** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
| **ý** |   | **Quarterly Report Pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934**  |   |
|------------|--------|-----------------------------------------------------------------------------------------------|--------|
|       |   | **For the quarterly period ended January 31, 2002**                                           |   |
|       |   |                                                                                          |   |
|       |   | **or**                                                                                        |   |
|       |   |                                                                                          |   |
| **o**      |   | **Transition Report 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)

 

**NOT APPLICABLE**

(Formername, former address and former fiscal year, if changed since last report)

 

 

 

 

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 (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.       Yes  ý  No  o

 

        The number of shares outstanding of theRegistrant’s classes of common stock were 1,155 shares of membership stock, parvalue $125.00, and 11,275,297 shares of equity stock, par value $2.50, as ofMarch 14, 2002.

 

 

 

 

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**PART I — FINANCIAL INFORMATION**

** **

**ITEM 1.FINANCIAL STATEMENTS**

** **

**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                           | ** ** | **January  31,  2002** | ** ** | **July 31,  2001** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
|                                                                                                                 |       | **(Unaudited)**        |       |               |       |
| **ASSETS**                                                                                                           |       |                   |       |               |       |
|                                                                                                                 |       |                   |       |               |       |
| CURRENT  ASSETS                                                                                                      |       |                   |       |               |       |
| Cash  and cash equivalents                                                                                           |       | $                      | 3          |               | $          | 3 |   |
|                                                                                                                 |       |                   |       |               |       |
| Short-term  investments (restricted)                                                                                 |       | 1,974                  |       | 1,974              |       |
|                                                                                                                 |       |                   |       |               |       |
| Trade  accounts receivable,less allowance for cash  discounts and  doubtful accounts of $588 and  $610, respectively |       | 13,378                 |       | 11,560             |       |
|                                                                                                                 |       |                   |       |               |       |
| Other  receivables                                                                                                   |       | 425                    |       | 1,138              |       |
|                                                                                                                 |       |                   |       |               |       |
| Inventories                                                                                                          |       | 20,105                 |       | 21,050             |       |
|                                                                                                                 |       |                   |       |               |       |
| Prepaid  expenses                                                                                                    |       | 2,137                  |       | 1,602              |       |
|                                                                                                                 |       |                   |       |               |       |
| Total  current assets                                                                                                |       | 38,022                 |       | 37,327             |       |
|                                                                                                                 |       |                   |       |               |       |
| PROPERTY  AND EQUIPMENT                                                                                              |       |                   |       |               |       |
| In  service                                                                                                          |       | 115,276                |       | 114,984            |       |
| Construction  in process                                                                                             |       | 39                     |       | 108                |       |
|                                                                                                                 |       | 115,315                |       | 115,092            |       |
| Less  accumulated depreciation                                                                                       |       | (36,755                | )          | (33,367            | )          |
|                                                                                                                 |       |                   |       |               |       |
| Net  property and equipment                                                                                          |       | 78,560                 |       | 81,725             |       |
|                                                                                                                 |       |                   |       |               |       |
| INVESTMENT  IN COOPERATIVE BANKS                                                                                     |       | 2,211                  |       | 2,211              |       |
|                                                                                                                 |       |                   |       |               |       |
| OTHER  ASSETS                                                                                                        |       | 8,049                  |       | 7,395              |       |
|                                                                                                                 |       |                   |       |               |       |
|                                                                                                                 |       | $                      | 126,842    |               | $          | 128,658 |   |

 

 

 

