-----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, JbZRxvOOf78YqKNsMKUg3mbvJV4WLTwZEVTXmAleTbQeVKFAu7MXQDKY0wAriA/F oKVykk0UHAilho8kzJmdJA== 0000891020-98-001383.txt : 19980916 0000891020-98-001383.hdr.sgml : 19980916 ACCESSION NUMBER: 0000891020-98-001383 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19980831 ITEM INFORMATION: ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19980915 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENFORD CORP CENTRAL INDEX KEY: 0000739608 STANDARD INDUSTRIAL CLASSIFICATION: GRAIN MILL PRODUCTS [2040] IRS NUMBER: 911221360 STATE OF INCORPORATION: WA FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-11488 FILM NUMBER: 98709443 BUSINESS ADDRESS: STREET 1: 777 108TH N E STE 2390 CITY: BELLEVUE STATE: WA ZIP: 98004-5193 BUSINESS PHONE: 4254626000 MAIL ADDRESS: STREET 1: 777 108TH N E STE 2390 CITY: BELLEVUE STATE: WA ZIP: 98009 FORMER COMPANY: FORMER CONFORMED NAME: PENWEST LTD DATE OF NAME CHANGE: 19920703 8-K 1 FORM 8-K FROM PERIOD ENDED AUGUST 31, 1998 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 8-K CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED) AUGUST 31, 1998 PENFORD CORPORATION -------------------------------------------------- (EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER) WASHINGTON --------------------------------------------------- (STATE OR OTHER JURISDICTION OF INCORPORATION) 0-11488 91-1221360 ------------------------ -------------------- (COMMISSION FILE NUMBER) (IRS EMPLOYER IDENTIFICATION NO.) 777-108TH AVENUE N.E., SUITE 2390 BELLEVUE, WASHINGTON 98004-5193 - ----------------------------------------- -------------------- (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (425) 462-6000 --------------- --------------------------------- (FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT) 2 ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS On September 1, 1998 Penford Corporation announced that on August 31, 1998, it distributed to Penford Corporation stockholders of record on August 10, 1998, approximately 11 million shares of common stock of Penwest Pharmaceuticals Co. (PPC). Certificates for shares of PPC were mailed to Penford Corporation stockholders on August 31, 1998 by ChaseMellon Shareholder Services, the distribution agent for the spin-off. This distribution completes Penford Corporation's previously announced spin-off of PPC, its wholly-owned subsidiary engaged in the research, development and commercialization of novel drug delivery technologies and an established manufacturer and distributor of excipients used in binding, disintegrating and lubricating tableted pharmaceutical and nutritional products. Reference is made to PPC's registration statement on From 10 under the Securities Act of 1933 and Item 1 of Penford Corporation's report on Form 10-K for the year ended August 31, 1997 for a description of PPC's drug delivery technologies and excipients business. ITEM 5. OTHER EVENTS Item 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS (a) FINANCIAL STATEMENTS OF BUSINESSES ACQUIRED Not Applicable (b) PRO FORMA FINANCIAL INFORMATION UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS The following Pro Forma Consolidated Financial Statements as of May 31, 1998, for the year ended August 31, 1997 and for the nine months ended May 31, 1998 are unaudited. The unaudited Pro Forma Consolidated Balance Sheet was prepared as if the spin off of Penwest Pharmaceuticals Co. was effective at May 31, 1998. The unaudited Pro Forma Consolidated Statement of Income for the year ended August 31, 1997 was prepared as if the spin off of Penwest Pharmaceuticals Co. was effective as of September 1, 1996. The unaudited Pro Forma Consolidated Statement of Income for the nine months ended May 31, 1998 was prepared as if the spin off of Penwest Pharmaceuticals Co., was effective as of September 1, 1997. The unaudited Pro Forma Consolidated Financial Statements do not purport to represent what the Company's financial position or results of operations would actually have been if the spin off had in fact occurred on such dates or to project the Company's financial position or results of operations as of any future date or for any future period. The unaudited Pro Forma Consolidated Financial Statements are based on the historical financial statements of the Company and its subsidiary Penwest Pharmaceuticals Co., which reflected the spin off of Penwest Pharmaceuticals Co. as a discontinued operation in accordance with APB No. 30, in the Company's filing on Form 10-Q for the period ended May 31, 1998. The unaudited Pro Forma Consolidated Balance Sheet, as adjusted reflects the distribution of all of the common stock of Penwest Pharmaceuticals Co. and the related forgiveness of intercompany indebtedness. The unaudited Pro Forma Consolidated Statements of Income, as adjusted reflect the elimination of Penwest Pharmaceuticals Co. from the consolidated operations of Penford Corporation. The unaudited Pro Forma Consolidated Financial Statements should be read in conjunction with the Penford Corporation audited financial statements appearing in the Company's 1997 Annual Report on Form 10-K and Quarterly Report on Form 10-Q as of May 31, 1998, filed with the Securities and Exchange Commission. 3 PENFORD CORPORATION AND SUBSIDIARIES PRO-FORMA CONSOLIDATED BALANCE SHEET (Dollars in Thousands)
May 31, 1998 ------------ ASSETS Current assets $ 45,532 Net property, plant and equipment 106,869 Deferred income taxes 13,073 Restricted cash value of life insurance 12,048 Other assets 5,071 -------- Total assets $182,593 ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 32,994 Long-term debt 57,460 Other postretirement benefits 10,360 Deferred income taxes 24,109 Other liabilities 7,036 Shareholders' equity 50,634 -------- Total liabilities and shareholders' equity $182,593 ========
4 PENFORD CORPORATION AND SUBSIDIARIES PRO-FORMA CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands except per share data)
Year Ended August 31 Nine Months Ended May 31 -------------------- ------------------------ 1997 1998 ----------- ----------- Sales $ 170,105 $ 122,773 Cost of sales 127,531 88,634 ----------- ----------- Gross margin 42,574 34,139 Operating expenses 25,105 19,354 ----------- ----------- Income from operations 17,469 14,785 Other income 1,200 Interest expense, net (5,251) (4,350) ----------- ----------- Income before income taxes 13,418 10,435 Income taxes 4,484 3,652 ----------- ----------- Net income $ 8,934 $ 6,783 =========== =========== Weighted average common shares assuming dilution 7,131,725 7,534,001 Earnings per share, diluted $ 1.25 $ 0.90 =========== ===========
NOTES TO PRO-FORMA CONSOLIDATED FINANCIAL STATEMENTS Footnote 1 The pro forma consolidated Balance Sheet, as adjusted reflects the forgiveness of intercompany debt of approximately $46.4 million and related reduction in shareholders equity of approximately $37.5 million to reflect the distribution of 100% of the common stock in Penwest Pharmaceuticals Co. Footnote 2 The pro forma consolidated statements of income, as adjusted reflect the elimination of the operations of Penwest Pharmaceuticals Co. which also includes the allocation of certain corporate office expenses to Penwest Pharmaceuticals Co., and the elimination of the previously reported loss on disposal including direct transaction costs. In addition, the pro-forma income statement for the nine months ended May 31, 1998 eliminates the effects of $1.9 million of non-recurring restructure costs incurred in the period, and reflected in the Company's filing on Form 10-Q for the period ended May 31, 1998 which were related to the spin-off plan. 5 (c) EXHIBITS 10.1 Separation and Distribution Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. 10.2 Services Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. 10.3 Employee Benefits Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. 10.4 Tax Allocation Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. 10.5 Excipient Supply Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. 99.1 Press release dated September 1, 1998 6 SIGNATURES: Pursuant to the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. PENFORD CORPORATION September 14, 1998 By /s/ Jeffrey T. Cook ------------------ ---------------------- Date Jeffrey T. Cook President and Chief Executive Officer EX-10.1 2 SEPARATION AND DISTRIBUTION AGREEMENT 1 EXHIBIT 10.1 SEPARATION AND DISTRIBUTION AGREEMENT THIS SEPARATION AND DISTRIBUTION AGREEMENT (the "Agreement") is made as of the 31ST day of July, 1998 between PENFORD CORPORATION, a Washington corporation (previously known as PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington corporation ("Penwest"). RECITALS WHEREAS, the Board of Directors of Penford has determined that it is in the best interest of Penford and its shareholders to separate the pharmaceutical division of its business from the food and paper division of its business; WHEREAS, it is the intention of Penford to contribute to Penwest certain assets and to assign certain liabilities, to transfer certain technology to Penwest and to make other arrangements to establish Penwest as a separate enterprise for the purpose of engaging in research, development and marketing of novel drug delivery technologies and sale and distribution of pharmaceutical excipients (the "Pharmaceutical Business"); WHEREAS, Penford and Penwest have determined that it is necessary and desirable, on the terms and conditions contemplated hereby, for Penford to distribute to shareholders of Penford the outstanding shares of Penwest Common Stock held by Penford; WHEREAS, the Distribution (as defined below) is intended to qualify as a tax-free spin-off under Sections 355 and 368 of the Code (as defined below); WHEREAS, Penford and Penwest have further determined that it is necessary and desirable to set forth the principal corporate transactions required to effect the Separation (as defined below) and the Distribution and to set forth other agreements that will govern certain other matters following the Separation and Distribution; and WHEREAS, Penford and Penwest are parties to that certain Separation Agreement dated as of November 3, 1997 (the "Separation Agreement"), which shall be canceled and superseded by this Separation and Distribution Agreement, with effect as of November 3, 1997 (the "Effective Date"); NOW, THEREFORE, in consideration of the mutual covenants and agreements made herein, the parties hereto agree as follows: 2 ARTICLE I DEFINITIONS 1.1 General. As used in this Agreement and the Exhibits hereto, the following terms shall have the following meanings: Action: any action, suit, arbitration, inquiry, proceeding or investigation by or before any court, any governmental or other regulatory or administrative agency or commission or any arbitration tribunal. Affiliate: affiliate of any Person means a Person that controls, is controlled by, or is under common control with such Person. As used herein, "control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management and polices of such entity, whether through ownership of voting securities or other interests, by contract or otherwise. Agent: the distribution agent to be appointed by Penford to distribute to the shareholders of Penford the shares of Penwest Common Stock held by Penford pursuant to the Distribution. Ancillary Agreements: all of the agreements, instruments, understandings, assignments or other arrangements entered into in connection with the transactions contemplated hereby, including, without limitation, the Excipient Supply Agreement, the Services Agreement, the Tax Allocation Agreement, the Employee Benefits Agreement and the Trademark Assignment. Code: the Internal Revenue Code of 1986, as amended. Collaborative Agreements: include the following agreements: (a) Product Development and Supply Agreement between Penwest, Ltd., a Washington corporation ("Penwest, Ltd.") and Mylan Pharmaceuticals, Inc., a West Virginia corporation ("Mylan") dated August 17, 1994. (b) Sales and Distribution Agreement between Penwest, Ltd. and Mylan dated January 3, 1997. (c) Product Development and Supply Agreement between Penwest, Ltd. and Mylan dated August 3, 1995. (d) Product Development and Supply Agreement between Penwest, Ltd. and Mylan dated March 22, 1996. -2- 3 (e) Custom Blending Agreement between Boehringer Ingelheim Pharmaceuticals, Inc. and Penwest, Ltd. dated November 23, 1994. (f) Product Development and Supply Agreement between TIMERx Technologies, a Washington corporation ("TIMERx Technologies") and Kremers Urban Development Company ("Kremers") dated August 30, 1996. (g) Product Development and Supply Agreement between TIMERx Technologies and Kremers dated May 31, 1996. (h) Heads of Agreement and Development Agreement between TIMERx Technologies and Schwarz dated September 20, 1995. (i) Product Development, License and Supply Agreement between TIMERx Technologies and Sanofi Winthrop International S.A., a company incorporated under the laws of France dated February 28, 1997, as amended. (j) The Agreement between Edward Mendell Co., Inc. and Leiras OY dated July 27, 1992. (k) Letter of Consent between TIMERx Technologies and Leiras OY dated May 26, 1995. (l) Letter of Agreement between TIMERx Technologies and Leiras OY dated May 26, 1995. (m) Strategic Alliance Agreement between Penwest Pharmaceuticals Group and Endo Pharmaceuticals Inc., dated September 17, 1997. Commission: the Securities and Exchange Commission. Conveyance and Assumption Instruments: collectively, the various agreements, instruments and other documents entered into or to be entered into to effect the transfer, prior to the Distribution Date and in the manner contemplated by this Agreement or any other agreement or document contemplated by this Agreement or otherwise, of Penwest Assets to Penwest (including, without limitation, the intellectual property rights and other assets described in the Information Statement) and the assumption of Penwest Liabilities by Penwest, in both cases relating to the business of Penwest as described in the Information Statement. -3- 4 Distribution: the distribution by Penford on a pro rata basis to holders of Penford Common Stock of all of the outstanding shares of Penwest Common Stock owned by Penford on the Distribution Date as set forth in Article IV. Distribution Date: August 31, 1998, or such other date as may be set by the Board of Directors of Penford in its sole discretion. Effective Date: November 3, 1997. Employee Benefits Agreement: the Employee Benefits Agreement between Penford and Penwest. Excipient Supply Agreement: the Excipient Supply Agreement between Penford and Penwest pursuant to which Penford will manufacture and supply exclusively to Penwest, and Penwest will purchase exclusively from Penford, all of Penwest's requirements for EMDEX and CANDEX. Ex-Dividend Date: The trading day on which the Penford Common Stock is first traded on the Nasdaq National Market at a price that does not reflect the value of the Penwest Common Stock held by Penford as set by the Nasdaq National Market. Existing Penford Options: Options to acquire shares of Penford Common Stock held by employees of Penford and/or its Subsidiaries. EMDEX/CANDEX: sugar based (Dextrate) binders. Exchange Act: the Securities Exchange Act of 1934, as amended. Form 10: General Form for Registration of Securities on Form 10, including the Information Statement, pursuant to which all the outstanding Penwest's Common Stock will be registered under the Exchange Act, together with all amendments thereto. Governmental Approvals: any notices, reports or other filings to be made, or any consents, registrations, approvals, permits or authorizations to be obtained from any Governmental Authority. Governmental Authority: any federal, state, local, foreign or international court, government, department, commission, board, bureau, agency, official or other regulatory, administrative or governmental authority. Information Statement: The Information Statement portion of the Form 10. -4- 5 Liabilities: any and all debts, liabilities and obligations, absolute or contingent, matured or unmatured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising (unless otherwise specified in this Agreement), including all costs and expenses relating thereto, and those debts, liabilities and obligations arising under any law, rule, regulation, Action, threatened Action, order or consent decree of any Governmental Authority or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. Penford Common Stock: the Common Stock, par value $1.00 per share, of Penford. Penwest Assets: (a) any and all assets that are expressly contemplated by the Penwest Contracts or this Agreement or any other agreement or document contemplated by this Agreement (or any Schedule hereto or thereto) as assets to be transferred to Penwest; (b) any assets reflected in Penwest's balance sheet dated August 31, 1998 as assets of Penwest, subject to any dispositions of such assets subsequent to the date of such balance sheet; and (c) any and all assets owned or held immediately prior to the Distribution Date by Penford that are used primarily in the Pharmaceutical Business. The intention of this clause (c) is only to rectify any inadvertent omission of transfer or conveyance of any assets that, had the parties given specific consideration to such asset as of the date hereof, would have otherwise been classified as a Penwest Asset. No asset shall be deemed to be a Penwest Asset solely as a result of this clause (c) if such asset is within the category or type of asset expressly covered by the subject matter of an Ancillary Agreement. Penwest Common Stock: the Common Stock, par value $0.001 per share, of Penwest, including any associated rights that may be attached to the Common Stock from time to time. Penwest Contracts: the following contracts and agreements to which Penford is a party or by which its assets are bound, whether or not in writing: (a) any supply or vendor contracts or agreements that relate primarily to the Pharmaceutical Business; (b) the Collaborative Agreements; -5- 6 (c) any contract or agreement entered into by Penford or Penwest that relates primarily to the Pharmaceutical Business; (d) any contract or agreement entered into by Penford or Penwest with any federal, state and local government that relates primarily to the Pharmaceutical Business; (e) any contract or agreement that is otherwise expressly contemplated pursuant to this Agreement or any of the Ancillary Agreements to be assigned to Penwest; and (f) any guarantee, indemnity, representation, warranty or other Liability of Penford in respect of any other Penwest Contract, any Penwest Liability or the Pharmaceutical Business. Penwest Employees: Penwest Employees include Penwest's current employees and any other employees who are hired by Penwest prior to the Distribution Date. Penwest Liabilities: (a) any and all Liabilities that are expressly contemplated by this Agreement or any other agreement or document contemplated by this Agreement or otherwise (or the Schedules hereto or thereto) as Liabilities to be assumed by Penwest; (b) all Liabilities (other than taxes based on, or measured by reference to, net income), including any Liabilities related to Penwest Employees and product Liabilities, primarily relating to, arising out of or resulting from: (i) the operation of the Pharmaceutical Business, as conducted at any time prior to, on or after the Distribution Date (including any Liability relating to, arising out of or resulting from any act or failure to act or any statement made by any director, officer, employee, agent or representatives (whether or not such act or failure to act or statement is or was within such Person's authority); or (ii) any Penwest Assets (including any Penwest Contracts); in any such case whether arising before, on or after the Distribution Date; (c) all Liabilities, excluding any intercompany indebtedness forgiven pursuant to Section 2.5 of this Agreement, reflected as liabilities or obligations of Penwest in its balance sheet, subject to any discharge of such Liabilities subsequent to the date of such balance sheet. -6- 7 Person: an individual, a general or limited