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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-11488

Penford Corporation

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $1.00 par value

      Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for at least the past 90 days.     Yes þ          No o

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      Indicate by checkmark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).     Yes þ          No o

      The aggregate market value of the Registrant’s Common Stock held by non-affiliates of the Registrant as of February 27, 2004 was approximately $98.3 million. Shares of Common Stock held by each executive officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. The net number of shares of the Registrant’s Common Stock (the Registrant’s only outstanding class of stock) outstanding as of November 9, 2004 was 8,823,633.

DOCUMENTS INCORPORATED BY REFERENCE

      The Registrant’s definitive Proxy Statement relating to the 2005 Annual Meeting of Shareholders is incorporated by reference into Part III of this Form 10-K.

PENFORD CORPORATION

FISCAL YEAR 2004 FORM 10-K ANNUAL REPORT

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PART I

Item 1:     Business

Description of Business

      Penford Corporation (“Penford” or the “Company”) is a developer, manufacturer and marketer of specialty natural-based ingredient systems for industrial and food applications. The Company uses its carbohydrate chemistry expertise to develop ingredients with starch as a base for value-added applications in several markets including papermaking and food products. The Company 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. Financial information about Penford’s segments and geographic areas is included in Note 17 to the Consolidated Financial Statements.

      Penford’s 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. 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, Penford has specialty processing capabilities for a variety of modified starches.

      Specialty products for industrial applications are designed to improve the strength and quality of customers’ products and efficiencies 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. Penford’s products are a cost-effective alternative to synthetic ingredients.

      Specialty starches produced for food applications are used in coatings to provide crispness, improved taste and texture, and increased product life for products such as French fries sold in quick-service restaurants. Food-grade starch products are also used as moisture binders to reduce fat levels, modify texture and improve color and consistency in a variety of foods such as canned products, sauces, whole and processed meats, dry powdered mixes and other food and bakery products.

      Penford is a Washington Corporation originally incorporated in September 1983. The Company commenced operations as a publicly-traded company on March 1, 1984.

Acquisition

      On September 29, 2000, Penford acquired Penford Australia for $54.2 million in cash, plus transaction costs of approximately $1.7 million. This acquisition expanded Penford’s product offerings to include corn-based food grade products. Penford Australia also expanded the Company’s global market presence in Australia, New Zealand and Asia.

Transactions with National Starch

      In November 2002, Penford sold certain assets of its resistant starch business to National Starch Corporation (“National Starch”), a wholly-owned subsidiary of Imperial Chemical Industries PLC of the U.K., for $2.5 million.

      Penford also licensed to National Starch the exclusive rights to its resistant starch intellectual property portfolio for applications in human nutrition. Penford retained the rights to practice its intellectual property for all non-human nutrition applications. Under the terms of the agreements, Penford received an initial licensing

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      Penford also entered into a tolling arrangement under which it will manufacture resistant starch products for National Starch, if requested by National Starch. See Note 19 to the Consolidated Financial Statements.

Raw Materials

      Corn: Penford’s North American corn wet milling plant is located in Cedar Rapids, Iowa, the middle of the U.S. corn belt. Accordingly, the plant has truck-delivered corn available throughout the year from a number of suppliers at prices related to the major U.S. grain markets.

      Penford Australia’s 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 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 forward for future delivery. Some corn is also purchased from Australia and China to supplement the corn sourced in New Zealand.

      Potato Starch: The 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. The Company enters into contracts typically having durations of one to five years with potato processors in North America, primarily in Northwestern and Midwestern United States and Eastern Canada, to acquire potato-based raw materials.

      Wheat Products: Penford Australia’s Tamworth facility uses wheat flour as the primary raw material for the production of its wheat products such as wheat starch, wheat gluten and glucose syrup. Tanker trucks from a local flour mill supply wheat flour under a four-year supply agreement which expires in December 2007.

      Chemicals: The primary chemicals used in the manufacturing processes are readily available commodity chemicals, subject to price fluctuations due to market conditions.

      Natural Gas: The primary energy source for most of Penford’s plants is natural gas. Penford contracts its natural gas supply with regional suppliers, generally under short-term supply agreements, and at times uses futures contracts to hedge the price of natural gas in North America.

      Corn, potato starch, wheat flour, chemicals and natural gas are not presently subject to availability constraints, although drought conditions in Australia have impacted the prices of corn and wheat in that area and strong demand has substantially increased natural gas prices. Penford’s current potato starch requirements constitute a material portion of the available North American supply. Penford estimates that it purchases approximately 45-50% of the recovered starch in North America. It is possible that, in the long term, continued growth in demand for potato starch-based ingredients and new product development will result in capacity constraints.

      Over half of the manufacturing costs are the costs of corn, potato starch, wheat flour, chemicals and natural gas. The remaining portion consists of other utility costs, labor costs and depreciation and maintenance costs related to manufacturing plant and equipment. The prices of raw materials may fluctuate, and increases in prices may affect Penford’s business adversely. To mitigate this risk, Penford hedges a portion of corn and gas purchases with futures and options contracts in the U.S. and enters into short term supply agreements for other production requirements in all locations.

