Back to GetFilings.com




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended NOVEMBER 30, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________________ to ______________________

Commission File No. 0-11488

PENFORD CORPORATION
(Exact name of registrant as specified in its charter)

Washington 91-1221360
----------------------------- -----------------------
(State of Incorporation) (I.R.S. Employer
Identification No.)

7094 South Revere Parkway,
Englewood, Colorado 80112-3932
------------------------------------------- -----------------------
(Address of principal executive offices) (Zip Code)


Registrant's telephone number, including area code: (303) 649-1900

Indicate by a check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.

Yes X No
------ ------

Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Rule 12b-2 of the Exchange Act

Yes X No
------ ------

The net number of shares of the Registrant's common stock (the Registrant's only
outstanding class of stock) outstanding as of January 12, 2004 was 8,736,623.








PENFORD CORPORATION AND SUBSIDIARIES

INDEX




Page
------

PART I--FINANCIAL INFORMATION

Item 1. Financial Statements

Condensed Consolidated Balance Sheets - November 30, 2003 and August 31, 2003 3

Condensed Consolidated Statements of Income - Three Months ended
November 30, 2003 and 2002 4

Condensed Consolidated Statements of Cash Flow - Three Months ended
November 30, 2003 and 2002 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11

Item 3. Quantitative and Qualitative Disclosures About Market Risk 13

Item 4. Controls and Procedures 14

PART II--OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 15

Signatures 16





2



PART I - FINANCIAL INFORMATION

ITEM 1: FINANCIAL STATEMENTS

PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS



November 30, August 31,
(In thousands, except share and per share data) 2003 2003
-------------- --------------
(Unaudited)

ASSETS
Current assets:
Cash $ 10,445 $ 5,697
Trade accounts receivable 35,589 35,809
Inventories 27,222 26,839
Prepaid expenses 3,920 4,168
Other 2,741 3,772
-------------- --------------
Total current assets 79,917 76,285

Property, plant and equipment, net 131,271 128,776
Deferred income taxes 9,979 9,853
Restricted cash value of life insurance 12,206 12,136
Goodwill, net 20,738 18,394
Other intangible assets, net 2,665 2,658
Other assets 3,438 2,791
-------------- --------------
Total assets $ 260,214 $ 250,893
============== ==============

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 19,647 $ 21,853
Accrued pension liability 2,732 2,524
Accrued liabilities 8,560 9,895
Current portion of long-term debt 4,044 3,000
-------------- --------------
Total current liabilities 34,983 37,272

Long-term debt 80,942 76,696
Other postretirement benefits 11,889 11,648
Deferred income taxes 19,662 19,914
Other liabilities 17,833 17,478
-------------- --------------
Total liabilities 165,309 163,008

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 10,681,694 and 10,584,715 shares, respectively 10,682 10,585
Additional paid-in capital 35,638 34,628
Retained earnings 74,308 73,985
Treasury stock, at cost, 1,981,016 shares (32,757) (32,757)
Accumulated other comprehensive income 7,034 1,444
-------------- --------------
Total shareholders' equity 94,905 87,885
-------------- --------------
Total liabilities and shareholders' equity $ 260,214 $ 250,893
============== ==============



The accompanying notes are an integral part of these statements.



3



PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED NOVEMBER 30

(Unaudited)





(In thousands except share and per share data) 2003 2002
------------ ------------


Sales $ 66,170 $ 66,041

Cost of sales 56,359 54,156
------------ ------------
Gross margin 9,811 11,885

Operating expenses 5,944 6,368
Research and development expenses 1,502 1,411
------------ ------------

Income from operations 2,365 4,106

Non-operating income (expense), net (25) 1,912
Interest expense 1,107 1,581
------------ ------------

Income before income taxes 1,233 4,437

Income taxes 388 1,139
------------ ------------

Net income $ 845 $ 3,298
============ ============

Weighted average common shares and equivalents outstanding:
Basic 8,636,255 7,716,817
Diluted 8,727,732 7,883,796

Earnings per share:
Basic $ 0.10 $ 0.43
Diluted $ 0.10 $ 0.42

Dividends declared per common share $ 0.06 $ 0.06













The accompanying notes are an integral part of these statements.



