UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
/X/ Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended April 30, 1998
OR
/ / Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
--------------------
COMMISSION FILE NUMBER 33-99834
--------------------
DAKOTA GROWERS PASTA COMPANY
(Exact name of registrant as specified in its charter)
NORTH DAKOTA
(State or other jurisdiction of
incorporation or organization)
ONE PASTA AVENUE
CARRINGTON, NORTH DAKOTA
(Address of principal executive offices)
45-0423511
(IRS Employer Identification Number)
58421
(Zip Code)
(701) 652-2855
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
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
The number of shares outstanding of the issuer's classes of common
stock was 1,096 shares of membership stock, par value $125.00, and 7,356,059
shares of equity stock, par value $2.50, outstanding as of June 5, 1998.
FINANCIAL STATEMENTS
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
April 30,
1998 July 31,
(Unaudited) 1997
----------- -----------
(000's omitted)
ASSETS
Current assets:
Cash and cash equivalents ...................... $ 72 $ 5
Trade accounts receivable, less allowance for
cash discounts and doubtful accounts of
$119,000 and $218,000......................... 11,656 8,048
Accounts receivable from growers ............... 254 49
Other receivables .............................. 475 190
----------- -----------
Total receivables .............................. 12.385 8,287
Inventories .................................... 22,016 8,700
Prepaid expenses ............................... 3,350 536
----------- -----------
Total current assets ........................ 37,823 17,528
Property and equipment
In service ..................................... 83,583 51,380
Construction in process ........................ 2,748 5,709
Accumulated depreciation ....................... (12,113) ( 8,617)
----------- -----------
Net property and equipment .................. 74,218 48,472
Investment in St. Paul Bank for Cooperatives ...... 2,086 1,804
Other assets ...................................... 1,470 935
---------- -----------
Total assets ................................ $115,597 $68,739
=========== ===========
The accompanying notes are an integral part of these financial statements.
2<PAGE>
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED BALANCE SHEETS
April 30,
1998 July 31,
(Unaudited) 1997
----------- -----------
(000's omitted)
LIABILITIES AND MEMBERS' INVESTMENT
Current liabilities:
Notes payable and current portion of long-term
debt ......................................... $14,979 $ 2,634
Accounts payable ............................... 6,146 3,432
Excess outstanding checks over cash on deposit . 92 2,457
Accrued grower payments ........................ 1,895 1,116
Accrued liabilities ............................ 2,552 1,560
----------- -----------
Total current liabilities ................... 25,664 11,199
Long-term debt, net of current portion ............ 52,983 27,131
Other long-term liabilities ....................... 88
----------- -----------
Total liabilities ........................... 78,735 38,330
----------- -----------
Preferred stock:
Redeemable preferred stock:
Series A, 6%, $100 par value, issued 1,500
shares at April 30, 1998 and 3,000 shares
at July 31, 1997 ........................... 150 300
Series B, 2% non-cumulative, $100 par value,
issued 1,525 shares ........................ 153 153
Convertible preferred stock:
Series D, convertible preferred stock, 6%
non-cumulative, $100 par value,
issued 23,038 shares ....................... 2,304
----------- -----------
Total preferred stock ....................... 2,607 453
----------- -----------
Members' investment:
Membership stock, $125 par value, issued 1,096
shares at April 30, 1998 and 1,084 shares
at July 31, 1997 ............................. 137 135
Equity stock, $2.50 par value, issued 7,356,059
shares at April 30, 1998, and $3.85 par value,
issued 4,904,034 at July 31, 1997............. 18,391 18,881
Additional paid in capital ..................... 4,100 3,610
Accumulated allocated earnings ................. 2,914 413
Accumulated unallocated earnings ............... 8,713 6,917
----------- -----------
Total members' investment ................... 34,255 29,956
----------- -----------
Total liabilities and members' investment ... $115,597 $68,739
=========== ===========
The accompanying notes are an integral part of these financial statements.
3<PAGE>
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
April 30,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
Net revenues (net of discounts and allowances of
$3,837,000 and $2,028,000 for 1998 and 1997,
respectively) .................................. $33,775 $17,018
Cost of product sold .............................. 29,134 13,836
----------- -----------
Gross proceeds .............................. 4,641 3,182
Marketing and general and administrative expenses . 1,012 591
----------- -----------
Operating proceeds .......................... 3,629 2,591
Other income (expense):
Interest and other income ...................... 4 3
Interest expense, net .......................... ( 967) ( 690)
----------- -----------
Income before income taxes ........................ 2,666 2,001
Income taxes expense ..............................
