-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Imu1FFbb6jRquD9A/IfCRWzfI26KuGK1vMKs65AysgGAnwNZQxCvf/Qw8V7KH+Ru Pf2a9OE9vYrWzR/WZC3O0A== 0000891020-95-000573.txt : 19951201 0000891020-95-000573.hdr.sgml : 19951201 ACCESSION NUMBER: 0000891020-95-000573 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19950831 FILED AS OF DATE: 19951129 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENWEST LTD CENTRAL INDEX KEY: 0000739608 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 911221360 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-11488 FILM NUMBER: 95597392 BUSINESS ADDRESS: STREET 1: 777 108TH AVE NE STE 2390 CITY: BELLEVUE STATE: WA ZIP: 98004-5193 BUSINESS PHONE: 2064626000 MAIL ADDRESS: STREET 1: PO BOX 1688 CITY: BELLEVUE STATE: WA ZIP: 98009 10-K 1 FORM 10-K FOR THE YEAR END OF 8/31/95 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K /x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended August 31, 1995 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________________ to _______________________ Commission File Number 0-11488 PENWEST, LTD. (Exact name of registrant as specified in its charter) Washington 91-1221360 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 777-108th Avenue N.E., Suite 2390 Bellevue, Washington 98004-5193 (Address of principal Executive Offices) (Zip Code) Registrant's telephone number, including area code: (206) 462-6000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange of which registered None None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $1.00 par value Common Stock Purchase Rights Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] 2 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (continued) The aggregate market value of the Registrant's Common Stock held by non-affiliates as of October 24, 1995 was approximately $171 million. The number of shares of the Registrant's Common Stock (the Registrant's only outstanding class of stock) outstanding (net of treasury stock) as of October 24, 1995 was 6,769,896. DOCUMENTS INCORPORATED BY REFERENCE The Registrant's definitive Proxy Statement relating to the 1996 Annual Meeting of Shareholders is incorporated by reference into Part III of this Form 10-K. Page 2 3 PART I ITEM 1: BUSINESS A) GENERAL: PENWEST, LTD. (PENWEST) was incorporated in September 1983 and commenced operations on March 1, 1984. PENWEST consists of the following business units: - Penford Products Co. (specialty carbohydrate chemicals for papermaking) - The history of Penford Products Co. can be traced to 1894. Penford Products Co. operates as a wholly-owned subsidiary of PENWEST. - Penwest Pharmaceutical Group (pharmaceutical excipients and controlled release technology) - In March 1991, PENWEST purchased the net assets of Edward Mendell Co., Inc. (Mendell) which manufactures and distributes pharmaceutical excipients. Mendell was founded in 1946 and is a wholly-owned subsidiary of PENWEST. The Company established TIMERx Technologies to focus on the development of controlled release technology. TIMERx Technologies is a division of PENWEST. - Penwest Foods Co. (specialty food ingredient products) - In September 1991, Penwest Foods Co. was organized to manufacture and market specialty carbohydrate-based food ingredients and agricultural nutrients formerly sold by Penford Products Co. Penwest Foods Co. is a division of PENWEST. - Pacific Cogeneration, Inc. - This entity was incorporated in 1981 and was a wholly-owned subsidiary of PENWEST. The Company sold the assets of Pacific Cogeneration to third parties during the second quarter of fiscal 1995. B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS: PENWEST's single business segment is developing, manufacturing and marketing carbohydrate-based specialty chemicals. The Company operates in three market lines: carbohydrate-based specialty chemicals used in paper manufacturing, pharmaceutical excipients and controlled release technology, and food ingredient products. The Company's cogeneration business was not of sufficient size to constitute a separate reportable industry segment. C) DESCRIPTION OF BUSINESS: BUSINESS UNITS: 1. SPECIALTY CHEMICALS: PENFORD PRODUCTS CO. (PENFORD), the core business of PENWEST, develops, manufactures and markets carbohydrate-based specialty chemical starches for papermaking. These starches are principally ethylated (chemically modified with ethylene oxide) and cationic (carrying a positive electrical charge) starches. Ethylated starches are used in coatings and as binders, providing strength and printability to fine white, magazine and catalog paper. Cationic starches are used at the "wet-end" of the paper machine, providing strong internal bonding of paper fibers. In addition, starch copolymers, a patented combination of synthetic and natural carbohydrate chemistry, are used in coating and binder applications in various segments of the paper industry. Penford's products, in general, are designed to improve strength, quality and runnability of coated and uncoated paper. Page 3 4 Specialty chemicals, principally corn-based ethylated and cationic starches and starch copolymers, are produced at the Company's Cedar Rapids, Iowa facility. Potato-based cationic starches are produced at the Company's Idaho Falls, Idaho facility. Penford also sells specialty starch products to the domestic textile industry for warp sizing, which is a fiber bonding process for yarn and finished fabric, and for fabric sizing, which provides body and stiffness to textiles. Specialty chemical brand names of Penford for the paper industry include, among others, Penford(R) Gums, PENSIZE and the Apollo(R) series. Penford's specialty chemicals for the paper industry are manufactured by a process known as corn wet milling, which is the process by which the various parts of corn are separated, refined and modified. The corn, after it is removed from the cob and cleaned, is placed in warm steepwater treated with sulfur dioxide, which causes the corn to swell and soften. The softened kernels pass through a mill which separates the corn's germ from its endosperm. Water is added, producing a thick slurry. The germ is then separated from the slurry. After the germ has been washed and dried, the crude corn oil contained in the germ is removed and refined, yielding a fine quality salad and cooking oil, or a raw material for corn oil margarines. Germ meal is used in animal feed. The remaining mixture of hull and endosperm is then processed. Hull particles are screened out for animal feed, while the finer particles of gluten and starch pass through. The corn oil, germ meal and hull particles are all sold as by-products. The water slurry of starch and gluten is separated. The starch, which is more than 99 percent pure, is washed a third time to remove small quantities of solubles. Modified starches are created by adding chemical reagents and catalysts to the pure starch slurry. The modified starch is then filtered and dried and is ready for shipping. 2. PHARMACEUTICALS GROUP: MENDELL manufactures and supplies pharmaceutical excipients. Pharmaceutical excipients are the non-active ingredients in tablet and capsule prescription pharmaceuticals, over-the-counter drugs and vitamins. The products include binders, lubricants, fillers and disintegrants. The products provide bulk for concentrated medicines, ease of manufacture, product integrity and disintegration which aids release of the active drug in the body. Mendell's primary product, Emcocel(R), is made from wood pulp, a cellulosic carbohydrate. Mendell operates facilities at Patterson, New York, Nastola, Finland, and Cedar Rapids, Iowa. Pharmaceutical excipients' brand names include, among others, EMCOCEL(R), EXPLOTAB(R), EMCOMPRESS(R) and EMDEX(R). TIMERx TECHNOLOGIES is engaged in the development of controlled release technology for pharmaceuticals. Its principal product is currently included in several drug formulation development projects with licensees. These projects are in different phases of development. All development work is subject to FDA approval. There is no assurance that such trials will be successful or that such approval, if and when applied for, will be obtained. TIMERx Technologies operates at facilities in Patterson, New York. Page 4 5 3. SPECIALTY FOOD INGREDIENT PRODUCTS: PENWEST FOODS CO. develops, manufactures and markets specialty food ingredients to the food and confectionery industries. These ingredients include food grade potato starch products as well as dextrose based products such as specialty maltodextrins and specialty dried corn syrup solids. Penwest Foods Co., headquartered in Englewood, Colorado, maintains manufacturing facilities at Cedar Rapids, Iowa for the dextrose and agricultural nutrient based products and at Richland, Washington for the food grade potato starches. Penwest Foods Co.'s product brand names include, among others, CanTab(R), CarriDex(TM), and PenPlus. Sales were less than 10% of the Company's consolidated total sales for the fiscal year ended August 31, 1995. 4. COGENERATION: PACIFIC COGENERATION, INC. owned and operated a cogeneration facility adjacent to Canada Malting Co.'s malting plant at Vancouver, Washington. This cogeneration facility consisted of a natural gas fired turbine, an electric generator and boilers. The heat output of this cogeneration facility was sold to the malting plant and the electrical energy was sold to a local public utility district. The Company sold the assets of Pacific Cogeneration, Inc. to third parties during the second quarter of fiscal 1995. The Company recognized a pre-tax gain of $899,000 on the sale of these assets. Sales were less than 2% of the Company's consolidated total sales for the fiscal year ended August 31, 1995. RAW MATERIALS Corn: The Penford corn wet milling plant is located at Cedar Rapids, Iowa, in the middle of the U.S. corn belt. Accordingly, the plant has truck and rail-delivered corn available throughout the year from a large number of corn dealers and farmers at prices related to the principal U.S. grain markets. The cost of the corn to be purchased is generally hedged by entering into futures contracts. Cellulose Wood Pulp: Mendell's facilities at Nastola, Finland and Cedar Rapids, Iowa use high-grade dissolving wood pulp (cellulose) as their primary raw material to manufacture microcrystalline cellulose (EMCOCEL). Mendell's suppliers of cellulose are located in North America. Chemicals: The principal chemical used in modifying starch is ethylene oxide, a petrochemical derivative. Ethylene oxide is a commodity chemical, subject to price fluctuations due to market conditions. Corn, cellulose and ethylene oxide are not generally subject to availability constraints. About one-half of total manufacturing costs are the costs of corn, cellulose, and chemicals. The remaining portion consists primarily of utility and labor costs. PATENTS, TRADEMARKS AND TRADENAMES PENWEST owns several patents, trademarks and tradenames, none of which is considered material to current operations. RESEARCH AND DEVELOPMENT Company sponsored research and development costs of $6,773,000, $6,346,000 and $5,662,000 in fiscal 1995, 1994 and 1993, respectively, were charged to expense as incurred. Page 5 6 ENVIRONMENTAL MATTERS The Company has adopted a Policy on Environmental Matters and has implemented a comprehensive corporate-wide environmental management program. The program is managed by the Director of Environmental Health and Safety and is intended to carry out the policy's goal of conducting the Company's business in a safe and fiscally responsible manner that protects and preserves the health and safety of Company employees, the communities surrounding the Company's plants and the environment. The Company continues to monitor environmental legislation and regulations which may affect its operations. No material capital expenditures were incurred for environmental control in fiscal 1995, 1994 or 1993. WORKING CAPITAL Working capital requirements of PENWEST are financed through cash resources, operating cash flow and an unsecured revolving line of credit of $15 million with four participating banks. There were no borrowings outstanding under the revolving line of credit during fiscal year 1995. The Company did have overnight borrowings during the year under additional uncommitted lines of credit, but there were no related outstanding balances at fiscal year end. PRINCIPAL CUSTOMERS PENWEST sells to approximately ninety major customers. No single customer accounted for more than 10% of total sales. COMPETITION PENWEST competes with approximately eight other companies that manufacture corn wet milling products, none of which is dominant in the ethylated starch business. Although Penford is one of the smaller corn wet millers, it is one of the major producers of specialty ethylated starches. Quality, service and price are the major competitive factors for Penford. PENWEST competes with approximately five other companies that manufacture pharmaceutical excipients, three of whom have larger market shares. Mendell is one of the major producers of microcrystalline cellulose. Quality, service and price are the major competitive factors for Mendell. PENWEST competes with approximately four other companies which manufacture specialty food ingredients, all of whom have larger market shares. Application expertise, quality, service, and price are the major competitive factors for Penwest Foods Co. PENWEST competes with numerous other companies in developing controlled release drug delivery systems for the pharmaceutical industry, a few of whom have larger market shares. Development expertise and proprietary technology are the major competitive factors for TIMERx Technologies. EMPLOYEES At October 24, 1995, PENWEST and its subsidiaries had 514 employees. PENWEST's specialty chemical and food ingredient operations, pharmaceuticals group and executive office employed 400, 101 and 13 people, respectively. Approximately 40% of the employees are represented by unions. Management believes its employee relations are good. Page 6 7 METHODS OF DISTRIBUTION Penford, Penwest Foods Co. and Mendell use a direct sales force to market their products in North America. Mendell uses a combination of direct sales and distributors in Europe. Penford customers may purchase products through fixed-price contracts for periods covering three months to one year or on a spot basis. Sales are approximately equally divided between the two methods. Products are shipped in either a bulk or bagged format. D) FOREIGN OPERATIONS AND EXPORT SALES: Mendell has a facility in Nastola, Finland. This operation is not significant to the Company taken as a whole. Sales from this facility were less than 5% of the Company's total sales in fiscal 1995. Export sales have accounted for less than 10% of the Company's total sales during each of the last three fiscal years. Page 7 8 ITEM 2: PROPERTIES (MAJOR) Registrant's executive offices, which are leased, are located at Suite 2390, 777-108th Avenue N.E., Bellevue, Washington 98004- 5193. Other facilities are as follows:
Bldg. Area Land Area Owned/ Function of (Sq. Ft.) (Acres) Leased Facility --------- ------- ------ -------- SPECIALTY CHEMICALS AND FOOD INGREDIENTS Cedar Rapids, Iowa 707,000 29 Owned Manufacture of corn starch products Englewood, Colorado 45,000 3 Leased -- Expires Offices and April 2000, with research renewal option laboratories Idaho Falls, Idaho 31,000 6 Owned Manufacture of potato starch products Richland, Washington 16,000 2 Leased -- Expires Manufacture of November 2014, potato starch with renewal option products
The corn wet milling operation in Cedar Rapids, Iowa has operating capacity, measured in bushels ground, of 65,000 bushels per day. The grind operates continuously except for periodic maintenance. PHARMACEUTICAL EXCIPIENTS Patterson, New York 40,000 15 Owned Warehouse and offices Nastola, Finland 15,000 2 Leased -- Manufacture of 2 years notice pharmaceutical required. excipients Cedar Rapids, Iowa 35,000 1 Owned Manufacture of pharmaceutical excipients
Page 8 9 All of the major properties are owned. Production facilities are well maintained and in good condition. The capacities of the plants are suitable and generally sufficient to meet current production requirements. PENWEST is continually undertaking a process of expanding and improving its property, plant and equipment. ITEM 3: LEGAL PROCEEDINGS There are no material legal actions pending either for or against PENWEST and its subsidiaries. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted to a vote of shareholders during the fourth quarter of fiscal 1995. Page 9 10 EXECUTIVE OFFICERS OF THE REGISTRANT (1) (2) (3) (4)
Name Age Title ---- --- ----- Tod R. Hamachek 49 President and Chief Executive Officer of Registrant 1985 - current President and Chief Operating Officer of Registrant 1983 - 1985 Franklin E. Olsen, Jr. 62 Vice President-Employee Relations of Registrant 1984 - 1995 Jeffrey T. Cook 39 Vice President-Finance and Chief Financial Officer of Registrant 1991 - current Treasurer of Registrant 1988-1991 Robert G. Widmaier, Ph.D. 47 Vice President-Technical Director and Chief Innovation Officer of Registrant 1990 - current Vice President-Technical Director of Registrant 1988 -1990 H. Thomas Reed 60 Vice President of Registrant and President and General Manager, Penford Products Co., a wholly-owned subsidiary of Registrant 1985 - current John V. Talley, Jr. 39 Vice President of Registrant and President and General Manager, Edward Mendell Co., Inc., a wholly-owned subsidiary of Registrant 1993 - current Vice President of Marketing, Sanofi Winthrop Pharma- ceuticals 1992 - 1993 Vice President - Marketing, Hospital Products Division Sanofi Winthrop Pharma- ceuticals 1989 - 1992
Page 10 11 Gregory C. Horn 47 Vice President of Registrant and President and General Manager, Penwest Foods Co. 1995 - current Vice President of Marketing, Penford Products Co. 1993 - 1994 Vice President and General Manager, Sarah Lee Corporation 1992 - 1993 Vice President and General Manager, Churchill Industries 1990 - 1993
(1) As of October 25, 1995 (2) With the exception of Mr. Talley and Mr. Horn, all executive officers of the Registrant have held an executive position with the Registrant, or a subsidiary of the Registrant, for a period exceeding five years. (3) Officers are appointed annually by the Board of Directors of the Company to serve for a period of one year and serve at the discretion of the Board. No arrangement or understanding exists between any officer and any other person pursuant to which he was selected as an officer. (4) Mr. Olsen retired as an executive officer of the Company effective August 31, 1995. Page 11 12 PART II ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS PENWEST common stock, $1.00 par value, trades on the Nasdaq Stock Market under the symbol "PENW". On October 25, 1995, there were 1,415 stockholders of record. The high and low closing bid prices of the Company's common shares during the last two fiscal years are set forth below. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily reflect actual transactions.
