ITEM 1. BUSINESS
Introduction
The Company is a North Dakota corporation that was organized on January 30, 2002. It is the successor to and its operations are a continuance of Dakota Growers Pasta Company, a North Dakota cooperative (the “Cooperative”), upon the conversion to a corporation effective July 1, 2002.
The Company owns and operates a vertically integrated, state-of-the-art durum wheat milling and pasta production facility in Carrington, North Dakota. Primo Piatto, Inc. (“Primo Piatto”), a wholly-owned subsidiary of the Company being operated as the Minnesota Division of the Company, currently operates a pasta production plant in New Hope, Minnesota. The Company currently has annual capacity to grind in excess of 12 million bushels of grain and to produce approximately 440 million pounds of pasta. The Company is currently undertaking a $15 million capital project at its New Hope facility to better balance its pasta production capabilities and improve operating costs. Upon completion of all phases of the upgrade at the New Hope facility, the overall pasta production capacity will increase to roughly 500 million pounds.
Pasta Industry and Markets
The Company estimates North American annual dry pasta demand to be roughly 4.0 billion pounds, including pasta used in dinners, side dishes and meal solutions. Based on the Company’s analysis of the marketplace and trade and industry information, the Company believes dry pasta consumption may have increased slightly last year after declining over 5% in the previous two years. While there seems to be a relatively stable level of consumers continuing to follow reduced carbohydrate lifestyles, the negative pasta consumption trend associated with low carbohydrate dieting appears to have subsided. The company is anticipating growth in dry pasta consumption between 1% and 2% in the upcoming year. In addition to the domestic market for dry pasta, much smaller domestic markets exist for refrigerated and frozen pasta.
The Pasta industry identifies domestic dry pasta into two basic markets: retail and institutional. The Company recognizes the institutional market as being comprised of ingredient and foodservice sales.
Retail Market
The Retail market includes sales of branded and private label pasta to grocery stores, club stores, mass merchants and other consumer retail operations. A significant portion of the Retail market is represented by established national or regional pasta brands. Barilla, New World Pasta Company and American Italian Pasta Company account for over 70% of the branded retail market. The Company focuses almost all of its Retail marketing efforts on private label sales. The market leaders in private label sales are American Italian Pasta Company and Dakota Growers, together representing nearly 80% of private label demand. A small portion of the
Retail market consists of sales to federal and state government entities. The Company estimates that the Retail market declined almost 9% from 2002 to 2004 before rebounding a little over 1% in 2005, with the traditional grocery channels declining at a rate slightly higher due to losses to alternative channels.
In 2004, DNA Dreamfields Company, LLC (“DNA Dreamfields”), of which the Company currently has a 47% economic ownership, launched a low digestible carbohydrate pasta under the DreamfieldsTM brand name. Effectively launched in the spring of 2004, DreamfieldsTM pasta has maintained a 1.1% dollar share of the traditional grocery channel pasta market during the last year based on data from A.C. Nielsen, making it the leading pasta in the low carbohydrate pasta category. The Company increased its economic ownership in DNA Dreamfields from 24% to 47% in fiscal year 2005.
In 2005, a new trend toward high fiber products developed, displacing some of the low carbohydrate consumption. While still small relative to the total pasta category, the consumption of these whole wheat/whole grain products is growing. DreamfieldsTM pasta offers fiber benefits similar to the levels of other whole wheat/whole grain pastas while maintaining the integrity of the taste and low carbohydrate traits. Dakota Growers also manufactures and sells traditional whole wheat/whole grain pastas.
Institutional Market
Ingredient sales consist of pasta used by food processors as an ingredient or component in a further-processed or combination food product. Such food products include dry pasta dinners, including macaroni and cheese, frozen entrees, refrigerated salads, canned entrees, baby food, and canned and dry soups. The size of the Ingredient market is influenced by the number of food processors that choose to produce pasta internally rather than outsource. The Company estimates that the Ingredient market has experienced consumption losses similar to the Retail market over the last several years, and is experiencing similar growth in 2005.
Foodservice sales are to commercial and non-commercial eating establishments such as restaurants, business and industry cafeterias, managed services, hotels and motels, retail vending, recreation, mobile and other away-from-home eating outlets. Marketing dry pasta to this market 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. A small portion of the Foodservice market consists of sales to federal and state government entities. The trend toward a reduced carbohydrate lifestyle did not have a significant impact on the Foodservice market, which the company believes is stable to slight growth.
Co-Pack Arrangements
A portion of each end-user market is supplied under “co-pack” arrangements between pasta manufacturers. These agreements involve the sale of dry pasta products between pasta manufacturers in order to supply short-term volume deficiencies such manufacturers suffer from time to time in meeting customer requirements, and to allow a manufacturer to draw upon particular areas of expertise of other manufacturers, which may be more cost beneficial than self-manufacturing. Co-pack sales comprised approximately 1%, 3% and 6% of the Company’s net revenues for the years ended July 31, 2005, 2004 and 2003, respectively.
Production and Products
The Company purchases durum wheat which is processed through its milling facility into semolina and durum wheat flours that are then used by the Company to produce dry pasta products.
Pasta production is basically a mixing, extrusion and drying process. The primary ingredients are semolina and water, although egg, tomato, spinach or other ingredients may be added to produce certain products. The finished dry pasta is packed to meet different markets and customer requirements.
The pasta products manufactured by the Company consist of over 80 different shapes and are sold to customers in all markets. In addition to the dry pasta produced by the Company, it purchases additional dry pasta shapes from other manufacturers and resells them. This practice is widely followed by many pasta manufacturers for efficiency and production capacity reasons, and allows distribution of wider product lines to the Company’s customers. Outside purchases of pasta, excluding imports, comprised approximately 2% of net sales for the year ended July 31, 2005 and 1% for the previous two fiscal years. The Company anticipates its outside purchases of pasta will decrease in fiscal year 2006 when compared to fiscal year 2005.
The Company has an agreement with Gruppo Euricom, an Italian pasta manufacturer, to be the exclusive distributor of Gruppo Euricom’s Italian pasta and rice products in the United States and Canada through August 2006. These products are primarily private label retail and foodservice products. Sales of imported products comprised approximately 1% to 2% of the Company’s net revenues in each of the last three fiscal years.
The Company’s identity preservation program provides our customers with food safety, traceability and quality from the field to the plate. The Company’s proximity to the durum growing regions, its milling and production facilities, and its information technology systems allow the Company to produce products under an identity preservation program.
The Company’s Carrington, North Dakota facilities have been certified by the Organic Crop Improvement Association and Farm Verified Organics, which allows the Company to offer 100% organic pasta and semolina. The Company’s facilities allow for the isolation of the durum, semolina and pasta to enable this certification.
The Company’s products are manufactured using a comprehensive Hazard Analysis Critical Control Point (HACCP) program, which requires strict monitoring in all aspects of the manufacturing process, to ensure food quality and safety. We believe that meeting HACCP standards strengthens customer confidence in the quality of our products. The Company undergoes food safety and product quality audits at various times throughout the year and consistently receives high scores.
In addition to its pasta products, the Company markets semolina, durum wheat flour and other flour blends to other manufacturers as market conditions allow. Lower grade flours and millfeed by-products of the durum milling process are sold primarily for animal feed. Non-pasta sales represented approximately 7%, 10% and 9% of the Company’s net revenues for the years ended July 31, 2005, 2004 and 2003, respectively. The decrease in fiscal year 2005 resulted from lower semolina sales volumes as the Company utilized a larger portion of its semolina production for internal pasta production purposes.
Sales, Marketing and Customers
The Company markets its products through direct sales, supplemented by the efforts of brokers retained by the Company. These brokers receive a commission upon sale of the Company’s products. The Company’s pasta products are distributed on a broad basis throughout the United States. The Company does not export significant quantities of its pasta products. One customer, U.S. Foodservice, accounted for approximately 13%, 15% and 17% of net revenues for the years ended July 31, 2005, 2004 and 2003, respectively. The Company’s top 10 customers accounted for 52% of revenues in fiscal year 2005, 51% of revenues in fiscal year 2004 and 58% of revenues in fiscal year 2003. Pasta revenues consisted of 53% Retail and 47% Institutional for fiscal year 2005, 59% Retail and 41% Institutional for fiscal year 2004, and 63% Retail and 37% Institutional for fiscal year 2003.
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, or under pricing commitments agreed to with terms of one year or less. The Company has one long-term marketing agreement, including volume commitments, with Safeway, Inc. that extends through August 31, 2006. The Company has entered into an agreement with Gruppo Euricom (“Gruppo”), an Italian pasta manufacturer, to be the exclusive distributor of Gruppo’s Italian pasta and rice products in the United States and Canada through August 2006. These products are primarily sold in the private label retail and foodservice markets.
Series D Delivery Preferred Stock Delivery Rights
Each share of Series D Delivery Preferred Stock of the Company gives its holder the privilege, but not the obligation, to deliver one bushel of durum wheat to the Company each fiscal year on a “first-come, first-served” basis. From time to time the Company will post notices to the market on its Web site (holders may also telephone the Company for information on market notices) for the purchase of durum wheat. During the 24-hour period following the posting of any market notice and to the extent that the Company’s durum wheat requirements as set forth in the market notice have not been fulfilled by other holders of Series D Delivery Preferred Stock, holders of Series D Delivery Preferred Stock have the right to (i) accept the Company’s offer to purchase durum wheat and (ii) deliver durum wheat to the Company on such terms and conditions as are set forth in the market notice. However, in any given fiscal year of the Company, the first-come, first-served privilege to deliver durum wheat shall be exercisable to deliver one bushel of durum wheat only once with respect to each share of Series D Delivery Preferred Stock. During the 24-hour period following the posting of any market notice, the Company will not purchase durum wheat from non-holders of Series D Delivery Preferred Stock to fulfill the Company’s durum wheat requirements as set forth in the market notice. If, after the lapse of a certain amount of time (not less than one day), holders of Series D Delivery Preferred Stock have not sold to the Company all of the durum wheat requested in the notice, the Company will fulfill its remaining requirements outside of the Series D Delivery Preferred Stock delivery privilege.
Because the privilege of a holder of Series D Delivery Preferred Stock to deliver durum wheat to the Company only arises if the Company actually requires durum, the privilege is not absolute. Any and all durum wheat delivered by a holder of Series D Delivery Preferred Stock to the Company shall conform to quality specifications established by the Company.
The Company has purchased durum wheat primarily on the open market. Durum wheat purchases from holders of the Company’s Series D Delivery Preferred Stock have been negligible.
Competition
Overview
The markets for pasta and semolina/durum wheat flour are highly competitive in most markets and geographic regions. 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, (4) the price of raw materials, primarily durum wheat, and (5) a distinguishing or unique ability to provide consistent product quality in line with customer specifications. The Company believes that, in a broad sense, the most influential factor on the intensity of competitive conditions is industry capacity utilization. It should be noted that detailed information regarding pasta production is somewhat difficult to obtain, as many pasta producers are closely-held enterprises.
Competition in the Pasta Market
The pasta market is highly competitive and includes several well-established enterprises. Those competitors are primarily independent companies and, to a lesser extent, divisions or subsidiaries of other, larger, food products companies. In addition, the Company competes against foreign suppliers, including Italian and Turkish enterprises, that sell pasta in the United States.
The Company markets in the Retail market primarily as a private label supplier. The Company’s Dakota Growers Pasta Co.® label to date has slight penetration in local area markets in the Dakotas and Minnesota and its Pasta Sanita® label is sold in small niches ranging from the upper Midwest to select markets in the Northeast United States. DreamfieldsTM pasta has maintained a 1.1% dollar share of the traditional grocery channel pasta market during the last year based on data from A.C. Nielsen, making it the leading pasta in the low carbohydrate pasta category.
The Company’s competition in the private label retail market is primarily American Italian Pasta Company and, to a lesser extent, New World Pasta Company. These private label retail sales compete with retail branded products distributed primarily by Barilla, New World Pasta Company (Ronzoni, San Giorgio, Skinner, American Beauty, Creamette, Prince brands et al), American Italian Pasta Company (Muellers, R&F, Anthony’s, Golden Grain/Mission brands et al) and a variety of smaller domestic and imported brands.
In the Foodservice market, 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’s main competitors in the Foodservice market are American Italian Pasta Company, A. Zerega’s Sons, Inc., and Barilla, as well as foreign competitors that sell product in the United States. The Company’s “Dakota Growers Pasta Co.®,” “Pasta Sanita®” and “Pasta Growers®” foodservice brands are sold throughout the United States to independent distributors and national chain accounts. In September 2004, the Company signed an exclusive distribution agreement with New World Pasta under which the Company is licensed to use the “Ronzoni,” “Prince”, “San Giorgio” and “Mrs. Weiss” brands in the Foodservice market, effectively taking over all of New World Pasta’s foodservice operations.
The Company’s ingredient sales have significantly increased as ingredient purchasers of dry pasta have sought out more reliable low cost suppliers. The Company’s top competitors in the Ingredient market include American Italian Pasta Company, Philadelphia Macaroni Co. Inc., and A. Zerega’s Sons, Inc. A large portion of the Ingredient market production capacity is represented by self-suppliers, which include Kraft Foods, Campbell Soup Company, ConAgra, Inc., Luigino’s and Stouffers Corporation.
The competitive environment in the pasta industry depends largely on aggregate industry capacity relative to aggregate demand for pasta products. The pasta manufacturing industry experienced capacity changes and restructuring in 2004 which reduced the excess pasta production capacity. However, future fluctuations in capacity availability are likely to occur as less cost-efficient capacity continues to be replaced by upgrade and expansion projects. The Company believes that there currently exists roughly 20% overall excess capacity in North America, most of it in older or other more inefficient factories. This is up slightly over the last several years, and the company believes it will continue to increase slightly in 2005.
Competition in the Semolina and Durum Wheat Flour Market
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., Horizon Milling, LLC and Miller Milling collectively are believed to represent approximately 40% of total domestic milling capacity, while the Company’s current milling operation represents about 15%. Most of the durum milling capacity in the United States is either part of an integrated pasta production facility or in an alliance with pasta manufacturers. The Company believes that the integration of its milling and pasta production facilities enables it to compete more effectively with those competitors who also have integrated facilities.
Government Regulation
Trade Policies
Governmental policies and regulations, including those impacting the amount of durum wheat imported from Canada, may affect the operations of the Company and the volume of pasta imports. United States government farm policies also affect durum plantings and thus can have a significant impact on the market price of durum.