----------- -----------
Net income from patronage and non-patronage
business ....................................... 2,666 2,001
Dividends on preferred stock ...................... 3 6
----------- -----------
Earnings from patronage and non-patronage business
available for members ........................... $ 2,663 $ 1,995
=========== ===========
Average equity shares outstanding ................. 7,356 7,356
Earnings from patronage and non-patronage
business per average equity share outstanding:
Basic .......................................... $ .36 $ .27
=========== ===========
Fully Diluted .................................. $ .35 $ .27
=========== ===========
The accompanying notes are an integral part of these financial statements.
4<PAGE>
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Nine Months Ended
April 30,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
Net revenues (net of discounts and allowances of
$8,203,000 and $5,450,000 for 1998 and 1997,
respectively) .................................. $83,889 $49,875
Cost of product sold .............................. 70,254 41,991
----------- -----------
Gross proceeds .............................. 13,635 7,884
Marketing and general and administrative expenses . 2,474 1,369
----------- -----------
Operating proceeds .......................... 11,161 6,515
Other income (expense):
Interest and other income ...................... 56 31
Interest expense, net .......................... ( 2,164) ( 1,522)
----------- -----------
Income before income taxes ........................ 9,053 5,284
Income tax expense ................................
----------- -----------
Net income from patronage and non-patronage
business ....................................... 9,053 5,284
Dividends on preferred stock ...................... 11 25
----------- -----------
Earnings from patronage and non-patronage business
available for members ........................... $ 9,042 $ 5,259
=========== ===========
Average equity shares outstanding ................. 7,356 7,356
Earnings from patronage and non-patronage
business per average equity share outstanding:
Basic .......................................... $ 1.23 $ .71
=========== ===========
Fully Diluted .................................. $ 1.21 $ .71
=========== ===========
The accompanying notes are an integral part of these financial statements.
5<PAGE>
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
April 30,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
Cash flows from operating activities:
Net Income ..................................... $ 9,053 $ 5,284
Add (deduct) non-cash items:
Depreciation and amortization ................ 3,262 1,933
Non-cash portion of patronage dividend ....... ( 289) ( 14)
Interest capitalized ......................... ( 122) ( 260)
Changes in assets and liabilities:
Trade receivables ............................ ( 242) ( 2,107)
Accounts receivable from growers ............. ( 205) 28
Other receivables ............................ 122 ( 10)
Inventories .................................. (10,543) ( 2,216)
Prepaid expenses and other assets ............ ( 2,513) 92
Accounts payable ............................. ( 1,015) 1,531
Excess outstanding checks over cash on deposit ( 2,366) 268
Grower payables .............................. 779 ( 1,437)
Dividends payable and other accrued liabilities ( 687) 723
Other liabilities ............................ 75
----------- -----------
Net cash from (used in) operating activities ( 4,766) 3,890
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment ............ ( 5,835) (12,257)
Acquisition of Primo Piatto net of cash acquired ( 8,011)
Lease improvements, packaging development and
purchase of other assets ..................... ( 757)
----------- -----------
Net cash used in investing activities......... (14,603)
Cash flows from financing activities:
Net issuance of short-term debt ................ 7,974
Issuance of long-term debt ..................... 17,677 8,950
Payments on long-term debt ..................... ( 1,311) ( 55)
Preferred stock retired ........................ ( 150) ( 150)
Dividends on preferred stock ................... ( 11) ( 27)
Membership stock issued (net)................... 2 1
Patronage distributions ........................ ( 4,745) ( 1,800)
----------- -----------
Net cash from financing activities .......... 19,436 6,919
----------- -----------
Net increase (decrease) in cash and cash
equivalents ..................................... 67 ( 1,448)
Cash and cash equivalents, beginning of period .... 5 1,448
----------- -----------
Cash and cash equivalents, end of period .......... $ 72 $
=========== ===========
The accompanying notes are an integral part of these financial statements.
6<PAGE>
DAKOTA GROWERS PASTA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Non-cash investing and financing activities:
Acquisition of Primo Piatto, Inc.
Working capital other than cash .............. $ 1,439
Property and equipment, net .................. 22,821
Other long-term liabilities .................. ( 88)
Long-term debt assumed ....................... (13,857)
Preferred stock issued ....................... ( 2,304)
------------
Cash paid to acquire Primo Piatto, Inc. ...... $ 8,011
============
The accompanying notes are an integral part of these financial statements.
