10-Q

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

FORM 10-Q

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

For the quarterly period ended May 31, 2001

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

777-108th Avenue N.E., Suite 2390, Bellevue, WA	98004-5193
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (425) 462-6000

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of July 6, 2001.

Class	Outstanding
Common stock, par value $1.00		7,499,769

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
	Item 1 Financial Statements
		CONDENSED CONSOLIDATED BALANCE SHEETS
		CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
		CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
		NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
	Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
PART II — OTHER INFORMATION
	Item 1 Legal Proceedings
	Item 2 Changes in Securities
	Item 3 Defaults Upon Senior Securities
	Item 4 Submission of Matters to a Vote of Security Holders
	Item 5 Other Information
	Item 6 Exhibits and Reports on Form 8-K.
SIGNATURES
EXHIBIT 10.17
EXHIBIT 10.18
EXHIBIT 10.19

PENFORD CORPORATION AND SUBSIDIARIES

INDEX

		Page No.
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets
	May 31, 2001 and August 31, 2000		3
Condensed Consolidated Statements of Operations
	Three and Nine Months Ended May 31, 2001 and May 31, 2000		4
Condensed Consolidated Statements of Cash Flow
	Nine Months Ended May 31, 2001 and May 31, 2000		5
Notes to Condensed Consolidated Financial Statements			6-11
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations			12-15
Item 3 - Quantitative and Qualitative Disclosures About Market Risk			16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings			17
Item 2 - Changes in Securities			17
Item 3 - Defaults Upon Senior Securities			17
Item 4 - Submission of Matters to a Vote of Security Holders			17
Item 5 - Other Information			17
Item 6 - Exhibits and Reports on Form 8-K			17-19
SIGNATURES			20

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PART I — FINANCIAL INFORMATION

Item 1           Financial Statements

PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)

			May 31, 2001			August 31, 2000
ASSETS
Current assets:
	Trade accounts receivable		$	28,960		$	17,530
	Inventories:
		Raw materials and other		10,078			3,016
		Work in progress		641			502
		Finished goods		13,000			6,701
				23,719			10,219
	Prepaid expenses and other			6,625			5,580
		Total current assets		59,304			33,329
Net property, plant and equipment				141,957			114,848
Deferred income taxes				11,441			11,466
Restricted cash value of life insurance				11,859			12,330
Other assets				5,635			3,650
Goodwill, net				15,025			—
		Total assets	$	245,221		$	175,623
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Bank overdraft, net		$	844		$	313
	Accounts payable			14,005			10,068
	Accrued liabilities			5,877			8,305
	Current portion of long-term debt			15,492			2,857
		Total current liabilities		36,218			21,543
Long-term debt				102,783			47,824
Other postretirement benefits				11,047			10,805
Deferred income taxes				22,377			21,048
Other liabilities				7,891			6,539
Shareholders’ equity:
	Common stock			9,480			9,392
	Additional paid-in capital			24,018			23,129
	Retained earnings			65,562			68,100
	Treasury stock			(32,757	)		(32,757	)
	Accumulated other comprehensive income (loss)			(1,398	)		—
		Total shareholders’ equity		64,905			67,864
		Total liabilities and shareholders’ equity	$	245,221		$	175,623

See accompanying notes to condensed consolidated financial statements.

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PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share data)

			Three Months Ended May 31						Nine Months Ended May 31
			2001			2000			2001			2000
Sales			$	53,485		$	39,744		$	151,046		$	118,629
Cost of sales				43,961			28,633			121,551			85,248
	Gross margin			9,524			11,111			29,495			33,381
Operating expenses				6,292			4,243			17,116			13,313
Research and development				1,539			1,365			4,883			4,031
	Income from operations			1,693			5,503			7,496			16,037
Interest expense				(2,522	)		(1,051	)		(7,852	)		(3,532	)
	Income (loss) before taxes and extraordinary item			(829	)		4,452			(356	)		12,505
Income tax expense (benefit)				(221	)		1,558			(51	)		4,377
	Income (loss) before extraordinary item			(608	)		2,894			(305	)		8,128
Extraordinary loss on early extinguishment of debt, net of applicable income taxes of $478				—			—			888			—
Net income (loss)			$	(608	)	$	2,894		$	(1,193	)	$	8,128
Weighted average common shares and equivalents outstanding, assuming dilution				7,487,429			7,795,053			7,460,030			7,758,400
Earnings per common share:
	Net income (loss)
		Basic	$	(0.08	)	$	0.39		$	(0.16	)	$	1.10
		Diluted	$	(0.08	)	$	0.37		$	(0.16	)	$	1.05
Dividends declared per common share			$	0.06		$	0.06		$	0.18		$	0.16

See accompanying notes to condensed consolidated financial statements.

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PENFORD CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(Dollars in thousands)

				Nine Months Ended May 31
				2001			2000
Operating Activities:
	Net income (loss)			$	(1,193	)	$	8,128
	Adjustments to reconcile net income (loss) to net cash from operations:
		Loss on early extinguishment of debt			888			—
		Depreciation and amortization			13,481			10,168
		Deferred income taxes			213			(444	)
		Change in operating assets and liabilities excluding impact of Penford Australia Limited acquisition:
			Trade receivables		(2,300	)		660
			Inventories		(1,307	)		(1,528	)
			Accounts payable, prepaids and other		(4,404	)		2,113
	Net cash from operating activities				5,378			19,097
Investing Activities:
	Additions to property, plant and equipment, net				(10,296	)		(13,938	)
	Acquisition of Penford Australia Limited				(55,886	)		—
	Other				471			575
	Net cash used by investing activities				(65,711	)		(13,363	)
Financing Activities:
	Proceeds from revolving line of credit				59,726			44,177
	Payments on revolving line of credit				(53,009	)		(43,692	)
	Proceeds from long-term debt				106,752			—
	Payments on long-term debt				(52,110	)		(3,277	)
	Payment of fees for early extinguishment of debt				(1,366	)		—
	Exercise of stock options				791			466
	Purchase of treasury stock				—			(1,858	)
	Payment of dividends				(1,339	)		(1,118	)
	Net cash provided (used) by financing activities				59,445			(5,302	)
	Effect of exchange rate changes on cash and cash equivalents				357			—
	Net increase (decrease) in cash and equivalents				(531	)		432
	Cash and cash equivalents (bank overdraft) at beginning of period				(313	)		15
	Cash and cash equivalents (bank overdraft) at end of period			$	(844	)	$	447

See accompanying notes to condensed consolidated financial statements.