Research and Development

      Penford’s research and development efforts cover a range of projects including technical service work focused on specific customer support projects requiring coordination with customers’ research efforts to develop innovative solutions to specific customer requirements. These projects are supplemented with longer-

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      At the end of fiscal 2004, Penford had 36 scientists, including 5 PhD’s in carbohydrate and polymer chemistry, who comprise a body of expert knowledge of material characterization and molecular structure of various carbohydrates. This expertise is integral to commercializing new market applications in all facets of Penford’s business.

Patents, Trademarks and Tradename

      Penford owns a number of patents, trademarks and tradenames to protect product development and commercialization findings that may provide a competitive advantage in the marketplace. However, most of Penford’s products are currently made with technology that is broadly available to companies that have the same level of scientific expertise and production capabilities as Penford.

      Penford has approximately 208 current and pending patents, most of which are related to base technologies in French fry coatings, coatings for the paper industry and high amylose resistant starch for food ingredients. Penford’s patents expire at various times between 2005 and 2020. The annual cost to renew all of the Company’s patents is approximately $0.2 million. Other companies may develop similar or functionally equivalent products or may successfully challenge the validity of these patents. Also, Penford’s processes or products may infringe upon the patents of third parties.

      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

      Penford’s revenues and operating results vary from quarter to quarter. The Company experiences seasonality with the Penford Australia operations. The Company has lower sales volumes and gross margins in Australia and New Zealand’s summer months, which corresponds to Penford’s second fiscal quarter. This seasonal decline is caused by the closure of some customers’ plants for public holidays and maintenance during this period. Decreased consumption of some foods, such as packaged bread, which use the Company’s products also contribute to this seasonal trend. Sales volumes of the Food Ingredients — North America products used in French fry coatings are also generally lower during the Penford’s second fiscal quarter due to decreased consumption of French fries during the holiday season.

Working Capital

      Penford generally carries a 1-45 day supply of materials required for production, depending on the lead time for the specific items. Penford manufactures finished goods to customer orders or anticipated demand. The Company is therefore able to carry less than 30 days supply of most products. Terms for trade receivables and trade payables are standard for the industry and region and generally do not exceed 30-day terms except for trade receivables for export sales.

Environmental Matters

      Penford’s operations are governed by various Federal, state, local and foreign environmental laws and regulations. In the United States, such laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the EPA Oil Pollution Control Act, OSHA Hazardous Materials regulations, the Toxic Substances Control Act, the Comprehensive Environmental Response Compensation and Liability Act and the Superfund Amendments and Reauthorization Act. In Australia, Penford is 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, the Company is subject to the Resource Manage-

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      Penford has adopted and implemented a comprehensive corporate-wide environmental management program. The program is managed by the Corporate Director of Environmental, Health and Safety and is designed to structure the conduct of Penford’s business in a safe and fiscally responsible manner that protects and preserves the health and safety of employees, the communities surrounding the Company’s plants, and the environment. The Company continuously monitors environmental legislation and regulations, which may affect any of Penford’s operations.

      There have been no material impacts on the Company’s operations resulting from compliance with environmental regulations. No unusual expenditures for environmental facilities and programs are anticipated in the coming year.

Principal Customers

      Penford sells to a variety of customers for applications in foods products, papermaking, textiles, mining and other industrial uses. The Company has several relatively large customers in each business segment. However, over the last three years Penford had no customers that exceeded 10% of sales.

Competition

      Penford competes directly with approximately five other companies that manufacture specialty starches for the papermaking industry and approximately six other companies that manufacture specialty food ingredients. Penford competes indirectly with a larger number of companies that provide synthetic and natural-based ingredients to industrial and food customers. Although some of these competitors are larger companies, and have greater financial and technical resources, Penford holds a significant market share of its targeted, niche markets. Application expertise, quality, service and price are the major competitive factors for Penford.

Employees

      At August 31, 2004, Penford had 618 total employees. In North America, Penford had 353 employees, of which approximately 42% are members of a trade union. The collective bargaining agreement covering the Cedar Rapids-based manufacturing workforce expired August 1, 2004, at which time approximately 150 members of the Bakery, Confectionary, Tobacco Workers and Grain Millers union, Local 100G, went on strike. On October 17, 2004, the union members voted to accept a five-year contract offer made by the Company. Penford Australia had 265 employees, of which 70% are members of trade unions in Australia and New Zealand. The Australian union contracts for its Lane Cove and Tamworth facilities have expiration dates of November 30, 2005 and September 30, 2006, respectively. The New Zealand union agreement expires in April 2007.

Sales and Distribution

      All sales are generated using a combination of direct sales and distributor agreements. Penford supports its sales efforts with technical and advisory assistance with the customers’ use of the Company’s products. Penford ships its product promptly upon receipt of purchase orders from its customers and, consequently, backlog is not significant.

      Customers for industrial corn-based starch ingredients purchase products through fixed-price contracts or formula-priced contracts for periods covering three months to three years or on a spot basis. In fiscal 2004,

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      Since Penford’s customers are generally other manufacturers and processors, most of the Company’s products are distributed via rail, truck or barge to customer facilities in bulk, except in Australia and New Zealand where most dry product is packaged in 25kg bags.