4




PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED NOVEMBER 30

(Unaudited)



(In thousands) 2003 2002
------------ ------------

Cash flows from operating activities:
Net income $ 845 $ 3,298
Adjustments to reconcile net income to net cash from operations:
Depreciation and amortization 4,439 4,361
Deferred income taxes (536) (884)
Gain on sale of Hi-maize(R) assets -- (1,916)
Loss on early extinguishment of debt 665 --
Other 93 (379)
Change in assets and liabilities:
Trade accounts receivables 1,864 (5,464)
Prepaid expenses 199 (218)
Inventories 1,468 2,244
Accounts payable and accrued liabilities (5,123) 47
Taxes payable 393 1,171
Other 1,375 (334)
------------ ------------

Net cash provided by operating activities 5,682 1,926
------------ ------------

Cash flow from investing activities:
Investment in property, plant and equipment, net (2,438) (1,543)
Proceeds from sale of Hi-maize(R) assets, net -- 2,054
Proceeds from licensing agreement, net -- 1,653
Other (88) (34)
------------ ------------

Net cash provided by (used in) investing activities (2,526) 2,130
------------ ------------

Cash flow from financing activities:
Proceeds from revolving line of credit 35,975 9,078
Payments on revolving line of credit (60,339) (5,496)
Proceeds from long-term debt 50,039 --
Payments of long-term debt (23,334) (5,525)
Exercise of stock options 1,051 894
Payment of loan fees (1,401) (185)
Increase in cash overdraft -- 201
Payment of dividends (516) (461)
------------ ------------

Net cash provided by (used in) financing activities 1,475 (1,494)
------------ ------------

Effect of exchange rate changes on cash and cash equivalents 117 82
------------ ------------

Net increase in cash and cash equivalents 4,748 2,644
Cash and cash equivalents, beginning of period 5,697 765
------------ ------------
Cash and cash equivalents end of period $ 10,445 $ 3,409
============ ============





The accompanying notes are an integral part of these statements.




5



PENFORD CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1--BUSINESS

Penford Corporation ("Penford" or the "Company") is in the business of
developing, manufacturing and marketing specialty natural-based ingredient
systems for various applications, including papermaking, textiles and food
products. The Company operates manufacturing facilities in the United States,
Australia, and New Zealand. Penford's products provide excellent binding and
film-forming characteristics that make customers' products better through
natural, convenient and cost effective solutions. Sales of the Company's
products are generated using a combination of direct sales and distributor
agreements.

The Company has extensive research and development capabilities, which are
used in understanding the complex chemistry of carbohydrate-based materials and
their application. In addition, the Company has specialty processing
capabilities for a variety of modified starches.

2--BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of Penford and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated. The condensed consolidated
balance sheet at November 30, 2003 and the condensed consolidated statements of
income and cash flows for the interim periods ended November 30, 2003 and 2002
have been prepared by the Company without audit. In the opinion of management,
all adjustments, consisting only of normal recurring adjustments, that are
necessary to present fairly the financial information have been made. Certain
information and footnote disclosures normally included in financial statements,
prepared in accordance with generally accepted accounting principles, have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission ("SEC"). The results of operations for interim periods are
not necessarily indicative of the operating results of a full year or of future
operations. Certain prior period amounts have been reclassified to conform with
the current period presentation. The accompanying condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the year ended August 31, 2003.

The Company accounts 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 its
various interpretations. Accordingly, no compensation expense has been
recognized for the stock-based compensation plans other than for the Directors'
Plan and restricted stock awards.




6



The following table illustrates the effect on net income and earnings per
share if the Company had elected to recognize compensation expense consistent
with the provisions prescribed in Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," as amended. Under
SFAS No. 123, compensation expense is measured at the grant date based on the
value of the award and is recognized over the vesting period.




