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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED AUGUST 31, 2002
[ ] 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)
WASHINGTON 91-1221360
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7094 S. REVERE PARKWAY 80112-3932
ENGLEWOOD, COLORADO (Zip Code)
(Address of principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (303) 649-1900
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE OF WHICH REGISTERED
------------------- -----------------------------------------
None None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of October 29, 2002 was approximately $85.5
million. Shares of Common Stock held by each executive officer and director and
by each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for other
purposes. The net number of shares of the Registrant's Common Stock (the
Registrant's only outstanding class of stock) outstanding as of October 29, 2002
was 7,692,344.
DOCUMENTS INCORPORATED BY REFERENCE
The Registrant's definitive Proxy Statement relating to the 2003 Annual
Meeting of Shareholders is incorporated by reference into Part III of this Form
10-K.
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EXPLANATORY NOTE
This amendment No. 1 on Form 10-K/A revises Items 1-9 and 15 within
Parts I, II and IV of our Annual Report on Form 10-K for the fiscal year ended
August 31, 2002 that was originally filed on November 27, 2002 (the "Form 10-K")
and includes information in response to comments from the staff of the
Securities and Exchange Commission.
Except with respect to information in Item 5, this report continues to
speak as of the date of the original filing of the Form 10-K and we have not
updated this disclosure in this report to speak as of a later date. All
information contained in this report, the Form 10-K, is subject to updating and
supplementing as provided in our periodic reports filed with the Securities and
Exchange Commission.
PENFORD CORPORATION
FISCAL YEAR 2002 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
PAGE
----
PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 8
Item 3. Legal Proceedings......................................................................... 8
Item 4. Submission of Matters to a Vote of Security Holders....................................... 9
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters..................... 10
Item 6. Selected Financial Data................................................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risk................................ 20
Item 8. Financial Statements and Supplemental Data................................................ 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 43
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 43
Signatures.......................................................................................... 44
2
PART I
ITEM 1: BUSINESS
DESCRIPTION OF BUSINESS
We are a developer, manufacturer and marketer of specialty
natural-based ingredient systems for industrial and food applications. We use
our carbohydrate chemistry expertise to develop ingredients with starch as a
base for value-added applications in several markets including papermaking and
food products. We manage our business in three segments. The first two,
industrial ingredients and food ingredients are broad categories of end-market
users, primarily served by our U.S. operations. The third segment is our
geographically separate operations in Australia and New Zealand. Our Australian
and New Zealand operations are engaged primarily in the food ingredients
business, although the industrial market is an important and growing category
there. Financial information about our segments is included in Note M to the
consolidated financial statements.
Penford's family of products provides functional characteristics to the
markets into which they are sold. Carbohydrate-based specialty starches possess
binding and film-forming attributes that provide natural, convenient and
cost-effective solutions that make our customers' products perform better. We
have extensive research and development capabilities, which are used in
understanding the complex chemistry of carbohydrate-based materials and their
application. In addition, we have 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 efficiencies in the manufacture of coated and uncoated
paper and paper packaging products. 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 and other liquid starches are generally used in the paper-forming
process in paper production, providing strong bonding of paper fibers and other
ingredients. Penford's products are a cost-effective alternative to more
expensive synthetic ingredients.
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.
We are a Washington Corporation originally incorporated in September
1983. We commenced operations as a publicly-traded company on March 1, 1984.
ACQUISITION AND DISPOSITION OF OPERATIONS AND OTHER TRANSACTIONS
In November 2002, Penford sold certain assets of its resistant starch
business to National Starch Corporation ("National Starch"), a wholly-owned
subsidiary of ICI of the U.K., for $2.5 million.
Penford also licensed to National Starch the exclusive rights to its
resistant starch intellectual property portfolio for applications in human
nutrition. We retained the rights to practice its intellectual property for all
non-human nutrition applications. Under the terms of the agreements Penford will
receive an initial licensing fee of $2.25 million and annual royalties for a
period of seven years or until a maximum of $11.0 million has been received by
Penford. The licensing fee will be amortized over the life of the agreement. The
royalty payments are subject to a minimum of $7 million over the first five
years of the licensing agreement.. The initial cash proceeds to Penford are
expected to be approximately $4.1 million, which is net of transaction expenses.
We also entered into a tolling arrangement under which we will
manufacture resistant starch products for National Starch, if requested by
National Starch. See Note O to the Consolidated Financial Statements.
Penford Australia Limited was acquired in September 2000. This
acquisition expanded our product offerings to include corn-based food grade
products. Penford Australia also expands our global geographic market presence
in Australia, Asia, and New Zealand.
3
In 1998, we divested our pharmaceuticals operations in a tax-free
distribution to shareholders. The divestiture was executed to maximize the
growth potential of Penford's specialty natural-based ingredient systems
business, and separately, the pharmaceuticals business.
RAW MATERIALS
Corn: Our North American corn wet milling plant is located in Cedar
Rapids, Iowa, the middle of the U.S. corn belt. Accordingly, the plant 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 and
Auckland, New Zealand are sourced through truck-delivered corn at contracted
prices with regional independent farmers and merchants. Corn is purchased at
harvest, March-June, and stored for use for the following year.
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. We enter into contracts typically having durations of one to
five years with potato processors in North America, primarily in the Northwest
and Midwest, to acquire our potato-based raw materials.
Wheat Products: Penford Australia's Tamworth facility uses wheat flour
as the primary raw material for the production of its wheat products such as
wheat starch, wheat gluten and glucose syrup. Tanker trucks from a local
flourmill supply wheat flour under a three-year supply agreement that assures
supply, which expires September 30, 2003.
Chemicals: The primary chemicals used in our manufacturing processes
are commodity chemicals, subject to price fluctuations due to market conditions.
Natural Gas: The primary energy source for most of our plants is
natural gas. We contract our natural gas supply with regional suppliers,
generally under short-term supply agreements, and at times use futures contracts
to hedge the price of natural gas in North America.
Corn, potato starch, wheat flour, chemicals and natural gas are not
presently subject to availability constraints, although drought conditions in
Australia are impacting the prices of corn and wheat in that area. Penford's
current potato starch requirements constitute a material portion of the
available North American supply. We estimate that we purchase approximately
45-50% of the recovered starch in North America. It is possible that, in the
long term, continued growth in demand for corn and potato starch-based
ingredients and new product development will result in capacity constraints.
Over half of our manufacturing costs are the costs of corn, potato
starch, wheat flour, chemicals and natural gas. The remaining portion consists
primarily of other utility and labor costs. The prices of our raw materials may
fluctuate, and increases in prices may affect our business adversely. To
mitigate this risk, we hedge a portion of corn and gas purchases with futures
and options contracts in the U.S. and enter into short term supply agreements
for other production requirements in all locations.
RESEARCH AND DEVELOPMENT
Our research and development efforts cover a range of projects
including technical service work focused on specific customer support and
projects requiring coordination with customers' research efforts to develop
innovative solutions to specific customer requirements. These projects are
supplemented with longer-term, new product development and commercialization
initiatives. Our research and development expenses were $6.0 million, $6.3
million, and $5.4 million for our fiscal years ended August 31, 2002, 2001 and
2000, respectively.
At the end of fiscal 2002, Penford had 36 scientists, including 11
PhD's in carbohydrate and polymer chemistry, who 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 our business.
4
PATENTS, TRADEMARKS AND TRADENAME
We own a number of patents, trademarks, and tradenames to protect
product development and commercialization findings that may provide a
competitive advantage in our marketplace. However, most of our products are
currently made with technology that is broadly available to companies that have
the same level of scientific expertise and production capabilities as Penford.
Other companies may develop similar or functionally equivalent products or may
successfully challenge the validity of these patents. Also, our processes or
products may infringe upon the patents of third parties.
We have approximately 200 patents, most of which are related to our
base technologies in French fry coatings, coatings for the paper industry, and
high amylose resistant starch for food ingredients. Our patents expire at
various times between 2004 and 2020. The annual cost to renew all of our patents
is approximately $150,000.
Specialty starch ingredient brand names for our industrial applications
include, among others, Penford(R) Gums, Pensize(R) binders, Penflex(R) sizing
agent, Topcat(R) cationic additive, and the Apollo(R) starch series. Product
brand names for our food ingredient applications include PenBind(R),
PenCling(R), PenPlus(R), CanTab(R), MAPS(TM), Mazaca(TM) and Fieldcleer(TM).
QUARTERLY FLUCTUATIONS
Penford's revenues and operating results vary from quarter to quarter.
We experience seasonality with our Penford Australia operations. We have lower
sales volumes and gross margins in Australia and New Zealand's summer months,
which corresponds to our second fiscal quarter. This seasonal decline is caused
by the closure of some customers' plants for public holidays and maintenance
during this period. Decreased consumption of some foods, such as bread, which
use our products also contribute to this seasonal trend.
WORKING CAPITAL
Penford generally carries a 1-45 day supply of materials required for
production, depending on the lead time for the specific items. We manufacture
finished goods to customer orders or anticipated demand. We are therefore able
to carry less than 30 days supply of most products. Terms for trade receivables
and trade payables are standard for the industry and region and generally do not
exceed 30-day terms except for trade receivables for export sales.
We carry a longer supply of corn for our Australian operations. We use
an inventory financing credit agreement to purchase corn at harvest in Australia
for production requirements for the following year. In fiscal 2002, that
purchasing activity increased to provide some of the input requirements for our
operations in New Zealand to ensure adequate supply and to minimize exposure to
the higher local prices in New Zealand due to increased demand for corn by the
dairy feed industry.
ENVIRONMENTAL MATTERS
Penford's operations are governed by various Federal, state, local and
foreign environmental laws and regulations. In the United States, such laws and
regulations include the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the EPA Oil Pollution Control Act, OSHA Hazardous
Materials regulations, the Toxic Substances Control Act, the Comprehensive
Environmental Response Compensation and Liability Act and the Superfund
Amendments and Reauthorization Act. In Australia, we are subject to the
environmental requirements of the Protection of the Environment Operations Act,
the Dangerous Goods Act, the Ozone Protection Act, the Environmentally Hazardous
Chemicals Act, and the Contaminated Land Management Act. In New Zealand, we are
subject to the Resource Management Act, the Dangerous Goods Act, the Hazardous
Substances and New Organisms Act and the Ozone Protection Act. Permits are
required by the various environmental agencies which regulate our operations.
Penford has obtained all necessary environmental permits. Penford's operations
are in compliance with applicable environmental laws and regulations in all
material aspects of its business. We estimate that annual compliance costs,
excluding operational costs for emission control devices, wastewater treatment
or disposal fees, is $1.7 million.
Penford has adopted and 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 our business in a safe and fiscally responsible manner that protects
and preserves the health and safety of our employees, the communities
surrounding our plants, and the environment. We continuously monitor
environmental legislation and regulations, which may affect any of our
5
operations. We are working with the Environmental Protection Agency on an
ongoing enforcement initiative. See Item 3, Legal Proceedings for a further
discussion of this matter.
There have been no material impacts on our operations resulting from
compliance with environmental regulations. No unusual expenditures for
environmental facilities and programs are anticipated in the coming year.
PRINCIPAL CUSTOMERS
We sell to a variety of customers for applications in papermaking,
textiles and food products. We have several relatively large customers in each
of our businesses. However, over the last three years we had only one customer
that exceeded 10% of sales, and that occurred in fiscal 2001 and 2000.
MeadWestvaco, a customer of our industrial ingredients business, accounted for
approximately 9%, 10% and 15% of total sales in fiscal 2002, 2001 and 2000,
respectively.
COMPETITION
We compete directly with approximately five other companies that
manufacture specialty starches for the papermaking industry and approximately
six other companies that manufacture specialty food ingredients. We compete
indirectly with a larger number of companies that provide synthetic and
natural-based ingredients to industrial and food customers. Although some of
these competitors are larger companies, and have greater financial and technical
resources, Penford holds a significant market share of our targeted, niche
markets. Application expertise, quality, service and price are the major
competitive factors for Penford.
EMPLOYEES
At August 31, 2002, Penford had 670 total employees. In North America
we had 365 employees, of which approximately 45% are members of a trade union.
An extension of our collective bargaining agreement covering our Cedar
Rapids-based manufacturing workforce expires in August 2003, and we expect to
successfully renegotiate the agreements. Penford Australia had 305 employees, of
which 64% are members of trade unions in Australia and New Zealand. These
contracts generally have two year terms and were renegotiated in 2002 and now
expire in fiscal 2004. We believe our employee relations are good company-wide.
SALES AND DISTRIBUTION
All sales are generated using a combination of direct sales and
distributor agreements. We support our sales efforts with technical and advisory
assistance in our customers' use of our products. Penford ships its product
promptly upon receipt of purchase orders from its customers and, consequently,
backlog is not significant.
Customers for industrial corn-based starch ingredients purchase
products through fixed-price contracts or formula-priced contracts for periods
covering three months to three years or on a spot basis. In fiscal 2002,
approximately 65% of these sales are under fixed price contracts, with 35%
representing formula price and spot business.
Since our customers are generally other manufacturers and processors,
most of our products are distributed via rail, truck or barge to customer
facilities in bulk, except in Australia and New Zealand where most dry product
is packaged in 25kg bags.
FOREIGN OPERATIONS AND EXPORT SALES
Penford further expanded into foreign markets with our acquisition of
Penford Australia in September 2000. Penford Australia is the sole producer of
corn starch products in Australia and New Zealand. Competition is from imported
products, except in wheat flour based starches where there is one other producer
in Australia. Starches have the ability to be chemically and physically modified
to meet the wide range of demands (such as viscosity, resistance to arduous
processing conditions and clarity) required by the food industry. Penford has
developed novel starch-based products, as evidenced by patents obtained for high
amylose maize starches for use as dietary fiber and in biodegradable packaging.
Penford Australia manufactures products used to enhance the functionality of
packaged food products, generally through providing the texture and viscosity
required by the customer for products such as sauces and gravies. Penford's
starch products are also used in the mining and paper industries. The products
used in the mining industry are specifically used in the flotation process for
extracting minerals from finely ground hard rock ores. Some starches assist in
this process by selectively adhering to elements of the ground rock to aid
separation in air agitated flotation cells. Our operations in Australia and New
Zealand include three manufacturing facilities for processing specialty corn
starches and wheat-related products.
6
Further information about the acquisition of Penford Australia and geographic
information can be found in Notes B and M of the Notes to Consolidated Financial
Statements in Item 8 of this annual report.
Export sales from our businesses in the U.S. and Australia/New Zealand
accounted for approximately 16%, 18% and 13% of our total sales in fiscal 2002,
2001 and 2000, respectively.
