Exhibit
10.3


 


CoBANK, ACB


SECURITY AGREEMENT


 


 


THIS SECURITY AGREEMENT is
executed and delivered by Dakota Growers Pasta Company, Inc. (the “Debtor”), a
North Dakota corporation, having its place of business (or chief executive
office 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”), a
federally chartered instrumentality of the United States, whose mailing address
is 5500 South Quebec Street, Greenwood Village, Colorado 80111.


 


SECTION 1.      GRANT OF
SECURITY INTEREST.  For valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the Debtor hereby grants to the Secured Party a
security interest in all of the personal property of the Debtor, wherever
located and whether now existing or hereafter acquired, together with all
accessions 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, certificated
and uncertificated securities, security entitlements, securities accounts,
commodity contracts, and commodity accounts); letters of credit;
letter-of-credit rights; documents; equipment; farm products; fixtures; general
intangibles (including, without limitation, payment intangibles, choses or
things in action, litigation rights and resulting judgments, goodwill, patents,
trademarks and other intellectual property, tax refunds, miscellaneous rights
to payment, investments and other interests in entities not included in the
definition of investment property (including, without limitation, all equities
and patronage rights in all cooperatives and all interests in partnerships and
joint ventures), margin accounts, computer programs, software, invoices,  books, records and other information
relating to or arising out of the Debtor’s business); and, to the extent not
covered by the above, all other personal property of the Debtor of every type
and description, including without limitation, supporting obligations,
interests or claims in or under any policy of insurance, commercial tort
claims, deposit accounts, money, and judgments (the “Collateral”).


 


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


 


SECTION 2.      THE
OBLIGATIONS.  The security interest granted hereunder shall secure the payment
of all indebtedness and the performance of all obligations of the Debtor to the
Secured Party of every type and description, whether now existing or hereafter
arising, 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 be
evidenced, including without limitation all loans, advances and other
extensions of credit and all covenants, agreements, and provisions contained in
all loan and other agreements between the parties (the “Obligations”).


 


SECTION 3.      REPRESENTATIONS,
WARRANTIES AND COVENANTS.  The Debtor represents, warrants and
covenants as follows:


 


A.          Title to Collateral.  Except
as permitted by any other written agreement between the parties, and except for
any security interest in favor of the Secured Party, the Debtor has clear title
to all Collateral free of all adverse claims, interests, liens, or encumbrances.  Without the prior written consent of the
Secured Party, the Debtor shall not create or permit the existence of any
adverse claims, interests, liens, or other encumbrances against any of the
Collateral.  The Debtor shall provide
prompt written notice to the Secured Party of any future adverse claims,
interests, liens, or encumbrances against all Collateral, and shall defend
diligently the Debtor’s and the Secured Party’s interests in all Collateral.


 

















 


B.          Validity of
Security Agreement; Corporate Authority.  This Security Agreement is the valid and
binding obligation of the Debtor, enforceable in accordance with its
terms.  The Debtor has the corporate
power to execute, deliver and carry out the terms and provisions of this
Security Agreement and all related documents, and has taken all necessary
corporate action to authorize the execution, delivery and performance of this
Security Agreement and all related documents.


 


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


 


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


 


E.           Name,
Identity, and Corporate Structure.  The Debtor’s exact legal name is as set
forth above.  Except as otherwise
disclosed to the Secured Party in writing, the Debtor has not within the past
ten years changed its name, identity or corporate structure through
incorporation, merger, consolidation, joint venture or otherwise.


 


F.           Change in
Name, State of Debtor’s Location, Location of Collateral, Etc.  Without
giving at least thirty days’ prior written notice to the Secured Party, the
Debtor shall not change its name, identity or corporate structure, the location
of its place of business (or chief executive office if more than one place of
business), its state of incorporation or formation, or the location of the
Collateral.


