Filed Pursuant to Rule 424(b)(3)
Registration
No. 333-144996
Prospectus Supplement
(To Prospectus dated September 28, 2007)
2,000,000 Shares
PENFORD
CORPORATION
Common
Stock
We are offering 2,000,000 shares of our common stock. Our
common stock is quoted on the NASDAQ Global Market under the
symbol PENX. The last reported sale price of our
common stock on the NASDAQ Global Market on December 6,
2007 was $26.32 per share.
Investing in our common stock involves a high degree of risk.
Please read Risk Factors beginning on
page S-7.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
accompanying prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
|
|
|
|
|
|
|
|
|
|
|
|
PER SHARE
|
|
TOTAL
|
|
Public Offering Price
|
|
$
|
25.000
|
|
|
$
|
50,000,000
|
|
Underwriting Discounts and Commissions
|
|
$
|
1.375
|
|
|
$
|
2,750,000
|
|
Proceeds to Penford (Before Expenses)
|
|
$
|
23.625
|
|
|
$
|
47,250,000
|
|
|
|
Delivery of the shares of common stock is expected to be made on
or about December 12, 2007. We have granted the
underwriters an option for a period of 30 days to purchase
an additional 300,000 shares of our common stock to cover
overallotments.
Jefferies &
Company
BMO
Capital Markets
Prospectus Supplement dated
December 6, 2007
Table of
Contents
|
|
|
|
|
Prospectus Supplement
|
|
|
|
ii
|
|
|
|
|
S-1
|
|
|
|
|
S-7
|
|
|
|
|
S-12
|
|
|
|
|
S-13
|
|
|
|
|
S-14
|
|
|
|
|
S-15
|
|
|
|
|
S-16
|
|
|
|
|
S-18
|
|
|
|
|
S-31
|
|
|
|
|
S-41
|
|
|
|
|
S-44
|
|
|
|
|
S-47
|
|
|
|
|
S-47
|
|
|
|
|
S-47
|
|
|
|
|
S-48
|
|
|
|
|
F-1
|
|
|
Prospectus
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
7
|
|
|
|
|
10
|
|
|
|
|
11
|
|
|
|
|
11
|
|
|
|
|
11
|
|
You should rely only on the information contained in or
incorporated by reference into this prospectus supplement and
the accompanying prospectus or in any free writing prospectus
that we may provide to you. Neither we nor the underwriters have
authorized any other person to provide you with information
different from that contained in this prospectus supplement and
the accompanying prospectus or in any free writing prospectus
that we may provide to you. We are offering to sell and are
seeking offers to buy shares of common stock only in
jurisdictions where offers and sales are permitted. The
information contained in or incorporated by reference into this
prospectus supplement and the accompanying prospectus is
accurate only as of the date such information is presented
regardless of the time of delivery of this prospectus supplement
and the accompanying prospectus or any sale of common stock. Our
business, financial condition, results of operations and
prospects may have changed since such date.
ABOUT
THIS PROSPECTUS SUPPLEMENT
This document is in two parts. The first part is this prospectus
supplement, which describes the specific terms of this offering
of shares of our common stock. The second part is the
accompanying prospectus, which gives more general information.
Generally, when we refer to the prospectus, we are referring to
both parts of this document combined. If the description of this
offering varies between this prospectus supplement and the
accompanying prospectus, you should rely on the information in
this prospectus supplement.
We incorporate important information into this prospectus by
reference. You may obtain the information incorporated by
reference into this prospectus without charge by following the
instructions under Where You Can Find More
Information.
You should read this prospectus supplement along with the
accompanying prospectus carefully before you invest. Both
documents contain important information you should consider when
making your investment decision. This prospectus supplement
contains information about the shares of common stock offered in
this offering and may add, update or change information in the
accompanying prospectus.
Unless otherwise mentioned or unless the context requires
otherwise, all references in this prospectus to
Penford, we, us,
our, or similar references mean Penford Corporation
together with its subsidiaries.
ii
Prospectus
Supplement Summary
The following summary highlights basic information about
Penford and this offering. This summary does not contain all of
the information you should consider before making a decision to
invest in our common stock. You should review this entire
prospectus supplement and the accompanying prospectus carefully,
including the risks of investing in our common stock discussed
in the Risk Factors section, our consolidated
financial statements and notes thereto and the documents
incorporated by reference.
Our
Business
According to an industry study, Penford Corporation is the
largest North American developer, manufacturer and marketer of
carbohydrate-based specialty starches for multiple industrial
and food applications. We have a history that dates back more
than 100 years, and we have established leading market
positions within the global starch industry based on a strong,
widely recognized reputation for quality and service and an
extensive array of customized products. Our
strategically-located manufacturing facilities in the United
States, Australia and New Zealand provide us with broad
geographic coverage of our target markets.
We operate in three business segments, each using our
carbohydrate chemistry expertise to develop starch-based
ingredients for value-added applications in several markets that
improve the quality and performance of our customers
products, including papermaking and food products. The first two
segments serve broad categories of end-users in industrial and
food ingredients and are primarily serviced by our United States
operations. The third segment consists of geographically
separate operations in Australia and New Zealand. Our Australian
and New Zealand operations are engaged primarily in the food
ingredients business. We have extensive research and development
capabilities, which enable us to understand the complex
chemistry of carbohydrate-based materials and to develop
applications to address our customers needs.
Our three business segments include:
|
|
|
|
|
Industrial Ingredients North America, which
generated approximately 54% of Penfords revenue in fiscal
2007, is a leading supplier of chemically modified specialty
starches to the paper, packaging and textile industries. Through
a commitment to research and development, Industrial Ingredients
develops customized product applications that help our customers
realize improved manufacturing efficiencies and advancements in
product performance. Industrial Ingredients has specialty
processing capabilities for a variety of modified starches from
renewable sources, including, for example, in the manufacture of
coated and uncoated paper and paper packaging products. These
starches are principally ethylated (chemically modified with
ethylene oxide), oxidized (treated with sodium hypochlorite) and
cationic (carrying a positive electrical charge). Ethylated and
oxidized 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. Industrial
Ingredients products are a cost-effective alternative to
synthetic, petroleum-based ingredients.
|
|
|
|
Food Ingredients North America, which generated
approximately 17% of Penfords revenue in fiscal 2007,
develops and manufactures specialty starches and dextrins for
the food manufacturing and food service industries. Food
Ingredients leverages the inherent characteristics of potato,
corn, tapioca and rice to help improve our customers
product performance. Food Ingredients is the only North American
manufacturer of modified food-grade potato starch. Food
Ingredients specialty starches produced for food
applications are used in coatings for products such as french
fries sold in quick-service restaurants to provide crispness,
improved taste and texture, and increased product life.
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 canned products,
sauces, whole and processed meats, dry powdered mixes and other
food and bakery products.
|
|
|
|
Australia/New Zealand Operations generated approximately 29% of
Penfords revenue in fiscal 2007, and we believe it is the
sole domestic manufacturer of maize starch, high amylose starch
and dextrin in Australia. Additionally, we believe Penford is
the sole manufacturer of glucose in New Zealand. The
Australia/New Zealand segment develops, manufactures and markets
ingredient systems, including
|
S-1
specialty starches and sweeteners for food and industrial
applications. Our manufacturing capabilities allow us to
manufacture products to customer specifications and to quickly
respond to customers changing needs.
We are constructing a new ethanol plant at our Cedar Rapids,
Iowa facility. We have obtained $45 million in capital
financing to expand the facility to allow for up to
45 million gallons of ethanol production capacity per year
with construction cost estimates maintained at $1.00 to $1.05
per gallon. We have signed contracts valued at $40 million
for this project as of October 31, 2007. We already have
much of the infrastructure within the Cedar Rapids plant to
manufacture ethanol cost effectively, with sufficient grain
handling, separation processes, electric utilities and logistic
capabilities. The existing factory is centrally located near
rail and ground transport arteries and the ethanol facility will
occupy available space within the existing site footprint. Once
complete, we expect this enhancement of our bio-refining
capabilities will give us the ability to select from multiple
output choices to capitalize on changing industry conditions and
selling opportunities, and will allow us to direct production
towards the most attractive strategic and financial
opportunities.
The mailing address and telephone number of our principal
executive offices are 7094 S. Revere Parkway,
Centennial, Colorado
80112-3932
and
(303) 649-1900.
Our website is www.penx.com. Information contained on or
accessible through our website is not a part of this prospectus
supplement.
Our
Industry
The global market for starches is estimated to be about
55 million metric tons sold in 2007, and includes native
and modified starches sold in a variety of forms, as well as
starch hydrolysates such as glucose, corn syrup solids, high
fructose corn syrup and maltodextrins. Within this broad market,
we focus on specialty starches for industrial and food
applications in both dry and liquid product forms. Specialty
starches are starches that have been chemically or physically
modified to enhance their performance as a food or industrial
ingredient. We design our specialty starches to provide
measurable processing and finished product benefits to our
industrial and food customers. Our industrial applications
improve the manufacturing processing characteristics of
paper-based products, resulting in reduced costs and increased
production volumes, while enhancing the finished products
strength and surface properties. In food applications, our
specialty starches manage moisture, flavor dispersion, cohesion,
adhesion and viscosity to contribute to the finished
products appearance, taste, texture and increased shelf
life. We believe that the current addressable markets for our
industrial and food starches are approximately 6 million to
7 million metric tons in the aggregate, with a market value
of between $3.3 billion and $3.9 billion.
Our Competitive
Strengths
We believe that we enjoy a number of important competitive
strengths that drive our success, differentiate us from our
competitors and support our market positions, including:
A recognized leader in select, value-added segments of the
modified specialty starch industry.
We provide
advanced ingredient systems made from renewable, environmentally
safe raw materials for a variety of value-added starch
applications worldwide. We have over 100 years of
experience manufacturing specialty starches for the industrial
and food ingredient markets, with a widely recognized reputation
for providing exceptional quality, technology and service. We
have leading positions in the modified specialty starch markets
in North America, Australia and New Zealand. Additionally, we
have established sustainable entry positions in targeted
end-markets that are growing rapidly as consumers demand more
natural-based solutions from our customers. We believe our
capability to extend our leading positions in existing markets
to complementary opportunities by offering improved
functionality and performance gives us an advantage over our
competitors.
Ability to provide customized specialty starch solutions from
a broad array of renewable, natural-based
ingredients.
We manufacture specialty starches
from a variety of renewable raw materials including corn,
potatoes and wheat, and also formulate solutions with tapioca
and rice starches. Our ability to provide natural, customized
and cost-effective solutions from a broad array of substrates
separates us from many competitors. We work closely with our
customers to select the appropriate raw materials, or blends of
raw materials, and then cooperatively develop customized
formulations that are tailored to meet specific performance or
processing needs. This approach enables
S-2
us to be involved in the early stages of product development and
promote proprietary applications that permit our customers
products to perform better. Our value proposition emphasizes the
benefits from using renewable source materials that offer
superior performance, yield or cost when compared with
alternative products, particularly synthetic ingredients derived
from petrochemicals.
Significant value creation and ability to capitalize on
changing industry trends through expanding output choices at our
Cedar Rapids manufacturing facility.
We are
expanding our Cedar Rapids, Iowa manufacturing site so that we
have the capacity to produce up to 45 million gallons of
ethanol per year. Our existing infrastructure required for grain
handling, separation processes, utilities and logistic
capabilities will permit us to build out the
facility and manufacture ethanol cost-effectively. Once
complete, we expect this enhancement of our bio-refining
capabilities will give us the ability to select from multiple
output choices to capitalize on changing industry conditions and
selling opportunities, and will allow us to direct production
towards the most attractive strategic and financial
opportunities. Additionally, by improving production capacity
and adding fermentation capability, we believe we will be better
positioned to participate in emerging bio-processing trends and
technologies that represent potential significant platforms for
future growth for products across all of our end-markets.
Diverse, premier customer base in broad range of end-markets
and geographies.
Over the past 100 years, we
have established strong relationships with some of the largest
companies in the industrial and food sectors. Our customers
include some of the worlds largest paper and food
manufacturers
,
and we believe our relationships have been
built on our successful delivery of high quality, extremely
functional applications that provide customers with sustainable
advantages for their products. Sixteen of our twenty largest
customers, representing about 50% of our sales in fiscal 2007,
have retained that status for at least five years. Sales to this
group of sixteen customers have increased by approximately 16%
over the last five years. We supply modified industrial starches
to five of the six largest North American producers of uncoated
freesheet paper and two of the three largest North American
manufacturers of coated freesheet paper. We also supply many of
the leading food processors in the United States and all of the
leading multi-national quick service restaurant chains in North
America, as well as many in the casual dining sector. In
Australia and New Zealand, we serve the five largest food
manufacturers and two of the top five mining companies. Three of
the twelve largest customers served by our Australia and New
Zealand operations are based in Japan.
Ability to leverage capabilities and products across business
segments and end-markets.
We are able to leverage
our product offerings and production expertise to transfer
learning, information and analytical services among our
businesses while supporting customers worldwide. We have
expanded biopolymers expertise and analytical services across
all three business segments for use in papermaking,
biodegradable packaging and companion pet treats. To lower costs
and improve product performance, we have moved starch processing
technology developed in Australia to the United States. Our
pilot plant facility in Cedar Rapids has developed commercial
applications in bioplastics and mining as well as functional and
nutritional food ingredients. We believe this broad competence
accelerates commercialization of new products in diverse
markets, improves customer acceptance of standardized
formulations across regions and reduces development costs.
Experienced and proven management team.
We are
led by a highly experienced and committed management team that
possesses substantial operational, technical and commercial
experience. On average, each member of our senior management
team has more than twenty years of experience within the food
and chemical ingredients industry. In addition, we have a
talented, experienced and dedicated mid-level management group
across all of our business segments. Under our current Chief
Executive Officer and Chief Financial Officer, we have grown
total sales from $225.7 million in 2001 to
$362.4 million in 2007, and operating income from
$11.0 million in 2001 to $23.6 million in 2007. Our
total debt to total capital ratio over the same six-year time
period was reduced from 63.2% on August 31, 2001 to 37.8%
on August 31, 2007.
Our Business
Strategy
Key elements of our business strategy are to:
Deliver superior total value with customized solutions for
our customers.
We are committed to manufacturing
high-quality products that exceed customer expectations, with an
emphasis on products that are safe, made from
S-3
renewable resources, cost-effective and customizable. We work to
deliver superior value to our customers through a combination of
advanced ingredient systems and highly tailored, service-based
solutions, supported by our technically trained sales and
applications teams. By providing additional products and
services, we anticipate strengthening our existing customer
relationships, winning new business and expanding into new
segments and geographic markets.
Focus resources and customer development programs on
higher-margin, value-added specialty products.
We
believe we can continue to improve margins in our businesses by
transitioning our product mix to a higher proportion of
specialty products. Where we believe our technologies and
differentiated applications offer our customers clear,
quantifiable benefits, we intend to expand value-added products
while maintaining cost competitiveness in our established
product offerings. We also intend to continue to invest in our
technical and commercial capabilities to develop more complex
ingredient solutions to create value for our customers.
Improve operating efficiencies while building in flexibility
to capitalize on new opportunities.
We intend to
continue to invest in capital and human resources to achieve
productivity gains and continual process improvements that
support our growth initiatives. We also plan to pursue superior
product manufacturing and innovation through technologically
advanced manufacturing processes to maximize profitability. We
expect to support profitable growth across multiple business
lines by reducing unit costs through manufacturing process
improvements, improving asset utilization at our facilities, and
containing our operating expenses. For example, we have
increased production by 34% in our potato processing plants and
by 14% in our Australia and New Zealand facilities since 2002.
Additionally, we are in the process of expanding the capacity
and production capability in our Cedar Rapids facility, which,
when the expansion is complete, will offer us greater
manufacturing flexibility and enable us to improve
profitability. This additional production capacity has allowed
us to develop a commercial product from alcohol-based reactions
to create a cationic liquid starch for use in personal care
products that can displace a petroleum-based chemical.
Grow through product innovation.
We intend to
strengthen our market positions through product innovation. We
continue to invest in human capital to enhance our skill bases,
technical expertise and research and development capacity. Our
technical personnel not only respond to customer requests, they
also actively bring new market-driven concepts and applications
to our customers. We also seek to invest in product innovations
where we believe opportunities exist to broaden our current
technology platforms into adjacent applications and markets. In
the past few years, we have developed numerous innovative
solutions that extend our businesses into complementary products
and end-markets. For example, our liquid natural additive
platform is a renewable source starch-based line of products
that can displace various synthetic chemicals, extending our
industrial business into recycled newsprint, recycled paperboard
and adhesive segments, which are areas in which there has been
substantial growth and consumer focus over the past several
years. We have already succeeded in displacing or partially
replacing a range of petroleum-based products, including
synthetic latex, proteins, synthetic optical brighteners and
polyvinyl alcohol with our proprietary products. Our advanced
food coatings technologies provide greater product integrity
(crispness and heat) and longer hold times for french fries. We
believe there is a range of opportunities in developing novel
ingredients, blends, nutritional delivery systems and resins for
the rapidly growing pet food industry, and our starch-based
bio-polymer formulas for edible injection molded and extruded
pet treats offer non-allergenic, high-dissolution product
benefits, with enhanced processing characteristics for our
customers. Market interest is high in the area of renewable raw
materials as a partial replacement for plastics in packaging and
consumable products, and we have commercialized a unique,
starch-based bio-polymer formulation for recyclable packaging to
compete against synthetic bio-polymers.
Seek external opportunities to accelerate shareholder
value.
We intend to pursue strategic alliances,
licensing arrangements and acquisitions of complementary
technologies and businesses to create value for our
shareholders. We believe that opportunities for expansion of our
business through strategic alliances or industry acquisitions
will arise as the bio-materials industry matures, and our
production facilities are well-positioned to capitalize on
developing trends and technologies in bio-refining and
bio-processing. In bio-refining, we believe there is opportunity
to develop bio-friendly solvents and chemicals from our ethanol
platform. In bio-processing, we believe we are aligned with
trends towards seed trait technology and the need to process the
expected range of new varieties of corn. Additionally, we
believe that advancements in bio-refining and bio-processing may
be conducive to strategic alliances or partnerships.
S-4
The
Offering
|
|
|
Common stock offered by us
|
|
2,000,000 shares.
|
|
Common stock to be outstanding immediately after this
offering
|
|
11,218,923 shares.
|
|
Over-allotment option
|
|
We have granted the underwriters an option to purchase up to
an additional 300,000 shares solely to cover
over-allotments.
|
|
Use of proceeds
|
|
We expect to use the net proceeds from this offering to
reduce our indebtedness and for general corporate purposes. You
should read the discussion under the heading Use of
Proceeds on
page S-13
for more information.
|
|
NASDAQ Global Market symbol
|
|
PENX
|
The number of shares to be outstanding after this offering is
based on the number of shares outstanding as of November 1,
2007. Unless we specifically state otherwise, the information in
this prospectus supplement:
|
|
|
|
|
is based on the assumption that the underwriters will not
exercise the over-allotment option granted to them by us;
|
|
|
|
excludes an aggregate of 1,033,977 shares of our common
stock subject to outstanding options as of August 31, 2007
at a weighted average exercise price of $14.25 per
share; and
|
|
|
|
excludes an additional 736,976 shares of our common stock
reserved for issuance upon exercise of options, or as restricted
stock grants or equity-based awards, that may be granted
subsequent to August 31, 2007 under our 2006 Long-Term
Incentive Plan.
|
S-5
Summary
Consolidated Financial Data
The following tables contain our summary consolidated financial
data as of the dates and for the periods shown. The summary
statement of operations data for the years ended August 31,
2007, 2006 and 2005, and the balance sheet data as of
August 31, 2007 and 2006, have been derived from our
consolidated audited financial statements included elsewhere in
this prospectus supplement. The summary statement of operations
data for the years ended August 31, 2004 and 2003, and the
balance sheet data as of August 31, 2005, 2004 and 2003,
have been derived from our consolidated audited financial
statements that are not included in this prospectus supplement.
The information in the tables below is only a summary and should
be read in conjunction with Selected Consolidated
Financial Data, Managements Discussion and
Analysis of Financial Condition and Results of Operations,
and our consolidated audited financial statements and related
notes contained elsewhere in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statement of Operations Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
$
|
279,386
|
|
|
$
|
262,467
|
|
Cost of sales
|
|
|
298,203
|
|
|
|
273,476
|
|
|
|
263,542
|
|
|
|
241,298
|
|
|
|
218,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
64,161
|
|
|
|
44,943
|
|
|
|
33,221
|
|
|
|
38,088
|
|
|
|
43,683
|
|
Operating expenses
|
|
|
31,391
|
|
|
|
29,477
|
|
|
|
26,413
|
|
|
|
23,063
|
|
|
|
24,620
|
|
Research and development expenses
|
|
|
6,812
|
|
|
|
6,198
|
|
|
|
5,796
|
|
|
|
6,115
|
|
|
|
5,399
|
|
Other costs
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
1,334
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
23,558
|
|
|
|
9,268
|
|
|
|
1,012
|
|
|
|
7,576
|
|
|
|
13,829
|
|
Interest expense
|
|
|
5,711
|
|
|
|
5,902
|
|
|
|
5,574
|
|
|
|
4,492
|
|
|
|
5,495
|
|
Non-operating (income) expense, net
|
|
|
(1,645
|
)
|
|
|
(1,896
|
)
|
|
|
(2,209
|
)
|
|
|
(1,987
|
)
|
|
|
(3,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
19,492
|
|
|
|
5,262
|
|
|
|
(2,353
|
)
|
|
|
5,071
|
|
|
|
11,539
|
|
Income taxes (benefits)
|
|
|
5,975
|
|
|
|
1,034
|
|
|
|
(4,927
|
)
|
|
|
1,369
|
|
|
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
|
$
|
3,702
|
|
|
$
|
8,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
8,986
|
|
|
|
8,900
|
|
|
|
8,827
|
|
|
|
8,733
|
|
|
|
8,122
|
|
Basic earnings (loss) per share
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
1.04
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
9,283
|
|
|
|
9,004
|
|
|
|
8,946
|
|
|
|
8,868
|
|
|
|
8,228
|
|
Diluted earnings (loss) per share
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
1.03
|
|
Cash dividends declared per share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
Balance Sheet Data
(as of period end)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
39,033
|
|
|
$
|
32,073
|
|
|
$
|
35,571
|
|
|
$
|
40,142
|
|
|
$
|
39,013
|
|
Total assets
|
|
|
288,388
|
|
|
|
250,668
|
|
|
|
249,917
|
|
|
|
252,191
|
|
|
|
250,893
|
|
Total debt
|
|
|
74,677
|
|
|
|
67,007
|
|
|
|
66,129
|
|
|
|
80,326
|
|
|
|
79,696
|
|
Shareholders equity
|
|
|
125,676
|
|
|
|
107,452
|
|
|
|
100,026
|
|
|
|
95,719
|
|
|
|
87,885
|
|
Other Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
34,734
|
|
|
$
|
14,905
|
|
|
$
|
9,413
|
|
|
$
|
15,454
|
|
|
$
|
8,772
|
|
Depreciation and amortization
|
|
|
15,696
|
|
|
|
15,583
|
|
|
|
17,025
|
|
|
|
17,689
|
|
|
|
17,680
|
|
Net cash provided by operating activities
|
|
|
22,529
|
|
|
|
11,385
|
|
|
|
21,056
|
|
|
|
20,383
|
|
|
|
26,529
|
|
Net cash used in investing activities
|
|
|
(34,778
|
)
|
|
|
(14,373
|
)
|
|
|
(4,168
|
)
|
|
|
(15,887
|
)
|
|
|
(5,734
|
)
|
Net cash provided by (used in) financing activities
|
|
|
11,249
|
|
|
|
(1,389
|
)
|
|
|
(17,390
|
)
|
|
|
(3,627
|
)
|
|
|
(16,241
|
)
|
|
|
(Dollars in thousands, except per
share data)
S-6
Prior to making a decision about investing in our common stock,
you should carefully consider the following risks and
uncertainties, together with all of the other information
contained in or incorporated by reference in this prospectus
supplement or the accompanying prospectus. If any of the
following risks actually occur, our business could be harmed. In
such case, the trading price of our common stock could decline,
and you may lose all or part of your investment.
Risks Related to
Our Business
The
availability and cost of agricultural products Penford purchases
are vulnerable to weather and other factors beyond our control.
Our ability to pass through cost increases for these products is
limited by worldwide competition and other factors.
In fiscal 2007, approximately 33% of Penfords
manufacturing costs were the costs of corn, wheat flour and
potato starch. Weather conditions, plantings, government
programs and policies, energy costs and global supply, among
other things, have historically caused volatility in the supply
and prices of these agricultural products. For example, in 2006
and 2007, growing regions in Australia experienced significant
droughts, reducing crop yields and increasing acquisition costs
for grain raw materials. Due to local
and/or
international competition, particularly in our Australia/New
Zealand operations, we may not be able to pass through the
increases in the cost of agricultural raw materials to our
customers. To manage price volatility in the commodity markets,
we may purchase inventory in advance or enter into exchange
traded futures or options contracts. Despite these hedging
activities, we may not be successful in limiting our exposure to
market fluctuations in the cost of agricultural raw materials.
Increases in the cost of corn, wheat flour and potato starch due
to weather conditions or other factors beyond Penfords
control and that cannot be passed through to customers may
reduce our future profitability.
Increases
in energy and chemical costs may reduce our
profitability.
Energy and chemicals comprised approximately 12% and 11%,
respectively, of the cost of manufacturing our products in
fiscal 2007. We use natural gas extensively in our Industrial
Ingredients business to dry starch products, and, to a lesser
extent, in our other business segments. We use chemicals in all
of our businesses to modify starch for specific product
applications and customer requirements. The prices of these
inputs to our manufacturing process fluctuate based on
anticipated changes in supply and demand, weather and the prices
of alternative fuels, including petroleum. We may use short-term
purchase contracts, exchange traded futures or option contracts
to reduce the price volatility of natural gas; however, these
strategies are not available for the chemicals we purchase. If
we are unable to pass on increases in energy and chemical costs
to our customers, our margins and profitability would be
adversely affected.
The loss
of a major customer could have an adverse effect on our results
of operations.
In fiscal 2006 and 2005, none of our customers constituted more
than 10% of sales. However, in fiscal 2007, our largest
customer, Domtar, Inc., represented approximately 12% of our
consolidated net sales and sales to our top ten customers
represented 44% of our consolidated net sales. Generally, we do
not have multi-year sales agreements with our customers.
Instead, many customers place orders on an as-needed basis and
generally can change their suppliers without penalty. If we lost
one or more of our major customers, or if one or more of our
major customers significantly reduced its orders, sales and
results of operations would be adversely affected.
We are
substantially dependent on our manufacturing facilities; any
operational disruption could result in a reduction of our sales
volumes and could cause us to incur substantial
losses.
Our revenues are and will continue to be derived from the sale
of starch-based ingredients that we manufacture at our
facilities. Our operations may be subject to significant
interruption if any of our facilities experiences a major
accident or is damaged by severe weather or other natural
disasters. In addition, our operations may be subject to labor
disruptions and unscheduled downtime, or other operational
hazards inherent in our industry, such as equipment failures,
fires, explosions, abnormal pressures, blowouts, pipeline
ruptures, transportation accidents and
S-7
natural disasters. Some of these operational hazards may cause
personal injury or loss of life, severe damage to or destruction
of property and equipment or environmental damage, and may
result in suspension of operations and the imposition of civil
or criminal penalties. Our insurance may not be adequate to
fully cover the potential operational hazards described above or
that we will be able to renew this insurance on commercially
reasonable terms or at all.
The
agreements governing our debt contain various covenants that
limit our ability to take certain actions and also require us to
meet financial maintenance tests, and our failure to comply with
any of our debt covenants could have a material adverse effect
on our business, financial condition and results of
operations.
The agreements governing our outstanding debt contain a number
of significant covenants that, among other things, limit our
ability to:
|
|
|
|
|
incur additional debt or liens;
|
|
|
|
consolidate or merge with any person or transfer or sell all or
substantially all of our assets;
|
|
|
|
make investments or acquisitions;
|
|
|
|
pay dividends or make certain other restricted payments;
|
|
|
|
enter into transactions with affiliates; and
|
|
|
|
pay dividends or other payments to subsidiaries.
|
In addition, our revolving credit facility requires us to comply
with specific financial ratios and tests, under which we are
required to achieve specific financial and operating results.
Events beyond our control may affect our ability to comply with
these provisions. A breach of any of these covenants would
result in a default under our revolving credit facility. In the
event of any default that is not cured or waived, our lenders
could elect to declare all amounts borrowed under the revolving
credit facility, together with accrued interest thereon, due and
payable, which could permit acceleration of other debt. If any
of our debt is accelerated, we do not assure you that we would
have sufficient assets to repay that debt or that we would be
able to refinance that debt on commercially reasonable terms or
at all.
Changes
in interest rates may affect Penfords
profitability.
Although we have fixed the interest rates on a significant
portion of our outstanding debt through interest rate swaps, as
of August 31, 2007, approximately $37.5 million of our
outstanding debt, including amounts outstanding under our
Australian grain inventory financing facility, was subject to
variable interest rates which move in direct relation to the
United States or Australian London Interbank Offered Rate, the
Australian bank bill rate, or the prime rate in the United
States, depending on the selection of borrowing options. Any
significant changes in these interest rates would materially
affect our profitability by increasing or decreasing our
borrowing costs.
Unanticipated
changes in tax rates or exposure to additional income tax
liabilities could affect our profitability.
We are subject to income taxes in the United States, Australia
and New Zealand. Our effective tax rates could be adversely
affected by changes in the mix of earnings in countries with
differing statutory tax rates, changes in the valuation of
deferred tax assets and liabilities or changes in tax laws. The
carrying value of deferred tax assets, which are predominantly
in the United States, is dependent on our ability to generate
future taxable income in the United States. The amount of income
taxes paid is subject to our interpretation of applicable tax
laws in the jurisdictions in which we operate. Although we
believe we have complied with all applicable income tax laws, we
do not assure you that a tax authority will not have a different
interpretation of the law or that any additional taxes imposed
as a result of tax audits will not have an adverse effect on our
results of operations.
Fluctuations
in the relative value of the U.S. dollar and foreign currencies
may negatively affect our revenues and profitability.
In the ordinary course of business, we are subject to risks
associated with changing foreign exchange rates. The value of
the U.S. dollar against foreign currencies has been
generally in decline in recent years. In fiscal year 2007,
approximately 29% of our revenue was denominated in currencies
other than the U.S. dollar. Our revenues and profitability
may be adversely affected by fluctuations in exchange rates
between the U.S. dollar and other currencies.
S-8
We may
not be able to implement ethanol production as planned or at
all. Even if we successfully implement ethanol production, our
ethanol facility may not be profitable.
Our ability to implement ethanol production as planned is
subject to uncertainty. We have secured $45 million of
financing for this project which we believe is adequate for the
projects completion; however, we could face financial
risks if this amount of financing is not sufficient to complete
the construction of the ethanol facility. We may be adversely
affected by environmental, health and safety laws, regulations
and liabilities in implementing ethanol production, which could
increase our costs. Changes in the markets for ethanol,
including oversupply of ethanol capacity,
and/or
legislation and regulations could materially and adversely
affect ethanol demand. We do not assure you that sufficient
demand for ethanol will develop to permit profitable operation
of the ethanol production facility.
Our
results of operations could be adversely affected by litigation
and other contingencies.
We face risks arising from litigation matters in which various
factors or developments can lead to changes in current estimates
of liabilities, such as final adverse judgments, significant
settlements or changes in applicable law. A future adverse
outcome, ruling or unfavorable development could result in
future charges that could have a material effect on our results
of operations.
We have
foreign operations, which exposes us to the risks of doing
business abroad.
Approximately 29% of our revenues are derived from our
operations in Australia and New Zealand. These foreign
operations subject us to a number of risks associated with
conducting business outside the United States, including the
following:
|
|
|
|
|
currency fluctuations;
|
|
|
|
transportation delays and interruptions;
|
|
|
|
political, social and economic instability and disruptions;
|
|
|
|
government embargoes or foreign trade restrictions;
|
|
|
|
the imposition of duties, tariffs and other trade barriers;
|
|
|
|
import and export controls;
|
|
|
|
labor unrest and changing regulatory environments;
|
|
|
|
limitations on our ability to enforce legal rights and remedies;
and
|
|
|
|
potentially adverse tax consequences.
|
Although our operations have not been materially affected by any
such factors to date, no assurance can be given that our
operations may not be adversely affected in the future. Any of
these events could have an adverse effect on our operations in
the future by reducing the demand for our products, decreasing
the prices at which we can sell our products or otherwise having
an adverse effect on our business, financial condition or
results of operations.
We depend
on our senior management team; the loss of any member could
adversely affect our operations.
Our success depends on the management and leadership skills of
our senior management team. The loss of any of these
individuals, particularly Thomas D. Malkoski, our President and
Chief Executive Officer, or Steven O. Cordier, our Chief
Financial Officer, or our inability to attract, retain and
maintain additional personnel, could prevent us from fully
implementing our business strategy. We do not assure you that we
will be able to retain our existing senior management personnel
or to attract additional qualified personnel when needed.