MARKET PRICE HIGH LOW ---- --- 1994/95 Quarter Ended November 30 $25.50 $21.00 Quarter Ended February 28 $23.00 $17.50 Quarter Ended May 31 $23.25 $20.50 Quarter Ended August 31 $26.25 $21.25 1993/94 Quarter Ended November 30 $22.50 $19.75 Quarter Ended February 28 $23.50 $19.50 Quarter Ended May 31 $23.25 $17.75 Quarter Ended August 31 $25.75 $18.25
During each quarter in fiscal years 1995 and 1994, a $0.05 per share cash dividend was declared and paid. The Company anticipates that it will continue to pay such quarterly dividends in the foreseeable future. Page 12 13 ITEM 6: SELECTED FINANCIAL DATA
Year Ended August 31 --------------------------------------------------------------------------------------- (Thousands of dollars except per share data) 1995 1994 1993 1992(1) 1991(2) - ----------------------------------------------------------------------------------------------------------------------------------- Operating Data: Net sales $174,200 $158,787 $135,517 $125,952 $110,910 Gross margin percentage 27.5% 25.9% 26.4% 26.8% 29.0% Income from operations 14,973 10,894 9,110 10,466 12,515 Net income 7,217 6,120 6,315 7,505 8,813 Earnings per share $1.03 $0.86 $0.88 $1.01 $1.17 Dividend declared per share $0.20 $0.20 $0.20 $0.15 -- Average shares outstanding 7,018,970 7,110,953 7,175,855 7,461,439 7,558,910 Balance Sheet Data: Property, plant and equipment (net) 111,440 99,973 96,250 73,742 61,223 Long-term debt 58,628 42,897 46,998 30,877 31,550 Shareholders' equity 71,982 67,165 62,490 61,447 60,081 Capital expenditures 23,019 13,259 31,266 19,450 14,006 Total assets 186,760 164,357 157,966 130,641 120,488
(1) During fiscal year 1992, the Company adopted FASB Statement No. 106 "Employer's Accounting for Post-Retirement Benefits Other Than Pensions." This change increased the annual pre-tax post-retirement benefit expense by $800,000 and decreased equity by $5,900,000 (net of tax). Also, during fiscal year 1992, the Company adopted FASB Statement No. 109 "Accounting for Income Taxes." This change resulted in a reduction of deferred taxes and an increase in equity of $1,560,000. (2) During fiscal year 1991, the Company purchased the net assets of Edward Mendell Co., Inc. for $8,090,000. Results of operations for six months have been included in the consolidated financial data. Page 13 14 ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Comparison of Fiscal 1995 to 1994 Results of Operations Sales increased $15.4 million, or 9.7 percent, during fiscal 1995. The increase reflects higher demand for hydroxyethylated (HES) corn starches from paper industry customers as new customers converted to Penford Gums. During the year, Penford converted the single largest customer in its history. As a result, Penford is near production capacity. The improvement in the paper industry has also benefited Penford. Also contributing to the increase were higher sales of industrial potato starches to the paper industry. The Company's Idaho Falls potato starch plant capacity was essentially sold out by year-end. Sales of microcrystalline cellulose (MCC) to pharmaceutical industry customers were up sharply as PENWEST's Cedar Rapids MCC plant's gained new customers and its operating results reached break-even. Specialty food-grade potato starches sold by Penwest Foods Co. (PFC) gained 107 percent, reflecting new product activity and the addition of major new customers. However, PFC was not profitable in 1995. Gross margins were 27.5% in 1995 compared with 25.9% in 1994. Higher gross margins reflected renegotiated sales contracts with key customers, a shift at Penford to higher margin products, the achievement of break-even at Mendell's Cedar Rapids MCC plant and reduced losses at Penwest Foods. Operating margins grew from 6.9% to 8.6%, a gain of 24.6%. The 1995 margins were depressed by power interruptions and higher corn costs at Penford Product Co.'s Cedar Rapids plant. High heat and humidity in Iowa placed exceptional demand on the local electrical utility, which interrupted service to some of its industrial customers, including Penford. The plant experienced ten blackouts during the fourth quarter. This resulted in fewer units being produced and therefore a higher per unit cost. Since Penford does not maintain much inventory, most of the impact was recorded during the fourth quarter. In December 1994 the Company sold the assets of its cogeneration facility, recording a pre-tax gain of $899,000 (8 cents per share after tax) in the second quarter. The gain effectively offset earnings the facility would have provided in fiscal 1995. The turbine from the facility was sold to IES Utilities, Inc. and in the fourth quarter of fiscal 1996, the Company expects to begin receiving a portion of its thermal needs in Cedar Rapids from that turbine under a thermal supply agreement with IES Utilities, Inc. This agreement should generate a savings that will approximate the earnings from the Company's cogeneration facility prior to the sale. Operating expenses increased $2.7 million, or 9.0%. Operating expenses in 1994 were reduced by $900,000 as the result of the curtailment of postretirement health benefits previously accrued. Research and development expenses increased $427,000, or 6.7%, as a result of greater development spending at Penwest Pharmaceuticals Group. The Company expects to continue R & D investments at approximately 3.5 to 4% of sales. Net interest expense increased $2.0 million reflecting a greater debt level, higher interest rates and a lower investment portfolio. The effective tax rate was 35.0% in fiscal 1995, compared with 24.3% in the prior year when PENWEST recorded a federal tax benefit relating to research and development expenditures. Page 14 15 Comparison of Fiscal 1994 to 1993 Results of Operations Sales increased $23.3 million, or 17.2%, during fiscal 1994. The gain was generated from additional volumes due to the specialty ethylated starch capacity expansion in late fiscal 1993 at Penford's Cedar Rapids plant, as well as greater utilization of existing oxidized starch capacity. Penford also had increased sales of its potato starch and corn cationic products. Mendell sales of microcrystalline cellulose (MCC) increased due to additional capacity that was brought on line in August 1993. Sales at Penwest Foods Co. (PFC) increased significantly during the year; however, PFC continued to record operating losses. Gross margins were 25.9% for fiscal 1994 compared to 26.4% for fiscal 1993. The gross margins in fiscal 1994 were affected by a change in the volume mix with an increase in the sales of oxidized starches, which yield lower margins. Margins at Penford in the prior year were negatively affected by approximately $425,000 of expenses related to flooding in the Midwest. Margins at Mendell declined during the year primarily due to increased expenses at the new MCC plant in Cedar Rapids. Operating expenses increased $3,537,000, or 13.3%, due to increased research and development, an increase in operating expenses at PFC, and higher expenses associated with a stock appreciation rights program. This increase at PFC was due to its growth and a continued investment in its business. Research and development expenses increased $684,000, or 12.1% in fiscal 1994 due to an increase at both Mendell and TIMERx Technologies. Net interest expense increased $1.3 million in fiscal 1994 due to lower capitalized interest in the current year, higher interest rates, and a lower investment portfolio. The effective tax rate was 24.3% in fiscal 1994 compared to 17.3% in fiscal 1993. The effective rate in 1994 is lower than the statutory rate primarily due to a federal tax benefit recorded during the first quarter related to research and development tax credits. The effective tax rate for 1993 was less than the statutory rate due to certain tax refunds and credits received by the Company. PENWEST's core business was strong in fiscal 1994. The specialty paper chemical products continued to grow at double-digit rates. Although there was some improvement in the Company's largest customer base, the paper industry, many of the large paper companies were still in the early stages of recovery which made the environment difficult to increase sales and prices. The starch copolymer family of products continued to make progress during fiscal 1994 and operated at break-even. Page 15 16 Liquidity and Capital Resources PENWEST has strong liquidity and capital resources. The Company had $5.3 million in cash and cash equivalents at year-end and working capital of $29.2 million. The Company has a $15 million revolving credit agreement. There were no borrowings under this agreement during the fiscal year. The Company also has several uncommitted lines with various banks that are used for overnight borrowings. These lines were used throughout the year, however, there were no outstanding balances at year-end. Operating cash flow was $16.3 million, $12.2 million, and $17.8 million in fiscal 1995, 1994, and 1993, respectively. The improvement in fiscal 1995 was primarily due to an improvement in operating income and by changes in working capital components. Capital expenditures amounted to $23.0 million in fiscal 1995 compared to $13.3 million in fiscal 1994 and were $31.3 million in fiscal 1993. Expenditures have been funded from operations, cash, a private placement of debt, and borrowings under uncommitted lines. The significant capital expenditures during fiscal 1995 were for the completion of expansion of the Penwest Foods facility in Richland, Washington, the completion of new laboratory facilities for Penwest Pharmaceuticals Group, and capacity expansion at Penford Products. The remainder of the expenditures was for various improvements to manufacturing facilities. Capital expenditures in fiscal 1996 should be lower than fiscal 1995. The only significant planned project is a $6 million capacity expansion project at Penford Products. The Company expects to fund these capital expenditures from operations and cash. The Company commenced paying a quarterly cash dividend of $0.05 per share with the quarter ended February 28, 1992, and has paid such dividend each quarter thereafter. The Board of Directors reviews the dividend policy on a periodic basis. In April 1994, the Board of Directors authorized a stock repurchase program for the purchase of up to 500,000 shares of the outstanding common stock of the Company. The Company repurchased 66,000 shares of its stock during fiscal 1995 for $1,310,000. Page 16 17 ITEM 8: PENWEST, LTD. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED BALANCE SHEETS
August 31 (Thousands of dollars) 1995 1994 - ----------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 5,334 Trade accounts receivable 23,943 $ 20,748 Inventories 14,209 16,734 Prepaid expenses and other 5,447 4,593 --------- --------- Total current assets 48,933 42,075 Property, plant and equipment: Land 3,359 3,089 Plant and equipment 175,533 162,570 Construction in progress 3,371 6,611 Less accumulated depreciation (70,823) (72,297) --------- --------- Net property, plant and equipment 111,440 99,973 Deferred income taxes 9,927 9,545 Other assets 16,460 12,764 --------- --------- $ 186,760 $ 164,357 ========= ========= Liabilities and shareholders' equity Current liabilities: Bank overdraft, net $ 635 Accounts payable $ 8,749 8,131 Accrued liabilities 6,728 7,847 Current portion of long-term debt 4,270 4,100 --------- --------- Total current liabilities 19,747 20,713 Long-term debt 58,628 42,897 Other post retirement benefits 10,155 10,102 Deferred income taxes and other 26,248 23,480 Shareholders' equity: Common stock, par value $1.00 per share, authorized 29,000,000 shares, issued 8,591,027 shares in 1995 and 8,577,427 in 1994, including treasury shares 8,591 8,577 Additional paid-in capital 12,550 12,489 Retained earnings 84,949 79,128 Treasury stock, at cost, 1,832,752 shares in 1995 and 1,766,752 shares in 1994 (30,637) (29,327) Note receivable from PENWEST Savings and Stock Ownership Plan (2,978) (3,340) Cumulative translation adjustment (493) (362) --------- --------- Total shareholders' equity 71,982 67,165 --------- --------- $ 186,760 $ 164,357 ========= =========
The accompanying notes are an integral part of these statements. Page 17 18 CONSOLIDATED STATEMENTS OF INCOME
Year Ended August 31 (Thousands of dollars except per share data) 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Sales $ 174,200 $ 158,787 $ 135,517 Cost of sales 126,341 117,734 99,785 ----------- ----------- ----------- Gross margin 47,859 41,053 35,732 Operating expenses 32,886 30,159 26,622 ----------- ----------- ----------- Income from operations 14,973 10,894 9,110 Other income 899 Investment income 418 636 1,016 Interest expense (5,183) (3,444) (2,489) ----------- ----------- ----------- Income before income taxes 11,107 8,086 7,637 Income taxes 3,890 1,966 1,322 ----------- ----------- ----------- Net income $ 7,217 $ 6,120 $ 6,315 =========== =========== =========== Weighted average common shares and equivalents outstanding 7,018,970 7,110,953 7,175,855 =========== =========== =========== Earnings per share $ 1.03 $ 0.86 $ 0.88 =========== =========== =========== Dividends declared per share $ 0.20 $ 0.20 $ 0.20 =========== =========== ===========
The accompanying notes are an integral part of these statements. Page 18 19 CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended August 31 (Thousands of dollars) 1995 1994 1993 - ---------------------------------------------------------------------------------------------- Operating activities: Net income $ 7,217 $ 6,120 $ 6,315 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 10,375 10,343 9,414 Deferred income taxes 1,504 2,676 2,891 Gain on sale of assets (899) Change in operating assets and liabilities Receivables (3,195) (4,743) (2,941) Inventories 2,525 (6,520) (367) Accounts payable and other (1,181) 4,349 2,523 -------- -------- -------- Net cash from operating activities 16,346 12,225 17,835 Investing activities: Additions to property, plant and equipment (23,019) (13,259) (31,266) Proceeds from sale of assets 2,500 Other (530) 1,594 (815) -------- -------- -------- Net cash used by investing activities (21,049) (11,665) (32,081) Financing activities: Proceeds from unsecured line of credit 41,305 30,605 Payments on unsecured line of credit (41,305) (30,605) Proceeds from long-term debt 20,000 20,000 Payments on long-term debt (4,100) (3,880) (673) Purchase of treasury stock (1,310) (1,277) (5,085) Purchase of life insurance for officers' benefit plans (2,501) (1,343) (1,343) Payment of dividends (1,360) (1,371) (1,394) Other (57) 1,199 489 -------- -------- -------- Net cash from (used by) financing activities 10,672 (6,672) 11,994 -------- -------- -------- Net increase (decrease) in cash 5,969 (6,112) (2,252) Cash, (bank overdrafts) and cash equivalents at beginning of year (635) 5,477 7,729 -------- -------- -------- Cash (bank overdrafts) and cash equivalents at end of year $ 5,334 $ (635) $ 5,477 ======== ======== ======== Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 4,976 $ 3,478 $ 2,341 Income taxes $ 2,052 $ 2,909 $ 3,005
The accompanying notes are an integral part of these statements. Page 19 20 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Note Receiv- able from PENWEST Total Additional Savings & Cumulative Share- Common Paid-In Retained Treasury Stock Own- Translation holders' (Thousands of dollars) Stock Capital Earnings Stock ership Plan Adjustment Equity - ----------------------------------------------------------------------------------------------------------------------------------- Balances, September 1, 1992 $ 8,540 $ 12,332 $ 68,994 $(22,965) $ (5,319) $ (135) $ 61,447 Net income 6,315 6,315 Exercise of stock options 23 71 94 Purchase of treasury stock (5,085) (5,085) Savings and Stock Ownership Plan activity 1,014 1,014 Pension plan minimum liability 450 450 Translation loss (361) (361) Dividends declared (1,384) (1,384) -------- -------- -------- -------- -------- -------- -------- Balances, August 31, 1993 8,563 12,403 74,375 (28,050) (4,305) (496) 62,490 Net income 6,120 6,120 Exercise of stock options 14 86 100 Purchase of treasury stock (1,277) (1,277) Savings and Stock Ownership Plan activity 965 965 Translation gain 134 134 Dividends declared (1,367) (1,367) -------- -------- -------- -------- -------- -------- -------- Balances, August 31, 1994 8,577 12,489 79,128 (29,327) (3,340) (362) 67,165 Net income 7,217 7,217 Exercise of stock options 14 61 75 Purchase of treasury stock (1,310) (1,310) Savings and Stock Ownership Plan activity 362 362 Translation loss (131) (131) Dividends declared (1,396) (1,396) -------- -------- -------- -------- -------- -------- -------- Balances, August 31, 1995 $ 8,591 $ 12,550 $ 84,949 $(30,637) $ (2,978) $ (493) $ 71,982 ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements. Page 20 21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business PENWEST's business is developing, manufacturing and marketing chemically modified carbohydrate-based specialty chemicals. No single customer accounts for more than 10% of sales. The consolidated financial statements include PENWEST and its wholly-owned subsidiaries. Material intercompany balances and transactions have been eliminated. Cash and Cash Equivalents The Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents. Cash equivalents consist of money market funds, short-term deposits, and commercial paper. Amounts reported in the balance sheet represent cost which approximates market value. PENWEST's cash management system includes a cash overdraft feature for uncleared checks in the disbursing accounts. Cash in the accompanying balance sheets represents the net amounts available to the disbursing accounts. Uncleared checks in excess of $1,581,000 are netted against cash at August 31, 1995. Property, Plant and Equipment Property, plant and equipment are recorded at cost. Expenditures for maintenance and repairs are expensed as incurred. The Company uses the straight-line method to compute depreciation assuming average useful lives of three to forty years for financial reporting purposes. For income tax purposes, the Company generally uses accelerated depreciation methods. Interest is capitalized on major construction projects while in progress. Interest of $209,000, $51,000 and $985,000 was capitalized in 1995, 1994, and 1993, respectively. Foreign Currencies Monetary assets and liabilities of the Company's foreign operations are translated into U.S. dollars at year-end exchange rates and revenue and expenses are translated at average exchange rates. Non-monetary assets and liabilities are converted at historical rates. In each instance, the functional currency is the U.S. dollar. Realized gains and losses from foreign currency transactions are reflected in the income statement. Income Taxes Deferred income taxes are provided on temporary differences between financial and income tax reporting methods. Revenue Recognition Sales revenue is recorded upon shipment of product. Page 21 22 Earnings Per Share Earnings per common share were computed by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding during the fiscal year. Outstanding stock options and stock appreciation rights are considered to be common share equivalents. Research and Development Research and development costs of $6,773,000, $6,346,000 and $5,662,000 in 1995, 1994, and 1993, respectively, were charged to expense as incurred. Reclassifications Certain prior year amounts have been reclassified to conform with current year presentation. NOTE B INVENTORIES Inventories are stated at the lower of cost or market. Cost, which includes material, labor and manufacturing overhead costs, is determined by the first-in, first-out (FIFO) method. The Company generally follows a policy of hedging corn purchases, related to fixed price sales contracts and certain anticipated corn purchases to minimize price risk due to market fluctuations and risk of crop failure. The instruments used are principally readily marketable exchange traded futures contracts which are designated as hedges. The changes in market value of such contracts have a high correlation to the price changes of the hedged commodity. Also, the underlying commodity can be delivered against such contracts. To obtain a proper matching of revenue and expense, gains or losses arising from open and closed hedging transactions are included in inventory as a cost of the commodities and reflected in the income statements when the product is sold. Components of inventory are as follows:
August 31 (Thousands of dollars) 1995 1994 - -------------------------------------------------------------------------------- Raw materials, supplies and other $ 3,828 $ 6,074 Work in progress 483 622 Finished goods 9,898 10,038 ------- ------- Total inventories $14,209 $16,734 ======= =======
Page 22 23 NOTE C DEBT
August 31 (Thousands of dollars) 1995 1994 - ------------------------------------------------------------------------------------------------------------ Unsecured term agreement, quarterly principal payments, final maturity in 2000, 6.50% interest rate at year-end $16,000 $19,000 Private placement, 7.93% interest rate, semiannual interest-only payments with principal payments beginning in 1996, final maturity in 2005 20,000 20,000 Private placement, 7.97% interest rate, semiannual interest-only payments with two equal principal payments, one in 1998 and one in 2006 20,000 Unsecured note, 9.4% interest rate, due in quarterly installments through 2000 3,780 4,450 Note payable, 8.49% interest rate, quarterly principal and interest payments through October 1997 3,118 3,547 ------- ------- 62,898 46,997 Less current portion 4,270 4,100 ------- ------- Net long-term debt $58,628 $42,897 ======= =======
Maturities of long-term debt for the fiscal years ending August 31, 1996 through 2000 are as follows (thousands of dollars): 1996 $4,270 1997 7,127 1998 8,955 1999 16,697 2000 6,277
The Company has an unsecured term loan agreement of $16 million with four banks which expires on November 30, 2000. Borrowing rates available to the Company under the term agreement are at prime rate or less depending on the selection of borrowing options. The Company has an unsecured revolving line of credit of $15 million with four banks which expires on April 15, 1997. Borrowing rates available to the Company under the revolver are at prime rate or less depending on the selection of borrowing options. Borrowings under the revolver can be converted, at the option of PENWEST, to term notes due on the expiration date of the revolving line of credit. At year-end, there were no outstanding borrowings under this agreement. The unsecured term agreement, the private placements, and the unsecured revolving line of credit include, among other terms, various limitations on long-term indebtedness, minimum net worth and working capital ratios, and restrictions on PENWEST's ability to purchase or redeem its own stock. The Company has uncommitted lines of credit aggregating $15 million, which provide for financing at various floating rates. Page 23 24 The Company enters into interest rate swap agreements to modify the interest characteristics of its outstanding debt. These agreements involve the exchange of interest payment streams without an exchange of the underlying principal amount. Net amounts paid or received are reflected as adjustments to interest expense. The fair values of the swap agreements are not recognized in the financial statements. In the event of default by a counterparty, the risk in these transactions is the cost of replacing the interest rate contract at current market rates. The Company continually monitors the credit ratings of its counterparties. Management believes the risk of incurring losses is remote, and that if incurred, such losses would be immaterial. At August 31, 1995, approximately $25 million of the Company's outstanding debt was subject to interest rate swap agreements. Of this amount, $15 million involves floating rate to fixed rate swaps which effectively fix rates at approximately 9% and $10 million involves fixed rate to floating rate swaps, with the floating rate approximating 6% at August 31, 1995. The Company has hedged the interest rate risk on $8.9 million of its long-term debt using Treasury note futures. The cost of the hedge has been deferred and will be recognized as a component of interest expense over the life of the debt. The hedge will result in an effective interest rate on the hedged portion of long-term debt of approximately 9.5%. NOTE D LEASES Certain of the Company's property, plant, and equipment is leased under operating leases ranging from one to fifteen years with renewal options. Rental expense under operating leases was $3,202,000, $2,787,000 and $2,066,000 for fiscal years ended August 31, 1995, 1994, and 1993, respectively. Future lease payments as of August 31, 1995 for noncancellable operating leases having initial lease terms of more than one year are as follows (thousands of dollars):
Years ending August 31 Operating Leases - ---------------------- ---------------- 1996 $4,098 1997 2,814 1998 2,312 1999 1,951 2000 608 Thereafter 1,898 ------- Total minimum lease payments $13,681 =======
Page 24 25 NOTE E STOCK OPTIONS Under stock option plans, options have been granted to certain officers and key employees to purchase PENWEST common stock. Changes in stock options for the three years ended August 31 are as follows:
1995 Option 1995 1994 1993 Price Range - ---------------------------------------------------------------------------------------------------------- Outstanding at beginning of year 615,859 590,809 596,762 $ 3.313 - $27.50 Granted 271,000 59,000 27,000 20.750 - 22.75 Exercised (13,600) (13,950) (23,003) 3.313 - 22.6 Cancelled (25,800) (20,000) (9,950) 19.13 ------- ------- ------ Outstanding at end of year 847,459 615,859 590,809 3.313 - 27.50 ======= ======= ======= ===== ===== Exercisable at end of year 401,159 299,109 184,259 3.313 - 27.50 ======= ======= ======= ===== =====
At August 31, 1995, 62,232 stock appreciation rights (SARs) were outstanding to certain officers. The SARs were granted in December 1986 at the market price of PENWEST stock and are fully vested as of August 31, 1995. As a result of appreciation (depreciation) of PENWEST stock and vesting of the SARs, compensation expense was charged (credited) for $78,000, $342,000 and ($303,000) in 1995, 1994, and 1993 respectively. Page 25 26 NOTE F INCOME TAXES Income tax expense consists of the following:
Year Ended August 31 (Thousands of dollars) 1995 1994 1993 - -------------------------------------------------------------------------------- Current Federal $ 2,102 $ (904) $(1,731) Foreign 4 138 213 State 232 56 (51) ------- ------- ------- 2,338 (710) (1,569) Deferred Federal 1,459 2,253 2,808 State 93 423 83 ------- ------- ------- 1,552 2,676 2,891 ------- ------- ------- Total provision $ 3,890 $ 1,966 $ 1,322 ======= ======= =======
A reconciliation of the statutory federal tax to the actual provision is as follows:
Year Ended August 31 (Thousands of dollars) 1995 1994 1993 - -------------------------------------------------------------------------------- Statutory tax rate 34% 34% 34% Statutory tax $ 3,776 $ 2,749 $ 2,597 State taxes, net of federal benefit 215 164 77 Tax credits, including research and development credits (313) (1,095) (1,503) Tax advantaged investment income (47) Other 259 148 151 ------- ------- ------- Total provision $ 3,890 $ 1,966 $ 1,322 ======= ======= =======
The significant components of deferred tax assets and liabilities are as follows:
August 31 (Thousands of dollars) 1995 1994 - -------------------------------------------------------------------------------- Deferred tax assets: Alternative minimum tax credit $ 2,725 $ 3,269 Research and development credit 622 300 Postretirement benefits 3,691 3,671 Provisions for accrued expenses 2,366 1,963 Other 523 342 ------------------------ Total deferred tax assets 9,927 9,545 Deferred tax liabilities: Depreciation 17,650 16,826 Other 2,143 926 ------------------------ Total deferred tax liabilities 19,793 17,752 ------------------------ Net deferred tax liabilities $ 9,866 $ 8,207 ========================
Page 26 27 NOTE G PENSION AND OTHER EMPLOYEE BENEFITS PENWEST maintains two noncontributory defined benefit pension plans that cover substantially all employees. Benefits under the plan for hourly employees are primarily related to years of service. Benefits for salaried employees are primarily related to years of credited service and final average five-year earnings. Employees generally become eligible to participate in the plans after attaining age 21 and benefits normally become vested after five years of credited service. The Company's funding policy is to contribute amounts to the plans sufficient to meet or exceed the minimum requirements of the Employee Retirement Income Security Act of 1974. Assumptions used in the measurement of the projected benefit obligation in 1995 and 1994 included a discount rate of 7.5% and 8.0%, respectively, and a rate of increase in compensation levels of 6.0% for the salaried employees. The change in the discount rate had the impact of increasing the projected benefit obligation by approximately $1.4 million. The expected long-term rate of return on plan assets is assumed to be 8.0%. Net periodic pension expense consisted of the following (in thousands):
Year Ended August 31 1995 1994 1993 - --------------------------------------------------------------------------------------------- Service cost of benefits earned during the year $ 603 $ 591 $ 545 Interest cost on projected benefit obligation 1,363 1,256 1,245 Actual return on plan assets (2,599) (842) (2,449) Net amortization and deferral 1,480 (253) 1,676 ------- ------- ------- Net pension expense $ 847 $ 752 $ 1,017 ======= ======= =======
The following table sets forth the funded status of both pension plans as of August 31, 1995 and 1994 (in thousands):
August 31 1995 1994 - ------------------------------------------------------------------------------------ Actuarial present value of projected obligation, based on service to date and current salary levels: Vested $ 17,081 $ 15,521 Nonvested 430 387 -------- -------- Accumulated benefit obligation 17,511 15,908 Effect of projected salary increases 2,052 1,663 -------- -------- Projected benefit obligation 19,563 17,571 Plan assets at fair market value 18,910 15,977 -------- -------- Projected benefit obligation greater than plan assets (653) (1,594) Unrecognized actuarial net loss 254 1,264 Balance of unrecognized net obligation at transition being amortized over 15 years 1,137 577 Unrecognized prior service cost 534 472 Adjustment to record minimum liability (1,987) -------- -------- Net pension asset (liability) $ 1,272 $ (1,268) ======== ========
Page 27 28 Assets of the pension plans are invested in units of common trust funds managed by Frank Russell Trust Company. The common trust funds own stocks, bonds and real estate. Penwest Savings And Stock Ownership Plan The Company has a savings investment plan. The savings component, available to all employees, matches 75% of the employee's contribution up to 6% of the employee's pay, in the form of PENWEST common stock. The plan held 113,271 unallocated shares of PENWEST common stock as of August 31, 1995, including shares earned but not yet allocated. During 1995, approximately 52,630 shares of stock were earned by plan participants. The savings component expense of the plan was $520,000, $599,900 and $519,000 for fiscal years 1995, 1994, and 1993, respectively. Compensation expense is recorded by the Company as the market value of shares released. The plan also includes an annual profit-sharing component that is awarded by the Board of Directors based on achievement of predetermined corporate goals. This feature of the plan is available to all employees who meet the eligibility requirements of the plan. The profit sharing expense, which reflects the cost basis of stock released by the plan to participants was $402,000, $285,000 and $420,000 for the fiscal years 1995, 1994 and 1993, respectively. The plan acquired the PENWEST common stock by issuing a note to the Company. The note is reflected as a reduction of shareholders' equity and is amortized ratably as stock is released to participants in the plan. The shares held by the plan are considered outstanding for puposes of calculating earnings per share. Supplemental Executive Retirement Plan The Company established a Supplemental Executive Retirement Plan (SERP), a nonqualified plan, which covers certain employees. For 1995, 1994, and 1993, the net pension expense accrued for the SERP was $856,000, $347,000 and $283,000 respectively. Health Care And Life Insurance Benefits The Company offers health care and life insurance benefits to most active employees. Costs incurred to provide these benefits are charged to expense when paid. Health care and life insurance expense was $2,501,000, $2,649,000 and $2,297,000 in 1995, 1994, and 1993, respectively. NOTE H OTHER POSTRETIREMENT BENEFITS PENWEST maintains two postretirement benefit plans that cover substantially all salaried and hourly retirees. Benefits under the plan for hourly employees include medical coverage, prescription drug coverage, and, to a certain grandfathered group, life insurance. Hourly participants contribute to the cost of the benefits based on a pension credit formula. Benefits under the plan for salaried employees includes medical coverage and vision coverage. Salaried participants contribute, for the most part, 100% of the premiums. Page 28 29 Postretirement benefit expense was $359,000, $834,000 and $1,088,000 for the years ended August 31, 1995, 1994, and 1993, respectively. Presently the Company funds the current benefits on a cash basis and therefore there are no plan assets. The following table sets forth the plan's funded status (in thousands of dollars): Accumulated postretirement benefit obligation:
Year Ended August 31, 1995 August 31, 1994 --------------- --------------- Retirees $ 4,119 $ 5,020 Fully eligible active plan participants 311 297 Other active plan participants 2,190 2,365 ------- ------- Accumulated post-retirement benefit obligation 6,620 7,682 Unrecognized actuarial net gain 3,535 2,420 ------- ------- Accrued postretirement benefit obligation $10,155 $10,102 ======= =======
Net periodic postretirement benefit costs include the following components:
Year Ended August 31 1995 1994 1993 ------- ------- ------- Service cost -- benefits earned during the period $ 186 $ 295 $ 288 Interest cost on accumulated postretirement benefit obligations 402 604 800 Net amortization and deferral (229) (65) ------- ------- ------- $ 359 $ 834 $ 1,088 ======= ======= =======
Future benefit costs were estimated assuming medical costs would increase at a 10% annual rate for fiscal 1996, then beginning in fiscal 1997, decreasing by one half of a percent ratably over the next nine years to a rate of 5.5%. A 1% increase in this annual trend rate would have increased the accumulated postretirement benefit obligation at August 31, 1995 by $954,000, with an increase of $105,000 in the annual 1995 postretirement benefit expense. The weighted average discount rate used to estimate the accumulated postretirement obligation was 7.5% in 1995 and 8.0% in 1994. The change in discount rate had the impact of increasing the accumulated post-retirement benefit obligation by $1.1 million. During the second quarter of fiscal 1994, the Company curtailed postretirement health benefits for salaried employees that had been previously accrued. The Company formerly paid a portion of the health insurance premiums for salaried retirees but no longer does so for eligible salaried employees retiring after May 15, 1994. As a result, in the second quarter of 1994, there was a $900,000 reduction of operating expenses recorded. Page 29 30 NOTE I SHAREHOLDERS' EQUITY UNISSUED PREFERRED STOCK There are 1,000,000 shares of $1.00 par value preferred stock authorized for issue; however, none are outstanding. Common Stock Purchase Rights On June 16, 1988, PENWEST distributed a dividend of one right (Right) for each outstanding share of PENWEST common stock. In addition, previously outstanding Rights were redeemed for $0.025 each. When exercisable, each Right will entitle its holder to buy one share of PENWEST's common stock at $44.00 per share. The Rights will become exercisable if a purchaser acquires 20% of PENWEST's common stock or makes an offer to acquire common stock. In the event that a purchaser acquires 20% of the common stock of PENWEST, each Right shall entitle the holder, other than the acquirer, to purchase one share of common stock of PENWEST for one half of the market price of the common stock. In the event that PENWEST is acquired in a merger or transfers 50% or more of its assets or earnings to any one entity, each Right entitles the holder to purchase common stock of the surviving or purchasing company having a market value of twice the exercise price of the Right. The Rights may be redeemed by PENWEST at a price of $.01 per Right, and they expire in June 1998. NOTE J PACIFIC COGENERATION, INC. In December of 1994 the Company sold the assets of its subsidiary Pacific Cogeneration, Inc. to third parties. The Company recognized a gain on the sale of $899,000 which is reflected as other income in 1995. NOTE K QUARTERLY FINANCIAL DATA (UNAUDITED)
Fiscal 1995 First Second Third Fourth (Thousands of dollars except earnings per share data) Quarter Quarter Quarter Quarter Total - ----------------------------------------------------------------------------------------------------------------------------- Sales $ 42,771 $ 42,429 $ 43,618 $ 45,382 $174,200 Gross margin 11,244 11,912 12,465 12,238 47,859 Income from operations 3,716 3,504 4,225 3,528 14,973 Net income 1,757 2,153 2,000 1,307 7,217 Earnings per common share $ 0.25 $ 0.31 $ 0.29 $ 0.19 $ 1.03 Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20 Fiscal 1994 First Second Third Fourth (Thousands of dollars except earnings per share data) Quarter Quarter Quarter Quarter Total - ----------------------------------------------------------------------------------------------------------------------------- Sales $ 37,817 $ 35,837 $ 41,347 $ 43,786 $158,787 Gross margin 9,987 8,724 11,050 11,292 41,053 Income from operations 2,599 1,678 3,267 3,350 10,894 Net income 1,761 863 1,774 1,722 6,120 Earnings per common share $ 0.25 $ 0.12 $ 0.25 $ 0.24 $ 0.86 Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20