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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, all of which have similar production methods.
2.	Basis of Presentation
	The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation for the interim periods presented have been included. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Operating results for the three and nine month periods ended May 31, 2001 are not necessarily indicative of the results that may be expected for the year ending August 31, 2001. For further information, refer to the consolidated financial statements and footnotes thereto included in Penford Corporation’s annual report on Form 10-K for the fiscal year ended August 31, 2000.

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3.	Recent Accounting Developments
	Effective September 1, 2000, the Company adopted Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities.” SFAS No. 133 establishes standards for recognition and measurement of derivatives and hedging activities. In the first quarter of fiscal 2001, the Company recorded an immaterial cumulative effect of change in accounting principle to other comprehensive income for derivatives which hedge the variable cash flows of certain forecasted transactions.
	On June 29, 2001, the FASB approved the final standards resulting from its business combinations project. The FASB will issue SFAS No. 141, “Business Combinations,” and No. 142, “Goodwill and Other Intangible Assets,” in July 2001. SFAS No. 141 is effective for any business combination accounted for by the purchase method that is completed after June 30, 2001. SFAS No. 142, which includes the requirements to test goodwill and intangible assets with indefinite lives for impairment rather than amortize them, will be effective for fiscal years beginning after December 15, 2001 with early adoption permitted for companies with fiscal years beginning after March 15, 2001, provided they have not yet issued their first quarter financial statements. The Company is in the process of assessing the impact of adoption of these standards.
4.	Acquisition of Penford Australia Limited
	On September 29, 2000, Penford Corporation completed its acquisition of Starch Australasia Limited from Goodman Fielder Limited for $54.2 million (USD) in cash, plus costs incurred directly related to the acquisition of approximately $1.7 million (USD), including accounting, financial consulting, taxation, legal and other due diligence efforts. Starch Australasia Limited, renamed Penford Australia Limited (“Penford Australia”), is Australia’s sole producer of corn starch products and a world leader in the research, development and commercialization of novel starch-based products. Penford Australia manufactures products used to enhance the functionality of packaged food products, as well as products used in the mining and paper industries. Its operations include three manufacturing facilities, two in Australia and one in New Zealand, for processing specialty corn starches and wheat related products.
	The acquisition was recorded using the purchase method of accounting. Accordingly, a portion of the purchase price was allocated to net tangible and intangible assets acquired based on their estimated fair values. The balance of the purchase price was recorded as goodwill, which is being amortized over a twenty-year period. Eight months of Penford Australia’s results of operations, from the September 29, 2000 date of acquisition, are included in the consolidated financial statements for the nine months ended May 31, 2001.

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The following unaudited pro forma financial information presents the combined results of operations of the Company and Penford Australia, as if the acquisition had occurred on September 1, 2000 and 1999, respectively. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Penford Australia constituted a single entity during such periods (dollars in thousands except per share data).

		Nine Months Ended
		May 31
		2001			2000
Sales		$	157,678		$	164,928
Income (loss) before extraordinary item			(228	)		9,353
Net income (loss)			(1,116	)		9,353
Earnings (loss) per common share:
	Income (loss) before extraordinary item	$	(.03	)	$	1.26
	Net income (loss)	$	(.15	)	$	1.26
Earnings (loss) per common share, assuming dilution:
	Income (loss) before extraordinary item	$	(.03	)	$	1.21
	Net income (loss)	$	(.15	)	$	1.21

5.	Credit Facilities
	On September 29, 2000, the Company obtained interim financing to finance the acquisition of Penford Australia and to replace its existing credit facilities. As a result, except for a $5 million uncommitted line of credit that remained in place, all outstanding debt as of August 31, 2000 was replaced by a $120 million bridge loan with a group of banks, consisting of the same three banks responsible for the previous $75 million unsecured credit facility. Borrowings under the bridge loan facility totaled $109.5 million.
	Of the facilities replaced by the bridge loan, $18.6 million was principal repaid to holders of private placement debt. Terms of the private placements also required a prepayment fee of $1.4 million, which has been presented as an extraordinary item, net of the related tax benefit of $478,000.
	On November 15, 2000, a new $130 million credit facility was completed with the aforementioned group of banks, plus the addition of an Australian bank, which replaced the bridge loan. The credit facility consists of various agreements with $65 million in term loans and $65 million of revolving lines of credit. The revolving lines of credit expire on October 31, 2003, and the term loans expire on October 31, 2005. Borrowing rates available to the Company under the entire credit facility are based on either the LIBOR or prime rate, depending on the selection of borrowing options. All of Penford’s assets secure the credit facility, and the new agreements include, among other terms, financial covenants with limitations on indebtedness, minimum net worth and

8

	maintenance of certain leverage, interest and fixed charge coverage ratios. The bank group has provided waivers for noncompliance with certain of the financial covenants through May 31, 2001, and has amended the covenant levels to reflect the Company’s current operating environment.
6.	Other Costs
	During the quarter ended May 31, 2001, the Company incurred non-recurring charges of $0.5 million for transaction costs related to terminated joint venture discussions and severance costs of $0.3 million relating to a workforce reduction of administrative employees. The costs are included in operating expenses.
7.	Income Taxes
	The effective tax rate for the third quarter and first nine months of fiscal 2001 varied from the Federal statutory rates due to the effects of state and foreign taxes, and the non-deductible nature of goodwill amortization related to the Penford Australia acquisition.
8.	Comprehensive Income
	The components of comprehensive income (loss) are as follows (dollars in thousands):

	Three Months Ended					Nine Months Ended
	May 31					May 31
	2001			2000		2001			2000
Net income (loss)	$	(608	)	$	2,894	$	(1,193	)	$	8,128
Change in unrealized gains on derivative instruments that qualify as cash flow hedges		409			—		408			—
Foreign currency translation adjustments		(256	)		—		(1,806	)		—
Comprehensive income (loss)	$	(455	)	$	2,894	$	(2,591	)	$	8,128

The foreign currency translation adjustment reflects the translation of the Company’s investment in its Australian operations to U.S. dollars from Australian dollars. The foreign currency exchange rates as of September 29, 2000 (date of acquisition), February 28, 2001, and May 31, 2001 were $0.542, $0.526, and $0.513 U.S. dollar to the Australian dollar, respectively.

