UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ Annual report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended July 31, 1997
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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COMMISSION FILE NUMBER 33-99834
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DAKOTA GROWERS PASTA COMPANY
(Exact name of registrant as specified in its charter)
NORTH DAKOTA 45-0423511
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
ONE PASTA AVENUE, P.O. BOX 21
CARRINGTON, ND 58421-0021 (701) 652-2855
(Address of principal executive offices) (Registrant's telephone number)
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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, and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
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. /X/
The number of shares outstanding of the issuer's classes of common
stock was 1,085 shares of membership stock, par value $125.00, and 7,356,059
shares of equity stock, par value $2.50, outstanding as of October 31, 1997. As
there is only a limited, private market for shares of the Registrant's stock and
the Registrant does not obtain information regarding the transfer price in
transactions between its members, the Registrant is not able to estimate the
aggregate market value of the Registrant's shares held by non-affiliates.
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DOCUMENTS INCORPORATED BY REFERENCE
Certain exhibits to this Report are incorporated by reference from the
Company's Registration Statement on Form S-1 (File number 33-99834), declared
effective on January 26, 1996, and by reference from the Company's Quarterly
Reports on Forms 10-Q for the quarterly periods ended January 31, 1997 and April
30, 1997.
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PART I
ITEM 1. BUSINESS
Introduction -
Dakota Growers Pasta Company is a North Dakota agricultural cooperative
which was incorporated on December 16, 1991. The Company owns and operates
state-of-the-art integrated facilities at Carrington, North Dakota at which
durum wheat provided by the Company's members is milled into high quality
semolina. This semolina is processed through advanced Italian pasta processing
equipment utilizing ultra-high temperature drying to consistently create a
premium quality product. In addition to marketing its pasta products, the
Company distributes excess semolina production and by-products of the milling
process. Since the Company's facilities began full operations on January 1,
1994, average annual growth of 38% has made it one of the country's five largest
producers of pasta.
With membership limited to agricultural producers, the Company has a total
of 1,085 members whose operations are located in North Dakota, Minnesota or
Montana. Each member of the Company must enter into a "Growers Agreement" with
the Company. Under that agreement, the member is obligated to deliver up to one
bushel of durum wheat to the Company during each processing year for each share
of Equity Stock owned by that member, subject to a pro-rata downward adjustment
depending on the production needs of the Company.
The Markets for Pasta and Durum Products -
Pasta
According to the U.S. Department of Commerce, American consumers have
increased their average consumption of pasta during the past ten years at an
annualized growth rate of approximately 3%. As a result, production of pasta
products has also increased at a significant rate during the last decade. The
Company expects the upward trends related to consumption and production of pasta
to continue during the next few years, but at annual rates estimated between one
and three percent.
The Company believes that the growth in domestic consumption of pasta
products has occurred as a result of a variety of factors. Those factors
include consumer perception of pasta as a "healthy" food, ease of preparation,
low cost in comparison to other types of foods, and flexibility of pasta
products as an ingredient in salads and entrees.
The Company competes in the dry pasta segment of the overall pasta market.
Based upon information available in trade and industry sources and the Company's
own analysis, the Company estimates that the demand for dry pasta in the United
States approximates 4.5 billion pounds. In addition to the domestic market for
dry pasta, much smaller domestic markets exist for refrigerated and frozen pasta
and on-site preparation and use of pasta by restaurants and households.
The Company identifies the domestic dry pasta market into which it sells
its pasta products as four basic areas, each presenting different product and
sales and distribution requirements. The applicable market areas and estimated
size are "Retail (1.7 billion pounds)," "Ingredient (1.9 billion pounds),"
"Foodservice (.4 billion pounds)," and "Government Bid (.5 billion pounds)."
The retail area includes sales to supermarkets, warehouse clubs, discount
stores, drug stores, and other consumer retail operations. Roughly 78% of the
retail segment is represented by established national or regional pasta
manufacturer brands, including imports; the remaining 22% of the retail portion
of the market consists of retail sales under various private labels.
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Recent sales of branded labels have shown slight growth, while the sales of
private label pasta has increased market share.
Ingredient customers use dry pasta as an ingredient or component in a
further-processed or combination food product, such as dry pasta dinners,
including macaroni and cheese, frozen entrees, refrigerated salads, canned
entrees, baby food, and canned and dry soups. Roughly three quarters of the
dry pasta used in the ingredient market is believed to be manufactured by end-
product marketers for use in their own products.
The foodservice area consists of sales of dry pasta to food preparation
operations such as restaurants, hotels, colleges and universities, elementary
and secondary schools, airlines, in-plant and in-office cafeteria facilities and
transportation services. Marketing dry pasta to this segment of the marketplace
generally consists of selling to a network of competitive distribution
organizations and buying groups, and selling dry pasta to individual restaurant
chains and other operator organizations.
The Company believes that federal and state government bid opportunities
for the delivery of dry pasta represent about 10% of the total domestic dry
pasta market. The United States Department of Agriculture has approved the
Company to bid on government contracts for pasta production.
A portion of each end-user market segment is supplied under "co-pack"
arrangements between pasta manufacturers. Those agreements involve the sale of
dry pasta products between pasta manufacturers in order to supply short-term
volume deficiencies that arise from time to time in meeting customer
requirements. Opportunities for co-pack arrangements have decreased in recent
periods due to the excess production capacity in the United States pasta
production industry.
Durum Products
Most pasta manufacturers in the United States purchase semolina from an
independent milling company. The Company is one of the few fully-integrated
pasta manufacturers in the United States, milling its members' durum wheat into
semolina for pasta production.
The Company believes that its relationship with its members provides a
reliable and consistent source of supply of milling quality durum. Pursuant to
the "Growers Agreement" with the Company, the Company's members are obligated to
deliver durum wheat to the Company's mill in Carrington, North Dakota for use in
the production of semolina which is then used by the Company to produce the
Company's dry pasta products.
The Company markets its semolina in excess of its internal demand for pasta
production to other pasta manufacturers. In addition to the semolina, other
products result from the overall durum wheat milling and blending process.
These granulars, first clear (higher grade) flours, second clear (lower grade)
flours, semolina/durum wheat flour blends, and millfeed products are sold as by-
products of the milling process. Millfeed and most second clear flour is sold
primarily for animal feed.
Pasta Production -
Pasta production is basically a mixing, extrusion and drying process.
Individual shapes are the result of extruding pasta "dough" through different
dies. Consistent monitoring and control is a key element in this process.
Each pasta production line operates independently and produces either long or
short good items, the difference in shape and size changing the way they are
conveyed through the drying operation. The long good items are conveyed while
hanging on poles; the short good items are conveyed on screens. At the Company,
both processes utilize continuous ultra high temperature dryers and coolers.
The Company's entire pasta production process is controlled by programmable
logic controllers, which allows for all of the production lines
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to be operated and monitored by minimal staff.
The finished dry pasta is packed to meet different market segment and
customer requirements, ranging from macaroni and cheese dinners in 7 1/4 ounce
boxes to dry pasta in containers ranging from 8 ounces to 2,000 pounds. The
packaged product is conveyed through metal detectors, check weighers and
automatic case packers.
The pasta products manufactured by the Company consist of over 60 different
shapes and are sold to customers in all market segments. In addition to the dry
pasta produced by the Company, the Company purchases approximately 10 additional
dry pasta shapes from other manufacturers and resells them. This practice is
widely followed by many pasta manufacturers for efficiency reasons and allows
distribution of wider product lines to the Company's customers. Pasta products
purchased from other manufacturers have historically represented less than 3% of
the Company's total sales, with most such pasta products manufactured from
semolina provided by the Company.
Due to increasing demand for the Company's pasta products, the Company
expanded its annual pasta production capacity in 1997 from 120 million pounds to
240 million pounds. Strong demand during the completion of this expansion
required the Company to increase its pasta purchases in 1997.
The cost of production of dry pasta is significantly impacted by changes in
durum wheat prices. The cost of milling quality durum wheat steadily increased
since the Company was organized and remained at historically high levels into
1996. An improved 1996 harvest resulted in lower prices, but the 1997 harvest,
estimated at 86 million bushels, is the smallest since 1993 and the fourth
lowest in the last 15 years. Worldwide, the durum harvest of 1997 is estimated
to be 20% below 1996. This has resulted in higher durum prices which may remain
throughout fiscal year 1998.
In the past few years, the Company believes that pasta manufacturers were
unable to implement price increases for their dry pasta products sufficient to
offset these higher durum prices because of intense price competition in the
market for dry pasta and excess capacity in the production of dry pasta. As a
result, profit margins for pasta manufacturers remained thin. Recent changes in
the industry, especially Borden Pasta Division's ("Borden") closure of five of
its ten manufacturing facilities and announcement that it was exiting the
private label market entirely and focusing on its branded labels, has created
pressure on existing capacity which may allow prices to align with cost
changes. Announced new capacity, including Barilla's (one of Italy's major
pasta marketers) construction of a new mill and pasta facility in Iowa and
Nissan Flour Milling of Japan's plant in Washington may have a future impact
the supply-demand effect on pricing, as may expansions by American Italian
Pasta Company ("AIPC") and the Company.
Sales, Marketing and Customers
The Company markets its products through direct sales, supplemented by the
efforts of brokers retained by the Company as necessary. These brokers receive
a modest commission upon sale of the Company's products. Since its full
operations began in 1994, the Company's customer base for pasta products has
continuously expanded.
The Company's pasta products are currently distributed on a broad basis
throughout the United States. The Company does not directly export its pasta
products, although several of its customers have exported minor quantities.
Within its pasta operation, the Company has steadily reduced the level of volume
concentration among its top customers since it began operations. At the present
time, sales to no one customer account for more than 10% of the
Company's net revenues.
Semolina and durum wheat flour not used for internal pasta manufacturing
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products are sold to other pasta manufacturers throughout the United States.
Current trends show the Company's sales in the retail segment exceeding 50%
of total sales while sales to foodservice and ingredient customers represent
approximately twenty-five percent (25%) each. A remaining small portion of the
Company's sales result from government bids or co-pack arrangements. The
current distribution of the Company's sales reflects significant growth in the
Company's retail sales and a reduction in the Company's involvement in
government and co-pack sales, which represented a significant portion of the
Company's sales during the early part of 1994.
Growers Agreement -
The durum wheat purchased and used in the Company's operation is obtained
through the delivery of grain pursuant to the Growers Agreements between the
Company and its members. The contractual obligations imposed on each member
under the Growers Agreement are intended to insure the availability of
sufficient quantities of durum wheat for use in the Company's processing
operations.
The impact of weather on the quality characteristics of each year's harvest
of durum wheat has been and will continue to be of concern to the Company and
its competitors in the milling and pasta industries. However, the Company feels
it is in a better position to maintain quality standards than many or most other
U.S. milling and/or pasta manufacturers, due to the relationship between the
Company and its member-shareholders who provide a consistent supply of quality
durum wheat to the Company.
The Growers Agreement is paired with ownership of the Equity Stock. For
each share of Equity Stock held by a member, that member is obligated to deliver
to the Company up to one bushel of durum wheat, of a quality specified by the
Company. The Company may, depending on the marketing needs of the Company,
reduce on a pro rata basis to all members the quantity of durum wheat to be
delivered. For fiscal year 1997, the delivery obligation was one annualized
bushel per equity share for the first two marketing periods and .903 annualized
bushels per equity share for the third marketing period.
The term of the Growers Agreement is indefinite and may be terminated by
the member only upon 18 months advance notice; however, no termination can
become effective prior to July 31, 1999. The Company reserves the right to
terminate the Growers Agreement and a grower's membership if the member does not
comply with the obligations of the Agreement or otherwise fails to meet the
criteria for membership in the Company. Upon termination of membership in the
Company, the member will cease to have voting rights and other rights of
membership, including the opportunity to realize economic benefits based upon
membership in and patronage of the Company. The obligations under the Growers
Agreement, specifically the obligation to deliver durum wheat meeting quality
specifications, continue until the July 31 next following.
The Company has implemented a grain delivery system that is intended to
ensure an adequate supply of durum wheat for the Company's operational needs.
However, the delivery policies are also intended to allow as much flexibility as
is practical for the Company's members consistent with the Company's needs and
the active involvement of the Company's members. The Company's grain delivery
policies are determined by the Company's Board of Directors and are subject to
modification from time to time at the Board's discretion.
A member may arrange for the delivery of durum wheat at any time throughout
the Company's marketing year, which runs from August 1 to July 31, provided that
the wheat delivered to the Company complies with the quality specifications and
production needs of the Company. The member may deliver
the member's durum wheat to the Company's facility or through any entity with
which the Company has contracted for the delivery of grain.
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In the event that a member is not able to grow and deliver the required
quality durum, the member must either (i) purchase the required quantity and
quality of durum wheat from other agricultural producers for delivery to the
Company or (ii) following purchase of the required durum wheat on the member's
behalf, account for the wheat purchased on the member's behalf. As a result, a
member not able to produce durum wheat for delivery to the Company would be
exposed to the risk that the price of acquiring durum wheat for delivery to the
Company would be in excess of the price to be paid for that durum wheat by the
Company under the Growers Agreement. The member is responsible for establishing
the terms of any arrangements which do not involve delivery of the required
quantities of durum wheat directly to the Company's facility.
If a member has not arranged for delivery to the Company of quantities of
durum wheat sufficient to satisfy that member's delivery obligation for the
marketing year, the member may be assessed an administrative fee on each bushel
of durum wheat procured on behalf of that member. Such fees are established in
the discretion of the Company's Board of Directors and may be modified by the
Board upon notice to the Company's members.
The quantities of durum wheat due from each member and the costs associated
with that wheat are calculated on a "settlement date" assigned to each member
during each of the three periods (August 1 through November 30; December 1
through March 31; and April 1 through July 31) into which each Company marketing
year is divided. On the applicable Settlement Date, the member's obligation to
deliver durum wheat is satisfied by the Company from commingled inventories of
members' durum wheat. The member is invoiced for (i) the Company's price per
bushel for durum wheat (with such market price established by the Company at the
beginning of each marketing period for that period) and (ii) the administrative
fee described above applicable to durum wheat acquired on behalf of a member.
The member is then credited for the sale of durum to the Company, less an
amount, 15% in fiscal year 1997 and 10% for fiscal year 1998, retained by the
Company as established by the Board of Directors. The amount retained by the
Company from each member on the member's settlement date is, in the discretion
of the Board of Directors, either refunded to the member at the close of the
applicable marketing period or retained by the Company as patronage capital held
in the account of each member. Pursuant to the By-laws of the Company, the
Board of Directors, in their absolute discretion, may retire and pay in cash, in
full or in part, any patronage capital under such method, basis, priority and
order as it shall determine. To date, the Board of Directors has refunded in
cash all the retains at the end of each marketing period. The per bushel
administrative fees charged to each member for fulfilling the member's delivery
obligation from the member's commingled inventories of durum wheat are refunded
if the member arranges for delivery of durum wheat during the marketing year to
satisfy the member's obligation to the Company under the Growers Agreement.
Competition -
Overview
The markets for semolina/durum wheat flour and pasta are highly competitive
in most segments and geographic regions. In all, there are an estimated 60 to
65 significant plants in the U.S. which manufacture dry pasta. The intensity of
competition varies from time to time as a result of a number of factors,
including: (1) the degree of industry capacity utilization, (2) comparative
product distribution costs, (3) ability to render distinctive service to
customers, and (4) a distinguishing or unique ability to provide consistent
product quality in line with customer specifications. The Company believes
that, in a broad sense, the single most influential factor on the intensity of
competitive conditions is industry capacity utilization. It should be noted
that detailed information regarding both pasta production and milling capacity
is often proprietary information of the closely-held companies which are active
in such markets.
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Pasta
The pasta market is highly competitive and includes several well-
established enterprises. Those competitors are both independent companies and
divisions or subsidiaries of other, larger, food products companies. In
addition, according to United States government data, the overall U.S. pasta
market has experienced rapid penetration by foreign suppliers, particularly in
the last three to four years.
Total domestic industry capacity, excluding self-supply capabilities within
the ingredient segment, is broadly estimated at over 3.1 billion pounds of pasta
per year. The Company's top competitors in the open market include Borden,
Hershey Pasta Group Division, AIPC, (including their recently announced long-
term contract to produce Muellers brand for CPC International), Philadelphia
Macaroni Co. Inc., A. Zerega's Sons, Inc., and Gooch Foods (Archer Daniel
Midland). Together with the Company, these organizations represent in the
aggregate in excess of 50% of total industry production capacity and over 75% of
the capacity excluding self-supply. These companies market under their own
labels and also supply private label customers.
Industry changes will impact pasta market competition. Borden recently
announced the closure of 5 of its 10 pasta plants and plans to exit the private
label market, focusing on its branded label products. Barilla, one of Italy's
largest pasta marketers, is aggressively expanding its branded label sales and
is constructing a new pasta manufacturing facility in Iowa.
Competition also comes from imported pasta, which represents approximately
10% of the total domestic market. The July, 1996 imposition of antidumping and
countervailing duties on certain imports from Italy and Turkey has had little
impact on pasta imports. Essentially flat from 1995 to 1996, imports are up
almost 4% in 1997 as the drop in imported pasta from Turkey has been replaced by
increased imports from Mexico and Italy.