7
ITEM 2: PROPERTIES
Our facilities as of August 31, 2002 are as follows:
BLDG. AREA LAND AREA OWNED/
(SQ. FT.) (ACRES) LEASED FUNCTION OF FACILITY
--------- ------- ------ --------------------
North America:
Englewood, Colorado.............. 25,200 -- Leased(1) Corporate headquarters,
administrative offices and
research laboratories
Cedar Rapids, Iowa............... 759,000 29 Owned Manufacture of corn starch
products and administration
offices
Idaho Falls, Idaho............... 30,000 4 Owned Manufacture of potato starch
products
Richland, Washington............. 16,000 3 Leased(2) Manufacture of potato and
tapioca starch products
Plover, Wisconsin................ 54,000 10 Owned Manufacture of potato starch
products
Bellevue, Washington............. 5,200 -- Leased(3) Administrative offices
Australia/New Zealand:
Lane Cove, New South Wales....... 75,700 7 Owned Manufacture of corn starch
products and administrative
offices
Tamworth, New South Wales........ 94,600 6 Owned Manufacture of wheat starch
and gluten products
Tamworth, New South Wales........ 7,700 605 Owned Land used for effluent dispersion
and agricultural use
Auckland, New Zealand............ 104,700 5 Owned Manufacture of corn starch
-- 3 Leased(4) products
(1) Lease expires March 2010. Annual lease costs of $414,000.
(2) Lease expires August 2014. Annual lease costs of $99,000.
(3) Lease expires December 2003. Annual lease costs, net of
sublease rentals, of $191,000.
(4) Month to month lease with six months notice to terminate.
Annual lease costs of $18,000.
Our production facilities are strategically located near the sources of
raw materials. We believe that our facilities are maintained in good condition
and that the capacities of the plants are suitable and sufficient to meet
current production requirements. We invest in expansion, improvement and
maintenance of our property, plant and equipment as required.
ITEM 3: LEGAL PROCEEDINGS
A complaint filed in late November 1999 against Penford in the United
States District Court for the District of Idaho has been resolved. The complaint
sought civil penalties for alleged violations of the Clean Air Act and
compensatory damages for alleged trespass, nuisance and personal injury claims.
The Clean Air Act claims were dismissed with prejudice by the federal court's
Summary Judgment order dated July 24, 2001. Personal injury claims were
dismissed with prejudice on summary judgment in May of 2002. Remaining property
damage claims were resolved by mutual agreement at minimal cost to Penford.
Attorney's fees, stack testing, air monitoring, independent process evaluation
and other costs of settling the lawsuit totaled $0.1 million.
On November 1, 2000, the Environmental Protection Agency initiated
enforcement action in the grain processing industry for adequacy of emission
permitting and later included a review of excessive levels of volatile organic
compounds in the action. Penford has been contacted, but is not currently the
subject of a formal enforcement action, and no assessment has been levied.
However, we working with the EPA to resolve any potential issues, and do not
believe that resolution of these issues will result in any material adverse
affect on the company.
8
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 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
NAME AGE TITLE
---- --- -----
Thomas D. Malkoski........ 46 Chief Executive Officer
Jeffrey T. Cook........... 46 President
Steven O. Cordier......... 46 Vice President and Chief Financial Officer
Jacqueline L. Davidson.... 42 Vice President, Finance
Gregory C. Horn........... 54 Vice President and President, Penford Food Ingredients
Gregory R. Keeley......... 53 Vice President and President, Penford Products Co.
Wallace H. Kunerth........ 54 Vice President and Chief Science Officer
Robert G. Lowndes......... 55 Vice President and Managing Director, Penford Australia
Mr. Malkoski was named Chief Executive Officer in January 2002. He
served as President and Chief Executive Officer of Griffith Laboratories, North
America, a specialty foods ingredients business, from 1997 to 2001. Formerly, he
served as Vice President/Managing Director of the Asia Pacific and South Pacific
regions for Chiquita Brands International, a global marketer, producer and
distributor of fresh and processed foods. Mr. Malkoski began his career at the
Procter and Gamble Company, a marketer of consumer brands, spending twelve years
progressing through major product category management responsibilities.
Mr. Cook served as President and Chief Executive Officer from September
1998 to January 2002 and is serving as President until November 30, 2002. He was
Penford's Vice President, Finance and Chief Financial Officer from 1991 to
August 1998, and was the Corporate Treasurer prior to that time.
Mr. Cordier joined Penford in July 2002 as Chief Financial Officer. He
came to Penford from Sensient Technologies, a manufacturer of specialty products
for the food, beverage, pharmaceutical and technology industries. He served as
Treasurer from 1995 to 1997 and as Vice President and Treasurer from 1997 to
1999. He completed his term at Sensient as Vice President, Administration from
1999 to 2002. During his tenure at Sensient, he had responsibility for treasury,
investor relations and finance functions. In his different positions, he also
managed other aspects of operations such as engineering, information technology
and marketing. From 1990 to 1995, he was employed in various financial
management positions at International Flavors & Fragrances, a manufacturer of
flavors and fragrances for the food, beverage and cosmetic industries.
Ms. Davidson has been the Vice President, Finance since February 2001.
Prior to that, she served in the same role at The Cobalt Group, Inc., an online
marketer for the automotive industry, from 1996 to 2001. She was the Controller
of Oceantrawl Inc., a commercial fishing business, from 1990 to 1995, and was
Vice President, Finance and Chief Financial Officer in 1996. Ms. Davidson is a
CPA and began her professional career at Price Waterhouse.
Mr. Horn joined Penford as Vice President of Marketing in 1993. Since
1995, he has served as the President of our food ingredients business in North
America. Before Penford, he was Vice President and General Manager for Sara Lee
Corporation, a global manufacturer and marketer of brand-name products for
consumers.
Mr. Keeley joined Penford in July 2000 as President of our industrial
ingredients business. Before he joined Penford, he served as Strategic Business
Executive from 1999 to 2000 for Church & Dwight, a producer of sodium
bicarbonate. From 1996 to 1999, he served as Director of Marketing and Sales for
Gen Corp, a technology-based manufacturing company with businesses concentrating
in aerospace and defense, pharmaceutical fine chemicals and automotive. He
started his career with Dow Chemical Company, serving in various management
roles in sales, marketing and business development.
Dr. Kunerth has served as our Chief Science Officer since 2000. From
1997 to 2000, he served in food science research management positions at
Monsanto Company, a provider of agricultural products and integrated solutions
for farmers.. Before Monsanto, he was the Vice President of Technology at
Penford's food ingredients business from 1993 to 1997.
Mr. Lowndes joined Penford as Managing Director of our Australian/New
Zealand operations when we acquired Penford Australian in September 2000. He
served as General Manager of that business from 1995 to 2000 under the ownership
of Goodman Fielder Ltd.
9
PART II
ITEM 5: MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
Penford's common stock, $1.00 par value, trades on the Nasdaq Stock
Market under the symbol "PENX." On October 29, 2002, there were 766 shareholders
of record. The high and low closing prices of Penford's common stock during the
last two fiscal years and the first three quarters of fiscal 2003 are set forth
below. The quotations reflect inter-dealer prices, without retail mark-up,
markdown or commission and may not necessarily represent actual transactions.
FISCAL 2003 FISCAL 2002 FISCAL 2001
----------- ----------- -----------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
Quarter Ended November 30..... $15.55 $ 9.78 $12.29 $ 9.02 $17.94 $ 9.75
Quarter Ended February 28..... $15.17 $10.61 $14.00 $11.30 $14.75 $10.13
Quarter Ended May 31.......... $13.89 $11.15 $19.60 $13.95 $13.50 $ 8.45
Quarter Ended August 31*...... $12.52 $ 9.95 $18.56 $13.25 $13.45 $10.12
*Through July 9, 2003
We have paid dividends to our shareholders since 1992. During each
quarter of fiscal year 2002 and 2001, a $0.06 per share cash dividend was
declared. Our Board of Directors reviews our dividend policy on a periodic
basis.
The following table provides information regarding our equity
compensation plans at August 31, 2002. We have no equity compensation plans that
have not been approved by security holders.
NUMBER OF SECURITIES NUMBER OF SECURITIES REMAINING
TO BE ISSUED WEIGHTED-AVERAGE AVAILABLE FOR FUTURE ISSUANCE
UPON EXERCISE OF EXERCISE PRICE UNDER EQUITY COMPENSATION PLANS
OUTSTANDING OPTIONS, OF OUTSTANDING OPTIONS, (EXCLUDING SECURITIES REFLECTED
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS IN COLUMN (A))
------------- ------------------- ------------------- --------------
Equity compensation plans approved by
security holders:
1994 Stock Option Plan 1,073,532 $12.48 479,016
Stock Option Plan for Non-Employee
Directors 265,059 $ 9.39 195,722
Restricted Stock Plan - - 27,641
10
ITEM 6: SELECTED FINANCIAL DATA
YEAR ENDED AUGUST 31
--------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Operating Data:
Sales....................................... $ 231,450 $ 225,672 $ 175,953 $ 171,859 $ 180,493
Cost of sales............................... 189,067 185,369 132,676 131,824 134,853
Gross margin percentage..................... 18.3% 17.9% 24.6% 23.3% 25.3%
Income from continuing operations............. $ 3,816(1) $ (777)(2) $ 10,362 $ 6,205(3) $ 8,110(4)
Diluted earnings per share from continuing
operations................................ $ 0.49 $ (0.10) $ 1.33 $ 0.80 $ 1.08
Dividends per share......................... $ 0.24 $ 0.24 $ 0.22 $ 0.20 $ 0.20
Average common shares and equivalents....... 7,794,304 7,637,564 7,765,044 7,749,723 7,530,640
Balance Sheet Data:
Total assets................................ $ 239,205 $ 244,113 $ 175,623 $ 173,133 $ 183,208
Capital expenditures........................ 7,384 12,349 17,480 16,536 10,768
Total debt.................................. 96,411 112,627 50,681 56,378 73,896
Shareholders' equity........................ 68,964 65,712 67,864 59,698 53,995
- ----------
Notes: Data for 1998 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.
2001 data includes eleven months of Penford Australia's results of
operations from the September 29, 2000 date of acquisition.
(1) Includes pretax charges of approximately $1.4 million related to a
strategic restructuring of business operations and $0.5 million related to
the write off of Penford's 1997 investment in an early stage technology
company.
(2) Includes an extraordinary loss on early extinguishment of debt of
approximately $1.4 million related to the financing of the Penford
Australia Ltd. acquisition.
(3) Includes a pretax charge of approximately $1.6 million related to
restructure costs recorded in connection with an administrative workforce
reduction program.
(4) Includes a pretax charge of approximately $1.9 million related to
restructure costs recorded in connection with the spin-off of Penwest
Pharmaceuticals Co.
11
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements concerning Penford's
performance and financial results, including Penford's ability to commercialize
new specialty starches and value-added ingredients, maintenance or improvement
of market share while developing new products targeted to a broader spectrum of
the paper-making industry, maintenance of gross margins, increases resulting
from added production capability for food-grade corn starches and diversified
product offerings, focused marketing projects designed to increase sales of
higher value-added products and improve profitability, expected levels of
operating and research and development expenses, the level of anticipated
interest rates, the expected level of our effective tax rate, the expectation
that we will generate sufficient cash flow from operations to reduce our debt
and not need to increase borrowings in the normal course of operations for the
next fiscal year except for seasonal borrowings to purchase grain (and that we
will have sufficient borrowing capacity and availability on our credit lines to
funds those seasonal grain purchases), the ability to use cash generated from
operations to fund the payment of accrued strategic restructuring costs, the
anticipated level of capital investment, and the expectation that we will
continue to pay a quarterly dividend. There are a variety of factors that 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 conditions or
developments with respect to specific industries or customers affecting demand
for our 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 Penford operates. Accordingly, there can be no assurance that future
activities or results will be as anticipated.
Forward-looking statements are based on our estimates and opinions on the
date the statements are made. We assume no obligation to update any
forward-looking statements if circumstances or estimates or opinions should
change.
ACQUISITION OF PENFORD AUSTRALIA
On September 29, 2000, we acquired Penford Australia for $54.2 million in
cash, plus transaction costs of $1.7 million. Penford Australia is the sole
producer of corn starch products in Australia and New Zealand. Competition is
from imported products, except in wheat flour based starches where there is one
other producer in Australia. Penford has developed novel starch-based products,
as evidenced by patents obtained for high amylose maize starches for use as
dietary fiber and biodegradable packaging. . Penford Australia manufactures
products used to enhance the functionality of food products, generally through
providing the texture and viscosity required by the customer for products such
as sauces and gravies. Penford's starch products are also used in the mining and
paper industries. The products used in the mining industry are specifically used
in the flotation process for extracting minerals from finely ground hard rock
ores. Some starches assist in this process by selectively adhering to elements
of the ground rock to aid separation in air agitated flotation cells. Our
operations in Australia and New Zealand include three manufacturing facilities
for processing specialty corn starches and wheat products.
The acquisition provided us with opportunities to develop, manufacture and
market specialty carbohydrate-based ingredient systems for our food, paper and
textile customers. We immediately added a line of food-grade corn starch items
to our product portfolio. Until the acquisition, our food grade product line
consisted primarily of potato-based product formulations.
We also expanded our market access, as well as established 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 systems that provide convenient
and cost-effective solutions for customers made from renewable resources.
The acquisition was recorded using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to net tangible and
intangible assets acquired based on their estimated fair values. The balance of
the purchase price was recorded as goodwill. See Note B to the Consolidated
Financial Statements. Eleven months of Penford Australia's results of
operations, from the September 29, 2000 date of acquisition, are included in the
consolidated financial statements for the year ended August 31, 2001.
12
RESULTS OF OPERATIONS
While Penford is in the business of developing, manufacturing and
marketing functional ingredients and previously reported results of operations
as a single segment, we increasingly manage the business in three segments. The
first two, industrial ingredients and food ingredients are broad categories of
end-market users, primarily served by our U.S. operations. The third segment is
our geographically separate operations in Australia and New Zealand. Our
Australian and New Zealand operations are engaged primarily in the food
ingredients business, although the industrial market is an important and growing
category there. Therefore, we have expanded our reporting and analysis to
present operating results by these three segments, Industrial Ingredients --
North America, Food Ingredients -- North America and Australia/New Zealand.
Fiscal 2002 Compared to Fiscal 2001
Industrial Ingredients Business -- North America
YEAR ENDED AUGUST 31
--------------------
2002 2001
-------- --------
(DOLLARS IN THOUSANDS)
Sales ................... $126,053 $127,300
Cost of sales ........... $105,751 $109,756
Gross margin ............ 16.1% 13.8%
Income from operations .. $ 9,002 $ 5,558
Sales in our industrial business declined 1% in 2002, a result of lower
sales volumes trends from 2001 that continued into 2002. In the latter half of
2002, volumes began to improve as customer demand improved and sales volumes
increased slightly over the prior year. The outlook for the paper-making
industry, our primary market for our industrial products remains soft. However,
we plan to maintain or improve our market share with increased penetration of
existing products and by developing new products targeted to a broader spectrum
of the paper-making industry. For example, we have commercialized a new liquid
natural additive technology for packaging and paper market segments we have not
historically targeted.