9

9.	Segment Reporting
	The Company operates in one business segment: developing, manufacturing, and marketing specialty natural-based ingredient systems for various applications.
	Information about the Company’s operations by geographic area, including its operations in North America and its recently acquired business in Australia and New Zealand, follows (dollars in thousands):

		Three Months Ended					Nine Months Ended
		May 31					May 31
		2001			2000		2001			2000
Sales - North America		$	39,645		$	39,744	$	114,087		$	118,629
	- Australia/New Zealand		13,840			—		36,959			—
		$	53,485		$	39,744	$	151,046		$	118,629
Income (loss) before extraordinary item - North America		$	(685	)	$	2,894	$	(596	)	$	8,128
	- Australia/New Zealand		77			—		291			—
		$	(608	)	$	2,894	$	(305	)	$	8,128

		May 31, 2001		August 31, 2000
Total Assets     - North America		$	176,810	$	175,623
	- Australia/New Zealand		68,411		—
		$	245,221	$	175,623

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10.	Earnings (Loss) Per Common Share
	The following table presents the computation of basic and diluted earnings per share (dollars in thousands except per share data):

			Three Months Ended					Nine Months Ended
			May 31					May 31
			2001			2000		2001			2000
Weighted average common shares outstanding				7,487,429			7,417,229		7,460,030			7,419,943
Net effect of dilutive stock options				—			377,824		—			338,457
Weighted average common shares outstanding, assuming dilution				7,487,429			7,795,053		7,460,030			7,758,400
Earnings (loss) per common share:
	Income (loss) before extraordinary item		$	(0.08	)	$	0.39	$	(0.04	)	$	1.10
	Extraordinary loss		$	—		$	—	$	(0.12	)	$	—
	Net income (loss)		$	(0.08	)	$	0.39	$	(0.16	)	$	1.10
Earnings (loss) per common share, assuming dilution:
	Income (loss) before extraordinary item		$	(0.08	)	$	0.37	$	(0.04	)	$	1.05
		Extraordinary loss	$	—		$	—	$	(0.12	)	$	—
		Net income (loss)	$	(0.08	)	$	0.37	$	(0.16	)	$	1.05

Basic earnings per share reflects only the weighted average common shares outstanding. Diluted earnings per share reflects weighted average common shares outstanding and the effect of any dilutive common stock equivalent shares.

Due to the loss quarter and year ended May 31, 2001, common stock equivalent shares of 109,001 and 173,219, respectively, were anti-dilutive, and therefore, not included in the weighted average common shares outstanding calculation.

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Item 2 MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Results of Operations

Sales increased to $53.5 million from $39.7 million, or 34.6%, in the third quarter of fiscal 2001 compared to the same prior year period. Sales for the first nine months of fiscal 2001 increased to $151.0 from $118.6, or 27.3%, versus last year’s same nine-month period. The increases in sales for the quarter and nine-month period were primarily due to the acquisition of Penford Australia and higher sales volume of the Company’s specialty starch-based ingredient systems for the food industry. The increase of these specialty potato-based food starches over last year was primarily due to continued penetration of existing markets, and the success of several new products in select food industry market segments. However, lower sales volumes for paper customers due to the current weakness of the North American paper industry offset overall sales growth. The Company expects similar sales levels in the near term, with continuing trends of strong sales in specialty food starches and, continuing weakness in the North American paper industry, which we expect will suppress sales to our paper customers.

Gross margin decreased to $9.5 million, or 17.8% of sales, in the third quarter, from $11.1 million, or 28.0% of sales, in the corresponding prior year period. The decline in gross margin was caused primarily by higher natural gas and electricity costs in North America, which significantly impacted manufacturing costs, offset by increased sales of higher margin specialty food ingredients. For these same reasons, gross margin for the nine months ended May 31, 2001 decreased to $29.5 million, or 19.5% of sales, from $33.4 million, or 28.1% of sales, for the same nine-month period in the prior year. As market prices for natural gas have declined recently, some improvement is expected in our gross margins as we enter into new delivery contracts at these lower market prices.

Operating expenses in the third quarter of $6.3 million were approximately $2.0 million higher compared to the same quarter in the prior year. For the nine months ended May 31, 2001, operating expenses rose to $17.1 million from $13.3 million, or 28.6%. The increases are primarily due to the addition of Penford Australia, as well as non-recurring charges of $0.5 million for transaction costs related to joint venture discussions that were terminated during the quarter ended May 31, 2001 and severance costs of $0.3 million for a workforce reduction of administrative employees. The Company has announced further workforce reductions in administrative staffing in the fourth quarter, which will result in a charge of similar magnitude.

Research and development expenses increased in the third quarter and first nine months of fiscal 2001 to $1.5 million and $4.9 million, respectively, representing increases of 12.7% and 21.1% from the corresponding periods in the prior year. The increases in research and development expenses are primarily due to the inclusion of Penford Australia in the Company’s operating results. The Company expects to maintain its investment in technology improvements to provide solutions to customer needs.

Net interest expense for the third quarter and first nine months of fiscal 2001 was $2.5 million and $7.9 million, respectively, compared to $1.1 million and $3.5 million, respectively, in the corresponding periods in the prior year. The increases are attributed to higher debt balances as a result of the acquisition of Penford Australia.

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The effective tax rate for the third quarter and first nine months of fiscal 2001 varied from the Federal statutory rates due to the effects of state and foreign taxes, and the non-deductible nature of goodwill amortization related to the Penford Australia acquisition.

