**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

ý      **AnnualReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

** **

**For the fiscal year ended July 31, 2001**

 

**or**

 

o      **TransitionReport Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**

 

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**Commission File No. 33-99834**

 

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**DAKOTA GROWERS PASTA COMPANY**

(Exactname of registrant as specified in its charter)

 

| **North  Dakota**         |   | **45-0423511**                     |
|---------------------------|--------|------------------------------------|
| (State  of incorporation) |   | (IRS  Employer Identification No.) |

 

**OnePasta Avenue, P.O. Box 21, Carrington, ND 58421-0021**

(Addressof principal executive offices including zip code)

 

**(701)652-2855**

(Registrant'stelephone number, including area code)

 

**SecuritiesRegistered Pursuant To Section 12(b) Of The Act:**

**NONE**

 

**SecuritiesRegistered Pursuant To Section 12(g) Of The Act:**

**NONE**

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Indicateby check mark whether the Registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.  Yes ý No  o

 

        Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of Registrant's knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K. ý

 

        There is no established public marketfor the Registrant's voting stock or equity stock. Although there is a limited,private market for shares of the Registrant's equity stock, the Registrant doesnot obtain information regarding the transfer price in transactions between itsmembers and therefore is unable to estimate the aggregate market value of theRegistrant's shares held by non-affiliates. As of October 29, 2001, the numberof shares outstanding of the Registrant's voting stock, par value $125.00, was1,155 shares, and its equity stock, par value $2.50, was 11,275,297 shares.

 

**DOCUMENTSINCORPORATED BY REFERENCE**

 

        None.

 

**PART I.**

 

**Forward-Looking Statements**

 

        This report contains forward-lookingstatements based upon assumptions by the management of Dakota Growers PastaCompany ("the Company", "the Cooperative", or “we”) as ofthe date of this Annual Report, including assumptions about risks anduncertainties faced by the Company. When used in this report, the words"believe," "expect," "anticipate,""will" and similar verbs or expressions are intended to identify suchforward-looking statements. If management’s assumptions prove incorrect orshould unanticipated circumstances arise, the Company’s actual results coulddiffer materially from those anticipated. These differences could be caused bya number of factors or combination of factors including, but not limited to,those factors described in the “Risk Factors” section of this report. Readersare strongly urged to consider such factors when evaluating any forward-lookingstatement. The Company undertakes no obligation to update any forward-lookingstatements in this report to reflect future events or developments.

 

 

**ITEM 1.  BUSINESS**

 

**Introduction**

 

        The Company is a North Dakotaagricultural cooperative that was incorporated on December 16, 1991. TheCompany owns and operates a vertically integrated, state-of-the-art durum wheatmilling and pasta production facility in Carrington, North Dakota. Thefacility, which became operational in 1994, currently has the capacity to grindin excess of twelve million bushels of grain annually and to produceapproximately 275 million pounds of pasta annually. In February 1998, theCompany acquired all of the outstanding stock of Primo Piatto, Inc. (PrimoPiatto) a Minnesota corporation engaged in pasta manufacturing. Primo Piatto,being operated as the Minnesota Division of the Company, currently operates apasta production plant in New Hope, Minnesota. The Company closed itsMinneapolis, Minnesota factory in fiscal year 2001. The closing of theMinneapolis, Minnesota facility combined with changes at its New Hope,Minnesota plant leaves the Company with annual production capacity ofapproximately 440 million pounds.

 

        With membership limited to agriculturalproducers, the Company has a total of 1,155 members, whose operations arepredominantly located in North Dakota, Minnesota or Montana. Each member mustenter into a Growers Agreement with the Company. This agreement obligates themember to deliver one bushel of durum wheat during each processing year foreach share of Equity Stock owned by that member, subject to a pro rata downwardadjustment depending on the production needs of the Company.

 

**Pasta Industry and Markets**

 

NorthAmerican annual pasta consumption is approximately 5.0 billion pounds. Pasta iswidely recognized as a “healthy” food that is easily prepared and inexpensivein comparison to other types of foods. According to the U.S. Department ofCommerce, American consumers have increased their average consumption of pastaduring the last decade at an annualized growth rate of approximately 2% to 3%.  However,based on the Company's analysis of the marketplace and trade and industryinformation, the Company believes dry pasta consumption is currently flat.  Inaddition to the domestic market for dry pasta, much smaller domestic marketsexist for refrigerated and frozen pasta.

 

        The Pastaindustry identifies the domestic dry pasta market into two basic segments, witheach segment presenting different product and sales and distributionrequirements. The applicable market segments are retail and institutional.  The Company further subdivides theinstitutional segment into ingredient and foodservice sales to delineate themarketing and manufacturing differences.

*Retail Segment*

 

        The Retailsegment, which includes sales of branded and private label pasta to grocerystores, club stores, mass merchants and other consumer retail operations,represents an estimated 32% of the total market for dry pasta in the UnitedStates. Roughly 62% of the Retail segment is represented by establishednational or regional pasta brands.  NewWorld Pasta Company, American Italian Pasta Company, and Barilla account for amajority of the branded retail market. The Company focuses a substantialportion of its marketing efforts on private label sales. The market leaders inprivate label sales are American Italian Pasta Company and Dakota Growers. Asmall portion of the Retail segment consists of sales to federal and stategovernment entities.

 

*Ingredient Segment*

 

        The Ingredient segment of the dry pastamarket consists of pasta used by food processors. Those entities use dry pastaas an ingredient or component in a further-processed or combination foodproduct. Such food products include dry pasta dinners, including macaroni andcheese, frozen entrees, refrigerated salads, canned entrees, baby food, andcanned and dry soups. The Ingredient segment represents about 47% of the totaldomestic dry pasta market. The size of the Ingredient segment is influenced bythe number of food processors that choose to produce pasta internally ratherthan outsource. We believe an increasing number of food processors maydiscontinue internal production and outsource their production.

 

*Foodservice Segment*

 

        The Foodservice segment consists ofsales of dry pasta to food preparation operations such as restaurants, hotels,colleges and universities, elementary and secondary schools, airlines, in-plantand in-office cafeteria facilities, transportation services, and otheraway-from-home eating places. The Foodservice segment represents about 18% ofthe total domestic dry pasta market. Marketing dry pasta to this segment of themarketplace generally consists of selling to a network of competitivedistribution organizations and buying groups, and selling dry pasta toindividual restaurant chains and other operator organizations. A small portionof the Foodservice segment consists of sales to federal and state governmententities.

 

*Co-Pack Arrangements*

 

        A portion of each end-user marketsegment is supplied under "co-pack" arrangements between pastamanufacturers. These agreements involve the sale of dry pasta products betweenpasta manufacturers in order to supply short-term volume deficiencies suchmanufacturers suffer from time to time in meeting customer requirements.Opportunities for co-pack arrangements have decreased in recent periods due tothe excess production capacity in the United States pasta production industry.As described below, the Company's business involves co-pack arrangements,although at a lower percentage than earlier in the Company's operationalhistory.

 

**Production And Products**

 

        Pursuant to the Growers Agreements withthe Company, the Company's members are obligated to deliver durum wheat for theCompany's use. The durum wheat is used in the production of semolina that isthen used by the Company to produce the Company's dry pasta products.

        Upondelivery, the durum wheat is sampled, weighed, pre-cleaned and unloaded intothe mill's grain silos. From the grain silos, the durum wheat is pre-blendedand conveyed into the mill's final mix bins, which use electronic mass flowcontrollers for precision blending and flow rate control. The wheat thenproceeds to the cleaning and tempering sections of the mill. In those sectionsof the process, foreign grains and weed seeds are removed and the durum wheatis dampened to the optimum moisture level required for milling. From thetempering bins, the cleaned and tempered durum wheat is conveyed to the millsection where grinding, sifting and purifying is completed to produce a highquality semolina. In addition to the semolina, five additional categories ofproduct result from the overall durum wheat milling and blending process:granulars, first clear (higher grade) flour, second clear (lower grade) flour,semolina/durum wheat flour blends, and mill feed. Mill feed and most secondclear flour are sold primarily for animal feed.

 

        The semolina is then conveyed to theCompany's pasta production or transferred to truck and rail load-out facilitiesfor shipment to the Company’s Minnesota operations or sale to other U.S. pastamanufacturers. The first clear flour is either blended with semolina ortransferred to rail and truck load-out bulk bins for sale to other users.

 

        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 producecertain products.  Individual shapes arethe result of extruding this pasta "dough" through differentdies.  Each pasta production lineoperates independently and produces either long or short good items, thedifference being in the way they are conveyed through the dryingoperation.  Both processes utilizecontinuous ultra high temperature dryers and coolers.  Consistent monitoring and control is a key element in thisprocess. The entire pasta production process is controlled by programmablelogic controllers located in control panels at the beginning of each productionline, allowing for efficient operation and monitoring.

 

        The finished dry pasta is conveyed tovarious continuous box and film packaging machines. Dry pasta is packed to meetdifferent market segment and customer requirements, with containers ranging insize from 8 ounce cartons and bags to 2,000 pound totes. The packaged productis conveyed through metal detectors, check weighers and automatic case packers.From the case packers, the case travels past jet print coders to automatedpalletizing and stretch wrapping operations.

 

        The pasta products manufactured by theCompany consist of over 80 different shapes and are sold to customers in allmarket segments. In addition to the dry pasta produced by the Company, theCompany purchases additional dry pasta shapes from other manufacturers andresells them. This practice is widely followed by many pasta manufacturers forefficiency reasons and allows distribution of wider product lines to theCompany's customers.  Outside purchasesof pasta, excluding imports, comprise approximately 1% of total sales. TheCompany does not anticipate any significant change in its outside purchases ofpasta in the foreseeable future.

 

        The Company has an agreement with GruppoEuricom, the second largest pasta manufacturer in Italy, to be the exclusivedistributor of Gruppo Euricom’s Italian pasta and rice products in the UnitedStates and Canada.  These products areprimarily private label retail and foodservice products. Sales of importedproduct comprised roughly 1% of net sales in fiscal 2001.

 

        The Company’s Carrington, North Dakotafacilities have been certified by Farm Verified Organics, which allows theCompany to also offer 100% organic pasta and semolina. The Company’s facilitiesallow for the isolation of the durum, semolina and pasta to enable thiscertification.

 

        Our products are manufactured using a comprehensiveHazard Analysis Critical Control Point (HACCP) program, which requires strictmonitoring in all aspects of the manufacturing process, to ensure food qualityand safety. We believe that meeting HACCP standards strengthens customerconfidence in the quality of our products.

        Inaddition to its pasta products, the Company has in the past sold semolina anddurum wheat flour to other pasta manufacturers in bulk truckload or railcarquantities. Such sales represented less than 1% of total net revenues in fiscalyear 2001. The Company currently has capacity available to provide semolina forsale to other producers, although with an over-capacity of durum milling, suchsales are anticipated at highly competitive pricing.

 

        The cost of production of dry pasta issignificantly impacted by changes in durum wheat prices. The cost of millingquality durum wheat steadily increased from the time the Company was organizedand remained at high levels through 1996. A significant 1996 crop led to areduction in prices in 1997, when the 1997 crop was significantly smaller anddurum wheat prices again increased. Worldwide, many durum wheat-producing areasreported large crops for 1998 and 1999, which led to extremely lower durumwheat prices. The quality of the 2000 crop in North Dakota and Canada,especially in North Dakota, was lower than in past years, which lead to anincrease in the price of milling quality durum. United States durum productionin 2001 was down 24% from the prior year. The decline was caused by a reductionin planted acres as well as disease problems. The drop in United Statesproduction combined with a decline in the Canadian durum crop may push durumprices higher in the near future. Such volatility with respect to the price ofthe basic raw material for the Company's products leaves the Company subject towide variation in its costs from year to year. As a result, factors whichimpact the size and quality of the durum wheat crop and the availability ofsuch wheat in the United States can have significant impact on the Company, andmay have a material adverse impact. Those factors include such variables as theweather in the area in which the Company's members reside, weather in otherdurum wheat production areas in the United States, Canada and other parts ofthe world, and import and export policies and regulations.

 

        Due to the intense competition presentin the market for pasta products, pasta manufacturers have in the last severalyears been unable to fully implement price increases for their dry pastaproducts in periods when higher durum wheat prices impacted the cost of pastaproduction. The Company believes that such competition results primarily fromexcess production capacity in the domestic pasta industry.

 

**Sales, Marketing and Customers**

 

        The Company markets its products throughdirect sales, supplemented by the efforts of brokers retained by the Company.These brokers receive a commission upon sale of the Company's products. TheCompany's pasta products are distributed on a broad basis throughout the UnitedStates. The Company does not directly export its pasta products, althoughseveral of its customers have exported minor quantities. No one customeraccounts for 10% or more of the Company's total revenues. The Company's top 10customers accounted for 48% of revenues in fiscal year 2001, 49% of revenues infiscal year 2000 and 45% in fiscal year 1999. Pasta volumes consisted of 63%Retail, 21% Foodservice and 16% Ingredient for fiscal year 2001, and 60%Retail, 20% Foodservice and 20% Ingredient for fiscal years 2000 and 1999.

 

        The Company sells most of its pastaunder "purchase orders", whereby the customer and the Company are notobligated for any pre-determined length of time. Occasionally, a pricingcommitment is agreed to with a term of one year or less. During fiscal year2001, the Company and one of its major customers, U.S. Foodservice, extended along-term agreement including volume and pricing commitments through December31, 2006. Effective August 2000, the Company entered into an agreement withGruppo Euricom (“EU”), the second largest pasta manufacturer in Italy, to bethe exclusive distributor of EU’s Italian pasta and rice products in the UnitedStates and Canada for a term of six years. These products are primarily sold inthe private label retail and foodservice markets.

 

**Growers Agreement; Durum Delivery System**

 

        The durum wheat purchased and used inthe Company's operations is obtained through the delivery of grain pursuant tothe Growers Agreements between the Company and its members. The contractualobligations imposed on each member under the Growers Agreement are intended toinsure the availability of sufficient quantities of durum wheat for use in theCompany's processing operations.

        TheGrowers Agreement is paired with ownership of the Equity Stock. For each shareof Equity Stock held, the member is obligated to deliver to the Company,subject to adjustment as described below, one bushel of No. 1 hard amber U.S.durum wheat. Delivery schedules have been established for three marketingperiods consisting of four months each during the fiscal year, with each membergiven notice of the member's delivery obligation for the upcoming marketingperiod. If a member sells or transfers Equity Stock, the member's obligations underthe Growers Agreement must also be assigned to the purchaser or transferee. Theterm of the Growers Agreement is indefinite and may be terminated by themember, effective upon the last day of a processing year, upon not less than 18months advance notice. The Company reserves the right to terminate the GrowersAgreement and a grower's membership if the member does not comply with theobligations of the Agreement or if the member otherwise fails to meet thecriteria for membership in the Company. Upon the Company's termination of amember's membership in the Company, the member will cease to have voting rightsand other rights of membership and the Growers Agreement will be cancelledeffective as of the following July 31. Until the effective date of cancellationof the Growers Agreement, the member's obligation to deliver durum wheat to theCompany pursuant to the terms of the Growers Agreement executed by the memberwill remain in effect.

 

        The Company may, depending on themarketing needs of the Company, reduce the quantity of durum wheat to bedelivered on a pro rata basis to all members. For fiscal year 2001, thedelivery obligation was slightly less than one bushel per share of Equity Stockowned.

 

        Effective August 1, 1998, the durumdelivery system to the Company was modified to include deliveries made throughNorthern Grains Institute (NGI) a North Dakota non-profit company. NGIadministers the delivery arrangements and acts as each member's grain handlingand delivery agent for the purpose of satisfying that member's obligationsunder the Growers Agreement. NGI is responsible for arranging the logistics ofdurum deliveries and handling payment and accounting matters. Consistent withDakota Growers' policies and the Growers Agreement, NGI assigns each member adelivery date by lottery for each of the three marketing periods, which are asfollows:

 

                August 1--November 30; December 1--March 31; April1--July 31

 

        NGI acts only as the agent for themember, and the member retains the economic risk and legal liability for suchdeliveries under the Growers Agreement. Each member must agree to be bound bythe Durum Pool Agreement among the members of Dakota Growers Pasta Company andNGI. A copy of the Durum Pool Agreement is provided to each member along with theGrowers Agreement.

 

        In advance of each marketing period, NGIwill invoice the members for the price of the durum to be delivered in themembers' names to Dakota Growers. The member must make payment under theinvoice in the amount indicated thereon, which shall be equal to DakotaGrowers' deduction for retainage on the durum to be delivered, plus the perbushel transaction fee. Dakota Growers' deduction for retainage is currently10% of the projected marketing period price (the Growers Agreement allows forretainage as high as 20%). NGI charged a transaction fee of $.03 per bushelthrough July 31, 2000. Effective August 1, 2000, the transaction fee waschanged to $.015 per bushel. This fee is refunded to the member on the finalsettlement date (no later than 45 days after the close of each marketingperiod) if the member sells and delivers under his own contract milling qualitydurum to NGI in an amount equal to or exceeding his quota.

 

        Upon the member's payment of theinvoice, NGI will make delivery for the member and receive on behalf of themember the initial payment from Dakota Growers. Dakota Growers will paydirectly to the members the amount of the retainage on the settlement date nolater than 45 days after the marketing period, but only to the extent thatearnings provide necessary funds to make such payments and allow DGPC to remainin compliance with agreements with its lenders.

 

        Members may make delivery to the NGIdurum pool by contacting NGI and arranging for a delivery date. Payment for suchdurum will be made at the Dakota Growers' spot market price within 14 days ofdelivery.

**Competition**

 

*Overview*

 

        The markets for semolina/durum wheatflour and pasta are highly competitive in most segments and geographic regions.In all, there are an estimated 60 to 65 significant plants in the U.S. whichmanufacture dry pasta. The intensity of competition varies from time to time asa result of a number of factors, including: (1) the degree of industry capacityutilization, (2) comparative product distribution costs, (3) ability to renderdistinctive service to customers, (4) the price of raw materials, primarilydurum wheat, and (5) a distinguishing or unique ability to provide consistentproduct quality in line with customer specifications. The Company believesthat, in a broad sense, the most influential factor on the intensity ofcompetitive conditions is industry capacity utilization. (It should be notedthat detailed information regarding pasta production is somewhat difficult toobtain, as many pasta producers are closely-held enterprises.)

* *

*Pasta*

 

        The pasta market is highly competitiveand includes several well-established enterprises. Those competitors are bothindependent companies and divisions or subsidiaries of other, larger, foodproducts companies. In addition, according to United States government data,the overall U.S. pasta market has experienced rapid penetration by foreignsuppliers, particularly in the last four to five years. Those suppliers includeItalian, Turkish and Mexican enterprises.

 

        The Company's top competitors in theprivate label retail market include American Italian Pasta Company and to alesser degree, New World Pasta Company. These private label retail sales compete with retail branded productsdistributed primarily by American Italian Pasta (Muellers, R&F, Anthony’sbrands et al), New World Pasta (Ronzoni, San Georgio, Skinner, American Beauty,Creamette, Prince brands et al), Barilla and a variety of smaller domestic andimported brands. Borden Pasta recently sold seven pasta brands, includingR&F and Anthony’s, to American Italian Pasta. New World Pasta purchasedBorden’s remaining pasta brands and pasta production facilities.

 

        In the institutional market, theCompany’s top competitors include American Italian Pasta, Philadelphia MacaroniCo. Inc., and A. Zerega's Sons, Inc., as well as foreign competitors that sellproduct in the United States. Approximately 20% of total domestic industryproduction capacity is represented by the largest self-suppliers, which includeKraft Foods, General Mills, Campbell Soup Company, ConAgra, Inc., Pillsbury andStouffers Corporation.  The Companybelieves opportunities are expanding for cost efficient manufacturers toco-pack for these and other current self-suppliers.

 

        The Company markets in the retail areaprimarily as a private label supplier. The Company's Dakota Growers Pasta Co.label to date has most effectively penetrated local area markets in the Dakotasand Minnesota. The Zia Briosa label is marketed through club stores on the westcoast and its Pasta Sanita label is sold in small niches ranging from the upperMidwest to select markets in the Northeast United States.

