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, 2003
[ ] 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:
<Table>
<Caption>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE OF WHICH REGISTERED
------------------- -----------------------------------------
None None
</Table>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $1.00 PAR VALUE
COMMON STOCK PURCHASE RIGHTS
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ X] No [ ]
The aggregate market value of the Registrant's Common Stock held by
non-affiliates of the Registrant as of October 31, 2003 was approximately $87.2
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 31, 2003
was 8,634,516.
EXPLANATORY NOTE
Penford Corporation ("Penford" or the "Company") is amending its Annual Report
on Form 10-K for the year ended August 31, 2003 ("Form 10-K") to include the
information required by Part III of the Form 10-K. This information is contained
in Penford's proxy statement which was filed with the Securities and Exchange
Commission on January 5, 2004, seven days beyond the time frame allowed for
incorporating by reference this information into the Company's Form 10-K.
PENFORD CORPORATION
FISCAL YEAR 2003 FORM 10-K/A ANNUAL REPORT
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PART III
Item 10. Directors and Executive Officers of the Registrant............................................ 3
Item 11. Executive Compensation........................................................................ 9
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters....................................................................................... 16
Item 13. Certain Relationships and Related Transactions................................................ 17
Item 14. Principal Accountant Fees and Services........................................................ 17
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on 8-K.................................... 18
Signatures .............................................................................................. 18
</Table>
2
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Set forth in the table below are the names, ages and positions of the
current directors of Penford Corporation ("Penford" or the "Company").
Information on the executive officers of the Company is included in Item 1 of
the Company's original Form 10-K filed November 21, 2003. All executive officers
are elected annually by the board of directors and hold office at the discretion
of the board of directors. None of the directors or executive officers have any
family relationship to any other director or executive officer of the Company.
<Table>
<Caption>
NAME AGE TITLE
---- --- -----
Paul H. Hatfield 67 Chairman of the Board of Directors
Thomas D. Malkoski 47 Director, President and Chief Executive Officer
William E. Buchholz 61 Director
Richard T. Crowder 64 Director
Jeffrey T. Cook 47 Director
R. Randolph Devening 61 Director
John C. Hunter III 56 Director
Sally G. Narodick 58 Director
James E. Warjone 60 Director
</Table>
Paul H. Hatfield, 67, has served as director of the Company since
October 1994 and as Chairman of the Board since January 2003. Mr. Hatfield is
Principal of the Hatfield Capital Group, a private investment company. He served
as Chairman, President and Chief Executive Officer of Petrolite Corporation
until July 1997. Previously, he worked for Ralston Purina Company from 1959
until his retirement in 1995. He served as a Vice President of Ralston as well
as the President and Chief Executive officer of Protein Technologies
International, Inc., then a wholly-owned subsidiary of Ralston. He serves as a
Board member and is Chairman of the Executive Development and Compensation
Committee of Solutia Inc., and Director of Bunge Limited, Maritz Inc. and Stout
Industries. Mr. Hatfield is Chairman of the Board of Boyce Thompson Institute
for Plant Research. Mr. Hatfield is also a member of the Advisory Board for
International Business at St. Louis University. Mr. Hatfield's term as a member
of the Board of Directors expires at the Annual Meeting of Shareholders to be
held in 2006.
Mr. Malkoski was named Chief Executive Officer and to the Company's
board of directors 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. Malkoski has
been nominated for election at the Company's Annual Meeting to be held January
20, 2004 ("the 2004 Meeting") to serve a three year term on the Board of
Directors ending at the Annual Meeting of Shareholders to be held in 2007.
William E. Buchholz, 61, was appointed to the Board of Directors in
January 2003. Mr. Buchholz most recently served as Senior Vice President of
Finance and Administration, Chief Financial Officer, and Secretary at
MessageMedia, a Colorado-based email messaging service and software company.
Prior to MessageMedia, Mr. Buchholz was Senior Vice President and Chief
Financial Officer of Nalco Chemical Company, a specialty chemical company, for
seven years with responsibilities for all finance functions including audit,
tax, financial systems, and U.S. and international treasury, and investor
relations. He also served as Vice President and Chief Financial Officer of
Cincinnati Milacron, an industrial equipment supplier. Mr. Buchholz is a
certified public accountant and holds an M.B.A., Finance and a B.A., Accounting,
both from Michigan State University. Mr. Buchholz has been nominated for
election at the 2004 Meeting to serve a one-year term on the Board of Directors
ending at the Annual Meeting of Shareholders to be held in 2005.
3
Richard T. Crowder, 64, has served as a director of the Company since
January 2001. Mr. Crowder is President and Chief Executive Officer of the
American Seed Trade Association ("ASTA"), one of the oldest trade organizations
in the United States consisting of over 800 companies involved in seed
production and distribution, plant breeding, and related industries. Mr. Crowder
was an independent consultant from 1999 until his appointment as CEO at ASTA in
April 2002. He served as Senior Vice President, International Operations of
Dekalb Genetics Corporation (now Monsanto) until 1999. Previously he worked as
Executive Vice President and General Manager, International Operations for
Armour Swift Eckrich from 1992 until 1994 and also the United States Department
of Agriculture as the Under Secretary of International Affairs and Commodity
Programs from 1989 until 1992. Mr. Crowder received a B.S. and an M.S. in
Agricultural Economics from Virginia Tech and earned a Doctorate in Agricultural
Economics from Oklahoma State University. Mr. Crowder's term as a member of the
Board of Directors expires at the Annual Meeting of Shareholders to be held in
2006.