Approximately 25% of total domestic industry production capacity is
represented by the largest self-suppliers, which include Kraft, General Mills,
American Home Foods Products, Inc., Campbell Soup Co., Inc., ConAgra, Inc.,
Pillsbury and Stouffers Corp.
The Company markets in the retail area primarily as a private label
supplier. The Company's "Pasta Growers" label to date has most effectively
penetrated local area markets in the Dakotas and Minnesota, while "Zia Briosa"
is marketed through club stores on the west coast and its "Pasta Sanita" label
is sold in small niches ranging from Montana, Minnesota, Illinois and Ohio to
select markets in the northeast United States.
In the foodservice area, the Company also markets its pasta primarily as a
private label supplier, including sales to three of the largest foodservice
distributors in the country under their labels.
The Company focuses its ingredient marketing efforts on companies that do
not also manufacture the dry pasta ingredient for their end-products.
The Company sells most of its pasta under "purchase orders", whereby the
customer and the Company are not obligated for any pre-determined length of
time. Occasionally, a longer-term pricing commitment is agreed to, usually with
a term of one year or less. In 1997, the Company and one of its major
customers, JP Foodservices, signed a long-term agreement including volume and
pricing commitments.
Semolina and Durum Wheat Flour
Given the commodity nature of the market for semolina and durum flour,
sales volume is largely dependent on delivered price when adequate supply
conditions exist. Italgrani USA, Inc., Harvest States Cooperatives and
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Miller Milling all have two or more active mills, and collectively are believed
to represent more than 60% of total domestic milling capacity; the Company's
current milling operation represents about 8% of total domestic milling
capacity. Some of the mills operated by the Company's competitors have
established integrated pasta production capabilities or have developed alliances
with pasta manufacturers. The Company believes that the integration of its
milling and pasta production facilities enables the Company to compete more
effectively with those competitors who also have integrated facilities.
Government Regulation -
Trade Policies
The operations of the Company may be affected by governmental policies
and regulations, including those impacting the amount of durum wheat imported
from Canada and the volume of pasta imports.
Pricing policy actions by the Canadian Wheat Board ("CWB") may have
resulted in increased sales of Canadian durum wheat in the United States and
lower durum wheat prices. These actions have resulted in complaints from durum
growers in the United States, and a continuing dispute over possible
restrictions on durum wheat imports. If restrictions are implemented, it could
impact both the milling and pasta areas of the Company's business operations.
Lower durum wheat prices could ultimately lead to reduced pasta production
costs and provide opportunity for profit improvements for pasta manufacturers
without requiring price increases for finished pasta products, while higher
durum prices could trigger price increases or reduced margins dependent on the
industry capacity utilization and pasta import levels.
Food and Drug Administration Regulation
As a producer of products intended for human consumption, the Company's
operations are subject to certain federal and state regulations, including
regulations promulgated by the United States Food and Drug Administration. The
Company believes that it is in material compliance with the applicable
regulatory requirements.
Environmental Regulation
Dakota Growers is subject to extensive federal and state environmental laws
and regulations with respect to water and air quality, solid waste disposal and
odor and noise control. The Company conducts an on-going control program
designed to meet these environmental laws and regulations. There are no pending
regulatory enforcement actions and the Company believes that it is in
substantial compliance with applicable environmental laws and regulations.
The Company cannot predict whether future changes in environmental laws or
regulations might increase the cost of operating its facilities and conducting
its business. Any such changes could have adverse financial consequences for
the Company and its members.
Intellectual Property Rights -
The Company relies on a combination of trade secrets, trademark law,
nondisclosure agreements and technical measures to establish and protect its
proprietary rights to its products and processes. The Company owns two
trademarks that have been registered with the United States Patent and Trademark
Office, including the corporate logo, Dakota Growers Pasta Company, and the
design on its packaging.
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Research and Development -
The Company supports research and development programs in North Dakota
which focus on improved varieties of durum wheat, including the Company's Durum
Education Research and Marketing Committee. The Company is not presently
participating in any formal, independent research and development programs for
pasta products. The Company, however, as part of its operations, maintains a
modern, well-equipped laboratory facility designed primarily to evaluate and
maintain high quality standards for incoming raw materials, outgoing finished
product, ongoing product manufacturing, and development of new pasta shapes.
Employees -
As of October 24, 1997, Dakota Growers had 274 full-time employees, of
which 231 were hourly and 43 were salaried. It also employs 21 hourly part-time
workers plus temporary, call-in and contract employees as necessary. Qualified
full-time employees are provided health insurance, vacation and holiday plans
and are eligible to participate in the Company's 401(k) savings plans. The
Company's employees are highly efficient, and it considers its employee
relations to be excellent. There are no collective bargaining agreements in
existence, and none are foreseen.
ITEM 2. PROPERTIES
Property and Processing Facilities -
Dakota Growers owns and operates a single vertically integrated, state-of-
the-art durum milling and pasta manufacturing plant at Carrington, North
Dakota. The plant, which was fully operational in January 1994 and expanded in
1996 and 1997, has the design capacity to grind approximately 7,000,000
bushels of grain each year. It has grain silos with a capacity to hold
360,000 bushels. The plant contains six pasta production lines, three long
goods lines and three short goods lines. Total pasta manufacturing capacity
240 million pounds annually.
The Company has ordered a fourth short goods line, which is anticipated to
be in production in July 1998, which will add an additional 30 million pounds of
capacity.
The Company anticipates that it will spend approximately $400,000 in each
fiscal year for routine mill and pasta productivity enhancement equipment and
new customer development.
Primary Company warehouses and distribution centers for pasta products are
maintained at the Carrington plant and in leased facilities in Fargo, North
Dakota. These facilities are supplemented by various public warehouses where
inventory is maintained and redistributed for the needs of specific customers.
ITEM 3. LEGAL PROCEEDINGS
From time to time and in the ordinary course of its business, the Company
is named as a defendant in legal proceedings related to various issues,
including worker's compensation claims, tort claims and contractual disputes.
Other than as provided herein, the Company is not currently involved in legal
proceedings which have arisen in the ordinary course of its business and the
Company is also unaware of other potential claims which could result in the
commencement of legal proceedings. The Company carries insurance, which
provides protection against certain types of claims.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's shareholders during
the quarter ended July 31, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
There is only a limited, private market for shares of the Company's common
stock, as such shares may be held only by farmer-producers who are eligible for
membership in the Company. Neither the Company's common shares nor its
preferred stock are listed for trading on any exchange or quotation system.
Although transfers of the Company's shares may occur only with the consent of
the Company's Board of Directors, the Company does not obtain information
regarding the transfer price in connection with such transfers, such information
deemed immaterial to the business decision process. As a result, the Company is
not able to provide information regarding the prices at which the Company's
shares have be transferred.
ITEM 6. SELECTED FINANCIAL DATA
Selected Financial Data -
The selected financial data of the Company should be read in conjunction
with the financial statements and related notes included elsewhere in this Form
10-K.
<TABLE>
<CAPTION>
Fiscal year ended July 31, (1)
--------------------------------------------
FINANCIAL DATA
(In Thousands, except ratios)
1997 1996 1995 1994 1993
<C> <C> <C> <C> <C>
<S>
Net Revenue 69,339 49,558 40,441 19,706 0
Net Income (Deficit) 6,926 2,618 1,436 ( 206) ( 423)
Patronage Dividends Per Share
Declared (2) .485 .300 0 0 0
Distributed (2) .485 .300 0 0 0
Total Assets 68,739 49,894 47,842 45,215 24,818
Long-term Debt (including current
maturities) and Redeemable
Preferred Stock 30,218 19,752 29,097 28,477 11,557
Members' Investment 29,956 24,866 13,497 12,107 12,183
Property and Equipment Additions,
net of Retirements 17,837 1,489 1,309 12,526 22,680
Working Capital 6,329 8,184 2,400 2,001 ( 1,638)
Ratio of Long-Term Debt to Members'
Investment .91 .76 1.84 2.15 0.85
Ratio of Earnings to Fixed
Charges 4.28 2.24 1.68 0.45 ( 4.06)
</TABLE>
(1) The Company was formed on December 16, 1991, and was in the development
stage through July 31, 1993. Full operations commenced on January 1, 1994, and,
thus, the financial statements contain only seven months of operations for the
year ended July 31, 1994. Accordingly, certain financial data comparisons for
the years ended July 31, 1994 and 1993 may not be relevant.
(2) The 1996 patronage dividends declared and paid represents the allocation
of the 1995 fiscal earnings ($.308 per bushel). 1997 patronage dividends
declared and paid represents the allocation of the 1996 fiscal earnings ($.50
per bushel). On October 16, 1997 the Board of Directors authorized a
distribution of 1997 fiscal earnings totaling $4,745,258 or $1.00 per bushel, to
be distributed November 6, 1997.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Comparison of the Years Ended July 31, 1997 and 1996 -
Net Revenues
Net revenues increased 40%, or $19.8 million, coinciding with a 38%
increase in pasta volumes sold.
Retail sales increased 67% over the same period last year and represented
49% of total sales for the year, up from 40% in 1996. The Company did not add
any major retail customers in 1997, but the impacts of a full year of sales for
three private label accounts added in 1996, significant increases at four
existing private label accounts and the development of the Company's "Zia
Briosa" branded label sales provided most of the increase. Revenues from co-
packing were down $818,000 and government bid sales decreased $600,000 from
1996.
Representing 26% of 1997 total sales (34% in 1996), foodservice sales
volumes were up 7%. The foodservice increase was predominantly the result of
the addition of two new significant accounts late in fiscal year 1996. Several
large accounts showed sales growth, but co-pack sales were down $1.9 million.
Ingredient sales increased by 34% for the year and remained relatively
constant as a percentage of total sales at 25%. Most of the increase resulted
from a new customer added in the first quarter of fiscal year 1996.
Overall, revenues were up by approximately $19.9 million due to pasta sales
volume increases. Lower average revenue per pound of pasta, on the other hand,
reduced revenues by almost $800,000.
While durum grind was up 28%, sales of flour and by-products were up only
13% as the Company utilized more of its semolina for internal pasta production.
Higher prices were realized for millfeed and secondary flours, but semolina
sales prices were down coinciding with lower durum prices. The net impact of
pricing was a reduction in revenues of $350,000, while the increased volume sold
increased revenues by approximately $970,000.
Cost of Product Sold
The cost of durum, ingredients, packaging and freight constitute a major
portion of the cost of product sold. These costs will increase or decrease with
changes in sales volumes. The cost of production is also significantly impacted
by changes in durum wheat prices.
Increased pasta production, with its resulting increase in durum bushels
ground, contributed $12.7 million of the $15.0 million increase in cost of
product sold. Because of short-term deficiencies during the Company's
expansion, the Company purchased over 10 million pounds of pasta more in 1997
than in 1996, adding $3.5 million to the cost of sales. A 12% decrease in
average cost of durum was partially offset higher average prices for packaging
and freight.
Marketing and General and Administrative Expenses
Increased marketing staffing and activities and increased information
technology expenditures were the primary drivers in the $583,000 rise in
marketing and general and administrative (MG&A) expense. As a percentage of net
revenues, however, MG&A at 3.1% of net revenues was down slightly from 1996's
3.2%.
11
<PAGE> 12
Interest Expense, Net
Interest expense for the year decreased by $311,000. The average
outstanding debt balance was $800,000 lower in 1997 than in 1996, and the
average interest rate was down one percent. The Company capitalized $307,000 of
1997's interest. In fiscal 1997, the Company adjusted its fiscal 1996 estimated
patronage from the St. Paul Bank as the Bank significantly reduced its patronage
refund for the calendar year 1996 from historical levels. Such adjustment
increased 1997 interest expense by $95,000. The Company has continued to accrue
estimated patronage refunds at the reduced level for calendar year 1997; such
reduction increased fiscal 1997 interest expense by $167,000 from historical
patronage levels.
Net Income
As a result of the above, net income increased $4,308,000, or 165%, over
last year.
Comparison of the Years Ended July 31, 1996 and 1995 -
Net Revenues
Net revenues increased 23%, or $9.1 million, coinciding with a 20% increase
in pasta volumes sold.
Retail sales increased 41% over the same period last year and represented
40% of total sales for the year, up from 34% in 1995. The increased sales were
the result of the roll out of six new significant private label accounts (three
in the latter part of last fiscal year and three in fiscal year 1996), increased
government bid sales and increased co-pack opportunities, partially offset by
reduced sales to two major private label accounts. Pricing in the retail
markets remained competitive; the average prices were off 11% from last year.
Foodservice sales were up 5%, representing 34% of total sales in 1996 (39%
in 1995). The foodservice increase was predominantly the result of sales growth
by existing customers; the roll out of four new significant accounts in the
latter part of fiscal year 1995 and early in fiscal year 1996 was offset by the
loss of two significant accounts and reduced co-pack opportunities.
While ingredient sales increased by 24% for the year, they remained
relatively constant as a percentage of total sales at 26%. Most of the increase
resulted from a new customer added in the first quarter of fiscal year 1996.
The average price for ingredient sales was essentially unchanged from 1995.
Overall, revenues were up by approximately $8.0 million due to pasta sales
volume increases. Lower average revenue per pound of pasta, on the other hand,
reduced revenues by $600,000.
Sales of flour and by-products were up 18%. The market prices for by-
products was significantly higher in 1996 than in 1995 due to higher prices for
competing grains. These higher prices added about $1.0 million in revenues,
while the increased volume sold increased revenues by approximately $700,000.
Cost of Product Sold
The cost of durum, ingredients, packaging and freight constitute a major
portion of the cost of product sold. These costs will increase or decrease with
changes in sales volumes. The cost of production is also significantly impacted
by changes in durum wheat prices.
Increased pasta production, with its resulting increase in durum bushels
12
<PAGE> 13
ground, contributed $6.0 million of the $7.5 million increase in cost of product
sold. Durum represented 48% of the total cost of product sold in 1996. A 10%
increase in the average cost per bushel of durum added an additional $1.6
million in expense. With the increased sales and production, however, the
company was able to implement cost savings and gain efficiencies which partially
offset this cost increase.
Marketing and General and Administrative Expenses
Due to settling an insurance claim for less than previously anticipated and
increased marketing personnel costs, marketing and general and administrative
expenses increased by $373,000, or 30%. As a percentage of net revenues,
marketing and general and administrative expenses increased slightly from 3% to
3.2%.
Interest Expense, Net
Interest expense for the year has increased by $42,000 as the result of
higher average interest rates, predominantly during the first quarter. The
average outstanding debt balance was $3.9 million lower in 1996 than in 1995.
Net Income
As a result of the above, net income increased $1,182,000, or 82%, over
last year.
LIQUIDITY AND CAPITAL RESOURCES
The Company has utilized substantial outside financing on both a seasonal
and long-term basis to fund its operations. The majority of such financing has
been provided by the St. Paul Bank for Cooperatives (the "Bank"). The Company
has a short-term line of credit with the Bank of $5,000,000 as of July 31,
1997. Borrowings against the line are secured by cash, receivables and
inventories. The Company utilizes its line of credit in maximizing its cash
management, including construction expenditures. The outstanding borrowings
of short-term debt at July 31, 1997 totaled $2,200,000.
Effective with the latest term loan agreement between the Bank and the
Company, dated March 31, 1997, the Company is obligated to maintain or achieve
certain financial ratios. The Company is required to maintain a current ratio
of not less than 1.25:1, a net ownership ratio of not less than 40% and a debt
service coverage ratio of not less than 1.25. As of July 31, 1997, the Company
is in compliance with the terms of the loan agreement.
With the new loan agreement, provisions were modified allowing for interest
rate breaks and more flexibility as long as certain equity, working capital and
cash flow ratios continue to be maintained.
Included in the term loan agreement are an $18,409,000 term loan and an
$18,000,000 construction term loan which was established to finance the 1997
mill and pasta expansions. The Company received $9.7 million in net proceeds
from its 1996 stock offering, which was terminated on April 18, 1996. With the
proceeds from this offering, the Company accelerated the pay down of its term
loan. The construction term loan was established including the "re-borrowing"
of this accelerated pay down. As of July 31, 1997, the Company has expended
$17.4 million of the $20.5 million total expansion cost, and had borrowed $8.7
million against the construction term loan. The Company anticipates borrowing
the remaining $9.3 million in fiscal 1998.
Repayments on the construction term loan will begin in December 1997 at
$625,000 per quarter. Repayments on the term loan, because of the accelerated
pay down, are not scheduled to begin until June 1998 at $685,000 per quarter.
13
<PAGE> 14
The Company has placed on order a seventh pasta line for installation in
1998. The total cost of this project is anticipated at $5.5 million, including
related mill enhancements and packaging equipment. The Company anticipates
borrowing $2.0 million for this project, but has not yet established any loan
agreement.