The net loss for the quarter ended May 31, 2001 was $0.6 million, or $0.08 per share, versus net income of $2.9 million, or $0.37 per share, in the third quarter of last year. In the first nine months of fiscal 2001, Penford lost $0.3 million before extraordinary item, or $0.04 per share, compared to net income of $8.1 million, or $1.05 per share, for the corresponding period a year ago.

During the first quarter of fiscal 2001, the Company prepaid its private placement debt facilities in connection with a comprehensive refinancing to fund the acquisition of Penford Australia. The prepayment of the private placements required prepayment fees resulted in a loss on early extinguishment of debt of $1.4 million, which is presented as an extraordinary item, net of the related tax benefit of $478,000.

Due to operating results that were less than projected, the Company did not meet all of the financial covenants of its credit agreement for which it has obtained waivers. Further, the Company has obtained an amendment to its credit agreement to adjust covenant levels to reflect its current operating environment. In consideration for this amendment to its credit agreement, the Company will pay amendment fees and may pay a higher margin over base interest rates depending on the level of its leverage ratio. However, given the current decline in overall market interest rates, the Company does not expect a significant increase in its overall effective interest rate.

Liquidity and Capital Resources

In connection with the acquisition of Penford Australia on September 29, 2000, the Company obtained interim financing to replace its credit facilities, to fund the acquisition and to fund the prepayment fee of $1.4 million incurred upon retirement of the private placement facilities. The interim financing was replaced by a new $130 million credit facility completed on November 15, 2000, with a group of banks. The credit facility consists of various agreements with $65 million in term loans and $65 million of revolving lines of credit. The revolving lines of credit expire on October 31, 2003, and the term loans expire on October 31, 2005. At May 31, 2001, there was $110.3 million outstanding under the facilities. Borrowing rates available to the Company under the entire credit facility are based on either the LIBOR or prime rate, depending on the selection of borrowing options. All of Penford’s assets secure the credit facility, and the new agreements include, among other terms, financial covenants with limitations on indebtedness, minimum net worth and maintenance of certain leverage, interest and fixed charge coverage ratios. The Company has obtained waivers for the interest coverage requirement as of November 30, 2000 and the leverage ratio requirement through May 31, 2001. The bank group has provided amended covenant levels to reflect the Company’s current operating environment. The next date on which compliance with this ratio will be measured is August 31, 2001.

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At May 31, 2001, Penford had working capital of $23.1 million and $46.9 million outstanding under the $65 million revolving lines of credit. The Company also has a $5 million uncommitted line of credit under which there was $3.2 million outstanding. The Company used its debt proceeds and operating cash flow to finance the purchase of Penford Australia and other capital expenditures during the first nine months of fiscal 2001.

Cash flow from operations for the nine months ended May 31, 2001 was $5.4 million compared to $19.1 million in the corresponding period of the prior year. The decrease in operating cash flow is mainly due to the lower earnings experienced during the current fiscal year.

Additions to property, plant and equipment during the nine months ended May 31, 2001 were $10.3 million. Third quarter additions of $2.6 million were primarily for various improvements at the Company’s industrial facility in Cedar Rapids, Iowa and equipment additions and improvements at all of the Company’s food-grade manufacturing facilities. We expect, in the near term, to continue our capital investment at a level similar to that of our third quarter. We do not plan to make commitments for significant new capital projects until we improve the cash generated from operations. In the meantime, we continue to make efficiency and safety improvements as required to maintain our operations in good working order.

The Company began paying a quarterly cash dividend of $0.05 per share in 1992 and has continued to pay quarterly dividends ever since. On April 3, 2000, the Board of Directors approved an increase in the quarterly cash dividend to $0.06 per share. The Company has paid $1.3 million in dividend payments to its shareholders this fiscal year.

The Board of Directors has authorized a stock repurchase program for the purchase of up to 500,000 shares of the outstanding common stock of the Company. Repurchases under the program to date have totaled 281,300 shares for $4.3 million in prior years. The Company has not purchased any of its common stock during fiscal 2001, and does not plan to do so in the near future.

Forward-looking Statements

This report contains forward-looking statements concerning the performance and results of the Company, including North American paper product sales, anticipated increases in specialty food starch sales, declines in natural gas prices, and the level of anticipated interest rates. There are a variety of factors which could cause actual events or results to differ materially from those projected in the forward-looking statements, including, without limitation, competition; the possibility of interruption of business activities due to equipment problems, accidents, strikes, weather or other factors; product development risk; changes in corn and other raw material prices; changes in general economic conditions or developments with respect to specific industries or customers affecting demand for 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 the Company operates. Accordingly, there can be no assurance that future activities or results will be as anticipated.

14

Forward-looking statements are based on the estimates and opinions of management on the date the statements are made. The Company assumes no obligation to update any forward-looking statements if circumstances or management’s estimates or opinions should change.

Additional information which could affect the Company’s financial results is included in the Company’s 2000 Annual Report to Shareholders and its Form 10-K for the fiscal year ended August 31, 2000 on file with the Securities and Exchange Commission.

15

Item 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Market Risk Sensitive Instruments and Positions

The market risk associated with the Company’s market risk sensitive instruments is the potential loss from adverse changes in interest rates, foreign currency exchange rates, and commodities prices.

The Company is unaware of any material changes to the market risk disclosures referred to in the Company’s Report on Form 10-K for the year ended August 31, 2000, other than the increase in the amount of borrowings undertaken principally to finance the acquisition of Penford Australia.

