<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) AUGUST 31, 1998
PENFORD CORPORATION
--------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
WASHINGTON
---------------------------------------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION)
0-11488 91-1221360
------------------------ --------------------
(COMMISSION FILE NUMBER) (IRS EMPLOYER 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
---------------
---------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 1, 1998 Penford Corporation announced that on August 31,
1998, it distributed to Penford Corporation stockholders of record on August 10,
1998, approximately 11 million shares of common stock of Penwest Pharmaceuticals
Co. (PPC). Certificates for shares of PPC were mailed to Penford
Corporation stockholders on August 31, 1998 by ChaseMellon Shareholder Services,
the distribution agent for the spin-off.
This distribution completes Penford Corporation's previously announced
spin-off of PPC, its wholly-owned subsidiary engaged in the research,
development and commercialization of novel drug delivery technologies and an
established manufacturer and distributor of excipients used in binding,
disintegrating and lubricating tableted pharmaceutical and nutritional products.
Reference is made to PPC's registration statement on From 10 under the
Securities Act of 1933 and Item 1 of Penford Corporation's report on Form 10-K
for the year ended August 31, 1997 for a description of PPC's drug delivery
technologies and excipients business.
ITEM 5. OTHER EVENTS
Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED
Not Applicable
(b) PRO FORMA FINANCIAL INFORMATION
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
The following Pro Forma Consolidated Financial Statements as of May 31, 1998,
for the year ended August 31, 1997 and for the nine months ended May 31, 1998
are unaudited. The unaudited Pro Forma Consolidated Balance Sheet was prepared
as if the spin off of Penwest Pharmaceuticals Co. was effective at May 31, 1998.
The unaudited Pro Forma Consolidated Statement of Income for the year ended
August 31, 1997 was prepared as if the spin off of Penwest Pharmaceuticals Co.
was effective as of September 1, 1996. The unaudited Pro Forma Consolidated
Statement of Income for the nine months ended May 31, 1998 was prepared as if
the spin off of Penwest Pharmaceuticals Co., was effective as of September 1,
1997. The unaudited Pro Forma Consolidated Financial Statements do not purport
to represent what the Company's financial position or results of operations
would actually have been if the spin off had in fact occurred on such dates or
to project the Company's financial position or results of operations as of any
future date or for any future period. The unaudited Pro Forma Consolidated
Financial Statements are based on the historical financial statements of the
Company and its subsidiary Penwest Pharmaceuticals Co., which reflected the spin
off of Penwest Pharmaceuticals Co. as a discontinued operation in accordance
with APB No. 30, in the Company's filing on Form 10-Q for the period ended May
31, 1998. The unaudited Pro Forma Consolidated Balance Sheet, as adjusted
reflects the distribution of all of the common stock of Penwest Pharmaceuticals
Co. and the related forgiveness of intercompany indebtedness. The unaudited Pro
Forma Consolidated Statements of Income, as adjusted reflect the elimination of
Penwest Pharmaceuticals Co. from the consolidated operations of Penford
Corporation. The unaudited Pro Forma Consolidated Financial Statements should be
read in conjunction with the Penford Corporation audited financial statements
appearing in the Company's 1997 Annual Report on Form 10-K and Quarterly Report
on Form 10-Q as of May 31, 1998, filed with the Securities and Exchange
Commission.
<PAGE> 3
PENFORD CORPORATION AND SUBSIDIARIES
PRO-FORMA CONSOLIDATED BALANCE SHEET
(Dollars in Thousands)
<TABLE>
<CAPTION>
May 31, 1998
------------
ASSETS
<S> <C>
Current assets $ 45,532
Net property, plant and equipment 106,869
Deferred income taxes 13,073
Restricted cash value of life insurance 12,048
Other assets 5,071
--------
Total assets $182,593
========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 32,994
Long-term debt 57,460
Other postretirement benefits 10,360
Deferred income taxes 24,109
Other liabilities 7,036
Shareholders' equity 50,634
--------
Total liabilities and shareholders' equity $182,593
========
</TABLE>
<PAGE> 4
PENFORD CORPORATION AND SUBSIDIARIES
PRO-FORMA CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands except per share data)
<TABLE>
<CAPTION>
Year Ended August 31 Nine Months Ended May 31
-------------------- ------------------------
1997 1998
----------- -----------
<S> <C> <C>
Sales $ 170,105 $ 122,773
Cost of sales 127,531 88,634
----------- -----------
Gross margin 42,574 34,139
Operating expenses 25,105 19,354
----------- -----------
Income from operations 17,469 14,785
Other income 1,200
Interest expense, net (5,251) (4,350)
----------- -----------
Income before income taxes 13,418 10,435
Income taxes 4,484 3,652
----------- -----------
Net income $ 8,934 $ 6,783
=========== ===========
Weighted average common
shares assuming dilution 7,131,725 7,534,001
Earnings per share, diluted $ 1.25 $ 0.90
=========== ===========
</TABLE>
NOTES TO PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS
Footnote 1
The pro forma consolidated Balance Sheet, as adjusted reflects the forgiveness
of intercompany debt of approximately $46.4 million and related reduction in
shareholders equity of approximately $37.5 million to reflect the distribution
of 100% of the common stock in Penwest Pharmaceuticals Co.
Footnote 2
The pro forma consolidated statements of income, as adjusted reflect the
elimination of the operations of Penwest Pharmaceuticals Co. which also includes
the allocation of certain corporate office expenses to Penwest Pharmaceuticals
Co., and the elimination of the previously reported loss on disposal including
direct transaction costs. In addition, the pro-forma income statement for the
nine months ended May 31, 1998 eliminates the effects of $1.9 million of
non-recurring restructure costs incurred in the period, and reflected in the
Company's filing on Form 10-Q for the period ended May 31, 1998 which were
related to the spin-off plan.
<PAGE> 5
(c) EXHIBITS
10.1 Separation and Distribution Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co.
10.2 Services Agreement dated as of July 31, 1998 between Registrant and
Penwest Pharmaceuticals Co.
10.3 Employee Benefits Agreement dated as of July 31, 1998 between Registrant
and Penwest Pharmaceuticals Co.
10.4 Tax Allocation Agreement dated as of July 31, 1998 between Registrant
and Penwest Pharmaceuticals Co.
10.5 Excipient Supply Agreement dated as of July 31, 1998 between Registrant
and Penwest Pharmaceuticals Co.
99.1 Press release dated September 1, 1998
<PAGE> 6
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934,the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
PENFORD CORPORATION
September 14, 1998 By /s/ Jeffrey T. Cook
------------------ ----------------------
Date Jeffrey T. Cook
President and
Chief Executive Officer
<PAGE> 1
EXHIBIT 10.1
SEPARATION AND DISTRIBUTION AGREEMENT
THIS SEPARATION AND DISTRIBUTION AGREEMENT (the "Agreement") is made as
of the 31ST day of July, 1998 between PENFORD CORPORATION, a Washington
corporation (previously known as PENWEST, LTD.) ("Penford"), and PENWEST
PHARMACEUTICALS CO., a Washington corporation ("Penwest").
RECITALS
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, it is the intention of Penford to contribute to Penwest certain
assets and to assign certain liabilities, to transfer certain technology to
Penwest and to make other arrangements to establish Penwest as a separate
enterprise for the purpose of engaging in research, development and marketing of
novel drug delivery technologies and sale and distribution of pharmaceutical
excipients (the "Pharmaceutical Business");
WHEREAS, Penford and Penwest have determined that it is necessary and
desirable, on the terms and conditions contemplated hereby, for Penford to
distribute to shareholders of Penford the outstanding shares of Penwest Common
Stock held by Penford;
WHEREAS, the Distribution (as defined below) is intended to qualify as a
tax-free spin-off under Sections 355 and 368 of the Code (as defined below);
WHEREAS, Penford and Penwest have further determined that it is
necessary and desirable to set forth the principal corporate transactions
required to effect the Separation (as defined below) and the Distribution and to
set forth other agreements that will govern certain other matters following the
Separation and Distribution; and
WHEREAS, Penford and Penwest are parties to that certain Separation
Agreement dated as of November 3, 1997 (the "Separation Agreement"), which shall
be canceled and superseded by this Separation and Distribution Agreement, with
effect as of November 3, 1997 (the "Effective Date");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
<PAGE> 2
ARTICLE I
DEFINITIONS
1.1 General. As used in this Agreement and the Exhibits hereto, the
following terms shall have the following meanings:
Action: any action, suit, arbitration, inquiry, proceeding or
investigation by or before any court, any governmental or other regulatory or
administrative agency or commission or any arbitration tribunal.
Affiliate: affiliate of any Person means a Person that controls, is
controlled by, or is under common control with such Person. As used herein,
"control" means the possession, directly or indirectly, of the power to direct
or cause the direction of the management and polices of such entity, whether
through ownership of voting securities or other interests, by contract or
otherwise.
Agent: the distribution agent to be appointed by Penford to distribute
to the shareholders of Penford the shares of Penwest Common Stock held by
Penford pursuant to the Distribution.
Ancillary Agreements: all of the agreements, instruments,
understandings, assignments or other arrangements entered into in connection
with the transactions contemplated hereby, including, without limitation, the
Excipient Supply Agreement, the Services Agreement, the Tax Allocation
Agreement, the Employee Benefits Agreement and the Trademark Assignment.
Code: the Internal Revenue Code of 1986, as amended.
Collaborative Agreements: include the following agreements:
(a) Product Development and Supply Agreement between Penwest,
Ltd., a Washington corporation ("Penwest, Ltd.") and Mylan
Pharmaceuticals, Inc., a West Virginia corporation ("Mylan")
dated August 17, 1994.
(b) Sales and Distribution Agreement between Penwest, Ltd. and
Mylan dated January 3, 1997.
(c) Product Development and Supply Agreement between Penwest,
Ltd. and Mylan dated August 3, 1995.
(d) Product Development and Supply Agreement between Penwest,
Ltd. and Mylan dated March 22, 1996.
-2-
<PAGE> 3
(e) Custom Blending Agreement between Boehringer Ingelheim
Pharmaceuticals, Inc. and Penwest, Ltd. dated November 23, 1994.
(f) Product Development and Supply Agreement between TIMERx
Technologies, a Washington corporation ("TIMERx Technologies")
and Kremers Urban Development Company ("Kremers") dated August
30, 1996.
(g) Product Development and Supply Agreement between TIMERx
Technologies and Kremers dated May 31, 1996.
(h) Heads of Agreement and Development Agreement between TIMERx
Technologies and Schwarz dated September 20, 1995.
(i) Product Development, License and Supply Agreement between
TIMERx Technologies and Sanofi Winthrop International S.A., a
company incorporated under the laws of France dated February 28,
1997, as amended.
(j) The Agreement between Edward Mendell Co., Inc. and Leiras OY
dated July 27, 1992.
(k) Letter of Consent between TIMERx Technologies and Leiras OY
dated May 26, 1995.
(l) Letter of Agreement between TIMERx Technologies and Leiras
OY dated May 26, 1995.
(m) Strategic Alliance Agreement between Penwest Pharmaceuticals
Group and Endo Pharmaceuticals Inc., dated September 17, 1997.
Commission: the Securities and Exchange Commission.
Conveyance and Assumption Instruments: collectively, the various
agreements, instruments and other documents entered into or to be entered into
to effect the transfer, prior to the Distribution Date and in the manner
contemplated by this Agreement or any other agreement or document contemplated
by this Agreement or otherwise, of Penwest Assets to Penwest (including, without
limitation, the intellectual property rights and other assets described in the
Information Statement) and the assumption of Penwest Liabilities by Penwest, in
both cases relating to the business of Penwest as described in the Information
Statement.
-3-
<PAGE> 4
Distribution: the distribution by Penford on a pro rata basis to holders
of Penford Common Stock of all of the outstanding shares of Penwest Common Stock
owned by Penford on the Distribution Date as set forth in Article IV.
Distribution Date: August 31, 1998, or such other date as may be set by
the Board of Directors of Penford in its sole discretion.
Effective Date: November 3, 1997.
Employee Benefits Agreement: the Employee Benefits Agreement between
Penford and Penwest.
Excipient Supply Agreement: the Excipient Supply Agreement between
Penford and Penwest pursuant to which Penford will manufacture and supply
exclusively to Penwest, and Penwest will purchase exclusively from Penford, all
of Penwest's requirements for EMDEX and CANDEX.
Ex-Dividend Date: The trading day on which the Penford Common Stock is
first traded on the Nasdaq National Market at a price that does not reflect the
value of the Penwest Common Stock held by Penford as set by the Nasdaq National
Market.
Existing Penford Options: Options to acquire shares of Penford Common
Stock held by employees of Penford and/or its Subsidiaries.
EMDEX/CANDEX: sugar based (Dextrate) binders.
Exchange Act: the Securities Exchange Act of 1934, as amended.
Form 10: General Form for Registration of Securities on Form 10,
including the Information Statement, pursuant to which all the outstanding
Penwest's Common Stock will be registered under the Exchange Act, together with
all amendments thereto.
Governmental Approvals: any notices, reports or other filings to be
made, or any consents, registrations, approvals, permits or authorizations to be
obtained from any Governmental Authority.
Governmental Authority: any federal, state, local, foreign or
international court, government, department, commission, board, bureau, agency,
official or other regulatory, administrative or governmental authority.
Information Statement: The Information Statement portion of the Form 10.
-4-
<PAGE> 5
Liabilities: any and all debts, liabilities and obligations, absolute or
contingent, matured or unmatured, liquidated or unliquidated, accrued or
unaccrued, known or unknown, whenever arising (unless otherwise specified in
this Agreement), including all costs and expenses relating thereto, and those
debts, liabilities and obligations arising under any law, rule, regulation,
Action, threatened Action, order or consent decree of any Governmental Authority
or any award of any arbitrator of any kind, and those arising under any
contract, commitment or undertaking.
Penford Common Stock: the Common Stock, par value $1.00 per share, of
Penford.
Penwest Assets:
(a) any and all assets that are expressly contemplated by the
Penwest Contracts or this Agreement or any other agreement or document
contemplated by this Agreement (or any Schedule hereto or thereto) as assets to
be transferred to Penwest;
(b) any assets reflected in Penwest's balance sheet dated August
31, 1998 as assets of Penwest, subject to any dispositions of such assets
subsequent to the date of such balance sheet; and
(c) any and all assets owned or held immediately prior to the
Distribution Date by Penford that are used primarily in the Pharmaceutical
Business. The intention of this clause (c) is only to rectify any inadvertent
omission of transfer or conveyance of any assets that, had the parties given
specific consideration to such asset as of the date hereof, would have otherwise
been classified as a Penwest Asset. No asset shall be deemed to be a Penwest
Asset solely as a result of this clause (c) if such asset is within the category
or type of asset expressly covered by the subject matter of an Ancillary
Agreement.
Penwest Common Stock: the Common Stock, par value $0.001 per share, of
Penwest, including any associated rights that may be attached to the Common
Stock from time to time.
Penwest Contracts: the following contracts and agreements to which
Penford is a party or by which its assets are bound, whether or not in writing:
(a) any supply or vendor contracts or agreements that relate
primarily to the Pharmaceutical Business;
(b) the Collaborative Agreements;
-5-
<PAGE> 6
(c) any contract or agreement entered into by Penford or Penwest
that relates primarily to the Pharmaceutical Business;
(d) any contract or agreement entered into by Penford or Penwest
with any federal, state and local government that relates primarily to the
Pharmaceutical Business;
(e) any contract or agreement that is otherwise expressly
contemplated pursuant to this Agreement or any of the Ancillary Agreements to be
assigned to Penwest; and
(f) any guarantee, indemnity, representation, warranty or other
Liability of Penford in respect of any other Penwest Contract, any Penwest
Liability or the Pharmaceutical Business.
Penwest Employees: Penwest Employees include Penwest's current employees
and any other employees who are hired by Penwest prior to the Distribution Date.
Penwest Liabilities:
(a) any and all Liabilities that are expressly contemplated by
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise (or the Schedules hereto or thereto) as Liabilities to be assumed
by Penwest;
(b) all Liabilities (other than taxes based on, or measured by
reference to, net income), including any Liabilities related to Penwest
Employees and product Liabilities, primarily relating to, arising out of or
resulting from:
(i) the operation of the Pharmaceutical Business, as
conducted at any time prior to, on or after the Distribution Date (including any
Liability relating to, arising out of or resulting from any act or failure to
act or any statement made by any director, officer, employee, agent or
representatives (whether or not such act or failure to act or statement is or
was within such Person's authority); or
(ii) any Penwest Assets (including any Penwest
Contracts);
in any such case whether arising before, on or after the Distribution Date;
(c) all Liabilities, excluding any intercompany indebtedness
forgiven pursuant to Section 2.5 of this Agreement, reflected as liabilities or
obligations of Penwest in its balance sheet, subject to any discharge of such
Liabilities subsequent to the date of such balance sheet.