Our gross margin improved this year to 16.1% from 13.8% primarily due to
the decline in natural gas prices. Natural gas is the primary energy source for
the plants that produce industrial products. Lower volumes were partly offset by
lower prices on other raw materials inputs. We expect to maintain our gross
margins with higher sales volumes in fiscal 2003 being offset by increases in
energy and chemicals costs.
Income from operations improved significantly over fiscal year 2001
primarily because of the improvement in gross margin. Operating and research and
development expenses were down 6% in fiscal 2002 due to staffing reductions made
at the end of 2001.
Food Ingredients Business -- North America
YEAR ENDED AUGUST 31
--------------------
2002 2001
------- -------
(DOLLARS IN THOUSANDS)
Sales ................... $43,533 $42,772
Cost of sales ........... $30,114 $29,541
Gross margin ............ 30.8% 30.9%
Income from operations .. $ 6,574 $ 6,580
Sales increased 2% over fiscal 2001. We experienced an increase in sales
to a new global food service customer, primarily for French fry coatings. The
contract, implemented part way through fiscal 2001, was in place for a full year
for 2002. However, sales to other French fry coatings customers declined,
largely offsetting the positive impact of the new contract. We expect French fry
coatings, over half of our business in 2002 to become a smaller relative part of
our business as we further commercialize technologies for new products. We also
added production capability for food-grade corn starches in North America, which
will diversify our product offerings throughout the region.
Our gross margin did not change significantly from 2001. Income from
operations was comparable to last year. The benefit of approximately $0.6
million realized from a decline in natural gas prices was offset by increases of
$0.2 million in chemical costs, $0.2 million in manufacturing labor costs and
$0.3 million in manufacturing overhead. As a result, income from operations was
comparable to the prior year.
13
Australia/New Zealand Operations
YEAR ENDED AUGUST 31
--------------------
2002 2001
------- -------
(DOLLARS IN THOUSANDS)
Sales ................... $62,311 $55,600
Cost of sales ........... $53,649 $46,073
Gross margin ............ 13.9% 17.1%
Income from operations .. $ 4,576 $ 4,347
Reported sales increased 12% in 2002. This is due primarily to the
inclusion of only eleven months of operations in 2001 versus a full year for
2002 because of the September 29, 2000 acquisition date. Proforma sales assuming
twelve months of 2001 were comparable to 2002. Volumes increased, offsetting the
impact on reported sales of an unfavorable product mix shift. Volumes decreased
in two of our most profitable products in 2002 while increasing in several lower
margin products. A program was initiated at Penford Australia in 2002 to focus
marketing projects on higher value-added products and to improve profitability.
Our margins deteriorated in 2002 because wheat prices increased due to
high export demand resulting from the weak Australian dollar. Additionally, corn
costs increased in New Zealand due to stronger demand for feed grains in the
dairy industry. The product mix shift also impacted margins.
Income from operations improved as lower operating and research and
development expenses totaling approximately $1 million offset the foregoing
factors. The reduction in expenses resulted from our adoption of SFAS 142
effective the beginning of fiscal 2002 which requires that goodwill no longer be
amortized. Goodwill amortization expense, included in operating expenses, was
$0.7 million in 2001. In addition, we reduced staff at the end of 2001, and the
cost of those staff reductions of $0.3 million were recognized in 2001.
Corporate Operating Expenses
Corporate operating expenses increased to $7.1 million from $5.9 million
in 2001. This is due primarily to the $1.4 million cost of a strategic
restructuring announced in January 2002, primarily for severance and lease
termination costs. In addition, increases in personnel and recruiting costs of
approximately $0.7 million incurred in connection with hiring new corporate
staff were offset by decreases of $0.8 million in other corporate operating
expenses. In 2001, we incurred $0.3 million in legal and tax consulting costs
which did not recur in 2002. Also in 2001, we recorded in operating expenses a
$0.5 million charge incurred in connection with terminated joint venture
discussions.
INTEREST, TAXES AND OTHER
In 2001, Penford invested in an early-stage technology company in the
business of developing data analytics software applications. Penford accounted
for its investment on the cost method. In 2002, with the continuing slowdown in
the technology business sector, Penford undertook an assessment of the fair
value of its investment. Penford considered a number of factors, including the
financial health and prospects of the investee, the prospects for receiving a
future return on Penford's investment, the adverse changes in the funding
environment for technology companies and the lack of marketability for the
investment. The assessment indicated that it was unlikely that Penford would
recover any of its then existing carrying amount and that an other than
temporary decline in the fair value of its investment had occurred. Penford
recorded an impairment charge of $0.5 million related to the complete write-off
of this investment. This charge is shown as an investment impairment charge in
the Consolidated Statements of Operations.
Interest expense was $7.1 million in 2002 compared to $10.2 million in
2001. This was due to lower market interest rates in the U.S. as well as lower
average debt balances than in 2001.
Our effective tax rate for 2002 was lower than the overall statutory rate
of 34% due to the benefits of our foreign sales corporation and research and
development tax credits. Our effective rate for 2001 was higher than our
statutory rates due to state taxes and nondeductible goodwill amortization. See
Note G to the Consolidated Financial Statements.
14
Fiscal 2001 Compared to Fiscal 2000
Industrial Ingredients Business -- North America
YEAR ENDED AUGUST 31
--------------------
2001 2000
-------- --------
(DOLLARS IN THOUSANDS)
Sales ................... $127,300 $142,889
Cost of sales ........... $109,756 $110,727
Gross margin ............ 13.8% 22.5%
Income from operations .. $ 5,558 $ 20,087
Sales declined 11% in 2001 primarily due to lower product shipments to our
customers in the paper industry, which was suffering from import competition and
decreased demand for their products in the general economic slowdown. We also
saw a decline in our average sales price resulting from a product mix shift and
pricing.
The primary factor in our gross margin decline was the increase in natural
gas prices in 2001. Lower production volumes, the negative product mix shift and
pricing concessions also contributed to the decline.
As a result of the foregoing, our income from operations decreased.
Operating expenses decreased by $0.4 million, including a $0.2 million charge
related to a staffing reduction in the fourth quarter of 2001.
Food Ingredients Business -- North America
YEAR ENDED AUGUST 31
--------------------
2001 2000
------- -------
(DOLLARS IN THOUSANDS)
Sales ................... $42,772 $33,063
Cost of sales ........... $29,541 $21,949
Gross margin ............ 30.9% 33.6%
Income from operations .. $ 6,580 $ 5,017
Sales increased 29% in 2001 primarily due to the addition of a new global
food service customer, as well as the success of several new products in various
food industry market segments.
Our gross margin declined primarily due to the increase in natural gas
prices, offset in part by lower manufacturing costs achieved on higher
production volumes.
Income from operations increased 31% over 2000 due to increased sales.
Operating expenses increased 9% to provide the cost of infrastructure needed to
support increased business activity.
Australia/New Zealand Operations
We acquired Penford Australia subsequent to fiscal 2000. The pro forma
impact of the acquisition is presented in Note B to the consolidated financials.
Corporate Operating Expenses,
Corporate operating expenses increased to $5.9 million from $4.4 million
in 2000. Operating expenses for 2001 included a $0.5 million charge for
terminated joint venture discussions. Operating expenses also increased for
corporate-wide employee benefit programs, insurance and professional fees.
Interest, Taxes and Other
Interest expense was $10.2 million in 2001, compared to $4.8 million in
the prior year. The increase was attributed to higher debt balances as a result
of the acquisition of Penford Australia. Our effective interest rate in fiscal
2001 was consistent with the prior year.
15
The effective tax rate in fiscal 2001 varied from statutory rates
primarily due to higher state taxes and the non-deductible nature of the
goodwill amortization related to the Penford Australia acquisition. See Note G
to the Consolidated Financial Statements.
During the first quarter of fiscal 2001, we paid our private placement
debt facilities early in connection with a comprehensive refinancing to fund the
acquisition of Penford Australia. The early repayment of the private placements
required prepayment fees, which resulted in a loss on early extinguishment of
debt of $1.4 million, which is presented as an extraordinary loss of $0.9
million in the Consolidated Statements of Operations, which is net of the
related tax benefit of $0.5 million.
LIQUIDITY AND CAPITAL RESOURCES
At August 31, 2002, Penford had working capital of $15.1 million and $50.4
million outstanding under its revolving credit facilities and inventory
financing credit agreement. We expect to generate sufficient cash flow from
operations to reduce our outstanding debt and do not expect to increase
borrowings in the normal course of operations during the year, except for
seasonal borrowings related to grain purchasing for our Australian operations,
generally in our third fiscal quarter. Discussion of unused capacity on our
revolving credit facilities follows below.
Cash flow from operations was $25.4 million, $13.9 million and $25.6
million in fiscal 2002, 2001 and 2000, respectively. The increase in operating
cash flows in 2002 over 2001 is due primarily to favorable changes in working
capital and improved profitability. In addition to normal operating expenses, we
will use cash generated from operations to fund the payment of $1.3 million of
accrued strategic restructuring costs.
Capital expenditures were $7.4 million, $12.3 million and $17.5 million in
fiscal 2002, 2001 and 2000, respectively. Capital expenditures in fiscal 2002
were primarily for improvements at the Company's facility in Cedar Rapids, Iowa,
including an investment in plant capability that allows us to manufacture
food-grade products from corn and improve asset utilization. Over the past two
years, due to the current operating environment and significant investments made
in the prior two years, we reduced capital expenditures from previous levels. We
expect that in the next fiscal year, our capital investments are not expected to
exceed 2001 levels. This will consist of efficiency improvements at our Cedar
Rapids facility, as well as at our other North American, Australian and New
Zealand operations. We continue to make efficiency and safety improvements as
required to maintain our operations in good working order.
On September 29, 2000, we acquired operations in Australia and New Zealand
for $55.9 million, which we financed through additional borrowings.
On November 26, 2002, our banks approved an amendment to our credit
agreements to modify the leverage ratio and to reduce scheduled term loan
payments in 2003. In connection with this modification, we paid a fee of
approximately $0.2 million. See Note D to the Consolidated Financial Statements.
We made term loan payments totaling $15.2 million during fiscal 2002. For
fiscal 2003, our banks have approved a revised loan amortization schedule, which
reduces our scheduled term loan payments to $12.1 million. We are required to
reduce our term loans by an additional $2.1 million in fiscal 2003 under
prepayment clauses of our credit agreement. We are also required to use proceeds
of $4.1 million from the National Starch transaction to repay our term loans.
Under the amended financial covenants of our credit agreements, we are
required over the coming fiscal quarters to improve our leverage ratio (the
ratio of our debt balance to the trailing four quarters of earnings before
interest, taxes, depreciation and amortization) as follows: 3.15 to 1 at
November 30, 2002; 3.00 to 1 at February 28, 2003; 2.75 to 1 at August 31, 2003;
2.50 to 1 at February 29, 2004; 2.25 to 1 at August 31, 2004; and 2.00 to 1 at
November 30, 2004 and thereafter. Although we have significantly improved
earnings and reduced our borrowings over the past year, we have limited ability
to borrow on available capacity under our existing credit lines until we improve
our leverage ratio. However, as mentioned previously, we do not expect to
increase our borrowings, other than seasonal borrowing related to grain
purchasing from our Australian operations in the third quarter of next year. We
anticipate that we will have sufficient borrowing capacity and availability on
our credit lines to fund those seasonal grain purchases.
Our financial covenants also restrict new indebtedness, require
maintenance of minimum tangible net worth and limit annual capital expenditures
to $15 million. In addition to the leverage ratio, we are also required to
maintain interest coverage and fixed charges coverage ratios. Fixed charges
include scheduled principal repayments, interest, rent, taxes, dividends and
capital expenditures. If earnings fall below projected levels, we could be
required to limit capital expenditures and/or dividends.
16
Penford Australia uses an inventory financing credit agreement to purchase
corn at harvest in Australia for production requirements for the following year.
In fiscal 2002, that purchasing activity increased to provide some of the input
requirements for our operations in New Zealand to ensure adequate supply and to
minimize exposure to the higher local prices in New Zealand due to increased
demand for corn by the dairy feed industry.
In fiscal 2001, our financial activities revolved primarily around
refinancing and additional borrowings for the acquisition of Penford Australia.
In fiscal 2002, we paid dividends of $1.8 million to our shareholders at a
quarterly rate of $0.06 per share. The Board of Directors reviews the dividend
policy on a periodic basis, and we have included the continuation of quarterly
dividends in our planning for fiscal 2003.
The Board of Directors has authorized a stock repurchase program for the
purchase of up to 500,000 shares of Penford's outstanding common stock.
Repurchases under the program to date have totaled 281,300 shares for $4.3
million in prior years. We did not purchase any of our common stock during
fiscal 2002 or 2001, and do not expect to do so in fiscal 2003.
EFFECTS OF INFLATION
Inflation has not had a material effect on Penford's revenue and income
from operations the past three years. Inflation is not expected to have a
material impact in fiscal 2003.
CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States. These accounting
principles require us to make estimates, judgments and assumptions to fairly
present results of operations and financial position. We believe that our
estimates, judgments and assumptions are reasonable based upon information
available to us at the time this report was prepared. To the extent there are
material differences between our estimates, judgments and assumptions and the
actual results, our financial statements will be affected.
In many cases, the accounting treatment of a particular transaction is
significantly dictated by generally accepted accounting principles and does not
require judgment or estimates. There are also areas in which management's
judgments in selecting among available alternatives would not produce a
materially different result. Our chief financial officer has reviewed our
accounting policies and related disclosures with our Audit committee. The notes
to our consolidated financial statements contain a summary of our accounting
policies. However, the accounting policies that we believe are the most
important to our financial statements and that require the most difficult,
subjective and complex judgments include the following:
- Evaluation of the allowance for doubtful accounts receivable
- Hedging activities
- Benefit plans
- Valuation of goodwill
A description of each of these follows:
Evaluation of the Allowance for Doubtful Accounts Receivable
We make judgments about our ability to collect outstanding receivables and
provide allowances for the portion of receivables that we may not be able to
collect. We record our estimate of accounts that we will not be able to collect
based upon a specific review of our larger accounts that make up approximately
64% of our accounts receivable. For those accounts not specifically reviewed, we
estimate uncollectible amounts based on the age of the receivable compared to
the terms offered. If our estimates do not reflect our future ability to collect
outstanding invoices, we may experience losses in excess of the reserves we have
established. At August 31, 2002 and 2001 our allowance for doubtful accounts
receivable was $345,000 and $301,000, respectively. The majority of our
allowance is related to our industrial ingredients business, and reflects the
difficult economics in the paper making industry.
17
Hedging Activities
We use derivatives, primarily futures contacts, to reduce our exposure to
price fluctuations of commodities used in our manufacturing processes in the
United States. We have elected to designate these activities as hedges. This
election allows us to defer gains and losses on those derivative instruments
until the underlying commodity is used in the production process.