 

        In the foodservice area, the Companyalso markets its pasta primarily as a private label supplier, including salesto three of the largest foodservice distributors in the country under theirlabels.  The Company’s “Dakota Growers”foodservice brand is sold throughout the U.S. to independent distributors andnational chain accounts.

 

        The Company focuses a majority of itsingredient marketing efforts on companies that do not also manufacture the drypasta ingredient for their end-products.

 

        The competitive environment in ourindustry depends largely on the aggregate industry capacity relative toaggregate demand for pasta products. The pasta manufacturing industry hasexperienced capacity changes and restructuring in recent years. As indicatedelsewhere herein, the Company believes that current pasta production capacityexceeds the current demand for pasta as several domestic pasta producers havecompleted production capacity additions in recent years.New World Pasta Company recently announcedthat it would close certain production facilities, which may help torationalize pasta production with current demand.

*Semolina and Durum Wheat Flour*

 

        Given the commodity nature of the marketfor semolina and durum flour, sales volume is largely dependent on deliveredprice when adequate supply conditions exist. Italgrani USA, Inc., HarvestStates Cooperatives and Miller Milling collectively are believed to representapproximately 40% of total domestic milling capacity. The Company's currentmilling operation represents about 15% of total domestic milling capacity. Someof the mills operated by the Company's competitors have established integratedpasta production capabilities or have developed alliances with pastamanufacturers. The Company believes that the integration of its milling andpasta production facilities enables the Company to compete more effectivelywith 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, mayaffect the operations of the Company and the volume of pasta imports. UnitedStates government farm policies also affect durum plantings and thus can have asignificant impact on the market price of durum.

 

        Pricing policy actions by the CanadianWheat Board may have resulted in increased sales of Canadian durum wheat in theUnited States and lower durum wheat prices. These actions have resulted incomplaints from durum growers in the United States, and a continuing disputeover possible restrictions on durum wheat imports. In response to a petition filedby the North Dakota Wheat Commission (“Wheat Commission”), on October 23, 2000,the Office of the United States Trade Representative announced the initiationof a Section 301 investigation.  In itspetition, the Wheat Commission alleged that the Canadian Wheat Board engages inunreasonable trade practices that have resulted in economic harm to U.S. wheatgrowers.  The U.S. government willconduct an investigation into the allegations made by the Wheat Commission regardingthe Canadian Wheat Board’s sales practices in the United States and thirdcountry markets.  If restrictions areimplemented, it could impact both the milling and pasta areas of the Company'sbusiness operations in a variety of ways.

 

        Lower durumwheat prices could ultimately lead to reduced pasta production costs andprovide opportunity for increased profitability for pasta manufacturers withoutrequiring price increases for finished pasta products, while higher durumprices could trigger price increases or reduced margins dependent on theindustry capacity utilization and pasta import levels.  Conversely, the Company believes lower durumwheat prices have in the past allowed certain pasta producers to lower theirprices and price proposals with reduced risk in efforts to gain market share.

 

*Food and Drug AdministrationRegulation*

 

        As a producer of products intended forhuman consumption, the Company's operations are subject to certain federal andstate regulations, including regulations promulgated by the United States Foodand Drug Administration. The Company believes that it is in material compliancewith the applicable regulatory requirements.

 

*Environmental Regulation*

 

        Dakota Growers is subject to extensivefederal and state environmental laws and regulations with respect to water andair quality, solid waste disposal and odor and noise control. The Companyconducts an on-going control program designed to meet these environmental lawsand regulations. There are no pending regulatory enforcement actions and theCompany believes that it is in substantial compliance with applicableenvironmental laws and regulations.

        TheCompany cannot predict whether future changes in environmental laws orregulations might increase the cost of operating its facilities and conductingits business. Any such changes could have adverse financial consequences forthe Company and its members.

 

**Intellectual Property Rights**

 

        The Company relies on a combination oftrade secret, trademark law, nondisclosure agreements and technical measures toestablish and protect its proprietary rights to its products and processes. TheCompany owns the following trademarks that have been registered with the UnitedStates Patent and Trademark Office: the design on its packaging, PastaGrowers®, Pasta Sanita®, Zia Briosa® and Dakota Growers Pasta Co.®.

 

**Research And Development**

 

        The Company supports research anddevelopment programs in North Dakota that focus on improved varieties of durumwheat. In fiscal year 1999, Dakota Growers hired an agronomist and initiated along-term project of small plot, replicated variety trial research, as well asfield-scale fungicide research. In connection with plant breeders andresearchers, the Company is working to develop scab-resistant, high-glutendurum varieties. The Company, as part of its operations, maintains a modern,well-equipped laboratory facility designed primarily to evaluate and maintainhigh quality standards for incoming raw materials, ongoing productmanufacturing, and development of new pasta shapes.

 

**Employees**

 

        As of October 1, 2001, the Company had423 employees, 121 of which are covered by collective bargaining agreements atits Primo Piatto, Inc. subsidiary. These collective bargaining agreementsexpire on October 1, 2002 and December 1, 2004. The Company considers its employeerelations to be good.

 

**Risk Factors**

 

        The following are important factors thatcould cause actual results to differ materially from those expressed in anyforward-looking statements made by or on behalf of the Company.

        **TaxTreatment**

 

        Subchapter T of the Internal RevenueCode sets forth rules for the tax treatment of cooperatives and applies both tocooperatives exempt from tax under Section 521 of the Internal Revenue Code andto nonexempt corporations operating on a cooperative basis. Dakota Growers is anonexempt cooperative. As a cooperative, Dakota Growers is not taxed on amountsof patronage sourced income withheld from its members in the form of qualifiedper-unit retains or on amounts distributed to its members in the form ofqualified written notices of allocation. Consequently, such amounts are taxeddirectly to the members. However, revenue attributable to non-patronage sourcedincome is taxed at the Company level and again upon distribution to theCompany's members. If the Company was not entitled to be taxed under SubchapterT or if significant portions of revenues are from non-patronage sourced income,its revenues would be taxed when earned by the Company and the members would betaxed when dividends are distributed. From time to time, the Internal RevenueService challenges the tax status of cooperatives, taking the position that thechallenged entities are not operating on a cooperative basis and are thereforenot entitled to the tax treatment described above. Those challenges can be basedon a variety of factors, including the nature of the cooperative's business,its interaction with its members and the portion of its business done for orwith its members. The impact of most such challenges, regardless of the factoron which the challenge is based, is that the Internal Revenue Service seeks toassert that some or all of a cooperative's income does not arise from a"patronage" transaction. As any income derived from non-patronagesources is subject to taxation at the entity level, the effect of a successfulchallenge is that the cooperative would be taxed as a corporation. The InternalRevenue Service has not challenged the Company's tax status; the Company wouldvigorously defend any such challenge. However, taxation at both the Companylevel and the shareholder level would have a material, adverse impact on theCompany.

 

        **Technology**

 

        The Company believes that its overallcommitment to maintaining and upgrading pasta manufacturing, milling andpackaging equipment is necessary to keep a competitive edge in the pastaindustry. In addition, it also acknowledges that ongoing computer systemupgrades to better service the demands of its customers are important tolong-term success and profitability. The Company may be negatively impacted ifit is unable to consistently keep pace with the industry in these areas.

 

        **Competitive Environment**

 

        Both the U.S. pasta industry and worldpasta industry are extremely competitive. The Company competes in all segments– retail store brand, foodservice and ingredient, with larger, national andinternational food companies. The pasta industry in the U.S. as well as inItaly is faced with excess production capacity, which is reflected in thecurrent low pasta pricing in all three segments. Additionally, some of theother companies have long-term, high volume contracts, which guarantee aspecified amount of volume over the term of the contract. Other competitorshave retail brand equity and larger amounts of marketing dollars to competeagainst imported and store brand products. The current environment, especiallyin the retail and ingredient segments, has put pressure on profitability andmay continue in the future. The Company has and will continue to apply, wherepossible, cost saving to remain competitive. Due to unforeseen circumstances,there is no guarantee that the Company can continue to grow and operateprofitably in the future.

        **Pasta,Semolina, Durum Wheat and By-Product Prices**

 

        The Company’s profitability is directlyrelated to the market price of dry pasta, semolina, durum wheat and mill feedby-products, matters over which the Company has little or no control. Thesupply and price of durum wheat are subject to market conditions and areinfluenced by many factors beyond our control including weather in the area inwhich the Company's members reside, weather in other durum wheat productionareas, governmental programs and regulations, insects, and plant diseases.Quantity or quality issues with the North Dakota durum crop may also make itdifficult for the Company’s members to procure sufficient durum to meet theirobligations under the Growers Agreement. The cost of durum wheat has variedgreatly in recent years. Such volatility with respect to the price of the basicraw material for the Company's products leaves the Company subject to widevariation in its costs from year to year. Future increases in durum costs couldhave a material adverse effect on operating profits unless we are able to passcost increases on to our customers. Competitive pressures often limit ourability to increase prices in response to higher input costs. Over-capacity inboth durum milling and pasta production worldwide, have placed downwardpressure on durum semolina and dry pasta pricing. The Company has capacity tosell durum semolina to other pasta producers. Such sales are currently beingmade at highly competitive prices. By-products of the milling process competewith other feed products, and fluctuate significantly in price with theavailability of these competing feed products.

 

        **Product Concentration**

 

        The Company competes exclusively in thedry pasta segment. Any decline in pricing or consumer preference for dry pastacould have a significant impact on the Company’s ability to grow or remainprofitable in the future.

 

        **Obligation to Deliver Wheat; Possible Reduction ofDelivery Obligation**

 

        All members of the Company are obligatedto deliver durum wheat to the Company in proportion to the amount of EquityStock owned by that member. If a member is unable to grow and deliver the durumwheat required to be delivered to the Company pursuant to the GrowersAgreement, the member must purchase the required quantity of durum wheat fromother agricultural producers or other owners of durum wheat for delivery to theCompany. As a result, a member not able to produce durum wheat for delivery tothe Company would be exposed to the risk that the price of acquiring durumwheat for delivery to the Company would be in excess of the price to be paidfor durum wheat by the Company under the Growers Agreement. Due to the poorquality of recent durum harvests in North Dakota, it may be difficult for theCompany’s members to deliver sufficient milling quality durum to meet theirobligations under the Growers Agreement.

 

        Under the Growers Agreement, the Companymay, depending on its marketing needs, reduce on a pro rata basis the quantityof durum wheat each member is obligated to deliver to the Company. In fiscalyears 2001, 2000, 1999 and 1997 the delivery obligation was slightly less thanone bushel of durum wheat per share of Equity Stock owned, while the deliveryobligation was one bushel of durum wheat per share for fiscal year 1998. Therecan be no assurance that the Company will not reduce the amount of durum wheatto be delivered by members. In the event that the Company reduces the amount ofdurum wheat to be delivered per share of Equity Stock, each member wouldexperience a proportionate reduction in the patronage activity with theCompany.

 

        **Government Regulation And Trade Policies**

 

        Dakota Growers is subject to extensivefederal and state environmental laws and regulations with respect to water andair quality, solid-waste disposal and odor and noise control. The Companyconducts an on-going program designed to comply with these laws andregulations. There are no pending regulatory enforcement actions against theCompany, and the Company believes that it currently is and will continue to bein substantial compliance with all applicable environmental laws andregulations.

 

        As a producer of products intended forhuman consumption, the Company's operations are subject to certain federal andstate regulations, including regulations promulgated by the U.S. Food and DrugAdministration. The Company believes that it is in material compliance with allapplicable regulatory requirements relating to food quality and safety.

        Theoperations of the Company may be affected by governmental trade policies andregulations, including those impacting the amount of durum wheat imported fromCanada and the volume of pasta imports. Pricing policy actions by the CanadianWheat Board in recent years may have resulted in increased sales of Canadiandurum wheat in the U.S. and lower durum wheat prices. These actions haveresulted in complaints from durum growers in the U.S. (including many of theCompany's grower-owners), and a continuing dispute over possible restrictionson durum wheat imports. If restrictions are implemented, it could impact boththe milling and pasta areas of the Company's business operations.

 

        Domestic pasta prices are alsoinfluenced by competition from foreign pasta producers, and as such, by thetrade policies of both the U.S. government and foreign governments. In 1996, aU.S. Department of Commerce investigation determined that several Italian andTurkish pasta producers were selling pasta at less than fair value in U.S.markets, and were benefiting from subsidies from their respective governments.Consequently, in July 1996, the U.S. International Trade Commission of theDepartment of Commerce (“Commerce”) imposed anti-dumping and countervailingduties on Turkish and Italian imports (“the 1996 Anti-dumping Order”). InDecember 1998, Commerce announced the final results of its review of the 1996Anti-dumping Order for three Turkish producers. Commerce indicated that one ofthe producers had not had any shipments during the review period of January 19,1996 to June 30, 1997. Commerce maintained the anti-dumping and countervailingduties for another Turkish producer and repealed such duties for the third. Inaddition, Commerce is conducting an administrative review of its 1996Anti-dumping Order relating to eight Italian pasta producers. Commercemaintained the anti-dumping duties for most of the Italian pasta producers.Though these duties may enable the Company to compete more favorably againstItalian and Turkish producers in the U.S. pasta market, there is no assuranceas to the length of time these duties will be maintained, or that foreignproducers will not sell competing products in the United States at prices lowerthan those of the Company. Bulk imported pasta and pasta produced in the UnitedStates by foreign companies are generally not subject to such anti-dumping andcountervailing duties; therefore, foreign pasta producers have also entered theUnited States pasta market by establishing production facilities in the UnitedStates, further increasing competition in the United States pasta market.

 

        **Restrictive Loan Covenants**

 

        The Company's loan agreements withCoBank and institutional investors obligate the Company to maintain or achievecertain amounts of equity and working capital and achieve certain financialratios. To the extent that the Company is unable in the future to satisfy thevarious conditions specified in the loan agreements, the Company's ability todistribute either patronage distributions or any other dividends to its membersmay be restricted or the Company may be prohibited from returning unit retainswithheld from durum wheat purchases from members. The failure to comply withthe various loan covenants may result in interest rate penalties, restrict theCompany's corporate activities or result in a default by the Company which mayhave a material adverse affect on the Company's liquidity.

 

        **Restrictions on Transferability of Shares; NoObligation to Repurchase Shares**

 

        There is no established public tradingmarket for the Membership Stock, Equity Stock or Preferred Stock of theCompany. There is a very limited private market for the Equity Stock. Shares ofEquity Stock in the Company may be transferred only with the consent of theCompany's Board of Directors. Any transferee of the Equity Stock must (i)satisfy the membership eligibility requirements described in the Company'sBylaws, (ii) be approved for membership by the Board of Directors, (iii) ownone share of Membership Stock and (iv) execute a Growers Agreement. The Companyhas no legal obligation to repurchase any Membership Stock or Equity Stock atany time, even if the Company terminates a member's membership. However, theCompany has consistently repurchased shares of Membership Stock from a memberdesiring to transfer all of the member's Equity Stock to a qualified thirdparty. Consequently, investors may be unable to sell their shares promptly orat a price equal to or above the purchase price, or sell their shares at all.

        **TerminationOf Membership Interest**

 

        Pursuant to the Company's governingdocuments, a stockholder's membership in the Company automatically terminatesupon ceasing to be a producer of agricultural products or upon failing topatronize the Company for thirteen consecutive calendar months. In addition,the Board of Directors may terminate a membership for cause. "Cause"includes intentional or repeated breach of the Bylaws, rules or regulations ofthe Company or failure to make timely payment of debts to the Company, breachof any contract between the member and the Company, and other causes determinedby the Board of Directors in the exercise of honest and good faith businessjudgment. Whether a membership is subject to termination for breach of acontract may be determined by the Board of Directors without regard to thecommencement or outcome of any litigation arising from the contract.

 

        Upon termination of membership in theCompany, a member will cease to have voting rights and other rights ofmembership. However, loss of membership rights will not relieve a member'sobligation to deliver durum wheat to the Company pursuant to the terms of themember's Growers Agreement or excuse a terminated member from performing anyother obligations under a contract between the Company and the terminatedmember. The Growers Agreement will remain in effect until the July 31 nextfollowing the termination of membership. The Company has no obligation torepurchase the Membership Stock or Equity Stock of a member determined to beineligible as a member.

 

        **Board Of Directors Discretion Regarding PatronageDistributions**

 

        The Company conducts its patronagebusiness on a cooperative basis. The quantity of durum wheat delivered to theCompany by any member is used in determining that particular member's patronagebusiness with the Company and the member's share of the Company's net proceeds.The Board of Directors of the Company has absolute discretion to determine themanner and amount of payment of patronage equity credits.

 

        **Unit Retains**

 

        As a means of raising capital, anagricultural cooperative may retain a portion of the payments otherwise duemembers for their crops. This is called a "unit retain" or "unitretention capital." A qualified unit retain is not taxable income to thecooperative under federal law, but is available for the general businesspurposes of the cooperative, including debt service. The Company's Board ofDirectors may determine on an annual basis the amount of unit retains to beapplied to all members on a uniform basis. Unit retains may be retained by theCompany indefinitely. To date, Dakota Growers has not withheld a unit retainbut has paid the full price of durum wheat to the growers, less applicabletransaction fees established by the Board of Directors. Although the Board doesnot envision using unit retains as a method to increase the Company's capital,there can be no assurance that the Company's Board of Directors will not exerciseits authority to withhold unit retains under certain circumstances, includingbut not limited to, maintaining sufficient capital to meet the capitalrequirements imposed under any agreements with its lenders.

 

        **Member's Consent to Taxation for Qualified Allocationsof Per-Unit Retains and Patronage Earnings**

 

        Each member of the Company must agreethat the amount of any qualified per-unit retain allocations and patronagedividends with respect to patronage which are made in money, qualified writtennotices of allocation (as defined in 26 U.S.C. Section 1388) or other propertywill be deemed to be taxable income to the member in the taxable year in whichsuch written notices of allocation are received by the member. Therefore,qualified per-unit retains are taxable income to the Company's members eventhough the member may not receive payment for such qualified per-unit retainsfor several years.

 

        To constitute a qualified written noticeof allocation of patronage dividends under federal tax law, the Company mustpay to each member at least 20% of the patronage dividend in cash or byqualified check. Therefore, in the event that the Company issues patronagedividends in the form of qualified written notices of allocation, the entireamount of such patronage dividend is deemed to be taxable income to the member,even though the member may receive a cash payment of only 20% of the patronagedividend.

**ITEM 2.  PROPERTIES AND PROCESSING FACILITIES**

 

        Dakota Growers operates a verticallyintegrated, state of the art durum milling and pasta manufacturing plant inCarrington, North Dakota, and a pasta production facility in New Hope,Minnesota through its wholly owned subsidiary Primo Piatto, Inc. The Companyclosed its Minneapolis, Minnesota factory in February 2001 and has terminatedits lease on the property.

 

        The Carrington mill became operationalin January 1994, was expanded in 1996 and again in 1999. It has the capacity togrind 40,000 bushels of durum per day, and over twelve million bushels peryear. It has grain silos with a capacity to hold 620,000 bushels. Its semolinaproduction capability meets the requirements of all of the Company's pastamanufacturing capacity, with excess capacity available for semolina sales toother producers.

 

        The Carrington pasta operations,initially operational in January 1994, have been expanded in 1997 and 1998. Theplant now has seven pasta production lines, three operated as long goods linesand four of which are short goods lines. Electronic control scales are used throughoutthe facility to continuously track production and yields. A central computercontrol room allows one operator to monitor efficiently both the milling andthe pasta operations. Total dry pasta manufacturing capacity is 275 millionpounds annually. The Company owns the physical plant in Carrington, and theland on which it is located.

 

        The Company's Primo Piatto, Inc.subsidiary operates a pasta production facility in New Hope, Minnesota. Thisfacility contains six production lines capable of producing approximately 165million pounds of dry pasta each year, predominantly in retail packaging. Alasagna line installed at the New Hope, Minnesota plant became operational inFebruary 2001. There is a direct Canadian Pacific rail line connecting the NewHope factory to the Carrington milling facility. This highly automated, costeffective processing and packaging facility has gone through significantupgrades within the last decade. Primo Piatto owns the physical plant and landat the New Hope facility.