We are
subject to stringent environmental and health and safety laws,
which may require us to incur substantial compliance and
remediation costs, thereby reducing our profits.
We are subject to many federal, state, local and foreign
environmental and health and safety laws and regulations,
particularly with respect to the use, handling, treatment,
storage, discharge and disposal of substances and hazardous
wastes used or generated in our manufacturing processes.
Compliance with these laws and regulations is a significant
factor in our business. We have incurred and expect to continue
to incur significant expenditures to
S-9
comply with applicable environmental laws and regulations. Our
failure to comply with applicable environmental laws and
regulations and permit requirements could result in civil or
criminal fines or penalties or enforcement actions, including
regulatory or judicial orders enjoining or curtailing operations
or requiring corrective measures, installation of pollution
control equipment or remedial actions.
We may be required to incur costs relating to the investigation
or remediation of property, including property where we have
disposed of our waste, and for addressing environmental
conditions. Some environmental laws and regulations impose
liability and responsibility on present and former owners,
operators or users of facilities and sites for contamination at
such facilities and sites without regard to causation or
knowledge of contamination. Consequently, we do not assure you
that existing or future circumstances, the development of new
facts or the failure of third parties to address contamination
at current or former facilities or properties will not require
significant expenditures by us.
We expect to continue to be subject to increasingly stringent
environmental and health and safety laws and regulations. It is
difficult to predict the future interpretation and development
of environmental and health and safety laws and regulations or
their impact on our future earnings and operations. We
anticipate that compliance will continue to require increased
capital expenditures and operating costs. Any increase in these
costs, or unanticipated liabilities arising, for example, out of
discovery of previously unknown conditions or more aggressive
enforcement actions, could adversely affect our results of
operations, and there is no assurance that they will not exceed
our reserves or have a material adverse effect on our business,
financial condition and results of operations.
Our
unionized workforce could cause interruptions in our provision
of services.
As of August 31, 2007, approximately 40% of our 357 North
American employees, and 69% of the 239 employees of Penford
Australia, were members of trade unions. Although our relations
with unions are currently stable, we do not assure you that we
will not experience work disruptions or stoppages in the future,
which could have a material adverse effect on our business and
results of operations and adversely affect our relationships
with our customers. For example, in the fourth quarter of fiscal
2004 and the first quarter of fiscal 2005, we experienced a
union strike at our Cedar Rapids manufacturing facility. We
incurred $4.2 million and $4.1 million in additional
production costs for fiscal 2004 and fiscal 2005, respectively,
in connection with the strike. Additionally, our non-union
workforce could be disrupted by union organizing activities and
similar actions.
Lower
investment performance by our pension plan assets will require
us to increase our pension liability and expense, which may also
lead us to accelerate funding of our pension obligations and
divert funds from other uses.
Lower investment performance by our pension plan assets could
increase our defined benefit pension plan obligations. We
estimate that minimum funding requirements for our qualified
defined benefit pension plans will be approximately
$1.6 million in fiscal 2008. However, we cannot predict
whether changing economic conditions or other factors will lead
or require us to make contributions in excess of our current
expectations, diverting funds we would otherwise apply to other
uses. Additionally, we do not assure you that we will have the
funds necessary to meet any minimum pension funding requirements.
Risk Factors
Relating to our Common Stock and the Offering
Our stock
price has fluctuated significantly; the trading price of our
common stock may fluctuate significantly in the
future.
The trading price of our common stock has fluctuated
significantly. In 2007, our stock price has ranged from a low of
$16.23 on January 5, 2007 to a high of $41.30 on
October 11, 2007. The trading price of our common stock may
fluctuate significantly in the future as a result of a number of
factors, including:
|
|
|
|
|
actual and anticipated variations in our operating results;
|
|
|
|
general economic and market conditions, including changes in
demand for our products;
|
|
|
|
interest rates;
|
|
|
|
geopolitical conditions throughout the world;
|
S-10
|
|
|
|
|
perceptions of the strengths and weaknesses of our industries;
|
|
|
|
our ability to pay principal and interest on our debt when due;
|
|
|
|
developments in our relationships with our lenders, customers
and/or
suppliers;
|
|
|
|
announcements of alliances, mergers or other relationships by or
between our competitors
and/or
our
suppliers and customers; and
|
|
|
|
quarterly variations in our results of operations due to, among
other things, seasonality in demand for products and
fluctuations in the cost of raw materials
|
The stock markets in general have experienced broad fluctuations
that have often been unrelated to the operating performance of
particular companies. These broad market fluctuations may
adversely affect the trading price of our common stock.
Accordingly, our common stock may trade at prices significantly
below the offering price, and you could lose all or part of your
investment in the event that you choose to sell your shares.
Provisions
of Washington law and our shareholder rights plan could
discourage or prevent a potential takeover.
Washington law imposes restrictions on certain transactions
between a corporation and certain significant shareholders. The
Washington Business Corporation Act generally prohibits a
target corporation from engaging in certain
significant business transactions with an acquiring
person, which is defined as a person or group of persons
that beneficially owns 10% or more of the voting securities of
the target corporation, for a period of five years after such
acquisition, unless the transaction or acquisition of shares is
approved by a majority of the members of the target
corporations board of directors prior to the time of the
acquisition. Such prohibited transactions include, among other
things, (1) a merger or consolidation with, disposition of
assets to, or issuance or redemption of stock to or from, the
acquiring person; (2) a termination of 5% or more of the
employees of the target corporation as a result of the acquiring
persons acquisition of 10% or more of the shares; and
(3) allowing the acquiring person to receive any
disproportionate benefit as a shareholder. After the five-year
period, a significant business transaction may occur
if it complies with fair price provisions specified
in the statute. A corporation may not opt out of
this statute.
In addition, Penford has adopted a shareholders rights plan,
intended to discourage a potential acquisition of us that our
board of directors believes is undesirable to us and our
shareholders. The shareholder rights plan expires in
June 2008 and our board of directors currently does not
intend to renew the plan. The shareholders rights plan and the
provisions under Washington law may have the effect of delaying,
deterring or preventing a change of control in the ownership of
Penford.
S-11
Forward-Looking
Statements
We make statements in this prospectus supplement and the
documents incorporated by reference that are forward-looking
statements within the meaning of the federal securities laws. In
particular, statements pertaining to our anticipated operations
and business strategies contain forward-looking statements.
Likewise, our statements regarding anticipated growth in our
business and anticipated market conditions are forward-looking
statements. Forward-looking statements involve numerous risks
and uncertainties and you should not rely on them as predictions
of future events. Forward-looking statements depend on
assumptions, data or methods that may be incorrect or imprecise,
and we may not be able to realize them. We do not guarantee that
the transactions and events described will happen as described
(or that they will happen at all). You can identify
forward-looking statements by the use of forward-looking
terminology such as believes, expects,
may, will, should,
seeks, approximately,
intends, plans, estimates,
or anticipates or the negative of these words and
phrases or similar words or phrases. You can also identify
forward-looking statements by discussions of strategy, plans or
intentions. The following factors, among others, could cause
actual results and future events to differ materially from those
set forth or contemplated in the forward-looking statements:
|
|
|
|
|
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 and availability;
|
|
|
|
expectations regarding the construction cost of the ethanol
facility and the timing of ethanol production;
|
|
|
|
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, chemical and energy cost volatility;
|
|
|
|
foreign currency exchange rate fluctuations;
|
|
|
|
changes in assumptions used for determining employee benefit
expense and obligations;
|
|
|
|
other unforeseen developments in the industries in which we
operate; and
|
|
|
|
other factors that we describe in the Risk Factors
section.
|
While forward-looking statements reflect our good faith beliefs,
they are not guarantees of future performance. We disclaim any
obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise, except as otherwise required by law.
S-12
We estimate that the net proceeds from the sale of our common
stock in this offering will be approximately $46.8 million
(approximately $53.8 million if the underwriters
over-allotment option is exercised in full), after deducting
underwriting discounts and commissions and our estimated
offering expenses.
Under the terms of our credit facility, we are required to use
half of the net proceeds from this offering to repay amounts
outstanding under the term loan portion of our credit facility.
We intend to use the remaining net proceeds to repay amounts
outstanding under, first, the revolving credit portion and,
second, the capital expansion loan portion of our credit
facility. As of November 19, 2007, the outstanding balances
under the term loan, revolving credit and capital expansion loan
portions of our credit facility were $36.0 million,
$18.6 million and $22.0 million, respectively, which
bear interest at rates based on either the London Interbank
Offered Rate in Australia or the United States or the prime
rate. As of November 19, 2007, the term loan, revolving
credit and capital expansion loan portions of our credit
facility bore interest at 6.86%, 7.56% and 6.57%, respectively.
The term loan and revolving credit portions of our credit
facility mature on December 31, 2011. The capital expansion
loan portion of our credit facility matures on December 31,
2012.
We expect to use any remaining net proceeds from this offering
for general corporate purposes. Pending these uses, we plan to
invest the net proceeds in short-term interest-bearing
obligations, investment-grade instruments, certificates of
deposit or direct guaranteed obligations of the United States.
The goal with respect to investment of these net proceeds is
capital preservation and liquidity so that funds are readily
available to fund our operations.
S-13
Price
Range of Common Stock and Dividend Policy
Our common stock is traded on the NASDAQ Global Market under the
symbol PENX. The following table sets forth, for the
periods indicated, the high and low reported sale prices of our
common stock as reported on the NASDAQ Global Market and the
dividends that we paid to holders of our common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
Low
|
|
|
Dividend
|
|
|
Year ended August 31, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
14.78
|
|
|
$
|
12.64
|
|
|
$
|
0.06
|
|
Second quarter
|
|
$
|
16.48
|
|
|
$
|
11.80
|
|
|
$
|
0.06
|
|
Third quarter
|
|
$
|
18.00
|
|
|
$
|
13.62
|
|
|
$
|
0.06
|
|
Fourth quarter
|
|
$
|
17.85
|
|
|
$
|
13.59
|
|
|
$
|
0.06
|
|
Year ended August 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
16.97
|
|
|
$
|
14.55
|
|
|
$
|
0.06
|
|
Second quarter
|
|
$
|
21.88
|
|
|
$
|
16.23
|
|
|
$
|
0.06
|
|
Third quarter
|
|
$
|
21.25
|
|
|
$
|
18.29
|
|
|
$
|
0.06
|
|
Fourth quarter
|
|
$
|
38.65
|
|
|
$
|
18.20
|
|
|
$
|
0.06
|
|
Year ending August 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter
|
|
$
|
41.30
|
|
|
$
|
23.88
|
|
|
$
|
0.06
|
|
Second quarter (through December 6, 2007)
|
|
$
|
29.34
|
|
|
$
|
24.30
|
|
|
|
|
|
|
|
As of November 19, 2007, there were 497 holders of record
of our common stock. On December 6, 2007, the last sale
price reported on the NASDAQ Global Market for our common stock
was $26.32 per share.
Dividends
During each quarter of fiscal 2007, 2006 and 2005, our Board of
Directors declared a $0.06 per share cash dividend. On a
periodic basis, our Board of Directors reviews our dividend
policy, which is affected by our earnings, financial condition,
and cash and capital requirements. Additionally, under the terms
of our credit facility, we may not pay cash dividends on our
common stock, except that we may pay cash dividends on our
common stock up to an annual aggregate amount of
$8.0 million so long as no default exists either before or
after paying the dividend. Future dividend payments are at the
discretion of the Board of Directors. Penford has included the
payment of dividends in its planning for fiscal 2008.
S-14
The following table shows our cash, cash equivalents and
investments and capitalization as of August 31, 2007 on an
actual basis and on an as adjusted basis to give effect to the
sale of our common stock in this offering and the application of
the net proceeds received in this offering as described under
Use of Proceeds. This table should be read with
Selected Consolidated Financial Data,
Managements Discussion and Analysis of Financial
Condition and Results of Operations and our audited
consolidated financial statements and the related notes included
elsewhere in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2007
|
|
|
|
Actual
|
|
|
As Adjusted(1)
|
|
|
Cash, cash equivalents and investments
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Secured credit agreements
|
|
|
|
|
|
|
|
|
Revolving loans
|
|
$
|
15,800
|
|
|
$
|
|
|
Term loans
|
|
|
37,000
|
|
|
|
13,625
|
|
Capital expansion loans
|
|
|
14,500
|
|
|
|
6,925
|
|
Grain inventory financing facility
|
|
|
7,218
|
|
|
|
7,218
|
|
Capital lease obligations
|
|
|
159
|
|
|
|
159
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
$
|
74,677
|
|
|
$
|
27,927
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, authorized
1,000 shares, none issued at August 31, 2007
|
|
$
|
|
|
|
$
|
|
|
Common stock, $1.00 par value; 29,000 shares
authorized and 11,099 shares outstanding issued, actual;
13,099 shares issued, as adjusted, including treasury shares
|
|
|
11,099
|
|
|
|
13,099
|
|
Additional paid-in capital
|
|
|
43,902
|
|
|
|
88,652
|
|
Retained earnings
|
|
|
89,486
|
|
|
|
89,486
|
|
Treasury shares, at cost, 1,981 shares
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
Accumulated other comprehensive (loss) income
|
|
|
13,946
|
|
|
|
13,946
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
125,676
|
|
|
$
|
172,426
|
|
|
|
|
|
|
|
|
|
|
Total capitalization
|
|
$
|
189,079
|
|
|
$
|
200,353
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
(1)
|
|
Reflects the use of approximately $46.8 million of the net
proceeds from this offering to reduce our indebtedness under our
credit facility. As of November 19, 2007, there was
approximately $18.6 million, $36.0 million and
$22.0 million outstanding under the revolving loan, term
loan and capital expansion loan portions of our credit facility,
respectively.
|
S-15
Selected
Consolidated Financial Data
The following selected consolidated statement of operations data
for the years ended August 31, 2007, 2006 and 2005, and the
balance sheet data as of August 31, 2007 and 2006, have
been derived from our consolidated audited financial statements
included in this prospectus supplement. The following selected
consolidated statement of operations data for the years ended
August 31, 2004 and 2003, and the balance sheet data as of
August 31, 2005, 2004 and 2003, have been derived from our
consolidated audited financial statements that are not included
in this prospectus supplement. This information should be read
in conjunction with Managements Discussion and
Analysis of Financial Condition and Results of Operations
and our audited consolidated financial statements and the
related notes included elsewhere in this prospectus supplement.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2007
|
|
|
|
2007(1)
|
|
|
2006(2)
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
$
|
279,386
|
|
|
$
|
262,467
|
|
Cost of sales
|
|
|
298,203
|
|
|
|
273,476
|
|
|
|
263,542
|
|
|
|
241,298
|
|
|
|
218,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
64,161
|
|
|
|
44,943
|
|
|
|
33,221
|
|
|
|
38,088
|
|
|
|
43,683
|
|
Operating expenses
|
|
|
31,391
|
|
|
|
29,477
|
|
|
|
26,413
|
|
|
|
23,063
|
|
|
|
24,620
|
|
Research and development expenses
|
|
|
6,812
|
|
|
|
6,198
|
|
|
|
5,796
|
|
|
|
6,115
|
|
|
|
5,399
|
|
Other costs
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
1,334
|
|
|
|
(165
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations(3)
|
|
|
23,558
|
|
|
|
9,268
|
|
|
|
1,012
|
|
|
|
7,576
|
|
|
|
13,829
|
|
Interest expense
|
|
|
5,711
|
|
|
|
5,902
|
|
|
|
5,574
|
|
|
|
4,492
|
|
|
|
5,495
|
|
Non-operating (income) expense, net
|
|
|
(1,645
|
)
|
|
|
(1,896
|
)
|
|
|
(2,209
|
)
|
|
|
(1,987
|
)
|
|
|
(3,205
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
19,492
|
|
|
|
5,262
|
|
|
|
(2,353
|
)
|
|
|
5,071
|
|
|
|
11,539
|
|
Income taxes (benefits)
|
|
|
5,975
|
|
|
|
1,034
|
|
|
|
(4,927
|
)
|
|
|
1,369
|
|
|
|
3,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
13,517
|
(4)
|
|
$
|
4,228
|
|
|
$
|
2,574
|
(4)
|
|
$
|
3,702
|
(5)
|
|
$
|
8,436
|
(6)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding
basic
|
|
|
8,986
|
|
|
|
8,900
|
|
|
|
8,827
|
|
|
|
8,733
|
|
|
|
8,122
|
|
Basic earnings per share
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
1.04
|
|
Weighted average number of common shares outstanding
diluted
|
|
|
9,283
|
|
|
|
9,004
|
|
|
|
8,946
|
|
|
|
8,868
|
|
|
|
8,228
|
|
Diluted earnings per share
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
1.03
|
|
Cash dividends declared per share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data (as of period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital
|
|
$
|
39,033
|
|
|
$
|
32,073
|
|
|
$
|
35,571
|
|
|
$
|
40,142
|
|
|
$
|
39,013
|
|
Total assets
|
|
|
288,388
|
|
|
|
250,668
|
|
|
|
249,917
|
|
|
|
252,191
|
|
|
|
250,893
|
|
Total debt
|
|
|
74,677
|
|
|
|
67,007
|
|
|
|
66,129
|
|
|
|
80,326
|
|
|
|
79,696
|
|
Shareholders equity
|
|
|
125,676
|
|
|
|
107,452
|
|
|
|
100,026
|
|
|
|
95,719
|
|
|
|
87,885
|
|
|
|
(Dollars in thousands, except per
share data)
|
|
|
(1)
|
|
Includes pre-tax charges of $2.4 million related to an
estimated loss contingency for litigation. See Note 17 to
the audited consolidated financial statements included elsewhere
in this prospectus supplement.
|
|
(2)
|
|
Penford adopted the provisions of Statement of Financial
Accounting Standards No. 123R, Share-Based
Payment, effective at the beginning of fiscal 2006. As a
result, the results of operations for fiscal 2006 and fiscal
2007 include incremental stock-based compensation cost in excess
of what would have been recorded had Penford continued to
account for stock-based compensation using the intrinsic value
method.
|
|
(3)
|
|
In the fourth quarter of fiscal 2004 and the first quarter of
fiscal 2005, Penford experienced a union strike at its Cedar
Rapids manufacturing facility. As a result, income from
operations for fiscal 2004 and fiscal 2005
|
S-16
|
|
|
|
|
reflects decreased production and increased expenses for fiscal
2004 and fiscal 2005, respectively, due to the strike.
|
|
(4)
|
|
Includes a pre-tax gain of $1.2 million related to the sale
of land in Australia, a $0.7 million pre-tax gain related
to the sale of an investment and a $1.1 million pre-tax
write off of unamortized deferred loan costs. See Note 12
to the audited consolidated financial statements included
elsewhere in this prospectus supplement. Includes a tax benefit
of $2.5 million related to fiscal 2001 through fiscal 2004
that we recognized in fiscal 2005 when we determined that it was
probable that the extraterritorial income exclusion deduction on
our U.S. federal income tax returns for those years would be
sustained. See Note 13 to the audited consolidated
financial statements included elsewhere in this prospectus
supplement.
|
|
(5)
|
|
Includes pre-tax charges of $1.3 million related to the
restructuring of business operations and $0.7 million
related to a pre-tax non-operating expense for the write off of
unamortized deferred loan costs. See Notes 12 and 14 to the
audited consolidated financial statements included elsewhere in
this prospectus supplement.
|
|
(6)
|
|
Includes a pre-tax gain of $1.9 million related to the sale
of certain assets to National Starch and Chemical Investment
Holdings Corporation.
|
S-17
Managements
Discussion and Analysis of Financial Condition
and Results of Operations
Overview
Penford generates revenues, income and cash flows by developing,
manufacturing and marketing specialty natural-based ingredient
systems for industrial and food applications. We develop and
manufacture ingredients with starch as a base, providing
value-added applications to our customers. Our starch products
are manufactured primarily from corn, potatoes, and wheat and
are used principally as binders and coatings in paper and food
production.
In analyzing business trends, management considers a variety of
performance and financial measures, including sales revenue
growth, sales volume growth, and gross margins and operating
income of our business segments. We manage our business in three
segments. The first two, Industrial Ingredients
North America and Food Ingredients North America,
are broad categories of end-market users, served by operations
in the United States. The third segment is comprised of our
operations in Australia and New Zealand, which operations are
engaged primarily in the food ingredients business.
Consolidated fiscal 2007 sales grew 13.8% to $362.4 million
from $318.4 million in fiscal 2006 due to favorable unit
pricing and product mix in all business segments and stronger
foreign currency exchange rates in Australia and New Zealand.
Gross margin as a percent of sales expanded 360 basis
points from 14.1% in fiscal 2006 to 17.7% in fiscal 2007
primarily due to revenue growth and improved manufacturing
efficiencies in each of the business units. The industrial
business unit contributed $13.9 million of the total
$19.2 million gain in gross margin with improvements in
unit pricing and product mix, energy unit costs, corn
procurement and manufacturing costs.
Operating expenses increased $1.9 million primarily due to
increases in employee-related costs, but declined as a percent
of sales to 8.7% in fiscal 2007 from 9.3% in fiscal 2006. In
addition, we recorded a pre-tax charge in the amount of
$2.4 million related to an estimated loss contingency for
litigation. Interest expense of $5.7 million in fiscal 2007
was $0.2 million less than in fiscal 2006 due to lower debt
balances and interest rates. The margin over the applicable
benchmark interest rate was reduced in fiscal 2007 due to our
improved financial performance.
The effective tax rate for fiscal 2007, at 31%, is lower than
the statutory tax rate of 35% due to the tax benefits from
domestic (U.S.) production activities, lower tax rates on
foreign earnings, research and development tax incentives in the
United States and Australia, and the effects of a tax audit
settled in fiscal 2007.
During the fourth quarter of fiscal 2007, we, applying our best
judgment of the likely outcome of litigation regarding alleged
breach of contract claims against Penford Products, established
a loss contingency against this matter of $2.4 million.
Depending upon the eventual outcome of this litigation, we may
incur additional material charges in excess of the amount we
have reserved.
In June 2006, we announced plans to invest $42 million for
up to 40 million gallons of ethanol production capacity per
year at our Cedar Rapids, Iowa facility. In October 2006, we
refinanced our credit facility and obtained a $45 million
capital expansion loan commitment under our credit facility
maturing December 2012 to finance construction of the ethanol
plant. The designed capacity has been expanded to
45 million gallons with construction cost estimates
maintained at $1.00 to $1.05 per gallon. We have signed
contracts valued at $40 million for this project as of the
end of October 2007. We already had much of the infrastructure
within the Cedar Rapids plant to manufacture ethanol cost
effectively, with sufficient grain handling, separation
processes, electric utilities and logistic capabilities prior to
the announcement. The factory is centrally located near rail and
ground transport arteries and the ethanol facility will occupy
available space within the existing site footprint. Once
complete, this enhancement of our bio-refining capabilities will
give management the ability to select from multiple output
choices to capitalize on changing industry conditions and
selling opportunities. This increased flexibility will allow us
to direct production towards the most attractive mix of returns
and margins. Additionally, by improving throughput capacity and
adding fermentation capability, we are better positioned to
participate in emerging bio-processing trends and technologies
that may represent future platforms for growth.
S-18
Accounting
Changes
As of August 31, 2007, we adopted the recognition and
disclosure provisions of Statement of Financial Accounting
Standards No. 158, Employers Accounting for
Defined Benefit Pension and Other Postretirement
Plans an amendment of FASB Statements No. 87,
88, 106, and 132R. The recognition provision requires an
employer to recognize a plans funded status in the
statement of financial position and recognize the changes in a
plans funded status in the statement of comprehensive
income in the year in which the changes occur. The effect of
adoption on the consolidated balance sheet was a decrease in
other assets of $2.5 million, a decrease in current accrued
liabilities of $1.2 million, an increase in other
liabilities of $4.3 million, a decrease in other
postretirement benefits of $1.1 million, a decrease in
accumulated other comprehensive income, net of tax, of
$2.8 million, and an increase in deferred tax assets of
$1.7 million. The adoption of SFAS No. 158s
recognition provision did not have an effect on our consolidated
results of operations for fiscal 2007, or for any prior year
presented, and it will not have an effect on the results of
operations in the future.
As of September 1, 2005, we adopted the provisions of
Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based Payment, utilizing the
modified-prospective transition method under which prior period
results were not restated. The consolidated results of
operations for fiscal years 2007 and 2006 include incremental
stock-based compensation cost in excess of what would have been
recorded had we continued to account for stock-based
compensation using the intrinsic value method. Pre-tax
stock-based compensation expense included in the consolidated
results of operations was $1.1 million in each of fiscal
years 2007 and 2006.
Results of
Operations
Fiscal
2007 Compared to Fiscal 2006
Industrial
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Sales
|
|
$
|
194,957
|
|
|
$
|
165,850
|
|
Cost of sales
|
|
$
|
159,851
|
|
|
$
|
144,656
|
|
Gross margin
|
|
|
18.0
|
%
|
|
|
12.8
|
%
|
Income from operations
|
|
$
|
19,251
|
|
|
$
|
9,121
|
|
|
|
(Dollars in thousands)
Industrial Ingredients fiscal 2007 sales of
$195.0 million increased $29.1 million, or 18%, over
fiscal 2006, primarily driven by unit price increases and the
positive effects on revenue of passing through higher corn
costs. Combined, these factors added $34 million to fiscal
2007 sales. Offsetting these increases was a 6% decline in
volume due to softness in the paper market as customers closed
or temporarily shuttered plants.
Gross margin increased $13.9 million, or 66%, over fiscal
2006 to $35.1 million, and, as a percentage of sales,
expanded to 18.0% in fiscal 2007 compared to 12.8% in fiscal
2006. Approximately $12 million of the margin growth was
due to higher unit pricing and favorable product mix.
Improvements in energy unit costs of $0.3 million,
favorable corn procurement costs of $3.3 million and
reductions in manufacturing overhead of $1.2 million also
contributed to increased margin. These favorable effects were
partially offset by increased chemical costs of
$0.7 million and the margin effect of a volume decline of
$2.7 million.
Income from operations increased $10.1 million over fiscal
2006 due to the increase in the gross margin, partially offset
by $2.4 million related to an estimated loss contingency
for litigation. Operating expenses declined to 5.2% of sales in
fiscal 2007, compared to 5.5% of sales in fiscal 2006. Research
and development expenses remained comparable to fiscal 2006 at
1.7% of sales.
S-19
Food
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
Sales
|
|
$
|
62,987
|
|
|
$
|
57,156
|
|
Cost of sales
|
|
$
|
44,036
|
|
|
$
|
41,954
|
|
Gross margin
|
|
|
30.1
|
%
|
|
|
26.6
|
%
|
Income from operations
|
|
$
|
10,684
|
|
|
$
|
7,819
|
|
|
|
(Dollars in thousands)
Sales at the Food Ingredients North America business
expanded 10.2% over the prior year driven by an 8.8% increase in
average unit sales prices. Volumes increased slightly, adding
120 basis points to the revenue increase. Annual sales in
the protein end-market grew 17% over last year and sales of
applications for the pet chew and treats product lines rose from
$.05 million in fiscal 2006 to $2.4 million in fiscal
2007.
Gross margin improved by $3.7 million in fiscal 2007, due
to higher unit selling prices and favorable product mix, offset
by a 14% increase in the average unit cost of raw materials.
Fiscal 2007 operating income increased 37% over last year on the
expansion in gross margin partially offset by $0.5 million
in higher employee-related expenses and increased research and
development expenses of $0.1 million.
Australia/New
Zealand Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
Sales
|
|
$
|
105,244
|
|
|
$
|
96,121
|
|
Cost of sales
|
|
$
|
95,141
|
|
|
$
|
87,575
|
|
Gross margin
|
|
|
9.6
|
%
|
|
|
8.9
|
%
|
Income from operations
|
|
$
|
3,269
|
|
|
$
|
1,735
|
|
|
|
(Dollars in thousands)
The Australian business reported a 9.5% increase in sales in
fiscal 2007 over fiscal 2006. Favorable foreign currency rates
and favorable unit pricing contributed 730 basis points and
140 basis points, respectively, to the revenue increase.
Sales volumes increased less than 1% and sales in local currency
increased 2%.
Gross margin expanded to 9.6% of sales in fiscal 2007 from 8.9%
in fiscal 2006 on lower distribution costs and improved
production yields and volumes. Escalating wheat costs of
$1.6 million were fully offset by improved product pricing.
Total operating expenses for fiscal 2007 were comparable to
fiscal 2006, but declined to 4.9% of sales from 5.6% in fiscal
2006. Research and development expenses increased by
$0.2 million and, as a percent of sales, were comparable to
fiscal 2006 at 1.6%. Increases in these expenses were due to
enhancements to the segments commercial and research
capabilities. Operating expenses in fiscal 2006 included
$0.9 million of employee- severance costs.
Corporate
Operating Expenses
Corporate operating expenses increased to $9.6 million in
fiscal 2007 from $9.4 million in fiscal 2006. Employee
related costs increased by $0.6 million partially offset by
declines in legal and professional fees.
S-20
Fiscal
2006 Compared to Fiscal 2005
Industrial
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2006
|
|
|
2005
|
|
Sales
|
|
$
|
165,850
|
|
|
$
|
147,782
|
|
Cost of sales
|
|
$
|
144,656
|
|
|
$
|
136,127
|
|
Gross margin
|
|
|
12.8
|
%
|
|
|
7.9
|
%
|
Income (loss) from operations
|
|
$
|
9,121
|
|
|
$
|
(147
|
)
|
|
|
(Dollars in thousands)
Industrial Ingredients fiscal 2006 sales of $165.9 million
increased $18.1 million, or 12%, over fiscal 2005,
primarily driven by a volume increase of 9%. More favorable
pricing and product mix contributed 2% of the sales increase for
the year.
Gross margin increased $9.5 million, or 82%, over fiscal
2005 to $21.2 million, and, as a percent of sales, expanded
to 12.8% in fiscal 2006 compared to 7.9% in fiscal 2005.
Approximately $8.8 million of the margin growth was due to
higher unit pricing, favorable product mix and increases in
manufacturing volumes. Improvements in energy usage of
$2.6 million, favorable corn procurement of
$2.2 million and recovery from $4.1 million in
incremental strike-related costs incurred during fiscal 2005
also contributed to increased margin. These favorable effects
were partially offset by increased unit costs of natural gas and
chemicals of $3.2 million and $3.3 million,
respectively, as well as $1.2 million in higher
distribution expenses.
Income from operations for fiscal 2006 increased
$9.3 million over fiscal 2005 due to the increase in the
gross margin. Operating expenses, which included
$0.2 million in severance costs, declined to 5.5% of sales
in fiscal 2006, compared to 6.1% of sales in fiscal 2005.
Research and development expenses remained comparable to fiscal
2005 at 1.8% of sales.
Food
Ingredients North America
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2006
|
|
|
2005
|
|
Sales
|
|
$
|
57,156
|
|
|
$
|
53,661
|
|
Cost of sales
|
|
$
|
41,954
|
|
|
$
|
38,964
|
|
Gross margin
|
|
|
26.6
|
%
|
|
|
27.4
|
%
|
Income from operations
|
|
$
|
7,819
|
|
|
$
|
7,404
|
|
|
|
(Dollars in thousands)
Sales at the Food Ingredients North America business
rose 7% in fiscal 2006 over fiscal 2005, driven by an 8% volume
increase. Annual sales volumes in the dairy and protein
end-markets grew 42% over fiscal 2005. Sales of formulations for
potato coatings and sweeteners increased 7% and 18%,
respectively. Revenues from nutrition (low-carbohydrate)
applications declined by $4.6 million in fiscal 2006.
Gross margin as a percent of sales declined by 80 basis
points in fiscal 2006 from fiscal 2005, due to the decrease in
sales of higher-margin nutrition products and higher chemical
and energy costs of $0.7 million. Improved plant
utilization from increased production volumes partially offset
the unfavorable product mix. Fiscal 2006 operating and research
and development expenses increased by $0.1 million and
declined to 12.9% of sales compared to 13.6% in fiscal 2005.
S-21
Australia/New
Zealand Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2006
|
|
|
2005
|
|
Sales
|
|
$
|
96,121
|
|
|
$
|
96,231
|
|
Cost of sales
|
|
$
|
87,575
|
|
|
$
|
89,362
|
|
Gross margin
|
|
|
8.9
|
%
|
|
|
7.1
|
%
|
Income from operations
|
|
$
|
1,735
|
|
|
$
|
1,331
|
|
|
|
(Dollars in thousands)
The Australian business reported sales of $96.1 million in
fiscal 2006 compared to $96.2 million in fiscal 2005. A 3%
sales volume increase was offset by unfavorable foreign currency
exchange rates. Sales in local currencies increased 1% as volume
increases were partially offset by lower unit pricing.
Gross margin expanded to 8.9% of sales in fiscal 2006 from 7.1%
in fiscal 2005 as the Tamworth, Australia facility improved its
production yields and plant utilization upon completion of a
reconfiguration of its manufacturing processes in fiscal 2005.