Jeffrey T. Cook, 47, is the President and Chief Operating Officer of
Stellar International Holdings, a Seattle-based private investment firm. Mr.
Cook was President of Penford Corporation from January 2002 to January 2003, and
is currently a member of the Board of Directors. He previously served as
President and Chief Executive Officer from September 1998 to January 2002, Vice
President, Finance and Chief Financial Officer from 1991 to August 1998, and was
the Corporate Treasurer prior to that time. He joined the Company in 1983. He is
a graduate of Stanford University with a B.A. in Economics. Mr. Cook serves as a
Board member of Eoscene Corporation and the Museum of Glass in Tacoma,
Washington. Mr. Cook has been nominated for election at the 2004 Meeting to
serve a three-year term on the Board of Directors ending at the Annual Meeting
of Shareholders to be held in 2007.
R. Randolph Devening, 61, was appointed to the Board of Directors in
August 2003. Until his retirement in 2001, Mr. Devening served for seven years
as Chairman, President and Chief Executive Officer of Foodbrands America, Inc.,
a company that produces, markets and distributes branded and processed food
products for the food service and retail markets. Prior to that, he served as
Vice Chairman and Chief Financial Officer from 1993 to 1994, and Executive Vice
President, Director and Chief Financial Officer from 1989 to 1993 for Fleming
Companies, Inc., a wholesale food distributor. Mr. Devening holds an
undergraduate degree in International Relations from Stanford University and an
MBA in Finance and Marketing from Harvard University Graduate School of
Business. Mr. Devening serves as a Director of Keystone Automotive Operations
and as an advisor to Catalyst/Hall Funds. Mr. Devening has been nominated for
election at the 2004 Meeting to serve a two-year term on the Board of Directors
ending at the Annual Meeting of Shareholders to be held in 2006.
John C. Hunter III, 56, has served as a director of the Company since
October 1998. Mr. Hunter is Chairman, President and Chief Executive Officer of
Solutia Inc., an international producer of high-performance, chemical-based
materials used to make consumer, household, automotive and industrial products.
Previously, he served as President and Chief Operating Officer since Solutia's
spin-off from Monsanto Company in 1997. From 1992 to 1997, Mr. Hunter was
President, Fibers for Monsanto Company. He graduated from the Georgia Institute
of Technology with a B.S. in Chemical Engineering and an M.B.A. from the
University of Houston at Clear Lake City. Mr. Hunter serves as a Board member of
Hercules, Inc. and Missouri Baptist Hospital. Mr. Hunter's term as a member of
the Board of Directors expires at the Annual Meeting of Shareholders to be held
in 2005.
Sally G. Narodick, 58, has served as a director of the Company since
August 1993. Ms. Narodick is an independent educational technology and
e-learning consultant. From 1998 to 2000, she served as Chief Executive Officer
of Apex Online Learning, an Internet educational software company. Previously,
Ms. Narodick served as an education technology consultant, both independently
and for the Consumer Division of IBM from 1996 to 1998. From 1989 to 1996, Ms.
Narodick served as Chair and Chief Executive Officer of Edmark Corporation, an
educational software company that was sold to IBM in 1996. A graduate of Boston
University, Ms. Narodick earned an M.A. in Teaching from Columbia University and
an M.B.A. from New York University. She serves as a Board member of
click2learn.com, Inc., Puget Energy, Inc., and Solutia Inc. Ms. Narodick has
been nominated for election at the 2004 Meeting to serve a three-year term on
the Board of Directors ending at the Annual Meeting of Shareholders to be held
in 2007.
4
James E. Warjone, 60, has served as director of the Company since
January 2001. Mr. Warjone is Chairman and General Partner of Port Blakely Tree
Farms, primarily a land and timber company that also develops real estate in
Washington. The company owns and operates commercial forests in Washington,
Oregon and New Zealand. He has been with Port Blakely since 1978. He earned his
B.S. in Economics from Claremont Men's College in 1965. Mr. Warjone also serves
as a Board member of the Association of Washington Business, Enterprises
International Inc., Joshua Green Corporation, Pacific Science Center, and Welco
Lumber Company. Mr. Warjone's term as a member of the Board of Directors expires
at the Annual Meeting of Shareholders to be held in 2005.
Committees of the Board
Board of Directors
The Board of Directors provides guidance and strategic oversight to the
Company's management with the objective of optimizing shareholders' returns on
their investment in the Company. The Board is designed to assure that there is
independent review and oversight as well as approval of significant strategic
and management decisions affecting the Company. Regular meetings of the Board
are held five times per year and special meetings are scheduled when required.
The Board held six meetings in fiscal 2003. All current directors attended at
least 75% of the meetings of the Board and the Board Committees of which they
are members.
Committees Established by the Board
The Board has established the following standing Committees, each of
which is composed solely of "independent" directors, as defined for all
applicable legal and listing requirements, to assist in discharging its
responsibilities:
Audit and Environmental, Health, and Safety Committee -The Audit and
EH&S Committee, which met nine times in fiscal 2003, was comprised of Richard T.