-6-
<PAGE> 7
Person: an individual, a general or limited partnership, a corporation,
a trust, a joint venture, an unincorporated organization, a limited liability
entity, any other entity and any Governmental Authority.
Record Date: the close of business on the date to be determined by the
Penford Board of Directors as the record date for determining shareholders of
Penford entitled to receive shares of Penwest Common Stock.
Separation: the transfer of the Penwest Assets to Penwest and the
assumption by Penwest of the Penwest Liabilities, all as more fully described in
this Agreement or any other agreement or document contemplated by this Agreement
or otherwise.
Services Agreement: the Services Agreement between Penford and Penwest
providing for, among other things, the provision by Penford to Penwest of
certain administrative and other services on a transitional basis.
Subsidiary: Subsidiary of any Person means any corporation or other
organization whether incorporated or unincorporated of which at least a majority
of the securities or interests having by the terms thereof ordinary voting power
to elect at least a majority of the board of directors or other performing
similar functions with respect to such corporation or other organization is
directly or indirectly owned or controlled by such Person or by any one or more
of its Subsidiaries, or by such Person and one or more of its Subsidiaries;
provided, however, that no Person that is not directly or indirectly
wholly-owned by any other Person shall be a Subsidiary of such other Person
unless such other Person controls, or has the right, power or ability to
control, that Person.
Tax Allocation Agreement: the Tax Allocation Agreement between Penford
and Penwest, providing for, among other things, the allocation of liabilities
with respect to federal, state and local income taxes and the procedures for
filing returns with respect to such taxes.
Trademark Assignment: the Trademark Assignment between Penford and
Penwest, providing for, among other things the assignment by Penford to Penwest
of certain trademarks and related rights.
-7-
<PAGE> 8
ARTICLE II
THE SEPARATION
2.1 Transfer of Assets and Assumption of Liabilities.
(a) Penford hereby assigns, transfers, conveys and delivers to
Penwest, and Penwest hereby accepts from Penford, all of Penford's right, title
and interest in all Penwest Assets.
(b) Penwest hereby assumes and agrees faithfully to perform and
fulfill all the Penwest Liabilities, in accordance with their respective terms.
Penwest shall be responsible for all Penwest Liabilities, regardless of when or
where such liabilities arose or arise, or whether the facts on which they are
based occurred prior to or subsequent to the date hereof, regardless of where or
against whom such liabilities are asserted or determined (including any Penwest
Liabilities arising out of claims made by Penford's or Penwest's respective
shareholders, directors, officers, employees, agents, Subsidiaries or Affiliates
against Penford or Penwest) or whether asserted or determined prior to the date
hereof.
(c) In the event that any time or from time to time (whether
prior to or after the Distribution Date), any party hereto, shall receive or
otherwise possess any asset that is allocated to any other Person pursuant to
this Agreement or any Ancillary Agreement, such party shall promptly transfer,
or cause to be transferred, such asset to the Person so entitled thereto. Prior
to any such transfer, the Person receiving or possessing such asset shall hold
such asset in trust for any such other Person.
2.2 Termination of Agreements. Except as otherwise provided or
contemplated in this Agreement, Penwest and Penford hereby terminate any and all
agreements, arrangements, commitments or understandings, whether or not in
writing, between Penwest and Penford, effective as of the Distribution Date;
provided, however, to the extent any such agreement, arrangement, commitment or
understanding is inconsistent with any Ancillary Agreement such termination
shall be effective as of the date of effectiveness of the applicable Ancillary
Agreement. No such terminated agreement, arrangement, commitment or
understanding (including any provision thereof which purports to survive
termination) shall be of any further force or effect after the Distribution Date
(or, to the extent contemplated by the proviso to the immediately preceding
sentence, after the effective date of the applicable Ancillary Agreement). Each
party shall, at the reasonable request of any other party, take, or cause to be
taken, such other actions as may be necessary to effect the foregoing.
-8-
<PAGE> 9
2.3 Documents Relating to Other Transfers of Assets and Assumption of
Liabilities. In furtherance of the assignment, transfer and conveyance of
Penwest Assets and the assumption of Penwest Liabilities set forth in Section
2.1(a) and (b), simultaneously with the execution and delivery hereof or as
promptly as practicable thereafter, (i) each of Penford and Penwest shall
execute and deliver such bills of sale, stock powers, certificates of titles,
assignments of contracts and other instruments of transfer, conveyance and
assignment as and to the extent necessary to evidence the transfer, conveyance
and assignment of all of Penford's right, title and interest in and to the
Penwest Assets to Penwest and (ii) Penwest shall execute and deliver to Penford
such bills of sale, stock powers, certificates of title, assumptions of
contracts and other instruments of assumption as and to the extent necessary to
evidence the valid and effective assumption of the Penwest Liabilities by
Penwest.
2.4 Ancillary Agreements. Each of Penford and Penwest will execute and
deliver all Ancillary Agreements to which it is a party, including but not
limited to:
(a) the Excipient Supply Agreement, which will become
effective as of the Distribution Date;
(b) the Services Agreement, which will become effective as
of the Distribution Date;
(c) the Tax Allocation Agreement, which will become
effective as of the Distribution Date;
(d) the Employee Benefits Agreement, which will become
effective as of the Distribution Date; and
(e) the Trademark Assignment, which became effective as of
the Effective Date.
2.5 Forgiveness of Intercompany Debt. Effective immediately prior to the
Distribution Date (but except for any indebtedness of Penwest to Penford
incurred in connection with an acquisition by Penwest of certain rights relating
to the PRUV product from Astra Production Chemicals AB, if any such acquisition
as approved in concept by the Board of Directors of Penford on March 4, 1998 (as
amended by resolution on May 18, 1998), occurs prior to the Distribution Date),
Penford hereby forgives all existing remaining intercompany indebtedness owed by
Penwest to Penford in order to provide an appropriate level of working capital
and equity at Penwest as it is established as a separate stand alone company.
Each of Penford and Penwest shall execute any documents and instruments
necessary or appropriate to confirm such loan forgiveness. Penford and Penwest
agree that Penford shall treat the loan forgiveness as a contribution to the
capital of Penwest in constructive exchange for Penwest Common Stock, provided
that no additional shares of Penwest Common Stock shall be issued or issuable in
connection with or as a result of such contributions.
-9-
<PAGE> 10
2.6 Consents. Each party hereto understands and agrees that no party
hereto is, in this Agreement or in any other agreement or document contemplated
by this Agreement or otherwise, representing or warranting in any way that the
obtaining of any consents or approvals, the execution and delivery of any
agreements or the making of any filings or applications contemplated by this
Agreement will satisfy the provisions of any or all applicable agreements or the
requirements of any or all applicable laws or judgments, it being agreed and
understood that the party to which any assets were or are transferred shall bear
the economic and legal risk that any necessary consents or approvals are not
obtained or that any requirements of laws or judgments are not complied with.
Notwithstanding the foregoing, the parties shall use reasonable best efforts to
obtain all consents and approvals, to enter into all agreements and to make all
filings and applications which may be required for the consummation of the
transactions contemplated by this Agreement or any other agreement or document
contemplated by this Agreement or otherwise, including, without limitation, all
applicable regulatory filings or consents under federal or state laws and all
necessary consents, approvals, agreements, filings and applications.
2.7 Representations or Warranties. Each of the parties hereto
understands and agrees that no party hereto is, in this Agreement or in any
other agreement or document contemplated by this Agreement or otherwise, making
any representations or warranties with respect to any assets of such party,
except that Penford represents and warrants to the best of its knowledge that
the delivery of all Penwest Assets transferred or being transferred to Penwest
pursuant to this Agreement or any other Conveyance and Assumption Instruments
has vested or will vest good title to such assets in Penwest free and clear of
all material liens, mortgages, pledges, security interests, restrictions, prior
assignments, encumbrances and claims of any kind or nature whatsoever affecting
such assets.
2.8 Collaborative Agreements. In the event that any transfer of
Penford's rights to Penwest under any of the Collaborative Agreements would
violate or is found to violate the terms of, or result in the loss of rights or
imposition of penalty under, any Collaborative Agreement covered thereby, or
would not be effective subsequent to the Distribution Date, such transfer shall
be deemed null and void and, in lieu thereof, (i) Penford shall retain all
rights and fulfill any obligations, at Penwest's expense, it may have to any
third party under any such Collaborative Agreement, it being understood that to
the extent practicable, Penwest shall fulfill such obligations on Penford's
behalf, (ii) Penford shall pay over to Penwest any royalty or other payments it
may receive from any third party pursuant to any such Collaborative Agreement
and (iii) at the request and expense of Penwest Penford shall use all reasonable
best efforts to arrange for the grant by the applicable third party of
comparable rights to Penwest.
2.9 Financing and Guaranty. Prior to the date on which the Commission
declares the Form 10 to be effective, Penwest and Penford will use their
reasonable
-10-
<PAGE> 11
best efforts to execute and deliver loan documents relating to certain bank
financing on terms approved by their Boards of Directors on June 22, 1998 and
June 25, 1998, respectively, including but not limited to Penford's providing
its guaranty of certain indebtedness of Penwest for a period before and after
the Distribution Date as so approved by the Penford Board which guaranty shall
be set forth in such loan documents (the "Guaranty").
ARTICLE III
THE DISTRIBUTION
3.1 The Distribution.
(a) Following the completion of the actions and the occurrence
of the events set forth in Section 3.2 hereof, or the mutual agreement of
Penford and Penwest that one or more of such actions need not be completed or
one or more of such events need not occur prior to the Distribution, and
provided that this Agreement shall not have been terminated at Penford's
election pursuant to Section 8.2, on or prior to the Distribution Date, Penford
will deliver to the Agent for the benefit of holders of record of Penford Common
Stock on the Record Date, a single stock certificate, endorsed by Penford in
blank, representing all of the outstanding shares of Penwest Common Stock then
owned by Penford, and shall cause the transfer agent for the shares of Penford
Common Stock to instruct the Agent to distribute on the Distribution Date the
appropriate number of such shares of Penwest Common Stock to each such holder or
designated transferee or transferees of such holder.
(b) Subject to Section 3.3 hereof, each holder of Penford Common
Stock on the Record Date (or such holder's designated transferee or transferees)
shall be entitled to receive, in the Distribution, a number of shares of Penwest
Common Stock equal to the number of outstanding shares of Penwest Common Stock
owned by Penford on the Record Date multiplied by a fraction, the numerator of
which is the number of shares of Penford Common Stock held by such holder on the
Record Date, and the denominator of which is the number of shares of Penford
Common Stock outstanding on the Record Date.
(c) Penwest and Penford, as the case may be, will provide to the
Agent all share certificates and any information required in order to complete
the Distribution on the basis specified above.
3.2 Actions and Events Prior to the Distribution.
(a) Penwest shall prepare and file the Form 10, and such
amendments or supplements thereto, as may be necessary in order to cause the
same
-11-
<PAGE> 12
to become and remain effective as required by law, including, but not limited
to, filing such amendments to the Form 10 as may be required by the Commission
or federal or state securities laws. The Form 10 shall have become effective on
or prior to the Distribution Date, and there shall be no stop-order in effect
with respect thereto.
(b) Penford and Penwest shall cooperate in preparing, filing
with the appropriate Governmental Authority any documents or statements which
are required to reflect the establishment of, or amendments to, any employee
benefit and other plans necessary or appropriate in connection with the
Separation, the Distribution or the other transactions contemplated by this
Agreement or any other agreement or document contemplated by this Agreement or
otherwise.
(c) Penford and Penwest shall prepare and mail, prior to the
Record Date, to the holders of Penford Common Stock, the Information Statement
and such other information concerning Penwest, its business, operations and
management, the Distribution and such other matters as Penford and Penwest shall
reasonably determine and as may be required by law.
(d) Penford and Penwest shall take all other actions as may be
necessary or appropriate under the securities or blue sky laws of the United
States in connection with the Distribution and such actions and filings, where
applicable, shall have become effective or been accepted.
(e) Penwest shall prepare and file, and shall use its reasonable
best efforts to have approved, an application for the listing of the Penwest
Common Stock to be distributed in the Distribution on the Nasdaq National
Market.
(f) A private letter ruling from the Internal Revenue Service
(the "Private Letter Ruling") shall have been obtained, and shall continue in
effect, or a written opinion from Ernst & Young LLP shall have been delivered,
in either case to the effect that, among other things, the Distribution will
qualify as a tax-free distribution for federal income tax purposes under
Sections 355 and 368 of the Code, and such ruling or opinion shall be in form
and substance satisfactory to Penford in its sole discretion.
(g) Any material Governmental Approvals and consents necessary
to consummate the Distribution shall have been obtained and shall be in full
force and effect.
(h) No order, injunction or decree issued by any court or agency
of competent jurisdiction or other legal restraint or prohibition preventing the
consummation of the Distribution shall be in effect and no other event outside
the
-12-
<PAGE> 13
control of Penford shall have occurred or failed to occur that prevents the
consummation of the Distribution.
(i) The transactions contemplated hereby shall be in compliance
with applicable federal and state securities laws.
(j) Each of Penwest and Penford shall have received such
consents, and shall have received executed copies of such agreements or
amendments of agreements, as they shall deem necessary in connection with the
completion of the transactions contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.
(k) All action and other documents and instruments deemed
necessary or advisable in connection with the transactions contemplated hereby
shall have been taken or executed, as the case may be, in form and substance
satisfactory to Penford and Penwest.
3.3 Fractional Shares. As soon as practicable after the Distribution
Date, Penford shall direct the Agent to determine the number of whole shares and
fractional shares of Penwest Common Stock allocable to each holder of record of
Penford Common Stock as of the Record Date, to aggregate all such fractional
shares and sell the whole shares obtained thereby in open-market transactions in
the Agent's sole discretion as to when, how, through which broker-dealer and at
what price to make such sales, and to cause to be distributed to each such
holder or for the benefit of each such holder, in lieu of any fractional share,
such holder's ratable share of the proceeds of such sale, after making
appropriate deductions of the amount required to be withheld for federal income
tax purposes and after deducting an amount equal to all brokerage charges,
commissions and transfer taxes attributed to such sale. Penford and the Agent
shall use their reasonable best efforts to aggregate the shares of Penford
Common Stock that may be held by any holder of record thereof through more than
one account in determining the fractional share allocable to such holder.
ARTICLE IV
ACKNOWLEDGEMENT OF MATERIAL FACTS
4.1 Organization. Penford and Penwest acknowledge that each is duly
organized, validly existing and in good standing under the laws of the State of
Washington, with requisite corporate power to own their properties and assets
and to carry on their respective businesses as presently conducted or
contemplated.
-13-
<PAGE> 14
ARTICLE V
MISCELLANEOUS LIABILITIES AND INDEMNIFICATION
5.1 Penwest Liabilities; Indemnification. Penwest shall indemnify,
defend and hold harmless Penford from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):
(a) the employment of Penwest Employees;
(b) the business of Penwest and the Penwest Assets;
(c) purchase orders, accounts payable, accrued compensation and
other accrued Penwest Liabilities and other agreements which relate to the
business of Penwest and the Penwest Assets; and
(d) any misstatement or omission of a material fact other than
misstatements or omissions with respect to Penford based on information supplied
in writing by Penford in any documents or filings prepared for purposes of
compliance or qualification under applicable securities laws in connection with
the Separation or the Distribution and related transactions, including, without
limitation, the Form 10.
5.2 Penford Liabilities; Indemnification. Penford shall indemnify,
defend and hold harmless Penwest from and against any and all Liabilities
arising out of or resulting from any of the following items (without
duplication):
(a) the business of Penford and the Liabilities not assumed by
Penwest under the terms of this Agreement or any other agreement or document
contemplated by this Agreement; and
(b) any misstatement or omission of a material fact with respect
to Penford based on information supplied in writing by Penford in any documents
or filings prepared for purposes of compliance or qualification under applicable
securities laws in connection with the Separation or the Distribution and
related transactions, including, without limitation, the Form 10.
5.3 Procedures for Indemnification of Third Party Claims.
(a) If any Person entitled to indemnification hereunder (an
"Indemnitee") shall receive notice or otherwise learn of the assertion by a
Person (including any Governmental Authority) of any claim or of the
commencement by any such Person of any Action (collectively, a "Third Party
Claim") with respect to which any party (an "Indemnifying Party") may be
obligated to provide indemnification to such Indemnitee pursuant to Section 5.1
or 5.2, or any other
-14-
<PAGE> 15
Section of this Agreement or any other agreement or document contemplated by
this Agreement or otherwise, such Indemnitee shall give such Indemnifying Party
written notice thereof within twenty (20) days after becoming aware of such
Third Party Claim. Any such notice shall describe the Third Party Claim in
reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee
or other Person to give notice as provided in this Section 5.3(a) shall not
relieve the Indemnifying Party of its obligations under this Article V, except
to the extent that such Indemnifying Party is actually prejudiced by such
failure to give notice.