7
DAKOTA GROWERS PASTA COMPANY
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION - Dakota Growers Pasta Company ("the Company" or "the
Cooperative") is organized as a farmers' cooperative for purposes of
manufacturing food for human consumption from durum and other grain products.
Net proceeds are allocated to patrons who are members on the basis of their
participation in the cooperative.
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.
NOTE 2. FINANCIAL STATEMENT PRESENTATION - The financial information
included herein as at April 30, 1998, and for the nine and three month periods
ended April 30, 1998 and 1997, is unaudited and, in the opinion of the
Company, reflects all adjustments (which include only normal recurring
accruals) necessary for a fair presentation of the financial position as of
those dates and the results of operations for those periods. The information
in the Balance Sheet at July 31, 1997, was derived from the Company's audited
annual report for 1997. Reclassifications may have been made consistent with
current presentation. Such reclassifications have no effect of the net result
of operations.
The financial information included herein as of April 30, 1998 and for the
none and three month periods ended April 30, 1998 includes the consolidated
balances and results of operations of Dakota Growers and its wholly-owned
subsidiary, which was acquired on February 23, 1998 and disclosed in NOTE 3.
The Company has eliminated intercompany balances, and intercompany sales and
purchases, from the consolidated balances and results.
NOTE 3. ACQUISITION - On February 23, 1998, Dakota Growers Pasta Company
acquired 100% of the outstanding stock of Primo Piatto, Inc., a Minnesota-
based pasta manufacturer, for cash and convertible preferred stock. Primo's
physical assets consist of two pasta production facilities and a distribution
center located in the Minneapolis, Minnesota metropolitan area. PJrimo
produces a range of pasta products for distribution under a variety of retail
private labels. The Company has acounted for this acquisition by the purchase
method. The statements of operation for the periods ended April 30, 1998,
contain the operating results of Primo for the period February 23, 1998
through April 30, 1998.
The shares of Primo were acquired for an aggregate consideration consisting
to a cash payment of $11,000,000, the issuance of 23,038 shares of Dakota
Growers' convertible preferred stock and the assumption of $13,857,000 of
Primo's debt. Of the shares of convertible preferred stock, 4,724 will be
held in escrow pending the resolution of certain outstanding issues.
NOTE 4. INVENTORIES - Inventories of $22,016,000 at April 30, 1998,
include raw materials of $3,929,000 and finished goods and by-products of
$18,087,000. At July 31, 1997, inventories of $8,700,000 included raw
materials of $2,804,000 and finished goods and by-products of $5,896,000.
NOTE 5. PATRONAGE BUSINESS - The Company's business is conducted on a
cooperative basis. 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 spring wheat flour purchased from non-
8
members and blended with other flours, 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. For the
nine months ended April 30, 1998, net income allocable to patronage business
was $5,433,000 compared to $5,433,000 for the comparable period in fiscal year
1997. For the three months ended April 30, 1998 and 1997, net income
allocable to patronage business was $1,910,000 and $1,910,000, respectively.
NOTE 6. EARNINGS AND DIVIDENDS - 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, it has calculated basic 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. The Company has reflected the
effect of a three for two stock split effective August 1, 1997 as if it were
in effect during the three and nine month periods ended April 30, 1997.
The Company has outstanding convertible preferred stock and stock options for
convertible preferred stock. Fully diluted earnings per share have been
calculated for the assumed conversion of these dilutive securities. Because
the Company's stock is only traded in a small secondary market through private
transactions, the Company has assumed the proceeds from the exercise of stock
options would reduce debt and, thus, interest expense.
Three Months Ended
April 30,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
Cash flows from operating activities:
Weighted Average Basis Shares................... 7,357 7,356
Fully diluted Average Shares ................... 7,620 7,411
Nine Months Ended
April 30,
(Unaudited)
-----------------------
(000's omitted)
1998 1997
----------- -----------
Cash flows from operating activities:
Weighted Average Basic Shares .................. 7,356 7,356
Fully diluted Average Shares ................... 7,485 7,374
A qualified patronage allocation of $4,745,000, $1.00 per bushel, was
authorized by the Board of Directors in October 1997 and distributed in
November 1997. Additionally, $2,501,000, $.527 per bushel, was allocated to
9
the members but neither distributed nor qualified for income tax purposes.