Page 30 31 Report of Ernst & Young LLP, Independent Auditors The Board of Directors and Shareholders PENWEST, LTD. We have audited the accompanying consolidated balance sheets of PENWEST, LTD. as of August 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended August 31, 1995. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of PENWEST, LTD. at August 31, 1995 and 1994, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 1995, in conformity with generally accepted accounting principles. Seattle, Washington October 12, 1995 Page 31 32 REPORT OF MANAGEMENT The management of PENWEST, LTD. has prepared and is responsible for the integrity and fairness of the financial statements and other financial information presented in this annual report. The statements have been prepared in accordance with generally accepted accounting principles and, to the extent appropriate, include amounts based on management's judgment and/or estimates. In order to fulfill its responsibilities for these financial statements and information, management maintains accounting systems and related internal controls. These controls are designed to provide reasonable assurance that transactions are properly authorized and recorded, that assets are safeguarded, and that financial records are reliably maintained. Ernst & Young LLP, independent auditors, is retained to audit the Company's consolidated financial statements. Their accompanying report is based on an audit conducted in accordance with generally accepted auditing standards, including a review of internal accounting controls and tests of accounting procedures and records to the extent necessary to support their audit. The Audit Committee of the Board of Directors, which is composed solely of outside directors, meets periodically with management and with the independent auditors to review the quality of financial reporting, the operation and development of the internal control systems, and the results of independent audits. The independent auditors regularly meet with the Audit Committee without the presence of any other parties. Tod R. Hamachek President and Chief Executive Officer Jeffrey T. Cook Vice President, Finance and Chief Financial Officer Jennifer L. Good Corporate Controller and Corporate Secretary Page 32 33 ITEM 9: CHANGES IN AND DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT The information set forth under "Election of Directors" in the Company's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding executive officers of the Company is set forth in Part I above and incorporated herein by reference. ITEM 11: EXECUTIVE COMPENSATION The information set forth under "Executive Compensation" in the Company's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth under "Security Ownership of Certain Beneficial Owners and Management" in the Company's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders is incorporated herein by reference. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information relating to certain relationships and related transactions of the Company set forth under "Change-in-Control Arrangements" in the Company's definitive Proxy Statement for the 1996 Annual Meeting of Shareholders is incorporated herein by reference. PART IV ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) (1) Financial Statements The consolidated balance sheets as of August 31, 1995 and 1994 and the related statements of income, cash flows and shareholders' equity for each of the three years in the period ended August 31, 1995 and the report of independent auditors are included in Part II, Item 8. Page 33 34 (a) (2) Financial Statement Schedules (a) Quarterly financial information is included in Part II, Item 8. All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. (a) (3) Exhibits See list of Exhibits on page 36. This list includes a subset containing each management contract, compensatory plan, or arrangement required to be filed as an exhibit to this report. (b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this report. Page 34 35 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PENWEST, LTD. Date November 29, 1995 Tod R. Hamachek --------------------------------------------- Tod R. Hamachek, President and Chief Executive Officer Principal Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Date November 29, 1995 Tod R. Hamachek --------------------------------------------- Tod R. Hamachek, President and Chief Executive Officer (Principal Executive Officer) Date November 29, 1995 Jeffrey T. Cook --------------------------------------------- Jeffrey T. Cook, Chief Financial Officer (Principal Financial Officer) Date November 29, 1995 Jennifer L. Good --------------------------------------------- Jennifer L. Good, Corporate Controller (Principal Accounting Officer) Directors Richard E. Engebrecht Tod R. Hamachek By Tod R. Hamachek Paul H. Hatfield ------------------------------------------ C. Calvert Knudsen Harry L. Mullikin Attorney-in-Fact Sally G. Narodick Power of Attorney Dated William G. Parzybok, Jr. October 24, 1995 N. Stewart Rogers Date October 24, 1995 William K. Street James H. Wiborg Page 35 36 INDEX TO EXHIBITS Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated by reference. Exhibit No. Item (3.1) Restated Articles of Incorporation of Registrant (3.2) Bylaws of Registrant as amended and restated as of June 27, 1995 (4.1) PENWEST, LTD. Common Stock Purchase Rights, dated June 3, 1988 (filed on Form 8-A dated June 3, 1988) (10.1) Unsecured Term Agreement among PENWEST, LTD. and Penford Products Co. as Borrowers, and Seattle- First National Bank, Continental Bank N.A., U.S. Bank of Washington, National Association, and The Bank of Nova Scotia as Lenders, dated as of November 9, 1990 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1993) (10.2) Senior Note Agreement among PENWEST, LTD. as Borrower and Mutual of Omaha and Affiliates as lenders, dated November 1, 1992 (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1993) (10.3) Term Loan Agreement among Penford Products Co., and PENWEST, LTD. as Borrowers, and First Interstate Bank of Washington, N.A. as Lender, dated September 27, 1990 (Registrant agrees to furnish a copy of this instrument to the Commission on request) (10.4) Loan Agreement among PENWEST, LTD. as Borrower and Seattle-First National Bank as Lender, dated December 1, 1989 (Registrant agrees to furnish a copy of this instrument to the Commission on request) Page 36 37 (10.5) PENWEST, LTD. Supplemental Executive Retirement Plan, dated March 19, 1990 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991) (10.6) PENWEST, LTD. Supplemental Survivor Benefit Plan, dated January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991) (10.7) PENWEST, LTD. Deferred Compensation Plan, dated January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991) (10.8) Change of Control Agreements with Messrs. Hamachek, Reed, Cook, Widmaier, Schmelzer, Talley, Horn and Rydzewski (a representative copy of these agreements is filed herewith) (10.9) PENWEST, LTD. 1993 Non-Employee Director Restricted Stock Plan (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended November 30, 1993) (10.10) Note Agreement dated as of October 1, 1994 among PENWEST, Ltd., Principal Mutual Life Insurance Company and TMG Life Insurance Company (filed as an Exhibit to Registrant's Form 10-Q for the quarter ended February 28, 1995) (10.11) PENWEST, Ltd. 1994 Stock Option Plan (filed as an Exhibit to the Registration Statement dated April 25, 1995 on Form S-8, Commission File No. 33-58799)
11 Statement Regarding Computation of Per Share Earnings 21 Subsidiaries of the Registrant 23 Consent of Independent Auditors 24 Power of Attorney 27 Financial Data Schedule
Page 37 38 SUBSET OF THE INDEX TO EXHIBITS Executive Compensation Plans and Arrangements. This subset of the index to exhibits includes a subset containing each management contract, compensatory plan, or arrangement required to be filed as an exhibit to this Report. Exhibit No. Item - ----------- ---- (10.5) PENWEST, LTD. Supplemental Executive Retirement Plan, dated March 19, 1990 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991, Commission File No. 0-11488) (10.6) PENWEST, LTD. Supplemental Survivor Benefit Plan, dated January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991, Commission File No. 0-11488) (10.7) PENWEST, LTD. Deferred Compensation Plan, dated January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K for the fiscal year ended August 31, 1991, Commission File No. 0-11488) (10.8) Change of Control Agreements with Messrs. Hamachek, Reed, Cook, Widmaier, Schmelzer, Talley, Horn and Rydzewski (a representative copy of these agreements is filed herewith) (10.9) PENWEST, LTD. 1993 Non-Employee Director Restricted Stock Plan. (Filed as an Exhibit to Registrant's Form 10-Q for the quarter ended November 30, 1993, Commission File Number 0-11488.) (10.11) PENWEST, LTD. 1994 Stock Option Plan (filed as an Exhibit to the Registration Statement dated April 25, 1995 on Form S-8, Commission File No. 33-58799) Page 38 EX-3.1 2 RESTATED ARTICLES OF INCORPORATION 1 Exhibit 3.1 RESTATED ARTICLES OF INCORPORATION OF PENWEST, LTD. Pursuant to RCW 23B.10.070 these Restated Articles of Incorporation are submitted for filing: 1. The name of the corporation is PENWEST, LTD. 2. The Restated Articles are as follows: ARTICLE I NAME The name of the corporation (the "Corporation") is PENWEST, LTD. ARTICLE II REGISTERED OFFICE AND AGENT The address of the registered office of the Corporation is 520 Pike Street, 26th Floor, Seattle, Washington 98101, and the name of the registered agent at such address is C T CORPORATION SYSTEM. ARTICLE III PURPOSE The purpose of the Corporation is to create the maximum continuing rate of value growth through long-term profit on invested capital and the growth of that capital. To accomplish this purpose, the Board of Directors, management and employees of the Corporation will strive to: - Properly select business opportunities versus risk; - Develop and maintain strategic direction for all business segments; - Develop and maintain superior management and organizational structures; - Encourage employee involvement in the business process; - Provide all employees the opportunity of a value growth environment of good employment, training, advancement and recognition of their achievements; - Create market understanding of the intrinsic values so created: - Conduct its business legally and ethically within the free enterprise system as a responsible corporate citizen. In carrying out this purpose, the Corporation is authorized to engage in any lawful act or activity for which corporations may be organized under the Washington Business Corporation Act. 1 2 ARTICLE IV SHARES 1. The total number of shares of all classes of stock which the Corporation shall have authority to issue is 30,000,000 shares to be divided into two classes consisting of 29,000,000 shares of common stock of the par value of $1.00 per share (hereinafter designated "Common Stock") and 1,000,000 shares of preferred stock of the par value of $1.00 per share (hereinafter designated "Preferred Stock"). The Common Stock shall have one (1) vote for each share. The Preferred Stock shall have such full or limited or absence of voting powers and designations, preferences, limitations and relative rights as shall be stated and expressed in the resolution or resolutions of the Board of Directors of the Corporation providing for the issue of such shares of Preferred Stock subject to the following limitations: (a) no share of Preferred Stock shall have voting powers in excess of one (1) vote per share; provided, however, if the Preferred Stock is convertible into Common Stock as of a record date on which a matter is submitted to a vote of the holders of Common Stock, then such shares of Preferred Stock may, in the resolution providing for the issue of such shares and subject to any restrictions or conditions set forth in the resolution, be granted the right to vote the number of shares of Common Stock which would be issued upon such conversion as of the record date; and (b) no shares of Preferred Stock shall be given a preference over the Common Stock in the event of any liquidation, dissolution, winding up, merger or consolidation of an amount greater than the per share fair market value of the consideration received upon the issuance of the shares of Preferred Stock as reasonably determined in good faith by the Board of Directors of the Corporation plus accrued but unpaid dividends. The Preferred Stock may be issued in one or more series of stock and each such series, subject to the limitations set forth above, may have such designations, preferences, limitations and relative rights as shall be stated and expressed in a resolution or resolutions providing for the issue of such Preferred Stock adopted by the Board of Directors pursuant to the authority hereby granted. The Preferred Stock may have voting powers, designations, preferences, limitations and relative rights that negate or supersede the provisions of Article VIII hereof (so long as the resolution or resolutions adopting the same are approved by the unanimous vote of the Board of Directors). 2. The shares of stock of the Corporation may be issued by the Corporation from time to time for such consideration, not less than the par value thereof except as otherwise provided by law, as from time to time may be fixed by the Board of Directors of the Corporation; and all issued shares of the capital stock of the Corporation shall be deemed fully paid and non-assessable and the holders of such shares shall not be liable thereunder to the Corporation or to its creditors. 3. No shareholder of the Corporation shall have any preemptive right to acquire additional shares of stock or securities convertible into shares of stock of the Corporation. ARTICLE V DURATION The existence of the Corporation is to be perpetual. 2 3 ARTICLE VI PAYMENT FOR CORPORATE DEBTS The private property of the shareholders shall not be subject to the payment of corporate debts to any extent whatsoever. ARTICLE VII CERTAIN DEFINITIONS For purposes of these Articles, the following defined terms shall have the meanings set forth below. All references in these Articles to statutes, rules or regulations shall include a reference to said statutes, rules or regulations as currently in effect or hereafter amended. (a) The terms "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the Securities Exchange Act of 1934. (b) The term "Beneficial Owner" and correlative terms shall have the meanings ascribed to them in Rule 13d-3 and related interpretive releases promulgated and issued under the Securities Exchange Act of 1934. Without limitation, any shares of Voting Stock of the Corporation which any Related Person has the right to vote or to acquire pursuant to any agreement, or upon exercise of conversion rights, warrants or options, or otherwise, shall be deemed "Beneficially Owned" by such Related Person. A person shall be a Beneficial Owner of any Voting Stock: (1) which such person or any of its Affiliates or Associates beneficially owns, directly or indirectly; or (2) which such person or any of its Affiliates or Associates has (a) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise, or (b) the right to vote pursuant to any agreement, arrangement or understanding; or (3) which are beneficially owned, directly or indirectly, by any other person with which such person or any of its Affiliates or Associates has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of any shares of Voting Stock. (c) The term "Board of Directors" or the "Board" means the group of individuals elected by the shareholders as directors of the Corporation or appointed by the directors to fill a vacancy on the Board. (d) The term "Continuing Director" shall mean, with respect to any proposed Major Transaction, a director who was a member of the Board of Directors of the Corporation immediately prior to the time that any Related Person involved in the proposed Major Transaction acquired 20% or more of the outstanding shares of Voting Stock of the Corporation. (e) The term "Disinterested Director" means any member of the Board of Directors who is unaffiliated with any Interested Shareholder and/or Substantial Shareholder and was a member of the Board prior to the time that any Interested Shareholder or Substantial Shareholder became an Interested Shareholder or Substantial Shareholder, and any successor of a Disinterested Director who is unaffiliated with any Interested Shareholder or Substantial 3 4 Shareholder and is recommended to succeed a Disinterested Director by a majority of Disinterested Directors then on the Board. (f) The term "Fair Market Value" means (i) in the case of stock, the Market Price, and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by the Board in good faith. (g) The term "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (1) is the Beneficial Owner, directly or indirectly, of 5% or more of the voting power of the outstanding Voting Stock; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the Beneficial Owner, directly or indirectly, of five percent (5%) or more of the voting power of the then outstanding Voting Stock; or (3) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were, at any time within the two-year period immediately prior to the date in question, beneficially owned by any Interested Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (h) The term "Major Transaction" shall mean (1) any merger or consolidation of the Corporation or a Subsidiary with or into a Related Person, (2) any sale, lease, exchange, transfer or other disposition, including without limitation a mortgage or other security device, of all or any Substantial Part of the assets of the Corporation (including without limitation any securities of a Subsidiary) or of a Subsidiary, to a Related Person, (3) any merger or consolidation of a Related Person with or into the Corporation or a Subsidiary, (4) any sale, lease, exchange, transfer or other disposition of all or any Substantial Part of the assets of a Related Person to the Corporation or a Subsidiary, (5) the issuance of any securities of the Corporation or a Subsidiary to a Related Person, (6) the acquisition by the Corporation or a Subsidiary of any securities of a Related Person, (7) any reclassification of Voting Stock of the Corporation, or any recapitalization involving Voting Stock of the Corporation, proposed by a Related Person within five years after such Related Person became a Related Person, (8) any loan or other extension of credit by the Corporation or a Subsidiary to a Related Person or any guarantees by the Corporation or a Subsidiary of any loan or other extension of credit by any person to a Related Person, and (9) any agreement, contract or other arrangement providing for any of the transactions described in this definition of Major Transaction. (i) The term "Market Price" means: the last closing sale price immediately preceding the time in question of a share of the stock in question on the Composite Tape for New York Stock Exchange-Listed Stocks, or if such stock is not quoted on the Composite Tape, on the New York Stock Exchange, or if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or if such stock is not listed on any such exchange, the last closing bid quotation with respect to a share of such stock immediately preceding the time in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use (or any other system of reporting or ascertaining quotations then available), or if such stock is not so quoted, the fair market value at the time in question of a share of such stock as determined by the Board in good faith. 4 5 (j) The term "other consideration to be received" shall, for the purposes of subparagraph 1(d)(1) of Article VIII, include without limitation Voting Stock of the Corporation retained by its existing public shareholders in the event of a Major Transaction which is a merger or consolidation in which the Corporation is the surviving corporation. (k) The term "Outside Director" shall mean, with respect to any proposed Major Transaction, a director who is not (1) an officer or employee of the Corporation or of any Subsidiary or any relative of an officer or employee, (2) a Related Person or an officer, director or employee, Associate or Affiliate of a Related Person, or a relative of any of the foregoing, or (3) a person having a direct or indirect material business relationship with the Corporation or any Subsidiary. (l) The term "Related Person" shall mean any individual, corporation, partnership or other person or entity and each member of any "person" as such term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934 which, together with its Affiliates and Associates, or other members of such "person" and any other person or entity with which it or its Affiliates or Associates has any agreement, arrangement, or understanding, directly or indirectly, for the purpose of acquiring, holding, voting or disposing of Voting Stock of the Corporation, is the Beneficial Owner of 20% or more in the aggregate of the outstanding shares of Voting Stock of the Corporation, and any Affiliate, Associate or member of such "person," or any such other persons or entities. (m) The term "Subsidiary" means any corporation or other entity of which a majority of any class of equity security is beneficially owned, directly or indirectly, by the Corporation; provided, however, that for the purposes of the definitions of Interested Shareholder and Substantial Shareholder set forth in paragraphs (g) and (o) of this Article VII, the term "Subsidiary" shall mean only a corporation of which a majority of the voting power of the capital stock entitled to vote generally in the election of directors is owned, directly or indirectly, by the Corporation. (n) The term "Substantial Part" shall mean more than ten percent (10%) of the total assets of the person or entity in question, as of the end of its most recent fiscal year ending prior to the time the determination is being made. (o) The term "Substantial Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (1) is the Beneficial Owner, directly or indirectly, of 40% or more of the voting power of the outstanding Voting Stock; or (2) is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the Beneficial Owner, directly or indirectly, of 40% or more of the voting power of the then outstanding Voting Stock; or (3) is an assignee of or has otherwise succeeded to any shares of Voting Stock which were at any time within the two-year period immediately prior to the date in question beneficially owned by any Substantial Shareholder, if such assignment or succession shall have occurred in the course of a transaction or series of transactions not involving a public offering within the meaning of the Securities Act of 1933. (p) The term "Voting Stock" shall mean all Common Stock and any other shares entitled to vote for the election of Directors of the Corporation. 