<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
------------------------------------------------
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended August 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
--------------------------------------------------------
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to _______________________
Commission File Number 0-11488
PENFORD CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Washington 91-1221360
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
777-108th Avenue N.E., Suite 2390
Bellevue, Washington 98004-5193
(Address of principal Executive Offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code:
(425) 462-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<S> <C>
Title of each class Name of each exchange of which registered
------------------- -----------------------------------------
None None
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $1.00 par value
Common Stock Purchase Rights
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for at least the past 90 days.
Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
(continued)
The aggregate market value of the Registrant's Common Stock held by
non-affiliates as of October 20, 2000 was approximately $96 million. The net
number of shares of the Registrant's Common Stock (the Registrant's only
outstanding class of stock) outstanding as of October 20, 2000 was 7,432,210.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to the 2001 Annual Meeting
of Shareholders is incorporated by reference into Part III of this Form 10-K.
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PART I
ITEM 1: BUSINESS
GENERAL/DESCRIPTION OF BUSINESS
Penford Corporation ("Penford" or the "Company") was incorporated in September
1983 and commenced operations on March 1, 1984. The Company's single business
segment is developing, manufacturing and marketing specialty carbohydrate-based
ingredient systems for industrial and food applications. The Company uses its
carbohydrate chemistry expertise to develop functional ingredients with starch
as a base for value-added applications in several markets including papermaking,
textiles and food products.
The Company's family of products provides similar functional characteristics to
the markets into which they are sold. Carbohydrate-based specialty starches
possess excellent binding and film-forming attributes that provide natural,
convenient and cost-effective solutions that make customers' products better.
The Company has extensive research and development capabilities, which are used
in understanding the complex chemistry of carbohydrate-based materials and their
application. In addition, the Company has specialty processing capabilities for
a variety of modified starches, all of which have similar production methods.
Specialty products for industrial applications are designed to improve the
strength, quality and runnability of coated and uncoated paper. These starches
are principally ethylated (chemically modified with ethylene oxide) and cationic
(carrying a positive electrical charge). Ethylated starches are used in coatings
and as binders, providing strength and printability to fine white, magazine and
catalog paper. Cationic starches are generally used in the paper-forming end of
the paper machine, providing strong bonding of paper fibers and other
ingredients.
Penford's starch copolymers ("SCP"), a patented combination of synthetic and
natural carbohydrate chemistry, are used in coating and binder applications in
various segments of the paper industry.
In April 2000, the Company entered into a strategic product development alliance
with Dow Chemical Company's Emulsion Polymers global business for coated paper
and other new applications. Combining Penford's SCP technology with Dow's
synthetic chemical-based expertise is an example of leveraging the Company's
natural-based carbohydrate chemistry to develop new products for its customers
in the paper industry.
Penford utilizes strategic alliances as key resources to drive its science into
new growth areas. Other alliances include partnerships with Process Chemicals in
textiles, Swedish-based Lyckeby Starkelsen in global food-grade potato starch
applications and the emerging relationship with Novartis in the world of
biological sciences.
Penford also sells specialty starch ingredients to the domestic textile industry
for warp sizing, which is a fiber bonding process for yarn and finished fabric,
and for fabric sizing, which provides body and stiffness to textiles.
Specialty starches produced for food applications are used in coatings to
provide crispness, improved taste and texture and increased product life for
products such as french fries sold in quick-service restaurants. Food-grade
starch products are also used as moisture binders to reduce fat levels, modify
texture and improve color and consistency in a variety of foods such as whole
and processed meats, dry powdered mixes and other food and bakery products.
Specialty starch ingredient brand names for industrial applications include,
among others, Penford(R) Gums, Pensize(R) binders, Penflex(R) sizing agent, and
the Apollo(R) starch series. Product brand names for food ingredient
applications include PenBind(R), PenCling(R), PenPlus(R) and CanTab(R).
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RECENT ACQUISITION
On September 29, 2000, Penford Corporation completed its acquisition of Starch
Australasia Limited from Goodman Fielder Limited for $54.5 million (USD) in
cash. Starch Australasia Limited, renamed Penford Australia Limited ("Penford
Australia"), is Australia's sole producer of corn starch products and a world
leader in the research, development and commercialization of novel new
starch-based products. Penford Australia produces products used to enhance the
functionality of packaged food products, as well as products used in the mining
and paper industries.
Penford Australia had fiscal 2000 revenues of approximately $70 million (USD)
and employs 300. Its operations include three manufacturing facilities, two in
Australia and one in New Zealand, for processing specialty corn starches and
wheat related products. The newly acquired facilities complement Penford's four
existing manufacturing locations in North America by providing flexible,
efficient manufacturing capabilities oriented toward the production of a wide
variety of products.
The acquisition provides Penford with new opportunities to develop, manufacture
and market specialty carbohydrate-based ingredient systems for its food, paper
and textile customers. Penford immediately added a product line of high growth
potential, food-grade corn starch products to its product portfolio, which up
until the acquisition consisted primarily of potato-based product offerings.
Penford also gained expanded market access, as well as a regional platform for
manufacturing specialty starches for Asian and African markets. These
capabilities further enhance Penford's ability to commercialize new specialty
starches and value-added ingredient system formulations that provide convenient,
natural and cost-effective solutions for customers.
Penford Australia also provides a pathway to the global market for functional
food ingredients through Hi-maize, a corn-based resistant starch. This type of
starch resists early digestive breakdown and functions similar to dietary fiber.
RAW MATERIALS
Corn: Penford's corn wet milling plant is located in Cedar Rapids, Iowa, the
middle of the U.S. corn belt. Accordingly, the plant primarily has truck
delivered corn available throughout the year from a number of suppliers at
prices related to the major U.S. grain markets. The cost of the corn to be
purchased for fixed price sales contracts is generally hedged by entering into
corn futures contracts.
Penford Australia's corn wet milling facilities in Lane Cove, Australia and
Auckland, New Zealand are sourced through truck delivered corn from a number of
suppliers at contracted prices with regional independent farmers and merchants.
Potato Starch: The facilities in Idaho Falls, Idaho, Richland, Washington and
Plover, Wisconsin use by-products from potato processors that contain the starch
used as the primary raw material to manufacture modified potato starches. The
Company enters into contracts typically having durations of one to three years
with potato processors in North America, primarily in the Northwest and Midwest,
to acquire its potato-based raw materials.
Wheat Related Products: The Tamworth, Australia facility of newly acquired
Penford Australia uses wheat flour as the primary raw material for the
production of its wheat starch and wheat related products such as wheat gluten
and glucose syrup. Tanker trucks from a local flourmill supply wheat flour under
a three-year supply agreement with the previous owner of Penford Australia.
Chemicals: The principal chemical used in modifying starch is ethylene oxide, a
petrochemical derivative. Ethylene oxide is a commodity chemical, subject to
price fluctuations due to market conditions.
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Corn, potato starch, wheat flour and chemicals are not presently subject to
availability constraints. The Company's current potato starch requirements
constitute a material portion of the available North American supply. In the
long term, continued growth in demand for corn and potato starch-based
ingredients and development by the Company and others of new products could
result in capacity constraints.
Approximately half of total manufacturing costs are the costs of corn, potato
starch, wheat flour and chemicals. The remaining portion consists primarily of
utility and labor costs.
PATENTS, TRADEMARKS AND TRADENAMES
The Company owns a number of patents, trademarks, and tradenames. There can be
no assurance that these patents will prevent other companies from developing
similar or functionally equivalent products or from successfully challenging the
validity of these patents. Further, there can be no assurance that the Company's
processes or products will not infringe upon the patents of third parties.
RESEARCH AND DEVELOPMENT
Company sponsored research and development costs of $5,359,000, $5,062,000 and
$4,358,000 in fiscal 2000, 1999 and 1998, respectively, were charged to expense
as incurred.
The Company's research and development ("R&D") efforts cover a range of projects
including technical service work focused on specific customer support and
projects requiring coordination with customers' R&D to develop innovative
solutions to specific customer requirements. These projects are balanced with
longer-term, new product development and commercialization initiatives.
At the end of fiscal 2000, Penford has approximately 40 scientists, including 13
PhD's in carbohydrate and polymer chemistry that comprise a body of expert
knowledge of material characterization and molecular structure of various
carbohydrates. This expertise is integral to commercializing new market
applications in all facets of the Company's business.
ENVIRONMENTAL MATTERS
The Company has adopted a Policy on Environmental Matters and has implemented a
comprehensive corporate-wide environmental management program. The program is
managed by the Corporate Director of Environmental, Health and Safety and is
designed to structure the conduct of the Company's business in a safe and
fiscally responsible manner that protects and preserves the health and safety of
Company employees, the communities surrounding the Company's plants, and the
environment. The Company continuously monitors environmental legislation and
regulations, which may affect any of its operations.
PRINCIPAL CUSTOMERS
The Company sells to a variety of customers for applications in papermaking,
textiles and food products. Two customers, Georgia Pacific and Mead Paper,
accounted for approximately 19% and 13%, respectively, of total sales in fiscal
2000. The same two customers accounted for approximately 18% and 11% of sales in
fiscal 1999, and 16% and 10% of sales in fiscal 1998.
COMPETITION
The Company competes with approximately five other companies that manufacture
specialty starches for the papermaking industry, none of which is dominant in
the ethylated starch business. Although Penford is one of the smaller industrial
starch producers, it is one of the major producers of specialty-ethylated
starches. The Company also competes with approximately five other companies that
manufacture specialty food ingredients, all of whom have larger market shares.
Application expertise, quality, service and price are the major competitive
factors for Penford.
Some of the Company's competitors have significantly greater financial and
technical resources than the Company.
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EMPLOYEES
At October 20, 2000, Penford Corporation and its North American subsidiaries had
382 employees. Approximately 44% of the employees are represented by unions.
Management believes its employee relations are good. The Company's collective
bargaining agreement covering all of its North American unionized employees was
completed in 1997 and expires in 2001.
As a result of the acquisition of Penford Australia, the company added an
additional 300 employees to its workforce, with all wage employees being members
of trade unions in Australia and New Zealand.
METHODS OF DISTRIBUTION
All sales are generated using a combination of direct sales and distributor
agreements.