Three months ended
November 30,
--------------------------------
(In thousands except share and per share data) 2003 2002
-------------- --------------


Net income, as reported $ 845 $ 3,298

Add: Stock-based employee compensation expense
included in reported net income, net of tax
18 32
Less: Stock-based employee compensation expense
determined under the fair value method for
all awards, net of tax (353) (309)
-------------- --------------
Pro forma net income $ 510 $ 3,021

Earnings per share:
Basic - as reported $ 0.10 $ 0.43
============== ==============
Basic - pro forma $ 0.06 $ 0.39
============== ==============
Diluted - as reported $ 0.10 $ 0.42
============== ==============
Diluted - pro forma $ 0.06 $ 0.38
============== ==============



3--INVENTORIES

The components of inventory are as follows:




November 30, August 31,
2003 2003
------------ ------------
(In thousands)

Raw materials and other $ 10,931 $ 11,470
Work in progress 666 569
Finished goods 15,625 14,800
------------ ------------
Total inventories $ 27,222 $ 26,839
============ ============


4--PROPERTY, PLANT AND EQUIPMENT



November 30, August 31,
2003 2003
-------------- --------------
(In thousands)

Land $ 15,646 $ 14,511
Plant and equipment 283,391 278,884
Construction in progress 9,823 7,323
-------------- --------------
308,860 300,718
Accumulated depreciation (177,589) (171,942)
-------------- --------------
Net property, plant and equipment $ 131,271 $ 128,776
============== ==============





7



5--RESTRUCTURING RESERVE

In fiscal 2002, the Company announced a strategic restructuring of its
business operations, including the relocation of its headquarters from
Washington to Colorado. As a result, the Company recorded restructuring costs
totaling $1.4 million related to severance and other exit activity expenses. The
restructuring covered seven employees, all of which have been terminated at
November 30, 2003. In the first quarter of fiscal 2004, $0.1 million in
severance costs were paid. The restructuring reserve at November 30, 2003 of
$0.3 million represents remaining severance costs to be paid in fiscal 2004.

6--DEBT

On October 7, 2003, Penford replaced its existing secured credit and
inventory financing credit facilities with a new $105 million secured credit
facility with a group of U.S. and Australian banks. The revolving lines of
credit expire on October 7, 2006 and the term loans expire on October 7, 2008.
Interest rates under the new credit facility are based on either LIBOR (or the
Australian equivalent) or the prime rate, depending on the selection of
borrowing options. All of Penford's assets secure the credit facility and the
new agreement includes, among other things, financial covenants with limitations
on indebtedness and capital expenditures and maintenance of fixed charge and
leverage ratios. For the quarter ended November 30, 2003, the Company was in
compliance with the covenants and expects to be in compliance for the remainder
of the fiscal year. At November 30, 2003, the Company had $34.4 million
outstanding under its revolving credit facilities and $50.6 million in term
loans.

7--TAXES

The Company's effective tax rate for the three months ended November 30,
2003 varied from the U.S. federal statutory rate due to U. S. tax credits
related to research and development, the favorable tax effect of export sales
from the U.S. and lower statutory rates applied to foreign earnings in Australia
and New Zealand.

8--OTHER COMPREHENSIVE INCOME (LOSS)

The components of total comprehensive income are as follows:




Three Months ended November 30,
-------------------------------
2003 2002
-------------- --------------
(In thousands)

Net income $ 845 $ 3,298
Foreign currency translation adjustments 5,566 752
Change in unrealized gains (losses) on derivative instruments
that qualify as cash flow hedges 24 (351)
-------------- --------------
Total comprehensive income $ 6,435 $ 3,699
============== ==============





8



9--NON-OPERATING INCOME (EXPENSE)

Non-operating income (expense) consists of the following:



Three Months ended November 30,
--------------------------------
2003 2002
-------------- --------------
(In thousands)

Loss on early extinguishment of debt $ (665) $ --
Gain on sale of Hi-maize(R) business -- 1,916
Gain on sale of investment 150 --
Royalty and licensing income 367 --
Other 123 (4)
-------------- --------------
Total $ (25) $ 1,912
============== ==============


In October 2003, Penford refinanced its existing secured credit and
inventory financing credit agreements and wrote off the unamortized deferred
transaction costs related to these credit agreements. In the first quarter of
fiscal 2003, Penford sold certain assets of its resistant starch Hi-maize(R)
business and recorded a gain on the sale. The Company also licensed the rights
to its resistant starch intellectual property portfolio for applications in
human nutrition. The Company will receive annual royalties for a period of seven
years or until a maximum of $11.0 million has been received. The initial
licensing fee of $2.25 million is being amortized over the life of the royalty
agreement.