(b) An Indemnifying Party may elect to defend (and, unless the
Indemnifying Party has specified any reservations or exceptions, to seek to
settle or compromise), at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days
after the receipt of notice from an Indemnitee in accordance with Section 5.3(a)
(or sooner, if the nature of such Third Party Claim so requires), the
Indemnifying Party shall notify the Indemnitee of its election whether the
Indemnifying Party will assume responsibility for defending such Third Party
Claim, which election shall specify any reservations or exceptions. After notice
from an Indemnifying Party to an Indemnitee of its election to assume the
defense of a Third Party Claim, such Indemnitee shall have the right to employ
separate counsel and to participate in (but not control) the defense,
compromise, or settlement thereof, but the fees and expenses of such counsel
shall be the expense of such Indemnitee except as set forth in Section 5.3(c).
(c) If an Indemnifying Party elects not to assume responsibility
for defending a Third Party Claim, or fails to notify an Indemnitee of its
election as provided in Section 5.3(b), such Indemnitee may defend such Third
Party Claim at the cost and expense (including allocated costs of in-house
counsel and other personnel) of the Indemnifying Party.
(d) Unless the Indemnifying Party has failed to assume the
defense of the Third Party Claim in accordance with the terms of this Agreement,
no Indemnitee may settle or compromise any Third Party Claim without the consent
of the Indemnifying Party.
(e) No Indemnifying Party shall consent to entry of any judgment
or enter into any settlement of the Third Party Claim without the consent of the
Indemnitee if the effect thereof is to permit any injunction, declaratory
judgment, other order or other nonmonetary relief to be entered, directly or
indirectly, against any Indemnitee.
-15-
<PAGE> 16
5.4 Tax Liabilities. Notwithstanding the provisions of Sections 5.1 and
5.2, all tax Liabilities relating to the business of Penwest and the Penwest
Assets including, without limitation, income taxes, franchise taxes, sales
taxes, use taxes, payroll taxes and employment taxes, shall be assumed by the
party to whom the Liability has been allocated in the Tax Allocation Agreement.
5.5 Additional Matters.
(a) Any claim on account of a Liability which does not result
from a Third Party Claim shall be asserted by written notice given by the
Indemnitee to the Indemnifying Party. Such Indemnifying Party shall have a
period of thirty (30) days after the receipt of such notice within which to
respond thereto. If such Indemnifying Party does not respond within such thirty
(30)-day period, such Indemnifying Party shall be deemed to have refused to
accept responsibility to make payment. If such Indemnifying Party does not
respond within such thirty (30)-day period or rejects such claim in whole or in
part, such Indemnitee shall be free to pursue such remedies as may be available
to such party as contemplated by this Agreement.
(b) In the event of payment by or on behalf of any Indemnifying
Party to any Indemnitee in connection with any Third Party Claim, such
Indemnifying Party shall be subrogated to and shall stand in the place of such
Indemnitee as to any events or circumstances in respect of which such Indemnitee
may have the right, defense or claim relating to such Third Party Claim against
any claimant or plaintiff asserting such Third Party Claim or against any other
person. Such Indemnitee shall cooperate with such Indemnifying Party in a
reasonable manner, and at the cost and expense (including allocated costs of
in-house counsel and other personnel) of such Indemnifying Party, in prosecuting
any subrogated right, defense or claim.
(c) In the event of an Action in which the Indemnifying Party is
not a named defendant, if either the Indemnitee or Indemnifying Party shall so
request, the parties shall endeavor to substitute the Indemnifying Party for the
named defendant. If such substitution or addition cannot be achieved for any
reason or is not requested, the named defendant shall allow the Indemnifying
Party to manage the Action as set forth in this Section and the Indemnifying
Party shall fully indemnify the named defendant against all costs of defending
the Action (including court costs, sanctions imposed by a court, attorneys'
fees, experts' fees and all other external expenses, and the allocated costs of
in-house counsel and other personnel), the costs of any judgment or settlement,
and the cost of any interest or penalties relating to any judgment or
settlement.
-16-
<PAGE> 17
5.6 Remedies Cumulative. The remedies provided in this Article V shall
be cumulative and shall not preclude assertion by an Indemnitee of any other
rights or the seeking of any and all other remedies against any Indemnifying
Party.
ARTICLE VI
ACCESS TO INFORMATION AND SERVICES
6.1 Provision of Corporate Records. Upon Penwest's request, Penford
shall arrange as soon as practicable following the Effective Date for the
delivery to Penwest of existing corporate records in the possession of Penford
relating to the business of Penwest or assets to be transferred to Penwest,
together with all active agreements and active litigation files relating to the
businesses of Penwest, except to the extent such items are already in the
possession of Penwest. Such records shall be the property of Penwest but shall
be available to Penford for review and duplication until Penford shall notify
Penwest in writing that such records are no longer of use to Penford.
6.2 Access to Information. From and after the Effective Date, Penford
shall afford to Penwest and its authorized accountants, counsel and other
designated representatives reasonable access (including using reasonable best
efforts to give access to persons or firms possessing information) and
duplicating rights during normal business hours to all records, books,
contracts, instruments, computer data and other data and information
(collectively, "Information") within Penford's possession relating to the
businesses of Penwest, insofar as such access is reasonably required by Penwest.
Penwest shall afford to Penford and its authorized accountants, counsel and
other designated representatives reasonable access (including using reasonable
best efforts to give access to persons or firms possessing Information) and
duplicating rights during normal business hours to Information within Penwest's
possession relating to the business of Penwest prior to the Distribution or to
the business of Penford, insofar as such access is reasonably required by
Penford. Information may be requested under this Article VI for, without
limitation, audit, accounting, claims, litigation and tax purposes, as well as
for purposes of fulfilling disclosure and reporting obligations and for
performing the transactions contemplated in this Agreement or any other
agreement or document contemplated by this Agreement or otherwise.
6.3 Production of Witnesses. At all times from and after the Effective
Date, each of Penford and Penwest shall use reasonable best efforts to make
available to the other, upon written request, its officers, directors, employees
and agents as witnesses to the extent that such persons may reasonably be
required, in connection with legal, administrative or other proceedings in which
the requesting party may from time to time be involved.
-17-
<PAGE> 18
6.4 Reimbursement. Except to the extent otherwise contemplated by any
Ancillary Agreement, a party providing information to the other party under this
Article VI shall be entitled to receive from the recipient, upon the
presentation of invoices therefor, payments for such amounts, relating to
supplies, disbursements and other out-of-pocket expenses, as may be reasonably
incurred in providing such information.
6.5 Retention of Records. For a period of six (6) years following the
Effective Date, each of Penford and Penwest shall retain all Information
relating to the other as of the Distribution Date, except as otherwise required
by law or set forth in an Ancillary Agreement or except to the extent that such
Information is in the public domain or in the possession of the other party.
6.6 Confidentiality. Subject to any contrary requirement of law and the
right of each party to enforce its rights hereunder in any legal action, each
party shall keep strictly confidential, and shall cause its employees and agents
to keep strictly confidential, any Information of or concerning the other party
which it or any of its agents or employees may acquire pursuant to, or in the
course of performing its obligations under, any provisions of this Agreement or
any Ancillary Agreement; provided, however, that such obligation to maintain
confidentiality shall not apply to Information which (i) at the time of
disclosure was in the public domain or (ii) was received by the receiving party
from a third party who did not receive such Information from the disclosing
party under an obligation of confidentiality.
ARTICLE VII
COVENANTS
7.1 Nasdaq National Market Listing. Penwest hereby agrees to use its
reasonable best efforts to effect and maintain the listing of the Penwest Common
Stock on the Nasdaq National Market.
7.2 Ancillary Agreements. The parties agree that they shall comply with
and provide all services and take any and all actions required to be provided or
taken by the terms of any and all of the Ancillary Agreements following the
effectiveness thereof.
7.3 Sharing of Utilities
(a) Penford agrees that Penwest shall be entitled to use and
consume, in an amount reasonably required, at Penwest's Cedar Rapids facility
certain utilities consisting of natural gas, electricity and steam from
Penford's Cedar Rapids facility. Any material change in the provision of such
utilities shall require six (6) months prior notice.
-18-
<PAGE> 19
(b) In connection with the sharing of utilities as described in
Section 8.3(a), Penwest will reimburse Penford for its consumption of such
utilities based on Penford's total cost for each item and Penwest's fraction of
the total consumption.
(c) Penford will submit a monthly invoice to Penwest of all
amounts owed by Penwest to Penford with respect to utilities consumed by Penwest
pursuant to Section 7.3(a). The charges will be due when billed and shall be
paid no later than thirty (30) days from the date of billing.
7.4 Non-Competition
(a) From the Effective Date to the longer of (i) five years or
(ii) the termination of the Excipient Supply Agreement, neither Penford nor any
of its Affiliates shall, directly or indirectly, manufacture, market, sell or
distribute for inclusion in any pharmaceutical or nutritional product (including
vitamins, minerals and cofactors, but excluding foods) any product having the
same or substantially the same form, composition or applications as EMDEX or
CANDEX or any similar 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, neither
Penford nor any of its Affiliates shall directly or indirectly recruit or
solicit any employee of Penwest or any of its Affiliates, or induce or attempt
to induce any employee of Penwest or any of its Affiliates to terminate his or
her employment with, or otherwise cease his or her relationship with, Penwest or
any of its Affiliates. For a period of five years from the Effective Date,
neither Penwest nor any of its Affiliates shall directly or indirectly recruit
or solicit any employee of Penford or any of its Affiliates, or induce or
attempt to induce any employee of Penford or any of its Affiliates to terminate
his or her employment with, or otherwise cease his or her relationship with,
Penford or any of its Affiliates.
(c) If any restriction set forth in Sections 7.4 (a) or (b) is
found by any court of competent jurisdiction to be unenforceable because it
extends for too long a period of time or over too great a range of activities or
in too broad a geographic area, it shall be interpreted to extend only over the
maximum period of time, range of activities or geographic area as to which it
may be enforceable.
(d) The restrictions contained in this Section 7.4 are necessary
for the protection of the respective businesses and goodwill of Penwest and
Penford and are considered by Penford and Penwest to be reasonable for such
purpose. Penford and
-19-
<PAGE> 20
Penwest agree that any breach of this Section 7.4 is likely to cause Penwest or
Penford, as the case may be, substantial and irrevocable damage and therefore,
in the event of any such breach, Penwest or Penford, as the case may be, in
addition to such other remedies which may be available, shall be entitled to
specific performance and other injunctive relief.
7.5 Stock Options.
(a) Each Existing Penford Option, vested and unvested, that is
outstanding at the Distribution Date will be adjusted as of the Distribution
Date in the manner set forth below to provide in exchange therefor new options
to acquire Penford Common Stock ("Adjusted Penford Options") to option holders
other than option holders that will be employed by Penwest as of the
Distribution Date ("Penwest Option Holders"), and separately, new options to
acquire Penwest Common Stock ("Penwest Options") to Penwest Option Holders and
to non-employee directors of Penford. The adjustment will be made by using the
average of the high and low trading prices of Penford Common Stock on the
trading day immediately prior to the Ex-Dividend Date (the "Penford
Pre-Distribution Price") and the average of the high and low trading prices of
Penford Common Stock and Penwest Common Stock on the Ex-Dividend Date (the
"Penford Post-Distribution Price" and "Penwest Post-Distribution Price",
respectively), all as reported by the Nasdaq National Market.
(b) The per share exercise price under each Adjusted Penford
Option will be determined by multiplying the per share exercise price under the
option holder's applicable Existing Penford Option by the Penford
Post-Distribution Price and then dividing the result by the Penford
Pre-Distribution Price. The number of shares of Penford Common Stock to be
covered by such Adjusted Penford Option will be determined by multiplying the
number of shares covered by such Existing Penford Option by the Penford
Pre-Distribution Price and then dividing the result by the Penford
Post-Distribution Price.
(c) The per share exercise price under each Penwest Option will
be determined by multiplying the per share exercise price under the option
holder's applicable Existing Penford Option by the Penwest Post-Distribution
Price and then dividing the result by the Penford Pre-Distribution Price. The
number of shares of Penwest Common Stock to be covered by such Penwest Option
will be determined by multiplying the number of shares covered by such Existing
Penford Option by the Penford Pre-Distribution Price and then dividing the
result by the Penwest Post-Distribution Price.
(d) The number of shares covered by each Adjusted Penford Option
and each Penwest Option as determined pursuant to paragraphs (b) and (c) of this
Section 7.5, respectively, shall be further adjusted in the case of the
non-employee directors of Penford so that the number of shares covered by the
Adjusted Penford
-20-
<PAGE> 21
Options and the Penwest Options issued to such directors shall each equal 50% of
the economic value of the Existing Penford Option that would have otherwise been
covered by such Adjusted Penford Options and Penwest Options if no adjustment
pursuant to this paragraph (d) had occurred.
(e) The boards of directors of both Penford and Penwest, or
their respective compensation committees authorized by such board of directors,
retain the authority to modify the foregoing adjustment procedure if, in their
respective judgments, the closing prices as described above reflect significant
disruptive market events that are independent, determinable, and verifiable
effects of events other than the Distribution.
(f) All other terms and conditions of the Existing Penford
Options pursuant to the stock option plans under which the options were
originally granted will continue to apply to the Adjusted Penford Options and to
the Penwest Options, including the continuation of the remaining portions of
their original vesting schedules and ten-year terms. The Penwest Options granted
to the non-employee directors of Penford will continue to vest so long as such
director is a director of Penford.
7.6 Representative on Penwest Board of Directors. During any and all
periods in which the Guaranty is effective, and subject to the exercise by the
Board of Directors of Penwest of its fiduciary duties Penwest will use its
reasonable best efforts to assure that at least one person designated by Penford
is elected and retained to serve as a director on the Board of Directors of
Penwest, including, but not limited to, the inclusion of such person in any
slate of nominees for submission to the shareholders of Penwest (unless such
person is already serving on the Penwest Board in a directorship that is
continuing and not subject to re-election at that time), and the prompt election
by the Penwest Board of such a person to fill any vacancy on the Board created
by the departure or removal from the Board of any person previously so
designated by Penford for such service. The initial such person designated by
Penford for service as a director of Penwest is N. Stewart Rogers. Penford may
from time to time designate a different person in replacement of Mr. Rogers or
his successor, whenever his or her directorship becomes subject to re-election,
or should he or she leave the Penwest Board for any reason. Upon the date on
which the Guaranty ceases to be effective, the rights provided under this
Section 7.6 shall terminate and the Penford designee shall resign from the
Penwest Board.
7.7 Mutual Assurances.
(a) In addition to the actions specifically provided for
elsewhere in this Agreement or any other agreement or document contemplated by
this Agreement or otherwise, Penford and Penwest agree to cooperate with respect
to the implementation of this Agreement or any other agreement or document
contemplated
-21-
<PAGE> 22
by this Agreement or otherwise, and to execute such further documents and
instruments as may be necessary to consummate and make effective the
transactions contemplated by this Agreement or any other agreement or document
contemplated by this Agreement or otherwise;
(b) Penford and Penwest shall arrange, attend and participate in
joint meetings with corporate collaborators, suppliers, customers and others to
the extent necessary to assure the orderly transition of the business and assets
contemplated hereby, provided that nothing herein shall be deemed to obligate
either Penford or Penwest to take any action or reach any understandings which
may violate any applicable laws.
(c) Penford and Penwest agree to take any reasonable actions
necessary in order for the Distribution to qualify as a tax-free distribution
pursuant to Sections 355 and 368 of the Code.
(d) Penford and Penwest agree that they shall not take any
action which could reasonably be expected to prevent the Distribution from
qualifying as a tax-free distribution within the meaning of Sections 355 and 368
of the Code or any other transaction contemplated by this Agreement or any other
agreement or document contemplated by this Agreement or otherwise which is
intended by the parties to be tax-free from failing so to qualify.
ARTICLE VIII
TERMINATION
8.1 Termination by Mutual Consent. This Agreement may be terminated at
any time prior to the Distribution Date by the mutual consent of Penford and
Penwest.
8.2 Termination by Penford. Prior to the Record Date, Penford may
terminate this Agreement at its election if its Board of Directors determines
that the consummation of the Distribution would, in light of the circumstances
at the time, not be in the best interests of the shareholders of Penford.
8.3 Other Termination. This Agreement shall terminate if the
Distribution Date shall not have occurred on or prior to December 31, 1999.
8.4 Effect of Termination. In the event of any termination of this
Agreement, no party to this Agreement (or any of its directors or officers)
shall have any Liability or further obligation to any other party.