16

PART II — OTHER INFORMATION

Item 1	Legal Proceedings
	A complaint was filed in late November 1999 against Penford in the United States District Court for the District of Idaho. An Amended Complaint filed in December 2000 alleges various violations of the Federal Clean Air Act, as well as claims for trespass, nuisance, emotional distress and outrage. The claims are based upon allegations that Penford violated its Clean Air Act permit and breached duties to the individual plaintiffs by allegedly excessive airborne emissions from Penford’s Idaho Falls starch processing plant. The complaint sought civil penalties for the Clean Air Act claims and private damages for trespass and nuisance against the individual plaintiffs.
	By agreement of the parties in June 2000, the Federal Clean Air Act claims were supposed to have been dismissed with prejudice. The Amended Complaint sought to re-assert those claims notwithstanding the parties’ agreement. By an Order issued in May 2001, the Federal Magistrate Judge to whom the case has been assigned for pretrial proceedings issued a Report and Recommendation to dismiss the Clean Air Act claims and award Penford its costs and fees incurred in bringing the motion to dismiss. The plaintiffs have not filed an objection to the Report and Recommendation within the time frame permitted. If adopted, only the state law claims will remain pending against Penford. Penford continues its efforts to resolve those claims by negotiation.
	Penford has received notice from the plaintiff’s counsel in Lytle alleging several other alleged violations of the Clean Air Act for which the plaintiffs intended to sue, although no such suit has yet been filed. Penford denies the factual allegations of the notice letter, and will defend the suit if filed.

Item 2	Changes in Securities
	Not applicable

Item 3	Defaults Upon Senior Securities
	Not applicable

Item 4	Submission of Matters to a Vote of Security Holders
	Not applicable

Item 5	Other Information
	Not applicable

Item 6	Exhibits and Reports on Form 8-K.
(a)	Exhibits:

(2.1) Starch Australasia Share Sale Agreement completed as of September 29, 2000 among Penford Holdings Pty Limited, a wholly owned subsidiary of Registrant, and Goodman Fielder Limited (filed as an exhibit to Registrant’s Form 8-K/A dated September 29, 2000)

17

(3.1)	Restated Articles of Incorporation of Registrant (filed as an exhibit to Registrant’s Form 10-K for fiscal year ended August 31, 1995)
(3.2)	Articles of Amendment to Restated Articles of Incorporation of Registrant (filed as an exhibit to Registrant’s Form 10-K for fiscal year ended August 31, 1997)
(3.3)	Bylaws of Registrant as amended and restated as of October 20, 1997 (filed as an exhibit to Registrant’s Form 10-K for fiscal year ended August 31, 1997)
(4.1)	Amended and Restated Rights Agreement dated as of April 30, 1997 (filed as an exhibit to Registrant’s Amendment to Registration Statement on Form 8-A/A dated May 5, 1997)
(10.1)	Penford Corporation Supplemental Executive Retirement Plan, dated March 19, 1990 (filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended August 31, 1991)
(10.2)	Penford Corporation Supplemental Survivor Benefit Plan, dated January 15, 1991 (filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended August 31, 1991)
(10.3)	Penford Corporation Deferred Compensation Plan, dated January 15, 1991 (filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended August 31, 1991)
(10.4)	Change of Control Agreements between Penford Corporation and Messrs. Cook, Horn, Keeley, and Kunerth (a representative copy of these agreements is filed as an exhibit to Registrant’s Form 10-K for the fiscal year ended August 31, 1995)
(10.5)	Penford Corporation 1993 Non-Employee Director Restricted Stock Plan (filed as an exhibit to Registrant’s Form 10-Q for the quarter ended November 30, 1993)
(10.6)	Penford Corporation 1994 Stock Option Plan as amended and restated as of January 21, 1997 (filed on Form S-8 dated March 17, 1997)
(10.7)	Penford Corporation Stock Option Plan for Non-Employee Directors (filed as an exhibit to the Registrant’s Form 10-Q for the quarter ended May 31, 1996)
(10.8)	Separation Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit to Registrant’s Form 8-K dated August 31, 1998)
(10.9)	Services Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit to Registrant’s Form 8-K dated August 31, 1998)
(10.10)	Employee Benefits Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit to Registrant’s Form 8-K dated August 31, 1998)

18

(10.11)	Tax Allocation Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit to Registrant’s Form 8-K dated August 31, 1998)
(10.12)	Excipient Supply Agreement dated as of July 31, 1998 between Registrant and Penwest Pharmaceuticals Co. (filed as an exhibit to Registrant’s Form 8-K dated August 31, 1998)
(10.13)	Amended and Restated Credit Agreement dated as of November 15, 2000 among Penford Corporation and Penford Products Co. as borrowers, and certain commercial lending institutions as lenders, and the Bank of Nova Scotia, as agent for the lenders (filed as an exhibit to Registrant’s Form 8-K/A dated September 29, 2000)
(10.14)	Debenture Trust Deed dated as of November 15, 2000 among Penford Holdings Pty Limited as issuer and ANZ Capel Court Limited as trustee (filed as an exhibit to Registrant’s Form 8-K/A dated September 29, 2000)
(10.15)	Syndicated Facility Agreement dated as of November 15, 2000 among Penford Australia Limited, a wholly owned subsidiary of Penford Holdings Pty Limited, as borrowers, and Australia and New Zealand Banking Group Limited as lender and agent (filed as an exhibit to Registrant’s Form 8-K/A dated September 29, 2000)
(10.16)	Intercreditor Agreement dated as of November 15, 2000 by and among The Bank of Nova Scotia, KeyBank National Association, U.S. National Association and Australia and New Zealand Banking Group Limited (filed as an exhibit to Registrant’s Form 8-K/A dated September 29, 2000)
(10.17)	First Amendment dated as of April 12, 2001 to Amended and Restated Credit Agreement dated as of November 15, 2000 among Penford Corporation and Penford Products Co. as borrowers, and certain commercial lending institutions as lenders, and the Bank of Nova Scotia, as agent for the lenders
(10.18)	Waiver Agreement dated as of April 12, 2001 to Amended and Restated Credit Agreement dated as of November 15, 2000 among Penford Corporation and Penford Products Co. as borrowers, and certain commercial lending institutions as lenders, and the Bank of Nova Scotia, as agent for the lenders
(10.19)	Second Amendment dated as of May 31, 2001 to Amended and Restated Credit Agreement dated as of November 15, 2000 among Penford Corporation and Penford Products Co. as borrowers, and certain commercial lending institutions as lenders, and the Bank of Nova Scotia, as agent for the lenders

        (b)   Reports on Form 8-K

A Form 8-K dated May 15, 2001 was filed reporting under Item 5, Registrant’s agreement with Cargill to call off a proposed joint venture to combine their industrial starch businesses in North America. Filed as an exhibit was a copy of the press release dated May 4, 2001.