Customers for corn-based starch ingredients may purchase products through
fixed-price contracts or formula-priced contracts for periods covering three
months to five years or on a spot basis. In fiscal 2000, approximately 60% of
sales are under fixed price contracts, with 40% representing formula price and
spot business.
FOREIGN OPERATIONS AND EXPORT SALES
Export sales accounted for approximately 13% of the Company's total sales in
fiscal 2000 and approximately 11% in fiscal 1999 and fiscal 1998.
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ITEM 2: PROPERTIES
The Company's leased headquarters are located at Suite 2390, 777-108th Avenue
N.E., Bellevue, Washington 98004-5193. The Registrant's mailing address is, P.O.
Box 1688, Bellevue, Washington 98009-1688. Other facilities as of August 31,
2000 are as follows:
<TABLE>
<CAPTION>
Bldg. Area Land Area Owned/ Function of
(Sq. Ft.) (Acres) Leased Facility
---------- --------- ------ -----------
<S> <C> <C> <C> <C>
Cedar Rapids, Iowa 707,000 29 Owned Manufacture
of corn starch
products
Englewood, Colorado 25,200 - Leased Offices and
research
laboratories
Idaho Falls, Idaho 31,000 6 Owned Manufacture of
industrial potato
starch products
Richland, Washington 16,000 3 Leased Manufacture of
food - grade potato
and tapioca starch
products
Plover, Wisconsin 54,000 10 Owned Manufacture of
food - grade potato
starch products
</TABLE>
The corn wet milling operation in Cedar Rapids, Iowa has operating capacity,
measured in bushels ground, of approximately 75,000 bushels per day. The grind
operates continuously except for periodic maintenance.
Most major properties are owned. The Company believes that its production
facilities are well maintained and in good condition and that the capacities of
the plants are suitable and sufficient to meet current production requirements.
The Company is continually undertaking a process of expanding and improving its
property, plant and equipment.
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ITEM 3: LEGAL PROCEEDINGS
A complaint was filed in late November 1999 against Penford in the United States
District Court for the District of Idaho, alleging various violations of the
Federal Clean Air Act, as well as claims for trespass and nuisance by alleged
emissions from Penford's Idaho Falls starch processing plant. The subject of the
complaint involves alleged excessive starch emissions that occurred in 1996 and
1997, which were previously disclosed by the Company, and certain other alleged
violations relating to the plant. The complaint sought civil penalties, together
with private damages. By agreement of the parties, the Federal Clean Air Act
claims have been dismissed with prejudice. Non-binding mediation for the
remaining trespass and nuisance claims is tentatively scheduled for early 2001
and is presently in the discovery stage.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of shareholders during the fourth quarter of
fiscal 2000.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<S> <C> <C> <C>
Jeffrey T. Cook 44 President and
Chief Executive Officer
of Registrant 1998 - current
Vice President-Finance and
Chief Financial Officer of
Registrant 1991 - 1998
Treasurer of Registrant 1988 - 1991
Gregory R. Keeley 51 Vice President of Registrant
and President and General
Manager, Penford Products Co.,
a wholly owned subsidiary of
Registrant 2000 - current
Strategic Business Development,
Church & Dwight 1999 - 2000
Director of Marketing and
Sales, GenCorp 1996 - 1999
Director of Marketing and New
Business Development,
Dow Chemical Company 1972 - 1996
Gregory C. Horn 52 Vice President of Registrant
and President and General
Manager, Penford Food
Ingredients Co., a division of
Penford Products Co. 1995 - current
Vice President of Marketing,
Penford Products Co.,
a wholly owned subsidiary of
Registrant 1993 - 1994
Vice President and General
Manager, Sara Lee
Corporation 1992 - 1993
Wallace H. Kunerth, Ph.D. 52 Vice President and Chief Science
Officer of Registrant 2000 - current
Food Discovery Applications
Lead, Monsanto Company 1999 - 2000
Co-Lead Food Science Function,
Monsanto Company 1997 - 1999
Vice President of Technology,
Penford Food Ingredients Co. 1990 - 1997
</TABLE>
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PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Penford common stock, $1.00 par value, trades on the Nasdaq Stock Market(R)
under the symbol "PENX." On October 20, 2000, there were 869 shareholders of
record. The high and low closing prices of the Company's common stock during the
last two fiscal years are set forth below. The quotations reflect inter-dealer
prices, without retail mark-up, markdown or commission and may not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 2000
Quarter Ended November 30 $15.13 $13.25
Quarter Ended February 29 $17.25 $14.28
Quarter Ended May 31 $19.38 $16.44
Quarter Ended August 31 $21.75 $16.56
FISCAL 1999
Quarter Ended November 30 $15.75 $11.25
Quarter Ended February 28 $22.13 $11.88
Quarter Ended May 31 $14.88 $12.06
Quarter Ended August 31 $16.25 $10.50
</TABLE>
During each quarter in fiscal year 1999 and the first two quarters of fiscal
year 2000, a $0.05 per share cash dividend was declared. Effective the quarter
ended May 31, 2000, the Board of Directors approved a quarterly cash dividend
rate increase to $0.06 per share. The Company anticipates that it will continue
to pay quarterly dividends in the foreseeable future.
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ITEM 6: SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended August 31
(Thousands of dollars except share and ----------------------------------------------------------------------------------
per share data) 2000 1999 1998 1997 1996
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Data:
Sales $ 158,150 $ 155,056 $ 163,045 $ 170,057 $ 168,018
Gross margin percentage 27.4% 25.8% 28.0% 25.2% 23.4%
Income from continuing
operations $ 10,362 $ 6,205(1) $ 8,110(2) $ 8,934(3) $ 6,969
Diluted earnings per share
from continuing operations $ 1.33 $ 0.80 $ 1.08 $ 1.25 $ 0.99
Dividends per share $ 0.22 $ 0.20 $ 0.20 $ 0.20 $ 0.20
Average common shares
and equivalents 7,765,044 7,749,723 7,530,640 7,131,725 7,007,340
Balance Sheet Data:
Total assets $ 175,623 $ 173,133 $ 183,208 $ 213,508 $ 200,317
Capital expenditures 17,480 16,536 10,768 18,349 19,447
Total debt 50,681 56,378 73,896 67,746 66,763
Shareholders' equity 67,864 59,698 53,995 89,101 78,572
</TABLE>
Note: All data prior to 1999, except share data, has been restated to reflect
the distribution of 100% of the common stock of Penwest Pharmaceuticals
Co. to the shareholders of Penford Corporation, which was completed on
August 31, 1998.
(1) Includes a pretax charge of approximately $1.6 million ($1.0 million
after-tax, or $0.13 per share) related to restructure costs recorded in
connection with an administrative workforce reduction program.
(2) Includes a pretax charge of approximately $1.9 million ($1.3 million
after-tax, or $0.17 per share) related to restructure costs recorded in
connection with the spin-off of Penwest Pharmaceuticals Co.
(3) Includes a pretax gain of approximately $1.2 million ($800,000 after-tax,
or $0.11 per share) related to the sale of air emission credits.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Recent Development
On September 29, 2000, subsequent to fiscal 2000 year end, Penford Corporation
completed its acquisition of Starch Australasia Limited from Goodman Fielder
Limited for $54.5 million (USD) in cash. Starch Australasia Limited, renamed
Penford Australia Limited ("Penford Australia"), is Australia's sole producer of
corn starch products and a world leader in the research, development and
commercialization of novel new starch-based products. Penford Australia produces
products used to enhance the functionality of packaged food products, as well as
products used in the mining and paper industries.
Penford Australia had fiscal 2000 revenues of approximately $70 million (USD)
and employs 300. Its operations include three manufacturing facilities, two in
Australia and one in New Zealand, for processing specialty corn starches and
wheat related products. The newly acquired facilities complement Penford's four
existing manufacturing locations in North America by providing flexible,
efficient manufacturing capabilities oriented toward the production of a wide
variety of products.
The acquisition provides Penford with new opportunities to develop, manufacture
and market specialty carbohydrate-based ingredient systems for its food, paper
and textile customers. Penford immediately added a product line of additional
high growth potential, food-grade corn starch products to its product portfolio,
which up until the acquisition consisted primarily of potato-based product
offerings. Penford also gained expanded market access, as well as a regional
platform for manufacturing specialty starches for Asian and African markets.
These capabilities further enhance Penford's ability to commercialize new
specialty starches and value-added ingredient system formulations that provide
convenient, natural and cost-effective solutions for customers.
Penford Australia also provides a pathway to the global market for functional
food ingredients through Hi-maize(TM), a corn-based resistant starch. This type
of starch resists early digestive breakdown and functions similar to dietary
fiber.
Results of Operations
Fiscal 2000 vs. Fiscal 1999
Fiscal 2000 sales of $158.1 million increased $3.0 million, or 1.9%, compared to
$155.1 million in fiscal 1999, primarily the result of higher company-wide sales
volume of specialty starches and starch-based ingredients. However, pricing
pressure and lower corn costs, a key pricing component, on certain paper
ingredient products dampened the overall sales growth.
Sales volumes (in lbs.) of industrial specialty products increased approximately
9.0% over the prior year, and sales volumes of specialty food ingredients
increased 20.2% over the prior year. The continued strong demand for
starch-based systems for food industry customers is primarily attributed to the
overall increase in consolidated sales.
Gross margin was 27.4% in 2000, compared to 25.8% in 1999. The gross margin
improvement is mostly the result of manufacturing efficiency gains on higher
volumes across all of the Company's specialty manufactured product lines.
Increased sales of higher margin, food-grade products relative to overall
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sales is also attributed to the increase in gross margin percentage. Total gross
margin of $43.3 million represents an increase of 8.1% compared to the prior
year. Higher overall sales volume and cost savings achieved in manufacturing and
raw material purchasing for the Company's corn-based operations more than offset
the pricing pressures associated with paper ingredient products and higher
overall natural gas prices. The increase in gross margin was particularly
affected by higher natural gas prices in the last quarter of fiscal 2000. It is
expected that fiscal 2001 operating results will continue to be impacted by high
energy costs through at least the first half of calendar 2001.