 


G.          Further
Assurances.  Upon the request of the Secured Party, the Debtor shall do all acts and
things as the Secured Party may from time to time deem necessary or advisable
to enable it to perfect, maintain, and continue the perfection and priority of
the security interest of the Secured Party in the Collateral, or to facilitate
the exercise by the Secured Party of any rights or remedies granted to the
Secured Party hereunder or provided by law. Without limiting the foregoing, the
Debtor agrees to execute, in form and substance satisfactory to the Secured
Party, such financing statements, amendments thereto, supplemental agreements,
assignments, notices of assignments, and other instruments and documents as the
Secured Party may from time to time request. 
In addition, in the event the Collateral or any part thereof consists of
instruments, documents, chattel paper, or money (whether or not proceeds of the
Collateral), the Debtor shall, upon the request of the Secured Party, deliver
possession thereof to the Secured Party (or to an agent of the Secured Party
retained for that purpose), together with any appropriate endorsements and/or
assignments.  Where Collateral is in the
possession of a third party, the Debtor will join with the Secured Party in
notifying the third party of the Secured Party’s security interest and obtaining
an acknowledgment from the third party that it is holding the Collateral for
the benefit of the Secured Party.  The
Debtor will cooperate with the Secured Party in obtaining control with respect
to Collateral consisting of deposit accounts (that are not held by the Secured
Party as depositary institution), investment property, letter-of-credit rights
and electronic chattel paper.  The
Secured Party shall use reasonable care in the custody and preservation of such
Collateral in its possession, but shall not be required to take any steps necessary
to 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 interest
granted hereunder (including the cost of all filings, recordings, and taxes
thereon and the fees and expenses of any agent retained by Secured Party) shall
become part of the Obligations secured hereby and be paid by the Debtor on
demand.


 


H.          Insurance.  The
Debtor shall maintain such property and casualty insurance with such insurance
companies, in such amounts, and covering such risks, as are at all times
satisfactory to the Secured Party.  All
such policies shall provide for loss payable clauses or endorsements in form and
content acceptable to the Secured Party. 
Upon the request of the Secured Party, all policies (or such other proof
of 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 to
any insured Collateral, the Secured Party shall have full power to collect any
and all insurance proceeds due under any of such policies, and may, at its
option,


 


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apply such proceeds to the payment of any of the Obligations
secured hereby, or may apply such proceeds to the repair or replacement of such
Collateral.


 


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 lien
against the Collateral.


 


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


 


K.          Receivables.  The
Debtor 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 a
diligent fashion and, upon the request of the Secured Party, the Debtor shall
execute an agreement in form and substance satisfactory to the Secured Party by
which the Debtor shall direct all account debtors and obligors on instruments
to make payment to a lock box deposit account under the exclusive control of
the Secured Party.


 


L.           Condition
of Collateral.  All tangible Collateral is now in good repair and condition and the
Debtor shall at all times hereafter, at its own expense, maintain all such
Collateral in good repair and condition.


 


M.          Condition of
Books and Records.  The Debtor has maintained and shall maintain complete, accurate and
up-to-date books, records, accounts, and other information relating to all
Collateral in such form and in such detail as may be satisfactory to the
Secured Party, and shall allow the Secured Party or its representatives at any
reasonable time to examine and copy such books, records, accounts, and other
information.


 


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


 


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


 


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


 


A.          Disposition
of Collateral.  The Secured Party may sell, lease, or otherwise dispose of all or any
part of the Collateral, in its then present condition or following any commercially
reasonable preparation or processing thereof, whether by public or private sale
or 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 may
be acceptable to the Secured Party, and the Secured Party may purchase at any
public sale.  At any time when advance
notice of sale is required, the Debtor agrees that ten days’ prior written
notice shall be reasonable.  In
connection with the foregoing, the Secured Party may:


 


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


 


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


 


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3.       without charge, use or occupy the premises
of 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 the
Debtor in connection with any of the Collateral; and


 


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


 


B.          Collection
of Receivables.  The Secured Party may, but shall not be obligated to, take all actions
reasonable or necessary to preserve, enforce or collect the Receivables,
including without limitation, the right to notify account debtors and obligors
on instruments to make direct payment to the Secured Party, to permit any
extension, compromise, or settlement of any of the Receivables for less than
face value, or to sue on any Receivable, all without prior notice to the
Debtor.


 


C.          Proceeds.  The
Secured Party may collect and apply all proceeds of the Collateral, and may
endorse the name of the Debtor in favor of the Secured Party on any and all
checks, drafts, money orders, notes, acceptances, or other instruments of the
same or a different nature, constituting, evidencing, or relating to the
Collateral. The Secured Party may receive and open all mail addressed to the
Debtor and remove therefrom any cash or non-cash items of payment
constituting proceeds of the Collateral.


 


D.          Insurance
Adjustments.  The Secured Party may adjust, settle, and cancel any and all insurance
covering any Collateral, endorse the name of the Debtor on any and all checks
or drafts drawn by any insurer, whether representing payment for a loss or a
return of unearned premium, and execute any and all proofs of claim and other
documents or instruments of every kind required by any insurer in connection
with any payment by such insurer.