-22-
<PAGE> 23
ARTICLE IX
MISCELLANEOUS
9.1 Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
9.2 Construction. Each provision of this Agreement shall be interpreted
in a manner to be effective and valid to the fullest extent permissible under
applicable law. The invalidity or unenforceability of any particular provision
of this Agreement shall not affect the other provisions of this Agreement which
shall remain in full force and effect.
9.3 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
9.4 Exhibits. Exhibits to this Agreement shall be deemed to be an
integral part hereof, and schedules or exhibits to such Exhibits shall be deemed
to be an integral part thereof.
9.5 Amendments; Waivers. This Agreement may be amended or modified only
in a writing executed on behalf of Penford and Penwest. No waiver shall operate
to waive any further or future act and no failure to object of forbearance shall
operate as a waiver.
9.6 Notices. Notices hereunder shall be effective if given in writing
and delivered or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777-108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: Prior to the Distribution Date to The
Chief Financial Officer,
thereafter to The President
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The Chief Executive Officer
-23-
<PAGE> 24
9.7 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein or in any exhibit or schedule hereto shall not be assignable,
in whole or in part, without the prior written consent of the parties hereto and
any attempt to effect any such assignment without such consent shall be void.
9.8 Publicity. Prior to the Distribution, each of Penwest and Penford
shall consult with each other prior to issuing any press releases or otherwise
making public statements with respect to the Distribution or any of the other
transactions contemplated hereby and prior to making any filings with any
Governmental Authority with respect thereto.
9.9 Expenses. Except as expressly set forth in this Agreement or in any
other agreement or document contemplated by this Agreement or otherwise, whether
or not the Distribution is consummated, all third party fees, costs and expenses
paid or incurred in connection with the Distribution will be paid by Penford.
9.10 Headings. The article, section and paragraph headings contained in
this Agreement and in the Ancillary Agreements are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement
or any Ancillary Agreement.
9.11 Arbitration. Any dispute, controversy or claim arising out of or in
connection with this Agreement or any of the Ancillary Agreements (including any
questions of fraud or questions concerning the validity and enforceability of
this Agreement or any of the Ancillary Agreements or any of the rights herein
and therein conveyed), shall be determined and settled by arbitration in
Seattle, Washington, pursuant to the rules then in effect of the American
Arbitration Association as modified by this paragraph. Any award rendered shall
be final and conclusive upon the parties and a judgment thereon may be entered
in any court having competent jurisdiction. The party submitting such dispute
shall give written notice to that effect to the other party, stating the dispute
to be arbitrated and the name and address of a person designated to act as
arbitrator on its behalf. Within fifteen (15) days after such notice, the other
party shall give written notice to the first party stating the name and address
of a person designated to act as an arbitrator on its behalf. In the event that
the second party shall fail to notify the first party of its designation of an
arbitrator within the time specified, then the first party shall request the
American Arbitration Association to appoint a second arbitrator. The two
arbitrators so chosen shall meet within fifteen (15) days after the second
arbitrator has been appointed to appoint a third arbitrator. If the two
arbitrators are unable to agree on the appointment of a third arbitrator within
such fifteen (15) day period, either party may request the American Arbitration
Association to appoint a third arbitrator. Each arbitrator appointed hereunder
shall be independent of the parties
-24-
<PAGE> 25
and either party may disqualify an arbitrator who is or is affiliated with a
supplier, customer or competitor of either party without the consent of the
other party. Each arbitrator shall be reasonably knowledgeable regarding the
area or areas in dispute. The arbitrators shall follow substantive rules of law
and the Federal Rules of Evidence, require the parties to conduct discovery
pursuant to the rules then in effect under the Federal Rules of Civil Procedure
in an expeditious manner, cause testimony to be transcribed, and make an award
accompanied by findings of fact and a statement of reasons for the decision. All
costs and expenses, including attorney's fees, of all parties incurred in any
dispute which is determined and/or settled by arbitration pursuant to this
paragraph shall be borne by the party determined to be liable in respect of such
dispute; provided, however, that if complete liability is not assessed against
only one party, the parties shall share the total costs in proportion to their
respective amounts of liability so determined. Except where clearly prevented by
the area in dispute, both parties agree to continue performing their respective
obligations under this Agreement while the dispute is being resolved. Each
party, and the arbitrators, shall use their best efforts, subject to reasonable
prosecution of the arbitration, court order and disclosure required under
securities laws, to keep the subject matter of the arbitration and confidential
information of each party confidential, and the arbitrators are authorized to
impose such protective orders as they may deem appropriate for such purpose.
9.12 Entire Agreement. This Agreement contains the full understanding of
the parties with respect to the subject matter hereof and supersedes all prior
understandings and writings relating thereto. No waiver, alteration or
modification of any of the provisions hereof shall be binding unless made in
writing and signed by the parties.
[Remainder of Page Intentionally Omitted]
-25-
<PAGE> 26
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PENFORD CORPORATION
By: /s/ Jeffrey T. Cook
--------------------------------
Title: CFO
-----------------------------
PENWEST PHARMACEUTICALS CO.
By: /s/ Tod R. Hamachek
--------------------------------
Title: Chairman & CEO
-----------------------------
-26-
<PAGE> 1
EXHIBIT 10.2
SERVICES AGREEMENT
THIS AGREEMENT is made as of July 31, 1998 between PENFORD
CORPORATION, a Washington corporation (previously known as PENWEST, LTD.)
("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington corporation
("Penwest").
RECITALS
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, Penford and Penwest recognize that it is advisable for Penford
to continue providing certain administrative and other services to Penwest until
Penwest has had a reasonable opportunity to evaluate its continued need for the
services and to investigate other sources of the services; and
WHEREAS, this Agreement is entered into pursuant to the Separation and
Distribution Agreement dated as of July 31, 1998 between Penford and Penwest
(the "Separation and Distribution Agreement") (All capitalized terms used and
not otherwise defined herein shall have the meanings set forth in the Separation
and Distribution Agreement);
NOW, THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
SECTION 1 - SERVICES
1.1 Services. Beginning on the Distribution Date (as defined in the
Separation and Distribution Agreement) (the "Effective Date"), Penford, through
its corporate staff, will provide or otherwise make available to Penwest, upon
the reasonable request of Penwest, certain general corporate services, including
but not limited to accounting and audit, finance and treasury, tax, financial
and human resource services, and arrange for administration of insurance and
risk management and employee benefit programs. The services may include the
following:
(a) Accounting Related Services. Provision of general financial advice
and services including, without limitation, assistance with respect to matters
such as raising of additional capital, cash management and financial controls.
(b) Tax Related Services. Preparation of Federal tax returns,
preparation of state and local tax returns (including income tax returns), tax
research and planning and assistance on tax audits (Federal, state and local) in
accordance with the terms of the Tax Allocation Agreement.
<PAGE> 2
(c) Insurance and Employee Benefit Related Services. Provision of
liability, property, casualty, and other normal business insurance coverage
until the Distribution Date and thereafter assistance, if required, with respect
to arrangement of such insurance coverage. Assistance, if required, with respect
to support for product, worker safety and environmental programs (Penwest
acknowledges that principal responsibility for compliance rests with Penwest).
Administration of Penwest's employee participation in employee benefit plans and
insurance programs sponsored by Penford in accordance with the Employee Benefits
Agreement. Filing of all required reports under ERISA for employee benefit plans
sponsored by Penford.
(d) Additional Services. Services in addition to those enumerated in
subsections 1.1(a) through 1.1(c) above as may be agreed upon by Penford and
Penwest from time to time.
SECTION 2 - CHARGES AND PAYMENTS
2.1 Charges for General Services. For performing general services of the
types described above in Section 1 Penford will charge Penwest 110% of the costs
actually incurred (including overhead and general administrative expenses). To
the extent such direct costs cannot be separately measured, Penford shall charge
Penwest for a portion of the total cost determined according to a method
reasonably selected by Penford and approved by Penwest.
The charges for services pursuant to subsection 2.1 above will be
determined and payable no less frequently than on a quarterly basis. The charges
will be due when billed and shall be paid no later than thirty 30 days from the
date of billing.
2.2 Charges for Third-Party Services. When services of the type
described above in Section 1 are provided, upon the mutual agreement of Penford
and Penwest, by outside providers or, in connection with the provision of such
services out-of-pocket costs are incurred such as travel, the cost thereof will
be paid by Penwest. To the extent that Penwest is billed by the provider
directly, Penwest shall pay the bill directly. If Penford is billed for such
services, Penford may pay the bill and charge Penwest the amount of the bill or
forward the bill to Penwest for payment by Penwest.
2.3 Penwest shall pay any sales, use or similar tax, excluding any
income tax or taxes levied with respect to gross receipts, payable by Penford or
Penwest with respect to amounts payable under this Agreement.
SECTION 3 - GENERAL OBLIGATIONS
2
<PAGE> 3
3.1 Penwest's Directors and Officers. Nothing contained herein will be
construed to relieve the directors or officers of Penwest from the performance
of their respective duties or to limit the exercise of their powers in
accordance with the Amended and Restated Articles of Incorporation or the
Amended and Restated Bylaws of Penwest or in accordance with any applicable
statute or regulation.
3.2 Liabilities. In furnishing Penwest with management advice and other
services as herein provided, neither Penford nor any of its officers, directors,
employees or agents shall be liable to Penwest or its creditors or shareholders
for errors of judgment or for anything except willful malfeasance, bad faith or
gross negligence in the performance of their duties or reckless disregard of
their obligations and duties under the terms of this Agreement. The provisions
of this Agreement are for the sole benefit of Penford and Penwest and will not,
except to the extent otherwise expressly stated herein, inure to the benefits of
any third party.
Penwest shall indemnify and hold harmless Penford and each of its
officers, directors, employees or agents against any claims of any kind arising
out of or relating to this Agreement or services provided hereunder, except for
claims caused by the willful malfeasance, bad faith or gross negligence of the
person seeking such indemnification.
3.3 Term. The initial term of this Agreement shall begin on the date of
this Agreement and continue until June 30, 1999. This Agreement shall
automatically renew at the end of the initial term or any renewal term for
successive one-year-terms until terminated by either party upon written notice
to the other party at least ninety (90) days prior to the expiration of the
initial term or any renewal terms of this Agreement.
3.4 Standard of Care. Penford will use (and will cause its subsidiaries
to use) reasonable efforts in providing the scheduled services to Penwest and
will perform such services with the same degree of care, skill and prudence
customarily exercised for its own operations; provided, however, that Penford
shall not be required to devote full time and attention to the performance of
its duties under this Agreement, but shall devote only so much of its time and
attention as it deems reasonable or necessary to perform the services required
hereunder. To the extent possible, such services will be substantially identical
in nature and quality to the services currently provided or otherwise made
available by Penford to its wholly-owned subsidiaries and their respective
operating divisions. Penford has the right to reasonably supplement, modify,
substitute or otherwise alter such services from time to time in a manner
consistent with supplements, modifications, substitutions or alterations made
with respect to similar services provided or otherwise made available by Penford
to its wholly-owned subsidiaries and their respective operating divisions. In
providing such services, Penford will not be responsible for the accuracy,
completeness or timeliness of any advice or service or any return, report,
3
<PAGE> 4
filing or other document which it provides, prepares or assists in preparing,
except to the extent that any inaccuracy, incompleteness or untimeliness arises
from Penford's gross negligence or willful misconduct. Penford and Penwest will
cooperate in planning the scope and timing of services provided by Penford under
this Agreement in order to minimize or eliminate interference with the conduct
of Penford's business activities. If such interference is unavoidable, Penford
will apportion, in its sole discretion, the available services in a fair and
reasonable manner. Notwithstanding anything set forth in this Section 3.4
neither Penford nor any of its officers, directors, employees or agents shall
have any liability under this Agreement except to the extent provided in Section
3.2.
3.5 Independence. All employees and representatives of Penford providing
the scheduled services to Penwest will be deemed for purposes of all
compensation and employee benefits to be employees or representatives of Penford
and not employees or representatives of Penwest. In performing such services,
such employees and representatives will be under the direction, control and
supervision of Penford (and not of Penwest) and Penford will have the sole right
to exercise all authority with respect to the employment (including termination
of employment), assignment and compensation of such employees and
representatives.
3.6 Non-exclusivity. Nothing in this Agreement precludes Penwest from
obtaining the scheduled services, in whole or in part, from its own employees or
from providers other than Penford.
3.7 Confidentiality. Penford agrees to hold, and to use its best efforts
to cause its employees and representatives to hold, in confidence all
confidential information concerning Penwest, furnished to or obtained by Penford
after the Effective Date in the course of providing the scheduled services, in a
manner consistent with Penford's standard policies with respect to the
preservation and disclosure of confidential information concerning Penford and
its subsidiaries and operating units.
SECTION 4 - MISCELLANEOUS
4.1 Notices. Notices hereunder shall be effective if given in writing
and delivered or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777-108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: Prior to the Distribution Date, to
The Chief Financial Officer, thereafter
to The President
4
<PAGE> 5
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The Chief Executive Officer
4.2 Applicable Law. This Agreement shall be governed by and construed
under the laws of the State of Washington applicable to contracts made and to be
performed therein.
4.3 Paragraph Titles. The paragraph titles used in this Agreement are
for convenience of reference and will not be considered in the interpretation or
construction of any of the provisions thereof.
4.4 Amendments; Waivers. This Agreement may be amended or modified only
in writing executed on behalf of Penford and Penwest. No waiver shall operate to
waive any further or future act and no failure to object or forbearance shall
operate as a waiver.
4.5 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein or in any exhibit or schedule hereto shall not be assignable,
in whole or in part, without the prior written consent of the parties hereto and
any attempt to effect any such assignment without such consent shall be void.
4.6 Arbitration. Any dispute, controversy or claim arising out of or in
connection with this Agreement (including any questions of fraud or questions
concerning the validity and enforceability of this Agreement or any of the
rights herein), shall be determined and settled by arbitration in Seattle,
Washington pursuant to the rules then in effect of the American Arbitration
Association as modified by this paragraph. Any award rendered shall be final and
conclusive upon the parties and a judgment thereon may be entered in any court
having competent jurisdiction. The party submitting such dispute shall give
written notice to that effect to the other party, stating the dispute to be
arbitrated and the name and address of a person designated to act as arbitrator
on its behalf. Within fifteen (15) days after such notice, the other party shall
give written notice to the first party stating the name and address of a person
designated to act as a substitute on its behalf. In the event that the second
party shall fail to notify the first party of its designation of an arbitrator
within the time specified, then the first party shall request the American
Arbitration Association to appoint a second arbitrator. The two arbitrators so
chosen shall meet within fifteen (15) days after the second arbitrator has been
appointed to appoint a third arbitrator. If the two arbitrators are unable to
agree on the
5
<PAGE> 6
appointment of a third arbitrator within such fifteen (15) day period, either
party may request the American Arbitration Association to appoint a third
arbitrator. Each arbitrator appointed hereunder shall be independent of the
parties and either party may disqualify an arbitrator who is or is affiliated
with a supplier, customer or competitor of either party without the consent of
the other party. Each arbitrator shall be reasonably knowledgeable regarding the
area or areas in dispute. The arbitrators shall follow substantive rules of law
and the Federal Rules of Evidence, require the parties to conduct discovery
pursuant to the rules then in effect under the Federal Rules of Civil Procedure
in an expeditious manner, cause testimony to be transcribed, and make an award
accompanied by findings of fact and a statement of reasons for the decision. All
costs and expenses, including attorney's fees, of all parties incurred in any
dispute which is determined and/or settled by arbitration pursuant to this
paragraph shall be borne by the party determined to be liable in respect of such
dispute; provided, however, that if complete liability is not assessed against
only one party, the parties shall share the total costs in proportion to their
respective amounts of liability so determined. Except where clearly prevented by
the area in dispute, both parties agree to continue performing their respective
obligations under this Agreement while the dispute is being resolved. Each
party, and the arbitrators, shall use their best efforts, subject to reasonable
prosecution of the arbitration, court order and disclosure required under
securities laws, to keep the subject matter of the arbitration and confidential
information of each party confidential, and the arbitrators are authorized to
impose such protective orders as they may deem appropriate for such purpose.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their fully authorized officers as of the Effective Date.
PENFORD CORPORATION
By: /s/ Jeffrey T. Cook
--------------------------------
Title: CFO
-----------------------------
PENWEST PHARMACEUTICALS CO.
By: /s/ Jennifer L. Good
--------------------------------
Title: VP Finance & CFO
-----------------------------
7
<PAGE> 1
EXHIBIT 10.3
EMPLOYEE BENEFITS AGREEMENT
This Agreement is made on July 31, 1998 (the "Effective Date")
between PENFORD CORPORATION, a Washington corporation (previously known as
PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington
corporation (previously known as Edward Mendell Co., Inc.) ("Penwest").