partnership, a corporation, a trust, a joint venture, an unincorporated organization, a limited liability entity, any other entity and any Governmental Authority. Record Date: the close of business on the date to be determined by the Penford Board of Directors as the record date for determining shareholders of Penford entitled to receive shares of Penwest Common Stock. Separation: the transfer of the Penwest Assets to Penwest and the assumption by Penwest of the Penwest Liabilities, all as more fully described in this Agreement or any other agreement or document contemplated by this Agreement or otherwise. Services Agreement: the Services Agreement between Penford and Penwest providing for, among other things, the provision by Penford to Penwest of certain administrative and other services on a transitional basis. Subsidiary: Subsidiary of any Person means any corporation or other organization whether incorporated or unincorporated of which at least a majority of the securities or interests having by the terms thereof ordinary voting power to elect at least a majority of the board of directors or other performing similar functions with respect to such corporation or other organization is directly or indirectly owned or controlled by such Person or by any one or more of its Subsidiaries, or by such Person and one or more of its Subsidiaries; provided, however, that no Person that is not directly or indirectly wholly-owned by any other Person shall be a Subsidiary of such other Person unless such other Person controls, or has the right, power or ability to control, that Person. Tax Allocation Agreement: the Tax Allocation Agreement between Penford and Penwest, providing for, among other things, the allocation of liabilities with respect to federal, state and local income taxes and the procedures for filing returns with respect to such taxes. Trademark Assignment: the Trademark Assignment between Penford and Penwest, providing for, among other things the assignment by Penford to Penwest of certain trademarks and related rights. -7- 8 ARTICLE II THE SEPARATION 2.1 Transfer of Assets and Assumption of Liabilities. (a) Penford hereby assigns, transfers, conveys and delivers to Penwest, and Penwest hereby accepts from Penford, all of Penford's right, title and interest in all Penwest Assets. (b) Penwest hereby assumes and agrees faithfully to perform and fulfill all the Penwest Liabilities, in accordance with their respective terms. Penwest shall be responsible for all Penwest Liabilities, regardless of when or where such liabilities arose or arise, or whether the facts on which they are based occurred prior to or subsequent to the date hereof, regardless of where or against whom such liabilities are asserted or determined (including any Penwest Liabilities arising out of claims made by Penford's or Penwest's respective shareholders, directors, officers, employees, agents, Subsidiaries or Affiliates against Penford or Penwest) or whether asserted or determined prior to the date hereof. (c) In the event that any time or from time to time (whether prior to or after the Distribution Date), any party hereto, shall receive or otherwise possess any asset that is allocated to any other Person pursuant to this Agreement or any Ancillary Agreement, such party shall promptly transfer, or cause to be transferred, such asset to the Person so entitled thereto. Prior to any such transfer, the Person receiving or possessing such asset shall hold such asset in trust for any such other Person. 2.2 Termination of Agreements. Except as otherwise provided or contemplated in this Agreement, Penwest and Penford hereby terminate any and all agreements, arrangements, commitments or understandings, whether or not in writing, between Penwest and Penford, effective as of the Distribution Date; provided, however, to the extent any such agreement, arrangement, commitment or understanding is inconsistent with any Ancillary Agreement such termination shall be effective as of the date of effectiveness of the applicable Ancillary Agreement. No such terminated agreement, arrangement, commitment or understanding (including any provision thereof which purports to survive termination) shall be of any further force or effect after the Distribution Date (or, to the extent contemplated by the proviso to the immediately preceding sentence, after the effective date of the applicable Ancillary Agreement). Each party shall, at the reasonable request of any other party, take, or cause to be taken, such other actions as may be necessary to effect the foregoing. -8- 9 2.3 Documents Relating to Other Transfers of Assets and Assumption of Liabilities. In furtherance of the assignment, transfer and conveyance of Penwest Assets and the assumption of Penwest Liabilities set forth in Section 2.1(a) and (b), simultaneously with the execution and delivery hereof or as promptly as practicable thereafter, (i) each of Penford and Penwest shall execute and deliver such bills of sale, stock powers, certificates of titles, assignments of contracts and other instruments of transfer, conveyance and assignment as and to the extent necessary to evidence the transfer, conveyance and assignment of all of Penford's right, title and interest in and to the Penwest Assets to Penwest and (ii) Penwest shall execute and deliver to Penford such bills of sale, stock powers, certificates of title, assumptions of contracts and other instruments of assumption as and to the extent necessary to evidence the valid and effective assumption of the Penwest Liabilities by Penwest. 2.4 Ancillary Agreements. Each of Penford and Penwest will execute and deliver all Ancillary Agreements to which it is a party, including but not limited to: (a) the Excipient Supply Agreement, which will become effective as of the Distribution Date; (b) the Services Agreement, which will become effective as of the Distribution Date; (c) the Tax Allocation Agreement, which will become effective as of the Distribution Date; (d) the Employee Benefits Agreement, which will become effective as of the Distribution Date; and (e) the Trademark Assignment, which became effective as of the Effective Date. 2.5 Forgiveness of Intercompany Debt. Effective immediately prior to the Distribution Date (but except for any indebtedness of Penwest to Penford incurred in connection with an acquisition by Penwest of certain rights relating to the PRUV product from Astra Production Chemicals AB, if any such acquisition as approved in concept by the Board of Directors of Penford on March 4, 1998 (as amended by resolution on May 18, 1998), occurs prior to the Distribution Date), Penford hereby forgives all existing remaining intercompany indebtedness owed by Penwest to Penford in order to provide an appropriate level of working capital and equity at Penwest as it is established as a separate stand alone company. Each of Penford and Penwest shall execute any documents and instruments necessary or appropriate to confirm such loan forgiveness. Penford and Penwest agree that Penford shall treat the loan forgiveness as a contribution to the capital of Penwest in constructive exchange for Penwest Common Stock, provided that no additional shares of Penwest Common Stock shall be issued or issuable in connection with or as a result of such contributions. -9- 10 2.6 Consents. Each party hereto understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, representing or warranting in any way that the obtaining of any consents or approvals, the execution and delivery of any agreements or the making of any filings or applications contemplated by this Agreement will satisfy the provisions of any or all applicable agreements or the requirements of any or all applicable laws or judgments, it being agreed and understood that the party to which any assets were or are transferred shall bear the economic and legal risk that any necessary consents or approvals are not obtained or that any requirements of laws or judgments are not complied with. Notwithstanding the foregoing, the parties shall use reasonable best efforts to obtain all consents and approvals, to enter into all agreements and to make all filings and applications which may be required for the consummation of the transactions contemplated by this Agreement or any other agreement or document contemplated by this Agreement or otherwise, including, without limitation, all applicable regulatory filings or consents under federal or state laws and all necessary consents, approvals, agreements, filings and applications. 2.7 Representations or Warranties. Each of the parties hereto understands and agrees that no party hereto is, in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, making any representations or warranties with respect to any assets of such party, except that Penford represents and warrants to the best of its knowledge that the delivery of all Penwest Assets transferred or being transferred to Penwest pursuant to this Agreement or any other Conveyance and Assumption Instruments has vested or will vest good title to such assets in Penwest free and clear of all material liens, mortgages, pledges, security interests, restrictions, prior assignments, encumbrances and claims of any kind or nature whatsoever affecting such assets. 2.8 Collaborative Agreements. In the event that any transfer of Penford's rights to Penwest under any of the Collaborative Agreements would violate or is found to violate the terms of, or result in the loss of rights or imposition of penalty under, any Collaborative Agreement covered thereby, or would not be effective subsequent to the Distribution Date, such transfer shall be deemed null and void and, in lieu thereof, (i) Penford shall retain all rights and fulfill any obligations, at Penwest's expense, it may have to any third party under any such Collaborative Agreement, it being understood that to the extent practicable, Penwest shall fulfill such obligations on Penford's behalf, (ii) Penford shall pay over to Penwest any royalty or other payments it may receive from any third party pursuant to any such Collaborative Agreement and (iii) at the request and expense of Penwest Penford shall use all reasonable best efforts to arrange for the grant by the applicable third party of comparable rights to Penwest. 2.9 Financing and Guaranty. Prior to the date on which the Commission declares the Form 10 to be effective, Penwest and Penford will use their reasonable -10- 11 best efforts to execute and deliver loan documents relating to certain bank financing on terms approved by their Boards of Directors on June 22, 1998 and June 25, 1998, respectively, including but not limited to Penford's providing its guaranty of certain indebtedness of Penwest for a period before and after the Distribution Date as so approved by the Penford Board which guaranty shall be set forth in such loan documents (the "Guaranty"). ARTICLE III THE DISTRIBUTION 3.1 The Distribution. (a) Following the completion of the actions and the occurrence of the events set forth in Section 3.2 hereof, or the mutual agreement of Penford and Penwest that one or more of such actions need not be completed or one or more of such events need not occur prior to the Distribution, and provided that this Agreement shall not have been terminated at Penford's election pursuant to Section 8.2, on or prior to the Distribution Date, Penford will deliver to the Agent for the benefit of holders of record of Penford Common Stock on the Record Date, a single stock certificate, endorsed by Penford in blank, representing all of the outstanding shares of Penwest Common Stock then owned by Penford, and shall cause the transfer agent for the shares of Penford Common Stock to instruct the Agent to distribute on the Distribution Date the appropriate number of such shares of Penwest Common Stock to each such holder or designated transferee or transferees of such holder. (b) Subject to Section 3.3 hereof, each holder of Penford Common Stock on the Record Date (or such holder's designated transferee or transferees) shall be entitled to receive, in the Distribution, a number of shares of Penwest Common Stock equal to the number of outstanding shares of Penwest Common Stock owned by Penford on the Record Date multiplied by a fraction, the numerator of which is the number of shares of Penford Common Stock held by such holder on the Record Date, and the denominator of which is the number of shares of Penford Common Stock outstanding on the Record Date. (c) Penwest and Penford, as the case may be, will provide to the Agent all share certificates and any information required in order to complete the Distribution on the basis specified above. 3.2 Actions and Events Prior to the Distribution. (a) Penwest shall prepare and file the Form 10, and such amendments or supplements thereto, as may be necessary in order to cause the same -11- 12 to become and remain effective as required by law, including, but not limited to, filing such amendments to the Form 10 as may be required by the Commission or federal or state securities laws. The Form 10 shall have become effective on or prior to the Distribution Date, and there shall be no stop-order in effect with respect thereto. (b) Penford and Penwest shall cooperate in preparing, filing with the appropriate Governmental Authority any documents or statements which are required to reflect the establishment of, or amendments to, any employee benefit and other plans necessary or appropriate in connection with the Separation, the Distribution or the other transactions contemplated by this Agreement or any other agreement or document contemplated by this Agreement or otherwise. (c) Penford and Penwest shall prepare and mail, prior to the Record Date, to the holders of Penford Common Stock, the Information Statement and such other information concerning Penwest, its business, operations and management, the Distribution and such other matters as Penford and Penwest shall reasonably determine and as may be required by law. (d) Penford and Penwest shall take all other actions as may be necessary or appropriate under the securities or blue sky laws of the United States in connection with the Distribution and such actions and filings, where applicable, shall have become effective or been accepted. (e) Penwest shall prepare and file, and shall use its reasonable best efforts to have approved, an application for the listing of the Penwest Common Stock to be distributed in the Distribution on the Nasdaq National Market. (f) A private letter ruling from the Internal Revenue Service (the "Private Letter Ruling") shall have been obtained, and shall continue in effect, or a written opinion from Ernst & Young LLP shall have been delivered, in either case to the effect that, among other things, the Distribution will qualify as a tax-free distribution for federal income tax purposes under Sections 355 and 368 of the Code, and such ruling or opinion shall be in form and substance satisfactory to Penford in its sole discretion. (g) Any material Governmental Approvals and consents necessary to consummate the Distribution shall have been obtained and shall be in full force and effect. (h) No order, injunction or decree issued by any court or agency of competent jurisdiction or other legal restraint or prohibition preventing the consummation of the Distribution shall be in effect and no other event outside the -12- 13 control of Penford shall have occurred or failed to occur that prevents the consummation of the Distribution. (i) The transactions contemplated hereby shall be in compliance with applicable federal and state securities laws. (j) Each of Penwest and Penford shall have received such consents, and shall have received executed copies of such agreements or amendments of agreements, as they shall deem necessary in connection with the completion of the transactions contemplated by this Agreement or any other agreement or document contemplated by this Agreement or otherwise. (k) All action and other documents and instruments deemed necessary or advisable in connection with the transactions contemplated hereby shall have been taken or executed, as the case may be, in form and substance satisfactory to Penford and Penwest. 3.3 Fractional Shares. As soon as practicable after the Distribution Date, Penford shall direct the Agent to determine the number of whole shares and fractional shares of Penwest Common Stock allocable to each holder of record of Penford Common Stock as of the Record Date, to aggregate all such fractional shares and sell the whole shares obtained thereby in open-market transactions in the Agent's sole discretion as to when, how, through which broker-dealer and at what price to make such sales, and to cause to be distributed to each such holder or for the benefit of each such holder, in lieu of any fractional share, such holder's ratable share of the proceeds of such sale, after making appropriate deductions of the amount required to be withheld for federal income tax purposes and after deducting an amount equal to all brokerage charges, commissions and transfer taxes attributed to such sale. Penford and the Agent shall use their reasonable best efforts to aggregate the shares of Penford Common Stock that may be held by any holder of record thereof through more than one account in determining the fractional share allocable to such holder. ARTICLE IV ACKNOWLEDGEMENT OF MATERIAL FACTS 4.1 Organization. Penford and Penwest acknowledge that each is duly organized, validly existing and in good standing under the laws of the State of Washington, with requisite corporate power to own their properties and assets and to carry on their respective businesses as presently conducted or contemplated. -13- 14 ARTICLE V MISCELLANEOUS LIABILITIES AND INDEMNIFICATION 5.1 Penwest Liabilities; Indemnification. Penwest shall indemnify, defend and hold harmless Penford from and against any and all Liabilities arising out of or resulting from any of the following items (without duplication): (a) the employment of Penwest Employees; (b) the business of Penwest and the Penwest Assets; (c) purchase orders, accounts payable, accrued compensation and other accrued Penwest Liabilities and other agreements which relate to the business of Penwest and the Penwest Assets; and (d) any misstatement or omission of a material fact other than misstatements or omissions with respect to Penford based on information supplied in writing by Penford in any documents or filings prepared for purposes of compliance or qualification under applicable securities laws in connection with the Separation or the Distribution and related transactions, including, without limitation, the Form 10. 5.2 Penford Liabilities; Indemnification. Penford shall indemnify, defend and hold harmless Penwest from and against any and all Liabilities arising out of or resulting from any of the following items (without duplication): (a) the business of Penford and the Liabilities not assumed by Penwest under the terms of this Agreement or any other agreement or document contemplated by this Agreement; and (b) any misstatement or omission of a material fact with respect to Penford based on information supplied in writing by Penford in any documents or filings prepared for purposes of compliance or qualification under applicable securities laws in connection with the Separation or the Distribution and related transactions, including, without limitation, the Form 10. 