**Exhibit10.3**

 

**CoBANK, ACB**

**SECURITY AGREEMENT**

 

 

**THIS SECURITY AGREEMENT** isexecuted and delivered by Dakota Growers Pasta Company, Inc. (the “Debtor”), aNorth Dakota corporation, having its place of business (or chief executiveoffice if more than one place of business) located at One Pasta Avenue,Carrington, North Dakota, and whose taxpayer identification number is 45-0423511, to CoBank, ACB (the “Secured Party”), afederally chartered instrumentality of the United States, whose mailing addressis 5500 South Quebec Street, Greenwood Village, Colorado 80111.

 

**SECTION 1.      GRANT OFSECURITY INTEREST.**  For valuable consideration, the receipt and sufficiency of whichare hereby acknowledged, the Debtor hereby grants to the Secured Party asecurity interest in all of the personal property of the Debtor, whereverlocated and whether now existing or hereafter acquired, together with allaccessions and additions thereto, and all products and proceeds thereof,including:

 

accounts; inventory (including without limitation,returned or repossessed goods); chattel paper; electronic chattel paper;instruments; investment property (including, without limitation, certificatedand uncertificated securities, security entitlements, securities accounts,commodity contracts, and commodity accounts); letters of credit;letter-of-credit rights; documents; equipment; farm products; fixtures; generalintangibles (including, without limitation, payment intangibles, choses orthings in action, litigation rights and resulting judgments, goodwill, patents,trademarks and other intellectual property, tax refunds, miscellaneous rightsto payment, investments and other interests in entities not included in thedefinition of investment property (including, without limitation, all equitiesand patronage rights in all cooperatives and all interests in partnerships andjoint ventures), margin accounts, computer programs, software, invoices,  books, records and other informationrelating to or arising out of the Debtor’s business); and, to the extent notcovered by the above, all other personal property of the Debtor of every typeand description, including without limitation, supporting obligations,interests or claims in or under any policy of insurance, commercial tortclaims, deposit accounts, money, and judgments (the “Collateral”).

 

Where applicable, all terms used herein shall have thesame meaning as presently and as hereafter defined in the Uniform CommercialCode (the “UCC”).

 

**SECTION 2.      THEOBLIGATIONS**.  The security interest granted hereunder shall secure the paymentof all indebtedness and the performance of all obligations of the Debtor to theSecured Party of every type and description, whether now existing or hereafterarising, fixed or contingent, as primary obligor or as guarantor or surety,acquired directly or by assignment or otherwise, liquidated or unliquidated,regardless of how they arise or by what agreement or instrument they may beevidenced, including without limitation all loans, advances and otherextensions of credit and all covenants, agreements, and provisions contained inall loan and other agreements between the parties (the “Obligations”).

 

**SECTION 3.      REPRESENTATIONS,WARRANTIES AND COVENANTS.**  The Debtor represents, warrants andcovenants as follows:

 

**A.          Title to Collateral. **Exceptas permitted by any other written agreement between the parties, and except forany security interest in favor of the Secured Party, the Debtor has clear titleto all Collateral free of all adverse claims, interests, liens, or encumbrances.  Without the prior written consent of theSecured Party, the Debtor shall not create or permit the existence of anyadverse claims, interests, liens, or other encumbrances against any of theCollateral.  The Debtor shall provideprompt written notice to the Secured Party of any future adverse claims,interests, liens, or encumbrances against all Collateral, and shall defenddiligently the Debtor’s and the Secured Party’s interests in all Collateral.

 

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**B.          Validity ofSecurity Agreement; Corporate Authority.** This Security Agreement is the valid andbinding obligation of the Debtor, enforceable in accordance with itsterms.  The Debtor has the corporatepower to execute, deliver and carry out the terms and provisions of thisSecurity Agreement and all related documents, and has taken all necessarycorporate action to authorize the execution, delivery and performance of thisSecurity Agreement and all related documents.

 

**C.          Location ofthe Debtor. **The Debtor’s place of business (or chief executive office if more thanone place of business) is located at the address shown above.  The Debtor’s state of incorporation orformation is as shown above.

 

**D.          Location ofCollateral. **All equipment and inventory are now at the location or locationsspecified on Schedule A attached hereto and made a part hereof.  All farm products and fixtures are now atthe location or locations specified on Schedule B attached hereto and made apart hereof.

 

**E.           Name,Identity, and Corporate Structure.**  The Debtor’s exact legal name is as setforth above.  Except as otherwisedisclosed to the Secured Party in writing, the Debtor has not within the pastten years changed its name, identity or corporate structure throughincorporation, merger, consolidation, joint venture or otherwise.

 

**F.           Change inName, State of Debtor’s Location, Location of Collateral, Etc. **Withoutgiving at least thirty days’ prior written notice to the Secured Party, theDebtor shall not change its name, identity or corporate structure, the locationof its place of business (or chief executive office if more than one place ofbusiness), its state of incorporation or formation, or the location of theCollateral.