Lower wheat and New Zealand grain costs also contributed
$0.6 million to the gross margin improvements.
Operating expenses rose to 5.6% of sales in fiscal 2006 from
4.5% in fiscal 2005 on $0.9 million of employee severance
costs incurred during fiscal 2006.
Corporate
Operating Expenses
Corporate operating expenses increased to $9.4 million in
fiscal 2006 from $7.6 million in fiscal 2005. We expensed
$0.7 million in stock-based compensation costs for
corporate employees during fiscal 2006 after adoption of
SFAS 123R. Legal and professional fees increased
$0.4 million and employee costs, including contributions to
our defined contribution plan, increased $0.5 million.
Non-Operating
Income (Expense)
Other non-operating income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Royalty and licensing income
|
|
$
|
1,902
|
|
|
$
|
1,827
|
|
|
$
|
1,386
|
|
Gain (loss) on sale of assets
|
|
|
(325
|
)
|
|
|
85
|
|
|
|
64
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,051
|
)
|
Gain on sale of Tamworth farm
|
|
|
60
|
|
|
|
78
|
|
|
|
1,166
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
736
|
|
Other
|
|
|
8
|
|
|
|
(94
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,645
|
|
|
$
|
1,896
|
|
|
$
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
In fiscal 2003, we exclusively licensed to National Starch and
Chemical Investment Holdings Corporation certain rights to its
resistant starch patent portfolio for applications in human
nutrition. Under the terms of the licensing agreement, we
received an initial licensing fee and royalties during the years
noted above.
In fiscal 2005, we refinanced our secured term and revolving
credit facilities and wrote off $1.1 million of unamortized
debt issuance costs related to this debt.
In fiscal 2005, we sold a parcel of land near our wheat starch
plant in Tamworth, New South Wales, Australia, that was used for
disposal of effluent from the Tamworth manufacturing process for
$1.9 million, and recognized a
S-22
gain on the sale of $1.2 million. A second parcel of land
was sold in fiscal 2006 with leasebacks to us. Gain on the sale
is being recognized in income proportionally over the terms of
the leases.
In fiscal 2005, we sold a majority of our investment in a small
Australian
start-up
company and recognized a $0.7 million pre-tax gain on the
transaction.
Interest
expense
Interest expense was $5.7 million, $5.9 million and
$5.6 million in fiscal years 2007, 2006 and 2005,
respectively. Interest expense for fiscal 2007 declined
$0.2 million from fiscal 2006 with increases in the
interest rates offset by a decline in the applicable interest
rate margin pursuant to the credit agreement as a result of our
improved financial performance and lower average debt balances,
excluding ethanol-related debt borrowings. Approximately
$14.5 million of debt outstanding at August 31, 2007
was attributable to the construction of the ethanol production
plant. Interest costs of $0.4 million related to
construction of the ethanol facility were capitalized in fiscal
2007. Interest expense for fiscal 2006 compared to fiscal 2005
rose on higher short-term interest rates on our revolving line
of credit and short-term borrowings.
As of August 31, 2007, all of our outstanding debt,
including amounts outstanding under the Australian grain
inventory financing facility, was subject to variable interest
rates. As of August 31, 2007, under interest rate swap
agreements with several banks, we have fixed our interest rates
on U.S. dollar denominated term debt of $32.8 million
at 4.18% and $4.2 million at 5.08%, plus the applicable
margin under our credit facility.
Income
taxes
The effective tax rates for fiscal years 2007, 2006 and 2005
were 31%, 20% and 209%, respectively. The effective tax rate for
fiscal 2007 varied from the U.S. federal statutory rate of
35% primarily due to Australian and U.S. tax incentives
related to research and development, the favorable tax effect of
domestic (U.S.) production activities, and the effect of a tax
settlement. The tax benefits previously available to us related
to the extraterritorial income exclusion expired in December
2006. In May 2007, we settled the outstanding Internal Revenue
Service audits of our U.S. federal income tax returns for
the fiscal years ended August 31, 2001 and 2002. Under the
settlement, we received a cash refund of $0.3 million. In
addition, in connection with the settlement of these audits in
the third quarter of fiscal 2007, we reversed a current tax
liability in the amount of $0.7 million, which represented
our estimate of the probable loss on certain tax positions being
examined.
In December 2006, the Tax Relief Healthcare Act of 2006 was
enacted in the United States, which retroactively reinstated and
extended the research and development tax credit from
January 1, 2006 through December 31, 2007. We recorded
the tax effect of $0.2 million of U.S. research and
development tax credits in fiscal 2007 related to fiscal 2006.
The effective tax rate for fiscal 2006 is lower than the
statutory tax rate due to the tax benefits of the
extraterritorial income exclusion deduction, lower tax rates on
foreign earnings and research and development tax credits.
The tax benefit recognized for fiscal 2005 of $4.9 million
included a $2.5 million tax benefit relating to our
incremental extraterritorial income exclusion deduction on our
U.S. federal income tax returns for fiscal years 2001
through 2004. In fiscal 2005, we determined that it was probable
that the extraterritorial income exclusion deduction would be
sustained under audit by the Internal Revenue Service. Other
factors affecting the effective tax rate for 2005 were the
benefits resulting from the 2005 extraterritorial income
exclusion deduction, research and development tax credits, and
lower foreign tax rates.
Liquidity and
Capital Resources
Our primary sources of short- and long-term liquidity are cash
flow from operations and our five-year revolving line of credit
which expires in 2011. We expect that cash from operations,
borrowings available under our credit facility and any remaining
net proceeds from this offering will be sufficient to fund our
cash requirements during fiscal 2008, including amounts required
for completion of our ethanol facility.
S-23
Operating
Activities
At August 31, 2007, we had working capital of
$39.0 million, and $67.3 million outstanding under our
credit facility. Cash flow from operations was
$22.5 million, $11.4 million and $21.1 million in
fiscal years 2007, 2006 and 2005, respectively. The increase in
cash flow in fiscal 2007 compared to fiscal 2006 was due to the
growth in earnings in fiscal 2007. The decrease in cash flow
from operations in fiscal 2006 compared to fiscal 2005 is due to
a change in our financing of Australian grain purchases from
vendor financing to bank financing. See Financing
Activities below for a discussion of the grain facility in
Australia.
We maintain two defined benefit pension plans in the United
States. Rising discount rates have decreased our underfunded
plan status (plan assets compared to benefit obligations). Based
on the current underfunded status of the plans and the actuarial
assumptions being used for fiscal 2008, we estimate that we will
be required to make minimum contributions to the pension plans
of $1.6 million during fiscal 2008.
Investing
Activities
Capital expenditures were $34.7 million, $14.9 million
and $9.4 million in fiscal years 2007, 2006 and 2005,
respectively. Capital expenditures in fiscal years 2007 and 2006
include $19.3 million and $0.7 million, respectively,
for the ethanol production facility. We expect capital
expenditures, including $27 million in expenditures for our
ethanol production facility, to be approximately
$47 million in fiscal 2008.
Financing
Activities
On October 5, 2006, we entered into a $145 million
Second Amended and Restated Credit Agreement, referred to as the
2007 Agreement, among Penford; Harris N.A.; LaSalle Bank
National Association; Cooperative Centrale
Raiffeisen-Boorleenbank B.A., Rabobank Nederland (New York
Branch); U.S. Bank National Association; and the Australia
and New Zealand Banking Group Limited.
The 2007 Agreement refinanced our previous $105 million
secured term and revolving credit facilities. Under the 2007
Agreement, we can borrow $40 million in term loans and
$60 million under a revolving line of credit. The
lenders revolving credit loan commitment may be increased
under certain conditions. In addition, the 2007 Agreement
provided us with the ability to borrow up to $45 million in
capital expansion funds, which would be used by us to finance
the construction of our planned ethanol production facility in
Cedar Rapids, Iowa. The capital expansion funds may be borrowed
as term loans from time to time prior to October 5, 2008.
The final maturity date for the term and revolving loans under
the 2007 Agreement is December 31, 2011. Beginning on
December 31, 2006, we must repay the term loans in twenty
equal quarterly installments of $1 million, with the
remaining amount due at final maturity. The final maturity date
for the capital expansion loans is December 31, 2012.
Beginning on December 31, 2008, we must repay the capital
expansion loans in equal quarterly installments of
$1.25 million through September 30, 2009 and
$2.5 million thereafter, with the remaining amount due at
final maturity. Interest rates under the 2007 Agreement are
based on either the London Interbank Offered Rate in Australia
or the United States, or the prime rate, depending on the
selection of available borrowing options under the 2007
Agreement. Pursuant to the terms of the 2007 Agreement, we are
required to use half of the net proceeds from this offering to
repay amounts outstanding under the term loan portion of our
credit facility. We intend to use the remaining net proceeds to
repay amounts outstanding under, first, the revolving credit
portion and, second, the capital expansion loan portion of our
credit facility.
The 2007 Agreement provides that the Total Funded Debt Ratio,
which is computed as funded debt divided by earnings before
interest, taxes, depreciation and amortization (as defined in
the 2007 Agreement), shall not exceed a maximum, which varies
between 3.00 and 4.50 through the term of the 2007 Agreement. In
addition, we must maintain a minimum tangible net worth of
$65 million, and a Fixed Charge Coverage Ratio, as defined
in the 2007 Agreement, of not more than 1.50 in fiscal 2007,
1.25 in fiscal 2008 and 1.50 in fiscal 2009 and thereafter.
Annual capital expenditures, exclusive of capital expenditures
incurred in connection with our ethanol production facility, are
limited to $20 million, we can maintain a Total Funded Debt
Ratio below 2.00 for each fiscal quarter during any fiscal year,
which would result in the annual capital expenditure limit to
increase to $25 million for such fiscal year.
S-24
Our obligations under the 2007 Agreement are secured by
substantially all of our U.S. assets and a majority of the
shares of Penford Holdings Pty. Ltd. (Australia). We were in
compliance with the covenants in the 2007 Agreement as of
August 31, 2007 and expect to be in compliance during
fiscal 2008. Pursuant to the terms of the 2007 Agreement, our
additional borrowing ability as of August 31, 2007 was
$30.5 million under the capital expansion facility and
$44.2 million under the revolving line of credit.
Our short-term borrowings consist of an Australian grain
inventory financing facility. In fiscal 2006, our Australian
subsidiary entered into a variable-rate revolving grain
inventory financing facility with an Australian bank for a
maximum of $32.7 million U.S. dollars at the exchange
rate at August 31, 2007. This facility expires on
March 15, 2008 and carries an effective interest rate
equal to the bank bill rate plus approximately 2%. Payments on
this facility are due as the grain financed is withdrawn from
storage. The amount outstanding under this arrangement, which is
classified as a current liability on the balance sheet, was
$7.2 million at August 31, 2007.
Dividends
In fiscal 2007, we paid dividends on our common stock of
$2.2 million at a quarterly rate of $0.06 per share. On
October 30, 2007, the Board of Directors declared a
dividend of $0.06 per common share payable on
December 7, 2007 to shareholders of record as of
November 16, 2007. On a periodic basis, the Board of
Directors reviews our dividend policy which is affected by our
earnings, financial condition and cash and capital requirements.
Future dividend payments are at the discretion of the Board of
Directors. We have included the continuation of quarterly
dividends in its planning for fiscal 2008.
Pursuant to the 2007 Agreement, we may not declare or pay
dividends on, or make any other distributions in respect of, our
common stock in excess of $8 million in any fiscal year or
if there exists a Default or Event of Default as defined in the
2007 Agreement.
Contractual
Obligations
As more fully described in Notes 5 and 8 to the audited
consolidated financial statements included elsewhere in this
prospectus supplement, we are a party to various debt and lease
agreements at August 31, 2007 that contractually commit us
to pay certain amounts in the future. The purchase obligations
at August 31, 2007 represent an estimate of all open
purchase orders and contractual obligations through our normal
course of business for commitments to purchase goods and
services for production and inventory needs, such as raw
materials, supplies, manufacturing arrangements, capital
expenditures and maintenance. The majority of terms allow us or
suppliers the option to cancel or adjust the requirements based
on business needs.
The following table summarizes such contractual commitments at
August 31, 2007 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
2009-2010
|
|
|
2011-2012
|
|
|
2013 & After
|
|
|
Total
|
|
|
Long-term Debt and Capital Lease Obligations
|
|
$
|
4,056
|
|
|
$
|
20,597
|
|
|
$
|
42,806
|
|
|
$
|
|
|
|
$
|
67,459
|
|
Short-term Borrowings
|
|
|
7,218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,218
|
|
Post-retirement Medical(1)
|
|
|
596
|
|
|
|
1,353
|
|
|
|
1,495
|
|
|
|
4,649
|
|
|
|
8,093
|
|
Operating Lease Obligations
|
|
|
6,602
|
|
|
|
10,957
|
|
|
|
5,262
|
|
|
|
4,408
|
|
|
|
27,229
|
|
Purchase Obligations
|
|
|
101,574
|
|
|
|
2,642
|
|
|
|
|
|
|
|
|
|
|
|
104,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
120,046
|
|
|
$
|
35,549
|
|
|
$
|
49,563
|
|
|
$
|
9,057
|
|
|
$
|
214,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Estimated contributions to the unfunded postretirement medical
plan made in amounts needed to fund benefit payments for
participants through fiscal 2017 based on actuarial assumptions.
|
Defined Benefit
Pension and Postretirement Benefit Plans
We maintain defined benefit pension plans and defined benefit
postretirement health care plans in the United States.
S-25
The most significant assumptions used to determine benefit
expense and benefit obligations are the discount rate and the
expected return on assets assumption. See Note 10 to the
audited consolidated financial statements included elsewhere in
this prospectus supplement for the assumptions used by Penford.
The discount rate we used in determining benefit expense and
benefit obligations reflects the yield of high quality (AA or
better rating by a recognized rating agency) corporate bonds
whose cash flows are expected to match the timing and amounts of
projected future benefit payments. Benefit obligations and
expense increase as the discount rate is reduced. The discount
rates to determine net periodic expense used in 2005 (6.25%),
2006 (5.50%) and 2007 (6.15%) reflect the changes in bond yields
over the past several years. Lowering the discount rate by
25 basis points would increase pension expense by
approximately $0.1 million and other postretirement benefit
expense by $0.01 million. During fiscal 2007, bond yields
rose and we have increased the discount rate for calculating our
benefit obligations at August 31, 2007, as well as net
periodic expense for fiscal 2008, to 6.51%.
The expected long-term return on assets assumption for the
pension plans represents the average rate of return to be earned
on plan assets over the period the benefits included in the
benefit obligation are to be paid. Pension expense increases as
the expected return on plan assets decreases. In developing the
expected rate of return, we consider long-term historical market
rates of return as well as actual returns on our plan assets,
and adjust this information to reflect expected capital market
trends. We also consider forward looking return expectations by
asset class, the contribution of active management and
management fees paid by the plans. The plan assets are held in
qualified trusts and anticipated rates of return are not reduced
for income taxes. The expected long-term return on assets
assumption used to calculate net periodic pension expense was
8.0% for fiscal 2007. A 50 basis point decrease (increase)
in the expected return on assets assumptions would increase
(decrease) pension expense by approximately $0.2 million
based on plan assets at August 31, 2007. The expected
return on plan assets used in calculating fiscal 2008 pension
expense is 8%.
Unrecognized net loss amounts reflect the difference between
expected and actual returns on pension plan assets as well as
the effects of changes in actuarial assumptions. Unrecognized
net losses in excess of certain thresholds are amortized into
net periodic pension and postretirement benefit expense over the
average remaining service life of active employees. As of
August 31, 2007, unrecognized losses from all sources are
$3.7 million for the pension plans and $0.6 million
for the postretirement health care plan. Amortization of
unrecognized net loss amounts is expected to increase net
pension expense by approximately $0.05 million in fiscal
2008. Amortization of unrecognized net losses is not expected to
affect the net postretirement health care expense in fiscal 2008.
We recognized pension expense of $1.7 million,
$2.4 million and $1.9 million in fiscal years 2007,
2006 and 2005, respectively. We expect pension expense to be
approximately $1.6 million in fiscal 2008. We contributed
$1.0 million, $3.3 million and $3.6 million to
the pension plans in fiscal years 2007, 2006 and 2005,
respectively. We estimate that we will be required to make
minimum contributions to our pension plans of $1.6 million
during fiscal 2008.
We recognized benefit expense for our postretirement health care
plan of $1.0 million, $1.2 million and
$1.0 million in fiscal years 2007, 2006 and 2005,
respectively. We expect to recognize approximately
$1.0 million in postretirement health care benefit expense
in fiscal 2008. We contributed $0.6 million,
$0.7 million, and $0.5 million in fiscal years 2007,
2006 and 2005 to the postretirement health care plans and
estimates that we will contribute $0.6 million in fiscal
2008.
Future changes in plan asset returns, assumed discount rates and
various assumptions related to the participants in the defined
benefit plans will affect future benefit expense and
liabilities. We cannot predict what these changes will be.
Off-Balance Sheet
Arrangements
We do not have any off-balance sheet arrangements.
S-26
Market
Risk
Market
Risk Sensitive Instruments and Positions
Penford is exposed to market risks that are inherent in the
financial instruments that are used in the normal course of
business. Penford may use various hedge instruments to manage or
reduce market risk, but we do not use derivative financial
instrument transactions for speculative purposes. The primary
market risks are discussed below.
Interest
Rate Risk
Our exposure to market risk for changes in interest rates
relates to its variable-rate borrowings. As of August 31,
2007, all of our outstanding debt, including amounts outstanding
under the Australian grain inventory financing facility, were
subject to variable interest rates, which are generally set for
one or three months. Under interest rate swap agreements with
several banks, we have fixed its interest rates on
U.S. dollar denominated term debt of $32.8 million at
4.18% and $4.2 million at 5.08%, plus the applicable margin
under our credit facility. The market risk associated with a
100 basis point adverse change in interest rates at
August 31, 2007 is approximately $0.4 million.
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 Australias operations
is used for capital investment in Australia and payment of debt
denominated in Australian dollars. At August 31, 2007,
approximately 21% of total debt was denominated in Australian
dollars.
We have not maintained any derivative instruments to mitigate
the
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. The currency exchange rate risk between Penfords
Australian and New Zealand operations is not significant. For
the year ended August 31, 2007, a 10% change in the foreign
currency exchange rates compared with the U.S. dollar would
have affected fiscal 2007 reported net income by approximately
$0.2 million.
From time to time, we enter into foreign exchange forward
contracts to manage exposure to receivables and payables
denominated in currencies different from the functional
currencies of the selling entities. As of August 31, 2007
and 2006, we did not have any foreign exchange forward contracts
outstanding. At August 31, 2007, we had U.S. dollar
denominated trade receivables of $1.9 million at Penford
Australia.
Commodities
The availability and price of corn, Penfords 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, Penford generally
follows a policy of using exchange-traded futures and options
contracts to hedge 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. A majority of
our sales contracts for corn-based industrial starch ingredients
contain a pricing methodology which allows us to pass-through
the majority of the changes in the commodity price of net corn.
Our net corn position in the United States consists
primarily of inventories, purchase contracts and exchange-traded
futures and options contracts that hedge our 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,
2007 and 2006, the fair value of our net corn position was
approximately $1.0 million and $0.02 million,
respectively. The market risk associated with a 10% adverse
change in corn prices at August 31, 2007 and 2006 is
estimated at $104,000 and $2,000, respectively.
S-27
Over the past 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 sudden market fluctuations, we generally enters into
short-term purchase contracts or uses exchange-traded futures
and options contracts to hedge 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, closely
correlated with the price changes in natural gas.
Penfords 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,
2007 and 2006, the fair value of the natural gas exchange-traded
futures and options contracts was a loss of approximately
$1.9 million and a loss of approximately $0.3 million,
respectively. The market risk associated with a 10% adverse
change in natural gas prices at August 31, 2007 and 2006 is
estimated at $188,000 and $27,000, respectively.
Critical
Accounting Policies
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The process of preparing financial statements requires
management to make estimates, judgments and assumptions that
affect our financial position and results of operations. These
estimates, judgments and assumptions are based on our historical
experience and managements knowledge and understanding of
the current facts and circumstances. Management believes that
its estimates, judgments and assumptions are reasonable based
upon information available at the time this report was prepared.
To the extent there are material differences between estimates,
judgments and assumptions and the actual results, the financial
statements will be affected.
Management has reviewed the accounting policies and related
disclosures with the Audit Committee of the Board of Directors.
The accounting policies that management believes are the most
important to the 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
|
|
|
|
Self-insurance program
|
|
|
|
Income taxes
|
|
|
|
Stock-based compensation
|
A description of each of these follows.
Evaluation
of the Allowance for Doubtful Accounts Receivable
Management makes judgments about our ability to collect
outstanding receivables and provides allowances for the portion
of receivables that we may not be able to collect. Penford
estimates the allowance for uncollectible accounts based on
historical experience, known troubled accounts, industry trends,
economic conditions, how recently payments have been received,
and ongoing credit evaluations of its customers. If the
estimates do not reflect our future ability to collect
outstanding invoices, we may experience losses in excess of the
reserves established. At August 31, 2007, the allowance for
doubtful accounts receivable was $0.8 million.
Hedging
Activities
Penford uses derivative instruments, primarily futures
contracts, to reduce exposure to price fluctuations of
commodities used in the manufacturing processes in the United
States. Penford has 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. To reduce exposure to variable
short-term interest rates, Penford uses interest rate swap
agreements.
S-28
The requirements for the designation of hedges are very complex,
and require judgments and analyses to qualify as hedges as
defined by Statement of Financial Accounting Standards
No. 133, Accounting for Derivative Instruments and
Hedging Activities. These judgments and analyses include
an assessment that the derivative instruments used are effective
hedges of the underlying risks. If we were to fail to meet the
requirements of SFAS No. 133, or if these derivative
instruments are not designated as hedges, we would be required
to mark these contracts to market at each reporting date.
Penford had deferred gains (losses), net of tax, of
$(0.6) million and $0.5 million at August 31,
2007 and 2006, respectively, which are reflected in accumulated
other comprehensive income in both years.
Benefit
Plans
Penford has defined benefit plans for its U.S. employees
providing retirement benefits and coverage for retiree health
care. Qualified third-party actuaries assist management in
determining the expense and funded status of these employee
benefit plans. Management makes several estimates and
assumptions in order to measure the expense and funded status,
including interest rates used to discount certain liabilities,
rates of return on plan assets, rates of compensation increases,
employee turnover rates, anticipated mortality rates, and
increases in the cost of medical care. We make judgments about
these assumptions based on 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 future results of
operations. Disclosure about these estimates and assumptions are
included in Note 10 to the audited consolidated financial
statements included elsewhere in this prospectus supplement.
Valuation
of Goodwill
Penford is required to assess, on an annual basis, whether the
value of goodwill reported on the balance sheet has been
impaired, 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 the business
units. If future operating results differ materially from the
estimates, the value of goodwill could be adversely impacted.
See Note 4 to the audited consolidated financial statements
included elsewhere in this prospectus supplement for more
information.
Self-insurance
Program
We maintain a self-insurance program covering portions of
workers compensation and group health liability costs. The
amounts in excess of the self-insured levels are fully insured
by third-party insurers. Liabilities associated with these risks
are estimated in part by considering historical claims
experience, severity factors and other actuarial assumptions.
Projections of future losses are inherently uncertain because of
the random nature of insurance claims occurrences and changes
that could occur in actuarial assumptions. Our financial results
could be significantly affected if future claims and assumptions
differ from those used in determining these liabilities.
Income
Taxes
The determination of our provision for income taxes requires
significant judgment, the use of estimates and the
interpretation and application of complex tax laws. Our
provision for income taxes reflects a combination of income
earned and taxed in the various U.S. federal and state, as
well as Australian and New Zealand, taxing jurisdictions.
Jurisdictional tax law changes, increases or decreases in
permanent differences between book and tax items, accruals or
adjustments of accruals for tax contingencies or valuation
allowances, and our change in the mix of earnings from these
taxing jurisdictions all affect the overall effective tax rate.
In evaluating the exposures connected with the various tax
filing positions, we establish an accrual, when, despite
managements belief that our tax return positions are
supportable, management believes that certain positions may be
successfully challenged and a loss is probable. When facts and
circumstances change, these accruals are adjusted. Beginning in
fiscal 2008, we will adopt Financial Accounting Standards Board
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes an Interpretation of FASB Statement
No. 109, of FIN 48, which will change
S-29
the accounting for tax positions. See discussion in Notes 1
and 13 to the audited consolidated financial statements included
elsewhere in this prospectus supplement.
Stock-Based
Compensation
Beginning September 1, 2005, we recognize stock-based
compensation in accordance with SFAS No. 123R. Under
the fair value recognition provisions of this statement,
share-based compensation cost is measured at the grant date
based on the fair value of the award and is recognized as
expense over the requisite service period of the award.
Determining the appropriate fair value model and calculating the
fair value of the share-based awards at the date of grant
requires judgment, including estimating stock price volatility,
forfeiture rates, the risk-free interest rate, dividends and
expected option life. See Note 9 to the audited
consolidated financial statements included elsewhere in this
prospectus supplement for more information.
If circumstances change, and we use different assumptions for
volatility, interest, dividends and option life in estimating
the fair value of stock-based awards granted in future periods,
stock-based compensation expense may differ significantly from
the expense recorded in the current period.
SFAS No. 123R requires forfeitures to be estimated at
the date of grant and revised in subsequent periods if actual
forfeitures differ from those estimated. Therefore, if actual
forfeiture rates differ significantly from those estimated, our
results of operations could be materially impacted.
Recent Accounting
Pronouncements
In June 2006, the Financial Accounting Standards Board, or FASB,
ratified the Emerging Issues Task Force consensus on EITF Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43. EITF Issue
No. 06-2
requires companies to accrue the costs of compensated absences
under a sabbatical or similar benefit arrangement over the
requisite service period. EITF Issue
No. 06-2
is effective for years beginning after December 15, 2006.
We are evaluating the impact that the adoption of EITF Issue
No. 06-2
will have on our consolidated financial statements and currently
do not believe the adoption will have a material impact on our
consolidated financial statements.
In July 2006, the FASB issued FIN 48. FIN 48 clarifies
the accounting for the uncertainty in income taxes recognized by
prescribing a recognition threshold that a tax position is
required to meet before being recognized in the financial
statements. It also provides guidance on derecognition,
classification, interest and penalties, interim period
accounting and disclosure. FIN 48 is effective for fiscal
years beginning after December 15, 2006. We are evaluating
the impact that the adoption of FIN 48 will have on our
consolidated financial statements and currently do not believe
the adoption will have a material impact on our consolidated
financial statements.
In September 2006, the FASB issued Statement of Financial
Accounting Standards No. 157, Fair Value
Measurements. SFAS No. 157 defines fair value,
establishes a framework and gives guidance regarding the methods
used for measuring fair value, and expands disclosures about
fair value measurements. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007 (fiscal
2009). We are currently evaluating the impact that the adoption
of SFAS No. 157 may have on our consolidated financial
statements.
In February 2007, the FASB issued Statement of Financial
Accounting Standards No. 159, The Fair Value Option
for Financial Assets and Financial Liabilities
including an amendment of FASB No. 115.
SFAS No. 159 allows companies the option to measure
financial instruments and certain other items at fair value that
are not currently required to be measured at fair value.
SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007 (fiscal 2009). We are currently
evaluating the impact that the adoption of
SFAS No. 159 may have on our consolidated financial
statements.
S-30
Description of
Business
According to an industry study, Penford Corporation is the
largest North American developer, manufacturer and marketer of
carbohydrate-based specialty starches for multiple industrial
and food applications. We have a history that dates back more
than 100 years, and we have established leading market
positions within the global starch industry based on a strong,
widely recognized reputation for quality and service and an
extensive array of customized products. Our
strategically-located manufacturing facilities in the United
States, Australia and New Zealand provide us with broad
geographic coverage of our target markets.
We operate in three business segments, each using our
carbohydrate chemistry expertise to develop starch-based
ingredients for value-added applications in several markets that
improve the quality and performance of our customers
products, including papermaking and food products. The first two
segments serve broad categories of end-users in industrial and
food ingredients and are primarily serviced by our United States
operations. The third segment consists of geographically
separate operations in Australia and New Zealand. Our Australian
and New Zealand operations are engaged primarily in the food
ingredients business. We have extensive research and development
capabilities, which enable us to understand the complex
chemistry of carbohydrate-based materials and to develop
applications to address our customers needs.
Our three business segments include:
|
|
|
|
|
Industrial Ingredients North America, which
generated approximately 54% of Penfords revenue in fiscal
2007, is a leading supplier of chemically modified specialty
starches to the paper, packaging and textile industries. Through
a commitment to research and development, Industrial Ingredients
develops customized product applications that help our customers
realize improved manufacturing efficiencies and advancements in
product performance. Industrial Ingredients has specialty
processing capabilities for a variety of modified starches from
renewable sources, including, for example, in the manufacture of
coated and uncoated paper and paper packaging products. These
starches are principally ethylated (chemically modified with
ethylene oxide), oxidized (treated with sodium hypochlorite) and
cationic (carrying a positive electrical charge). Ethylated and
oxidized 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. Industrial
Ingredients products are a cost-effective alternative to
synthetic, petroleum-based ingredients.
|
|
|
|
Food Ingredients North America, which generated
approximately 17% of Penfords revenue in fiscal 2007,
develops and manufactures specialty starches and dextrins for
the food manufacturing and food service industries. Food
Ingredients leverages the inherent characteristics of potato,
corn, tapioca and rice to help improve our customers
product performance. Food Ingredients is the only North American
manufacturer of modified food-grade potato starch. Food
Ingredients specialty starches produced for food
applications are used in coatings for products such as french
fries sold in quick-service restaurants to provide crispness,
improved taste and texture, and increased product life.
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 canned products,
sauces, whole and processed meats, dry powdered mixes and other
food and bakery products.
|
|
|
|
Australia/New Zealand Operations generated approximately 29% of
Penfords revenue in fiscal 2007, and we believe it is the
sole domestic manufacturer of maize starch, high amylose starch
and dextrin in Australia. Additionally, we believe Penford is
the sole manufacturer of glucose in New Zealand. The
Australia/New Zealand segment develops, manufactures and markets
ingredient systems, including specialty starches and sweeteners
for food and industrial applications. Our manufacturing
capabilities allow us to manufacture products to customer
specifications and to quickly respond to customers
changing needs.
|
S-31
We are constructing a new ethanol plant at our Cedar Rapids,
Iowa facility. We have obtained $45 million in capital
financing to expand the facility to allow for up to
45 million gallons of ethanol production capacity per year
with construction cost estimates maintained at $1.00 to $1.05
per gallon. We have signed contracts valued at $40 million
for this project as of October 31, 2007. We already have
much of the infrastructure within the Cedar Rapids plant to
manufacture ethanol cost effectively, with sufficient grain
handling, separation processes, electric utilities and logistic
capabilities. The existing factory is centrally located near
rail and ground transport arteries and the ethanol facility will
occupy available space within the existing site footprint. Once
complete, we expect this enhancement of our bio-refining
capabilities will give us the ability to select from multiple
output choices to capitalize on changing industry conditions and
selling opportunities, and will allow us to direct production
towards the most attractive strategic and financial
opportunities.
Our
Industry
The global market for starches is estimated to be about
55 million metric tons sold in 2007, and includes native
and modified starches sold in a variety of forms, as well as
starch hydrolysates such as glucose, corn syrup solids, high
fructose corn syrup and maltodextrins. Within this broad market,
we focus on specialty starches for industrial and food
applications in both dry and liquid product forms. Specialty
starches are starches that have been chemically or physically
modified to enhance their performance as a food or industrial
ingredient. We design our specialty starches to provide
measurable processing and finished product benefits to our
industrial and food customers. Our industrial applications
improve the manufacturing processing characteristics of
paper-based products, resulting in reduced costs and increased
production volumes, while enhancing the finished products
strength and surface properties. In food applications, our
specialty starches manage moisture, flavor dispersion, cohesion,
adhesion and viscosity to contribute to the finished
products appearance, taste, texture and increased shelf
life. We believe that the current addressable markets for our
industrial and food starches are approximately 6 million to
7 million metric tons in the aggregate, with a market value
of between $3.3 billion and $3.9 billion.
Industrial
Ingredients
The North American industrial starch market serves four major
industries: paper products; paperboard; building materials; and
textiles. The dominant consumers in this 4.7 billion pound
industrial starch market are the paper products and paperboard
industries, which combined represent approximately 88% of total
annual industrial starch consumption in North America. Paper and
paperboard represent approximately 60% and 28% of total
industrial starch consumption, respectively. We have a leading
market share in the industrial modified starch for the paper
products industry based on revenue. The paper products industry
represented approximately 76% and 74% of Penfords annual
industrial starch volume sold and revenue, respectively, for
fiscal 2007.
The North American Paper Market.
The North
American paper and paperboard sectors generate revenues of
approximately $900 million annually. The paper and
paperboard segments have accounted for approximately 84% of
Industrial Ingredients revenues in fiscal 2006, with non-paper
applications (adhesives, building products and textiles)
representing the remainder. Paper products are typically divided
into the following categories: printing and writing papers;
newsprint; and tissue paper. Penford competes primarily in the
printing and writing papers category, which represented
approximately 74% of Industrial Ingredients revenues in fiscal
2007.