Crowder (Chair), William E. Buchholz, John C. Hunter III, Sally G. Narodick and
James E. Warjone. The committee selects the independent auditors; reviews the
proposed scope of the independent audit; reviews the annual financial statements
and the independent auditors' report; reviews the independent auditors'
recommendations relating to accounting, internal controls and other matters;
reviews internal controls and accounting policies with management; and approves
policies relating to risk management and environmental, health, and safety
matters. On October 29, 2003 the committee reviewed and reassessed the adequacy
of its charter and confirmed that it complies with all applicable Nasdaq listing
and federal securities laws requirements. An amended copy of the charter is
attached as Appendix A. The amended charter also reflects the reallocation of
the environmental, health and safety functions to the Governance and Nominating
Committee and a change in the committee's name. The committee also designated
Mr. Buchholz as its Chair and its Audit Committee Financial Expert effective at
the end of the meeting held on October 29, 2003.
Executive Compensation and Development Committee -The Executive
Compensation and Development Committee, which met four times in fiscal 2003, was
comprised of Sally G. Narodick (Chair), Paul H. Hatfield and James E. Warjone.
The committee establishes the compensation of executive officers, provided that,
as to the salary of the Chief Executive Officer, the committee recommends an
appropriate salary to the Board for approval. The committee also directs and
monitors the Company's benefit plans, works with management to set fiscal year
incentive compensation goals for recommendation to the Board, determines
executive bonus payments, and authorizes stock options to officers and employees
under the Company's stock option plan. In addition, the committee reviews plans
for executive development and succession on a regular basis. On October 29, 2003
the Board approved amendments to the committee's charter and confirmed that it
complies with all applicable Nasdaq listing and federal securities laws
requirements.
Executive Committee -The Executive Committee, which met one time in
fiscal 2003, was comprised of Paul H. Hatfield (Chair) and the chairs of the
other standing committees (Richard T. Crowder, John C. Hunter III and Sally G.
Narodick). The committee is authorized to exercise all powers and authority of
the Board with certain exceptions.
5
Governance and Nominating Committee -The Governance and Nominating
Committee, which met three times in fiscal 2003, was comprised of John C. Hunter
III (Chair), Richard T. Crowder and James E. Warjone. The committee makes
recommendations to the Board for director nominations and the appointment of the
Chairman; reports to the Board on corporate governance matters and practices
including the effectiveness of the Board, its committees and individual
directors; determines the criteria for qualification of directors; and
periodically reviews Board compensation for non-employee directors and the
processes and policies established by the Board. The committee recommends to the
Board individuals for nomination for election to the Board at the Annual Meeting
of Shareholders and committee appointments.* On October 29, 2003 the Board
approved amendments to the committee's charter and confirmed that it complies
with all applicable Nasdaq listing and federal securities laws requirements. The
amended charter also reflects that the committee has assumed responsibility for
the environmental, health and safety functions formerly discharged by the Audit
Committee.
- ----------
* Persons beneficially owning 1% or more of the outstanding shares of voting
stock when cumulative voting is in effect have the right to nominate candidates
for election as a director and to have information relating to such nominees
included in the Company's proxy statement. However, cumulative voting is only in
effect when a shareholder owns 40% or more of the Company's outstanding voting
stock; no shareholder currently holds 40% or more of the Company's outstanding
voting stock. The procedures to be followed in the case of any such nominations
are set forth in the Bylaws of the Company.
6
Report of the Audit Committee
The Audit Committee (the "committee") of the Board of the Directors of
the Company is comprised of four independent Directors and acts under a written
charter approved by the Board of Directors. The Board annually reviews the
Nasdaq listing standards' definition of independence for audit committee members
and has determined that each member of the Committee meets that standard. The
Board has affirmatively determined that each member of the committee is able to
read and understand fundamental financial statements as required by the listing
standards of Nasdaq, and that Mr. William E. Buchholz is an "audit committee
financial expert" as such term is defined in applicable rules adopted pursuant
to the Sarbanes-Oxley Act of 2002.
The committee oversees the Company's financial reporting process on
behalf of the Board of Directors. Management has the primary responsibility for
the financial statements and the reporting process including the systems of
internal controls. In fulfilling its oversight responsibilities, the committee
reviewed and discussed the audited financial statements for fiscal year 2003
with management including a discussion of the quality, not just the
acceptability, of the accounting principles, the reasonableness of significant
judgments, and the clarity of disclosures in the financial statements.
The committee reviewed with Ernst & Young LLP, the Company's
independent auditors, who are responsible for expressing an opinion on the
conformity of those audited financial statements with generally accepted
accounting principles, their judgments as to the quality, not just the
acceptability, of the Company's accounting principles and such other matters as
are required to be discussed with the committee by the Statement on Auditing
Standards No. 61,"Communication with Audit Committees," as amended. In addition,
Ernst & Young LLP has provided the committee with the written disclosures and
the letter required by the Independence Standards Board Standard No. 1,
"Independence Discussions with Audit Committees," and the committee has
discussed with the independent auditors the auditors' independence from
management and the Company.