10--SEGMENT REPORTING

Financial information for the Company's three segments is presented below.
The first two segments, Industrial Ingredients--North America and Food
Ingredients--North America, are broad categories of end-market users, primarily
served by the Company's U.S. operation. The third segment is the Company's
geographically separate operations in Australia and New Zealand, which are
engaged primarily in the food ingredients business. A fourth item for "corporate
and other" activity is presented to provide reconciliation to amounts reported
in the condensed 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 elimination and consolidation entries.
Intercompany sales between Australia/New Zealand operations and Food
Ingredients--North America of $193,000 and $61,000 for the three months ended
November 30, 2003 and 2002, respectively, are eliminated in corporate and other
since the chief operating decision maker views segment results prior to
intercompany eliminations.



9






Three Months ended November 30,
--------------------------------
2003 2002
-------------- --------------
(In thousands)

Sales:
Industrial Ingredients--North America $ 32,526 $ 35,688
Food Ingredients--North America 11,893 11,511
Australia/New Zealand operations 21,944 18,903
Corporate and other (193) (61)
-------------- --------------
$ 66,170 $ 66,041
============== ==============

Income (loss) from operations:
Industrial Ingredients--North America $ 1,548 $ 2,804
Food Ingredients--North America 1,900 1,700
Australia/New Zealand operations 271 1,447
Corporate and other (1,354) (1,845)
-------------- --------------
$ 2,365 $ 4,106
============== ==============






November 30, August 31,
2003 2003
-------------- --------------
(In thousands)

Total assets:
Industrial Ingredients-North America $ 102,204 $ 106,732
Food Ingredients--North America 34,234 35,205
Australia/New Zealand operations 96,356 85,269
Corporate and other 27,420 23,687
-------------- --------------
$ 260,214 $ 250,893
============== ==============


11--EARNINGS PER SHARE

Basic earnings per share reflects only the weighted average common shares
outstanding during the period. Diluted earnings per share reflects weighted
average common shares outstanding and the effect of any dilutive common stock
equivalent shares. The following table presents the computation of diluted
weighted average shares outstanding for the three months ended November 30, 2003
and 2002.



Three months ended November 30,
-------------------------------
2003 2002
-------------- --------------


Weighted average common shares outstanding 8,636,255 7,716,817
Dilutive stock options 91,477 166,979
-------------- --------------
Weighted average common shares,
outstanding, assuming dilution 8,727,732 7,883,796
============== ==============









10




ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

The statements contained in this Quarterly Report on Form 10-Q ("Quarterly
Report") that are not historical facts, including, but not limited to statements
found in the Notes to Condensed Consolidated Financial Statements and in Item 2
- - Management's Discussion and Analysis of Financial Condition and Results of
Operations, are forward-looking statements that represent management's beliefs
and assumptions based on currently available information. Forward-looking
statements can be identified by the use of words such as "believes," "may,"
"will," "looks," "should," "could," "anticipates," "expects," or comparable
terminology or by discussions of strategies or trends.

Although the Company believes that the expectations reflected in such
forward-looking statements are reasonable, it cannot give any assurances that
these expectations will prove to be correct. Such statements by their nature
involve substantial risks and uncertainties that could significantly affect
expected results. Actual future results could differ materially from those
described in such forward-looking statements, and the Company disclaims any
intention or obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise. Among the
factors that could cause actual results to differ materially are the risks and
uncertainties discussed in this Quarterly Report, including those referenced
above, and those described from time to time in other filings with the
Securities and Exchange Commission which include, but are not limited to,
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; changes in general economic conditions or developments with
respect to specific industries or customers affecting demand for the Company's
products including unfavorable shifts in product mix; unanticipated costs,
expenses or third party claims; the risk that results may be affected by
construction delays, cost overruns, technical difficulties, nonperformance by
contractors or changes in capital improvement project requirements or
specifications; interest rate and energy cost volatility; foreign currency
exchange rate fluctuations; or other unforeseen developments in the industries
in which Penford operates.