Operating expenses decreased $1.3 million, or 7.1%, in fiscal 2000. The cost
reduction was primarily due to lower corporate costs and the effect of the prior
year's workforce reduction program. Research and development expenses of $5.4
million increased $300,000, or 5.9%, over the prior year due to
commercialization efforts and alliance activities in specialty ingredient
systems.
Restructure costs totaling $1.6 million were charged to continuing operations in
fiscal 1999 in connection with the workforce reduction program.
Interest expense decreased $600,000, or 11.1%, in fiscal 2000, reflective of
lower outstanding debt balances.
Income from continuing operations before income taxes, excluding restructure
costs, increased $4.8 million, or 43.2%, in fiscal 2000. After the restructure
costs, income from continuing operations before income taxes increased $6.4
million, or 66.5%.
The effective tax rate in fiscal 2000 and 1999 was 35.0%, and is expected to be
similar in fiscal 2001.
Fiscal 1999 vs. Fiscal 1998
Fiscal 1999 sales of $155.1 million decreased $7.9 million, or 4.8%, compared to
$163.0 million in fiscal 1998, primarily the result of lower sales volume of the
Company's specialty paper chemical starches, which decreased approximately 4.0%
from the prior year. Although the North American paper markets served by Penford
experienced modest improvement at the end of fiscal year 1999, the adverse
impact of Asian and worldwide economic conditions on the operations of the North
American paper industry triggered the Company's sales and volume decline. To a
lesser extent, lower overall corn costs, a key component in pricing, also
contributed to the lower sales in fiscal 1999.
Strong sales volume of potato-based food starches driven by increased market
penetration across all product lines by the Company's food ingredients products
reduced the impact of the volume decline of specialty paper chemical starches on
a consolidated basis. Sales of specialty starches for food-grade applications
increased approximately 35.0% in fiscal 1999.
Gross margin was 25.8% in 1999, compared to 28.0% in 1998. Increased margin
pressure from competitive pricing in the North American paper industry and the
negative effect of lower production volumes on capacity utilization caused the
decrease in gross margin. However, firming production rates and a shifting of
product mix to higher margin, specialty paper chemical starches in the second
half of the fiscal year partially mitigated the conditions in the North American
paper industry. Higher sales volume and production of higher margin specialty
food-grade starches also lessened the decrease in gross margin.
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Operating expenses decreased $2.6 million, or 12.4%, in fiscal 1999 primarily
due to lower corporate office expenses related to the spin-off of Penwest
Pharmaceuticals Co. ("PPCO") and company-wide cost containment efforts. Research
and development expenses increased $700,000, or 16.2%, with the increase
attributed to new product development and commercialization, including the
Company's efforts in biodegradable food packaging that uses starch as a primary
ingredient.
Restructure costs of $1.6 million were recorded in the third quarter of fiscal
1999 in connection with the administrative workforce reduction of 20 employees,
consistent with the plan announced in March 1999. The total charge included an
increase in the actuarial liability of the Company's retirement pension plans,
severance and other actual and estimated expenses related to the overall
reduction plan.
Interest expense decreased $381,000, or 6.6%, mostly as a result of lower
outstanding debt balances.
Income from continuing operations before income taxes, excluding restructure
costs, decreased $3.3 million, or 22.7%, in fiscal 1999. After the restructure
costs, income from continuing operations before income taxes decreased $2.9
million, or 23.2%.
The effective tax rate in fiscal 1999 and 1998 was 35.0%.
Liquidity and Capital Resources
As of August 31, 2000, the Company had working capital of $11.8 million. Also in
place at the end of fiscal 2000 was an unsecured $75 million credit agreement
under which $32.0 million was outstanding. The Company also has a $5 million
uncommitted line of credit used for overnight borrowings, which was utilized
throughout the year. There was $110,000 outstanding under the line of credit at
the end of fiscal 2000.
In connection with the completion of the acquisition of Penford Australia on
September 29, 2000, the Company obtained interim financing for replacing its
credit facilities. As a result, except for the $5 million uncommitted line of
credit that remains in place, all outstanding debt as of August 31, 2000, was
replaced by a $120 million bridge loan with a syndicate of banks. The new
borrowings totaling $109.5 million were used to finance the acquisition in
addition to replacing the existing outstanding debt balances.
Subsequent to the consummation of the purchase transaction, a new $130 million
credit facility was completed on November 15, 2000. The new credit facility
consists of various agreements with $65 million in term loans and $65 million of
revolving lines of credit. The revolving lines of credit expire on October 31,
2003, and the term loans expire on October 31, 2005. All of Penford's assets
secure the credit facility and the new agreements include, among other terms,
financial covenants containing restrictions related to limitations on
indebtedness and minimum net worth and maintenance of certain leverage, interest
and fixed charge coverage ratios, all of which are similar to restrictions on
the existing debt as of August 31, 2000. Total outstanding debt of the Company
subsequent to the completion of the new $130 million facility is approximately
the same as immediately prior to its execution.
Operating cash flow from continuing operations was $25.6 million, $33.9 million
and $21.6 million in fiscal 2000, 1999 and 1998, respectively. In fiscal 2000,
the Company used available cash and operating cash flow primarily to pay down
$5.7 million of debt, finance capital expenditures and repurchase Company stock.
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Capital expenditures related to continuing operations were $17.5 million, $16.5
million and $10.8 million in 2000, 1999 and 1998, respectively. Capital
expansion has been funded from operating cash flow. Capital projects in 2000
were directed primarily to increasing productive capacity through equipment
additions at the Company's food-grade facilities and improving operational
efficiency at all locations Penford operates.
The Company expects the amount of capital expenditures in fiscal 2001, including
its new Australian operations, will be approximately the same as in fiscal 2000.
Significant projects include capacity expansion at all of the Company's
food-grade operations and the completion of projects started in 2000. The
Company intends to fund capital expenditures primarily from operating cash
flows.
The Company began paying a quarterly cash dividend of $0.05 per share in 1992
and has continued to pay quarterly dividends ever since. On April 3, 2000, the
Board of Directors approved an increase in the quarterly cash dividend to $0.06
per share. The Board of Directors reviews the dividend policy on a periodic
basis, and the Company anticipates that it will continue to pay quarterly
dividends in the foreseeable future.
The Board of Directors has authorized a stock repurchase program for the
purchase of up to 500,000 shares of the outstanding common stock of the Company.
During fiscal 2000, the Company repurchased 141,100 shares of its own common
stock for approximately $2.4 million.
Spin-off of Penwest Pharmaceuticals Co.
At the end of fiscal 1998, Penford effected a tax-free distribution to its
shareholders of the Company's pharmaceuticals subsidiary, PPCO. The distribution
was completed on August 31, 1998 to foster the growth potential of the Company's
specialty carbohydrate-based ingredients business, and separately, the
pharmaceuticals business.
Penford Corporation reported PPCO as a discontinued operation in fiscal 1998.
One-time charges totaling $5.6 million ($3.6 million after-tax) were included as
a component of discontinued operations, reflecting the costs of separating the
two businesses. The PPCO loss from operations through May 31, 1998, of $7.9
million ($5.1 million after-tax) includes the write-off of certain costs
incurred in connection with the previously planned IPO of approximately $1.7
million. In addition, the Company incurred restructuring costs of $1.9 million
charged to continuing operations in fiscal 1998.
During the second quarter of fiscal 2000, PPCO paid off all outstanding amounts
on a $15 million revolving credit facility, which was guaranteed by Penford in
connection with the spin-off of PPCO in August 1998. As a result, Penford's
guaranty agreement was cancelled, releasing Penford of any obligation under
PPCO's $15 million credit facility.
Forward-looking Statements
This report contains forward-looking statements concerning the estimated capital
expenditures, long-term debt maturities, the price and availability of raw
materials, and the anticipated results of the Company. There are a variety of
factors which could cause actual events or results to differ materially from
those projected in the forward-looking statements, including, without
limitation, competition; the possibility of interruption of business activities
due to equipment problems, accidents, strikes, weather or other factors; product
development risk; changes in corn and other raw material prices; changes in
general economic
Page 15
<PAGE> 16
conditions or developments with respect to specific industries or customers
affecting demand for the Company's products including unfavorable shifts in
product mix; unanticipated costs, expenses or third party claims; the risk that
results may be affected by construction delays, cost overruns, technical
difficulties, nonperformance by contractors or changes in capital improvement
project requirements or specifications; interest rate and energy cost
volatility; foreign currency exchange rate fluctuations; or other unforeseen
developments in the industries in which the Company operates. Accordingly, there
can be no assurance that future activities or results will be as anticipated.
Forward-looking statements are based on the estimates and opinions of management
on the date the statements are made. The Company assumes no obligation to update
any forward-looking statements if circumstances or management's estimates or
opinions should change.
Page 16
<PAGE> 17
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
The market risk associated with the Company's market risk sensitive instruments
is the potential loss from adverse changes in interest rates and commodities
prices.
INTEREST
The fair market value of the Company's long-term debt is estimated using
discounted cash flow analysis based on the Company's current incremental
borrowing rates for similar types of borrowings. The fair value of the Company's
long-term debt, assuming current incremental borrowing rates of interest as of
August 31, 2000, was approximately equal to the carrying value of $50.7 million.
The fair value of the Company's long-term debt as of August 31, 1999 was $58.6
million, representing an excess of approximately $2.2 million over the carrying
value. The Company's market risk has been calculated as the possible increase in
fair value resulting from a hypothetical one-point change in interest rates. The
market risk associated with a one-point change in interest rates at August 31,
2000 and 1999, is approximately $555,000 and $800,000, respectively.
COMMODITIES
The availability and price of corn, the Company's most significant raw material,
is subject to fluctuations due to unpredictable factors such as weather,
plantings, domestic and foreign governmental farm programs and policies, changes
in global demand and the worldwide production of corn. The Company generally
follows a policy of hedging corn purchases related to fixed-price sales
contracts to reduce price risk caused by market fluctuations. The instruments
used are principally readily marketable exchange traded futures contracts, which
are designated as hedges. The changes in market value of such contracts have a
high correlation to changes in the price of corn. To obtain a proper matching of
revenue and expense, gains or losses arising from hedging transactions are
included in inventories as a cost of the raw material and reflected in earnings
when the related sale is made.