The committee discussed with the Company's independent auditors the
overall scope and plans for their respective audits. The committee meets with
the independent auditors, with and without management present, to discuss the
results of their examinations, their evaluations of the Company's internal
controls, and the overall quality of the Company's financial reporting.
In reliance on the reviews and discussions referred to above, the
committee recommended that the audited financial statements be included in the
Annual Report on Form 10-K for the year ended August 31, 2003 for filing with
the Securities and Exchange Commission. The committee has also approved the
selection of the Company's independent auditors for the fiscal year ending
August 31, 2004.
Richard T. Crowder, Chair
William E. Buchholz
John C. Hunter III
Sally G. Narodick
7
Code of Business Conduct and Ethics
The Company has adopted a Code of Business Conduct and Ethics (the
"Code") that is applicable to all employees, consultants and members of the
Board of Directors, including the Chief Executive Officer, Chief Financial
Officer and Corporate Controller. This Code embodies the commitment of the
Company and its subsidiaries to conduct business in accordance with the highest
ethical standards and applicable laws, rules and regulations. The Company will
provide any shareholder a copy of the Code, without charge, upon written request
to the Company's Secretary.
Section 16(a) Beneficial Ownership Reporting Compliance
The federal securities laws require the Company's directors and
executive officers, and persons who own more than ten percent (10%) of the
Company's common stock, to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of any
securities of the Company.
Messrs. Malkoski, Cordier, Keeley and Kunerth were late in filing a
report on Form 4 relating to a stock option grant to each on August 22, 2003.
8
ITEM 11. EXECUTIVE COMPENSATION.
Compensation paid by the Company during fiscal years 2003, 2002, and
2001 for the Chief Executive Officer and the other four most highly compensated
executive officers is set out in the following table.
SUMMARY COMPENSATION TABLE
<Table>
<Caption>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
----------------------------------------- ------------
OTHER ANNUAL SECURITIES ALL OTHER
FISCAL SALARY COMPENSATION UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($)(1) BONUS ($) ($) OPTIONS (#) ($)(2)
- --------------------------- ------ ---------- ---------- ------------ ----------- ------------
Thomas D. Malkoski ................ 2003 362,116 410,000 0 70,000 12,000
President and Chief Executive 2002 233,333 210,000 0 185,000 1,030
Officer
Steven O. Cordier ................. 2003 221,000 147,800 37,263(3) 55,000 0
Vice President, Chief 2002 20,673 20,000 60,000 0
Financial Officer and
Corporate Secretary
Gregory R. Keeley ................. 2003 238,577 119,295 0 20,000 4,636
Vice President 2002 231,000 102,375 0 0 4,827
2001 221,667 22,000 0 0 7,610
Wallace H. Kunerth ................ 2003 202,800 73,336 0 25,000 5,438
Vice President 2002 195,333 72,310 0 0 5,821
2001 186,667 38,000 0 0 5,151
John R. Randall ................... 2003 95,000 50,000 0 50,000 2,372
Vice President
</Table>
- ----------
(1) The salary amounts for Messrs. Malkoski and Cordier reflect a partial
year's salary based on their date of hire within fiscal year 2002. The
salary amount for Mr. Randall reflects a partial year's salary based on his
date of hire in fiscal year 2003.
(2) These amounts represent the Company's matching contributions under the
Penford Corporation Savings and Stock Ownership Plan.
(3) Of the total amount disclosed $35,613 represented relocation expenses and
$1,650 gross-up for Mr. Cordier's company automobile.
1994 Employee Stock Option Plan
The Company has a stock option plan pursuant to which options to
purchase common stock are granted to officers and certain employees of the
Company. The plan is administered by the Executive Compensation and Development
Committee of the Board of Directors, which determines to whom the options are
granted, the number of shares subject to each option grant, the type of option,
the vesting schedule and the exercise price. The plan and related agreements
contain provisions that, in certain circumstances, may cause the date of
exercise of such option to accelerate upon a change of control of the Company.
9
OPTION GRANTS IN FISCAL 2003
INDIVIDUAL GRANTS
<Table>
<Caption>
POTENTIAL REALIZABLE
VALUE AT ASSUMED ANNUAL
NUMBER OF % OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION FOR OPTION
UNDERLYING GRANTED TO OR BASE TERMS($)(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
NAME GRANTED (#) FISCAL YEAR ($/SH) DATE 5% 10%
- ---- ------------ ------------ ------------ ------------ ------------ ------------
Thomas D. Malkoski ... 20,000 6.8 14.945 10/30/2012 $ 187,977 $ 476,370
50,000 17.1 12.79 08/22/2013 $ 402,178 $ 1,019,198
Steven O. Cordier .... 15,000 5.1 14.945 10/30/2012 $ 140,982 $ 357,277
40,000 13.7 12.79 08/22/2013 $ 321,742 $ 815,359
Gregory R. Keeley .... 20,000 6.8 12.79 08/22/2013 $ 160,871 $ 407,679
Wallace H. Kunerth ... 25,000 8.5 12.79 08/22/2013 $ 201,089 $ 509,599
John R. Randall ...... 50,000 17.1 12.59 02/17/2013 $ 371,456 $ 979,355
</Table>
- ----------
(1) Potential realizable value is based on the assumption that the stock price
of the Company's common stock appreciates at the annual rate shown
(compounded annually) from the date of grant until the end of the ten-year
option term. These numbers are calculated based on the requirements
promulgated by the Securities and Exchange Commission and do not reflect
the Company's estimate of future stock price performance.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<Table>
<Caption>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
SHARES YEAR-END(#) FISCAL YEAR-END($)(1)
ACQUIRED ON VALUE ----------------------------- -----------------------------
NAME EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ------------ ------------ ------------ ------------- ------------ -------------
Thomas D. Malkoski ... 0 0 46,250 208,750 30,000 121,000
Steven O. Cordier .... 0 0 15,000 100,000 0 24,800
Gregory R. Keeley .... 0 0 75,000 45,000 0 12,400
Wallace H. Kunerth ... 0 0 37,500 37,500 0 15,500
John R. Randall ...... 0 0 0 50,000 0 41,000
</Table>
- ----------
(1) Values are calculated by subtracting the exercise price from the fair
market value of the stock as of the fiscal year end.