A qualified patronage allocation of $1,800,000, $0.50 per bushel, was
authorized by the Board of Directors in October 1996 and was distributed in
November 1996. Additonally, $413,000, $0.115 per bushel, was allocated to the
members but not distributed or qualified for income tax purposes.
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 transacted with member patrons which are allocated, qualified
and paid as prescribed in Section 1382 of the code will be taxable to the
members and not to the Company. 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 allocated and paid as stated above or
arise from business done with non-members, the Company shall have taxable
income subject to corporate income tax rates. 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.
The Company has not established any provision for income taxes for the nine
months ended April 30, 1998.
10<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company is a North Dakota agricultural cooperative and has 1,096
members at April 30, 1998. Membership in the Company is limited to
agricultural producers whose operations are located within the states of North
Dakota, Minnesota or Montana. The Company mills durum wheat into semolina,
which is sold or used for the manufacture of the Company's pasta products.
The pasta products are then marketed and sold by the Company. The Company
also sells by-products of the milling process.
An expansion project began in fiscal year 1996, resulting in increasing
total annual pasta production capacity to 240 million pounds. The Company's
second mill became operational in late December 1996. Two new production
lines began operation in May 1997 and October 1997.
In July, 1997, the Company entered into agreement to purchase a seventh
pasta line, a short goods line, with capacity up to 30 million pounds. This
line is expected to begin production in July, 1998.
In February, 1998, the Company acquired Primo Piatto. Primo Piatto's pasta
manufacturing facilities, located in the Minneapolis, Minnesota, metropolitan
area, consist of two pasta production facilities and a distribution center.
The larger of the two production facilities contains 6 production lines and is
capable of producing approximately 170 million pounds of pasta per year. The
smaller production facility contains 4 production lines and is capable of
producing approximately 30 million pounds of pasta per year. The distribution
center is a 100,000 square foot facility. The Company intends to operate the
newly acquired facilities as part of its own business of producing for private
label distribution.
In addition to the additional production capacity, Primo's facilities add
efficiencies and result in cost savings for production, warehousing and
distribution. At the same time, it will allow greater control of pasta
inventories while maintaining service levels for existing customers.
The Company is presently entering into agreements to further expand its
Carrington mill facilities. A 500 metric ton flour mill will be completed by
February 1999 to meet the need for semolina at the Carrington and Primo
facilities.
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. Such durum wheat prices are
influenced by the quantity of milling quality durum available as well as the
export practices of Canada. The Company is able to partially offset this risk
through contracts which allow for price adjustments with fluctuations in the
durum/flour markets.
QUARTER ENDED APRIL 30, 1998 COMPARED TO QUARTER ENDED APRIL 30, 1997
Revenues increased by $16,757,000, as total pasta sold increased by 94%.
Most of the pasta increase was experienced in the retail segment, but
increases were also experienced in the foodservice and ingredient sectors.
Sales in the retail segment, which more than doubled, represented 65% of pasta
11
sales for the quarter. The increase was primarily due to sales to customers
of Primo Piatto, which was acquired in February, as well as continued growth
in sales to the Company's existing customers. While competetion from domestic
and imported pasta remains strong, roll out of six significant new private
label programs continued to increase sales.
The ingredient segment experienced a 33 % increase in pasta volumes, while
the foodservice segment increased 32% from the same quarter last year. The
increase in the ingredient segment was mainly driven by expanding sales to one
customer which was in the roll out phase last year. The foodservice sales
increase is attributed to two significant new accounts and continued growth in
several others.
In the by-products segment, the Company continues to use a greater
percentage of its mill capacity for its internal pasta manufacturing and is
supplying semolina to Primo. Semolina sales prices have increased from last
year as the cost of durum has increased. Mill feed sales volume has nearly
doubled, but sales price dropped significantly.
Cost of product sold was up $15.3 million, primarily due to a 67% increase
in pasta produced and purchased. The volume change represented $9.7 million
of the increase. Price decreases for freight reduced the cost of product sold
while increases for ingredients (egg) and packaging and warehousing rose by
$922,000. The average cost of durum for the quarter increased $1.18 per
bushel from last year, increasing expense by $1,445,000.
Marketing and general and administrative expenses were up $421,000, due to
increased marketing costs and administrative personnel changes.
Interest expense increased $318,000 due to a $27.8 million increase in
average borrowings, the result of borrowing to complete the producton
expansion program and the acquisition of Primo. The Company capitalized
$41,000 of interest to the major expansion projects during the quarter.