Domestic pasta prices are also influenced by competition from foreign pasta producers, and as such, by the trade policies of both the U.S. government and foreign governments. U.S. Customs and Border Protection (Customs) distributes antidumping and countervailing duties assessed on certain pasta imported from Italy and Turkey to affected domestic producers pursuant to the Continued Dumping and Subsidy Offset Act of 2000 (the “ Offset Act”). The Company received net payments of $425,000 under the Offset Act in its fiscal year 2005 and $598,000 in fiscal year 2004. Although these duties may enable the Company to compete more favorably against
Italian and Turkish producers in the U.S. pasta market, there is no assurance as to the length of time these duties will be maintained, or that foreign producers will not sell competing products in the United States at prices lower than those of the Company.
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. The FDA is currently reviewing the labeling requirements for products marketed as low carbohydrate and disclosures related to the terminology “net carbohydrates.” DNA Dreamfields Company, LLC does not believe that any new rule changes will have a significant impact on the DreamfieldsTM business.
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.
Intellectual Property Rights
The Company relies on a combination of trade secret, trademark law, nondisclosure agreements and technical measures to establish and protect its proprietary rights to its products and processes. The Company owns the following trademarks that have been registered with the United States Patent and Trademark Office for the sale of dry pasta: Pasta Growers®, Pasta Sanita®, Zia Briosa®, Primo Piatto® and Dakota Growers Pasta Co.®.
Research and Development
The Company supports research and development programs in North Dakota that focus on improved varieties of durum wheat. Dakota Growers has an on-staff agronomist and is in the midst of a long-term project of small plot, replicated variety trial research, as well as field-scale fungicide research. In connection with plant breeders and researchers, the Company is working to develop scab-resistant, high-gluten durum varieties.
As a result of the creation of DNA Dreamfields Company, LLC and the introduction of the DreamfieldsTM low digestible carbohydrate products, the Company is investing and participating in product and manufacturing technique research beyond the scope of traditional dry pasta.
The Company, 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, ongoing product manufacturing, and development of new pasta shapes.
Employees
As of October 1, 2005, the Company had 409 employees, 120 of which are covered by collective bargaining agreements at its Primo Piatto, Inc. subsidiary. These collective bargaining agreements expire on November 30, 2005 and December 1, 2007. The Company considers its employee relations to be very good.
Risk Factors
The following are important factors that could cause actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company. Additional risks that we do not yet know of, or currently believe are immaterial, may also impair the business operations of the Company.
Consumer Trends
As the Company competes exclusively in the dry pasta industry, changes in consumer trends that result in lowered demand for dry pasta may have a material adverse effect on the Company’s financial condition and results of operations.
Competitive Environment
Both the U.S. pasta industry and world pasta industry are extremely competitive. The Company competes in all dry pasta markets - retail store brand, foodservice and ingredient, with larger, national and international food companies. Competition within the pasta industry is largely dependent upon the relationship of overall industry production capacity to overall market demand for pasta. The pasta industry in the U.S. has, until recently, been faced with excess production capacity. Recent developments have significantly reduced this excess capacity, although future fluctuations in capacity availability are sure to occur. Italy faces an excess capacity situation which may influence the availability and price of imported products. Some competitors may have long-term, high volume contracts, which guarantee a specified amount of volume over the term of the contract. Other competitors have retail brand equity and larger amounts of marketing dollars to compete against imported and store brand products. The competitive environment, especially in the retail private label and ingredient markets, has in the past, and may in the future, put pressure on the Company’s profitability and its ability to maintain market share. While the Company has and will continue to apply, where possible, cost saving measures in an effort to remain competitive, there is no guarantee that the Company can operate profitably in the future.
No Public Market for Shares of the Company’s Common Stock and Preferred Stock
There is currently no established public trading market for the shares of Common Stock and Preferred Stock of the Company, and an active trading market may never develop. The Company maintains no obligation to seek or to obtain a listing on a national market. As a result, you may not be able to readily resell your shares in the Company.
Technology
The Company believes that its overall commitment to maintaining and upgrading pasta manufacturing, milling and packaging equipment is necessary to keep a competitive edge in the pasta industry. In addition, it also acknowledges that ongoing computer system upgrades to better service the demands of its customers are important to long-term success and profitability. The Company may be negatively impacted if it is unable to consistently keep pace with the industry in these areas.
Pasta, Semolina, Durum Wheat and By-Product Prices
The Company’s profitability is directly related to the market price of dry pasta, semolina, durum wheat and mill feed by-products. The supply and price of durum wheat are subject to market conditions and are influenced by many factors beyond the Company’s control including weather patterns affecting durum wheat production, governmental programs and regulations, insects, and plant diseases. Such volatility with respect to the price of the basic raw material for the Company’s products leaves the Company subject to wide variation in its costs from year to year. Future increases in durum costs could have a material adverse effect on operating profits unless we are able to pass cost increases on to our customers. Competitive pressures often limit our ability to increase prices in response to higher input costs. By-products of the milling process compete with other feed products, and fluctuate significantly in price with the availability of these competing feed products.
Product Concentration
The Company competes almost exclusively in the dry pasta industry and related flours and by-product markets, with a significant portion of pasta sales concentrated in the retail and foodservice private label markets. Any decline in pricing or demand for dry pasta, particularly within the retail and foodservice private label markets, could have a material adverse effect on the Company’s financial condition and results of operations.
Product Liability
The sale of food products for human consumption involves the risk of injury to consumers. These injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, aflatoxin and other agents, or residues introduced during the growing, storage, handling or transportation phases. The Company has never been involved in a product liability lawsuit. The Company is subject to U.S. Food and Drug Administration inspection and regulations and we believe the Company’s facilities comply in all material respects with all applicable laws and regulations, but we cannot be certain that we will not be subject to claims or lawsuits in the future for injuries relating to the consumption of the Company’s products. The Company carries insurance for product liability claims related to its products and for the costs related to product recalls. However, we cannot be certain that the Company will not incur claims or liabilities for which it is not insured or that exceed the amount of its insurance coverage.
Government Regulation and Trade Policies
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 program designed to comply with these laws and regulations. There are no pending regulatory enforcement actions against the Company, and the Company believes that it currently is and will continue to be in substantial compliance with all applicable environmental laws and regulations.
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 U.S. Food and Drug Administration. The Company believes that it is in material compliance with all applicable regulatory requirements relating to food quality and safety.
The operations of the Company may be affected by governmental trade policies and regulations, including those impacting the amount of durum wheat imported from Canada. Domestic pasta prices are also influenced by competition from foreign pasta producers, and as such, by the trade policies of both the U.S. government and foreign governments.
Restrictive Loan Covenants
The Company’s loan agreements with CoBank and institutional investors obligate the Company to maintain or achieve certain amounts of equity and working capital and achieve certain financial ratios. The failure to comply with the various loan covenants may result in interest rate penalties, restrict the Company’s corporate activities or result in a default by the Company which may have a material adverse effect on the Company’s liquidity.
Board of Directors Discretion Regarding Dividends
The Board of Directors of the Company has absolute discretion to determine the manner and amount of payment of dividends on shares of Common Stock and, subject to certain exceptions, Preferred Stock.
Available Information
The Company’s Internet website address is www.dakotagrowers.com. We make available, free of charge through the “Investors” portion of our website, the Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “1934 Act”) as soon as reasonably practicable after we electronically file such materials with, or furnish such materials to, the Securities and Exchange Commission. Reports of beneficial ownership filed pursuant to Section 16(a) of the 1934 Act are also available through our website.
The Securities and Exchange Commission maintains an Internet site that contains reports, proxy, and information statements and other information regarding issuers that file electronically with the Securities and Exchange Commission. The address of that site is http://www.sec.gov.
ITEM 2.
ITEM 2. PROPERTIES AND PROCESSING FACILITIES
Dakota Growers owns and operates a milling facility in North Dakota, and pasta plants in North Dakota and Minnesota. The Company owns the warehouse facilities at the pasta plants. These facilities are supplemented by public warehouses in California, Kansas, Minnesota, New York, North Carolina, North Dakota, Oregon and Washington where inventory is maintained and redistributed for the needs of specific customers.
Dakota Growers continues to invest in technologies to improve operational efficiencies, and information technology to provide enterprise visibility to all facilities and activities within the supply chain. These information systems encompass communications, data collection, data storage, process management and record management to ensure the Company is providing a superior level of service to our customers while reducing operating and administrative expenses.
ITEM 3.
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 such routine litigation, the Company is not currently involved in any material legal proceedings. In addition, the Company is not aware of other potential claims that could result in the commencement of legal proceedings. The Company carries insurance that provides protection against certain types of claims, up to the policy limits of the Company’s insurance.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders during the fourth quarter of fiscal year 2005.
PART II.
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
There is no established public trading market for the Company’s Common Stock or Preferred Stock. As of October 7, 2005 there were 1,322 holders of the Company’s Common Stock.
Ownership of shares of Common Stock may be transferred subject only to the requirements of the applicable securities laws. Holders of Series D Delivery Preferred Stock have a delivery right, but not a delivery obligation, to sell durum to the Company. The Company must approve all transfers of shares of Series D Delivery Preferred Stock.
Two unrelated companies, Variable Investment Advisers, Inc. (VIA) and Alerus Securities have established Alternative Trading Systems (ATS) to facilitate trading of the Company’s Common Stock. We do not implicitly or explicitly endorse VIA, Alerus Securities or their respective web sites, and we are not responsible for products and services that VIA or Alerus Securities provide. We do not stand behind VIA or Alerus Securities or receive any fees from either of them in connection with the services offered on their respective web sites. Links to the respective web sites of VIA and Alerus Securities are available through the “Investors” portion of the Company’s website at www.dakotagrowers.com.
Trading volumes of the Company’s Common Stock have been minimal to date.
The Company has not declared or paid any dividends in the last two fiscal years.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below for the fiscal years ended July 31, 2001 through 2005 has been derived from the audited consolidated financial statements of the Company (and the Cooperative for periods presented prior to the conversion to a corporation). The conversion of Dakota Growers Pasta Company from a cooperative to a corporation, completed effective July 1, 2002, was accounted for as an exchange between related parties; therefore, no gain or loss was recognized at the time of conversion and the book value of the assets and liabilities of the Cooperative carried over to the Company. The comparability of results after the conversion versus those in prior periods is affected by the income tax status change associated with the conversion.
Effective May 1, 2005, the Company began to include DNA Dreamfields Company, LLC in its consolidated financial statements. The financial statements for prior fiscal years have not been restated and therefore do not include consolidated data pertaining to DNA Dreamfields. The Company has included consolidated amounts for DNA Dreamfields in the income statement for the year ending July 31, 2005. See Note 2 of the consolidated financial statements for additional information.
The selected financial data set forth in this section should be read in conjunction with the Company’s consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this report.
SELECTED FINANCIAL DATA
(In thousands, except per share data and ratios)
(1) Prior to conversion, the Cooperative had not recorded deferred taxes for temporary differences that were likely to be eliminated through patronage allocations. Upon conversion to a corporation effective July 1, 2002, the Company recorded deferred tax assets and liabilities for the tax effects of any temporary differences existing between income tax and financial reporting on the date of the change. In recording such deferred tax assets and liabilities upon conversion to a corporation, the Company recorded a nonrecurring, non-cash income tax charge of $6,105,000 during the year ended July 31, 2002.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion contains forward-looking statements. Such statements are based on assumptions by the Company’s management, as of the date of this report, and are subject to risks and uncertainties, including those discussed under “Risk Factors” in this report, that could cause actual results to differ materially from those anticipated. The Company cautions readers not to place undue reliance on such forward-looking statements.
Summary
Dakota Growers is the third largest pasta manufacturer in North America. The Company has two production plants, located in Carrington, North Dakota and New Hope, Minnesota and generates a majority of its revenues from manufacturing pasta for the retail store brand and foodservice markets, although we serve and continually look for opportunities in the entire dry pasta industry. Our identity preservation program provides our customers food safety, traceability and quality from the field to the plate. The Company also has a certified organic program and markets organic pasta through its Dakota Growers Pasta Co.® retail label, as well as into the private label retail, foodservice, and ingredient markets. The Company competes through low cost production, high product quality, flexibility and customer service.
Net income for the year ended July 31, 2005 totaled $2.5 million compared to net income of $0.3 million for the year ended July 31, 2004.
The Company secured new business in its first fiscal quarter 2005 and began realizing increased revenues as a result of these new customer rollouts in its second fiscal quarter 2005. The growth in new customers continued throughout the year. Pasta revenues for the last three quarters of fiscal 2005 tracked 17% higher than the comparable period of the previous year. With this increase in demand, the Company was able to more efficiently operate its production facilities resulting in conversion costs per unit running 4.6% lower than fiscal year 2004. As a result of a supply/demand imbalance in the Company’s fourth fiscal quarter of 2004, the Company reduced production during this period to keep its inventories at proper levels, resulting in higher per unit conversion costs. A significant portion of these increased per unit costs flowed through cost of goods sold in the Company’s first fiscal quarter of 2005.
The Company increased its economic ownership in DNA Dreamfields to 47% effective May 2005. DNA Dreamfields was formed by the Company and other food technology, manufacturing and consumer products marketing enterprises to develop, manufacture and sell low digestible carbohydrate pasta, rice and potatoes under the DreamfieldsTM brand name. In conjunction with the Company’s increase in ownership in DNA Dreamfields, the DNA Dreamfields operating agreement was amended whereby Dakota Growers was named the managing member of DNA Dreamfields. The Company is the exclusive manufacturer of DreamfieldsTM low digestible carbohydrate pasta, and provides administrative, accounting, information technology, sales, customer service and distribution services to DNA Dreamfields.
The Company believes that the DreamfieldsTM line of products is well suited for consumers seeking healthy low carbohydrate alternatives. The DreamfieldsTM low digestible carbohydrate pasta products carry a higher selling price and higher profit margins than traditional pasta. DreamfieldsTM pasta is currently distributed in over 11,000 grocery outlets nationwide. Initial shipments to customer distribution centers began in February 2004.
In 2005, a new trend toward high fiber products developed, displacing some of the low carbohydrate consumption. While still small relative to the total pasta category, the consumption of these whole wheat/whole grain products is growing. DreamfieldsTM pasta offers fiber benefits similar to the levels of other whole wheat/whole grain pastas while maintaining the integrity of the taste and low carbohydrate traits. Dakota Growers also manufactures and sells traditional whole wheat/whole grain pastas.