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**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                                                                                     | ** ** | **January  31,  2002** | ** ** | **July 31,  2001** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|--------------------|------------|
|                                                                                                                                                                           |       | **(Unaudited)**        |       |               |       |
| **LIABILITIES AND MEMBERS’ INVESTMENT**                                                                                                                                   |       |                   |       |               |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| CURRENT  LIABILITIES                                                                                                                                                           |       |                   |       |               |       |
| Notes  payable                                                                                                                                                                 |       | $                      | 3,500      |               | $          | 8,100 |   |
| Current  portion of long-term debt                                                                                                                                             |       | 7,983                  |       | 2,657              |       |
| Accounts  payable                                                                                                                                                              |       | 3,334                  |       | 4,400              |       |
| Excess  outstanding checks over cash on deposit                                                                                                                                |       | 2,238                  |       | 1,072              |       |
| Accrued  grower payments                                                                                                                                                       |       | 880                    |       | 969                |       |
| Accrued  liabilities                                                                                                                                                           |       | 5,724                  |       | 5,709              |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| Total  current liabilities                                                                                                                                                     |       | 23,659                 |       | 22,907             |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                 |       | —                 |       | —             |       |
| LONG-TERM  DEBT, net of current portion                                                                                                                                        |       | 40,910                 |       | 47,594             |       |
| DEFERRED  INCOME TAXES                                                                                                                                                         |       | 3,618                  |       | 3,777              |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| Total  liabilities                                                                                                                                                             |       | 68,187                 |       | 74,278             |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| REDEEMABLE  PREFERRED STOCK                                                                                                                                                    |       |                   |       |               |       |
| Series  A, 6% non-cumulative, $100 par value, 800 shares authorized, 533 and 600  shares issued and outstanding as of January 31, 2002 and July 31, 2001,  respectively        |       | 53                     |       | 60                 |       |
| Series  B, 2% non-cumulative, $100 par value, 2,700 shares authorized, 525 shares  issued and outstanding                                                                      |       | 53                     |       | 53                 |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| Total  redeemable preferred stock                                                                                                                                              |       | 106                    |       | 113                |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| MEMBERS’  INVESTMENT                                                                                                                                                      |       |                   |       |               |       |
| Convertible  preferred stock                                                                                                                                                   |       |                   |       |               |       |
| Series  C, 6% non-cumulative, $100 par value, 15,000 shares authorized, 924 shares  issued and outstanding as of July 31, 2001                                                 |       | —                 |       | 92                 |       |
| Membership  stock, $125 par value, 2,000 shares authorized, 1,155 and 1,156 shares issued  and outstanding as of January 31, 2002 and July 31, 2001, respectively              |       | 144                    |       | 144                |       |
| Equity  stock, $2.50 par value, 25,000,000 shares authorized, 11,275,297 and  11,253,121 shares issued and outstanding as of January 31, 2002 and July 31,  2001, respectively |       | 28,188                 |       | 28,133             |       |
| Additional  paid-in capital                                                                                                                                                    |       | 22,913                 |       | 22,876             |       |
| Accumulated  allocated earnings                                                                                                                                                |       | 4,596                  |       | 4,596              |       |
| Accumulated  unallocated earnings (deficit)                                                                                                                                    |       | 2,708                  |       | (1,574             | )          |
|                                                                                                                                                                           |       |                   |       |               |       |
| Total  members’ investment                                                                                                                                                |       | 58,549                 |       | 54,267             |       |
|                                                                                                                                                                           |       |                   |       |               |       |
| Total  liabilities and members’ investment                                                                                                                                |       | $                      | 126,842    |               | $          | 128,658 |   |

 

See Notes toConsolidated Financial Statements

 

 

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**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(InThousands, Except Per Share Amounts)(Unaudited)**