The requirements for our designation of hedges are very complex, and
require judgments and analysis to qualify as hedges as defined by SFAS 133.
These judgments and analysis include an assessment that the derivative
instruments we use are effective hedges of the underlying risks. If we were to
fail to meet the requirements of SFAS 133, or if we do not designate these
derivative instruments as hedges, we would be required to mark these contracts
to market at each reporting date. We had deferred gains of $169,000 and $31,000
at August 31, 2002 and 2001, respectively, which is reflected in accumulated
other comprehensive income in both years.
Benefit Plans
Penford has stock option plans for its employees and directors. Because we
grant options to employees at the market price on date of grant, we follow the
policy of recording no compensation expense for those option grants. An
alternative financial reporting standard, SFAS 123, provides a methodology for
estimating the hypothetical compensation expense associated with stock option
grants, which expense is then amortized over the vesting period. As required by
SFAS 123, we have disclosed the pro forma impact of this alternative accounting
treatment in Note F to the consolidated financial statements.
Penford has defined benefit plans for its employees providing retirement
benefits and coverage for retiree health care. Qualified actuaries determine the
estimated cost of these plans annually. These actuarial estimates are based on
assumptions of the discount rate used to calculate the present value of future
payments, the expected investment return on plan assets, the estimate of future
increases in compensation rates and the estimate of increases in the cost of
medical care. We make judgments about these assumptions based on our historical
investment results and experience as well as available historical market data
and trends. However, if these assumptions are wrong, it could materially affect
the amounts reported in our financial statements. Disclosure about these
estimates and assumptions are included in Note H to the consolidated financial
statements. See "Defined Benefit Plans" in this Item 7.
Valuation of Goodwill
We are required to assess whether the value of goodwill reported on our
balance sheet has been impaired on an annual basis, or more often if conditions
exist that indicate that there might be an impairment. These assessments require
extensive and subjective judgments to assess the fair value of goodwill. While
we engage qualified valuation experts to assist in this process, their work is
based on our estimates of future operating results and allocation of goodwill to
our business units. If future operating results differ materially from our
estimates, the value of goodwill could be adversely impacted. See Note A to the
Consolidated Financial Statements.
18
CONTRACTUAL OBLIGATIONS
As more fully described in Notes D and E to the Consolidated Financial
Statements, the Company is a party to various debt and lease agreements at
August 31, 2002 that contractually commit the Company to pay certain amounts in
the future. The following table summarizes such contractual commitments:
2003 2004-2005 2006-2007 2008 & After Total
---- --------- --------- ------------ -----
Indebtedness ....... $ 18,779 $ 74,432 $ 3,200 $ -- $ 96,411
Operating leases ... 5,268 6,603 3,244 4,545 19,660
-------- -------- -------- -------- --------
$ 24,047 $ 81,035 $ 6,444 $ 4,545 $116,071
======== ======== ======== ======== ========
DEFINED BENEFIT PENSION PLANS
Penford maintains two defined benefit pension plans in the U.S.
The most significant assumptions used to determine pension expense and
pension obligations are the discount rate and the expected return on assets
assumption. The discount rate use by Penford in determining pension expense and
pension obligations is based on a review of high quality (Baa to Aaa) corporate
annualized bond yields (maturities of 20 or more years) and 30-year U.S.
Treasury rates.
The expected return on assets assumption used in determining pension
expense is based on Penford's evaluation of historical market rates of return
and asset class return expectations. Penford was also provided with projected
returns, which were forward-looking and not based on historical returns. The
projected returns considered returns from active management and fees.
Penford recorded pension expense (income) of $0.2 million, $(0.8) million
and $(0.5) million in 2002, 2001 and 2000, respectively. Penford expects pension
expense to be approximately $1.1 million in fiscal 2003. The Company made no
cash contributions to the pension plans during fiscal 2002, 2001 or 2000.
Minimum cash contributions to the plans of $0.3 million are required in fiscal
2003.
The expected return on assets assumption was reduced by 0.5% to 9.5% for
pension expense for the year ending August 31, 2003. A 0.5% decrease in the
expected return on assets assumption would increase pension expense by
approximately $0.1 million based on asset levels over the past several years.
Penford is evaluating the expected return on assets assumption that will be used
to determine pension expense for future years.
The discount rate used to determine pension expense reflects the decline
in bond yields over the past several years. Lowering the discount rate by 0.25%
would increase pension expense by approximately $0.1 million. Penford bases its
pension expense on the market value of assets. The difference between actual
investment earnings and those assumed is recognized in pension expense through
amortization over the expected future working lifetime of active employees. As
of August 31, 2002, unrecognized losses from all sources (assets and
liabilities) were $4.5 million. The estimated increase in future expense as a
result of these losses is approximately $0.2 million.
19
NEW ACCOUNTING PRONOUNCEMENTS
Effective September 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142
established new standards related to how acquired goodwill and other intangible
assets are to be recorded upon their acquisition as well as how they are to be
accounted for after they have been initially recognized in the financial
statements. Effective with the adoption of this standard, Penford is no longer
amortizing goodwill. We have completed the required transitional impairment test
at September 1, 2001, as well as the annual update as of June 1, 2002 and
determined there was no impairment to the recorded value of goodwill. In order
to identify potential impairments, Penford compared the fair value of each of
its reporting units with its carrying amount, including goodwill. Penford then
compared the implied fair value of its reporting units' goodwill with the
carrying amount of that goodwill. The implied fair value of the reporting units
was determined using primarily discounted cash flows. This testing was performed
on our Food ingredients -- North America and the Australia/New Zealand
operations reporting units, which are the same as two of our business segments.
Since there was no indication of impairment, Penford was not required to
complete the second step of the process which would measure the amount of any
impairment. See Note A to the consolidated financial statements.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," which required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in APB Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
("APB No. 30") will now be used to classify those gains and losses. We adopted
SFAS No. 145 on September 1, 2002 and we will reclassify extraordinary items
from all prior periods into income from continuing operations upon adoption. It
is unlikely that we will classify future gains or losses from extinguishment of
debt as extraordinary in nature.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires that a liability
for cost associated with exit or disposal activities be recognized and measured
initially at fair value only when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. We do not expect the adoption of SFAS 146 to have a material impact on our
operating results or financial position.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVE INSTRUMENTS AND POSITIONS
Penford is exposed to market risks that are inherent in the financial
instruments that we use in the normal course of business. We may use various
hedge instruments to manage or reduce market risk, but we do not use derivative
financial instrument transactions for speculative purposes. Our primary market
risks are discussed below.
Long-term debt
All of Penford's long-term debt has variable interest rates, which are set
for periods of one to six months. We have managed interest rates using interest
rate swaps in the past, but there are no such instruments outstanding as of
August 31, 2002. The carrying value of our variable-rate long-term debt as of
August 31, 2002 of $96.4 million was approximately equal to the fair value.
Our 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, 2002 and
2001, is approximately $1.2 million and $2.1 million, respectively.
Foreign Currency Exchange Rates
We have U.S.-Australian and Australian-New Zealand dollar currency
exchange rate risks due to revenues and costs denominated in Australian and New
Zealand dollars with our foreign operation, Penford Australia. Currently, cash
generated by Penford Australia's operations is used for capital investment in
Australia and payment of debt denominated in Australian dollars. At August 31,
2002, approximately 33.9% of our total debt was denominated in Australian
dollars.
20
We have not maintained any derivative instruments to mitigate our
U.S.-Australian dollar currency exchange translation exposure. This position is
reviewed periodically, and based on our review, may result in the incorporation
of derivative instruments in our hedging strategy. Our currency exchange rate
risk between our Australian and New Zealand operations is not significant. The
impact of a 10% change in the foreign currency exchange rates compared with the
U.S. dollar would not have a significant impact on reported net income for the
year ended August 31, 2002.
From time to time, we enter into foreign exchange forward contracts to
manage our exposure to receivables denominated in currencies different from the
functional currencies of the selling entities. As of August 31, 2002, we did not
have any foreign exchange forward contracts outstanding. At that date, we had
trade receivables of US$0.5 million at Penford Australia.
Commodities
The availability and price of corn, Penford'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. To
reduce the price risk caused by market fluctuations, we generally follow a
policy of using exchange-traded futures and options contracts to hedge our
exposure to corn price fluctuations in North America. These futures and options
contracts are designated as hedges. The changes in market value of these
contracts have historically been, and are expected to continue to be, highly
effective in offsetting the price changes in corn.
Penford's net corn position in the U.S. consists primarily of inventories,
purchase contracts and exchange traded futures and options contracts that hedge
Penford's exposure to commodity price fluctuations. The fair value of the
position is based on quoted market prices. We have estimated our market risk as
the potential loss in fair value resulting from a hypothetical 10% adverse
change in prices. As of August 31, 2002 and 2001, the fair value of our net corn
position was approximately $0.2 million and $1.9 million, respectively. The
market risk associated with a 10% adverse change in corn prices at August 31,
2002 and 2001, is estimated at $21,000 and $188,000, respectively.
Over the past two years, prices for natural gas have increased over
historic levels. Prices for natural gas fluctuate due to anticipated changes in
supply and demand and movement of prices of related or alternative fuels. To
reduce the price risk caused by market fluctuations, we generally enter into
short-term purchase contracts or use exchange-traded futures and options
contracts to hedge our exposure to natural gas price fluctuations. These futures
and options contracts are designated as hedges. The changes in market value of
these contracts have historically been, and are expected to continue to be,
highly effective in offsetting the price changes in natural gas.
Penford's exchange traded futures and options contracts hedge production
requirements. The fair value of these contracts is based on quoted market
prices. We have estimated our market risk as the potential loss in fair value
resulting from a hypothetical 10% adverse change in prices. As of August 31,
2002, the fair value of our natural gas contracts was a loss of approximately
$0.5 million. The market risk associated with a 10% adverse change in natural
gas prices at August 31, 2002 is estimated at $45,000. We did not have any
natural gas derivatives positions at August 31, 2001.
21
ITEM 8: PENFORD CORPORATION CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
AUGUST 31
---------
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)
ASSETS
CURRENT ASSETS:
Cash ....................................................... $ 765 $ 199
Trade accounts receivable, net ............................. 29,744 27,304
Inventories ................................................ 27,956 23,564
Prepaid expenses and other ................................. 5,171 6,505
--------- ---------
Total current assets ..................................... 63,636 57,572
Property, plant and equipment:
Land ..................................................... 13,153 12,977
Plant and equipment ...................................... 267,837 261,687
Construction in progress ................................. 5,415 3,812
Less accumulated depreciation ............................ (154,363) (137,918)
--------- ---------
Net property, plant and equipment ...................... 132,042 140,558
Deferred income taxes ...................................... 10,375 13,214
Restricted cash value of life insurance .................... 11,705 11,866
Other assets ............................................... 3,592 4,614
Other intangible assets, net ............................... 2,770 1,224
--------- ---------
Goodwill, net .............................................. 15,850 15,264
--------- ---------
$ 239,970 $ 244,312
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Cash overdraft ............................................. $ 1,754 $ 1,975
Accounts payable ........................................... 17,161 13,477
Accrued liabilities ........................................ 10,872 8,541
Current portion of long-term debt .......................... 18,779 17,658
--------- ---------
Total current liabilities ................................ 48,566 41,651
Long-term debt ............................................. 77,632 94,969
Other postretirement benefits .............................. 11,240 11,129
Deferred income taxes ...................................... 20,474 22,947
Other liabilities .......................................... 13,094 7,904
Commitments and contingencies .............................. -- --
Shareholders' equity:
Preferred stock, par value $1.00 per share, authorized
1,000,000 shares, none issued ............................ -- --
Common stock, par value $1.00 per share, authorized
29,000,000 shares, issued 9,666,149 shares in 2002 and
9,511,178 in 2001, including treasury shares ............. 9,666 9,511
Additional paid-in capital ................................. 26,055 24,340
Retained earnings .......................................... 67,513 65,526
Treasury stock, at cost, 1,981,016 shares in 2002 and 2001 . (32,757) (32,757)
Accumulated other comprehensive income (loss) .............. (1,513) (908)
--------- ---------
Total shareholders' equity ............................... 68,964 65,712
--------- ---------
$ 239,970 $ 244,312
========= =========
The accompanying notes are an integral part of these statements.
22
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED AUGUST 31
--------------------
2002 2001 2000
----------- ----------- -----------
(DOLLARS IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
Sales ....................................................... $ 231,450 $ 225,672 $ 175,953
Cost of sales ............................................... 189,067 185,369 132,676
----------- ----------- -----------
Gross margin ................................................ 42,383 40,303 43,277
Operating expenses .......................................... 21,940 22,911 17,202
Research and development expenses ........................... 5,986 6,325 5,359
Restructure costs ........................................... 1,383 486 --
----------- ----------- -----------
Income from operations ...................................... 13,074 10,581 20,716
Investment impairment charge ................................ (486) -- --
Investment income ........................................... 84 134 39
Interest expense ............................................ (7,108) (10,185) (4,813)
----------- ----------- -----------
Income before income taxes and extraordinary item ........... 5,564 530 15,942
Income taxes ................................................ 1,748 419 5,580
----------- ----------- -----------
Income before extraordinary item ............................ 3,816 111 10,362
Extraordinary loss on early extinguishment of debt, net of
applicable income taxes of $478 in 2001 ................... -- 888 --
----------- ----------- -----------
Net income (loss) ........................................... $ 3,816 $ (777) $ 10,362
=========== =========== ===========
Weighted average common shares and equivalents
outstanding, assuming dilution ............................ 7,794,304 7,637,564 7,765,044
=========== =========== ===========
Earnings per common share:
Income before extraordinary item
Basic .................................................... $ 0.50 $ 0.02 $ 1.40
=========== =========== ===========
Diluted .................................................. $ 0.49 $ 0.02 $ 1.33
=========== =========== ===========
Net income (loss)
Basic .................................................... $ 0.50 $ (0.10) $ 1.40
=========== =========== ===========
Diluted .................................................. $ 0.49 $ (0.10) $ 1.33
=========== =========== ===========
Dividends declared per common share ......................... $ 0.24 $ 0.24 $ 0.22
=========== =========== ===========
The accompanying notes are an integral part of these statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED AUGUST 31
--------------------
2002 2001 2000
--------- --------- ---------
(DOLLARS IN THOUSANDS)
Operating activities:
Net income (loss) ............................................... $ 3,816 $ (777) $ 10,362
Adjustments to reconcile net income (loss) to net cash from
operations:
Loss on early extinguishment of debt .......................... -- 888 --
Loss on write-off of long-term investment ..................... 486 -- --
Depreciation and amortization ................................. 17,793 18,294 13,786
Deferred income taxes ......................................... 1,123 (1,020) 1,662
Stock compensation expense related to non-employee director
stock options ................................................ 263 144 301
Change in operating assets and liabilities excluding impact of
Penford Australia Limited acquisition:
Trade receivables ............................................. (2,068) (3) 888
Inventories ................................................... (3,835) (848) (98)
Prepaid expenses .............................................. 1,695 197 (1,300)
--------- --------- ---------
Accounts payable and accrued liabilities ...................... 4,353 (3,071) (59)
--------- --------- ---------
Taxes payable ................................................. 1,329 (459) --
--------- --------- ---------
Other ......................................................... 421 518 98
--------- --------- ---------
Net cash flow from operating activities ......................... 25,376 13,863 25,640
Investing activities:
Acquisitions of property, plant and equipment, net ............ (7,384) (12,349) (17,480)
Acquisition of Penford Australia Limited ...................... -- (55,953) --
Other ......................................................... 547 35 108
--------- --------- ---------
Net cash used by investing activities ........................... (6,837) (68,267) (17,372)
Financing activities:
Proceeds from revolving line of credit ........................ 13,369 73,865 58,807
Payments on revolving line of credit .......................... (15,574) (70,031) (59,227)
Proceeds from long-term debt .................................. -- 108,510 --
Payments on long-term debt .................................... (15,191) (55,923) (5,277)
Payment of fees for early extinguishment of debt .............. -- (1,366) --
Exercise of stock options ..................................... 1,251 1,077 1,086
Purchase of treasury stock .................................... -- -- (2,430)
Payment of loan fees .......................................... -- (1,603) --
--------- --------- ---------
Increase (decrease) in cash overdraft ......................... (221) 1,662 313
--------- --------- ---------
Payment of dividends .......................................... (1,819) (1,790) (1,555)
--------- --------- ---------
Net cash from (used by) financing activities .................... (18,185) 54,401 (8,283)
--------- --------- ---------
Effect of exchange rate changes on cash and cash equivalents .... 212 202 --
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents ............ 566 199 (15)
Cash and cash equivalents, beginning of year .................... 199 -- 15
--------- --------- ---------
Cash and cash equivalents, end of year .......................... $ 765 $ 199 $ --
========= ========= =========
Supplemental disclosure of cash flow information
Cash paid (refunded) during the year for:
Interest ...................................................... $ 7,306 $ 10,496 $ 5,091
Income taxes, net ............................................. $ (1,222) $ 1,641 $ 3,456
The accompanying notes are an integral part of these statements.