The cost of production of dry pasta is significantly impacted by changes in durum wheat prices, which have varied widely in recent years. Durum wheat costs per bushel declined by 4% from fiscal year 2004 to 2005, and represent approximately one-third of the Company’s cost of goods sold. The Company attempts to manage the risk associated with durum wheat cost fluctuations through cost pass-through mechanisms with our customers and forward purchase contracts for durum wheat. Volatility with respect to the price of the basic raw material for the Company’s products leaves it subject to wide variation in its costs from year to year. As a result, factors which impact the size and quality of the durum wheat crop and the availability of such wheat in the United States and Canada can have a material adverse impact on the Company. Those factors include such variables as producer strategies, the weather in durum wheat production areas in the United States, Canada and other parts of the world, and import and export policies and regulations.
Freight costs represent approximately 15% of cost of goods sold. Beginning in calendar year 2004, new regulations in the trucking industry and significant increases in fuel costs, which have accelerated in 2005, have dramatically impacted the Company’s costs. Natural disasters such as the hurricanes of the last several years also have major short-term impacts on freight costs due to increased demands. The Company utilizes its forward warehousing and rail programs to offset the effects of these increases. The effectiveness of the Company’s rail programs has diminished over the last several years as the Company believes the improved economy has increased competition for available rail capacity, thereby increasing costs. Additionally, packaging material costs, which traditionally represent 15% of cost of goods sold, continue to increase due to oil and other raw material price increases, fuel costs and other input costs passed on by our packaging suppliers.
Due to the intense competition present in the market for pasta products over the last several years, pasta manufacturers have, at times, been unable to fully implement price increases for their dry pasta products in periods when higher durum wheat prices or other input costs impacted the cost of pasta production. The Company believes that the competitive environment results primarily from excess production capacity in the domestic pasta industry in relation to total market demand and from strategic actions relating to market share. The industry experienced some capacity rationalization within the past several years, with both New World Pasta Company and American Italian Pasta Company implementing permanent or temporary shutdowns of certain pasta production facilities. In May 2004, New World Pasta Company filed for Chapter 11 bankruptcy protection.
Critical Accounting Policies
The accompanying discussion and analysis of the Company’s results of operations and financial condition are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. We base our estimates and judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances. However, future events are subject to change and the best estimates and judgments may require adjustment. For a complete description of the Company’s significant accounting policies, please see Note 1 to the consolidated financial statements. Our critical accounting policies are those that have meaningful impact on the reporting of our financial condition and results, and that require significant management judgment and estimates. These policies include our accounting for (a) allowance for doubtful accounts, (b) inventory valuation, (c) asset impairment, and (d) income taxes.
Allowance for Doubtful Accounts
We evaluate the collectibility of our accounts receivable based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations to us, we record a specific allowance against amounts due to us, and thereby reduce the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due and our historical experience. If the financial
condition of our customers would deteriorate, additional allowances may be required in the future which could have an adverse impact on our future operating results.
Inventory Valuation
Inventories are stated at the lower of cost or market, determined on a first-in, first-out (FIFO) basis, using product specific standard costs. The Company analyzes variances between actual manufacturing costs incurred and amounts absorbed at inventory standard costs. Inventory valuations are adjusted for these variances as applicable. The Company regularly evaluates its inventories and recognizes inventory allowances for discontinued and slow-moving inventories based upon these evaluations.
Asset Impairment
We are required to evaluate our long-lived assets, including goodwill, for impairment and write down the value of any assets if they are determined to be impaired. Evaluating the impairment of long-lived assets involves management judgment in estimating the fair values and future cash flows related to these assets. The Company recognized a loss on asset impairment related to certain pasta production equipment totaling $704,000 during the year ended July 31, 2004. Future events could cause management to conclude that impairment indicators exist and that the value of certain long-lived assets is impaired.
Income Taxes
In determining income (loss) for financial statement purposes, management must make certain estimates and judgments in calculating tax liabilities and in determining the recoverability of certain deferred tax assets. Deferred tax assets must be reduced by a valuation allowance, if based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Management believes it is likely that the deferred tax assets as of July 31, 2004 will be realized through the generation of future taxable income and tax planning strategies.
Basis of Presentation
Effective May 1, 2005, the Company began to include DNA Dreamfields in its consolidated financial statements. The financial statements for prior fiscal years have not been restated and therefore do not include consolidated data pertaining to DNA Dreamfields. The Company has included consolidated amounts for DNA Dreamfields in the income statement for the year ending July 31, 2005. See Note 2 of the consolidated financial statements for additional information.
Results of Operations
Comparison of Fiscal Years ended July 31, 2005 and 2004
Net Revenues. Net revenues increased $10.9 million, or 7.6%, to $155.6 million for the year ended July 31, 2005, from $144.7 million for the year ended July 31, 2004. The increase resulted from higher pasta sales volumes, particularly in the foodservice and ingredient markets.
Revenues from the retail market, a portion of which includes co-pack and governmental sales, increased $0.2 million, or 0.3%, for the year ended July 31, 2005 due to a 7.7% increase in average selling prices offset by volume declines. A significant factor contributing to retail volume declines was a decrease in co-pack sales, primarily to New World Pasta Company. Foodservice revenues increased $6.1 million, or 14.9%, primarily due to sales volume growth associated with sales under the New World Pasta license agreement combined with new customer sales. The Company entered into a license agreement with New World Pasta Company in September 2004, which gave the Company the exclusive right to produce and market pasta products bearing the Ronzoni,
Prince, San Giorgio and Mrs. Weiss brands in the foodservice market. Ingredient revenues increased $8.7 million, or 67.4%, due to sales volume increases primarily associated with the addition of one customer in this market.
The Company markets semolina production in excess of its own requirements as well as durum wheat flour, other flour blends and by-products of the durum milling process. Revenues from mill product sales for the year ended July 31, 2005 totaled $10.6 million, down $3.9 million from the prior year. The decrease resulted from lower semolina sales volumes as the Company utilized a larger portion of its semolina production for internal pasta production purposes.
The consolidation of DNA Dreamfields in the Company’s consolidated financial statements for fiscal year 2005 did not have a material impact on net revenues when compared to fiscal year 2004.
Cost of Goods Sold. Cost of goods sold totaled $136.2 million for the year ended July 31, 2005, an increase of 3.0% compared to the $132.2 million reported for the year ended July 31, 2004, mainly due to higher sales volumes relative to the prior year. Gross profit as a percentage of net revenues increased to 12.5% in fiscal year 2005 compared to 8.6% in fiscal year 2004 due to various factors including lower per unit manufacturing costs resulting from increased factory utilization. These positive factors were partially offset by the negative impacts of higher freight costs. The impact of including DNA Dreamfields in the Company’s consolidated financial statements for fiscal year 2005 accounted for approximately one-half of the 3.9% change in gross profit percentage improvement.
Marketing, General and Administrative (“MG&A”) Expenses. MG&A expenses increased $8.2 million, or 97.8%, to $16.5 million for the year ended July 31, 2005, from $8.3 million for the year ended July 31, 2004. The impact of including DNA Dreamfields in the Company’s consolidated financial statements for the year ended July 31, 2005 accounted for 75% of the increase in MG&A expenses, and related primarily to consumer advertising. The remainder of the increase in MG&A resulted from a variety of factors, the most significant of which were increased customer marketing support associated with DreamfieldsTM pasta products and increased research and development costs. MG&A expenses as a percentage of net revenues increased from 5.8% to 10.6%.
Loss on Asset Impairment. The Company recorded a loss on asset impairment of $0.7 million during the year ended July 31, 2004. The impairment loss related to certain pasta production equipment which was under a purchase option agreement that expired in July 2004. Upon review, the Company determined the asset was impaired and adjusted to fair value which was estimated based on the current market conditions for similar equipment.
Net Loss Allocated from Joint Venture. The Company did not report a net loss allocation from joint venture for the year ended July 31, 2005 as the Company included DNA Dreamfields in the consolidated financial statements for fiscal year 2005 (See also Note 2 - DNA Dreamfields Company, LLC of the consolidated financial statements). The net loss allocated from joint venture totaled $0.6 million for the year ended July 31, 2004, and represents the Company’s allocable share of net losses from DNA Dreamfields Company, LLC based upon its 24% ownership interest during that period.
Interest Expense. Interest expense for the year ended July 31, 2005, totaled $2.3 million, down $0.5 million from $2.8 million for the year ended July 31, 2004. The decrease was mainly due to lower average outstanding debt levels. Cash and equity patronage refunds received from CoBank totaling $114,000 and $103,000 have been netted against interest expense for the years ended July 31, 2005 and 2004, respectively.
Other Income. Other income totaled $0.5 million for both of the years ended July 31, 2005 and 2004. U.S. Customs and Border Protection (“Customs”) has distributed antidumping and countervailing duties assessed on certain pasta imported from Italy and Turkey to affected domestic producers pursuant to the Continued Dumping and Subsidy Offset Act of 2000 (the “Offset Act”), which was enacted in October 2000. The Company received net payments in the amount of $0.4 million and $0.6 million in fiscal years 2005 and 2004, respectively, under the Offset Act. These amounts have been classified as other income. The Company cannot reasonably estimate the potential amount, if any, that it may receive under the Offset Act in future periods as any such amount will be
based upon future events over which the Company has little or no control, including, but not limited to, the amount of expenditures by domestic pasta producers and the amount of antidumping and countervailing duties collected by Customs.
Noncontrolling Interests. Noncontrolling interests reflects the portion of the DNA Dreamfields net loss allocable to the other members of DNA Dreamfields for the year ended July 31, 2005.
Income Taxes. Income tax expense for the years ended July 31, 2005 and 2004 totaled $1.6 million and $0.2 million, respectively, reflecting an effective corporate income tax rate of approximately 39%.
Net Income (Loss). Net income for the year ended July 31, 2005 totaled $2.5 million, an increase of $2.2 million compared to net income of $0.3 million for the year ended July 31, 2004.
Comparison of Fiscal Years ended July 31, 2004 and 2003
Net Revenues. Net revenues increased $7.9 million, or 5.8%, to $144.7 million for the year ended July 31, 2004, from $136.8 million for the year ended July 31, 2003. The increase was primarily due to higher sales volumes in the foodservice market and sales related to the introduction of DreamfieldsTM pasta products into the marketplace.
Revenues from the retail market, a portion of which includes co-pack and governmental sales, decreased $2.2 million, or 2.7%, as a result of a 6.8% decrease in sales volume offset by higher per unit selling prices. The volume declines were mainly in co-pack and governmental sales. Sales of DreamfieldsTM low digestible carbohydrate pasta, which have significantly higher per unit sales prices than the Company’s other products, accounted for a majority of the average sales price increase in the retail market. Foodservice revenues increased $5.7 million, or 16.2%, primarily driven by a 13.7% increase in sales volumes. Ingredient revenues increased $2.3 million, or 21.3%, resulting mainly from a 14.1% increase in sales volumes combined with higher per unit sales prices.
The Company markets semolina production in excess of its own requirements as well as durum wheat flour, other flour blends and by-products of the durum milling process. Revenues from mill product sales for the year ended July 31, 2004, increased $2.0 million from the prior year. The increase resulted primarily from higher mill product sales volumes.
Cost of Goods Sold. Cost of goods sold totaled $132.2 million for the year ended July 31, 2004, an increase of $7.0 million or 5.7% compared to the $125.2 million reported for the year ended July 31, 2003. This increase was primarily due to revenue growth. Gross profit as a percentage of net revenues remained relatively constant at 8.6% in fiscal year 2004 compared to 8.5% in fiscal year 2003. Durum cost decreases were offset by increases in egg ingredients and the higher ingredient costs associated with DreamfieldsTM pasta products. The Company utilized its forward warehousing and rail programs to reduce the effects of freight industry cost increases resulting from higher fuel prices and regulation changes.
Marketing, General and Administrative (“MG&A”) Expenses. MG&A expenses decreased $1.5 million, or 15.0%, to $8.3 million for the year ended July 31, 2004, from $9.8 million for the year ended July 31, 2003. MG&A expenses as a percentage of net revenues decreased from 7.2% to 5.8%. The decrease in MG&A expenses was primarily due to lower incentive compensation costs. A portion of the incentive compensation for the year ended July 31, 2003 related to a compensatory transaction in conjunction with the unwinding of previous stock option exercises and related officer loans in response to the Sarbanes-Oxley Act of 2002.
Loss on Asset Impairment. The Company recorded a loss on asset impairment of $0.7 million during the year ended July 31, 2004. The impairment loss related to certain pasta production equipment which was under a purchase option agreement that expired in July 2004. Upon review, the Company determined the asset was impaired and adjusted to fair value which was estimated based on the current market conditions for similar equipment.
Net Loss Allocated from Joint Venture. The net loss allocated from joint venture totaled $0.6 million for the year ended July 31, 2004, and represents the Company’s allocable share of net losses from DNA Dreamfields Company, LLC based upon its 24% ownership interest during that period.
Interest Expense. Interest expense for the year ended July 31, 2004, totaled $2.8 million, down $0.6 million from $3.4 million for the year ended July 31, 2003. The decrease was mainly due to lower average outstanding debt levels. Cash and equity patronage refunds received from CoBank totaling $103,000 and $126,000 have been netted against interest expense for the years ended July 31, 2004 and 2003, respectively.
Other Income. Other income totaled $0.5 million for the year ended July 31, 2004 compared to $1.1 million for the year ended July 31, 2003. The Company received payments in the amount of $0.9 million and $1.0 million in December 2003 and 2002, respectively, under the Offset Act, based on duties assessed from October 1, 2001 to September 30, 2003. The Company repaid $0.3 million to Customs in April 2004 pursuant to a reclamation request from Customs. The reclamation request noted Customs had inadvertently left out an affected domestic producer that had timely filed a valid claim in the allocation calculation, resulting in the initial overpayment to the Company. The Company cannot reasonably estimate the potential amount, if any, that it may receive under the Offset Act in future periods as any such amount will be based upon future events over which the Company has little or no control, including, but not limited to, the amount of expenditures by domestic pasta producers and the amount of antidumping and countervailing duties collected by Customs.
Income Taxes. Income tax expense for the year ended July 31, 2004 was $0.2 million, reflecting an effective corporate income tax rate of approximately 39%. The income tax benefit for the year ended July 31, 2003 was $0.1 million.
Net Income (Loss). Net income for the year ended July 31, 2004 totaled $0.3 million, an increase of $0.7 million compared to the net loss of $0.4 million incurred for the year ended July 31, 2003.