 
| ** **                                                                                           |   | **Three  Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|--------|--------------------------------------|------------|
|                                                                                                 |   | **2002**                             |       | **2001** |   |
| Net  revenues (net of discounts and allowances of $4,083 and $4,537, respectively)                   |   | $                                    | 37,020     |   | $ | 31,632 |   |
|                                                                                                 |   |                                 |       |   |   |
| Cost  of product sold                                                                                |   | 32,023                               |       | 30,010 |   |
|                                                                                                 |   |                                 |       |   |   |
| Gross  proceeds                                                                                      |   | 4,997                                |       | 1,622 |   |
|                                                                                                 |   |                                 |       |   |   |
| Marketing,  general and administrative expenses                                                      |   | 2,381                                |       | 2,469 |   |
|                                                                                                 |   |                                 |       |   |   |
| Operating  proceeds (loss)                                                                           |   | 2,616                                |       | (847 | ) |
|                                                                                                 |   |                                 |       |   |   |
| Other  income (expense)                                                                              |   |                                 |       |   |   |
| Interest  and other income                                                                           |   | 66                                   |       | 46 |   |
| Interest  expense, net                                                                               |   | (1,028                               | )          | (1,062 | ) |
|                                                                                                 |   |                                 |       |   |   |
| Income  (loss) before income taxes                                                                   |   | 1,654                                |       | (1,863 | ) |
|                                                                                                 |   |                                 |       |   |   |
| Income  tax benefit                                                                                  |   | 79                                   |       | 80 |   |
|                                                                                                 |   |                                 |       |   |   |
| Net  income (loss) from patronage and non-patronage business                                         |   | 1,733                                |       | (1,783 | ) |
| Dividends  on preferred stock                                                                        |   | 1                                    |       | 1 |   |
|                                                                                                 |   |                                 |       |   |   |
| Net  earnings (loss) from patronage and non-patronage business available for  members                |   | $                                    | 1,732      |   | $ | (1,784 | ) |
|                                                                                                 |   |                                 |       |   |   |
| Average  equity shares outstanding                                                                   |   | 11,275                               |       | 11,253 |   |
|                                                                                                 |   |                                 |       |   |   |
| Net  earnings (loss) from patronage and non-patronage business per average equity  share outstanding |   |                                 |       |   |   |
|                                                                                                 |   |                                 |       |   |   |
| Basic                                                                                                |   | $                                    | 0.15       |   | $ | (0.16 | ) |

 

See Notes to ConsolidatedFinancial Statements

 

 

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**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(InThousands, Except Per Share Amounts)(Unaudited)**

 
| ** **                                                                                           |   | **Six Months  Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|--------|------------------------------------|------------|
|                                                                                                 |   | **2002**                           |       | **2001** |   |
| Net  revenues (net of discounts and allowances of $8,251 and $9,401, respectively)                   |   | $                                  | 74,566     |   | $ | 64,915 |   |
|                                                                                                 |   |                               |       |   |   |
| Cost  of product sold                                                                                |   | 63,665                             |       | 60,957 |   |
|                                                                                                 |   |                               |       |   |   |
| Gross  proceeds                                                                                      |   | 10,901                             |       | 3,958 |   |
|                                                                                                 |   |                               |       |   |   |
| Marketing,  general and administrative expenses                                                      |   | 4,810                              |       | 5,071 |   |
|                                                                                                 |   |                               |       |   |   |
| Operating  proceeds (loss)                                                                           |   | 6,091                              |       | (1,113 | ) |
|                                                                                                 |   |                               |       |   |   |
| Other  income (expense)                                                                              |   |                               |       |   |   |
| Interest  and other income                                                                           |   | 178                                |       | 185 |   |
| Gain  on sale of other assets                                                                        |   | 2                                  |       | — |   |
| Interest  expense, net                                                                               |   | (2,139                             | )          | (2,115 | ) |
|                                                                                                 |   |                               |       |   |   |
| Income  (loss) before income taxes                                                                   |   | 4,132                              |       | (3,043 | ) |
|                                                                                                 |   |                               |       |   |   |
| Income  tax benefit                                                                                  |   | 159                                |       | 159 |   |
|                                                                                                 |   |                               |       |   |   |
| Net  income (loss) from patronage and non-patronage business                                         |   | 4,291                              |       | (2,884 | ) |
| Dividends  on preferred stock                                                                        |   | 9                                  |       | 13 |   |
|                                                                                                 |   |                               |       |   |   |
| Net  earnings (loss) from patronage and non-patronage business available for  members                |   | $                                  | 4,282      |   | $ | (2,897 | ) |
|                                                                                                 |   |                               |       |   |   |
| Average  equity shares outstanding                                                                   |   | 11,275                             |       | 11,253 |   |
|                                                                                                 |   |                               |       |   |   |
| Net  earnings (loss) from patronage and non-patronage business per average equity  share outstanding |   |                               |       |   |   |
|                                                                                                 |   |                               |       |   |   |
| Basic                                                                                                |   | $                                  | 0.38       |   | $ | (0.26 | ) |