19

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)
July 13, 2001	/s/ Jacqueline L. Davidson
Date	Jacqueline L. Davidson
	Vice President of Finance (Chief Accounting Officer)

20

EX-10.17

   1

                                                                   EXHIBIT 10.17

                     FIRST AMENDMENT TO AMENDED AND RESTATED
                                CREDIT AGREEMENT


        THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is entered
into as of April 12, 2001 by and among PENFORD CORPORATION, a Washington
corporation, PENFORD PRODUCTS CO., a Delaware corporation, and each of the
Lenders.

                                    RECITALS

        The parties hereto are parties to that certain Amended and Restated
Credit Agreement dated as of November 15, 2000 (the "Agreement"). All
capitalized terms used herein and not otherwise defined herein shall have the
meaning attributed to them in the Agreement. The parties desire to amend the
Agreement to provide for a waiver of certain defaults and to adjust certain
financial covenants and the Pricing Schedule.

        NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties contained herein, Borrowers and Lenders hereby agree as follows:

        1. SECTIONS 10.1, 10.2 AND 10.4. Sections 10.1, 10.2 and 10.4 are
amended in their entirety to read as follows:

        10.1 LEVERAGE RATIO

                As of the end of each fiscal quarter, Parent shall maintain a
        Leverage Ratio not greater than: (i) 3.75:1 as of the end of the fiscal
        quarter ending on May 31, 2001; (ii) 3.50:1 as of the end of the fiscal
        quarter ending on August 31, 2001; (iii) 3.25:1 as of the end of the
        fiscal quarter ending on November 30, 2001; (iv) 3.00:1 as of the end of
        the fiscal quarter ending on February 28, 2002; (v) 2.75:1 as of the end
        of the fiscal quarter ending on May 31, 2002; (vi) 2.50:1 as of the end
        of the fiscal quarters ending after May 31, 2002 and before June 1,
        2003; and (vii) 2.00:1 as of the end of each fiscal quarter ending after
        May 31, 2003.

        10.2 INTEREST COVERAGE RATIO

                As of the end of each fiscal quarter, Parent shall maintain an
        Interest Coverage Ratio not less than: (i) 2.00:1 as of the end of the
        fiscal quarters ending on May 31, 2001 and August 31, 2001; (ii) 2.25:1
        as of the end of the fiscal quarter ending on November 30, 2001; (iii)
        2.50:1 as of the end of the fiscal quarters ending on February 28, 2002
        and May 31, 2002; (iv) 2.75:1 as of the end of the fiscal quarter ending
        on August 31, 2002; and (v) 3.00:1 as of the end of each fiscal quarter
        ending after August 31, 2002.



   2

        10.4 TANGIBLE NET WORTH

                Parent will not permit its Tangible Net Worth as of the end of
        any fiscal quarter to be less than the total of (i) $43,950,000, plus
        (ii) 50% of the sum of Parent's consolidated net income for each fiscal
        quarter since the Closing Date (exclusive of any fiscal quarter in which
        Parent's consolidated net income is less than zero), plus (iii) an
        amount equal to the proceeds of any Stock or Stock Equivalent issued by
        Parent or any Subsidiary after the Closing Date.

        2. SCHEDULE III. Schedule III is amended in its entirety to read as
Schedule III attached hereto.

        3. FEE. As consideration for Lenders entering into this First Amendment,
Borrowers shall pay to Administrative Lender, for the ratable benefit of
Lenders, an amendment fee of $257,375.00 upon the execution of this First
Amendment.

        4. EFFECTIVE DATE. This First Amendment shall be effective upon the
execution by the parties and payment by Borrowers of the amendment fee.

        5. RATIFICATION. Except as otherwise provided in this First Amendment,
all of the provisions of the Agreement are hereby ratified and confirmed and
shall remain in full force and effect.

        6. ONE AGREEMENT. The Agreement, as modified by the provisions of this
First Amendment, shall be construed as one agreement.

        7. COUNTERPARTS. This First Amendment may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
agreement. Delivery of an executed signature page of this First Amendment by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof.

        8. STATUTORY NOTICE.

        UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY
LENDER AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH
ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE
BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY
LENDER TO BE ENFORCEABLE.



   3

        IN WITNESS WHEREOF, the parties hereto have caused this First Amendment
to be executed as of the date first above written.


PENFORD CORPORATION                         PENFORD PRODUCTS CO.


By:  /s/ Susan M. Iverson                   By:  /s/ Susan M. Iverson
   ---------------------------------           ---------------------------------
Title:  Corporate Secretary                 Title:  Corporate Secretary
   ---------------------------------           ---------------------------------


THE BANK OF NOVA SCOTIA                     U.S. BANK NATIONAL ASSOCIATION


By:  /s/ Patrik Norris                      By:  /s/ James H. Lawrence
   ---------------------------------           ---------------------------------
Title:  Director                            Title:  Senior Vice President
   ---------------------------------           ---------------------------------


                                            KEYBANK NATIONAL ASSOCIATION


                                            By:  /s/ Cheryl L. Ebner
                                               ---------------------------------
                                            Title:  Senior Vice President
                                               ---------------------------------


                                 CONSENT OF ANZ

        Australian and New Zealand Banking Group Limited hereby consents to the
foregoing First Amendment to Amended and Restated Credit Agreement.

        Dated: April 12, 2001.

                                           AUSTRALIAN AND NEW ZEALAND BANKING
                                           GROUP LIMITED


                                           By:  /s/ Michael Stapleton
                                               ---------------------------------
                                           Title: Analyst, Credit Products Group
                                                  ------------------------------
                                                  1,20 Martin Place, Sydney



   4

                                  SCHEDULE III

                                PRICING SCHEDULE



                         Level I        Level II       Level III        Level IV         Level V
                         -------        --------       ---------        --------         -------
                                                                          
Base Rate Margin           50bps           75bps          100bps          125bps          150bps
LIBOR Margin              175bps          200bps          225bps          250bps          275bps
Commitment Fee             30bps           35bps           40bps           45bps           50bps


        For purposes of this Pricing Schedule, the following terms have the
following meanings:

        "LEVEL I" applies on any day after the Reporting Date if, on such day,
the applicable Leverage Ratio is less than or equal to 2:1.