 

**G.          FurtherAssurances. **Upon the request of the Secured Party, the Debtor shall do all acts andthings as the Secured Party may from time to time deem necessary or advisableto enable it to perfect, maintain, and continue the perfection and priority ofthe security interest of the Secured Party in the Collateral, or to facilitatethe exercise by the Secured Party of any rights or remedies granted to theSecured Party hereunder or provided by law. Without limiting the foregoing, theDebtor agrees to execute, in form and substance satisfactory to the SecuredParty, such financing statements, amendments thereto, supplemental agreements,assignments, notices of assignments, and other instruments and documents as theSecured Party may from time to time request. In addition, in the event the Collateral or any part thereof consists ofinstruments, documents, chattel paper, or money (whether or not proceeds of theCollateral), the Debtor shall, upon the request of the Secured Party, deliverpossession thereof to the Secured Party (or to an agent of the Secured Partyretained for that purpose), together with any appropriate endorsements and/orassignments.  Where Collateral is in thepossession of a third party, the Debtor will join with the Secured Party innotifying the third party of the Secured Party’s security interest and obtainingan acknowledgment from the third party that it is holding the Collateral forthe benefit of the Secured Party.  TheDebtor will cooperate with the Secured Party in obtaining control with respectto Collateral consisting of deposit accounts (that are not held by the SecuredParty as depositary institution), investment property, letter-of-credit rightsand electronic chattel paper.  TheSecured Party shall use reasonable care in the custody and preservation of suchCollateral in its possession, but shall not be required to take any steps necessaryto preserve rights against prior parties. All costs and expenses incurred by the Secured Party to establish,perfect, maintain, determine the priority of, or release the security interestgranted hereunder (including the cost of all filings, recordings, and taxesthereon and the fees and expenses of any agent retained by Secured Party) shallbecome part of the Obligations secured hereby and be paid by the Debtor ondemand.

 

**H.          Insurance. **TheDebtor shall maintain such property and casualty insurance with such insurancecompanies, in such amounts, and covering such risks, as are at all timessatisfactory to the Secured Party.  Allsuch policies shall provide for loss payable clauses or endorsements in form andcontent acceptable to the Secured Party. Upon the request of the Secured Party, all policies (or such other proofof compliance with this Section as may be satisfactory to the Secured Party)shall be delivered to the Secured Party. The Debtor shall pay all insurance premiums when due.  In the event of loss, damage, or injury toany insured Collateral, the Secured Party shall have full power to collect anyand all insurance proceeds due under any of such policies, and may, at itsoption,

 

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apply such proceeds to the payment of any of the Obligationssecured hereby, or may apply such proceeds to the repair or replacement of suchCollateral.

 

**I.            Taxes,Levies, Etc. **The Debtor has paid and shall continue to pay when due all taxes,levies, assessments, or other charges which may become an enforceable lienagainst the Collateral.

 

**J.           Dispositionand Use of Collateral by the Debtor. **Without the prior written consent of the Secured Party and provided theDebtor is not in default hereunder, the Debtor shall not at any time sell,transfer, lease, abandon, or otherwise dispose of any Collateral except in theordinary course of its business.  TheDebtor shall not use any of the Collateral in any manner which violates anystatute, regulation, ordinance, rule, decree, order, or insurance policy.

 

**K.          Receivables. **TheDebtor shall preserve, enforce, and collect all accounts, chattel paper,electronic chattel paper, instruments, documents and general intangibles,whether now owned or hereafter acquired or arising (the “Receivables”), in adiligent fashion and, upon the request of the Secured Party, the Debtor shallexecute an agreement in form and substance satisfactory to the Secured Party bywhich the Debtor shall direct all account debtors and obligors on instrumentsto make payment to a lock box deposit account under the exclusive control ofthe Secured Party.

 

**L.           Conditionof Collateral. **All tangible Collateral is now in good repair and condition and theDebtor shall at all times hereafter, at its own expense, maintain all suchCollateral in good repair and condition.

 

**M.          Condition ofBooks and Records. **The Debtor has maintained and shall maintain complete, accurate andup-to-date books, records, accounts, and other information relating to allCollateral in such form and in such detail as may be satisfactory to theSecured Party, and shall allow the Secured Party or its representatives at anyreasonable time to examine and copy such books, records, accounts, and otherinformation.

 

**N.          Right ofInspection. **At all reasonable times upon the request of the Secured Party, theDebtor shall allow the Secured Party or its representatives to visit any of theDebtor’s properties or locations so that the Secured Party or itsrepresentatives may confirm, inspect and appraise any of the Collateral.

 

**SECTION 4.      DEFAULT. **The breach of any of the Obligations secured hereby, and/or the breachof any representation, warranty, covenant, or agreement contained in thisSecurity Agreement, shall constitute default hereunder.