Operating activities
Cash flow provided by operations has increased to $8.0 million in 1997
compared to $3.6 million in 1996 and $1.3 million in 1995. Trade receivables
increased $3.2 million in 1997 and $1.4 million in 1996 reflective of the
increase in revenues, while inventories rose $2.0 million in 1997 after being
relatively unchanged in 1996. Earnings before depreciation and amortization
increased significantly in 1997 compared to 1996 and 1995 due to the sales
volume increase.
Investing Activities
The cash flows for fiscal year 1997 reflects significant capital
expenditures for the expansion of the Company's facilities, which commenced in
late 1996. Capital expenditures in 1995 were primarily for carryover
expenditures related to the initial plant construction. Capital expenditures
for the years ended July 31, 1997, 1996 and 1995 were $17.8 million, $1.5
million and $1.3 million, respectively.
In fiscal year 1998, the Company anticipates routine capital expenditures,
including expenditures to further improve efficiencies and for new product
development, to total approximately $1.0 million. Further, it expects to spend
an additional $3.1 million to complete the 1997 expansion project and $5.5
million to add the seventh pasta line.
Financing Activities
In fiscal 1997, the Company borrowed a total of $10.9 million under its
construction term loan and seasonal line of credit. In 1996, it received $9.7
million in net proceeds from its stock offering, which was terminated on April
18, 1996. With the proceeds from this offering, the Company accelerated the pay
down of long-term debt. In fiscal 1998, the Company anticipates borrowing up to
$11.3 million for the completion of the 1997 expansion project and further
expansion currently anticipated. With these borrowings, the Company anticipates
holding its debt to equity ratio at 1:1 or better.
A qualified patronage allocation of $935,000, $.308 per bushel,
representing the allocation of 1995 fiscal earnings authorized by the Board of
Directors in October 1995, was distributed in cash on November 3, 1995.
Qualified patronage allocation of $1,800,000 or $.50 per bushel, representing
the allocation of the 1996 fiscal earnings authorized by the Board of Directors,
was distributed in cash on November 8, 1996. On October 16, 1997 the Board of
Directors authorized a distribution of 1997 fiscal earnings totaling $4,745,258
or $1.00 per bushel, to be distributed November 6, 1997.
FINANCIAL CONDITION
Total assets increased $18.8 million or 38% during the fiscal year ended
July 31, 1997. Current assets increased $4.0 million due to increased
receivables and inventories, while working capital at July 31, 1997 was $6.3
million, down from $8.2 million at July 31, 1996 due primarily to the resumption
of debt repayments beginning in December 1997. The Company's loan agreement
requires a working capital ratio of 1.25:1 to be maintained. The ratio at July
31, 1997 is 1.57:1, and the Company does not anticipate any difficulties in
complying with the loan agreement.
14
<PAGE> 15
EIDE HELMEKE PLLP
Certified Public Accountants & Consultants
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -----------------------------------------------------------------------------
To the Members of
Dakota Growers Pasta Company
Carrington, North Dakota
We have audited the accompanying balance sheets of Dakota Growers Pasta Company
(a North Dakota Cooperative) as of July 31, 1997, and 1996, and the related
statements of operations, changes in members' investments and cash flows for the
years ended July 31, 1997, 1996, and 1995. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dakota Growers Pasta Company as
of July 31, 1997, and 1996, and the results of its operations and its cash flows
for the years ended July 31, 1997, 1996, and 1995, in conformity with generally
accepted accounting principles.
/s/ Eide Helmeke PLLP
August 26, 1997, except for Note 12, as to
which the date is October 29, 1997
Fargo, North Dakota
EIDE HELMEKE PLLP
Certified Public Accountants & Consultants
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
- -----------------------------------------------------------------------------
We consent to the use of our report dated August 26, 1997, with respect to the
financial statements of Dakota Growers Pasta Company for the year ended July 31,
1997, in this Form 10-K (file number 33-99834).
/s/ Eide Helmeke PLLP
October 29, 1997
Fargo, ND
15
<PAGE> 16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
DAKOTA GROWERS PASTA COMPANY
BALANCE SHEETS
JULY 31, 1997 AND 1996
(in thousands, except share information)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<C> <C>
<S>
ASSETS
Current assets:
Cash and cash equivalents ......................... $ 5 $ 1,448
Receivables:
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts of
$218 and $70 .................................. 8,048 4,874
Accounts receivable from growers ................ 49 207
Other receivables ............................... 190 116
---------- ----------
Total receivables ............................... 8,287 5,197
Inventories ....................................... 8,700 6,737
Prepaid expenses .................................. 536 150
---------- ----------
Total current assets ............................ 17,528 13,532
Property and equipment:
Land and improvements ............................. 852 852
Buildings ......................................... 12,285 10,654
Equipment ......................................... 38,243 26,787
---------- ----------
Property and equipment in service ............... 51,380 38,293
Construction in process ........................... 5,709 1,152
Accumulated depreciation and amortization ......... ( 8,617) ( 5,861)
---------- ----------
Net property and equipment ...................... 48,472 33,584
Investment in St. Paul Bank for Cooperatives ........ 1,804 1,710
Other assets ........................................ 935 1,068
---------- ----------
Total assets .................................... $ 68,739 $ 49,894
========== ==========
</TABLE>
See notes to financial statements.
16
<PAGE> 17
DAKOTA GROWERS PASTA COMPANY
BALANCE SHEETS
JULY 31, 1997 AND 1996
(in thousands, except share information)
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<C> <C>
<S>
LIABILITIES AND MEMBERS' INVESTMENT
Current liabilities:
Notes payable and current portion of long-term
debt ............................................ $ 2,634 $ 72
Accounts payable .................................. 3,432 2,889
Excess outstanding checks over cash on deposit .... 2,457
Accrued grower payments ........................... 1,116 1,845
Accrued liabilities ............................... 1,560 542
---------- ----------
Total current liabilities ....................... 11,199 5,348
Commitments and contingencies .......................
Long-term debt, net of current portion .............. 27,131 18,860
---------- ----------
Total liabilities ............................... 38,330 24,208
---------- ----------
Redeemable preferred stock:
Series A, 6%, $100 par value, issued 3,000
shares in 1997 and 5,500 shares in 1996 ......... 300 550
Series B, 2% non-cumulative, $100 par value, issued
1,525 shares in 1997 and 2,700 shares in 1996 ... 153 270
---------- ----------
Total redeemable preferred stock ................ 453 820
---------- ----------
Members' investment:
Membership stock, $125 par value, issued 1,084
shares in 1997 and 1,082 shares in 1996 ......... 135 135
Equity stock, $3.85 par value, issued 4,904,034
shares in 1997 and 1996 ......................... 18,881 18,881
Additional paid in capital ........................ 3,610 3,610
Accumulated allocated earnings .................... 413
Accumulated unallocated earnings .................. 6,917 2,240
---------- ----------
Total members' investment ....................... 29,956 24,866
---------- ----------
Total liabilities and members' investment ....... $ 68,739 $ 49,894
========== ==========
</TABLE>
See notes to financial statements.
17
<PAGE> 18
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF OPERATIONS
TWELVE MONTHS ENDED JULY 31, 1997, 1996 AND 1995
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<C> <C> <C>
<S>
Net revenues (net of discounts and allowances of
$7,694, $5,452 and $5,650 for 1997, 1996 and
1995, respectively) ........................... $ 69,339 $ 49,558 $ 40,441
Cost of product sold ............................ 58,357 43,318 35,789
-------- -------- --------
Gross proceeds ................................ 10,982 6,240 4,652
Marketing and general and administrative expenses 2,179 1,596 1,223
-------- -------- --------
Operating proceeds ............................ 8,803 4,644 3,429
Other income (expense):
Interest and other income ..................... 39 101 60
Loss on retirement of property, plant and
equipment ................................... ( 104)
Interest expense, net ......................... ( 1,812) ( 2,123) ( 2,081)
-------- -------- --------
Income before income taxes ...................... 6,926 2,622 1,408
Expense of (benefit from) income taxes .......... 4 ( 28)
-------- -------- --------
Net income from patronage and non-patronage
business ...................................... 6,926 2,618 1,436
Dividends on preferred stock .................... 36 39 42
-------- -------- --------
Earnings from patronage and non-patronage
business available for members ................ $ 6,890 $ 2,579 $ 1,394
======== ======== ========
Average equity shares outstanding ............... 4,904 3,712 3,116
Earnings from patronage and non-patronage
business per average equity share outstanding.. $ 1.40 $ .69 $ .45
======== ======== ========
</TABLE>
See notes to financial statements.
18
<PAGE> 19
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF CHANGES IN MEMBERS' INVESTMENTS
TWELVE MONTHS ENDED JULY 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
Preferred Stock
--------------------- Membership Equity
Series A Series B Stock Stock
---------- ---------- ---------- ----------
<C> <C> <C> <C>
<S>
Balance, July 31, 1994 ......... $ 700 $ 270 $ 125 $ 11,997
Preferred dividends declared .
Net membership stock issued
(redeemed) ................. ( 3)
Net income for the year ended
July 31, 1995 ..............
---------- ---------- ---------- ----------
Balance, July 31, 1995 ......... 700 270 122 11,997
Redemption of preferred stock ( 150)
Preferred dividends declared .
Net membership stock issued
(redeemed) ................. 13
Equity stock issued .......... 6,884
Subscriptions forfeited ......
Expenses of stock offering ...
Net income (loss) for the year
ended July 31, 1996 ........
Patronage allocations ........
Patronage paid ...............
---------- ---------- ---------- ----------
Balance, July 31, 1996 ......... 550 270 135 18,881
Redemption of preferred stock ( 250) ( 117)
Preferred dividends declared .
Net income (loss) for the year
ended July 31, 1997 ........
Patronage allocations ........
Patronage paid ...............
---------- ---------- ---------- ----------
Balance, July 31, 1997 ......... $ 300 $ 153 $ 135 $ 18,881
========== ========== ========== ==========
</TABLE>
(continued on next page)
19
<PAGE> 20
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF CHANGES IN MEMBERS' INVESTMENTS
TWELVE MONTHS ENDED JULY 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
Allocated Unallocated Accumulated
Additional Accumulated Earnings Earnings (Deficit)
Paid-in --------------------- ---------------------
Capital Qualified Non-Qual. Patronage Non-member Total
---------- ---------- ---------- ---------- ---------- ----------
<C> <C> <C> <C> <C> <C>
<S>
.......... $ 782 $ $ $( 919) $ 121 $ 13,076
.......... ( 42) ( 42)
.......... ( 3)
.......... 1,432 4 1,436
---------- ---------- ---------- ---------- ---------- ----------
.......... 782 513 83 14,467
.......... ( 150)
.......... ( 39) ( 39)
.......... 13
.......... 2,950 9,834
.......... 2 2
.......... ( 124) ( 124)
.......... 2,635 ( 17) 2,618
.......... 935 ( 935)
.......... ( 935) ( 935)
---------- ---------- ---------- ---------- ---------- ----------
.......... 3,610 2,213 27 25,686
.......... ( 367)
.......... ( 36) ( 36)
.......... 7,283 ( 357) 6,926
.......... 1,800 413 ( 2,213)
.......... ( 1,800) ( 1,800)
---------- ---------- ---------- ---------- ---------- ----------
.......... $ 3,610 $ $ 413 $ 7,247 $( 330) $ 30,409
========== ========== ========== ========== ========== ==========
</TABLE>
See notes to financial statements.
20
<PAGE> 21
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED JULY 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<C> <C> <C>
<S>
Cash flows from operating activities:
Net income .................................... $ 6,926 $ 2,618 $ 1,436
Add (deduct) non-cash items:
Depreciation and amortization ............... 3,138 2,430 2,375
Non-cash portion of patronage dividends ..... ( 51) ( 274) ( 383)
Loss on retirement of property, plant and
equipment ................................. 164
Changes in assets and liabilities:
Trade receivables ........................... ( 3,174) ( 1,404) ( 198)
Accounts receivable from growers ............ 158 ( 85) 189
Other receivables ........................... ( 74) 373 ( 337)
Inventories ................................. ( 1,963) ( 50) ( 2,357)
Prepaid expenses ............................ ( 386) ( 120) ( 9)
Accounts payable ............................ 543 136 867
Excess outstanding checks over cash on deposit 2,457 ( 542)
Grower payables ............................. ( 729) 262 326
Other accrued liabilities ................... 1,026 ( 262) ( 77)
-------- -------- --------
Net cash from operating activities .......... 8,035 3,624 1,290
-------- -------- --------
Cash flows for investing activities:
Purchases of property and equipment ........... (17,837) ( 1,489) ( 1,309)
Proceeds from sale of property and equipment .. 2
Lease improvements, packaging development and
purchase of other assets .................... ( 263) ( 140) ( 274)
Investment in St. Paul Bank for Cooperatives .. ( 171)
-------- -------- --------
Net cash used in investing activities ....... (18,100) ( 1,629) ( 1,752)
-------- -------- --------
Cash flows from (for) financing activities:
Issuance of long-term debt .................... 10,900 2,078
Payments on long-term debt .................... ( 67) ( 9,195) ( 1,458)
Retirement of preferred stock ................. ( 367) ( 150)
Dividends paid on preferred stock ............. ( 44) ( 147)
Membership stock issued ....................... 2 14 2
Membership stock retired ...................... ( 2) ( 1) ( 5)
Equity stock issued ........................... 9,834
Subscriptions forfeited ....................... 2
Expenses of stock offering .................... ( 124)
Patronage distributions ....................... ( 1,800) ( 935)
-------- -------- --------
Net cash from (for) financing activities .... 8,622 ( 702) 617
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents ................................... ( 1,443) 1,293 155
Cash and cash equivalents, beginning of period .. 1,448 155
-------- -------- --------
Cash and cash equivalents, end of period ........ $ 5 $ 1,448 $ 155
======== ======== ========
</TABLE>
(continued on next page)
21
<PAGE> 22
DAKOTA GROWERS PASTA COMPANY
STATEMENTS OF CASH FLOWS
TWELVE MONTHS ENDED JULY 31, 1997, 1996 AND 1995
(in thousands)
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<C> <C> <C>
<S>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash payments for:
Interest .................................... $ 2,120 $ 2,556 $ 2,561
======== ======== ========
Income taxes ................................ $ $( 72)$ 55
======== ======== ========
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Accrued dividends on Series A preferred stock . $ $ 8 $ 42
======== ======== ========
</TABLE>
See notes to financial statements.
22
<PAGE> 23
DAKOTA GROWERS PASTA COMPANY
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JULY 31, 1997, 1996 AND 1995
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization -
Dakota Growers Pasta Company ("the Company" or "the Cooperative") was
formed on December 16, 1991 and commenced operation on January 1, 1994. The
Company is organized as a farmers' cooperative for purposes of manufacturing
food for human consumption from durum and other grain products.
The ownership of membership stock, which signifies membership in the
Cooperative, is restricted to producers of agricultural products. The ownership
of equity stock is restricted to members of the Cooperative. Preferred stock
may be held by persons who are not members of the Cooperative.
Net proceeds are allocated to patrons who are members on the basis of their
participation in the cooperative. Equity requirements, as determined by the
Board of Directors, may be retained from amounts due to patrons and credited to
members' investments in the form of unit retains or undistributed allocated
patronage.
The Cooperative reserves the right to acquire any of its stock offered for
sale and the right to recall the stock of any stockholder. In the event this
right is exercised, the consideration paid for such stock shall be the fair
market value at that point in time.
Estimates -
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Reclassifications -
Certain amounts previously reported in the financial statements as of July
31, 1996 and for the years ended July 31, 1996 and 1995 have been reclassified
to facilitate comparability with the statements as of July 31, 1997 and for the
year ended July 31, 1997. Such reclassifications have no effect of the net
result of operations.
Cash and cash equivalents -
Cash and cash equivalents include cash on hand and in financial
institutions.
Trade accounts receivable and revenue -
The Cooperative grants credit to its customers located throughout the
United States. Trade accounts receivable are presented net of allowances for
cash discounts and doubtful accounts which totaled $218,000 and $70,000 as of
July 31, 1997 and 1996, respectively.
Revenues are presented net of discounts and allowances of $7,694,000,
$5,452,000 and $5,650,000 for the years ended July 31, 1997, 1996 and 1995,
respectively. No customer represented greater than 10% of revenues for the
23
<PAGE> 24
years ended July 31, 1997 and 1996. Two customers accounted for approximately
25% of revenues for the year ended July 31, 1995.
Accounts receivable from growers -
Accounts receivable from growers represents amounts billed to members under
the delivery policy but unpaid at the balance sheet date.
Inventories -
Finished goods, mill by-products and durum are valued at estimated net
realizable value. This is determined based on current selling price less any
remaining cost to finish, transport, warehouse and sell the product. Packaging
and ingredient inventories are valued at the lower of cost or market. Cost is
determined based on actual purchase cost on a FIFO basis, while market is
current replacement cost.
The major components of inventories as of July 31, 1997 and 1996 are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<C> <C>
<S>
Durum ............................................... $ 1,536 $ 535
Finished goods and by-products ...................... 5,896 4,353
Packaging and ingredients ........................... 1,268 1,849
---------- ----------
$ 8,700 $ 6,737
========== ==========
</TABLE>
Property and equipment -
Property and equipment are stated at cost. Expenditures for renewals and
improvements that significantly add to the productive capacity or extend the
useful life of an asset are capitalized. Expenditures for maintenance and
repairs are charged to expense as incurred. When depreciable properties are
retired or sold, the cost and related accumulated depreciation are eliminated
from the accounts and the resultant gain or loss is reflected in income.