A sensitivity analysis has been prepared to estimate the Company's exposure to
market risk of its raw material position. The Company's net commodity position
consists primarily of inventories, purchase contracts and exchange traded
futures contracts which hedge fixed sales commitments. The fair value of the
position is based on quoted market prices. The Company has estimated its market
risk as the potential loss in fair value resulting from a hypothetical 10%
adverse change in such prices. As of August 31, 2000 and 1999, the fair value of
the Company's net corn position was approximately $2.0 million and $1.4 million,
respectively. The market risk associated with a 10% adverse change in corn
prices at August 31, 2000 and 1999, is estimated at $205,000 and $140,000,
respectively. Actual results could differ from this analysis.
Page 17
<PAGE> 18
ITEM 8: PENFORD CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
August 31
-------------------------
(Thousands of dollars) 2000 1999
--------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ -- $ 15
Trade accounts receivable 17,530 18,418
Inventories 10,219 10,121
Prepaid expenses and other 5,580 4,384
--------- ---------
Total current assets 33,329 32,938
Property, plant and equipment:
Land 5,387 4,837
Plant and equipment 223,334 205,451
Construction in progress 6,795 8,823
Less accumulated depreciation (120,668) (108,039)
--------- ---------
Net property, plant and equipment 114,848 111,072
Deferred income taxes 11,466 13,849
Restricted cash value of life insurance 12,330 11,896
Other assets 3,650 3,378
--------- ---------
$ 175,623 $ 173,133
========= =========
Liabilities and shareholders' equity
Current liabilities:
Bank overdraft, net $ 313 $ --
Accounts payable 10,068 9,655
Accrued liabilities 8,305 9,185
Current portion of long-term debt 2,857 3,277
--------- ---------
Total current liabilities 21,543 22,117
Long-term debt 47,824 53,101
Other postretirement benefits 10,805 10,572
Deferred income taxes 21,048 21,769
Other liabilities 6,539 5,876
Commitments and Contingencies -- --
Shareholders' equity:
Common stock, par value $1.00 per share,
authorized 29,000,000 shares, issued 9,391,902
shares in 2000 and 9,267,177 in 1999, including
treasury shares 9,392 9,267
Additional paid-in capital 23,129 21,459
Retained earnings 68,100 59,370
Treasury stock, at cost, 1,981,016 shares in 2000
and 1,839,916 in 1999 (32,757) (30,327)
Note receivable from Savings
and Stock Ownership Plan -- (71)
--------- ---------
Total shareholders' equity 67,864 59,698
--------- ---------
$ 175,623 $ 173,133
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 18
<PAGE> 19
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended August 31
-------------------------------------------------------
(Thousands of dollars except share and per share data) 2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Sales $ 158,150 $ 155,056 $ 163,045
Cost of sales 114,873 115,021 117,405
----------- ----------- -----------
Gross margin 43,277 40,035 45,640
Operating expenses 17,202 18,513 21,122
Research and development expenses 5,359 5,062 4,358
Restructure costs -- 1,559 1,931
----------- ----------- -----------
Income from operations 20,716 14,901 18,229
Investment income 39 89 34
Interest expense (4,813) (5,413) (5,794)
----------- ----------- -----------
Income from continuing operations
before income taxes 15,942 9,577 12,469
Income taxes 5,580 3,372 4,359
----------- ----------- -----------
Income from continuing operations 10,362 6,205 8,110
Discontinued operations -- -- (8,742)
----------- ----------- -----------
Net income (loss) $ 10,362 $ 6,205 $ (632)
=========== =========== ===========
Weighted average common shares and
equivalents outstanding 7,765,044 7,749,723 7,530,640
=========== =========== ===========
Earnings per common share:
Income from continuing operations
Basic $ 1.40 $ 0.84 $ 1.11
=========== =========== ===========
Diluted $ 1.33 $ 0.80 $ 1.08
=========== =========== ===========
Net income (loss)
Basic $ 1.40 $ 0.84 $ (0.09)
=========== =========== ===========
Diluted $ 1.33 $ 0.80 $ (0.08)
=========== =========== ===========
Dividends declared per common share $ 0.22 $ 0.20 $ 0.20
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 19
<PAGE> 20
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended August 31
--------------------------------------
(Thousands of dollars) 2000 1999 1998
--------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating activities:
Income from continuing operations $ 10,362 $ 6,205 $ 8,110
Adjustments to reconcile income from
continuing operations to net cash from
continuing operations
Depreciation 13,786 12,582 12,087
Deferred income taxes 1,662 (181) 1,075
Stock compensation expense related to non-
employee director stock options 301 155 219
Change in operating assets and liabilities
of continuing operations
Trade receivables 888 2,539 1,512
Inventories (98) 6,031 (1,876)
Accounts payable, prepaids and other (1,261) 6,549 484
-------- -------- --------
Net cash flow from continuing operations 25,640 33,880 21,611
Net cash used by discontinued operations -- (1,150) (12,170)
-------- -------- --------
Net cash from operating activities 25,640 32,730 9,441
Investing activities:
Acquisitions of fixed assets, net (17,480) (16,536) (10,768)
Other 108 180 1,291
-------- -------- --------
Net cash used by investing activities (17,372) (16,356) (9,477)
Financing activities:
Proceeds from unsecured line of credit 58,807 39,040 87,867
Payments on unsecured line of credit (59,227) (42,861) (89,512)
Proceeds from long-term debt -- 10,000 39,000
Payments on long-term debt (5,277) (23,697) (31,205)
Exercise of stock options 1,086 1,353 721
Purchase of treasury stock (2,430) (1,917) --
Payment of dividends (1,555) (1,477) (1,458)
Purchase of officers' life insurance -- -- (1,158)
-------- -------- --------
Net cash from (used by) financing activities (8,596) (19,559) 4,255
-------- -------- --------
Net increase (decrease) in cash
and cash equivalents (328) (3,185) 4,219
Cash and cash equivalents
(bank overdrafts) at beginning of year 15 3,200 (1,019)
-------- -------- --------
Cash and cash equivalents
(bank overdrafts) at end of year $ (313) $ 15 $ 3,200
======== ======== ========
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 5,091 $ 5,117 $ 6,206
Income taxes $ 3,456 $ 1,523 $ 1,832
</TABLE>
The accompanying notes are an integral part of these statements.
Page 20
<PAGE> 21
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Note Receiv-
able from Total
Additional Savings & Cumulative Share-
Common Paid-In Retained Treasury Stock Translation holders'
(Thousands of dollars) Stock Capital Earnings Stock Ownership Plan Adjustment Equity
---------------------- ----- ---------- -------- -------- -------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, September 1, 1997 $ 9,093 $ 18,466 $ 93,854 $(30,604) $(639) $(1,069) $ 89,101
Net loss (632) (632)
Spin-off of PPCO (37,115) 1,069 (36,046)
Exercise of stock options 37 684 721
Stock compensation expense
related to non-employee
director stock options 219 219
Savings and Stock Ownership
Plan activity 854 957 284 2,095
Dividends declared (1,463) (1,463)
------- -------- -------- -------- ----- ------- --------
Balances, August 31, 1998 9,130 20,223 54,644 (29,647) (355) -- 53,995
Net income 6,205 6,205
Exercise of stock options 137 1,216 1,353
Tax benefit of stock option
exercises 138 138
Stock compensation expense
related to non-employee
director stock options 155 155
Savings and Stock Ownership
Plan activity (273) 1,237 284 1,248
Purchase of treasury stock (1,917) (1,917)
Dividends declared (1,479) (1,479)
------- -------- -------- -------- ----- ------- --------
Balances, August 31, 1999 9,267 21,459 59,370 (30,327) (71) -- 59,698
Net income 10,362 10,362
Exercise of stock options 117 969 1,086
Tax benefit of stock option
exercises 408 408
Stock compensation expense
related to non-employee
director stock options 8 293 301
Savings and Stock Ownership
Plan activity 71 71
Purchase of treasury stock (2,430) (2,430)
Dividends declared (1,632) (1,632)
------- -------- -------- -------- ----- ------- --------
Balances, August 31, 2000 $ 9,392 $ 23,129 $ 68,100 $(32,757) $ -- $ -- $ 67,864
======= ======== ======== ======== ===== ======= ========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 21
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Penford Corporation ("Penford" or the "Company") is in the business of
developing, manufacturing and marketing specialty carbohydrate-based ingredient
systems for various applications, including papermaking, textiles and food
products. The Company's products provide excellent binding and film-forming
characteristics that make customer's products better through natural, convenient
and cost effective solutions. Sales of the Company's products are generated
using a combination of direct sales and distributor agreements.
The Company has extensive research and development capabilities, which are used
in understanding the complex chemistry of carbohydrate-based materials and their
application. In addition, the Company has specialty processing capabilities for
a variety of modified starches, all of which have similar production methods.
Basis of Presentation
The consolidated financial statements include Penford and its wholly owned
subsidiaries excluding Penwest Pharmaceuticals Co. ("PPCO"), which was spun-off
to shareholders on August 31, 1998, and is reflected as a discontinued operation
in the accompanying financial statements for fiscal 1998 (see Note B). Material
intercompany balances and transactions have been eliminated. The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results
could differ from those estimates.
The consolidated financial statements also do not include the operations or
assets of Penford Australia, acquired subsequent to year end (see Note N).
Certain prior year amounts have been reclassified to conform with the current
year presentation. These reclassifications had no effect on previously reported
net income.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of less than
three months when purchased to be cash equivalents.
Cash equivalents consist of money market funds, short-term deposits and
commercial paper. Amounts reported in the balance sheets represent cost which
approximates market value.
Penford's cash management system includes a cash overdraft feature for uncleared
checks in the disbursing accounts. Cash in the accompanying balance sheets
represents the net amounts available to the disbursing accounts. Uncleared
checks of $386,000 and $1,034,000 are netted against cash at August 31, 2000 and
1999, respectively.
Page 22
<PAGE> 23
Concentration of Credit Risk and Financial Instruments
The Company performs ongoing credit evaluations of its customers and generally
does not require collateral. The Company maintains an allowance for doubtful
accounts which management believes is sufficient to cover potential credit
losses. The carrying value of financial instruments including cash, cash
equivalents, receivables and payables approximates market value at August 31,
2000.