 

        The Company owns the warehousing at theCarrington and New Hope plants. These facilities are supplemented by publicwarehouses in Kansas, Kentucky, Minnesota, New York, North Dakota, Ohio,Oregon, Utah and Washington where inventory is maintained and redistributed forthe needs of specific customers.

**ITEM 3.  LEGAL PROCEEDINGS**

 

        From time to time and in the ordinarycourse of its business, the Company is named as a defendant in legalproceedings related to various issues, including worker's compensation claims,tort claims and contractual disputes. Other than such routine litigation, theCompany is not currently involved in any material legal proceedings. Inaddition, the Company is not aware of other potential claims that could resultin the commencement of legal proceedings. The Company carries insurance thatprovides protection against certain types of claims, up to the policy limits ofthe Company's insurance.

 

**ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS**

 

        No matters were submitted to a vote ofsecurity holders during the fourth quarter of fiscal 2001.

 

 

**PARTII.**

 

**ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK ANDRELATED STOCKHOLDER**

**          MATTERS**

 

        There is no established public marketfor the voting Membership Stock, Equity Stock or Preferred Stock of theCompany. There is a very limited private market for the Equity Stock. Ownershipof Membership Stock and Equity Stock is restricted to eligible agriculturalproducers. At the Annual Members’ Meeting held January 6, 2001, the membersapproved amendments to the Company’s governing documents to permit membershipin the Company by (i) agricultural producers who are not residents of theUnited States and (ii) associations or cooperatives of agricultural producers.The Membership Stock, Equity Stock and Preferred Stock may not be transferredwithout the consent of the Company's Board of Directors.

 

        As of October 29, 2001, there were 1,155holders of Membership Stock. As voting rights are limited to holders ofMembership Stock, each member of the Cooperative has an equal voting influenceregardless of the member’s Equity Stock holdings.

 

        Members are obligated to deliver durumwheat to Dakota Growers under the Growers Agreement in proportion to theirEquity Stock. Commencing August 1, 1998, all durum wheat deliveries by membersmust be made through an agency arrangement administered by Northern GrainsInstitute (NGI). NGI acts as each member's grain handling and delivery agent inconnection with deliveries of durum to Dakota Growers. Members making actualdelivery of durum to NGI receive the Dakota Growers' spot market price withinfourteen (14) days of delivery.

 

        Durum wheat delivered to Dakota Growersby its members is processed and the resulting semolina and pasta products aremarketed on a cooperative basis. Each member is paid for the durum wheatdelivered to the Company. In addition, a member may receive a portion of thenet proceeds of the Company from its value added processing operations, basedon each member's patronage with the Company as compared to total patronage ofall members. The Company may withhold a portion of the payments owed to membersfor their durum delivered to the Company in the form of unit retains and mayelect not to pay the entire amount of patronage in cash.

 

        A unit retain is a portion of thepayment to the members for their durum delivered to the Company, which isretained by the Company for use as capital for the Company's business. UnderIRS guidelines, the Company has the option to treat the unit retains as taxableat the cooperative level or to treat the unit retains as nontaxable bydeclaring the unit retains as "qualified." Qualified unit retains aretaxable to the member in the member's tax year of notification. When aqualified per unit retain is reimbursed or "revolved" in the form ofa cash payment to the member, the member reports no additional income, havingalready paid tax on the whole amount in the year of declaration. Unit retainsdo not contain a minimum cash payment requirement to qualify for this taxtreatment.

        TheBoard of Directors, in its absolute discretion, taking action pursuant toreasonable policies of uniform application, is empowered to determine themanner of distribution and payment of patronage which may be in cash, credits,certificates of interest, revolving fund certificates, letters of advice,promissory notes, or other certificates or securities of the Company or ofother associations or cooperatives, in other property, or in any combinationthereof. The Company may pay patronage dividends in the form of qualifiedwritten notices of allocation of patronage earnings to the members, based oneach member's patronage business with the Company. If the Company payspatronage dividends in the form of qualified written notices of allocation, theCompany must pay at least 20% of the allocation in cash in order for thepatronage dividend to constitute a qualified written notice of allocation underfederal tax law. If the written notice of allocation is "qualified",the entire amount of the qualified patronage allocation is taxable income tothe member in the year declared, regardless of the amount distributed in cash.

 

        The Company has no obligation, includingupon its termination of a member, to pay the members amounts retained as unit retainsor patronage equity credits. Moreover, various loan agreements between theCompany and its lenders could compel the Board to retain amounts as unitretains in order to satisfy capital requirements under its loan agreements andcould restrict the Board from paying more than 20% of patronage as cashdividends.

**ITEM 6.  SELECTED FINANCIAL DATA**

 

        The selected financial data presentedbelow for the fiscal years ended July 31, 1997, 1998, 1999, 2000 and 2001 arederived from the financial statements of the Company, which were audited byEide Bailly LLP, independent accountants. This section should be read inconjunction with the Company's financial statements and related notes includedelsewhere in this report.

 

**FINANCIAL DATA**

**(In thousands, except per share dataand ratios)**

 
|                                                                                                                                                   |   | **Fiscal  year ended July 31** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------|--------|
|                                                                                                                                                   |   | **1997**                       |   | **1998** |   | **1999** |   | **2000** |   | **2001** |   |
| **INCOME STATEMENT DATA**                                                                                                                              |   |                           |   |   |   |   |   |   |   |   |   |
| Net  revenues                                                                                                                                          |   | $                              | 70,702 |   | $ | 119,621 |   | $ | 124,869 |   | $ | 136,862 |   | $ | 135,921 |   |
| Cost  of product sold                                                                                                                                  |   | 58,357                         |   | 100,229 |   | 106,062 |   | 116,890 |   | 124,811 |   |
| Gross  proceeds                                                                                                                                        |   | 12,345                         |   | 19,392 |   | 18,807 |   | 19,972 |   | 11,110 |   |
| Marketing,  general and administrative expenses                                                                                                        |   | 3,542                          |   | 6,754 |   | 7,886 |   | 9,713 |   | 9,631 |   |
| Operating  proceeds                                                                                                                                    |   | 8,803                          |   | 12,638 |   | 10,921 |   | 10,259 |   | 1,479 |   |
| Other  income (expense)                                                                                                                                |   | (1,877                         | )      | (3,264 | ) | (2,434 | ) | (3,929 | ) | (3,574 | ) |
| Income  tax (expense) benefit                                                                                                                          |   | -                              |   | - |   | (499 | ) | 1,298 |   | 311 |   |
| Income  (loss) before cumulative effect of change in accounting principle                                                                              |   | 6,926                          |   | 9,374 |   | 7,988 |   | 7,628 |   | (1,784 | ) |
| Cumulative  effect on prior years (to July 31, 1998) of changing to a different inventory  valuation method                                            |   | -                              |   | - |   | (3,429 | ) | - |   | - |   |
| Net  income (loss) from patronage and non-patronage business                                                                                           |   | 6,926                          |   | 9,374 |   | 4,559 |   | 7,628 |   | (1,784 | ) |
| Dividends  on preferred stock                                                                                                                          |   | 36                             |   | 15 |   | 143 |   | 4 |   | 15 |   |
| Net  earnings (loss) from patronage and non-patronage business available for  members                                                                  |   | $                              | 6,890  |   | $ | 9,359 |   | $ | 4,416 |   | $ | 7,624 |   | $ | (1,799 | ) |
|                                                                                                                                                   |   |                           |   |   |   |   |   |   |   |   |   |
| Average  equity shares outstanding (1)                                                                                                                 |   | 7,356                          |   | 7,356 |   | 8,603 |   | 11,166 |   | 11,253 |   |
|                                                                                                                                                   |   |                           |   |   |   |   |   |   |   |   |   |
| Net  earnings (loss) from patronage and non-patronage business per average equity  share outstanding before cumulative effect of accounting change (1) |   | $                              | 0.94   |   | $ | 1.27 |   | $ | 0.91 |   | $ | 0.68 |   | $ | (0.16 | ) |
|                                                                                                                                                   |   |                           |   |   |   |   |   |   |   |   |   |
| Patronage  and other dividends per average share outstanding (1)                                                                                       |   |                           |   |   |   |   |   |   |   |   |   |
| Declared  (2)                                                                                                                                          |   | $                              | 0.65   |   | $ | 1.00 |   | $ | 0.86 |   | $ | 0.40 |   | $ | - |   |
| Distributed  (2)                                                                                                                                       |   | 0.65                           |   | 1.00 |   | 0.86 |   | 0.40 |   | - |   |
|                                                                                                                                                   |   |                           |   |   |   |   |   |   |   |   |   |
| Pro  forma amounts assuming the inventory valuation method adopted in 1999 is  applied retroactively (3)                                               |   |                           |   |   |   |   |   |   |   |   |   |
| Net  earnings (loss) from patronage and non-patronage business available for  members                                                                  |   | $                              | 6,848  |   | $ | 6,731 |   | $ | 7,845 |   | $ | 7,624 |   | $ | (1,799 | ) |
| Net  earnings (loss) from patronage and non-patronage business per average equity  share outstanding (1)                                               |   | $                              | 0.93   |   | $ | 0.92 |   | $ | 0.91 |   | $ | 0.68 |   | $ | (0.16 | ) |
|                                                                                                                                                   |   |                           |   |   |   |   |   |   |   |   |   |
| **BALANCE SHEET DATA**                                                                                                                                 |   |                           |   |   |   |   |   |   |   |   |   |
| Cash                                                                                                                                                   |   | $                              | 5      |   | $ | 182 |   | $ | 3,425 |   | $ | 1,725 |   | $ | 3 |   |
| Working  capital                                                                                                                                       |   | 6,329                          |   | 22,813 |   | 31,065 |   | 25,089 |   | 14,420 |   |
| Total  assets                                                                                                                                          |   | 68,739                         |   | 124,537 |   | 135,873 |   | 131,857 |   | 128,658 |   |
| Long-term  debt (excluding current maturities)                                                                                                         |   | 27,131                         |   | 66,056 |   | 59,116 |   | 51,626 |   | 47,594 |   |
| Redeemable  preferred stock                                                                                                                            |   | 453                            |   | 253 |   | 53 |   | 126 |   | 113 |   |
| Members'  investment                                                                                                                                   |   | 29,956                         |   | 36,875 |   | 58,982 |   | 60,533 |   | 54,267 |   |

----

| (1)    |   | Adjusted  for the impact of the 3-for-2 stock split effective August 1, 1997.                                                                                                                                                                                                                                                                                                                                                                                                            |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)    |   | Qualified patronage  declarations have been made by the Board of Directors in October of each year  based on the patronage earnings and average shares for the prior fiscal year ending  July 31. Payments of patronage declaration have been made in November of each  year, except for 1999 in which a portion was paid in January.                                                                                                                                                    |
| (3)    |   | The Company changed  its method of computing inventory valuations in the third quarter of fiscal  year 1999 from the net realizable value method (a GAAP method of inventory  valuation for cooperatives) to the lower of cost or market method, determined  on a first-in, first-out basis, using product specific standard costs. The  impact of the change on prior years (to July 31, 1998) of $3,429,000 was  included as a charge against income for the year ended July 31, 1999. |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |

Amountsreflected above include only dividends on equity stock and qualified patronagedeclarations, and exclude non-qualified allocations to each member’s account.Such non-qualified amounts are reserved in each member’s account but are nottaxable until qualified.

**ITEM 7.  MANAGEMENT'SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

        The following discussion containsforward-looking statements. Such statements are based on assumptions by theCompany’s management, as of the date of this report, and are subject to risksand uncertainties, including those discussed under "Risk Factors" inthis report, that could cause actual results to differ materially from thoseanticipated. The Company cautions readers not to place undue reliance on suchforward-looking statements.

 

**Summary**

 

        Dakota Growers incurred a net loss of$1.8 million for the year ended July 31, 2001, compared to net earnings of $7.6million for the prior year. The net loss resulted from lower sales volumes andcompetitive pricing within the dry pasta industry combined with increased rawmaterial, packaging, freight, and utility costs. The Company increased prices,where possible, to cover higher input costs. With excess capacity available inthe pasta industry, the Company was unable to implement price increases tofully cover the higher costs incurred.

 

        The Cooperative did generate netearnings of $2.1 million in the fourth quarter of fiscal year 2001, ending astreak of three consecutive quarters of net losses. Improved profitability inthe fourth quarter resulted from various revenue enhancement and cost cuttingmeasures that were implemented. The Company realized gains from strong clubstore and supermarket sales in the fourth quarter. Efficiencies were realizedfrom the closure of the Minneapolis factory in conjunction with the completionof the lasagna line in New Hope. The labor force was reduced and productionschedule cut from seven to five days a week at the New Hope facility to bettermatch supply with current demand. Further implementation of pasta rail freightand forward warehouse programs is beginning to generate freight cost savings.

 

        Our core strength remains in privatelabel for our retail and foodservice customers where we will continue to focuson customized growth strategy programs with these customers. We will alsocontinue to look for greater sales opportunities for our branded product aswell as organic and imported pasta. The Company has implemented a certifiedorganic program and markets organic pasta through its Dakota Growers Pasta Co.®retail label, as well as into the private label retail, foodservice, andingredient segments of the pasta market. Imported pasta is distributed via anexclusive agreement with Gruppo Euricom, the second largest pasta manufacturerin Italy.

 

**Effect of Change in Accounting Estimate**

 

        Effective August 1, 1999, the Companychanged the period over which it depreciates certain mill and pasta productionequipment from 15 years to 20 years. The Company feels the change betterreflects the useful life of the related equipment and is comparable to industrypractice for similar equipment. The change in accounting estimate increased netincome for the year ended July 31, 2000 by $917,000.

 

**Results Of Operations**

 

*Comparison of Fiscal Yearsended July 31, 2001 and 2000*

 

***        NetRevenues.***Net revenues totaled $135.9 million for the year ended July 31, 2001, adecrease of $0.9 million, or 0.7%, from the prior year. The decrease wasprimarily due to lower pasta and semolina sales volumes. Volume declines werepartially offset by a small increase in pasta average sales prices of 0.8%, aresult of price increases obtained in attempting to pass-through highermaterial and operating costs.

 

        Revenues from the retail segment increased $2.4 million, or3.0%, primarily due to volume increases of 4.3% offset partially by loweraverage selling prices. Growth in the club store market was particularlystrong. Foodservice revenues increased by $1.4 million, or 5.3%, on volumegrowth of 3.0% and an increase in average selling prices of 2.3%. Volume growthin the foodservice segment continues to be driven by expansions andacquisitions by our current customers. Ingredient revenues decreased $4.0million, or 20.7%, mainly as a result of a 20.8% sales volume decrease.

 

        The Company markets semolina production in excess of its ownrequirements as well as by-products of the durum milling process. Revenues fromsemolina and by-product sales were down $0.7 million from the prior year mainlydue to reductions in semolina sales volumes.

 

        ***Costof Product Sold.*** Cost of product sold increased 6.8% to$124.8 million. A majority of the $7.9 million increase was due to increases indurum, packaging, freight, and utility costs. As a result of competitivepressures within the pasta industry, the Company was unable to fully coverincreased input costs through sales price increases. Gross margin as apercentage of net revenues decreased from 14.6% to 8.2% reflecting reducedprofitability due to higher manufacturing input costs.

 

        ***Marketing,General and Administrative ("MG&A") Expenses.*** MG&Aexpenses totaled $9.6 million for the year ended July 31, 2001, down slightlyfrom the prior year. MG&A expenses as a percentage of net revenues remainedconsistent at 7.1%.

        ***Interest Expense.***Interest expense, including patronage creditsand adjustments, decreased $0.4 million. The Companyrecorded a patronage credit to interest expense of $248,000 for the year endedJuly 31, 2001, and a net charge to interest expense of $68,000 related toadjustments for estimated patronage refunds from and investments in cooperativebanks for the year ended July 31, 2000, accounting for a majority of thechange.

 

        ***Income Taxes.***The Company recorded an income tax benefit of$311,000 for the year ending July 31, 2001 related primarily to a reduction indeferred tax liabilities. The Company recorded an income tax benefit of$1,298,000 for the year ended July 31, 2000, of which $407,000 related tocurrent income tax benefits while $891,000 related to changes in deferredincome taxes. The current income tax benefit recorded for fiscal 2000 wasprimarily a reversal of the income tax expense recorded in fiscal 1999, whichresulted from a reclassification of approximately $2.0 million of income fromnonpatronage to patronage for gains on sale of properties in fiscal 1999. Thereclassification was based on cooperative income tax developments taking placein the second quarter of fiscal 2000. The deferred income tax benefit relatedprimarily to a reduction in deferred income tax liabilities associated withdifferences between the book and tax basis of property and equipment.

 

        ***Net Income (Loss).*** The Company incurred a net loss of$1.8 million for the year ended July 31, 2001 compared to net income of $7.6million for the year ended July 31, 2001. The net loss resulted from areduction in net revenues combined with higher manufacturing input costs asnoted above.

 

*Comparison of Fiscal Yearsended July 31, 2000 and 1999*

 

***        NetRevenues.***Overall net revenues increased $12.0 million, or 9.6%, compared to theprior year. The increase was primarily due to pasta volume growth of 10.2%. Thepasta volume growth was offset by a decline in pasta average sales prices of4.6% mainly due to competition within the pasta industry and contractualadjustments relating to lower average raw material costs. The Company marketssemolina production in excess of its own requirements as well as by-products ofthe durum milling process. Revenues from semolina and by-product salesincreased 90%, due to the completion of the mill expansion project in May 1999,accounting for approximately $4.6 million of the increase in revenues.

 

        Revenues from the retail segment increased 6.3% due to volumeincreases. Foodservice revenues increased by 13.9%, primarily due to expansionsand acquisitions made by current customers. Ingredient revenues were up 7.1%mainly due to sales to new customers.

 

        ***Costof Product Sold.*** Cost of product sold increased 10.2% to$116.9 million. A majority of the $10.8 million increase was due to salesvolume growth. Gross margin as a percentage of net revenues decreased slightlyfrom 15.1% to 14.6% reflecting reduced profitability due to competitivepressures.

 

        ***Marketing,General and Administrative ("MG&A") Expenses.*** MG&Aexpense increased $1.8 million, or 23.2%, over the prior year. A majority ofthe increase was due to the enhancement of the Company’s sales and salessupport efforts to meet the needs of new and existing customers while pursuingcontinued growth. The Company also incurred increased consulting fees inconjunction with an extensive study on strategic initiatives and capital structureoptions in fiscal 2000.

 

        ***Interest Expense.***Interest expense, including patronageadjustments, decreased $851,000. The Company recorded a net charge to interestexpense related to adjustments for estimated patronage refunds from andinvestments in cooperative banks totaling $68,000 and $310,000 for the yearsended July 31, 2000 and 1999, respectively. The remainder of the decrease ininterest expense relates to a decrease in average outstanding debt.

 

        ***Other Income.***The Company recorded $2.5 million in gainson the sale of properties during fiscal year 1999 accounting for a majority ofthe difference in other income.

        ***Income Taxes.***The Company has recorded an income tax benefitof $1,298,000 for the year ended July 31, 2000, of which $407,000 related to currentincome tax benefits while $891,000 related to changes in deferred income taxes.The current income tax benefit is primarily a reversal of the income taxexpense recorded in the prior year, and relates to a reclassification ofapproximately $2.0 million of income from nonpatronage to patronage for gainson sale of properties in fiscal 1999 noted above. The reclassification wasbased on cooperative income tax developments taking place in the second quarterof fiscal 2000. The deferred income tax benefit relates primarily to areduction in deferred income tax liabilities associated with differencesbetween the book and tax basis of property and equipment.

 

        ***Net Income.*** Net income increased $3.1 million from theprior year, primarily due to the $3.4 million charge related to cumulativeeffect of change in accounting principle recorded in fiscal 1999.

 

**Liquidity and Capital Resources**

 

        The Company meets its liquidityrequirements through cash provided by operations, short-term borrowings underits line of credit, sales of equities, and outside debt financing. Workingcapital as of July 31, 2001 was $14.4 million compared to $25.1 million as ofJuly 31, 2000.