 

**SECTION 5.      RIGHTS AND REMEDIES.**  Upon the Debtor’s default and at any timethereafter, the Secured Party may declare all Obligations to be immediately dueand payable and may exercise any and all rights and remedies of the SecuredParty in the enforcement of its security interest under the UCC, this SecurityAgreement, or any other applicable law. Without limiting the foregoing:

 

**A.          Dispositionof Collateral. **The Secured Party may sell, lease, or otherwise dispose of all or anypart of the Collateral, in its then present condition or following any commerciallyreasonable preparation or processing thereof, whether by public or private saleor at any brokers’ board, in lots or in bulk, for cash, on credit or otherwise,with or without representations or warranties, and upon such other terms as maybe acceptable to the Secured Party, and the Secured Party may purchase at anypublic sale.  At any time when advancenotice of sale is required, the Debtor agrees that ten days’ prior writtennotice shall be reasonable.  Inconnection with the foregoing, the Secured Party may:

 

1.        require the Debtor to assemble theCollateral and all records pertaining thereto and make such Collateral andrecords available to the Secured Party at a place to be designated by theSecured Party which is reasonably convenient to both parties;

 

2.        enter the premises of the Debtor orpremises under the Debtor’s control and take possession of the Collateral;

 

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3.       without charge, use or occupy the premisesof the Debtor or premises under the Debtor’s control, including without limitation,warehouse and other storage facilities;

 

4.       without charge, use any patent, trademark,tradename, or other intellectual property or technical process used by theDebtor in connection with any of the Collateral; and

 

5.       rely conclusively upon the advice orinstructions of any one or more brokers or other experts selected by theSecured Party to determine the method or manner of disposition of any of theCollateral and, in such event, any disposition of the Collateral by the SecuredParty in accordance with such advice or instructions shall be deemed to becommercially reasonable.

 

**B.          Collectionof Receivables. **The Secured Party may, but shall not be obligated to, take all actionsreasonable or necessary to preserve, enforce or collect the Receivables,including without limitation, the right to notify account debtors and obligorson instruments to make direct payment to the Secured Party, to permit anyextension, compromise, or settlement of any of the Receivables for less thanface value, or to sue on any Receivable, all without prior notice to theDebtor.

 

**C.          Proceeds. **TheSecured Party may collect and apply all proceeds of the Collateral, and mayendorse the name of the Debtor in favor of the Secured Party on any and allchecks, drafts, money orders, notes, acceptances, or other instruments of thesame or a different nature, constituting, evidencing, or relating to theCollateral. The Secured Party may receive and open all mail addressed to theDebtor and remove therefrom any cash or non-cash items of paymentconstituting proceeds of the Collateral.

 

**D.          InsuranceAdjustments. **The Secured Party may adjust, settle, and cancel any and all insurancecovering any Collateral, endorse the name of the Debtor on any and all checksor drafts drawn by any insurer, whether representing payment for a loss or areturn of unearned premium, and execute any and all proofs of claim and otherdocuments or instruments of every kind required by any insurer in connectionwith any payment by such insurer.

 

The net proceeds of anydisposition of the Collateral may be applied by the Secured Party, afterdeducting its reasonable expenses incurred in such disposition, to the paymentin whole or in part of the Obligations in such order as the Secured Party mayelect.  The enumeration of the foregoingrights and remedies is not intended to be exhaustive, and the exercise of anyright and/or remedy shall not preclude the exercise of any other rights orremedies, all of which are cumulative and non-exclusive.

 

**SECTION 6.      OTHER PROVISIONS.**

 

**A.          Amendment,Modification, and Waiver. **Without the prior written consent of the Secured Party, no amendment,modification, or waiver of, or consent to any departure by the Debtor from, anyprovision hereunder shall be effective. Any such amendment, modification, waiver, or consent shall be effectiveonly in the specific instance and for the specific purpose for whichgiven.  No delay or failure by theSecured Party to exercise any remedy hereunder shall be deemed a waiver thereofor of any other remedy hereunder.  Awaiver on any one occasion shall not be construed as a bar to or waiver of anyremedy on any subsequent occasion.

 

**B.          Costs andAttorneys’ Fees. **Except as prohibited by law, if at any time the Secured Party employscounsel in connection with the creation, perfection, preservation, or releaseof the Secured Party’s security interest in the Collateral or the enforcementof any of the Secured Party’s rights or remedies hereunder, all of the SecuredParty’s reasonable attorneys’ fees arising from such services and all expenses,costs, or charges relating thereto shall become part of the Obligations securedhereby and be paid by the Debtor on demand.

 

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**C.          NoObligation to Make Loans. **Nothing contained herein or in any financing statement or other documentexecuted or filed in connection herewith shall be construed to obligate theSecured Party to make any loans or advances to the Debtor, whether pursuant toa commitment or otherwise.