Penford Products' two largest customers individually accounted for approximately
19% and 13% of sales in fiscal 2000, with the same two customers accounting for
approximately 18% and 11% of sales in fiscal 1999. These customers represented
approximately 16% and 10% of sales in fiscal 1998. Export sales accounted for
approximately 13% of total sales in fiscal 2000 and approximately 11% in fiscal
1999 and fiscal 1998.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for maintenance
and repairs are expensed as incurred. The Company uses the straight-line method
to compute depreciation expense assuming average useful lives of three to forty
years for financial reporting purposes. For income tax purposes, the Company
generally uses accelerated depreciation methods.
Interest is capitalized on major construction projects while in progress.
Interest of $329,000, $153,000 and $39,000 was capitalized in 2000, 1999 and
1998, respectively.
Income Taxes
The provision for income taxes includes federal and state taxes currently
payable and deferred income taxes arising from temporary differences between
financial and income tax reporting methods. Deferred taxes have been recorded
using the liability method in recognition of these temporary differences.
Revenue Recognition
Sales revenue is recorded upon shipment of product.
Research and Development
Research and development costs of $5,359,000, $5,062,000 and $4,358,000 in 2000,
1999 and 1998, respectively, were charged to expense as incurred.
Recent Accounting Developments
Effective September 1, 2000, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments
and Hedging Activities." The adoption of this Statement, which establishes
standards for recognition and measurement of derivatives and hedging activities,
will result in the Company recording no cumulative effect adjustment in the
first quarter of fiscal 2001 to other comprehensive income for derivatives which
hedge the variable cash flows of certain forecasted transactions. The fair value
of these derivative instruments is currently classified as inventory.
Page 23
<PAGE> 24
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, which summarized certain areas of the staff's views in
applying generally accepted accounting principles to revenue recognition. The
Company's revenue recognition policies are intended to comply with this
bulletin.
NOTE B
DISCONTINUED OPERATIONS
At the end of fiscal 1998, Penford completed a tax-free distribution to its
shareholders of the Company's pharmaceuticals subsidiary, PPCO. On August 31,
1998, Penford shareholders of record on August 10, 1998, received PPCO shares on
a basis of three shares of PPCO for every two shares of the Company.
The consolidated financial statements of the Company reflect the spin-off of
PPCO. Accordingly, PPCO's operating results and cash flows for fiscal 1998 have
been excluded from their respective captions in the accompanying financial
statements. Summarized financial information from fiscal 1998 for the
discontinued operations included sales, pre-tax losses from operations, and
identifiable assets of $28.0 million, $10.2 million and $42.8 million,
respectively.
The Company recorded one-time charges totaling $5.6 million ($3.6 million
after-tax) which are included as a component of discontinued operations. These
charges comprise the costs of separating the two businesses and operating losses
incurred from May 31, 1998, the measurement date, through August 31, 1998, the
spin-off date. The PPCO loss from operations of $7.9 million ($5.1 million
after-tax) includes the write-off of certain costs incurred in connection with
the previously planned IPO of PPCO of approximately $1.7 million. As of August
31, 1998, Penford forgave all intercompany borrowings of PPCO and reflected the
distribution of PPCO stock to its shareholders as a reduction to consolidated
retained earnings of $36.0 million.
NOTE C
INVENTORIES
Inventories are stated at the lower of cost or market. Cost, which includes
material, labor and manufacturing overhead costs, is determined by the first-in,
first-out ("FIFO") method.
The Company generally follows a policy of hedging corn purchases related to
fixed-price sales contracts and certain anticipated corn purchases to minimize
price risk due to market fluctuations. The instruments used are principally
readily marketable exchange-traded futures contracts which are designated as
hedges. The changes in market value of such contracts have a high correlation to
the price changes of the hedged commodity. Also, the underlying commodity can be
delivered against such contracts. Gains or losses arising from open and closed
hedging transactions are included in inventory as a cost of raw materials and
reflected in the statement of income when the related product is sold.
Components of inventory are as follows:
<TABLE>
<CAPTION>
August 31 (Thousands of dollars) 2000 1999
-------------------------------------------------------------------
<S> <C> <C>
Raw materials and other $ 3,016 $ 3,423
Work in progress 502 438
Finished goods 6,701 6,260
------- -------
Total inventories $10,219 $10,121
======= =======
</TABLE>
Page 24
<PAGE> 25
NOTE D
DEBT
<TABLE>
<CAPTION>
August 31 (Thousands of dollars) 2000 1999
------- -------
<S> <C> <C>
Unsecured credit agreement, matures in fiscal 2003, 7.31%
interest rate at August 31, 2000 $32,000 $34,000
Private placement, 8.43% interest rate, semiannual interest
payments, annual principal payments of $2,857,
maturity in fiscal 2003 8,571 11,428
Private placement, 8.85% interest rate, semiannual interest-only
payments, maturity in fiscal 2007 10,000 10,000
Unsecured note, 9.40% interest rate, due in quarterly installments
through December 1999 -- 420
Lines of credit, interest rate 7.25% at August 31, 2000 110 530
------- -------
50,681 56,378
Less current portion 2,857 3,277
------- -------
Net long-term debt $47,824 $53,101
======= =======
</TABLE>
Maturities of long-term debt for the fiscal years ending August 31, 2001 through
2005, and thereafter, are as follows (Thousands of dollars):
<TABLE>
<S> <C>
2001 $ 2,857
2002 2,857
2003 34,967
2004 --
2005 --
Thereafter 10,000
--------
$ 50,681
========
</TABLE>
As of August 31, 2000, the Company had an unsecured $75.0 million revolving
credit agreement with three banks which would have expired on June 30, 2003. The
unsecured credit agreement, the private placements and other notes require,
among other provisions, that the Company maintain certain leverage and fixed
charge coverage ratios and include limitations on long-term indebtedness and
minimum net worth. See Note N for the subsequent event disclosure regarding the
replacement of existing credit facilities in connection with the purchase of
Penford Australia.
The Company has uncommitted lines of credit aggregating $5.0 million, which
provide for financing at various floating rates, of which $110,000 was
outstanding at August 31, 2000.
The Company has entered into interest rate swap agreements to modify the
interest characteristics of its outstanding debt. These agreements involve the
exchange of interest payment streams without an exchange of the underlying
principal amount. Net amounts paid or received are reflected as adjustments to
interest expense. The fair values of the swap agreements are not recognized in
the financial statements. In the event of default by a counterparty, the risk in
these transactions is the cost of replacing the interest rate contract at
current market rates. Management monitors the credit ratings of its
counterparties, and believes the risk of incurring such losses is remote, and
that if incurred, such losses would be immaterial.
Page 25
<PAGE> 26
At August 31, 2000, approximately $15 million of the Company's outstanding debt
was subject to interest rate swap agreements, consisting of floating-rate to
fixed-rate swaps, which effectively fix interest rates at approximately 8.5%.
During the second quarter of 2000, PPCO paid off all outstanding amounts on its
$15 million revolving credit facility, which was guaranteed by Penford in
connection with the spin-off of PPCO in August 1998. As a result, Penford's
guaranty agreement was cancelled, releasing Penford of any obligation under
PPCO's $15 million credit facility.
The fair market value of long-term debt at August 31, 2000, was approximately
equal to the carrying value of $50.7 million. At August 31, 1999, the fair value
of long-term debt was approximately $58.6 million, with a carrying value of
$56.4 million. The fair value of fixed-rate, long-term debt is estimated using
discounted cash flow analyses based on the Company's current incremental
borrowing rates for similar types of borrowings.
NOTE E
LEASES
Certain of the Company's property, plant and equipment is leased under operating
leases ranging from one to ten years with renewal options. Rental expense under
operating leases was $4,855,000, $4,517,000 and $4,635,000 for fiscal years
ended August 31, 2000, 1999 and 1998, respectively. Future minimum lease
payments as of August 31, 2000, for noncancellable operating leases having
initial lease terms of more than one year are as follows (Thousands of dollars):
<TABLE>
<CAPTION>
Years ending August 31 Operating Leases
---------------------- ----------------
<S> <C>
2001 $ 4,769
2002 4,461
2003 3,485
2004 2,572
2005 1,786
Thereafter 8,277
--------
Total minimum lease payments $ 25,350
========
</TABLE>
NOTE F
STOCK OPTIONS
As of August 31, 2000, the Company had two stock option plans for which
1,967,599 shares of common stock were authorized for grants of options as
adjusted for the spin-off of PPCO: the 1994 Stock Option Plan (the "1994 Plan")
and the Stock Option Plan for Non-Employee Directors (the "Directors' Plan").
The 1994 Plan superseded the 1984 Stock Option Plan (126,659 shares outstanding
at August 31, 2000) which expired in February 1994, and provides for the
granting of stock options at the fair market value of the Company's common stock
on the date of grant. Either incentive stock options or non-qualified stock
options are granted under the 1994 Plan. The incentive stock options generally
vest over five years at the rate of 20% each year and expire 10 years from the
date of grant. The non-qualified stock options generally vest over four years at
the rate of 25% each year and expire 10 years and 10 days from the date of
grant.
Page 26
<PAGE> 27
The Directors' Plan provides for the granting of non-qualified stock options at
75% of the fair market value of the Company's common stock on the date of grant.
At each director's annual election, annual retainers and meeting fees may be
received in the form of non-qualified stock options in lieu of cash
compensation. Options granted under the Directors' Plan vest six months after
the grant date and expire at the earlier of ten years after the date of grant or
three years after the date the non-employee director ceases to be a member of
the Board. In addition, non-employee directors receive restricted stock under a
restricted stock plan every three years. The restricted stock may be sold or
otherwise transferred at the rate of 33.3% each year.