Foreign Operations and Export Sales

      Penford further expanded into foreign markets with its acquisition of Penford Australia in September 2000. Penford Australia is the sole producer of corn starch products in Australia and New Zealand. Competition is from imported products, except in wheat flour based starches where there is one other producer in Australia. Starches have the ability to be chemically and physically modified to meet the wide range of demands (such as viscosity, resistance to arduous processing conditions and clarity) required by the food industry. Penford Australia has developed novel starch-based products, as evidenced by patents obtained for high amylose maize starches for use as dietary fiber. Penford Australia manufactures products used to enhance the quality of packaged food products, generally through providing the texture and viscosity required by the customer for products such as sauces and gravies. Penford Australia’s starch products are also used in industrial applications including mining, paper, corrugating and building materials. The products used in the mining industry are specifically used in the flotation process for extracting minerals from finely ground hard rock ores. The starches assist in this process by selectively adhering to elements of the ground rock to aid separation in air agitated flotation cells. The Company’s operations in Australia and New Zealand include three manufacturing facilities for processing specialty corn starches and wheat-related products.

      Export sales from Penford’s businesses in the U.S. and Australia/ New Zealand accounted for approximately 19%, 18% and 17% of total sales in fiscal 2004, 2003 and 2002, respectively.

Available Information

      Penford’s Internet address is www.penx.com. There the Company provides free access to Penford’s annual report on 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports, as soon as reasonably practicable after such material is filed electronically with, or furnished to, the Securities and Exchange Commission (“SEC”). The Company’s SEC reports can be accessed through the investor relations section of the Web site. The information found on Penford’s Web site is not part of this or any other report filed with or furnished to the SEC.

Executive Officers of the Registrant

      Mr. Malkoski was named Chief Executive Officer in January 2002. He served as President and Chief Executive Officer of Griffith Laboratories, North America, a specialty foods ingredients business, from 1997 to 2001. Formerly, he served as Vice President/ Managing Director of the Asia Pacific and South Pacific regions for Chiquita Brands International, a global marketer, producer and distributor of fresh and processed foods. Mr. Malkoski began his career at the Procter and Gamble Company, a marketer of consumer brands, spending twelve years progressing through major product category management responsibilities.

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      Mr. Burns joined Penford in August 2003 as Vice President, Operations and Supply Chain. From 2002 to August 2003, Mr. Burns was Operations Manager-Central Area for Kraft Foods, Inc. and from 1996 to 2002 he was the North Area Manager/ Plant Manager for Nabisco, Inc./ Kraft Foods. From 1993-1996, Mr. Burns was the General Manager, Operations for Continental Baking Company, a subsidiary of Ralston Purina which operated bread bakeries. Prior to 1993, Mr. Burns held various management and operations positions with Nalley’s Fine Foods, a manufacturer of specialty foods, and Frito-Lay Company, a manufacturer and marketer of snack foods.

      Mr. Cordier joined Penford in July 2002 as Vice President and Chief Financial Officer. Mr. Cordier was named Corporate Secretary in January 2003. He came to Penford from Sensient Technologies, a manufacturer of specialty products for the food, beverage, pharmaceutical and technology industries. He served as Treasurer from 1995 to 1997 and as Vice President and Treasurer from 1997 to 1999. He completed his term at Sensient as Vice President, Administration from 1999 to 2002. During his tenure at Sensient, he had responsibility for treasury, investor relations and finance functions. In his different positions, he also managed other aspects of operations such as engineering, information technology and marketing. From 1990 to 1995, he was employed in various financial management positions at International Flavors & Fragrances, a manufacturer of flavors and fragrances for the food, beverage and cosmetic industries.

      Mr. Keeley joined Penford in July 2000 as President of the industrial ingredients business. Before he joined Penford, he served as Strategic Business Executive from 1999 to 2000 for Church & Dwight, a producer of sodium bicarbonate. From 1996 to 1999, he served as Director of Marketing and Sales for Gen Corp, a technology-based manufacturing company with businesses concentrating in aerospace and defense, pharmaceutical fine chemicals and automotive. He started his career with Dow Chemical Company, serving in various management roles in sales, marketing and business development.

      Dr. Kunerth has served as Penford’s Chief Science Officer since 2000. From 1997 to 2000, he served in food science research management positions at Monsanto Company, a provider of agricultural products and integrated solutions for farmers. Before Monsanto, he was the Vice President of Technology at Penford’s food ingredients business from 1993 to 1997.

      Mr. Lowndes joined Penford as Managing Director of the Australian/ New Zealand operations when the Company acquired Penford Australia in September 2000. He served as General Manager of that business from 1995 to 2000 under the ownership of Goodman Fielder Ltd.

      Mr. Randall has served as Vice President and General Manager of Penford Food Ingredients since February 2003. 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 leadership positions at Romanoff International, Inc., a manufacturer and marketer of gourmet specialty food products, and at Kraft/ General Foods.

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Item 2:     Properties

      Penford’s facilities as of August 31, 2004 are as follows:

      Penford’s production facilities are strategically located near the sources of raw materials. The Company believes that the facilities are maintained in good condition and that the capacities of the plants are suitable and sufficient to meet current production requirements. The Company invests in expansion, improvement and maintenance of property, plant and equipment as required.

      None

      No matter was submitted to a vote of shareholders during the fourth quarter of fiscal 2004.

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PART II

Market Information and Holders of Common Stock

      Penford’s common stock, $1.00 par value, trades on The Nasdaq Stock Market under the symbol “PENX.” On November 9, 2004, there were 629 shareholders of record. The high and low closing prices of Penford’s common stock during the last two fiscal years are set forth below. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission and may not necessarily represent actual transactions.

