible under applicable law. The invalidity or unenforceability of any
particular provision of this Agreement shall not affect the other provisions of
this Agreement which shall remain in full force and effect.
10.3 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
10.4 EXHIBITS. Exhibits to this Agreement shall be deemed to be an
integral part hereof, and schedules or exhibits to such Exhibits shall be deemed
to be an integral part thereof.
10.5 AMENDMENTS; WAIVERS. This Agreement may be amended or modified
only in a writing executed on behalf of Penford and Penwest. No waiver shall
operate to waive any further or future act and no failure to object of
forbearance shall operate as a waiver.
10.6 NOTICES. Notices hereunder shall be effective if given in writing
and delivered or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777-108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: The President
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The President
10.7 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein
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or in any exhibit or schedule hereto shall not be assignable, in whole or in
part, without the prior written consent of the parties hereto and any attempt to
effect any such assignment without such consent shall be void.
10.8 PUBLICITY. Prior to the Distribution, each of Penwest and Penford
shall consult with each other prior to issuing any press releases or otherwise
making public statements with respect to the IPO, the Distribution or any of the
other transactions contemplated hereby and prior to making any filings with any
Governmental Authority with respect thereto.
10.9 EXPENSES. Except as expressly set forth in this Agreement or in
any other agreement or document contemplated by this Agreement or otherwise,
whether or not the IPO or the Distribution is consummated, all third party fees,
costs and expenses paid or incurred in connection with the Distribution will be
paid by Penford.
10.10 HEADINGS. The article, section and paragraph headings contained
in this Agreement and in the Ancillary Agreements are for reference purposes
only and shall not affect in any way the meaning or interpretation of this
Agreement or any Ancillary Agreement.
10.11 ARBITRATION. Any dispute, controversy or claim arising out of or
in connection with this Agreement or any of the Ancillary Agreements (including
any questions of fraud or questions concerning the validity and enforceability
of this Agreement or any of the Ancillary Agreements or any of the rights herein
and therein conveyed), shall be determined and settled by arbitration in
Seattle, Washington, pursuant to the rules then in effect of the American
Arbitration Association as modified by this paragraph. Any award rendered shall
be final and conclusive upon the parties and a judgment thereon may be entered
in any court having competent jurisdiction. The party submitting such dispute
shall give written notice to that effect to the other party, stating the dispute
to be arbitrated and the name and address of a person designated to act as
arbitrator on its behalf. Within fifteen (15) days after such notice, the other
party shall give written notice to the first party stating the name and address
of a person designated to act as an arbitrator on its behalf. In the event that
the second party shall fail to notify the first party of its designation of an
arbitrator within the time specified, then the first party shall request the
American Arbitration Association to appoint a second arbitrator. The two
arbitrators so chosen shall meet within fifteen (15) days after the second
arbitrator has been appointed to appoint a third arbitrator. If the two
arbitrators are unable to agree on the appointment of a third arbitrator within
such fifteen (15) day period, either party may request the American Arbitration
Association to appoint a third arbitrator. Each arbitrator appointed hereunder
shall be independent of the parties and either party may disqualify an
arbitrator who is or is affiliated with a supplier, customer or competitor of
either party without the consent of the other party. Each
-28-
<PAGE> 29
arbitrator shall be reasonably knowledgeable regarding the area or areas in
dispute. The arbitrators shall follow substantive rules of law and the Federal
Rules of Evidence, require the parties to conduct discovery pursuant to the
rules then in effect under the Federal Rules of Civil Procedure in an
expeditious manner, cause testimony to be transcribed, and make an award
accompanied by findings of fact and a statement of reasons for the decision. All
costs and expenses, including attorney's fees, of all parties incurred in any
dispute which is determined and/or settled by arbitration pursuant to this
paragraph shall be borne by the party determined to be liable in respect of such
dispute; provided, however, that if complete liability is not assessed against
only one party, the parties shall share the total costs in proportion to their
respective amounts of liability so determined. Except where clearly prevented by
the area in dispute, both parties agree to continue performing their respective
obligations under this Agreement while the dispute is being resolved. Each
party, and the arbitrators, shall use their best efforts, subject to reasonable
prosecution of the arbitration, court order and disclosure required under
securities laws, to keep the subject matter of the arbitration and confidential
information of each party confidential, and the arbitrators are authorized to
impose such protective orders as they may deem appropriate for such purpose.
10.12 ENTIRE AGREEMENT. This Agreement contains the full understanding
of the parties with respect to the subject matter hereof and supersedes all
prior understandings and writings relating thereto. No waiver, alteration or
modification of any of the provisions hereof shall be binding unless made in
writing and signed by the parties.
-29-
<PAGE> 30
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PENFORD CORPORATION
By: /s/ JEFFREY T. COOK
-----------------------
Jeffrey T. Cook
Title: Vice President, Finance and
Chief Financial Officer
PENWEST PHARMACEUTICALS CO.