24
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
NOTE RECEIVABLE ACCUMULATED
FROM OTHER TOTAL
ADDITIONAL SAVINGS & COMPREHENSIVE SHARE-
COMMON PAID-IN RETAINED TREASURY STOCK INCOME HOLDERS'
STOCK CAPITAL EARNINGS STOCK OWNERSHIP PLAN (LOSS) EQUITY
----- ------- -------- ----- -------------- ------ ------
(DOLLARS IN THOUSANDS)
Balances, September 1, 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
Net loss...................... (777) (777)
Change in unrealized gains on
derivative instruments that
qualify as cash flow hedges. 31 31
Foreign currency translation
adjustments................. (939) (939)
---------
Comprehensive loss............ (1,685)
Exercise of stock options..... 119 958 1,077
Tax benefit of stock option
exercises................... 109 109
Stock compensation expense
related to non-employee
director stock options...... 144 144
Dividends declared............ (1,797) (1,797)
------- --------- --------- ---------- ----- --------- ---------
Balances, August 31, 2001..... 9,511 24,340 65,526 (32,757) -- (908) 65,712
Net income.................... 3,816 3,816
Additional minimum pension
liability................... (1,996) (1,996)
Change in unrealized gains on
derivative instruments that
qualify as cash flow hedges. 138 138
Foreign currency translation
adjustments................. 1,253 1,253
---------
Comprehensive income.......... 3,211
Exercise of stock options..... 155 1,096 1,251
Tax benefit of stock option
exercises................... 356 356
Stock compensation expense
related to non-employee
director stock options and
option accelerations........ 263 263
Dividends declared............ (1,829) (1,829)
------- --------- --------- ---------- ----- --------- ---------
Balances, August 31, 2002..... $ 9,666 $ 26,055 $ 67,513 $ (32,757) $ -- $ (1,513) $ 68,964
======= ========= ========= ========== ===== ========= =========
The accompanying notes are an integral part of these statements.
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
Penford is in the business of developing, manufacturing and marketing
specialty natural-based ingredient systems for various applications, including
papermaking and food products. The Company operates manufacturing facilities in
the United States, Australia, and New Zealand. Penford's products provide
binding and film-forming characteristics that improve customer's products
through convenient and cost-effective solutions made from renewable sources.
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
to develop applications to address customer needs. In addition, the Company has
specialty processing capabilities for a variety of modified starches, all of
which have similar production methods.
While Penford is in the business of developing, manufacturing and
marketing functional ingredients and previously reported results of operations
as a single segment, we increasingly manage the business in three segments. The
first two, industrial ingredients and food ingredients are broad categories of
end-market users, primarily served by our U.S. operations. The third segment is
our geographically separate operations in Australia and New Zealand. Our
Australian and New Zealand operations are engaged primarily in the food
ingredients business, although the industrial market is an important and growing
category there. Therefore, we have expanded our reporting and analysis to
present operating results by these three segments.
BASIS OF PRESENTATION
The consolidated financial statements include Penford and its wholly owned
subsidiaries. Intercompany balances and transactions have been eliminated. The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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.
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
are reported in the balance sheets at cost, which approximates market value.
CONCENTRATION OF CREDIT RISK, FINANCIAL INSTRUMENTS, SIGNIFICANT CUSTOMER AND
EXPORT SALES
Approximately half of the Company's sales in fiscal 2002 were made to
customers who operate in the North American paper industry. This industry has
suffered an economic downturn, which has resulted in the closure of a number of
smaller mills. To date, the Company has not experienced any significant credit
losses as a result of these economic conditions.
The Company performs ongoing credit evaluations of its customers and
generally does not require collateral. The Company maintains an allowance for
doubtful accounts that management believes is sufficient to cover potential
credit losses. The allowance was $345,000 and $301,000 at August 31, 2002 and
2001, respectively. The company wrote off receivables of approximately $184,000,
$368,000 and $93,000 for the years ended August 31, 2002, 2001 and 2000.
Additional allowances were recorded of approximately $228,000, $356,000 and
$158,000 for the years ended August 31, 2002, 2001 and 2000. In 2001, there were
write-offs of receivables of approximately $287,000 due to bankruptcies in our
customer base in our industrial ingredients and food ingredients businesses. As
a result of the write-offs in 2001, additional allowances of approximately
$288,000 were provided.
The carrying value of financial instruments including cash, cash
equivalents, receivables, payables, and variable-rate long-term debt
approximates market value at August 31, 2002.
26
Sales to a customer, Meadwestvaco, comprised approximately 9%, 10% and 15%
of consolidated sales in fiscal 2002, 2001 and 2000, respectively. Export sales
accounted for approximately 16%, 18% and 13% of consolidated sales in fiscal
2002, 2001 and 2000, respectively.
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. Depreciation of
$17,116,000, $17,002,000 and $13,704,000 was expensed in 2002, 2001 and 2000,
respectively. For income tax purposes, the Company generally uses accelerated
depreciation methods.
Interest is capitalized on major construction projects while in progress.
No interest was capitalized in 2002, and $120,000 and $329,000 was capitalized
in 2001 and 2000, respectively.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of acquisition costs over the fair value of
the net assets of Penford Australia, which was acquired on September 29, 2000.
The Company evaluates annually, or more frequently if certain indicators are
present, the carrying value of its goodwill under provisions of SFAS No. 142,
adopted September 1, 2001.
Effective with the adoption of this standard, Penford is no longer
amortizing goodwill. The Company completed a transitional impairment test at
September 1, 2001 as well as the annual update as of June 1, 2002 and determined
there was no impairment to the recorded value of goodwill. In order to identify
potential impairments, Penford compared the fair value of each of its reporting
units with its carrying amount, including goodwill. Penford then compared the
implied fair value of its reporting units' goodwill with the carrying amount of
that goodwill. The implied fair value of the reporting units was determined
using primarily discounted cash flows. This testing was performed on our Food
ingredients -- North America and the Australia/New Zealand operations reporting
units, which are the same as two of our business segments. Since there was no
indication of impairment, Penford was not required to complete the second step
of the process which would measure the amount of any impairment. On a
prospective basis, the Company is required to continue to test its goodwill for
impairment on an annual basis, or more frequently if certain indicators arise.
The Company's goodwill of $15.9 million and $15.3 million at August 31,
2002 and 2001 respectively, represents the excess of acquisition costs over the
fair value of the net assets of Penford Australia. The increase in the carrying
value of goodwill since August 31, 2001 reflects the impact of exchange rate
fluctuations between the Australian and U.S. dollar on the translation of this
asset.
The following table provides a reconciliation of previously reported
income (loss) before extraordinary item and earnings (loss) per share before
extraordinary item to adjusted amounts assuming that SFAS No. 142 had been
applied as of September 1, 2000:
YEAR END AUGUST 31
---------------
2001
---------------
(DOLLARS IN
THOUSANDS EXCEPT
PER SHARE DATA)
Reported income (loss) before extraordinary item....... $ 111
Add: Goodwill amortization............................. 463
-------
Adjusted income (loss) before extraordinary item....... $ 574
=======
Earnings (loss) per common share, diluted:
Reported income (loss) before extraordinary item..... $ 0.02
Goodwill amortization................................ 0.06
-------
Adjusted income (loss) before extraordinary item..... $ 0.08
=======
The impact of the non-amortization of goodwill on net income (loss) and
earnings (loss) per share is the same as in the above table.
Our intangible assets consist of patents which are being amortized over
the weighted average remaining amortization period of 11 years as of August 31,
2003 and an intangible pension asset. There is no residual value associated with
patents. The carrying amount and accumulated amortization of our intangible
assets are as follows:
27
AUGUST 31, 2002 August 31, 2001
--------------- ---------------
CARRYING ACCUMULATED Carrying Accumulated
AMOUNT AMORTIZATION Amount Amortization
------ ------------ ------ ------------
(In thousands)
Intangible assets:
Patents ...................... $ 2,153 $ 806 $ 1,902 $ 678
Intangible pension asset(1) .. 1,423 -- -- --
--------- --------- --------- ---------
$ 3,576 $ 806 $ 1,902 $ 678
- -------------
(1) Not covered by the scope of SFAS No. 142.
Amortization expense related to intangible assets was $0.1 million in each
of 2002, 2001 and 2000. The estimated aggregate annual amortization expense for
patents is $0.1 million for each of the next five fiscal years, 2003-2007.
INCOME TAXES
The provision for income taxes includes federal, state, and foreign 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
Revenue from sales of products and shipping and handling revenue are
recognized at the time goods are shipped, and title transfers to the customer.
RESEARCH AND DEVELOPMENT
Research and development costs are expensed as incurred, except for costs
of patents, which are capitalized and amortized over the life of the patents.
Patent costs of $236,000, $123,000, and $51,000 were capitalized in 2002, 2001
and 2000, respectively.
EMPLOYEES
At August 31, 2002, Penford had 670 total employees. In North America we
had 365 employees, of which approximately 45% are members of a trade union. An
extension of our collective bargaining agreement covering our Cedar Rapids-based
manufacturing workforce expires in August 2003. Penford Australia had 305
employees, of which 64% are members of trade unions in Australia and New
Zealand. These agreements generally have two year terms and were renegotiated in
2002 and now expire in fiscal 2004.
FOREIGN CURRENCY TRANSLATION
The financial statements of Penford Australia have been translated from
New Zealand and Australian dollars to U.S. dollars in accordance with FASB
Statement No. 52, "Foreign Currency Translation." All balance sheet accounts
have been translated using the exchange rate in effect at the balance sheet
date. Income statement amounts have been translated using the average exchange
rate for the year. The translation gain resulting from the change in exchange
rate from the September 29, 2000 date of acquisition to August 31, 2002 is
reported as a component of other comprehensive income.
RECENT ACCOUNTING DEVELOPMENTS
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statement No.
4, 44, and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
Among other things, this statement rescinds FASB Statement No. 4, "Reporting
Gains and Losses from Extinguishment of Debt," which required all gains and
losses from extinguishments of debt to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria in APB Opinion No. 30, "Reporting the Results of Operations
- -- Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions,"
("APB No. 30") will now be used to classify those gains and losses. We adopted
SFAS No. 145
28
on September 1, 2002 and we will reclassify extraordinary items from all prior
periods into income from continuing operations upon adoption. It is unlikely
that we will classify future gains or losses from extinguishment of debt as
extraordinary in nature.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 requires that a liability
for cost associated with exit or disposal activities be recognized and measured
initially at fair value only when the liability is incurred. SFAS 146 is
effective for exit or disposal activities that are initiated after December 31,
2002. We do not expect the adoption of SFAS 146 to have a material impact on our
operating results or financial position.
NOTE B -- ACQUISITION OF PENFORD AUSTRALIA
On September 29, 2000, Penford acquired Penford Australia for $54.2
million in cash, plus transaction costs of approximately $1.7 million. Penford
Australia is the sole producer of corn starch products in Australia and New
Zealand and has developed novel-starch-based products, as evidenced by patents
obtained for high amylose maize starches for use as dietary fiber and in
biodegradable packaging. . Penford Australia manufactures products used to
enhance the functionality of food products, generally through providing the
texture and viscosity required by the customer for products such as sauces and
gravies. Penford's starch products are also used in the mining and paper
industries, specifically in the flotation process for extracting minerals from
finely ground hard rock ores. Its operations include three manufacturing
facilities, two in Australia and one in New Zealand, for processing specialty
corn starches and wheat products.
The acquisition was recorded using the purchase method of accounting.
Accordingly, a portion of the purchase price was allocated to net tangible and
intangible assets acquired based on their estimated fair values. The balance of
the purchase price was recorded as goodwill. Penford accounted for the purchase
as follows:
Consideration given related to the purchase:
Cash ...................................... $ 54,195
Direct costs of acquisition ............... 1,691
--------
$ 55,886
--------
Fair market value of assets acquired:
Current assets ............................ $ 23,113
Property, plant and equipment ............. 30,498
Other assets .............................. 2,340
Current liabilities ....................... (11,336)
Debt ...................................... (1,659)
Other long-term liabilities ............... (2,584)
--------
$ 40,372
--------
Goodwill $ 15,514
--------
Eleven months of Penford Australia's results of operations, from the
September 29, 2000 date of acquisition, are included in the consolidated
financial statements for the year ended August 31, 2001.
29
The following unaudited pro forma financial information presents the
combined results of operations of the Company and Penford Australia, as if the
acquisition had occurred on September 1, 2000 and 1999. The unaudited pro forma
financial information does not necessarily reflect the results of operations
that would have occurred had the Company and Penford Australia constituted a
single entity during such periods.