 

**D.          Revival ofObligations. **To the extent the Debtor or any third party makes a payment or paymentsto the Secured Party or the Secured Party enforces its security interest orexercises any right of setoff, and such payment or payments or the proceedsthereof are subsequently invalidated, declared to be fraudulent orpreferential, set aside, and/or required to be repaid to a trustee, receiver,or any other party under any bankruptcy, insolvency or other law or in equity,then, to the extent of such recovery, the Obligations or any part thereoforiginally intended to be satisfied shall be revived and continued in fullforce and effect as if such payment or payments had not been made, or suchenforcement or setoff had not occurred.

 

**E.           Performanceby the Secured Party. **In the event the Debtor shall at any time fail to pay or performpunctually any of its duties hereunder, the Secured Party may, at its optionand without notice to or demand upon the Debtor, without obligation and withoutwaiving or diminishing any of its other rights or remedies hereunder, fullyperform or discharge any of such duties. All costs and expenses incurred by the Secured Party in connectiontherewith, together with interest thereon at the Secured Party’s NationalVariable Rate plus four percent per annum, shall become part of the Obligationssecured hereby and be paid by the Debtor upon demand.

 

**F.           Indemnification,Etc. **TheDebtor hereby expressly indemnifies and holds the Secured Party harmless fromany and all claims, causes of action, or other proceedings, and from any andall liability, loss, damage, and expense of every nature, arising by reason ofthe Secured Party’s enforcement of its rights and remedies hereunder, or byreason of the Debtor’s failure to comply with any environmental or other law orregulation.  As to any action taken bythe Secured Party hereunder, the Secured Party shall not be liable for anyerror of judgment or mistake of fact or law, absent gross negligence or willfulmisconduct on its part.

 

**G.          Power ofAttorney. **The Debtor hereby appoints the Secured Party or the Secured Party’sdesignee as its attorney-n-fact, which appointment is irrevocable, durable, andcoupled with an interest, with full power of substitution, in the name of theDebtor or in the name of the Secured Party, to take any action which the Debtoris obligated to perform hereunder or which the Secured Party may deem necessaryor advisable to accomplish the purposes of this Security Agreement.  In taking any action in accordance with thisSection, the Secured Party shall not be deemed to be the agent of theDebtor.  The powers conferred upon theSecured Party in this Section are solely to protect its interest in theCollateral and shall not impose any duty upon the Secured Party to exercise anysuch powers.

 

**H.          ContinuingEffect. **ThisSecurity Agreement, the Secured Party’s security interest in the Collateral,and all other documents or instruments contemplated hereby shall continue infull force and effect until all of the Obligations have been satisfied in full,the Secured Party has no commitment to make any further advances to the Debtor,and the Debtor has sent a valid written demand to the Secured Party fortermination of this Security Agreement.

 

**I.            BindingEffect. **ThisSecurity Agreement shall be binding upon and inure to the benefit of the Debtorand the Secured Party and their respective successors and assigns.

 

**J.           SecurityAgreement as Financing Statement and Authorization to File. **Aphotographic copy or other reproduction of this Security Agreement may be usedas a financing statement.  In addition,the Debtor authorizes the Secured Party to prepare and file financingstatements describing the Collateral, amendments thereto, and continuationstatements and file any financing statement, amendment thereto or continuationstatement electronically.  In addition,the Debtor authorizes the Secured Party to file financing statements describingany agricultural liens or other statutory liens held by the Secured Party.

 

**K.          GoverningLaw. **Subjectto any applicable federal law, this Security Agreement shall be construed inaccordance with and governed by the laws of the State of Colorado, except tothe extent that the UCC provides for the application of the law of anotherstate.

 

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**L.           Notices. **Allnotices, requests, demands, or other communications required or permittedhereunder shall be in writing and shall be deemed to have been given when sentby registered or certified mail, return receipt requested, addressed to theother party at the respective addresses given above, or to such other person oraddress as either party designates to the other in the manner hereinprescribed.

 

**M.          Severability. **Thedetermination that any term or provision of this Security Agreement isunenforceable or invalid shall not affect the enforceability or validity of anyother term or provision hereof.

 

**IN WITNESS WHEREOF,**the Debtor has executed this Security Agreement by its duly authorizedofficer as of the day and year shown below.

 
| Date:  | February 11, 2003 |   | **DEBTOR:** | **DAKOTA  GROWERS PASTA COMPANY,   INC.**, a North Dakota corporation |
|--------|-------------------|--------|-------------|-----------------------------------------------------------------------|
|   |              |   |        |
|   |              |   | By:         | /s/  Thomas Friezen                                                   |   |
|   |              |   |        |                                                                  |
|   |              |   | Title:      | CFO                                                                   |   |

 

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