 

See Notes toConsolidated Financial Statements

 

 

5

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**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
| ** **                                                                                    | ** ** | **Six Months  Ended  January 31,** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
|                                                                                          |       | **2002**                           |       | **2001** |   |
| OPERATING  ACTIVITIES                                                                         |       |                               |       |   |   |
| Net  income (loss)                                                                            |       | $                                  | 4,291      |   | $ | (2,884 | ) |
| Adjustments  to reconcile net income (loss) to net cash from (used in) operating  activities: |       |                               |       |   |   |
| Depreciation  and amortization                                                                |       | 4,398                              |       | 4,403 |   |
| Gain  on sale of other assets                                                                 |       | (2                                 | )          | — |   |
| Deferred  income taxes                                                                        |       | (159                               | )          | (159 | ) |
| Payments  for long-term prepaid marketing costs                                               |       | (2,250                             | )          | (5,038 | ) |
| Changes  in assets and liabilities:                                                           |       |                               |       |   |   |
| Trade  receivables                                                                            |       | (1,818                             | )          | 1,125 |   |
| Other  receivables                                                                            |       | 713                                |       | 130 |   |
| Inventories                                                                                   |       | 945                                |       | (2,574 | ) |
| Prepaid  expenses                                                                             |       | 221                                |       | 178 |   |
| Other  assets                                                                                 |       | —                             |       | 2 |   |
| Accounts  payable                                                                             |       | (1,066                             | )          | 141 |   |
| Excess  outstanding checks over cash deposits                                                 |       | 1,166                              |       | 1,459 |   |
| Growers  payables                                                                             |       | (89                                | )          | (130 | ) |
| Other  accrued liabilities                                                                    |       | 15                                 |       | 497 |   |
|                                                                                          |       |                               |       |   |   |
| NET  CASH FROM (USED IN) OPERATING ACTIVITIES                                                 |       | 6,365                              |       | (2,850 | ) |
|                                                                                          |       |                               |       |   |   |
| INVESTING  ACTIVITIES                                                                         |       |                               |       |   |   |
| Purchases  of property and equipment                                                          |       | (223                               | )          | (2,415 | ) |
| Proceeds  from sale of other assets                                                           |       | 53                                 |       | — |   |
| Payments  for package design costs                                                            |       | (221                               | )          | (173 | ) |
|                                                                                          |       |                               |       |   |   |
| NET  CASH USED IN INVESTING ACTIVITIES                                                        |       | (391                               | )          | (2,588 | ) |
|                                                                                          |       |                               |       |   |   |
| FINANCING  ACTIVITIES                                                                         |       |                               |       |   |   |
| Net  change in short-term debt                                                                |       | (4,600                             | )          | 12,525 |   |
| Payments  on long-term debt                                                                   |       | (1,358                             | )          | (4,327 | ) |
| Preferred  stock retirements                                                                  |       | (7                                 | )          | (6 | ) |
| Dividends  paid on preferred stock                                                            |       | (9                                 | )          | (13 | ) |
| Patronage  distributions                                                                      |       | —                             |       | (4,466 | ) |
|                                                                                          |       |                               |       |   |   |
| NET CASH FROM (USED IN) FINANCING  ACTIVITIES                                                 |       | (5,974                             | )          | 3,713 |   |
|                                                                                               |            |                                    |            |  |  |  |  |

 

(continued on next page)

 

 