Dividends

      During each quarter of fiscal year 2004 and 2003, the Board of Directors declared a $0.06 per share cash dividend. On November 3, 2004, the Board of Directors declared a dividend of $0.06 per common share payable on December 3, 2004 to shareholders of record as of November 12, 2004. On a periodic basis, the Board of Directors reviews the Company’s dividend policy which is impacted by Penford’s earnings, financial condition, and cash and capital requirements. Future dividend payments are at the discretion of the Board of Directors. Penford has included the payment of dividends in its planning for fiscal 2005.

Recent Sales of Unregistered Securities

      In March 2003, the Company sold 650,000 shares of common stock in a private placement at $11.11 per share to the T. Rowe Price Small-Cap Value Fund. Proceeds of the sale of $7.2 million were used to reduce debt by $6.8 million and the majority of the remaining proceeds were used to pay the expenses of the transaction, including placement fees and professional services fees. The shares were registered under the Securities Act of 1933 on Form S-3 (File No. 333-104509) which was effective on July 14, 2003.

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Issuer Purchases of Equity Securities

      The Company made no repurchases of its equity securities during fiscal 2004, 2003 or 2002.

Securities Authorized for Issuance Under Equity Compensation Plans

      The following table provides information regarding Penford’s equity compensation plans at August 31, 2004. The Company has no equity compensation plans that have not been approved by security holders.

Notes:	2001 data includes eleven months of Penford Australia’s results of operations from the September 29, 2000 date of acquisition.

(1)	Includes pretax charges of approximately $1.3 million related to restructuring of business operations and $0.7 million related to non-operating expense for unamortized transaction fees associated with the Company’s prior credit agreement. See Notes 13 and 15 to the Consolidated Financial Statements.
(2)	Includes a gain of $1.9 million related to the sale of Hi-Maize assets. See Note 19 to the Consolidated Financial Statements.

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(3)	Includes pretax charges of approximately $1.4 million related to a strategic restructuring of business operations and $0.5 million related to the write off of Penford’s 2001 investment in an early stage technology company. See Notes 13 and 15 to the Consolidated Financial Statements.
(4)	Includes a loss on early extinguishment of debt of approximately $1.4 million related to the financing of the Penford Australia Ltd. acquisition.

Forward-Looking Statements

      The statements contained in this Annual Report on Form 10-K (“Annual Report”) that are not historical facts, including, but not limited to statements found in the Notes to Consolidated Financial Statements and in Item 1 — Business and Item 7 — 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 Annual 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; changes in assumptions used for determining employee benefit expense and obligations; or other unforeseen developments in the industries in which Penford operates.

Results of Operations

      Penford generates revenues, income and cash flows by developing, manufacturing and marketing specialty natural-based ingredient systems for industrial and food applications. The Company develops and manufactures ingredients with starch as a base which provide value-added applications to its customers. Penford’s starch products are manufactured primarily from corn, potatoes, and wheat and are used 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, gross margins and operating income of the Company’s business segments. Penford manages its business in three segments. The first two, Industrial Ingredients and Food Ingredients are broad categories of end-market users, served by operations in the United States. 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.

      Consolidated fiscal 2004 sales of $279.4 million rose 6% from $262.5 million a year ago, primarily due to rising Australian dollar exchange rates. Gross margin as a percent of sales declined 3% from 16.6% last year to 13.6% in fiscal 2004, reflecting $4.2 million in strike-related costs at the Industrial Ingredients — North

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      Sales in the industrial ingredients business rose 2% in 2004 to $143.6 million as higher prices and a 21% increase in sales of specialty products were partially offset by a volume decrease of 1%.

      Gross margin declined to 10.9% of sales in fiscal 2004 from 15.5% last year, reflecting a 23%, or $2.3 million increase in the cost of natural gas which is used in drying industrial starches, a $1.0 million increase in costs related to employee benefits, primarily pensions and postretirement health care, and $4.2 million in additional strike-related costs discussed below. Penford expects that the unfavorable effects of increasing natural gas costs will continue in fiscal 2005.

      On August 1, 2004, approximately 150 union members at the Company’s Industrial Ingredients manufacturing facility in Cedar Rapids, Iowa, went on strike. The business experienced increased operating costs of $4.2 million in August 2004 attributable to the strike. The increased costs included labor and overtime, product distribution, additional maintenance expenses and production inefficiencies, particularly in the first few weeks of the strike. On October 17, 2004, the union members voted to accept a five-year contract offer made by the Company.

      Income from operations declined $5.7 million from 2003 due to the decrease in gross margin, and a $0.5 million restructuring charge, related to a workforce reduction in the second quarter of fiscal 2004.

      Fiscal 2004 sales increased 6% to $47.5 million compared to sales of $44.7 million in fiscal 2003. A 3% increase in sales volumes and favorable product mix changes contributed to the gain in sales. Sales of potato coating formulations increased 6% over last year. Gross margin as a percent of sales for fiscal 2004 declined by 280 basis points to 25.4% on higher manufacturing expenses, increased natural gas costs, increased pension and health care costs, and the impact of lower utilization rates at the dextrose manufacturing plant in the second quarter of fiscal 2004 as the business reduced inventory balances at that facility.