5 6 (q) For the purposes of determining whether a person is an Interested Shareholder or a Substantial Shareholder pursuant to paragraphs (g) and (o) of this Article VII, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph (b) of this Article VII, but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. ARTICLE VIII HIGHER THAN MAJORITY VOTE OF SHAREHOLDERS REQUIRED IN THE EVENT OF CERTAIN TRANSACTIONS 1. Subject to the provisions of any series of Preferred Stock which may at the time be outstanding, any Major Transaction shall require the affirmative vote of the holders of not less than 80% of the outstanding Voting Stock of the Corporation, which shall include the affirmative vote of at least 50% of the outstanding Voting Stock held by shareholders other than the Related Person involved in such Major Transaction; provided, however, that such voting requirement shall not be applicable if: (a) The Major Transaction was approved by the Board either (i) prior to the Related Person involved in the Major Transaction having become a Related Person, or (ii) after such Related Person became such but only if the Related Person has sought and obtained the unanimous approval by the Board of such Related Person's acquisition of 20% or more of the outstanding shares of Voting Stock prior to such acquisition being consummated; or (b) The Major Transaction involves solely the Corporation and a Subsidiary none of whose stock is Beneficially Owned by a Related Person (other than Beneficial Ownership arising solely because of control of the Corporation); provided that each shareholder of the Corporation receives the same type of consideration in such transaction in proportion to his stock holdings; or (c) Prior to becoming a Related Person, such Related Person made a tender offer for Voting Stock which (i) conformed in all respects to federal laws and regulations governing such a transaction whether or not the Corporation or such stock was then regulated by or registered under said laws, (ii) committed such Related Person to take all shares tendered if it took any shares, and (iii) resulted in such Related Person acquiring at least 75% of the shares of each class of Voting Stock held by persons other than such Related Person; or (d) All the following conditions are satisfied: (1) The cash or Fair Market Value of the property, securities or other consideration to be received per share (as adjusted for stock splits, stock dividends, reclassification of shares into a lesser number and similar events) by holders of Common Stock of the Corporation in the Major Transaction is not less than the higher of (i) the highest per share price (including brokerage commissions, soliciting dealer's fees, dealer-management compensation, and other expenses, including, but not limited to, costs of newspaper advertisements, printing expenses and attorneys' fees, paid by such Related Person in acquiring any of its holdings of the Corporation's Common Stock or (ii) an amount which bears the same or a greater percentage relationship to the Market Price of the Corporation's Common Stock immediately prior to the announcement of such Major Transaction as the highest per share price determined in (i) above bears to the Market Price of the Corporation's Common Stock immediately prior to the commencement of acquisition of the Corporation's Common Stock by such Related Person; and 6 7 (2) After becoming a Related Person and prior to the consummation of such Major Transaction, (i) such Related Person shall not have acquired any shares of stock, directly or indirectly, from the Corporation or a Subsidiary (except upon conversion of convertible securities acquired by it prior to becoming a Related Person or upon compliance with the provisions of this Article VIII or as a result of a pro rata stock dividend or stock split) and (ii) such Related Person shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or tax credits provided by the Corporation or a Subsidiary, or made any major changes in the Corporation's business or equity capital structure without the unanimous vote of the members of the Board then in office; and (3) A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, whether or not the Corporation is then subject to such requirements, shall be mailed to all shareholders of the Corporation for the purpose of soliciting shareholder approval of such Major Transaction and shall contain at the front thereof, in a prominent place any recommendations as to the advisability (or inadvisability) of the Major Transaction which the Continuing Directors, or any Outside Directors, may choose to state. 2. The Board of Directors of the Corporation shall have the power and duty to determine for the purposes of this Article VIII, on the basis of information known to the Corporation, whether (a) any corporation, person or other entity "Beneficially Owns," directly or indirectly, more than twenty percent (20%) of the shares of the Voting Stock, (b) any corporation, person or other entity is an Affiliate or Associate of another and (c) any proposed sale, lease, exchange or other disposition of part of the assets of the Corporation or any of its Affiliates involves a Substantial Part of the assets of the Corporation or such Affiliate, provided that assets involved in any single transaction or series of related transactions having an aggregate fair market value of more than fifteen percent (15%) of the total consolidated assets of the Corporation and its Affiliates shall always be deemed to constitute a "Substantial Part" for purposes of this Article VIII. Any such determination made in good faith shall be conclusive and binding for all purposes of this Article VIII. 3. Nothing contained in this Article VIII shall be construed to relieve any Related Person from any fiduciary obligation imposed by law. ARTICLE IX RESTRICTIONS ON SHARE REPURCHASES AND OTHER TRANSACTIONS 1. Any purchase by the Corporation of shares of Voting Stock from an Interested Shareholder, other than pursuant to an offer to the holders of all of the outstanding shares of the same class of Voting Stock as those so purchased, at a per share price in excess of the Market Price at the time of such purchase of the shares so purchased, shall require the affirmative vote of the holders of that amount of the voting power of the Voting Stock equal to the sum of (i) the voting power of the shares of Voting Stock of which the Interested Shareholder is the Beneficial Owner and (ii) a majority of the voting power of the remaining outstanding shares of Voting Stock, voting together as a single class. 2. In addition to any affirmative vote required by law or these Articles of Incorporation: (a) any merger or consolidation of the Corporation or any Subsidiary with (1) any Interested Shareholder or (2) any other corporation (whether or not itself an Interested Shareholder) which is, or after such merger or consolidation would be, an Affiliate of an Interested Shareholder; or 7 8 (b) any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with any Interested Shareholder or any Affiliate of any Interested Shareholder of any assets of the Corporation or any Subsidiary having an aggregate Fair Market value of $2,000,000 or more; or (c) the issuance or transfer by the Corporation or any Subsidiary (in one transaction or a series of transactions) of any securities of the Corporation or any Subsidiary having an aggregate Fair Market Value of $2,000,000 or more to any Interested Shareholder or any Affiliate of any Interested Shareholder in exchange for cash, securities or other property (or a combination thereof); or (d) the adoption of any plan or proposal for the liquidation or dissolution of the Corporation proposed by or on behalf of an Interested Shareholder or any Affiliate of any Interested Shareholder; or (e) any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any Subsidiary or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, of increasing the proportionate share of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate of any Interested Shareholder; shall require either (a) the approval of a majority of the Disinterested Directors or (b) the affirmative vote of the holders of that amount of voting power of the Voting Stock equal to the sum of (1) the voting power of the shares of Voting Stock of which the Interested Shareholder is the Beneficial Owner and (2) a majority of the voting power of the remaining outstanding shares of Voting Stock, voting together as a single class; provided, however, that no such vote shall be required for (i) the purchase by the Corporation of shares of Voting Stock from an Interested Shareholder unless such vote is required by Section 1 of this Article IX, (ii) any transaction with an Interested Shareholder who is also a Related Person as defined in Article VII and to which the provisions of Article VIII apply and are complied with, or (iii) any transaction with an Interested Shareholder who has Beneficially Owned all his shares of Voting Stock for two years or more. 3. At any election of directors of the Corporation on or after the date on which any Substantial Shareholder becomes a Substantial Shareholder, and until such time as there is no longer any Substantial Shareholder, there shall be cumulative voting for election of directors so that any holder of shares of Voting Stock entitled to vote in such election shall be entitled to as many votes as shall equal the number of directors to be elected multiplied by the number of votes to which such shareholder's shares would be entitled except for the provisions of this Section 3, and such shareholder may cast all of such votes for a single director, or distribute such votes among as many candidates as such shareholder sees fit. In any such election of directors, one or more candidates for the Board may be nominated by a majority of the Disinterested Directors and by any person who is the Beneficial Owner of 1% or more of the outstanding shares of Voting Stock. With respect to any candidates nominated by a majority of the Disinterested Directors or by any person who is the Beneficial Owner of 1% or more of the outstanding shares of Voting Stock, there shall be included in any proxy statement or other communication with respect to such election to be sent to holders of shares of Voting Stock by the Corporation during the period in which there is a Substantial Shareholder, at the expense of the Corporation, descriptions and other statements of or with respect to such candidates submitted by them or on their behalf, which shall receive equal space, coverage and treatment as is received by candidates 8 9 nominated by the Board or management of the Corporation provided that such information is received on a timely basis and complies with applicable federal and state securities laws. 4. It shall be the duty of any Interested Shareholder: (a) to give or cause to be given written notice to the Corporation, immediately upon becoming an Interested Shareholder, of such person's status as an Interested Shareholder and of such other information as the Corporation may reasonably require with respect to identifying all owners and amount of ownership of the outstanding Voting Stock of which such Interested Shareholder is a Beneficial Owner, and (b) to notify the Corporation promptly in writing of any change in the information provided in subparagraph (a) of this Section 4; provided, however, that the failure of an Interested Shareholder to comply with the provisions of this Section 4 shall not in any way be construed to prevent the Corporation from enforcing the provisions of Sections 1 through 3 of this Article IX. 5. A majority of the Disinterested Directors of the Corporation shall have the power and duty to determine for the purposes of this Article IX, on the basis of information known to them after reasonable inquiry, (a) whether a person is an Interested Shareholder or a Substantial Shareholder, (b) the number of shares of Voting Stock Beneficially Owned by any person, (c) whether a person is an Affiliate or an Associate of another person and (d) whether a transaction or a series of transactions constitutes one of the transactions specified in Section 2 hereof. The good faith determination of a majority of the Disinterested Directors shall be conclusive and binding for all purposes of this Article IX. ARTICLE X ELECTION OF DIRECTORS 1. The number of directors of the Corporation shall be specified in the Bylaws, and such number may from time to time be increased or decreased in such manner as may be prescribed in the Bylaws, provided the number of directors of the Corporation shall not be less than seven (7). 2. Directors shall be classified with respect to the time for which they shall severally hold office by dividing them into three classes, as nearly equal in number as possible. Those of the first class shall be elected for a term of office to expire at the first annual meeting of shareholders after their election, those of the second class shall be elected for a term of office to expire at the second annual meeting of shareholders after their election, and those of the third class shall be elected for a term of office to expire at the third annual meeting of shareholders after their election. Thereafter, the class of directors then being elected shall be elected to hold office for a term of office to expire at the third succeeding annual meeting of shareholders after their election. Each director shall hold office for the term for which elected and until such director's successor shall have been elected and qualified. 3. At a meeting of shareholders called expressly for that purpose, any director, any class of directors, or the entire Board of Directors may be removed from office as a director at any time (a) for cause by the shareholders entitled to elect such director if the number of votes cast to remove the director exceeds the number of votes cast not to remove the director, and if cumulative voting is then in effect, then a director may not be removed if the number of votes sufficient to elect such director is voted against the director's removal, or (b) without cause by the affirmative vote which satisfies the requirements of Article XI applicable to an amendment, modification, or repeal of certain of these Articles. 9 10 4. Vacancies in the Board of Directors, including vacancies resulting from an increase in the number of directors, shall be filled only by the affirmative vote of a majority of the remaining directors then in office, though less than a quorum, or by the sole remaining director. The term of a director elected to fill a vacancy shall expire at the next annual meeting of shareholders at which directors are elected. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 5. All corporate powers shall be exercised by the Board of Directors except as otherwise provided by law or these Articles of Incorporation. 6. Except as otherwise provided in these Articles of Incorporation, shareholders of the Corporation shall not have the right to cumulate votes in the election of directors. ARTICLE XI RESTRICTIONS ON CERTAIN AMENDMENTS The provisions set forth in this Article XI and in Articles III, VII, VIII, IX, X and XVII herein may not be repealed or amended in any respect, unless such action is approved by the affirmative vote of the holders of not less than 80% of the outstanding shares of Voting Stock of the Corporation, subject to the provisions of any series of Preferred Stock which may at the time be outstanding, provided, however, that if there is a shareholder of the Corporation which is a Related Person, such 80% vote must include the affirmative vote of at least 50% of the outstanding Voting Stock held by shareholders other than the Related Person. ARTICLE XII POWERS OF DIRECTORS The directors shall have power to make and to alter or amend the Bylaws and shall have all such other powers as they may be afforded by applicable law. ARTICLE XIII LIMITATION OF LIABILITY To the fullest extent permitted by the Washington Business Corporation Act as the same exists or may hereafter be amended, a director of the Corporation shall not be liable to the Corporation or its shareholders for monetary damages for conduct as a director. Any amendments to or repeal of this Article XIII shall not adversely affect any right or protection of a director for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. ARTICLE XIV INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS 1. The Corporation shall have the following powers: (a) The Corporation may indemnify and hold harmless to the fullest extent not prohibited by applicable law each person who was or is made a party to or is threatened to be made a party to or is involved (including, without limitation, as a witness) in any actual or threatened action, suit or other proceeding, whether civil, criminal, derivative, administrative or investigative, by reason of the fact that he or she is or was a director, officer, employee or agent of the Corporation or, being or having been such a director, officer, employee or agent, he or she is or was serving at the request of the Corporation as a director, officer, employee, agent, trustee, 10 11 or in any other capacity of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to employee benefit plans, whether the basis of such proceeding is alleged action or omission in an official capacity or in any other capacity while serving as a director, officer, employee, agent, trustee or in any other capacity, against all expense, liability and loss (including, without limitation, attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts to be paid in settlement) actually or reasonably incurred or suffered by such person in connection therewith. Such indemnification may continue as to a person who has ceased to be a director, officer, employee or agent of the Corporation and shall inure to the benefit of his or her heirs and personal representatives. (b) The Corporation may pay expenses incurred in defending any such proceeding in advance of the final disposition of any such proceeding; provided, however, that the payment of such expenses in advance of the final disposition of a proceeding shall be made to or on behalf of a director, officer, employee or agent only upon delivery to the Corporation of an undertaking, by or on behalf of such director, officer, employee or agent, to repay all amounts so advanced if it shall ultimately be determined that such director, officer, employee or agent is not entitled to be indemnified under this Article XIV or otherwise, which undertaking may be unsecured and may be accepted without reference to financial ability to make repayment. (c) The Corporation may enter into contracts with any person who is or was a director, officer, employee or agent of the Corporation in furtherance of the provisions of this Article XIV and may create a trust fund, grant a security interest in property of the Corporation, or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article XIV. (d) If the Washington Business Corporation Act (the "Act") is amended in the future to expand or increase the power of the Corporation to indemnify, to pay expenses in advance of final disposition, to enter into contracts, or to expand or increase any similar or related power, then, without any further requirement of action by the shareholders or directors of the Corporation, the powers described in this Article XIV shall be expanded and increased to the fullest extent permitted by the Act, as so amended. (e) No indemnification shall be provided under this Article XIV to any such person if the Corporation is prohibited by the nonexclusive provisions of the Act or other applicable law as then in effect from paying such indemnification. For example, no indemnification shall be provided to any director in respect of any proceeding, whether or not involving action in his or her official capacity, in which he or she shall have been finally adjudged to be liable on the basis of intentional misconduct or knowing violation of law by the director, or from conduct of the director in violation of Section 23B.08.310 of the Act, or that the director personally received a benefit in money, property or services to which the director was not legally entitled. 