 


The net proceeds of any
disposition of the Collateral may be applied by the Secured Party, after
deducting its reasonable expenses incurred in such disposition, to the payment
in whole or in part of the Obligations in such order as the Secured Party may
elect.  The enumeration of the foregoing
rights and remedies is not intended to be exhaustive, and the exercise of any
right and/or remedy shall not preclude the exercise of any other rights or
remedies, 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, any
provision hereunder shall be effective. 
Any such amendment, modification, waiver, or consent shall be effective
only in the specific instance and for the specific purpose for which
given.  No delay or failure by the
Secured Party to exercise any remedy hereunder shall be deemed a waiver thereof
or of any other remedy hereunder.  A
waiver on any one occasion shall not be construed as a bar to or waiver of any
remedy on any subsequent occasion.


 


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


 


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C.          No
Obligation to Make Loans.  Nothing contained herein or in any financing statement or other document
executed or filed in connection herewith shall be construed to obligate the
Secured Party to make any loans or advances to the Debtor, whether pursuant to
a commitment or otherwise.


 


D.          Revival of
Obligations.  To the extent the Debtor or any third party makes a payment or payments
to the Secured Party or the Secured Party enforces its security interest or
exercises any right of setoff, and such payment or payments or the proceeds
thereof are subsequently invalidated, declared to be fraudulent or
preferential, 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 thereof
originally intended to be satisfied shall be revived and continued in full
force and effect as if such payment or payments had not been made, or such
enforcement or setoff had not occurred.


 


E.           Performance
by the Secured Party.  In the event the Debtor shall at any time fail to pay or perform
punctually any of its duties hereunder, the Secured Party may, at its option
and without notice to or demand upon the Debtor, without obligation and without
waiving or diminishing any of its other rights or remedies hereunder, fully
perform or discharge any of such duties. 
All costs and expenses incurred by the Secured Party in connection
therewith, together with interest thereon at the Secured Party’s National
Variable Rate plus four percent per annum, shall become part of the Obligations
secured hereby and be paid by the Debtor upon demand.


 


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


 


G.          Power of
Attorney.  The Debtor hereby appoints the Secured Party or the Secured Party’s
designee as its attorney-n-fact, which appointment is irrevocable, durable, and
coupled with an interest, with full power of substitution, in the name of the
Debtor or in the name of the Secured Party, to take any action which the Debtor
is obligated to perform hereunder or which the Secured Party may deem necessary
or advisable to accomplish the purposes of this Security Agreement.  In taking any action in accordance with this
Section, the Secured Party shall not be deemed to be the agent of the
Debtor.  The powers conferred upon the
Secured Party in this Section are solely to protect its interest in the
Collateral and shall not impose any duty upon the Secured Party to exercise any
such powers.


 


H.          Continuing
Effect.  This
Security Agreement, the Secured Party’s security interest in the Collateral,
and all other documents or instruments contemplated hereby shall continue in
full 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 for
termination of this Security Agreement.


 


I.            Binding
Effect.  This
Security Agreement shall be binding upon and inure to the benefit of the Debtor
and the Secured Party and their respective successors and assigns.


 


J.           Security
Agreement as Financing Statement and Authorization to File.  A
photographic copy or other reproduction of this Security Agreement may be used
as a financing statement.  In addition,
the Debtor authorizes the Secured Party to prepare and file financing
statements describing the Collateral, amendments thereto, and continuation
statements and file any financing statement, amendment thereto or continuation
statement electronically.  In addition,
the Debtor authorizes the Secured Party to file financing statements describing
any agricultural liens or other statutory liens held by the Secured Party.


 


K.          Governing
Law.  Subject
to any applicable federal law, this Security Agreement shall be construed in
accordance with and governed by the laws of the State of Colorado, except to
the extent that the UCC provides for the application of the law of another
state.


 


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L.           Notices.  All
notices, requests, demands, or other communications required or permitted
hereunder shall be in writing and shall be deemed to have been given when sent
by registered or certified mail, return receipt requested, addressed to the
other party at the respective addresses given above, or to such other person or
address as either party designates to the other in the manner herein
prescribed.


 


M.          Severability.  The
determination that any term or provision of this Security Agreement is
unenforceable or invalid shall not affect the enforceability or validity of any
other term or provision hereof.


 


IN WITNESS WHEREOF, the Debtor has executed this Security Agreement by its duly authorized
officer 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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