Liquidity and Capital Resources
The Company’s primary sources of liquidity are cash provided by operations and borrowings under its revolving credit facility. Net working capital as of July 31, 2005 was $20.2 million compared to $16.6 million as of July 31, 2004.
On June 30, 2005, the Company entered into various agreements with CoBank. The agreements include a Master Loan Agreement, a Statused Revolving Credit Supplement, a Non-Revolving Credit Supplement, and a Multiple Advance Term Loan Supplement. Primo Piatto, Inc., a wholly-owned subsidiary of the Company, also entered into a Continuing Guarantee Agreement and a Security Agreement with CoBank on June 30, 2005.
The Company has a revolving credit facility with CoBank under which it may borrow an aggregate principal amount not to exceed, at any one time outstanding, the lesser of $25.0 million or a borrowing base established by CoBank based upon the Company’s accounts receivable and inventory amount. The primary purpose of the revolving credit facility is to finance inventory and receivables. The revolving credit facility allows for both variable and fixed interest rate options and extends through May 31, 2006. The balance outstanding under line of credit arrangements was $10.0 million and $12.2 million as of July 31, 2005 and 2004, respectively. $15.0 million was available for borrowing as of July 31, 2005.
Under the term loan facility with CoBank, the Company may borrow an aggregate principal amount of up to $19 million through May 1, 2006. The primary purpose of the term loan facility is to finance the capital project currently in process at the New Hope, Minnesota facility. The term loan facility allows for both variable and fixed interest rate options, requires minimum principal payments beginning August 20, 2006, and matures May 20, 2011. The balance outstanding under the term loan was $9.1 million as of July 31, 2005.
The Master Loan Agreement with CoBank contains certain restrictive covenants including, but not limited to, financial covenants which require the Company to maintain, at the end of each of the Company’s fiscal quarters, a minimum current ratio of 1.20 to 1.0, a maximum total debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) of 4.25 to 1.0, a minimum fixed charge ratio of 1.15 to 1.0, and a minimum tangible net worth level of at least $40 million adjusted for subsequent earnings and capital contributions.
The Company’s long-term financing is also provided through secured notes held by institutional investors. The Note Purchase Agreement (as amended) with the institutional investors requires the Company to maintain the following: (a) consolidated net worth of not less than the sum of (1) $27,000,000 plus (2) an aggregate amount equal to 30% of consolidated net income for each completed fiscal year beginning with the fiscal year ended July 31, 1998, (b) a trailing twelve month ratio of consolidated cash flow to consolidated fixed charges of not less than 2.0 to 1.0 at the end of each fiscal quarter, and (c) a ratio of consolidated funded debt to consolidated cash flow ratio not to exceed 3.0 to 1.0 determined at the end of each fiscal quarter for the immediately preceding four fiscal quarters. The Notes (as amended) require the rate of interest on the unpaid balance be increased by one percent at any time that either (a) the ratio of the Company’s consolidated funded debt to consolidated cash flow is greater than 3.0 to 1.0 as of the end of each fiscal quarter for the immediately preceding four fiscal quarters or (b) the Securities Valuation Office of the National Association of Insurance Commissioners has not assigned a designation category of “1” or “2” to the Notes.
The Company was in compliance with all debt covenants as of July 31, 2005 and the date of this filing.
Net cash from operations totaled $12.7 million and $10.6 million for the years ended July 31, 2005 and 2004, respectively. Net cash used for operations totaled $3.2 million for the year ended July 31, 2003. The $2.1 million net increase from fiscal year 2004 to 2005 was attributable to a $2.2 million increase in net income and $5.4 million of accrued promotional costs applied to marketing prepayments related to U.S. Foodservice, offset partially by an increase in inventories. In March 2005, the Company entered into an agreement with U.S. Foodservice which finalized the economic terms and conditions governing the purchase of dry pasta products by U.S. Foodservice from the Company. The agreement includes provisions to apply accrued promotional amounts to marketing prepayments which the Company anticipates will lessen the time to recover the unamortized portion of these marketing prepayments made to U.S. Foodservice. The agreement also eliminated the Company’s right to be the exclusive supplier of dry pasta products to U.S. Foodservice and does not provide for minimum purchase commitments by U.S. Foodservice. The increase in inventories primarily related to inventory build-up during the latter portion of 2005 to allow for reduced pasta production volumes while the production upgrade project at the New Hope, Minnesota manufacturing facility is in process. The $13.8 million increase from fiscal 2003 to fiscal year 2004 was mainly driven by reductions in inventory and lower payments for long-term marketing costs offset by increases in trade receivables.
Net cash used for investing activities totaled $16.0 million, $4.8 million, and $0.4 million for the years ended July 31, 2005, 2004 and 2003, respectively. The $11.2 million increase in net cash used for investing activities for fiscal year 2005 when compared to last year related to increased fixed asset expenditures in conjunction with the New Hope production upgrade project and increased investments in DNA Dreamfields. The Company is currently undertaking a $15.0 million capital project at its New Hope facility to better balance its pasta production capabilities and improve operating costs. As of July 31, 2005, the Company had expended $6.7 million in conjunction with this project, and had entered into additional commitments to purchase pasta equipment totaling $4.4 million related to the New Hope project. The Company made aggregate investments in DNA Dreamfields Company, LLC totaling $7.0 million and $2.5 million during fiscal years 2005 and 2004, respectively. The Company redeemed short-term investments of $2.0 million during fiscal 2003 which were previously restricted (See Note 14 - Related Party Transactions to the consolidated financial statements).
Net cash from financing activities totaled $2.9 million and $0.7 million for the years ended July 31, 2005 and 2003. Net cash used for financing activities totaled $5.3 million for the year ended July 31, 2004. The $2.9 million of net cash from financing activities for the year ended July 31, 2005 included $9.1 million in borrowings under the CoBank secured term loan facility to finance the New Hope production upgrade project and investments in DNA Dreamfields and $7.2 million for scheduled debt principal payments. The $5.3 million of net cash used
for financing activities for the year ended July 31, 2004 related primarily to principal payments on long-term debt offset by net proceeds of $4.5 million received upon the issuance of common stock to MVC Capital, Inc. The Company paid $1.8 million for the repurchase of stock during the year ended July 31, 2003 (See Note 14 - Related Party Transactions to the consolidated financial statements). The remaining cash used for the fiscal year 2003 related to debt principal payments offset by net borrowings under the Company’s revolving credit facility.
The Company increased its economic ownership in DNA Dreamfields from 24% to 30% effective November 2004, and to 47% effective May 2005. In connection with the latest investment in DNA Dreamfields, the Company and the other member/owners of DNA Dreamfields also entered into an Amended and Restated DNA Dreamfields Company, LLC Operating Agreement, under which the Company was named as the “Managing Member” of DNA Dreamfields. As such, the Company has authority to make all decisions with respect to DNA Dreamfields, its business, assets and operations that do not expressly require either a unanimous vote of the member/owners of DNA Dreamfields or a “Super Majority” vote of the holders of 75% of the outstanding Membership Units in DNA Dreamfields.
The Company also entered into a “2005 Line of Credit Loan Agreement” with DNA Dreamfields in the fourth quarter of fiscal year 2005. Under that Agreement, the Company has agreed to loan up to $5,000,000 to DNA Dreamfields, with DNA Dreamfields able to repay and reborrow amounts under the Line of Credit Loan Agreement from time to time. Interest on amounts outstanding under the Line of Credit Loan Agreement will accrue from the date of any advance at a variable rate ranging from a high of the then-current LIBOR thirty day rate plus 8.0% per annum to a low of the then-current LIBOR thirty day rate plus 5.0% per annum based on the adjusted income of DNA Dreamfields. Interest will be payable on a monthly basis, but payments of outstanding principal amounts will not begin until the earlier of ten months after the date of the first advance under the Line of Credit Loan Agreement or the date on which the principal amount outstanding equals the maximum loan amount of $5.0 million. Once DNA Dreamfields is obligated to commence payments of principal, the amounts due to the Company on a monthly basis will equal DNA Dreamfields monthly net income (as determined in accordance with generally accepted accounting principles) reduced by any cash or other reserves established by DNA upon the decision of the Company as the managing member of DNA Dreamfields. The Line of Credit Loan Agreement matures on May 31, 2010. DNA Dreamfields is also required to comply with certain financial covenants under the Line of Credit Loan Agreement. To secure DNA Dreamfield’s obligations under the 2005 Line of Credit Loan Agreement, the member/owners of DNA Dreamfields other than the Company have pledged their Membership Units in DNA Dreamfields to the Company pursuant to a “LLC Unit Pledge Agreement”.
The following table summarizes the Company’s contractual obligations as of July 31, 2005 (in thousands):
The Company forward contracts for a certain portion of its future durum wheat requirements. At July 31, 2005, the Company had outstanding commitments for grain purchases totaling $6.8 million related to forward purchase contracts. These contracts are set price contracts to deliver grain to the Company’s mill, and are not derivative in nature as they have no net settlement provision and are not transferable.
Pursuant to certain warehouse agreements, the Company is obligated to minimum monthly storage and handling amounts totaling $1,881,000, $1,701,000 and $1,537,000 for the years ending July 31, 2006, 2007 and 2008, respectively.
Management believes that net cash to be provided by operating activities, along with amounts available under its line of credit and term loan facilities, will be sufficient to meet the Company’s expected capital and liquidity requirements for the foreseeable future.
Recently Issued Accounting Standards
The FASB issued SFAS No. 123(R), “Share-Based Payment” in December 2004. SFAS No. 123(R) is a revision of SFAS No. 123, “Accounting for Stock Based Compensation” and is effective for fiscal quarters beginning after June 15, 2005. SFAS No. 123(R) requires the cost of share-based payments to employees, including grants of employee stock options, to be measured based on grant-date fair values. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. SFAS No. 123(R) will become effective for the Company beginning with its first fiscal quarter 2006. The Company does not expect this Statement to have a material impact on its financial statements upon adoption. However, future employee stock option grants may have a material impact on the Company’s financial statements as a result of this statement.
The FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB 43, Chapter 4” in November 2004. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) so as to require such costs to be treated as current period charges. Further, this Statement requires that the allocation of fixed overhead costs to the inventoriable production costs be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and will become effective for the Company beginning with its first fiscal quarter 2006. The Company does not expect this Statement to have a material impact on its financial statements upon adoption. However, future changes in the Company’s production or logistics could have a material impact on the Company’s financial statements as a result of this statement.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss to future earnings, to fair values or to future cash flows that may result from changes in the price of a financial instrument. The value of a financial instrument may change as a result of changes in interest rates, commodity prices, exchange rates, equity prices and other market changes. Market risk is attributed to all market-risk sensitive financial instruments, including long-term debt.
The Company forward contracts for a certain portion of its future durum wheat requirements. These contracts are set price contracts to deliver grain to the Company’s mill, and are not derivative in nature as they have no net settlement provision and are not transferable. The Company does not believe it is subject to any material market risk exposure with respect to interest rates, commodity prices, exchange rates, equity prices, or other market changes that would require disclosure under this item.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
DAKOTA GROWERS PASTA COMPANY, INC.
PAGE
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Changes in Stockholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Audit Committee
Dakota Growers Pasta Company, Inc.
Carrington, North Dakota
We have audited the accompanying consolidated balance sheets of Dakota Growers Pasta Company, Inc. (a North Dakota corporation) as of July 31, 2005 and 2004, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended July 31, 2005, 2004 and 2003. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dakota Growers Pasta Company, Inc. as of July 31, 2005 and 2004, and the results of their operations and their cash flows for the years ended July 31, 2005, 2004 and 2003, in conformity with accounting principles generally accepted in the United States of America.
/s/ Eide Bailly LLP
Fargo, North Dakota
September 1, 2005
DAKOTA GROWERS PASTA COMPANY, INC. CONSOLIDATED BALANCE SHEETS JULY 31, 2005 AND 2004
(In Thousands, Except Share Information)
See Notes to Consolidated Financial Statements
DAKOTA GROWERS PASTA COMPANY, INC. CONSOLIDATED STATEMENTS OF OPERATIONS YEARS ENDED JULY 31, 2005, 2004 AND 2003 (In Thousands, Except Per Share Amounts)
See Notes to Consolidated Financial Statements
DAKOTA GROWERS PASTA COMPANY, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY YEARS ENDED JULY 31, 2005, 2004 AND 2003 (In Thousands)
See Notes to Consolidated Financial Statements
DAKOTA GROWERS PASTA COMPANY, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED JULY 31, 2005, 2004 AND 2003
(In Thousands)
See Notes to Consolidated Financial Statements
DAKOTA GROWERS PASTA COMPANY, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEARS ENDED JULY 31, 2005, 2004 AND 2003
NOTE 1 -NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Conversion and Nature of Business
Dakota Growers Pasta Company, Inc. (“Dakota Growers” or “the Company”) is a North Dakota corporation that operates milling and pasta manufacturing facilities in Carrington, North Dakota. In addition, the Company’s wholly owned subsidiary, Primo Piatto, Inc. (“Primo Piatto”), a Minnesota corporation, operates pasta manufacturing facilities in New Hope, Minnesota.
Principles of Consolidation
The consolidated financial statements are comprised of the Company, its wholly-owned subsidiary Primo Piatto, Inc., and DNA Dreamfields Company, LLC (“DNA Dreamfields”), which the Company began to consolidate in fiscal year 2005. All material inter-company accounts and transactions have been eliminated in the preparation of the consolidated financial statements.
The Company acquired an additional 17.25% ownership interest in DNA Dreamfields, effective May 1, 2005, resulting in an increase in the Company’s ownership in DNA Dreamfields to 46.7 %. As a result of the ownership increase and changes in the DNA Dreamfields operating agreement and other contractual agreements, the Company reevaluated whether DNA Dreamfields was a variable interest entity under FASB Interpretation No. 46(R), “Consolidation of Variable Interest Entities,” (FIN 46(R)). The Company determined that DNA Dreamfields was a variable interest entity and that the Company was the primary beneficiary. Therefore, effective May 1, 2005, the Company began to include DNA Dreamfields in its consolidated financial statements. The financial statements for prior fiscal years have not been restated and therefore do not include consolidated data pertaining to DNA Dreamfields. The Company has included consolidated amounts for DNA Dreamfields in the income statement for the year ending July 31, 2005. The Company had previously accounted for its investment in and share of net earnings or losses of its ownership interest in DNA Dreamfields Company, LLC under the equity method.