2. The Corporation shall indemnify and hold harmless any person who is or was a director or officer of the Corporation, and pay expenses in advance of final disposition of a proceeding, to the full extent to which the Corporation is empowered. 3. The Corporation may, by action of its Board of Directors from time to time, indemnify and hold harmless any person who is or was an employee or agent of the Corporation, and pay expenses in advance of final disposition of a proceeding, to the full extent to which the Corporation is empowered, or to a lesser extent which the Board of Directors may determine. 4. The rights to indemnification and payment of expenses in advance of final disposition of a proceeding conferred by or pursuant to this Article XIV shall be contract rights. 11 12 5 A director, officer, employee or agent ("claimant") shall be presumed to be entitled to indemnification and/or payment of expenses under this Article XIV upon submission of a written claim (and, in an action brought to enforce a claim for expenses incurred in defending any proceeding in advance of its final disposition, where the undertaking in subsection 1(b) above has been delivered to the Corporation) and thereafter the Corporation shall have the burden of proof to overcome the presumption that the claimant is so entitled. If a claim under this Article XIV is not paid in full by the Corporation within sixty (60) days after a written claim has been received by the Corporation, except in the case of a claim for expenses incurred in defending a proceeding in advance of its final disposition, in which case the applicable period shall be twenty (20) days, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim and, to the extent successful in whole or in part, the claimant shall be entitled to be paid also the expense of prosecuting such claim. Neither the failure of the Corporation (including its board of directors, its shareholders or independent legal counsel) to have made a determination prior to the commencement of such action that indemnification of or reimbursement or advancement of expenses to the claimant is proper in the circumstances nor an actual determination by the Corporation (including its board of directors, its shareholders or independent legal counsel) that the claimant is not entitled to indemnification or to the reimbursement or advancement of expenses shall be a defense to the action or create a presumption that the claimant is not so entitled. 6. The right to indemnification and payment of expenses in advance of final disposition of a proceeding conferred in this Article XIV shall not be exclusive of any other right which any person may have or hereafter acquire under any statute, provision of the articles of incorporation, bylaws, agreement, vote of shareholders or disinterested directors or otherwise. 7. The Corporation may purchase and maintain insurance, at its expense, to protect itself and any director, officer, employee, agent or trustee of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Act. 8. Any repeal or modification of this Article XIV shall not adversely affect any right of any person existing at the time of such repeal or modification. 9. If any provision of this Article XIV or any application thereof shall be invalid, unenforceable or contrary to applicable law, the remainder of this Article XIV, or the application of such provision to persons or circumstances other than those as to which it is held invalid, unenforceable or contrary to applicable law, shall not be affected thereby and shall continue in full force and effect. 10. For purposes of this Article XIV, applicable law shall at all times be construed as the applicable law in effect at the date indemnification may be sought, or the law in effect at the date of the action, omission or other event giving rise to the situation for which indemnification may be sought, whichever is selected by the person seeking indemnification. As of the date hereof, applicable law shall include Section 23B.08.500 through .600 of the Act. ARTICLE XV MERGERS, SHARE EXCHANGES, AND OTHER TRANSACTIONS Except as otherwise expressly provided in these Articles, a merger, share exchange, sale of substantially all of the Corporation's assets, or dissolution must be approved by the affirmative vote of a majority of the Corporation's outstanding shares entitled to vote, or if separate voting by 12 13 voting groups is required, then by not less than a majority of all the votes entitled to be cast by that voting group. ARTICLE XVI CORPORATION'S ACQUISITION OF ITS OWN SHARES The Corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal with and in its own shares. As a specific modification of Section 231B.06.310 of the Act, pursuant to the authority in Section 23B.02.020(5)(c) of the Act to include provisions related to the management of the business and the regulation of the affairs of the Corporation, shares of the Corporation's stock acquired by it pursuant to this Article XVI shall be considered "Treasury Stock" and so held by the Corporation. The shares so acquired by the Corporation shall not be considered as authorized and unissued but rather as authorized, issued, and held by the Corporation. The shares so acquired shall not be regarded as canceled or as a reduction to the authorized capital of the Corporation unless specifically so designated by the Board of Directors in an amendment to these Articles. The provisions of this Article XVI do not alter or effect the status of the Corporation's acquisition of its shares as a "distribution" by the Corporation as defined in Section 23B.01.400(6) of the Act, nor alter or effect the limitations on distributions by the Corporation as set forth in Section 23B.06.400 of the Act. Any shares so acquired by the Corporation, unless otherwise specifically designated by the Board of Directors, at the time of acquisition, shall be considered on subsequent disposition as transferred rather than reissued. Nothing in this Article XVI limits or restricts the right of the Corporation to resell or otherwise dispose of any of its shares previously acquired for such consideration and according to such procedures as established by the Board of Directors. ARTICLE XVII SPECIAL SHAREHOLDER MEETINGS Special meetings of the shareholders of the Corporation for any purpose or purposes may be called at any time by the Board of Directors, or by a committee of the Board of Directors which has been duly designated by the Board of Directors and whose powers and authority, as provided in a resolution of the Board of Directors or in the bylaws of the Corporation, include the power to call such meeting, but such special meetings may not be called by any other person or persons. ARTICLE XVIII INCORPORATOR The name and address of the incorporator are: Edmund 0. Belsheim, Jr., Two Union Square, 601 Union Street, Seattle, Washington 98101. Dated: November 10, 1995. /s/ Jeffrey T. Cook ---------------------------- Jeffrey T. Cook Vice President and Chief Financial Officer 13 EX-3.2 3 AMENDED AND RESTATED BYLAWS OF PENWEST 1 Exhibit 3.2 AMENDED AND RESTATED BYLAWS OF PENWEST, LTD. (A Washington Corporation) (Amended as of June 27, 1995) ARTICLE I CAPITAL STOCK 1.1 Stock Certificates. Stock certificates of the Corporation shall be in such form as the Board of Directors may from time to time prescribe. Every stock certificate shall be signed by two officers designated by the Board of Directors and sealed with the corporate seal. All certificates shall be countersigned by a transfer agent and a registrar of the Corporation. Any and all signatures on any such certificate and the corporate seal upon any such certificate may be facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if he or she were such officer, transfer agent, or registrar at the date of issue. 1.2 Transfer of Shares. The shares of stock of the Corporation shall be transferable on its books, or other appropriate records, kept for such purpose, by the holder thereof in person or by his duly authorized attorney upon surrender and cancellation of such holder's certificates, properly endorsed, accompanied by authority to transfer. Upon surrender, as above provided, of a stock certificate, one or more new stock certificates for such aggregate number of shares of stock as equals the aggregate number of shares represented by the surrendered stock certificate shall be issued to the parties entitled thereto. 1.3 Holders of Stock of Record. The Corporation shall be entitled to treat the holder of record of any share or shares of stock of the Corporation as the holder in fact thereof, and shall not be bound to recognize any claim to, or interest in, such shares on the part of any other person, whether or not the Corporation shall have express or other notice thereof. -1- 2 1.4 Rules and Regulations Concerning the Issue, Transfer, and Registration of Stock Certificates. The Board of Directors of the Corporation shall have the power and authority to make all such rules and regulations as the Board may deem proper or expedient concerning the issue, transfer and registration of stock certificates for shares of stock of the Corporation. The Board of Directors shall have the power and authority to appoint from time to time one, or more than one, transfer agent, and one, or more than one, registrar of transfers, and may require all stock certificates for shares of stock of the Corporation to be properly countersigned, and/or otherwise properly authenticated, by such transfer agent or registrar. 1.5 Rules and Regulations Concerning Lost and Destroyed Certificate. A new certificate or certificates of stock may be issued in place of any certificate or certificates of stock theretofore issued by the Corporation and alleged to have been lost or destroyed, upon delivery to the Secretary of the Corporation or any authorized transfer agent of the Corporation of a written claim in the form of an affidavit stating all pertinent facts relating to the alleged loss or destruction of such certificate or certificates together with an open penalty indemnity bond, approved as provided below, written by a surety company approved by an executive officer of the Corporation and indemnifying against any claim that may be made against the Corporation for or in respect of the shares of stock represented by the certificate or certificates alleged to have been lost or destroyed. The penalty of such bond shall be unlimited as to time and amount and said bond must be approved by an executive officer of the Corporation. The Board of Directors may, in the discretion of a majority of the Board, however, direct the issuance of a certificate or certificates in place of any certificate or certificates alleged to have been lost or destroyed upon such lesser conditions or security. ARTICLE II MEETINGS OF SHAREHOLDERS 2.1 Place of Meetings of Shareholders. The Annual Meetings of shareholders of the Corporation shall be held at such place as the Board of Directors may from time to time designate. The time and place of the meeting shall be stated in the Notice to Shareholders. -2- 3 2.2 Annual Meetings of Shareholders -- Time -- Business. The Annual Meeting of the shareholders of the Corporation for the election of Directors and for the transaction of any such other business as properly may be submitted to such Annual Meeting shall be held at the hour and on the date designated by the Board of Directors or the Executive Committee of the Board of Directors, such date to be within 180 days of the end of the fiscal year. Any and all business pertaining to the affairs of the Corporation may be transacted at any such Annual Meeting of its shareholders or at any adjournment thereof, except only to the extent otherwise expressly proscribed by law. 2.3 Special Meetings of Shareholders. Special meetings of the shareholders of the Corporation may be called at any time by the Board of Directors. 2.4 Quorum at Shareholders' Meetings. The holders of record of a majority of the issued and outstanding shares of the stock of the Corporation present in person or represented by proxy at any shareholders' meeting and entitled to vote thereat shall constitute a quorum for the transaction of business at any such meeting, except as may otherwise be provided by law; but if there be less than a quorum present at any such meeting, the holders of a majority of the shares so present or represented at such meeting may adjourn the meeting from time to time. 2.5 Notice of Annual or Special Meetings of Shareholders. Written notice stating the place, day and hour of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called shall be given by or at the direction of the Board of Directors, the Chairman of the Board of Directors, the President, the Secretary or an Assistant Secretary to each shareholder entitled to notice of or to vote at the meeting not less than 10 nor more than 60 days before the meeting, except that notice of a meeting to act on an amendment to the Articles of Incorporation, a plan of merger or share exchange, the sale, lease, exchange, or other disposition of all or substantially all of the Corporation's assets other than in the regular course of business or the dissolution of the Corporation shall be given not less than 20 nor more than 60 days before such meeting. Such notice may be transmitted by mail, private carrier, personal delivery, telegraph, teletype or communications equipment which transmits a facsimile of the -3- 4 notice to like equipment which receives and reproduces such notice. If these forms of written notice are impractical in the view of the Board of Directors, the Chairman of the Board of Directors, the President, the Secretary or an Assistant Secretary, written notice may be transmitted by an advertisement in a newspaper of general circulation in the area of the Corporation's principal office. If such notice is mailed, it shall be deemed effective when deposited in the official government mail, first-class postage prepaid, properly addressed to the shareholder at such shareholder's address as it appears in the Corporation's current record of shareholders. Notice given in any other manner shall be deemed effective when dispatched to the shareholder's address, telephone number or other number appearing on the records of the Corporation. Any notice given by publication as herein provided shall be deemed effective five days after first publication. 2.6 Voting List of Shareholders and Fixing of Record Date for Voting and For Other Purposes. At least 10 days before each meeting of shareholders, an alphabetical list of the shareholders entitled to notice of such meeting shall be made, arranged by voting group and by each class or series of shares therein, with the address of and number of shares held by each shareholder. This record shall be kept at the principal office of the Corporation for 10 days prior to such meeting, and shall be kept open at such meeting, for the inspection of any shareholder or any shareholder's agent. For the purpose of determining shareholders entitled to (a) notice of or to vote at any meeting of shareholders or any adjournment thereof, or (b) to receive payment of any dividend, or in order to make a determination of shareholders for any other purpose, the Board of Directors may fix a future date as the record date for any such determination. Such record date shall be not more than 70 days, and in case of a meeting of shareholders not less than 10 days, prior to the date on which the particular action requiring such determination is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of or to vote at a meeting, the record date shall be the day immediately preceding the date on which notice of the meeting is first given to shareholders. Such a determination shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date, which it shall do if the meeting is adjourned to a date more than 120 days after the date fixed for the original meeting. If no record date is set for the determination of shareholders entitled to receive payment of any stock dividend or distribution (other than one involving a purchase, redemption, or other acquisition of the Corporation's shares) the record date shall be the date the Board of Directors authorizes the stock dividend or distribution. -4- 5 2.7 Officers of Meetings of Shareholders. The President of the Corporation (or in his absence, the Chairman of the Board of Directors of the Corporation) may call any meeting of shareholders to order and shall be the Chairman thereof. If the Chairman of the Board of Directors and the President are absent from any such meeting, then a Vice President of the Corporation shall be the Chairman thereof and shall preside at such meeting. The Secretary of the Corporation, if present at any meeting of its shareholders, shall act as the Secretary of such meeting. If the Secretary is absent from any such meeting, the Chairman of such meeting may appoint a Secretary for the meeting. 2.8 Proper Business for Shareholders' Meetings. At any annual or special meeting of the shareholders of the Corporation, only business properly brought before the meeting may be transacted. To be properly brought before an annual or special meeting, business or other proposals must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (ii) otherwise properly brought before the meeting by or at the direction of the Board of Directors, or (iii) otherwise properly brought before the meeting by a shareholder. For business to be properly brought before an annual meeting by a shareholder, written notice thereof must have been received by the Secretary of the Corporation from such shareholder not less than 120 days prior to the date corresponding to the date on which the Corporation mailed its proxy statement in connection with its previous year's annual meeting of shareholders. For business to be properly brought before a special meeting by a shareholder, or in the event the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, notice by the shareholder to be timely must be received by the Secretary of the Corporation not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the scheduled meeting was mailed or the day on which public disclosure of such date was made. Any such notice shall set forth as to each matter the shareholder proposes to bring before the meeting (i) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting, and the language of the proposal, (ii) the name and address of the shareholder proposing such business, (iii) a representation that the shareholder is a holder of record of stock of the Corporation entitled to vote at such meeting, and (iv) any material interest of the shareholder in such business. Any such notice to the Corporation shall also comply with all applicable provisions of Regulation 14A under the Securities Exchange Act of -5- 6 1934. No business shall be conducted at any meeting of shareholders except in accordance with this Section, and the Chairman of any meeting of shareholders and the Board of Directors may refuse to permit any business to be brought before the meeting without compliance with the foregoing procedures. ARTICLE III DIRECTORS 3.1 Number of Directors. The authorized number of directors of the Corporation shall be not less than seven, nor more than fifteen. The Board of Directors, by resolution, shall fix the number of directors to constitute the whole Board of Directors of the Corporation, within the above limits, which number shall prevail until a resolution is adopted by the Board of Directors prescribing a different number of directors to be the authorized number of directors of the Corporation. 