Starch is a critical component in the paper making process.
Starches are sometimes used in combination with petroleum-based
chemicals to produce a variety of paper products to create
desired finished product attributes. Increasing the use of
starch in paper processing generally lowers manufacturing costs
and offers environmental advantages because it is derived from
renewable resources instead of petrochemicals. In order to
improve the strength and printability of the paper, pigments and
binders, such as starch, may be added. In addition, paper may be
supercalendared, which involves applying starch or other
ingredients to the paper surface to impart smoothness and gloss.
The Printing and Writing Papers Market
Segment.
The printing and writing papers market
segment consists of uncoated and coated paper. According to the
American Forest & Paper Association, these two grades
accounted for 60% of the domestic industrys paper
production in 2006. In 2006, uncoated paper accounted for 58% of
printing and writing paper production. Uncoated freesheet is
used for publishing, writing and business applications such as
S-32
photocopying, computer printing, and envelopes. Uncoated
groundwood paper is used for preprinted newspaper inserts,
lower-cost business forms, paperback books and telephone
directories. Coated paper is used principally for magazines,
catalogs and other publications that require colored inks. In
2006, coated papers accounted for 37% of printing and writing
production. According to Resource Information Systems Inc.,
demand for coated free sheet in North America was about
6.0 million tons in 2006. The uncoated paper market
represents approximately 58% of Industrial Ingredients current
annual industrial starch volume. We also compete in the coated
free sheet and coated groundwood paper markets, with the two
markets comprising approximately 12% and 6%, respectively, of
the industrial ingredients markets annual volume.
Technology advances have recently negatively affected the
printing and writing papers segment. Historically, this segment
exhibited a steady growth pattern, with demand rising in 27 of
the 30 years between 1970 and 1999, averaging growth of
about 5% per year. Demand has fallen in six of the past seven
years, despite solid economic growth. In uncoated free sheet,
output remained sluggish in 2006: shipments declined 2.4%, even
though growth in the United States gross domestic product
reached 3.3%. For coated free sheet papers, demand in 2006 was
down 3.5%, resulting in easing price levels. The paper
manufacturing industry has consolidated assets over the past two
years driving capacity utilization rates from the mid-1980s to
above 90% for both coated and uncoated free sheet production. As
higher capacity utilization rates require higher value starches,
we have aligned our industrial starch business with strong paper
customers and efficient production assets in order to minimize
the impact of slowing demand. This business has also increased
international business and accelerated growth of its specialty
products, expanding into other industrial segments.
Food
Ingredients
Unmodified starches have limited functionality in food industry
applications because they cannot create the desired sensory
attributes in the end products. Corn is the most significant raw
material for food starch, representing about 80% of the market,
followed by wheat and potato starch. Food starch prices range
from around $0.20 per pound to over $1.65 per pound for highly
modified starches.
Starches are modified for use in the food industry to make
finished products easier to use and more stable in processing
and to give a wider range of textures. Modified starches improve
performance in large-scale food production required by our
customers, unlike unmodified starches. For example, in frozen
foods, modified starches maintain taste and texture in products
that are subjected to several freeze-thaw cycles during
distribution and preparation. Similarly, in a pudding
application, a modified precooked starch provides instant
viscosity, resulting in a creamy texture and evenly distributed
flavor. Common end products that use our food starches include
fried foods, processed meats, marinades, soups, sauces, gravies,
bakery items, beverages and snacks.
Food Ingredients sells into most segments of the food industry,
including quick-service restaurants, or QSRs, food processors,
branded manufacturers, casual dining and food service
distribution. We also develop products for the companion pet
market. Revenues of Food Ingredients have increased 32.5% for
the period from fiscal 2004 through fiscal 2007, averaging 9.8%
growth in revenues per year. The growth in our North American
Food Ingredients business is primarily attributable to product
introductions and expansions with the QSR and retail food
industry. For example, the fast food market grew by 4.6% in
fiscal 2006 to $55 billion in sales. Within this market,
the QSR segment accounts for approximately 73.3% of the
markets value in the United States. The QSR industry
accounts for slightly over half of our food sales. We sell
product applications to most of the national QSR chains and many
of the regional restaurant chains. We also work closely with
many of the branded food manufacturers in developing products
that they sell through retail supermarkets.
We focus on competing where we can provide differentiated
products that create desirable attributes in our customers
finished products. Unlike most food starch companies that
formulate mostly with corn, we have built our business platform
around providing starches from a variety of sources, depending
on the needs of our customers. Our dominant starch is potato
starch, which accounts for over 80% of the starch raw material
used by Food Ingredients. Modified potato starch is a preferred
starch because it offers advantages over other starch types in
certain applications in terms of moisture management, coating
and binding characteristics with a low flavor profile. We also
provide corn, tapioca and rice starch products for the food
processing industry, and specialty dextrose products for the
pharmaceutical industry. Food Ingredients generated revenue of
$63.0 million in fiscal 2007, up from $33.1 million in
fiscal 2000. Slightly over half of this revenue was in coating
formulations, with
S-33
applications for french fries accounting for the vast majority
of this product segment. Coatings revenue has increased 57%
since fiscal 2000. Although we sell potato-based coating
formulations to processors who supply french fries to QSRs,
retail, casual dining and other food services, overall demand
growth of french fries tends to parallel that of the QSR
industry. French fries are important to the QSRs, because they
are one of the highest profit margin menu items. Penfords
clear coat starch batter systems keep fries hotter and crisper
for a longer period of time than uncoated fries. More
importantly, these characteristics deliver significant
advantages to consumers where a high percentage of QSR meals are
eaten away from the location of purchase.
Our second largest product segment is protein applications for
processed meat and poultry, representing nearly 20% of Food
Ingredients revenue, and is now more than four times its
size compared to fiscal 2000. Desired characteristics of protein
applications include moisture management and flavor dispersion,
binding, marinades, and whole muscle coating systems for batters
and breading. Modified starches also provide improved
performance for convenience foods, allowing them to move
directly from the freezer to fryer or oven. These products
reduce in-store labor and ensure a more consistent end product.
We use primarily potato and corn starches in these applications.
The majority of our growth in the protein segment has come from
a wider range of technologies and applications for the expanding
poultry segment for restaurants and retail. The growth in
poultry products available in restaurants and at retail is
consistent with consumer interest in health and wellness.
In mid-2007, we introduced a range of new extruded and injection
molded treats and chews into the companion pet market. These
bio-polymer products are based on new carbohydrate technology
and are designed to address consumer demands for safer and more
functional chews and treats that enhance the health and quality
of life for their pets. We believe the technology platform will
provide opportunities for additional products that can deliver
additional benefits to animals.
Australia
/ New Zealand
Total annual volume of starch-based products in Australia is
estimated at 354,000 metric tons and is comprised of starch,
sweeteners and wheat gluten. Starch represents 62% of the total
volume of these combined categories. Within starches, food usage
accounts for about one-third, paper for one-third and other
industrial segments about one-third of the total volume. We
believe there is only one other significant domestic producer of
starch in Australia. About 85% of the Australia/New Zealand
segments sales are in food. Penford sells starch-based
applications for a wide range of food products, including
confectionary, bakery, cereals, processed meats, sauces, soups,
processed foods and dairy. Customers include most multinational
food companies and major domestic manufacturers. About 14% of
our Australian revenue is generated from customers in Japan. Our
industrial business in Australia is primarily in specialized
dextrins and modified starches for mining. We do not view the
large paper and packaging segments as attractive in Australia
because most of the starch used is in the form of low value
unmodified wheat starch and is supplied by a domestic competitor.
The New Zealand starch-based products market is roughly 47,100
metric tons. Food use represents about two-thirds of the market,
with industrial consumption representing the remaining
one-third. We believe we are the only significant domestic
manufacturer of starch and starch derived products. Our
competition comes from imported products. This business serves
food manufacturers and industrial applications in the paper and
corrugated packaging markets.
Our Competitive
Strengths
We believe that we enjoy a number of important competitive
strengths that drive our success, differentiate us from our
competitors and support our market positions, including:
A recognized leader in select, value-added segments of the
modified specialty starch industry.
We provide
advanced ingredient systems made from renewable, environmentally
safe raw materials for a variety of value-added starch
applications worldwide. We have over 100 years of
experience manufacturing specialty starches for the industrial
and food ingredient markets, with a widely recognized reputation
for providing exceptional quality, technology and service. We
have leading positions in the modified specialty starch markets
in North America, Australia and New Zealand. Additionally, we
have established sustainable entry positions in targeted
end-markets that are growing
S-34
rapidly as consumers demand more natural-based solutions from
our customers. We believe our capability to extend our leading
positions in existing markets to complementary opportunities by
offering improved functionality and performance gives us an
advantage over our competitors.
Ability to provide customized specialty starch solutions from
a broad array of renewable, natural-based
ingredients.
We manufacture specialty starches
from a variety of renewable raw materials including corn,
potatoes and wheat, and also formulate solutions with tapioca
and rice starches. Our ability to provide natural, customized
and cost-effective solutions from a broad array of substrates
separates us from many competitors. We work closely with our
customers to select the appropriate raw materials, or blends of
raw materials, and then cooperatively develop customized
formulations that are tailored to meet specific performance or
processing needs. This approach enables us to be involved in the
early stages of product development and promote proprietary
applications that permit our customers products to perform
better. Our value proposition emphasizes the benefits from using
renewable source materials that offer superior performance,
yield or cost when compared with alternative products,
particularly synthetic ingredients derived from petrochemicals.
Significant value creation and ability to capitalize on
changing industry trends through expanding output choices at our
Cedar Rapids manufacturing facility.
We are
expanding our Cedar Rapids, Iowa manufacturing site so that we
have the capacity to produce up to 45 million gallons of
ethanol per year. Our existing infrastructure required for grain
handling, separation processes, utilities and logistic
capabilities will permit us to build out the
facility and manufacture ethanol cost-effectively. Once
complete, we expect this enhancement of our bio-refining
capabilities will give us the ability to select from multiple
output choices to capitalize on changing industry conditions and
selling opportunities, and will allow us to direct production
towards the most attractive strategic and financial
opportunities. Additionally, by improving production capacity
and adding fermentation capability, we believe we will be better
positioned to participate in emerging bio-processing trends and
technologies that represent potential significant platforms for
future growth for products across all of our end-markets.
Diverse, premier customer base in broad range of end-markets
and geographies.
Over the past 100 years, we
have established strong relationships with some of the largest
companies in the industrial and food sectors. Our customers
include some of the worlds largest paper and food
manufacturers
,
and we believe our relationships have been
built on our successful delivery of high quality, extremely
functional applications that provide customers with sustainable
advantages for their products. Sixteen of our twenty largest
customers, representing about 50% of our sales in fiscal 2007,
have retained that status for at least five years. Sales to this
group of sixteen customers have increased by approximately 16%
over the last five years. We supply modified industrial starches
to five of the six largest North American producers of uncoated
freesheet paper and two of the three largest North American
manufacturers of coated freesheet paper. We also supply many of
the leading food processors in the United States and all of the
leading multi-national quick service restaurant chains in North
America, as well as many in the casual dining sector. In
Australia and New Zealand, we serve the five largest food
manufacturers and two of the top five mining companies. Three of
the twelve largest customers served by our Australia and New
Zealand operations are based in Japan.
Ability to leverage capabilities and products across business
segments and end-markets.
We are able to leverage
our product offerings and production expertise to transfer
learning, information and analytical services among our
businesses while supporting customers worldwide. We have
expanded biopolymers expertise and analytical services across
all three business segments for use in papermaking,
biodegradable packaging and companion pet treats. To lower costs
and improve product performance, we have moved starch processing
technology developed in Australia to the United States. Our
pilot plant facility in Cedar Rapids has developed commercial
applications in bioplastics and mining as well as functional and
nutritional food ingredients. We believe this broad competence
accelerates commercialization of new products in diverse
markets, improves customer acceptance of standardized
formulations across regions and reduces development costs.
Experienced and proven management team.
We are
led by a highly experienced and committed management team that
possesses substantial operational, technical and commercial
experience. On average, each member of our senior management
team has more than twenty years of experience within the food
and chemical ingredients industry. In addition, we have a
talented, experienced and dedicated mid-level management group
across all of our business segments. Under our current Chief
Executive Officer and Chief Financial Officer, we have grown
total sales from
S-35
$225.7 million in 2001 to $362.4 million in 2007, and
operating income from $11.0 million in 2001 to
$23.6 million in 2007. Our total debt to total capital
ratio over the same six-year time period was reduced from 63.2%
on August 31, 2001 to 37.8% on August 31, 2007.
Our Business
Strategy
Key elements of our business strategy are to:
Deliver superior total value with customized solutions for
our customers.
We are committed to manufacturing
high-quality products that exceed customer expectations, with an
emphasis on products that are safe, made from renewable
resources, cost-effective and customizable. We work to deliver
superior value to our customers through a combination of
advanced ingredient systems and highly tailored, service-based
solutions, supported by our technically trained sales and
applications teams. By providing additional products and
services, we anticipate strengthening our existing customer
relationships, winning new business and expanding into new
segments and geographic markets.
Focus resources and customer development programs on
higher-margin, value-added specialty products.
We
believe we can continue to improve margins in our businesses by
transitioning our product mix to a higher proportion of
specialty products. Where we believe our technologies and
differentiated applications offer our customers clear,
quantifiable benefits, we intend to expand value-added products
while maintaining cost competitiveness in our established
product offerings. We also intend to continue to invest in our
technical and commercial capabilities to develop more complex
ingredient solutions to create value for our customers.
Improve operating efficiencies while building in flexibility
to capitalize on new opportunities.
We intend to
continue to invest in capital and human resources to achieve
productivity gains and continual process improvements that
support our growth initiatives. We also plan to pursue superior
product manufacturing and innovation through technologically
advanced manufacturing processes to maximize profitability. We
expect to support profitable growth across multiple business
lines by reducing unit costs through manufacturing process
improvements, improving asset utilization at our facilities, and
containing our operating expenses. For example, we have
increased production by 34% in our potato processing plants and
by 14% in our Australia and New Zealand facilities since 2002.
Additionally, we are in the process of expanding the capacity
and production capability in our Cedar Rapids facility, which,
when the expansion is complete, will offer us greater
manufacturing flexibility and enable us to improve
profitability. This additional production capacity has allowed
us to develop a commercial product from alcohol-based reactions
to create a cationic liquid starch for use in personal care
products that can displace a petroleum-based chemical.
Grow through product innovation.
We intend to
strengthen our market positions through product innovation. We
continue to invest in human capital to enhance our skill bases,
technical expertise and research and development capacity. Our
technical personnel not only respond to customer requests, they
also actively bring new market-driven concepts and applications
to our customers. We also seek to invest in product innovations
where we believe opportunities exist to broaden our current
technology platforms into adjacent applications and markets. In
the past few years, we have developed numerous innovative
solutions that extend our businesses into complementary products
and end-markets. For example, our liquid natural additive
platform is a renewable source starch-based line of products
that can displace various synthetic chemicals, extending our
industrial business into recycled newsprint, recycled paperboard
and adhesive segments, which are areas in which there has been
substantial growth and consumer focus over the past several
years. We have already succeeded in displacing or partially
replacing a range of petroleum-based products, including
synthetic latex, proteins, synthetic optical brighteners and
polyvinyl alcohol with our proprietary products. Our advanced
food coatings technologies provide greater product integrity
(crispness and heat) and longer hold times for french fries. We
believe there is a range of opportunities in developing novel
ingredients, blends, nutritional delivery systems and resins for
the rapidly growing pet food industry, and our starch-based
bio-polymer formulas for edible injection molded and extruded
pet treats offer non-allergenic, high-dissolution product
benefits, with enhanced processing characteristics for our
customers. Market interest is high in the area of renewable raw
materials as a partial replacement for plastics in packaging and
consumable products, and we have commercialized a unique,
starch-based bio-polymer formulation for recyclable packaging to
compete against synthetic bio-polymers.
S-36
Seek external opportunities to accelerate shareholder
value.
We intend to pursue strategic alliances,
licensing arrangements and acquisitions of complementary
technologies and businesses to create value for our
shareholders. We believe that opportunities for expansion of our
business through strategic alliances or industry acquisitions
will arise as the bio-materials industry matures, and our
production facilities are well-positioned to capitalize on
developing trends and technologies in bio-refining and
bio-processing. In bio-refining, we believe there is opportunity
to develop bio-friendly solvents and chemicals from our ethanol
platform. In bio-processing, we believe we are aligned with
trends towards seed trait technology and the need to process the
expected range of new varieties of corn. Additionally, we
believe that advancements in bio-refining and bio-processing may
be conducive to strategic alliances or partnerships.
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
consistent with those available in the major U.S. grain
markets.
Penford Australias corn wet milling facilities in Lane
Cove, Australia, and Auckland, New Zealand are sourced through
truck-delivered corn at contracted prices with regional
independent farmers and merchants. The corn sourced in Australia
and New Zealand is normally contracted prior to harvest
(March June). Corn used in Australia is purchased
and stored for use in both the current and following year. The
corn sourced in New Zealand is purchased in advance for future
delivery. Corn is also purchased from Australia as necessary to
supplement the corn sourced and processed in New Zealand.
Potato
Starch
Our facilities in Idaho Falls, Idaho; Richland, Washington; and
Plover, Wisconsin use starch recovered as by-products from
potato processors as the primary raw material to manufacture
modified potato starches. We enter into contracts typically
having durations of one to three years with potato processors in
the United States, Canada and Mexico to acquire potato-based raw
materials.
Wheat
Products
Penford Australias Tamworth facility uses wheat flour as
the primary raw material for the production of its wheat
products, including wheat starch, wheat gluten and glucose
syrup. We are currently negotiating with various suppliers for
the supply of wheat flour subsequent to the expiration of our
current wheat supply contract at the end of calendar 2007.
Chemicals
The primary chemicals used in the manufacturing processes are
readily available commodity chemicals. The prices for these
chemicals are subject to price fluctuations due to market
conditions.
Natural
Gas
The primary energy source for most of Penfords 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 currently subject to availability constraints, although
drought conditions in Australia have periodically affected the
prices of corn and wheat in that area and strong demand has
substantially increased the prices of natural gas, chemicals and
agricultural raw materials. Current forecasts for wheat
production in Australia indicate that the existing drought will
affect the future price for that raw material. Our current
potato starch requirements constitute a material portion of the
available North American supply. We estimate that we purchase
approximately
50-55%
of
the recovered potato starch in North
S-37
America. It is possible that, in the long term, continued growth
in demand for potato starch-based ingredients and new product
development could result in capacity constraints.
Over half of our manufacturing costs consists of the costs of
corn, potato starch, wheat flour, chemicals and natural gas. The
remaining portion consists of the costs of labor, distribution,
depreciation and maintenance of manufacturing plant and
equipment, and other utilities. The prices of 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 United
States 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 projects which require 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. Research and development expenses were
$6.8 million, $6.2 million and $5.8 million for
fiscal years ended August 31, 2007, 2006 and 2005,
respectively.
At the end of fiscal 2007, we had 39 scientists, including seven
with PhDs with expert knowledge of carbohydrate characteristics
and chemistry.
Patents,
Trademarks and Tradenames
We own a number of patents, trademarks and tradenames.
We have approximately 200 current patents and pending patent
applications, most of which are related to technologies in
french fry coatings, coatings for the paper industry and animal
and human nutrition. Our issued patents expire at various times
between 2008 and 2025. The annual cost to renew all of our
patents is approximately $0.2 million. 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 that we do.
Specialty starch ingredient brand names for industrial
applications include, among others,
Penford
®
Gums,
Pensize
®
binders,
Penflex
®
sizing agent,
Topcat
®
cationic additive and the
Apollo
®
starch series. Product brand names for food ingredient
applications include
PenBind
®
,
PenCling
®
,
PenPlus
®
,
CanTab
®
,
MAPS
tm
,
Mazaca
tm
and
Fieldcleer
tm
.
Quarterly
Fluctuations
Our revenues and operating results vary from quarter to quarter.
In particular, we experience seasonality in its Australian
operations. We have lower sales volumes and gross margins in
Australia and New Zealands summer months, which occur
during 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 which use our products, such as
packaged bread, also contributes to this seasonal trend. Sales
volumes of the Food Ingredients North America
products used in french fry coatings are also generally lower
during our second fiscal quarter due to decreased consumption of
french fries during the post-holiday season. The cost of natural
gas in North America is generally higher in the winter months
than the summer months.
Working
Capital
Our growth is funded through a combination of cash flows from
operations and short- and long-term borrowings. For more
information, see the Liquidity and Capital Resources
section under Managements Discussion and Analysis of
Financial Condition and Results of Operations and our
audited consolidated financial statements and the related notes
included elsewhere in this prospectus supplement
We generally carry a one- to
45-day
supply of materials required for production, depending on the
lead time for specific items. We manufacture finished goods to
customer orders or anticipated demand. We are therefore able to
S-38
carry less than a
30-day
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.
Environmental
Matters
Our operations are governed by various federal, state, local and
foreign environmental laws and regulations. In the United
States, these laws and regulations include the Clean Air Act,
the Clean Water Act, the Resource Conservation and Recovery Act,
the EPA Oil Pollution Control Act, the Occupational Safety and
Health Administrations 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. We believe that we have obtained all
necessary material environmental permits required for our
operations. We believe that our operations are in compliance
with applicable environmental laws and regulations in all
material aspects of our business. We estimate that annual
compliance costs, excluding operational costs for emission
control devices, wastewater treatment or disposal fees, are
approximately $1.8 million.
We have 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 employees, the communities surrounding our
plants, and the environment. We continuously monitor
environmental legislation and regulations that may affect our
operations.
During fiscal 2007, there have been no material effects on our
operations that resulted from compliance with environmental
regulations. No unusual expenditures for environmental
facilities and programs are anticipated in fiscal 2008.
Principal
Customers
We sell to a variety of customers and has several relatively
large customers in each business segment. None of our customers
constituted 10% of sales in fiscal years 2006 and 2005. However,
for fiscal 2007, our largest customer, Domtar, Inc., represented
approximately 12% of our consolidated net sales. Domtar, Inc. is
a customer of the our Industrial Ingredients North
America business.
Competition
In our primary markets, 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. Some
of these competitors are larger companies, and have greater
financial and technical resources than we do. Application
expertise, quality and service are the major competitive
advantages for us.
Employees
At August 31, 2007, we had 596 total employees. In North
America, we had 357 employees, of which approximately 40%
are members of a trade union. The collective bargaining
agreement covering the Cedar Rapids-based manufacturing
workforce expires in August 2012. Penford Australia had
239 employees, of which 69% are members of trade unions in
Australia and New Zealand. The union contracts for the Tamworth,
Australia, and the New Zealand facilities have expiration dates
of September 2008 and February 2008, respectively. The Lane
Cove, Australia, union agreement expires in December 2007 and is
currently being negotiated. We do not assure you that we will
successfully renegotiate this agreement before expiration or at
all.
S-39
Sales and
Distribution
Sales are generated using a combination of direct sales and
distributor agreements. In many cases, we support our sales
efforts with technical and advisory assistance to customers. We
generally ship our products upon receipt of purchase orders from
our 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 two years or on a
spot basis. In fiscal 2007, approximately 63% of these sales
were under fixed-price contracts, and the remaining 37% of the
sales were under formula-priced contracts or sold on a spot
basis.
Since our customers are generally other manufacturers and
processors, most of our products are distributed via rail or
truck to customer facilities in bulk, except in Australia and
New Zealand where most dry product is packaged in
25 kilogram bags.
Foreign
Operations and Export Sales
We expanded into foreign markets with our acquisition of Penford
Australia in September 2000. Penford Australia is the sole
domestic manufacturer of maize starch, high amylose starch and
dextrin in Australia. Additionally, in New Zealand, Penford is
the sole manufacturer of glucose. Penford Australia manufactures
products used to enhance the quality and performance of packaged
food products, generally through providing the texture and
viscosity required by its customers for products such as sauces
and gravies. Penford Australias starch products are also
used in industrial applications including mining, paper,
corrugating and building materials. Our operations in Australia
and New Zealand include three manufacturing facilities for
processing specialty corn starches and wheat-related products.
Competition is mainly from imported products, except in wheat
flour based starches where there is one other producer in
Australia. Export sales from our businesses in the United States
and Australia/New Zealand accounted for approximately 15%, 13%
and 16% of total sales in fiscal 2007, 2006 and 2005,
respectively.
Legal
Proceedings
In October 2004, Penford Products Co., a wholly-owned subsidiary
of Penford, was sued by Graphic Packaging International, Inc. in
the Fourth Judicial District Court, Ouachita Parish, Louisiana.
Graphic Packaging sought monetary damages for, among other
things, Penford Products alleged breach of an agreement
during the 2004 strike affecting its Cedar Rapids, Iowa plant to
supply Graphic Packaging with certain starch products. Penford
Products denied all liability and countersued for damages.
During October 2007, this case was tried before a judge of the
above-noted court. As of November 26, 2007, no decision in
the matter had been rendered by the judge and the judge had not
advised Penford Products of the date upon which his decision
would be issued.
At trial, Graphic Packaging argued that it was entitled to
damages of approximately $3.27 million, plus interest.
Penford Products argued that it was entitled to damages of
approximately $550,000, plus interest.
We vigorously defended our position at trial. However, we,
applying our best judgment of the likely outcome of the
litigation, have established a loss contingency against this
matter of $2.4 million. Depending upon the eventual outcome
of this litigation, we may incur additional material charges in
excess of the amount we have reserved, or we may incur lower
charges, the amounts of which in each case management is unable
to predict at this time.
We are involved from time to time in various other claims and
litigation arising in the normal course of business. In the
judgment of management, which relies in part on information from
our outside legal counsel, the ultimate resolution of these
matters will not materially affect our consolidated financial
position, results of operations or liquidity.
S-40
We believe that our management team is one of our competitive
strengths. Our Board of Directors has eight members and is
divided into three classes, with directors in each class serving
a three-year term. The following table sets forth the names and
ages of our executive officers and directors, as well as the
positions held by those persons:
|
|
|
|
|
|
|
|
Name
|
|
Age
|
|
Position
|
Paul H. Hatfield
|
|
|
71
|
|
|
Chairman
|
Thomas D. Malkoski
|
|
|
51
|
|
|
Director, President and Chief Executive Officer
|
William E. Buchholz
|
|
|
65
|
|
|
Director
|
Jeffrey T. Cook
|
|
|
51
|
|
|
Director
|
R. Randolph Devening
|
|
|
65
|
|
|
Director
|
John C. Hunter III
|
|
|
60
|
|
|
Director
|
Sally G. Narodick
|
|
|
62
|
|
|
Director
|
James E. Warjone
|
|
|
64
|
|
|
Director
|
Steven O. Cordier
|
|
|
51
|
|
|
Senior Vice President, Chief Financial Officer and Assistant
Secretary
|
Timothy M. Kortemeyer
|
|
|
41
|
|
|
Vice President and President, Penford Products Co.
|
John R. Randall
|
|
|
63
|
|
|
Vice President and President, Penford Food Products
|
Christopher L. Lawlor
|
|
|
57
|
|
|
Vice President Human Resources, General Counsel and
Secretary
|
Wallace H. Kunerth
|
|
|
59
|
|
|
Vice President and Chief Science Officer
|
Russell A. Allwell
|
|
|
43
|
|
|
Managing Director, Penford Australia and Penford New Zealand
|
|
|
Paul H. Hatfield
has served as a director of Penford
since October 1994 and as Chairman of the Board since January
2003. Mr. Hatfield has been Principal of the Hatfield
Capital Group, a private investment company since 1997. 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 lead director for Solutia
Inc., and is a director of Bunge Limited, Maritz Inc. and Stout
Industries.
Thomas D. Malkoski
joined Penford Corporation as Chief
Executive Officer and was appointed to the Board of Directors in
January 2002. He was named President of Penford Corporation in
January 2003. From 1997 to 2001, he served as President and
Chief Executive Officer of Griffith Laboratories, North America,
a formulator, manufacturer and marketer of ingredient systems to
the food industry. Previously, he served in various senior
management positions, including as Vice President/Managing
Director of the Asia Pacific and South Pacific regions for
Chiquita Brands International, an international marketer and
distributor of bananas and other fresh produce.
Mr. Malkoski began his career at the Procter and Gamble
Company, a marketer of consumer brands, progressing through
major product category management responsibilities.
William E. Buchholz
joined Penfords Board of
Directors in January 2003. He has been a business consultant and
private investor since 2002. From 2001 to 2002,
Mr. Buchholz 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. Mr. Buchholz was Senior Vice President
and Chief Financial Officer of Nalco Chemical Company, a
specialty chemicals company, with responsibilities for all
finance functions including audit, tax, financial systems,
U.S. and international treasury, and investor relations
from 1992 to 1999. Prior to that, he served as Vice President
and Chief Financial Officer of Cincinnati Milacron, an
industrial equipment supplier.
S-41
Mr. Buchholz is a certified public accountant and holds an
M.B.A., Finance and a B.A., Accounting, both from Michigan State
University.
Jeffrey T. Cook
is the President and Chief Operating
Officer of Stellar Holdings, Inc. a Seattle based private
investment firm. Mr. Cook has been a member of the Board of
Directors since 1998. He previously served Penford Corporation
as President from January 2002 to January 2003, 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 Penford in 1983. He is a graduate of Stanford
University with a B.A. in Economics. Mr. Cook serves as a
board member of Port Blakely Company, a privately held natural
resources and real estate development company headquartered in
Seattle, Washington; Micro A.B., a retail auto parts
publicly traded company based in Sweden; and Powerit Holdings,
Inc., a leader in intelligent energy demand management also
headquartered in Seattle.
R. Randolph Devening
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 and as 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, Chief Financial Officer, and Director from 1993
to 1994, and Executive Vice President, Chief Financial Officer
and Director 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 7 Eleven Inc., Gold Kist Inc., and Safety-Kleen
Holdco, Inc., and as an advisor to Hall Brothers Capital
Partners.
John C. Hunter III
has served as a director of
Penford since October 1998. From 1999 until his retirement in
2004, Mr. Hunter was the 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.
Mr. Hunter also served as President and Chief Operating
Officer of Solutia, Inc. from 1997 to 1999. On December 17,
2003, Solutia, Inc. and its domestic subsidiaries filed a
voluntary petition under Chapter 11 of the
U.S. Bankruptcy Code in the U.S. Bankruptcy Court for
the Southern District of New York in order to reorganize its
business and to obtain relief from certain legacy liabilities
which accrued under prior ownership and management. 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 Energizer Holdings, Inc.
Sally G. Narodick
has served as a member of the Board of
Directors of Penford since August 1993. Ms. Narodick was an
educational technology and
e-learning
consultant until she retired in March 2004. 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 Teachers College and an M.B.A. from
New York University. She serves as a board member of Puget
Energy, Inc.; Solutia, Inc.; SumTotal Systems, Inc.; and Cray,
Inc.
James E. Warjone
has served as a director of Penford
since January 2001. Mr. Warjone is Chairman and Chief
Executive Officer of The Port Blakely Companies, a private
company that owns and operates commercial forests in Washington,
Oregon and New Zealand and also develops real estate in
Washington State. Mr. Warjone has been with Port Blakely
since 1978. He earned his B.S. in economics from Claremont
Mens College. Mr. Warjone also serves as a board
member of The Joshua Green Corporation, Leisure Care, Inc., the
Association of Washington Business, the Greater Seattle Chamber
of Commerce and the American Forest and Paper Association.
Steven O. Cordier
is Penfords Senior Vice
President, Chief Financial Officer and Assistant Secretary. He
joined Penford in July 2002 as Vice President and Chief
Financial Officer, and was promoted to Senior Vice President in
November 2004. From September 2005 to April 2006,
Mr. Cordier served as the interim Managing Director of
Penfords Australian and New Zealand operations. He came to
Penford from Sensient Technologies Corporation, a
S-42
manufacturer of specialty products for the food, beverage,
pharmaceutical and technology industries, where he held a
variety of senior financial management positions since 1995.
Timothy M. Kortemeyer
has served as Vice President of
Penford since October 2005 and President of Penford Products Co.
since June 2006. He served as General Manager of Penford
Products from August 2005 to June 2006. Mr. Kortemeyer
joined Penford in 1999 and served as a Team Leader in the
manufacturing operations of Penford Products until 2001. From
2001 until 2003, he was an Operations Manager and Quality
Assurance Manager. From July 2003 to November 2004,
Mr. Kortemeyer served as the business unit manager of
Penfords co-products business, and from November 2004
until August 2005, as the director of Penfords specialty
starches product lines, responsible for sales, marketing and
business development.
