Employee Benefits Agreement Dated July 31, 1998

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");


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(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.


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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 sh ...