RESULTS OF OPERATIONS

Results of operations for the Company's three segments are presented below.
The first two segments, Industrial Ingredients--North America and Food
Ingredients--North America, are broad categories of end-market users, primarily
served by the Company's U.S. operations. The third segment is the Company's
geographically separate operations in Australia and New Zealand, which are
engaged primarily in the food ingredients business. 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 elimination and consolidation entries.

Sales

For the three months ended November 30, 2003, consolidated sales increased
to $66.2 million from $66.0 million for the same period last year.

Sales at the Company's Industrial Ingredients--North America business unit
decreased by $3.2 million, or 9%, in the first quarter of fiscal 2004 compared
to the year-ago quarter. The decrease is primarily due to the decline in sales
volume as a result of soft retail demand for products serving office and
publishing applications. The primary market for Penford's industrial starches is
the printing and writing segment of the paper industry. Penford's customers have
responded to the soft demand by reducing production which has had a direct
negative impact on Penford's sales volumes in the first quarter of fiscal 2004.



11


Sales at Penford's Australia/New Zealand operations rose $3.0 million, or
16% in the first quarter of fiscal 2004 compared to the same quarter of fiscal
2003 due to favorable currency exchange rates, partially offset by lower sales
volumes and price competition for products domestically manufactured in
Australia and New Zealand.

The Food Ingredients--North America sales in the first quarter of fiscal
2004 increased by 3% to $11.9 million compared to the year-ago quarter. The
increase is due primarily to an improvement in sales of potato coating products
for the quick service restaurant business.

Income from operations

Consolidated income from operations decreased by $1.7 million for the
quarter ended November 30, 2003 as compared to the year-ago quarter. The
decrease is primarily related to lower sales volume in the Industrial
Ingredients business, higher costs of natural gas in North America and grain in
Australia discussed below, partially offset by favorable currency exchange
rates.

Income from operations at the Company's Industrial Ingredients--North
America business unit declined by $1.3 million for the first quarter of fiscal
2004 compared to the year-ago quarter. This decrease was due to the sales volume
decline discussed above and higher natural gas costs compared to the same
quarter in the prior year.

Income from operations at Penford's Australia/New Zealand operations
declined by $1.2 million in the first quarter of fiscal 2004 compared to the
same quarter of fiscal 2003. This decrease was due to lower volumes and a
reduction in gross margin from 13.3% last year to 8% in fiscal 2004, reflecting
higher grain costs which reduced the gross margin by 2% and the effect of the
lower sales volumes and price competition. Also, in the first quarter of fiscal
2004, Penford Australia eliminated nine positions and recorded severance costs
of $0.3 million which are included in operating expenses.

Income from operations at the Food Ingredients--North American business unit
increased $0.2 million to $1.9 million for the three months ended November 30,
2003 as compared to the same period in fiscal 2003. This increase was primarily
due to an improvement in sales volume and a reduction of operating expenses. The
gross margin for the first quarter of fiscal 2004 was 29.3%, comparable to the
first quarter last year.

Corporate operating expenses

Corporate operating expenses decreased approximately $0.5 million in the
first quarter of fiscal 2004 compared to the same quarter in the prior year.
This decline is primarily due to a reduction in executive personnel costs of
approximately $0.3 million and lower temporary fees, travel and office expenses
in the first quarter of fiscal 2004.

Interest and taxes

Interest expense decreased 30% in the three months ended November 30, 2003
compared to the same quarter in fiscal 2003 primarily due to lower average debt
outstanding during the period.

The Company's effective tax rate for the three months ended November 30,
2003 varied from the U.S. federal statutory rate due to U. S. tax credits
related to research and development, the favorable tax effect of export sales
from the U.S. and lower statutory rates applied to foreign earnings in Australia
and New Zealand.