Estimates
The preparation of consolidated 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 consolidated financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Reclassifications have been made to the financial statements as of July 31, 2004 and for the years ended July 31, 2004 and 2003 to facilitate comparability with the statements as of and for the year ended July 31, 2005. Such reclassifications have no effect on the net result of operations.
Risks and Uncertainties
The Company attempts to minimize the effects of durum wheat cost fluctuations mainly through forward contracting and through agreements with certain customers that provide for price adjustments based on raw material cost changes. Such efforts, while undertaken to attempt to minimize the risks associated with increasing durum costs on profitability, may temporarily prevent the Company from recognizing the benefits of declining durum prices.
Most of the Company’s currently outstanding debt instruments have fixed interest rates to maturity. If the Company’s operations require additional debt issuance, any changes in interest rates may have an impact on future results.
The Company’s cash balances are maintained in various bank deposit accounts. The deposit accounts may exceed federally insured limits at various times throughout the year.
Impairment and Disposal of Long-Lived Assets
The Company accounts for impairment or disposal of long-lived assets in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Long-lived assets to be disposed of by sale are reported at the lower of the carrying amount or fair value less costs to sell, and will cease to be depreciated. SFAS No. 144 also requires long-lived assets to be disposed of other than by sale to be considered as held and used until disposed of, requiring the depreciable life to be adjusted as an accounting change.
The Company recorded a loss on asset impairment of $704,000 during the year ended July 31, 2004. The impairment loss related to certain pasta production equipment which was under a purchase option agreement that expired in July 2004. Upon review, the Company determined the asset was impaired and adjusted to fair value which was estimated based on the current market conditions for similar equipment.
Goodwill
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company does not amortize goodwill. SFAS No. 142 requires that goodwill be evaluated for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. The Company used a discounted cash flow analysis in evaluating goodwill for impairment in fiscal year 2005 and determined that no impairment charge was necessary.
Revenue Recognition
Revenues are recognized when risk of loss transfers, which occurs when goods are shipped. Pricing terms, including promotions and rebates, are final at that time. Revenues include amounts billed for products as well as any associated shipping costs billed to deliver such products.
The Company provides allowances for annual promotional programs based upon annual sales volumes. Revenues are presented net of discounts and allowances of $24,184,000, $21,188,000 and $16,706,000 for the years ended July 31, 2005, 2004 and 2003, respectively.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand and in financial institutions, and investments with maturities of less than 90 days.
Trade Accounts Receivable and Major Customers
The Company grants unsecured credit to certain customers who meet the Company’s credit requirements. Trade accounts receivable are uncollateralized customer obligations due under normal terms and are generally non-interest bearing. Payments on trade receivables are allocated to specific invoices identified on a customer’s remittance advice or, if unspecified, are generally applied to the earliest unpaid invoices. The carrying amount of the receivables is reduced by an amount that reflects management’s best estimate of amounts that will not be collected. Trade accounts receivable are presented net of allowances for cash discounts and doubtful accounts, which totaled $1,507,000 and $1,209,000 as of July 31, 2005 and 2004, respectively.
One customer accounted for 17% and 18% of accounts receivable as of July 31, 2005 and 2004, respectively and 13%, 15% and 17% of net revenues for the years ended July 31, 2005, 2004 and 2003, respectively.
The following summarizes balance and activity information related to the allowance for cash discounts and doubtful accounts (in thousands):
Inventories
Inventories are stated at the lower of cost or market, determined on a first-in, first-out (FIFO) basis, using product specific standard costs. The major components of inventories as of July 31, 2005 and 2004 are as follows (in thousands):
Concentration of Sources of Labor
The Company’s total hourly and salaried workforce consists of approximately 409 employees, of which 29% are covered by collective bargaining agreements. Approximately 25% of the Company’s workforce is covered by a collective bargaining agreement expiring November 30, 2005.
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 is capitalized on construction projects of higher cost and longer duration.
The initial acquisition of land by the Company was 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 40 years. Depreciation expense totaled $5,357,000, $5,759,000 and $6,100,000 for the years ended July 31, 2005, 2004 and 2003, respectively.
Details relative to property and equipment are as follows (in thousands):
Investment in Cooperative Bank
Investment in cooperative bank is stated at cost, plus unredeemed patronage refunds received in the form of capital stock.
Other Assets
The Company capitalizes package design costs, which relate to certain third party costs to design artwork and to produce die plates and negatives necessary to manufacture and print packaging materials according to Company and customer specifications. These costs are amortized ratably over three to five year periods based on estimated useful life. 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. Package design costs are presented net of accumulated amortization totaling $4,381,000 and $3,949,000 as of July 31, 2005 and 2004, respectively.
Prepaid marketing costs relate to payments made to certain customers covering contract terms and pricing for varying periods extending beyond one year. These costs are amortized in proportion to sales volumes over the term of the agreement. In fiscal year 2005, the Company entered into an agreement with U.S. Foodservice that included provisions to apply accrued promotional amounts to marketing prepayments, which resulted in the significant decrease in prepaid marketing costs as of July 31, 2005 when compared to July 31, 2004.
The breakdown of other assets, net of accumulated amortization, is as follows (in thousands):
Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Shipping and Handling Costs
Shipping and handling costs are included in cost of goods sold upon shipment of the Company’s product to its customers.
Advertising
Costs of advertising are expensed as incurred. Advertising expenses included in the consolidated income statement totaled $5,062,000 (primarily related to consumer advertising for DreamfieldsTM pasta products) for the year ended July 31, 2005, and were immaterial for the years ended July 31, 2004 and 2003.
Research and Development
Research and development costs are expensed as incurred. Research and development expenses included in the consolidated income statement for the year ended July 31, 2005 totaled $1,059,000, including $551,000 incurred by DNA Dreamfields which the Company began to consolidate in fiscal year 2005. Research and development expenses totaled $152,000 and $109,000 for the years ended July 31, 2004 and 2003, respectively.
Interest Expense, Net
The Company earns patronage refunds from its patronage-based debt issued through cooperative banks based on its share of the net interest income earned by the banks. These patronage refunds received are applied against interest expense.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates expected to apply when the differences are expected to reverse. Deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled.
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 and has adopted the pro forma disclosure requirements under SFAS No. 123, “Accounting for Stock-Based Compensation.” The Company has not recognized any compensation expense under APB No. 25 upon 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.
Earnings per Share
Basic Earnings per Share (EPS) is calculated by dividing net earnings on common stock by the weighted average number of common shares effective and outstanding during the period. Diluted EPS includes the effect of all potentially dilutive securities, such as options and convertible preferred stock.
Dilutive securities, consisting of stock options and convertible preferred stock, included in the calculation of diluted weighted average common shares totaled 380,000 shares, 360,000 shares and 254,000 shares for the years ended July 31, 2005, 2004 and 2003, respectively. As there is currently no established public trading market for the Company’s common stock, for purposes of calculating Diluted EPS the Company has assumed the proceeds from the exercise of stock options would reduce debt and, thus, interest expense.
Recently Issued Accounting Standards
The FASB issued SFAS No. 123(R), “Share-Based Payment” in December 2004. SFAS No. 123(R) is a revision of SFAS No. 123, “Accounting for Stock Based Compensation” and is effective for fiscal quarters beginning after June 15, 2005. SFAS No. 123(R) requires the cost of share-based payments to employees, including grants of employee stock options, to be measured based on grant-date fair values. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award, usually the vesting period. SFAS No. 123(R) will become effective for the Company beginning with its first fiscal quarter 2006. The Company does not expect this Statement to have a material impact on its financial statements upon adoption. However, future employee stock option grants may have a material impact on the Company’s financial statements as a result of this statement.
The FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB 43, Chapter 4” in November 2004. This Statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) so as to require such costs to be treated as current period charges. Further, this Statement requires that the allocation of fixed overhead costs to the inventoriable production costs be based on the normal capacity of the production facilities. The provisions of this Statement are effective for inventory costs incurred during fiscal years beginning after June 15, 2005 and will become effective for the Company beginning with its first fiscal quarter 2006. The Company does not expect this Statement to have a material impact on its financial statements upon adoption. However, future changes in the Company’s production or logistics could have a material impact on the Company’s financial statements as a result of this statement.
NOTE 2 - DNA DREAMFIELDS COMPANY, LLC
DNA Dreamfields was formed by the Company and other food technology, manufacturing and consumer products marketing enterprises to develop, manufacture and sell low digestible carbohydrate pasta, rice and potatoes under the DreamfieldsTM brand name. The Company initially acquired a 24% ownership interest in DNA Dreamfields during fiscal year 2004. At that time, the Company accounted for the investment using the equity method after reviewing the applicability of FIN 46(R) to the Company’s interest in DNA Dreamfields. The Company increased it economic ownership in DNA Dreamfields to 29.5% in November 2004.
The Company acquired an additional 17.25% ownership interest in DNA Dreamfields effective May 1, 2005, resulting in an increase in the Company’s ownership in DNA Dreamfields to 46.7%. In conjunction with the Company’s increase in ownership in DNA Dreamfields, the DNA Dreamfields operating agreement was amended whereby Dakota Growers was named the managing member of DNA Dreamfields. As a result of the ownership increase and changes in the DNA Dreamfields operating agreement and other contractual agreements, the Company reevaluated whether DNA Dreamfields was a variable interest entity under FIN 46(R). The Company determined that DNA Dreamfields was a variable interest entity and that the Company was the primary beneficiary. Therefore, effective May 1, 2005, the Company began to include DNA Dreamfields in its consolidated financial statements. Goodwill totaling $16,654,000 was recorded in conjunction with the Company’s consolidation of DNA Dreamfields. The financial statements for prior fiscal years have not been restated and therefore do not include consolidated data pertaining to DNA Dreamfields. The Company has included consolidated amounts for DNA Dreamfields in the income statement for the year ending July 31, 2005. The Company had previously accounted for its investment in and share of net earnings or losses of its ownership interest in DNA Dreamfields Company, LLC under the equity method. The investment in joint venture on the balance sheet as of July 31, 2004 and net loss allocated from joint venture on the income statement for the year ended July 31, 2004 represent amounts reported under the equity method.
Following is summary balance sheet information for DNA Dreamfields as of April 30, 2005 prior to consolidation (in thousands):
Following are summary pro forma consolidated results of operations as if DNA Dreamfields were consolidated for the year ended July 31, 2004 (in thousands except earnings per share):
The Company has entered into a manufacturing agreement with DNA Dreamfields whereby Dakota Growers is the exclusive manufacturer of DreamfieldsTM low digestible carbohydrate pasta. The Company has also entered into a services agreement with DNA Dreamfields under which the Company provides administrative, accounting, information technology, sales, customer service and distribution services to DNA Dreamfields. Shipments of DreamfieldsTM low digestible carbohydrate pasta began in February 2004.
Pursuant to the terms of the services agreement with DNA Dreamfields, sales of DreamfieldsTM products are included in the Company’s net revenues. Manufacturing, distribution, and promotional costs incurred by the Company related to DreamfieldsTM products are included in the applicable line items of the Company’s income statement. The Company calculates a net amount due to DNA Dreamfields based on the total sales of DreamfieldsTM product less related DreamfieldsTM product and selling costs, as outlined in the manufacturing agreement. Prior to consolidating DNA Dreamfields in its financial statements, the Company presented this net amount due to DNA Dreamfields, which totaled $2,712,000 for the year ended July 31, 2004, in the Company’s cost of goods sold. Service fee income from DNA Dreamfields totaling $119,000 for the year ended July 31, 2004 is included in net revenues. The net amount due from DNA Dreamfields as of July 31, 2004 was $621,000, which is included in other receivables on the balance sheet. All material inter-company accounts and transactions have been eliminated in the preparation of the consolidated financial statements as of and for the year ended July 31, 2005.
The Company entered into a “2005 Line of Credit Loan Agreement” with DNA Dreamfields in the fourth quarter of fiscal year 2005. Under that Agreement, the Company has agreed to loan up to $5,000,000 to DNA Dreamfields, with DNA Dreamfields able to repay and reborrow amounts under the Line of Credit Loan Agreement from time to time. The Line of Credit Loan Agreement matures on May 31, 2010. The balance outstanding related to advances to DNA Dreamfields under the Line of Credit Loan Agreement totaled $465,000 as of July 31, 2005, which has been eliminated in the preparation of the consolidated financial statements. To secure the obligations of DNA Dreamfields under the 2005 Line of Credit Loan Agreement, the other member/owners of DNA Dreamfields have pledged their Membership Units in DNA Dreamfields to the Company.
NOTE 3 - SHORT-TERM NOTES PAYABLE
The Company has a $25 million revolving credit facility with CoBank which matures on May 31, 2006. The revolving line has a variable interest rate (5.59% at July 31, 2005) established by CoBank based on CoBank’s cost of funds. The facility is secured by property, equipment, and current assets of the Company. The balance outstanding on the revolving line of credit was $10,000,000 and $12,200,000 as of July 31, 2005 and 2004, respectively. Weighted average interest rates on short-term borrowings were 4.84%, 3.50% and 3.67% for the years ended July 31, 2005, 2004 and 2003, respectively.
NOTE 4 - LONG-TERM DEBT
Information regarding long-term debt at July 31, 2005 and 2004 is as follows (in thousands):
Aggregate future maturities required on long-term debt are as follows (in thousands):
The Company has a $4,800,000 letter of credit commitment with CoBank, securing the non-patronage loan from CoBank. The letter of credit commitment is subject to a commitment fee of 1.0% on an annualized basis and expires December 31, 2008. Advances on the letter of credit commitment are payable on demand.
The Company’s debt agreements with CoBank and the institutional note holders obligate the Company to maintain or achieve certain amounts of equity and financial ratios and impose restrictions on the Company. The Company was in compliance with these financial covenants as of July 31, 2005.
The Company incurred $2,518,000, $2,879,000 and $3,547,000 of interest on long and short-term debt and other obligations in fiscal years 2005, 2004 and 2003, respectively, of which $121,000, $14,000 and $7,000 was capitalized in the respective periods. Patronage income from CoBank of $114,000, $103,000 and $126,000 was netted against interest expense on the statement of operations for the years ended July 31, 2005, 2004 and 2003, respectively.
NOTE 5 - STOCKHOLDERS’ EQUITY
The Company is authorized to issue 75,000,000 shares of Common Stock, $.01 par value per share, 2,731 shares of Series C Preferred Stock, $100 par value per share, 11,340,841 shares of Series D Delivery Preferred Stock, $.01 par value per share, 130,000 shares of Series E Junior Participating Preferred Stock, $.01 par value per share, and 13,525,370 shares of undesignated preferred stock, $.01 par value per share.