The Equity Compensation Plan Information is included in Item 5 of the
Company's Form 10-K for fiscal year ended August 31, 2003.
Retirement Plan
The Company has a defined benefit retirement plan (the "Retirement
Plan"). The following table shows the estimated annual benefits payable at
retirement under the Retirement Plan to persons in the specified compensation
and years of service classifications.
10
PENSION PLAN TABLE
BENEFITS COMPUTED WITHOUT SALARY MAXIMUMS OR INTERNAL REVENUE CODE SECTION 415
MAXIMUMS
<Table>
<Caption>
YEARS OF SERVICE
FIVE-YEAR AVERAGE -------------------------------------------------------
COMPENSATION(1) 15 20 25 30
----------------- ---------- ---------- ---------- ----------
$ 200,000 41,702 55,603 69,504 83,405
300,000 64,202 85,603 107,004 128,405
400,000 86,702 115,603 144,504 173,405
500,000 109,202 145,603 182,004 218,405
600,000 131,702 175,603 219,504 263,405
700,000 154,202 205,603 257,004 308,405
800,000 176,702 235,603 294,504 353,405
900,000 199,202 265,603 332,004 398,405
</Table>
- ----------
(1) The highest possible final five-year average compensation in 1993 was
$235,840. The Internal Revenue Code limits the compensation that can be
considered for plan purposes each year. In 2003, the maximum compensation
that will be considered is $200,000. With certain exceptions, Internal
Revenue Code Section 415 restricts to an aggregate amount of $160,000
(subject to cost of living adjustments) the annual pension that may be paid
by an employer from a plan that is qualified under the Code.
The retirement benefits shown are based upon retirement at age 65 and
the payments of a single-life annuity to the employee using current average
Social Security wage base amounts and are not subject to any deduction for
Social Security or other offset amounts. The Retirement Plan's formula limits
years of service to 30 years. With certain exceptions, the Internal Revenue Code
restricts to an aggregate amount of $160,000 (subject to cost of living
adjustments) the annual pension that may be paid by an employer from a plan that
is qualified under the Code.
All North American-based active employees who are not members of the
collective bargaining unit are eligible to participate in the Retirement Plan.
Compensation covered by the Retirement Plan includes salaries and bonuses.
As of August 31, 2003, the approximate years of credited service
(rounded to the nearest year) under the Retirement Plan of the named executive
officers were: Mr. Malkoski, 2; Mr. Cordier, 1; Mr. Keeley, 4; and Dr. Kunerth,
11.
Change-of-Control Arrangements
The Company has change-of-control agreements with the following
executive officers: Messrs. Thomas D. Malkoski, Randy J. Burns, Steven O.
Cordier, Gregory R. Keeley, Wallace H. Kunerth and John R. Randall. Each
agreement provides that the executive will receive compensation for 30 months if
his employment is terminated by the Company upon a change of control for any
reason other than gross misconduct, death, disability, or reaching age 65, or if
he terminates his employment following (i) the assignment to him of
responsibilities or title materially less than his responsibilities and title
prior to a change of control; (ii) the reduction in the aggregate of his salary
and bonus; or (iii) a material breach by the Company of the agreement, provided
such termination occurs within 24 months after certain defined events that might
lead to a change of control of the Company. The compensation will be paid at a
rate equal to the executive's then-current salary and target bonus. The
compensation is subject to a minimum annual rate of not less than the
executive's average compensation for the preceding three calendar years and is
subject to reduction if the aggregate present value of all payments would equal
or exceed three times the executive's "base amount," as defined in Section 280G
of the Internal Revenue Code. The executive also will continue to have
"employee" status for the 30-month period and will retain most employee benefits
during this period. The amount to be paid is reduced by amounts received by the
executive from other employers during the 30-month period.
The estimated aggregate amounts presently payable in the event of a
change of control (assuming each executive receives payments for the maximum
30-month period) would be: Mr. Malkoski, $1,825,000; Mr. Cordier,
11
$787,500; Mr. Keeley, $903,750; Dr. Kunerth, $721,000; Mr. Randall, $665,000;
and Mr. Burns, $717,500. This does not include the value of employee benefits
that might be payable to the executive during the 30-month period. Such benefits
cannot be determined with any reasonable certainty at this time. Continuation of
these benefits would include participation in the Company's health and welfare
plans and policies, continued vesting of stock options, and continuation of
years of service for pension and other retirement plan benefit computation
purposes.