5.3 Procedures for Indemnification of Third Party Claims. (a) If any Person entitled to indemnification hereunder (an "Indemnitee") shall receive notice or otherwise learn of the assertion by a Person (including any Governmental Authority) of any claim or of the commencement by any such Person of any Action (collectively, a "Third Party Claim") with respect to which any party (an "Indemnifying Party") may be obligated to provide indemnification to such Indemnitee pursuant to Section 5.1 or 5.2, or any other -14- 15 Section of this Agreement or any other agreement or document contemplated by this Agreement or otherwise, such Indemnitee shall give such Indemnifying Party written notice thereof within twenty (20) days after becoming aware of such Third Party Claim. Any such notice shall describe the Third Party Claim in reasonable detail. Notwithstanding the foregoing, the failure of any Indemnitee or other Person to give notice as provided in this Section 5.3(a) shall not relieve the Indemnifying Party of its obligations under this Article V, except to the extent that such Indemnifying Party is actually prejudiced by such failure to give notice. (b) An Indemnifying Party may elect to defend (and, unless the Indemnifying Party has specified any reservations or exceptions, to seek to settle or compromise), at such Indemnifying Party's own expense and by such Indemnifying Party's own counsel, any Third Party Claim. Within thirty (30) days after the receipt of notice from an Indemnitee in accordance with Section 5.3(a) (or sooner, if the nature of such Third Party Claim so requires), the Indemnifying Party shall notify the Indemnitee of its election whether the Indemnifying Party will assume responsibility for defending such Third Party Claim, which election shall specify any reservations or exceptions. After notice from an Indemnifying Party to an Indemnitee of its election to assume the defense of a Third Party Claim, such Indemnitee shall have the right to employ separate counsel and to participate in (but not control) the defense, compromise, or settlement thereof, but the fees and expenses of such counsel shall be the expense of such Indemnitee except as set forth in Section 5.3(c). (c) If an Indemnifying Party elects not to assume responsibility for defending a Third Party Claim, or fails to notify an Indemnitee of its election as provided in Section 5.3(b), such Indemnitee may defend such Third Party Claim at the cost and expense (including allocated costs of in-house counsel and other personnel) of the Indemnifying Party. (d) Unless the Indemnifying Party has failed to assume the defense of the Third Party Claim in accordance with the terms of this Agreement, no Indemnitee may settle or compromise any Third Party Claim without the consent of the Indemnifying Party. (e) No Indemnifying Party shall consent to entry of any judgment or enter into any settlement of the Third Party Claim without the consent of the Indemnitee if the effect thereof is to permit any injunction, declaratory judgment, other order or other nonmonetary relief to be entered, directly or indirectly, against any Indemnitee. -15- 16 5.4 Tax Liabilities. Notwithstanding the provisions of Sections 5.1 and 5.2, all tax Liabilities relating to the business of Penwest and the Penwest Assets including, without limitation, income taxes, franchise taxes, sales taxes, use taxes, payroll taxes and employment taxes, shall be assumed by the party to whom the Liability has been allocated in the Tax Allocation Agreement. 5.5 Additional Matters. (a) Any claim on account of a Liability which does not result from a Third Party Claim shall be asserted by written notice given by the Indemnitee to the Indemnifying Party. Such Indemnifying Party shall have a period of thirty (30) days after the receipt of such notice within which to respond thereto. If such Indemnifying Party does not respond within such thirty (30)-day period, such Indemnifying Party shall be deemed to have refused to accept responsibility to make payment. If such Indemnifying Party does not respond within such thirty (30)-day period or rejects such claim in whole or in part, such Indemnitee shall be free to pursue such remedies as may be available to such party as contemplated by this Agreement. (b) In the event of payment by or on behalf of any Indemnifying Party to any Indemnitee in connection with any Third Party Claim, such Indemnifying Party shall be subrogated to and shall stand in the place of such Indemnitee as to any events or circumstances in respect of which such Indemnitee may have the right, defense or claim relating to such Third Party Claim against any claimant or plaintiff asserting such Third Party Claim or against any other person. Such Indemnitee shall cooperate with such Indemnifying Party in a reasonable manner, and at the cost and expense (including allocated costs of in-house counsel and other personnel) of such Indemnifying Party, in prosecuting any subrogated right, defense or claim. (c) In the event of an Action in which the Indemnifying Party is not a named defendant, if either the Indemnitee or Indemnifying Party shall so request, the parties shall endeavor to substitute the Indemnifying Party for the named defendant. If such substitution or addition cannot be achieved for any reason or is not requested, the named defendant shall allow the Indemnifying Party to manage the Action as set forth in this Section and the Indemnifying Party shall fully indemnify the named defendant against all costs of defending the Action (including court costs, sanctions imposed by a court, attorneys' fees, experts' fees and all other external expenses, and the allocated costs of in-house counsel and other personnel), the costs of any judgment or settlement, and the cost of any interest or penalties relating to any judgment or settlement. -16- 17 5.6 Remedies Cumulative. The remedies provided in this Article V shall be cumulative and shall not preclude assertion by an Indemnitee of any other rights or the seeking of any and all other remedies against any Indemnifying Party. ARTICLE VI ACCESS TO INFORMATION AND SERVICES 6.1 Provision of Corporate Records. Upon Penwest's request, Penford shall arrange as soon as practicable following the Effective Date for the delivery to Penwest of existing corporate records in the possession of Penford relating to the business of Penwest or assets to be transferred to Penwest, together with all active agreements and active litigation files relating to the businesses of Penwest, except to the extent such items are already in the possession of Penwest. Such records shall be the property of Penwest but shall be available to Penford for review and duplication until Penford shall notify Penwest in writing that such records are no longer of use to Penford. 6.2 Access to Information. From and after the Effective Date, Penford shall afford to Penwest and its authorized accountants, counsel and other designated representatives reasonable access (including using reasonable best efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contracts, instruments, computer data and other data and information (collectively, "Information") within Penford's possession relating to the businesses of Penwest, insofar as such access is reasonably required by Penwest. Penwest shall afford to Penford and its authorized accountants, counsel and other designated representatives reasonable access (including using reasonable best efforts to give access to persons or firms possessing Information) and duplicating rights during normal business hours to Information within Penwest's possession relating to the business of Penwest prior to the Distribution or to the business of Penford, insofar as such access is reasonably required by Penford. Information may be requested under this Article VI for, without limitation, audit, accounting, claims, litigation and tax purposes, as well as for purposes of fulfilling disclosure and reporting obligations and for performing the transactions contemplated in this Agreement or any other agreement or document contemplated by this Agreement or otherwise. 6.3 Production of Witnesses. At all times from and after the Effective Date, each of Penford and Penwest shall use reasonable best efforts to make available to the other, upon written request, its officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required, in connection with legal, administrative or other proceedings in which the requesting party may from time to time be involved. -17- 18 6.4 Reimbursement. Except to the extent otherwise contemplated by any Ancillary Agreement, a party providing information to the other party under this Article VI shall be entitled to receive from the recipient, upon the presentation of invoices therefor, payments for such amounts, relating to supplies, disbursements and other out-of-pocket expenses, as may be reasonably incurred in providing such information. 6.5 Retention of Records. For a period of six (6) years following the Effective Date, each of Penford and Penwest shall retain all Information relating to the other as of the Distribution Date, except as otherwise required by law or set forth in an Ancillary Agreement or except to the extent that such Information is in the public domain or in the possession of the other party. 6.6 Confidentiality. Subject to any contrary requirement of law and the right of each party to enforce its rights hereunder in any legal action, each party shall keep strictly confidential, and shall cause its employees and agents to keep strictly confidential, any Information of or concerning the other party which it or any of its agents or employees may acquire pursuant to, or in the course of performing its obligations under, any provisions of this Agreement or any Ancillary Agreement; provided, however, that such obligation to maintain confidentiality shall not apply to Information which (i) at the time of disclosure was in the public domain or (ii) was received by the receiving party from a third party who did not receive such Information from the disclosing party under an obligation of confidentiality. ARTICLE VII COVENANTS 7.1 Nasdaq National Market Listing. Penwest hereby agrees to use its reasonable best efforts to effect and maintain the listing of the Penwest Common Stock on the Nasdaq National Market. 7.2 Ancillary Agreements. The parties agree that they shall comply with and provide all services and take any and all actions required to be provided or taken by the terms of any and all of the Ancillary Agreements following the effectiveness thereof. 7.3 Sharing of Utilities (a) Penford agrees that Penwest shall be entitled to use and consume, in an amount reasonably required, at Penwest's Cedar Rapids facility certain utilities consisting of natural gas, electricity and steam from Penford's Cedar Rapids facility. Any material change in the provision of such utilities shall require six (6) months prior notice. -18- 19 (b) In connection with the sharing of utilities as described in Section 8.3(a), Penwest will reimburse Penford for its consumption of such utilities based on Penford's total cost for each item and Penwest's fraction of the total consumption. (c) Penford will submit a monthly invoice to Penwest of all amounts owed by Penwest to Penford with respect to utilities consumed by Penwest pursuant to Section 7.3(a). The charges will be due when billed and shall be paid no later than thirty (30) days from the date of billing. 7.4 Non-Competition (a) From the Effective Date to the longer of (i) five years or (ii) the termination of the Excipient Supply Agreement, neither Penford nor any of its Affiliates shall, directly or indirectly, manufacture, market, sell or distribute for inclusion in any pharmaceutical or nutritional product (including vitamins, minerals and cofactors, but excluding foods) any product having the same or substantially the same form, composition or applications as EMDEX or CANDEX or any similar sugar- based product. From the Effective Date to the longer of (i) five years or (ii) the termination of the Excipient Supply Agreement, neither Penwest nor any of its Affiliates shall, directly or indirectly, manufacture, market, sell or distribute for inclusion in any foods product any product having the same or substantially the same form, composition or applications as EMDEX or CANDEX or any similar sugar-based product. (b) For a period of five years from the Effective Date, neither Penford nor any of its Affiliates shall directly or indirectly recruit or solicit any employee of Penwest or any of its Affiliates, or induce or attempt to induce any employee of Penwest or any of its Affiliates to terminate his or her employment with, or otherwise cease his or her relationship with, Penwest or any of its Affiliates. For a period of five years from the Effective Date, neither Penwest nor any of its Affiliates shall directly or indirectly recruit or solicit any employee of Penford or any of its Affiliates, or induce or attempt to induce any employee of Penford or any of its Affiliates to terminate his or her employment with, or otherwise cease his or her relationship with, Penford or any of its Affiliates. (c) If any restriction set forth in Sections 7.4 (a) or (b) is found by any court of competent jurisdiction to be unenforceable because it extends for too long a period of time or over too great a range of activities or in too broad a geographic area, it shall be interpreted to extend only over the maximum period of time, range of activities or geographic area as to which it may be enforceable. (d) The restrictions contained in this Section 7.4 are necessary for the protection of the respective businesses and goodwill of Penwest and Penford and are considered by Penford and Penwest to be reasonable for such purpose. Penford and -19- 20 Penwest agree that any breach of this Section 7.4 is likely to cause Penwest or Penford, as the case may be, substantial and irrevocable damage and therefore, in the event of any such breach, Penwest or Penford, as the case may be, in addition to such other remedies which may be available, shall be entitled to specific performance and other injunctive relief. 7.5 Stock Options. (a) Each Existing Penford Option, vested and unvested, that is outstanding at the Distribution Date will be adjusted as of the Distribution Date in the manner set forth below to provide in exchange therefor new options to acquire Penford Common Stock ("Adjusted Penford Options") to option holders other than option holders that will be employed by Penwest as of the Distribution Date ("Penwest Option Holders"), and separately, new options to acquire Penwest Common Stock ("Penwest Options") to Penwest Option Holders and to non-employee directors of Penford. The adjustment will be made by using the average of the high and low trading prices of Penford Common Stock on the trading day immediately prior to the Ex-Dividend Date (the "Penford Pre-Distribution Price") and the average of the high and low trading prices of Penford Common Stock and Penwest Common Stock on the Ex-Dividend Date (the "Penford Post-Distribution Price" and "Penwest Post-Distribution Price", respectively), all as reported by the Nasdaq National Market. (b) The per share exercise price under each Adjusted Penford Option will be determined by multiplying the per share exercise price under the option holder's applicable Existing Penford Option by the Penford Post-Distribution Price and then dividing the result by the Penford Pre-Distribution Price. The number of shares of Penford Common Stock to be covered by such Adjusted Penford Option will be determined by multiplying the number of shares covered by such Existing Penford Option by the Penford Pre-Distribution Price and then dividing the result by the Penford Post-Distribution Price. (c) The per share exercise price under each Penwest Option will be determined by multiplying the per share exercise price under the option holder's applicable Existing Penford Option by the Penwest Post-Distribution Price and then dividing the result by the Penford Pre-Distribution Price. The number of shares of Penwest Common Stock to be covered by such Penwest Option will be determined by multiplying the number of shares covered by such Existing Penford Option by the Penford Pre-Distribution Price and then dividing the result by the Penwest Post-Distribution Price. (d) The number of shares covered by each Adjusted Penford Option and each Penwest Option as determined pursuant to paragraphs (b) and (c) of this Section 7.5, respectively, shall be further adjusted in the case of the non-employee directors of Penford so that the number of shares covered by the Adjusted Penford -20- 21 Options and the Penwest Options issued to such directors shall each equal 50% of the economic value of the Existing Penford Option that would have otherwise been covered by such Adjusted Penford Options and Penwest Options if no adjustment pursuant to this paragraph (d) had occurred. (e) The boards of directors of both Penford and Penwest, or their respective compensation committees authorized by such board of directors, retain the authority to modify the foregoing adjustment procedure if, in their respective judgments, the closing prices as described above reflect significant disruptive market events that are independent, determinable, and verifiable effects of events other than the Distribution. (f) All other terms and conditions of the Existing Penford Options pursuant to the stock option plans under which the options were originally granted will continue to apply to the Adjusted Penford Options and to the Penwest Options, including the continuation of the remaining portions of their original vesting schedules and ten-year terms. The Penwest Options granted to the non-employee directors of Penford will continue to vest so long as such director is a director of Penford. 7.6 Representative on Penwest Board of Directors. During any and all periods in which the Guaranty is effective, and subject to the exercise by the Board of Directors of Penwest of its fiduciary duties Penwest will use its reasonable best efforts to assure that at least one person designated by Penford is elected and retained to serve as a director on the Board of Directors of Penwest, including, but not limited to, the inclusion of such person in any slate of nominees for submission to the shareholders of Penwest (unless such person is already serving on the Penwest Board in a directorship that is continuing and not subject to re-election at that time), and the prompt election by the Penwest Board of such a person to fill any vacancy on the Board created by the departure or removal from the Board of any person previously so designated by Penford for such service. The initial such person designated by Penford for service as a director of Penwest is N. Stewart Rogers. Penford may from time to time designate a different person in replacement of Mr. Rogers or his successor, whenever his or her directorship becomes subject to re-election, or should he or she leave the Penwest Board for any reason. Upon the date on which the Guaranty ceases to be effective, the rights provided under this Section 7.6 shall terminate and the Penford designee shall resign from the Penwest Board. 7.7 Mutual Assurances. (a) In addition to the actions specifically provided for elsewhere in this Agreement or any other agreement or document contemplated by this Agreement or otherwise, Penford and Penwest agree to cooperate with respect to the implementation of this Agreement or any other agreement or document contemplated -21- 22 by this Agreement or otherwise, and to execute such further documents and instruments as may be necessary to consummate and make effective the transactions contemplated by this Agreement or any other agreement or document contemplated by this Agreement or otherwise; (b) Penford and Penwest shall arrange, attend and participate in joint meetings with corporate collaborators, suppliers, customers and others to the extent necessary to assure the orderly transition of the business and assets contemplated hereby, provided that nothing herein shall be deemed to obligate either Penford or Penwest to take any action or reach any understandings which may violate any applicable laws. (c) Penford and Penwest agree to take any reasonable actions necessary in order for the Distribution to qualify as a tax-free distribution pursuant to Sections 355 and 368 of the Code. (d) Penford and Penwest agree that they shall not take any action which could reasonably be expected to prevent the Distribution from qualifying as a tax-free distribution within the meaning of Sections 355 and 368 of the Code or any other transaction contemplated by this Agreement or any other agreement or document contemplated by this Agreement or otherwise which is intended by the parties to be tax-free from failing so to qualify. ARTICLE VIII TERMINATION 8.1 Termination by Mutual Consent. This Agreement may be terminated at any time prior to the Distribution Date by the mutual consent of Penford and Penwest. 