Changes in stock options for the three years ended August 31 follow:
<TABLE>
<CAPTION>
Weighted Average
Shares Option Price Range Exercise Price
--------- ------------------ ----------------
<S> <C> <C> <C>
Fiscal 1998
Balance, September 1, 1997 1,614,892 $ 5.77-10.88 $ 8.65
Granted 32,451 10.06-12.32 10.80
Exercised (83,725) 7.47-10.44 8.60
Cancelled (5,459) 8.02 8.02
---------
Balance, August 31, 1998 1,558,159 5.77-12.32 8.39
Fiscal 1999
Granted 525,141 $ 9.25-14.88 $ 9.43
Exercised (136,662) 5.77-10.88 8.89
Cancelled (812,607) 7.47-10.77 8.53
---------
Balance, August 31, 1999 1,134,031 5.77-14.88 9.16
Fiscal 2000
Granted 327,493 $11.16-19.31 $15.28
Exercised (116,631) 5.77-12.32 9.11
Cancelled (67,625) 8.13-10.00 9.08
---------
Balance, August 31, 2000 1,277,268 5.77-19.31 10.74
=========
Options Exercisable at August 31
-1998 595,283 5.77-12.32 8.73
-1999 433,015 5.77-13.13 9.02
-2000 524,099 5.77-19.31 9.19
Shares available for future
grant at August 31, 2000 540,842
</TABLE>
Page 27
<PAGE> 28
The following table summarizes information concerning outstanding and
exercisable options as of August 31, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------- ----------------------------
Wtd. Avg.
Remaining Wtd. Avg Wtd. Avg.
Range of Number of Contractual Exercise Number of Exercise
Exercise Prices Options Life Price Options Price
--------------- --------- ----------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
$ 5.77- 9.23 394,987 5.29 $ 8.31 210,848 $ 7.65
9.24-13.42 595,281 6.80 9.88 312,251 10.21
13.43-19.31 287,000 9.47 15.84 1,000 14.87
--------- -------
1,277,268 524,099
========= =======
</TABLE>
Subsequent to the spin-off of PPCO on August 31, 1998, the exercise price and
number of options outstanding were adjusted in order to preserve the options'
value as of the distribution date. The number of shares available for grant
under the Plan was also adjusted in accordance with the Plan provisions. The
option information for the three years ended August 31 shown above has been
changed to reflect the adjustments required by the spin-off.
The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation,"
using the intrinsic-value method prescribed by APB Opinion No. 25. Accordingly,
no compensation expense has been recognized for the stock-based compensation
plans other than for the Directors' Plan and restricted stock awards. Had
compensation cost been recognized based on the fair value at the date of grant
for options awarded in 2000, 1999 and 1998 under the Plans, pro forma amounts of
the Company's income from continuing operations and earning per common share
from continuing operations would have been as follows (In thousands, except per
share data):
<TABLE>
<CAPTION>
Fiscal 2000 Fiscal 1999 Fiscal 1998
----------- ----------- -----------
<S> <C> <C> <C>
Income from continuing operations - as reported $ 10,362 $ 6,205 $ 8,110
Income from continuing operations - pro forma 9,646 5,883 7,411
Earnings per common share from continuing
operations - as reported $ 1.40 $ 0.84 $ 1.11
Earnings per common share from continuing
operations - pro forma 1.30 0.80 1.01
Earnings per common share from continuing
operations, diluted - as reported 1.33 0.80 1.08
Earnings per common share from continuing
operations, diluted - pro forma 1.24 0.76 0.98
</TABLE>
Page 28
<PAGE> 29
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions for fiscal
2000: risk-free interest rates of 4.2% to 6.2%; expected option life of each
vesting increment of 2.7 years for employees and 3.0 years for non-employee
directors; expected volatility of 58%; and expected dividends of $0.22 per
share. The weighted average fair value of options granted under the 1994 Plan
during fiscal year 2000 was $8.90. The weighted average fair value of options
granted under the 1994 Plan during fiscal year 1999 was $5.18, and there were no
options granted under the 1994 Plan in fiscal 1998. The weighted average fair
value of options granted under the Directors' Plan during fiscal years 2000,
1999 and 1998 was $8.58, $7.47 and $7.23, respectively. The effect of applying
SFAS No. 123 for providing pro forma disclosures for fiscal years 2000, 1999 and
1998 is not likely to be representative of the effects in future years because
the amounts above reflect only the options granted in 2000, 1999 and 1998 that
vest over four to five years, and additional grants are generally made annually.
Page 29
<PAGE> 30
NOTE G
INCOME TAXES
Income tax expense on income from continuing operations consists of the
following:
<TABLE>
<CAPTION>
Year Ended August 31
(Thousands of dollars) 2000 1999 1998
---------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 3,264 $ 3,233 $ 1,687
State 654 320 100
------- ------- -------
3,918 3,553 1,787
Deferred:
Federal 1,322 (171) 2,579
State 340 (10) (7)
------- ------- -------
1,662 (181) 2,572
------- ------- -------
Total provision $ 5,580 $ 3,372 $ 4,359
======= ======= =======
</TABLE>
A reconciliation of the statutory federal tax to the actual provision for taxes
on income from continuing operations is as follows:
<TABLE>
<CAPTION>
Year Ended August 31
(Thousands of dollars) 2000 1999 1998
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 35% 34% 35%
Statutory tax on income from continuing operations $ 5,580 $ 3,256 $ 4,364
State taxes, net of federal benefit 369 211 58
Tax credits, including research and
development credits (125) (45) (468)
Foreign sales corporation (245) (153) (210)
Restructuring and other nondeductible expenses -- 82 633
Other 1 21 (18)
------- ------- -------
Total provision $ 5,580 $ 3,372 $ 4,359
======= ======= =======
</TABLE>
Page 30
<PAGE> 31
The significant components of deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
August 31
(Thousands of dollars) 2000 1999
---------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Alternative minimum tax credit $ 3,934 $ 4,788
Postretirement benefits 3,890 3,806
Provisions for accrued expenses 2,791 3,508
Net operating losses -- 945
Other 851 802
------- -------
Total deferred tax assets 11,466 13,849
Deferred tax liabilities:
Depreciation 20,440 21,099
Other 608 670
------- -------
Total deferred tax liabilities 21,048 21,769
------- -------
Net deferred tax liabilities $ 9,582 $ 7,920
======= =======
</TABLE>
Page 31
<PAGE> 32
NOTE H
PENSIONS AND OTHER POSTRETIREMENT BENEFITS
The Company adopted SFAS No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," in fiscal 1999. The Statement revises and
standardizes disclosures about pensions and other postretirement benefits and
does not impact financial position or the results of operations.
Penford maintains two noncontributory defined benefit pension plans and two
postretirement benefit plans that cover substantially all employees and
retirees.
The Company's funding policy for its defined benefit plans is to contribute
amounts sufficient to meet or exceed the minimum requirements of the Employee
Retirement Income Security Act of 1974. Presently, the Company funds the current
benefits of its other postretirement benefit plans on a cash basis, and
therefore, there are no plan assets.
The following represents information summarizing the Company's pension and other
postretirement benefit plans (in thousands):
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
YEAR ENDED AUGUST 31
CHANGE IN BENEFIT OBLIGATION 2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Benefit obligation at September 1 $ 22,229 $ 24,102 $ 7,531 $ 7,459
Service Cost 642 754 270 268
Interest Cost 1,609 1,583 549 489
Plan participants' contributions -- -- 9 11
Settlement of benefit obligations -- (477) -- --
Actuarial (gain) loss 591 (890) (594) (814)
Change in assumptions (1,256) (1,388) 1 --
Benefits paid (1,938) (1,455) (367) (361)
-------- -------- -------- --------
Benefit obligation at August 31 21,877 22,229 7,399 7,052
======== ======== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at September 1 26,673 23,840 -- --
Actual return on plan assets 4,034 5,818 -- --
Settlements -- (1,530) -- --
Company contributions -- -- 358 350
Plan participants' contributions -- -- 9 11
Benefits paid (1,938) (1,455) (367) (361)
-------- -------- -------- --------
Fair value of the plan assets at August 31 28,769 26,673 -- --
======== ======== ======== ========
Funded status of the plan (underfunded) 6,892 4,444 (7,399) (7,052)
Unrecognized net (gain) (8,745) (6,949) (3,406) (3,520)
Unrecognized transition obligation 499 625 -- --
Unrecognized prior service cost 974 1,041 -- --
-------- -------- -------- --------
Prepaid (accrued) benefit cost $ (380) $ (839) $(10,805) $(10,572)
======== ======== ======== ========
</TABLE>
Assets of the pension plans are invested in units of common trust funds managed
by Frank Russell Trust Company. The common trust funds own stocks, bonds, and
real estate.
Page 32
<PAGE> 33
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
------------------- ----------------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF
AUGUST 31 2000 1999 2000 1999
----- ----- ----- -----
<S> <C> <C> <C> <C>
Discount Rate 8.00% 7.50% 8.00% 7.50%
Expected return on plan assets 10.00 10.00
Rate of compensation increase 4.00 4.00
</TABLE>
Future benefit costs were estimated assuming medical costs would increase at an
8.5% annual rate for fiscal 2001, decreasing by one half percent ratably over
the next six years to a rate of 5.5%.
<TABLE>
<CAPTION>
PENSION BENEFITS OTHER BENEFITS
----------------------------------- -----------------------------------
2000 1999 1998 2000 1999 1998
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
COMPONENTS OF NET PERIODIC
BENEFIT COST (IN THOUSANDS)
Service Cost $ 642 $ 754 $ 780 $ 270 $ 268 $ 242
Interest Cost 1,609 1,583 1,541 549 489 496
Expected return on plan assets (2,590) (2,319) (2,398) -- -- --
Net amortization and deferral (120) 194 (11) (229) (218) (280)
------- ------- ------- ------- ------- -------
Benefit cost $ (459) $ 212 $ (88) $ 590 $ 539 $ 458
======= ======= ======= ======= ======= =======
</TABLE>
As a result of the PPCO spin-off (see Note B) and the administrative workforce
reduction program at Penford Products Co. (see Note M), curtailment and
settlement accounting resulted in the recognition of net additional expenses of
approximately $906,000 related to the Company's defined benefit plan for
salaried employees.
The assumed health care cost trend rate could have a significant effect on the
amounts reported. A one-percentage-point change in the assumed health care cost
trend rate would have the following effects (in thousands):
<TABLE>
<CAPTION>
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
<S> <C> <C>
Effect on total of service and interest cost $ 159 $ (126)
components in fiscal 2000
Effect on postretirement benefit obligation
as of August 31, 2000 $1,175 $ (949)
</TABLE>
Page 33
<PAGE> 34
NOTE I
OTHER EMPLOYEE BENEFITS
Savings and Stock Ownership Plan
The Company has a savings investment plan that provides to all employees a 75%
Company match of the employee's contribution, up to 6% of the employee's
eligible pay. The savings component expense of the plan recorded by the Company
was $666,000, $712,000 and $833,000 for fiscal years 2000, 1999 and 1998,
respectively.