John R. Randall
is Vice President of Penford Corporation
and President of Penford Food Ingredients. He joined Penford in
February 2003 as Vice President and General Manager of Penford
Food Ingredients and was promoted to President of the Food
Ingredients division in June 2006. Prior to joining Penford,
Mr. Randall was Vice President, Research &
Development/Quality Assurance of Griffith Laboratories, USA, a
specialty foods ingredients business, from 1998 to 2003. From
1993 to 1998, Mr. Randall served in various research and
development positions with KFC Corporation, a quick-service
restaurant business, most recently as Vice President, New
Product Development. Prior to 1993, Mr. Randall served in
research and development leadership positions at Romanoff
International, Inc., a manufacturer and marketer of gourmet
specialty food products, and at Kraft/General Foods.
Christopher L. Lawlor
joined Penford in April 2005 as
Vice President-Human Resources, General Counsel and Secretary.
From 2002 to April 2005, Mr. Lawlor served as Vice
President-Human Resources for Sensient Technologies Corporation,
a manufacturer of specialty chemicals and food products. From
2000 to 2002, he was Assistant General Counsel for Sensient.
Mr. Lawlor was Vice President-Administration, General
Counsel and Secretary for Kelley Company, Inc., a manufacturer
of material handling and safety equipment from 1997 to 2000.
Prior to joining Kelley Company, Mr. Lawlor was employed as
an attorney at a manufacturer of paper and packaging products
and in private practice with two national law firms.
Dr. Wallace H. Kunerth
has served as Penfords
Vice President and Chief Science Officer since 2000. From 1997
to 2000, he served in food applications research management
positions in the Consumer and Nutrition Sector at Monsanto
Company, a provider of hydrocolloids, high intensity sweeteners,
agricultural products and integrated solutions for industrial,
food and agricultural customers. Before Monsanto, he was the
Vice President of Technology at Penfords food ingredients
business from 1993 to 1997.
Russell A. Allwell
joined Penford as Managing Director of
its Australian and New Zealand operations in April 2006. Prior
to joining Penford, Mr. Allwell had been the General
Manager Retail Sales for George Weston Foods, a manufacturer of
baked goods and other foods, since 2003. From 1996 to 2003,
Mr. Allwell served in various senior management roles with
Berri Ltd., a beverage manufacturer, including as Director of
Strategy from 2000 to 2003, as Marketing Director from 1997 to
2003, and as General Manager New Ventures from 1996
to 1997. Prior to that, Mr. Allwell served in various
management, sales and marketing positions with Simplot
Australia, Kraft Foods, Calbecks Ltd. and Humes ARC Ltd.
S-43
Under the terms and subject to the conditions contained in an
underwriting agreement dated December 6, 2007, the
underwriters named below, for whom Jefferies &
Company, Inc. is acting as representative, have severally agreed
to purchase, and we have agreed to sell to them, the number of
shares indicated below:
|
|
|
|
|
|
|
Name
|
|
Number of Shares
|
|
Jefferies & Company, Inc.
|
|
|
1,425,000
|
|
BMO Capital Markets Corp.
|
|
|
475,000
|
|
Sidoti & Company, LLC
|
|
|
50,000
|
|
Gabelli & Company, Inc.
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
2,000,000
|
|
|
|
The underwriters are offering the shares of common stock subject
to their acceptance of the shares from us and subject to prior
sale. The underwriting agreement provides that the obligations
of the several underwriters to pay for and accept delivery of
the shares of common stock offered by this prospectus supplement
are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The underwriters are
obligated to take and pay for all of the shares of common stock
if any such shares are taken. However, the underwriters are not
required to take or pay for the shares covered by the
underwriters over-allotment option described below.
Over-Allotment
Option
We have granted to the underwriters an option, exercisable for
30 days from the date of this prospectus supplement, to
purchase up to an aggregate of 300,000 additional shares of
common stock at the public offering price set forth on the cover
page of this prospectus supplement, less underwriting discounts
and commissions. The underwriters may exercise this option
solely for the purpose of covering over-allotments, if any, made
in connection with the offering of the shares of common stock
offered by this prospectus supplement. If the underwriters
exercise this option, each underwriter will be obligated,
subject to some conditions, to purchase a number of additional
shares proportionate to that underwriters initial purchase
commitment as indicated in the table above.
Commission and
Expenses
The underwriters have advised us that they propose to offer the
shares of common stock to the public at the initial public
offering price set forth on the cover page of this prospectus
supplement and to certain dealers at that price less a
concession not in excess of $0.82 per share. The underwriters
may allow, and certain dealers may reallow, a discount from the
concession not in excess of $0.10 per share of common stock to
certain brokers and dealers. After the offering, the initial
public offering price, concession and reallowance to dealers may
be reduced by the representative. No such reduction shall change
the amount of proceeds to be received by us as set forth on the
cover page of this prospectus supplement. The shares of common
stock are offered by the underwriters as stated herein, subject
to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. The underwriters do not
intend to confirm sales to any accounts over which they exercise
discretionary authority.
The following table shows the public offering price, the
underwriting discounts and commissions payable to the
underwriters by us and the proceeds, before expenses, to us.
Such amounts are shown assuming both no exercise and full
exercise of the underwriters over-allotment option to
purchase additional shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
Total
|
|
|
|
Without
|
|
|
With
|
|
|
Without
|
|
|
With
|
|
|
|
Overallotment
|
|
|
Overallotment
|
|
|
Overallotment
|
|
|
Overallotment
|
|
Public offering price
|
|
$
|
25.000
|
|
|
$
|
25.000
|
|
|
$
|
50,000,000
|
|
|
$
|
57,500,000
|
|
Underwriting discounts and commissions paid by us
|
|
$
|
1.375
|
|
|
$
|
1.375
|
|
|
$
|
2,750,000
|
|
|
$
|
3,162,500
|
|
Proceeds to us, before expenses
|
|
$
|
23.625
|
|
|
$
|
23.625
|
|
|
$
|
47,250,000
|
|
|
$
|
54,337,500
|
|
|
|
S-44
We estimate expenses payable by us in connection with the
offering of shares of common stock, other than the underwriting
discounts and commissions referred to above, will be
approximately $500,000.
Indemnification
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments that the underwriters may be required
to make in respect of those liabilities.
Lock-up
Agreements
We and our executive officers and directors have agreed, subject
to specified exceptions, not to directly or indirectly:
|
|
|
|
|
sell, offer, contract or grant any option to sell (including any
short sale), pledge, transfer, establish an open put
equivalent position within the meaning of
Rule 16a-l(h)
under the Securities Exchange Act, or
|
|
|
|
otherwise dispose of any shares of common stock, options or
warrants to acquire shares of common stock, or securities
exchangeable or exercisable for or convertible into shares of
common stock currently or hereafter owned either of record or
beneficially, or
|
|
|
|
publicly announce an intention to do any of the foregoing for a
period of 90 days after the date of this prospectus
supplement without the prior written consent of
Jefferies & Company, Inc.
|
This restriction terminates after the close of trading of the
shares of common stock on and including the 90 days after
the date of this prospectus supplement. However, subject to
certain exceptions, in the event that either (i) during the
last 17 days of the
90-day
restricted period, we issue an earnings release or material news
or a material event relating to us occurs or (ii) prior to
the expiration of the
90-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
90-day
restricted period, then in either case the expiration of the
90-day
restricted period will be extended until the expiration of the
18-day
period beginning on the date of the issuance of an earnings
release or the occurrence of the material news or event, as
applicable, unless Jefferies & Company, Inc. waives,
in writing, such an extension.
Jefferies & Company, Inc may, in its sole discretion
and at any time or from time to time before the termination of
the
90-day
period, without notice, release all or any portion of the
securities subject to
lock-up
agreements. There are no existing agreements between the
underwriters and any of our executive officers and directors who
will execute a
lock-up
agreement, providing consent to the sale of shares prior to the
expiration of the
lock-up
period.
Listing
Our common stock is listed on the NASDAQ Global Market under the
trading symbol PENX.
Electronic
Distribution
A prospectus supplement in electronic format may be made
available on websites or through other online services
maintained by one or more of the underwriters of the offering,
or by their affiliates. Other than the prospectus supplement in
electronic format, the information on the underwriters
website and any information contained in any other website
maintained by the underwriter is not part of the prospectus
supplement or the registration statement of which this
prospectus supplement forms a part, has not been approved
and/or
endorsed by us or the underwriter in its capacity as underwriter
and should not be relied upon by investors.
Price
Stabilization, Short Positions and Penalty Bids
Until the distribution of the shares of common stock is
completed, SEC rules may limit underwriters from bidding for and
purchasing shares. However, the representative may engage in
transactions that stabilize the market price of the shares, such
as bids or purchases to peg, fix or maintain that price so long
as stabilizing transactions do not exceed a specified maximum.
In connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise make short
sales of shares of our common stock and may purchase shares of
our common stock on the open
S-45
market to cover positions created by short sales. Short sales
involve the sale by the underwriters of a greater number of
shares than they are required to purchase in this offering.
Covered short sales are sales made in an amount not
greater than the underwriters over-allotment option to
purchase additional shares in this offering. The underwriters
may close out any covered short position by either exercising
their over-allotment option or purchasing shares in the open
market. In determining the source of shares to close out the
covered short position, the underwriters will consider, among
other things, the price of shares available for purchase in the
open market as compared to the price at which they may purchase
shares through the over-allotment option. Naked
short sales are sales in excess of the over-allotment option.
The underwriters must close out any naked short position by
purchasing shares in the open market. A naked short position is
more likely to be created if the underwriters are concerned that
there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors
who purchase in this offering. A stabilizing bid is
a bid for or the purchase of shares of common stock on behalf of
the underwriters in the open market prior to the completion of
this offering for the purpose of fixing or maintaining the price
of the shares of common stock. A syndicate covering
transaction is the bid for or purchase of shares of common
stock on behalf of the underwriters to reduce a short position
incurred by the underwriters in connection with the offering.
Similar to other purchase transactions, the underwriters
purchases to cover the syndicate short sales may have the effect
of raising or maintaining the market price of our stock or
preventing or retarding a decline in the market price of our
stock. As a result, the price of our stock may be higher than
the price that might otherwise exist in the open market.
The representative may also impose a penalty bid on
underwriters. A penalty bid is an arrangement
permitting the representative to reclaim the selling concession
otherwise accruing to the underwriters in connection with this
offering if the shares of common stock originally sold by the
underwriters are purchased by the underwriters in a syndicate
covering transaction and have therefore not been effectively
placed by the underwriters. The imposition of a penalty bid may
also affect the price of the shares of common stock in that it
discourages resales of those shares of common stock.
In connection with this offering, the underwriters may also
engage in passive market making transactions in our common stock
on the NASDAQ Global Market in accordance with Rule 103 of
Regulation M during a period before the commencement of
offers or sales of shares of our common stock in this offering
and extending through the completion of distribution. A passive
market maker must display its bid at a price not in excess of
the highest independent bid of that security. However, if all
independent bids are lowered below the passive market
makers bid, that bid must then be lowered when specified
purchase limits are exceeded.
Neither we, nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect
that the transactions described above may have on the price of
shares of our common stock. In addition, neither we nor any of
the underwriters makes any representation that the
representative will engage in these transactions or that any
transaction, if commenced, will not be discontinued without
notice.
Affiliations
The underwriters and their affiliates have provided, and may in
the future provide, various investment banking, commercial
banking, financial advisory and other services to us and our
affiliates for which services they have received, and may in the
future receive, customary fees. In the course of their
businesses, the underwriters and their affiliates may actively
trade our securities or loans for their own account or for the
accounts of customers, and, accordingly, the underwriters and
their affiliates may at any time hold long or short positions in
such securities or loans.
BMO Capital Markets Corp. acted as the sole book runner and
sole lead arranger, and its affiliate, Harris N.A., has
acted as the administrative agent and a lender, under our credit
facility. BMO Capital Markets Corp. and Harris N.A.
have received, and Harris N.A. will continue to receive,
customary fees for their services in such capacities. The net
proceeds from this offering will be used to repay a portion of
the borrowings under our credit facility. Because
Harris N.A. may receive more than 10% of the net proceeds
from this offering, this offering is being conducted in
accordance with NASD Rule 2710(h). Pursuant to that
rule, a qualified independent underwriter is not necessary in
connection with this offering because a bona fide
independent market (as defined by the NASD) exists in our
common stock.
S-46
The validity of the issuance of our common stock to be sold in
this offering will be passed upon for us by Perkins Coie LLP,
Seattle, Washington. Certain legal matters in connection with
the offering will be passed upon for the underwriters by Jones
Day.
The consolidated financial statements of Penford Corporation
included herein have been audited by Ernst & Young
LLP, independent registered public accounting firm, as set forth
in their report thereon, included herein. The effectiveness of
internal control over financial reporting of Penford Corporation
as of August 31, 2007 also has been audited by
Ernst & Young LLP as set forth in their report
thereon, appearing in Penford Corporations Annual Report
(Form 10-K)
for the year ended August 31, 2007, and incorporated herein
by reference. Such financial statements have been included
herein in reliance upon such reports given on the authority of
such firm as experts in accounting and auditing.
Incorporation
of Certain Documents by Reference
The SEC allows us to incorporate by reference
information from other documents that we file with it, which
means that we can disclose important information by referring to
those documents. The information incorporated by reference is
considered to be part of this prospectus supplement and the
accompanying prospectus, and information that we file later with
the SEC will automatically update and supersede this
information. We incorporate by reference the documents listed
below and any future filings we make with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934, as amended, prior to the sale of all the
common stock covered by this prospectus supplement; provided,
however, that we are not incorporating any information furnished
under either Item 2.02 or Item 7.01 or any exhibit
furnished under Item 9.01(d) of any Current Report on
Form 8-K
unless, and except to the extent, specified in any such Current
Report on
Form 8-K:
|
|
|
|
1.
|
Our Annual Report on
Form 10-K
for the fiscal year ended August 31, 2007 filed on
November 8, 2007.
|
|
|
2.
|
Our Current Report on Form
8-K
filed on
November 27, 2007.
|
|
|
3.
|
The description of our common stock contained in our
Registration Statement on Form 10 filed with the SEC on
January 24, 1984, including any amendment or report filed
for the purpose of updating such description.
|
|
|
4.
|
The description of our common stock purchase rights contained in
our Registration Statement on
Form 8-A
filed with the SEC on June 7, 1988, including any amendment
or report filed for the purpose of updating such description.
|
We have also filed a registration statement on
Form S-3
with the SEC, of which this prospectus supplement and the
accompanying prospectus form a part. This prospectus supplement
and the accompanying prospectus do not contain all of the
information set forth in the registration statement. You should
read the registration statement for further information about us
and about our common stock.
Any statement contained in a document incorporated by reference
shall be deemed to be modified or superseded to the extent that
a statement contained herein or in any other subsequently filed
incorporated document modifies or supersedes such statement.
We will provide to you, without charge, upon your written or
oral request, a copy of any or all of the documents that we
incorporate by reference, including exhibits. Please direct
requests to: Steven O. Cordier, Senior Vice President and Chief
Financial Officer, Penford Corporation, 7094 South Revere
Parkway, Centennial, Colorado
80112-3932,
telephone
(303) 649-1900.
S-47
Where
You Can Find More Information
We are a reporting company and file annual, quarterly, and
special reports and proxy statements and other information with
the SEC. You may read and copy any document that we file at the
SECs Public Reference Room at 100 F Street, N.E.
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the operation of the Public Reference
Room. Our SEC filings are also available on the SECs web
site at
http://www.sec.gov.
Copies of certain information filed by us with the SEC are also
available on our web site at
http://www.penx.com.
Our website is not part of this prospectus supplement.
S-48
Index
to Consolidated Financial Statements
|
|
|
|
|
|
|
Page
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-6
|
|
|
|
|
F-33
|
|
F-1
Consolidated
Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
|
|
|
$
|
939
|
|
Trade accounts receivable, net
|
|
|
54,333
|
|
|
|
44,593
|
|
Inventories
|
|
|
39,537
|
|
|
|
34,953
|
|
Prepaid expenses
|
|
|
5,025
|
|
|
|
4,649
|
|
Other
|
|
|
6,384
|
|
|
|
4,782
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
105,279
|
|
|
|
89,916
|
|
Property, plant and equipment, net
|
|
|
146,663
|
|
|
|
124,829
|
|
Restricted cash value of life insurance
|
|
|
10,366
|
|
|
|
10,278
|
|
Other assets
|
|
|
1,725
|
|
|
|
989
|
|
Other intangible assets, net
|
|
|
878
|
|
|
|
2,785
|
|
Goodwill, net
|
|
|
23,477
|
|
|
|
21,871
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Cash overdraft, net
|
|
$
|
5,468
|
|
|
$
|
961
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
4,056
|
|
|
|
4,295
|
|
Short-term borrowings
|
|
|
7,218
|
|
|
|
9,541
|
|
Accounts payable
|
|
|
32,410
|
|
|
|
31,686
|
|
Accrued liabilities
|
|
|
17,094
|
|
|
|
11,360
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
66,246
|
|
|
|
57,843
|
|
Long-term debt and capital lease obligations
|
|
|
63,403
|
|
|
|
53,171
|
|
Other postretirement benefits
|
|
|
12,814
|
|
|
|
13,606
|
|
Deferred income taxes
|
|
|
3,140
|
|
|
|
5,924
|
|
Other liabilities
|
|
|
17,109
|
|
|
|
12,672
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
162,712
|
|
|
|
143,216
|
|
Commitments and contingencies (Notes 8 and 17)
|
|
|
|
|
|
|
|
|
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 11,098,739 shares in 2007
and 10,909,153 shares , including treasury shares
|
|
|
11,099
|
|
|
|
10,909
|
|
Additional paid-in capital
|
|
|
43,902
|
|
|
|
39,427
|
|
Retained earnings
|
|
|
89,486
|
|
|
|
78,131
|
|
Treasury stock, at cost, 1,981,016 shares
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
Accumulated other comprehensive income
|
|
|
13,946
|
|
|
|
11,742
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
|
125,676
|
|
|
|
107,452
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
F-2
Consolidated
Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
Cost of sales
|
|
|
298,203
|
|
|
|
273,476
|
|
|
|
263,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
64,161
|
|
|
|
44,943
|
|
|
|
33,221
|
|
Operating expenses
|
|
|
31,391
|
|
|
|
29,477
|
|
|
|
26,413
|
|
Research and development expenses
|
|
|
6,812
|
|
|
|
6,198
|
|
|
|
5,796
|
|
Other costs
|
|
|
2,400
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations
|
|
|
23,558
|
|
|
|
9,268
|
|
|
|
1,012
|
|
Interest expense
|
|
|
5,711
|
|
|
|
5,902
|
|
|
|
5,574
|
|
Other non-operating income, net
|
|
|
1,645
|
|
|
|
1,896
|
|
|
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
19,492
|
|
|
|
5,262
|
|
|
|
(2,353
|
)
|
Income tax expense (benefit)
|
|
|
5,975
|
|
|
|
1,034
|
|
|
|
(4,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
assuming dilution
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
8,946,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands, except per
share data)
Consolidated
Statements of Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of derivatives, net of tax benefit
(expense) of $1,619, $(271) and $156
|
|
|
(2,641
|
)
|
|
|
492
|
|
|
|
(303
|
)
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax benefit
(expense) of $950, $(152) and $350
|
|
|
1,550
|
|
|
|
(294
|
)
|
|
|
679
|
|
Foreign currency translation adjustments
|
|
|
4,690
|
|
|
|
536
|
|
|
|
3,271
|
|
(Increase) decrease in post retirement liabilities, net of
applicable income tax benefit (expense) of $(864), $(1,530) and
$365
|
|
|
1,409
|
|
|
|
2,842
|
|
|
|
(677
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
5,008
|
|
|
|
3,576
|
|
|
|
2,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
18,525
|
|
|
$
|
7,804
|
|
|
$
|
5,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
F-3
Consolidated
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
Adjustments to reconcile net income to net cash from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
15,696
|
|
|
|
15,583
|
|
|
|
17,025
|
|
Stock-based compensation
|
|
|
1,092
|
|
|
|
1,150
|
|
|
|
91
|
|
Loss (gain) on sale of assets
|
|
|
325
|
|
|
|
(85
|
)
|
|
|
(64
|
)
|
Loss on early extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
1,051
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
(736
|
)
|
Gain on sale of land
|
|
|
(60
|
)
|
|
|
(78
|
)
|
|
|
(1,166
|
)
|
Deferred income tax benefit
|
|
|
(1,771
|
)
|
|
|
(293
|
)
|
|
|
(5,410
|
)
|
Loss (gain) on derivative transactions
|
|
|
(946
|
)
|
|
|
40
|
|
|
|
(300
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
(1,001
|
)
|
|
|
(102
|
)
|
|
|
|
|
Other
|
|
|
95
|
|
|
|
38
|
|
|
|
(67
|
)
|
Change in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade receivables
|
|
|
(8,537
|
)
|
|
|
(4,836
|
)
|
|
|
(122
|
)
|
Inventories
|
|
|
(3,136
|
)
|
|
|
(692
|
)
|
|
|
(1,177
|
)
|
Prepaid expenses
|
|
|
(339
|
)
|
|
|
449
|
|
|
|
(914
|
)
|
Accounts payable and accrued liabilities
|
|
|
3,148
|
|
|
|
(4,944
|
)
|
|
|
12,102
|
|
Taxes payable
|
|
|
3,334
|
|
|
|
(215
|
)
|
|
|
(2,594
|
)
|
Other
|
|
|
1,112
|
|
|
|
1,142
|
|
|
|
763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow from operating activities
|
|
|
22,529
|
|
|
|
11,385
|
|
|
|
21,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions of property, plant and equipment, net
|
|
|
(34,734
|
)
|
|
|
(14,905
|
)
|
|
|
(9,413
|
)
|
Proceeds from investments
|
|
|
|
|
|
|
|
|
|
|
3,525
|
|
Proceeds from sale of land
|
|
|
|
|
|
|
612
|
|
|
|
1,870
|
|
Other
|
|
|
(44
|
)
|
|
|
(80
|
)
|
|
|
(150
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities
|
|
|
(34,778
|
)
|
|
|
(14,373
|
)
|
|
|
(4,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from short-term borrowings
|
|
|
4,625
|
|
|
|
13,916
|
|
|
|
|
|
Payments on short-term borrowings
|
|
|
(7,548
|
)
|
|
|
(4,744
|
)
|
|
|
|
|
Proceeds from revolving line of credit
|
|
|
54,454
|
|
|
|
22,920
|
|
|
|
57,830
|
|
Payments on revolving line of credit
|
|
|
(45,255
|
)
|
|
|
(27,907
|
)
|
|
|
(48,177
|
)
|
Proceeds from long-term debt
|
|
|
4,200
|
|
|
|
|
|
|
|
22,396
|
|
Payments on long-term debt
|
|
|
(4,249
|
)
|
|
|
(3,980
|
)
|
|
|
(47,867
|
)
|
Exercise of stock options
|
|
|
2,572
|
|
|
|
508
|
|
|
|
682
|
|
Payment of loan fees
|
|
|
(836
|
)
|
|
|
(224
|
)
|
|
|
(905
|
)
|
Excess tax benefit from stock-based compensation
|
|
|
1,001
|
|
|
|
102
|
|
|
|
|
|
Increase in cash overdraft.
|
|
|
4,507
|
|
|
|
184
|
|
|
|
776
|
|
Payment of dividends
|
|
|
(2,163
|
)
|
|
|
(2,132
|
)
|
|
|
(2,117
|
)
|
Other
|
|
|
(59
|
)
|
|
|
(32
|
)
|
|
|
(8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash from (used by) financing activities
|
|
|
11,249
|
|
|
|
(1,389
|
)
|
|
|
(17,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
61
|
|
|
|
(51
|
)
|
|
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
(939
|
)
|
|
|
(4,428
|
)
|
|
|
(548
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
939
|
|
|
|
5,367
|
|
|
|
5,915
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
|
|
|
$
|
939
|
|
|
$
|
5,367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
5,645
|
|
|
$
|
5,240
|
|
|
$
|
4,754
|
|
Income taxes, net
|
|
$
|
5,257
|
|
|
$
|
1,342
|
|
|
$
|
563
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital lease obligations incurred for certain equipment leases
|
|
$
|
72
|
|
|
$
|
102
|
|
|
$
|
85
|
|
|
|
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
F-4
Consolidated
Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common stock
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
10,909
|
|
|
$
|
10,849
|
|
|
$
|
10,784
|
|
Exercise of stock options
|
|
|
190
|
|
|
|
51
|
|
|
|
65
|
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
11,099
|
|
|
|
10,909
|
|
|
|
10,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional paid-in capital
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
39,427
|
|
|
|
37,728
|
|
|
|
36,911
|
|
Exercise of stock options
|
|
|
2,382
|
|
|
|
457
|
|
|
|
617
|
|
Tax benefit of stock option exercises
|
|
|
1,001
|
|
|
|
101
|
|
|
|
109
|
|
Stock based compensation
|
|
|
1,050
|
|
|
|
1,150
|
|
|
|
91
|
|
Issuance of restricted stock, net
|
|
|
42
|
|
|
|
(9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
43,902
|
|
|
|
39,427
|
|
|
|
37,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
78,131
|
|
|
|
76,040
|
|
|
|
75,585
|
|
Net income
|
|
|
13,517
|
|
|
|
4,228
|
|
|
|
2,574
|
|
Dividends declared
|
|
|
(2,162
|
)
|
|
|
(2,137
|
)
|
|
|
(2,119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
89,486
|
|
|
|
78,131
|
|
|
|
76,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
(32,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
11,742
|
|
|
|
8,166
|
|
|
|
5,196
|
|
Change in fair value of derivatives, net of tax
|
|
|
(2,641
|
)
|
|
|
492
|
|
|
|
(303
|
)
|
Loss (gain) from derivative transactions reclassified into
earnings from other comprehensive income, net of tax
|
|
|
1,550
|
|
|
|
(294
|
)
|
|
|
679
|
|
Foreign currency translation adjustments
|
|
|
4,690
|
|
|
|
536
|
|
|
|
3,271
|
|
(Increase) decrease in postretirement liabilities, net of tax
|
|
|
1,409
|
|
|
|
2,842
|
|
|
|
(677
|
)
|
Adoption of SFAS No. 158 recognition provision, net of
tax
|
|
|
(2,804
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
13,946
|
|
|
|
11,742
|
|
|
|
8,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity
|
|
$
|
125,676
|
|
|
$
|
107,452
|
|
|
$
|
100,026
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
The accompanying notes are an integral part of these statements.
F-5
Notes
to Consolidated Financial Statements
|
|
Note 1
|
Summary of
Significant Accounting Policies
|
Business
Penford Corporation (Penford or the
Company) is a developer, manufacturer and marketer
of specialty natural-based ingredient systems for industrial and
food ingredient applications. The Company operates manufacturing
facilities in the United States, Australia and New Zealand.
Penfords products provide convenient and cost-effective
solutions derived from renewable sources. Sales of the
Companys 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 in developing applications to
address customer needs. In addition, the Company has specialty
processing capabilities for a variety of modified starches.
Penford manages its business in three segments. The first two,
Industrial Ingredients and Food Ingredients are broad categories
of end-market users, primarily served by the
U.S. operations. The third segment is the geographically
separate operations in Australia and New Zealand. The Australian
and New Zealand operations are engaged primarily in the food
ingredients business.
Basis
of Presentation
The accompanying consolidated financial statements include the
accounts of Penford and its wholly owned subsidiaries. All
material intercompany balances and transactions have been
eliminated. Certain reclassifications have been made to prior
years financial statements in order to conform to the
current year presentation.
Use of
Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at
the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Estimates
are used in accounting for, among other things, the allowance
for doubtful accounts, accruals, the determination of
assumptions for pension and postretirement employee benefit
costs, and the useful lives of property and equipment. Actual
results may differ from previously estimated amounts.
Cash
and Cash Equivalents
Cash and cash equivalents consist of cash and temporary
investments with maturities of less than three months when
purchased. Amounts are reported in the balance sheets at cost,
which approximates fair value.
Allowance
for Doubtful Accounts and Concentration of Credit
Risk
The allowance for doubtful accounts reflects the Companys
best estimate of probable losses in the accounts receivable
balances. Penford estimates the allowance for uncollectible
accounts based on historical experience, known troubled
accounts, industry trends, economic conditions, how recently
payments have been received, and
F-6
Notes
to Consolidated Financial
Statements (Continued)
ongoing credit evaluations of its customers. Activity in the
allowance for doubtful accounts for fiscal 2007, 2006 and 2005
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
|
Charged to
|
|
|
|
|
|
|
|
|
|
Beginning of
|
|
|
Costs and
|
|
|
Deductions
|
|
|
Balance
|
|
|
|
Year
|
|
|
Expenses
|
|
|
and Other
|
|
|
End of Year
|
|
|
Year ended August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
$
|
851
|
|
|
$
|
379
|
|
|
$
|
475
|
|
|
$
|
755
|
|
2006
|
|
$
|
401
|
|
|
$
|
359
|
|
|
$
|
(91
|
)
|
|
$
|
851
|
|
2005
|
|
$
|
364
|
|
|
$
|
196
|
|
|
$
|
159
|
|
|
$
|
401
|
|
|
|
In fiscal 2006, the increase in the allowance for doubtful
accounts reflects an additional reserve of approximately
$0.5 million for a bankrupt customer in the industrial
ingredients segment.
In fiscal 2007, approximately $0.5 million was wrote-off
from allowance for doubtful accounts related to an uncollectible
receivable of bankrupt customer in the industrial ingredients
segment.
Approximately half of the Companys sales in fiscal 2007,
2006 and 2005 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.
Financial
Instruments
The carrying value of financial instruments including cash and
cash equivalents, receivables, payables and accrued liabilities
approximates fair value because of their short maturities. The
Companys bank debt re-prices with changes in market
interest rates and, accordingly, the carrying amount of such
debt approximates fair value.
Inventories
Inventory is stated at the lower of cost or market. Inventory is
valued using the
first-in,
first-out (FIFO) method, which approximates actual
cost. Capitalized costs include materials, labor and
manufacturing overhead related to the purchase and production of
inventories.
Goodwill
and Other Intangible Assets
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other
Intangible Assets, goodwill is not amortized, but instead
is tested for impairment at least annually or more frequently if
there is an indication of impairment.
Patents are amortized using the straight-line method over their
estimated period of benefit. At August 31, 2007, the
weighted average remaining amortization period for patents is
seven years. Penford has no intangible assets with indefinite
lives.
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 $15,376,000,
$15,527,000 and $16,326,000 was recorded in fiscal years 2007,
2006 and 2005, respectively. For income tax purposes, the
Company generally uses accelerated depreciation methods.
Interest is capitalized on major construction projects while in
progress. In fiscal 2007, the Company capitalized
$0.4 million in interest costs related to the ethanol
facility construction. No interest was capitalized in fiscal
2006 and 2005.
F-7
Notes
to Consolidated Financial
Statements (Continued)
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 are recorded using the
liability method in recognition of these temporary differences.
Deferred taxes are not recognized on temporary differences from
undistributed earnings of foreign subsidiaries, as these
earnings are deemed to be permanently reinvested.
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. Costs associated with shipping and
handling are included in cost of sales.
Research
and Development
Research and development costs are expensed as incurred, except
for costs of patents, which are capitalized and amortized over
the lives of the patents. Research and development costs
expensed were $6.8 million, $6.2 million and
$5.8 million in fiscal 2007, 2006 and 2005, respectively.
Patent costs of $48,000, $134,000 and $19,000 were capitalized
in fiscal years 2007, 2006 and 2005, respectively.
Foreign
Currency
Assets and liabilities of subsidiaries whose functional currency
is deemed to be other than the U.S. dollar are translated
at year end rates of exchange. Resulting translation adjustments
are accumulated in the currency translation adjustments
component of other comprehensive income. Income statement
amounts are translated at average exchange rates prevailing
during the year. For fiscal years 2007 and 2006, the net foreign
currency transaction gain (loss) recognized in earnings was not
material.
Derivatives
Penford uses derivative instruments to manage the exposures
associated with commodity prices, interest rates and energy
costs. The derivative instruments are marked-to-market and any
resulting unrealized gains and losses, representing the fair
value of the derivative instruments, are recorded in other
current assets or accounts payable in the consolidated balance
sheets. The fair value of derivative instruments included in
other current assets at August 31, 2007 was
$(0.6) million.
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 as a component of cost of goods
sold. At August 31, 2007, derivative instruments designated
as fair value hedges are not material. 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 when the
hedged exposure affects earnings. The Company recognizes the
gain or loss on the derivative instrument as a component of cost
of goods sold in the period when the finished goods produced
from the hedged item are sold or, for interest rate swaps, as a
component of interest expense in the period the forecasted
transaction is reported in earnings. If it is determined that
the derivative instruments used are no longer effective at
offsetting changes in the price of the hedged item, then the
changes in market value would be recognized in current earnings
as a component of cost of good sold or interest expense. There
was no ineffectiveness related to the Companys hedging
activities related to interest rate swaps. At August 31,
2007, the amount in other comprehensive income related to
derivative transactions which the Company expects to recognize
in earnings in fiscal 2008 is not material.