Interest capitalized totaled $307,000 for the year ended July 31, 1997.
Direct labor capitalized totaled $55,000 and $7,000 for the years ended July 31,
1997 and 1996, respectively.
The initial acquisition of land is stated at the estimated fair value of
the land at acquisition. Subsequent land acquisitions are recorded at cost.
Depreciation is provided for over the estimated useful lives of the
individual assets using the straight-line method. The estimated useful lives
used in the computation of depreciation expense range from 3 to 39.5 years.
Depreciation expense totaled $2,844,000, $2,365,000 and $2,318,000 for the years
ended July 31, 1997, 1996 and 1995, respectively.
Effective August 1, 1996 the Company revised the period over which it
depreciates packaging printing plates from 15 years to 5 years. Such change in
accounting estimate reduced net income for the year ended July 31, 1997 by
$88,000.
Investments in the St. Paul Bank for Cooperatives (the "Bank") -
Investments in the St. Paul Bank for Cooperatives are stated at cost, plus
unredeemed patronage refunds received in the form of capital stock. Patronage
refunds estimated to be received are shown as other receivables or other
assets.
24
<PAGE> 25
Other assets -
The breakdown of other assets is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<C> <C>
<S>
Syndication and trademark costs - net ............... $ 22 $ 36
Leasehold improvements - net ........................ 52
Packaging design development costs - net ............ 636 772
Estimated patronage refunds ......................... 211 254
Other ............................................... 14 6
---------- ----------
$ 935 $ 1,068
========== ==========
</TABLE>
The syndication and trademark costs are recorded at cost and are being
amortized on a straight-line basis over five years beginning at the commencement
of operations on January 1, 1994.
The Company capitalizes the initial cost incurred in the development of
packaging designs for new customers and products. These costs are amortized
over five years. Minor revisions are expensed as incurred. If a product design
is discontinued or replaced prior to the end of the amortization period, the
remaining unamortized balance is charged to expense.
Effective August 1, 1996 the Company revised the period over which it
amortizes packaging design development costs from 15 years to 5 years. This
change in accounting estimate reduced net income for the year ended July 31,
1997, by $197,000.
Accrued grower payments -
Accrued grower payments represent amounts due to growers for amounts
withheld from durum purchases pursuant to the growers agreement and delivery
policy.
Interest expense, net -
The Company earns patronage refunds from the St. Paul Bank for Cooperatives
(the "Bank") based on its share of the net interest income earned by the Bank.
These patronage refunds received or estimated to be received are applied against
interest expense.
The Bank significantly reduced its patronage refund for the calendar year
1996 from historical levels, which resulted in the Company reducing its
estimated refunds for the year ended July 31, 1996. Such adjustment, which
totaled $95,000, is reflected in the results for the year ended July 31, 1997.
The Company has continued to accrue estimated patronage refunds at the reduced
level for calendar year 1997.
Income taxes -
The Company is a non-exempt cooperative for federal income tax purposes.
Business conducted with its members constitutes patronage business as defined by
the Internal Revenue Code. The Company is subject to income taxes on earnings
from non-patronage sources. The provision for income taxes relates to the
results of operations from non-patronage business, state income taxes and
certain other permanent differences between financial and income tax reporting.
For the years ended July 31, 1997, 1996 and 1995, net income allocable to
patronage business totaled $7,283,000, $2,635,000 and $1,432,000, respectively.
25
<PAGE> 26
Members' investment -
The Cooperative is a nonprofit membership corporation, organized with
capital stock.
Accumulated unallocated earnings represents cumulative net income which has
not been allocated to members, while Accumulated non-qualified allocated
earnings represents earnings which have been allocated to members based on
patronage but not distributed or qualified for income tax purposes.
The Company calculates income from patronage sources based on income
derived from bushels of durum delivered by members. Non-patronage income is
derived from the resale of wheat flour containing spring wheat flour purchased
from non-members, the resale of pasta purchased from non-members, the resale of
semolina purchased from non-members, interest income on invested funds and any
income taxes assessed on non-member business.
Cooperative organizations have 8 1/2 months after their fiscal year-end to
make patronage allocations in the form of written notices of allocation or
cash. As such, these allocations are normally reflected in the financial
statements in the period in which such allocations are declared by the Board
of Directors. Accordingly, the allocations for the fiscal year ended July
31, 1997 are not reflected in the accompanying financial statements.
Stock options -
The Company has elected to follow Accounting Principles Board Opinion (APB)
No. 25, "Accounting for Stock Issued to Employees" and related interpretations
in accounting for its employee stock options. Under APB No. 25, no compensation
expense is recognized on the granting or exercise of stock options because the
exercise price is equal to or greater than the market price of the underlying
stock on the date of grant.
NOTE 2. SHORT-TERM DEBT
The Cooperative has a $5.0 million seasonal line of credit with the St.
Paul Bank for Cooperatives, which is secured by property and equipment and
current assets of the company.
The seasonal line of credit has a variable interest rate and matures on
March 31, 1998. There was a $2,200,000 balance outstanding as of July 31, 1997,
and no outstanding balance as of July 31, 1996.
The Company utilizes its line of credit in maximizing its cash management,
including construction expenditures. Because the line of credit carries
interest rates slightly lower than available through its construction term loan,
the Company first uses seasonal debt in financing construction expenditures,
paying down the seasonal debt as necessary through draws against the
construction term loan. Because the seasonal debt balance of $2,200,000 as of
July 31, 1997, was less than the $6,006,000 available to draw against the
construction term loan as of July 31, 1997, the Company has classified the
$2,200,000 as a long-term debt item.
Maximum borrowings, average borrowing levels and average interest rates for
short-term debt for the years ended July 31, 1997, 1996 and 1995 are as follows
(in thousands, except interest rates):
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<C> <C> <C>
<S>
Maximum borrowings ............................. $ 4,825 $ 4,700 $ 2,500
======== ======== ========
Average borrowing levels ....................... $ 2,205 $ 1,268 $ 850
======== ======== ========
Average interest rates ......................... 7.57% 8.89% 9.15%
======== ======== ========
26
<PAGE> 27
NOTE 3. LONG-TERM DEBT
Information regarding long-term debt at July 31, 1997 and 1996 is as
follows (in thousands):
</TABLE>
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<C> <C>
<S>
Term loans from the St. Paul Bank for Cooperatives
due in quarterly installments of $685,000
commencing June 30, 1998 through 2003, interest at
8.16% to 10.22%, with first lien on substantially
all property and equipment ........................ $ 18,409 $ 18,409
Construction Term loan from the St. Paul Bank for
Cooperatives due in quarterly installments of
$625,000 commencing December 31, 1997 through
2004, interest at 8.16% as of July 31, 1997,
collateralized by property and equipment .......... 8,700
Seasonal loan utilized in lieu of construction term
loan, interest at 7.65% as of July 31, 1997 ....... 2,200
Term loan from the City of Carrington, due in
installments through 2003, interest rate of 4% .... 336 383
Convertible debt from Tri-County Electric
Cooperative, due in installments through 2003,
non-interest bearing .............................. 60 70
Convertible debt from Dakota Central
Telecommunications, due in installments through
2003, non-interest bearing ........................ 60 70
---------- ----------
Total long-term debt .............................. 29,765 18,932
Current maturities .................................. ( 2,634) ( 72)
---------- ----------
Net long-term debt .................................. $ 27,131 $ 18,860
========== ==========
</TABLE>
Aggregate future maturities required on long-term debt are as follows (in
thousands):
<TABLE>
<S> <C>
Twelve months ending
July 31,
--------------------
1998 $ 2,634
1999 5,318
2000 5,320
2001 5,323
2002 5,325
Thereafter 5,845
----------
$ 29,765
==========
</TABLE>
The Company has a loan agreement with the Bank containing certain covenants
related to, among other matters, the maintenance of certain working capital,
ownership and debt service ratios. As of July 31, 1997 and 1996, the Company
has met these loan covenants.
With the proceeds from the 1996 stock offering (see Note 4, Members'
Equity), the Company accelerated the pay down of long-term debt pending the
issuance of debt financing for the expansion of its mill and pasta operations
(see Note 10, Commitments and Contingencies). Under the current loan
27
<PAGE> 28
agreement, the Company will not have a quarterly principal payment due on this
debt until the June 1998.
The Bank has approved an $18.0 million construction term loan to finance
the expansion of the Company's mill operations and the addition of two pasta
lines with associated packaging equipment. The Company has borrowed $8.7
million against the term loan as of July 31, 1997. Expenditures incurred
through July 31, 1997, would allow the Company to borrow an additional $6.0
million against this loan commitment. Quarterly principal payments on this
construction term loan are scheduled to begin in December 1997.
The Company has convertible debt related to two non-interest bearing notes
with annual installments of $10,000 each. Per the loan agreements, from March
1, 1995 through February 1, 2003, the Company shall have the privilege of
converting the unpaid balance of indebtedness into series B preferred stock.
The holders of the debt do not have the option to convert this debt.
The Company incurred $2,187,000, $2,485,000 and $2,591,000 of interest on
long and short-term debt and other obligations in fiscal years 1997, 1996 and
1995, respectively. $307,000 of interest was capitalized in 1997. Patronage
income from the Bank of $68,000, $362,000 and $510,000 has been netted for the
years ended July 31, 1997, 1996 and 1995, respectively.
NOTE 4. MEMBERS' INVESTMENT
By vote of the membership on February 1, 1997 the Company has authorized
capital stock of 2,000 shares of membership stock with a par value of $125 per
share and twenty-five million (25,000,000) shares of equity stock with a par
value of $3.85 (revised to $2.50 concurrent with a stock split effective August
1, 1997, see note 12, Subsequent Events).
At July 31, 1997 the Company had issued and outstanding 1,084 shares of
membership stock and 4,904,034 shares of equity stock.
Effective January 24, 1996, the Company was authorized by the Securities
and Exchange Commission to offer for sale up to 500 shares of membership stock
at $125 per share and up to 2,070,000 shares of equity stock ($3.85 par value),
at $5.50 per share.
A total of 81 membership shares and 1,788,008 equity shares were sold. The
Company received net proceeds of $9,720,000 (net of $124,000 expenses of the
offering). All shares sold were made effective April 1, 1996 for
patronage participation. The Board of Directors voted on April 18, 1996 to
terminate the stock offering. On July 3, 1996 the Company filed a post-
effective amendment to the registration statement to deregister the remaining
419 membership shares and 281,992 equity shares.
The Company used the proceeds of the sale for mill expansion expenditures
and temporary debt reduction (see Note 3, Long-term Debt, for debt issues
related to construction expenditures).
The Company allocates its patronage earnings and patronage distributions
based on patronage business (bushels of durum delivered, which approximates one
bushel of durum per equity share). For presentation purposes only, it has
calculated net income per share by dividing earnings from patronage and non-
patronage business available for members (net income less preferred dividends)
by the weighted average number of equity shares outstanding during the period.
A patronage allocation of $1,800,000, $.50 per bushel, representing the
allocation of 1996 fiscal earnings, was authorized by the Board of Directors in
October 1996 and was distributed in November 1996. Additionally,
28
<PAGE> 29
$413,000, $.115 per bushel, was allocated to the members but not distributed or
qualified for income tax purposes. A patronage allocation of $935,000, $.308
per bushel, representing the allocation of 1995 fiscal earnings authorized by
the Board of Directors in October 1995, was distributed in November 1995.
NOTE 5. PREFERRED STOCK
The Company is authorized to issue 50,000 shares of preferred stock with a
par value of $100 per share. As of July 31, 1997 the Company has outstanding
4,525 shares of preferred stock in two series', both redeemable pursuant to
agreement.
Each share of preferred series A stock entitles its holder to receive a 6%
annual dividend accrued from the date of issuance and payable upon declaration
by the Board of Directors.
Pursuant to an agreement with the holder of series A preferred stock, on
August 1, 1995, the Company paid all accrued dividends and, quarterly beginning
November 1, 1995, shall redeem 500 shares at par value of $100 per share, plus
accrued dividends. The Company, at its discretion, may increase the number of
shares redeemed at any quarterly installment. The Company may postpone
quarterly redemptions if the equity level falls below an acceptable level set by
the Bank, shortages in working capital or for unforeseen short-term business
opportunities.
As of July 31, 1997 the Company has 3,000 shares of preferred series A
stock outstanding.
Each share of preferred series B stock entitles its holder to receive an
annual cash dividend at the rate of $2.00 per share, when and as declared by the
Board of Directors. Dividends on the preferred series B stock shall not
accumulate if not declared by the board.
Two thousand two hundred fifty (2,250) shares of the preferred series B
stock may be redeemed, in whole or in part, at the option of the Company at any
time after August 1, 1997, at the redemption price of $100 per share, plus any
declared but unpaid dividends. On or after August 1, 1997, the stockholder may
require the Company to redeem all or a said portion of the shares for $100 per
share, plus any declared but unpaid dividends, if both (1) the equity exclusive
of the preferred series A and B stock is 40% or greater of the total capital as
of July 31, 1997, and (2) the Company made dividend payments on the equity stock
for the year ended July 31, 1997.
Four hundred fifty (450) shares of the preferred series B stock are
governed by a repurchase agreement obligating the Company to repurchase their
shares as of September 1, 1998, at the par value of $100 per share, plus any
declared but unpaid dividends. These shares may be redeemed by the Cooperative
on or after August 1, 1997, in agreement with the terms stated above.
One shareholder of preferred series B stock, representing one thousand one
hundred seventy-five (1,175) shares, notified the Company of its desire to
exercise its redemption rights available on August 1, 1997. By vote of the
Board of Directors, this redemption was made on July 31, 1997.
As of July 31, 1997 the Company has 1,525 shares of preferred series B
stock outstanding.
NOTE 6. EMPLOYEE BENEFIT PLAN
Effective January 1, 1994, the Company implemented a 401 (k) plan covering
employees who have met the age and service requirements. Effective July 1, 1997,
the eligibility requirement to the plan was amended to cover
29
<PAGE> 30
all employees who will work 1000 hours, have reached 21 years of age and
completed six-months of service as defined in the plan document. The amount to
be contributed annually by the Company is discretionary. Contributions by the
Company were $31,000, $28,000 and $25,000 for the years ended July 31, 1997,
1996 and 1995, respectively.
NOTE 7. INCOME TAXES
The Company is a non-exempt cooperative as defined by Section 1381(a)(2)
of the Internal Revenue Code. Accordingly, net margins from business done with
member patrons which are allocated and paid as prescribed in Section 1382 of the
code (hereafter referred to as "qualified") will be taxable to the members and
not to the Cooperative. Net margins and member allocations are determined on
the basis of accounting used for financial reporting purposes. To the extent
that net margins are not qualified as stated above or arise from business done
with non-members, the Cooperative shall have taxable income subject to corporate
income tax rates.
Tax expense in 1996 represents taxes paid to various states pursuant to
their respective tax provisions. The benefit from income taxes in 1995
represents amounts refunded due to the carryback of a non-member operating loss.
Certain temporary differences exist between financial statement and income
tax reporting purposes that also create a difference in the amount of patronage
income determined on either basis. As these differences are ultimately
allocated to the members through patronage allocations, no deferred taxes are
provided for these temporary differences.
NOTE 8. FAIR VALUE OF FINANCIAL INSTRUMENTS -
The fair value of a financial instrument is generally defined as the amount
at which the instrument could be exchanged in a current transaction between
willing parties, other than in a forced liquidation sale. Quoted market prices
are generally not available for the Company's financial instruments.
Accordingly, fair values are based on judgements regarding anticipated cash
flows, future expected loss experience, current economic conditions, risk
characteristics of various financial instruments and other factors. These
estimates involve uncertainties and matters of judgement, and therefore cannot
be determined with precision. Changes in assumptions could significantly affect
the estimates.
The carrying amount of cash and cash equivalents, receivables, payables,
short-term debt and other current liabilities approximates fair value because of
the short maturity and/or frequent repricing of those instruments.
The Company believes it is not practical to estimate the fair value of the
securities of non-subsidiary cooperatives without incurring excessive costs
because there is no established market for these securities and it is
inappropriate to estimate future cash flows which are largely dependent on
future patronage earnings of the non-subsidiary cooperatives.
Based upon current borrowing rates with similar maturities, the fair value
of the long-term debt approximates the carrying value as of July 31, 1997.
NOTE 9. OPERATING LEASES
The Company leases various warehouse facilities in North Dakota, as well as
various items of equipment, primarily forklifts and computers. These leases
call for monthly payments as of July 31, 1997 of $59,000 and expiration dates
ranging from 1998 to 2001.
30
<PAGE> 31
Future obligations for the above leases for the fiscal years ended July 31
are as follows (in thousands):
<TABLE>
<S> <C>
Twelve months ending
July 31,
--------------------
1998 $ 670
1999 602
2000 566
2001 503
2002 330
</TABLE>
Lease expense totaled $404,000, $304,000 and $169,000 for the years ended
July 31, 1997, 1996 and 1995, respectively.