3.2 Qualifications of Directors. No director of the Corporation need be a shareholder therein. Each director of the Corporation shall be eligible to serve as a director until the regular meeting of the Board of Directors immediately following his 72nd birthday. 3.3 Election of Directors -- Terms of Office. The shareholders shall, at their annual meeting held each year, elect the class of directors of the Corporation as set forth in the Articles of Incorporation of the Corporation. 3.4 Nominations of Directors for Election. Nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or, if the shareholders are, at the time, entitled to cumulate their votes in the election of directors in accordance with Article IX of the Articles of Incorporation of the Corporation, by a majority of the "Disinterested Directors" or by any shareholder who is the "Beneficial Owner" of one percent or more of the outstanding shares of "voting stock" of the Corporation as said terms are defined in the Articles of Incorporation in accordance with the following procedures. However, any such one percent shareholder at the time may nominate one or more persons for election as directors at a meeting only if written notice of such shareholder's intent to make such nomination or nominations has been given, either by personal delivery or by United States mail, postage prepaid, to the Secretary of the Corporation in accordance with the following procedures: For a nomination to be properly submitted before an -6- 7 annual meeting by a shareholder, written notice thereof must have been received by the Secretary of the Corporation from such shareholder not less than 120 days prior to the date corresponding to the date on which the Corporation mailed its proxy statement in connection with its previous year's annual meeting of shareholders. For a nomination to be properly submitted before a special meeting by a shareholder, or in the event the date of the annual meeting has been changed by more than 30 calendar days from the date contemplated at the time of the previous year's proxy statement, notice by the shareholder to be timely must be received by the Secretary of the Corporation not later than the close of business on the 10th day following the earlier of the day on which notice of the date of the scheduled meeting was mailed or the day on which public disclosure of such date was made. Each such notice to the Secretary shall set forth: (i) the name and address of record of the shareholder who intends to make the nomination; (ii) a representation that the shareholder is a holder of record of shares of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) the name, age, business and residence addresses, and principal occupation or employment of each nominee; (iv) a description of all arrangements or understandings between the shareholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the shareholder; (v) such other information regarding each nominee proposed by such shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission; and (vi) the consent of each nominee to serve as a director of the Corporation if so elected. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a director of the Corporation. The presiding officer of the meeting may, if the facts warrant, determine that a nomination was not made in accordance with the foregoing procedure, and if such officer should so determine, such officer shall so declare to the meeting and the defective nomination shall be disregarded. 3.5 Failure to Elect Directors at Annual Meeting of the Shareholders. If the class of directors of the Corporation to be elected at the annual meeting shall not be elected as herein provided at the annual meeting in any year of the shareholders of the Corporation, or at any adjournment of such annual meeting, then, in such event, the Corporation shall not for that reason be dissolved, but its directors at the time shall be deemed lawful directors of the Corporation for all purposes, and shall continue -7- 8 to hold office as directors until their successors, respectively, are duly elected and qualified. 3.6 Authority of the Board of Directors. The business of the Corporation shall be managed by its Board of Directors, and such Board shall have and exercise full powers and authority in the management, control, regulation, and conduct of the property, interests, business transactions and affairs of the Corporation; provided, however, that the Executive Committee of the Board of Directors of the Corporation may exercise the power and authority of such Board pursuant but subject to (a) the limitations in Section 23B.08.250 of the Washington Business Corporation Act and (b) restrictions imposed by the Board of Directors pursuant to Article IV hereof. If the position, Chairman of the Board, is not designated as an office of the Corporation, then the Board may from time to time elect one of its members to act as Chairman. 3.7 Action by the Board of Directors or Any of Its Committees Without a Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or of the Executive Committee or of any other committee of said Board may be taken without a meeting if a written consent describing the action taken is signed by all members of the Board or of such committee, as the case may be, and such written consent is filed with the minutes of said Board or of said committee. Action taken by such written consent is effective when the last director signs the consent, unless the consent specifies a later effective date. 3.8 Regular Meetings of the Board of Directors. Meetings of the Board of Directors of the Corporation may be held at its corporate offices, or at such other place or places as may be authorized by such Board. Such Board shall also fix the time or times of such regular meetings. No notice of any regularly scheduled meeting need be given. The Chairman of the Board or the President may change the time and place of any regular meeting by giving reasonable notice thereof, in writing or by telephone, not later than 24 hours before the time originally fixed for such meeting. The Chairman of the Board shall act as Chairman of the meetings, but in his absence, the President shall act as Chairman. The Secretary of the Corporation shall act as Secretary of the meetings, but in his absence, the Chairman of the meeting shall appoint a Secretary of the meeting. -8- 9 3.9 Special Meetings of the Board of Directors. Meetings of the Board of Directors of the Corporation may be held from time to time on written call thereof by the Chairman of the Board of Directors or the President made at any time at his or her own instance and discretion or on call thereof made by such number of its directors as equals a majority of its whole Board of Directors at the time. Any special meeting of the Board of Directors may be held at such time or at such place designated in said call. The time, place and purpose of any special meeting of the Board of Directors to be held pursuant to call and notice shall be stated both in the call and the notice thereof, and no business other than that stated in such notice shall be transacted, or acted upon, at such special meeting. Reasonable notice of a special meeting shall be given in writing or by telephone by the person or persons calling the meeting, not later than 72 hours prior to the time set for the meeting; provided that the minimum notice period shall be 48 hours in the event of a tender or exchange offer to purchase securities of the Corporation. Any special meeting of the Board of Directors may be held at any time without previous call, or previous notice thereof, if all directors of the Corporation either attend such meeting, or consent in writing thereto, or if each director not present at such meeting waives notice thereof. Any and all business and matters pertaining to the affairs of the Corporation may be considered, transacted and acted on at any special meeting so held without previous call or previous notice. 3.10 Quorum of Directors. A majority of the members of the Board of Directors as constituted for the time being shall constitute a quorum for the transaction of business, but less than a quorum may adjourn any meeting from time to time until a quorum is present and without further notice being given. 3.11 Waiver of Notice of Meetings of the Board of Directors. Any director of the Corporation may waive in writing at any time any such notice of any meeting of the Board of Directors of the Corporation as may be provided by the Washington Business Corporation Act or by these Bylaws to be given; and a written waiver thereof signed by any director entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent to such notice legally given to such director. Attendance at any meeting of the Board of Directors of the Corporation by a director shall constitute waiver of notice of such meeting, unless such director at the beginning of the meeting, or promptly upon such director's arrival, objects to holding the meeting or transacting business thereat and does not thereafter vote for or assent to action taken at the meeting. -9- 10 3.12 Fees to the Directors for Attending Meetings of the Board of Directors. The directors of the Corporation shall be entitled, as directors, to receive an annual fee for service as directors and an attendance fee for meetings of the Board of Directors and for meetings of committees of the Board of Directors. Said fees shall be payable in the amounts and under provisions prescribed from time to time by resolution of the Board of Directors, and the Corporation is hereby authorized to pay such fees to each of its directors; provided, however, that no director of the Corporation shall be entitled to said fee if at the time he is otherwise employed by the Corporation at a regular monthly or annual salary as a full time employee. 3.13 Meeting by Telephone. Members of the Board of Directors or any committee designated by the Bylaws or appointed by the Board of Directors may participate in a meeting of such Board or committee by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time, and participation by such means shall constitute presence at a meeting. 3.14 Rights Agreement. Notwithstanding anything to the contrary in these Bylaws, any action stated in the Rights Agreement between the Corporation and First Interstate Bank of California dated as of June 3, 1988, as such agreement may be amended from time to time (the "Rights Agreement"), to be taken by the Board of Directors after a Person has become an Acquiring Person shall require the presence of Continuing Directors and the concurrence of a majority of the Continuing Directors. Capitalized terms in this paragraph shall have the meanings indicated in the Rights Agreement. ARTICLE IV COMMITTEES OF THE BOARD OF DIRECTORS 4.1 Creation of Committees The Board of Directors, by resolution adopted by the greater of a majority of the directors then in office and the number of directors required to take action in accordance with these Bylaws, may create one or more committees, including an Executive Committee, and appoint members to such committee from its own members. Each committee must have two or more members, who shall serve at the pleasure of the Board of Directors. 4.2 Authority of Committees -10- 11 Each committee shall have and may exercise the authority of the Board of Directors to the extent provided in the resolution of the Board creating the committee and any subsequent resolutions pertaining thereto, except that no committee shall have the authority to: (1) authorize or approve a distribution except according to a general formula or method prescribed by the Board, (2) approve or propose to shareholders actions or proposals required by the Washington Business Corporation Act to be approved by shareholders, (3) fill vacancies on the Board or on any committee, (4) adopt, amend or repeal Bylaws, (5) amend the Articles of Incorporation, (6) approve a plan of merger not requiring shareholder approval, or (7) authorize or approve the issuance or sale or contract for sale of shares, or determine the designation and relative rights, preferences and limitations of a class or series of shares, except that the Board may authorize a committee or a senior executive officer of the Corporation to do so within limits specifically prescribed by the Board. ARTICLE V OFFICERS AND THEIR POWERS AND DUTIES 5.1 Authorized Officers. The officers of the Corporation shall consist of a President, one or more Vice Presidents (who may be designated as Vice Presidents, Senior Vice Presidents or Executive Vice Presidents), and Secretary. The Corporation may have such additional officers (hereinafter in these Bylaws sometimes referred to as "additional officers") as its Board of Directors may deem necessary for its business and may appoint from time to time. The Board of Directors may designate one of the officers as the chief financial officer of the Corporation. The Board of Directors at any meeting of the Board may fill a vacancy in any office. The officers of the Corporation shall be elected at the first Board of Director's meeting held after the annual election of directors and they shall serve until the next annual election of officers, subject to the right of the Board of Directors to remove any officer at any time. The Board of Directors, by resolution duly adopted at any meeting thereof duly held, may authorize and direct that any office of the Corporation, except the offices of President and Secretary, may be left unfilled for any such period of time as the Board may fix in such resolution. -11- 12 5.2 Qualifications of Officers. No officer of the Corporation need be a shareholder therein. No officer of the Corporation, except the President, need be a director. 5.3 Powers and Duties of Officers. The respective officers of the Corporation, subject, always, to control by its Board of Directors, shall have such power and authority and perform such duties in the management and conduct of its property, business and affairs, as from time to time may be prescribed with respect to such officers, respectively, by and under any Section of these Bylaws, by resolution of the Board of Directors or by the President. The Board of Directors may by appointment designate either the Chairman, if an officer of the Corporation, or the President as the Chief Executive Officer of the Corporation and either of said officers as the Chief Operating Officer of the Corporation. 5.4 Powers and Duties of the Chief Executive Officer and the Chief Operating Officer. The Chief Executive Officer of the Corporation shall have general charge and supervision of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors and of the Executive Committee are carried out. The Chief Executive Officer shall designate the duties of all officers of the Corporation, which designations shall be subject to review by the Board of Directors; provided, however, that the specific duties assigned to the Chief Executive Officer, the Chief Operating Officer and the Secretary shall not be changed except by amendment to these Bylaws and/or by resolution of the Board of Directors, as appropriate. The Chief Operating Officer of the Corporation shall have general supervisory authority and responsibility for the day to day operations of the Corporation. In the event of the death of either of the Chief Executive Officer or the Chief Operating Officer or the permanent disability preventing such officer from performing his duties, all officers normally reporting to such deceased or disabled officer shall report to the Executive Committee. The Chairman of the Board shall call a meeting of the Board to be held within 20 days of the date of such death or disability for the purpose of electing a new Chief Executive Officer or Chief Operating Officer, as the case may be. -12- 13 Either the Chief Executive Officer or the Chief Operating Officer may sign in the name of the Corporation all instruments required to be signed by the Corporation in the ordinary course of its business. Each such officer shall perform such other duties as may be assigned to such officer by the Board of Directors or by these Bylaws. 5.5 Compensation to Officers. The Board of Directors shall have authority (a) to fix the compensation, whether in the form of salary or otherwise, of all officers and employees of the Corporation, either specifically or by formula applicable to particular classes of officers or employees, and (b) to authorize officers of the Corporation to fix the compensation of subordinate employees. The Board of Directors shall have authority to appoint a Compensation Committee and may delegate to such committee authority to review the compensation of all employees of the Corporation, and its subsidiaries. The Compensation Committee may also be authorized to make recommendations to the Board with respect to compensation of the corporate officers. ARTICLE VI MISCELLANEOUS 6.1 Corporate Seal. The corporate seal of the Corporation shall be a seal consisting of two concentric circles, in the outer of which circles shall appear and be inscribed the following words: "PENWEST, LTD. WASHINGTON", and in the inner of which circles shall appear and be inscribed the following words and figures: "CORPORATE SEAL 1995"; and such seal, as impressed on the margin thereof, shall be the corporate seal of the Corporation; provided, however, that at any time, and from time to time, such seal may be altered or a new corporate seal for the Corporation may be authorized and adopted, at the pleasure of its Board of Directors, by resolution duly adopted by such Board at any meeting thereof duly held. 6.2 Fiscal Year. The fiscal year of the Corporation shall begin on September 1 and end on August 31 of each year. 6.3 Amendments. These Bylaws may be amended, altered or repealed, in whole or in part, or new Bylaws may be made for the Corporation from time to time by the affirmative vote of the majority of its whole Board of Directors at any meeting of such Board duly held, -13- 14 subject to the right and power of the shareholders of the Corporation to change or repeal such Bylaws. 