 

        The Company utilizes financing on ashort-term basis to fund operations and capital projects until permanentfinancing is issued. The Company has a seasonal line of credit for $19 millionwith CoBank (“the Bank). The balance outstanding on the line of credit as ofJuly 31, 2001 was $8.1 million. Cash, receivables and inventories secureborrowings against the line of credit.

 

        The Company’s long-term financing isprovided through various secured term loans and secured notes. The LoanAgreement with CoBank provides the Company with a total of approximately $51.6million in term and seasonal loans and commitments, bearing either variable orfixed interest rates. The Company is charged a fee of .10% on the dailyoutstanding balance of term loans and commitments payable on the last day ofeach calendar quarter. The Company also is charged a commitment fee of 1% onthe daily outstanding commitments payable on the last day of each calendarquarter.

 

        In August 1998, the Company issued $27.0million in debt through a private placement to institutional investors and usedthe proceeds to repay certain outstanding long and short-term debt with theBank.

        Thevarious debt agreements with the Bank and institutional investors obligate theCompany to maintain or achieve certain amounts of equity and certain financialratios and impose restrictions on the Company. The Company is required tomaintain a current ratio of 1.35 to 1.00, a long term debt to net worth ratio(adjusted to reflect a current ratio of 1.35:1.00) of not greater than 1.10 to1.00, and a debt service coverage ratio of not less than 1.50 to 1.00, measuredat the end of each fiscal year. The Company cannot pay dividends on capitalstock in excess of minimum requirements, or revolve any owner equity if suchaction will cause a noncompliance position in any financial condition withoutthe prior written consent of the Bank. The Company's consolidated net worth maynot be less than the sum of (a) $27,000,000 plus (b) an aggregate amount equalto 30% of consolidated net income for each completed fiscal year beginning withthe fiscal year ended July 31, 1998. The Company's trailing twelve month ratioof consolidated cash flow to consolidated fixed charges may not be less than2.00 to 1.00 at the end of each fiscal quarter. The Company entered into aWaiver and Second Amendment to the Note Purchase Agreement and Notes effectiveJune 1, 2001, whereby the events of default existing under Section 10.4(b) ofthe Note Purchase Agreement (as amended by the Waiver and First Amendment datedNovember 28, 2000) relating to the consolidated funded debt to consolidatefunded cash flow ratio were waived. The Waiver and Second Amendment requiresthat the ratio of consolidated funded debt to consolidated cash flow not exceed4.25 to 1.00 for the period from May 1, 2001 to and including July 31, 2001,3.75 to 1.00 for the period from August 1, 2001 to and including October 31,2001, 3.25 to 1.00 for the period from November 1, 2001 to and includingJanuary 31, 2002 and 3.00 to 1.00 at all times thereafter, in each casedetermined as of the end of each fiscal quarter for the immediately precedingfour fiscal quarters, treating such period of four fiscal quarters as a singleaccounting period. The Notes were amended such that the rate of interest on theunpaid balance was increased by one percent at any time that either (a) theratio of the Company’s consolidated funded debt to consolidated cash flow isgreater than 3.00 to 1.00 as of the end of each fiscal quarter for theimmediately preceding four fiscal quarters or (b) the Securities ValuationOffice of the National Association of Insurance Commissioners has not assigneda designation category of “1” or “2” to the Notes. The one percent interestrate increase became effective August 1, 2001, amending the interest rate onthe Series A Notes to 8.04% and the interest rate on the Series B Notes to8.14% pursuant to the above.

 

        Net cash provided by operations totaled$9.5 million for the year ended July 31, 2001, compared to $16.9 million and$7.9 million generated for the years ended July 31, 2000 and 1999. The $7.4million decrease from fiscal years 2000 to 2001 primarily resulted from thedecrease in net income. The increase in net cash provided by operations infiscal 2000 compared to fiscal 1999 was primarily due to decreases inreceivables partially offset by increases in inventories.

 

        Net cash used in investing activitiesrelates primarily to the construction and installation of milling and pastaequipment and payments made under long-term marketing agreements, offset byproceeds from sales of property and equipment. Expenditures for the purchase ofproperty and equipment totaled $4.0 million, $5.3 million and $14.3 million forthe years ended July 31, 2001, 2000, and 1999, respectively. A significantportion of the equipment expenditures for fiscal years 2001 and 2000 related tothe installation of the lasagna line in the New Hope, Minnesota facility. Amajority of the expenditures in 1999 were for mill expansion. Most of theCompany’s technology assets are placed under lease agreements, which allow theCompany to stay relatively current with changing technologies. Payments madeunder long-term marketing agreements totaled $5.0 million, $1.5 million and$0.9 million for the years ended July 31, 2001, 2000 and 1999, respectively.

 

        Net cash used for financing activitiestotaled $2.7 million and $11.7 million for the years ended July 31, 2001 and2000, respectively. This compares to net cash provided by financing activitiestotaling $9.6 million for the year ended July 31, 1999. Net cash used forfinancing activities in fiscal years 2001 and 2000 related primarily toprincipal payments on long term debt totaling $4.5 million and $7.6 million,respectively, and patronage distributions. These amounts were offset byproceeds from short term financing and stock options exercised. Through its stockoffering ended February 28, 1999, the Company received $24.4 million ofproceeds, net of expenses of the offering and payments due the sellingpreferred shareholders. The proceeds from this offering were used for the millexpansion project, a reduction of debt and the enhancement of the Company’sworking capital position.

        Patronagedistributions to members of the Cooperative totaled $4.5 million, $7.4 millionand $7.3 million for the years ended July 31, 2001, 2000 and 1999,respectively. The Board of Directors authorized a qualified patronageallocation of $4,466,000 ($.4284 per bushel acquired or $.40 per averageoutstanding equity share) for fiscal year 2000 at its November 2000 meeting.The total qualified patronage allocation was paid in cash on November 30,2000.  The Board also voted to allocate,on a non-qualified basis, the remainder of the fiscal 2000 patronage earningstotaling $2,665,000. In taking these actions, the Board of Director rescindedthe patronage allocations authorized at the October 2000 meeting as reported inthe Company’s Form 10-K for the year ended July 31, 2000.

 

        The Company has current commitments for$5.7 million in raw material purchases, primarily durum purchase ommitmentsfrom its members. The Company anticipates capital expenditures in fiscal year2002 to total approximately $2.0 million. These expenditures are primarily forpasta line upgrades and cost reduction projects. Commitments for monthlyoperating lease payments for technology and other assets total $0.9 million, ofwhich $0.5 million is due in fiscal year 2002. Pursuant to a warehouseagreement with Sky Logistics & Distribution, Inc. (Sky), the Company isobligated to minimum monthly storage and handling volumes totalingapproximately $110,000 per month. This agreement expires October 31, 2004. TheCompany has also transferred the obligation for a certain building lease toSky. If Sky were unable to perform under the existing lease, the Company wouldbe obligated to make payments under this lease over the remaining term. Currentmonthly payments under this lease total approximately $67,000, and the leaseexpires April 30, 2004. The Company currently has no other materialcommitments.

 

        Management believes that net cashcurrently available and to be provided by operating activities, along with itsavailable line of credit, will be sufficient to meet the Company’s expectedcapital and liquidity requirements for the foreseeable future.

## **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

        Market risk is the risk of loss to futureearnings, to fair values or to future cash flows that may result from changesin the price of a financial instrument. The value of a financial instrument maychange as a result of changes in interest rates, commodity prices, exchangerates, equity prices and other market changes. Market risk is attributed to allmarket-risk sensitive financial instruments, including long-term debt.

 

        The Company does notbelieve it is subject to any material market risk exposure with respect tointerest rates, commodity prices, exchange rates, equity prices, or othermarket changes that would require disclosure under this item.

**ITEM 8.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEXTO CONSOLIDATED FINANCIAL STATEMENTS OF**

**DAKOTAGROWERS PASTA COMPANY**

 
| Report of Independent  Auditors                            |   |   |   |
|------------------------------------------------------------|--------|--------|--------|
|                                                       |   |   |   |
| Consolidated Balance  Sheets                               |   |   |   |
|                                                       |   |   |   |
| Consolidated  Statements of Operations                     |   |   |   |
|                                                       |   |   |   |
| Consolidated  Statements of Changes in Members' Investment |   |   |   |
|                                                       |   |   |   |
| Consolidated  Statements of Cash Flows                     |   |   |   |
|                                                       |   |   |   |
| Notes  to Consolidated Financial Statements                |   |   |   |

 

## **INDEPENDENTAUDITOR’S REPORT**

 

 

 

The Board of Directors

Dakota GrowersPasta Company

Carrington, North Dakota

 

We have audited the accompanyingconsolidated balance sheets of DakotaGrowers Pasta Company (a North Dakota Cooperative) and subsidiary as ofJuly 31, 2001 and 2000, and the related consolidated statements of operations,changes in members' investment and cash flows for the years ended July 31,2001, 2000 and 1999. These consolidated financial statements are theresponsibility of the Company's management. Our responsibility is to express anopinion on these consolidated financial statements based on our audits.

 

We conducted our audits in accordancewith auditing standards generally accepted in the United States of America.Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financial statements.An audit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall consolidatedfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of DakotaGrowers Pasta Company** **and subsidiary as of July 31, 2001 and 2000, and the results oftheir operations and their cash flows for the years ended July 31, 2001, 2000and 1999, in conformity with accounting principles generally accepted in theUnited States of America.

 

Asdiscussed in Note 1 to the financial statements, the Company changed its methodof valuing inventories in fiscal year 1999.

 

 

 

/s/ Eide Bailly LLP

 

Fargo, North Dakota

September 5, 2001

**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**JULY31, 2001 AND 2000**

**(In Thousands, Except Share Information)**

 
|                                                                                                 |   | **2001** |    | **2000** |   |
|------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
| **ASSETS**                                                                                           |   |     |    |     |   |
|                                                                                                 |   |     |    |     |   |
| CURRENT ASSETS                                                                                       |   |     |    |     |   |
| Cash and cash equivalents                                                                            |   | $        | 3       |     | $      | 1,725 |   |
|                                                                                                 |   |     |    |     |   |
| Short-term investments (restricted)                                                                  |   | 1,974    |    | 1,974    |   |
|                                                                                                 |   |     |    |     |   |
| Trade accounts receivable, less  allowance for cash discounts and doubtful accounts of $610 and $348 |   | 11,560   |    | 12,890   |   |
|                                                                                                 |   |     |    |     |   |
| Other receivables                                                                                    |   | 1,138    |    | 593      |   |
|                                                                                                 |   |     |    |     |   |
| Inventories                                                                                          |   | 21,050   |    | 21,781   |   |
|                                                                                                 |   |     |    |     |   |
| Prepaid expenses                                                                                     |   | 1,602    |    | 1,603    |   |
|                                                                                                 |   |     |    |     |   |
| Total current assets                                                                                 |   | 37,327   |    | 40,566   |   |
|                                                                                                 |   |     |    |     |   |
| PROPERTY AND EQUIPMENT                                                                               |   |     |    |     |   |
| In service                                                                                           |   | 114,984  |    | 110,021  |   |
| Construction in process                                                                              |   | 108      |    | 2,560    |   |
|                                                                                                 |   | 115,092  |    | 112,581  |   |
| Less accumulated depreciation                                                                        |   | (33,367  | )       | (27,009  | )      |
|                                                                                                 |   |     |    |     |   |
| Net property and equipment                                                                           |   | 81,725   |    | 85,572   |   |
|                                                                                                 |   |     |    |     |   |
| INVESTMENT IN COOPERATIVE BANKS                                                                      |   | 2,211    |    | 2,037    |   |
|                                                                                                 |   |     |    |     |   |
| OTHER ASSETS                                                                                         |   | 7,395    |    | 3,682    |   |
|                                                                                                 |   |     |    |     |   |
|                                                                                                 |   | $        | 128,658 |     | $      | 131,857 |   |
|                                                                                                      |        |          |         |          |        |  |  |  |  |

 
| **LIABILITIES AND  MEMBERS' INVESTMENT**                                                               |   |   |           |   |           |
|--------------------------------------------------------------------------------------------------------|--------|--------|----------------|--------|----------------|
|                                                                                                   |   |   |           |   |           |
| CURRENT LIABILITIES                                                                                    |   |   |           |   |           |
| Notes payable                                                                                          |   | $      | 8,100          |   | $              | 1,875 |   |
| Current portion of long-term debt                                                                      |   | 2,657  |           | 3,104  |           |
| Accounts payable                                                                                       |   | 4,400  |           | 4,104  |           |
| Excess outstanding checks over cash on  deposit                                                        |   | 1,072  |           | -      |           |
| Accrued grower payments                                                                                |   | 969    |           | 1,287  |           |
| Accrued liabilities                                                                                    |   | 5,709  |           | 5,107  |           |
|                                                                                                   |   |   |           |   |           |
| Total current liabilities                                                                              |   | 22,907 |           | 15,477 |           |
|                                                                                                   |   |   |           |   |           |
| COMMITMENTS AND CONTINGENCIES                                                                          |   | -      |           | -      |           |
| LONG-TERM DEBT, net of current portion                                                                 |   | 47,594 |           | 51,626 |           |
| DEFERRED INCOME TAXES                                                                                  |   | 3,777  |           | 4,095  |           |
|                                                                                                   |   |   |           |   |           |
| Total liabilities                                                                                      |   | 74,278 |           | 71,198 |           |
|                                                                                                   |   |   |           |   |           |
| REDEEMABLE PREFERRED STOCK                                                                             |   |   |           |   |           |
| Series A, 6% non-cumulative, $100 par  value, issued 600 and 733 shares in 2001 and 2000, respectively |   | 60     |      | 73     |      |
| Series B, 2% non-cumulative, $100 par  value, issued 525 shares in 2001 and 2000                       |   | 53     |      | 53     |      |
|                                                                                                   |   |   |           |   |           |
| Total preferred stock                                                                                  |   | 113    |           | 126    |           |
|                                                                                                   |   |   |           |   |           |
| MEMBERS' INVESTMENT                                                                                    |   |   |           |   |           |
| Convertible preferred stock                                                                            |   |   |           |   |           |
| Series C, 6% non-cumulative, $100 par  value, issued 924 shares in 2001 and 2000                       |   | 92     |      | 92     |      |
| Membership stock, $125 par value,  issued 1,156 and 1,158 shares in 2001 and 2000, respectively        |   | 144    |      | 145    |      |
| Equity stock, $2.50 par value, issued  11,253,121 in 2001 and 2000                                     |   | 28,133 |      | 28,133 |      |
| Additional paid-in capital                                                                             |   | 22,876 |           | 22,876 |           |
| Accumulated allocated earnings                                                                         |   | 4,596  |           | 1,931  |           |
| Accumulated unallocated earnings                                                                       |   | (1,574 | )              | 7,356  |           |
|                                                                                                   |   |   |           |   |           |
| Total members' investment                                                                              |   | 54,267 |           | 60,533 |           |
|                                                                                                   |   |   |           |   |           |
| Total liabilities and members'  investment                                                             |   | $      | 128,658        |   | $              | 131,857 |   |
|                                                                                                        |        |        |                |        |                |  |  |  |

See Notes toConsolidated Financial Statements

**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**YEARSENDED JULY 31, 2001, 2000, AND 1999**

**(In Thousands, Except Per Share Amounts)**

 
|                                                                                                                   |   | **2001** |                      | **2000**                  |                      | **1999**      |                      |
|------------------------------------------------------------------------------------------------------------------------|--------|----------|---------------------------|---------------------------|---------------------------|---------------|---------------------------|
| Net revenues (net of discounts and  allowances of $17,312, $20,899 and $20,534 for 2001, 2000 and 1999,  respectively) |   | $        |  135,921             |       | $                         |  136,862 |       | $ |  124,869 |       |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Cost of product sold                                                                                                   |   | 124,811  |                      | 116,890                   |                      | 106,062       |                      |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Gross proceeds                                                                                                         |   | 11,110   |                      | 19,972                    |                      | 18,807        |                      |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Marketing, general and administrative  expenses                                                                        |   | 9,631    |                      | 9,713                     |                      | 7,886         |                      |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Operating proceeds                                                                                                     |   | 1,479    |                      | 10,259                    |                      | 10,921        |                      |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Other income (expense)                                                                                                 |   |     |                      |                      |                      |          |                      |
| Interest and other income                                                                                              |   | 373      |                      | 645                       |                      | 400           |                      |
| Gain (loss) on sale of property and  equipment                                                                         |   | 201      |                 | (52                       | )                         | 2,539         |                 |
| Interest expense, net                                                                                                  |   | (4,148   | )                         | (4,522                    | )                         | (5,373        | )                         |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Income (loss) before income taxes                                                                                      |   | (2,095   | )                         | 6,330                     |                      | 8,487         |                      |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Income tax expense (benefit)                                                                                           |   | (311     | )                         | (1,298                    | )                         | 499           |                      |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Income (loss) before cumulative effect  of change in accounting principle                                              |   | (1,784   | )                         | 7,628                     |                 | 7,988         |                 |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Cumulative effect on prior years (to  July 31, 1998) of changing to a different inventory valuation method             |   | -        |       | -                         |       | (3,429        | )                         |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Net income (loss) from patronage and  non-patronage business                                                           |   | (1,784   | )                         | 7,628                     |                 | 4,559         |                 |
| Dividends on preferred stock                                                                                           |   | 15       |                      | 4                         |                      | 143           |                      |
|                                                                                                                   |   |     |                      |                      |                      |          |                      |
| Net earnings (loss) from patronage and  non-patronage business available for members                                   |   | $        |  (1,799              | )                         | $                         |  7,624   |                 | $ |  4,416 |      |

 
|                                                                                                |   |   |                     |   |                     |   |                     |
|-----------------------------------------------------------------------------------------------------|--------|--------|--------------------------|--------|--------------------------|--------|--------------------------|
| Average equity shares outstanding                                                                   |   | 11,253 |                     | 11,166 |                     | 8,603  |                     |
|                                                                                                |   |   |                     |   |                     |   |                     |
| Net earnings (loss) from patronage and  non-patronage business per average equity share outstanding |   |   |      |   |      |   |      |
| Basic, before cumulative effect of  accounting change                                               |   | $      | (0.16                    | )      | $                        | 0.68   |                | $ | 0.91 |      |
| Cumulative effect of accounting change                                                              |   | -      |                     | -      |                     | (0.40  | )                        |
|                                                                                                |   |   |                     |   |                     |   |                     |
| Basic                                                                                               |   | $      | (0.16                    | )      | $                        | 0.68   |                     | $ | 0.51 |   |
|                                                                                                |   |   |                     |   |                     |   |                     |
| Diluted, before cumulative effect of  accounting change                                             |   | $      | (0.16                    | )      | $                        | 0.68   |                | $ | 0.90 |      |
| Cumulative effect of accounting change                                                              |   | -      |                     | -      |                     | (0.39  | )                        |
|                                                                                                |   |   |                     |   |                     |   |                     |
| Diluted                                                                                             |   | $      | (0.16                    | )      | $                        | 0.68   |                     | $ | 0.51 |   |
|                                                                                                |   |   |                     |   |                     |   |                     |
| Pro forma amounts assuming the  inventory valuation method adopted in 1999 is applied retroactively |   |   |      |   |      |   |      |
| Net earnings (loss) from patronage and  non-patronage business available for members                |   | $      | (1,799                   | )      | $                        | 7,624  |                | $ | 7,845 |      |
|                                                                                                |   |   |                     |   |                     |   |                     |
| Net earnings (loss) from patronage and  non-patronage business per average equity share outstanding |   |   |      |   |      |   |      |
| Basic                                                                                               |   | $      | (0.16                    | )      | $                        | 0.68   |                     | $ | 0.91 |   |
|                                                                                                |   |   |                     |   |                     |   |                     |
| Diluted                                                                                             |   | $      | (0.16                    | )      |                     | $      | 0.68                     |   |   | $ | 0.90 |   |
|                                                                                                     |        |        |                          |        |                          |        |                          |  |  |  |  |  |

 