By: /s/ TOD R. HAMACHEK
----------------------
Tod R. Hamachek
Title: Chairman of the Board and
Chief Executive Officer
-30-
<PAGE> 1
Exhibit 11
PENFORD CORPORATION AND SUBSIDIARIES
COMPUTATION OF PER-SHARE EARNINGS
<TABLE>
<CAPTION>
Year Ended August 31
1997 1996 1995
----------------------------------------------
PRIMARY:
- --------
<S> <C> <C> <C>
Net income $6,625,000 $5,052,000 7,217,000
========== ========== ==========
Weighted average number of shares outstanding 7,001,209 6,805,740 6,745,566
Net effect of diluted stock options 130,516 201,600 273,404
---------- ---------- ----------
Weighted average common shares
and equivalents outstanding 7,131,725 7,007,340 7,018,970
========== ========== ==========
Earnings per share: $ 0.93 $ 0.72 $ 1.03
========== ========== ==========
FULLY DILUTED:
----------
Net income $6,625,000 $5,052,000 $7,217,000
========== ========== ==========
Weighted average number of shares outstanding 7,001,209 6,805,740 6,745,566
Net effect of diluted stock options 143,275 194,352 279,333
---------- ---------- ----------
Weighted average common shares and
equivalents outstanding 7,144,484 7,000,092 7,024,899
========== ========== ==========
Earnings per share $ 0.93 $ 0.72 $ 1.03
========== ========== ==========
</TABLE>
Page 47
<PAGE> 1
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Year Ended August 31, 1997
Wholly owned subsidiaries of the registrant are:
Penford Products Co.
incorporated under the laws of the State of Delaware
Penwest Pharmaceuticals Co. (formerly Edward Mendell Co., Inc.)
incorporated under the laws of the State of Washington
Mendell U.K. Ltd.
incorporated under the laws of the United Kingdom
Edward Mendell GmbH
incorporated under the laws of Germany
Edward Mendell Finland OY
incorporated under the laws of Finland
Penford Export Corporation
All subsidiaries are included in the consolidated financial
statements.
Page 48
<PAGE> 1
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-58799) pertaining to the Penford Corporation 1994 Stock
Option Plan and to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-88946) pertaining to the Penford Corporation Savings and
Stock Ownership Plan of our report dated October 17, 1997, with respect to the
consolidated financial statements of Penford Corporation included in the Annual
Report (Form 10-K) for the year ended August 31, 1997.
Seattle, Washington
November 25, 1997 ERNST & YOUNG LLP
Page 49
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENT, that each person whose signature
appears below constitutes and appoints Tod R. Hamachek, Jeffrey T. Cook and
each of them, severally as attorney-in-fact for him or her in any and all
capacities, to sign the Annual Report on Form 10-K of Penford Corporation. for
the fiscal year ended August 31, 1997, and to file same and any amendments,
with exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
said attorney-in-fact, or his substitute or substitutes, may do or cause to be
done virtue hereof.
SIGNATURE DATE
/s/ RICHARD E. ENGEBRECHT October 28, 1997
- ---------------------------------------- ------------------------
Richard E. Engebrecht, Director
/s/ PAUL E. FREIMAN October 28, 1997
- ---------------------------------------- ------------------------
Paul E. Freiman, Director
/s/ TOD R. HAMACHEK October 28, 1997
- ---------------------------------------- ------------------------
Tod R. Hamachek, Director
- ---------------------------------------- ------------------------
Paul H. Hatfield, Director
/s/ HARRY MULLIKIN October 28, 1997
- ---------------------------------------- ------------------------
Harry Mullikin, Director
/s/ SALLY G. NARODICK October 28, 1997
- ---------------------------------------- ------------------------
Sally G. Narodick, Director
/s/ WILLIAM G. PARZYBOK, JR. October 28, 1997
- ---------------------------------------- ------------------------
William G. Parzybok, Jr., Director
/s/ N. STEWART ROGERS October 28, 1997
- ---------------------------------------- ------------------------
N. Stewart Rogers, Director
/s/ WILLIAM K. STREET October 28, 1997
- ---------------------------------------- ------------------------
William K. Street, Director
Page 50
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT AUGUST 31, 1997, THE CONDENSED CONSOLIDATED
STATEMENTS OF INCOME AT AUGUST 31, 1997, AND THE CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOW AT AUGUST 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1997
<PERIOD-START> SEP-01-1996
<PERIOD-END> AUG-31-1997
<CASH> 0
<SECURITIES> 176
<RECEIVABLES> 27,181
<ALLOWANCES> 0
<INVENTORY> 21,835
<CURRENT-ASSETS> 54,371
<PP&E> 130,374
<DEPRECIATION> 0
<TOTAL-ASSETS> 215,929
<CURRENT-LIABILITIES> 24,201
<BONDS> 0
0
0
<COMMON> 9,093
<OTHER-SE> 80,008
<TOTAL-LIABILITY-AND-EQUITY> 215,929
<SALES> 196,634
<TOTAL-REVENUES> 196,634
<CGS> 146,081
<TOTAL-COSTS> 146,081
<OTHER-EXPENSES> 36,583
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,323
<INCOME-PRETAX> 9,919
<INCOME-TAX> 3,294
<INCOME-CONTINUING> 6,625
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,625
<EPS-PRIMARY> 0.93
<EPS-DILUTED> 0.93
</TABLE>