F-8
Notes
to Consolidated Financial
Statements (Continued)
Significant
Customer and Export Sales
The Company has several relatively large customers in each
business segment. None of the Companys customers
constituted 10% of sales in fiscal 2006 and 2005. However, for
fiscal 2007, the Companys largest customer, Domtar, Inc.,
represented approximately 12% of the Companys consolidated
net sales. Domtar, Inc. is a customer of the Companys
Industrial Ingredients North America business.
Export sales accounted for approximately 15%, 13% and 16% of
consolidated sales in fiscal 2007, 2006 and 2005, respectively.
Stock-Based
Compensation
Beginning September 1, 2005, the Company began to recognize
stock-based compensation in accordance with
SFAS No. 123R, Share-Based Payment. The
Company utilizes the Black-Scholes option-pricing model to
determine the fair value of stock options on the date of grant.
This model derives the fair value of stock options based on
certain assumptions related to expected stock price volatility,
expected option life, risk-free interest rate and dividend
yield. See Note 9 for further detail.
Recent
Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board
(FASB) ratified the Emerging Issues Task Force
(EITF) consensus on EITF Issue
No. 06-2,
Accounting for Sabbatical Leave and Other Similar Benefits
Pursuant to FASB Statement No. 43. EITF Issue
No. 06-2
requires companies to accrue the costs of compensated absences
under a sabbatical or similar benefit arrangement over the
requisite service period. EITF Issue
No. 06-2
is effective for years beginning after December 15, 2006.
The Company is evaluating the impact that the adoption of EITF
Issue
No. 06-2
will have on its consolidated financial statements and currently
does not believe adoption will have a material impact on its
consolidated financial statements.
In July 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the accounting
for the uncertainty in income taxes recognized by prescribing a
recognition threshold that a tax position is required to meet
before being recognized in the financial statements. It also
provides guidance on derecognition, classification, interest and
penalties, interim period accounting and disclosure. FIN 48
is effective for fiscal years beginning after December 15,
2006. The Company is evaluating the impact that the adoption of
FIN 48 will have on its consolidated financial statements
and currently does not believe adoption will have a material
impact on its consolidated financial statements
In September 2006, the FASB issued Statement No. 157,
Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework and
gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements.
SFAS 157 is effective for fiscal years beginning after
November 15, 2007 (fiscal 2009). The Company is currently
evaluating the impact that the adoption of SFAS 157 may
have on its consolidated financial statements.
In February 2007, the FASB issued Statement No. 159,
The Fair Value Option for Financial Assets and Financial
Liabilities including an amendment of FASB
No. 115 (SFAS 159). SFAS 159
allows companies the option to measure financial instruments and
certain other items at fair value that are not currently
required to be measured at fair value. SFAS 159 is
effective for fiscal years beginning after November 15,
2007 (fiscal 2009). The Company is currently evaluating the
impact that the adoption of SFAS 159 may have on its
consolidated financial statements.
F-9
Notes
to Consolidated Financial
Statements (Continued)
Components of inventory are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Raw materials
|
|
$
|
17,438
|
|
|
$
|
18,531
|
|
Work in progress
|
|
|
720
|
|
|
|
449
|
|
Finished goods
|
|
|
21,379
|
|
|
|
15,973
|
|
|
|
|
|
|
|
|
|
|
Total inventories
|
|
$
|
39,537
|
|
|
$
|
34,953
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
To reduce the price volatility of corn used in fulfilling some
of its starch sales contracts, Penford, from time to time, uses
readily marketable exchange-traded futures as well as forward
cash corn purchases. The exchange-traded futures are not
purchased or sold for trading or speculative purposes and are
designated as hedges. As of August 31, 2007, Penford had
purchased corn positions of 6.4 million bushels, of which
6.1 million bushels represented equivalent firm priced
starch sales contract volume, resulting in an open position of
0.3 million bushels. The changes in market value of such
contracts have historically been, and are expected to continue
to be, effective in offsetting the price changes of the hedged
commodity. Penford also at times uses exchange-traded futures to
hedge corn inventories. Hedges are designated as cash flow
hedges at the time the transaction is established and are
recognized in earnings in the time period for which the hedge
was established. Hedged transactions are within 12 months
of the time the hedge is established. The amount of
ineffectiveness related to the Companys hedging activities
was not material.
|
|
Note 3
|
Property and
equipment
|
Components of property and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$
|
17,694
|
|
|
$
|
16,659
|
|
Plant and equipment
|
|
|
338,496
|
|
|
|
322,169
|
|
Construction in progress
|
|
|
27,433
|
|
|
|
7,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
383,623
|
|
|
|
345,906
|
|
Accumulated depreciation
|
|
|
(236,960
|
)
|
|
|
(221,077
|
)
|
|
|
|
|
|
|
|
|
|
Net property and equipment
|
|
$
|
146,663
|
|
|
$
|
124,829
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
The above table includes approximately $0.2 million and
$0.1 million of equipment under capital leases for fiscal
years 2007 and 2006, respectively. Changes in Australian and New
Zealand currency exchange rates have increased net property,
plant and equipment in fiscal 2007 by approximately
$2.9 million.
For fiscal 2007, the Company had $19.3 million of capital
expenditures related to construction of the ethanol facility. As
of August 31, 2007, the Company had a total of
$20.0 million in capital expenditures related to the
ethanol facility which includes $0.4 million in related
capitalized interest costs.
F-10
Notes
to Consolidated Financial
Statements (Continued)
|
|
Note 4
|
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.
In accordance with this standard, Penford does not amortize
goodwill. The Company completed the annual update as of
June 1, 2007 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 Penfords Food Ingredients North
America and the Australia/New Zealand operations reporting
units, which are the same as two of the Companys 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 Companys goodwill of $23.5 million and
$21.9 million at August 31, 2007 and 2006,
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,
2006 reflects the impact of exchange rate fluctuations between
the Australian and U.S. dollar on the translation of this
asset.
Penfords intangible assets consist of patents which are
being amortized over the weighted average remaining amortization
period of seven years as of August 31, 2007. There is no
residual value associated with patents. The carrying amount and
accumulated amortization of intangible assets are as follows
(dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2007
|
|
|
August 31, 2006
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,239
|
|
|
$
|
1,361
|
|
|
$
|
2,162
|
|
|
$
|
1,217
|
|
Intangible pension asset(1)
|
|
|
|
|
|
|
|
|
|
|
1,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,239
|
|
|
$
|
1,361
|
|
|
$
|
4,002
|
|
|
$
|
1,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Not covered by the scope of SFAS No. 142
|
Amortization expense related to intangible assets was
$0.1 million in each of fiscal years 2007, 2006 and 2005.
The estimated aggregate annual amortization expense for patents
is approximately $0.1 million for each of the next five
fiscal years, 2008 through 2012.
F-11
Notes
to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Secured credit agreements revolving loans, 7.37%
weighted average interest rate at August 31, 2007
|
|
$
|
15,800
|
|
|
$
|
11,188
|
|
Secured credit agreements term loans, 6.97% weighted
average interest rate at August 31, 2007
|
|
|
37,000
|
|
|
|
46,133
|
|
Secured credit agreements capital expansion loans,
6.82% weighted average interest rate at August 31, 2007
|
|
|
14,500
|
|
|
|
|
|
Grain inventory financing facility revolving loan,
8.19% weighted average interest rate at August 31, 2007
|
|
|
7,218
|
|
|
|
9,541
|
|
Capital lease obligations
|
|
|
159
|
|
|
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
74,677
|
|
|
|
67,007
|
|
Less: current portion and short-term borrowings
|
|
|
11,274
|
|
|
|
13,836
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
$
|
63,403
|
|
|
$
|
53,171
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
On October 5, 2006, Penford entered into a
$145 million Second Amended and Restated Credit Agreement
(the 2007 Agreement) among the Company; Harris N.A.;
LaSalle Bank National Association; Cooperative Centrale
Raiffeisen-Boorleenbank B.A., Rabobank Nederland
(New York Branch); U.S. Bank National Association; and the
Australia and New Zealand Banking Group Limited.
The 2007 Agreement refinances the Companys previous
$105 million secured term and revolving credit facilities.
Under the 2007 Agreement, the Company may borrow
$40 million in term loans and $60 million in revolving
lines of credit. The lenders revolving credit loan
commitment may be increased under certain conditions. In
addition, the 2007 Agreement provides the Company with
$45 million in new capital expansion funds which may be
used by the Company to finance the construction of its planned
ethanol production facility in Cedar Rapids, Iowa. The capital
expansion funds may be borrowed as term loans from time to time
prior to October 5, 2008.
The final maturity date for the term and revolving loans under
the 2007 Agreement is December 31, 2011. Beginning on
December 31, 2006, the Company must repay the term loans in
twenty equal quarterly installments of $1 million, with the
remaining amount due at final maturity. The final maturity date
for the capital expansion loans is December 31, 2012.
Beginning on December 31, 2008, the Company must repay the
capital expansion loans in equal quarterly installments of
$1.25 million through September 30, 2009 and
$2.5 million thereafter, with the remaining amount due at
final maturity. Interest rates under the 2007 Agreement are
based on either the London Interbank Offering Rates
(LIBOR) in Australia or the United States, or the
prime rate, depending on the selection of available borrowing
options under the 2007 Agreement.
The Agreement provides that the Total Funded Debt Ratio, which
is computed as funded debt divided by earnings before interest,
taxes, depreciation and amortization (as defined in the 2007
Agreement) shall not exceed 3.25 through November 30, 2006.
Subsequent to November 30, 2006, the maximum Total Funded
Debt Ratio varies between 3.00 and 4.50. In addition, the
Company must maintain a minimum tangible net worth of
$65 million, and a Fixed Charge Coverage Ratio, as defined
in the 2007 Agreement, of not more than 1.50 in fiscal 2007,
1.25 in fiscal 2008 and 1.50 in fiscal 2009 and thereafter.
Annual capital expenditures, exclusive of capital expenditures
incurred in connection with the Companys ethanol
production facility, are limited to $20 million, unless the
Company can maintain a Total Funded Debt Ratio below 2.00 for
each fiscal quarter during any fiscal year, which would result
in the annual capital expenditure limit to increase to
$25 million for such fiscal year. The Companys
obligations under the 2007 Agreement are secured by
substantially all of the Companys U.S. assets.
F-12
Notes
to Consolidated Financial
Statements (Continued)
At August 31, 2007, the Company had $15.8 million and
$37.0 million outstanding, respectively, under the
revolving credit and term loan portions of its credit facility.
In addition, the Company has borrowed $14.5 million of the
$45 million in capital expansion loans available under the
credit facility for the construction of the ethanol facility.
Pursuant to the terms of the 2007 Agreement, Penfords
additional borrowing ability as of August 31, 2007 was
$30.5 million under the capital expansion facility and
$44.2 million under the revolving credit facility. The
Company was in compliance with the covenants in the Agreement as
of August 31, 2007 and expects to be in compliance during
fiscal 2008.
The Companys short-term borrowings consist of an
Australian revolving line of credit. On March 1, 2006, the
Companys Australian subsidiary entered into a
variable-rate revolving grain inventory financing facility with
an Australian bank for a maximum of $32.7 million
U.S. dollars at the exchange rate at August 31, 2007.
This facility expires on March 15, 2008 and carries an
effective interest rate equal to the Australian one-month bank
bill rate (BBSY) plus approximately 2%. Payments on
this facility are due as the grain financed is withdrawn from
storage. The amount outstanding under this arrangement, which is
classified as a current liability on the balance sheet, was
$7.2 million at August 31, 2007.
As of August 31, 2007, all of the Companys
outstanding debt, including amounts outstanding under the
Australian grain inventory financing facility, is subject to
variable interest rates. Under interest rate swap agreements
with several banks, the Company has fixed its interest rates on
U.S. dollar denominated term debt of $32.8 million at
4.18% and $4.2 million at 5.08%, plus the applicable margin
under the 2007 Agreement.
As of August 31, 2007, Penford borrowed $37.0 million
in term loans and $30.3 million under its revolving lines
of credit, of which $8.1 million U.S. dollar
equivalent was denominated in Australian dollars. The maturities
of debt existing at August 31, 2007 for the fiscal years
beginning with fiscal 2008 are as follows (dollars in thousands):
|
|
|
|
|
|
2008
|
|
$
|
11,274
|
|
2009
|
|
|
7,821
|
|
2010
|
|
|
12,776
|
|
2011
|
|
|
6,006
|
|
2012
|
|
|
36,800
|
|
|
|
|
|
|
|
|
$
|
74,677
|
|
|
|
|
|
|
|
|
Included in the Companys long-term debt at August 31,
2007 is $159,000 of capital lease obligations, of which $56,000
is considered current portion of long-term debt. See Note 8.
|
|
Note 6
|
Stockholders
Equity
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of year
|
|
|
10,909,153
|
|
|
|
10,849,487
|
|
|
|
10,784,200
|
|
Exercise of stock options
|
|
|
189,586
|
|
|
|
50,972
|
|
|
|
65,287
|
|
Issuance of restricted stock, net
|
|
|
|
|
|
|
8,694
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
|
11,098,739
|
|
|
|
10,909,153
|
|
|
|
10,849,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-13
Notes
to Consolidated Financial
Statements (Continued)
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 Penfords 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 at a price of $100. 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 on June 16, 2008.
|
|
Note 7
|
Accumulated Other
Comprehensive Income (Loss)
|
The components of accumulated other comprehensive income (loss)
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Net unrealized gain (loss) on derivatives, net of tax
|
|
$
|
(611
|
)
|
|
$
|
480
|
|
Foreign currency translation adjustments
|
|
|
18,083
|
|
|
|
13,393
|
|
Minimum pension liability, net of tax
|
|
|
(722
|
)
|
|
|
(2,131
|
)
|
Impact of adoption of SFAS No. 158, net of tax
|
|
|
(2,804
|
)
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,946
|
|
|
$
|
11,742
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
The earnings associated with the Companys investment in
Penford Australia are considered to be permanently invested and
no provision for U.S. income taxes on the related
translation adjustment has been provided.
Certain of the Companys property, plant and equipment is
leased under operating leases generally ranging from one to
twenty years with renewal options. Rental expense under
operating leases was $6.6 million, $6.3 million and
$5.4 million in fiscal years 2007, 2006 and 2005,
respectively. Future minimum lease payments for fiscal years
beginning with fiscal year 2008 for noncancelable operating and
capital leases having initial lease terms of more than one year
are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
|
Operating
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2008
|
|
$
|
69
|
|
|
$
|
6,602
|
|
2009
|
|
|
77
|
|
|
|
6,138
|
|
2010
|
|
|
28
|
|
|
|
4,819
|
|
2011
|
|
|
6
|
|
|
|
2,983
|
|
2012
|
|
|
|
|
|
|
2,279
|
|
Thereafter
|
|
|
|
|
|
|
4,408
|
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
180
|
|
|
$
|
27,229
|
|
|
|
|
|
|
|
|
|
|
Less: amounts representing interest
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments
|
|
$
|
159
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
Notes
to Consolidated Financial
Statements (Continued)
|
|
Note 9
|
Stock-based
Compensation Plans
|
Penford maintains the 2006 Long-Term Incentive Plan (the
2006 Incentive Plan) pursuant to which various
stock-based awards may be granted to employees, directors and
consultants. Prior to the 2006 Incentive Plan, the Company
awarded stock options to employees and officers through the
Penford Corporation 1994 Stock Option Plan (the 1994
Plan) and to members of its Board under the Stock Option
Plan for Non-Employee Directors (the Directors
Plan). The 1994 Plan was suspended when the 2006 Plan
became effective in the second quarter of fiscal 2006. The
Directors Plan expired in August 2005. As of
August 31, 2007, the aggregate number of shares of the
Companys common stock that are available to be issued as
awards under the 2006 Incentive Plan is 736,976. In addition,
any shares previously granted under the 1994 Plan which are
subsequently forfeited or not exercised will be available for
future grants under the 2006 Incentive Plan.
Non-qualified stock options granted under the 1994 Plan
generally vest ratably over four years and expire ten years from
the date of grant. Non-qualified stock options granted under the
2006 Incentive Plan generally vest ratably over four years and
expire seven years from the date of grant. Non-qualified options
granted under the Directors Plan were granted at 75% of
the fair market value of the Companys common stock on the
date of grant. Options granted under the Directors Plan
vested 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.
General
Option Information
A summary of the stock option activity for the three years ended
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Option Price
|
|
|
Exercise
|
|
|
Remaining Term
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Range
|
|
|
Price
|
|
|
(In Years)
|
|
|
Value
|
|
|
Outstanding Balance, August 31, 2004
|
|
|
972,663
|
|
|
$
|
5.77-17.69
|
|
|
$
|
13.31
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
224,235
|
|
|
|
12.75-16.34
|
|
|
|
15.69
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(62,378
|
)
|
|
|
5.77-14.50
|
|
|
|
10.45
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(26,985
|
)
|
|
|
12.75-14.50
|
|
|
|
12.99
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2005
|
|
|
1,107,535
|
|
|
|
6.02-17.69
|
|
|
|
13.96
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
248,500
|
|
|
|
13.32-16.03
|
|
|
|
14.81
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,972
|
)
|
|
|
6.02-13.92
|
|
|
|
15.35
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(134,000
|
)
|
|
|
12.79-17.69
|
|
|
|
16.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2006
|
|
|
1,171,063
|
|
|
|
6.18-17.69
|
|
|
|
13.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000
|
|
|
|
16.25-19.77
|
|
|
|
16.72
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(189,586
|
)
|
|
|
6.18-17.69
|
|
|
|
13.57
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(22,500
|
)
|
|
|
12.14-16.34
|
|
|
|
14.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding Balance, August 31, 2007
|
|
|
1,033,977
|
|
|
|
7.59-19.77
|
|
|
|
14.25
|
|
|
|
5.62
|
|
|
$
|
21,760,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Exercisable at August 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
689,735
|
|
|
|
6.02-17.69
|
|
|
|
13.57
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
721,938
|
|
|
|
6.18-17.69
|
|
|
|
13.38
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
696,352
|
|
|
$
|
7.59-17.69
|
|
|
$
|
13.60
|
|
|
|
5.12
|
|
|
$
|
15,108,798
|
|
|
|
The aggregate intrinsic value disclosed in the table above
represents the total pretax intrinsic value, based on the
Companys closing stock price of $35.30 as of
August 31, 2007 that would have been received by the option
F-15
Notes
to Consolidated Financial
Statements (Continued)
holders had all option holders exercised on that date. The
intrinsic value of options exercised during fiscal years 2007,
2006 and 2005 was $2,761,400, $274,700 and $327,400,
respectively.
The following table summarizes information concerning
outstanding and exercisable options as of August 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
|
|
Options Exercisable
|
|
|
|
|
|
|
Remaining
|
|
|
Wtd. Avg.
|
|
|
|
|
|
Wtd. Avg.
|
|
|
|
Number of
|
|
|
Contractual
|
|
|
Exercise
|
|
|
Number of
|
|
|
Exercise
|
|
Range of Exercise Prices
|
|
Options
|
|
|
Life (Years)
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
|
$ 7.59-13.00
|
|
|
397,307
|
|
|
|
4.83
|
|
|
$
|
12.01
|
|
|
|
397,307
|
|
|
$
|
12.01
|
|
13.01-16.00
|
|
|
341,170
|
|
|
|
6.20
|
|
|
|
14.71
|
|
|
|
157,795
|
|
|
|
14.55
|
|
16.01-19.77
|
|
|
295,500
|
|
|
|
6.03
|
|
|
|
16.75
|
|
|
|
141,250
|
|
|
|
17.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,977
|
|
|
|
|
|
|
|
|
|
|
|
696,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption
of SFAS No. 123R
On September 1, 2005, the Company adopted
SFAS No. 123R which requires the measurement and
recognition of compensation cost for all share-based payment
awards made to employees and directors based on estimated fair
values.
Prior to the adoption of SFAS No. 123R, the Company
accounted for its stock-based employee compensation related to
stock options under the intrinsic value recognition and
measurement principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and the
disclosure alternative prescribed by SFAS No. 123,
Accounting for Stock-Based Compensation, as amended
by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure.
Accordingly, the Company presented pro forma information for the
periods prior to the adoption of SFAS No. 123R and no
compensation cost was recognized for the stock-based
compensation plans other than the grant date intrinsic value for
the options granted under the Directors Plan and
restricted stock awards prior to September 1, 2005.
The Company elected to use the modified prospective transition
method for adopting SFAS No. 123R which requires the
recognition of stock-based compensation cost on a prospective
basis; therefore, prior period financial statements have not
been restated. Under this method, the provisions of
SFAS No. 123R are applied to all awards granted after
the adoption date and to awards not yet vested with unrecognized
expense at the adoption date based on the estimated fair value
at grant date as determined under the original provisions of
SFAS No. 123. Pursuant to the requirements of
SFAS No. 123R, the Company will continue to present
the pro forma information for periods prior to the adoption date.
Valuation
and Expense Under SFAS No. 123R
The Company utilizes the Black-Scholes option-pricing model to
determine the fair value of stock options on the date of grant.
This model derives the fair value of stock options based on
certain assumptions related to expected stock price volatility,
expected option life, risk-free interest rate and dividend
yield. The Companys expected volatility is based on the
historical volatility of the Companys stock price over the
most recent period commensurate with the expected term of the
stock option award. The estimated expected option life is based
primarily on historical employee exercise patterns and considers
whether and the extent to which the options are in-the-money.
The risk-free interest rate assumption is based upon the
U.S. Treasury yield curve appropriate for the term of the
Companys stock options awards and the selected dividend
yield assumption was determined in view of the Companys
historical and estimated dividend payout. The Company has no
reason to believe that the
F-16
Notes
to Consolidated Financial
Statements (Continued)
expected volatility of its stock price or its option exercise
patterns would differ significantly from historical volatility
or option exercises.
Under the 2006 Incentive Plan, the Company estimated the fair
value of stock options using the following assumptions and
resulting in the following weighted-average grant date fair
values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
45
|
%
|
|
|
51
|
%
|
|
|
|
|
Expected life (years)
|
|
|
5.5
|
|
|
|
5.5
|
|
|
|
|
|
Interest rate (percent)
|
|
|
4.5-4.9
|
|
|
|
4.9-5.1
|
|
|
|
|
|
Dividend yield
|
|
|
1.5
|
%
|
|
|
1.6
|
%
|
|
|
|
|
Weighted-average fair values
|
|
$
|
6.88
|
|
|
$
|
7.18
|
|
|
|
|
|
|
|
Under the 1994 Plan, the Company estimated the fair value of
stock options using the following assumptions and resulting in
the following weighted-average grant date fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Expected volatility
|
|
|
|
|
|
|
52
|
%
|
|
|
58
|
%
|
Expected life (years)
|
|
|
|
|
|
|
5.0
|
|
|
|
4.1
|
|
Interest rate (percent)
|
|
|
|
|
|
|
4.4-4.5
|
|
|
|
3.7-4.0
|
|
Dividend yield
|
|
|
|
|
|
|
1.7
|
%
|
|
|
1.6
|
%
|
Weighted-average fair values
|
|
|
|
|
|
$
|
6.01
|
|
|
$
|
6.95
|
|
|
|
There were no stock options granted under the Directors
Plan in fiscal years 2007 and 2006 and options granted to
directors in fiscal 2005 were cancelled in exchange for cash
because of changes in the tax laws.
As of August 31, 2007, the Company had $1.1 million of
unrecognized compensation costs related to non-vested stock
option awards that are expected to be recognized over a weighted
average period of 1.5 years.
The Company recognizes stock-based compensation expense
utilizing the accelerated multiple option approach over the
requisite service period, which equals the vesting period. For
each of fiscal years 2007 and 2006, the Company recognized
$1.1 million in stock-based compensation costs. In fiscal
years 2007, 2006 and 2005, the Company recognized $42,000 per
year of stock-based compensation cost related to directors
restricted stock awards. The following table summarizes the
stock-based compensation cost under SFAS No. 123R for
fiscal years 2007 and 2006 and the effect on the Companys
consolidated statements of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Cost of sales
|
|
$
|
104
|
|
|
$
|
70
|
|
Operating expenses
|
|
|
926
|
|
|
|
999
|
|
Research and development expenses
|
|
|
20
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
1,050
|
|
|
$
|
1,107
|
|
Tax benefit
|
|
|
399
|
|
|
|
410
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense, net of tax
|
|
$
|
651
|
|
|
$
|
697
|
|
|
|
|
|
|
|
|
|
|
|
|
See Note 15 for stock-based compensation costs recognized
in the financial statements of each business segment.
F-17
Notes
to Consolidated Financial
Statements (Continued)
Pro-forma
Information under SFAS No. 123 for Periods Prior to
Fiscal 2006
If the fair value recognition provisions of SFAS 123 had
been applied to stock-based compensation for fiscal 2005, the
Companys pro forma net income and basic and diluted
earnings per share would have been as follows:
|
|
|
|
|
|
|
|
|
2005
|
|
|
Net income, as reported
|
|
$
|
2,574
|
|
Add: Stock-based employee compensation expense included in
reported net income, net of tax
|
|
|
36
|
|
Less: Stock-based employee compensation expense determined under
the fair value method for all awards, net of tax
|
|
|
(898
|
)
|
|
|
|
|
|
Net income, pro forma
|
|
$
|
1,712
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
Basic as reported
|
|
$
|
0.29
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
0.19
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
0.29
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
(In thousands, except per share
data)
Restricted
Stock
Non-employee directors receive restricted stock under the 1993
Non-Employee Director Restricted Stock Plan, which 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. One-third
of the shares vest on each anniversary of the date of the award.
The Company recognizes compensation cost for restricted stock
ratably over the vesting period. On September 1, 2005,
8,694 shares of restricted common stock of the Company were
granted to the non-employee directors. As of October 30,
2007, this plan has been terminated and no additional restricted
stock will be granted under this plan.
|
|
Note 10
|
Pensions and
Other Postretirement Benefits
|
Penford maintains two noncontributory defined benefit pension
plans that cover substantially all North American employees
and retirees.
The Company also maintains a postretirement health care benefit
plan covering its North American bargaining unit hourly retirees.
F-18
Notes
to Consolidated Financial
Statements (Continued)
Adoption
of SFAS No. 158
In September 2006, the FASB issued Statement No. 158,
Employers Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements
No. 87, 88, 106, and 132R
(SFAS No. 158). SFAS 158 requires
companies to recognize the funded status of defined benefit
pension and other postretirement plans as an asset or liability
in the statement of financial position and to recognize changes
in that funded status in the year in which the changes occur
through comprehensive income in shareholders equity. In
addition, a company is required to measure plan assets and
benefit obligations as of the date of its fiscal year-end
statement of financial position. The Company currently measures
its plan assets and benefit obligations as of the end of its
fiscal year. The incremental effects of adopting
SFAS No. 158 on the Companys consolidated
balance sheet as of August 31, 2007 are presented in the
following table. The adoption of SFAS No. 158 had no
effect on the Companys consolidated results of operations
for the fiscal year ended August 31, 2007, or for any prior
period presented, and it will not affect the Companys
consolidated results of operation in future periods. Prior to
the adoption of SFAS No. 158 on August 31, 2007,
the Company recognized an additional minimum pension liability
pursuant to the provisions of SFAS Nos. 87 and 106, which
is reflected in the Balance Before SFAS No. 158
Adoption column in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of August 31,
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
SFAS No. 158
|
|
|
|
|
|
|
Balance Before SFAS
|
|
|
Adoption
|
|
|
Balance After SFAS
|
|
|
|
No. 158 Adoption
|
|
|
Adjustments
|
|
|
No. 158 Adoption
|
|
|
Intangible Asset
|
|
$
|
2,522
|
|
|
$
|
(2,522
|
)
|
|
$
|
|
|
Current accrued benefit liability
|
|
|
1,776
|
|
|
|
(1,180
|
)
|
|
|
596
|
|
Non-current accrued benefit liability pensions
|
|
|
1,316
|
|
|
|
4,298
|
|
|
|
5,614
|
|
Other postretirement benefits
|
|
|
13,932
|
|
|
|
(1,118
|
)
|
|
|
12,814
|
|
Accumulated other comprehensive loss, net of tax
|
|
|
722
|
|
|
|
2,804
|
|
|
|
3,526
|
|
Deferred income tax liability
|
|
|
7,095
|
|
|
|
1,719
|
|
|
|
8,814
|
|
|
|
(Dollars in thousands)
Obligations
and Funded Status
The following represents information summarizing the
Companys pension and other postretirement benefit plans. A
measurement date of August 31, 2007 was used for all plans.
F-19
Notes
to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at September 1
|
|
$
|
36,735
|
|
|
$
|
39,132
|
|
|
$
|
13,621
|
|
|
$
|
15,041
|
|
Service cost
|
|
|
1,467
|
|
|
|
1,673
|
|
|
|
309
|
|
|
|
391
|
|
Interest cost
|
|
|
2,207
|
|
|
|
2,102
|
|
|
|
818
|
|
|
|
785
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
151
|
|
|
|
148
|
|
Amendments
|
|
|
873
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
(387
|
)
|
|
|
(1,052
|
)
|
|
|
(1,218
|
)
|
|
|
(840
|
)
|
Change in assumptions
|
|
|
175
|
|
|
|
(3,312
|
)
|
|
|
529
|
|
|
|
(1,104
|
)
|
Benefits paid
|
|
|
(1,829
|
)
|
|
|
(1,808
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at August 31
|
|
$
|
39,241
|
|
|
$
|
36,735
|
|
|
$
|
13,410
|
|
|
$
|
13,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at September 1
|
|
$
|
30,521
|
|
|
$
|
26,759
|
|
|
$
|
|
|
|
$
|
|
|
Actual return on plan assets
|
|
|
3,945
|
|
|
|
2,262
|
|
|
|
|
|
|
|
|
|
Company contributions
|
|
|
990
|
|
|
|
3,308
|
|
|
|
649
|
|
|
|
652
|
|
Plan participants contributions
|
|
|
|
|
|
|
|
|
|
|
151
|
|
|
|
148
|
|
Benefits paid
|
|
|
(1,829
|
)
|
|
|
(1,808
|
)
|
|
|
(800
|
)
|
|
|
(800
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of the plan assets at August 31
|
|
$
|
33,627
|
|
|
$
|
30,521
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan assets less than projected benefit obligation
|
|
$
|
(5,614
|
)
|
|
$
|
(6,214
|
)
|
|
$
|
(13,410
|
)
|
|
$
|
(13,621
|
)
|
Unrecognized net actuarial loss
|
|
|
NA
|
|
|
|
5,655
|
|
|
|
NA
|
|
|
|
1,234
|
|
Unrecognized prior service cost
|
|
|
NA
|
|
|
|
1,840
|
|
|
|
NA
|
|
|
|
(1,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net asset (liability)
|
|
$
|
(5,614
|
)
|
|
$
|
1,281
|
|
|
$
|
(13,410
|
)
|
|
$
|
(13,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible asset
|
|
$
|
|
|
|
$
|
1,840
|
|
|
$
|
|
|
|
$
|
|
|
Current accrued benefit liability
|
|
|
|
|
|
|
(1,090
|
)
|
|
|
(596
|
)
|
|
|
|
|
Non-current accrued benefit liability
|
|
|
(5,614
|
)
|
|
|
(2,748
|
)
|
|
|
(12,814
|
)
|
|
|
(13,606
|
)
|
Other comprehensive income
|
|
|
NA
|
|
|
|
3,279
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Amount Recognized
|
|
$
|
(5,614
|
)
|
|
$
|
1,281
|
|
|
$
|
(13,410
|
)
|
|
$
|
(13,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Accumulated other comprehensive loss as of August 31, 2007
consists of the following amounts that have not yet been
recognized as components of net benefit cost (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
Unrecognized prior service cost (credit)
|
|
$
|
2,522
|
|
|
$
|
(1,067
|
)
|
Unrecognized net actuarial loss
|
|
|
3,687
|
|
|
|
545
|
|
Total
|
|
$
|
6,209
|
|
|
$
|
(522
|
)
|
|
|
F-20
Notes
to Consolidated Financial
Statements (Continued)
Selected information related to the Companys defined
benefit pension plans that have benefit obligations in excess of
fair value of plan assets is presented below (dollars in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Projected benefit obligation
|
|
$
|
39,241
|
|
|
$
|
36,735
|
|
Accumulated benefit obligation
|
|
$
|
36,719
|
|
|
$
|
34,359
|
|
Fair value of plan assets
|
|
$
|
33,627
|
|
|
$
|
30,521
|
|
|
|
Effective August 1, 2004, the Companys postretirement
health care benefit plan covering bargaining unit hourly
employees was closed to new entrants and to any current employee
who did not meet minimum requirements as to age plus years of
service.
The defined benefit pension plans for salary and hourly
employees were closed to new participants effective
January 1, 2005 and August 1, 2004, respectively.