8.2 Termination by Penford. Prior to the Record Date, Penford may terminate this Agreement at its election if its Board of Directors determines that the consummation of the Distribution would, in light of the circumstances at the time, not be in the best interests of the shareholders of Penford. 8.3 Other Termination. This Agreement shall terminate if the Distribution Date shall not have occurred on or prior to December 31, 1999. 8.4 Effect of Termination. In the event of any termination of this Agreement, no party to this Agreement (or any of its directors or officers) shall have any Liability or further obligation to any other party. -22- 23 ARTICLE IX MISCELLANEOUS 9.1 Governing Law. This Agreement shall be governed by the laws of the State of Washington. 9.2 Construction. Each provision of this Agreement shall be interpreted in a manner to be effective and valid to the fullest extent permissible under applicable law. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions of this Agreement which shall remain in full force and effect. 9.3 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 9.4 Exhibits. Exhibits to this Agreement shall be deemed to be an integral part hereof, and schedules or exhibits to such Exhibits shall be deemed to be an integral part thereof. 9.5 Amendments; Waivers. This Agreement may be amended or modified only in a writing executed on behalf of Penford and Penwest. No waiver shall operate to waive any further or future act and no failure to object of forbearance shall operate as a waiver. 9.6 Notices. Notices hereunder shall be effective if given in writing and delivered or mailed, postage prepaid, by registered or certified mail to: Penford Corporation 777-108th Avenue NE Suite 2390 Bellevue, WA 98004-5193 Attention: Prior to the Distribution Date to The Chief Financial Officer, thereafter to The President or to: Penwest Pharmaceuticals Co. 2981 Route 22 Patterson, NY 12563-9970 Attention: The Chief Executive Officer -23- 24 9.7 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, provided that this Agreement and the rights and obligations contained herein or in any exhibit or schedule hereto shall not be assignable, in whole or in part, without the prior written consent of the parties hereto and any attempt to effect any such assignment without such consent shall be void. 9.8 Publicity. Prior to the Distribution, each of Penwest and Penford shall consult with each other prior to issuing any press releases or otherwise making public statements with respect to the Distribution or any of the other transactions contemplated hereby and prior to making any filings with any Governmental Authority with respect thereto. 9.9 Expenses. Except as expressly set forth in this Agreement or in any other agreement or document contemplated by this Agreement or otherwise, whether or not the Distribution is consummated, all third party fees, costs and expenses paid or incurred in connection with the Distribution will be paid by Penford. 9.10 Headings. The article, section and paragraph headings contained in this Agreement and in the Ancillary Agreements are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement or any Ancillary Agreement. 9.11 Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement or any of the Ancillary Agreements (including any questions of fraud or questions concerning the validity and enforceability of this Agreement or any of the Ancillary Agreements or any of the rights herein and therein conveyed), shall be determined and settled by arbitration in Seattle, Washington, pursuant to the rules then in effect of the American Arbitration Association as modified by this paragraph. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in any court having competent jurisdiction. The party submitting such dispute shall give written notice to that effect to the other party, stating the dispute to be arbitrated and the name and address of a person designated to act as arbitrator on its behalf. Within fifteen (15) days after such notice, the other party shall give written notice to the first party stating the name and address of a person designated to act as an arbitrator on its behalf. In the event that the second party shall fail to notify the first party of its designation of an arbitrator within the time specified, then the first party shall request the American Arbitration Association to appoint a second arbitrator. The two arbitrators so chosen shall meet within fifteen (15) days after the second arbitrator has been appointed to appoint a third arbitrator. If the two arbitrators are unable to agree on the appointment of a third arbitrator within such fifteen (15) day period, either party may request the American Arbitration Association to appoint a third arbitrator. Each arbitrator appointed hereunder shall be independent of the parties -24- 25 and either party may disqualify an arbitrator who is or is affiliated with a supplier, customer or competitor of either party without the consent of the other party. Each arbitrator shall be reasonably knowledgeable regarding the area or areas in dispute. The arbitrators shall follow substantive rules of law and the Federal Rules of Evidence, require the parties to conduct discovery pursuant to the rules then in effect under the Federal Rules of Civil Procedure in an expeditious manner, cause testimony to be transcribed, and make an award accompanied by findings of fact and a statement of reasons for the decision. All costs and expenses, including attorney's fees, of all parties incurred in any dispute which is determined and/or settled by arbitration pursuant to this paragraph shall be borne by the party determined to be liable in respect of such dispute; provided, however, that if complete liability is not assessed against only one party, the parties shall share the total costs in proportion to their respective amounts of liability so determined. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Each party, and the arbitrators, shall use their best efforts, subject to reasonable prosecution of the arbitration, court order and disclosure required under securities laws, to keep the subject matter of the arbitration and confidential information of each party confidential, and the arbitrators are authorized to impose such protective orders as they may deem appropriate for such purpose. 9.12 Entire Agreement. This Agreement contains the full understanding of the parties with respect to the subject matter hereof and supersedes all prior understandings and writings relating thereto. No waiver, alteration or modification of any of the provisions hereof shall be binding unless made in writing and signed by the parties. [Remainder of Page Intentionally Omitted] -25- 26 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. PENFORD CORPORATION By: /s/ Jeffrey T. Cook -------------------------------- Title: CFO ----------------------------- PENWEST PHARMACEUTICALS CO. By: /s/ Tod R. Hamachek -------------------------------- Title: Chairman & CEO ----------------------------- -26- EX-10.2 3 SERVICES AGREEMENT DATED JULY 31, 1998 1 EXHIBIT 10.2 SERVICES AGREEMENT THIS AGREEMENT is made as of July 31, 1998 between PENFORD CORPORATION, a Washington corporation (previously known as PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington corporation ("Penwest"). RECITALS WHEREAS, the Board of Directors of Penford has determined that it is in the best interest of Penford and its shareholders to separate the pharmaceutical division of its business from the food and paper division of its business; WHEREAS, Penford and Penwest recognize that it is advisable for Penford to continue providing certain administrative and other services to Penwest until Penwest has had a reasonable opportunity to evaluate its continued need for the services and to investigate other sources of the services; and WHEREAS, this Agreement is entered into pursuant to the Separation and Distribution Agreement dated as of July 31, 1998 between Penford and Penwest (the "Separation and Distribution Agreement") (All capitalized terms used and not otherwise defined herein shall have the meanings set forth in the Separation and Distribution Agreement); NOW, THEREFORE, in consideration of the mutual covenants and agreements made herein, the parties hereto agree as follows: SECTION 1 - SERVICES 1.1 Services. Beginning on the Distribution Date (as defined in the Separation and Distribution Agreement) (the "Effective Date"), Penford, through its corporate staff, will provide or otherwise make available to Penwest, upon the reasonable request of Penwest, certain general corporate services, including but not limited to accounting and audit, finance and treasury, tax, financial and human resource services, and arrange for administration of insurance and risk management and employee benefit programs. The services may include the following: (a) Accounting Related Services. Provision of general financial advice and services including, without limitation, assistance with respect to matters such as raising of additional capital, cash management and financial controls. (b) Tax Related Services. Preparation of Federal tax returns, preparation of state and local tax returns (including income tax returns), tax research and planning and assistance on tax audits (Federal, state and local) in accordance with the terms of the Tax Allocation Agreement. 2 (c) Insurance and Employee Benefit Related Services. Provision of liability, property, casualty, and other normal business insurance coverage until the Distribution Date and thereafter assistance, if required, with respect to arrangement of such insurance coverage. Assistance, if required, with respect to support for product, worker safety and environmental programs (Penwest acknowledges that principal responsibility for compliance rests with Penwest). Administration of Penwest's employee participation in employee benefit plans and insurance programs sponsored by Penford in accordance with the Employee Benefits Agreement. Filing of all required reports under ERISA for employee benefit plans sponsored by Penford. (d) Additional Services. Services in addition to those enumerated in subsections 1.1(a) through 1.1(c) above as may be agreed upon by Penford and Penwest from time to time. SECTION 2 - CHARGES AND PAYMENTS 2.1 Charges for General Services. For performing general services of the types described above in Section 1 Penford will charge Penwest 110% of the costs actually incurred (including overhead and general administrative expenses). To the extent such direct costs cannot be separately measured, Penford shall charge Penwest for a portion of the total cost determined according to a method reasonably selected by Penford and approved by Penwest. The charges for services pursuant to subsection 2.1 above will be determined and payable no less frequently than on a quarterly basis. The charges will be due when billed and shall be paid no later than thirty 30 days from the date of billing. 2.2 Charges for Third-Party Services. When services of the type described above in Section 1 are provided, upon the mutual agreement of Penford and Penwest, by outside providers or, in connection with the provision of such services out-of-pocket costs are incurred such as travel, the cost thereof will be paid by Penwest. To the extent that Penwest is billed by the provider directly, Penwest shall pay the bill directly. If Penford is billed for such services, Penford may pay the bill and charge Penwest the amount of the bill or forward the bill to Penwest for payment by Penwest. 2.3 Penwest shall pay any sales, use or similar tax, excluding any income tax or taxes levied with respect to gross receipts, payable by Penford or Penwest with respect to amounts payable under this Agreement. SECTION 3 - GENERAL OBLIGATIONS 2 3 3.1 Penwest's Directors and Officers. Nothing contained herein will be construed to relieve the directors or officers of Penwest from the performance of their respective duties or to limit the exercise of their powers in accordance with the Amended and Restated Articles of Incorporation or the Amended and Restated Bylaws of Penwest or in accordance with any applicable statute or regulation. 3.2 Liabilities. In furnishing Penwest with management advice and other services as herein provided, neither Penford nor any of its officers, directors, employees or agents shall be liable to Penwest or its creditors or shareholders for errors of judgment or for anything except willful malfeasance, bad faith or gross negligence in the performance of their duties or reckless disregard of their obligations and duties under the terms of this Agreement. The provisions of this Agreement are for the sole benefit of Penford and Penwest and will not, except to the extent otherwise expressly stated herein, inure to the benefits of any third party. Penwest shall indemnify and hold harmless Penford and each of its officers, directors, employees or agents against any claims of any kind arising out of or relating to this Agreement or services provided hereunder, except for claims caused by the willful malfeasance, bad faith or gross negligence of the person seeking such indemnification. 3.3 Term. The initial term of this Agreement shall begin on the date of this Agreement and continue until June 30, 1999. This Agreement shall automatically renew at the end of the initial term or any renewal term for successive one-year-terms until terminated by either party upon written notice to the other party at least ninety (90) days prior to the expiration of the initial term or any renewal terms of this Agreement. 3.4 Standard of Care. Penford will use (and will cause its subsidiaries to use) reasonable efforts in providing the scheduled services to Penwest and will perform such services with the same degree of care, skill and prudence customarily exercised for its own operations; provided, however, that Penford shall not be required to devote full time and attention to the performance of its duties under this Agreement, but shall devote only so much of its time and attention as it deems reasonable or necessary to perform the services required hereunder. To the extent possible, such services will be substantially identical in nature and quality to the services currently provided or otherwise made available by Penford to its wholly-owned subsidiaries and their respective operating divisions. Penford has the right to reasonably supplement, modify, substitute or otherwise alter such services from time to time in a manner consistent with supplements, modifications, substitutions or alterations made with respect to similar services provided or otherwise made available by Penford to its wholly-owned subsidiaries and their respective operating divisions. In providing such services, Penford will not be responsible for the accuracy, completeness or timeliness of any advice or service or any return, report, 3 4 filing or other document which it provides, prepares or assists in preparing, except to the extent that any inaccuracy, incompleteness or untimeliness arises from Penford's gross negligence or willful misconduct. Penford and Penwest will cooperate in planning the scope and timing of services provided by Penford under this Agreement in order to minimize or eliminate interference with the conduct of Penford's business activities. If such interference is unavoidable, Penford will apportion, in its sole discretion, the available services in a fair and reasonable manner. Notwithstanding anything set forth in this Section 3.4 neither Penford nor any of its officers, directors, employees or agents shall have any liability under this Agreement except to the extent provided in Section 3.2. 3.5 Independence. All employees and representatives of Penford providing the scheduled services to Penwest will be deemed for purposes of all compensation and employee benefits to be employees or representatives of Penford and not employees or representatives of Penwest. In performing such services, such employees and representatives will be under the direction, control and supervision of Penford (and not of Penwest) and Penford will have the sole right to exercise all authority with respect to the employment (including termination of employment), assignment and compensation of such employees and representatives. 3.6 Non-exclusivity. Nothing in this Agreement precludes Penwest from obtaining the scheduled services, in whole or in part, from its own employees or from providers other than Penford. 3.7 Confidentiality. Penford agrees to hold, and to use its best efforts to cause its employees and representatives to hold, in confidence all confidential information concerning Penwest, furnished to or obtained by Penford after the Effective Date in the course of providing the scheduled services, in a manner consistent with Penford's standard policies with respect to the preservation and disclosure of confidential information concerning Penford and its subsidiaries and operating units. SECTION 4 - MISCELLANEOUS 4.1 Notices. Notices hereunder shall be effective if given in writing and delivered or mailed, postage prepaid, by registered or certified mail to: Penford Corporation 777-108th Avenue NE Suite 2390 Bellevue, WA 98004-5193 Attention: Prior to the Distribution Date, to The Chief Financial Officer, thereafter to The President 4 5 or to: Penwest Pharmaceuticals Co. 2981 Route 22 Patterson, NY 12563-9970 Attention: The Chief Executive Officer 4.2 Applicable Law. This Agreement shall be governed by and construed under the laws of the State of Washington applicable to contracts made and to be performed therein. 4.3 Paragraph Titles. The paragraph titles used in this Agreement are for convenience of reference and will not be considered in the interpretation or construction of any of the provisions thereof. 4.4 Amendments; Waivers. This Agreement may be amended or modified only in writing executed on behalf of Penford and Penwest. No waiver shall operate to waive any further or future act and no failure to object or forbearance shall operate as a waiver. 4.5 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, provided that this Agreement and the rights and obligations contained herein or in any exhibit or schedule hereto shall not be assignable, in whole or in part, without the prior written consent of the parties hereto and any attempt to effect any such assignment without such consent shall be void. 4.6 Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement (including any questions of fraud or questions concerning the validity and enforceability of this Agreement or any of the rights herein), shall be determined and settled by arbitration in Seattle, Washington pursuant to the rules then in effect of the American Arbitration Association as modified by this paragraph. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in any court having competent jurisdiction. The party submitting such dispute shall give written notice to that effect to the other party, stating the dispute to be arbitrated and the name and address of a person designated to act as arbitrator on its behalf. Within fifteen (15) days after such notice, the other party shall give written notice to the first party stating the name and address of a person designated to act as a substitute on its behalf. In the event that the second party shall fail to notify the first party of its designation of an arbitrator within the time specified, then the first party shall request the American Arbitration Association to appoint a second arbitrator. The two arbitrators so chosen shall meet within fifteen (15) days after the second arbitrator has been appointed to appoint a third arbitrator. If the two arbitrators are unable to agree on the 5 6 appointment of a third arbitrator within such fifteen (15) day period, either party may request the American Arbitration Association to appoint a third arbitrator. Each arbitrator appointed hereunder shall be independent of the parties and either party may disqualify an arbitrator who is or is affiliated with a supplier, customer or competitor of either party without the consent of the other party. Each arbitrator shall be reasonably knowledgeable regarding the area or areas in dispute. The arbitrators shall follow substantive rules of law and the Federal Rules of Evidence, require the parties to conduct discovery pursuant to the rules then in effect under the Federal Rules of Civil Procedure in an expeditious manner, cause testimony to be transcribed, and make an award accompanied by findings of fact and a statement of reasons for the decision. All costs and expenses, including attorney's fees, of all parties incurred in any dispute which is determined and/or settled by arbitration pursuant to this paragraph shall be borne by the party determined to be liable in respect of such dispute; provided, however, that if complete liability is not assessed against only one party, the parties shall share the total costs in proportion to their respective amounts of liability so determined. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Each party, and the arbitrators, shall use their best efforts, subject to reasonable prosecution of the arbitration, court order and disclosure required under securities laws, to keep the subject matter of the arbitration and confidential information of each party confidential, and the arbitrators are authorized to impose such protective orders as they may deem appropriate for such purpose. 6 7 IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by their fully authorized officers as of the Effective Date. PENFORD CORPORATION By: /s/ Jeffrey T. Cook -------------------------------- Title: CFO ----------------------------- PENWEST PHARMACEUTICALS CO. By: /s/ Jennifer L. Good -------------------------------- Title: VP Finance & CFO ----------------------------- 7 EX-10.3 4 EMPLOYEE BENEFITS AGREEMENT DATED JULY 31, 1998 1 EXHIBIT 10.3 EMPLOYEE BENEFITS AGREEMENT This Agreement is made on July 31, 1998 (the "Effective Date") between PENFORD CORPORATION, a Washington corporation (previously known as PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington corporation (previously known as Edward Mendell Co., Inc.) ("Penwest"). RECITALS WHEREAS, the Board of Directors of Penford has determined that it is in the best interest of Penford and its shareholders to separate the pharmaceutical division of its business from the food and paper division of its business; WHEREAS, to effect the separation of its pharmaceutical division, Penford intends as of a date certain (the "Distribution Date") to distribute to its shareholders, in a pro-rata distribution of a dividend (the "Distribution") all shares of Penwest common stock held by Penford; WHEREAS, the current employees of Penwest are participants in some of Penford's employee benefit plans and certain employees of Penford are expected to become employees of Penwest as of the Distribution Date; WHEREAS, this Agreement sets forth the employment and employee benefit plan arrangements that will apply to Penwest's current employees, and any other employees who are hired by Penwest prior to the Distribution Date (all of such employees being referred to herein as the "Penwest Employees"); and WHEREAS, the Agreement is entered into pursuant to the Separation and Distribution Agreement dated as of [____________] between Penford and Penwest (the "Separation and Distribution Agreement"); NOW THEREFORE, in consideration of the mutual covenants and agreements made herein, the parties hereto agree as follows: SECTION 1 - TERMINATION OF COVERAGE OF PENWEST EMPLOYEES UNDER PENFORD PLANS 1.1 Termination of Coverage of Penwest Employees under Certain Penford Plans Effective as of the Distribution Date, Penwest Employees shall cease to be eligible to actively participate in the following employee benefit plans offered by Penford: (a) the Penford Corporation Supplemental Executive Retirement Plan (the "Penford SERP"); 1 2 (b) the Penford Corporation Deferred Compensation Plan; (c) certain Penford welfare plans (consisting of basic life insurance, accidental death and dismemberment insurance, supplemental life insurance, long-term disability, supplemental disability, business travel accident insurance and employee assistance plan, as set forth in Exhibit 1 (the "Penford Welfare Plans"); (d) the Penford Corporation Savings and Stock Ownership Plan (the "Penford 401(k) Plan"); 1.2 Termination of Coverage For Penwest Employees Under the Penford Corporation Health and Flex Plans Pursuant to prior agreement between Penford and Penwest and appropriate Board action by Penford, effective midnight on December 31, 1997, Penwest Employees ceased to be covered under the Penford health and cafeteria plans, as set forth in exhibit 2 ("Penford Health/Flex Plans") and Penford has no further obligation to cover the Penwest Employees under such plans; provided, however, that nothing in this section 1.2 is intended to abrogate, discontinue or terminate stop loss coverage under the policy maintained by Penford to the extent that it applies to medical claims and expenses resulting from injury or illness to Penwest employees incurred prior to January 1, 1998, but for which no claim was filed, or is filed, until after December 31, 1997. 1.3 Termination of Coverage of Penwest Employees Under the Penford Corporation Retirement Plan (a) Effective as of the Distribution Date, Penford shall amend the retirement plan sponsored by Penford (the "Penford Retirement Plan") to freeze all benefits accrued in the Penford Retirement Plan for all Penwest Employees and to permit the distribution of the accrued benefits of Penwest employees. After the Distribution Date and the receipt of approval by the Internal Revenue Service of such amendments, a Penwest Employee may elect to receive his or her fully vested interest under the Penford Retirement Plan in the form of a lump sum cash payment or an annuity. (b) It is contemplated that Penford will amend the Penford Retirement Plan to provide enhanced pension plan benefits to certain older participants who were Penwest Employees and are identified by the Penford Retirement Plan Administrative Committee ("Administrative Committee"), provided (i) that such participants shall not be deemed to continue to accrue any benefits under the Penford Retirement Plan as a result of such pension enhancement and (ii) that the amount of any such enhancements is to be determined solely in the discretion of the Administrative Committee. 2 3 1.4 Notice to Administrators and Insurers To the extent required, Penford agrees to inform, on or prior to the Distribution Date, all relevant third party administrators and insurance carriers, that coverage of the Penwest Employees in the Penford Welfare Plans ceases as of the Distribution Date. 1.5 Amendment and Termination of Plans Nothing in this Agreement, including without limitation the agreement of Penford and Penwest to maintain employee benefit plans or to make contributions to such plans for any period, shall be construed as a limitation of the right of Penford or Penwest to amend or terminate one or more of such plans in accordance with the terms of this Agreement and applicable law. SECTION 2 - ESTABLISHMENT OF PENWEST EMPLOYEE BENEFIT PLANS 2.1 Establishment of Penwest Savings and Stock Ownership Plan (a) Effective as of the Distribution Date, Penwest will cease to be a participating Employer under the Penford 401(k) Plan and Penwest Employees will cease to accrue any benefits under such plan. Effective on the Distribution Date, Penwest will establish a 401(k) retirement plan (the "Penwest 401(k) Plan") substantially the same in all material features to the Penford 401(k) Plan as of that date. (b) As soon as practicable following the Distribution Date and the establishment of the Penwest 401(k) Plan, Penford shall direct the trustee of the Penford 401(k) Plan to transfer to the trustee of the Penwest 401(k) Plan (which shall accept such transfer) all assets (including, but not limited to, loans) and liabilities in the individual accounts of Penwest Employees in the Penford 401(k) Plan ("First Transfer of Account Balances"). Accounts in the name of such Penwest Employees will be maintained under the Penford 401(k) Plan (although these accounts will show a $0 account balance following the First Transfer of Account Balances) until the allocation of profit sharing contributions to the accounts of participants in the Penford 401(k) Plan for the fiscal year ending 8/31/98 ("Profit Sharing Allocation"). Following the Profit Sharing Allocation, Penford shall direct the trustee of the Penford 401(k) Plan to transfer to the trustee of the Penwest 401(k) Plan (which shall accept such transfer) all remaining assets and liabilities in the individual accounts of Penwest Employees in the Penford 401(k) Plan ("Second Transfer of Account Balances"). (c) As of the date of the First Transfer of Account Balances, Penwest and the Penwest 401(k) Plan shall assume all liabilities for all accrued benefits under the Penford 401(k) Plan for the Penwest Employees, and the Penford 401(k) Plan shall be relieved of all liabilities for such benefits, except for claims relating to account balances resulting from the Profit Sharing Allocation. As of the date of the Second Transfer of Account Balances, Penwest and the Penwest 401(k) Plan shall assume all liabilities for accrued benefits under the Penford 401(k) 3 4 Plan for the Penwest Employees, including claims relating to account balances resulting from the Profit Sharing Allocation, and the Penford 401(k) Plan shall be relieved of all such liabilities.. (d) The Penwest 401(k) Plan shall provide the following: 1. that Penwest employees shall participate in the Penwest 401(k) Plan to the extent that they were eligible to participate in the Penford 401(k) Plan immediately prior to the Distribution Date, and shall receive credit for eligibility, vesting, and benefit accrual service for all service credited for such purposes under the Penford 401(k) Plan; 2. that the compensation paid by Penford to the Penwest Employees that was recognized under the Penford 401(k) Plan shall be credited for all applicable purposes under the Penwest 401(k) Plan; and 3. that with respect to any amounts transferred from the Penford 401(k) Plan, the Penwest 401(k) Plan will preserve any rights and features protected under Section 411(d)(6) of the Internal Revenue Code ("Code"). 2.2 Establishment of Penwest Supplemental Executive Retirement Plan and Penwest Deferred Compensation Plan (a) Effective upon the Distribution Date, Penwest shall adopt, or cause to be adopted, a supplemental executive retirement plan and a deferred compensation plan (the "Penwest SERP and DC Plans") and establish a related grantor trust (the "Penwest Rabbi Trust") to provide benefits to Tod R. Hamachek, after he becomes an employee of Penwest, and to Jack V. Talley, Jr. (the "Transferring Executives"). (b) As of the Distribution Date, Penwest and the Penwest SERP and DC Plans shall assume all liabilities for all accrued benefits under the Penford SERP and Penford Corporation Deferred Compensation Plan for the Transferring Executives. (c) As soon as practicable after receipt by Penford of (1) a copy of the Penwest SERP and DC Plans and (2) certified resolutions of Penwest's Board of Directors evidencing adoption of the Penwest SERP and DC Plans and the creation of a the Penwest Rabbi Trust thereunder, Penford shall direct the trustees of the Penford SERP and the Penford Corporation Deferred Compensation Plan to transfer to the trustee of the Penwest SERP and DC Plans all accounts in the Penford SERP and the Penford Corporation Deferred Compensation Plan of the Transferring Executives. (d) Penwest and Penford shall take any and all action necessary to ensure that participants in the Penwest SERP and DC Plans or the Penford SERP and Penford Corporation Deferred Compensation Plan shall not suffer any adverse federal income tax consequences as a result of the transfer of liabilities to the Penwest SERP and DC Plans. (e) Effective as of or before the Distribution Date, Penwest shall appoint Wells Fargo Bank as trustee under the Penwest Rabbi Trust and Penford shall transfer, or cause to be 4 5 transferred by a comparable rabbi trust established by Penford, to the Penwest Rabbi Trust, life insurance policies sufficient to cover the accrued benefits (as of the date of transfer) of the Transferring Executives under the Penford SERP and to cover the account balances of the Transferring Executives in the Penford Corporation Deferred Compensation Plan ("Transferred Policies"). Penwest will be responsible for any premium payments with respect to the Transferred Policies which become due after the date of transfer of the Transferred Policies. 2.3 Penwest Welfare Plans Effective upon the Distribution Date, Penwest shall adopt, or cause to be adopted, on a fully pooled basis, welfare plans ("Penwest Welfare Plans") substantially identical in all material features to the corresponding plans offered by Penford as of the Distribution Date to its salaried employees, and set forth on Exhibit 1, as follows: (a) basic life insurance; (b) basic accidental death and dismemberment insurance; (c) supplemental life insurance; (d) business travel accident insurance; (e) employee assistance plan; (f) long term disability; (g) supplemental disability 2.4 Penwest Health/Flex Plan Effective as of January 1, 1998, Penwest adopted the Penwest Health/Flex Plans substantially identical in all material features to the Penford Health/Flex Plans, which plans are listed on Exhibit 2. As of the Distribution Date, Tod Hamachek will be covered under the Penwest Health/Flex Plans, and will cease to be covered by the Penford Health/Flex Plans. 2.5 COBRA Pursuant to prior agreement between Penford and Penwest, acknowledged and ratified herein, effective January 1, 1998, Penwest assumed any and all liability and responsibility for providing continuation of health care coverage under the Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") to any active Penwest Employee (and any qualified beneficiaries with respect to such employee), whether or not such continuation requirements arose under the Penford Health/Flex Plans, and Penford has no further obligation or liability for any requirements to provide continuation of health care coverage to any Penwest Employees. 5 6 2.6 Cooperation Penford and Penwest agree to provide each other with all records and information necessary or useful to carry out their obligations under this Agreement, and to cooperate in the filing of documents required by the transfer of assets and liabilities described herein and to take any other actions necessary or advisable to meet any statutory, regulatory or contractual requirements under this Agreement. SECTION 3 - INDEMNIFICATION 3.1 Indemnification (a) Penwest agrees to indemnify and hold harmless Penford and its affiliates, their officers, directors, employees, agents, and fiduciaries from and against any and all costs, damages, losses, expenses (including reasonable attorneys fees and costs) and other liabilities arising out of or related to the Penford Welfare Plans, the Penford SERP, the Penford Deferred Compensation Plan, the Penford 401(k) Plan, and the Penford Health/Flex Plans (collectively referred to as the "Penford Benefit Plans") (other than the determination of the amount, if any, of claims and accrued benefits payable from such plans) with respect to the Penwest Employees and from any liability relating to any applicable taxes or penalties arising from the failure of the Penwest 401(k) Plan, to be qualified under Section 401(a) of the Internal Revenue Code of 1986, as amended (the "Code") at the time of the asset transfer other than any failure attributable to the terms or operation of the Penford 401(k) Plan prior to the asset transfer. (b) Penford agrees to indemnify and hold harmless Penwest and its affiliates, their officers, directors, employees, agents, and fiduciaries from and against any and all costs, damages, losses, expenses (including reasonable attorneys fees and costs) and other liabilities arising out of or related to the Penford benefit plans which are attributable to the determination of the amount of any claims payable to Penwest Employees from the Penford Welfare Plans; the determination of the accrued benefits to be transferred to the Penwest 401(k) Plan; the determination of book reserves or salary deduction liabilities with respect to the Penwest Employees under and from the Penford benefit plans; any claims under the Penford benefit plans which are not attributable to Penwest Employees and assumed by Penwest under this Agreement; and any liability relating to the applicable taxes or penalties arising from the failure of the Penwest 401(k) Plan to be qualified under Section 401(a) of the Code due to the terms or operation of the Penford 401(k) Plan prior to the date the assets are transferred. 3.2 Health and Welfare Benefit Claims Except as provided in Section 3.1, Penwest agrees that it shall assume and be solely responsible for the following: (a) all liabilities and obligations of Penford in connection with the claims for benefits brought by or on behalf of Penwest Employees under the Penford Welfare Plans and the Penford Health/Flex Plans, and Penford shall cease to have any such liabilities or obligation related to such claims; and 6 7 (b) all liabilities and obligations of Penford in connection with claims for post-employment health and welfare benefits (including but not limited to, medical, dental, and vision benefits, severance pay, disability and life insurance) made by or on behalf of Penwest Employees who retire or otherwise terminate employment with Penwest after January 1, 1998. SECTION 4 - MISCELLANEOUS 4.1 Notices Notices hereunder shall be effective if given in writing and delivered or mailed, postage prepaid, by registered or certified mail to: Penford Corporation 777 - 108th Avenue NE Suite 2390 Bellevue, WA 98004-5193 Attention: Susan M. Iverson or to: Penwest Pharmaceuticals Co. 2981 Route 22 Patterson, NY 12563-9970 Attention: Jennifer L. Good 4.2 Amendments; Waivers This Agreement may be amended or modified only in writing executed on behalf of Penford and Penwest. No waiver shall operate to waive any further or future act and no failure to object or forbearance shall operate as a waiver. 4.3 No Third Party Beneficiary This Agreement is solely between Penford and Penwest, and nothing herein, whether expressed or implied, shall confer any rights or remedies on any employee of Penford or Penwest, any former employee of Penford, or any other person. 4.4 Entire Agreement This Agreement constitutes the sole and entire agreement and understanding between the parties with respect to the matters covered hereby. Any amendment, modification, or termination of this Agreement must be in writing and must be signed by both parties. 7 8 4.5 Governing Law This Agreement shall be governed by the laws of the State of Washington, except to the extent preempted by the Employee Retirement Income Security Act of 1974, as amended. 