NOTE 10. COMMITMENTS AND CONTINGENCIES
In July 1997 the Company entered into agreements to purchase an additional
pasta line. The total estimated project cost, including mill enhancements and
packaging equipment, is expected to aggregate $5.5 million, of which $63,000 has
been expended in the year ended July 31, 1997.
The Company has an agreement to engage another pasta company as a co-packer
for up to seven million pounds of pasta annually for two years commencing June
15, 1996.
On January 1, 1996, the Company became self-insured with respect to certain
employee medical costs. Terms of the plan include a stop-loss provision which
limits the Company's liability to $20,000 per claim with an aggregate stop-loss
maximum totaling approximately $330,000 for calendar year 1997. Through July
31, 1997 the Company has charged $196,000 against its 1997 maximum liability.
The Company forward contracts for a certain portion of its future durum
wheat requirements. At July 31, 1997, the Company has outstanding commitments
for grain purchases totaling $10,961,000.
The Cooperative is subject to various lawsuits and claims which arise in
the ordinary course of its business. While the results of such litigation and
claims cannot be predicted with certainty, management believes the disposition
of all such proceedings, individually or in aggregate, should not have a
material adverse effect on the Company's financial position, results of
operations or cash flows.
NOTE 11. STOCK OPTION PLANS
On January 31, 1997 the Company's Compensation Committee of the Board of
Directors (the "Compensation Committee") adopted the Dakota Growers Incentive
Stock Option Plan (the "Plan"). The purpose of the Plan is to provide benefits
to participants in the form of additional compensation for services which have
been or will be rendered as an inducement for continuing as employees of the
Company. The Plan will be presented to the membership for ratification at its
annual meeting in January 1998.
The Plan is administered by the Compensation Committee. The Compensation
Committee or the Board of Directors have the power to determine the key
management employees of the Company to receive options and the number of shares
to be optioned to each of the employees.
Options granted under the Plan are for the purchase of preferred stock at
$100.00 per share, convertible into equity stock at the option of the employee,
under the applicable conversion ratio. The maximum number of
31
<PAGE> 32
preferred shares which may be issued pursuant to options granted under the Plan
is fifteen thousand (15,000).
The conversion ratio of preferred stock shall be determined as of the
issuance date of each respective option based on the option price of the
preferred stock ($100.00 per share) divided by the fair market value of the
equity stock as of that date. The conversion ratio shall be proportionately
adjusted if the Company increases the outstanding shares of equity stock without
the payment of consideration by the members for such additional shares (e.g.
stock split, stock dividend or other action).
Options granted under this Plan shall be granted within ten years from the
date of adoption, and shall not be exercisable after the expiration of ten years
from the date such option is granted. Options are not transferable by the
employee other than by will or the laws of descent and distribution.
The option price must not be less than the fair market value of the
preferred stock at the time the option is granted. To the extent that the
aggregate fair market value of stock with respect to which incentive stock
options are exercisable for the first time by any individual during a calendar
year exceeds one hundred thousand dollars ($100,000), such option shall be
treated as options which are not incentive stock options.
Upon conversion to equity stock, if the employee does not meet the
requirements of membership in the Company, such equity stock must be sold to an
entity which is qualified for membership.
If the preferred stock is changed into another kind of capital stock or
debt as a result of any capital reorganization, reclassification or any merger
or consolidation with another entity in which the Company is not the surviving
entity, the option entitles the employee to acquire upon exercise the kind and
number of shares of stock or other securities or property to which the employee
would have been entitled if he had held the preferred stock issuable upon the
exercise of this option immediately prior to such capital reorganization,
reclassification, merger or consolidation.
As of July 31, 1997 the Company had outstanding options to purchase 4,715
preferred shares at an exercise price of $100.00, convertible into 75,440 shares
of equity stock, all granted in 1997. The first exercisable date of the
outstanding options ranges from January 31, 1997 through January 1, 2000. No
options have been exercised as of July 31, 1997.
The Company did not record any compensation expense during the year ended
July 31, 1997 related to the issuance or exercise of stock options.
The pro forma application of Statement of Financial Accounting Standard
(SFAS) No. 123 "Accounting for Stock-Based Compensation" would have minimal
impact on net income and earnings per share.
NOTE 12. SUBSEQUENT EVENTS
On July 24, 1997 the Board of Directors voted to split the outstanding
equity stock on a three for two basis, such split to be effective August 1,
1997. The Board of Directors also voted to adjust the par value per share to
$2.50. Each member of record as of that date received three shares of equity
stock, par value $2.50, in exchange for each two shares of equity stock owned as
of August 1, 1997, par value $3.85. With said stock split, the Company has
7,356,056 shares of equity stock outstanding as of August 1, 1997.
The Board of Directors also voted to reduce the marketing period per unit
retain from 15% to 10% of the purchase price, and to reduce the pool access fee
from $.15 per bushel to $.10 per bushel effective August 1, 1997.
32
<PAGE> 33
On October 16, 1997, the Board of Directors, for fiscal year 1997, authorized a
qualified patronage allocation to members in the amount of $4,745,258, or $1.00
per bushel of patronage and a non-qualified patronage allocation to members in
the amount of $2,500,751, or $.527 per bushel of patronage. The total qualified
patronage allocation of $1.00 per bushel is to be paid in cash on November 6,
1997.
Additionally, the Board of Directors declared an additional qualified
patronage allocation for Alternative Minimum Tax ("AMT") purposes of $.49 per
bushel of patronage. This qualification served the purpose of reducing the
Company's AMT liability to zero by passing this liability on to its members
proportionately.
Cooperative organizations have 8 1/2 months after their fiscal year-end to
make such allocations in the form of written notices of allocation or cash. As
such, these allocations are normally reflected in the financial statements in
the period in which such allocations are declared by the Board of Directors.
Accordingly, the allocations noted above are not reflected in the accompanying
financial statements.
On October 15, 1997, the Company entered into a consulting agreement with
one of its customers, Peninsula Trading Company ("Peninsula"), whereby Peninsula
will be paid consulting fees for the development and fostering of a direct
business relationship between Costco and the Company. Costco had previously
been a customer of Peninsula. The agreement, which calls for a payment upon
execution of the agreement and continued monthly payments up to a maximum total
consulting fee, will have minimal impact on the Company's future results of
operations.
33
<PAGE> 34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
The Board of Directors consists of a member/director from each of the
Company's nine geographic districts, elected by other holders of membership
stock from that district. Officers are elected annually by the Board of
Directors. In preparation for the 1997 members' meeting, and triennially
thereafter, the Bylaws require that the incumbent Board of Directors appoint a
redistricting committee to review and recommend changes in the boundaries of the
districts necessary or appropriate to maintain equitable representation of not
more than a fifteen percent variance of the number of members in each district.
If the Board of Directors approves the recommendations of the committee, the
recommendation will be submitted to the members for approval, rejection or
modification.
The table below lists the current directors of the Company. The directors
have been elected to serve three-year terms expiring at the annual meeting in
the years indicated in the table below.
<TABLE>
<CAPTION>
Name and Address Age District Term Expires
<C> <C> <C>
<S>
John S. Dalrymple, III 49 Sheyenne 2000
P.O. Box 220 Number 4
Casselton, ND 58012
Allyn K. Hart 58 Northeast 1999
RR 1, Box 61 Number 6
Wales, ND 58281
Roger A. Kenner (1) 48 East Durum Triangle 1998
RR 2, Box 53 Number 8
Leeds, ND 58346
James F. Link 70 Southeast 2000
1304 4th Street North Number 3
Wahpeton, ND 58075
Eugene J. Nicholas 52 North Central 1998
RR 1 Number 7
Cando, ND 58324
John D. Rice, Jr. (1) 43 West Durum Triangle 2000
RR 2, Box 104 Number 9
Maddock, ND 58348
Jeffrey O. Topp 38 Central 1998
RR 1, Box 23 Number 2
Grace City, ND 58445
Curtis R. Trulson 45 Western 1999
RR 1, Box 62 Number 1
Ross, ND 58776
Michael E. Warner 47 East Central 1999
RR 2, Box 119 Number 5
Hillsboro, ND 58045
</TABLE>
34
<PAGE> 35
(1) Mr. Kenner and Mr. Rice are first cousins.
John S. Dalrymple III has been chairman of the Board of Directors of the
Company since 1991. He has been a state representative since 1984. Mr.
Dalrymple also is Chairman of the House Appropriations Committee and Chairman of
the Budget Section of the North Dakota House of Representatives. Mr. Dalrymple
also serves on the board of directors of U.S. Durum Growers Association. He has
been a farmer in the Casselton, N.D. area since 1971. He received a bachelor of
arts in American Studies from Yale University.
Allyn K. Hart has been a director of the Company since 1991. He has been a
farmer in the Cavalier, N.D. area since 1961. He is vice president and a member
of the board of directors of Cavalier County Job Development Authority. Mr.
Hart also serves on the board of directors of Maple Manor Care Center. Mr. Hart
received a bachelor of science from North Dakota State University.
Roger A. Kenner has been a director of the Company since 1991. He is owner
of Kenner Seed Farm and Simmental Ranch and a farmer in Leeds, N.D. since 1964.
He is a trustee of the American Simmental Association and a past Chairman of the
North Dakota Simmental Association. Mr. Kenner is vice-chairman of the Leeds,
N.D. Economic Development Authority and a director of the Greater North Dakota
Association. He is a past director of the North Dakota State University
President's Advisory Council. Mr. Kenner received a bachelor of science in 1971
from North Dakota State University.
James F. Link has been a director of the Company since 1991. Mr. Link has
served on the boards of directors of Farm Credit and Minn-Dak Farmers
Cooperative. Mr. Link served on the Pro-Gold Corn Plan Development Committee.
He has been a farmer in the Wahpeton, N.D. area since 1947.
Eugene J. Nicholas has been a director of the Company since 1991. Mr.
Nicholas has been a state representative since 1974. He serves as chairman of
the North Dakota House of Representatives Agriculture Committee. Mr Nicholas
also serves on the boards of directors of the U.S. Durum Growers Association,
Towner County Bank, Cando, and the Durum Triangle Economic Development
Committee. Mr. Nicholas received a bachelor of science in Business Economics
from North Dakota State University.
John D. Rice, Jr. is the vice chairman of the Board of Directors of the
Company and has been a director of the Company since 1991. He has been a farmer
in the Maddock, N.D. area since 1968. Mr. Rice currently serves on the board of
directors of the National Bank, Harvey, N.D., and as a director of the C.L.K.
Educational Trust. He has served on the boards of directors of National Pasta
Association and U.S. Durum Growers Association. Mr Rice also serves as a
trustee for Maddock Zion Lutheran Church. Mr. Rice received an associate of
science in agricultural economics from North Dakota State University.
Jeffrey O. Topp has been a director of the Company since 1991. He has been
a farmer in the Grace City, N.D. area since 1978, and is a partner of the T-T
Ranch. Mr. Topp is serving on the interim board of directors of AgGrow Oils of
Carrington. He is a member of the Eddy County Agriculture Improvement
Association.
Curtis R. Trulson has been secretary/treasurer of the Board of Directors
and a director of the Company since 1991. He has been a farmer in Mountrail
County, North Dakota, since 1975. Mr. Trulson is a past president of the North
Dakota Grain Growers Association and previously served on the board of directors
of the National Association of Wheat Growers. He is also a past chairman of the
Stanley Community Hospital Association. Mr. Trulson received a bachelor of
science in Business Administration from the University of North Dakota.
Michael E. Warner has been a director of the Company since 1992. Mr.
Warner has been a farmer since 1967 and is currently owner/operator of Mike
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<PAGE> 36
Warner Farm near Hillsboro, North Dakota. Mr. Warner is chairman of the board
of directors of United Spring Wheat Processors. He also serves as president of
Warner Equipment Company and on the board of trustees of Meritcare Health
Systems. He is a past member of the boards of directors of American Crystal
Sugar Company of Moorhead, Minnesota. Mr. Warner received a bachelor of science
in pharmacy from North Dakota State University.
Directors Compensation
The Board of Directors meets monthly. The Company provides its directors
with compensation consisting of (i) a per diem payment of $200 ($250 for the
Chairman of the Board) for any day on which a director partakes of activities on
the Company's behalf, including board meetings and other Company functions, (ii)
a monthly stipend of $200, and (iii) reimbursement for out-of-pocket expenses
incurred on behalf of the Company.
Company Management and Key Employees
The table below lists the principal managers of the Company, none of whom
owns any Membership Stock or Equity Stock.
<TABLE>
<CAPTION>
Name Age Position
<C> <C>
<S>
Timothy J. Dodd 42 President and General Manager, Principal
Executive Officer
Thomas P. Friezen 38 Vice President, Finance, Principal
Financial and Accounting Officer
Gary E. Mackintosh 45 Vice President, Sales and Marketing
David E. Tressler 43 Plant Superintendent
Harlan W. Jemison 68 Vice President, Ingredient and
Foodservice Sales
</TABLE>
Timothy J. Dodd is the President and General Manager of the Company. Prior
to joining the Company in December 1991, he had been since 1988 the vice
president of manufacturing of the American Italian Pasta Co., a durum milling
and pasta production company located in Missouri. He received a bachelor of
science in Milling Science and Management from Kansas State University.
Thomas P. Friezen joined the Company in April 1995. From 1991 to April
1995 he was with Arizona Electric Power Cooperative, an electricity generation
and transmission company. Prior to that Mr. Friezen worked for Williston Basin
Interstate Pipeline, a natural gas transmission company. He received a bachelor
of science in accounting from the University of Mary, Bismarck, North Dakota and
is a certified public accountant.
Gary E. Mackintosh has been with the Company since December 1991. From
1988 to 1991 he was director of retail sales at American Italian Pasta Co. From
1978 to 1988 he was regional sales manager for The Prince Company, a pasta
manufacturer. He received a bachelor of business in administration from The
Barney School, University of Hartford, Connecticut.
David E. Tressler joined the Company in February 1992 as Project Engineer.
He received a bachelor of science degree in Industrial Engineering from Iowa
State University at Ames, Iowa. Prior to joining the Company, Mr. Tressler
worked as a director of engineering at American Italian Pasta Co., where he was
responsible for monitoring the completion of the initial pasta plant. From 1977
to 1988 he was plant engineer at International Multi-Foods, Inc.
Harlan W. Jemison has been involved in ingredient and foodservice sales for
the Company since September, 1992. Prior to joining the Company, from 1991 to
1992 he was national sales manager for Shade Pasta Company. In 1990 he was
director of Foodservice Sales at American Italian Pasta Co. From 1969
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<PAGE> 37
to 1990 Mr. Jemison was national sales manager - foodservice for CPC
International, a food products manufacturer. He attended the University of
Washington and Syracuse University Advanced Business Management and Marketing
School.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the amount of compensation paid to the
Company's key employees for the fiscal years ended July 31, 1997, 1996 and 1995
whose cash compensation during the fiscal year ended July 31, 1997 exceeded
$100,000.
<TABLE>
<CAPTION>
Other Annual
Name Year Salary Bonus Compensation (1)
<C> <C> <C> <C>
<S>
Timothy J. Dodd, 1997 $147,108 $ 1,430 $ 1,908
President and 1996 120,000 1,426 1,800
General Manager 1995 120,000 561 1,182
Gary E. Mackintosh 1997 $ 98,583 $ 6,720 $ 328
Vice President - 1996 72,038 14,800 332
Sales and Marketing 1995 67,500 9,159 88
David E. Tressler 1997 $ 78,829 $ 31,125 $ 1,775
Plant Superintendent 1996 79,560 1,126 1,564
1995 77,100 541 1,020
Harlan W. Jemison 1997 $ 75,003 $ 24,759 $ 1,455
Vice President - 1996 69,137 14,728 1,549
Foodservice and 1995 65,417 11,275 450
Ingredient Sales
</TABLE>
(1) Includes the Company's 401(k) matching contribution.
Mr. Dodd's compensation is set by a sub-committee of the Board of
Directors.
Compensation Plans
On January 31, 1997 the Company's Compensation Committee of the Board of
Directors (the "Compensation Committee") adopted the Dakota Growers Incentive
Stock Option Plan (the "Plan"). The purpose of the Plan is to provide benefits
to participants in the form of additional compensation for services which have
been or will be rendered as an inducement for continuing as employees of the
Company. The Plan will be presented to the membership for ratification at its
annual meeting in January 1998.
The Plan is administered by the Compensation Committee. The Compensation
Committee or the Board of Directors have the power to determine the key
management employees of the Company to receive options and the number of shares
to be optioned to each of the employees.
Options granted under the Plan are for the purchase of preferred stock at
$100.00 per share, convertible into equity stock at the option of the employee,
under the applicable conversion ratio. The maximum number of preferred shares
which may be issued pursuant to options granted under the Plan is fifteen
thousand (15,000).