Net
Periodic Benefit Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
1,467
|
|
|
$
|
1,673
|
|
|
$
|
1,066
|
|
|
$
|
309
|
|
|
$
|
391
|
|
|
$
|
352
|
|
Interest cost
|
|
|
2,207
|
|
|
|
2,102
|
|
|
|
2,065
|
|
|
|
818
|
|
|
|
785
|
|
|
|
775
|
|
Expected return on plan assets
|
|
|
(2,379
|
)
|
|
|
(2,150
|
)
|
|
|
(1,868
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of transition obligation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior service cost
|
|
|
191
|
|
|
|
187
|
|
|
|
194
|
|
|
|
(152
|
)
|
|
|
(152
|
)
|
|
|
(152
|
)
|
Amortization of actuarial loss
|
|
|
190
|
|
|
|
602
|
|
|
|
480
|
|
|
|
|
|
|
|
143
|
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit cost
|
|
$
|
1,676
|
|
|
$
|
2,414
|
|
|
$
|
1,937
|
|
|
$
|
975
|
|
|
$
|
1,167
|
|
|
$
|
1,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Assumptions
The Company assesses its benefit plan assumptions on a regular
basis. Assumptions used in determining plan information are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
Pension Benefits
|
|
|
Other Benefits
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted-average assumptions used to calculate net periodic
expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.15%
|
|
|
|
5.50%
|
|
|
|
6.25%
|
|
|
|
6.15%
|
|
|
|
5.50%
|
|
|
|
6.25%
|
|
Expected return on plan assets
|
|
|
8.00%
|
|
|
|
8.00%
|
|
|
|
8.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00%
|
|
|
|
4.00%
|
|
|
|
4.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average assumptions used to calculate benefit
obligations at August 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discount rate
|
|
|
6.51%
|
|
|
|
6.15%
|
|
|
|
5.50%
|
|
|
|
6.51%
|
|
|
|
6.15%
|
|
|
|
5.50%
|
|
Expected return on plan assets
|
|
|
8.00%
|
|
|
|
8.00%
|
|
|
|
8.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rate of compensation increase
|
|
|
4.00%
|
|
|
|
4.00%
|
|
|
|
4.00%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-21
Notes
to Consolidated Financial
Statements (Continued)
The expected long-term return on assets assumption for the
pension plans represents the average rate of return to be earned
on plan assets over the period the benefits included in the
benefit obligation are to be paid. In developing the expected
rate of return, the Company considers long-term historical
market rates of return as well as actual returns on the
Companys plan assets, and adjusts this information to
reflect expected capital market trends. Penford also considers
forward looking return expectations by asset class, the
contribution of active management and management fees paid by
the plans. The plan assets are held in qualified trusts and
anticipated rates of return are not reduced for income taxes.
The expected long-term return on assets assumption used to
calculate net periodic pension expense was 8.0% for fiscal 2007.
A decrease (increase) of 50 basis points in the expected
return on assets assumptions would increase (decrease) pension
expense by approximately $0.2 million based on the assets
of the plans at August 31, 2007. The expected return on
plan assets to be used in calculating fiscal 2008 pension
expense is 8%.
The discount rate used by the Company in determining pension
expense and pension obligations reflects the yield of high
quality (AA or better rating by a recognized rating agency)
corporate bonds whose cash flows are expected to match the
timing and amounts of projected future benefit payments. The
discount rates to determine net periodic expense used in 2005
(6.25%), 2006 (5.50%) and 2007 (6.15%) reflect the change in
bond yields over the last several years. During fiscal 2007,
bond yields rose and Penford has increased the discount rate for
calculating its benefit obligations at August 31, 2007, as
well as net periodic expense for fiscal 2008, to 6.51%. Lowering
the discount rate by 25 basis points would increase pension
expense by approximately $0.1 million and other
postretirement benefit expense by $0.01 million.
Unrecognized net loss amounts reflect the difference between
expected and actual returns on pension plan assets as well as
the effects of changes in actuarial assumptions. Unrecognized
net losses in excess of certain thresholds are amortized into
net periodic pension and postretirement benefit expense over the
average remaining service life of active employees. Amortization
of unrecognized net loss amounts is expected to increase net
pension expense by approximately $0.05 million in fiscal
2008. Amortization of unrecognized net losses is not expected to
impact the net postretirement health care expense in fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Assumed health care cost trend rates:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current health care trend assumption
|
|
|
9.00
|
%
|
|
|
10.00
|
%
|
|
|
10.00
|
%
|
Ultimate health care trend rate
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
|
|
4.75
|
%
|
Year ultimate health care trend is reached
|
|
|
2015
|
|
|
|
2015
|
|
|
|
2014
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
1-Percentage-
|
|
|
1-Percentage-
|
|
|
|
Point Increase
|
|
|
Point Decrease
|
|
|
Effect on total of service and interest cost components in
fiscal 2007
|
|
$
|
190
|
|
|
$
|
(154
|
)
|
Effect on postretirement accumulated benefit obligation as of
August 31, 2007
|
|
$
|
1,984
|
|
|
$
|
(1,629
|
)
|
|
|
(Dollars in thousands)
F-22
Notes
to Consolidated Financial
Statements (Continued)
Plan
Assets
The weighted average asset allocations of the investment
portfolio for the pension plans at August 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Target
|
|
|
August 31,
|
|
|
|
Allocation
|
|
|
2007
|
|
|
2006
|
|
|
U.S. equities
|
|
|
60%
|
|
|
|
55%
|
|
|
|
55%
|
|
International equities
|
|
|
10%
|
|
|
|
15%
|
|
|
|
15%
|
|
Fixed income investments
|
|
|
25%
|
|
|
|
25%
|
|
|
|
25%
|
|
Real estate
|
|
|
5%
|
|
|
|
5%
|
|
|
|
5%
|
|
|
|
The assets of the pension plans are invested in units of common
trust funds actively managed by Russell Trust Company, a
professional fund investment manager. The investment strategy
for the defined benefit pension assets is to maintain a
diversified asset allocation in order to minimize the risk of
large losses and maximize the long-term risk-adjusted rate of
return. No plan assets are invested in Penford shares. There are
no plan assets for the Companys postretirement health care
plans.
Contributions
and Benefit Payments
The Companys funding policy for the defined benefit
pension plans is to contribute amounts sufficient to meet the
statutory funding requirements of the Employee Retirement Income
Security Act of 1974. The Company contributed $1.0 million,
$3.3 million and $3.6 million in fiscal 2007, 2006 and
2005, respectively. The Company expects to contribute
$1.6 million to its defined benefit pension plans during
fiscal 2008. Penford funds the benefit payments of its
postretirement health care plans on a cash basis; therefore, the
Companys contributions to these plans in fiscal 2008 will
approximate the benefit payments below.
Expected benefit payments are based on the same assumptions used
to measure the benefit obligations and include benefits
attributable to estimate future employee service.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
Pension
|
|
|
Postretirement
|
|
|
2008
|
|
$
|
2.0
|
|
|
$
|
0.6
|
|
2009
|
|
|
2.0
|
|
|
|
0.7
|
|
2010
|
|
|
2.0
|
|
|
|
0.7
|
|
2011
|
|
|
2.1
|
|
|
|
0.7
|
|
2012
|
|
|
2.2
|
|
|
|
0.8
|
|
2013-2017
|
|
$
|
12.6
|
|
|
$
|
4.6
|
|
|
|
(Dollars in millions)
|
|
Note 11
|
Other Employee
Benefits
|
Savings
and Stock Ownership Plan
The Company has a defined contribution savings plan by which
eligible North American-based employees can elect a maximum
salary deferral of 16%. The plan provides a 100% match on the
first 3% of salary contributions and a 50% match on the next 3%
per employee. The Companys matching contributions were
$920,000, $882,000 and $750,000 for fiscal years 2007, 2006 and
2005, respectively.
F-23
Notes
to Consolidated Financial
Statements (Continued)
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 Moodys current
Corporate Bond Yield. Deferred compensation interest of
$180,000, $184,000 and $188,000 was accrued in fiscal years
2007, 2006 and 2005, respectively.
Supplemental
Executive Retirement Plan
The Company sponsors a supplemental executive retirement plan, a
non-qualified plan, which covers certain employees. No current
executive officers participate in this plan. For fiscal 2007,
2006 and 2005, the net periodic pension expense accrued for this
plan was $320,000, $305,000 and $302,000, respectively. The
accrued obligation related to the plan was $4.0 million and
$3.9 million for fiscal years 2007 and 2006, 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
$4.4 million, $4.3 million and $4.7 million in
fiscal years 2007, 2006 and 2005, 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 9% of each employees
eligible pay. In New Zealand, the Company sponsors a
superannuation benefit plan whereby it contributes 7.5% and 5%
of eligible pay for salaried and hourly employees, respectively.
The Company contributions to superannuation funds were
$1.1 million, in each of fiscal years 2007, 2006 and 2005.
|
|
Note 12
|
Other
Non-operating Income
|
Other non-operating income consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Royalty and licensing income
|
|
$
|
1,902
|
|
|
$
|
1,827
|
|
|
$
|
1,386
|
|
Gain (loss) on sale of assets
|
|
|
(325
|
)
|
|
|
85
|
|
|
|
64
|
|
Loss on extinguishment of debt
|
|
|
|
|
|
|
|
|
|
|
(1,051
|
)
|
Gain on sale of Tamworth farm
|
|
|
60
|
|
|
|
78
|
|
|
|
1,166
|
|
Gain on sale of investment
|
|
|
|
|
|
|
|
|
|
|
736
|
|
Other
|
|
|
8
|
|
|
|
(94
|
)
|
|
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,645
|
|
|
$
|
1,896
|
|
|
$
|
2,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
In fiscal 2003, the Company exclusively licensed to National
Starch and Chemical Investment Holdings Corporation
(National Starch) certain rights to its resistant
starch patent portfolio (the RS Patents) for
applications in human nutrition. Under the terms of the
licensing agreement, the Company received an initial licensing
fee of $2.25 million ($1.6 million net of transaction
expenses) which is being amortized over the life of the royalty
agreement. The Company recognized $1.9 million,
$1.8 million and $1.4 million in income during fiscal
2007, 2006 and 2005, respectively, related to the licensing fee
and royalties. The Company has recognized $8.5 million in
royalty income from the inception of the agreement through
August 31, 2007.
In the first quarter of fiscal 2007, in connection with the
settlement of litigation in which Penfords Australian
subsidiary companies were plaintiffs, Penford received a
one-time payment of $625,000 and granted a license to
F-24
Notes
to Consolidated Financial
Statements (Continued)
one of the defendants in this litigation under Penfords RS
Patents in certain non-human nutrition applications. In
addition, Penford became entitled to receive additional
royalties under a license of rights under the RS Patents in
human nutrition applications granted to one of the defendants.
As part of the settlement agreement, Penford is entitled to
receive certain other benefits, including an acceleration and
extension of certain royalties under its license with National
Starch. The Company is deferring and recognizing license income
of $625,000 ratably over the remaining life of the patent
license, which is estimated to be seven years.
In 2005, the Company refinanced its secured term and revolving
credit facilities and wrote off $1.1 million of unamortized
debt issuance costs related to these credit agreements.
In fiscal 2005, Penford sold a parcel of land near its wheat
starch plant in Tamworth, New South Wales, Australia, that was
used for disposal of effluent from the Tamworth manufacturing
process for $1.9 million, and recognized a gain on the sale
of $1.2 million.
In fiscal 2006, the Company sold a parcel of land suitable only
for agricultural purposes in Tamworth, New South Wales,
Australia to a third-party purchaser for $0.7 million. The
Company leases back the property from the purchaser under two
lease terms and arrangements: i) a small parcel of land
will be leased for 25 years beginning August 2006 with
annual rent of approximately $0.016 million converted to
U.S. dollars at the Australian dollar exchange rate at
August 31, 2007 and ii) the majority of land sold was
leased for one year beginning August 2006 with annual rental of
approximately $0.09 million converted to U.S. dollars
at the Australian dollar exchange rate at August 31, 2007.
The total gain on the sale was $0.3 million. The gain of
$0.1 million in excess of the present value of the lease
payments was recognized during the second quarter of fiscal
2006. The remaining gain of $0.2 million is being
recognized proportionally over the terms of the leases discussed
above.
In fiscal 2005, the Company sold a majority of its investment in
a small Australian
start-up
company and recognized a $0.7 million pre-tax gain on the
transaction.
Income (loss) before income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Domestic
|
|
$
|
16,335
|
|
|
$
|
3,502
|
|
|
$
|
(4,635
|
)
|
Foreign
|
|
|
3,157
|
|
|
|
1,760
|
|
|
|
2,282
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
19,492
|
|
|
$
|
5,262
|
|
|
$
|
(2,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
F-25
Notes
to Consolidated Financial
Statements (Continued)
Income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
4,630
|
|
|
$
|
68
|
|
|
$
|
(353
|
)
|
State
|
|
|
1,051
|
|
|
|
709
|
|
|
|
170
|
|
Foreign
|
|
|
2,065
|
|
|
|
550
|
|
|
|
666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,746
|
|
|
|
1,327
|
|
|
|
483
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
78
|
|
|
|
529
|
|
|
|
(4,579
|
)
|
State
|
|
|
(644
|
)
|
|
|
(536
|
)
|
|
|
(573
|
)
|
Foreign
|
|
|
(1,205
|
)
|
|
|
(286
|
)
|
|
|
(258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,771
|
)
|
|
|
(293
|
)
|
|
|
(5,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
$
|
(4,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Comprehensive tax expense (benefit) allocable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before taxes
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
$
|
(4,927
|
)
|
Comprehensive income (loss)
|
|
|
(195
|
)
|
|
|
1,649
|
|
|
|
(871
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
5,780
|
|
|
$
|
2,683
|
|
|
$
|
(5,798
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
A reconciliation of the statutory federal tax to the actual
provision (benefit) for taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Statutory tax rate
|
|
|
35
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
Statutory tax on income
|
|
$
|
6,822
|
|
|
$
|
1,789
|
|
|
$
|
(800
|
)
|
State taxes, net of federal benefit
|
|
|
79
|
|
|
|
114
|
|
|
|
(245
|
)
|
Domestic production exclusion benefit
|
|
|
(202
|
)
|
|
|
(14
|
)
|
|
|
|
|
Tax credits, including research and development credits
|
|
|
(382
|
)
|
|
|
(136
|
)
|
|
|
(247
|
)
|
Extraterritorial income exclusion benefit
|
|
|
(5
|
)
|
|
|
(546
|
)
|
|
|
(2,970
|
)
|
Lower statutory rate on foreign earnings
|
|
|
(66
|
)
|
|
|
(82
|
)
|
|
|
(449
|
)
|
Other
|
|
|
(271
|
)
|
|
|
(91
|
)
|
|
|
(216
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$
|
5,975
|
|
|
$
|
1,034
|
|
|
$
|
(4,927
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
F-26
Notes
to Consolidated Financial
Statements (Continued)
The significant components of deferred tax assets and
liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Alternative minimum tax credit
|
|
$
|
|
|
|
$
|
466
|
|
Postretirement benefits
|
|
|
8,814
|
|
|
|
7,957
|
|
Provisions for accrued expenses
|
|
|
2,902
|
|
|
|
1,988
|
|
Stock-based compensation
|
|
|
735
|
|
|
|
389
|
|
Other
|
|
|
2,627
|
|
|
|
1,274
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
15,078
|
|
|
|
12,074
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
15,502
|
|
|
|
16,513
|
|
Other
|
|
|
434
|
|
|
|
393
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
15,936
|
|
|
|
16,906
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
858
|
|
|
$
|
4,832
|
|
|
|
|
|
|
|
|
|
|
Recognized as:
|
|
|
|
|
|
|
|
|
Other current assets
|
|
$
|
1,985
|
|
|
$
|
1,092
|
|
Other assets
|
|
|
297
|
|
|
|
|
|
Long-term deferred income tax liability
|
|
|
(3,140
|
)
|
|
|
(5,924
|
)
|
|
|
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
858
|
|
|
$
|
4,832
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
At August 31, 2007, the Company had no federal alternative
minimum tax credit or research and development carry forwards.
Deferred taxes are not recognized on temporary differences from
undistributed earnings of foreign subsidiaries of approximately
$16.9 million, as these earnings are deemed to be
permanently reinvested. The amount of unrecognized deferred tax
liability associated with these temporary differences is
approximately $6.4 million.
The Company has not provided for U.S. federal income and
foreign withholding taxes on undistributed earnings from
non-U.S. operations
as of August 31, 2007 because the Company intends to
reinvest such earnings indefinitely outside of the United States.
In August 2005, the Company received a report from the Internal
Revenue Service (IRS) regarding the audit of the
Companys U.S. federal income tax returns for fiscal
years ended August 31, 2001 and 2002. In May 2007, the
Company settled the outstanding IRS audits of the Companys
U.S. federal income tax returns for the fiscal years ended
August 31, 2001 and 2002. Under the settlement the Company
received a cash refund of $0.3 million. In addition, in
connection with the settlement of these audits in the third
quarter of fiscal 2007, the Company reversed a current tax
liability in the amount of $0.7 million, which represented
its estimate of the probable loss on certain tax positions being
examined.
In December 2006, the Tax Relief Healthcare Act of 2006 was
enacted in the U.S., which retroactively reinstated and extended
the research and development tax credit from January 1,
2006 through December 31, 2007. The Company recorded the
tax effect of $0.2 million of U.S. research and
development tax credits in 2007 related to fiscal 2006.
F-27
Notes
to Consolidated Financial
Statements (Continued)
In 2004, the Company filed amended U.S. federal income tax
returns for fiscal years ended August 31, 2001 and 2002,
increasing the extraterritorial income exclusion
(EIE) deduction. The methodology that was used to
determine the incremental EIE deduction for those years was also
utilized for the federal income tax returns for fiscal years
ended August 31, 2003, 2004 and 2005. Penford had not
recognized the tax benefit associated with the incremental EIE
deduction for fiscal years 2001 through 2004 because the Company
had concluded that it was not probable, as defined in FASB
Statement No. 5, Accounting for Contingencies,
that the deduction would be sustained. In its tax audits of the
fiscal 2001 and 2002 federal income tax returns, the IRS did not
challenge the Companys EIE deduction for those years.
Accordingly, in 2005, the Company recognized the incremental tax
benefit of this deduction for fiscal years 2001 through 2004.
The amount of tax benefit recognized for years prior to 2005 was
$2.5 million.
In evaluating the exposures connected with the various tax
filing positions, the Company establishes an accrual, when,
despite managements belief that the Companys tax
return positions are supportable, management believes that
certain positions may be successfully challenged and a loss is
probable. When facts and circumstances change, these accruals
are adjusted. Beginning in fiscal 2008, the Company will adopt
FIN 48, which will change the accounting for tax positions.
See discussion in Note 1.
|
|
Note 14
|
Earnings Per
Common Share
|
The following table presents the computation of basic and
diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net income
|
|
$
|
13,517
|
|
|
$
|
4,228
|
|
|
$
|
2,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
8,986,413
|
|
|
|
8,899,999
|
|
|
|
8,826,916
|
|
Net effect of dilutive stock options
|
|
|
296,712
|
|
|
|
104,191
|
|
|
|
119,279
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares and equivalents outstanding,
assuming dilution
|
|
|
9,283,125
|
|
|
|
9,004,190
|
|
|
|
8,946,195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.50
|
|
|
$
|
0.48
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
1.46
|
|
|
$
|
0.47
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Amounts in thousands, except share
and per share data)
Weighted-average stock options omitted from the denominator of
the earnings per share calculation because they were
antidilutive were 57,159, 536,775 and 346,388 for 2007, 2006 and
2005, respectively.
|
|
Note 15
|
Segment
Reporting
|
Financial information for the Companys 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 served by the Companys
U.S. operations. The Industrial Ingredients segment
provides carbohydrate-based starches for industrial
applications, primarily in the paper and packaging products
industries. The Food Ingredients segment produces specialty
starches for food applications. The third segment is the
geographically separate operations in Australia and New Zealand.
The Australian and New Zealand operations produce specialty
starches used primarily in the food ingredients business. See
Part 1, Item 1, Business, for a
description of the products for each segment. 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. The elimination of intercompany sales between
F-28
Notes
to Consolidated Financial
Statements (Continued)
Australia/New Zealand operations and Food
Ingredients North America is presented separately
since the chief operating decision maker views segment results
prior to intercompany eliminations. The accounting policies of
the reportable segments are the same as those described in
Note 1.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
194,957
|
|
|
$
|
165,850
|
|
|
$
|
147,782
|
|
Food ingredients North America
|
|
|
62,987
|
|
|
|
57,156
|
|
|
|
53,661
|
|
Australia/New Zealand operations
|
|
|
105,244
|
|
|
|
96,121
|
|
|
|
96,231
|
|
Corporate and other
|
|
|
(824
|
)
|
|
|
(708
|
)
|
|
|
(911
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
7,830
|
|
|
$
|
7,812
|
|
|
$
|
8,832
|
|
Food ingredients North America
|
|
|
2,944
|
|
|
|
3,301
|
|
|
|
3,311
|
|
Australia/New Zealand operations
|
|
|
4,605
|
|
|
|
4,199
|
|
|
|
4,306
|
|
Corporate and other
|
|
|
317
|
|
|
|
271
|
|
|
|
576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,696
|
|
|
$
|
15,583
|
|
|
$
|
17,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
19,251
|
|
|
$
|
9,121
|
|
|
$
|
(147
|
)
|
Food ingredients North America
|
|
|
10,684
|
|
|
|
7,819
|
|
|
|
7,404
|
|
Australia/New Zealand operations
|
|
|
3,269
|
|
|
|
1,735
|
|
|
|
1,331
|
|
Corporate and other
|
|
|
(9,646
|
)
|
|
|
(9,407
|
)
|
|
|
(7,576
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,558
|
|
|
$
|
9,268
|
|
|
$
|
1,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures, net
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
30,492
|
|
|
$
|
8,858
|
|
|
$
|
4,211
|
|
Food ingredients North America
|
|
|
2,477
|
|
|
|
1,651
|
|
|
|
1,742
|
|
Australia/New Zealand operations
|
|
|
1,952
|
|
|
|
4,323
|
|
|
|
3,319
|
|
Corporate and other
|
|
|
(187
|
)
|
|
|
73
|
|
|
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
34,734
|
|
|
$
|
14,905
|
|
|
$
|
9,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
F-29
Notes
to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Total assets
|
|
|
|
|
|
|
|
|
Industrial ingredients North America
|
|
$
|
133,187
|
|
|
$
|
98,733
|
|
Food ingredients North America
|
|
|
33,684
|
|
|
|
31,714
|
|
Australia/New Zealand operations
|
|
|
108,084
|
|
|
|
104,491
|
|
Corporate and other
|
|
|
13,433
|
|
|
|
15,730
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
288,388
|
|
|
$
|
250,668
|
|
|
|
|
|
|
|
|
|
|
Total goodwill Australia/New Zealand
|
|
$
|
23,477
|
|
|
$
|
21,871
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Reconciliation of total income from operations for the
Companys segments to income before income taxes as
reported in the consolidated financial statements follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income from operations
|
|
$
|
23,558
|
|
|
$
|
9,268
|
|
|
$
|
1,012
|
|
Other non-operating income
|
|
|
1,645
|
|
|
|
1,896
|
|
|
|
2,209
|
|
Interest expense
|
|
|
(5,711
|
)
|
|
|
(5,902
|
)
|
|
|
(5,574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
$
|
19,492
|
|
|
$
|
5,262
|
|
|
$
|
(2,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Sales, attributed to the point of origin, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
257,120
|
|
|
$
|
222,298
|
|
|
$
|
200,532
|
|
Australia/New Zealand
|
|
|
105,244
|
|
|
|
96,121
|
|
|
|
96,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Sales, attributed to the area to which the product was shipped,
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
United States
|
|
$
|
227,438
|
|
|
$
|
198,439
|
|
|
$
|
175,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Australia/New Zealand
|
|
|
79,647
|
|
|
|
79,919
|
|
|
|
74,222
|
|
Japan
|
|
|
18,636
|
|
|
|
18,334
|
|
|
|
19,343
|
|
Canada
|
|
|
12,654
|
|
|
|
11,718
|
|
|
|
13,063
|
|
Mexico
|
|
|
10,358
|
|
|
|
5,761
|
|
|
|
2,268
|
|
Other
|
|
|
13,631
|
|
|
|
4,248
|
|
|
|
12,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-U.S.
|
|
|
134,926
|
|
|
|
119,980
|
|
|
|
121,022
|
|
Total
|
|
$
|
362,364
|
|
|
$
|
318,419
|
|
|
$
|
296,763
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
F-30
Notes
to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
Long-lived assets, net
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
103,942
|
|
|
$
|
82,556
|
|
Australia/New Zealand
|
|
|
66,198
|
|
|
|
64,144
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
170,140
|
|
|
$
|
146,700
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
With the adoption of SFAS No. 123R on
September 1, 2005, the Company recognized $1.1 million
in stock-based compensation expense for each of fiscal years
2007 and 2006. The following table summarizes the stock-based
compensation expense related to stock option awards by segment
for fiscal years 2007 and 2006.
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
Industrial Ingredients North America
|
|
$
|
264
|
|
|
$
|
217
|
|
Food Ingredients North America
|
|
|
170
|
|
|
|
123
|
|
Australia/New Zealand operations
|
|
|
52
|
|
|
|
49
|
|
Corporate
|
|
|
564
|
|
|
|
718
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,050
|
|
|
$
|
1,107
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
Prior to September 1, 2005, the Company presented pro forma
information for the periods prior to the adoption of
SFAS No. 123R and no compensation expense was
recognized for the stock-based compensation plans other than for
the Directors Plan and restricted stock awards. See
Note 9.
|
|
Note 16
|
Quarterly
Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2007
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
Sales
|
|
$
|
85,500
|
|
|
$
|
85,241
|
|
|
$
|
95,406
|
|
|
$
|
96,217
|
|
|
$
|
362,364
|
|
Cost of sales
|
|
|
72,306
|
|
|
|
72,839
|
|
|
|
76,838
|
|
|
|
76,220
|
|
|
|
298,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
13,194
|
|
|
|
12,402
|
|
|
|
18,568
|
|
|
|
19,997
|
|
|
|
64,161
|
|
Net income
|
|
|
2,573
|
|
|
|
1,706
|
|
|
|
4,955
|
|
|
|
4,283
|
|
|
|
13,517
|
|
Earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.29
|
|
|
$
|
0.19
|
|
|
$
|
0.55
|
|
|
$
|
0.47
|
|
|
$
|
1.50
|
|
Diluted
|
|
$
|
0.28
|
|
|
$
|
0.19
|
|
|
$
|
0.54
|
|
|
$
|
0.45
|
|
|
$
|
1.46
|
|
Dividends declared
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.24
|
|
|
|
(Dollars in thousands, except per
share data)
F-31
Notes
to Consolidated Financial
Statements (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
|
Fiscal 2006
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Total
|
|
|
Sales
|
|
$
|
77,903
|
|
|
$
|
77,078
|
|
|
$
|
79,130
|
|
|
$
|
84,308
|
|
|
$
|
318,419
|
|
Cost of sales
|
|
|
67,503
|
|
|
|
68,534
|
|
|
|
67,070
|
|
|
|
70,369
|
|
|
|
273,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
|
10,400
|
|
|
|
8,544
|
|
|
|
12,060
|
|
|
|
13,939
|
|
|
|
44,943
|
|
Net income (loss)
|
|
|
196
|
|
|
|
(511
|
)
|
|
|
1,991
|
|
|
|
2,552
|
|
|
|
4,228
|
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.22
|
|
|
$
|
0.29
|
|
|
$
|
0.48
|
|
Diluted
|
|
$
|
0.02
|
|
|
$
|
(0.06
|
)
|
|
$
|
0.22
|
|
|
$
|
0.28
|
|
|
$
|
0.47
|
|
Dividends declared
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.06
|
|
|
$
|
0.24
|
|
|
|
(Dollars in thousands, except per
share data)
In the fourth quarter of fiscal 2007, the Company recorded a
$2.4 million pretax charge for an estimated loss
contingency related to litigation. See Note 17.
|
|
Note 17
|
Legal
Proceedings
|
In October 2004, Penford Products Co. (Penford
Products), a wholly-owned subsidiary of the Company, was
sued by Graphic Packaging International, Inc.
(Graphic) in the Fourth Judicial District Court,
Ouachita Parish, State of Louisiana. Graphic sought monetary
damages for, among other things, Penford Products alleged
breach of an agreement during the 2004 strike affecting its
Cedar Rapids, Iowa plant to supply Graphic with certain starch
products. Penford Products denied all liability and countersued
for damages.
During October 2007, this case was tried before a judge of the
above-noted court. As of November 7, 2007, no decision in
the matter had been rendered by the judge and the judge had not
advised Penford Products of the date upon which his decision
would be issued. At trial, Graphic argued that it was entitled
to damages in the amount of approximately $3.27 million,
plus interest. Penford Products argued that it was entitled to
damages of approximately $550,000, plus interest.
The Company vigorously defended its position at trial. However,
the Company, applying its best judgment of the likely outcome of
the litigation, has established a loss contingency against this
matter of $2.4 million. Depending upon the eventual outcome
of this litigation, the Company may incur additional material
charges in excess of the amount it has reserved, or it may incur
lower charges, the amounts of which in each case management is
unable to predict at this time.
The Company is involved from time to time in various other
claims and litigation arising in the normal course of business.
In the judgment of management, which relies in part on
information from the Companys outside legal counsel, the
ultimate resolution of these matters will not materially affect
the consolidated financial position, results of operations or
liquidity of the Company.
F-32
Report
of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Penford Corporation
We have audited the accompanying consolidated balance sheets of
Penford Corporation as of August 31, 2007 and 2006, and the
related consolidated statements of operations, comprehensive
income, shareholders equity, and cash flows for each of
the three years in the period ended August 31, 2007. These
financial statements are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (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 financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of Penford Corporation at August 31,
2007 and 2006, and the consolidated results of its operations
and its cash flows for each of the three years in the period
ended August 31, 2007, in conformity with
U.S. generally accepted accounting principles.
As discussed in Notes 1 and 9 to the consolidated financial
statements, effective September, 1, 2005, the Company adopted
Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment.
As discussed in Notes 1 and 10 to the consolidated
financial statements, effective August 31, 2007, the
Company changed its method for accounting for postretirement
benefit plans in accordance with Statement of Financial
Accounting Standards No. 158, Employers
Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R).
Denver, Colorado
November 6, 2007
F-33
PROSPECTUS
$100,000,000
OFFERED BY
PENFORD CORPORATION
Common Stock
Preferred Stock
Senior or Subordinated Debt
Securities
Convertible Debt
Securities
We may use this prospectus to offer from time to time
|
|
|
|
|
shares of our common stock
|
|
|
|
shares of our preferred stock, or
|
|
|
|
debt securities, consisting of notes, debentures or other
evidences of indebtedness, including senior debt securities,
subordinated debt securities and indebtedness convertible into
equity securities, in one or more series.
|
In addition, certain selling securityholders may use this
prospectus to offer securities for their own accounts.
We refer to the common stock, the preferred stock and the debt
securities in this prospectus collectively as the
securities. We, or the selling securityholders, will
offer the securities at an aggregate initial offering price of
up to $100,000,000 at prices and on terms that we will determine
in light of market conditions at the time of sale. We, or the
selling securityholders, will provide specific information on
the number of securities offered and the price and terms of the
offered securities in one or more prospectus supplements.
This prospectus describes some of the general terms that may
apply to these securities. We, or the selling securityholders,
will provide the specific terms of these securities in
supplements to this prospectus. You should read this prospectus
and any accompanying prospectus supplement carefully before you
make your investment decision.
THIS PROSPECTUS MAY NOT BE USED TO SELL SECURITIES UNLESS
ACCOMPANIED BY A PROSPECTUS SUPPLEMENT.
We, or the selling securityholders, may offer securities through
underwriting syndicates managed or co-managed by one or more
underwriters or dealers, through agents or directly to
purchasers or shareholders. The prospectus supplement for each
offering of securities will describe in detail the plan of
distribution for that offering. For general information about
the distribution of securities offered, please see Plan of
Distribution in this prospectus.
To the extent that any selling securityholder resells any
securities, the selling securityholder may be required to
provide you with this prospectus and a prospectus supplement
identifying and containing specific information about the
selling securityholder and the terms of the securities being
offered.
Our common stock is quoted on the Nasdaq Global Market under the
symbol PENX. On July 30, 2007, the last sale
price of the shares as reported on the Nasdaq Global Market was
$34.58 per share.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK.
RISKS ASSOCIATED WITH AN INVESTMENT IN OUR SECURITIES WILL BE
DESCRIBED IN THE APPLICABLE PROSPECTUS SUPPLEMENT AND CERTAIN OF
OUR FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION, AS
DESCRIBED IN RISK FACTORS ON PAGE 4. YOU SHOULD
CAREFULLY CONSIDER THOSE RISK FACTORS BEFORE INVESTING.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION OR OTHER REGULATORY BODY HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is September 28, 2007.
Table of
Contents
|
|
|
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
4
|
|
|
|
|
7
|
|
|
|
|
10
|
|
|
|
|
11
|
|
|
|
|
11
|
|
|
|
|
11
|
|
This prospectus is part of a Registration Statement on
Form S-3
that we filed with the Securities and Exchange Commission (the
Commission or the SEC) using the
shelf registration process. By using a shelf
registration statement, we or our selling securityholders may
offer and sell, from time to time, in one or more offerings the
securities described in this prospectus up to an aggregate
amount of $100,000,000 or the equivalent in foreign denominated
currencies.