4.6 Successors and Assigns This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, provided that this Agreement and the rights and obligations contained herein or in any exhibit or schedule hereto shall not be assignable, in whole or in part, without the prior written consent of the parties hereto and any attempt to effect any such assignment without such consent shall be void. IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by their authorized representatives as of the Effective Date. PENFORD CORPORATION By: /s/ Jeffrey T. Cook -------------------------------- Title: CFO ----------------------------- PENWEST PHARMACEUTICALS CO. By: /s/ Jennifer L. Good -------------------------------- Title: VP Finance & CFO ----------------------------- 8 9 EXHIBIT 1 PENFORD WELFARE PLANS UNUM INSURANCE COMPANY OF AMERICA - Group Life (Basic Life Insurance) and Accidental Death and Dismemberment Insurance Plan - Supplemental Life Plan - Long-Term Disability Income Plan - Group Travel Accident Insurance Plan MANAGED HEALTH NETWORK - Employee Assistance Program MCG NORTHWEST - Supplemental Disability Plan 9 10 EXHIBIT 2 PENFORD HEALTH/FLEX PLANS BLUE CROSS BLUE SHIELD OF IOWA - Medical Plan for Salaried Employees ADVANCE PARADIGM - Prescription Drug Plan DELTA DENTAL - USA - Dental Plan for Salaried Employees VISION SERVICE PLAN - Vision Plan for Salaried Employees PENCHOICE FLEXIBLE BENEFITS PROGRAM Pre-tax health plan premiums, medical reimbursement flexible spending account, dependent care flexible spending 10 EX-10.4 5 TAX ALLOCATION AGREEMENT DATED JULY 31, 1998 1 EXHIBIT 10.4 TAX ALLOCATION AGREEMENT THIS TAX ALLOCATION AGREEMENT (the "Agreement") is made as of July 31, 1998, by and among Penford Corporation, a Washington corporation ("Parent" and, together with its subsidiaries existing immediately following the Distribution, the "Parent Group"), and Penwest Pharmaceuticals Co., a Washington corporation ("Penwest" and, together with its subsidiaries existing immediately following the Distribution, the "Penwest Group"). WHEREAS, Parent and Penwest have entered into the Separation and Distribution Agreement (as defined below) providing for the distribution of all of the Penwest stock owned by Parent to Parent's shareholders in accordance with the Separation and Distribution Agreement; and WHEREAS, Parent and Penwest desire to set forth their agreement regarding the allocation between the Parent Group and the Penwest Group of all responsibilities, liabilities and benefits affecting Taxes (as defined below) paid or payable by either of them for all taxable periods. NOW, THEREFORE, in consideration of their mutual promises, the parties hereby agree as follows: 1. Definitions. Capitalized terms used herein and not otherwise defined shall have the meanings given them in the Separation and Distribution Agreement. As used in this Agreement, the following terms shall have the following meanings: (a) "Affiliate" of any person means any person, corporation, partnership or other entity directly or indirectly controlling, controlled by or under common control with such person. (b) "Penwest" has the meaning set forth in the preamble hereto. (c) "Penwest-Caused Taxes" means any liability for Taxes, including interest and penalties, incurred by the Parent Group or the Penwest Group arising from or attributable to any of the transactions that are directly related to the Distribution failing to qualify under Code Sections 355 or 368 (or any comparable provisions of state law), but only if such failure (i) was caused by an act that occurred after the Distribution and in which Penwest participated or (ii) was otherwise attributable to one or more of the representations contained in Section 8 hereof failing to be true as of the date of this Agreement. For purposes of this definition, if any failure to so qualify occurs and Penwest has participated in a Post-Distribution Act, such failure shall be deemed to have been caused by Penwest's participation in the Post-Distribution Act unless established to the contrary by clear 2 and convincing evidence that the Post-Distribution Act did not cause the failure to qualify under Code Sections 355 or 368. Penwest-Caused Taxes shall include any increase in Taxes of the Parent Group or the Penwest Group for any period to the extent such increase in Taxes would not have occurred but for the transactions directly related to the Distribution failing to qualify under Sections 355 or 368 of the Code (or comparable provisions of state law). Thus, for example, if the failure of any of the transactions to so qualify results in additional income being realized by the Parent Group in its 1998 taxable year, but such income is substantially offset by operating losses or net operating loss carryovers (other than operating losses or net operating loss carryovers of the Penwest Group), Penwest-Caused Taxes will include (to the extent the other requirements of this definition are met) any increase in Taxes realized by any member of the Parent Group in subsequent years to the extent such increase in Taxes would not have been realized had the loss or loss carryovers not been used in 1998. (d) "Penwest Group" has the meaning set forth in the preamble hereto. (e) "Code" means the Internal Revenue Code of 1986, as amended or, as the context may require, the Internal Revenue Code applicable to the taxable year in question. (f) "Distribution" has the meaning set forth in the Separation and Distribution Agreement. (g) "Separation and Distribution Agreement" means the Separation and Distribution Agreement dated June ___, 1998 between Parent and Penwest providing for the Distribution. (h) "Distribution Date" has the meaning set forth in the Separation and Distribution Agreement. (i) "Final Determination" shall mean the final resolution of liability for any Tax for a taxable period, (i) by Internal Revenue Service Form 870 or 870-AD (or any successor forms thereto), on the date of acceptance by or on behalf of the taxpayer, or by comparable form under the laws of other jurisdictions; except that a Form 870 or 870-AD or comparable form that reserves (whether by its terms or by operation of law) the right of the taxpayer to file a claim for refund and/or the right of the taxing authority to assert a further deficiency shall not constitute a Final Determination; (ii) by a decision, judgment, decree, or other order by a court of competent jurisdiction, which has become final and unappealable; (iii) by a closing agreement or accepted offer in compromise under Section 7121 or 7122 of the Code, or comparable agreements under the laws of other jurisdictions; (iv) by any allowance of a refund or credit in respect of an overpayment of Tax, but only after -2- 3 the expiration of all periods during which such refund may be recovered (including by way of offset) by the Tax imposing jurisdiction; or (v) by any other final disposition, including by reason of the expiration of the applicable statute of limitations or by mutual agreement of the parties. (j) "Post-Distribution Act" means any event or transaction (or the execution of an agreement, letter of intent or option providing for a transaction) in which Penwest participates and in which any of the following occurs: (i) Penwest transfers (whether or not in liquidation) a material portion of its assets (other than a transfer of assets in the ordinary course of business) within one year following the Distribution Date; (ii) Penwest merges with another corporation within one year following the Distribution Date; (iii) Within two years of following the Distribution Date Penwest discontinues a material portion of its historic business activities; and (iv) Within one year following the Distribution Date Penwest Common Stock distributed in the Distribution is converted into (or redeemed or exchanged for) any other stock, any security, any property or cash. (k) "Post-Distribution Taxes" means any and all liability for Taxes of the Penwest Group or the Parent Group, as appropriate, other than for Pre-Distribution Taxes. (l) "Pre-Distribution Taxes" means any and all Taxes of the Parent Group or the Penwest Group for all periods that ended on or prior to the Distribution Date. For purposes of computing the amount of Pre-Distribution Taxes in the case of a Tax period that begins before and ends after the Distribution Date, the amount of Taxes considered to have accrued with respect to the portion of the Tax period that ended on the Distribution Date shall be determined as follows: (i) In the case of any ad valorem, personal property and real property Taxes, an amount of such Tax for the entire Tax period multiplied by a fraction the numerator of which is the number of days in the portion of the Tax period ended on the Distribution Date and the denominator of which is the number of days in the entire Tax period; (ii) In the case of any Tax other than ad valorem, personal property and real property Taxes, the amount that would be payable if the relevant Tax period ended on the Distribution Date; and -3- 4 (iii) In the case of any withholding Tax, the amount of Taxes required to be held which relates to any payment by any member of the Parent Group or the Penwest Group on or before the Distribution Date. Any credits relating to a Tax period that begins before and ends after the Distribution Date shall be taken into account as though the relevant Tax period ended on the Distribution Date. (m) "Returns" means all returns, reports and information statements (including all exhibits and schedules thereto) required to be filed with a Taxing Authority with respect to any Taxes. (n) "Taxes" means any income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, franchise, profits, license, withholding, payroll, employment, environmental excise, severance, stamp, transfer, recording occupation, premium, property, value added, windfall profit tax, custom duty, or other tax of any kind whatsoever, together with any interest and any penalty, addition to tax or additional amount imposed by any governmental authority (a "Taxing Authority") responsible for the imposition of any such tax (domestic or foreign). 2. Operative Provisions. (a) Parent shall indemnify Penwest against and be responsible for all Post-Distribution Taxes attributable to any member of the Parent Group and all Pre-Distribution Taxes other than Penwest-Caused Taxes. (b) Penwest shall indemnify Parent against and shall be responsible for all Post-Distribution Taxes attributable to any member of the Penwest Group and all Penwest-Caused Taxes. (c) With respect to the tax year of the Parent Consolidated Group that includes the Distribution Date and the tax year of Penwest that commences immediately following the Distribution Date, the Parent Consolidated Group shall claim on its federal income tax returns the benefit of (i) the graduated tax rates of Code Section 11, (ii) the $25,000 bracket amount in Code Section 38, (iii) the $40,000 exemption amount and the $150,000 bracket amount in Section 55, and (iv) the $2,000,000 bracket amount in Section 59A and Penwest shall claim none of such benefits. 3. Returns; Refunds; Contest Provisions. (a) Parent shall have the obligation and the sole right and full discretion to control (i) the preparation of all Returns with respect to Pre-Distribution -4- 5 Taxes (including Penwest-Caused Taxes) and (ii) the defense, settlement or compromise of any audit, examination, investigation suit, action or other proceeding relating to Pre-Distribution Taxes other than Penwest-Caused Taxes. Parent shall be entitled to all refunds of Pre-Distribution Taxes other than Penwest-Caused Taxes paid or reimbursed by Penwest pursuant to this Agreement. Notwithstanding the foregoing, in the event that Parent decides to abandon the defense of, or settle or compromise any claim relating to any Pre-Distribution Taxes and such claim may have an effect on Post-Distribution Taxes, Parent shall notify Penwest of such decision and Penwest shall have ten days to notify Parent that it assumes all liability with respect to the Pre-Distribution Taxes under dispute and wishes to assume the defense of such audit or other proceedings at its own expense. In the event that Parent timely receives such notice from Penwest, it shall use all reasonable efforts to cooperate so as to facilitate Penwest's handling of such proceedings. (b) Except as otherwise provided for herein, Penwest shall have the obligation and the sole right and full discretion to control (i) the preparation of all Returns with respect to Post-Distribution Taxes attributable to any member of the Penwest Group and (ii) the defense, settlement or compromise of any audit, examination, investigation suit, action or other proceeding relating to (A) Post-Distribution Taxes attributable to any member of the Penwest Group and (B) any Penwest-Caused Taxes. Penwest shall have the right to all refunds of Post-Distribution Taxes attributable to any member of the Penwest Group and of Penwest-Caused Taxes paid (directly or indirectly) by any member of the Penwest Group. Notwithstanding the foregoing, in the event that Penwest decides to abandon the defense of, or settle or compromise any claim relating to any Penwest-Caused Taxes, Penwest shall notify Parent of such decision and Parent shall have ten days to notify Penwest that it assumes all liability with respect to the Penwest-Caused Taxes under dispute and wishes to assume the defense of such audit or other proceedings at its own expense. In the event that Penwest timely receives such notice from Parent, it shall use all reasonable efforts to cooperate so as to facilitate Parent's handling of such proceedings. (c) Except as otherwise provided for herein, Parent shall have the obligation and the sole right and full discretion to control (i) the preparation of all Returns with respect to Post-Distribution Taxes attributable to any member of the Parent Group and (ii) the defense, settlement or compromise of any audit, examination, investigation suit, action or other proceeding relating to Post-Distribution Taxes attributable to any member of the Parent Group. Parent shall have the right to all refunds of Post-Distribution Taxes attributable to any member of the Parent Group and of Penwest-Caused Taxes paid (directly or indirectly) by any member of the Parent Group which were not reimbursed by Penwest pursuant to this Agreement. 4. Windfalls. -5- 6 (a) Parent shall promptly pay to Penwest the amount of any incremental Tax savings generated by (i) a deduction, credit or exclusion that (A) is actually realized by the Parent Group with respect to Pre-Distribution Taxes and (B) relates to or is based on an item that is the basis for a similar deduction, credit or exclusion taken on a Return with respect to Post-Distribution Taxes of the Penwest Group that is denied, disallowed, forfeited, or accelerated until prior to the Distribution Date or (ii) a reduction in the amount of any gross income or revenue that (A) is actually realized by the Parent Group with respect to Pre-Distribution Taxes and (B) relates to, or is based on, a similar item of gross income or revenue that the Penwest Group is required to include on a Return or otherwise required to include in its computation of taxable income as a result of an audit, other administrative proceeding or otherwise. Parent shall use reasonable best efforts to realize any such incremental tax savings that may potentially be available. (b) Penwest shall promptly pay to Parent the amount of any incremental Tax savings generated by (i) a deduction, credit or exclusion that (A) is actually realized by the Penwest Group with respect to its Post-Distribution Taxes and (B) relates to or is based on an item that is the basis for a similar deduction, credit or exclusion taken on a Return with respect to Pre-Distribution Taxes other than Penwest-Caused Taxes that is denied, disallowed, forfeited, or deferred until after the Distribution Date or (ii) a reduction in the amount of any gross income or revenue that (A) is actually realized by the Penwest Group with respect to Post-Distribution Taxes and (B) relates to, or is based on, a similar item of gross income or revenue that the Parent Group is required to include on a Return or otherwise required to include in its computation of taxable income as a result of an audit, other administrative proceeding or otherwise. Penwest shall use reasonable best efforts to realize any such incremental tax savings that may potentially be available. 5. Agency. Penwest irrevocably designates Parent (and shall cause each member of the Penwest Group to irrevocably designate Parent) as its agent and attorney in fact (and shall execute any necessary powers of attorney) for the purpose of taking any and all actions necessary or incidental to the filing of federal income tax returns and state unitary or combined Returns for (i) any period during which any member of the Penwest Group or any predecessor qualified to file a consolidated, combined, unitary or similar Return with any member of the Parent Group and (ii) any period ending on or before the Distribution Date. Parent shall keep Penwest reasonably informed of, and shall reasonably consult with Penwest with respect to, all actions to be taken on behalf of any member of the Penwest Group. Parent and Penwest will each furnish the other any and all information which the other may reasonably request in -6- 7 order to carry out the provisions of this Agreement to determine the amount of any Tax liability. 6. Consistent Reporting. (a) With respect to all taxable periods ending on or prior to December 31, 2001, Penwest, each member of the Penwest Group and any future Affiliates thereof shall file federal income tax and state income tax Returns in a manner consistent with the Returns filed (or to be filed) in respect to Pre-Distribution Taxes and in a manner consistent with the form of the transactions contemplated by the Separation and Distribution Agreement (the "Form") including that the Distribution qualifies under Section 355 of the Code. (b) To the extent there is an inconsistency or an apparent inconsistency amongst the Returns relating to Pre-Distribution Taxes (including after taking into account Returns to be filed after the Distribution Date) and/or the Form, Penwest shall file Returns with respect to Post-Distribution Taxes in the manner directed by Parent. (c) Parent and Penwest agree to contest any proposed adjustment by any Taxing Authority that is, in the sole judgement of Parent, inconsistent with the provisions of this Section 6. 7. Covenants of Penwest and Parent Relating to Actions After the Distribution Date. (a) Penwest shall, and shall cause each member of the Penwest Group to refrain from participating in any Post-Distribution Act without the prior written consent of Parent. (b) Penwest and Parent shall cooperate (and shall cause each of their Affiliates to cooperate) fully at such time and to the extent reasonably requested by the other party in connection with the preparation and filing of any Return or the conduct of any audit, dispute, proceeding, suit or action in respect of Taxes or other Tax matters. Such cooperation shall include, without limitation, (i) the retention and provision on demand of books, records, documentation or other information relating to any Return until the expiration of the applicable statute of limitation (giving effect to any extension, waiver, or mitigation thereof) plus two years; (ii) the execution of any document that may be necessary or reasonably helpful in connection with the filing of any Return by any member of the Parent Group or the Penwest Group or in connection with any audit, examination, investigation suit, action or other proceeding; and (iii) the use of the parties' reasonable best efforts to obtain any documentation from a governmental authority or a third party that may be necessary or helpful in connection with the foregoing. -7- 8 (c) Penwest and Parent shall cooperate (and shall cause each of their Affiliates to cooperate) in causing the tax year end of Penwest to be changed to December 31, effective for the year ended December 31, 1998 with respect to any jurisdiction in which Penwest is not included in a consolidated or combined group Tax Return for a Tax period which will end on the Distribution Date. 8. Penwest Representations. Penwest hereby represents and warrants to the Parent and each member of the Parent Group that the statements contained in this Section 8 are true and correct in all material respects on the date hereof: (a) To the best of Penwest's knowledge and belief, no part of its stock being distributed in the Distribution will be received by a shareholder of Parent in such shareholder's capacity as a creditor, employee or in any capacity other than that of a shareholder of Parent. (b) To the best of Penwest's knowledge and belief, shareholders of Parent owning stock two years prior to the Distribution Date will continue to hold at least 50% of the stock of Penwest two years after the Distribution Date. (c) Penwest has no plan or intention to liquidate Penwest, to merge it with another corporation or to sell or otherwise dispose of the assets of Penwest subsequent to the Distribution except in the ordinary course of business. (d) To the best of Penwest's knowledge and belief, no plan or intention exists by the shareholders of Parent to sell, exchange, transfer by gift, or otherwise dispose of any of their stock in Parent or Penwest subsequent to the Distribution. (e) Following the Distribution, each of Parent and Penwest will operate as independent corporations except that certain administrative and other common activities of the two corporations will be undertaken by common personnel in accordance with the Ancillary Agreements. Payments made in connection with all continuing transactions between, and services provided for, each of Parent and Penwest will be for fair market value based on terms and conditions arrived at by the Parties bargaining at arm's length. (f) Penwest has no plan involving the issuance or transfer of equity interests in Penwest following the Distribution other than issuances to employees and consultants of Penwest upon the exercise of stock options or otherwise under the Company's 1997 Equity Incentive Plan, 1997 Employee Stock Purchase Plan or 1998 Spinoff Option Plan. -8- 9 (g) Penwest has no plan or intention for the transfer or cessation of a substantial portion of the business of Penwest or other substantial change in the business of Penwest following the Distribution. 