YEAR ENDED AUGUST 31
--------------------
2001 2000
----------- -----------
(DOLLARS IN THOUSANDS
EXCEPT PER SHARE DATA)
Revenue ............................................... $ 232,601 $ 242,218
Income before extraordinary item ...................... 188 12,073
Net income (loss) ..................................... (700) 12,073
Earnings (loss) per common share:
Income before extraordinary item .................... $ 0.03 $ 1.63
=========== ===========
Net income (loss) ................................... $ (0.09) $ 1.63
=========== ===========
Earnings (loss) per common share, assuming dilution:
Income before extraordinary item .................... $ 0.02 $ 1.55
=========== ===========
Net income (loss) ................................... $ (0.09) $ 1.55
=========== ===========
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. Components of inventory are as follows:
AUGUST 31
---------
2002 2001
---- ----
(DOLLARS IN THOUSANDS)
Raw materials and other .. $14,250 $ 9,164
Work in progress ......... 597 610
Finished goods ........... 13,109 13,790
------- -------
Total inventories ... $27,956 $23,564
======= =======
To reduce the price risk caused by market fluctuations for the corn
purchased for its North American operations, the Company generally follows a
policy of using exchange-traded futures contracts to hedge its exposure to
commodity price fluctuations. The instruments used are principally readily
marketable exchange-traded futures contracts that are designated as hedges. The
changes in market value of such contracts have historically been, and are
expected to continue to be, highly effective in offsetting the price changes of
the hedged commodity. As of August 31, 2002, the Company had designated certain
derivative instruments as fair value hedges of certain of the Company's firmly
committed fixed-price commodity purchase contracts and had designated certain
derivative instruments as cash flow hedges of specific volumes of commodities
that will be purchased and processed in a future month. For derivative
instruments designated as fair value hedges, the gain or loss on the derivative
instruments as well as the offsetting loss or gain on the hedged firm
commitments are recognized in current earnings. For derivative instruments
designated as cash flow hedges, the effective portion of the gain or loss on the
derivative instruments is reported as a component of other comprehensive income,
net of applicable income taxes, and recognized in earnings in the period when
the finished goods produced from the hedged item are sold. The Company's cash
flow hedges at August 31, 2002 will be recognized in earnings over the next
twelve months. The amount of ineffectiveness related to the Company's hedging
activities was not material.
30
NOTE D -- DEBT
AUGUST 31
---------
2002 2001
---- ----
(DOLLARS IN THOUSANDS)
Secured credit agreements -- revolving loans, 4.94% weighted
average interest rate at August 31, 2002 ........................ $ 43,735 $ 47,650
Secured credit agreements -- term loans, 5.31% weighted average
interest rate at August 31, 2002 ................................ 46,046 60,492
Inventory financing credit agreement, 6.23% interest rate at
August 31, 2002 ................................................. 6,630 3,745
Lines of credit ................................................... -- 740
-------- --------
96,411 112,627
Less current portion .............................................. 18,779 17,658
-------- --------
Long-term debt .................................................... $ 77,632 $ 94,969
======== ========
Maturities of long-term debt for the fiscal years beginning with the year
ending August 31, 2003 are as follows (dollars in thousands):
2003...................................... $ 18,779
2004...................................... 59,084
2005...................................... 15,348
2006...................................... 3,200
----------
$ 96,411
==========
On November 15, 2000, a $130 million credit facility was completed to
finance the acquisition of Penford Australia and to replace existing credit
facilities. The combined credit facilities in the U.S. and Australia consist of
$65 million in term loans and $65 million of revolving lines of credit. These
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 either LIBOR in the U.S. and BBSY in Australia or
prime rate, depending on the selection of borrowing options. All of Penford's
assets secure the credit facility, and the credit facility agreements include,
among other terms, financial covenants with limitations on indebtedness, minimum
net worth and capital expenditures as well as maintenance of leverage, interest
and fixed charge coverage ratios. We were in compliance with all debt covenants
at August 31, 2002. On November 26, 2002, the Company's banks approved an
amendment to the credit agreements to modify the leverage ratio and to reduce
scheduled term loan payments in 2003 to reflect the current operating
environment and to ensure continued availability of credit. We are required to
reduce our leverage ratio (the ratio of our debt balance to the trailing four
quarters of earnings before interest, taxes, depreciation and amortization) as
follows: 3.15 to 1 at November 30, 2002; 3.00 to 1 at February 28, 2003; 2.75 to
1 at August 31, 2003; 2.50 to 1 at February 28, 2004; 2.25 to 1 at August 31,
2004; 2.00 to 1 at November 30, 2004 and thereafter. We are required to reduce
our term loans by an additional $2.1 million in fiscal 2003 under prepayment
clauses of our credit agreement. Maturities of long-term debt shown above
reflect the amended repayment schedule. The Company expects to continue to be in
compliance with the amended covenants.
Of the facilities replaced by the acquisition financing in fiscal 2001,
$18.6 million was principal repaid to holders of private placement debt. Terms
of the private placements also required a prepayment fee of $1.4 million, which
has been presented as an extraordinary loss of $0.9 million, net of the related
tax benefit of $0.5 million.
31
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 $5,393,000, $5,518,000 and $4,855,000 in
2002, 2001 and 2000, respectively. Future minimum lease payments for fiscal
years beginning with the fiscal year ending August 31, 2003 for noncancelable
operating leases having initial lease terms of more than one year are as follows
(dollars in thousands):
2003................................... $ 5,268
2004................................... 4,110
2005................................... 2,493
2006................................... 1,769
2007................................... 1,475
Thereafter............................. 4,545
----------
$ 19,660
==========
NOTE F -- STOCK-BASED COMPENSATION PLANS
As of August 31, 2002, the Company had two stock option plans for which
2,467,599 shares of common stock were authorized for grants of options: the 1994
Stock Option Plan (the "1994 Plan") and the Stock Option Plan for Non-Employee
Directors (the "Directors' Plan").
The 1994 Plan 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.
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 grants, 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. In 2002, 2001
and 2000, we expensed approximately, $92,000, $98,000 and $69,000, respectively,
in non-cash compensation related to our directors' deferred compensation and
restricted stock plans.
Changes in stock options for the three years ended August 31 follow:
WEIGHTED AVERAGE
SHARES OPTION PRICE RANGE EXERCISE PRICE
--------- ------------------ ----------------
Balance, September 1, 1999............................. 1,134,031 $ 5.77 -- 14.88 $ 9.16
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
Granted................................................ 200,042 $ 7.59 -- 13.73 $ 12.86
Exercised.............................................. (119,276) 8.02 -- 10.88 9.29
Cancelled.............................................. (110,549) 8.02 -- 13.73 10.63
---------
Balance, August 31, 2001............................... 1,247,485 5.77 -- 19.31 11.22
Granted................................................ 302,282 $ 7.73 -- 17.50 $ 13.05
Exercised.............................................. (185,505) 5.77 -- 14.88 9.61
Cancelled.............................................. (25,671) 9.25 -- 13.63 10.68
---------
Balance, August 31, 2002............................... 1,338,591 5.77 -- 19.31 11.87
=========
Options Exercisable at August 31
-2000............................................... 524,099 $ 5.77 -- 19.31 $ 9.19
-2001............................................... 643,540 5.77 -- 19.31 10.04
-2002............................................... 700,173 5.77 -- 19.31 10.68
Shares available for future grant at August 31, 2002... 674,738
32
The following table summarizes information concerning outstanding and
exercisable options as of August 31, 2002:
OPTIONS OUTSTANDING
------------------------------------ OPTIONS EXERCISABLE
WTD. AVG. WTD. ---------------------
REMAINING AVG. WTD. AVG.
RANGE OF NUMBER OF CONTRACTUAL EXERCISE NUMBER OF EXERCISE
EXERCISE PRICES OPTIONS LIFE PRICE OPTIONS PRICE
- ------------------- ------------- ----------- -------- --------- ---------
$ 5.77 -- 9.23 312,512 4.09 $ 8.31 232,897 $ 8.00
9.24 -- 13.42 573,928 7.33 10.88 304,281 10.10
13.43 -- 19.31 452,151 8.14 15.59 162,995 15.58
------------- -------
1,338,591 700,173
============= =======
The Company uses the intrinsic-value method to record expense for stock
options. 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
method at the date of grant for options awarded in fiscal 2002, 2001 and 2000
under the Plans, pro forma amounts of the Company's net income (loss) and
earning (loss) per common share would have been as follows:
YEAR ENDED AUGUST 31,
--------------------------------
2002 2001 2000
---------- ---------- -------
(DOLLARS IN THOUSANDS EXCEPT PER
SHARE DATA)
Net income (loss) -- as reported........................ $ 3,816 $ (777) $ 10,362
Net income (loss) -- pro forma.......................... 2,906 (1,502) 9,646
Net income (loss) per common share -- as reported....... $ 0.50 $ (0.10) $ 1.40
Net income (loss) per common share -- pro forma......... 0.38 (0.20) 1.30
Net income (loss) per common share, diluted -- as
reported.............................................. $ 0.49 $ (0.10) $ 1.33
Net income (loss) per common share, diluted -- pro forma 0.37 (0.20) 1.24
The fair value of each option grant was estimated using the Black-Scholes
option-pricing model with the following weighted average assumptions for fiscal
2002: risk-free interest rates of 1.7% to 4.2%; expected option life of each
vesting increment of 2.7 years for employees and 2.2 years for non-employee
directors; expected volatility of 61%; and expected dividends of $0.24 per
share. The weighted average fair value of options granted under the 1994 Plan
during fiscal years 2002, 2001 and 2000 was $7.54, $7.48 and 8.90, respectively.
The weighted average fair value of options granted under the Directors' Plan
during fiscal years 2002, 2001 and 2000 was $5.56, $8.85 and $8.58,
respectively. The effect of applying SFAS No. 123 for providing pro forma
disclosures for fiscal years 2002, 2001, and 2000 is not likely to be
representative of the effects in future years because the amounts above reflect
only the options granted in 2002, 2001, and 2000 that vest over four to five
years, and additional grants are generally made annually.
NOTE G -- INCOME TAXES
Income before income taxes and extraordinary item is as follows:
YEAR ENDED AUGUST 31
-------------------------------
2002 2001 2000
--------- ---------- -------
(DOLLARS IN THOUSANDS)
Domestic............... $ 3,137 $ (1,812) $ 15,942
Foreign................ 2,427 2,342 --
--------- ---------- ----------
Total............. $ 5,564 $ 530 $ 15,942
33
Income tax expense on income before extraordinary item consists of the
following:
YEAR ENDED AUGUST 31
-------------------------------
2002 2001 2000
---------- ---------- -------
(DOLLARS IN THOUSANDS)
Current:
Federal.................. $ (195) $ -- $ 3,264
State.................... 100 465 654
Foreign.................. 720 1,000 --
--------- ---------- ---------
625 1,465 3,918
Deferred:
Federal.................. 1,125 (1,193) 1,322
State.................... -- -- 340
Foreign.................. (2) 147 --
--------- ---------- ---------
1,123 (1,046) 1,662
--------- ---------- ---------
Total provision............ $ 1,748 $ 419 $ 5,580
========= ========== =========
A reconciliation of the statutory federal tax to the actual provision for
taxes on income before extraordinary item is as follows:
YEAR ENDED AUGUST 31
---------------------------------
2002 2001 2000
----------- ---------- --------
(DOLLARS IN THOUSANDS)
Statutory tax rate......................................... 34% 35% 35%
Statutory tax on income before extraordinary item.......... $ 1,892 $ 186 5,580
State taxes, net of federal benefit........................ 58 273 369
Nondeductible depreciation and amortization................ 53 231 --
Tax credits, including research and development credits.... (245) (140) (125)
Effect of enacted tax legislation.......................... 1,213 -- --
Tax rate change on net deferred tax liabilities............ (270) -- --
Foreign sales corporation benefit.......................... (709) (96) (245)
Lower statutory rate on foreign earnings................... (96) -- --
Other...................................................... (148) (35) 1
--------- -------- ---------
Total provision............................................ $ 1,748 $ 419 $ 5,580
========= ======== =========
The effect of enacted tax legislation in 2002 of $1,213,000 related to
certain provisions of the Job Creation and Worker Assistance Act of 2002 which
permit the utilization of net operating losses incurred in 2001 to recoup
alternative minimum tax paid over an extended five year carryback period. The
impact of this legislation is a reduction of the benefit previously recorded for
loss carrybacks due to the difference in regular tax and alternative minimum tax
rates.
The significant components of deferred tax assets and liabilities are as
follows:
YEAR ENDED AUGUST 31
-----------------------
2002 2001
---------- ---------
(DOLLARS IN THOUSANDS)
Deferred tax assets:
Alternative minimum tax credit...... $ 1,268 $ 3,476
Research and development credit..... 623 402
Postretirement benefits............. 3,934 4,006
Provisions for accrued expenses..... 3,927 2,744
Net operating losses................ -- 1,419
Other............................... 623 1,167
---------- ---------
Total deferred tax assets............. 10,375 13,214
---------- ---------
Deferred tax liabilities:
Depreciation........................ 20,921 22,114
Other............................... (447) 833
---------- ---------
Total deferred tax liabilities........ 20,474 22,947
---------- ---------
Net deferred tax liabilities........ $ 10,099 $ 9,733
========== =========
34
The Company had research and development tax credit carryforwards of $0.6
million at August 31, 2002 that expire in fiscal years 2013 through 2022, and
federal alternative minimum tax credit carryforwards of $1.3 million, which do
not expire under current tax law.
NOTE H -- PENSIONS AND OTHER POSTRETIREMENT BENEFITS
Penford maintains two noncontributory defined benefit pension plans that
cover substantially all North American 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. The Company did not make any contributions in 2002 and
2001. 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.
The Company also maintains two other postretirement benefit plans covering
its hourly retirees, as well as a group of its past salaried retirees.
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:
YEAR ENDED AUGUST 31
-------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------- -------------------------
2002 2001 2002 2001
---------- ---------- ----------- -----------
(DOLLARS IN THOUSANDS)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at September 1............ $ 23,122 $ 21,877 $ 8,344 $ 7,578
Service Cost................................. 493 522 254 269
Interest Cost................................ 1,726 1,686 628 589
Plan participants' contributions............. -- -- 12 8
Amendments................................... -- 348 -- --
Actuarial (gain) loss........................ 953 (325) 373 138
Change in assumptions........................ 697 611 -- --
Benefits paid................................ (1,654) (1,597) (588) (295)
---------- ---------- ----------- -----------
Benefit obligation at August 31.............. 25,337(1) 23,122(2) 9,023 8,287
========== ========== =========== ===========
CHANGE IN PLAN ASSETS
Fair value of plan assets at September 1..... 23,430 28,769 -- --
Actual return on plan assets................. (2,027) (3,742) -- --
Company contributions........................ -- -- 576 287
Plan participants' contributions............. -- -- 12 8
Benefits paid................................ (1,654) (1,597) (588) (295)
---------- ---------- ----------- -----------
Fair value of the plan assets at August 31... 19,749(1) 23,430(2) -- --
========== ========== =========== ==========
Funded status of the plan (underfunded)...... (5,588) 308 (9,023) (8,287)
Unrecognized net gain........................ 4,456 (1,485) (2,217) (2,842)
Unrecognized transition obligation........... 246 372 -- --
Unrecognized prior service cost.............. 1,165 1,254 -- --
---------- ---------- ----------- ----------
Prepaid (accrued) benefit cost............... $ 279 $ 449 $ (11,240) $ (11,129)
========== ========== =========== ===========
- ----------
(1) Includes a defined benefit pension plan with an accumulated benefit
obligation of $13,140 which is in excess of the fair value of plan assets of
$9,693.