RECITALS
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the pharmaceutical
division of its business from the food and paper division of its business;
WHEREAS, to effect the separation of its pharmaceutical division,
Penford intends as of a date certain (the "Distribution Date") to distribute to
its shareholders, in a pro-rata distribution of a dividend (the "Distribution")
all shares of Penwest common stock held by Penford;
WHEREAS, the current employees of Penwest are participants in some of
Penford's employee benefit plans and certain employees of Penford are expected
to become employees of Penwest as of the Distribution Date;
WHEREAS, this Agreement sets forth the employment and employee benefit
plan arrangements that will apply to Penwest's current employees, and any other
employees who are hired by Penwest prior to the Distribution Date (all of such
employees being referred to herein as the "Penwest Employees"); and
WHEREAS, the Agreement is entered into pursuant to the Separation and
Distribution Agreement dated as of [____________] between Penford and Penwest
(the "Separation and Distribution Agreement");
NOW THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
SECTION 1 - TERMINATION OF COVERAGE OF PENWEST EMPLOYEES UNDER PENFORD PLANS
1.1 Termination of Coverage of Penwest Employees under Certain Penford
Plans
Effective as of the Distribution Date, Penwest Employees shall cease to
be eligible to actively participate in the following employee benefit plans
offered by Penford:
(a) the Penford Corporation Supplemental Executive Retirement Plan (the
"Penford SERP");
1
<PAGE> 2
(b) the Penford Corporation Deferred Compensation Plan;
(c) certain Penford welfare plans (consisting of basic life insurance,
accidental death and dismemberment insurance, supplemental life insurance,
long-term disability, supplemental disability, business travel accident
insurance and employee assistance plan, as set forth in Exhibit 1 (the "Penford
Welfare Plans");
(d) the Penford Corporation Savings and Stock Ownership Plan (the
"Penford 401(k) Plan");
1.2 Termination of Coverage For Penwest Employees Under the Penford
Corporation Health and Flex Plans
Pursuant to prior agreement between Penford and Penwest and appropriate
Board action by Penford, effective midnight on December 31, 1997, Penwest
Employees ceased to be covered under the Penford health and cafeteria plans, as
set forth in exhibit 2 ("Penford Health/Flex Plans") and Penford has no further
obligation to cover the Penwest Employees under such plans; provided, however,
that nothing in this section 1.2 is intended to abrogate, discontinue or
terminate stop loss coverage under the policy maintained by Penford to the
extent that it applies to medical claims and expenses resulting from injury or
illness to Penwest employees incurred prior to January 1, 1998, but for which no
claim was filed, or is filed, until after December 31, 1997.
1.3 Termination of Coverage of Penwest Employees Under the Penford
Corporation Retirement Plan
(a) Effective as of the Distribution Date, Penford shall amend the
retirement plan sponsored by Penford (the "Penford Retirement Plan") to freeze
all benefits accrued in the Penford Retirement Plan for all Penwest Employees
and to permit the distribution of the accrued benefits of Penwest employees.
After the Distribution Date and the receipt of approval by the Internal Revenue
Service of such amendments, a Penwest Employee may elect to receive his or her
fully vested interest under the Penford Retirement Plan in the form of a lump
sum cash payment or an annuity.
(b) It is contemplated that Penford will amend the Penford Retirement
Plan to provide enhanced pension plan benefits to certain older participants who
were Penwest Employees and are identified by the Penford Retirement Plan
Administrative Committee ("Administrative Committee"), provided (i) that such
participants shall not be deemed to continue to accrue any benefits under the
Penford Retirement Plan as a result of such pension enhancement and (ii) that
the amount of any such enhancements is to be determined solely in the discretion
of the Administrative Committee.
2
<PAGE> 3
1.4 Notice to Administrators and Insurers
To the extent required, Penford agrees to inform, on or prior to the
Distribution Date, all relevant third party administrators and insurance
carriers, that coverage of the Penwest Employees in the Penford Welfare Plans
ceases as of the Distribution Date.
1.5 Amendment and Termination of Plans
Nothing in this Agreement, including without limitation the agreement of
Penford and Penwest to maintain employee benefit plans or to make contributions
to such plans for any period, shall be construed as a limitation of the right of
Penford or Penwest to amend or terminate one or more of such plans in accordance
with the terms of this Agreement and applicable law.
SECTION 2 - ESTABLISHMENT OF PENWEST EMPLOYEE BENEFIT PLANS
2.1 Establishment of Penwest Savings and Stock Ownership Plan
(a) Effective as of the Distribution Date, Penwest will cease to be a
participating Employer under the Penford 401(k) Plan and Penwest Employees will
cease to accrue any benefits under such plan. Effective on the Distribution
Date, Penwest will establish a 401(k) retirement plan (the "Penwest 401(k)
Plan") substantially the same in all material features to the Penford 401(k)
Plan as of that date.
(b) As soon as practicable following the Distribution Date and the
establishment of the Penwest 401(k) Plan, Penford shall direct the trustee of
the Penford 401(k) Plan to transfer to the trustee of the Penwest 401(k) Plan
(which shall accept such transfer) all assets (including, but not limited to,
loans) and liabilities in the individual accounts of Penwest Employees in the
Penford 401(k) Plan ("First Transfer of Account Balances"). Accounts in the name
of such Penwest Employees will be maintained under the Penford 401(k) Plan
(although these accounts will show a $0 account balance following the First
Transfer of Account Balances) until the allocation of profit sharing
contributions to the accounts of participants in the Penford 401(k) Plan for the
fiscal year ending 8/31/98 ("Profit Sharing Allocation"). Following the Profit
Sharing Allocation, Penford shall direct the trustee of the Penford 401(k) Plan
to transfer to the trustee of the Penwest 401(k) Plan (which shall accept such
transfer) all remaining assets and liabilities in the individual accounts of
Penwest Employees in the Penford 401(k) Plan ("Second Transfer of Account
Balances").
(c) As of the date of the First Transfer of Account Balances, Penwest
and the Penwest 401(k) Plan shall assume all liabilities for all accrued
benefits under the Penford 401(k) Plan for the Penwest Employees, and the
Penford 401(k) Plan shall be relieved of all liabilities for such benefits,
except for claims relating to account balances resulting from the Profit Sharing
Allocation. As of the date of the Second Transfer of Account Balances, Penwest
and the Penwest 401(k) Plan shall assume all liabilities for accrued benefits
under the Penford 401(k)
3
<PAGE> 4
Plan for the Penwest Employees, including claims relating to account balances
resulting from the Profit Sharing Allocation, and the Penford 401(k) Plan shall
be relieved of all such liabilities..
(d) The Penwest 401(k) Plan shall provide the following:
1. that Penwest employees shall participate in the Penwest
401(k) Plan to the extent that they were eligible to participate in the Penford
401(k) Plan immediately prior to the Distribution Date, and shall receive credit
for eligibility, vesting, and benefit accrual service for all service credited
for such purposes under the Penford 401(k) Plan;
2. that the compensation paid by Penford to the Penwest
Employees that was recognized under the Penford 401(k) Plan shall be credited
for all applicable purposes under the Penwest 401(k) Plan; and
3. that with respect to any amounts transferred from the Penford
401(k) Plan, the Penwest 401(k) Plan will preserve any rights and features
protected under Section 411(d)(6) of the Internal Revenue Code ("Code").
2.2 Establishment of Penwest Supplemental Executive Retirement Plan and
Penwest Deferred Compensation Plan
(a) Effective upon the Distribution Date, Penwest shall adopt, or cause
to be adopted, a supplemental executive retirement plan and a deferred
compensation plan (the "Penwest SERP and DC Plans") and establish a related
grantor trust (the "Penwest Rabbi Trust") to provide benefits to Tod R.
Hamachek, after he becomes an employee of Penwest, and to Jack V. Talley, Jr.
(the "Transferring Executives").
(b) As of the Distribution Date, Penwest and the Penwest SERP and DC
Plans shall assume all liabilities for all accrued benefits under the Penford
SERP and Penford Corporation Deferred Compensation Plan for the Transferring
Executives.
(c) As soon as practicable after receipt by Penford of (1) a copy of the
Penwest SERP and DC Plans and (2) certified resolutions of Penwest's Board of
Directors evidencing adoption of the Penwest SERP and DC Plans and the creation
of a the Penwest Rabbi Trust thereunder, Penford shall direct the trustees of
the Penford SERP and the Penford Corporation Deferred Compensation Plan to
transfer to the trustee of the Penwest SERP and DC Plans all accounts in the
Penford SERP and the Penford Corporation Deferred Compensation Plan of the
Transferring Executives.
(d) Penwest and Penford shall take any and all action necessary to
ensure that participants in the Penwest SERP and DC Plans or the Penford SERP
and Penford Corporation Deferred Compensation Plan shall not suffer any adverse
federal income tax consequences as a result of the transfer of liabilities to
the Penwest SERP and DC Plans.
(e) Effective as of or before the Distribution Date, Penwest shall
appoint Wells Fargo Bank as trustee under the Penwest Rabbi Trust and Penford
shall transfer, or cause to be
4
<PAGE> 5
transferred by a comparable rabbi trust established by Penford, to the Penwest
Rabbi Trust, life insurance policies sufficient to cover the accrued benefits
(as of the date of transfer) of the Transferring Executives under the Penford
SERP and to cover the account balances of the Transferring Executives in the
Penford Corporation Deferred Compensation Plan ("Transferred Policies"). Penwest
will be responsible for any premium payments with respect to the Transferred
Policies which become due after the date of transfer of the Transferred
Policies.
2.3 Penwest Welfare Plans
Effective upon the Distribution Date, Penwest shall adopt, or cause to
be adopted, on a fully pooled basis, welfare plans ("Penwest Welfare Plans")
substantially identical in all material features to the corresponding plans
offered by Penford as of the Distribution Date to its salaried employees, and
set forth on Exhibit 1, as follows:
(a) basic life insurance;
(b) basic accidental death and dismemberment insurance;
(c) supplemental life insurance;
(d) business travel accident insurance;
(e) employee assistance plan;
(f) long term disability;
(g) supplemental disability
2.4 Penwest Health/Flex Plan
Effective as of January 1, 1998, Penwest adopted the Penwest Health/Flex
Plans substantially identical in all material features to the Penford
Health/Flex Plans, which plans are listed on Exhibit 2. As of the Distribution
Date, Tod Hamachek will be covered under the Penwest Health/Flex Plans, and will
cease to be covered by the Penford Health/Flex Plans.
2.5 COBRA
Pursuant to prior agreement between Penford and Penwest, acknowledged
and ratified herein, effective January 1, 1998, Penwest assumed any and all
liability and responsibility for providing continuation of health care coverage
under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to
any active Penwest Employee (and any qualified beneficiaries with respect to
such employee), whether or not such continuation requirements arose under the
Penford Health/Flex Plans, and Penford has no further obligation or liability
for any requirements to provide continuation of health care coverage to any
Penwest Employees.
5
<PAGE> 6
2.6 Cooperation
Penford and Penwest agree to provide each other with all records and
information necessary or useful to carry out their obligations under this
Agreement, and to cooperate in the filing of documents required by the transfer
of assets and liabilities described herein and to take any other actions
necessary or advisable to meet any statutory, regulatory or contractual
requirements under this Agreement.
SECTION 3 - INDEMNIFICATION
3.1 Indemnification
(a) Penwest agrees to indemnify and hold harmless Penford and its
affiliates, their officers, directors, employees, agents, and fiduciaries from
and against any and all costs, damages, losses, expenses (including reasonable
attorneys fees and costs) and other liabilities arising out of or related to the
Penford Welfare Plans, the Penford SERP, the Penford Deferred Compensation Plan,
the Penford 401(k) Plan, and the Penford Health/Flex Plans (collectively
referred to as the "Penford Benefit Plans") (other than the determination of the
amount, if any, of claims and accrued benefits payable from such plans) with
respect to the Penwest Employees and from any liability relating to any
applicable taxes or penalties arising from the failure of the Penwest 401(k)
Plan, to be qualified under Section 401(a) of the Internal Revenue Code of 1986,
as amended (the "Code") at the time of the asset transfer other than any failure
attributable to the terms or operation of the Penford 401(k) Plan prior to the
asset transfer.
(b) Penford agrees to indemnify and hold harmless Penwest and its
affiliates, their officers, directors, employees, agents, and fiduciaries from
and against any and all costs, damages, losses, expenses (including reasonable
attorneys fees and costs) and other liabilities arising out of or related to the
Penford benefit plans which are attributable to the determination of the amount
of any claims payable to Penwest Employees from the Penford Welfare Plans; the
determination of the accrued benefits to be transferred to the Penwest 401(k)
Plan; the determination of book reserves or salary deduction liabilities with
respect to the Penwest Employees under and from the Penford benefit plans; any
claims under the Penford benefit plans which are not attributable to Penwest
Employees and assumed by Penwest under this Agreement; and any liability
relating to the applicable taxes or penalties arising from the failure of the
Penwest 401(k) Plan to be qualified under Section 401(a) of the Code due to the
terms or operation of the Penford 401(k) Plan prior to the date the assets are
transferred.
3.2 Health and Welfare Benefit Claims
Except as provided in Section 3.1, Penwest agrees that it shall assume
and be solely responsible for the following:
(a) all liabilities and obligations of Penford in connection with the
claims for benefits brought by or on behalf of Penwest Employees under the
Penford Welfare Plans and the Penford Health/Flex Plans, and Penford shall cease
to have any such liabilities or obligation related to such claims; and
6
<PAGE> 7
(b) all liabilities and obligations of Penford in connection with claims
for post-employment health and welfare benefits (including but not limited to,
medical, dental, and vision benefits, severance pay, disability and life
insurance) made by or on behalf of Penwest Employees who retire or otherwise
terminate employment with Penwest after January 1, 1998.
SECTION 4 - MISCELLANEOUS
4.1 Notices
Notices hereunder shall be effective if given in writing and delivered
or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777 - 108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: Susan M. Iverson
or to:
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: Jennifer L. Good
4.2 Amendments; Waivers
This Agreement may be amended or modified only in writing executed on
behalf of Penford and Penwest. No waiver shall operate to waive any further or
future act and no failure to object or forbearance shall operate as a waiver.
4.3 No Third Party Beneficiary
This Agreement is solely between Penford and Penwest, and nothing
herein, whether expressed or implied, shall confer any rights or remedies on any
employee of Penford or Penwest, any former employee of Penford, or any other
person.
4.4 Entire Agreement
This Agreement constitutes the sole and entire agreement and
understanding between the parties with respect to the matters covered hereby.
Any amendment, modification, or termination of this Agreement must be in writing
and must be signed by both parties.
7
<PAGE> 8
4.5 Governing Law
This Agreement shall be governed by the laws of the State of Washington,
except to the extent preempted by the Employee Retirement Income Security Act of
1974, as amended.
4.6 Successors and Assigns This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective successors
and assigns, provided that this Agreement and the rights and obligations
contained herein or in any exhibit or schedule hereto shall not be assignable,
in whole or in part, without the prior written consent of the parties hereto and
any attempt to effect any such assignment without such consent shall be void.
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed
by their authorized representatives as of the Effective Date.
PENFORD CORPORATION
By: /s/ Jeffrey T. Cook
--------------------------------
Title: CFO
-----------------------------
PENWEST PHARMACEUTICALS CO.
By: /s/ Jennifer L. Good
--------------------------------
Title: VP Finance & CFO
-----------------------------
8
<PAGE> 9
EXHIBIT 1
PENFORD WELFARE PLANS
UNUM INSURANCE COMPANY OF AMERICA
- Group Life (Basic Life Insurance) and Accidental Death and
Dismemberment Insurance Plan
- Supplemental Life Plan
- Long-Term Disability Income Plan
- Group Travel Accident Insurance Plan
MANAGED HEALTH NETWORK
- Employee Assistance Program
MCG NORTHWEST
- Supplemental Disability Plan
9
<PAGE> 10
EXHIBIT 2
PENFORD HEALTH/FLEX PLANS
BLUE CROSS BLUE SHIELD OF IOWA
- Medical Plan for Salaried Employees
ADVANCE PARADIGM
- Prescription Drug Plan
DELTA DENTAL - USA
- Dental Plan for Salaried Employees
VISION SERVICE PLAN
- Vision Plan for Salaried Employees
PENCHOICE FLEXIBLE BENEFITS PROGRAM
Pre-tax health plan premiums, medical reimbursement flexible spending account,
dependent care flexible spending
10
<PAGE> 1
EXHIBIT 10.4
TAX ALLOCATION AGREEMENT
THIS TAX ALLOCATION AGREEMENT (the "Agreement") is made as of July 31,
1998, by and among Penford Corporation, a Washington corporation ("Parent" and,
together with its subsidiaries existing immediately following the Distribution,
the "Parent Group"), and Penwest Pharmaceuticals Co., a Washington corporation
("Penwest" and, together with its subsidiaries existing immediately following
the Distribution, the "Penwest Group").