Holders of Series C Preferred Stock shall receive payment of a non-cumulative annual dividend at the rate of 6% of the $100 par value on each share of Series C Preferred Stock. Each share of Series C Preferred Stock is convertible into 24 shares of Common Stock and 24 shares of Series D Delivery Preferred Stock of the Company. The conversion ratio shall be proportionately adjusted at any time the outstanding shares of Common Stock are increased or decreased without payment by or to the Company or the Company’s shareholders.
Each share of Series D Delivery Preferred Stock of the Company gives its holder the privilege, but not the obligation, to deliver one bushel of durum wheat to the Company each year on a “first-come, first-served” basis. Because the privilege of a holder of Series D Delivery Preferred Stock to deliver durum wheat to the Company only arises if the Company requires durum, the privilege is not absolute. Holders of Series D Delivery Preferred Stock will be entitled to receive, if and when declared by the Board of Directors, a non-cumulative annual dividend of up to $.04 per share on each share of Series D Delivery Preferred Stock held by such holder. The Company must pay holders of Series D Delivery Preferred Stock a dividend of at least $.01 per share before paying any dividends on Common Stock.
The Board of Directors of the Company adopted a Rights Plan that became effective July 1, 2002. Under the Rights Plan, the Board of Directors of the Company has declared a dividend of one purchase right (a “Right”) for each outstanding share of Common Stock held. Each Right will entitle the holder to purchase from the Company one-hundredth of one share of Series E Junior Participating Preferred Stock at a specified price, subject to certain adjustments. The Rights will not become exercisable, and will not be transferable apart from the Company’s shares of Common Stock, until a person or group has acquired 15% or more of the Company’s Common Stock or has commenced a tender or exchange offer for 15% or more of the Company’s Common Stock. In those events, each Right will entitle the holder (other than the acquiring person or group) to receive, upon exercise, common shares of either the Company or the acquiring company having value equal to two times the exercise price of the Right. The Rights issued under the Rights Plan will be redeemable by the Company’s Board of Directors in certain circumstances and will expire ten years from the date of adoption.
In November 2002, the Board of Directors approved the repurchase of 294,456 shares of the Company’s Common Stock from certain executive officers of the Company. The Company purchased these shares for $1,840,350 or $6.25 per share (see also Note 14 - Related Party Transactions). These shares were held in treasury as of July 31, 2003.
On July 30, 2004, the Company completed the sale of 909,091 shares of Common Stock, which included the 294,456 shares of Common Stock held in treasury at that time, to MVC Capital, Inc.
NOTE 6 - MANDATORILY REDEEMABLE PREFERRED STOCK
The Company adopted SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity” effective August 1, 2003. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. Many of these instruments were previously classified as equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope as a liability, or as an asset in some circumstances. This Statement applies to three types of freestanding financial instruments. One type of financial instrument to which SFAS No. 150 applies is mandatorily redeemable shares, which the issuing company is obligated to buy back in exchange for cash or assets.
The Company is authorized to issue 533 shares of Series A Preferred Stock, $100 par value per share. The Company had 67 and 200 shares of Series A Preferred Stock outstanding as of July 31, 2005 and 2004 respectively. The Series A Preferred Stock is required to be redeemed ratably on a quarterly basis through December 2005. Each share of Series A Preferred Stock entitles its holder to receive a cumulative annual dividend of 6% of the $100 par value per share. As the shares of Series A Preferred Stock are mandatorily redeemable, these shares have been classified as a liability in the Company’s consolidated balance sheet and “dividends” paid on the Series A Preferred Stock have been recorded as interest expense upon adoption of SFAS No. 150. “Dividends” paid on Series A Preferred Stock prior to the adoption of SFAS No. 150 have not been reclassified as interest cost.
NOTE 7 - EMPLOYEE BENEFIT PLANS
Dakota Growers Pasta Company, Inc. and Primo Piatto, Inc. have a 401(k) plan that covers employees who have met age and service requirements. The plan covers employees who have reached 21 years of age and who have completed 500 hours of service within six months. Effective January 1, 2003, the 401(k) plan was amended, and the Company match was changed to 100% on the first 3% of the employees’ elected deferral and 50% on the next 2%. Previously, the Company matched 100% on the first 2% of the employees’ elected deferral, 50% on the next 1%, and 25% on the next 4%. Employer contributions to the plan totaled $437,000, $377,000 and $345,000 for the years ended July 31, 2005, 2004 and 2003, respectively.
Primo Piatto, Inc. is also required to contribute to a multi-employer pension plan covering certain hourly employees subject to a collective bargaining agreement. Such employees may also participate in the 401(k) plan but are excluded from amounts contributed by Primo Piatto. Contributions to the pension plan for the years ended July 31, 2005, 2004 and 2003 totaled $51,000, $60,000 and $81,000, respectively.
NOTE 8 - INCOME TAXES
Significant components of the Company’s deferred tax assets and liabilities as of July 31, 2005 and 2004 related to temporary differences are as follows (in thousands):
Classified in the accompanying balance sheets as follows:
At July 31, 2005, the Company has an AMT credit carryforward of $851,000, which may be carried forward indefinitely. Management believes it is more likely than not that the deferred tax assets as of July 31, 2005 will be realized through the generation of future taxable income and tax planning strategies.
Income tax expense (benefit) for the years ended July 31, 2005, 2004 and 2003 consists of the following (in thousands):
The reconciliation of the federal statutory income tax rate to the effective income tax rate for the years ended July 31, 2005, 2004 and 2003 is as follows:
NOTE 9 - 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 judgments 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 judgment, 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 assets and 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, 2005 and 2004.
NOTE 10 - OPERATING LEASES
The Company leases equipment and office space under operating lease agreements. Future obligations for operating leases for fiscal years ended July 31 are as follows (in thousands):
Lease expense totaled $1,413,000, $1,402,000 and $1,485,000 for the years ended July 31, 2005, 2004 and 2003, respectively.
NOTE 11 - SALE-LEASEBACK
The Company entered into a sale-leaseback transaction effective March 29, 2002, for certain pasta production equipment. Proceeds from the sale totaled $5 million. The lease, which is classified as operating, sets forth an initial term of five years and calls for lease payments of $72,000 per month. At the end of the initial lease term, the Company may renew the lease at fair rental value, terminate the lease and surrender the equipment with the payment of a 10% of equipment cost remarketing fee, or purchase the equipment for $1,750,000. The Company realized a gain on the sale of $255,000, which was deferred and is being amortized in proportion to the gross rentals charged to expense over the five-year lease term. Minimum rentals required under the lease, which are also included in the future lease obligations disclosed in Note 10, for fiscal years ending July 31 are as follows (in thousands):
NOTE 12 - COMMITMENTS AND CONTINGENCIES
The Company forward contracts for a certain portion of its future durum wheat requirements. At July 31, 2005, the Company had outstanding commitments for grain purchases totaling $6,785,000 related to forward purchase contracts. These contracts are set price contracts to deliver grain to the Company’s mill, and are not derivative in nature as they have no net settlement provision and are not transferable.
The Company had commitments to purchase pasta equipment totaling approximately $4.4 million as of July 31, 2005. These amounts are expected to be paid within one year.
Pursuant to certain warehouse agreements, the Company is obligated to minimum monthly storage and handling amounts totaling $1,881,000, $1,701,000 and $1,537,000 for the years ending July 31, 2006, 2007 and 2008, respectively.
The Company has entered into a long-term marketing agreement, which includes volume commitments, with Safeway, Inc. through August 31, 2006. The Company has also entered into an agreement with Gruppo Euricom, an Italian pasta manufacturer, to be the exclusive distributor of Gruppo Euricom’s Italian pasta and rice products in the United States and Canada with an initial term through August 2006. These products are primarily sold in the private label retail and foodservice markets.
The Company 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 13 - STOCK OPTION PLANS
On January 31, 1997 the Cooperative’s Compensation Committee of the Board of Directors (the “Compensation Committee”) adopted the Dakota Growers Incentive Stock Option Plan (the “Plan”). The Plan was ratified by the Cooperative members at the annual meeting in January 1998. The Compensation Committee or the Board of Directors has 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 Series C Convertible Preferred Stock at fair market value, which were convertible into Equity Stock as a cooperative, and are now convertible into Common Stock and Series D Delivery Preferred Stock as a corporation at the option of the employee, under the applicable conversion ratio. The maximum number of preferred shares that may be issued pursuant to options granted under the Plan is 15,000, all of which have been issued. Each share of Series C Preferred Stock is convertible into 24 shares of Common Stock and 24 shares of Series D Delivery Preferred Stock of the Company. The conversion ratio is proportionately adjusted if the Company increases the outstanding shares of Common Stock or Series D Delivery Preferred Stock, as applicable, without payment by or to the Company or the Company’s shareholders for such additional shares (e.g. stock split, stock dividend or other action). Options granted under the Plan must be exercised within ten years from the date such options are granted. In the event of the employee’s termination with the Company, all exercisable options may be exercised within 90 days of the termination date. If not exercised, such options lapse.
The Company’s 2002 Stock Option Plan (the “2002 Plan”) was adopted by the Board of Directors on November 21, 2002. All options granted under the 2002 Plan are non-qualified stock options and are for the purchase of the Company’s Common Stock. The maximum number of shares of Common Stock that may be issued pursuant to options granted under the 2002 Plan is 294,456 shares, all of which have been issued. Stock options granted under the 2002 Plan expire 10 years from the date of grant.
On November 21, 2002 the Board of Directors adopted the Dakota Growers Pasta Company, Inc. 2003 Stock Option Plan (the “2003 Plan”), which was approved by the Company’s shareholders at the Annual Meeting on January 11, 2003. The 2003 Plan covers 500,000 shares of the Company’s Common Stock. Participation in this Plan shall be limited to officers, directors, employees, vendors or consultants of the Company or any subsidiary of the Company. Options granted under the 2003 Plan may be incentive stock options (as defined under Section 422 of the Code) or non-qualified stock options, as determined by the 2003 Plan administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code and the regulations promulgated there under. The stock options generally expire 10 years from the date of grant. If the employment of the Optionee is terminated by any reason other than his or her death or disability, all exercisable options may be exercised within 90 days of the termination date. If not exercised, such options lapse. Options to purchase 80,524 shares of Common Stock were granted under the 2003 Plan in fiscal year 2004.
The following tables set forth information regarding stock options outstanding and exercisable:
The Company applied APB No. 25 in accounting for employee stock options. Accordingly, no compensation expense was recorded during the years ended July 31, 2005, 2004 and 2003 related to the issuance or exercise of stock options. The fair value of the stock options granted was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions (excluding a volatility assumption): 2004 - risk free interest rate of 2.3%, expected dividend yield of zero and an expected life of 3 years; 2003 - risk free interest rate of 2.5%, expected dividend yield of zero and an expected life of 3 years. The pro forma application of Statement of Financial Accounting Standard (SFAS) No. 123 “Accounting for Stock-Based Compensation” would not have had a material impact on net income and earnings per share for the periods presented.
NOTE 14 - RELATED PARTY TRANSACTIONS
Transactions with Executive Officers
The Company had pledged certificates of deposit as security for loans, totaling approximately $1,974,000, made by a financial institution to Timothy J. Dodd, President and Chief Executive Officer, and Thomas P. Friezen, Chief Financial Officer, to exercise stock options. These loans matured December 1, 2002.
In accordance with the provisions of the Sarbanes-Oxley Act of 2002, the Board of Directors approved the repurchase of 190,800 and 103,656 shares of the Company’s Common Stock from Messrs. Dodd and Friezen, respectively. The repurchase was completed in November 2002. In conjunction with the repurchase of these shares at $6.25 per share, Messrs. Dodd and Friezen received proceeds of $1,192,500 and $647,850, respectively. In addition, Mr. Friezen received additional gross proceeds of $229,993 under a compensatory transaction in conjunction with the unwinding of previous stock option exercises and related officer loans. Messrs. Dodd and Friezen also received $81,311 and $53,425, respectively, under compensatory transactions for the interest on the loans made by the financial institution to exercise stock options. The proceeds received by Messrs. Dodd and Friezen were used to pay off their loans with the financial institution. As a result, the Company’s certificates of deposit were no longer restricted. The Company redeemed the certificates of deposit in December 2002. Finally, Messrs. Dodd and Friezen were granted stock options to purchase 190,800 and 103,656 shares, respectively, of the Company’s Common Stock with an exercise price of $6.25 per share. Such options were first exercisable on December 2, 2002.
The Company had advanced funds to Mr. Dodd and Mr. Friezen under promissory agreements to cover personal (unaudited) alternative minimum taxes and other costs generated as a result of these officers exercising stock options. Interest on the advances is charged at the applicable federal rate as published by the Internal Revenue Service. Certain of these promissory notes became due in conjunction with the repurchase of Common Stock from Messrs. Dodd and Friezen noted above. The Compensation Committee approved forgiving the principal totaling $92,153 and interest totaling $11,093 on these promissory notes in fiscal year 2003 as well as an additional compensatory transaction of $63,292 to cover estimated personal income taxes the officers incurred on the promissory note forgiveness.
Amounts due from officers totaled $82,000 as of July 31, 2005 and 2004.
NOTE 15 - CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000
U.S. Customs and Border Protection (“Customs”) has distributed antidumping and countervailing duties assessed on certain pasta imported from Italy and Turkey to affected domestic producers pursuant to the Continued Dumping and Subsidy Offset Act of 2000 (the “Offset Act”), which was enacted in October 2000. The Company received payments in the amount of $425,000, $903,000 and $1,000,000 in December 2004, 2003 and 2002, respectively, under the Offset Act. The Company repaid $34,000 and $305,000 to Customs in June 2003 and April 2004, respectively, pursuant to reclamation requests from Customs. The net proceeds received under the Offset Act have been classified as Other Income on the Income Statement. The Company cannot reasonably estimate the potential amount, if any, that it may receive under the Offset Act in future periods as any such amount will be based upon future events over which the Company has little or no control, including, but not limited to, the amount of expenditures by domestic pasta producers and the amount of antidumping and countervailing duties collected by Customs.
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summary quarterly results are as follows (in thousands, except per share amounts):
The quarterly results for the year ended July 31, 2005 are presented on a proforma basis to include the results of operations of DNA Dreamfields in the consolidated income statement for the entire year.