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      The decrease in operating income is due to the decline in gross margin of $0.5 million discussed above, an increase in operating expense of $0.2 million and an increase of $0.1 million in research and development costs due to additional personnel hired during fiscal 2004.

      Reported sales rose 15% in 2004 to $89.1 million, primarily due to the further strengthening of the Australian and New Zealand dollars, which appreciated 20% during the year. Sales volumes declined by approximately 1% and sales revenue in local currency declined by 4% in fiscal 2004 as the Australian and New Zealand operations encountered competition from lower priced import goods.

      Margins declined in 2004 to 11.6%. Lower Australian grain costs were offset by pricing concessions both in Australia and New Zealand to maintain business in the face of increased competition. Income from operations in fiscal 2004 included $0.8 million in restructuring costs incurred primarily in connection with workforce reductions at the Tamworth, New South Wales, Australia manufacturing facility. See Note 15 to the Consolidated Financial Statements.

      Corporate operating expenses declined to $5.9 million in fiscal 2004 from $6.6 million last year. During the first quarter of fiscal 2003, the Company incurred increased compensation expense of approximately $0.8 million for both current and outgoing officers of the Company. The compensation expense for outgoing officers ceased at the end of the first quarter of fiscal 2003 as these officers left the Company at that time. Offsetting the decrease in compensation expense was an increase of $0.3 million in professional fees.

      In fiscal 2004, the Company recorded $1.3 million in restructuring costs related primarily to workforce reductions at the Industrial Ingredients — North America and Australia/ New Zealand operations. Restructuring costs are shown separately in the Consolidated Statements of Operations. See Note 15 to the Consolidated Financial Statements.

      Sales in the industrial ingredients business rose 12% in 2003, a result of higher sales volume trends from the second half of fiscal 2002 that continued into 2003. Sales volume increases contributed 9% to the increase in revenues while improvements in pricing and product mix added an additional 3%.

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      Gross margin declined to 15.5% of sales in fiscal 2003 from 16.1% in the prior year primarily due to the rising cost of natural gas, which is used in drying industrial starches. Increased natural gas prices reduced gross margin by $2.8 million and by 200 basis points as a percent of sales.

      Income from operations improved over fiscal year 2002 due to an increase in gross margin of $1.5 million offset by a $1.0 million increase in operating expenses. The increase in operating expenses was due to increases in salaries and benefits, including a $0.3 million increase in pension expense.

      Sales increased 3% over fiscal 2002, driven by a 7% increase in volumes offset by a 4% deterioration in the product mix. The gross margin for fiscal 2003 declined by 260 basis points to 28.2%, primarily due to the soft demand for Penford’s higher margin potato coatings which are used in applications in the quick-service restaurant business.

      The decrease in operating income is due to the decline in gross margin of $0.8 million offset by a $0.2 million reduction in total operating expenses. Operating expenses decreased primarily due to headcount reductions in research and development.

      Reported sales rose 25% in 2003, primarily due to a strong Australian dollar which increased revenue by 17%. Higher volumes increased sales by 4% and gains in pricing and improvements in product mix added 4% to sales.

      Margins deteriorated in 2003 primarily because grain prices increased due to a severe drought in the region. Increased grain prices reduced gross margin by $2.8 million and by 350 basis points as a percent of sales. Income from operations was comparable to the prior year as the effects of stronger currency translation were largely offset by the increase in grain prices.

      Corporate operating expenses increased to $6.6 million in fiscal 2003 from $5.7 million in fiscal 2002. During the first quarter of fiscal 2003, the Company incurred increased compensation expense of approximately $0.8 million for both current and outgoing officers of the Company. The compensation expense for outgoing officers ceased at the end of the first quarter of fiscal 2003 as these officers left the Company at that time.

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      In the second quarter of fiscal 2002, the Company announced a strategic restructuring of its business operations, including the relocation of its headquarters from the State of Washington to Colorado. During the second quarter of 2002, the Company recorded restructuring costs totaling $1.4 million primarily related to severance and other exit activity expenses which are included in income from operations. During fiscal 2003, the Company settled its lease obligations and other exit activity expenses for less cost that had been expected, and therefore, adjusted the restructuring reserve by $0.2 million. Restructuring costs are shown separately in the Consolidated Statements of Operations. See Note 15 to the Consolidated Financial Statements.

      Other non-operating income (expense) consists of the following:

      In the first quarter of fiscal 2004, Penford refinanced its existing secured credit and inventory financing credit agreements and wrote off $0.7 million of unamortized deferred transaction costs related to these credit agreements.

      In the first quarter of fiscal 2003, the company sold certain assets of its resistant starch Hi-maize business to National Starch Corporation (“National Starch”). The Company recorded a $1.9 million gain on the sale of these assets. The Company also licensed to National Starch the exclusive rights to its resistant starch intellectual property portfolio 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. In addition, the Company will receive annual royalties for a period of seven years or until a maximum of $11.0 million in royalties has been received by Penford. The royalty payments are subject to a minimum of $7 million over the first five years of the licensing agreement. The Company recognized $2.2 million and $1.2 million in income during fiscal 2004 and 2003, respectively, related to the licensing fee and royalties.