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**DAKOTAGROWERS PASTA COMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
| ** **                                         | ** ** | **Six Months  Ended  January 31,** | ** ** |
|----------------------------------------------------|------------|------------------------------------|------------|
|                                               |       | **2002**                           |       | **2001** |   |
| NET  CHANGE IN CASH AND CASH EQUIVALENTS           |       | —                             |       | (1,725 | ) |
|                                               |       |                               |       |   |   |
| CASH  AND CASH EQUIVALENTS, BEGINNING OF PERIOD    |       | 3                                  |       | 1,725 |   |
|                                               |       |                               |       |   |   |
| CASH  AND CASH EQUIVALENTS, END OF PERIOD          |       | $                                  | 3          |   | $ | — |   |
|                                               |       |                               |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION |       |                               |       |   |   |
|                                               |       |                               |       |   |   |
| Cash payments for                                  |       |                               |       |   |   |
| Interest  (net of amounts capitalized)             |       | $                                  | 2,035      |   | $ | 2,056 |   |
|                                               |       |                               |       |   |   |
| Income  taxes                                      |       | $                                  | 10         |   | $ | 4 |   |

 

See Notes toConsolidated Financial Statements

 

 

7

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**DAKOTAGROWERS PASTA COMPANY**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notes should be read in conjunction withthe notes to the financial statements for the year ended July 31, 2001 as filedin the Company’s Form 10-K.

 

**NOTE 1 —ORGANIZATION**

 

Dakota Growers Pasta Company (“Dakota Growers”, “the Company” or “theCooperative”) is organized as a farmers’ cooperative for purposes of manufacturingfood for human consumption from durum and other grain products. Net proceedsare allocated to patrons who are members on the basis of their participation inthe Cooperative.

 

The ownership of membership stock, which signifies membership in theCooperative, is restricted to producers of agricultural products. The ownershipof equity stock is restricted to members of the Cooperative. Preferred stockmay be held by persons who are not members of the Cooperative.

 

The Company formed three wholly owned subsidiaries in January 2002. OnFebruary 1, 2002, Dakota Growers Restructuring Company, Inc, one of the whollyowned subsidiaries created by the Company, filed a Registration Statement onForm S-4 with the United States Securities and Exchange Commission. The S-4describes the proposed conversion of the Company from a North Dakotacooperative into a North Dakota corporation. Subject to the approval of themembers of the Company, the proposed conversion will be effected by a series ofmergers, via the newly created wholly owned subsidiaries, as described withinthe S-4.  If the proposed conversion iscompleted, the Company’s wholly owned subsidiary, Dakota Growers RestructuringCompany, Inc., would be the surviving entity, conducting the Company’s on-goingbusiness.  Upon completion of theconversion, the surviving entity would adopt the name Dakota Growers PastaCompany, Inc. Please see the aforementioned Form S-4 for more informationregarding the proposed transaction.

 

**NOTE 2 —FINANCIAL STATEMENT PRESENTATION**

 

The unaudited consolidated financialstatements included herein have been prepared pursuant to the rules andregulations of the Securities and Exchange Commission. Accordingly, they do notinclude all the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the three and six month periods ended January31, 2002 are not necessarily indicative of the results that may be expected forthe year ended July 31, 2002. The information included in this Form 10-Q shouldbe read in conjunction with Management’s Discussion and Analysis and theconsolidated financial statements and footnotes included in the Company’s Form10-K for the year ended July 31, 2001. The information contained in the balancesheet as of July 31, 2001 was derived from the Company’s audited annual reportfor fiscal 2001. Reclassifications have been made to facilitate comparabilitywith current presentation. Such reclassifications have no effect on the netresults of operations.

 

The financial information presented hereinincludes the consolidated balances and results of operations of Dakota GrowersPasta Company and its wholly owned subsidiaries. All significant intercompanybalances and transactions have been eliminated.

 

###### **NOTE 3 — INVENTORIES**

 

Inventories are valued at lower of cost ormarket. Inventories as of January 31, 2002 include raw materials of $5,813,000and finished goods of $14,292,000. Inventories at July 31, 2001 include rawmaterials of $5,710,000 and finished goods of $15,340,000.