WHEREAS, Parent and Penwest have entered into the Separation and
Distribution Agreement (as defined below) providing for the distribution of all
of the Penwest stock owned by Parent to Parent's shareholders in accordance with
the Separation and Distribution Agreement; and
WHEREAS, Parent and Penwest desire to set forth their agreement
regarding the allocation between the Parent Group and the Penwest Group of all
responsibilities, liabilities and benefits affecting Taxes (as defined below)
paid or payable by either of them for all taxable periods.
NOW, THEREFORE, in consideration of their mutual promises, the parties
hereby agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise defined
shall have the meanings given them in the Separation and Distribution Agreement.
As used in this Agreement, the following terms shall have the following
meanings:
(a) "Affiliate" of any person means any person, corporation,
partnership or other entity directly or indirectly controlling, controlled by or
under common control with such person.
(b) "Penwest" has the meaning set forth in the preamble hereto.
(c) "Penwest-Caused Taxes" means any liability for Taxes,
including interest and penalties, incurred by the Parent Group or the Penwest
Group arising from or attributable to any of the transactions that are directly
related to the Distribution failing to qualify under Code Sections 355 or 368
(or any comparable provisions of state law), but only if such failure (i) was
caused by an act that occurred after the Distribution and in which Penwest
participated or (ii) was otherwise attributable to one or more of the
representations contained in Section 8 hereof failing to be true as of the date
of this Agreement. For purposes of this definition, if any failure to so qualify
occurs and Penwest has participated in a Post-Distribution Act, such failure
shall be deemed to have been caused by Penwest's participation in the
Post-Distribution Act unless established to the contrary by clear
<PAGE> 2
and convincing evidence that the Post-Distribution Act did not cause the failure
to qualify under Code Sections 355 or 368. Penwest-Caused Taxes shall include
any increase in Taxes of the Parent Group or the Penwest Group for any period to
the extent such increase in Taxes would not have occurred but for the
transactions directly related to the Distribution failing to qualify under
Sections 355 or 368 of the Code (or comparable provisions of state law). Thus,
for example, if the failure of any of the transactions to so qualify results in
additional income being realized by the Parent Group in its 1998 taxable year,
but such income is substantially offset by operating losses or net operating
loss carryovers (other than operating losses or net operating loss carryovers of
the Penwest Group), Penwest-Caused Taxes will include (to the extent the other
requirements of this definition are met) any increase in Taxes realized by any
member of the Parent Group in subsequent years to the extent such increase in
Taxes would not have been realized had the loss or loss carryovers not been used
in 1998.
(d) "Penwest Group" has the meaning set forth in the preamble
hereto.
(e) "Code" means the Internal Revenue Code of 1986, as amended
or, as the context may require, the Internal Revenue Code applicable to the
taxable year in question.
(f) "Distribution" has the meaning set forth in the Separation
and Distribution Agreement.
(g) "Separation and Distribution Agreement" means the Separation
and Distribution Agreement dated June ___, 1998 between Parent and Penwest
providing for the Distribution.
(h) "Distribution Date" has the meaning set forth in the
Separation and Distribution Agreement.
(i) "Final Determination" shall mean the final resolution of
liability for any Tax for a taxable period, (i) by Internal Revenue Service Form
870 or 870-AD (or any successor forms thereto), on the date of acceptance by or
on behalf of the taxpayer, or by comparable form under the laws of other
jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves
(whether by its terms or by operation of law) the right of the taxpayer to file
a claim for refund and/or the right of the taxing authority to assert a further
deficiency shall not constitute a Final Determination; (ii) by a decision,
judgment, decree, or other order by a court of competent jurisdiction, which has
become final and unappealable; (iii) by a closing agreement or accepted offer in
compromise under Section 7121 or 7122 of the Code, or comparable agreements
under the laws of other jurisdictions; (iv) by any allowance of a refund or
credit in respect of an overpayment of Tax, but only after
-2-
<PAGE> 3
the expiration of all periods during which such refund may be recovered
(including by way of offset) by the Tax imposing jurisdiction; or (v) by any
other final disposition, including by reason of the expiration of the applicable
statute of limitations or by mutual agreement of the parties.
(j) "Post-Distribution Act" means any event or transaction (or
the execution of an agreement, letter of intent or option providing for a
transaction) in which Penwest participates and in which any of the following
occurs:
(i) Penwest transfers (whether or not in liquidation) a
material portion of its assets (other than a transfer of assets
in the ordinary course of business) within one year following
the Distribution Date;
(ii) Penwest merges with another corporation within one
year following the Distribution Date;
(iii) Within two years of following the Distribution
Date Penwest discontinues a material portion of its historic
business activities; and
(iv) Within one year following the Distribution Date
Penwest Common Stock distributed in the Distribution is
converted into (or redeemed or exchanged for) any other stock,
any security, any property or cash.
(k) "Post-Distribution Taxes" means any and all liability for
Taxes of the Penwest Group or the Parent Group, as appropriate, other than for
Pre-Distribution Taxes.
(l) "Pre-Distribution Taxes" means any and all Taxes of the
Parent Group or the Penwest Group for all periods that ended on or prior to the
Distribution Date. For purposes of computing the amount of Pre-Distribution
Taxes in the case of a Tax period that begins before and ends after the
Distribution Date, the amount of Taxes considered to have accrued with respect
to the portion of the Tax period that ended on the Distribution Date shall be
determined as follows:
(i) In the case of any ad valorem, personal property and
real property Taxes, an amount of such Tax for the entire Tax
period multiplied by a fraction the numerator of which is the
number of days in the portion of the Tax period ended on the
Distribution Date and the denominator of which is the number of
days in the entire Tax period;
(ii) In the case of any Tax other than ad valorem,
personal property and real property Taxes, the amount that would
be payable if the relevant Tax period ended on the Distribution
Date; and
-3-
<PAGE> 4
(iii) In the case of any withholding Tax, the amount of
Taxes required to be held which relates to any payment by any
member of the Parent Group or the Penwest Group on or before the
Distribution Date.
Any credits relating to a Tax period that begins before and ends after
the Distribution Date shall be taken into account as though the relevant Tax
period ended on the Distribution Date.
(m) "Returns" means all returns, reports and information
statements (including all exhibits and schedules thereto) required to be filed
with a Taxing Authority with respect to any Taxes.
(n) "Taxes" means any income, alternative or add-on minimum tax,
gross income, gross receipts, sales, use, ad valorem, franchise, profits,
license, withholding, payroll, employment, environmental excise, severance,
stamp, transfer, recording occupation, premium, property, value added, windfall
profit tax, custom duty, or other tax of any kind whatsoever, together with any
interest and any penalty, addition to tax or additional amount imposed by any
governmental authority (a "Taxing Authority") responsible for the imposition of
any such tax (domestic or foreign).
2. Operative Provisions.
(a) Parent shall indemnify Penwest against and be responsible
for all Post-Distribution Taxes attributable to any member of the Parent Group
and all Pre-Distribution Taxes other than Penwest-Caused Taxes.
(b) Penwest shall indemnify Parent against and shall be
responsible for all Post-Distribution Taxes attributable to any member of the
Penwest Group and all Penwest-Caused Taxes.
(c) With respect to the tax year of the Parent Consolidated
Group that includes the Distribution Date and the tax year of Penwest that
commences immediately following the Distribution Date, the Parent Consolidated
Group shall claim on its federal income tax returns the benefit of (i) the
graduated tax rates of Code Section 11, (ii) the $25,000 bracket amount in Code
Section 38, (iii) the $40,000 exemption amount and the $150,000 bracket amount
in Section 55, and (iv) the $2,000,000 bracket amount in Section 59A and Penwest
shall claim none of such benefits.
3. Returns; Refunds; Contest Provisions.
(a) Parent shall have the obligation and the sole right and full
discretion to control (i) the preparation of all Returns with respect to
Pre-Distribution
-4-
<PAGE> 5
Taxes (including Penwest-Caused Taxes) and (ii) the defense, settlement or
compromise of any audit, examination, investigation suit, action or other
proceeding relating to Pre-Distribution Taxes other than Penwest-Caused Taxes.
Parent shall be entitled to all refunds of Pre-Distribution Taxes other than
Penwest-Caused Taxes paid or reimbursed by Penwest pursuant to this Agreement.
Notwithstanding the foregoing, in the event that Parent decides to abandon the
defense of, or settle or compromise any claim relating to any Pre-Distribution
Taxes and such claim may have an effect on Post-Distribution Taxes, Parent shall
notify Penwest of such decision and Penwest shall have ten days to notify Parent
that it assumes all liability with respect to the Pre-Distribution Taxes under
dispute and wishes to assume the defense of such audit or other proceedings at
its own expense. In the event that Parent timely receives such notice from
Penwest, it shall use all reasonable efforts to cooperate so as to facilitate
Penwest's handling of such proceedings.
(b) Except as otherwise provided for herein, Penwest shall have
the obligation and the sole right and full discretion to control (i) the
preparation of all Returns with respect to Post-Distribution Taxes attributable
to any member of the Penwest Group and (ii) the defense, settlement or
compromise of any audit, examination, investigation suit, action or other
proceeding relating to (A) Post-Distribution Taxes attributable to any member of
the Penwest Group and (B) any Penwest-Caused Taxes. Penwest shall have the right
to all refunds of Post-Distribution Taxes attributable to any member of the
Penwest Group and of Penwest-Caused Taxes paid (directly or indirectly) by any
member of the Penwest Group. Notwithstanding the foregoing, in the event that
Penwest decides to abandon the defense of, or settle or compromise any claim
relating to any Penwest-Caused Taxes, Penwest shall notify Parent of such
decision and Parent shall have ten days to notify Penwest that it assumes all
liability with respect to the Penwest-Caused Taxes under dispute and wishes to
assume the defense of such audit or other proceedings at its own expense. In the
event that Penwest timely receives such notice from Parent, it shall use all
reasonable efforts to cooperate so as to facilitate Parent's handling of such
proceedings.
(c) Except as otherwise provided for herein, Parent shall have
the obligation and the sole right and full discretion to control (i) the
preparation of all Returns with respect to Post-Distribution Taxes attributable
to any member of the Parent Group and (ii) the defense, settlement or compromise
of any audit, examination, investigation suit, action or other proceeding
relating to Post-Distribution Taxes attributable to any member of the Parent
Group. Parent shall have the right to all refunds of Post-Distribution Taxes
attributable to any member of the Parent Group and of Penwest-Caused Taxes paid
(directly or indirectly) by any member of the Parent Group which were not
reimbursed by Penwest pursuant to this Agreement.
4. Windfalls.
-5-
<PAGE> 6
(a) Parent shall promptly pay to Penwest the amount of any
incremental Tax savings generated by (i) a deduction, credit or exclusion that
(A) is actually realized by the Parent Group with respect to Pre-Distribution
Taxes and (B) relates to or is based on an item that is the basis for a similar
deduction, credit or exclusion taken on a Return with respect to
Post-Distribution Taxes of the Penwest Group that is denied, disallowed,
forfeited, or accelerated until prior to the Distribution Date or (ii) a
reduction in the amount of any gross income or revenue that (A) is actually
realized by the Parent Group with respect to Pre-Distribution Taxes and (B)
relates to, or is based on, a similar item of gross income or revenue that the
Penwest Group is required to include on a Return or otherwise required to
include in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise. Parent shall use reasonable best efforts
to realize any such incremental tax savings that may potentially be available.
(b) Penwest shall promptly pay to Parent the amount of any
incremental Tax savings generated by (i) a deduction, credit or exclusion that
(A) is actually realized by the Penwest Group with respect to its
Post-Distribution Taxes and (B) relates to or is based on an item that is the
basis for a similar deduction, credit or exclusion taken on a Return with
respect to Pre-Distribution Taxes other than Penwest-Caused Taxes that is
denied, disallowed, forfeited, or deferred until after the Distribution Date or
(ii) a reduction in the amount of any gross income or revenue that (A) is
actually realized by the Penwest Group with respect to Post-Distribution Taxes
and (B) relates to, or is based on, a similar item of gross income or revenue
that the Parent Group is required to include on a Return or otherwise required
to include in its computation of taxable income as a result of an audit, other
administrative proceeding or otherwise. Penwest shall use reasonable best
efforts to realize any such incremental tax savings that may potentially be
available.
5. Agency.
Penwest irrevocably designates Parent (and shall cause each
member of the Penwest Group to irrevocably designate Parent) as its agent and
attorney in fact (and shall execute any necessary powers of attorney) for the
purpose of taking any and all actions necessary or incidental to the filing of
federal income tax returns and state unitary or combined Returns for (i) any
period during which any member of the Penwest Group or any predecessor qualified
to file a consolidated, combined, unitary or similar Return with any member of
the Parent Group and (ii) any period ending on or before the Distribution Date.
Parent shall keep Penwest reasonably informed of, and shall reasonably consult
with Penwest with respect to, all actions to be taken on behalf of any member of
the Penwest Group. Parent and Penwest will each furnish the other any and all
information which the other may reasonably request in
-6-
<PAGE> 7
order to carry out the provisions of this Agreement to determine the amount of
any Tax liability.
6. Consistent Reporting.
(a) With respect to all taxable periods ending on or prior to
December 31, 2001, Penwest, each member of the Penwest Group and any future
Affiliates thereof shall file federal income tax and state income tax Returns in
a manner consistent with the Returns filed (or to be filed) in respect to
Pre-Distribution Taxes and in a manner consistent with the form of the
transactions contemplated by the Separation and Distribution Agreement (the
"Form") including that the Distribution qualifies under Section 355 of the Code.
(b) To the extent there is an inconsistency or an apparent
inconsistency amongst the Returns relating to Pre-Distribution Taxes (including
after taking into account Returns to be filed after the Distribution Date)
and/or the Form, Penwest shall file Returns with respect to Post-Distribution
Taxes in the manner directed by Parent.
(c) Parent and Penwest agree to contest any proposed adjustment
by any Taxing Authority that is, in the sole judgement of Parent, inconsistent
with the provisions of this Section 6.
7. Covenants of Penwest and Parent Relating to Actions After the
Distribution Date.
(a) Penwest shall, and shall cause each member of the Penwest
Group to refrain from participating in any Post-Distribution Act without the
prior written consent of Parent.
(b) Penwest and Parent shall cooperate (and shall cause each of
their Affiliates to cooperate) fully at such time and to the extent reasonably
requested by the other party in connection with the preparation and filing of
any Return or the conduct of any audit, dispute, proceeding, suit or action in
respect of Taxes or other Tax matters. Such cooperation shall include, without
limitation, (i) the retention and provision on demand of books, records,
documentation or other information relating to any Return until the expiration
of the applicable statute of limitation (giving effect to any extension, waiver,
or mitigation thereof) plus two years; (ii) the execution of any document that
may be necessary or reasonably helpful in connection with the filing of any
Return by any member of the Parent Group or the Penwest Group or in connection
with any audit, examination, investigation suit, action or other proceeding; and
(iii) the use of the parties' reasonable best efforts to obtain any
documentation from a governmental authority or a third party that may be
necessary or helpful in connection with the foregoing.
-7-
<PAGE> 8
(c) Penwest and Parent shall cooperate (and shall cause each of
their Affiliates to cooperate) in causing the tax year end of Penwest to be
changed to December 31, effective for the year ended December 31, 1998 with
respect to any jurisdiction in which Penwest is not included in a consolidated
or combined group Tax Return for a Tax period which will end on the Distribution
Date.
8. Penwest Representations. Penwest hereby represents and warrants to
the Parent and each member of the Parent Group that the statements contained in
this Section 8 are true and correct in all material respects on the date hereof:
(a) To the best of Penwest's knowledge and belief, no part of
its stock being distributed in the Distribution will be received by a
shareholder of Parent in such shareholder's capacity as a creditor, employee or
in any capacity other than that of a shareholder of Parent.
(b) To the best of Penwest's knowledge and belief, shareholders
of Parent owning stock two years prior to the Distribution Date will continue to
hold at least 50% of the stock of Penwest two years after the Distribution Date.
(c) Penwest has no plan or intention to liquidate Penwest, to
merge it with another corporation or to sell or otherwise dispose of the assets
of Penwest subsequent to the Distribution except in the ordinary course of
business.
(d) To the best of Penwest's knowledge and belief, no plan or
intention exists by the shareholders of Parent to sell, exchange, transfer by
gift, or otherwise dispose of any of their stock in Parent or Penwest subsequent
to the Distribution.
(e) Following the Distribution, each of Parent and Penwest will
operate as independent corporations except that certain administrative and other
common activities of the two corporations will be undertaken by common personnel
in accordance with the Ancillary Agreements. Payments made in connection with
all continuing transactions between, and services provided for, each of Parent
and Penwest will be for fair market value based on terms and conditions arrived
at by the Parties bargaining at arm's length.
