focus
With the August 1998 spin-off of Penwest Pharmaceuticals Co. (PPCO), we enabled both identities, Penford and PPCO, to focus on what they do best. Focus takes on many forms: strategic direction, management time, human and financial resources, research and development, and physical plant. All of these will be deployed appropriately within each discrete company, resulting in, we believe, increasing value for our shareholders.

identity
What exactly is Penford's new identity? Why are we so excited? More importantly, why should you be? First, Penford Corporation is centered around its proven expertise in carbohydrate chemistry. We have dedicated the section immediately following this letter to explain just what that means. For purposes of this letter, let me summarize by saying that we convert the basic science of carbohydrate chemistry into applications that make our customers' products better. From the specialty starch coatings that make french fries crispier, to the Penford Gums that give a sheet of paper strength and keep the ink from blotting into the paper, the theme is consistent, our products make other products better.

core values
A substantive dedication to providing value for our customers. We continually drive our organization closer to the customer. For decades, Penford Products has driven to become the recognized market leader in specialty modified starches for value-added applications in papermaking. In the past this has meant superior technical service. In the most recent few years it has grown to include multiple year contractual arrangements that coordinate raw materials, research, technical service and logistics efforts under an involved Account Management Program (AMP). It's an attitude that has quickly infused Penford Food Ingredients Co. as well. In a few short years, PFI has established itself as the market leader in value-added potato starch applications to the North American food industry.

A shared dedication to applications research. A key outcome of understanding our customer needs is delivering value-added applications that make our customers's products better. Over the past several years we've talked extensively about our disciplined, coordinated Third Generation Research and Development program. With Third Generation as a foundation, we have made internal strides to bring chemists and engineers into Penford Corporation who bring a customer application perspective to innovation. For instance, our recent successes in value-added starch applications for the processed meat segment of the food industry are the direct result of a core research group and meat applications pilot plant we built over the past two years. Our renewed focus allows us to push even more aggressively to improve our applications research capabilities, delivering faster value to the customer and ultimately to our shareholders.

delivering shareholder value
Knowing all that, you may reasonably ask of the new Penford, how are you doing? How will you measure yourselves going forward? Operating results during the past year reflect the impact on Penford Products of a global slowdown in the paper industry. As in years past, we were better positioned to withstand those conditions because of our investment in our base carbohydrate chemistry, our value-added niches, and enduring customer relationships. In fact, during the fourth quarter of fiscal 1998 and into the first quarter of fiscal 1999, the impact of the severe downturn in North American paper was almost offset by combination of new business at Penford Products, an accelerating earngings story at Penford Food Ingredients Co. and a lower corporate overhead burden.

Delivering on our obligation to our shareholders requires complementing Penford's cash and earnings generating paper chemicals base with a profit stream featuring better and more consistent growth characteristics. Penford Food Ingredients is moving us towards that goal.

We have equally promising opportunities in other areas including our starch copolymer family of products and alliances that either leverage our technology or provide rapid channels to new marketplaces. As we proceed, we will apply very strict performance standards and measures to our performance. We will hold ourselves to the same benchmarks applied to the top tier specialty chemical companies, including earnings per share growth, operating margins, cash flow generation and return on capital employed.

Looking ahead, like everyone else we are cautious about the current economic environment and accompanying market volatilty, particularly as it relates to the North American paper industry. Whatever the climate, our paper chemicals group will continue to build on their strong market and specialty chemical position. On the food ingredients side, all systems are go. We'll continue to drive ourselves closer to our value-added food grade coatings customers, build a strong second leg in processed meats and begin to drive our chemistry into other industry segments in a thoughtful manner.

We thank all of our shareholders, new and old alike, for their support. You have our commitment that we will build and deliver the values inherent in this company for your benefit.