        "LEVEL II" applies on any day after the Reporting Date if, on such day,
the applicable Leverage Ratio is greater than 2:1 and less than or equal to
2.5:1.

        "LEVEL III" applies until the Reporting Date and on any day thereafter
if, on such day, the applicable Leverage Ratio is greater than 2.5:1 and less
than or equal to 3.0:1.

        "LEVEL IV" applies until the Reporting Date and on any day thereafter
if, on such day, the applicable Leverage Ratio is greater than 3.0:1 and less
than or equal to 3.5:1.

        "LEVEL V" applies until the Reporting Date and on any day thereafter if,
on such day, the applicable Leverage Ratio is greater than 3.5:1.

        "REPORTING DATE" means the first Business Day after the receipt by
Administrative Lender of the certificate required by Section 8.3(iii) for
Parent's fiscal quarter ending May 31, 2001.

        For purposes of this Pricing Schedule, the Leverage Ratio shall be
calculated once every fiscal quarter based on the financial information most
recently reported pursuant to Section 8.3 of the Agreement; provided, however,
that the Leverage Ratio shall not be computed on the financial information most
recently reported pursuant to Section 8.3 until the later of the fifth day of
the month after receipt of such information or five Business Days after the
receipt thereof and if the most recent report required pursuant to Section 8.3
has not been delivered, or if Administrative Lender reasonably objects to the
accuracy of such report within five Business Days after the receipt thereof, the
next higher Level from the Level then in effect shall apply until such time as
the delinquent report is delivered or Administrative Lender's objections are
resolved to Administrative Lender's reasonable satisfaction.

EX-10.18

   1

                                                                   EXHIBIT 10.18

                                WAIVER AGREEMENT


        THIS WAIVER AGREEMENT is entered into as of April 12, 2001 by and among
PENFORD CORPORATION, a Washington corporation, PENFORD PRODUCTS CO., a Delaware
corporation, and each of the Lenders.

                                    RECITALS

        The parties hereto are parties to that certain Amended and Restated
Credit Agreement dated as of November 15, 2000 (the "Agreement"). All
capitalized terms used herein and not otherwise defined herein shall have the
meaning attributed to them in the Agreement.

        NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties contained herein, Borrowers and Lenders hereby agree as follows:

        1. WAIVERS. The Lenders hereby waive the requirements of (a) Section
10.1 of the Agreement for the fiscal quarters ending November 30, 2000 and
February 28, 2001 and (b) Section 10.2 for the fiscal quarter ending February
28, 2001.

        2. EFFECTIVE DATE. This Waiver Agreement shall be effective upon the
execution by the parties.

        3. RATIFICATION. All of the provisions of the Agreement are hereby
ratified and confirmed and shall remain in full force and effect.

        4. COUNTERPARTS. This Waiver Agreement may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
agreement. Delivery of an executed signature page of this Waiver Agreement by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof.


                           [INTENTIONALLY LEFT BLANK]



   2

        IN WITNESS WHEREOF, the parties hereto have caused this Waiver Agreement
to be executed as of the date first above written.


PENFORD CORPORATION                         PENFORD PRODUCTS CO.


By:  /s/ Susan M. Iverson                   By:  /s/ Susan M. Iverson
   ---------------------------------           ---------------------------------
Title: Corporate Secretary                  Title:  Corporate Secretary
      ------------------------------              ------------------------------

THE BANK OF NOVA SCOTIA                     U.S. BANK NATIONAL ASSOCIATION


By:  /s/ Patrik Norris                      By:  /s/ James H. Lawrence
   ---------------------------------           ---------------------------------
Title:  Director                            Title:  Senior Vice President
      ------------------------------              ------------------------------


                                            KEYBANK NATIONAL ASSOCIATION


                                            By:  /s/ Cheryl L. Ebner
                                               ---------------------------------
                                            Title:  Senior Vice President
                                                  ------------------------------


                                 CONSENT OF ANZ

        Australian and New Zealand Banking Group Limited hereby consents to the
foregoing Waiver Agreement.

        Dated:  April 12, 2001.

                                            AUSTRALIAN AND NEW ZEALAND BANKING
                                            GROUP LIMITED


                                            By:  /s/ Ralph Allen
                                               ---------------------------------
                                            Title:  Director
                                                  ------------------------------

EX-10.19

   1

                                                                   EXHIBIT 10.19

                    SECOND AMENDMENT TO AMENDED AND RESTATED
                                CREDIT AGREEMENT


        THIS SECOND AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT is
entered into as of May 31, 2001 by and among PENFORD CORPORATION, a Washington
corporation, PENFORD PRODUCTS CO., a Delaware corporation, and each of the
Lenders.

                                    RECITALS

        The parties hereto are parties to that certain Amended and Restated
Credit Agreement dated as of November 15, 2000 (as previously amended, the
"Agreement"). All capitalized terms used herein and not otherwise defined herein
shall have the meaning attributed to them in the Agreement. The parties desire
to amend the Agreement to provide for a waiver of a covenant default and to
adjust certain financial covenants and the Pricing Schedule.

        NOW, THEREFORE, in consideration of the mutual covenants and promises of
the parties contained herein, Borrowers and Lenders hereby agree as follows:

        1. SECTIONS 10.1 AND 10.2. Sections 10.1 and 10.2 are amended in their
entirety to read as follows:

        10.1 LEVERAGE RATIO

                As of the end of each fiscal quarter, Parent shall maintain a
        Leverage Ratio not greater than: (i) 4.25:1 as of the end of the fiscal
        quarter ending on August 31, 2001 (ii) 4.05 as of the end of the fiscal
        quarter ending November 30, 2001; (iii) 3.75 as of the end of the fiscal
        quarter ending February 28, 2002; (iv) 3.25:1 as of the end of the
        fiscal quarter ending on May 31, 2002; (v) 3.00:1 as of the end of the
        fiscal quarter ending on August 31, 2002; (vi) 2.50:1 as of the end of
        each fiscal quarter ending after August 31, 2002 and before June 1,
        2003; and (vii) 2.00:1 as of the end of each fiscal quarter ending after
        May 31, 2003.