See Notes toConsolidated Financial Statements

**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS' INVESTMENTS**

**YEARSENDED JULY 31, 2001, 2000 AND 1999**

**(In Thousands, Except Share Information)**

 
|                                                                                         |   |                              |     |                  |   |              |   |                                   |         | **Allocated Accumulated  Earnings** |   | **Unallocated  Accumulated Earnings  (Deficit)** |   |          |    |
|----------------------------------------------------------------------------------------------|--------|-----------------------------------|----------|-----------------------|--------|-------------------|--------|----------------------------------------|--------------|-------------------------------------|--------|--------------------------------------------------|--------|---------------|---------|
|                                                                                         |   | **Convertible  Preferred  Stock** |     | **Membership  Stock** |   | **Equity  Stock** |   | **Additional  Paid-in********Capital** |         | **Qualified**                       |   | **Non-Qualified**                                |   | **Patronage** |    | **Non-member** |   | **Total** |   |
| BALANCE, JULY 31, 1998                                                                       |   | $                                 | 2,304    |                  | $      | 137               |   | $                                      | 18,390       |                                | $      | 4,101                                            |   | $             | -       |   | $ | 2,914 |   | $ | 9,917 |   | $ | (888 | ) | $ | 36,875 |   |
| Preferred dividends declared                                                                 |   | -                                 |     | -                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | (138          | )       | (5 | ) | (143 | ) |
| Net membership stock issued (51 shares)                                                      |   | -                                 |     | 7                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | -             |    | - |   | 7 |   |
| Equity stock issued (3,624,782 shares)                                                       |   | -                                 |     | -                     |   | 9,062             |   | 18,134                                 |         | -                                   |   | -                                                |   | -             |    | - |   | 27,196 |   |
| Expenses of stock offering                                                                   |   | -                                 |     | -                     |   | -                 |   | (137                                   | )            | -                                   |   | -                                                |   | -             |    | - |   | (137 | ) |
| Contributed capital                                                                          |   | -                                 |     | -                     |   | -                 |   | 42                                     |         | -                                   |   | -                                                |   | -             |    | - |   | 42 |   |
| Preferred Series D stock retired  (23,038 shares)                                            |   | (2,304                            | )        | -                     |   | -                 |   | (288                                   | )            | -                                   |   | -                                                |   | -             |    | - |   | (2,592 | ) |
| Equity stock options exercised (116,568  shares)                                             |   | -                                 |     | -                     |   | 291               |   | 222                                    |         | -                                   |   | -                                                |   | -             |    | - |   | 513 |   |
| Net income for the year ended July 31,  1999                                                 |   | -                                 |     | -                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | 4,393         |    | 166 |   | 4,559 |   |
| Patronage allocations                                                                        |   | -                                 |     | -                     |   | -                 |   | -                                      |         | 7,338                               |   | 1,982                                            |   | (9,320        | )       | - |   | - |   |
| Patronage paid                                                                               |   | -                                 |     | -                     |   | -                 |   | -                                      |         | (7,338                              | )      | -                                                |   | -             |    | - |   | (7,338 | ) |
|                                                                                         |   |                              |     |                  |   |              |   |                                   |         |                                |   |                                             |   |          |    |   |   |   |   |
| BALANCE, JULY 31, 1999                                                                       |   | $                                 | -        |                  | $      | 144               |   | $                                      | 27,743       |                                | $      | 22,074                                           |   | $             | -       |   | $ | 4,896 |   | $ | 4,852 |   | $ | (727 | ) | $ | 58,982 |   |
| Preferred dividends declared                                                                 |   | -                                 |     | -                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | (4            | )       | - |   | (4 | ) |
| Net membership stock issued (6 shares)                                                       |   | -                                 |     | 1                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | -             |    | - |   | 1 |   |
| Reclass to Series A redeemable  preferred stock                                              |   | -                                 |     | -                     |   | -                 |   | (22                                    | )            | -                                   |   | -                                                |   | -             |    | - |   | (22 | ) |
| Series C preferred stock issued (7,412  shares)                                              |   | 741                               |     | -                     |   | -                 |   | 565                                    |         | -                                   |   | -                                                |   | -             |    | - |   | 1,306 |   |
| Series C preferred stock (6,488 shares)  converted to equity stock (155,712 shares)          |   | (649                              | )        | -                     |   | 390               |   | 259                                    |         | -                                   |   | -                                                |   | -             |    | - |   | - |   |
| Net income for the year ended July 31,  2000                                                 |   | -                                 |     | -                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | 7,134         |    | 494 |   | 7,628 |   |
| Patronage allocations                                                                        |   | -                                 |     | -                     |   | -                 |   | -                                      |         | 3,929                               |   | 464                                              |   | (4,393        | )       | - |   | - |   |
| Cumulative effect of accounting change  allocated against non-qualified accumulated earnings |   | -                                 |     | -                     |   | -                 |   | -                                      |         | 3,429                               |   | (3,429                                           | )      | -             |    | - |   | - |   |
| Patronage paid                                                                               |   | -                                 |     | -                     |   | -                 |   | -                                      |         | (7,358                              | )      | -                                                |   | -             |    | - |   | (7,358 | ) |
|                                                                                         |   |                              |     |                  |   |              |   |                                   |         |                                |   |                                             |   |          |    |   |   |   |   |
| BALANCE, JULY 31, 2000                                                                       |   | $                                 | 92       |                  | $      | 145               |   | $                                      | 28,133       |                                | $      | 22,876                                           |   | $             | -       |   | $ | 1,931 |   | $ | 7,589 |   | $ | (233 | ) | $ | 60,533 |   |
| Preferred dividends declared                                                                 |   | -                                 |     | -                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | (15           | )       | - |   | (15 | ) |
| Net membership stock retired (2 shares)                                                      |   | -                                 |     | (1                    | )      | -                 |   | -                                      |         | -                                   |   | -                                                |   | -             |    | - |   | (1 | ) |
| Net loss for the year ended July 31,  2001                                                   |   | -                                 |     | -                     |   | -                 |   | -                                      |         | -                                   |   | -                                                |   | (1,542        | )       | (242 | ) | (1,784 | ) |
| Patronage allocations                                                                        |   | -                                 |     | -                     |   | -                 |   | -                                      |         | 4,466                               |   | 2,665                                            |   | (7,131        | )       | - |   | - |   |
| Patronage paid                                                                               |   | -                                 |     | -                     |   | -                 |   | -                                      |         | (4,466                              | )      | -                                                |   | -             |    | - |   | (4,466 | ) |
|                                                                                         |   |                              |     |                  |   |              |   |                                   |         |                                |   |                                             |   |          |    |   |   |   |   |
| BALANCE, JULY 31, 2001                                                                       |   | $                                 |  92 |                  | $      |  144         |   | $                                      |  28,133 |                                | $      |  22,876                                     |   | $             |  - |   | $ |  4,596 |   | $ |  (1,099 | ) | $ |  (475 | ) | $ |  54,267 |   |

 

See Notes toConsolidated Financial Statements

**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**YEARSENDED JULY 31, 2001, 2000 AND 1999**

**(In Thousands)**

 
|                                                                     |   | **2001** |           | **2000** |           | **1999** |         |
|--------------------------------------------------------------------------|--------|----------|----------------|----------|----------------|----------|--------------|
| OPERATING ACTIVITIES                                                     |   |     |           |     |           |     |         |
| Net income (loss)                                                        |   | $        | (1,784         | )        | $              | 7,628    |         | $ | 4,559 |   |
| Add (deduct) non-cash items                                              |   |     |           |     |           |     |         |
| Cumulative effect of changing to a  different inventory valuation method |   | -        |      | -        |      | 3,429    |    |
| Depreciation and amortization                                            |   | 8,859    |           | 7,853    |           | 8,642    |         |
| Non-cash portion of patronage dividends                                  |   | (204     | )              | 18       |           | 241      |         |
| Cooperative bank stock valuation  adjustment                             |   | -        |           | 36       |           | 68       |         |
| (Gain) loss on sale of property and  equipment                           |   | (201     | )              | 52       |      | (2,539   | )            |
| Deferred income taxes                                                    |   | (318     | )              | (891     | )              | 32       |         |
| Changes in assets and liabilities                                        |   |     |           |     |           |     |         |
| Trade receivables                                                        |   | 1,330    |           | 2,953    |           | (3,439   | )            |
| Other receivables                                                        |   | (545     | )              | 1,158    |           | (1,091   | )            |
| Inventories                                                              |   | 731      |           | (3,100   | )              | (175     | )            |
| Prepaid expenses                                                         |   | 40       |           | 88       |           | 941      |         |
| Other assets                                                             |   | (100     | )              | 111      |           | (25      | )            |
| Accounts payable                                                         |   | 296      |           | 244      |           | (1,888   | )            |
| Excess outstanding checks over cash on  deposit                          |   | 1,072    |      | -        |      | (2,336   | )            |
| Growers payables                                                         |   | (318     | )              | 168      |           | (235     | )            |
| Other accrued liabilities                                                |   | 602      |           | 544      |           | 1,669    |         |
|                                                                     |   |     |           |     |           |     |         |
| NET CASH FROM OPERATING ACTIVITIES                                       |   | 9,460    |           | 16,862   |           | 7,853    |         |
|                                                                     |   |     |           |     |           |     |         |
| INVESTING ACTIVITIES                                                     |   |     |           |     |           |     |         |
| Purchases of property and equipment                                      |   | (4,005   | )              | (5,278   | )              | (14,278  | )            |
| Proceeds from sale of property and  equipment                            |   | 1,050    |           | 121      |           | 1,833    |         |
| Receipts on note receivable                                              |   | -        |           | 1,884    |           | -        |         |
| Net purchase of short-term investments                                   |   | -        |           | (1,461   | )              | (513     | )            |
| Payments for long-term prepaid  marketing costs                          |   | (5,038   | )              | (1,463   | )              | (941     | )            |
| Payments for package design costs                                        |   | (440     | )              | (656     | )              | (280     | )            |
|                                                                     |   |     |           |     |           |     |         |
| NET CASH USED FOR INVESTING ACTIVITIES                                   |   | (8,433   | )              | (6,853   | )              | (14,179  | )            |
|                                                                          |        |          |                |          |                |          |              |  |  |  |

 

| FINANCING ACTIVITIES                                                         |   |   |   |           |   |   |           |
|------------------------------------------------------------------------------|--------|--------|--------|----------------|--------|--------|----------------|
| Net change in short-term notes payable                                       |   | 6,225  |   | 1,875          |   | (9,808 | )              |
| Issuance of long-term debt                                                   |   | -      |   | -              |   | 6,711  |           |
| Payments on long-term debt                                                   |   | (4,479 | )      | (7,580         | )      | (4,682 | )              |
| Preferred stock issued                                                       |   | -      |   | 58             |   | -      |           |
| Preferred stock retirements                                                  |   | (13    | )      | (7             | )      | (2,792 | )              |
| Dividends paid on preferred stock                                            |   | (15    | )      | (4             | )      | (143   | )              |
| Memberships issued (retired), net                                            |   | (1     | )      | 1              |   | 7      |           |
| Proceeds of stock offering                                                   |   | -      |   | -              |   | 27,196 |           |
| Expenses of stock offering                                                   |   | -      |   | -              |   | (137   | )              |
| Contributed capital                                                          |   | -      |   | -              |   | 42     |           |
| Options exercised                                                            |   | -      |   | 1,306          |   | 513    |           |
| Patronage distributions                                                      |   | (4,466 | )      | (7,358         | )      | (7,338 | )              |
|                                                                         |   |   |   |           |   |   |           |
| NET CASH FROM (USED FOR) FINANCING  ACTIVITIES                               |   | (2,749 | )      | (11,709        | )      | 9,569  |      |
|                                                                         |   |   |   |           |   |   |           |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                      |   | (1,722 | )      | (1,700         | )      | 3,243  |           |
|                                                                         |   |   |   |           |   |   |           |
| CASH AND CASH EQUIVALENTS, BEGINNING OF  YEAR                                |   | 1,725  |   | 3,425          |   | 182    |           |
|                                                                         |   |   |   |           |   |   |           |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                       |   | $      | 3      |      | $      | 1,725  |      | $ | 3,425 |    |
|                                                                         |   |   |   |           |   |   |           |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION                           |   |   |   |           |   |   |           |
| Cash payments for                                                            |   |   |   |           |   |   |           |   |   |   |
| Interest (net of amounts capitalized)                                        |   | $      | 4,375  |           | $      | 3,443  |           | $ | 5,297 |   |
| Income taxes (refunded)                                                      |   | $      | (21    | )              | $      | 548    |           | $ | 279 |   |
|                                                                         |   |   |   |           |   |   |           |
| SUPPLEMENTAL DISCLOSURES OF NONCASH  INVESTING AND FINANCING ACTIVITIES      |   |   |   |           |   |   |           |
| Issuance of short-term note receivable  in conjunction with sale of property |   |   |   |           |   | $      | 1,884          |   |

See Notes toConsolidated Financial Statements

**DAKOTAGROWERS PASTA COMPANY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2001, 2000 AND 1999**

** **

**NOTE 1 - SUMMARY OF SIGNIFICANTACCOUNTING POLICIES**

 

*Natureof Business*

 

DakotaGrowers Pasta Company ("the Company" or "the Cooperative")was formed on December 16, 1991 and commenced operation on January 1, 1994. TheCompany is organized as a farmers' cooperative for purposes of manufacturingfood from durum and other grain products. The Company operates millingfacilities in Carrington, North Dakota, and pasta manufacturing facilities inCarrington, North Dakota and New Hope, Minnesota.

 

*Principlesof Consolidation*

 

Theconsolidated financial statements include the accounts of the Company and PrimoPiatto, Inc. (Primo), its wholly owned subsidiary. All significantinter-company accounts and transactions have been eliminated in the preparationof the consolidated financial statements.

 

*Estimates*

 

Thepreparation of consolidated financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities at thedate of the consolidated financial statements and reported amounts of revenuesand expenses during the reporting period. Actual results could differ fromthose estimates.

 

*Reclassifications*

 

Reclassificationshave been made to the financial statements as of July 31, 2000 and for theyears ended July 31, 2000 and 1999 to facilitate comparability with thestatements as of and for the year ended July 31, 2001. Such reclassificationshave no effect on the net result of operations.

 

*Risks and Uncertainties*

 

TheCompany grants unsecured credit to certain customers who meet the Company’scredit requirements. Credit losses are provided for in the financialstatements. Trade accounts receivable are presented net of allowances for cashdiscounts and doubtful accounts which totaled $610,000 and $348,000 as of July31, 2001 and 2000, respectively. No customer represented greater than 10% ofrevenues for the years ended July 31, 2001, 2000 and 1999.

 

TheCompany’s durum wheat requirements are provided through the delivery of grainpursuant to a Growers Agreement between the Cooperative and its members. Thecontractual obligations imposed on each member under the Growers Agreement areintended to insure the availability of sufficient quantities of durum wheat foruse in the Company’s processing operations. The Company attempts to minimizethe effects of durum wheat cost fluctuations mainly through forward contractingand through agreements with certain customers that provide for priceadjustments based on raw material cost changes. Such efforts, while undertakento minimize the risks associated with fluctuating durum prices, may temporarilyprevent the Company from recognizing the benefits of declining durum prices.

Mostof the Company’s currently outstanding debt instruments have fixed interestrates to maturity. If the Company’s operations require additional debtissuance, any changes in interest rates may have an impact on future results.

 

TheCompany's cash balances are maintained in various bank deposit accounts. Thedeposit accounts may exceed federally insured limits at various timesthroughout the year.

 

*CommoditiesFutures Contracts*

 

Inconnection with durum acquisitions for milling and pasta productionrequirements, the Company entered into durum and wheat futures contracts infiscal year 1999 to reduce the effect of price fluctuations. In accordance withStatement of Financial Accounting Standards No. 80, "Accounting forFutures Contracts," these futures contracts met the hedge criteria andwere accounted for as hedges. Accordingly, gains and losses were deferred and recognizedin cost of sales as part of the product cost for the fiscal year ended July 31,1999.

 

Statement of Financial Accounting Standards (SFAS) No.133, “Accounting for Derivative Instruments and Hedging Activities” waseffective for the Company in fiscal 2001. The Company did not enter into anymaterial commodities futures contracts during fiscal years 2001 and 2000, andno material futures contracts were outstanding as of July 31, 2001 and 2000.

 

*RevenueRecognition*

 

Revenuesare recognized upon shipment of the Company’s product to its customers. Pricingterms, including promotions and rebates, are final at that time.

 

TheCompany provides allowances for annual promotional programs on a pro-rata basisthroughout the year. Revenues are presented net of discounts and allowances of$17,312,000, $20,899,000 and $20,534,000 for the years ended July 31, 2001,2000 and 1999, respectively.

 

*Cashand Cash Equivalents*

 

Cashand cash equivalents include cash on hand and in financial institutions, andinvestments with maturities of less than 90 days.

 

*Short-termInvestments (Restricted)*

 

Short-terminvestments (restricted) represent certificates of deposit that are pledged assecurity for loans made by a financial institution to officers of the Companyto exercise stock options.

 

*Inventories*

 

Inventoriesare stated at the lower of cost or market, determined on a first-in, first-out(FIFO) basis, using product specific standard costs.

Themajor components of inventories as of July 31, 2001 and 2000 are as follows (inthousands):

 
|                      |   | **2001** |   | **2000** |   |
|---------------------------|--------|----------|--------|----------|--------|
| Durum                     |   | $        | 2,010  |     | $      | 1,626 |   |
| Finished goods            |   | 15,340   |   | 16,452   |   |
| Packaging and ingredients |   | 3,700    |   | 3,703    |   |
|                      |   |     |   |     |   |
|                      |   | $        | 21,050 |     | $      | 21,781 |   |

 

*Changein Inventory Valuation Method*

 

In the thirdquarter of fiscal year 1999, the Company’s method of computing inventoryvaluations was changed from the net realizable value method used in prior years(a GAAP method of inventory valuation for cooperatives) to the lower of cost ormarket, determined on a FIFO basis, using product specific standard costs. Theimpact of this change on prior years (to July 31, 1998) of $3,429,000 isincluded as a charge against income for the year ended July 31, 1999.

 

In the three yearsprior to the change, the Company experienced significant increases in inventory,both overall quantities as well as in the number of product lines and number ofitems. Because of the incompatibility of the net realizable value methodologyof valuing inventory with manufacturing software systems and the high cost ofspecialized programming to automate the net realizable value calculations, theCompany had been maintaining manual net realizable value calculations andanalysis, resulting in higher than appropriate administrative costs. As part ofa cost analysis and reduction process, the Company determined that it wasprudent to eliminate these recurring costs. The Company also had experiencedfrequent and rapid market changes in inventory values using the net realizablevalue method, and its results of operations were impacted by such fluctuations.

 

The adoption ofthe product specific standard cost methodology will improve comparability ofthe Company’s operating results and its internal financial condition toindustry practice, and provide a better matching of revenues, cash flows andcosts.

 

The statements ofoperations for the years ended July 31, 2001, 2000 and 1999 reflect the resultsutilizing the new methodology, with the change on prior years (to July 31,1998) reflected as a charge against income for the year ended July 31, 1999. Ifthe change had been applied retroactively, the following pro forma amountswould have been reflected (in thousands, except per share amounts):

 
|                            |   | **2001** |    | **2000** |   | **1999** |   |
|---------------------------------|--------|----------|---------|----------|--------|----------|--------|
| Net revenues                    |   | $        | 135,921 |     | $      | 136,862  |   | $ | 124,869 |   |
| Cost of product sold            |   | 124,811  |    | 116,890  |   | 106,062  |   |
|                            |   |     |    |     |   |     |   |
| Gross proceeds                  |   | $        | 11,110  |     | $      | 19,972   |   | $ | 18,807 |   |
|                            |   |     |    |     |   |     |   |
| Net earnings (loss)             |   | $        | (1,799  | )        | $      | 7,624    |   | $ | 7,845 |   |
|                            |   |     |    |     |   |     |   |
| Basic earnings (loss) per share |   | $        | (0.16   | )        | $      | 0.68     |   | $ | 0.91 |   |

*Propertyand Equipment*

 

Propertyand equipment are stated at cost. Expenditures for renewals and improvementsthat significantly add to the productive capacity or extend the useful life ofan asset are capitalized. Expenditures for maintenance and repairs are chargedto expense as incurred. When depreciable properties are retired or sold, thecost and related accumulated depreciation are eliminated from the accounts andthe resultant gain or loss is reflected in income.