The conversion ratio of preferred stock shall be determined as of the
issuance date of each respective option based on the option price of the
preferred stock ($100.00 per share) divided by the fair market value of the
equity stock as of that date. The conversion ratio shall be proportionately
adjusted if the Company increases the outstanding shares of equity stock without
the payment of consideration by the members for such additional
37
<PAGE> 38
shares (e.g. stock split, stock dividend or other action).
The following table sets out the stock options awarded in the year ended
July 31, 1997. To date no options have been exercised.
<TABLE>
<CAPTION>
Preferred
Shares Grant
Underlying Pct. Exercise Date
Options Options Price Expiration Present
Name Granted Granted ($/Sh) Date Value
- ------------------ --------- ------- --------- ----------- ----------
<C> <C> <C> <C> <C>
<S>
Timothy J. Dodd 1,000 21% $100.00 1/31/2007 $100,000
1,000 21% 100.00 1/ 1/2008 100,000
1,000 21% 100.00 1/ 1/2009 100,000
413 9% 100.00 1/ 1/2010 41,300
-------- ------ ----------
3,413 72% 341,300
Gary E. Mackintosh 760 16% 100.00 1/31/2007 76,000
Thomas P. Friezen 542 12% 100.00 1/31/2007 54,200
</TABLE>
The above options were granted with a conversion ratio of 16 shares of Equity
Stock for each share of Preferred Stock. This conversion ratio was adjusted to
24 shares of Equity Stock for each share of Preferred Stock effective August 1,
1997 as a result of the 3-for-2 stock split declared effective that date.
Under the terms of the plan, the option price must not be less than the
fair market value of the preferred stock at the time the option is granted.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As a cooperative, each member (represented by ownership of one share of
membership stock) has equal voting rights regardless of the number of equity
shares owned. As of October 29, 1997, no director (or member designating a
director) owns beneficially more than .65% of the Company's issued and
outstanding membership stock and such directors, as a group, beneficially own
2.3%.
As of October 29, 1997, no director (or member designating a director) owns
beneficially more than three and one-half percent of the Company's issued and
outstanding Equity Stock and such directors, as a group, beneficially own 8.7%
of the Company's issued and outstanding Equity Stock.
To the best of the Company's knowledge, no other party beneficially owned
more than five percent of the Company's Membership (Voting) Stock or Equity
Stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Each of the Company's directors is also an agricultural producer and a
member of the Company. By virtue of their status as such members of the
Company, each director sells durum wheat to the Company and receives payments
for that durum wheat, including payments for wheat delivered in excess of the
member's obligation to deliver durum wheat by virtue of the member's ownership
of shares of Equity Stock. In prior years, such payments for durum wheat often
exceed $60,000. However, such payments are received by the directors or the
entities they represent on exactly the same basis as payments are received by
other members of the Company for the delivery of their durum wheat. Except for
the durum wheat sales described in the preceding sentences, none of the
directors or executive officers of the Company have engaged in any other
transactions with the Company involving amounts in excess of $60,000.
38
<PAGE> 39
PART IV.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statement Schedules
None.
Reports on Form 8-K
The Company was not required to and did not file any reports on Form 8-K
during the three months ended July 31, 1997.
Exhibits
3/ 3.1 Certified Articles of Incorporation of Dakota Growers Pasta Company
3/ 3.2 Bylaws of Dakota Growers Pasta Company.
3/ 10.1 Form of Growers Agreement between the Company and members of the
Company.
4/ 10.2 Loan Agreement in the aggregate amount of $41,409,007.58 dated
March 31, 1997, between the Company and St. Paul Bank for
Cooperatives.
4/ 10.3 Nonnegotiable Note of Dakota Growers Pasta Company in the principal
amount of $5,000,000.00 dated March 31, 1997.
4/ 10.4 Real Estate Mortgage executed by Dakota Growers Pasta Company to
the St. Paul Bank for Cooperatives in the amount of $42,000,000
dated May 15, 1997.
1/ 10.5 Series A Preferred Stock Purchase Agreement dated October 28, 1992
between the Company and the State of North Dakota acting by and
through North Dakota Future Fund, Inc., including Amendment to
Preferred Stock Purchase Between Dakota Growers Pasta Company and
North Dakota Future Fund dated August 26, 1995.
1/ 10.6 Loan Agreement in the aggregate amount of $100,000 dated February
5, 1993 between the Company and Dakota Central Telecommunications
Cooperative.
1/ 10.7 Promissory Note in the principal amount of $100,000 dated February
5, 1993 between the Company and Dakota Central Telecommunications
Cooperative.
1/ 10.8 Loan Agreement in the aggregate amount of $100,000 dated February
5, 1993 between the Company and Tri-County Electric Cooperative,
Inc.
1/ 10.9 Promissory Note in the principal amount of $100,000 dated February
5, 1993 between the Company and Tri-County Electric Cooperative,
Inc.
5/ 10.10 Indenture of Lease between RLN Leasing, Inc. and Dakota Growers
Pasta Company, dated May 1, 1997.
2/ 10.11 Lease Agreement between Congress, Inc. and Dakota Growers Pasta
Company, dated March 13, 1995.
1/ 10.12 Sample Broker Agreement between Dakota Growers Pasta Company and
Sinco, Inc. dated May 1, 1995.
5/ 10.13 Agreement between Dakota Growers Pasta Company and JP Foodservice,
Inc. dated March 7, 1997.
5/ 10.14 Consulting Agreement between Dakota Growers Pasta Company and
Peninsula Trading Company, Inc. dated October 15, 1997.
23.1 Consent of Independent Auditors, see Independent Auditor's Report
on page 15.
27 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not
filed.
1/ Incorporated by reference from the Company's Registration Statement on
Form S-1, File No. 33-99834, declared effective January 26, 1996.
2/ Incorporated by reference from the Company's Registration Statement on
Form S-1, File No. 33-99834, declared effective January 26, 1996.
Confidential treatment was granted with respect to portions of these
agreements.
39
<PAGE> 40
3/ Incorporated by reference from the Company's Quarterly Report on Form
10-Q, File No. 33-99834, for the quarterly period ended January 31, 1997.
4/ Incorporated by reference from the Company's Quarterly Report on Form
10-Q, File No. 33-99834, for the quarterly period ended April 30, 1997.
5/ Confidential treatment being requested with respect to portions of these
agreements.
40
<PAGE> 41
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dakota Growers Pasta Company
<TABLE>
<S> <C>
Date: October 29, 1997 /s/ Timothy J. Dodd
---------------- ----------------------------------
Timothy J. Dodd (President and
General Manager, and Principal
Executive Officer)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<C> <C>
<S>
/s/ Timothy J. Dodd
- ------------------------
Timothy J. Dodd President and General Manager October 29, 1997
(Principal Executive Officer)
/s/ Thomas P. Friezen
- ------------------------
Thomas P. Friezen Vice President, Finance October 29, 1997
(Principal Financial and
Accounting Officer)
/s/ John S. Dalrymple III
- ------------------------
John S. Dalrymple III Director October 29, 1997
/s/ John D. Rice Jr.
- ------------------------
John D. Rice Jr. Director October 29, 1997
/s/ Curt R. Trulson
- ------------------------
Curt R. Trulson Director October 29, 1997
/s/ Allyn K. Hart
- ------------------------
Allyn K. Hart Director October 29, 1997
/s/ Roger A. Kenner
- ------------------------
Roger A. Kenner Director October 29, 1997
/s/ James F. Link
- ------------------------
James F. Link Director October 29, 1997
/s/ Eugene J. Nicholas
- ------------------------
Eugene J. Nicholas Director October 29, 1997
/s/ Jeffrey O. Topp
- ------------------------
Jeffrey O. Topp Director October 29, 1997
/s/ Michael E. Warner
- ------------------------
Michael E. Warner Director October 29, 1997
</TABLE>
41
<PAGE> 42
Exhibit 10.10
INDENTURE OF LEASE
THIS INDENTURE OF LEASE, entered into, in duplicate, this 1st day of May,
1997, by and between RLN LEASING, INC., (hereafter collectively called
"Landlord"), and DAKOTA GROWERS PASTA COMPANY, INC. a corporation organized
under the laws of the State of North Dakota with principal offices at One Pasta
Avenue, Carrington, North Dakota, 58421 (hereafter "Tenant"); WITNESSETH:
It is convenanted and agreed that in addition to the below listed
covenants, that this lease replaces and supersedes the lease between the above
listed parties dated October 12, 1995.
1. PREMISES. Landlord, for and in consideration of the rents hereafter
reserved and of the covenants and agreements of Tenant hereafter contained, has
demised and leased and by these presents does demise and lease unto Tenant for
the term hereafter set forth, 137,580 sq. ft. of warehouse space located at 4001
32nd Street North, Fargo, North Dakota. In addition to the aforementioned
square footage of warehouse area, this lease is also to include the office
portion, both upper and lower floors approximately 4,600 in square footage. The
total square footage of the building shall be 281,580 sq. ft., and the Tenant's
location is shown in Exhibit A and described on Exhibit C. The build-out of the
Tenant's space shall be shown on this agreement as Exhibit B.
2. (A) ORIGINAL TERM. Tenant shall have and hold the demised premises
described in Exhibit A hereof together with all the improvements thereon and all
rights, privileges, easements and appurtenances thereunto attached and
belonging, for and during the original term of five(5) years (as hereafter
defined) commencing upon the date as hereafter provided.
(B) OPTIONS TO EXTEND. Tenant shall have the right and privilege at
its election to extend the original term of the lease for one successive
additional two year period. The option period shall automatically commence
unless Tenant provides Landlord with written notice of its election not to
extend not less than 90 days prior to the expiration of the original term. All
such extensions shall be upon all the terms, covenants and agreements contained
in this Indenture of Lease. Additional extensions beyond the option period
shall be permitted only upon the express written agreement of the parties
hereto.
3. LEASE YEAR. The parties agree hereto that the term "lease year"
shall refer to the year commencing on the 1st day of May, 1997, and shall end on
the 30th day of April, 2002. The term "rent commencement date" as used herein,
shall be the first day of the lease year.
4. (A) ORIGINAL TERM. Tenant covenants commencing on the rent
commencement date to pay Landlord at such place as may be designated in writing
from Landlord to Tenant from time to time and annual rent for the initial term
of this lease, (confidential treatment requested) INCLUDES OFFICE @
(confidential treatment requested), in twelve equal installments of
(confidential treatment requested), each installment payable in advance on or
before the commencement date of this lease and on or before the monthly
anniversary of said commencement date, subject to the adjustment provisions
hereafter set out. Until further notice, the rent shall be payable to:
RLN LEASING, INC.
2719 40th Avenue North
Fargo, North Dakota 58102
(B) RENT FOR THE OPTIONAL TERM. The annual rental for the option
period may be the same as the original term. However, Landlord reserves the
42
<PAGE> 43
right to make modifications to the rent for increases in real estate taxes and
special assessments, interest rates, and energy costs, Insurance costs. (Set a
base period, verses the 1997)
(C) REAL ESTATE TAXES. Landlord shall pay each year the full amount
of the real estate taxes and special levies and assessments (including area
assessements) levied during the term of this lease or the extension thereof and
assessed against and attributalbe to the demised premises.
(D) INSURANCE. Landlord shall procure and maintain during the term
of this lease, a policy or policies of insurance, insuring Landlord, any
mortgagee, and Tenant, as their interest may appear, against fire and expended
coverage risks covering demised premises, which coverage shall be for the full
insurable replacement value thereof during the term of this lease. Such
insurable shall not be subject to cancellation except after 30 days prior
written notice to Landlord, Tenant and any mortgagee.
Tenant shall self-insure or procure and maintain during the term of this
Lease, at its own cost and expense a policy or policies of insurance, insuring
Landlord, and mortgagee, and Tenant, as their interest may appear, against fire
and extended coverage risks covering the Tenant's personal property at the
demised premises, which coverage shall be for the full replacement value of
thereof during the term of this lease. Such insurance shall not be subject to
cancellation, except after 30 days prior written notice to Landlord, Tenant and
any mortgagee. For policies of insurance to be provided by Tenant, notice of
renewal of such policies, or certificates in lieu thereof, shall be deposited
with Landlord not less than 10 days prior to the expiration of the term of such
coverage. Any reasonable counsel fees, charges or costs involved in collecting
the proceeds of casualty insurance policies provided by the Tenant shall be
borne by Tenant, and Tenant shall have the obligation to proceed with the
collection of said proceeds to the full replacement value of such damages,
including suit, if necessary.
5. USE OF DEMISED PREMISES. Tenant may use the demised premises for the
storage of pasta and pasta related products and any other related food items,
the storage of equipment, and such other uses are consistent with operating a
commercial food warehouse.
6. CARE OF PREMISES. Tenant covenants and agrees that it will not use
or occupy said demised premises or any part thereof for the term of this lease
or any extension thereof in such hazardous manner that any building or
improvement thereon of which said demised premises are a part will not be
insurable by the responsible insurance companies against loss or damage by fire,
extended coverage and broad form perils for the fair insurable value thereof.
Tenant further agrees that upon the expiration or termination of this lease or
any extension thereof in any manner, it will surrender immediate possession of
said demised premises to Landlord in good condition, loss by fire not caused by
Tenant, tornado, act of God, or other unavoidable casualty and ordinary wear
excepted, and that it will deliver the keys to said premises at the place where
the rent reserved herein is payable.
7. HAZARDOUS MATERIALS.
(A) DEFINITIONS: As used in this paragraph, the following terms
shall mean:
1. "Hazardous Materials" shall mean (a)asbestos in any form;
(b)urea formaldehyde foam insulation; (c)transformers of other equipment which
contain dielectric fluid containing levels or polychlorinated biphenyls in
excess of 50 parts per million; or (d)any other chemical, material or substance
which is (i)present in amounts in excess of what is permitted or deemed safe
under Applicable Law, or (ii) handled, stored or otherwise used in any way which
is prohibited or deemed safe under Applicable Law.
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<PAGE> 44
2. "Applicable Law" shall mean any law, rule order, ordinance, or
regulation of any federal, state, county, regional, local, or other governmental
authority.
(B) RESTRICTIONS. Tenant, from the date of this lease, shall not
install, store (including without limitation, storage in underground tanks),
use, treat, transport, or dispose (or knowingly permit or acquiesce in the
installation, storage, use treatment, transportation or disposal by Tenant, its
agents, employees, independent contractors or tenants) on the Leased Premises
any Hazardous Materials. In the event of any subsequent installation, storage,
use, treatment, presence, transportation or disposal of any hazardous materials
by Tenant, or any employees, agents, contractors or third parties, whether or
not known by Tenant, Tenant shall remove any Hazardous Materials and otherwise
comply with Applicable Law, all at the expense of Tenant. Tenant, for acts done
by Tenant from the date of this lease shall indemnify Landlord and hold Landlord
harmless from and against all loss, damage, and expenses (including, without
limitation, reasonable attorney's fees and costs incurred in the investigation,
defense, and settlement of claims) that Landlord may incur as a result of or in
connection with the assertion against Landlord or the demised premises of any
claim relating directly or indirectly, in whole or in part, to the presence or
removal of any Hazardous Materials, or relating to any activity on or off
demised premises carried by Tenant or any of its employees, agents, contractors,
or third parties, if such activity involved Hazardous Materials, in whole or in
part, directly or indirectly, or noncompliance with any Applicable Law which
relate to acts of Tenant after the date of this Lease. Tenant's obligations and
liabilities under this paragraph shall continue so long as Landlord remains
responsible for any spills, emissions, or discharges of hazardous substances or
wastes at or from the demised premises that occur during the term of this
paragraph shall be restrainable by injunction.
8. REPAIRS AND MAINTENANCE.
(A) TENANT'S REPAIRS. Tenant shall throughout the term of this lease
and any extension thereof at its own cost and expense provide the maintenance
and ordinary repair to the interior of the demised premises, including door and
windows and plumbing fixtures, except for structural defects and repairs which
shall be the responsibility and expense of Landlord. Tenant shall also be
responsible for annual maintenance to the heating and air conditioning system.
Tenant shall replace any broken glass with glass of like kind. Tenant shall
also be responsible for repairs to and shall respond to any calls regarding
their alarm system and shall be responsible for any service work or monthly
charges for the alarm system.
(B) LANDLORD'S REPAIRS. Landlord shall be responsible for the
structural maintenance and repair of the roof, foundation and exterior walls of
demised premises and for any and all structural parts of demised premises. In
addition, Landlord shall maintain, repair and replace all utilities, conduits,
fixtures, facilities and equipment to the outside walls or sulfurs of the
building situated on the demised premises.
Landlord further agrees to maintain and repair the parking lot, sidewalks
and service drives in and about the premises, if any, including landscaping,
snow removal, cleaning and drainage, as appropriate.
9. ALTERATIONS. Tenant shall not make any alterations in or additions
to the interior or exterior of the demised premises nor make any contract
therefor without first securing Landlord's written consent which will not be
unreasonably withheld and delivering to Landlord the Plans and Specifications
and furnishing indemnification against all liens, costs damages and expenses, as
may by reasonably required by Landlord. All alterations, additions,
improvements and fixtures other than Tenant's trade fixtures which may be made
or installed by either Landlord or Tenant on the demised premises as a part
thereof without disturbance, molestation or injury
44
<PAGE> 45
at the termination of the term of the lease, whether be lapse of time or
otherwise, all without compensation or credit to Tenant.