        10.2 INTEREST COVERAGE RATIO

                As of the end of each fiscal quarter, Parent shall maintain an
        Interest Coverage Ratio not less than: (i) 2.00:1 as of the end of the
        fiscal quarters ending on August 31, 2001 and November 30, 2001; (ii)
        2.25:1 as of the end of the fiscal quarter ending on February 28, 2002;
        (iii) 2.50:1 as of the end of the fiscal quarter ending on May 31, 2002;
        (iv) 2.75:1 as of the end of the fiscal quarter ending on August 31,
        2002; and (v) 3.00:1 as of the end of each fiscal quarter ending after
        August 31, 2002.



   2

        2. SCHEDULE III. Effective July 15, 2001, Schedule III is amended in its
entirety to read as Schedule III attached hereto.

        3. WAIVER. The Lenders hereby waive the requirements of Section 10.1 of
the Agreement for the fiscal quarter ending May 31, 2001.

        4. FEE. As consideration for Lenders entering into this Second
Amendment, Borrowers shall pay to Administrative Lender, for the ratable benefit
of Lenders, an amendment fee of $189,577 upon the execution of this Second
Amendment.

        5. EFFECTIVE DATE. This Second Amendment shall be effective upon the
execution by the parties and payment by Borrowers of the amendment fee.

        6. RATIFICATION. Except as otherwise provided in this Second Amendment,
all of the provisions of the Agreement are hereby ratified and confirmed and
shall remain in full force and effect.

        7. ONE AGREEMENT. The Agreement, as modified by the provisions of this
Second Amendment, shall be construed as one agreement.

        8. COUNTERPARTS. This Second Amendment may be executed in any number of
counterparts, each of which when executed and delivered shall be deemed to be an
original, and all of which when taken together shall constitute one and the same
agreement. Delivery of an executed signature page of this Second Amendment by
facsimile transmission shall be effective as delivery of a manually executed
counterpart hereof.

        9. STATUTORY NOTICE.

        UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY
LENDER AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH
ARE NOT FOR PERSONAL, FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE
BORROWER'S RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY
LENDER TO BE ENFORCEABLE.



   3

        IN WITNESS WHEREOF, the parties hereto have caused this Second Amendment
to be executed as of the date first above written.


PENFORD CORPORATION                         PENFORD PRODUCTS CO.


By:  /s/ Jacqueline L. Davidson             By:  /s/ Jacqueline L. Davidson
   ---------------------------------           ---------------------------------
Title:  VP Finance                          Title:  VP Finance
      ------------------------------              ------------------------------


THE BANK OF NOVA SCOTIA                     U.S. BANK NATIONAL ASSOCIATION


By:  /s/ Patrik Norris                      By:  /s/ James R. Farmer
   ---------------------------------           ---------------------------------
Title:  Director                            Title:  Vice President
      ------------------------------              ------------------------------


                                            KEYBANK NATIONAL ASSOCIATION


                                            By:  /s/ Cheryl L. Ebner
                                               ---------------------------------
                                            Title:  Senior Vice President
                                                  ------------------------------


                                 CONSENT OF ANZ

        Australian and New Zealand Banking Group Limited hereby consents to the
foregoing Second Amendment to Amended and Restated Credit Agreement.

        Dated:  _11 July_, 2001.

                                            AUSTRALIAN AND NEW ZEALAND BANKING
                                            GROUP LIMITED


                                            By:  /s/ Michael Stapleton
                                               ---------------------------------
                                            Title:  Analyst
                                                  ------------------------------



   4

                                  SCHEDULE III

                                PRICING SCHEDULE



                         Level I        Level II       Level III        Level IV         Level V        Level VI
                         -------        --------       ---------        --------         -------        --------
                                                                                      
Base Rate Margin           50bps           75bps          100bps          125bps          150bps          175bps
LIBOR Margin              175bps          200bps          225bps          250bps          275bps          300bps
Commitment Fee             30bps           35bps           40bps           45bps           50bps           50bps


        For purposes of this Pricing Schedule, the following terms have the
following meanings:

        "LEVEL I" applies on any day after the Reporting Date if, on such day,
the applicable Leverage Ratio is less than or equal to 2:1.

        "LEVEL II" applies on any day after the Reporting Date if, on such day,
the applicable Leverage Ratio is greater than 2:1 and less than or equal to
2.5:1.

        "LEVEL III" applies until the Reporting Date and on any day thereafter
if, on such day, the applicable Leverage Ratio is greater than 2.5:1 and less
than or equal to 3.0:1.

        "LEVEL IV" applies until the Reporting Date and on any day thereafter
if, on such day, the applicable Leverage Ratio is greater than 3.0:1 and less
than or equal to 3.5:1.

        "LEVEL V" applies until the Reporting Date and on any day thereafter if,
on such day, the applicable Leverage Ratio is greater than 3.5:1 and less than
or equal to 4.0:1.

        "LEVEL VI" applies until the Reporting Date and on any day thereafter
if, on such day, the applicable Leverage Ratio is greater than 4.0:1.

        "REPORTING DATE" means the first Business Day after the receipt by
Administrative Lender of the certificate required by Section 8.3(iii) for
Parent's fiscal quarter ending May 31, 2001.

        For purposes of this Pricing Schedule, the Leverage Ratio shall be
calculated once every fiscal quarter based on the financial information most
recently reported pursuant to Section 8.3 of the Agreement; provided, however,
that the Leverage Ratio shall not be computed on the financial information most
recently reported pursuant to Section 8.3 until the later of the fifth day of
the month after receipt of such information or five Business Days after the
receipt thereof and if the most recent report required pursuant to Section 8.3
has not



   5

been delivered, or if Administrative Lender reasonably objects to the accuracy
of such report within five Business Days after the receipt thereof, the next
higher Level from the Level then in effect shall apply until such time as the
delinquent report is delivered or Administrative Lender's objections are
resolved to Administrative Lender's reasonable satisfaction.