 

Interestis capitalized on construction projects of higher cost and longer duration.Interest capitalized totaled $112,000, $115,000 and $306,000 for the yearsended July 31, 2001, 2000 and 1999.

 

Theinitial acquisition of land by the Cooperative is stated at the estimated fairvalue of the land at acquisition. Subsequent land acquisitions are recorded atcost.

 

Depreciationis provided for over the estimated useful lives of the individual assets usingthe straight-line method. The estimated useful lives used in the computation ofdepreciation expense range from 3 to 40 years. Depreciation expense totaled$7,003,000, $6,702,000 and $7,068,000 for the years ended July 31, 2001, 2000and 1999, respectively.

 

EffectiveAugust 1, 1999, the Company changed the period over which it depreciatescertain mill and pasta production equipment from 15 years to 20 years. TheCompany feels the change better reflects the useful life of the relatedequipment and is comparable to industry practice for similar equipment. Thechange in accounting estimate increased net income for the year ended July 31,2000 by $917,000.

 

Detailsrelative to property and equipment are as follows (in thousands):

* *
|                              |   | **2001** |   | **2000** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
| Land and improvements             |   | $        | 2,865  |     | $      | 2,800 |   |
| Buildings                         |   | 21,998   |   | 22,048   |   |
| Equipment                         |   | 90,121   |   | 85,173   |   |
|                              |   |     |   |     |   |
| Property and equipment in service |   | 114,984  |   | 110,021  |   |
| Construction in process           |   | 108      |   | 2,560    |   |
| Less accumulated depreciation     |   | (33,367  | )      | (27,009  | )      |
|                              |   |     |   |     |   |
|                              |   | $        | 81,725 |     | $      | 85,572 |   |

* *

*Investments in Cooperative Banks*

 

Investmentsin cooperative banks are stated at cost, plus unredeemed patronage refundsreceived in the form of capital stock. Patronage refunds estimated to bereceived are shown as other receivables or other assets.

 

TheCompany was notified of reductions in its estimated patronage refunds fromCoBank, ACB (CoBank) as well as its investment in CoBank during each of fiscalyears 2000 and 1999. The Company has included a charge against income for theadjustment of its estimated patronage refunds totaling $23,000 and $284,000 forthe years ended July 31, 2000 and 1999, respectively. The Company also recordeda write down of the value of its investment in CoBank, which includes theformer St. Paul Bank for Cooperatives, totaling $36,000 and $68,000 for theyears ended July 31, 2000 and 1999, respectively.

*Other Assets*

 

TheCompany capitalizes the initial cost incurred in the development of packagingdesigns for new customers and products. These costs are amortized over three tofive year periods. Minor revisions are expensed as incurred. If a productdesign is discontinued or replaced prior to the end of the amortization period,the remaining unamortized balance is charged to expense. Package design costsare presented net of accumulated amortization totaling $2,263,000 and$1,636,000 as of July 31, 2001 and 2000, respectively.

 

Prepaidmarketing costs relate to payments made to certain customers covering contractterms and pricing for varying periods extending beyond one year. These costsare amortized in proportion to sales volumes over the term of the agreement.

 

Thedebt issuance costs relate to expenditures incurred in obtaining long-termdebt. These costs are being amortized over the term of the related debt basedon the effective interest rate.

 

Thebreakdown of other assets, net of accumulated amortization, is as follows (inthousands):

 
|                    |   | **2001** |   | **2000** |   |
|-------------------------|--------|----------|--------|----------|--------|
| Package design costs    |   | $        | 1,265  |     | $      | 1,453 |   |
| Prepaid marketing costs |   | 5,780    |   | 1,979    |   |
| Debt issuance costs     |   | 152      |   | 182      |   |
| Other                   |   | 198      |   | 68       |   |
|                    |   |     |   |     |   |
|                    |   | $        | 7,395  |     | $      | 3,682 |   |

 

*AccruedGrower Payments*

 

Accruedgrower payments represent amounts due to growers for amounts withheld fromdurum purchases pursuant to the Growers Agreement.

 

EffectiveAugust 1, 1998, the durum delivery system to the Company was modified toinclude deliveries made through Northern Grains Institute (NGI), a North Dakotanon-profit company. NGI administers the delivery arrangements and acts as eachmember’s grain handling and delivery agent for purposes of satisfying thatmember’s obligations under the Growers Agreement. NGI is responsible for arrangingthe logistics of durum deliveries and handling payment and accounting matters.NGI acts only as the agent for the member, and the member retains the economicrisk and legal liability for such deliveries under the Growers Agreement.

 

*AccruedLiabilities*

 

Accruedliabilities consisted of the following (in thousands):

 
|                       |   | **2001** |   | **2000** |
|----------------------------|--------|----------|--------|----------|
| Accrued  promotional costs |   | $        | 2,033  |     | $ | 2,012 |
| Accrued interest           |   | 1,159    |   | 1,167    |
| Accrued freight            |   | 800      |   | 683      |
| Other                      |   | 1,717    |   | 1,245    |
|                       |   |     |   |     |
|                       |   | $        | 5,709  |     | $ | 5,107 |

 

*Shippingand Handling Costs*

 

Shipping and handling costs are included in cost ofproduct sold upon shipment of theCompany’s product to its customers.

 

*Advertising*

 

Costsof advertising are immaterial and expensed as incurred.

*InterestExpense, Net*

 

TheCompany earns patronage refunds from its patronage-based debt issued throughcooperative banks based on its share of the net interest income earned by thebanks. These patronage refunds received or estimated to be received are appliedagainst interest expense. The Company recorded a net credit to interest expenseof $248,000 for the year ended July 31, 2001. The Company recorded a charge tointerest expense of $68,000 and $310,000 for the years ended July 31, 2000 and1999, respectively.

 

*IncomeTaxes*

 

TheCompany is a non-exempt cooperative for federal income tax purposes. Businessconducted with its members constitutes patronage business as defined by theInternal Revenue Code. The Company calculates income from patronage sourcesbased on income derived from bushels of durum delivered by members.Non-patronage income is derived from the resale of wheat flour containingspring wheat flour purchased from non-members, the resale of pasta purchasedfrom non-members, the resale of semolina purchased from non-members, rentalincome, certain amounts of interest income, and any income taxes assessed onnon-member business.

 

TheCompany is subject to income taxes on earnings from non-patronage sources andpatronage earnings not qualified to its members. Cooperative organizations have8 1⁄2 months after their fiscal year-end to make qualified patronage allocationsin the form of written notices of allocation or cash. The provision for incometaxes relates to the results of operations from non-patronage business, stateincome taxes and certain other permanent and temporary differences betweenfinancial and income tax reporting.

 

*Members'Investment*

 

Accumulatedunallocated earnings represents cumulative net income which has not beenallocated to members, while accumulated non-qualified allocated earningsrepresents earnings which have been allocated to members based on patronage butnot distributed or qualified for income tax purposes.

 

Cooperativeorganizations have 8 1⁄2 months after their fiscal year-end to make patronageallocations in the form of written notices of allocation or cash. As such,these allocations are normally reflected in the financial statements in theperiod in which such allocations are declared by the Board of Directors.

 

*StockOptions*

 

The Company has elected tofollow Accounting Principles Board Opinion (APB) No. 25, "Accounting forStock Issued to Employees" and related interpretations in accounting forits employee stock options and has adopted the pro forma disclosurerequirements under SFAS No. 123, “Accounting for Stock-Based Compensation.” TheCompany has not recognized any compensation expense under APB No. 25 upon thegranting or exercise of stock options because the exercise price is equal to orgreater than the market price of the underlying stock on the date of grant.

*Earnings per Share*

 

The Company haspresented earnings per share (EPS) for the years ended July 31, 2001, 2000 and1999 using the guidelines established in Statement of Financial AccountingStandards No. 128, “Earnings per Share”. Basic EPS is calculated by dividingnet earnings from patronage and non-patronage business available for members bythe weighted average number of equity shares effective and outstanding duringthe period. Diluted EPS includes the effect of all potentially dilutive securities,such as options and convertible preferred stock.

 

Dilutivesecurities, consisting of options and convertible preferred stock, included inthe calculation of diluted weighted average common shares were 22,000 in fiscalyear 2001, 59,000 in fiscal year 2000 and 239,000 in fiscal year 1999. Becausethe Company’s stock is only traded in a small secondary market through privatetransactions, the Company has assumed the proceeds from the exercise of stockoptions would reduce debt and, thus, interest expense.

 

**NOTE 2 - SHORT-TERM NOTES PAYABLE**

 

TheCooperative has a $19.0 million seasonal line of credit with CoBank, which issecured by property, equipment and current assets of the Company. The seasonalline of credit has a variable interest rate and matures on December 31, 2001.The balance outstanding as of July 31, 2001 and 2000 was $8,100,000 and$1,875,000, respectively.

 

Maximumborrowings, average borrowing levels and average interest rates for short-termdebt for the years ended July 31, 2001, 2000 and 1999 are as follows (inthousands, except interest rates):

 
|                     |   | **2001** |   | **2000** |   | **1999** |   |
|--------------------------|--------|----------|--------|----------|--------|----------|--------|
| Maximum borrowings       |   | $        | 15,490 |     | $      | 7,875    |   | $ | 10,108 |   |
|                     |   |     |   |     |   |     |   |
| Average borrowing levels |   | $        | 9,055  |     | $      | 2,257    |   | $ | 3,536 |   |
|                     |   |     |   |     |   |     |   |
| Average interest rates   |   | 6.97     | %      | 7.82     | %      | 7.30     | %      |

**NOTE 3 - LONG-TERM DEBT**

 

Informationregarding long-term debt at July 31, 2001 and 2000 is as follows (inthousands):

 
|                                                                                                                                                                                                           |   | **2001** |                                               | **2000**                  |                                             |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|----------------------------------------------------|---------------------------|--------------------------------------------------|
| Term loans due to cooperative banks due  in quarterly installments of $685,000 plus interest through December 31,  2004, interest at 8.68% to 8.76%, collateralized by property and equipment                  |   | $        | 6,000                                              |       | $                                                | 6,000 |      |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Term loans due to cooperative banks due  in quarterly installments of $625,000 plus interest through December 31,  2004, interest at 8.54% to 8.76%, collateralized by property and equipment                  |   | 7,375    |                                | 10,375                    |                              |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Non-patronage term loan from  cooperative banks due in annual principal installments of $1,200,000 through  September 30, 2008, interest at 5.71%, collateralized by property and equipment                    |   | 9,600    |                                | 10,800                    |                              |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Senior Secured Guaranteed Notes, Series  A, due in annual principal installments of $2,571,000 commencing August 1,  2002 through August 1, 2008, interest at 7.04%, collateralized by property  and equipment |   | 18,000   |                      | 18,000                    |                    |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Senior Secured Guaranteed Notes, Series  B, due in annual principal installments of $1,000,000 commencing August 1,  2002 through August 1, 2010, interest at 7.14%, collateralized by property  and equipment |   | 9,000    |                      | 9,000                     |                    |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Capital lease, three year term through  March 1, 2002, Imputed interest at 9.1%                                                                                                                                |   | 124      |                                               | 323                       |                                             |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Term loan from the City of Carrington,  due in monthly installments through 2003, interest rate of 4%                                                                                                          |   | 112      |                                               | 172                       |                                             |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Convertible debt from Northern Plains  Cooperative, due in annual installments through 2003, non-interest bearing                                                                                              |   | 20       |            | 30                        |          |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Convertible debt from Dakota Central  Telecommunications, due in annual installments through 2003, non-interest  bearing                                                                                       |   | 20       |            | 30                        |          |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Total long-term debt                                                                                                                                                                                           |   | 50,251   |                                               | 54,730                    |                                             |
| Less current portion                                                                                                                                                                                           |   | 2,657    |                                               | 3,104                     |                                             |
|                                                                                                                                                                                                           |   |     |                                               |                      |                                             |
| Net long-term debt                                                                                                                                                                                             |   | $        | 47,594                                             |                      | $                                                | 51,626 |   |

 

As of July 31, 2001, theCompany has prepaid $3,500,000, or approximately five quarterly installments onone term loan due to CoBank, and $1,250,000, or two quarterly installments, ofthe second term loan due to CoBank. These prepayments are reflected in theaggregate future maturities schedule present herein.

 

Aggregatefuture maturities required on long-term debt are as follows (in thousands):

 
| **Years ending July 31,**             |   | **Long-term Debt** |   | **Capital Lease** |   | **Total** |   |
|---------------------------------------|--------|--------------------|--------|-------------------|--------|-----------|--------|
| 2002                                  |   | $                  | 2,533  |              | $      | 128       |   | $ | 2,661 |   |
| 2003                                  |   | 9,320              |   | -                 |   | 9,320     |   |
| 2004                                  |   | 10,011             |   | -                 |   | 10,011    |   |
| 2005                                  |   | 7,176              |   | -                 |   | 7,176     |   |
| 2006                                  |   | 4,771              |   | -                 |   | 4,771     |   |
| Thereafter                            |   | 16,316             |   | -                 |   | 16,316    |   |
|                                  |   | 50,127             |   | 128               |   | 50,255    |   |
| Less imputed interest                 |   | -                  |   | 4                 |   | 4         |   |
|                                  |   |               |   |              |   |      |   |
| Present value of net minimum payments |   | 50,127             |   | 124               |   | 50,251    |   |
| Less current portion                  |   | 2,533              |   | 124               |   | 2,657     |   |
|                                  |   |               |   |              |   |      |   |
| Long-term obligations                 |   | $                  | 47,594 |              | $      | -         |   | $ | 47,594 |   |

 

The Company has a$9,600,000 letter of credit commitment with CoBank, securing the non-patronageloan from CoBank. The letter of credit commitment is subject to a commitmentfee of 1.0% on an annualized basis and expires December 31, 2008. Advances onthe letter of credit commitment are payable on demand.

 

The Company’s loanagreements with its lenders contain certain covenants related to, among othermatters, the maintenance of certain working capital, leverage, and debt serviceratios and a minimum net worth requirement. The Company entered into a Waiverand Second Amendment to the Note Purchase Agreement and Notes effective June 1,2001, whereby the events of default existing under Section 10.4(b) of the NotePurchase Agreement (as amended by the Waiver and First Amendment dated November28, 2000) relating to the consolidated funded debt to consolidate funded cashflow ratio were waived. The Waiver and Second Amendment requires that the ratioof consolidated funded debt to consolidated cash flow not exceed 4.25 to 1.00for the period from May 1, 2001 to and including July 31, 2001, 3.75 to 1.00for the period from August 1, 2001 to and including October 31, 2001, 3.25 to1.00 for the period from November 1, 2001 to and including January 31, 2002 and3.00 to 1.00 at all times thereafter, in each case determined as of the end ofeach fiscal quarter for the immediately preceding four fiscal quarters,treating such period of four fiscal quarters as a single accounting period. TheNotes were amended such that the rate of interest on the unpaid balance wasincreased by one percent at any time that either (a) the ratio of the Company’sconsolidated funded debt to consolidated cash flow is greater than 3.00 to 1.00as of the end of each fiscal quarter for the immediately preceding four fiscalquarters or (b) the Securities Valuation Office of the National Association ofInsurance Commissioners has not assigned a designation category of “1” or “2”to the Notes. The one percent interest rate increase became effective August 1,2001, amending the interest rate on the Series A Notes to 8.04% and theinterest rate on the Series B Notes to 8.14% pursuant to the above.

 

The Company hasconvertible debt related to two non-interest bearing notes with annualinstallments of $10,000 each. Per the loan agreements, from March 1, 1995through February 1, 2003, the Company shall have the privilege of convertingthe unpaid balance of indebtedness into series B preferred stock. The holdersof the debt do not have the option to convert this debt.

The Company incurred$4,508,000, $4,569,000 and $5,369,000 of interest on long and short-term debtand other obligations in fiscal years 2001, 2000 and 1999, respectively, ofwhich $112,000, $115,000 and $306,000 was capitalized in the respectiveperiods. Patronage income from cooperative banks of $248,000 was netted againstinterest expense on the statement of operations for the year ended July 31,2001. A charge from cooperative banks of $68,000 and $310,000 was included ininterest expense in fiscal years 2000 and 1999, respectively.

 

**NOTE 4 - MEMBERS' INVESTMENT**

 

The Company had 1,156 and1,158 shares of membership stock issued and outstanding as of July 31, 2001 and2000, respectively.  11,253,121 sharesof equity stock were issued and outstanding as of July 31, 2001 and 2000.

 

Underthe terms of the Cooperative’s bylaws, the Cooperative’s net income, determinedin accordance with generally accepted accounting principles consistentlyapplied, shall be distributed annually based on the volume of patronagebusiness (bushels of durum delivered, which approximates one bushel of durumper equity share). The distribution can be in the form of cash or credits toeach member-producer’s patronage credit account which has been established onthe books of the Cooperative as determined by the Board of Directors. Equityrequirements of the Cooperative may be retained as unallocated earnings, orretained from amounts due to patrons and credited to members' investments inthe form of unit retains or undistributed allocated patronage. In the event ofa net loss in any fiscal year, the Company may first offset the net lossagainst any earned unallocated surplus. If the net loss exceeds the earnedunallocated surplus, the Company can elect to recover the net loss from prioror subsequent years net margins or savings. In no event can the Company makeany assessment against the members. The Company can only allocate the currentyear net loss against prior years net operating margins or retains if theCompany is in liquidation or a majority of the membership approves at a specialmeeting called before the end of the Company’s fiscal year.

 

Forpresentation purposes only, the Company has calculated net income (loss) pershare by dividing earnings (loss) from patronage and non-patronage businessavailable for members (net income (loss) less preferred dividends) by theweighted average number of equity shares outstanding during the period.

 

Thenet loss allocable to patronage business totaled $1,542,000 for the year endedJuly 31, 2001. Net income allocable to patronage business totaled $7,134,000for the year ended July 31, 2000. For the year ended July 31, 1999, net incomeallocable to patronage business totaled $7,822,000 before the cumulative effectof a change in accounting method and $4,393,000 after the effect of the change.

 

TheBoard of Directors authorized a qualified patronage allocation of $4,466,000($.4284 per bushel acquired or $.40 per average outstanding equity share) forfiscal year 2000 at its November 2000 meeting. The total qualified patronageallocation was paid in cash on November 30, 2000.  The Board also voted to allocate, on a non-qualified basis, theremainder of the fiscal 2000 patronage earnings totaling $2,665,000. In takingthese actions, the Board of Directors rescinded the patronage allocationsauthorized at the October 2000 meeting as reported in the Company’s Form 10-Kfor the year ended July 31, 2000.

TheBoard of Directors authorized a qualified patronage allocation of $5,787,000($.70 per bushel) and declared a dividend on equity stock of $.10 per share inOctober 1999. In addition, the Board voted to allocate the $3,429,000cumulative effect of the change in accounting principle proportionately againstprior non-qualified, allocated accumulated earnings. The qualified patronageallocation and dividend authorized in October 1999 were rescinded by the Boardat the January 2000 meeting in response to the reclassification of $2,000,000of income from nonpatronage to patronage for the year ended July 31, 1999described in Note 7. The Board then voted to qualify and allocate $7,358,000($.89 per bushel acquired or $.86 per average outstanding equity share) of therevised core patronage income for fiscal year 1999. The total qualifiedpatronage allocation was paid in cash, of which a portion was paid in November1999 and the remainder in January 2000. The Board also voted to allocate, on anon-qualified basis, the remainder of the fiscal 1999 patronage earnings beforecumulative effect of the change in accounting principle, which totaled$464,000.

 

Aqualified patronage allocation of $7,338,000 ($1.00 per bushel) and anon-qualified patronage allocation of $1,982,000 ($.27 per bushel) wereauthorized by the Board of Directors in October 1998. All of the qualifiedpatronage allocation was distributed in cash to the Cooperative's members inNovember 1998.