Report of the Executive Compensation and Development Committee on Executive
Compensation
The Board of Directors of the Company has an Executive Compensation and
Development Committee (the "Committee") comprised of three independent
directors. The Committee is broadly charged by the Board of Directors to
establish compensation and incentive programs for key employees, and to direct
and monitor the Company's benefit plans for all Penford employees. In addition,
the Committee reviews plans for executive development and succession on a
regular basis.
Following review and approval by the Committee, issues pertaining to
executive compensation are reported to the full Board of Directors, except that
with regard to the base salary of the Chief Executive Officer, the Committee
reviews and recommends to the full Board for approval.
Total Compensation
The Committee believes that executive officer compensation should be
closely aligned with the performance of the Company on both a short-term and
long-term basis, and that such compensation should assist the Company in
attracting and retaining key executives critical to its long-term success. To
that end, the Committee's policy is that the compensation package for executive
officers shall consist of three components: (i) annual base salary; (ii) the
potential to earn incentive bonuses, the amount of which is dependent upon both
Company and individual performance during the fiscal year; and (iii) stock
option awards designed to align management's interests with those of
shareholders by providing long-term incentives for the Company's key employees.
The Committee establishes total annual compensation for the chief
executive officer and other senior executive officers after reviewing each
component of such executive's compensation against executive compensation
surveys prepared by outside consultants. The surveys used for comparison reflect
compensation levels and practices for persons holding comparably responsible
positions at a targeted peer group and other similarly sized manufacturing
companies. In addition to reviewing senior executive officers' compensation
against the comparator group, the Committee also solicits appropriate input from
the Company's Chief Executive Officer regarding total compensation for those
executives who report directly to him.
For fiscal year 2003, the Committee determined that total cash
compensation for executive officers (the sum of base salary and cash bonus)
should be targeted between the 50th and the 75th percentile of selected peer
group companies. The Committee may, at its discretion, award compensation in
excess of the target. The program is intended to be competitive with other
high-performing organizations and to enable the Company to attract, reward and
retain exceptional talent.
Base Salary
Base salaries for executive officers are reviewed on an annual basis
and at the time of promotion or other increase in responsibilities. Increases in
salary are based on evaluation of such factors as the levels of responsibility,
individual performance, experience, current pay, and Company peer group pay
levels. Mr. Malkoski's stated annual base salary for fiscal year 2003 was
$365,000.
Incentive Compensation
The Committee selects participants for the executive bonus plan, sets
bonus target percentages and objective quantitative and qualitative performance
goals, approves individual performance factors, and determines level of
achievement to objective performance measures. Target bonus amounts, payable in
cash, are expressed as a percentage of base salary and are established according
to the overall intended peer group companies. For fiscal year 2003, the bonus
targets for participating employees ranged from 25% to 100% of base salary
depending on
12
position. After the end of the performance period, the Committee determines the
extent to which a plan participant achieved the performance goals and the amount
of the award that is payable.
Penford's Board of Directors believes strongly that a balanced
combination of targets requiring the achievement of short-term operating goals
and longer-term strategic objectives translates directly into increasing the
long-term value of Penford stock. Individual incentive compensation target
awards are also subject to an adjustment based on individual performance.
Payouts can exceed targets to a maximum of 200% when quantitative and
qualitative targets are exceeded.
Stock Based Incentive Programs
The Board of Directors encourages all executive officers of Penford to
build a significant ownership position in Penford common stock. All stock
options to executive officers have been granted at market price on the date of
the grant. The non-qualified stock option plan is administered by the Executive
Compensation and Development Committee of the Board of Directors, which
determines to whom the options are granted, the number of shares subject to each
option grant, the vesting schedule and exercise price.
The amount of stock option shares granted under any given program is
evaluated based on a potential long-term total return to shareholders versus the
potential long-term return to the option holder for performance in increasing
the value of Penford stock. Factors such as dilution to existing shareholders
and existing open market stock trading activity are taken into account.
Supplemental Benefit Plan
The Company offers an Executive Deferred Compensation Plan to executive
officers and certain other key personnel. This plan is designed to be
competitive with other plans for comparably sized companies and to attract and
retain highly qualified management.
CEO Compensation
As discussed above, Penford's executive cash compensation program
includes a base salary and a Company performance-based incentive compensation
program. Mr. Malkoski participates in the same program applicable to the other
named executive officers with an incentive target of 100% of base salary. The
Committee's objective is to correlate the CEO's remuneration with the
performance of the Company. The Chief Executive Officer's remuneration is
adjusted to reflect the level of target achievement for that particular fiscal
year. After a review of all of the factors described above, the Executive
Compensation and Development Committee determined that Mr. Malkoski's actual
bonus for 2003 would be $410,000 consisting of $354,000 based on application of
the criteria in the Incentive Compensation Program described above and an
additional one-time bonus of $56,000 in recognition of his leadership in
completing the sale of the Hi-Maize(R) business and equity and debt financings.
Mr. Malkoski's annual base salary will increase to $400,000 effective January 1,
2004.