(f) Penwest has no plan involving the issuance or transfer of
equity interests in Penwest following the Distribution other than issuances to
employees and consultants of Penwest upon the exercise of stock options or
otherwise under the Company's 1997 Equity Incentive Plan, 1997 Employee Stock
Purchase Plan or 1998 Spinoff Option Plan.
-8-
<PAGE> 9
(g) Penwest has no plan or intention for the transfer or
cessation of a substantial portion of the business of Penwest or other
substantial change in the business of Penwest following the Distribution.
9. Parent Representations. Parent hereby represents and warrants to
Penwest and each member of the Penwest Group that the statements contained in
this Section 9 are true and correct in all material respects on the date hereof:
(a) No part of the Penwest stock being distributed in the
Distribution will be received by a shareholder of Parent in such shareholder's
capacity as a creditor, employee or in any capacity other than that of a
shareholder of Parent.
(b) To the best of Parent's knowledge and belief, shareholders
of Parent owning stock two years prior to the Distribution Date will continue to
hold at least 50% of the stock of Parent two years after the Distribution Date.
(c) Parent has no plan or intention to liquidate Parent, to
merge it with another corporation or to sell or otherwise dispose of the assets
of Parent subsequent to the Distribution except in the ordinary course of
business.
(d) To the best of Parent's knowledge and belief, no plan or
intention exists by the shareholders of Parent to sell, exchange, transfer by
gift, or otherwise dispose of any of their stock in Parent or Penwest subsequent
to the Distribution.
(e) Following the Distribution, each of Parent and Penwest will
operate as independent corporations except that certain administrative and other
common activities of the two corporations will be undertaken by common personnel
in accordance with the Ancillary Agreements. Payments made in connection with
all continuing transactions between, and services provided for, each of Parent
and Penwest will be for fair market value based on terms and conditions arrived
at by the Parties bargaining at arm's length.
(f) Parent has no plan or intention for the transfer or
cessation of a substantial portion of the business of Parent or other
substantial change in the business of Parent following the Distribution.
10. Payments. All payments to be made hereunder shall be made in
immediately available funds. Unless otherwise provided herein, any payment not
made when due hereunder shall bear interest from the due date at an annual rate
equal to the lowest prime rate as reported in the Wall Street Journal plus 2%,
compounded and adjusted monthly. For purposes of this Agreement, the following
payments shall be due at the following times:
-9-
<PAGE> 10
(a) Payments due under Section 2 hereof shall be paid within 10
days of the receipt of notice from the party entitled to the payment indicating
the occurrence of the later of (i) a Final Determination relating to the item or
items giving rise to the Tax for which indemnification is made and (ii) actual
payment of the Tax giving rise to the claim for indemnification.
(b) In the case of any refunds of Taxes received by a party
other than the party entitled to such refunds pursuant to Section 3 hereof, the
recipient of the refund shall pay the amount of such refund to the other party
within five days of the receipt of such refund.
(c) Amounts payable pursuant to Section 4 hereof shall be paid
within five days of the later to occur of (i) a Final Determination relating to
the Tax item that gave rise to the windfall benefit and (ii) the actual receipt
of the windfall benefit.
11. Arbitration. Any dispute, controversy or claim arising out of or in
connection with this Agreement (including any questions of fraud or questions
concerning the validity and enforceability of this Agreement or any of the
rights herein and therein conveyed), shall be determined and settled by
arbitration in Seattle, Washington, pursuant to the rules then in effect of the
American Arbitration Association as modified by this paragraph. Any award
rendered shall be final and conclusive upon the parties and a judgment thereon
may be entered in any court having competent jurisdiction. The party submitting
such dispute shall give written notice to that effect to the other party,
stating the dispute to be arbitrated and the name and address of a person
designated to act as arbitrator on its behalf. Within fifteen (15) days after
such notice, the other party shall give written notice to the first party
stating the name and address of a person designated to act as an arbitrator on
its behalf. In the event that the second party shall fail to notify the first
party of its designation of an arbitrator within the time specified, then the
first party shall request the American Arbitration Association to appoint a
second arbitrator. The two arbitrators so chosen shall meet within fifteen (15)
days after the second arbitrator has been appointed to appoint a third
arbitrator. If the two arbitrators are unable to agree on the appointment of a
third arbitrator within such fifteen (15) day period, either party may request
the American Arbitration Association to appoint a third arbitrator. Each
arbitrator appointed hereunder shall be independent of the parties and either
party may disqualify an arbitrator who is or is affiliated with a supplier,
customer or competitor of either party without the consent of the other party.
Each arbitrator shall be reasonably knowledgeable regarding the area or areas in
dispute. The arbitrators shall follow substantive rules of law and the Federal
Rules of Evidence, require the parties to conduct discovery pursuant to the
rules then in effect under the Federal Rules of Civil Procedure in an
expeditious manner, cause testimony to be transcribed, and make an award
accompanied by findings of fact and a statement of reasons for the decision. All
costs and expenses, including attorney's
-10-
<PAGE> 11
fees, of all parties incurred in any dispute which is determined and/or settled
by arbitration pursuant to this paragraph shall be borne by the party determined
to be liable in respect of such dispute; provided, however, that if complete
liability is not assessed against only one party, the parties shall share the
total costs in proportion to their respective amounts of liability so
determined. Except where clearly prevented by the area in dispute, both parties
agree to continue performing their respective obligations under this Agreement
while the dispute is being resolved. Each party, and the arbitrators, shall use
their best efforts, subject to reasonable prosecution of the arbitration, court
order and disclosure required under securities laws, to keep the subject matter
of the arbitration and confidential information of each party confidential, and
the arbitrators are authorized to impose such protective orders as they may deem
appropriate for such purpose.
12. Costs and Expenses. Except as expressly set forth in this Agreement,
each party shall bear its own costs and expenses incurred pursuant to this
Agreement regardless of the beneficiary of the items or services relating to
such costs and expenses.
13. Termination and Survival. Notwithstanding anything in this Agreement
to the contrary, this Agreement shall remain in effect and its provisions shall
survive for the full period of all applicable statutes of limitation relating to
the assessment of Taxes (giving effect to any extension, waiver or mitigation
thereof) plus two years.
14. Amendments; Limitation on Waivers.
(a) Any provision of this Agreement may be amended if, and only
if, such amendment is in writing and signed by Parent and Penwest.
(b) The provisions of this Agreement may be waived only if the
waiver is in writing and signed by the party making the waiver. No delay or
omission in exercising any right under this Agreement will operate as a waiver
of the right on any further occasion. No waiver of any particular provision of
the Agreement will be treated as a waiver of any other provision, and no waiver
of any rights will be deemed a continuing waiver of the same right with respect
to subsequent occurrences that give rise to it. All rights given by this
Agreement are cumulative to other rights provided for in this Agreement and to
any other rights available under applicable law.
15. Governing Law and Interpretation. This Agreement shall be governed
by, interpreted and enforced in accordance with the laws of the State of
Washington (regardless of the laws that might be applicable under principles of
conflict of law).
16. Confidentiality. Each party shall hold and shall cause its
consultants and advisors to hold in strict confidence, unless compelled to
disclose by judicial or
-11-
<PAGE> 12
administrative process or, in the opinion of its counsel, by other requirements
of law, all information (other than any such information relating solely to the
business or affairs of such party) concerning the other parties hereto furnished
it by such other party or its representatives pursuant to this Agreement (except
to the extent that such information can be shown to have been (a) previously
known by the party to which it was furnished, (b) in the public domain through
no fault of such party, or (c) later lawfully acquired from other sources by the
party to which it was furnished), and each party shall not release or disclose
such information to any other person, except its auditors, attorneys, financial
advisors, bankers and other consultants and advisors who shall be advised of the
provisions of this Section 16. Each party shall be deemed to have satisfied its
obligation to hold confidential information concerning or supplied by the other
party if it exercises the same care as it takes to preserve confidentiality for
its own similar information.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be an original, but all of which
together shall constitute one and the same instrument.
18. Assignments and Third Party Benefit. This Agreement and the terms
and provisions hereof shall be binding upon and shall inure to the benefit of,
the parties and their respective successors and assigns.
19. Severability. If any term, provision, condition or covenant of this
Agreement, or the application thereof to any party or circumstance shall be held
by a court of competent jurisdiction to be invalid, unenforceable or void, the
remainder of this instrument, or the application of such term, provision,
condition or covenant to persons or circumstances other than those as to whom or
which it is held invalid or unenforceable, shall not be affected thereby, and
each term and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law.
20. Merger of Prior Agreements.
(a) This Agreement contains all of the terms and provisions and
constitutes the entire agreement between the parties with respect to the subject
matter hereof and supersedes all prior written, oral or implied understandings,
representations and agreements of the parties relating to the subject matter of
this Agreement. Without limiting the foregoing, the parties acknowledge and
agree that in the event of any conflict or inconsistency between the provisions
of this Agreement and the provisions of the Separation and Distribution
Agreement, the provisions of this Agreement shall control and to such extent
shall be deemed to supersede such conflicting provisions under the Separation
and Distribution Agreement.
(b) The parties acknowledge that pursuant hereto any and all
existing tax sharing agreements or arrangements binding or benefiting Penwest
shall
-12-
<PAGE> 13
be terminated as of the close of business on the Distribution Date, and
that after the Distribution Date this Agreement shall constitute the sole tax
sharing agreement among Parent and Penwest.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the day and year first above written.
PENFORD CORPORATION
By: /s/ Jeffrey T. Cook
-----------------------
Title: CFO
-------------------
PENWEST PHARMACEUTICALS CO.
By: /s/ Jennifer L. Good
-----------------------
Title: VP Finance & CFO
-------------------
-13-
<PAGE> 1
EXHIBIT 10.5
EXCIPIENT SUPPLY AGREEMENT
This EXCIPIENT SUPPLY AGREEMENT (the "Agreement") is made as of the 31st
day of July, 1998 between PENFORD CORPORATION, a Washington corporation
(previously known as PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS
CO., a Washington corporation ("Penwest").
RECITALS:
WHEREAS, the Board of Directors of Penford has determined that it is in
the best interest of Penford and its shareholders to separate the
pharmaceutical division of its business from the food and paper division of its
business;
WHEREAS, Penford and Penwest wish to enter into an agreement describing
the terms and conditions upon which Penford will manufacture and supply to
Penwest, and Penwest will purchase from Penford, EMDEX(R) and CANDEX(R) (sugar
based tabletting binders hereinafter referred to as "Pharmaceutical Excipients")
in bulk form; and
WHEREAS, this Agreement is entered into pursuant to the Separation and
Distribution Agreement dated as of July 31, 1998 between Penford and Penwest
(the "Separation and Distribution Agreement");
NOW, THEREFORE, in consideration of the mutual covenants and agreements
made herein, the parties hereto agree as follows:
ARTICLE 1
SUPPLY OF PHARMACEUTICAL EXCIPIENTS
1.1 Purchases of Pharmaceutical Excipients. Except as otherwise set forth
herein, commencing as of the Distribution Date (as defined in the Separation
and Distribution Agreement) (the "Effective Date"), Penwest shall purchase
exclusively from Penford, Penwest's requirements for Pharmaceutical
Excipients. Penford shall manufacture and sell Pharmaceutical Excipients to
Penwest in bulk form.
1.2 Production Planning; Forecasts.
(a) To facilitate Penford's planning for the supply of
Pharmaceutical Excipients, Penwest shall give Penford, at the beginning of
every calendar quarter, an estimate of its requirements of the Pharmaceutical
Excipients for the following twelve (12) months (the "Rolling Forecast"). The
Rolling Forecast shall specify the monthly estimate for the first six (6)
months of the forecast period and the quarterly estimate for the next six (6)
months based on calendar quarters.
<PAGE> 2
(b) Penwest shall furnish Penford firm written purchase orders for
its planned monthly requirements of Pharmaceutical Excipients no later than
thirty (30) days prior to the required date for receipt of the shipment. Such
firm purchase orders shall be equal to no less than eighty percent (80%) of the
monthly estimate contained in the Rolling Forecast. The form of purchase order
to be used by Penwest shall be agreed upon by the parties in advance of Penwest
submitting firm orders for Pharmaceutical Excipients.
(c) Penford shall deliver Pharmaceutical Excipients F.O.B. Penford's
place of manufacture by the required date for receipt of the shipment.
(d) All invoices for Pharmaceutical Excipients shall be due and
payable within thirty (30) days from the date of invoice to Penwest, which date
of invoice shall not be earlier than the date of shipment.
(e) Penford shall inform Penwest as soon as possible regarding any
anticipated long-term or short-term supply problems.
1.3 Inspections. Throughout the period during which Penford is
responsible for the manufacture of Pharmaceutical Excipients for sale to
Penwest, Penwest shall have the right, on ten (10) days prior notice, to
inspect the manufacturing facility of Penford at which a Pharmaceutical
Excipient is being manufactured to assure compliance with (i) the terms and
conditions of this Agreement; (ii) current approved standards of Good
Manufacturing Practice (cGMP); and (iii) environmental laws and regulations;
provided, however, that such inspections (a) shall not be undertaken more
frequently than once per calendar year unless such inspection reveals a cause
for further investigation, and (b) shall be during normal business hours and
not unreasonably interrupt the operations of Penford.
ARTICLE 2
MANUFACTURING PRICE
2.1 Pharmaceutical Excipient Price. The price at which Penford shall sell
Pharmaceutical Excipients to Penwest (the "Purchase Price") shall be as set
forth in Exhibit A.
-2-
<PAGE> 3
ARTICLE 3
WARRANTY; COMPLAINTS
3.1 Warranty. Penford warrants that each Pharmaceutical Excipient, when
supplied by Penford to Penwest hereunder and through the product expiration date
thereafter, shall meet the product specifications for such Pharmaceutical
Excipient set forth on Exhibit B hereto, as such specifications may be modified
from time to time by mutual agreement of the parties (the "Specifications"). In
addition, Penford warrants that all Pharmaceutical Excipients delivered
hereunder shall be produced in accordance with cGMP and all applicable laws,
rules and regulations. Except as otherwise provided in this Agreement,
Penford's only liability for breach of this warranty shall be to replace, at
its own expense, the non-conforming Pharmaceutical Excipient as provided in
Section 3.2(b). EXCEPT FOR THE CONTRACTUAL PROVISIONS EXPRESSLY SET FORTH IN
THIS AGREEMENT, PENFORD DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, WRITTEN
OR ORAL, WITH RESPECT TO PHARMACEUTICAL EXCIPIENTS, INCLUDING, BUT NOT LIMITED
TO, ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. In no event shall Penford be liable to Penwest for special, incidental,
indirect or consequential damages arising out of the manufacture, use or sale of
any Pharmaceutical Excipient whether based on contract, tort or any other legal
theory.
3.2 Complaints Regarding Pharmaceutical Excipients. In the event Penwest
has a complaint with respect to a Pharmaceutical Excipient supplied to Penwest,
then:
(a) if Penwest's complaint concerns the quantity of such
Pharmaceutical Excipient, Penwest shall provide Penford written notice of its
complaint and provide sufficient evidence to substantiate the short quantity.
Upon receipt of such written notice and substantiating evidence, Penford shall
supply to Penwest as promptly as practicable, however in no event later than
forty-five (45) days, the said short quantity of such Pharmaceutical
Excipient. Such replacement quantity shall be provided by Penford at no
additional cost to Penwest, assuming that Penwest has already paid for the
agreed upon quantity;
(b) if Penwest's complaint concerns the quality of such
Pharmaceutical Excipient (non-compliance with the Specifications (as defined
below)), Penwest shall provide Penford written notice of its complaint and
provide sufficient analytical evidence, based on the use of assays reasonably
acceptable to Penford, to substantiate the impairment. Upon receipt of such
written notice and substantiating evidence, the impaired amount of
Pharmaceutical Excipients shall be replaced by Penford with an equal amount of
Pharmaceutical Excipients conforming with the Specifications (as defined
below), as promptly as practicable, however, in no event later than forty-five
(45) days. Such replacement quantity shall be provided by
-3-
<PAGE> 4
Penford at no additional cost to Penwest, assuming that Penwest has already
paid for such replacement quantity;
(c) should Penford disagree with the substantiating evidence provided
by Penwest, Penford shall supply the replacement quantity of Pharmaceutical
Excipients in accordance with the terms of paragraphs (a) and (b) of this
Section 3.2, and then both parties shall immediately and jointly carry out the
necessary analysis to verify whether Penwest's complaint is justified. Should
said analysis confirm the validity of the complaint by Penwest, then the matter
shall be deemed conclusively resolved. Should said analysis confirm the
invalidity of the complaint by Penwest, then Penford shall invoice Penwest for
the replacement quantity provided in accordance with the terms of this
Agreement;
(d) in the event that a disagreement concerning the quantity or
quality of a Pharmaceutical Excipient continues after the joint analyses by
Penwest and Penford, the matter shall be submitted to an independent laboratory
chosen by Penwest and reasonably acceptable to Penford. The findings of this
independent laboratory, based on the use of assays reasonably acceptable to
both Penford and Penwest, shall be final and binding on both Penford and
Penwest and the fees and expenses of this independent laboratory shall be paid
by the non-prevailing party; and
(e) this Section 3.2 sets forth Penwest's exclusive remedy for any
complaint described in this Section 3.2. In no event shall Penford be liable
for any special, incidental, indirect or consequential damages arising out of
or associated with any such complaint.