 

**NOTE 5 - PREFERRED STOCK**

 

TheCompany is authorized to issue 50,000 shares of preferred stock with a parvalue of $100 per share. Preferred stock may be held by persons or entitiesthat are not members of the Cooperative.

 

TheCompany issued 800 shares of series A preferred stock in fiscal 2000, of which200 had been redeemed as of July 31, 2001. Each share of preferred series Astock entitles its holder to receive a non-cumulative 6% annual dividend. Thepreferred series A stock is scheduled to be redeemed ratably on a quarterlybasis through December 2005.

 

Eachshare of series B preferred stock entitles its holder to receive an annual cashdividend at the rate of $2.00 per share, when and as declared by the Board ofDirectors. Dividends on the series B preferred stock shall not accumulate ifnot declared by the board.

 

The525 shares of outstanding preferred series B stock may be redeemed, in whole orin part, at the option of the Company at any time at the redemption price of$100 per share, plus any declared but unpaid dividends. The stockholder mayrequire the Company to redeem all or a said portion of the shares for $100 pershare, plus any declared but unpaid dividends.

 

Each share of preferred series C stock shall receivepayment of non-cumulative dividends at the rate of 6% per annum, calculated onthe par value of the preferred stock. Each share of series C preferred stock isconvertible into 24 shares of the Company’s equity stock. The conversion ratioshall be proportionately adjusted at any time the outstanding shares of equitystock are increased or decreased without payment by or to the Company or theCompany’s members. The Company had 924 shares of preferred series C stockissued and outstanding as of July 31, 2001 and 2000.

 

**NOTE 6 - EMPLOYEE BENEFIT PLANS**

 

DakotaGrowers Pasta Company and Primo Piatto, Inc. have a 401(k) plan that coversemployees who have met age and service requirements. The plan covers employeeswho have reached 21 years of age and completed six months of service as definedin the plan document. The Company matches 100% on the first 2% of theemployees’ elected deferral, 50% on the next 1%, and 25% on the next 4%.Employer contributions to the plan totaled $342,000, $291,000 and $216,000 forthe years ended July 31, 2001, 2000 and 1999, respectively.

Primo Piatto, Inc. isalso required to contribute to a multi-employer pension plan covering certainhourly employees subject to a collective bargaining agreement. Such employeesmay also participate in the 401(k) plan but are excluded from amountscontributed by Primo. Contributions for the years ended July 31, 2001, 2000 and1999 totaled $99,000, $74,000 and $83,000, respectively.

 

**NOTE 7 - INCOME TAXES**

 

TheCompany is a non-exempt cooperative as defined by Section 1381(a)(2) of theInternal Revenue Code. Accordingly, net margins from business done with memberpatrons, which are allocated and paid as prescribed in Section 1382 of the Code(hereafter referred to as "qualified"), will be taxable to themembers and not to the Cooperative. Net margins and member allocations aredetermined on the basis of accounting used for financial reporting purposes. Tothe extent that net margins are not qualified as stated above or arise frombusiness done with non-members, the Cooperative shall have taxable incomesubject to corporate income tax rates.

 

Certaintemporary differences exist between financial statement and income taxreporting that also create a difference in the amount of patronage incomedetermined on either basis. Some of these differences are likely to beallocated to the members through patronage allocations; therefore, no deferredtaxes are provided for the temporary differences likely to be allocated tomembers.

 

Significant components ofthe Company's deferred tax assets and liabilities as of July 31, 2001 and 2000related to temporary differences are as follows (in thousands):

 
|                                          |   | **2001** |   | **2000** |   |
|-----------------------------------------------|--------|----------|--------|----------|--------|
| Deferred tax assets                           |   |     |   |     |   |
| AMT credit carryforward                       |   | $        | 20     |     | $      | 20 |   |
| Nonpatronage net operating loss  carryforward |   | 266      |   | 169      |   |
|                                          |   | 286      |   | 189      |   |
| Less valuation allowance                      |   | (286     | )      | (189     | )      |
|                                          |   |     |   |     |   |
| Total deferred tax assets                     |   | -        |   | -        |   |
|                                          |   |     |   |     |   |
| Deferred tax liabilities                      |   |     |   |     |   |
| Property and equipment                        |   | 3,777    |   | 4,095    |   |
| Deferred gain on installment sale             |   | -        |   | -        |   |
|                                          |   |     |   |     |   |
| Total deferred tax liabilities                |   | 3,777    |   | 4,095    |   |
|                                          |   |     |   |     |   |
| Net deferred tax liabilities                  |   | $        | (3,777 | )        | $      | (4,095 | ) |

 

Classified in theaccompanying balance sheets as follows:

 
|                   |   | **2001** |   | **2000** |   |
|------------------------|--------|----------|--------|----------|--------|
| Noncurrent liabilities |   | $        | (3,777 | )        | $      | (4,095 | ) |
|                        |        |          |        |          |        |  |  |

 

TheCompany has a nonpatronage net operating loss carryforward as of July 31, 2001totaling $666,000, of which $424,000 will expire in fiscal year 2018 and$242,000 will expire in fiscal year 2021. The AMT credit carryforward may becarried forward indefinitely.

Incometax expense (benefit) consists of the following (in thousands):

 
|                                 |   | **2001** |   | **2000** |   | **1999** |   |
|--------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current income tax expense (benefit) |   | $        | 7      |     | $      | (407     | )      | $ | 467 |   |
| Deferred income taxes                |   | (318     | )      | (891     | )      | 32       |   |
|                                 |   |     |   |     |   |     |   |
| Income tax expense (benefit)         |   | $        | (311   | )        | $      | (1,298   | )      | $ | 499 |   |

 

 The current income tax benefit for the yearended July 31, 2000 relates primarily to an overaccrual of income taxes for theyear ended July 31, 1999. $2,000,000 of income relating to the year ended July31, 1999 was reclassified from nonpatronage to patronage based on cooperativeincome tax developments taking place in the second quarter of fiscal year 2000,subsequent to the publishing of the July 31, 1999 financial statements. Thedeferred income tax benefit relates primarily to reductions in deferred taxliabilities associated with differences between the book and tax basis ofproperty and equipment.

 

**NOTE 8 - FAIR VALUE OF FINANCIALINSTRUMENTS**

 

Thefair value of a financial instrument is generally defined as the amount atwhich the instrument could be exchanged in a current transaction betweenwilling parties, other than in a forced liquidation sale. Quoted market pricesare generally not available for the Company's financial instruments.Accordingly, fair values are based on judgments regarding anticipated cashflows, future expected loss experience, current economic conditions, riskcharacteristics of various financial instruments and other factors. Theseestimates involve uncertainties and matters of judgment, and therefore cannotbe determined with precision. Changes in assumptions could significantly affectthe estimates.

 

The carrying amount ofcash and cash equivalents, receivables, payables, short-term debt and othercurrent liabilities approximates fair value because of the short maturityand/or frequent repricing of those instruments.

 

TheCompany believes it is not practical to estimate the fair value of thesecurities of non-subsidiary cooperatives without incurring excessive costsbecause there is no established market for these securities and it isinappropriate to estimate future cash flows, which are largely dependent onfuture patronage earnings of the non-subsidiary cooperatives.

 

Basedupon current borrowing rates with similar maturities, the fair value of thelong-term debt and capital leases approximates the carrying value as of July31, 2001 and 2000.

**NOTE 9 - OPERATING LEASES**

 

TheCompany leases various items of equipment, primarily rail cars, forklifts andcomputers.

 

Futureobligations for the above leases for the fiscal years ended July 31 are asfollows (in thousands):

 
| 2002 |   | $   | 531    |   |
|------|--------|-----|--------|--------|
| 2003 |   | 189 |   |
| 2004 |   | 114 |   |
| 2005 |   | 59  |   |
| 2006 |   | 12  |   |
|      |   | $   | 905    |   |

 

Leaseexpense totaled $988,000, $907,000 and $849,000 for the years ended July 31,2001, 2000 and 1999, respectively.

 

**NOTE 10 - COMMITMENTS ANDCONTINGENCIES**

 

TheCompany forward contracts for a certain portion of its future durum wheatrequirements. At July 31, 2001, the Company had outstanding commitments forgrain purchases totaling $5,661,000.

 

Pursuantto a warehouse agreement with Sky Logistics & Distribution, Inc. (Sky), theCompany is obligated to minimum monthly storage and handling volumes totalingapproximately $1.3 million for fiscal years 2002, 2003, and 2004. Thisagreement expires October 31, 2004. The Company has also transferred theobligation for a certain building lease to Sky. If Sky were unable to performunder the existing lease, the Company would be obligated to make payments underthis lease over the remaining term. Current monthly payments under this leasetotal approximately $67,000, and the lease expires April 30, 2004.

 

TheCooperative is subject to various lawsuits and claims which arise in theordinary course of its business. While the results of such litigation andclaims cannot be predicted with certainty, management believes the dispositionof all such proceedings, individually or in aggregate, should not have amaterial adverse effect on the Company's financial position, results ofoperations or cash flows.

**NOTE 11 - STOCK OPTION PLANS**

 

OnJanuary 31, 1997 the Company's Compensation Committee of the Board of Directors(the "Compensation Committee") adopted the Dakota Growers IncentiveStock Option Plan (the "Plan"). The purpose of the Plan is to providebenefits to participants in the form of additional compensation for serviceswhich have been or will be rendered as an inducement for continuing asemployees of the Company. The Plan was ratified by membership at its annualmeeting on January 10, 1998.

 

ThePlan is administered by the Compensation Committee. The Compensation Committeeor the Board of Directors have the power to determine the key managementemployees of the Company to receive options and the number of shares to beoptioned to each of the employees.

 

Optionsgranted under the Plan are for the purchase of preferred stock at fair marketvalue, convertible into equity stock at the option of the employee, under theapplicable conversion ratio. The maximum number of preferred shares, which maybe issued pursuant to options granted under the Plan, is fifteen thousand(15,000).

 

Theconversion ratio with respect to each of the options is 24 shares of equitystock for each share of preferred stock. The conversion ratio shall beproportionately adjusted if the Company increases the outstanding shares ofequity stock without the payment of consideration by the members for suchadditional shares (e.g. stock split, stock dividend or other action).

 

Optionsgranted under this Plan must be exercised within ten years from the date suchoptions are granted. Options are exercisable only by the employee during theemployee’s lifetime. In the event of the employee’s termination with theCompany, all exercisable options may be exercised within 90 days of thetermination date. If not exercised, such options lapse. The employee must sellor dispose of the preferred stock, or equity stock upon conversion, within 15months from the date of employment termination.

 

If the preferred stock ischanged into another kind of capital stock or debt as a result of any capitalreorganization, reclassification or any merger or consolidation with anotherentity in which the Company is not the surviving entity, the option entitlesthe employee to acquire, upon exercise, the kind and number of shares of stockor other securities or property to which the employee would have been entitledif he had held the preferred stock issuable upon the exercise of this optionimmediately prior to such capital reorganization, reclassification, merger orconsolidation.

Thefollowing table sets out information on options outstanding and exercisable:

 
|                         |   | **Number of Shares** |   | **Option Price per Share** |   | **Weighted********Average********Exercise Price** |   | **Exercisable** |   |
|------------------------------|--------|----------------------|--------|----------------------------|--------|---------------------------------------------------|--------|-----------------|--------|
| Outstanding at July 31, 1998 |   | 5,728                |   | $  100 - $150              |   | $                                                 | 108.84 |            | 3,809  |   |
| Exercised                    |   | (4,857               | )      | $  100 - $150              |   | $                                                 | 105.71 |            |   |   |
| Granted                      | 2,174  |                 | $ 150  |                       | $      | 150.00                                            |   |            |   |
| Canceled/Expired             |   | -                    |   |                       |   |                                              |   |            |   |
|                         |   |                 |   |                       |   |                                              |   |            |   |
| Outstanding at July 31, 1999 |   | 3,045                |   | $  100 - $150              |   | $                                                 | 108.84 |            | 958    |   |
| Exercised                    |   | (7,412               | )      | $  150 - $180              |   | $                                                 | 176.12 |            |   |   |
| Granted                      |   | 8,142                |   | $ 180                      |   | $                                                 | 180.00 |            |   |   |
| Canceled/Expired             |   | (3,775               | )      | $  100 - $180              |   | $                                                 | 157.95 |            |   |   |
|                         |   |                 |   |                       |   |                                              |   |            |   |
| Outstanding at July 31, 2000 |   | -                    |   |                       |   |                                              |   |            |   |

 

Therewas no stock option activity in fiscal year 2001, and no options wereoutstanding as of July 31, 2001 and 2000.

 

TheCompany applies APB No. 25 in accounting for employee stock options.Accordingly, no compensation expense was recorded during the years ended July31, 2000 and 1999 related to the issuance or exercise of stock options. The proforma application of Statement of Financial Accounting Standard (SFAS) No. 123"Accounting for Stock-Based Compensation" would not have had amaterial impact on net income and earnings per share in fiscal years 2000 or1999.

**ITEM 9.  DISAGREEMENTSON ACCOUNTING AND FINANCIAL DISCLOSURE.**

 

        None.

 

 

**PARTIII.**

 

**ITEM 10.  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Board of Directors**

 

        The Board of Directors consists of ninemember-directors, each of whom represents one of the nine geographic districts.Members residing in the district represented elect each Director. Every threeyears, the Bylaws require that the incumbent Board of Directors appoint aredistricting committee to review the boundaries of the districts. Thecommittee will recommend any changes in the district boundaries necessary orappropriate to maintain equitable representation of not more than afifteen-percent variance of the number of members in each district. If theBoard of Directors approves the recommendations of the committee, therecommendation will be submitted to the members for approval, rejection ormodification. The next redistricting review is scheduled to occur in calendaryear 2003.

 

        The table below sets forth certaininformation concerning the current directors of the Company. The directors havebeen elected to serve three-year terms expiring at the annual meeting in thecalendar years indicated in the table below.

 
| **Name and Address**                 |   | **Age** |   | **District**   |   | **Term Expires** |
|--------------------------------------|--------|---------|--------|----------------|--------|------------------|
| John  S. Dalrymple, III (1)(2)       |   | 53      |   | Cass-Barnes    |   | 2003             |
| PO Box 220                           |   |    |   | Number 4       |   |             |
| Casselton, ND  58102            |   |    |   |           |   |             |
| Allyn  K. Hart                       |   | 62      |   | Northeast      |   | 2002             |
| RR 1, Box 61                         |   |    |   | Number 6       |   |             |
| Wales, North Dakota  58281      |   |    |   |           |   |             |
| Roger  A. Kenner (3)                 |   | 52      |   | Lake Region    |   | 2004             |
| RR 2, Box 53                         |   |    |   | Number 8       |   |             |
| Leeds, North Dakota  58346      |   |    |   |           |   |             |
| James  F. Link                       |   | 74      |   | Southeast      |   | 2003             |
| 1304 4th Street North                |   |    |   | Number 3       |   |             |
| Wahpeton, North Dakota  58075   |   |    |   |           |   |             |
| Eugene  J. Nicholas (1)(2)           |   | 56      |   | North Central  |   | 2004             |
| 214 14th Street                      |   |    |   | Number 7       |   |             |
| Cando, North Dakota  58324      |   |    |   |           |   |             |
| John  D. Rice, Jr. (3)               |   | 47      |   | Durum Triangle |   | 2003             |
| 3556 52nd Ave NE                     |   |    |   | Number 9       |   |             |
| Maddock, North Dakota  58348    |   |    |   |           |   |             |
| Jeffery  O. Topp                     |   | 42      |   | South Central  |   | 2004             |
| RR 1, Box 23                         |   |    |   | Number 2       |   |             |
| Grace City, North Dakota  58445 |   |    |   |           |   |             |
| Curtis  R. Trulson (1)(2)            |   | 49      |   | Western        |   | 2002             |
| RR 1, Box 62                         |   |    |   | Number 1       |   |             |
| Ross, North Dakota  58776       |   |    |   |           |   |             |
| Michael  E. Warner (1)(2)            |   | 51      |   | East Central   |   | 2002             |
| RR 2, Box 119                        |   |    |   | Number 5       |   |             |
| Hillsboro, North Dakota  58045  |   |    |   |           |   |             |

----

(1)Member of Compensation Committee.

(2)Member of Audit Committee.

(3)Mr. Kenner and Mr. Rice are first cousins.

        **John S. Dalrymple III.**  Mr. Dalrymple has been chairman of the boardof directors of the Company since 1991. He became Lieutenant Governor of NorthDakota in 2000. He had been a state representative since 1984 and served asChairman of the House Appropriations Committee and of the Budget Section of theNorth Dakota House of Representatives. Mr. Dalrymple previously served on theboard of directors of Spring Wheat Bakers and the U.S. Durum GrowersAssociation. He has been a farmer in the Casselton area since 1971. He receiveda Bachelor of Arts in American Studies from Yale University.

 

        **Allyn K. Hart.**  Mr. Hart has been a director of the Company since 1991. He hasbeen a farmer in the Cavalier County area since 1961. He is a member of theboard of directors of Cavalier County Job Development Authority. Mr. Hartreceived a Bachelor of Science from North Dakota State University.

 

        **Roger A. Kenner.**  Mr. Kenner has been a director of the Company since 1991. He isthe chairman of the American Simmental Association and a past president of theNorth Dakota Simmental Association. Mr. Kenner is currently chairman of GoldenPlains Frozen Foods LLC. He is active in many economic development projects andhas served on various other boards and committees. He has been a farmer andcertified seed producer in the Leeds area since 1964. Mr. Kenner received aBachelor of Science in Agricultural Economics from North Dakota StateUniversity in 1971.

 

        **James F. Link.**  Mr. Link has been a director of the Company since 1991. Mr. Linkhas served on the boards of directors of Farm Credit and Minn-Dak FarmersCooperative. Mr. Link served on the Pro-Gold Corn Plan Development Committee.He has been a farmer in the Wahpeton area since 1947.

 

        **Eugene J. Nicholas.**  Mr. Nicholas has been a director of theCompany since 1991. Mr. Nicholas has been a state representative since 1974. Heserves as chairman of the North Dakota House of Representatives Agriculture Committee.Mr. Nicholas also serves on the boards of directors of Towner County Bank,Cando, and the Durum Triangle Economic Development Committee. Mr. Nicholaspreviously served on the board of directors of the U.S. Durum GrowersAssociation. Mr. Nicholas received a Bachelor of Science in Business Economicsfrom North Dakota State University.

 

        **John D. Rice, Jr.**  Mr. Rice is the vice-chairman of the board of directors of theCompany and has been a director of the Company since 1991. He also served onthe boards of directors of National Pasta Association and U.S. Durum GrowersAssociation. Mr. Rice also serves as a trustee for Maddock Zion LutheranChurch. He has been a farmer in the Maddock area since 1968. Mr. Rice receivedan Associate of Science in Agricultural Economics from North Dakota StateUniversity.

 

        **Jeffrey O. Topp.** Mr. Topp has been a director of the Company since 1991. He ispresident of the Eddy County Agriculture Improvement Association. Mr. Topp alsoserves on the board of Bethel Chapel. He is a partner of T-T Ranch, and hasbeen a farmer in the Grace City area since 1978.

 

        **Curtis R. Trulson.** Mr. Trulson has been secretary/treasurer ofthe Board of Directors and a director of the Company since 1991. He previouslyserved on the boards of directors of the North Dakota Grain Growers Associationand the National Association of Wheat Growers. He has been a farmer inMountrail County, North Dakota, since 1975. Mr. Trulson received a Bachelor ofScience in Business Administration from the University of North Dakota.

 

        **Michael E. Warner.**  Mr. Warner has been a director of theCompany since 1992. Mr. Warner has been a farmer since 1967 and is currentlyowner of Mike Warner Farm near Hillsboro, North Dakota. Mr. Warner is chairmanof the board of directors of Spring Wheat Bakers. He also serves on the boardof directors of Warner Equipment Co., and as a trustee of Meritcare HealthSystems of Fargo, North Dakota. Mr. Warner served on the board of directors ofAmerican Crystal Sugar from 1989 through 1996. Mr. Warner received a Bachelorof Science in Pharmacy from North Dakota State University.