9. Parent Representations. Parent hereby represents and warrants to Penwest and each member of the Penwest Group that the statements contained in this Section 9 are true and correct in all material respects on the date hereof: (a) No part of the Penwest stock being distributed in the Distribution will be received by a shareholder of Parent in such shareholder's capacity as a creditor, employee or in any capacity other than that of a shareholder of Parent. (b) To the best of Parent's knowledge and belief, shareholders of Parent owning stock two years prior to the Distribution Date will continue to hold at least 50% of the stock of Parent two years after the Distribution Date. (c) Parent has no plan or intention to liquidate Parent, to merge it with another corporation or to sell or otherwise dispose of the assets of Parent subsequent to the Distribution except in the ordinary course of business. (d) To the best of Parent's knowledge and belief, no plan or intention exists by the shareholders of Parent to sell, exchange, transfer by gift, or otherwise dispose of any of their stock in Parent or Penwest subsequent to the Distribution. (e) Following the Distribution, each of Parent and Penwest will operate as independent corporations except that certain administrative and other common activities of the two corporations will be undertaken by common personnel in accordance with the Ancillary Agreements. Payments made in connection with all continuing transactions between, and services provided for, each of Parent and Penwest will be for fair market value based on terms and conditions arrived at by the Parties bargaining at arm's length. (f) Parent has no plan or intention for the transfer or cessation of a substantial portion of the business of Parent or other substantial change in the business of Parent following the Distribution. 10. Payments. All payments to be made hereunder shall be made in immediately available funds. Unless otherwise provided herein, any payment not made when due hereunder shall bear interest from the due date at an annual rate equal to the lowest prime rate as reported in the Wall Street Journal plus 2%, compounded and adjusted monthly. For purposes of this Agreement, the following payments shall be due at the following times: -9- 10 (a) Payments due under Section 2 hereof shall be paid within 10 days of the receipt of notice from the party entitled to the payment indicating the occurrence of the later of (i) a Final Determination relating to the item or items giving rise to the Tax for which indemnification is made and (ii) actual payment of the Tax giving rise to the claim for indemnification. (b) In the case of any refunds of Taxes received by a party other than the party entitled to such refunds pursuant to Section 3 hereof, the recipient of the refund shall pay the amount of such refund to the other party within five days of the receipt of such refund. (c) Amounts payable pursuant to Section 4 hereof shall be paid within five days of the later to occur of (i) a Final Determination relating to the Tax item that gave rise to the windfall benefit and (ii) the actual receipt of the windfall benefit. 11. Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement (including any questions of fraud or questions concerning the validity and enforceability of this Agreement or any of the rights herein and therein conveyed), shall be determined and settled by arbitration in Seattle, Washington, pursuant to the rules then in effect of the American Arbitration Association as modified by this paragraph. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in any court having competent jurisdiction. The party submitting such dispute shall give written notice to that effect to the other party, stating the dispute to be arbitrated and the name and address of a person designated to act as arbitrator on its behalf. Within fifteen (15) days after such notice, the other party shall give written notice to the first party stating the name and address of a person designated to act as an arbitrator on its behalf. In the event that the second party shall fail to notify the first party of its designation of an arbitrator within the time specified, then the first party shall request the American Arbitration Association to appoint a second arbitrator. The two arbitrators so chosen shall meet within fifteen (15) days after the second arbitrator has been appointed to appoint a third arbitrator. If the two arbitrators are unable to agree on the appointment of a third arbitrator within such fifteen (15) day period, either party may request the American Arbitration Association to appoint a third arbitrator. Each arbitrator appointed hereunder shall be independent of the parties and either party may disqualify an arbitrator who is or is affiliated with a supplier, customer or competitor of either party without the consent of the other party. Each arbitrator shall be reasonably knowledgeable regarding the area or areas in dispute. The arbitrators shall follow substantive rules of law and the Federal Rules of Evidence, require the parties to conduct discovery pursuant to the rules then in effect under the Federal Rules of Civil Procedure in an expeditious manner, cause testimony to be transcribed, and make an award accompanied by findings of fact and a statement of reasons for the decision. All costs and expenses, including attorney's -10- 11 fees, of all parties incurred in any dispute which is determined and/or settled by arbitration pursuant to this paragraph shall be borne by the party determined to be liable in respect of such dispute; provided, however, that if complete liability is not assessed against only one party, the parties shall share the total costs in proportion to their respective amounts of liability so determined. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Each party, and the arbitrators, shall use their best efforts, subject to reasonable prosecution of the arbitration, court order and disclosure required under securities laws, to keep the subject matter of the arbitration and confidential information of each party confidential, and the arbitrators are authorized to impose such protective orders as they may deem appropriate for such purpose. 12. Costs and Expenses. Except as expressly set forth in this Agreement, each party shall bear its own costs and expenses incurred pursuant to this Agreement regardless of the beneficiary of the items or services relating to such costs and expenses. 13. Termination and Survival. Notwithstanding anything in this Agreement to the contrary, this Agreement shall remain in effect and its provisions shall survive for the full period of all applicable statutes of limitation relating to the assessment of Taxes (giving effect to any extension, waiver or mitigation thereof) plus two years. 14. Amendments; Limitation on Waivers. (a) Any provision of this Agreement may be amended if, and only if, such amendment is in writing and signed by Parent and Penwest. (b) The provisions of this Agreement may be waived only if the waiver is in writing and signed by the party making the waiver. No delay or omission in exercising any right under this Agreement will operate as a waiver of the right on any further occasion. No waiver of any particular provision of the Agreement will be treated as a waiver of any other provision, and no waiver of any rights will be deemed a continuing waiver of the same right with respect to subsequent occurrences that give rise to it. All rights given by this Agreement are cumulative to other rights provided for in this Agreement and to any other rights available under applicable law. 15. Governing Law and Interpretation. This Agreement shall be governed by, interpreted and enforced in accordance with the laws of the State of Washington (regardless of the laws that might be applicable under principles of conflict of law). 16. Confidentiality. Each party shall hold and shall cause its consultants and advisors to hold in strict confidence, unless compelled to disclose by judicial or -11- 12 administrative process or, in the opinion of its counsel, by other requirements of law, all information (other than any such information relating solely to the business or affairs of such party) concerning the other parties hereto furnished it by such other party or its representatives pursuant to this Agreement (except to the extent that such information can be shown to have been (a) previously known by the party to which it was furnished, (b) in the public domain through no fault of such party, or (c) later lawfully acquired from other sources by the party to which it was furnished), and each party shall not release or disclose such information to any other person, except its auditors, attorneys, financial advisors, bankers and other consultants and advisors who shall be advised of the provisions of this Section 16. Each party shall be deemed to have satisfied its obligation to hold confidential information concerning or supplied by the other party if it exercises the same care as it takes to preserve confidentiality for its own similar information. 17. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. 18. Assignments and Third Party Benefit. This Agreement and the terms and provisions hereof shall be binding upon and shall inure to the benefit of, the parties and their respective successors and assigns. 19. Severability. If any term, provision, condition or covenant of this Agreement, or the application thereof to any party or circumstance shall be held by a court of competent jurisdiction to be invalid, unenforceable or void, the remainder of this instrument, or the application of such term, provision, condition or covenant to persons or circumstances other than those as to whom or which it is held invalid or unenforceable, shall not be affected thereby, and each term and provision of this Agreement shall be valid and enforceable to the fullest extent permitted by law. 20. Merger of Prior Agreements. (a) This Agreement contains all of the terms and provisions and constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all prior written, oral or implied understandings, representations and agreements of the parties relating to the subject matter of this Agreement. Without limiting the foregoing, the parties acknowledge and agree that in the event of any conflict or inconsistency between the provisions of this Agreement and the provisions of the Separation and Distribution Agreement, the provisions of this Agreement shall control and to such extent shall be deemed to supersede such conflicting provisions under the Separation and Distribution Agreement. (b) The parties acknowledge that pursuant hereto any and all existing tax sharing agreements or arrangements binding or benefiting Penwest shall -12- 13 be terminated as of the close of business on the Distribution Date, and that after the Distribution Date this Agreement shall constitute the sole tax sharing agreement among Parent and Penwest. IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. PENFORD CORPORATION By: /s/ Jeffrey T. Cook ----------------------- Title: CFO ------------------- PENWEST PHARMACEUTICALS CO. By: /s/ Jennifer L. Good ----------------------- Title: VP Finance & CFO ------------------- -13- EX-10.5 6 EXCIPIENT SUPPLY AGREEMENT DATED JULY 31, 1998 1 EXHIBIT 10.5 EXCIPIENT SUPPLY AGREEMENT This EXCIPIENT SUPPLY AGREEMENT (the "Agreement") is made as of the 31st day of July, 1998 between PENFORD CORPORATION, a Washington corporation (previously known as PENWEST, LTD.) ("Penford"), and PENWEST PHARMACEUTICALS CO., a Washington corporation ("Penwest"). RECITALS: WHEREAS, the Board of Directors of Penford has determined that it is in the best interest of Penford and its shareholders to separate the pharmaceutical division of its business from the food and paper division of its business; WHEREAS, Penford and Penwest wish to enter into an agreement describing the terms and conditions upon which Penford will manufacture and supply to Penwest, and Penwest will purchase from Penford, EMDEX(R) and CANDEX(R) (sugar based tabletting binders hereinafter referred to as "Pharmaceutical Excipients") in bulk form; and WHEREAS, this Agreement is entered into pursuant to the Separation and Distribution Agreement dated as of July 31, 1998 between Penford and Penwest (the "Separation and Distribution Agreement"); NOW, THEREFORE, in consideration of the mutual covenants and agreements made herein, the parties hereto agree as follows: ARTICLE 1 SUPPLY OF PHARMACEUTICAL EXCIPIENTS 1.1 Purchases of Pharmaceutical Excipients. Except as otherwise set forth herein, commencing as of the Distribution Date (as defined in the Separation and Distribution Agreement) (the "Effective Date"), Penwest shall purchase exclusively from Penford, Penwest's requirements for Pharmaceutical Excipients. Penford shall manufacture and sell Pharmaceutical Excipients to Penwest in bulk form. 1.2 Production Planning; Forecasts. (a) To facilitate Penford's planning for the supply of Pharmaceutical Excipients, Penwest shall give Penford, at the beginning of every calendar quarter, an estimate of its requirements of the Pharmaceutical Excipients for the following twelve (12) months (the "Rolling Forecast"). The Rolling Forecast shall specify the monthly estimate for the first six (6) months of the forecast period and the quarterly estimate for the next six (6) months based on calendar quarters. 2 (b) Penwest shall furnish Penford firm written purchase orders for its planned monthly requirements of Pharmaceutical Excipients no later than thirty (30) days prior to the required date for receipt of the shipment. Such firm purchase orders shall be equal to no less than eighty percent (80%) of the monthly estimate contained in the Rolling Forecast. The form of purchase order to be used by Penwest shall be agreed upon by the parties in advance of Penwest submitting firm orders for Pharmaceutical Excipients. (c) Penford shall deliver Pharmaceutical Excipients F.O.B. Penford's place of manufacture by the required date for receipt of the shipment. (d) All invoices for Pharmaceutical Excipients shall be due and payable within thirty (30) days from the date of invoice to Penwest, which date of invoice shall not be earlier than the date of shipment. (e) Penford shall inform Penwest as soon as possible regarding any anticipated long-term or short-term supply problems. 1.3 Inspections. Throughout the period during which Penford is responsible for the manufacture of Pharmaceutical Excipients for sale to Penwest, Penwest shall have the right, on ten (10) days prior notice, to inspect the manufacturing facility of Penford at which a Pharmaceutical Excipient is being manufactured to assure compliance with (i) the terms and conditions of this Agreement; (ii) current approved standards of Good Manufacturing Practice (cGMP); and (iii) environmental laws and regulations; provided, however, that such inspections (a) shall not be undertaken more frequently than once per calendar year unless such inspection reveals a cause for further investigation, and (b) shall be during normal business hours and not unreasonably interrupt the operations of Penford. ARTICLE 2 MANUFACTURING PRICE 2.1 Pharmaceutical Excipient Price. The price at which Penford shall sell Pharmaceutical Excipients to Penwest (the "Purchase Price") shall be as set forth in Exhibit A. -2- 3 ARTICLE 3 WARRANTY; COMPLAINTS 3.1 Warranty. Penford warrants that each Pharmaceutical Excipient, when supplied by Penford to Penwest hereunder and through the product expiration date thereafter, shall meet the product specifications for such Pharmaceutical Excipient set forth on Exhibit B hereto, as such specifications may be modified from time to time by mutual agreement of the parties (the "Specifications"). In addition, Penford warrants that all Pharmaceutical Excipients delivered hereunder shall be produced in accordance with cGMP and all applicable laws, rules and regulations. Except as otherwise provided in this Agreement, Penford's only liability for breach of this warranty shall be to replace, at its own expense, the non-conforming Pharmaceutical Excipient as provided in Section 3.2(b). EXCEPT FOR THE CONTRACTUAL PROVISIONS EXPRESSLY SET FORTH IN THIS AGREEMENT, PENFORD DISCLAIMS ALL WARRANTIES, EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO PHARMACEUTICAL EXCIPIENTS, INCLUDING, BUT NOT LIMITED TO, ALL IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE. In no event shall Penford be liable to Penwest for special, incidental, indirect or consequential damages arising out of the manufacture, use or sale of any Pharmaceutical Excipient whether based on contract, tort or any other legal theory. 3.2 Complaints Regarding Pharmaceutical Excipients. In the event Penwest has a complaint with respect to a Pharmaceutical Excipient supplied to Penwest, then: (a) if Penwest's complaint concerns the quantity of such Pharmaceutical Excipient, Penwest shall provide Penford written notice of its complaint and provide sufficient evidence to substantiate the short quantity. Upon receipt of such written notice and substantiating evidence, Penford shall supply to Penwest as promptly as practicable, however in no event later than forty-five (45) days, the said short quantity of such Pharmaceutical Excipient. Such replacement quantity shall be provided by Penford at no additional cost to Penwest, assuming that Penwest has already paid for the agreed upon quantity; (b) if Penwest's complaint concerns the quality of such Pharmaceutical Excipient (non-compliance with the Specifications (as defined below)), Penwest shall provide Penford written notice of its complaint and provide sufficient analytical evidence, based on the use of assays reasonably acceptable to Penford, to substantiate the impairment. Upon receipt of such written notice and substantiating evidence, the impaired amount of Pharmaceutical Excipients shall be replaced by Penford with an equal amount of Pharmaceutical Excipients conforming with the Specifications (as defined below), as promptly as practicable, however, in no event later than forty-five (45) days. Such replacement quantity shall be provided by -3- 4 Penford at no additional cost to Penwest, assuming that Penwest has already paid for such replacement quantity; (c) should Penford disagree with the substantiating evidence provided by Penwest, Penford shall supply the replacement quantity of Pharmaceutical Excipients in accordance with the terms of paragraphs (a) and (b) of this Section 3.2, and then both parties shall immediately and jointly carry out the necessary analysis to verify whether Penwest's complaint is justified. Should said analysis confirm the validity of the complaint by Penwest, then the matter shall be deemed conclusively resolved. Should said analysis confirm the invalidity of the complaint by Penwest, then Penford shall invoice Penwest for the replacement quantity provided in accordance with the terms of this Agreement; (d) in the event that a disagreement concerning the quantity or quality of a Pharmaceutical Excipient continues after the joint analyses by Penwest and Penford, the matter shall be submitted to an independent laboratory chosen by Penwest and reasonably acceptable to Penford. The findings of this independent laboratory, based on the use of assays reasonably acceptable to both Penford and Penwest, shall be final and binding on both Penford and Penwest and the fees and expenses of this independent laboratory shall be paid by the non-prevailing party; and (e) this Section 3.2 sets forth Penwest's exclusive remedy for any complaint described in this Section 3.2. In no event shall Penford be liable for any special, incidental, indirect or consequential damages arising out of or associated with any such complaint. ARTICLE 4 PRODUCT LIABILITY INDEMNIFICATION 4.1 Product Liability Indemnification by Penford. Penford agrees to defend Penwest and its affiliates and sublicensees, at Penford's cost and expense, and to indemnify and hold Penwest and its affiliates and sublicensees, and their respective directors, officers, employees and agents (the "Penwest Indemnified Parties") harmless from and against any losses, costs, damages, fees or expenses arising out of any claim relating to personal injury from the development, manufacture, importation, use, sale or other disposition of a Pharmaceutical Excipient manufactured by or for Penford, to the extent that such claim arises out of a failure by Penford to manufacture such Pharmaceutical Excipient in conformity with the Specifications and other requirements set forth in Section 3.1. In the event of any such claim against the Penwest Indemnified Parties by any party, Penwest shall promptly notify Penford in writing of the claim and Penford shall manage and control, at its sole expense, the defense of the claim and its settlement. The Penwest Indemnified Parties shall cooperate with Penford and may, at their option and expense, be represented in any -4- 5 such action or proceeding. Penford shall not be liable for any litigation costs or expenses incurred by the Penwest Indemnified Parties without Penford's written authorization so long as Penford has assumed the defense thereof as provided in this Section 4.1. 