As a result of the above, net income for the quarter was $2,666,000
compared to $2,001,000 last year.
NINE MONTHS ENDED APRIL 30, 1998 COMPARED TO NINE MONTHS ENDED APRIL 30, 1997
Revenues increased by $34.0 million, as total pasta volume sold increased
by 61%. Sales in the retail pasta segment increased 88% over last year, while
ingredient sales rose 29% and foodservice sales increased 52%. The retail
increase was primarily due to the addition of six significant new private
label programs and an increase in government bid sales over the same period
last year as well as the sales to Primo's retail and co-pack customers.
Volumes for most existing private label programs increased as well.
Retail sales now make up 57% of total pasta sales compared to 50% last year.
The roll out of one new significant ingredient customer had a major impact
on ingredient volumes, but sales to several other ingredient customers also
rose over last year. The increase in foodservice sales is attributed to the
addition of two new significant accounts and growth in several others.
For the year, mill feed and second clear flour prices have decreased, while
average semolina prices are up. Sales volumes have increased in all by-
product areas as durum grind has increased.
Cost of product sold was up $28.3 million. The increase in pasta volumes
produced and purchased accounted for $24.1 million of the increase. Price
12
decreases for packaging and freight reduced expense by $1.4 million, offset by
nearly equal increases in ingredient and warehouse costs. The year to date
average cost of durum is $.19 higher than last year increasing expense by
$583,000.
Marketing and general and administrative expenses increased $1,105,000,
primarily due to increased marketing costs and the addition of administrative
personnel as a result to the increased sales volume and the acquisition of
Primo. As a percentage of net revenues, marketing and general and
administrative expenses are up slightly, from 2.7% for the nine months ended
April 30, 1997 to 2.9% for the same period in 1998.
Interest expense increased $760,000 due to a $14.7 million increase in
average borrowings, the result of the production expansion project and the
acquisition of Primo. Average interest rates have decreased from last year.
The Company has capitalized $122,000 of interest to the major expansion
projects this year.
As a result of the above, net income increased $3.8 million, increasing
from $5,284,000 last year to $9,053,000 for the nine months ended April 30,
1998. The Company anticipates continued growth as it markets the additional
capacity available through the acquisition of Primo and continued improvements
in production efficiencies with the additional pasta production lines.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow from operations, before changes in inventories, was $5.8 million
for the nine months ended April 30, 1998 compared to $6.1 million for the same
period in 1997. During the nine months ended April 30, 1998, the Company
increased its inventories by $10.5 million. This increase is attributed to an
effort by the Company to guarantee order fill of its customers, the inventory
associated with the roll out of new private label programs and preparing for
scheduled promotional activities. The Company's seasonal line of credit was
increased by the St. Paul Bank for Cooperatives to $11 million in January
1998.
In Februry 1998, the Company acquired Pimo Piatto for cash, preferred stock
and the assumption of debt. In July 1998, the Company anticipates the
completion of the seventh pasta production line at its Carrington facilities.
These additions, together with the completion of the sixth pasta production
line in Carrington in October 1997, bring the Company's total production
capability to 470 million pounds annually.
In April 1998, the Company's Board of Directors authorized the construction
of a third mill. Upon completion, the Company will have milling capacity in
excess of 13 million bushels per year.
These construction projects have commitments totaling $16 million, of which
$2.3 million has been expended as of April 30, 1998. The Company feels it has
adequate internal and external resources to meet these capital requirements.
In April 1998, the Company signed an agreement with SPP Hambro & Co., LLC
and St. Paul Bank to act as financial advisors in arranging a direct placement
of $30,000,000 senior notes. This transaction is anticipated to be completed
in July 1998. The proceeds will be used to refinance existing debt.
13
Part II
Item 4. Submission of Matters to a Vote of Security Holders
The Company's Annual Members' Meeting was held January 10, 1998. At Annual
District Meetings held in December 1997, Mr. Jeffrey O. Topp, Mr. Eugene J.
Nicholas and Mr. Roger A. Kenner were reelected to their positions as members
of the Company's Board of Directors.
The terms of office of the remaining members of the board of Directors
continue for the terms for which they were elected in prior years as follows:
Mr. Allyn K. Hart, Mr. Michael E. Warner and Mr. Curtis R. Trulson - one year
remaining; Mr. John S. Dalrymple III, Mr. James F. Link and Mr. John D. Rice
Jr. - two years remaining.