Sally G. Narodick, Chair
Paul H. Hatfield
James E. Warjone
13
Director Compensation
<Table>
Non-employee directors were compensated during the last fiscal year as follows:
Annual retainer as Chairman of the Board of Directors .......................................... $30,000
Annual retainer as a director................................................................... 9,000
Annual retainer as Chair of the Executive Committee............................................. 4,000
Annual retainer as Chair of all other standing committees....................................... 2,000
Fee for each meeting of the Board of Directors attended......................................... 1,000
Fee for each meeting of the Board of Directors attended when held out of state of director's
residence.................................................................................. 2,000
Fee for Chair and member of each standing committee for each meeting attended................... 1,000
</Table>
Under a non-qualified deferred compensation plan, non-employee
directors may elect to defer, with interest, all or part of their director
compensation.
Non-employee directors also receive restricted stock under the 1993
Non-Employee Director Restricted Stock Plan (the "Restricted Stock Plan"). The
Restricted Stock Plan provides that beginning September 1, 1993 and every three
years thereafter, each non-employee director shall receive $18,000 worth of
common stock of the Company, based on the last reported sale price of the stock
on the preceding trading day. A person who becomes a non-employee director after
the September 1 on which an award was made will be awarded the number of shares
determined by dividing the amount equal to $18,000 minus the product of $500
times the number of months since such September 1 by the last reported sale
price of the stock on the trading day next preceding the award date. A
non-employee director may sell or otherwise transfer one-third of the shares
covered by an award on each anniversary of the date of the award. If a
non-employee director ceases to be a director before the restrictions against
transfer have lapsed with respect to any shares, then, except in certain
circumstances, such as retirement, the director forfeits such shares. On
September 3, 2002, the last grant date under the Restricted Stock Plan, the
Company granted each non-employee director 1,309 shares.
In addition, non-employee directors receive stock options under the
Stock Option Plan for Non-Employee Directors. The plan provides that on each
September 1, each non-employee director shall receive an option to purchase the
number of shares of the Company's common stock equal to $10,000 divided by 25%
of the fair market value of a share of such stock on such date. The exercise
price is 75% of the fair market value of a share of such stock on the grant
date. If a non-employee director will not serve during the full fiscal year due
to retirement, then a pro rata award will be made. Accordingly, on September 2,
2003 each non-employee director was granted an option to purchase 3,053 shares
of common stock. Each non-employee director also may elect to receive stock
options in lieu of all or a portion of director cash compensation for that
fiscal year. Grants of these options, if so elected, occur quarterly. The number
of shares subject to each option is equal to the amount of compensation
(retainer, meeting and committee fees) payable to the non-employee director as
of the quarterly date divided by 25% of the fair market value of a share of the
Company's common stock on the grant date. The exercise price for these deferred
compensation stock options is 75% of the fair market value of a share of such
stock on the grant date. In fiscal year 2003, Messrs. Richard T. Crowder and
James E. Warjone elected to receive such options in lieu of all or a portion of
director cash compensation. Unless an option granted under the plan is
terminated or its exercisability is accelerated in accordance with the plan upon
the occurrence of certain events (including a change of control), the option is
exercisable six months after its grant date. The options terminate 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.
14
Performance Graph
The following graph compares the Company's cumulative total shareholder
return on its common stock for a five-year period (September 1, 1998 to August
31, 2003) with the cumulative total return of the Nasdaq Market Index and all
companies traded on the Nasdaq Stock Market ("Nasdaq") with a market
capitalization of $100 - $200 million, excluding financial institutions. The
graph assumes that $100 was invested on September 1, 1998 in the Company's
common stock and in the stated indices. The comparison assumes that all
dividends are reinvested.
COMPARE 5-YEAR CUMULATIVE TOTAL RETURN
AMONG PENFORD CORPORATION,
NASDAQ MARKET INDEX AND PEER GROUP INDEX
[PERFORMANCE GRAPH]
ASSUMES $100 INVESTED ON SEPTEMBER 1, 1998
ASSUMES DIVIDEND REINVESTED
FISCAL YEAR ENDING AUGUST 31, 2003
<Table>
<Caption>
1998 1999 2000 2001 2002 2003
------ ------ ------ ------ ------ ------
PENFORD CORPORATION 100.00 105.25 131.51 79.20 106.16 102.59
NASDAQ MARKET INDEX (U.S.) 100.00 185.55 284.19 121.61 89.25 122.94
NASDAQ MARKET CAP ($100-200M) 100.00 160.25 152.24 49.18 17.51 23.04
</Table>
Management does not believe there is either a published index, or a
group of companies whose overall business is sufficiently similar to the
business of Penford to allow a meaningful benchmark against which the Company
can be compared. The Company sells products based on specialty carbohydrate
chemistry to several distinct markets, making overall comparisons to one of
these markets misleading to the Company as a whole.
For these reasons, the Company has elected to use non-financial
companies traded on Nasdaq with a similar market capitalization as a peer group.
15
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information, as of December 5, 2003,
regarding the beneficial ownership of the Company's common stock by any person
known to the Company to be the beneficial owner of more than five percent of
such outstanding common stock; by the directors including the Company's Chief
Executive Officer; by the four other highest paid executive officers in fiscal
year 2003; and by the directors and named executive officers as a group.