      In 2001, Penford invested in an early-stage technology company in the business of developing data analytics software applications. Penford accounted for its investment on the cost method. In 2002, with the continuing slowdown in the technology business sector, Penford undertook an assessment of the fair value of its investment. Penford considered a number of factors, including the financial health and prospects of the investee, the prospects for receiving a future return on Penford’s investment, the adverse changes in the funding environment for technology companies and the lack of marketability for the investment. The assessment indicated that it was unlikely that Penford would recover any of its then existing carrying amount and that an other than temporary decline in the fair value of its investment had occurred. In 2002, Penford recorded an impairment charge of $0.5 million related to the complete write-off of this investment.

      Interest expense was $4.5 million, $5.5 million and $7.1 million in 2004, 2003 and 2002, respectively. All of the Company’s debt had variable interest rates through June 30, 2004. On June 30, 2004, the Company entered into an interest rate swap in Australia and fixed the interest rate on approximately $9.5 million of

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      The effective tax rate for 2004 was lower than the overall U.S. federal statutory rate of 34% primarily due to the tax benefits of foreign sales. The effective tax rate for 2003 was lower than the overall statutory rate of 34% due to the benefits of foreign sales, research and development tax credits and lower foreign tax rates. As discussed above, during fiscal 2003, Penford recorded a $1.9 million gain on the sale of certain assets of its Hi-maize business. Penford determined that, due to changes in Australian tax legislation, no income taxes would be payable related to this gain and accordingly, no income taxes were provided on this gain. The effective tax rate for fiscal 2002 was lower than the overall statutory rate due to the tax benefits of foreign sales and research and development tax credits, offset by the effect of enacted tax legislation. See Notes 14 and 19 to the Consolidated Financial Statements.

Liquidity and Capital Resources

      At August 31, 2004, Penford had working capital of $40.3 million, and $80.3 million outstanding under its credit facilities. Cash flow from operations was $20.4 million, $26.5 million and $25.4 million in fiscal 2004, 2003 and 2002, respectively. The decline in cash flow in fiscal 2004 was primarily due to a decline in earnings as a result of the strike in the Industrial Ingredients — North America business discussed above.

      Capital expenditures were $15.5 million, $8.8 million and $7.4 million in fiscal 2004, 2003 and 2002, respectively. Penford expects to spend approximately $11.0 million for capital projects in 2005, primarily for maintenance and growth opportunities.

      Penford maintains two defined benefit pension plans in the U.S. The combination of negative actual investment returns and declining discount rates have increased the Company’s 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 2005, Penford estimates that it will be required to make minimum contributions to the pension plans of $3.2 million during fiscal 2005.

      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 credit facility consists of $50 million in term loans and $55 million in revolving lines of credit. 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 the London Interbank Offered Rates (“LIBOR”) and the Bank Bill Rate in Australia, 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. Pursuant to the terms of the credit agreement, Penford’s borrowing availability was $4.8 million at August 31, 2004.

      As a result of additional costs incurred to operate the Company’s Cedar Rapids based facility during the strike, which began on August 1, 2004, the Company believes that, for the first quarter of fiscal 2005, it is reasonably likely that it will be in breach of its funded debt ratio covenant contained in the credit agreement. The strike was settled on October 17, 2004 and the bargaining unit employees returned to work. In addition, the company is currently pursuing a cost reduction program. The Company has contacted its lenders and believes that it will obtain a waiver and/or amendment of this covenant from its lenders. The Company cannot estimate the effect an amendment to the credit facility may have on its financial position or liquidity.

      In fiscal 2004, Penford paid dividends on its common stock of $2.1 million at a quarterly rate of $0.06 per share. On November 3, 2004, the Board of Directors declared a dividend of $0.06 per common share payable on December 3, 2004 to shareholders of record as of November 12, 2004. On a periodic basis, the Board of Directors reviews the Company’s dividend policy which is impacted by the Company’s earnings, financial condition and cash and capital requirements. Future dividend payments are at the discretion of the Board of Directors. Penford has included the continuation of quarterly dividends in its planning for fiscal 2005.

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Critical Accounting Policies

      The Company’s consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States. These accounting principles require management to make estimates, judgments and assumptions to fairly present results of operations and financial position. 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.

      In many cases, the accounting treatment of a particular transaction is significantly dictated by generally accepted accounting principles and does not require judgment or estimates. There are also areas in which management’s judgments in selecting among available alternatives would not produce a materially different result. Management has reviewed the accounting policies and related disclosures with the Audit Committee. The notes to the consolidated financial statements contain a summary of the Company’s accounting policies. 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

      A description of each of these follows:

      Management makes judgments about the Company’s ability to collect outstanding receivables and provide allowances for the portion of receivables that the Company 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 the Company’s future ability to collect outstanding invoices, Penford may experience losses in excess of the reserves established. At August 31, 2004, the allowance for doubtful accounts receivable was $364,000.

      Penford uses derivative instruments, primarily futures contacts, 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 the Company to defer gains and losses on those derivative instruments until the underlying commodity is used in the production process.

      The requirements for the designation of hedges are very complex, and require judgments and analysis to qualify as hedges as defined by Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended (“SFAS No. 133”). These judgments and analyses include an assessment that the derivative instruments used are effective hedges of the underlying risks. If the Company were to fail to meet the requirements of SFAS No. 133, or if these derivative instruments are not designated as hedges, the Company would be required to mark these contracts to market at each reporting date. Penford had deferred losses of $95,000 at August 31, 2004 and $431,000 at August 31, 2003, which are reflected in accumulated other comprehensive income (loss) in both years.

