Note 11 — Stock-based Compensation Plans

Penford maintains the 2006 Long-Term Incentive Plan (the “2006 Incentive Plan”) pursuant to which various stock-based awards may be granted to employees, directors and consultants. At the Annual Meeting of Shareholders of the Company held on January 26, 2012, the Company’s shareholders approved the amended Penford Corporation 2006 Long-Term Incentive Plan and the number of shares of the Company’s common stock available for issuance under the 2006 Incentive Plan was increased by 800,000 shares. As of August 31, 2012, the aggregate number of shares of the Company’s common stock that were available to be issued as awards under the 2006 Incentive Plan is 353,616. In addition, any shares previously granted under the 1994 Stock Option Plan which are subsequently forfeited or not exercised will be available for future grants under the 2006 Incentive Plan. Non-qualified stock options and restricted stock awards granted under the 2006 Incentive Plan generally vest ratably over one to four years and stock options expire seven years from the date of grant. In addition, the Company may from time to time award compensatory stock-based awards outside of the 2006 Incentive Plan to newly hired employees.

General Option Information

A summary of the stock option activity for the year ended August 31, 2012 is as follows:


	Number of Shares			Option Price Range		Weighted Average Exercise Price		Weighted Average Remaining Term (in years)		Aggregate Intrinsic Value
Outstanding Balance, August 31, 2011		1,333,885		$	4.66 — 21.73	$	14.52
Granted		760,500			5.29 — 5.65		5.61
Exercised		—
Cancelled		(269,469	)		7.73 — 17.50		13.61

Outstanding Balance, August 31, 2012		1,824,916			4.66 — 21.73		10.94		3.97	$	1,360,000

Options Exercisable at August 31, 2012		1,050,916		$	4.66 — 21.73	$	14.88		2.19	$	40,500

The aggregate intrinsic value disclosed in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $7.31 per share as of August 31, 2012 that would have been received by the option holders had all option holders exercised on that date. No stock options were exercised in fiscal years 2012, 2011 and 2010.

Valuation and Expense Under ASC 718

The Company utilizes the Black-Scholes option-pricing model to determine the fair value of stock options on the date of grant. This model derives the fair value of stock options based on certain assumptions related to expected stock price volatility, expected option life, risk-free interest rate and dividend yield. The Company’s expected volatility is based on the historical volatility of the Company’s stock price over the most recent period commensurate with the expected term of the stock option award. The estimated expected option life is based primarily on historical employee exercise patterns and considers whether and the extent to which the options are in-the-money. The risk-free interest rate assumption is based upon the U.S. Treasury yield curve appropriate for the term of the Company’s stock options awards and the selected dividend yield assumption was determined in view of the Company’s historical and estimated dividend payout. The Company has no reason to believe that the expected volatility of its stock price or its option exercise patterns would differ significantly from historical volatility or option exercises.

At the time of the acquisition of the business of Carolina Starches, the Company entered into compensatory stock option agreements outside of the Company’s 2006 Incentive Plan with the former owners of Carolina Starches. Pursuant to these agreements, the Company granted options to purchase an aggregate of 82,500 shares of the Company’s common stock at an exercise price equal to the closing price as of the close of business on January 11, 2012. These options have a term of seven years and, subject to certain conditions, vest ratably over a two year period.

Under the 2006 Incentive Plan, the Company granted 678,000 stock options during fiscal 2012 which vest ratably over three years. In fiscal 2011, the Company granted 98,000 stock options, (i) 80,000 stock options which vest one year from the date of grant, and (ii) 18,000 stock options which vest ratably over four years. The Company estimated the fair value of stock options granted using the following weighted-average assumptions and resulting in the following weighted-average grant date fair value:


	2012	2011
Expected volatility	68%	71%
Expected life (years)	4.9	4.3
Interest rate	0.5 - 1.1%	1.1 - 2.8%
Dividend yield	0%	0%
Weighted-average fair values	$3.13	$3.62

No stock options were granted in fiscal year 2010. As of August 31, 2012, the Company had $1.5 million of unrecognized compensation costs related to non-vested stock option awards that are expected to be recognized over a weighted average period of 1.4 years.

Restricted Stock Awards

The grant date fair value of the Company’s restricted stock awards is equal to the fair value of Penford’s common stock at the grant date. The following table summarizes the restricted stock award activity for the twelve months ended August 31, 2012 as follows:


	Number of Shares			Weighted Average Grant Date Fair Value
Nonvested at August 31, 2011		84,232		$	14.67
Granted		31,851			5.65
Vested		(54,367	)		19.29
Cancelled		—

Nonvested at August 31, 2012		61,716		$	5.94

No restricted stock awards were granted in fiscal year 2011. The weighted average grant date fair value of awards granted in fiscal year 2010 was $6.60. The total fair value of awards vested in 2012, 2011, and 2010 was $1.0 million, $1.2 million and $1.0 million, respectively. On January 26, 2012, each non-employee director received an award of 3,539 shares of restricted stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding trading day, which vests one year from grant date of the award. On January 1, 2010, each non-employee director received an award of 2,301 shares of restricted stock under the 2006 Incentive Plan at the last reported sale price of the stock on the preceding trading day, which vested one year from grant date of the award. The Company recognizes compensation cost for restricted stock ratably over the vesting period.

As of August 31, 2012, the Company had $0.1 million of unrecognized compensation costs related to non-vested restricted stock awards that is expected to be recognized over a weighted average period of 0.4 years.

Compensation Expense

The Company recognizes stock-based compensation expense utilizing the accelerated multiple option approach over the requisite service period, which equals the vesting period. The following table summarizes the total stock-based compensation cost for fiscal years 2012, 2011 and 2010 and the effect on the Company’s consolidated statements of operations (dollars in thousands):


	2012			2011			2010
Cost of sales	$	48		$	130		$	170
Operating expenses		1,324			949			1,413
Research and development expenses		15			38			28
Income (loss) from discontinued operations		—			—			(25	)

Total stock-based compensation expense	$	1,387		$	1,117		$	1,586
Income tax benefit		(527	)		(424	)		(603	)

Total stock-based compensation expense, net of tax	$	860		$	693		$	983