The plan also includes an annual profit-sharing component that is awarded by the
Board of Directors based on achievement of predetermined corporate goals. This
feature of the plan is available to all employees who meet the eligibility
requirements of the plan. Profit-sharing contributions to participants were
$379,000, $505,000 and $451,000 for the fiscal years 2000, 1999 and 1998,
respectively.
The shares held by the plan are considered outstanding for purposes of
calculating earnings per share. Dividends on shares held by the plan are
allocated to participant accounts.
Supplemental Executive Retirement Plan
The Company sponsors a Supplemental Executive Retirement Plan ("SERP"), a
non-qualified plan, which covers certain employees. For 2000, 1999 and 1998, the
net periodic pension expense accrued for the SERP was $457,000, $515,000 and
$650,000, respectively.
Health Care And Life Insurance Benefits
The Company offers health care and life insurance benefits to most active
employees. Costs incurred to provide these benefits are charged to expense when
paid. Health care and life insurance expense was $2,851,000, $2,625,000 and
$2,455,000 in 2000, 1999 and 1998, respectively.
Page 34
<PAGE> 35
NOTE J
SHAREHOLDERS' EQUITY
Unissued Preferred Stock
As of August 31, 2000, there are 1,000,000 shares of $1.00 par value preferred
stock authorized for issue; however, none are outstanding.
Common Stock Purchase Rights
On June 16, 1988, Penford distributed a dividend of one right (Right) for each
outstanding share of Penford common stock. In May 1997 the Company amended its
Shareholder Rights Plan. When exercisable, each Right will entitle its holder to
buy one share of Penford's common stock at $100 per share. The Rights will
become exercisable if a purchaser acquires 15% of Penford's common stock or
makes an offer to acquire common stock. In the event that a purchaser acquires
15% of the common stock of Penford, each Right shall entitle the holder, other
than the acquirer, to purchase one share of common stock of Penford for one half
of the market price of the common stock. In the event that Penford is acquired
in a merger or transfers 50% or more of its assets or earnings to any one
entity, each Right entitles the holder to purchase common stock of the surviving
or purchasing company having a market value of twice the exercise price of the
Right. The Rights may be redeemed by Penford at a price of $0.01 per Right, and
expire in June 2008.
Page 35
<PAGE> 36
NOTE K
EARNINGS PER COMMON SHARE
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands, except share and per share data):
<TABLE>
<CAPTION>
Year Ended August 31
2000 1999 1998
---------- ---------- -------------
<S> <C> <C> <C>
Income from continuing operations $ 10,362 $ 6,205 8,110
Discontinued operations -- -- (8,742)
---------- ---------- -------------
Net income (loss) $ 10,362 $ 6,205 (632)
========== ========== =============
Weighted average common
shares outstanding 7,414,435 7,394,368 7,303,056
Net effect of dilutive
stock options 350,609 355,355 227,584
---------- ---------- -------------
Weighted average common shares and
equivalents outstanding 7,765,044 7,749,723 7,530,640
========== ========== =============
Earnings (loss) per common share, basic:
Continuing operations $ 1.40 $ 0.84 $ 1.11
Discontinued operations -- -- (1.20)
---------- ---------- -------------
Net income (loss) $ 1.40 $ 0.84 $ (0.09)
========== ========== =============
Earnings (loss) per common share, diluted:
Continuing operations $ 1.33 $ 0.80 $ 1.08
Discontinued operations -- -- (1.16)
---------- ---------- -------------
Net income (loss) $ 1.33 $ 0.80 $ (0.08)
========== ========== =============
</TABLE>
Certain adjustments to outstanding options were made on September 1, 1998,
subsequent to the spin-off of PPCO (see Note F).
NOTE L
SEGMENT REPORTING
The Company operates in one business segment: developing, manufacturing, and
marketing specialty carbohydrate-based ingredient systems for various
applications.
Page 36
<PAGE> 37
NOTE M
OTHER EVENTS
Restructure Costs
On March 22, 1999, the Company announced a plan to reduce its administrative
workforce by 20 employees in an effort to align operating costs with market
conditions. The plan was implemented through a combination of a voluntary
retirement incentive program and involuntary layoffs. As a result, restructuring
costs totaling $1.6 million were charged to continuing operations in the third
quarter of fiscal 1999.
The restructuring costs included an increase to the actuarial liability of the
Company's retirement pension plan, severance and other expenses related to the
overall workforce reduction plan. The Company's retirement plan funds
approximately 60% of the total charge with existing assets. The remaining costs
were paid out in the first half of fiscal 2000.
Restructure costs of $1.9 million relating to the spin-off of PPCO were charged
to Penford's continuing operations in fiscal year 1998.
NOTE N
SUBSEQUENT EVENTS
On September 29, 2000, Penford Corporation completed its acquisition of Starch
Australasia Limited from Goodman Fielder Limited for $54.5 million (USD) in
cash. Starch Australasia Limited, renamed Penford Australia Limited ("Penford
Australia"), is Australia's sole producer of corn starch products and a world
leader in the research, development and commercialization of novel new
starch-based products. Penford Australia produces products used to enhance the
functionality of packaged food products, as well as products used in the mining
and paper industries.
Penford Australia had fiscal 2000 revenues of approximately $70 million (USD)
and employs 300. Its operations include three manufacturing facilities, two in
Australia and one in New Zealand, for processing specialty corn starches and
wheat related products.
The acquisition will be recorded using the purchase method of accounting.
Accordingly, a portion of the purchase price will be allocated to net tangible
and intangible assets acquired based on their estimated fair values. The balance
of the purchase price will be recorded as goodwill, and the Company is currently
preparing the purchase price allocation and determining the useful lives of the
assets acquired.
In connection with the completion of the acquisition of Penford Australia on
September 29, 2000, the Company obtained interim financing for replacing its
credit facilities. As a result, except for a $5 million uncommitted line of
credit that remains in place, all outstanding debt as of August 31, 2000, was
replaced by a $120 million bridge loan with a syndicate of banks, consisting of
the same three banks used with a previous $75 million unsecured credit facility.
Page 37
<PAGE> 38
The new borrowings totaling $109.5 million under the bridge loan were used to
finance the acquisition, in addition to replacing the existing outstanding debt
balances.
Subsequent to the consummation of the purchase transaction, a new $130 million
credit facility was completed on November 15, 2000, with the same syndicate of
banks, including the addition of an Australian bank. The new credit facility
consists of various agreements with $65 million in term loans and $65 million of
revolving lines of credit. The revolving lines of credit expire on October 31,
2003, and the term loans expire on October 31, 2005. Borrowing rates available
to the Company under the entire credit facility are based on the LIBOR or prime
rate depending on the selection of borrowing options. All of Penford's assets
secure the credit facility and the new agreements include, among other terms,
financial covenants covering restrictions related to limitations on indebtedness
and minimum net worth and maintenance of certain leverage, interest and fixed
charge coverage ratios, all of which are similar to restrictions on the existing
debt as of August 31, 2000. Total outstanding debt of the Company subsequent to
the completion of the new $130 million facility is approximately the same as
immediately prior to its execution.
NOTE O
QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Fiscal 2000 First Second Third Fourth
(Thousands of dollars except per share data) Quarter Quarter Quarter Quarter Total
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 40,553 $ 38,333 $ 39,744 $ 39,520 $ 158,150
Gross margin 11,066 11,205 11,111 9,895 43,277
Net income 2,485 2,750 2,894 2,233 10,362
Earnings per common share:
Basic $ 0.33 $ 0.37 $ 0.39 $ 0.31 $ 1.40
Diluted $ 0.32 $ 0.35 $ 0.37 $ 0.29 $ 1.33
Dividends declared $ 0.05 $ 0.05 $ 0.06 $ 0.06 $ 0.22
</TABLE>
<TABLE>
<CAPTION>
Fiscal 1999 First Second Third Fourth
(Thousands of dollars except per share data) Quarter Quarter Quarter(1) Quarter Total
-----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 38,723 $ 37,161 $ 39,262 $ 39,910 $ 155,056
Gross margin 10,634 8,888 10,217 10,296 40,035
Net income 2,295 1,259 703 1,948 6,205
Earnings per common share:
Basic $ 0.31 $ 0.17 $ 0.10 $ 0.26 $ 0.84
Diluted $ 0.30 $ 0.16 $ 0.09 $ 0.25 $ 0.80
Dividends declared $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.20
</TABLE>
(1) Third quarter fiscal 1999 income from continuing operations includes
restructure costs of $1.6 million ($1.0 million after-tax, or $0.13 per
share) related to an administrative workforce reduction program.
Page 38
<PAGE> 39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Penford Corporation
We have audited the accompanying consolidated balance sheets of Penford
Corporation as of August 31, 2000 and 1999, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended August 31, 2000. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Penford
Corporation at August 31, 2000 and 1999, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
August 31, 2000, in conformity with accounting principles generally accepted in
the United States.
Seattle, Washington
October 9, 2000 Ernst & Young LLP
Page 39
<PAGE> 40
REPORT OF MANAGEMENT
The management of Penford Corporation has prepared and is responsible for the
integrity and fairness of the financial statements and other financial
information presented in this annual report. The statements have been prepared
in accordance with generally accepted accounting principles, and to the extent
appropriate, include amounts based on management's estimates and judgments. In
order to fulfill its responsibilities for these financial statements and other
information, management maintains accounting systems and related internal
controls. These controls are designed to provide reasonable assurance that
transactions are properly authorized and recorded, that assets are safeguarded,
and that financial records are reliably maintained.
Ernst & Young LLP, independent auditors, is retained to audit the Company's
consolidated financial statements. Their accompanying report is based on an
audit conducted in accordance with generally accepted auditing standards,
including a review of internal accounting controls and tests of accounting
procedures and records to the extent necessary to support their audit.
The Audit Committee of the Board of Directors, which is composed solely of
nonmanagement directors, meets with management and with the independent auditors
to review the quality of financial reporting, the operation and development of
the internal control systems, and the results of independent audits.