(2) Includes a defined benefit pension plan with a projected benefit obligation
of $13,084 and an accumulated benefit obligation of $11,886 which is in
excess of the fair value of plan assets of $11,475.
35
At August 31, 2002 the Company recorded a net pension liability of
$3,071,000 to reflect the excess of the accumulated benefit obligations over the
fair value of plan assets. That charge is reflected in other comprehensive
income, net of tax.
AUGUST 31
------------------------------------
PENSION BENEFITS OTHER BENEFITS
----------------- --------------
2002 2001 2002 2001
----- ------ ---- ----
WEIGHTED-AVERAGE ASSUMPTIONS
Discount Rate....................... 7.50% 7.75% 7.5% 7.75%
Expected return on plan assets...... 10.00 10.00
Rate of compensation increase....... 4.00 4.00
Future benefit costs were estimated assuming medical costs would increase
at a 8.5% annual rate for fiscal 2003, decreasing by one half percent ratably
over the next eight years to a rate of 4.5%.
YEAR ENDED AUGUST 31
--------------------------------------------------------------------
PENSION BENEFITS OTHER BENEFITS
------------------------------------ ------------------------------
2002 2001 2000 2002 2001 2000
---------- ---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS)
COMPONENTS OF NET PERIODIC BENEFIT COST
Service Cost................................. $ 493 $ 522 $ 642 $ 254 $ 269 $ 270
Interest Cost................................ 1,726 1,686 1,609 628 589 549
Expected return on plan assets............... (2,258) (2,797) (2,590) -- -- --
Net amortization and deferral................ 210 (240) (120) (195) (247) (229)
---------- ---------- ---------- -------- -------- --------
Benefit cost................................. $ 171 $ (829) $ (459) $ 687 $ 611 $ 590
========== ========== ========== ======== ======== ========
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):
1-PERCENTAGE- 1-PERCENTAGE-
POINT POINT
INCREASE DECREASE
------------- -------------
Effect on total of service and interest cost components in fiscal 2002 $ 173 $ (138)
Effect on postretirement benefit obligation as of August 31, 2002..... $ 1,563 $ (1,263)
NOTE I -- OTHER EMPLOYEE BENEFITS
SAVINGS AND STOCK OWNERSHIP PLAN
The Company has a defined contribution savings plan where eligible North
American-based employees can elect a maximum salary deferral of 12%. The plan
provides a 100% match on the first 3% of salary contributions and a 50% match on
the next 3%. The Company's matching contributions were $796,000, $692,000 and
$666,000 for fiscal years 2002, 2001 and 2000, 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. There were no profit-sharing contributions paid to
participants for fiscal years 2002 and 2001. Profit-sharing contributions were
$379,000 for fiscal year 2000.
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.
DEFERRED COMPENSATION PLAN
The Company provides its directors and certain employees the opportunity
to defer a portion of their salary, bonus and fees. The deferrals earn interest
based on Moody's current Corporate Bond Yield. Deferred compensation interest of
$285,000, $258,000 and $254,000 was accrued in 2002, 2001 and 2000,
respectively.
36
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The Company sponsors a supplemental executive retirement plan, a
non-qualified plan, which covers certain employees. For fiscal 2002, 2001 and
2000, the net periodic pension expense accrued for this plan was $399,000,
$423,000 and $457,000, respectively.
HEALTH CARE AND LIFE INSURANCE BENEFITS
The Company offers health care and life insurance benefits to most active
North American employees. Costs incurred to provide these benefits are charged
to expense as incurred. Health care and life insurance expense, net of employee
contributions, was $3,548,000, $3,358,000 and $2,851,000 in 2002, 2001 and 2000,
respectively.
SUPERANNUATION FUND
The Company contributes to superannuation funds on behalf of the employees
of Penford Australia. Australian law requires the Company to contribute at least
8% of each employee's eligible pay, whereas New Zealand law requires at least a
7.5% and 5% employer contribution for salaried and hourly employees,
respectively. Effective July 1, 2002, the minimum contribution in Australia
increased to 9%. The Company contributions to superannuation funds were $723,000
and $653,000 in 2002 and 2001, respectively.
NOTE J -- COMMON STOCK PURCHASE RIGHTS
On June 16, 1988, Penford distributed a dividend of one right (Right) for
each outstanding share of Penford common stock. 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.
NOTE K -- OTHER COMPREHENSIVE INCOME (LOSS)
The components of other comprehensive income (loss) are as follows
(dollars in thousands):
ADDITIONAL MINIMUM FOREIGN CURRENCY DERIVATIVE FINANCIAL
PENSION LIABILITY TRANSLATION ADJUSTMENTS INSTRUMENTS GAINS TOTAL
------------------ ----------------------- -------------------- ----------
Balance at August 31, 2000............... $ -- $ -- $ -- $ --
Foreign currency translation adjustments. -- (939) -- (939)
Change in fair value of derivatives, net
of applicable income taxes of $314..... -- -- 583 583
Gains from derivative transactions
reclassified into earnings from other
comprehensive income, net of $297 tax
expense................................ -- -- (552) (552)
--------- --------- ------- ----------
Balance at August 31, 2001............... -- (939) 31 (908)
Foreign currency translation adjustments. -- 1,253 -- 1,253
Change in fair value of derivatives, net
of applicable income taxes of $357..... -- -- 663 663
Gains from derivative transactions
reclassified into earnings from other
comprehensive income, net of $283 tax
expense................................ -- -- (525) (525)
--------- --------- ------- ----------
Additional minimum pension liability,
net of $1,075 tax benefit.............. (1,996) -- -- (1,996)
--------- --------- ------- ----------
Balance at August 31, 2002............... $ (1,996) $ 314 $ 169 $ (1,513)
========= ========= ======= ==========
37
The earnings associated with the Company's investment in Penford Australia
are considered to be permanently invested and no provision for U.S. federal and
state income taxes on the related translation adjustment has been provided.
NOTE L -- EARNINGS (LOSS) PER COMMON SHARE
The following table presents the computation of basic and diluted earnings
(loss) per share:
YEAR ENDED AUGUST 31
--------------------------------------------
2002 2001 2000
------------- ------------- ------------
(DOLLARS IN THOUSANDS EXCEPT SHARE
AND PER SHARE DATA)
Income before extraordinary item........................ $ 3,816 $ 111 $ 10,362
Extraordinary loss...................................... -- (888) --
------------- ------------- ------------
Net income (loss)....................................... $ 3,816 $ (777) $ 10,362
============= ============= =============
Weighted average common shares outstanding.............. 7,594,628 7,473,340 7,414,435
Net effect of dilutive stock options.................... 199,676 -- 350,609
------------- ------------- -------------
Weighted average common shares and equivalents
outstanding.......................................... 7,794,304 7,473,340 7,765,044
============= ============= =============
Earnings (loss) per common share, basic:
Income before extraordinary item...................... $ 0.50 $ 0.02 $ 1.40
Extraordinary loss.................................... -- (0.12) --
------------- ------------- ------------
Net income (loss)..................................... $ 0.50 $ (0.10) $ 1.40
============= ============= =============
Earnings (loss) per common share, diluted:
Income before extraordinary item...................... $ 0.49 $ 0.02 $ 1.33
Extraordinary loss.................................... -- (0.12) --
------------- ------------- ------------
Net income (loss)..................................... $ 0.49 $ (0.10) $ 1.33
============= ============= =============
NOTE M -- SEGMENT REPORTING
Financial information for the Company's three segments is presented below.
The first two segments, Industrial Ingredients -- North America and Food
Ingredients -- North America, are broad categories of end-market users,
primarily served by our U.S. operations. The third segment is our geographically
separate operations in Australia and New Zealand. Our Australian and New Zealand
operations are engaged primarily in the food ingredients business, although the
industrial market is an important and growing category there. A fourth item for
"corporate and other" activity has been presented to provide reconciliation to
amounts reported in the consolidated financial statements. Corporate and other
represents the activities related to the corporate headquarters such as public
company reporting, personnel costs of the executive management team,
corporate-wide professional services and consolidation entries. Intercompany
sales of $447,000 between Australia/New Zealand operations and Food Ingredients
- -- North America in 2002 are eliminated in corporate and other since the chief
operating decision maker views segment results prior to intercompany
eliminations. All interest expense of the Company is included in corporate and
other and is not allocated to the other reportable segments. The extraordinary
item in 2001 was attributable to corporate and other. The accounting policies of
the reportable segments are the same as those described in Note A.
38
YEAR ENDED AUGUST 31
---------------------------------------
2002 2001 2000
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Sales
- - Industrial ingredients -- North America $ 126,053 $ 127,300 $ 142,889
- - Food ingredients -- North America..... 43,533 42,772 33,064
- - Australia/New Zealand operations...... 62,311 55,600 --
- - Corporate and other................... (447) -- --
----------- ----------- ----------
$ 231,450 $ 225,672 $ 175,953
=========== =========== ===========
Depreciation and amortization
- - Industrial ingredients -- North America $ 10,809 $ 10,963 $ 10,636
- - Food ingredients -- North America..... 3,200 3,135 2,857
- - Australia/New Zealand operations...... 3,108 3,500 --
- - Corporate and other................... 676 696 --
----------- ----------- ----------
Income from operations $ 17,793 $ 18,294 $ 13,786
=========== =========== ===========
- - Industrial ingredients -- North America $ 9,002 $ 5,558 $ 20,087
- - Food ingredients -- North America..... 6,574 6,580 5,017
- - Australia/New Zealand operations...... 4,576 4,347 --
- - Corporate and other................... (7,078) (5,904) (4,388)
----------- ----------- -----------
$ 13,074 $ 10,581 $ 20,716
=========== =========== ===========
Capital expenditures, net
- - Industrial ingredients -- North America $ 4,877 $ 7,077 $ 11,044
- - Food ingredients -- North America..... 684 2,186 6,360
- - Australia/New Zealand operations...... 1,802 3,194 76
- - Corporate and other................... 21 (108) --
----------- ----------- ----------
$ 7,384 $ 12,349 $ 17,480
=========== =========== ===========
AUGUST 31
------------------------
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Total Assets
- - Industrial ingredients -- North America $ 108,635 $ 113,751
- - Food ingredients -- North America..... 35,171 37,424
- - Australia/New Zealand operations...... 75,042 69,275
- - Corporate and other................... 21,122 23,862
----------- -----------
$ 239,970 $ 244,312
=========== ===========
AUGUST 31
----------------------
2002 2001
--------- ---------
(DOLLARS IN THOUSANDS)
Goodwill
- - Food ingredients -- North America..... $ 4,500 $ 4,500
- - Australia/New Zealand operations...... 11,350 10,764
--------- ---------
$ 15,850 $ 15,264
========= =========
Reconciliation of total income from operations for the Company's segments
to income before income taxes and extraordinary item as reported in the
consolidated financial statements follows:
YEAR ENDED AUGUST 31
-------------------------------------
2002 2001 2000
---------- ----------- ----------
(DOLLARS IN THOUSANDS)
Income from operations................................. $ 13,074 $ 10,581 $ 20,716
Other non-operating expense............................ 486 -- --
Investment income...................................... 84 134 39
Interest expense....................................... (7,108) (10,185) (4,813)
---------- ----------- ----------
Income before income taxes and extraordinary item...... $ 5,564 $ 530 $ 15,942
========== =========== ==========
39
Information about the Company's operations by geographic area follows:
YEAR ENDED AUGUST 31
-------------------------------------
2002 2001 2000
----------- ----------- ----------
(DOLLARS IN THOUSANDS)
Sales
- - North America........... $ 169,139 $ 170,072 $ 175,953
- - Australia/New Zealand... 62,311 55,600 --
----------- ----------- ----------
$ 231,450 $ 225,672 $ 175,953
=========== =========== ===========
AUGUST 31
-------------------------
2002 2001
----------- -----------
(DOLLARS IN THOUSANDS)
Long-lived assets, net
- - North America............. $ 105,753 $ 114,258
- - Australia/New Zealand..... 42,139 41,564
----------- -----------
$ 147,892 $ 155,822
=========== ===========
NOTE N -- OTHER EVENTS
In the second quarter of fiscal 2002, the Company announced a strategic
restructuring of its business operations, including the relocation of its
headquarters from Washington to Colorado. As a result, the Company recorded
restructuring costs totaling $1,383,000 related to severance and other exit
activity expenses, which are included in operating expenses. The restructuring
covers 7 employees, 1 of which had been terminated as of August 31, 2002. All
amounts accrued are expected to be paid in fiscal 2003.
The following table is an analysis of the reserve recorded for the 2002
restructuring (in thousands).
EMPLOYEE LEASE TERMINATION
COSTS AND OTHER TOTAL
--------- ----------------- ---------
Initial accrual.............. $ 1,040 $ 343 $ 1,383
Payments..................... (26) (79) (105)
--------- ------ ---------
Balance, August 31, 2002..... $ 1,014 $ 264 $ 1,278
========= ====== =========
In 2001, Penford invested in an early-stage technology company in the
business of developing data analytics software applications. Penford accounted
for its investment on the cost method. In 2002, with the continuing slowdown in
the technology business sector, Penford undertook an assessment of the fair
value of its investment. Penford considered a number of factors, including the
financial health and prospects of the investee, the prospects for receiving a
future return on Penford's investment, the adverse changes in the funding
environment for technology companies and the lack of marketability for the
investment. The assessment indicated that it was unlikely that Penford would
recover any of its then existing carrying amount and that an other than
temporary decline in the fair value of its investment had occurred. Penford
recorded an impairment charge of $0.5 million related to the complete write-off
of this investment. This charge is shown as an investment impairment charge in
the consolidated statements of operations.
In fiscal 2001, the Company incurred other charges of $533,000 for
transaction costs related to terminated joint venture discussions and severance
costs of $486,000 relating to workforce reductions of administrative employees.
The costs are included in operating expenses.
NOTE O -- SUBSEQUENT EVENT
In November 2002, Penford sold certain assets of its resistant starch
business to National Starch Corporation ("National Starch"), a wholly-owned
subsidiary of ICI of the U. K., for $2.5 million.