The above quarterly financial data is unaudited, but in the opinion of management, all adjustments necessary for a fair presentation of the selected data for these interim periods presented have been included.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures.
The Company's Chief Executive Officer, Timothy J. Dodd, and Chief Financial Officer, Thomas P. Friezen, have evaluated the Company's disclosure controls and procedures as of the end of the period covered by this report. Based upon the review, they have concluded that these controls and procedures are effective.
(b) Changes in Internal Controls over Financial Reporting.
There were no changes in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended July 31, 2005, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III.
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Board of Directors
The Board of Directors currently consists of ten members. The Board may consist of a minimum of seven members and a maximum of fifteen members. The Articles of Incorporation and Bylaws of the Company require that at least five members of the Board of Directors be residents of the State of North Dakota and that at least three members be agricultural producers. The Board of Directors is divided into three classes: Class I, Class II and Class III. Class I, Class II and Class III will consist of an equal number of directors, except that, if the Board of Directors consists of a number of directors such that mathematically there cannot be an equal number of directors in each of Class I, Class II and Class III, then the one remaining director shall be made a member of Class I and, if there is more than one remaining director, the first remaining director shall be made a member of Class I and the second remaining director shall be made a member of Class II. Each director in each of Class I, Class II and Class III will hold office until the third regular meeting of shareholders following the regular meeting of the shareholders at which such director or such director’s predecessor was elected, until his successor shall have been elected and shall qualify, or until he resigns or is removed.
The table below sets forth certain information concerning the directors of the Company. The directors have been elected to serve three-year terms expiring at the annual meeting in the calendar years indicated in the table below.
(1) Mr. Kenner and Mr. Rice are first cousins.
John S. Dalrymple III. Mr. Dalrymple has been Chairman of the Board of Directors of the Company since 1991. He became Lieutenant Governor of North Dakota in 2000. Mr. Dalrymple had been a state representative since 1984 and served as Chairman of the House Appropriations Committee and of the Budget Section of the North Dakota House of Representatives. He previously served on the board of directors of the U.S. Durum Growers Association. He has been a farmer in the Casselton, North Dakota area since 1971. He serves on the board of directors of the U.S. Chamber of Commerce.
Allyn K. Hart. Mr. Hart has been a director of the Company since 1991. He has been a farmer in the Cavalier County, North Dakota area since 1961.
Roger A. Kenner. Mr. Kenner has been a director of the Company since 1991. Mr. Kenner is chairman of Golden Plains Frozen Foods LLC and is a director of Blue Cross Blue Shield of North Dakota. He has been a farmer and certified seed producer in the Leeds, North Dakota area since 1964.
James F. Link. Mr. 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, including 15 years as its chairman. He has been a farmer in the Wahpeton, North Dakota area since 1947.
Eugene J. Nicholas. Mr. Nicholas has been a director of the Company since 1991. Mr. Nicholas has been a state representative since 1974, and serves as chairman of the North Dakota House of Representatives Agriculture Committee. Mr. Nicholas also serves on the board of directors of Country Bank USA, Cando, North Dakota, and the board of governors of Golden Plains Frozen Foods LLC. Mr. Nicholas previously served on the board of directors of the U.S. Durum Growers Association.
John D. Rice, Jr. Mr. Rice is the Vice Chairman of the Board of Directors and has been a director of the Company since 1991. He also served on the boards of directors of the National Pasta Association and U.S. Durum Growers Association. He has been a farmer in the Maddock, North Dakota area since 1968.
Michael T. Tokarz. Mr. Tokarz has been a director of the Company since 2004. Mr. Tokarz is the Chairman of MVC Capital, a registered investment company traded on the New York Stock Exchange (Ticker: MVC) that makes equity and debt investments. In addition, Mr. Tokarz is the Managing Member of The Tokarz Group, which manages Mr. Tokarz’s personal investments. From 1985 to 2002, Mr. Tokarz was a senior General Partner and Administrative Partner at Kohlberg Kravis Roberts & Co., a private equity firm specializing in management buyouts. Prior to joining KKR, Mr. Tokarz was with Continental Illinois National Bank and Trust Company of Chicago, joining the firm in 1973. He also currently serves on the corporate boards of Conseco, Inc, Walter Industries, Inc., IDEX Corporation, Timberland Machines & Irrigation, Inc., Ohio Medical Corporation, Baltic Motors Company, Stonewater Control Systems, Lomonsov, Athleta, Inc. and Apertio Ltd. Mr. Tokarz also serves on the Board of the University of Illinois Foundation and its Investment Committee and as Chairman of its Budget and Finance Committee. He is a member of the Board of Managers of Illinois Ventures and Chairman of Illinois Emerging Technology Fund, both affiliated with the University of Illinois.
Jeffrey O. Topp. Mr. Topp has been a director of the Company since 1991. He serves on the board of directors of Farmers Elevator, Inc. in Grace City, North Dakota. He is a partner in T-T Ranch and has been a farmer in the Grace City area since 1978.
Curtis R. Trulson. Mr. Trulson has been a director of the Company since 1991. He previously served on the boards of directors of the National Association of Wheat Growers and the North Dakota Grain Growers Association, including service as its President. He has been a farmer in Mountrail County, North Dakota, since 1975.
Michael E. Warner. Mr. Warner has been a director of the Company since 1992. Mr. Warner has been a farmer in the Hillsboro, North Dakota area since 1967. He also currently serves on the board of directors of Warner Equipment Co. and Agriceutical Resources LLC. In 2002, Mr. Warner was awarded a fellowship by the University of Missouri. He served on the board of directors of American Crystal Sugar Company from 1989 through 1996, as part of a 23-year career of service to the sugar industry. He is a past member of the board of trustees of Meritcare Health Systems of Fargo, North Dakota, the largest hospital/multiple clinic system between Minneapolis, Minnesota and Seattle, Washington.
Committees of the Board of Directors
The Audit Committee is responsible for assessing and ensuring the independence of the independent auditor, evaluating audit performance, approving the services to be provided by the independent auditor, evaluating policies and procedures relating to internal accounting function and controls, and reviewing and approving the Company’s annual audited financial statements before issuance, subject to approval by the Board of Directors. The members of the Audit Committee are Messrs. Trulson, Dalrymple and Warner, each of whom is independent, as they are not employees of the Company and have no other relationships which would prevent them from being considered independent pursuant to the Company’s policies and applicable laws and regulations. The Board of Directors has determined that Mr. Trulson qualifies as an “audit committee financial expert” within the meaning of Securities and Exchange Commission regulations.
The Compensation Committee makes recommendations to the Board of Directors of the Company regarding stock and compensation plans, approves transactions of certain officers and authorizes the granting of stock options. Messrs. Dalrymple, Trulson and Warner are members of the Compensation Committee.
The Nomination Committee is responsible for recommending nominees to the Board of Directors of the Company. Under the Company’s current bylaws, the Nomination Committee consists of the Company’s Chairman, Vice Chairman, and Chief Executive Officer.
The Policy Committee provides oversight of the Company’s governance obligations to assure compliance with all applicable laws, regulations, Articles of Incorporation and By-laws, operating pursuant to a written Policy Committee Charter adopted by the Company’s Board of Directors. Messrs. Hart, Trulson and Link are members of the Policy Committee.
Compensation of Directors
Effective August 1, 2005, the Company provides its directors with compensation consisting of (i) a per diem payment of $500 (except for the Chairman of the Board and Chairman of the Audit Committee who will each receive $600 per day) for any day on which a director undertakes activities on the Company’s behalf, including board meetings and other functions of the Company, (ii) a monthly fee of $1,000 (except for the Chairman of the Board and Chairman of the Audit Committee who each receive $1,200 per month), and (iii) reimbursement for out-of-pocket expenses incurred on behalf of the Company.
Executive Officers
The table below lists the executive officers of the Company. Officers are elected annually by the Board of Directors.
Timothy J. Dodd. Mr. Dodd is the President and Chief Executive Officer of the Company. Prior to joining the Company in December 1991, he had been the Vice President of Manufacturing for American Italian Pasta Company since 1988. Previously, Mr. Dodd participated in the construction and management of two other grain processing facilities, one in Texas and one in Cando, North Dakota. Mr. Dodd serves on the board of directors of Country Bank USA, Cando, North Dakota.
Thomas P. Friezen. Mr. Friezen is the Chief Financial Officer of the Company. Mr. Friezen joined the Company in April 1995 as Vice President, Finance and became Chief Financial Officer in August 2000. Mr. Friezen is a member of the board of directors of CDT, Inc., a development stage water technology company for which he serves as chair of the audit committee and as a member of the compensation committee. Mr. Friezen is a certified public accountant.
Code of Conduct
The Company has adopted a Code of Conduct applicable to all employees. A Code of Ethics certification for senior financial officers, including the principal executive officer, principal financial officer and principal accounting officer, is included within the Code of Conduct.
A copy of the Code of Conduct is available under the “Investors” portion of the Company’s website at www.dakotagrowers.com. A copy of the Company’s Code of Conduct will also be provided, without charge, upon written request to:
Investor Relations
Dakota Growers Pasta Company, Inc.
One Pasta Avenue
Carrington, ND 58421
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the amount of compensation paid to the Company’s President and Chief Executive Officer and Chief Financial Officer for the fiscal year ended July 31, 2005 and the two prior fiscal years.
Summary Compensation Table
(1) Includes the Company’s 401(k) matching contribution, excess life insurance, the taxable portion of reimbursable business expenses and the taxable portion of other benefits.
(2) Compensation resulting from transactions to effect compliance with the Sarbanes-Oxley Act of 2002. See “Transactions with Executive Officers” under “Item 13. Certain Relationships and Related Transactions” for further information.
Options Exercised in Fiscal Year 2005 and Unexercised Options at July 31, 2005
The following table summarizes stock option exercises and total number of options held for Series C Convertible Preferred Stock at the end of fiscal year 2005.
The following table summarizes stock option exercises and total number of options held for Common Stock at the end of fiscal year 2005.
(1) There is no established public trading market for the Company’s securities; therefore, the Company is unable to estimate the value of unexercised options as of July 31, 2005.
Employment Agreements
The Company does not have any employment agreements in place at the current time.
Stock Option Plans
On January 31, 1997 the Cooperative’s Compensation Committee of the Board of Directors (the “Compensation Committee”) adopted the Dakota Growers Incentive Stock Option Plan (the “Plan”). The Plan was ratified by the Cooperative members at the annual meeting in January 1998. The Compensation Committee or the Board of Directors has 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 Series C Convertible Preferred Stock at fair market value, which were convertible into Equity Stock as a cooperative, and are now convertible into Common Stock and Series D Delivery Preferred Stock as a corporation at the option of the employee, under the applicable conversion ratio. The maximum number of preferred shares that may be issued pursuant to options granted under the Plan is 15,000, all of which have been issued. Each share of Series C Preferred Stock is convertible into 24 shares of Common Stock and 24 shares of Series D Delivery Preferred Stock of the Company. The conversion ratio is proportionately adjusted if the Company increases the outstanding shares of Common Stock or Series D Delivery Preferred Stock, as applicable, without payment by or to the Company or the Company’s shareholders for such additional shares (e.g. stock split, stock dividend or other action). Options granted under the Plan must be exercised within ten years from the date such options are granted. In the event of the employee’s termination with the Company, all exercisable options may be exercised within 90 days of the termination date. If not exercised, such options lapse.
The Company’s 2002 Stock Option Plan (the “2002 Plan”) was adopted by the Board of Directors on November 21, 2002. All options granted under the 2002 Plan are non-qualified stock options and are for the purchase of the Company’s Common Stock. The maximum number of shares of Common Stock that may be issued pursuant to options granted under the 2002 Plan is 294,456 shares, all of which have been issued. Stock options granted under the 2002 Plan expire 10 years from the date of grant.
On November 21, 2002 the Board of Directors adopted the Dakota Growers Pasta Company, Inc. 2003 Stock Option Plan (the “2003 Plan”), which was approved by the Company’s shareholders at the Annual Meeting on January 11, 2003. The 2003 Plan covers 500,000 shares of the Company’s Common Stock. Participation in this Plan shall be limited to officers, directors, employees, vendors or consultants of the Company or any subsidiary of the Company. Options granted under the 2003 Plan may be incentive stock options (as defined under Section 422 of the Code) or non-qualified stock options, as determined by the 2003 Plan administrator at the time of grant of an option and subject to the applicable provisions of Section 422 of the Code and the regulations promulgated there under. The stock options generally expire 10 years from the date of grant. If the employment of the Optionee is terminated by any reason other than his or her death or disability, all exercisable options may be exercised within 90 days of the termination date. If not exercised, such options lapse. Options to purchase 80,524 shares of Common Stock were granted under the 2003 Plan in fiscal year 2004.
Compensation Committee Interlocks and Insider Participation
The members of the Compensation Committee are John S. Dalrymple III, Curtis R. Trulson and Michael E. Warner. None of these directors are or have been an officer or employee of the Company. During fiscal year 2005, no executive officer of the Company served as a director or member of the Compensation Committee (or other committee serving an equivalent function) of any other entity, one of whose executive officers served as a director of or member of the Compensation Committee of the Company.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table furnishes information as to the beneficial ownership of the Company’s Common Stock, Series C Convertible Preferred Stock and Series D Delivery Preferred Stock by (a) each person known by us to beneficially own more than 5% of the issued and outstanding shares of the Company’s voting securities, (b) each of the Company’s executive officers, (c) each of the Company’s directors and (d) all of the Company’s directors and executive officers as a group.
The address of each person listed below is c/o Dakota Growers Pasta Company, Inc., One Pasta Avenue, Carrington, North Dakota 58421. Except as otherwise noted, each person listed below has sole investment discretion and voting power. In accordance with the Securities and Exchange Commission’s rules, in computing the number of shares beneficially owned by a person and the percentage ownership of that person, securities subject to options held by that person that are currently exercisable or exercisable within 60 days of July 31, 2005 are treated as outstanding. These shares, however, are not treated as outstanding for the purpose of computing the percentage ownership of any other person.
(1) Includes shares held in the names of Mr. Dalrymple’s spouse, daughter and the John S. Dalrymple III Trust.
(2) Includes shares held in the name of Mr. Kenner’s spouse.
(3) Includes shares held in the names of Link Farms LLP LSB Pasta and Link Farms LLP.
(4) Includes shares held in the name of Mr. Nicholas’ spouse.
(5) Includes shares held in the name of John Rice Farm.
(6) Includes shares held in the names of T-T Ranch and Mr. Topp’s spouse and children.