12





Non-operating income (expense)

Non-operating income (expense) consists of the following:



Three Months ended November 30,
2003 2002
-------------- --------------
(In thousands)

Loss on early extinguishment of debt $ (665) $ --
Gain on sale of Hi-maize(R) business -- 1,916
Gain on sale of investment 150 --
Royalty and licensing income 367 --
Other 123 (4)
-------------- --------------
Total $ (25) $ 1,912
============== ==============


In October 2003, Penford refinanced its existing secured credit and
inventory financing credit agreements and wrote off the unamortized deferred
transaction costs related to these credit agreements. In the first quarter of
fiscal 2003, Penford sold certain assets of its resistant starch Hi-maize(R)
business and recorded a gain on the sale. The Company also licensed the rights
to its resistant starch intellectual property portfolio for applications in
human nutrition. The Company will receive annual royalties for a period of seven
years or until a maximum of $11.0 million has been received. The initial
licensing fee of $2.25 million is being amortized over the life of the royalty
agreement.

LIQUIDITY AND CAPITAL RESOURCES

At November 30, 2003, Penford had working capital of $44.9 million compared
to $39.0 million at August 31, 2003. Cash flow from operations was $5.7 million
and $1.9 million for the three months ended November 30, 2003 and 2002,
respectively. The increase in operating cash flow is primarily due to the
positive change in working capital of $2.7 million.

Cash flow from investing activities declined approximately $4.7 million
primarily due to the receipts of cash related to the Company's sale of certain
assets of its Hi-maize(R) business and an upfront licensing fee for the use of
certain intellectual property in three months ended November 30, 2002 and an
increase in capital expenditures of $0.9 million in the first quarter of fiscal
2004.

On October 7, 2003, Penford replaced its existing secured credit and
inventory financing credit facilities with a new $105 million secured credit
facility with a group of U.S. and Australian banks. The revolving lines of
credit expire on October 7, 2006 and the term loans expire on October 7, 2008.
Interest rates under the new credit facility are based on either LIBOR (or the
Australian equivalent) or the prime rate, depending on the selection of
borrowing options. All of Penford's assets secure the credit facility and the
new agreement includes, among other things, financial covenants with limitations
on indebtedness and capital expenditures and maintenance of fixed charge and
leverage ratios. For the quarter ended November 30, 2003, the Company was in
compliance with the covenants and expects to be in compliance for the remainder
of the fiscal year. At November 30, 2003, the Company had $34.4 million
outstanding under its revolving credit facilities and $50.6 million in term
loans.

During the first quarter of fiscal 2004, the Company paid dividends of $0.5
million, comparable to the dividend payment in the same quarter last year. Any
future dividends will be paid at the discretion of the Company's board of
directors and will depend upon, among other things, earnings, financial
condition, cash requirements and availability, and contractual requirements.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The Company is exposed to market risks from adverse changes in interest
rates, foreign currency exchange rates and commodity prices. Since August 31,
2003, there have been no significant changes in the Company's exposure to market
risks.



13



ITEM 4: CONTROLS AND PROCEDURES.

Under the supervision and with the participation of management, including
the Chief Executive Officer and Chief Financial Officer, the Company has
evaluated the effectiveness of the design and operation of its disclosure
controls and procedures pursuant to Exchange Act Rule 13a-14(c) as of the end of
the period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no changes in the internal
control over financial reporting during the quarter ended November 30, 2003 that
have materially affected, or are reasonably likely to materially affect, the
internal controls over financial reporting.



14





PART II - OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits


31.1 Certifications of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

31.2 Certifications of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002

32 Certifications of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley act of
2002

(b) Reports on Forms 8-K.

A Form 8-K was filed on October 16, 2003 relating to the Registrant's
financial information for the fourth quarter and fiscal year ending
August 31, 2003, as presented in a press release on October 16, 2003.











15



SIGNATURES




Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



Penford Corporation
----------------------------------------------
(Registrant)




January 14, 2004 /s/ Steven O. Cordier
----------------------------------------------
Steven O. Cordier
Vice President, Chief Financial Officer and
Corporate Secretary






EXHIBIT INDEX



Exhibit No. Description
- ---------------- ----------------------------------------------------------------------------------------------------

31.1 Certifications of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2 Certifications of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of
the Sarbanes-Oxley act of 2002

















16