**Directors Compensation**

 

        The Board of Directors meets monthly.The Company provides its directors with minimal compensation, consisting of (i)a per diem payment of $200 (except for the Chairman who receives $250 per day)for any day on which a director undertakes activities on the Company's behalf,including board meetings and other Company functions, (ii) a monthly fee of$450, and (iii) reimbursement for out-of-pocket expenses incurred on behalf ofthe Company.

 

**Executive Officers**

 

        The table below lists the principalofficers of the Company. Officers are elected annually by the Board ofDirectors.

 
| **Name**           |   | **Age** |   | **Position**                                        |
|--------------------|--------|---------|--------|-----------------------------------------------------|
| Timothy  J. Dodd   |   | 46      |   | President  and General Manager                      |
| Thomas  P. Friezen |   | 42      |   | Chief  Financial Officer                            |
| Susan  M. Clemens  |   | 40      |   | Vice  President, Human Resources and Administration |
| James  D. Cochran  |   | 34      |   | Vice  President, Supply Chain                       |
| Radwan  Ibrahim    |   | 57      |   | Vice  President, Quality Assurance                  |
| Eldon  Buschbom    |   | 53      |   | Vice  President, Operations (Minnesota)             |
| David  E. Tressler |   | 47      |   | Vice  President, Operations (North Dakota)          |
| Edward  O. Irion   |   | 30      |   | Vice  President, Finance                            |

 

**TimothyJ. Dodd.** Mr. Dodd is thePresident and General Manager of the Company. Prior to joining the Company inDecember 1991, he had been the vice president of manufacturing of the AmericanItalian Pasta Co., a durum milling and pasta production company located inMissouri, since 1988. He received a Bachelor of Science degree in millingscience and management from Kansas State University.

 

        **Thomas P. Friezen.** Mr. Friezen joined the Company in April 1995as Vice President--Finance and became Chief Financial Officer in August 2000.From 1991 to 1995 he was the Accounting Supervisor at Arizona Electric PowerCooperative, an electricity generation and transmission company. Prior to thatMr. Friezen was the Accounting Manager at Williston Basin Interstate Pipeline,a natural gas transmission company. He received a Bachelor of Science inaccounting from University of Mary, Bismarck, North Dakota and is a certifiedpublic accountant.

 

        **Susan M. Clemens.** Ms. Clemens has been Vice President--HumanResources and Administration since February 20, 1998. From August 1997 toFebruary 1998, she was Vice President of Human Resources and Administration atPrimo Piatto, Inc. Ms. Clemens was Senior Human Resources Manager at BordenFoods from January 1993 to August 1997. Ms. Clemens has a bachelor degree inbusiness and education from the University of Wisconsin--Stout.

 

        **James D. Cochran.**  Mr. Cochran has been Vice President--Supply Chain since February20, 1998. From 1997 to 1998, he was Vice President of New Business Developmentat Primo Piatto, Inc. Mr. Cochran held various positions with Borden Foods from1990 to 1997, most recently as Materials Manager. Mr. Cochran has a Bachelor ofScience degree in industrial management from Purdue University and a Master’sdegree in manufacturing systems from the University of St. Thomas, St. Paul,Minnesota.

 

        **Radwan Ibrahim.**  Mr. Ibrahim has been Vice President--Quality Assurance sinceFebruary 20, 1998. From August 1997 to February 1998, he served as ChiefTechnical Officer and Vice President of Primo Piatto, Inc. Mr. Ibrahim also wasGroup Quality Control Manager at Borden Foods from 1992 to 1997. Mr. Ibrahimreceived a Bachelor of Science degree in food science and a master’s degree incereal technology from Alexandria University, Egypt and holds a Ph.D. degree incereal chemistry from North Dakota State University.

        **EldonF. Buschbom.** Mr. Buschbom has been Vice President--Operations (Minnesota) since May30, 2000.  He joined Borden/Creamette inFebruary 1996 as Engineering Manager. He served as Vice President ofEngineering and Manufacturing Technology for Primo Piatto, Inc. from August1997 to February 1998.  Prior to joiningthe Company, Mr. Buschbom was Plant Manager for Steel Prep, Inc., and duringthe previous 14 years, held various engineering and manufacturing operationsmanagement positions with divisions of Pillsbury including American BeautyPasta, Green Giant Frozen Vegetables, Totino’s Pizza and the InternationalFoods Division. He received a Bachelor of Science Degree in mechanicalengineering from the University of Minnesota, IT.

 

        **David E. Tressler.**  Mr. Tressler, currently VicePresident--Operations (North Dakota) joined the Company in February 1992 as aProject Engineer. Prior to joining the Company, Mr. Tressler worked as adirector of engineering at American Italian Pasta Company, where he wasresponsible for monitoring the completion of the initial pasta plant. From 1977to 1988 he was plant engineer at International Multi-Foods, Inc. He received aBachelor of Science degree in industrial engineering from Iowa State Universityat Ames, Iowa.

 

        **Edward O. Irion.** Mr. Irion joined the Company in December 1999 as Assistant VicePresident--Planning and Control and became Vice President--Finance in August2000. Prior to joining the Company, he spent six years with the regionalaccounting firm of Eide Bailly LLP in Fargo, North Dakota. He received aBachelor of Science in accounting from Minnesota State University-Moorhead andis a certified public accountant.

**ITEM 11.  EXECUTIVE COMPENSATION**

 

        The following table summarizes theamount of compensation paid to the Company's President and General Manager andeach of the Company's most highly compensated officers for services rendered tothe Company during the fiscal year ended July 31, 2001 and the two prior fiscalyears.

 

**SummaryCompensation Table**

 
|                             |   |            |   | **Annual Compensation** |    | **Long-Term Compensation Awards** |   |
|----------------------------------|--------|-----------------|--------|-------------------------|---------|-----------------------------------|--------|
| **Name  and Principal Position** |   | **Fiscal Year** |   | **Salary**              |    | **Bonus**                         |   | **Other Annual Compensation (1)** |   | **Securities Underlying Options** |   |
| Timothy  J. Dodd                 |   | 2001            |   | $                       | 185,652 |                              | $      | - |   | $ | 6,234 |   | - |   |
| President  and General Manager   |   | 2000            |   | 175,000                 |    | 102,785                           |   | 3,884 |   | 4,950 |   |
|                             |   | 1999            |   | 177,869                 |    | 94,221                            |   | 6,312 |   | 1,168 |   |
|                             |   |            |   |                    |    |                              |   |   |   |   |   |
| Thomas  P. Friezen               |   | 2001            |   | 137,955                 |    | -                                 |   | 4,813 |   | - |   |
| Chief  Financial Officer         |   | 2000            |   | 136,250                 |    | 22,510                            |   | 4,194 |   | 580 |   |
|                             |   | 1999            |   | 129,385                 |    | 17,229                            |   | 9,997 |   | 386 |   |
|                             |   |            |   |                    |    |                              |   |   |   |   |   |
| James  D. Cochran                |   | 2001            |   | 106,217                 |    | -                                 |   | 3,881 |   | - |   |
| Vice  President, Supply Chain    |   | 2000            |   | 100,000                 |    | 15,000                            |   | 6,023 |   | - |   |
|                             |   | 1999            |   | 80,269                  |    | -                                 |   | 6,349 |   | - |   |
|                             |   |            |   |                    |    |                              |   |   |   |   |   |
| David  E. Tressler               |   | 2001            |   | 106,152                 |    | -                                 |   | 1,378 |   | - |   |
| Vice  President,                 |   | 2000            |   | 100,000                 |    | 50,000                            |   | 4,423 |   | - |   |
| Operations  (North Dakota)       |   | 1999            |   | 100,000                 |    | 20,165                            |   | 1,154 |   | - |   |
|                             |   |            |   |                    |    |                              |   |   |   |   |   |
| Eldon  F. Buschbom (2)           |   | 2001            |   | 105,506                 |    | -                                 |   | 3,693 |   | - |   |
| Vice  President,                 |   | 2000            |   | 58,119                  |    | 10,000                            |   | 2,397 |   | - |   |
| Operations  (Minnesota)          |   | 1999            |   | 73,925                  |    | -                                 |   | 3,108 |   | - |   |
|                                  |        |                 |        |                         |         |                                   |        |  |  |  |  |  |  |  |

----

(1)Includes the Company's 401(k) matching contribution, excess life insurance andwith respect to Mr. Dodd and Mr. Friezen the taxable portion of reimbursablebusiness expenses.

 

(2)Mr. Buschbom left the Company in March 2000 and returned in May 2000 as VicePresident of Operations (Minnesota).

 

**Compensation Plans**

 

        On January 31, 1997 the CompensationCommittee of the Board of Directors adopted the Dakota Growers Incentive StockOption Plan (the "Plan"). The purpose of the Plan is to providebenefits to participants in the form of additional compensation for servicesthat have been or will be rendered as an inducement for continuing as employeesof the Company. The Plan was ratified by the members at the annual meeting inJanuary 1998.

 

        The Compensation Committee administersthe Plan. The Compensation Committee or the Board of Directors has the power todetermine the key management employees of the Company to receive options andthe number of shares to be optioned to each of the employees.

 

        Options granted under the Plan are forthe purchase of Series C Convertible Preferred Stock at fair market value,convertible into Equity Stock at the option of the employee, under theapplicable conversion ratio. The maximum number of preferred shares which maybe issued pursuant to options granted under the Plan is fifteen thousand(15,000). Each share of Series C Preferred Stock carries a non-cumulativedividend of 6% per annum. Under the terms of the Plan, the option price may notbe less than the fair market value of the Series C Preferred Stock at the timethe option is granted.

        Theconversion ratio is 24 shares of Equity Stock for each share of Series CPreferred Stock after adjustment for the 3-for-2 stock split declared effectiveAugust 1, 1997. The conversion ratio is proportionately adjusted if the Companyincreases the outstanding shares of Equity Stock without the payment ofconsideration by the members for such additional shares (e.g. stock split,stock dividend or other action).

 

**Compensation CommitteeInterlocks and Insider Participation**

 

        The members of the CompensationCommittee are John S. Dalrymple III, Eugene J. Nicholas and Curtis R. Trulson.None of these directors are or have been an officer or employee of the Company.During fiscal year 2001, no executive officer of the Company served as adirector or member of the Compensation Committee (or other committee serving anequivalent function) of any other entity, one of whose executive officersserved as a director of or member of the Compensation Committee of the Company.

 

**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

        Since the Company is a cooperative withvoting rights arising from ownership of a share of Membership Stock, each memberhas equal voting rights of one vote per member. No director or officer ownsbeneficially more than 0.6% of the Company's issued and outstanding MembershipStock; the directors and officers as a group beneficially own approximately2.5% of the issued and outstanding Membership Stock. With regard to the EquityStock, no director or officer owns beneficially more than 3.1% of the issuedand outstanding shares. The directors and officers, as a group, beneficiallyown approximately 11.2% of the Company’s issued and outstanding Equity Stock.

 

**ITEM 13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

        Each of the Company's directors andthose officers who hold membership in the Company are also agriculturalproducers and members of the Company. By virtue of their membership status andownership of Equity Stock, each such director and officer is obligated todeliver durum wheat to the Company. The Company makes payments to each suchdirector and officer for such deliveries and the payments often exceed $60,000.However, the amount and terms of the payments received by those directors andofficers (or the entities they represent) are made on exactly the same basis asthose received by other members of the Company for the delivery of their durumwheat.

 

        On March 1, 1999, the Company recordedthe conversion of its Series D convertible preferred stock into equity stock,and recorded the payment of $2,592,000 of the proceeds from the stock offeringdue the selling shareholders. Certain of these selling shareholders areofficers of the Company. The following table sets forth the amounts paid tosuch officers:

 
| Susan M. Clemens  |   | $       | 291,600 |   |
|-------------------|--------|---------|---------|--------|
| James D. Cochran  |   | 362,475 |    |
| Radwan Ibrahim    |   | 349,800 |    |
| Eldon F. Buschbom |   | 244,148 |    |

        The Company has advanced funds tocertain officers to cover personal alternative minimum taxes and other costsgenerated as a result of these officers exercising stock options. Interest onthe advances is charged at the applicable federal rate as published by theInternal Revenue Service. The amount due from officers as of July 31, 2001 forindebtedness exceeding $60,000 at any time during the fiscal year is asfollows:

 
| Timothy J. Dodd |   | $ | 106,658 |   |
|-----------------|--------|---|---------|--------|

 

        Except for durum wheat sales and theabove transactions noted, none of the directors or executive officers of theCompany have engaged in any other transactions with the Company involvingamounts in excess of $60,000.

 

 

**PART IV**

 

**ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES ANDREPORTS ON FORM 8-K**

 

(a)   Thefollowing are filed as part of this report:

 

**1.  FinancialStatements**

 

        Independent Auditor's Report

 

        Consolidated Balance Sheets as of July31, 2001 and 2000

 

        Consolidated Statements of Operationsfor the years ended July 31, 2001, 2000 and 1999

 

        ConsolidatedStatements of Changes in Members' Investment for the years ended July 31, 2001,2000 and 1999

 

        Consolidated Statements of Cash Flowsfor the years ended July 31, 2001, 2000 and 1999

 

        Notes to Consolidated FinancialStatements

 

**2.  Financial Statement Schedules**

 

        All schedules are omitted as therequired information is inapplicable or the information is presented in theconsolidated financial statements or related notes.

 

**3.  Reports on Form 8-K**

 

        None.

 

**4.  Exhibits**

 
| 3.1 | Restated Articles of  Association of Dakota Growers Pasta Company. (Incorporated by reference to  Exhibit 3.1 from the Company's Quarterly Report on Form 10-Q, File No.  33-99834, for the quarter ended January 31, 2001.) |  
 

 

 
3.2

Restated Bylaws of  Dakota Growers Pasta Company. (Incorporated by reference to Exhibit 3.2 from  the Company's Quarterly Report on Form 10-Q, File No. 33-99834, for the  quarter ended January 31, 2001.)

 
 

 

 
4.1

Note Purchase  Agreement dated July 15, 1998. (Incorporated by reference to Exhibit 4.1 from  the 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 the 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.

 
 

 

 
10.1

Form of Growers  Agreement between the Company and members of the Company. (Incorporated by  reference to Exhibit 10.5 from the Company's Quarterly Report on Form 10-Q,  File No. 33-99834, for the quarter ended January 31, 2001.)

 
 

 

 
10.2

Loan Agreement in the  aggregate amount of $100,000 dated February 5, 1993 between the Company and  Dakota Central Telecommunications Cooperative. (Incorporated by reference to  Exhibit 10.9 from the Company's Registration Statement on Form S-1, File No.  33-99834, declared effective January 26, 1996.)

 
 

 

 
10.3

Promissory Note in the  principal amount of $100,000 dated February 5, 1993 between the Company and  Dakota Central Telecommunications Cooperative. (Incorporated by reference to  Exhibit 10.10 from the Company's Registration Statement on Form S-1, File No.  33-99834, declared effective January 26, 1996.)

 
 

 

 
10.4

Loan Agreement in the  aggregate amount of $100,000 dated February 5, 1993 between the Company and  Tri-County Electric Cooperative, Inc. (Incorporated by reference to Exhibit  10.11 from the Company's Registration Statement on Form S-1, File No.  33-99834, declared effective January 26, 1996.)

 
 

 

 
10.5

Promissory Note in the  principal amount of $100,000 dated February 5, 1993 between the Company and  Tri-County Electric Cooperative, Inc. (Incorporated by reference to Exhibit  10.12 from the Company's Registration Statement on Form S-1, File No.  33-99834, declared effective January 26, 1996.)

 
 

 

 
10.6

Indenture of Lease  between RLN Leasing, Inc. and Dakota Growers Pasta Company dated May 1, 1997.  (Incorporated by reference to Exhibit 10.10 from the Company's Annual Report  on Form 10-K for the fiscal year ended July 31, 1997, as amended on September  30, 1998, File No. 33-99834.) Confidential treatment has been granted with  respect to portions of this Exhibit.

 
 

 

 
10.7

Master Loan Agreement  and Supplements dated June 20, 2001 between the Company and CoBank, ACB.

 
 

 

 
10.8

Agreement between  Dakota Growers Pasta Company and JP Foodservice, Inc. dated March 7, 1997.  (Incorporated by reference to Exhibit 10.13 from the Company's Annual Report  on Form 10-K for the fiscal year ended July 31, 1997, as amended on September  30, 1998, File No. 33-99834.) Confidential treatment has been granted with  respect to portions of this Exhibit.

 
 

 

 
10.9

Consulting Agreement  between Dakota Growers Pasta Company and Peninsula Trading Company, Inc.  dated October 15, 1997. (Incorporated by reference to Exhibit 10.14 from the  Company's Annual Report on Form 10-K for the fiscal year ended July 31, 1997,  as amended on September 30, 1998, File No. 33-99834.)

 
 

 

 
10.10

Incentive Stock Plan.  (Incorporated by reference to Exhibit 10.1 from the Company's Quarterly  Report on Form 10-Q, File No. 33-99834, for the quarter ended April 30,  1998.) *

 
 

 

 
10.11

Distribution and  Marketing Alliance Agreement between the Company and Gruppo Euricom dated  August 15, 2000. (Incorporated by reference to Exhibit 10.3 from the  Company's Quarterly Report on Form 10-Q, File No. 33-99834, for the quarter  ended January 31, 2001.) Confidential treatment has been granted with respect  to portions of this Exhibit.

 
 

 

 
10.12

Five-Year Contract  Extension between the Company and U.S. Foodservice dated December 28, 2000.  (Incorporated by reference to Exhibit 10.4 from the Company's Quarterly  Report on Form 10-Q, File No. 33-99834, for the quarter ended January 31,  2001.) Confidential treatment has been granted with respect to portions of  this Exhibit.

 
 

 

 
10.13

Amendment to Master  Loan Agreement dated October 16, 2001 between the Company and CoBank, ACB.

 
 

 

 
21

Subsidiary of the  registrant

 

 

 

 

 

 

 

**Name  of Subsidiary**

 

**Jurisdiction  of Incorporation**

 

Primo  Piatto, Inc.

 

Minnesota

 

*  Executive compensation plan or arrangement.

 

**SIGNATURES**

 

        Pursuant to the requirements of Section13 or 15(d) of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 

 

DAKOTA GROWERS PASTA  COMPANY

 

 

 

 

 

 

 

 

 

 

By:

/s/  Timothy J. Dodd

 

 

Timothy  J. Dodd,

 

 

PRESIDENT  AND GENERAL MANAGER,

 

 

AND  PRINCIPAL EXECUTIVE OFFICER

 

 

 

 

Dated: October 29,  2001

 

        Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 

**Signature**

 

**Title**

 

**Date**

 

 

 

 

 

/s/  Timothy J. Dodd

 

General  Manager

 

 

Timothy  J. Dodd

 

(Principal  Executive Officer)

 

October  29, 2001

 

 

 

 

 

 

 

 

 

 

/s/  Thomas P. Friezen

 

Chief  Financial Officer

 

 

Thomas  P. Friezen

 

(Principal  Financial Officer)

 

October  29, 2001

 

 

 

 

 

 

 

 

 

 

/s/  Edward O. Irion

 

Vice-President  - Finance

 

 

Edward  O. Irion

 

(Principal  Accounting Officer)

 

October  29, 2001

 

 

 

 

 

 

 

 

 

 

/s/  John S. Dalrymple III

 

 

 

 

John  S. Dalrymple III

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  John D. Rice, Jr.

 

 

 

 

John  D. Rice, Jr.

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  Curt R. Trulson

 

 

 

 

Curt  R. Trulson

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  Allyn K. Hart

 

 

 

 

Allyn  K. Hart

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  Roger A. Kenner

 

 

 

 

Roger  A. Kenner

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  James F. Link

 

 

 

 

James  F. Link

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  Eugene J. Nicholas

 

 

 

 

Eugene  J. Nicholas

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  Jeffery O. Topp

 

 

 

 

Jeffery  O. Topp

 

Director

 

October  29, 2001

 

 

 

 

 

/s/  Michael E. Warner

 

 

 

 

Michael  E. Warner

 

Director

 

October  29, 2001

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