This prospectus provides you with a general description of the
securities we may offer. The general description contained in
this prospectus is not meant to be complete. Each time we or our
selling securityholders offer to sell securities under this
prospectus, we or our selling securityholders, as applicable,
will provide a prospectus supplement containing specific
information about the terms of that offering. The prospectus
supplement may also add, update or change information contained
in this prospectus. You should read both this prospectus and any
prospectus supplement together with the additional information
described under the heading Where You Can Find More
Information.
This prospectus does not include all of the information
contained in the registration statement. You should refer to the
registration statement and its exhibits for additional
information. Copies of the registration statement together with
its exhibits may be inspected or obtained as described in the
section entitled Where You Can Find More
Information. Statements contained in this prospectus
concerning the provisions of documents are not necessarily
complete, and in each instance, reference is made to the copy of
the document filed as an exhibit to the registration statement
or otherwise filed with the SEC. Each such statement is
qualified in its entirety by reference to the registration
statement.
You should rely only on the information contained or
incorporated by reference in this prospectus, the registration
statement and any accompanying prospectus supplement or
amendment to the registration statement. We have not authorized
anyone to provide you with different information. If anyone
provides you with different or inconsistent information, you
should not rely on it.
Neither we nor our selling securityholders are making an offer
to sell securities in any jurisdiction where the offer or sale
is not permitted.
You should not assume that the information contained in this
prospectus, or in any prospectus supplement, is accurate as of
any date other than its date regardless of the time of delivery
of the prospectus or prospectus supplement or any sale of the
securities.
Where
You can Find More Information
We file annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy
materials that we file with the SEC at the SEC public reference
room located at 100 F Street, N.E.,
Washington, D.C. 20549. You may obtain information on the
operation of the public reference room by calling the SEC at
1-800-SEC-0330.
Our SEC filings are also available to the public at no charge
from the SECs website at
www.sec.gov
and under the
Investor Relations section of our website at
www.penx.com
. Information on our website is not
incorporated into this prospectus or other securities filings
and is not a part of these filings.
Incorporation
by Reference
The SEC allows us to incorporate by reference the
information we file with it, which means that we can disclose
important information to you by referring you to documents that
we have previously filed with the SEC or documents that we will
file with the SEC in the future. The information incorporated by
reference is an important part of this prospectus, and
information that we file later with the SEC will automatically
update and supersede this information.
1
This prospectus incorporates by reference the documents listed
below that we have previously filed with the SEC. These
documents contain important information about us:
|
|
|
|
|
Our Annual Report on
Form 10-K
for the fiscal year ended August 31, 2006 filed on
November 14, 2006;
|
|
|
|
Our Quarterly Report on
Form 10-Q
for the fiscal quarters ended November 30, 2006 filed on
January 9, 2007; February 28, 2007 filed on
April 9, 2007; and May 31, 2007 filed on July 10,
2007.
|
|
|
|
Our Current Reports on
Form 8-K
filed on September 29, 2006, October 10, 2006,
November 3, 2006, November 13, 2006, January 10,
2007, April 10, 2007, and July 2, 2007 (other than
information furnished pursuant to Item 2.02 and
Item 9.01); and
|
|
|
|
The description of our common stock contained in our
Registration Statement on Form 10, filed with the SEC on
March 5, 1984, and
Form 8-A/A
filed on May 5, 1997, including any amendment or report
filed for the purpose of updating such description.
|
We incorporate by reference any additional documents that we may
file with the SEC under Section 13(a), 13(c), 14 or 15(d)
of the Securities Exchange Act of 1934 (other than those
furnished pursuant to Item 2.02 or
Item 7.01 on
Form 8-K
or other information furnished to the SEC) from the
date of the registration statement of which this prospectus is
part until the termination of the offering of the securities.
These documents may include annual, quarterly and current
reports, as well as proxy statements.
We will provide without charge, upon written or oral request, a
copy of any or all of the documents that are incorporated by
reference into this prospectus, excluding any exhibit to those
documents unless the exhibit is specifically incorporated by
reference as an exhibit to the registration statement of which
this prospectus forms a part. Requests should be directed to
Penford Corporation, Attention: Corporate Secretary,
7094 S. Revere Parkway, Centennial, CO
80112-3932
and our telephone number is
(303) 649-1900.
Forward-looking
Statements
This prospectus and the documents incorporated by reference in
this prospectus contain various forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995, and information that is based on
managements belief as well as assumptions made by and
information available to management. The Act provides a
safe harbor for forward-looking statements to
encourage companies to provide prospective information about
themselves so long as they identify these statements as
forward-looking and provide meaningful cautionary statements
identifying important factors that could cause actual results to
differ from the projected results. All statements other than
statements of historical fact we make in this prospectus or in
any document incorporated by reference are forward-looking.
Words such as anticipate, estimate,
project, forecast, intend,
plan, believe, expect and
similar expressions reflect forward-looking statements, but the
absence of these words does not mean the statement is not
forward- looking. Although we believe that the expectations
reflected in our forward-looking statements are reasonable, our
expectations may not prove correct. Our forward-looking
statements are subject to risks, uncertainties and assumptions.
Actual results may differ materially from those we forecast in
forward-looking statements due to a variety of factors,
including those set forth in the section entitled Risk
Factors below and in the documents we have incorporated by
reference. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect,
actual results may vary materially from those anticipated,
estimated, projected, forecasted or expected. We do not intend
to update any forward-looking statements as a result of new
information, future events or otherwise. If we do update or
correct one or more forward-looking statements, investors and
others should not conclude that we will make additional updates
or corrections with respect to other forward-looking statements.
2
You should read the following summary together with the more
detailed information regarding our company, our common stock and
our financial statements and notes to those statements appearing
elsewhere in this prospectus, in the prospectus supplements or
incorporated herein or therein by reference.
Penford Corporation (which, together with its subsidiary
companies, we refer to as Penford, we,
usor our) is a developer, manufacturer
and marketer of specialty natural-based ingredient systems for
industrial and food applications. Penford is a Washington
corporation originally incorporated in September 1983. We
commenced operations as a publicly-traded company on
March 1, 1984. We operate manufacturing facilities in the
United States, Australia and New Zealand.
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 consists of geographically separate operations
in Australia and New Zealand. The Australian and New Zealand
operations are engaged primarily in the food ingredients
business.
Our family of products provides functional characteristics to
customers products. Carbohydrate-based specialty starches
possess binding and film-forming attributes that provide
convenient and cost-effective solutions that make
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 June 2006, we announced plans to invest $42 million for
up to 40 million gallons of ethanol production capacity per
year at our Cedar Rapids, Iowa facility. Construction of the
facility is on schedule and we expect the facility to be
producing ethanol by the end of calendar year 2007. The designed
capacity has been expanded to 45 million gallons with
construction cost estimates maintained at $1.00 to $1.05 per
gallon. Approximately 70% of the total construction expenses
have been committed as of May 31, 2007. We refinanced our
credit facility in October 2006 and obtained a $45 million
capital expansion loan commitment maturing December 2012 to
finance construction of the ethanol plant.
Our Corporate
Information
Our principal executive offices are located at
7094 S. Revere Parkway, Centennial, CO
80112-3932
and our telephone number is
(303) 649-1900.
Our website is located at www.penx.com. Information contained on
our website does not constitute, and shall not be deemed to
constitute, part of this prospectus and shall not be deemed to
be incorporated by reference into the registration statement of
which this prospectus is a part.
Before making an investment decision, you should carefully
consider the risks described under Risk Factors in
the applicable prospectus supplement and in our most recent
Annual Report on
Form 10-K,
or any updates in our Quarterly Reports on
Form 10-Q,
together with all of the other information appearing in this
prospectus or incorporated by reference into this prospectus and
any applicable prospectus supplement, in light of your
particular investment objectives and financial circumstances.
The risks so described are not the only risks facing our
company. Additional risks not presently known to us or that we
currently deem immaterial may also impair our business
operations. Our business, financial condition and results of
operations could be materially adversely affected by any of
these risks. The trading price of our securities could decline
due to any of these risks, and you may lose all or part of your
investment.
3
Unless otherwise set forth in a prospectus supplement, we intend
to use the net proceeds of any offering of securities for
working capital and other general corporate purposes, which may
include the repayment or refinancing of outstanding
indebtedness, the financing of capital expenditures, future
acquisitions or share repurchases. We will have significant
discretion in the use of any net proceeds. The net proceeds may
be invested temporarily in interest-bearing accounts and
short-term interest-bearing securities until they are used for
their stated purpose. We may provide additional information on
the use of the net proceeds from the sale of the offered
securities in an applicable prospectus supplement relating to
the offered securities.
We will not receive any proceeds from the sale of securities by
any selling security holders.
Ratio
of Earnings to Fixed Charges
The following table sets forth our ratio of earnings to fixed
charges for each of the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months
|
|
|
|
|
|
|
|
|
|
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
Years Ended August 31,
|
|
|
2007
|
|
2006
|
|
2005
|
|
2004
|
|
2003
|
|
2002
|
|
Ratio of earnings to fixed charges
|
|
|
2.96
|
x
|
|
|
1.66
|
x
|
|
|
n/a
|
|
|
|
1.81
|
x
|
|
|
2.59
|
x
|
|
|
1.62
|
x
|
Deficiency of earnings to fixed charges (000s)
|
|
|
n/a
|
|
|
|
n/a
|
|
|
$
|
2,353
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
For purposes of computing the ratio of earnings to fixed
charges, earnings consist of income (loss) before income taxes,
plus fixed charges, less interest capitalized. Fixed charges
consist of interest expensed and capitalized, including the
amortization of debt issuance costs, and the portion of rental
expense representative of the interest factor. We do not have
any outstanding preferred stock so our ratios of earnings to
fixed charges and preferred share dividends would be the same as
the ratios included in the table above. The deficiency of
earnings to fixed charges represents the amount by which our
earnings would need to increase to create a one-to-one ratio of
earnings to fixed charges. The information in the table above
should be read in conjunction with our consolidated financial
statements, including the notes thereto, and other information
set forth in the reports filed by us with the SEC. Please refer
to Exhibit 12.1 filed with the registration statement of
which this prospectus constitutes a part for additional
information regarding the ratio of earnings to fixed charges.
Description
of Capital Stock
The following description discusses the general terms of the
common stock and preferred stock that we may issue. The
prospectus supplement relating to a particular series of
preferred stock will describe various other terms of such series
of preferred stock. If so indicated in the prospectus supplement
relating to a particular series of preferred stock, the terms of
the series of preferred stock may differ from the terms set
forth below. The description of preferred stock set forth below
and the description of the terms of a particular series of
preferred stock set forth in the applicable prospectus
supplement are not complete and are qualified in their entirety
by reference to our charter.
General
As of the date of this prospectus, our authorized capital stock
consists of:
|
|
|
|
|
29,000,000 shares of common stock, par value $1.00 per
share, of which 9,108,317 shares were outstanding as of
July 27, 2007; and
|
|
|
|
1,000,000 shares of preferred stock, par value $1.00 per
share, none of which have been issued.
|
4
Set forth below is a summary description of all the material
terms of our capital stock. This description is qualified in its
entirety by reference to our articles of incorporation and
bylaws, a copy of each of which is incorporated as an exhibit to
the registration statement of which this prospectus is a part,
and by the provisions of applicable law.
Common
Stock
Each holder of our common stock is entitled to one vote for each
share of common stock held on all matters submitted to a vote of
shareholders. Except as provided with respect to any other class
or series of stock, the holders of our common stock will possess
the exclusive right to vote for the election of directors and
for all other purposes. There is no cumulative voting in the
election of directors, which means that the holders of a
majority of the outstanding shares of common stock can elect all
of the directors then standing for election, and the holders of
the remaining shares will not be able to elect any directors. No
shares of our common stock are subject to redemption or have
preemptive rights.
Subject to any preference rights of holders of our preferred
stock, the holders of our common stock are entitled to receive
dividends, if any, declared from time to time by our board of
directors out of legally available funds. In the event of our
liquidation, dissolution or winding up, our holders of common
stock are entitled to share ratably in all assets remaining
after the payment of liabilities, subject to any rights of our
holders of preferred stock to prior distribution.
Preferred
Stock
Our board of directors may authorize, without action by our
shareholders, the issuance of preferred stock in one or more
series and may fix the designations and powers, preferences and
relative, participating, optional or other rights, if any, and
qualifications, limitations and restrictions thereof, including,
without limitation:
|
|
|
|
|
dividend rights and preferences over dividends on our common
stock or any series of preferred stock;
|
|
|
|
the dividend rate (and whether dividends are cumulative);
|
|
|
|
conversion rights, if any;
|
|
|
|
voting rights, subject to the limitation, with specified
exceptions, that our preferred stock may not have more than one
vote per share;
|
|
|
|
rights and terms of redemption (including sinking fund
provisions, if any);
|
|
|
|
redemption price and liquidation preferences of any wholly
unissued series of any preferred stock and the designation
thereof of any of them; and
|
|
|
|
to increase or decrease the number of shares of any series
subsequent to the issue of shares of that series but not below
the number of shares then outstanding.
|
You should refer to the prospectus supplement relating to the
series of preferred stock being offered for the specific terms
of that series, including:
|
|
|
|
|
the title of the series and the number of shares in the series;
|
|
|
|
the price at which the preferred stock will be offered;
|
|
|
|
the dividend rate or rates or method of calculating the rates,
the dates on which the dividends will be payable, whether or not
dividends will be cumulative or noncumulative and, if
cumulative, the dates from which dividends on the preferred
stock being offered will cumulate;
|
|
|
|
the voting rights, if any, of the holders of shares of the
preferred stock being offered;
|
|
|
|
the provisions for a sinking fund, if any, and the provisions
for redemption, if applicable, of the preferred stock being
offered, including any restrictions on the foregoing as a result
of arrearage in the payment of dividends or sinking fund
installments;
|
|
|
|
the liquidation preference per share;
|
|
|
|
the terms and conditions, if applicable, upon which the
preferred stock being offered will be convertible into our
common stock, including the conversion price, or the manner of
calculating the conversion price, and the conversion period;
|
5
|
|
|
|
|
the terms and conditions, if applicable, upon which the
preferred stock being offered will be exchangeable for debt
securities, including the exchange price, or the manner of
calculating the exchange price, and the exchange period;
|
|
|
|
any listing of the preferred stock being offered on any
securities exchange;
|
|
|
|
a discussion of any material federal income tax considerations
applicable to the preferred stock being offered;
|
|
|
|
any preemptive rights;
|
|
|
|
the relative ranking and preferences of the preferred stock
being offered as to dividend rights and rights upon liquidation,
dissolution or the winding up of our affairs;
|
|
|
|
any limitations on the issuance of any class or series of
preferred stock ranking senior or equal to the series of
preferred stock being offered as to dividend rights and rights
upon liquidation, dissolution or the winding up of our
affairs; and
|
|
|
|
any additional rights, preferences, qualifications, limitations
and restrictions of the series.
|
Upon issuance, the shares of preferred stock will be fully paid
and nonassessable, which means that its holders will have paid
their purchase price in full and we may not require them to pay
additional funds.
Shareholders
Rights Plan
On June 3, 1988, we declared a dividend of one right for
each outstanding share of our common stock. Effective
April 30, 1997, we amended the original rights in their
entirety. The rights will become exercisable if a purchaser
acquires, or makes an offer to acquire, 15% of our common stock.
In that event, the holder of each share of our common stock,
other than the acquirer, is entitled to purchase, for each share
held, one share of our common stock at a price of $100 per
share. If we are acquired in a merger or transfer 50% or more of
our 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 us at a price
of $0.01 per right and expire on June 16, 2008.
Anti-takeover
Provisions
Washington
Anti-takeover Law
Washington law imposes restrictions on certain transactions
between a corporation and certain significant shareholders.
Chapter 23B.19 of the Washington Business Corporation Act
generally prohibits a target corporation from
engaging in certain significant business transactions with an
acquiring person, which is defined as a person or
group of persons that beneficially owns 10% or more of the
voting securities of the target corporation, for a period of
five years after the date the acquiring person first became a
10% beneficial owner of the voting securities of the target
corporation, unless the business transaction or the acquisition
of shares is approved by a majority of the members of the target
corporations board of directors prior to the time the
acquiring person first became a 10% beneficial owner of the
target corporations voting securities. Such prohibited
transactions include, among other things:
|
|
|
|
|
a merger or consolidation with, disposition of assets to, or
issuance or redemption of stock to or from, the acquiring person;
|
|
|
|
termination of 5% or more of the employees of the target
corporation as a result of the acquiring persons
acquisition of 10% or more of the shares; or
|
|
|
|
receipt by the acquiring person of any disproportionate benefit
as a shareholder.
|
After the five-year period, a significant business
transaction may occur if it complies with fair
price provisions specified in the statute. A corporation
may not opt out of this statute. We expect the
existence of this provision to have an antitakeover effect with
respect to transactions that our board of directors does not
approve in advance and may discourage takeover attempts that
might result in the payment of a premium over the market price
for common stock held by shareholders or otherwise might benefit
shareholders.
6
Anti-takeover
Effects of Provisions of Our Articles of Incorporation and
Bylaws
Provisions of our amended and restated certificate of
incorporation and bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a
third party from attempting to acquire, control of our company.
In particular, our articles of incorporation provide that,
subject to specified exceptions, any major
transaction requires the affirmative vote of the holders
of not less than 80% of our outstanding voting stock, which must
include the affirmative vote of at least 50% of the outstanding
voting stock held by shareholders other than the related
person involved in the transaction. A related
person is any person or entity who is the beneficial owner
of 20% or more of the outstanding shares of our voting stock. A
major transaction is any merger or consolidation
into a related person, any sale or transfer of a substantial
part of our assets to the related person, any issuance of our
securities to the related person, and any various other
transactions specified in our articles of incorporation.
Transfer Agent
and Registrar
The transfer agent and registrar for our common stock is Mellon
Investor Services.
Description
of Debt Securities
As used in this prospectus, debt securities means the
debentures, notes, bonds and other evidences of indebtedness
that we may issue from time to time. The debt securities will
either be senior debt securities or subordinated debt
securities. We may also issue convertible debt securities. The
debt securities will be issued under an indenture entered into
between us and a trustee to be named in the indenture.
The indenture or form of indentures will be filed as exhibits to
the registration statement of which this prospectus is a part.
The statements and descriptions in this prospectus or in any
prospectus supplement regarding provisions of the indenture and
debt securities are summaries thereof, do not purport to be
complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the indenture (and any
amendments or supplements we may enter into from time to time
which are permitted under the indenture) and the debt
securities, including the definitions in the indenture of
certain terms.
General
Unless otherwise specified in a prospectus supplement, the debt
securities will be direct unsecured obligations of Penford. The
senior debt securities will rank equally with any of our other
unsecured senior and unsubordinated debt. The subordinated debt
securities will be subordinate and junior in right of payment to
any senior indebtedness.
The indenture does not limit the aggregate principal amount of
debt securities that we may issue and provide that we may issue
debt securities from time to time in one or more series, in each
case with the same or various maturities, at par or at a
discount. Unless indicated in a prospectus supplement, we may
issue additional debt securities of a particular series without
the consent of the holders of the debt securities of such series
outstanding at the time of the issuance. Any such additional
debt securities, together with all other outstanding debt
securities of that series, will constitute a single series of
debt securities under the indenture and will be equal in ranking.
The senior indebtedness issued pursuant to the indenture will
effectively be subordinate to any of our secured indebtedness.
In the event of a bankruptcy or other liquidation event
involving a distribution of assets to satisfy our outstanding
indebtedness or an event of default under a loan agreement
relating to secured indebtedness, the holders of our secured
indebtedness would be entitled to receive payment of principal
and interest prior to payments on the senior indebtedness issued
under the indenture.
Additionally, the senior indebtedness will effectively be
subordinate to any indebtedness of any subsidiaries. In the
event of a bankruptcy, receivership, state-ordered
rehabilitation, liquidation or similar event involving a
subsidiary, the assets of that subsidiary would be used to
satisfy claims of creditors of the subsidiary rather than our
creditors. As a result of the application of the
subsidiarys assets to satisfy claims of creditors, the
value of the stock of the subsidiary would be diminished and
perhaps rendered worthless. Any such diminution in the value of
the shares of
7
any subsidiaries would adversely impact our financial condition
and possibly impair our ability to meet our obligations on the
debt securities. In addition, any liquidation of the assets of
any subsidiaries to satisfy claims of the subsidiarys
creditors might make it impossible for such subsidiary to pay
dividends to us. This inability to pay dividends would further
impair our ability to satisfy our obligations under the debt
securities.
Prospectus
Supplement
Each prospectus supplement will describe the terms relating to
the specific series of debt securities being offered. These
terms will include some or all of the following:
|
|
|
|
|
the title of debt securities and whether they are subordinated
debt securities or senior debt securities;
|
|
|
|
any limit on the aggregate principal amount of debt securities
of the series;
|
|
|
|
the percentage of the principal amount at which the debt
securities of any series will be issued;
|
|
|
|
the ability to issue additional debt securities of the same
series;
|
|
|
|
the purchase price for the debt securities and the denominations
of the debt securities;
|
|
|
|
the specific designation of the series of debt securities being
offered;
|
|
|
|
the maturity date or dates of the debt securities and the date
or dates upon which the debt securities are payable and the rate
or rates at which the debt securities of the series shall bear
interest, if any, which may be fixed or variable, or the method
by which the rate shall be determined;
|
|
|
|
the basis for calculating interest if other than
360-day
year
or twelve
30-day
months;
|
|
|
|
the date or dates from which any interest will accrue or the
method by which the date or dates will be determined;
|
|
|
|
the duration of any deferral period, including the maximum
consecutive period during which interest payment periods may be
extended;
|
|
|
|
whether the amount of payments of principal of (and premium, if
any) or interest on the debt securities may be determined with
reference to any index, formula or other method, such as one or
more currencies, commodities, equity indices or other indices,
and the manner of determining the amount of the payments;
|
|
|
|
the dates on which we will pay interest on the debt securities
and the regular record date for determining who is entitled to
the interest payable on any interest payment date;
|
|
|
|
the place or places where the principal of (and premium, if any)
and interest on the debt securities will be payable, where any
securities may be surrendered for registration of transfer,
exchange or conversion, as applicable, and notices and demands
may be delivered to or upon us pursuant to the indenture;
|
|
|
|
the rate or rates of amortization of the debt securities;
|
|
|
|
if we possess the option to do so, the periods within which and
the prices at which we may redeem the debt securities, in whole
or in part, pursuant to optional redemption provisions, and the
other terms and conditions of any such provisions;
|
|
|
|
our obligation or discretion, if any, to redeem, repay or
purchase debt securities by making periodic payments to a
sinking fund or through an analogous provision or at the option
of holders of the debt securities, and the period or periods
within which and the price or prices at which we will redeem,
repay or purchase the debt securities, in whole or in part,
pursuant to the obligation, and the other terms and conditions
of the obligation;
|
|
|
|
the terms and conditions, if any, regarding the mandatory
conversion or exchange of debt securities;
|
|
|
|
the period or periods within which, the price or prices at which
and the terms and conditions upon which any debt securities of
the series may be redeemed, in whole or in part at our option
and, if other than by a board resolution, the manner in which
any election by us to redeem the debt securities shall be
evidenced;
|
|
|
|
any restriction or condition on the transferability of the debt
securities of a particular series;
|
8
|
|
|
|
|
the portion, or methods of determining the portion, of the
principal amount of the debt securities which we must pay upon
the acceleration of the maturity of the debt securities in
connection with an event of default , if other than the full
principal amount;
|
|
|
|
the currency or currencies in which the debt securities will be
denominated and in which principal, any premium and any interest
will or may be payable or a description of any units based on or
relating to a currency or currencies in which the debt
securities will be denominated;
|
|
|
|
provisions, if any, granting special rights to holders of the
debt securities upon the occurrence of specified events;
|
|
|
|
any deletions from, modifications of or additions to the events
of default or our covenants with respect to the applicable
series of debt securities, and whether or not the events of
default or covenants are consistent with those contained in the
indenture;
|
|
|
|
any limitation on our ability to incur debt, redeem stock, sell
our assets or other restrictions;
|
|
|
|
the application, if any, of the terms of the indenture relating
to defeasance and covenant defeasance to the debt securities;
|
|
|
|
whether the subordination provisions summarized below or
different subordination provisions will apply to the debt
securities;
|
|
|
|
the terms, if any, upon which the holders may convert or
exchange the debt securities into or for our common stock,
preferred stock or other securities or property;
|
|
|
|
whether the debt securities will be issued in registered form,
in bearer form or in both registered and bearer form. In
general, ownership of registered debt securities is evidenced by
the records of the issuing entity. Accordingly, a holder of
registered debt securities may transfer the debt securities only
on the records of the issuer. By contrast, ownership of bearer
debt securities generally is evidenced by physical possession of
the securities. Accordingly, the holder of a bearer debt
security can transfer ownership merely by transferring
possession of the security;
|
|
|
|
any changes necessary to issue the debt securities of any
particular series in bearer form, registrable or not registrable
as to principal, and with or without interest coupons;
|
|
|
|
any restrictions or special procedures applicable to
(1) the place of payment of the principal, any premium and
any interest on bearer debt securities, (2) the exchange of
bearer debt securities for registered debt securities or
(3) the sale and delivery of bearer debt securities. A
holder of debt securities will not be able to exchange
registered debt securities into bearer debt securities except in
limited circumstances;
|
|
|
|
whether we are issuing the debt securities in whole or in part
in global form;
|
|
|
|
any change in the right of the trustee or the requisite holders
of debt securities to declare the principal amount of the debt
securities due and payable because of an event of default;
|
|
|
|
the depositary for global or certificated debt securities;
|
|
|
|
any federal income tax consequences applicable to the debt
securities, including any debt securities denominated and made
payable, as described in the prospectus supplements, in foreign
currencies, or units based on or related to foreign currencies;
|
|
|
|
any right we may have to satisfy, discharge and defease our
obligations under the debt securities, or terminate or eliminate
restrictive covenants or events of default in the indenture, by
depositing money or U.S. government obligations with the
trustee of the indenture;
|
|
|
|
the names of any trustees, depositaries, authenticating or
paying agents, transfer agents or registrars or other agents
with respect to the debt securities;
|
|
|
|
any other specific terms of the debt securities, including any
modifications to the Events of Default under the debt securities
and any other terms which may be required by or advisable under
applicable laws or regulations;
|
|
|
|
to whom any interest on any debt security shall be payable, if
other than the person in whose name the security is registered,
on the record date for such interest, the extent to which, or
the manner in which,
|
9
|
|
|
|
|
any interest payable on a temporary global debt security will be
paid if other than in the manner provided in the indenture;
|
|
|
|
|
|
if the principal of or any premium or interest on any debt
securities of the series is to be payable in one or more
currencies or currency units other than as stated, the currency,
currencies or currency units in which it shall be paid and the
periods within and terms and conditions upon which an election
is to be made and the amounts payable (or the manner in which
the amount shall be determined);
|
|
|
|
the portion of the principal amount of any debt securities of
the series which shall be payable upon declaration of
acceleration of the maturity of the debt securities pursuant to
the indenture if other than the entire principal amount; and
|
|
|
|
if the principal amount payable at the stated maturity of any
debt security of the series will not be determinable as of any
one or more dates prior to the stated maturity, the amount which
shall be deemed to be the principal amount of the debt
securities as of any such date for any purpose, including the
principal amount of the debt securities, which shall be due and
payable upon any maturity other than the stated maturity or
which shall be deemed to be outstanding as of any date prior to
the stated maturity (or, in any case, the manner in which the
amount deemed to be the principal amount shall be determined).
|
Unless otherwise specified in the applicable prospectus
supplement, the debt securities will not be listed on any
securities exchange.
Unless otherwise specified in the applicable prospectus
supplement, debt securities will be issued in fully-registered
form without coupons.
Holders of the debt securities may present their securities for
exchange and may present registered debt securities for transfer
in the manner described in the applicable prospectus supplement.
Except as limited by the indenture, we will provide these
services without charge, other than any tax or other
governmental charge payable in connection with the exchange or
transfer.
Debt securities may bear interest at a fixed rate or a variable
rate as specified in the prospectus supplement. In addition, if
specified in the prospectus supplement, we may sell debt
securities bearing no interest or interest at a rate that at the
time of issuance is below the prevailing market rate, or at a
discount below their stated principal amount. We will describe
in the applicable prospectus supplement any special federal
income tax considerations applicable to these discounted debt
securities.
We may issue debt securities with the principal amount payable
on any principal payment date, or the amount of interest payable
on any interest payment date, to be determined by referring to
one or more currency exchange rates, commodity prices, equity
indices or other factors. Holders of these debt securities may
receive a principal amount on any principal payment date, or
interest payments on any interest payment date, that are greater
or less than the amount of principal or interest otherwise
payable on those dates, depending upon the value on those dates
of applicable currency, commodity, equity index or other
factors. The applicable prospectus supplement will contain
information as to how we will determine the amount of principal
or interest payable on any date, as well as the currencies,
commodities, equity indices or other factors to which the amount
payable on that date relates and various additional tax
considerations.
We, or any selling securityholders, may distribute the offered
securities from time to time in one or more transactions at a
fixed price or prices, which may be changed, or at prices
determined as the prospectus supplement specifies. We, or any
selling securityholders, may sell the offered securities to one
or more underwriters for public offering and sale by them or may
sell the offered securities to investors directly or through
agents. We, or any selling securityholders, will name any
underwriter or agent involved in the offer and sale of the
offered securities in a prospectus supplement.
Underwriters may offer and sell the securities at a fixed price
or prices, which may be changed. Underwriters may also offer and
sell the securities at market prices, at prices related to
market prices or at negotiated prices. We, or any
10
selling securityholders, also may authorize underwriters acting
as our respective agents to offer and sell the securities upon
the terms and conditions set forth in any prospectus supplement.
In connection with the sale of the securities, we, or any
selling securityholders, may be deemed to have paid compensation
to the underwriters in the form of underwriting discounts or
commissions. Underwriters may also receive commissions from
purchasers of the securities for whom they may act as agent.
Underwriters may sell the securities to or through dealers, and
such dealers may receive compensation in the form of discounts,
concessions or commissions from the underwriters
and/or
commissions (which may be changed from time to time) from the
purchasers for whom they may act as agent.
The accompanying prospectus supplement will set forth the terms
of the offering and the method of distribution and will identify
any firms acting as underwriters, dealers or agents in
connection with the offering, including:
|
|
|
|
|
the name or names of any underwriters;
|
|
|
|
the purchase price of the securities and the proceeds to us from
the sale;
|
|
|
|
any underwriting discounts and other items constituting
underwriters compensation;
|
|
|
|
any public offering price;
|
|
|
|
any discounts or concessions allowed or reallowed or paid to
dealers; and
|
|
|
|
any securities exchange on which the securities offered in the
prospectus supplement may be listed.
|
Under the Securities Act, underwriters, dealers and agents
participating in the distribution of the securities may be
deemed to be underwriters, and any discounts and commissions
they receive and any profit they realize on resale of the
securities may be deemed to be underwriting discounts and
commissions. We or any selling securityholders, as applicable,
may enter into agreements with underwriters, dealers and agents
providing them indemnification against and contribution toward
certain civil liabilities, including liabilities under the
Securities Act, and reimbursement for certain expenses.
We or any selling securityholders, as applicable, will indicate
the extent to which we anticipate that a secondary market for
the securities will be available in a prospectus supplement. Our
common stock is listed on the Nasdaq Global Market. Except as
indicated in the applicable prospectus supplement, securities
other than common stock are not expected to be listed on any
securities exchange.
This prospectus may be amended or supplemented from time to
time, if required, to describe a specific plan of distribution.
Information about selling securityholders, where applicable,
will be set forth in a prospectus supplement, in a
post-effective amendment or in filings we make with the
Commission under the Exchange Act that are incorporated by
reference into this prospectus.
Unless otherwise indicated in the applicable prospectus
supplement, the validity of any securities issued under this
prospectus will be passed upon by Perkins Coie LLP,
Portland, Oregon. Any underwriters will be represented by their
own legal counsel, which will be named in the applicable
prospectus supplement.
The consolidated financial statements of Penford Corporation
appearing in Penford Corporations Annual Report
(Form 10-K)
for the year ended August 31, 2006, and Penford Corporation
managements assessment of the effectiveness of internal
control over financial reporting as of August 31, 2006
included therein, have been audited by Ernst & Young
LLP, independent registered public accounting firm, as set forth
in their reports thereon, included therein, and incorporated
herein by reference. Such consolidated financial statements and
managements assessment are incorporated herein by
reference in reliance upon such reports given on the authority
of such firm as experts in accounting and auditing.
11
2,000,000 Shares
Common
Stock
Prospectus Supplement
Jefferies &
Company
BMO
Capital Markets
December 6, 2007
(MM) (NASDAQ:PENX)
Historical Stock Chart
From Jul 2024 to Aug 2024
(MM) (NASDAQ:PENX)
Historical Stock Chart
From Aug 2023 to Aug 2024