6.4 Severability. In the event that any provision of these Bylaws is determined by a court to require the Corporation to do or to fail to do an act which is in violation of applicable law, such provision shall be limited or modified in its application to the minimum extent necessary to avoid a violation of law, and, as so limited or modified, such provision and the balance of these Bylaws shall remain in full force and effect. -14- EX-10.8 4 CHANGE OF CONTROL AGREEMENTS 1 Exhibit 10.8 CHANGE OF CONTROL AGREEMENT AGREEMENT between PENWEST, LTD., a Washington corporation (the "Corporation"), and _______________ (the "Executive"), dated as of October 24, 1995. RECITALS A. The Executive is an executive officer of the Corporation and an integral part of its management. B. The Corporation wishes to assure both itself and the Executive of continuity of management in the event of any actual or threatened change in control of the Corporation. C. This Agreement is not intended to alter the compensation and benefits that the Executive could reasonably expect in the absence of the occurrence of a Trigger Date, as defined in this Agreement; consequently, this Agreement will be operative only upon the Executive's termination during the term of this Agreement after the occurrence of a Trigger Date. NOW, THEREFORE, it is hereby agreed as follows; 1. Term of Agreement. The effective date of this Agreement is October 24, 1995. This Agreement shall remain in effect until terminated by the Corporation or, if a Trigger Date occurs prior to such termination by the Corporation, until the obligations of the Corporation pursuant to paragraphs 4 and 6 have been fulfilled. This Agreement shall terminate one year after the date the Corporation gives the Executive written notice of the termination of this Agreement; except that if a Trigger Date occurs prior to the termination date, this Agreement shall remain in effect with respect to all rights accruing as a result of the occurrence of the Trigger Date. 2. Operation of Agreement - Trigger Date. The provisions of this Agreement shall become operative the day before each "Trigger Date" which occurs during the term of this Agreement. Any of the following shall constitute a Trigger Date: (a) any Person is or becomes the beneficial owner, directly or indirectly, of securities of the Corporation representing more than 50% of the voting power of the outstanding Voting Stock, (b) the effective date of a merger, consolidation, reorganization or dissolution in which the Corporation is not the surviving entity or (c) during any period of two consecutive years, individuals who constitute the Board of Directors of the -1- 2 Corporation at the beginning of any such period cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election by the Corporation's shareholders, of each new director was approved by a vote of at least two-thirds of the directors then still in office who were directors of the Corporation at the beginning of such period. means an individual, firm, corporation or other entity, together with all Affiliates and Associates of such Person, but shall not include the Corporation, any subsidiary of the Corporation or any employee benefit plan of the Corporation. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the Securities Exchange Act of 1934, as amended. "Voting Stock" means the common stock of the Corporation and any other shares entitled to vote for the election of directors of the Corporation. 3. Termination of Employment. If, during the term of this Agreement, there is a termination of the Executive's employment after a Trigger Date, then the Executive shall receive the compensation and benefits described in paragraphs 4 and 6. The term "termination of the Executive's employment" for purposes of this Agreement shall mean (1) termination by the Corporation of the employment of the Executive for any reason other than cause, the Executive's having reached age 65, death, or disability if the disability is covered by the Corporation's long term disability plan, or (2) termination by the Executive of his employment following (i) the assignment to the Executive of responsibilities or title materially less than his responsibilities and title immediately prior to the Trigger Date, (ii) the reduction in the aggregate of the Executive's salary and bonus to which he was entitled immediately prior to the Trigger Date that is not remedied within 30 days after receipt by the Corporation of written notice from the Executive of such reduction, or (iii) without limiting the generality of effect of the foregoing, any material breach of this Agreement by the Corporation. The term "cause" shall mean gross misconduct in connection with the Executive's position as an officer of the Corporation which results in demonstrably material injury to the Corporation. Bad judgment or negligence shall not constitute gross misconduct nor shall any act or omission reasonably believed by the Executive to have been in, or not opposed to, the interests of the Corporation. 4. Compensation. Subject to the provisions of paragraph 8, if there is a termination of the Executive's employment on or before 24 months after a Trigger Date, the Executive shall have the right to receive the compensation described in this paragraph during the compensation period, subject to reduction as provided in paragraph 5 if the Executive is employed by one or more employers during such period. The term "compensation period" shall mean the period between the Executive's termination date and 30 months after such termination -2- 3 date. However, in no event shall the compensation period extend beyond the end of the month in which the Executive reaches 65 years of age. During the compensation period the Executive shall continue to receive his annual salary, payable at the same time and in the same manner as it was paid immediately prior to his termination. The term "annual salary" shall mean the annual salary being paid the Executive immediately before his termination, determined prior to any deductions actually taken from salary (1) for salary reductions or deferrals under any plan of the Corporation, (2) for payment of employee benefits under any plan of the Corporation which were charged to the Executive, and (3) for the purchase of stock under any plan of the Corporation. In addition, the Executive shall receive his target bonus (determined under the bonus plan last in effect for the Executive as if the Executive had not been terminated) for the fiscal year in which the Executive was terminated at the time that such bonus was paid in the previous year. The same bonus shall be paid on the same month and day in any succeeding year that occurs within the compensation period. Notwithstanding any other provision in this paragraph, if the Executive's annual salary and target bonus are less than the average of the Executive's gross compensation for the three calendar years prior to the Executive's termination date, then the Executive shall receive, in monthly payments, such average annual gross compensation during the compensation period instead of his salary and target bonus. The term "gross compensation" shall mean compensation as reported on the Executive's Federal Income Tax Withholding Statement (Form W-2) plus the following items to the extent they were not reported on the Executive's Federal Income Tax Withholding Statement: (1) any salary reductions or deferrals under any plan of the Corporation, (2) any amounts paid for employee benefits under any plan of the Corporation which are charged to the Executive, and (3) any amounts charged to the Executive for the purchase of stock under any plan of the Corporation. Notwithstanding any other provision of this Agreement, if the aggregate present value of the payments to or for the benefit of the Executive under this paragraph and paragraph 6 equals or exceeds three times the "base amount" (as defined in Internal Revenue Code Section 280G), such that a deduction would not be allowed to the Corporation under that Section for all or any part of such payments, or if the payments made hereunder would cause the Executive to be liable for tax under Internal Revenue Code Section 4999, then the payments under this paragraph and paragraph 6 shall be reduced so that the aggregate "present value" (as defined in Internal Revenue Code Section 280G(d)(4)) of such payments shall total $100.00 less than three times the base amount. The purpose of such reduction is to ensure that the payments to the Executive will not constitute a parachute payment within the meaning of Internal Revenue Code Section 280G(b)(2) and that the Executive will not be subject to tax under Internal Revenue Code Section 4999. The Executive shall have the right (but shall not be required) to -3- 4 receive the benefit of any amendments to Internal Revenue Code Section 280G that increase the amount that may be received without loss of the deduction to the Corporation. 5. Reduction by Reason of Other Employment. If the Executive is employed by one employer or simultaneously by more than one employer during the compensation period, the amount payable under paragraph 4 shall be reduced by the total gross compensation received from such employer or employers. Gross compensation shall have the same meaning as in paragraph 4. No amount required to be paid to the Executive under paragraph 4 shall be reduced prior to the time the Executive actually receives compensation from such new employer or employers, except that if compensation from the new employer is deferred, either voluntarily or involuntarily, the Corporation may reduce its payments in an equitable manner. The Executive shall use best efforts to give the Corporation access to the Executive's new employer in order to confirm such gross compensation or to confirm compliance by the Executive with paragraph 8. 6. Benefits. Subject to the provisions of paragraph 8, if there is a termination of the Executive's employment on or before 24 months after a Trigger Date, then the Executive shall continue to be treated during the compensation period as an "employee" under all stock option, purchase or acquisition plans in effect on his termination date; however, no new stock or option awards shall be granted after the Executive's termination date. The Executive, his dependents, beneficiaries and/or estate shall continue during the compensation period to be entitled to all benefits under medical, dental, life insurance and similar plans (except for any disability plan) that are in effect on the Executive's termination date. If by reason of law or government regulation or third-party contractual restriction the Executive, his dependents, beneficiaries and/or estate cannot receive or participate in a benefit, then the Corporation shall, to the extent necessary, pay or provide for payment of such benefit to the Executive, his dependents, beneficiaries and/or estate in the same amount and manner as they would have been provided by the plan. Notwithstanding the foregoing, if the Executive is employed by another employer, the Corporation shall not provide any medical, dental, life insurance or similar benefit to the extent it is provided by the other employer. The participation of the Executive in the PENWEST, LTD. Retirement Plan, the PENWEST, LTD. 401(k) Plan or any other plan described in Internal Revenue Code Section 401(a) shall terminate after his termination date in accordance with the terms of such plans and the Corporation shall not be obligated to provide equivalent benefits. -4- 5 7. Effect of Death. In the event of death of the Executive during the compensation period, the compensation under paragraph 4 for the month in which death occurs shall be paid to the Executive's estate and the compensation period shall be deemed to have ended as of the close of business on the last day of the month in which the death occurred. Coverage of the Executive and any dependents under any plan described in paragraph 6 shall also end on such date. Nothing in this paragraph shall affect payments due in respect of the Executive's death. 8. Non-Competition and Confidentiality. The Executive agrees that: (a) the Corporation shall cease providing payments and benefits under paragraphs 4 and 6 (other than benefits or payments already earned or accrued) if, during the compensation period, the Executive shall be employed by or otherwise engaged or be interested in any business that is competitive with any business of the Corporation or of any of its subsidiaries in which the Executive was engaged during his employment prior to a termination and if such employment or activity is likely to cause, or causes, serious damage to the Corporation or any of its subsidiaries; and (b) during and after the compensation period, the Executive will not divulge or appropriate to the Executive's own use or the use of others any secret or confidential information or knowledge pertaining to the business of the Corporation, or any of its subsidiaries, obtained during his employment by the Corporation or any of its subsidiaries. The Board of Directors has determined, in its best judgment, that the payments to the Executive under paragraphs 4 and 6 are reasonable consideration for not competing as provided in (a) and for maintaining the confidentiality of information as provided in (b). 9. Arbitration of All Disputes. Any controversy or claim arising out of or relating to this Agreement or the breach hereof shall be settled by arbitration in the City of Seattle in accordance with the laws of the State of Washington by three arbitrators, one of whom shall be appointed by the Corporation, one of whom shall be appointed by the Executive and one of whom shall be appointed by the first two arbitrators. The arbitration shall be conducted in accordance with the rules of the American Arbitration Association, except with respect to the selection of arbitrators which shall be as provided in this paragraph. Judgment upon the award rendered by the arbitrators may be entered in any court having jurisdiction thereof. In the event that it shall be necessary or desirable for the Executive to retain legal counsel or incur other costs and expenses in -5- 6 connection with the enforcement of the Executive's rights under this Agreement, the Corporation shall pay the Executive's reasonable attorneys' fees and costs and expenses in connection with such enforcement (including the enforcement of any arbitration award in court), regardless of the final outcome, unless the arbitrators shall determine that under the circumstances recovery by the Executive of any such fees, costs and expenses would be unjust. 10. Notices. Any notices, requests, demands and other communications provided for by this Agreement shall be sufficient if in writing and if sent by registered or certified mail to the Executive at the last address he has filed in writing with the Corporation and to the Corporation at its principal executive offices. 11. Non-Alienation. The Executive shall not pledge, hypothecate, assign or create a lien upon any amounts provided under this Agreement; and no benefits payable hereunder shall be assignable in anticipation of payment either by voluntary or involuntary acts, or by operation of law. 12. Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Washington. 13. Amendments. This Agreement may not be changed, waived or discharged orally, but only by an instrument in writing, signed by the party against which enforcement of such change, waiver or discharge is sought. 14. Successors. This Agreement shall extend to and be binding upon the Corporation, its successors and assigns. For purposes of this Agreement, unless the context otherwise requires, references to the Corporation shall include its subsidiaries. 15. Severability. In the event that any provision of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. -6- 7 16. Headings. The headings of the paragraphs in this Agreement are solely for convenience or reference and shall not control the meaning or interpretation of any provision of this Agreement. PENWEST, LTD. By___________________________ _____________________________ [Executive] -7- EX-11 5 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS 1 Exhibit 11 PENWEST, LTD. AND SUBSIDIARIES COMPUTATION OF PER-SHARE EARNINGS Year Ended August 31
1995 1994 1993 -------------------------------------------------- PRIMARY: - -------- Net income $7,217,000 $6,120,000 $6,315,000 ========== ========== ========== Weighted average number of shares outstanding 6,745,566 6,828,400 6,932,860 Net effect of diluted stock options 273,404 282,553 242,995 ---------- ---------- ---------- Weighted average common shares and equivalents outstanding 7,018,970 7,110,953 7,175,855 ========== ========== ========== Earnings per share: $1.03 $0.86 $0.88 ===== ===== ===== FULLY DILUTED: Net income $7,217,000 $6,120,000 $6,315,000 ========== ========== ========== Weighted average number of shares outstanding 6,745,566 6,828,400 6,783,654 Net effect of diluted stock options 279,333 251,616 367,942 ---------- ---------- ---------- Weighted average common shares and equivalents outstanding 7,024,899 7,080,016 7,151,596 ========== ========== ========== Earnings per share: $1.03 $0.86 $0.88 ===== ===== =====
EX-21 6 SUBSIDIARIES OF THE REGISTRANT 1 Exhibit 21 SUBSIDIARIES OF THE REGISTRANT Year Ended August 31, 1995 Wholly owned subsidiaries of the registrant are: Penford Products Co. incorporated under the laws of the State of Delaware Edward Mendell Co., Inc. incorporated under the laws of the State of Washington Edward Mendell GmBH incorporated under the laws of Germany Edward Mendell Finland OY incorporated under the laws of Finland PENWEST Foreign Sales Corporation All subsidiaries are included in the consolidated financial statements. EX-23 7 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23 Consent of Independent Auditors We consent to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the PENWEST, LTD. 1994 Stock Option Plan and to the incorporation by reference in the Registration Statement (Form S-8) pertaining to the PENWEST Savings and Stock Ownership Plan of our report dated October 12, 1995, with respect to the consolidated financial statements of PENWEST, LTD. included in the Annual Report (Form 10-K) for the year ended August 31, 1995. Seattle, Washington November 28, 1995 EX-24 8 POWER OF ATTORNEY 1 Exhibit 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENT, that each person whose signature appears below constitutes and appoints Tod R. Hamachek, Jeffrey T. Cook, and each of them, severally as attorney-in-fact for him or her in any and all capacities, to sign the Annual Report on Form 10-K of PENWEST, LTD. for the fiscal year ended August 31, 1995, and to file same and any amendments, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact, or his substitute or substitutes, may do or cause to be done by virtue hereof. SIGNATURE DATE - --------- ---- /s/ R.E. Engebrecht October 24, 1995 - -------------------------------------- ------------------------------ Richard E. Engebrecht, Director /s/ Tod R. Hamachek October 24, 1995 - -------------------------------------- ------------------------------ Tod R. Hamachek, Director /s/ C. Calvert Knudsen October 24, 1995 - -------------------------------------- ------------------------------ C. Calvert Knudsen, Director /s/ Harry Mullikin October 24, 1995 - -------------------------------------- ------------------------------ Harry Mullikin, Director /s/ Sally G. Narodick October 24, 1995 - -------------------------------------- ------------------------------ Sally G. Narodick, Director /s/ William G. Parzybok, Jr. October 24, 1995 - -------------------------------------- ------------------------------ William G. Parzybok, Jr., Director /s/ N. Stewart Rogers October 24, 1995 - ----------------------------------- ------------------------------ N. Stewart Rogers, Director /s/ William K. Street October 24, 1995 - ----------------------------------- ------------------------------ William K. Street, Director /s/ James H. Wiborg October 24, 1995 - ----------------------------------- ------------------------------ James H. Wiborg, Director /s/ Paul H. Hatfield October 24, 1995 - ----------------------------------- ------------------------------ Paul H. Hatfield, Director EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) FORM 10K FOR THE PERIOD ENDED AUGUST 31, 1995 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) FINANCIAL STATEMENTS 1,000 YEAR AUG-31-1995 SEP-01-1994 AUG-31-1995 5,334 0 23,943 0 14,209 48,933 111,440 0 186,760 19,747 0 8,591 0 0 63,391 186,760 174,200 174,200 126,341 126,341 32,886 0 4,765 11,107 3,890 0 0 0 0 7,271 1.03 1.03
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