(7) Includes shares held in the name of Trulson Brothers.
(8) Messrs. Dodd and Friezen have been granted options that are currently exercisable or exercisable within 60 days of July 31, 2005, to purchase 1,977 and 754 shares, respectively, of the Company’s Series C Preferred Stock and 197,556 and 109,444 shares, respectively, of the Company’s Common Stock. Each share of Series C Preferred Stock is convertible into 24 shares of Common Stock and 24 shares of Series D Delivery Preferred Stock of the Company. The number of shares of Common Stock presented for Messrs. Dodd and Friezen include 47,448 and 18,096 shares, respectively, of Common Stock issuable upon exercise of the options to purchase Series C Preferred Stock of the Company and conversion of each such share of Series C Preferred Stock into 24 shares of
Common Stock in the Company. The number of shares of Series D Delivery Preferred Stock presented for Messrs. Dodd and Friezen includes 47,448 and 18,096 shares, respectively, of Series D Delivery Preferred Stock issuable upon exercise of the options to purchase Series C Preferred Stock of the Company and conversion of each such share of Series C Preferred Stock into 24 shares of Common Stock in the Company, with one share of Series D Delivery Preferred Stock issuable for each share of Common Stock so issued upon conversion. The number of shares of Common Stock presented for Messrs. Dodd and Friezen also includes 197,556 and 109,444 shares, respectively, of Common Stock issuable upon exercise of options to purchase Common Stock.
(9) The number of shares of Common Stock and Series D Delivery Preferred Stock and the percentage of the total number of shares of Common Stock and Series D Delivery Preferred Stock beneficially owned by all directors and executive officers as a group are shown on a fully-diluted basis, based upon 13,541,926 shares of Common Stock and 11,340,841 shares of Series D Delivery Preferred Stock issued and outstanding on a fully-diluted basis.
(10) The shares are directly owned by MVC Capital, Inc. of which Mr. Tokarz is a stockholder, director and Chairman. Mr. Tokarz disclaims any beneficial ownership of the Company’s securities for purposes of Section 16(a) under the Securities Exchange Act of 1934, as amended, or otherwise, except to the extent of the Reporting Person’s pecuniary interests therein.
Equity Compensation Plan Information
See “Item 11. Executive Compensation” for a discussion of the material features of the Company’s Stock Option Plans. The following table provides information regarding the Company’s equity compensation plans as of July 31, 2005.
(1) Each share of Series C Convertible Preferred Stock is convertible into 24 shares of Common Stock and 24 shares of Series D Delivery Preferred Stock of the Company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Executive Officers
The Company had pledged certificates of deposit as security for loans, totaling approximately $1,974,000, made by a financial institution to Timothy J. Dodd, President and Chief Executive Officer, and Thomas P. Friezen, Chief Financial Officer, to exercise stock options. These loans matured December 1, 2002.
In accordance with the provisions of the Sarbanes-Oxley Act of 2002, the Board of Directors approved the repurchase of 190,800 and 103,656 shares of the Company’s Common Stock from Messrs. Dodd and Friezen, respectively. The repurchase was completed in November 2002. In conjunction with the repurchase of these shares at $6.25 per share, Messrs. Dodd and Friezen received proceeds of $1,192,500 and $647,850, respectively. In addition, Mr. Friezen received additional gross proceeds of $229,993 under a compensatory transaction in conjunction with the unwinding of previous stock option exercises and related officer loans. Messrs. Dodd and Friezen also received $81,311 and $53,425, respectively, under compensatory transactions for the interest on the loans made by the financial institution to exercise stock options. The proceeds received by Messrs. Dodd and Friezen were used to pay off their loans with the financial institution. As a result, the Company’s certificates of deposit were no longer restricted. The Company redeemed the certificates of deposit in December 2002. Finally, Messrs. Dodd and Friezen were granted stock options to purchase 190,800 and 103,656 shares, respectively, of the Company’s Common Stock with an exercise price of $6.25 per share. Such options were first exercisable on December 2, 2002.
The Company had advanced funds to Mr. Dodd and Mr. Friezen under promissory agreements to cover personal alternative minimum taxes and other costs generated as a result of these officers exercising stock options. Interest on the advances is charged at the applicable federal rate as published by the Internal Revenue Service. Certain of these promissory notes became due in conjunction with the repurchase of Common Stock from Messrs. Dodd and Friezen noted above. The Compensation Committee approved forgiving the principal ($92,153) and interest ($11,093) on these promissory notes along with an additional compensatory transaction of $63,292 to cover estimated personal income taxes the officers incurred on the promissory note forgiveness.
Consulting Services
In July 2004, the Company and MVC Financial Services, Inc. entered into a consulting agreement pursuant to which MVC Financial Services, Inc. will provide certain business consulting services to the Company for annual compensation of $75,000 per year and the reimbursement of expenses. MVC Financial Services, Inc. is an affiliate of MVC Capital, Inc., a holder of 5% or greater of the Company’s Common Stock. Michael T. Tokarz, a director of the Company, is a stockholder and Chairman of MVC Capital, Inc.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table represents aggregate fees billed (in thousands) to the Company for fiscal years ended July 31, 2005 and 2004 by Eide Bailly LLP, the Company’s principal accounting firm.
(a) Primarily benefit plan audit services.
(b) Primarily tax advisory and preparation services.
(c) The Audit Committee has approved all fees.
Auditor Services Pre-approval Policy
The Audit Committee has a formal policy concerning pre-approval of all services to be provided by Eide Bailly LLP, the Company’s independent auditor, including audit, audit-related, tax and other services. The Chair of the Committee has the authority to pre-approve permitted services that require action between regular Committee meetings, provided a report of these services is given to the full Committee at the next regular meeting. The Committee approved all services provided by Eide Bailly LLP during fiscal year 2005.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following are filed as part of this report:
1. Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of July 31, 2005 and 2004
Consolidated Statements of Operations for the years ended July 31, 2005, 2004 and 2003
Consolidated Statements of Changes in Stockholders’ Equity for the years ended July 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended July 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
All schedules are omitted as the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
3. Exhibits
2.1 Second Amended and Restated Plan of Merger between Dakota Growers Pasta Company and Dakota Growers Pasta Restructuring Cooperative. (Incorporated by reference to Exhibit 2.1 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
2.2 Second Amended and Restated Merger Agreement between Dakota Growers Pasta Restructuring Cooperative and Dakota Growers Corporation. (Incorporated by reference to Exhibit 2.2 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
2.3 Second Amended and Restated Merger Agreement between Dakota Growers Corporation and the Company, formerly Dakota Growers Restructuring Company, Inc. (Incorporated by reference to Exhibit 2.3 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
2.4 Second Amended and Restated Transaction Agreement between Dakota Growers Pasta Company, Dakota Growers Pasta Restructuring Cooperative, Dakota Growers Corporation and the Company, formerly Dakota Growers Restructuring Company, Inc. (Incorporated by reference to Exhibit 2.4 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
3.1 Second Amended and Restated Articles of Incorporation of the Company, formerly Dakota Growers Restructuring Company, Inc. (Incorporated by reference to Exhibit 3.1 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
3.2 Second Amended and Restated Bylaws of the Company, formerly Dakota Growers Restructuring Company, Inc. (Incorporated by reference to Exhibit 3.3 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
3.3 Certificate of Designation of Series E Junior Participating Preferred Stock of the Company, formerly Dakota Growers Restructuring Company, Inc. (Incorporated by reference to Exhibit 3.2 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
4.1 Note Purchase Agreement dated July 15, 1998. (Incorporated by reference to Exhibit 4.1 from Dakota Growers Pasta Company’s Amendment No. 1 to Form S-1 Registration Statement on Form S-1/A, File No. 333-65071, declared effective October 21, 1998).
4.2 Waiver and First Amendment to Note Purchase Agreements dated November 28, 2000. (Incorporated by reference to Exhibit 4.1 from Dakota Growers Pasta Company’s Quarterly Report on Form 10-Q, File No. 33-99834, for the quarter ended October 31, 2000).
4.3 Waiver and Second Amendment to Note Purchase Agreement and Notes dated June 1, 2001. (Incorporated by reference to Exhibit 4.3 from Dakota Growers Pasta Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2001, File No. 33-99834).
10.1 Incentive Stock Option Plan. (Incorporated by reference to Exhibit 10.1 from Dakota Growers Pasta Company’s Quarterly Report on Form 10-Q, File No. 33-99834, for the quarter ended April 30, 1998).
10.2 Master Lease Agreement dated March 6, 2002 and related Schedule A dated March 29, 2002 between Dakota Growers Pasta Company and Farm Credit Leasing Services Corporation. (Incorporated by reference to Exhibit 10.2 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
10.3 Amended and Restated Share Rights Agreement, dated as of April 19, 2002, by and among the Company, formerly Dakota Growers Restructuring Company, Inc., and Wells Fargo Bank Minnesota, National Association, as Rights Agent. (Incorporated by reference to Exhibit 10.1 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).
10.4 Dakota Growers Pasta Company, Inc. 2002 Stock Option Plan. (Incorporated by reference to Exhibit 10.16 from the Company’s Annual Report on Form 10-K, File No. 000-50111, for the year ended July 31, 2003).
10.5 Dakota Growers Pasta Company, Inc. Amended and Restated 2003 Stock Option Plan. (Incorporated by reference to Exhibit 10.6 from the Company’s Quarterly Report on Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004).
10.6 Manufacturing Agreement dated December 26, 2003 between the Company and DNA Dreamfields Company, LLC. (Incorporated by reference to Exhibit 10.2 from the Company’s Quarterly Report on Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004). Confidential treatment has been granted with respect to portions of the Exhibit.
10.7 Services Agreement dated December 26, 2003 between the Company and DNA Dreamfields Company, LLC. (Incorporated by reference to Exhibit 10.3 from the Company’s Quarterly Report on Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004). Confidential treatment has been granted with respect to portions of the Exhibit.
10.8 Trademark License Agreement dated December 26, 2003 between the Company and DNA Dreamfields Company, LLC. (Incorporated by reference to Exhibit 10.4 from the Company’s Quarterly Report on Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004).
10.9 Technology Sublicense Agreement dated December 26, 2003 between the Company and DNA Dreamfields Company, LLC. (Incorporated by reference to Exhibit 10.5 from the Company’s Quarterly Report on Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004).
10.10 Stock Purchase Agreement dated July 30, 2004 between the Company and MVC Capital, Inc. (Incorporated by reference to Exhibit 99.2 from the Company’s Report on Form 8-K, File No. 000-50111, filed August 6, 2004).
10.11 Registration Rights Agreement dated July 30, 2004 between the Company and MVC Capital, Inc. (Incorporated by reference to Exhibit 99.3 from the Company’s Report on Form 8-K, File No. 000-50111, filed August 6, 2004).
10.12 Consulting Agreement dated July 30, 2004 between the Company and MVC Financial Services, Inc. (Incorporated by reference to Exhibit 99.4 from the Company’s Report on Form 8-K, File No. 000-50111, filed August 6, 2004).
10.13 Membership Unit Purchase Agreement effective May 1, 2005 between and among Dakota Growers Pasta Company, Inc., B-New, LLC, TechCom Group, LLC and Buhler, Inc. (Incorporated by reference to Exhibit 10.1 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).
10.14 Amended and Restated DNA Dreamfields Company, LLC Operating Agreement effective May 1, 2005 between the Company, B-New, LLC, TechCom Group, LLC and Buhler, Inc. (Incorporated by reference to Exhibit 10.2 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).
10.15 2005 Line of Credit Loan Agreement effective May 31, 2005 by and between the Company (“Lender”) and DNA Dreamfields Company, LLC (“Borrower”). (Incorporated by reference to Exhibit 10.3 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).
10.16 Promissory Note effective May 31, 2005 executed by DNA Dreamfields Company, LLC. (Incorporated by reference to Exhibit 10.4 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).
10.17 LLC Unit Pledge Agreement effective May 31, 2005 between and among B-New, LLC, TechCom Group, LLC, Buhler, Inc. (collectively the “Pledgors”) and the Company (“Lender”). (Incorporated by reference to Exhibit 10.5 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).
10.18 Master Loan Agreement dated May 23, 2005 between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.1 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).
10.19 Statused Revolving Credit Supplement dated May 23, 2005 between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.2 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).
10.20 Non-Revolving Credit Supplement dated May 23, 2005 between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.3 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).
10.21 Multiple Advance Term Loan Supplement dated May 23, 2005 between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.4 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).
10.22 Continuing Guarantee Agreement dated May 23, 2005 between Primo Piatto, Inc., a wholly-owned subsidiary of the Company, and CoBank, ACB. (Incorporated by reference to Exhibit 10.5 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).
10.23 Security Agreement dated May 23, 2005 between Primo Piatto, Inc. and CoBank, ACB. (Incorporated by reference to Exhibit 10.6 from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).
21 Subsidiary of the registrant.
Name of Subsidiary
Jurisdiction of Incorporation
Primo Piatto, Inc.
Minnesota
23 Consent of Independent Registered Public Accounting Firm; Eide Bailly LLP.
31.1 Certification of Chief Executive Officer required by Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a).
31.2 Certification of Chief Financial Officer required by Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a).
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
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.
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.
Signature
Title
Date
/s/ Timothy J. Dodd
President and Chief Executive Officer
Timothy J. Dodd
(Principal Executive Officer)
October 28, 2005
/s/ Thomas P. Friezen
Chief Financial Officer
Thomas P. Friezen
(Principal Financial Officer)
October 28, 2005
Vice President - Finance and
/s/ Edward O. Irion
Chief Accounting Officer
Edward O. Irion
(Principal Accounting Officer)
October 28, 2005
/s/ John S. Dalrymple III
John S. Dalrymple III
Director
October 28, 2005
/s/ John D. Rice, Jr.
John D. Rice, Jr.
Director
October 28, 2005
/s/ Curt R. Trulson
Curt R. Trulson
Director
October 28, 2005
/s/ Allyn K. Hart
Allyn K. Hart
Director
October 28, 2005
/s/ Roger A. Kenner
Roger A. Kenner
Director
October 28, 2005
/s/ James F. Link
James F. Link
Director
October 28, 2005
/s/ Eugene J. Nicholas
Eugene J. Nicholas
Director
October 28, 2005
/s/ Michael T. Tokarz
Michael T. Tokarz
Director
October 28, 2005
/s/ Jeffrey O. Topp
Jeffrey O. Topp
Director
October 28, 2005
/s/ Michael E. Warner
Michael E. Warner
Director
October 28, 2005