The independent auditors periodically meet with the Audit Committee without the
presence of management.
Jeffrey T. Cook
President and
Chief Executive Officer
Keith T. Fujinaga
Corporate Director of Finance and
Chief Accounting Officer
Page 40
<PAGE> 41
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
The information set forth under "Election of Directors" in the Company's
definitive Proxy Statement for the 2001 Annual Meeting of Shareholders is
incorporated herein by reference.
Information regarding executive officers of the Company is set forth in Part I
above and incorporated herein by reference.
ITEM 11: EXECUTIVE COMPENSATION
The information set forth under "Executive Compensation" in the Company's
definitive Proxy Statement for the 2001 Annual Meeting of Shareholders is
incorporated herein by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under "Security Ownership of Certain Beneficial Owners
and Management" in the Company's definitive Proxy Statement for the 2001 Annual
Meeting of Shareholders is incorporated herein by reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information relating to certain relationships and related transactions of
the Company set forth under "Change-in-Control Arrangements" in the Company's
definitive Proxy Statement for the 2001 Annual Meeting of Shareholders is
incorporated herein by reference.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
The consolidated balance sheets as of August 31, 2000 and 1999
and the related statements of operations, cash flows and
shareholders' equity for each of the three years in the period
ended August 31, 2000 and the report of independent auditors are
included in Part II, Item 8.
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission
are omitted because they are not applicable or because the
information is presented in the financial statements or notes
thereto.
Page 41
<PAGE> 42
(3) Exhibits
See list of Exhibits on page 44. This list includes a subset
containing each management contract, compensatory plan, or
arrangement required to be filed as an exhibit to this report.
(b) Reports on Form 8-K
A Form 8-K dated August 29, 2000 was filed reporting under Item
5, Registrant's intention to acquire Starch Australasia Limited
from Goodman Fielder Limited on September 29, 2000. Filed as an
exhibit was a copy of the press release dated August 29, 2000.
A Form 8-K dated September 29, 2000 was filed reporting under
Item 2, Registrant's completion of its acquisition of Starch
Australasia Limited from Goodman Fielder Limited. Filed as an
exhibit was a copy of the press release dated September 29, 2000.
In accordance with paragraph 4 of Item 7(a) of Form 8-K, the
financial statements will be filed by amendment as soon as
practicable and no later than December 12, 2000.
Page 42
<PAGE> 43
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Penford Corporation
Date: November 22, 2000 /s/ Jeffrey T. Cook
----------------- -------------------------------------
Jeffrey T. Cook, President and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Date: November 22, 2000 /s/ Jeffrey T. Cook
----------------- -------------------------------------
Jeffrey T. Cook, President and
Chief Executive Officer (Principal
Executive Officer)
Date: November 22, 2000 /s/ Keith T. Fujinaga
----------------- -------------------------------------
Keith T. Fujinaga, Corporate
Director of Finance
(Chief Accounting Officer)
Date: November 22, 2000
-----------------
Directors
Jeffrey T. Cook*
Paul H. Hatfield* By /s/ Keith T. Fujinaga
John C. Hunter, III* -----------------------------------
Sally G. Narodick* Attorney-in-Fact*
William G. Parzybok, Jr.* Power of Attorney Dated
N. Stewart Rogers*
William K. Street* Date October 17, 2000
---------------------------------
Page 43
<PAGE> 44
INDEX TO EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission, are incorporated by reference.
<TABLE>
<CAPTION>
Exhibit No. Item
----------- ----
<S> <C>
(3.1) Restated Articles of Incorporation of Registrant (filed as an
Exhibit to Registrant's Form 10-K for fiscal year ended August
31, 1995)
(3.2) Articles of Amendment to Restated Articles of Incorporation of
Registrant (filed as an exhibit to Registrant's Form 10-K for
fiscal year ended August 31, 1997)
(3.3) Bylaws of Registrant as amended and restated as of October 20,
1997 (filed as an exhibit to Registrant's Form 10-K for fiscal
year ended August 31, 1997)
(4.1) Amended and Restated Rights Agreement dated as of April 30, 1997
(filed as an Exhibit to Registrant's Amendment to Registration
Statement on Form 8-A/A dated May 5, 1997)
(10.1) Penford Corporation Supplemental Executive Retirement Plan, dated
March 19, 1990 (filed as an Exhibit to Registrant's Form 10-K for
the fiscal year ended August 31, 1991)
(10.2) Penford Corporation Supplemental Survivor Benefit Plan, dated
January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1991)
(10.3) Penford Corporation Deferred Compensation Plan, dated January 15,
1991 (filed as an Exhibit to Registrant's Form 10-K for the
fiscal year ended August 31, 1991)
(10.4) Change of Control Agreements between Penford Corporation and
Messrs. Cook, Horn, Keeley, and Kunerth (a representative copy of
these agreements is filed as an exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1995)
(10.5) Penford Corporation 1993 Non-Employee Director Restricted Stock
Plan (filed as an Exhibit to Registrant's Form 10-Q for the
quarter ended November 30, 1993)
(10.6) Penford Corporation 1994 Stock Option Plan as amended and
restated as of January 21, 1997 (filed on Form S-8 dated March
17, 1997)
(10.7) Penford Corporation Stock Option Plan for Non-Employee Directors
(filed as an exhibit to the Registrant's Form 10-Q for the
quarter ended May 31, 1996)
(10.8) Separation Agreement dated as of July 31, 1998 between Registrant
and Penwest Pharmaceuticals Co. (filed as an exhibit to
Registrant's Form 8-K dated August 31, 1998)
(10.9) Services Agreement dated as of July 31, 1998 between Registrant
and Penwest Pharmaceuticals Co. (filed as an exhibit to
Registrant's Form 8-K dated August 31, 1998)
(10.10) Employee Benefits Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrant's Form 8-K dated August 31, 1998)
(10.11) Tax Allocation Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrant's Form 8-K dated August 31, 1998)
(10.12) Excipient Supply Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrant's Form 8-K dated August 31, 1998)
</TABLE>
Page 44
<PAGE> 45
<TABLE>
<S> <C>
(10.13) Restatement and Exchange Agreement amending the Senior Note
Agreement among Penford Corporation as Borrower and Mutual of
Omaha and Affiliates as lenders, dated as of August 1, 1998
(filed as an exhibit to Registrant's Form 10-K for the fiscal
year ended August 31, 1998)
(10.14) Guaranty Agreement dated as of August 1, 1998 by Penford Products
Co., a wholly-owned subsidiary of Registrant, of the Restatement
and Exchange Agreement among Registrant and Mutual of Omaha and
Affiliates (filed as an exhibit to Registrant's Form 10-K for the
fiscal year ended August 31, 1998)
(10.15) Restatement and Exchange Agreement amending the Senior Note
Agreement among Penford Corporation as Borrower, and Principal
Mutual Life Insurance Company and TMG Life Insurance Company as
lenders, dated as of August 1, 1998 (filed as an exhibit to
Registrant's Form 10-K for the fiscal year ended August 31, 1998)
(10.16) Guaranty Agreement dated as of August 1, 1998 by Penford Products
Co., a wholly owned subsidiary of Registrant, of the Restatement
and Exchange Agreement among Registrant, Principal Mutual Life
Insurance Company, and TMG Life Insurance Company (filed as an
exhibit to Registrant's Form 10-K for the fiscal year ended
August 31, 1998)
(10.17) Credit Agreement dated as of July 2, 1998 among Penford
Corporation and Penford Products Co. as borrowers, and certain
commercial lending institutions as the lenders, and The Bank of
Nova Scotia, as agent for the lenders (filed as an exhibit to
Registrant's Form 10-K for the fiscal year ended August 31, 1998)
(10.18) Intercreditor Agreement dated as of August 1, 1998 among the
parties to the Credit Agreement dated July 2, 1998 and the
parties to the Senior Note Agreements dated as of August 1, 1998
(filed as an exhibit to Registrant's Form 10-K for the fiscal
year ended August 31, 1998)
21 Subsidiaries of the Registrant
23 Consent of Ernst & Young LLP, Independent Auditors
24 Power of Attorney
27 Financial Data Schedule
</TABLE>
Page 45
<PAGE> 46
SUBSET OF THE INDEX TO EXHIBITS
Executive Compensation Plans and Arrangements
This subset of the index to exhibits includes a subset containing each
management contract, compensatory plan, or arrangement required to be filed as
an exhibit to this Report.
<TABLE>
<CAPTION>
Exhibit No. Item
----------- ----
<S> <C>
(10.1) Penford Corporation Supplemental Executive Retirement Plan, dated
March 19, 1990 (filed as an Exhibit to Registrant's Form 10-K for
the fiscal year ended August 31, 1991, Commission File No.
0-11488)
(10.2) Penford Corporation Supplemental Survivor Benefit Plan, dated
January 15, 1991 (filed as an Exhibit to Registrant's Form 10-K
for the fiscal year ended August 31, 1991, Commission File No.
0-11488)
(10.3) Penford Corporation Deferred Compensation Plan, dated January 15,
1991 (filed as an Exhibit to Registrant's Form 10-K for the
fiscal year ended August 31, 1991, Commission File No. 0-11488)
(10.4) Agreements relating to compensation in the event of a change in
control of the corporation between the Corporation and Messrs.
Cook, Horn, Keeley, and Kunerth (a representative copy of these
agreements filed as an Exhibit to Registrant's Form 10-K for the
fiscal year ended August 31, 1995, Commission File No. 0-11488)
(10.5) Penford Corporation 1993 Non-Employee Director Restricted Stock
Plan (filed as an Exhibit to Registrant's Form 10-Q for the
quarter ended November 30, 1993, Commission File Number 0-11488)
(10.6) Penford Corporation 1994 Stock Option Plan as amended and
restated as of January 21, 1997 (filed on Form S-8, No. 33-58799,
dated March 17, 1997)
(10.7) Penford Corporation Stock Option Plan for Non-Employee Directors
(filed as an Exhibit to the Registrant's Form 10-Q for the
quarter ended May 31, 1996, Commission File Number 0-11488)
(10.10) Employee Benefits Agreement dated as of July 31, 1998 between
Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit
to Registrant's Form 8-K dated August 31, 1998, Commission File
Number 0-11488)
</TABLE>
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