At the Annual Members' Meeting, by a vote of 222 in favor and 11 opposed,
the members approved a Key Employee "Incentive Stock Option" Plan as defined
in Exhibit No. 10.1.
Item 6. Exhibits and Reports on Form 10-Q
(a) Exhibits
EXHIBIT
NO. DESCRIPTION
------- -----------
10.1 Incentive Stock Option Plan effective January 31, 1997.
27 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
(b) Reports on Form 8-K
None
14<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dakota Growers Pasta Company
Date: June 5, 1998 /s/ Timothy J. Dodd
---------------- ----------------------------------
Timothy J. Dodd (President and
General Manager, and Principal
Executive Officer)
Date: June 5, 1998 /s/ Thomas P. Friezen
---------------- ----------------------------------
Thomas P. Friezen (Vice President,
Finance and Principal Financial
and Accounting Officer)
15<PAGE>
Exhibit 10.1
DAKOTA GROWERS PASTA COMPANY
INCENTIVE STOCK OPTION PLAN
This Plan, executed this 31st day of January, 1997, but effective for all
purposes as of January 31, 1997, by Dakota Growers Pasta Company, a North
Dakota Cooperative, ("Cooperative").
RECITALS
1. The Cooperative believes it is the best interests of the Cooperative
to establish the Plan for the purpose of providing certain benefits for the
participants described hereunder;
2. The Cooperative wishes to offer an inducement to such participants to
remain as Employees in the form of additional compensation for services which
they rendered or will hereafter render; and,
3. The duly authorized Compensation Committee of the Cooperatives's Board
of Directors agreed to and approved of this Plan at a duly constituted meeting
in January, 1997, with such Plan to become effective on January 31, 1997.
DEFINITIONS
For purposes of this Plan:
1. "Cooperative" shall mean Dakota Growers Pasta Company, an North Dakota
cooperative.
2. "Employees" shall mean the employees of the Cooperative who are
eligible for participation under the Plan.
3. "Equity Stock" shall mean the equity stock of the Cooperative, which
requires the holder of Equity Stock to be a member in the Cooperative and to
satisfy all qualifications for membership as set forth in the Cooperative's
Bylaws and Growers Agreement.
4. "Plan" shall mean this Incentive Stock Option Plan as adopted by the
Cooperative.
5. "Preferred Stock" shall mean the convertible preferred stock of the
Cooperative to be issued to the Employees pursuant to the terms of this Plan.
ARTICLE I
QUALIFICATION FOR BENEFITS
1. Tax Restrictions. Under this Plan:
a. Options are to be granted only to employees for a reason connected
with their employment who:
(1) At all times during the period beginning on the date of the
granting of the option and ending on the day three (3) months before the
date of such exercise, were Employees of either the Cooperative, or, a
parent or subsidiary of Cooperative. In the case of an Employee who is
disabled (within the meaning of Section 105(d)(4) of the Internal Revenue
Code), the three-month period will be one (1) year.
16
(2) Do not own stock possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of this Cooperative
or of its parent or subsidiary cooperative. This provision shall not apply
if at the time such option is granted the option price is at least one
hundred ten percent (110%) of the fair market value of the stock subject
to the option, and such option by its terms is not exercisable after the
expiration of five (5) years from the date such option is granted.
b. Options granted under this Plan:
(1) Shall allow the issuance of not more the fifteen thousand
(15,000) shares of the Preferred Stock of the Cooperative.
(2) Shall be granted within ten (10) years from the date this Plan
is adopted, or the date this Plan is approved by the stockholders of the
Cooperative, whichever is earlier.
(3) Shall not be exercisable after the expiration of ten (10) years
from the date such option is granted.
(4) Shall be, by its terms, not transferable by such Employee to whom
granted otherwise than by will or the laws of descent and distribution,
and shall be exercisable, during his or her lifetime, only by him or her.
(5) 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 calender year exceeds one hundred thousand
($100,000.00) dollars, such option shall be treated as options which are
not incentive stock options.
c. The option price must not be less than the fair market value of the
Preferred Stock at the time such option is granted.
2. Employee Eligibility. Options shall be granted to the key management
Employees of the Cooperative who are selected by the Board of Directors of the
Cooperative or the Compensation Committee of the Board to receive options. The
Board of Directors or the Compensation Committee shall determine the number of
shares to be optioned to each of the selected key management Employees.