ARTICLE 4
PRODUCT LIABILITY INDEMNIFICATION
4.1 Product Liability Indemnification by Penford. Penford agrees to defend
Penwest and its affiliates and sublicensees, at Penford's cost and expense, and
to indemnify and hold Penwest and its affiliates and sublicensees, and their
respective directors, officers, employees and agents (the "Penwest Indemnified
Parties") harmless from and against any losses, costs, damages, fees or
expenses arising out of any claim relating to personal injury from the
development, manufacture, importation, use, sale or other disposition of a
Pharmaceutical Excipient manufactured by or for Penford, to the extent that
such claim arises out of a failure by Penford to manufacture such
Pharmaceutical Excipient in conformity with the Specifications and other
requirements set forth in Section 3.1. In the event of any such claim against
the Penwest Indemnified Parties by any party, Penwest shall promptly notify
Penford in writing of the claim and Penford shall manage and control, at its
sole expense, the defense of the claim and its settlement. The Penwest
Indemnified Parties shall cooperate with Penford and may, at their option and
expense, be represented in any
-4-
<PAGE> 5
such action or proceeding. Penford shall not be liable for any litigation costs
or expenses incurred by the Penwest Indemnified Parties without Penford's
written authorization so long as Penford has assumed the defense thereof as
provided in this Section 4.1.
4.2 Product Liability Indemnification by Penwest. Penwest agrees to
defend Penford and its affiliates and sublicenses, at Penwest's cost and
expense, and to indemnify and hold Penford and its affiliates and sublicensees,
and their respective directors, officers, employees, and agents (the "Penford
Indemnified Parties") harmless from and against any losses, costs, damages,
fees or expenses arising out of any claim relating to personal injury from the
development, manufacture, importation, use, sale or other disposition of any
Pharmaceutical Excipient sold by Penford to Penwest except to the extent that
such claim arises out of a failure by Penford to manufacture such
Pharmaceutical Excipient in accordance with the specifications and other
requirements set forth in Section 3.1. In the event of any such claim against
the Penford Indemnified Parties by any party, Penford shall promptly notify
Penwest in writing of the claim and Penwest shall manage and control, at its
sole expense, the defense of the claim and its settlement. The Penford
Indemnified Parties shall cooperate with Penwest and may, at their option and
expense, be represented in any such action or proceeding. Penwest shall not be
liable for any litigation costs or expenses incurred by the Penford Indemnified
Parties without Penwest's written authorization so long as Penwest has assumed
the defense thereof as provided in this Section 4.2.
ARTICLE 5
RIGHT OF PENWEST TO MANUFACTURE
5.1 Default Events. With respect to each Pharmaceutical Excipient, in the
event that Penford (a) fails to provide Penwest with such Pharmaceutical
Excipient in accordance with the forecast and order procedures of Article 1
hereof and such failure results in a shortfall of twenty percent (20%) or more
for any single calendar quarter or between fifteen percent (15%) and
twenty-five percent (25%) for any two consecutive calendar quarters, or (b)
supplies Penwest with Pharmaceutical Excipients which fail on more than two
occasions to conform to the Specifications (and Penford is unable to remedy the
nonconformity in accordance with Article 3 hereof), then Penwest shall have the
right to purchase such Pharmaceutical Excipient from a bona fide third party
supplier or manufacturer of such Pharmaceutical Excipient.
5.2 Competitive Bid Option. With respect to each Pharmaceutical
Excipient, in the event that Penwest can reasonably demonstrate to Penford that
a bona fide third party supplier has the documented capacity to manufacture
such Pharmaceutical Excipient of at least the same quality as the
Pharmaceutical Excipients manufactured by or for Penford, in at least the same
quantity and at a cost that is less than ninety percent (90%) of the Purchase
Price for such Pharmaceutical
-5-
<PAGE> 6
Excipient currently charged Penwest by Penford, then Penford shall have sixty
(60) days in which to reduce its Purchase Price for such Pharmaceutical
Excipient to the price to be charged Penwest by such third party. If within
such sixty (60) day period, Penford fails to reduce its Purchase Price for such
Pharmaceutical Excipient to the price to be charged by such third party, then
Penwest shall have the right to purchase any and all amounts of such
Pharmaceutical Excipient from such third party. Penwest shall notify Penford in
writing of any decision by Penwest to acquire Pharmaceutical Excipients from
such bona fide third party, and this Agreement shall thereafter be terminable
with respect to such Pharmaceutical Excipient at any time at Penford's election.
5.3 Cooperation by Penford. In the event that Penwest chooses to purchase
any Pharmaceutical Excipients from a bona fide third party supplier pursuant to
Sections 5.1 and 5.2, Penford shall cooperate with such third party supplier
and shall make available, free of charge, any and all technology which is
necessary or required to enable the third party supplier selected by Penwest to
manufacture such Pharmaceutical Excipients. Subject to any contrary requirement
of law and the right of each party to enforce its rights hereunder in any legal
action, such bona fide third party supplier shall enter into a confidentiality
agreement in form and substance satisfactory to Penford to keep strictly
confidential, and shall cause its employees and agents to keep strictly
confidential, any information of or concerning Penford which it or any of its
agents or employees may acquire pursuant to, or in the course of performing its
obligations under, any excipient supply agreement entered into between Penwest
and such third party supplier; provided, however, that such obligation to
maintain confidentiality shall not apply to information which (i) at the time of
disclosure was in the public domain; (ii) was already independently in the
possession of such third party supplier at the time of disclosure, or (iii) was
received by such third party supplier from a third party who did not receive
such information from the disclosing party under an obligation of
confidentiality.
ARTICLE 6
TERMINATION
6.1 Termination by Penford. Without prejudice to any other rights it may
have hereunder or at law or in equity, Penford may terminate this Agreement in
the event of any of the following:
(a) upon a material breach of this Agreement by Penwest which, if
curable and not a payment default, is not cured by Penwest within ninety (90)
days of a written notice thereof by Penford or which, if a payment default, is
not cured within thirty (30) days of a written notice thereof by Penford; or
(b) upon written notice at least one year prior to such termination
-6-
<PAGE> 7
6.2 Termination by Penwest. Without prejudice to any other rights it may
have hereunder or at law or in equity, Penwest may terminate this Agreement in
the event of any of the following:
(a) upon a material breach of this Agreement by Penford which, if
curable, is not cured by Penford within ninety (90) days of a written notice
thereof by Penwest; or
(b) upon written notice at least one year prior to such termination.
6.3 Survival of Obligations. Notwithstanding any termination of this
Agreement, (a) neither party shall be relieved of any obligation incurred prior
to such termination and (b) the obligations of the parties with respect to the
protection and nondisclosure of Confidential Information (Article 7), as well
as any other provisions which by their nature are intended to survive any such
termination, shall survive and continue to be enforceable.
ARTICLE 7
CONFIDENTIAL INFORMATION
7.1 Confidentiality. Subject to any contrary requirement of law and the
right of each party to enforce its rights hereunder in any legal action, each
party shall keep strictly confidential, and shall cause its employees and
agents to keep strictly confidential, any information of or concerning the
other party which it or any of its agents or employees may acquire pursuant to,
or in the course of performing its obligations under, any provisions of this
Agreement or which it may have obtained from the other party before the
commencement of this Agreement that relates to the subject matter of this
Agreement; provided, however, that such obligation to maintain confidentiality
shall not apply to information which (i) at the time of disclosure was in the
public domain; (ii) was already independently in the possession of the
receiving party at the time of disclosure, or (iii) was received by the
receiving party from a third party who did not receive such information from
the disclosing party under an obligation of confidentiality.
ARTICLE 8
MISCELLANEOUS
8.1 Term. The initial term of this Agreement shall commence on the
Effective Date and, subject to earlier termination pursuant to Article 6,
continue until December 31, 2003, and any subsequent renewal terms provided
that this Agreement shall automatically renew at the end of the initial term
for successive one year terms unless either party, at least ninety (90) days
prior to the expiration of the initial or renewal terms, provides written
notice of its election not to renew the term.
-7-
<PAGE> 8
8.2 Independent Status of Parties. Each party shall act as an independent
contractor and shall not bind nor attempt to bind the other party to any
contract, or any performance of obligations outside of this Agreement. Nothing
contained or done under this Agreement shall be interpreted as constituting
either party the agent of the other in any sense of the term whatsoever unless
expressly so stated.
8.3 Force Majeure. In the event of strikes, lock-outs or other industrial
disturbances, rebellions, mutinies, epidemics, landslides, lightning,
earthquakes, fires, storms, floods, sinking, drought, civil disturbances,
explosions, acts or decisions of duly constituted municipal, state or national
governmental authorities or of courts of law, as well as impossibility to obtain
equipment, supplies, fuel or other required materials, in spite of having acted
with reasonable diligence, or by reason of any other causes, which are not under
the control of the party requesting the abatement of performance, or causes due
to unexpected circumstances which may not be possible to eliminate or overcome
with due diligence by such party ("Force Majeure"), the parties agree that, if
either of them find themselves wholly or partially unable to fulfill their
respective obligations in this Agreement by reasons of Force Majeure, the party
affected will advise the other party in writing of its inability to perform
giving a detailed explanation of the occurrence of the event which excuses
performance as soon as possible after the cause or event has occurred. If said
notice is given, the performance of the party giving the notification, except
the payment of funds, shall be abated for so long as performance may be
prevented by such event of Force Majeure. Except for the payment of funds that
are due and payable, neither party shall be required to make up any performance
that was prevented by Force Majeure.
8.4 Publicity. Each of Penwest and Penford shall consult with each other
prior to issuing any press releases or otherwise making public statements with
respect to any transactions contemplated hereby.
8.5 Governing Law. This Agreement shall be governed by the laws of the
State of Washington.
8.6 Notices. Notices hereunder shall be effective if given in writing and
delivered or mailed, postage prepaid, by registered or certified mail to:
Penford Corporation
777-108th Avenue NE
Suite 2390
Bellevue, WA 98004-5193
Attention: The President
or to:
-8-
<PAGE> 9
Penwest Pharmaceuticals Co.
2981 Route 22
Patterson, NY 12563-9970
Attention: The President
8.7 Entire Agreement. This Agreement contains the full understanding of
the parties with respect to the subject matter hereof and supersedes all prior
understandings and writings relating thereto. No waiver, alteration or
modification of any of the provisions hereof shall be binding unless made in
writing and signed by the parties.
8.8 Headings. The article, section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
8.9 Construction. Each provision of this Agreement shall be interpreted
in a manner to be effective and valid to the fullest extent permissible under
applicable law. The invalidity or unenforceability of any particular provision
of this Agreement shall not affect the other provisions of this Agreement which
shall remain in full force and effect.
8.10 Successors and Assigns. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and assigns, provided that this Agreement and the rights and
obligations contained herein or in any exhibit or schedule hereto shall not be
assignable, in whole or in part, without the prior written consent of the
parties hereto or except in connection with a sale by a party of all or
substantially all of its assets and any attempt to effect any such assignment
without such consent shall be void.
8.11 Counterparts. This Agreement may be executed in one or more
counterparts, all of which shall be considered one and the same agreement.
8.12 Amendments; Waivers. This Agreement may be amended or modified only
in writing executed on behalf of Penford and Penwest. No waiver shall operate
to waive any further or future act and no failure to object of forbearance
shall operate as a waiver.
8.13 Exhibits. Exhibits to this Agreement shall be deemed to be an
integral part hereof, and schedules or exhibits to such Exhibits shall be
deemed to be an integral part thereof.
8.14 Arbitration. Any dispute, controversy or claim arising out of or in
connection with this Agreement (including any questions of fraud or questions
concerning the validity and enforceability of this Agreement or any of the
rights
-9-
<PAGE> 10
herein), shall be determined and settled by arbitration in Seattle, Washington,
pursuant to the rules then in effect of the American Arbitration Association as
modified by this paragraph. Any award rendered shall be final and conclusive
upon the parties and a judgment thereon may be entered in any court having
competent jurisdiction. The party submitting such dispute shall given 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 given
written notice to the first party stating the name and address of a person
designated to act as a substitute on its behalf. In the event that the second
party shall fail to notify the first party of its designation of an arbitrator
within the time specified, then the first party shall request the American
Arbitration Association to appoint a second arbitrator. The two arbitrators so
chosen shall meet within fifteen (15) days after the second arbitrator has been
appointed to appoint a third arbitrator. If the two arbitrators are unable to
agree on the appointment of third arbitrator within such fifteen (15) day
period, either party may request the American Arbitration Association to
appoint a third arbitrator. Each arbitrator appointed hereunder shall be
independent of the parties and either party may disqualify an arbitrator who is
or is affiliated with a supplier, customer or competitor of either party
without the consent of the other party. Each arbitrator shall be reasonably
knowledgeable regarding the area or areas in dispute. The arbitrators shall
follow substantive rules of law and the Federal Rules of Evidence, require the
parties to conduct discovery pursuant to the rules then in effect under the
Federal Rules of Civil Procedure in an expeditious manner, cause testimony to be
transcribed, and make an award accompanied by findings of fact and a statement
of reasons for the decision. All costs and expenses, including attorney's fees,
of all parties incurred in any dispute which is determined and/or settled by
arbitration pursuant to this paragraph shall be borne by the party determined to
be liable in respect of such dispute; provided, however, that if complete
liability is not assessed against only one party, the parties shall share the
total costs in proportion to their respective amounts of liability so
determined. Except where clearly prevented by the area in dispute, both parties
agree to continue performing their respective obligations under this Agreement
while the dispute is being resolved. Each party, and the arbitrators, shall use
their best efforts, subject to reasonable prosecution of the arbitration, court
order and disclosure required under securities laws, to keep the subject matter
of the arbitration and confidential information of each party confidential, and
the arbitrators are authorized to impose such protective orders as they may deem
appropriate for such purpose.
-10-
<PAGE> 11
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
PENFORD CORPORATION
By: /s/ Jeffrey T. Cook
--------------------------------
Title: CFO
-----------------------------
PENWEST PHARMACEUTICALS CO.
By: /s/ Jack V. Talley
--------------------------------
Title: President
-----------------------------
-11-
<PAGE> 12
EXHIBIT A
The purchase price for the Pharmaceutical Excipients during the period
from the Effective Date through December 31, 1999 shall be $0.33 per pound.
Beginning on January 1, 2000, a new purchase price shall be negotiated in good
faith by the parties on an annual basis or for such other period of time as the
parties may agree upon. If the parties fail to reach agreement on a new
purchase price, the then current purchase price shall remain in effect,
provided that either party shall have the right to terminate this Agreement
upon ninety (90) days prior written notice.
-12-
<PAGE> 1
Exhibit 99.1
Contacts: Victor W. Breed Lissa Perlman
Chief Financial Officer Roanne Kulakoff
Penford Corporation Kekst and Company
425-462-6000 212-521-4800
FOR IMMEDIATE RELEASE
PENFORD CORPORATION ANNOUNCES COMPLETION OF ITS SPINOFF OF
PENWEST PHARMACEUTICALS CO.
Bellevue, WA, September 1, 1998 -- Penford Corporation (NASDAQ:PENX) today
announced that on August 31, 1998, it distributed to Penford Corporation
stockholders of record on August 10, 1998, approximately 11 million shares of
common stock of Penwest Pharmaceuticals Co. (PPC).
This distribution completes Penford Corporation's previously announced spin-off
of PPC, its wholly-owned subsidiary engaged in the research, development and
commercialization of novel drug delivery technologies and an established
manufacturer and distributor of excipients used in binding, disintegrating and
lubricating tableted pharmaceutical and nutritional products.
The spin-off is the culmination of the plan announced last year by Penford
Corporation to foster the growth potential of its pharmaceuticals business and,
separately, its specialty paper chemicals and food ingredients businesses, which
will be the continuing businesses of Penford Corporation.
Certificates for shares of PPC were mailed to Penford Corporation stockholders
on August 31, 1998 by ChaseMellon Shareholder Services, the distribution agent
for the spin-off. For those Penford Corporation stockholders who are entitled to
fractional shares of PPC common stock, the distribution agent will mail checks.
PPC is listed on the Nasdaq National Market under the symbol "PPCO" and began
regular trading today.
Penford Corporation develops, manufactures and markets specialty
carbohydrate-based chemicals for papermaking and specialty food ingredients
through its Penford Products Co. and Penford Food Ingredients Co. Businesses.