4.2 Product Liability Indemnification by Penwest. Penwest agrees to defend Penford and its affiliates and sublicenses, at Penwest's cost and expense, and to indemnify and hold Penford and its affiliates and sublicensees, and their respective directors, officers, employees, and agents (the "Penford Indemnified Parties") harmless from and against any losses, costs, damages, fees or expenses arising out of any claim relating to personal injury from the development, manufacture, importation, use, sale or other disposition of any Pharmaceutical Excipient sold by Penford to Penwest except to the extent that such claim arises out of a failure by Penford to manufacture such Pharmaceutical Excipient in accordance with the specifications and other requirements set forth in Section 3.1. In the event of any such claim against the Penford Indemnified Parties by any party, Penford shall promptly notify Penwest in writing of the claim and Penwest shall manage and control, at its sole expense, the defense of the claim and its settlement. The Penford Indemnified Parties shall cooperate with Penwest and may, at their option and expense, be represented in any such action or proceeding. Penwest shall not be liable for any litigation costs or expenses incurred by the Penford Indemnified Parties without Penwest's written authorization so long as Penwest has assumed the defense thereof as provided in this Section 4.2. ARTICLE 5 RIGHT OF PENWEST TO MANUFACTURE 5.1 Default Events. With respect to each Pharmaceutical Excipient, in the event that Penford (a) fails to provide Penwest with such Pharmaceutical Excipient in accordance with the forecast and order procedures of Article 1 hereof and such failure results in a shortfall of twenty percent (20%) or more for any single calendar quarter or between fifteen percent (15%) and twenty-five percent (25%) for any two consecutive calendar quarters, or (b) supplies Penwest with Pharmaceutical Excipients which fail on more than two occasions to conform to the Specifications (and Penford is unable to remedy the nonconformity in accordance with Article 3 hereof), then Penwest shall have the right to purchase such Pharmaceutical Excipient from a bona fide third party supplier or manufacturer of such Pharmaceutical Excipient. 5.2 Competitive Bid Option. With respect to each Pharmaceutical Excipient, in the event that Penwest can reasonably demonstrate to Penford that a bona fide third party supplier has the documented capacity to manufacture such Pharmaceutical Excipient of at least the same quality as the Pharmaceutical Excipients manufactured by or for Penford, in at least the same quantity and at a cost that is less than ninety percent (90%) of the Purchase Price for such Pharmaceutical -5- 6 Excipient currently charged Penwest by Penford, then Penford shall have sixty (60) days in which to reduce its Purchase Price for such Pharmaceutical Excipient to the price to be charged Penwest by such third party. If within such sixty (60) day period, Penford fails to reduce its Purchase Price for such Pharmaceutical Excipient to the price to be charged by such third party, then Penwest shall have the right to purchase any and all amounts of such Pharmaceutical Excipient from such third party. Penwest shall notify Penford in writing of any decision by Penwest to acquire Pharmaceutical Excipients from such bona fide third party, and this Agreement shall thereafter be terminable with respect to such Pharmaceutical Excipient at any time at Penford's election. 5.3 Cooperation by Penford. In the event that Penwest chooses to purchase any Pharmaceutical Excipients from a bona fide third party supplier pursuant to Sections 5.1 and 5.2, Penford shall cooperate with such third party supplier and shall make available, free of charge, any and all technology which is necessary or required to enable the third party supplier selected by Penwest to manufacture such Pharmaceutical Excipients. Subject to any contrary requirement of law and the right of each party to enforce its rights hereunder in any legal action, such bona fide third party supplier shall enter into a confidentiality agreement in form and substance satisfactory to Penford to keep strictly confidential, and shall cause its employees and agents to keep strictly confidential, any information of or concerning Penford which it or any of its agents or employees may acquire pursuant to, or in the course of performing its obligations under, any excipient supply agreement entered into between Penwest and such third party supplier; provided, however, that such obligation to maintain confidentiality shall not apply to information which (i) at the time of disclosure was in the public domain; (ii) was already independently in the possession of such third party supplier at the time of disclosure, or (iii) was received by such third party supplier from a third party who did not receive such information from the disclosing party under an obligation of confidentiality. ARTICLE 6 TERMINATION 6.1 Termination by Penford. Without prejudice to any other rights it may have hereunder or at law or in equity, Penford may terminate this Agreement in the event of any of the following: (a) upon a material breach of this Agreement by Penwest which, if curable and not a payment default, is not cured by Penwest within ninety (90) days of a written notice thereof by Penford or which, if a payment default, is not cured within thirty (30) days of a written notice thereof by Penford; or (b) upon written notice at least one year prior to such termination -6- 7 6.2 Termination by Penwest. Without prejudice to any other rights it may have hereunder or at law or in equity, Penwest may terminate this Agreement in the event of any of the following: (a) upon a material breach of this Agreement by Penford which, if curable, is not cured by Penford within ninety (90) days of a written notice thereof by Penwest; or (b) upon written notice at least one year prior to such termination. 6.3 Survival of Obligations. Notwithstanding any termination of this Agreement, (a) neither party shall be relieved of any obligation incurred prior to such termination and (b) the obligations of the parties with respect to the protection and nondisclosure of Confidential Information (Article 7), as well as any other provisions which by their nature are intended to survive any such termination, shall survive and continue to be enforceable. ARTICLE 7 CONFIDENTIAL INFORMATION 7.1 Confidentiality. Subject to any contrary requirement of law and the right of each party to enforce its rights hereunder in any legal action, each party shall keep strictly confidential, and shall cause its employees and agents to keep strictly confidential, any information of or concerning the other party which it or any of its agents or employees may acquire pursuant to, or in the course of performing its obligations under, any provisions of this Agreement or which it may have obtained from the other party before the commencement of this Agreement that relates to the subject matter of this Agreement; provided, however, that such obligation to maintain confidentiality shall not apply to information which (i) at the time of disclosure was in the public domain; (ii) was already independently in the possession of the receiving party at the time of disclosure, or (iii) was received by the receiving party from a third party who did not receive such information from the disclosing party under an obligation of confidentiality. ARTICLE 8 MISCELLANEOUS 8.1 Term. The initial term of this Agreement shall commence on the Effective Date and, subject to earlier termination pursuant to Article 6, continue until December 31, 2003, and any subsequent renewal terms provided that this Agreement shall automatically renew at the end of the initial term for successive one year terms unless either party, at least ninety (90) days prior to the expiration of the initial or renewal terms, provides written notice of its election not to renew the term. -7- 8 8.2 Independent Status of Parties. Each party shall act as an independent contractor and shall not bind nor attempt to bind the other party to any contract, or any performance of obligations outside of this Agreement. Nothing contained or done under this Agreement shall be interpreted as constituting either party the agent of the other in any sense of the term whatsoever unless expressly so stated. 8.3 Force Majeure. In the event of strikes, lock-outs or other industrial disturbances, rebellions, mutinies, epidemics, landslides, lightning, earthquakes, fires, storms, floods, sinking, drought, civil disturbances, explosions, acts or decisions of duly constituted municipal, state or national governmental authorities or of courts of law, as well as impossibility to obtain equipment, supplies, fuel or other required materials, in spite of having acted with reasonable diligence, or by reason of any other causes, which are not under the control of the party requesting the abatement of performance, or causes due to unexpected circumstances which may not be possible to eliminate or overcome with due diligence by such party ("Force Majeure"), the parties agree that, if either of them find themselves wholly or partially unable to fulfill their respective obligations in this Agreement by reasons of Force Majeure, the party affected will advise the other party in writing of its inability to perform giving a detailed explanation of the occurrence of the event which excuses performance as soon as possible after the cause or event has occurred. If said notice is given, the performance of the party giving the notification, except the payment of funds, shall be abated for so long as performance may be prevented by such event of Force Majeure. Except for the payment of funds that are due and payable, neither party shall be required to make up any performance that was prevented by Force Majeure. 8.4 Publicity. Each of Penwest and Penford shall consult with each other prior to issuing any press releases or otherwise making public statements with respect to any transactions contemplated hereby. 8.5 Governing Law. This Agreement shall be governed by the laws of the State of Washington. 8.6 Notices. Notices hereunder shall be effective if given in writing and delivered or mailed, postage prepaid, by registered or certified mail to: Penford Corporation 777-108th Avenue NE Suite 2390 Bellevue, WA 98004-5193 Attention: The President or to: -8- 9 Penwest Pharmaceuticals Co. 2981 Route 22 Patterson, NY 12563-9970 Attention: The President 8.7 Entire Agreement. This Agreement contains the full understanding of the parties with respect to the subject matter hereof and supersedes all prior understandings and writings relating thereto. No waiver, alteration or modification of any of the provisions hereof shall be binding unless made in writing and signed by the parties. 8.8 Headings. The article, section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 8.9 Construction. Each provision of this Agreement shall be interpreted in a manner to be effective and valid to the fullest extent permissible under applicable law. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions of this Agreement which shall remain in full force and effect. 8.10 Successors and Assigns. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, provided that this Agreement and the rights and obligations contained herein or in any exhibit or schedule hereto shall not be assignable, in whole or in part, without the prior written consent of the parties hereto or except in connection with a sale by a party of all or substantially all of its assets and any attempt to effect any such assignment without such consent shall be void. 8.11 Counterparts. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement. 8.12 Amendments; Waivers. This Agreement may be amended or modified only in writing executed on behalf of Penford and Penwest. No waiver shall operate to waive any further or future act and no failure to object of forbearance shall operate as a waiver. 8.13 Exhibits. Exhibits to this Agreement shall be deemed to be an integral part hereof, and schedules or exhibits to such Exhibits shall be deemed to be an integral part thereof. 8.14 Arbitration. Any dispute, controversy or claim arising out of or in connection with this Agreement (including any questions of fraud or questions concerning the validity and enforceability of this Agreement or any of the rights -9- 10 herein), shall be determined and settled by arbitration in Seattle, Washington, pursuant to the rules then in effect of the American Arbitration Association as modified by this paragraph. Any award rendered shall be final and conclusive upon the parties and a judgment thereon may be entered in any court having competent jurisdiction. The party submitting such dispute shall given written notice to that effect to the other party, stating the dispute to be arbitrated and the name and address of a person designated to act as arbitrator on its behalf. Within fifteen (15) days after such notice, the other party shall given written notice to the first party stating the name and address of a person designated to act as a substitute on its behalf. In the event that the second party shall fail to notify the first party of its designation of an arbitrator within the time specified, then the first party shall request the American Arbitration Association to appoint a second arbitrator. The two arbitrators so chosen shall meet within fifteen (15) days after the second arbitrator has been appointed to appoint a third arbitrator. If the two arbitrators are unable to agree on the appointment of third arbitrator within such fifteen (15) day period, either party may request the American Arbitration Association to appoint a third arbitrator. Each arbitrator appointed hereunder shall be independent of the parties and either party may disqualify an arbitrator who is or is affiliated with a supplier, customer or competitor of either party without the consent of the other party. Each arbitrator shall be reasonably knowledgeable regarding the area or areas in dispute. The arbitrators shall follow substantive rules of law and the Federal Rules of Evidence, require the parties to conduct discovery pursuant to the rules then in effect under the Federal Rules of Civil Procedure in an expeditious manner, cause testimony to be transcribed, and make an award accompanied by findings of fact and a statement of reasons for the decision. All costs and expenses, including attorney's fees, of all parties incurred in any dispute which is determined and/or settled by arbitration pursuant to this paragraph shall be borne by the party determined to be liable in respect of such dispute; provided, however, that if complete liability is not assessed against only one party, the parties shall share the total costs in proportion to their respective amounts of liability so determined. Except where clearly prevented by the area in dispute, both parties agree to continue performing their respective obligations under this Agreement while the dispute is being resolved. Each party, and the arbitrators, shall use their best efforts, subject to reasonable prosecution of the arbitration, court order and disclosure required under securities laws, to keep the subject matter of the arbitration and confidential information of each party confidential, and the arbitrators are authorized to impose such protective orders as they may deem appropriate for such purpose. -10- 11 IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above. PENFORD CORPORATION By: /s/ Jeffrey T. Cook -------------------------------- Title: CFO ----------------------------- PENWEST PHARMACEUTICALS CO. By: /s/ Jack V. Talley -------------------------------- Title: President ----------------------------- -11- 12 EXHIBIT A The purchase price for the Pharmaceutical Excipients during the period from the Effective Date through December 31, 1999 shall be $0.33 per pound. Beginning on January 1, 2000, a new purchase price shall be negotiated in good faith by the parties on an annual basis or for such other period of time as the parties may agree upon. If the parties fail to reach agreement on a new purchase price, the then current purchase price shall remain in effect, provided that either party shall have the right to terminate this Agreement upon ninety (90) days prior written notice. -12- EX-99.1 7 PRESS RELEASE DATED SEPTEMBER 1, 1998 1 Exhibit 99.1 Contacts: Victor W. Breed Lissa Perlman Chief Financial Officer Roanne Kulakoff Penford Corporation Kekst and Company 425-462-6000 212-521-4800 FOR IMMEDIATE RELEASE PENFORD CORPORATION ANNOUNCES COMPLETION OF ITS SPINOFF OF PENWEST PHARMACEUTICALS CO. Bellevue, WA, September 1, 1998 -- Penford Corporation (NASDAQ:PENX) today announced that on August 31, 1998, it distributed to Penford Corporation stockholders of record on August 10, 1998, approximately 11 million shares of common stock of Penwest Pharmaceuticals Co. (PPC). This distribution completes Penford Corporation's previously announced spin-off of PPC, its wholly-owned subsidiary engaged in the research, development and commercialization of novel drug delivery technologies and an established manufacturer and distributor of excipients used in binding, disintegrating and lubricating tableted pharmaceutical and nutritional products. The spin-off is the culmination of the plan announced last year by Penford Corporation to foster the growth potential of its pharmaceuticals business and, separately, its specialty paper chemicals and food ingredients businesses, which will be the continuing businesses of Penford Corporation. Certificates for shares of PPC were mailed to Penford Corporation stockholders on August 31, 1998 by ChaseMellon Shareholder Services, the distribution agent for the spin-off. For those Penford Corporation stockholders who are entitled to fractional shares of PPC common stock, the distribution agent will mail checks. PPC is listed on the Nasdaq National Market under the symbol "PPCO" and began regular trading today. Penford Corporation develops, manufactures and markets specialty carbohydrate-based chemicals for papermaking and specialty food ingredients through its Penford Products Co. and Penford Food Ingredients Co. Businesses. -----END PRIVACY-ENHANCED MESSAGE-----