ARTICLE II
BENEFITS
1. Grant. The Board of Directors of the Cooperative shall issue options
pursuant to the terms of this Plan at its discretion and in accordance with
the Stock Option Agreements with individual employees.
2. Option Price. Said option shall be exercisable upon the payment of
One Hundred and 00/100 ($100.00) Dollars for each share of Preferred Stock to
be received.
3. Exercise. The Employee shall exercise his/her options by tendering
the appropriate price as set forth above to the Cooperative with a statement
that such options are being exercised.
4. Conversion. Each share of Preferred stock shall be convertible into
equity stock at the option of the holder, under applicable conversion ratio.
The conversion ratio of Preferred stock to Equity Stock shall be determined as
of the issuance date of each respective option, based on the Option Price of
the Preferred Stock ($100.00) divided by the fair market value of the Equity
17
Stock as of that date, as determined by the Cooperative's independent
certified public accounting firm. For example, if it is determined that the
Equity Stock has a fair market value on the option issue date of $5.00 per
share, then the conversion ratio would be 20:1 ($100 Option Price divided by
$5.00 fair market value of Equity Stock), and each share of Preferred Stock
would be convertible into 20 shares of Equity Stock.
5. Adjustment of Conversion Ratio. The conversion ratio referred to
herein shall be subject to adjustment from time to time as follows:
a. In the event that the Cooperative shall at any time increase the
outstanding shares of Equity Stock without the payment of consideration by the
members for such additional stock (e.g. stock split, stock dividend or other
action), the conversion ratio in effect immediately prior to such action shall
be proportionately adjusted.
b. In case the Preferred Stock of the Cooperative issuable upon exercise
of such stock option shall be changed into another kind of capital stock
or debt or shall represent the right to receive some other security or
property, as a result of any capital reorganization, reclassification or any
merger or consolidation with another entity in which the Cooperative is not
the surviving entity, this option shall (subject to necessary adjustment in
the conversion ratio as herein provided) thereafter entitle the record holder
to acquire upon exercise thereof the kind and number of shares of stock or
other securities or propery to which such holder would have been entitled if
he had held the Preferred Stock issuable upon the exercise of this option
immediately prior to such capital reoganization, reclassification, merger,
consolidation or sale of assets.
c. Whenever the conversion ratio shall be adjusted as provided in this
paragraph, the Cooperative shall forthwith provide a written statement to each
Employee eligible to exercise the Options signed by the chairman or secretary
of the Board showing in reasonable detail the facts requiring such adjustment
and the conversion ratio that will be effective after such adjustment. The
statement shall also be recorded in the Cooperative's corporate records.
6. Other Attributes of Preferred Stock. In addition to the conversion
rights as set forth herein, the Preferred Stock shall have the following
rights and restrictions consistent with the Cooperative's Articles of
Association and Bylaws.
a. Distributions. There shall be no dividends paid to the holders of the
Preferred Stock, except as may be declared by the Board of Directors and as
limited by the Articles and Bylaws.
b. Voting. The Preferred Stock shall be nonvoting stock
c. Liquidation. The holders of the Preferred Stock shall be entitled to
receive the par value of the stock at the time of dissolution in the priority
estblished in the Cooperative's Articles of Association.
d. Transferability. The Preferred Stock is transferrable only if
approved by the Board of Directors of the Cooperative.
7. Termination of Employment. Upon the termination of employment of an
Employee (whether such termination is initiated by the Employee or the
Cooperative with or without cause), the Employee must sell, or otherwise
dispose of the Preferred Stock or the Equity Stock upon conversion, within
fifteen (15) months from the date of termination. Moreover, the Employee shall
exercise all unexercised Options within 90 days of such termination, or such
18
unexercised options shall lapse.
ARTICLE III
MISCELLANEOUS
1. Governing Law; Choice of Forum. This Plan shall be subject to and
govered by the laws of the State of North Dakota irrespective of the fact that
one or more of the parties now is, or may become, a resident of a different
state. Any dispute rgarding this Plan shall only be resolved in District Court
for the State of North Dakota, County of Foster.
2. Void Language. In the event any parts of this Plan are found to be
void, the remaining provisions of this Plan shall nevertheless be binding
within the same effect as though the void parts were deleted.
3. Rules of Construcion. Wherever in this Plan, words including
pronouns, are used in the masculine, they shall be read and construed as in
the feminine or neuter whenever they would so apply, and wherever in this
Plan, words, including pronouns, are used in the singular or plural, they
shall be read and constructed as in the plural or singular, respectively,
wherever they would so apply.