10. ASSIGNMENT AND SUBLEASE. Tenant may not assign this lease or
sublease any of the demised premises without the prior written consent of
Landlord, which shall not be unreasonably denied. No such assignment or
subletting shall release the Tenant from the full payment and performance of
each and every covenant, agreement and obligation herein contained on Tenant's
part to be performed.
11. TRADE FIXTURES. Trade fixtures, equipment, furniture and
furnishings, except floor covering, that may have been or may be installed by
Tenant in demised premises shall not become a part thereof, whether affixed or
annexed or not, but Tenant shall, at its own costs and expense, repair any and
all damage to demised premises resulting from or cause by the removal thereof
from the demised premises. Any floor coverings shall be considered to be a part
of the premises and shall not be removed except in the case of replacement by
equivalent or better floor covering acceptable to Landlord.
12. ADDITIONAL INSURANCE.
(A) Tenant shall self-insure or procure and maintain at its own
expense, such insurance may by necessary to indemnify Landlord as to claims
which might be asserted against the demised premises or the owners thereof by
reason of the Tenant's use thereof, all as hereafter provided.
(B) Tenant shall self-insure or procure and pay for public liability
insurance in responsible companies in an amount not less that $1,000,000.00 to
any one person or $1,000,000.00 on any one accident and $300,000.00 property
damage insurance. For policies of insurance procured by Tenant from third
parties, the original policy or policies or certificates in lieu thereof shall
be furnished by Tenant to Landlord bearing a notation evidencing the payment of
premiums or accompanied by other evidences of payment of the premiums
satisfactory to Landlord.
(C) Not less than ten days prior to the expiration of any such
policy or policies procured from third parties, evidence of the renewal of such
policy or policies, or a new certificate, together with evidence of the payment
or premiums for the renewal period or new policy, as the case may be, shall be
delivered to the Landlord. All such insurance shall contain an agreement by the
insurance company that the policy or policies will not be canceled, or the
coverage changed without ten day's written notice to Landlord.
(D) Tenant, its successors and assigns, shall carry Worker's
Compensation Insurance as may be required to cover liability to employees as
imposed by the statutes of any state of municipality or by reason of any federal
regulation.
(E) Should any intoxicating beverages at any time be sold or served
upon the premises, Tenant shall carry dram shop insurance to the extent of the
maximum statutory liability.
(F) Any policies and certificates of insurance from third party
insurers shall also designate as insured, Landlord, Landlord's mortgagee, and
Tenant, as their interests may appear.
13. UTILITIES. Landlord agrees to pay the tenants utilities associated
with the leasing of the facility and as provided here within including
electricity for normal warehouse lighting rated at 10 candle power per square
foot, provided, however, Landlord's responsibility to pay for Tenant's
electricity usage is limited to 96,096 kilowatt hours of electrical usage during
any "lease term" as provided free of charge by Landlord, Landlord will, on a
monthly basis, furnish during the remainder of the "lease
45
<PAGE> 46
term," Tenant within ten (10) days of Landlord's receipt of the electrical bill
a separate billing for kilowatt hours in excess of 96,096 kilowatt hours per
lease term representing Tenant's electrical costs not paid by the Landlord
pursuant this section. Tenant shall have ten(10) days after Landlord's date of
billing to pay such utilities directly to the Landlord. Tenant's failure to do
so will constitute additional rent which shall become due and payable
immediately and the Tenant's failure to pay the same shall be considered a
default of this lease. "Lease term" shall be 365 day intervals commencing upon
the acceptance of the facility as provided in Article 3 and for 365 days
thereafter. Subsequent "lease terms" shall be 365 days thereafter. Tenant
shall also be responsible for water, sewer and garbage charges.
Tenant shall pay and discharge as the same become due, all charges for
telephone and telephone services which shall, during the term of this lease, be
levied, assessed, charged or imposed upon or against the demised premises.
Tenant shall also be responsible for any telephone charges and maintenance in
connection with the alarm system.
14. INSPECTION BY LANDLORD. Landlord or their agents may have free
access to said premises at all reasonable times and under reasonable
restrictions for the purpose of examining the same or of inspecting the use by
Tenant of the same or to see if the terms of this lease or extension thereof are
being observed by Tenant, and the Landlord at any time within 90 days before the
expiration or sooner termination of the term of this lease or any extension
thereof, may enter upon said premises and affix to the exterior o the same the
ordinary and usual sign or signs for the sale or reletting of said premises; and
Tenant will not remove said sign or signs and will permit all persons having
written authority therefor from landlord to view said premises at all reasonable
hours.
15. FIRE OR OTHER CASUALTY. If during the term of this lease, the
demised premises should be damaged or destroyed by reason of fire, casualty or
any other cause so as to be rendered wholly or partially untenable, the Landlord
shall promptly repair, rebuild and restore the demised premises to the condition
it was in preceding the fire or other casualty or other cause, such as
repairing, rebuilding and restoration to be subject to and in conformance with
all municipal and other governmental regulations, ordinances, laws, rules,
permits and requirements existing at the time of such repairing, rebuilding and
restoration. Landlord shall complete the repairs and restoration, the rent
payable by Tenant shall be abated in proportion to the extent Tenant shall be
reasonably unable to conduct its business from the demised premises. If the
building shall be reason of such fire or other casualty be damaged in excess of
50% of its replacement value, Landlord shall have the option of terminating this
lease by delivering written notice thereof to Tenant within 60 days from such
fire or other casualty, and this lease and terms hereof shall thereupon
terminate.
16. EMINENT DOMAIN. If any part of demised premises or the parking lot
and entrances to the street of highway and to demised premises shall be taken
for any public or quasi-public use under any statute or by right of eminent
domain or private purchase in lieu thereof to the extent that Tenant can no
longer use the premises for the purposes for which it is presently intended,
then when possession shall be taken thereunder of the premises or any part
thereof, the term herein demised and all rights of Tenant shall determine that
it can continue using the demised premises for the purposes for which it is
presently intended, then this lease shall continue, but there shall be a
reduction in the annual rental payable hereunder commensurate with the reduction
in space and usability of remaining space available to Tenant. Such reduction
shall be agreed upon by the parties hereto in writing within 15 days or as
hereafter set out. As soon as Tenant has determined that it desires to retain
remainder of the premises, it shall so notify Landlord in writing and the
parties hereto shall attempt to agree as to the reduction in rent. Should such
agreement not be consummated within 15 days of said
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notice, either party may then notify the other that it desires the determination
of the renewal rental to be determined by arbitration and at that time shall
give notice to the other party of the arbitrator that it has chosen. The other
party shall then notify the original party within seven
days of said notification of the selection of an arbitrator to represent that
party. The two arbitrators shall then view the property and the rental and
attempt to agree as to a fair rental. If they are unable to agree within
ten(10) days of the appointment of the second arbitrator, said arbitrators shall
select a third arbitrator within five(5) days thereafter and decision of the
majority of the arbitrators shall control. The above time may be lengthened or
shortened by mutual agreement. The decision of the arbitrators as to the
rental, and, if there is a dispute as to whether the remained of the property
can be used for the original intended use, the decision of the arbitrators in
regard to said factors shall be controlling.
If a party of the premises shall be so taken so as to terminate the rights
of Tenant, or in the event Landlord elects to make a voluntary conveyance in
lieu of such proceedings to some public authority with power to take under its
right of eminent domain, Tenant shall be notified in writing within 10 days
after the institution of such proceedings by the service of summons or writ upon
Landlord or within 10 days after the election of Landlord to so convey and
Tenant shall have reasonable time to vacate. All rights under such eminent
domain procedure shall insure to the benefit of Landlord; provided Tenant shall
have the right to make a separate and independent claim for any property taken,
or damages sustained, by reason of eminent domain proceedings against itself not
provided for hereunder.
17. DEFAULT. It is further covenanted and agreed that during the term
of this lease or any extension thereof, that the Landlord shall have the right
to declare a default and termination of the lease and recover the immediate
possession of the leased premises if:
1. The Tenant shall timely fail to pay rent as required by Article
4 of this agreement;
2. The Tenant shall neglect to timely perform or timely observe any
of the covenants and conditions as contained in this lease;
3. The Tenant shall fail to pay any utility fee or any obligation
other than rent as required by this lease agreement;
4. The Tenant shall make an assignment for the benefit of
creditors;
5. The Tenant shall be adjudicated a bankrupt or a petition is
filed for the extension of time of payment, composition, adjustment,
modification, settlement, or satisfaction of the liabilities of Tenant or to
which any property of Tenant be subject or the involuntary reorganization (other
than a reorganization not involving the liabilities of the Tenant) or the
involuntary liquidation of Tenant;
6. A receiver be appointed for the property of Tenant by reason of
the insolvency or alleged insolvency of Tenant, and such receiver be not
discharged within 90 days thereafter; and
7. Tenant shall abandon or vacate the premises.
A. If the Tenant fails to timely tender rent, the Landlord may
elect to terminate this lease by providing notice to Tenant of Landlord's
intention to terminate this lease. Notice of intention to terminate this lease
commences to run upon the Landlord's placing the notice in the mail or
personally serving the Tenant, or affixing the notice to the leased premises.
Upon service of the notice of termination, the Tenant shall have five (5) days
to reinstate the lease. The Tenant must actually tender to the Landlord
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within the five days all rents in default. If the Tenant fails to timely cure
the rental payments in default in the manner provided here within, the
termination of this lease will be effective, without further notice, without the
necessity of any legal suit or action, upon the expiration of the five day
period of time Tenant is allowed to reinstate this lease and to timely
cure all defaults.
B. In the event of the occurrence of a default other than the
Tenant's failure to timely tender rent to the Landlord, at its option, may elect
to terminate this lease by providing notice to Tenant of Landlord's intention to
terminate this lease. Notice of the intention to terminate this lease shall
commence and run upon service and service may be accomplished by Landlord
mailing the notice to Tenant's address listed here within or personally serving
Tenant, or affixing the notice upon the leased premises. Upon service of the
notice of termination, Tenant shall have thirty(30) days to reinstate the lease
by curing all defaults (defaults other than the failure to timely tender the
rent to Landlord) within 30 days of the date of the notice of termination.
C. Unless Tenant reinstates the lease in the time and in the manner
provided here within by providing Landlord with documented proof that all non-
rental payment defaults have been cured, termination of this lease will be
effective, without further notice and without the necessity of any legal suit or
action, on the expiration of the 30 day period of time the Tenant is allowed to
reinstate the lease.
D. Upon the termination of the Lease as provided for here within,
Tenant will then quit and surrender the demised premises to Landlord, and Tenant
shall remain liable as hereafter provided. In any such event, Landlord, at its
option, immediately or any time thereafter, enter upon said premises with or
without process of law, and take possession thereof together with any and all
buildings and improvements which may have been erected thereon, Tenant waiving
any demand for the possession thereof. Landlord will make its best efforts to
relet the demised premises or any part thereof, applying the same first to the
payment of such expenses that Landlord may have incurred in recovering
possession of the premises and putting the same in good order and condition, and
all other such expenses, commission and charges incurred by Landlord in or about
reletting the premises, and then to the fulfillment of the covenants of Tenant
hereunder. Any such reletting may be for the remainder of the original term, or
any extended term (if previously extended by Tenant) or for a longer period or
shorter period. Landlord shall be entitled, notwithstanding any other
provisions of this lease, to the extent permitted by law, the amount of damages
which Landlord sustains by reason of Tenant's default, including the right to
recover the difference between the total rent, taxes and charges which Landlord
is able to obtain in a new lease for the balance of the term and the then
present value of the remaining rent to be paid hereunder until the end of the
term of the lease.
18. MORTGAGE SUBORDINATION. Tenant agrees that upon the request of
Landlord in writing it will subordinate this lease and Tenant's rights and
interest hereunder to the lien of any future first mortgage placed on any part
of the real estate of which the demised premises are a part, irrespective of the
time of execution or time of recording of any such mortgage or mortgages,
provided that the holder of any mortgage shall enter into an agreement with
Tenant, in recordable form, that in the event of foreclosure or other right
asserted under the mortgage by the holder or any assignee thereof, this lease
and the rights of Tenant and obligations of Landlord (which must be assumed by
the holder) hereunder shall continue in full force and effect and shall not be
terminated, amended, modified, or disturbed except on accordance with the
provisions of this lease.
Tenant agrees that if requested by the holder of any such mortgage, it will
be a party to said agreement and will agree in substance that if the
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mortgage or any person claiming under the mortgage shall succeed to the interest
of Landlord in this lease, it will recognize said mortgagee or person as its
Landlord under the terms of this lease. Tenant agrees that it will, upon
request of Landlord, execute, acknowledge, and deliver any and all instruments
necessary or desirable to give effect to or notice of such subordination. The
word "mortgage" as used herein includes mortgages, deeds of trust, or other
similar instruments and modifications, consolidations, extensions, renewals,
replacements, and substitutes thereof.
19. SALE OF LANDLORD'S INTEREST. Landlord shall be entitled to convey
and otherwise dispose of the demised premises and Landlord's interest thereunder
at any time, and thereafter, shall not be subject to any of the obligations of
Landlord under this lease. However, nothing in this paragraph is to be
construed in such a manner as to release, extinguish or alter the rights or the
obligations of the successors) to the Landlord's interest hereunder should a
sale be consummated.
Landlord shall be entitled to exhibit the demises during the normal
business hours without disturbing the operation of Tenant's business for the
purpose of selling the premises or Landlord's interest under this lease.
20. WAIVER OF SUBROGATION. Each of Landlord and Tenant hereby releases
the other to the extent of its insurance coverage from any all liability for any
loss or damage caused by fires or any of the extended coverage casualties, even
if such fire or other casualty shall be brought about by the fault or negligence
of the party, or any persons claiming under it.
21. REMEDIES.
(A) It is mutually covenanted and agreed that this lease is made
upon the express condition that this Tenant shall always keep and perform all
its covenants and agreements hereunder and make all payments of money herein
stipulated to be made, promptly and at the time and in the manner stipulated and
limited for such performance and payment, and that accordingly the time so
limited for such payments and the performance of such covenants and agreements
are, and shall be deemed to be, of the essence of this lease.
(B) No remedy herein or otherwise conferred upon, or reserved to,
Landlord or Tenant shall be considered exclusive of any other remedy given
hereunder, or now or hereafter existing at law or in equity or by statute: and
every power and remedy given by this Indenture of Lease to Landlord or Tenant
may be exercised from time to time and as often as occasion may arise or as may
be deemed expedient. No delay or omission of Landlord or Tenant to exercise any
right of power arising from any default shall impair any such right or power, or
shall be construed to be a waiver of any such default, or an acquiescence
therein.
(C) No waiver of any breach of any of the covenants of this lese
shall be construed, taken or held to be a waiver of any other breach, or waiver
of, acquiescence in, or consent to, any further or succeeding breach of the same
covenants.
22. NOTICES. In the event notice is to be given by either party to the
other, it is agreed that such notice may be given at any time by an instrument
in writing delivered personally or dispatched by registered or certified mail to
the following address:
LANDLORD: RLN LEASING, INC.
2719 40th Avenue North
Fargo, North Dakota 58102
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TENANT: DAKOTA GROWERS PASTA COMPANY, INC.
c/o President, General Manager
One Pasta Avenue
Carrington, North Dakota 58421
or as either party otherwise direct in writing to the other party from time to
time.
All notices shall be deemed delivered when delivered personally or two
days following deposit in the United States mail in the Continental United
States with first class postage and registered or certified fees prepaid except
in the event of mail strike, in which event proof of actual delivery shall be
required.
23. BINDING COVENANTS. It is mutually covenanted and agreed by and
between the partied hereto that the covenants in this lease contained shall be
covenants running with the land and that each of the covenants, agreements,
conditions and provisions of the lease shall wherever applicable extend to and
bind or inure to the benefit of (as the case may be) not only the parties hereto
and each of the,. but also their respective successors and assigns and wherever
in this lease reference is made to any of the parties hereto or to Landlord or
to Tenant, it shall be held it include and apply wherever and whenever
applicable also the successors and assigns of such parties the same as is in
each case and every case so expressed.
24. REGULATIONS. Tenant, in the performance of its covenants and
obligations, under the terms of the Indenture of Lease, shall comply with all
governmental ordinances, laws, rules, regulations and permits pertaining to the
operation of its business at the demised premises.
Landlord, in the performance of its covenants and obligations, under the
terms of this Indenture of Lease, shall comply with all governmental ordinances,
laws, rules, regulations and permits, pertaining to the buildings and other
improvements or repairs to the same required to be made by Landlord in order to
comply therewith.
25. INTERPRETATION. In the event any clause, paragraph or provision of
this lease should be found to be invalid by reason of any statute, law or
judicial decision, then the remainder of the lease shall nevertheless remain in
full force and effect, the same as if such paragraph or provision had been
deleted therefrom.
In the use of pronouns the singular shall include the plural, and the use
of any gender shall include all genders.