      Penford has defined benefit plans for its employees providing retirement benefits and coverage for retiree health care. Qualified actuaries determine the estimated cost of these plans annually. These actuarial estimates are based on assumptions of the discount rate used to calculate the present value of future payments,

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      Penford is required to assess whether the value of goodwill reported on the balance sheet has been impaired on an annual basis, or more often if conditions exist that indicate that there might be an impairment. These assessments require extensive and subjective judgments to assess the fair value of goodwill. While the Company engages qualified valuation experts to assist in this process, their work is based on the Company’s 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 5 to the Consolidated Financial Statements.

Contractual Obligations

      As more fully described in Notes 6 and 9 to the Consolidated Financial Statements, the Company is a party to various debt and lease agreements at August 31, 2004 that contractually commit the Company to pay certain amounts in the future.

      The following table summarizes such contractual commitments:

Defined Benefit Pension and Postretirement Benefit Plans

      Penford maintains defined benefit pension plans and defined benefit postretirement health care plans in the U.S.

      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 11 to the Consolidated Financial Statements for the assumptions used by Penford.

      The discount rate used by the Company 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 2002 (7.75%), 2003 (7.5%) and 2004 (6.4%) reflect the decline in bond yields over the past several years. Lowering the discount rate by 0.25% would increase pension expense by approximately $0.1 million and other postretirement benefit expense by $0.02 million. Penford has reduced the discount rate for calculating its benefit obligations at August 31, 2004, as well as net periodic expense for fiscal 2005, to 6.25%.

      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, the Company considers long-term historical market rates of return as well as actual returns on the Company’s 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

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      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, 2004, unrecognized losses from all sources are $8.9 million for the pension plans and $2.1 million for the postretirement health care plan. Amortization of unrecognized net loss amounts is expected to increase net pension expense and net postretirement health care expense by approximately $0.5 million and $0.1 million, respectively, in fiscal 2005.

      Penford recorded pension expense of $1.7 million, $1.2 million and $0.2 million in 2004, 2003 and 2002, respectively. Penford expects pension expense to be approximately $1.7 million in fiscal 2005. The Company contributed $1.1 million and $0.3 million to the pension plans in fiscal 2004 and 2003, respectively. No contributions were made in fiscal 2002. Penford estimates that it will be required to make minimum contributions to the pension plans of $3.2 million during fiscal 2005.

      The Company recognized benefit expense for its postretirement health care plans of $1.4 million, $1.0 million and $0.7 million in fiscal 2004, 2003 and 2002, respectively. Penford expects to recognize approximately $1.2 million in postretirement health care benefit expense in fiscal 2005. The Company contributed $0.5 million in each of fiscal 2004 and 2003 to the postretirement health care plans and estimates that it will contribute $0.7 in fiscal 2005.

      Future changes in plan asset returns, assumed discount rates and various assumptions related to the participants in the defined benefit plans will impact future benefit expense and liabilities. The Company cannot predict what these factors will be.

Recent Accounting Pronouncements

      In December 2003, the Financial Accounting Standards Board (“FASB”) issued revised SFAS No. 132 (revised 2003), “Employer’s Disclosure about Pensions and Other Post-Retirement Benefits.” SFAS No. 132(R) requires additional disclosures in annual financial statements about the types of plan assets, investment strategy, measurement dates, plan obligations, cash flows, and components of net periodic benefit cost of defined benefit pension plans and other post-retirement benefit plans. The annual disclosures required are shown in Note 11 to the Consolidated Financial Statements.

      In May 2004, the FASB issued FASB Staff Position No. 106-2 (“FSP 106-2”), “Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003” (the “Act”). The Act introduces a prescription drug benefit under Medicare (Medicare Part D) as well as a federal subsidy to sponsors of post-retirement health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company’s post-retirement health care benefit plan provides no prescription drug benefit to Medicare eligible salaried retirees, and the prescription drug benefit provided to Medicare eligible hourly retirees is insured and the insurance premium is fully paid by the retirees. The benefits of the Act are expected to be realized by the Company’s retirees and the Act will have no effect on the Company’s results of operations, financial position or liquidity.

Risks and Uncertainties

      Approximately 30% of Penford’s manufacturing costs are the costs of agricultural raw materials, corn, wheat flour and maize. Weather conditions, plantings and global supply, among other things, have historically caused volatility in the supply and prices of these agricultural products. For example, drought conditions in

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      Electricity and natural gas comprise approximately 15% of the cost of manufacturing the Company’s products in North America. Natural gas is used extensively in the Industrial Ingredients — North America business to dry the starch products. The prices of these inputs to the manufacturing process fluctuate based on anticipated changes in supply and demand, weather and the prices of alternative fuels. Penford may use short-term purchase contracts or exchange traded futures or option contracts to reduce the price volatility of natural gas. Penford may not be able to pass on increases in energy costs to its customers and margins and profitability would be adversely affected.