4. Plan Binding. This Plan shall be binding upon the parties hereto,
their heirs, executers, administrators, successors and assigners. The
Cooperative agress it will not be a party to any merger, consolidation or
reorganization unless and until its obligations hereunder shall be expressly
assumed by its successor or successors.
5. Designation of Named Fiduciary. The Cooperative is hereby designated
as the named fiduciary hereunder, and shall be responsible for the management
and control of the opertion and administraion of the Plan including any and
all decisions pertaining to the granting or denial of benefit claims and any
decisions pertaining to the granting or denial of benefit claims and any and
all decisions pertaining to the reviews of denials of benefit claims.
6. Amendment. The Plan may be amended at any time, and from time to
time, by the Board of Directors as evidenced by a written instrument executed
by a duly authorized officer of the Cooperative, provided that such amendment
is communicatied to those Employees participating in this Plan. Such amendment
shall apply prospectively without adversely affecting the existing contract
right of Employees unless required to comply with applicable tax laws.
7. Funding Policy. The Cooperative shall establish a funding policy and
method for the Plan, and shall annually review such funding policy and method
to make any necessary adjustments therto in order to ensure that such funding
policy and method at all times shall remain consistent with the objectives of
the Plan and the requirements of Title I of the Employee Retirement Income Act
of 1974, as amended or supplemented.
8. Claims for Benefits. Claims for benefits under the Plan shall be made
in writing to the Cooperative. If such claim for benefits is wholly or
partially denied, the Cooperative shall, within a reasonable period of time,
but no later that ninety (90) days after receipt of the claim, notify the
claimant of the denial of the claim. Such notice of denial:
a. shall be in writing;
b. shall be written in a manner calculated to be understood by the
claimant; and,
19
c. shall contain:
(1) the specific reason or reasons for denial of the claim;
(2) a specific reference to the pertinent Plan provisions upon
which the denial is based;
(3) a description of any additional material or information necessary
for the claimant to perfect he claim, along with an explanation of why
such material or information is necessary; and,
(4) an explanation of the Plan's claim review procedure.
9. Request for Review of Denial of Claim. Within one hundred twenty
(120) days of the receipt by the claimant of the writter notice of denial of
the claim, or such later time as shall be deemed reasonable, taking into
account the nature of the benefit subject to the claim and any other attendant
circumstances, or it the claim has not been granted within a reasonable period
of time, the claimant may file a written request with the Cooperative that it
conduct a full and fair review of the denial of the claimant's claim for
benefits, including the conducting of hearing, if deemed necessary by the
reviewing party. In connection with the claimant's appeal of the denial of his
benefit, the claim may review pertinent documents and may subject issues and
comments in writing.
IN WITNESS WHEREOF, the parties hereto have hereunder set their hands the
day and year first above written.
DAKOTA GROWERS PASTA COMPANY
By /s/ John S. Dalrymple III
Its Chairman
20
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AND STATEMENTS OF INCOME FILED AS PART OF THE QUARTERLY REPORT ON FORM
10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON
FORM 10-Q.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> JUL-31-1998 JUL-31-1998
<PERIOD-START> FEB-01-1998 AUG-01-1997
<PERIOD-END> APR-30-1998 APR-30-1998
<CASH> 72 72
<SECURITIES> 0 0
<RECEIVABLES> 12,504 12,504
<ALLOWANCES> 119 119
<INVENTORY> 22,016 22,016
<CURRENT-ASSETS> 37,823 37,823
<PP&E> 83,583 83,583
<DEPRECIATION> 12,113 12,113
<TOTAL-ASSETS> 115,597 115,597
<CURRENT-LIABILITIES> 25,664 25,664
<BONDS> 52,983 52,983
150 150
2,457 2,457
<COMMON> 18,527 18,527
<OTHER-SE> 15,727 15,727
<TOTAL-LIABILITY-AND-EQUITY> 115,597 115,597
<SALES> 33,775 83,889
<TOTAL-REVENUES> 33,775 83,889
<CGS> 29,134 70,254
<TOTAL-COSTS> 29,134 70,254
<OTHER-EXPENSES> 1,012 2,472
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 967 2,164
<INCOME-PRETAX> 2,666 9,053
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<NET-INCOME> 2,666 9,053
<EPS-PRIMARY> .36 1.23
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