26. LATE PAYMENTS, ATTORNEY'S FEES AND COSTS. In the event of any legal
action or proceeding brought by either party hereto against the other arising
out of this lease, the prevailing party shall be entitled to recover its
reasonable attorney's fees incurred in such legal action or proceeding and such
attorney's fees shall be included in any judgment rendered.
27. QUIET POSSESSION. Landlord agrees that when possession of the
demised premises shall be delivered to Tenant, the leasehold interest of Tenant
will be free and clear of all tenancies, occupancies, restrictions, violations,
liens and encumbrances. Landlord further covenants and represents that Tenant,
upon paying the rents reserved herein, and keeping, performing, observing and
fulfilling the covenants and agreements in this lease contained on the part of
Tenant, upon paying the rents reserved herein, and keeping, performing,
observing and fulfilling the covenants and agreements in this lease contained on
the part of Tenant to be kept, performed, observed and fulfilled, shall and may
peaceably and quietly possess, have, hold and enjoy the demised premises and all
rights, including ingress and egress, easements, appurtenances and privileges
thereunto belonging or in any way appertaining during the full term hereby
granted and
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any extensions thereof, without any interruption or disturbance whatever by
Landlord or by anyone claiming by, through, under or against Landlord.
IN WITNESS WHEREOF, Landlord and Tenant have executed this lease as of the
day and year first above written.
LANDLORD: TENANT:
RLN LEASING, INC. DAKOTA GROWERS PASTA
COMPANY, INC.
By:_/s/ Robert Nelson By:_/s/ Tim Dodd
Its: President Its: President
Dated: 5/1/97 Dated: 5/1/97
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EXHIBIT C
Location: 4001 32nd Street North, Fargo, North Dakota
Size: 270' E/W by 160' N/S = 43,200 SF, plus 450' E/W by 200' N/S=
90,000, plus 120 E/W by 36.5 N/S = 4,380, plus two floors
of office space.
Docks: 16 - 8 x 9 door with weather seals.
16 - 6 x 8 mechanical load leveler with swing loading
lights.
Ceiling Height: 24' interior ceiling clear height.
Heat: Electric forced air. Off peak service with Gen Set Backup
Gas backup as alternate heat.
Power: 480 - 208 - 110 volts.
Sprinklers: Yes - Fargo city water.
Lighting: Sodium vapor lights with 10 foot candlepower of light
available.
Water and Sewer: City of Fargo water and sewer.
Misc.: Concrete fit-up poured walls with 4' bead board insulation
and white metal lined walled 12 inch glass ceiling
insulation with wire interior mesh.
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Exhibit 10.13
AGREEMENT BETWEEN
DAKOTA GROWERS PASTA COMPANY
AND
JP FOODSERVICE, INC.
The following outlines the terms and conditions of this agreement:
A. PRODUCTS
A line of dry pasta products for the Foodservice and retail markets packed under
the Roseli brand.
B. PRICING: TERMS OF SALE
1. Current pricing as of March 3, 1997, as listed on the attached Roseli/JP
Foodservice net pricing schedule.
2. Product pricing will be subject to adjustment every calendar quarter
beginning with the period from July 1, 1997 - September 30, 1997. An adjustment
to pricing will be made based on the projected Minneapolis semolina price during
that quarter. Current pricing, covering the period from March 3, 1997 - June
30, 1997, is based on $(confidential treatment requested) per cwt semolina.
3. It is understood that JP Foodservice reserves the right to contract at a
specified semolina price over a longer period of time, provided that Dakota
Growers is able to secure sufficient raw material to cover JP Foodservice
requirements for that additional period of time.
4. All price adjustments will be mutually agreed upon and set between the two
parties prior to the start of every succeeding quarterly pricing period, as
described above.
5. All other terms of sale are noted on the current net price list, which is
attached as part of this Agreement.
C. PRODUCT ORDERING: INVENTORY LEVELS
1. Product will be shipped within eight (8) working days after an order is
received.
2. Whenever possible, product will be ordered in full pallet quantities.
3. Finished goods inventories equal to one months normal usage will be
maintained by Dakota Growers on a good-faith basis.
4. It is understood that because of the lead-time required, packaging material
inventories equal to four (4) months or more of normal usage may need to be
maintained by Dakota Growers.
D. PROMOTIONAL PAYMENTS, ALLOWANCES, CHAIN REBATES
This is a met price program other than previously agreed upon chain account
rebates as follows:
(confidential treatment requested)
Additionally, Dakota Growers agrees to pay JP Foodservice a quarterly
(confidential treatment requested) label usage allowance covering Roseli dry
pasta sold to (confidential treatment requested).
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E. FIVE YEAR CONTRACT INCENTIVE PROGRAM
(confidential treatment requested)
F. ENTIRETY AND INTERPRETATION OF AGREEMENT
1. This Agreement contains the entire understanding and all prior negotiations
and understandings are superceded and merged into this Agreement.
2. This Agreement shall be construed in accordance with and governed by the
laws of the State of North Dakota.
G. DURATION OF AGREEMENT: EXCLUSIVITY
1. While this Agreement is in effect, JP Foodservice authorizes only Dakota
Growers to pack Roseli brand dry pasta products.
2. This Agreement binds both parties through December 31, 2001, unless it is
mutually agreed by both parties to terminate or amend it.
3. This Agreement may not be amended or modified orally at any time. However,
this Agreement may be amended or modified by a written instrument if mutually
agreed and signed by the parties hereto.
4. This Agreement may not be transferred or assigned, or any portion thereof,
by JP Foodservice, Inc., without the written consent of Dakota Growers Pasta
Company.
Reviewed and accepted by:
DAKOTA GROWERS PASTA COMPANY
/s/ Timothy J. Dodd
Timothy Dodd, President and General Manager
/s/ Gary Mackintosh
Gary Mackintosh, Vice President, Sales & Marketing
Date 3/7/97
Reviewed and accepted by:
JP FOODSERVICE, INC.
/s/ Mark Kaiser
Mark Kaiser, Senior Vice President
/s/ Timothy Lee
Timothy Lee, Vice President, Procurement
Date 3/6/97
Attachment
(confidential treatment requested)
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Exhibit 10.14
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT, ("Agreement") is entered into this 15th day of
October, 1997, by and among DAKOTA GROWERS PASTA COMPANY, a North Dakota
cooperative association, Carrington, North Dakota ("DGPC"), and Peninsula
Trading Company, Inc., a California corporation, 719 Yarmouth Road, Suite 203,
Palos Verdes Estates, California 90274 ("Peninsula") and acknowledged by its
shareholders (confidential treatment requested), all residents of California,
(referred herein collectively as "Peninsula shareholders") and is subject to the
following terms and conditions:
1. APPOINTMENT OF PENINSULA; ACCEPTANCE. DGPC appoints Peninsula, and
Peninsula accepts such appointment, as a consultant for DGPC in DGPC's dry pasta
and pasta sauce business with Costco, whereby Peninsula will perform such
services as may be requested by DGPC under the terms and conditions of
this Agreement during the term of this Agreement.
2. REPRESENTATIONS AND WARRANTIES. Peninsula represents and warrants that
(a) the shareholders of Peninsula are (confidential treatment requested); (b)
Peninsula is a California corporation validly existing and in good standing
under the laws of the State of California; (c) that the above named shareholders
comprise all of the shareholders of Peninsula; (d) the execution and performance
of Peninsula's obligations under the Agreement will not violate any agreement,
instrument or organizational documents of Peninsula; (e) it has no knowledge of
any proposed termination of Peninsula's account with Costco and it has no reason
to believe that Costco would terminate the account merely because of its
transfer from Peninsula to DGPC; and (f) Peninsula will not take any action that
is contrary or detrimental to Peninsula's performance hereunder, or in anyway
adversely affects the DGPC - Costco business relationship; (g) the services to
be performed under this Agreement will be performed by certain of the
shareholders of Peninsula. The shareholders agree to use their best efforts in
performing the duties required of Peninsula hereunder.
3. FUNCTIONS AND DUTIES OF CONSULTANT.
3.1 Peninsula shall work diligently and use its best efforts as DGPC's
consultant for the sales and promotion of all DGPC dry pasta products and Zia
Briosa (tm) pasta sauce to Costco as requested by DGPC. In performing such
tasks as requested by DGPC, Peninsula agrees (a) to comply with all DGPC
policies and procedures; (b) to exercise reasonable concern for the financial
welfare of DGPC; (c) to introduce DGPC employees to the appropriate pasta
purchasing personnel for Costco or its agents and to facilitate the creation and
maintenance of a good business relationship by and between those individuals and
the respective companies; (d) to periodically review with DGPC its relationship
with Costco, and to take whatever reasonable steps are requested by DGPC to
maintain and strengthen that relationship; (e) Peninsula will not take any
action or make any contact with Costco, Costco personnel, or brokers associated
with Costco regarding any dry pasta products or Zia Briosa (tm) pasta sauce
without prior approval of DGPC.
3.2 Peninsula shall have no authority to delegate its obligations
hereunder to other entities or individuals.
3.3 Peninsula agrees it will not act as a broker, agent or consultant in
connection with the promotion or sale of any dry pasta products for any pasta
manufacturer other than DGPC, or act as broker, agent or consultant in
connection with the promotion of any Zia Briosa (tm) pasta sauce products, for
five (5) years following the date of this Agreement.
4. TERMS OF SALE. Prices, terms and conditions of sales shall be
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determined solely by DGPC and may be changed from time to time. All orders,
returns and credits are subject to DGPC's approval. Costco's payments shall be
made directly to DGPC.
5. CONSULTING FEE. Upon execution of this Agreement, DGPC shall pay to
Peninsula $(confidential treatment requested) in exchange for Peninsula's
development and fostering of a direct business relationship between Costco and
DGPC without Peninsula's further involvement as an intermediary-reseller of dry
pasta products and Zia Briosa (tm) pasta sauce products. Peninsula shall also
be entitled to a consulting fee of $(confidential treatment requested) per month
for each month DGPC continues its business relationship with Costco after
execution of this Agreement, up to maximum additional payment of $(confidential
treatment requested). If DGPC decides to discontinue its business relationship
with Costco, Peninsula shall be entitled to the unpaid portion of the
$(confidential treatment requested) maximum additional payment. All consulting
fees shall be paid no later than ten (10) days following the close of each
month's accounting period.
6. PENINSULA'S LEGAL STATUS AND AUTHORITY. Peninsula will act as DGPC's
consultant in connection with DGPC in the sale and marketing of DGPC's dry pasta
products and Zia Briosa (tm) pasta sauce to Costco. Peninsula shall only
perform such duties as requested by DGPC. It is agreed that Peninsula is an
independent contractor and not a DGPC employee. Peninsula shall have no right
or power to obligate DGPC in any way or manner, nor represent that it has any
right to do so. Peninsula agrees that it is solely responsible for all of the
expenses of operating its business, including the entertainment expenses
incurred to nurture the business relationships between DGPC and Costco
management, and for the payment and collection of all taxes and levies of any
and all kinds in connection with Peninsula's business. Expenses incurred for
services or acts requested of Peninsula by Costco in order to properly supply
and service Costco's purchasing needs shall be considered a selling expense of
DGPC.
7. OBLIGATIONS PRIOR TO AGREEMENT. Peninsula agrees that it is solely
responsible for all obligations incurred or committed to by Peninsula prior to
the date of this Agreement. Peninsula further guarantees that the settlement of
these obligations will not affect its ability to perform under the Agreement,
nor impact DGPC's business relationship with Costco.
8. SURRENDER OF RIGHTS AND CLAIMS. Peninsula agrees to surrender all
rights and claims related to past and future sales of any DGPC dry pasta
products and Zia Briosa (tm) pasta sauce to Costco, or any other customer,
including but not limited to, any agent, distributor or chain operator, domestic
or foreign, except as expressly approved by DGPC. Peninsula acknowledges that
as of the date of this Agreement it does not have any claim against DGPC arising
from the parties' previous business relationship.
9. TERM. This Agreement shall continue until terminated under any of the
following conditions:
a. Attainment of maximum consulting fee payment;
b. Either party may immediately terminate this Agreement upon written
notice to the other in the event that such other party breaches any material
provision of this Agreement;
c. DGPC may immediately terminate this Agreement upon written notice if
it determines, in its sole judgement, that any action of Peninsula is unlawful
or destructive to DGPC's public image or business;
d. DGPC may immediately terminate this Agreement upon written notice in
the event of Peninsula's bankruptcy, insolvency, change of ownership, death or
disability of Peninsula's principal owners or any other condition which may
affect the ability of Peninsula to perform its duties under this Agreement.
10. OBLIGATIONS UPON TERMINATION. Upon termination of this Agreement,
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Peninsula shall immediately cease any and all activities with respect to the
sale of DGPC's dry pasta products and Zia Briosa (tm) pasta sauce products sold
to Costco, and shall cease using any information or material regarding DGPC for
any purpose whatsoever. Peninsula is entitled to all earned consulting fees
through the date of termination. Peninsula agrees to return to DGPC all records
and materials relating to its duties and performance under this Agreement, as
DGPC may request.
11. NOTICE. Any written notice given hereunder by either party shall be
delivered or sent by certified or registered mail, postage prepaid, addressed as
follows:
If to DGPC:
Dakota Growers Pasta Company
ATTN: Tim Dodd
One Pasta Avenue
P.O. Box 21
Carrington, ND 58421
If to Peninsula:
Mr. Barry Colvin
Peninsula Trading Company, Inc.
P.O. Box 4199
Palos Verdes Estates, CA 90274-9570
12. GOVERNING LAW; VENUE. It is mutually agreed that this Agreement shall
be conclusively deemed to have been executed under and pursuant to the laws of
the state of North Dakota and that the laws of said State, and only said State,
shall be applied hereunder, and that any causes of action between the parties
hereto shall only have jurisdiction and venue in the courts of the state of
North Dakota, in and for the County of Foster.
13. NO ASSIGNMENT. Peninsula may not assign this Agreement in whole or in
part without DGPC's prior written consent.
14. MISCELLANEOUS.
14.1 EQUAL BARGAINING POSITION. The parties acknowledge that each is a
sophisticated business or business person and is fully capable of understanding
the terms of the Agreement. Each party has had the opportunity to seek such
business and legal advise as deemed appropriate. Each party has entered into
this Agreement voluntarily and freely.
14.2 MODIFICATION. No change or modification of this Agreement shall be
binding upon the parties hereto, unless it shall be in writing and signed by
both parties.
14.3 ENTIRE AGREEMENT. This Agreement constitute the entire Agreement
between the parties hereto and supersedes all prior and contemporaneous
negotiations, understandings, Agreements, inducements, and conditions of any
nature whatsoever with respect to the subject matter hereof.
14.4 PROVISIONS SEVERABLE. If any provision of this Agreement shall be or
shall become illegal or unenforceable, in whole or in part for any reason, the
remaining provisions hereof shall nevertheless be deemed valid, binding and
subsisting.
14.5 TITLES NOT TO AFFECT INTERPRETATION. The titles of the sections and
subsections in this Agreement are inserted for convenience of reference only,
and they neither form a part of this Agreement nor are they to be used in the
construction or interpretation thereof.
14.6 BINDING EFFECT. This Agreement is entered into freely and
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voluntarily between the parties, and it shall be binding upon and inure to the
benefit of the parties hereto, as well as their respective heirs, personal
representatives, successors and assigns.
14.7 INDULGENCES NOT WAIVERS. No indulgences extended by either party to
the other party shall be construed as a waiver of any breach on the part of such
other party, nor shall any waiver of one breach be construed as a waiver of any
rights or remedies with respect to any subsequent breach.
IN WITNESS WHEREOF, the parties hereto have set their hands on the day and year
first above written.
DAKOTA GROWERS PASTA COMPANY
By /s/ Tim Dodd
Its President
PENINSULA TRADING COMPANY
By /s/ Barry Colvin
Its President
58
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEETS AND STATEMENTS OF INCOME FILED AS PART OF THE ANNUAL REPORT ON FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> JUL-31-1997 JUL-31-1996
<PERIOD-END> JUL-31-1997 JUL-31-1996
<CASH> 5 1,448
<SECURITIES> 0 0
<RECEIVABLES> 8,505 5,267
<ALLOWANCES> 218 70
<INVENTORY> 8,700 6,737
<CURRENT-ASSETS> 17,528 13,532
<PP&E> 57,089 39,445
<DEPRECIATION> 8,617 5,861
<TOTAL-ASSETS> 68,739 49,894
<CURRENT-LIABILITIES> 11,199 5,348
<BONDS> 27,131 18,860
300 550
153 270
<COMMON> 19,016 19,016
<OTHER-SE> 10,940 5,850
<TOTAL-LIABILITY-AND-EQUITY> 68,739 49,894
<SALES> 69,339 49,558
<TOTAL-REVENUES> 69,339 49,558
<CGS> 58,357 43,318
<TOTAL-COSTS> 60,536 44,914
<OTHER-EXPENSES> 104 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,773 2,022
<INCOME-PRETAX> 6,926 2,622
<INCOME-TAX> 0 4
<INCOME-CONTINUING> 6,926 2,618
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,926 2,618
<EPS-PRIMARY> 1.40 .69
<EPS-DILUTED> 1.40 .69
</TABLE>