Penford also licensed to National Starch the exclusive rights to its
resistant starch intellectual property portfolio for applications in human
nutrition. Penford retained the rights to practice its intellectual property for
all non-human nutrition applications. Under the terms of the agreements Penford
will receive an initial licensing fee of $2.25 million and annual royalties for
a period of seven years or until a maximum of $11.0 million in royalties has
been received by Penford. The licensing fee will be amortized over the life of
the agreement. The royalty payments are subject to a minimum of $7.0 million
over the first five years of the licensing agreement. The initial cash proceeds
to Penford are expected to be approximately $4.1 million, which is net of
transaction expenses.
40
We also entered into a tolling arrangement under which we will manufacture
resistant starch products for National Starch, if requested by National Starch.
We do not know the level to which National Starch will request production in the
future. Penford's sales of resistant starch products in 2002 and for the eleven
months in 2001 since the acquisition of Penford Australia were approximately $5
million.
NOTE P -- QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
FISCAL 2002 QUARTER QUARTER(1) QUARTER QUARTER(2) TOTAL
- ------------------------------- ---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Sales.......................... $ 56,305 $ 54,837 $ 59,137 $ 61,171 $ 231,450
Cost of sales.................. 46,106 44,773 47,870 50,318 189,067
---------- ---------- ---------- ---------- -----------
Gross margin................... 10,199 10,064 11,267 10,853 42,383
Net income..................... 1,240 144 1,420 1,012 3,816
Earnings per common share:
Basic........................ $ 0.16 $ 0.02 $ 0.19 $ 0.13 $ 0.50
Diluted...................... $ 0.16 $ 0.02 $ 0.18 $ 0.13 $ 0.49
Dividends declared............. $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
FIRST SECOND THIRD FOURTH
FISCAL 2001 QUARTER(3) QUARTER QUARTER(4) QUARTER TOTAL
- ------------------------------------------- ---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
Sales...................................... $ 51,889 $ 55,843 $ 58,785 $ 59,155 $ 225,672
Cost of sales.............................. 40,936 46,825 49,261 48,347 185,369
Gross margin............................... 10,953 9,018 9,524 10,808 40,303
Income (loss) before extraordinary item.... 1,136 (832) (608) 415 111
Extraordinary loss......................... 888 -- -- -- 888
Net income (loss).......................... 248 (832) (608) 415 (777)
Earnings (loss) per common share:
Basic.................................... $ 0.03 $ (0.11) $ (0.08) $ 0.06 $ (0.10)
Diluted.................................. $ 0.03 $ (0.11) $ (0.08) $ 0.06 $ (0.10)
Dividends declared......................... $ 0.06 $ 0.06 $ 0.06 $ 0.06 $ 0.24
- ----------
(1) Second quarter fiscal 2002 operating results include a charge of $1.4
million for costs related to the announcement of a strategic restructuring
of the Company's business operations.
(2) Fourth quarter fiscal 2002 operating results include a charge of $0.5
million for costs related to the write-off of a long-term investment.
(3) First quarter fiscal 2001 operating results include an extraordinary loss
on early extinguishment of debt of approximately $1.4 million ($0.9
million after tax, or $0.12 per share) related to the prepayment of
existing debt to enable the financing of the Penford Australia Ltd.
acquisition.
(4) Third quarter fiscal 2001 operating results include charges of $0.5
million for transaction costs related to terminated joint venture
discussions and severance costs of $0.3 million for workforce reductions.
(5) Fourth quarter fiscal 2001 operating results include charges for severance
costs of $0.2 million for workforce reductions.
41
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, 2002 and 2001, and the related consolidated
statements of operations, shareholders' equity, and cash flows for each of the
three years in the period ended August 31, 2002. Our audits also included the
financial statement schedule listed in the Table of Contents at Item 8. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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, 2002 and 2001, and the consolidated results of
its operations and its cash flows for each of the three years in the period
ended August 31, 2002, in conformity with accounting principles generally
accepted in the United States. Also, in our opinion, the related financial
statement schedule, when considered in relation to the consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein. .As discussed in Note A to the consolidated
financial statements, effective September 1, 2001, the Company changed its
method of accounting for goodwill in accordance with Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets."
/s/ ERNST & YOUNG LLP
-----------------------------------------
Ernst & Young LLP
Seattle, Washington
October 7, 2002, except as to Note D
as to which the date is November 26, 2002
42
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART IV
ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) Financial Statements
The consolidated balance sheets as of August 31, 2002 and 2001 and the
related statements of operations, cash flows and shareholders' equity for each
of the three years in the period ended August 31, 2002 and the report of
independent auditors are included in Part II, Item 8.
(2) Financial Statement Schedules
Schedule II is included herein All other schedules for which provision is
made in the applicable accounting regulations of the Securities and Exchange
Commission are omitted because they are not applicable.
(3) Exhibits
See index to Exhibits on page 45.
(b) Reports on Form 8-K
Penford filed a report on From 8-K on October 21, 2002 with respect to the
relocation of its principal executive office from the State of Washington to
Colorado.
(c) Exhibits
See Item 15(a)(3), above.
(d) Financial Statement Schedules
Schedule II - Valuation and Qualifying Accounts
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
\s\ Thomas D. Malkoski
---------------------------------
Thomas D. Malkoski
Date: July 10, 2003
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.
SIGNATURE TITLE
- ------------------------------------------ -----------------------------------------------
\s\ Thomas D. Malkoski President, Chief Executive Officer and Director
- ------------------------------------------ (Principal Executive Officer)
Thomas D. Malkoski
* Vice President and Chief Financial Officer
- ------------------------------------------ (Principal Financial and Accounting Officer)
Steven O. Cordier
* Chairman of the Board of Directors
- ------------------------------------------
Paul H. Hatfield
* Director
- ------------------------------------------
Richard T. Crowder
\s\ William E. Buchholz Director
- ------------------------------------------
William E. Buchholz
* Director
- ------------------------------------------
Jeffrey T. Cook
* Director
- ------------------------------------------
John C. Hunter III
* Director
- ------------------------------------------
Sally G. Narodick
* Director
- ------------------------------------------
James E. Warjone
\s\ Thomas D. Malkoski
- ------------------------------------------
*By Thomas D. Malkoski,
pursuant to a power of attorney dated October 22, 2002
44
CHIEF EXECUTIVE OFFICER CERTIFICATION
I, Thomas D. Malkoski, certify that:
1. I have reviewed this annual report on Form 10-K/A of Penford Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PENFORD CORPORATION
Date: July 10, 2003 \s\ Thomas D. Malkoski
---------------------------------
Thomas D. Malkoski
Chief Executive Officer
45
CHIEF FINANCIAL OFFICER CERTIFICATION
I, Steven O. Cordier, certify that:
1. I have reviewed this annual report on Form 10-K/A of Penford Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this annual report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls;
and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
PENFORD CORPORATION
Date: July 10, 2003 /s/ STEVEN O. CORDIER
------------------------------------
Steven O. Cordier
Chief Financial Officer
46
PENFORD CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
-------------------------------------
Balance at Charged to costs Charged to other Balance at end
Description beginning of year and expenses accounts Deductions of year
----------- ----------------- ---------------- ---------------- ---------- --------------
Year ended August 31, 2002
Allowance for doubtful
accounts $301 $228 $ -- $184 $345
Year ended August 31 ,2001
Allowance for doubtful
accounts $313 $356 $ -- $368 $301
Year ended August 31, 2000
Allowance for doubtful
accounts $248 $158 $ -- $ 93 $313
47
INDEX TO EXHIBITS
Exhibits identified in parentheses below, on file with the Securities and
Exchange Commission, are incorporated by reference. Copies of exhibits can be
obtained at no cost by writing to Penford Corporation, 7094 S. Revere Parkway,
Englewood, Colorado 80112.
EXHIBIT NO. ITEM
----------- ----
(2.1) Starch Australasia Share Sale Agreement completed as of September 29, 2000 among
Penford Holdings Pty. Limited, a wholly owned subsidiary of Registrant, and
Goodman Fielder Limited (filed as an exhibit to Registrant's, File No.
000-11488, Form 8-K/A dated September 29, 2000, filed December 12, 2000)
(3.1) Restated Articles of Incorporation of Registrant (filed as an exhibit to
Registrant's, File No. 000-11488, Form 10-K for fiscal year ended August 31,
1995, filed November 29, 1995)
(3.2) Articles of Amendment to Restated Articles of Incorporation of Registrant (filed
as an exhibit to Registrant's, File No. 000-11488, Form 10-K for fiscal year
ended August 31, 1997, filed November 26, 1997)
(3.3) Bylaws of Registrant as amended and restated as of October 20, 1997 (filed as an
exhibit to Registrant's, File No. 000-11488, Form 10-K for fiscal year ended
August 31, 1997, filed November 26, 1997)
(4.1) Amended and Restated Rights Agreement dated as of April 30, 1997 (filed as an
exhibit to Registrant's, File No. 000-11488, Amendment to Registration Statement
on Form 8-K/A dated May 5, 1997, filed May 5, 1997)
(10.1) Penford Corporation Supplemental Executive Retirement Plan, dated March 19, 1990
(filed as an exhibit to Registrant's, File No. 000-11488, 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, File No. 000-11488, 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, File No. 000-11488, Form 10-K for the fiscal year
ended August 31, 1991)*
(10.4) Change of Control Agreements between Penford Corporation and Messrs. Horn,
Keeley, Kunerth, Malkoski and Cordier (a representative copy of these agreements
is filed as an exhibit to Registrant's, File No. 000-11488, Form 10-K for the
fiscal year ended August 31, 1995, filed November 29, 1995)*
(10.5) Penford Corporation 1993 Non-Employee Director Restricted Stock Plan (filed as
an exhibit to Registrant's, File No. 000-11488, 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 as an exhibit to Registrant's, File No. 000-11488, Form S-8
dated March 17, 1997, filed March 17, 1997)*
(10.7) Penford Corporation Stock Option Plan for Non-Employee Directors (filed as an
exhibit to Registrant's, File No. 000-11488, Form 10-Q for the quarter ended May
31, 1996, filed July, 15, 1996)*
(10.8) Separation Agreement dated as of July 31, 1998 between Registrant and Penwest
Pharmaceuticals Co. (filed as an exhibit to Registrant's, File No. 000-11488,
Form 8-K dated August 31, 1998, filed September 15, 1998)
(10.9) Services Agreement dated as of July 31, 1998 between Registrant and Penwest
Pharmaceuticals Co. (filed as an exhibit to Registrant's, File No. 000-11488,
Form 8-K dated August 31, 1998, filed September 15, 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, File No.
000-11488, Form 8-K dated August 31, 1998, filed September 15, 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, File No.
000-11488, Form 8-K dated August 31, 1998, filed September 15, 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, File No.
000-11488, Form 8-K dated August 31, 1998, filed September 15, 1998)
(10.13) Amended and Restated Credit Agreement dated as of November 15, 2000 among
Penford Corporation and Penford Products Co. as borrowers, and certain
commercial lending institutions as lenders, and the Bank of Nova Scotia, as
agent for the lenders (filed as an exhibit to Registrant's, File No. 000-11488,
Form 8-K/A dated September 29, 2000, filed December 12, 2000)
(10.14) Debenture Trust Deed dated as of November 15, 2000 among Penford Holdings Pty.
Limited as issuer and ANZ
48
<Caption>
Exhibit No. Item
- ------- --- ----
Capel Court Limited as trustee (filed as an exhibit to Registrant's, File No.
000-11488, Form 8-K/A dated September 29, 2000, filed December 12, 2000)
(10.15) Syndicated Facility Agreement dated as of November 15, 2000 among Penford
Australia Limited, a wholly owned subsidiary of Penford Holdings Pty. Limited,
as borrowers, and Australia and New Zealand Banking Group Limited as lender and
agent (filed as an exhibit to Registrant's, File No. 000-11488, Form 8-K/A dated
September 29, 2000, filed December 12, 2000)
(10.16) Intercreditor Agreement dated as of November 15, 2000 by and among The Bank of
Nova Scotia, KeyBank National Association, U.S. National Association and
Australia and New Zealand Banking Group Limited (filed as an exhibit to
Registrant's, File No. 000-11488, Form 8-K/A dated September 29, 2000, filed
December 12, 2000)
(10.17) First Amendment dated as of April 12, 2001 to Amended and Restated Credit
Agreement dated as of November 15, 2000 among Penford Corporation and Penford
Products Co. as borrowers, and certain commercial lending institutions as
lenders, and the Bank of Nova Scotia, as agent for the lenders (filed as an
exhibit to Registrant's, File No. 000-11488, Form 10-Q for the quarter ended May
31, 2001, filed July 13, 2001)
(10.18) Waiver Agreement dated as of April 12, 2001 to Amended and Restated Credit
Agreement dated as of November 15, 2000 among Penford Corporation and Penford
Products Co. as borrowers, and certain commercial lending institutions as
lenders, and the Bank of Nova Scotia, as agent for the lenders (filed as an
exhibit to Registrant's, File No. 000-11488, Form 10-Q for the quarter ended May
31, 2001, filed July 13, 2001)
(10.19) Second Amendment dated as of May 31, 2001 to Amended and Restated Credit
Agreement dated as of November 15, 2000 among Penford Corporation and Penford
Products Co. as borrowers, and certain commercial lending institutions as
lenders, and the Bank of Nova Scotia, as agent for the lenders (filed as an
exhibit to Registrant's, File No. 000-11488, Form 10-Q for the quarter ended May
31, 2001, filed July 13, 2001)
(10.20) Transition Agreement dated as of January 17, 2002 between Registrant and Jeffrey
T. Cook (filed as an exhibit to Registrant's, File No. 000-11488, Form 10-Q for
the quarter ended February 28, 2002, filed April 12, 2002)*
(10.21) Third Amendment dated as of April 29, 2002 to Amended and Restated Credit
Agreement dated as of November 15, 2000 among Penford Corporation and Penford
Products Co. as borrowers, and certain commercial lending institutions as
lenders, and the Bank of Nova Scotia, as agent for the lenders (filed as an
exhibit to Registrant's, File No. 000-11488, Form 10-Q for the quarter ended May
31, 2002, filed July 12, 2002).
(10.22) Fourth Amendment dated as of November 27, 2002 to Amended and Restated Credit
Agreement dated as of November 15, 2000 among Penford Corporation and Penford
Products Co. as borrowers, and certain commercial lending institutions as
lenders, and the Bank of Nova Scotia, as agent for the lenders (filed as an
exhibit to Registrant's, File No. 000-11488, Form 10-K for the fiscal year ended
August 31, 2002, filed November 27, 2002)
21 Subsidiaries of the Registrant (filed as an exhibit to Registrant's, File No.
000-11488, Form 10-K for the fiscal year ended August 31, 2002, filed November
27, 2002)
23 Consent of Independent Auditors (filed as an exhibit to Registrant's, File No.
000-11488, Form 10-K for the fiscal year ended August 31, 2002, filed November
27, 2002)
24 Power of Attorney (see Signature Page of the Registrant's, File No. 000-11488,
Form 10-K for the fiscal year ended August 31, 2002.
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
99.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act
- ----------
* Denotes management contract or compensatory plan or arrangements
49