<Table>
<Caption>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP OF
NAME (AND ADDRESS FOR BENEFICIAL OWNERS OVER 5%) COMMON STOCK(1) PERCENT OF CLASS
- ------------------------------------------------ ------------------------ ----------------
T. Rowe Price .................................................... 825,000 9.48 (3)
100 East Pratt Street
Baltimore, Maryland 21202
David L. Babson & Co., Inc........................................ 694,750 7.99 (3)
One Memorial Drive
Cambridge, MA 02142
Rutabaga Capital Management 602,166 6.92 (3)
64 Broad Street
Boston, MA 02109
Thomas D. Malkoski................................................ 93,250 1.06 (3)
William E. Buchholz .............................................. 2,891 **
Jeffrey T. Cook (2)............................................... 246,373 2.83 (3)
Steven O. Cordier ................................................ 19,750 **
Richard T. Crowder................................................ 22,866 **
R. Randolph Devening ............................................. 916 **
Paul H. Hatfield.................................................. 82,412 **
John C. Hunter III................................................ 24,598 **
Gregory R. Keeley................................................. 75,469 **
Wallace H. Kunerth................................................ 37,624 **
Sally G. Narodick................................................. 30,003 **
John R. Randall................................................... 4,502 **
James E. Warjone.................................................. 19,936 **
All directors and executive officers as a group (15 persons)...... 679,540 7.47 (3)
</Table>
- ----------
** Represents less than 1%
(1) Unless otherwise indicated, beneficial ownership represents sole voting and
investment power. The totals, which include shares that may be acquired
within 60 days through the exercise of stock options, are as follows: Mr.
Malkoski, 88,750; Mr. Buchholz, 1,773; Mr. Cook, 2,102; Mr. Cordier,
18,750; Mr. Crowder, 19,953;; Mr. Hatfield, 66,356; Mr. Hunter, 21,815; Mr.
Keeley, 75,000; Dr. Kunerth 37,500; Ms. Narodick, 25,028; Mr. Warjone,
18,023; and all directors and executive officers as a group, 393,800.
(2) Includes 78,300 shares held in irrevocable trusts for which Mr. Cook shares
voting and investment power.
(3) For purposes of calculating the percentage of class owned by this officer
or director and the directors and named officers as a group, the total
shares of the class includes shares that may be acquired within 60 days
through the exercise of stock options.
16
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
See "Change-of-Control Arrangements" in Item 11 of this Part III,
above.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The following table sets forth approximate aggregate fees billed to the
Company by Ernst & Young LLP, the Company's principal independent auditor.
<Table>
<Caption>
2002 2003
------------ ------------
Audit Fees ................... $ 303,366 $ 329,989
Audit-Related Fees (1) ....... 47,451 24,850
Tax Fees (2) ................. 202,906 850,110
All Other Fees (3) ........... 2,881 6,544
------------ ------------
Total Fees ................... $ 556,604 $ 1,211,493
============ ============
</Table>
- ----------
(1) Audit-Related Fees consist of fees billed related to the performance of
audits of the Company's benefit plans and accounting consultations related
to the application of generally accepted accounting principles.
(2) Tax Fees consist of the fees billed related to professional services
performed by Ernst & Young LLP for tax compliance, tax advice and domestic
and international tax planning. Tax Fees billed in fiscal 2003 include
$507,000 related to assistance with a state sales tax audit.
(3) All Other Fees consist of fees billed for reviews of royalties and other
areas to comply with contractual obligations of the Company.
The Audit Committee has concluded that the provision of the non-audit
services listed above is compatible with maintaining the independence of Ernst &
Young LLP.
Policy on Audit Committee Pre-Approval of Audit and Permissible Non-Audit
Services of Independent Auditors
The Audit Committee has adopted an Audit and Non-Audit Services
Pre-Approval Policy that sets forth the procedures and the conditions pursuant
to which services proposed to be performed by the independent auditor may be
pre-approved. These services may include audit services, audit-related services,
tax services and other services. The Audit Committee determines from time to
time those permitted services that have the general pre-approval of the Audit
Committee, which is generally provided for up to one year. Any pre-approval is
detailed as to the particular service or category of services and is generally
subject to a specific budget. The Audit Committee considers whether such
services are consistent with SEC rules on auditor independence, as well as
whether the independent auditor is best positioned to provide the most effective
and efficient service, for reasons such as its familiarity with the Company's
business, people, culture, accounting systems, risk profile and other factors,
and whether the service might enhance the Company's ability to manage or control
risk or improve audit quality. The independent auditors and management are
required to periodically report to the Audit Committee regarding the extent of
services provided by the independent auditors in accordance with this
pre-approval, and the fees for the services performed to date. The Audit
Committee may also pre-approve particular services on a case-by-case basis.
17
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(3) Exhibits
31.1 Certifications of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certifications of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley act of 2002
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/ Steven O. Cordier
------------------------------------------
Steven O. Cordier
Vice President and Chief Financial Officer
Date: January 14, 2004
18
INDEX TO EXHIBITS
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
31.1 Certifications of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certifications of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certifications of Chief Executive Officer and Chief
Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley act of 2002
</Table>