      None of the Company’s customers constituted 10% of sales in the last three years. However, in fiscal 2004, sales to the top ten customers and sales to the largest customer represented 47% and 8.6%, respectively, of total consolidated net sales. Customers place orders on an as-needed basis and generally can change their suppliers without penalty. If the Company lost one or more of its major customers, or if one or more of its customers significantly reduced its orders, sales and results of operations would be adversely affected.

      In order to be successful, the Company must retain and motivate executives and other key employees. In particular, hiring and retaining qualified personnel in management, research and development, sales and marketing, manufacturing and finance is critical to Penford’s future. Penford faces intense competition for its personnel needs. The loss of key employees could have a significant impact on the Company’s results of operations and stock price. Penford must also continue to motivate employees and keep them focused on the Company’s strategies and goals in spite of the workforce reductions and the effects of the Cedar Rapids strike.

      At August 31, 2004, approximately $70.8 million of the Company’s outstanding debt is subject to variable interest rates which move in direct proportion to the London InterBank Offered Rate (“LIBOR”) or the Australian Bank Bill Buying Rate (BBSY). Significant changes in these interest rates would materially affect Penford’s profitability.

      Penford is subject to income taxes in the United States, Australia and New Zealand. The 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 Penford’s ability to generate future taxable income in the United States.

      In the ordinary course of business, Penford is subject to risks associated with changing foreign exchange rates. Approximately 31% of the Company’s revenue is denominated in currencies other than the U.S. dollar.

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      Penford is incorporated in the State of Washington and subject to the anti-takeover provisions of the Washington Business Corporation Act (the “Act”), which prohibits the Company from engaging in a “business combination” with an “interested shareholder” for a period of three years after the date of the transaction in which the person became an interested shareholder, unless the business combination is approved in a prescribed manner. The application of the anti-takeover provisions of the Act could have the effect of delaying or preventing a change of control in the ownership of the Company.

Item 7A:     Quantitative and Qualitative Disclosures About Market Risk

Market Risk Sensitive Instruments and Positions

      Penford is exposed to market risks that are inherent in the financial instruments that are used in the normal course of business. Penford may use various hedge instruments to manage or reduce market risk, but the Company does not use derivative financial instrument transactions for speculative purposes. The primary market risks are discussed below.

      The Company’s exposure to market risk for changes in interest rates relates to its variable-rate borrowings. At August 31, 2004, approximately $70.8 million of the Company’s debt carried variable interest rates, which are generally set for one to six months. The market risk associated with a 1% adverse change in interest rates at August 31, 2004, is approximately $0.7 million.

      On June 30, 2004, Penford entered into an interest rate swap with a bank in Australia to fix the interest rate on the Australian denominated term loans, approximately $9.5 million in U.S. dollars, at 5.975%. The swap expires on September 30, 2008.

      The Company has 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 the Company’s foreign operation, Penford Australia. Currently, cash generated by Penford Australia’s operations is used for capital investment in Australia and payment of debt denominated in Australian dollars. At August 31, 2004, approximately 27% of total debt was denominated in Australian dollars.

      The Company has not maintained any derivative instruments to mitigate the U.S.-Australian dollar currency exchange translation exposure. This position is reviewed periodically, and based on the Company’s review, may result in the incorporation of derivative instruments in the Company’s hedging strategy. The currency exchange rate risk between Penford’s Australian and New Zealand operations is not significant. For the year ended August 31, 2004, a 10% change in the foreign currency exchange rates compared with the U.S. dollar would have impacted fiscal 2004 reported net income by approximately $0.3 million.

      From time to time, Penford enters 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, 2004, Penford did not have any foreign exchange forward contracts outstanding. At that date, the Company had trade receivables of U.S. $0.6 million at Penford Australia.

      The availability and price of corn, Penford’s most significant raw material, is subject to fluctuations due to unpredictable factors such as weather, plantings, domestic and foreign governmental farm programs and policies, changes in global demand and the worldwide production of corn. To reduce the price risk caused by

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      Penford’s net corn position in the U.S. consists primarily of inventories, purchase contracts and exchange traded futures and options contracts that hedge Penford’s exposure to commodity price fluctuations. The fair value of the position is based on quoted market prices. The Company has estimated its market risk as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices. As of August 31, 2004 and 2003, the fair value of the Company’s net corn position was approximately $0.7 million and $2.5 million, respectively. The market risk associated with a 10% adverse change in corn prices at August 31, 2004 and 2003, is estimated at $66,000 and $250,000, respectively.

      Over the past three years, prices for natural gas have increased over historic levels. Prices for natural gas fluctuate due to anticipated changes in supply and demand and movement of prices of related or alternative fuels. To reduce the price risk caused by market fluctuations, Penford 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, highly effective in offsetting the price changes in natural gas.

      Penford’s exchange traded futures and options contracts hedge production requirements. The fair value of these contracts is based on quoted market prices. The Company has estimated its market risk as the potential loss in fair value resulting from a hypothetical 10% adverse change in prices. As of August 31, 2004 and 2003, the fair value of the natural gas contracts was a loss of approximately $0.2 million and $0.7 million, respectively. The market risk associated with a 10% adverse change in natural gas prices at August 31, 2004 and 2003 is estimated at $25,000 and $66,000, respectively.

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Consolidated Balance Sheets

The accompanying notes are an integral part of these statements.

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Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income

The accompanying notes are an integral part of these statements.

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Consolidated Statements of Cash Flows