 

 

8

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###### **NOTE4 — LOAN AGREEMENTS**

 

On February 15, 2002, the Company secured a $19 million revolvingcredit facility with CoBank covering the period from March 1, 2002 throughFebruary 25, 2003. The revolving line has a variable interest rate not to exceedCoBank’s National Variable Rate plus 1% and is secured by property, equipment,and current assets of the Company. The balance outstanding under the Company’sprevious line of credit agreements totaled $3.5 million and $8.1 million as ofJanuary 31, 2002 and July 31, 2001, respectively.

 

Thevarious debt agreements with the Bank and institutional investors obligate theCompany to maintain or achieve certain amounts of equity and certain financialratios and impose certain restrictions on the Company. The Company was incompliance with these financial covenants as of January 31, 2002. On January24, 2002, the Company and CoBank entered into an amendment of the Master LoanAgreement, which requires the Company to maintain a debt service coverageratio, measured at the end of each fiscal year, of 1.25 to 1. The Company hadpreviously been required to maintain a debt service coverage ratio of 1.50 to1.

 

**NOTE 5 — STOCK OPTIONS**

 

In December 2001, the Board ofDirectors approved the issuance of non-qualified stock options for 2,045 sharesof Series C convertible preferred stock with a total exercise price of$204,500. Each share of Series C convertible preferred stock may be convertedinto 24 shares of equity stock at the option of the holder.

 

###### **NOTE 6 — INCOME TAXES**

 

The Company is a non-exempt cooperative as defined by Section1381(a)(2) of the Internal Revenue Code (“Code”). Accordingly, net margins frombusiness transacted with its member patrons which are allocated, qualified, andpaid as prescribed in Section 1382 of the Code will be taxable to the membersand not to the Company. Net margins and member allocations are determined onthe basis of accounting used for financial reporting purposes. To the extentthat net margins are not allocated and paid as stated above or arise frombusiness done with non-members, the Company shall have taxable income subjectto corporate income tax rates. Cooperative organizations have 8 1⁄2 months aftertheir fiscal year end to make such allocations in the form of written noticesof allocation or cash.

 

Income tax benefit amounts shown for theperiods presented resulted from reductions in deferred tax liabilitiesassociated with differences between the book and tax basis of property andequipment.

 

###### **NOTE 7 — PATRONAGE BUSINESS**

 

The Company’s business is conducted on a cooperative basis. The Companycalculates income from patronage sources based on income derived from bushelsof durum delivered by members. Non-patronage income is derived from the resaleof pasta purchased from non-members, the resale of semolina purchased fromnon-members, certain amounts of interest income and any income taxes assessedon non-member business. Net income allocable to patronage business totaled$4,381,000 for the six months ended January 31, 2002, compared to a net lossallocable to patronage business of $2,720,000 for the six months ended January31, 2001.

 

###### **NOTE 8 — EARNINGS (LOSS) PERSHARE**

 

The Company allocates its earnings (loss) and patronage distributionsbased on patronage business (bushels of durum delivered, which approximates onebushel of durum per equity share). For presentation purposes, it has calculatedbasic net earnings (loss) per share by dividing earnings (loss) from patronageand non-patronage 

 

 

9

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business available for members (net income (loss) less preferreddividends) by the weighted average number of equity shares effective andoutstanding during the period.

 

The Company had convertible preferred stock and stock options for convertiblepreferred stock outstanding during the periods presented. Fully dilutedearnings (loss) per share are calculated for the assumed conversion of thesedilutive securities. As the Company’s stock is only traded in a small secondarymarket through private transactions, the Company has assumed the proceeds fromthe exercise of stock options would reduce debt and, thus, interest expense.Fully diluted earnings (loss) per share are not presented, as the dilutiveeffect of outstanding convertible preferred stock and stock options is notmaterial for the periods presented.

 

###### **NOTE 9 — COMMITMENTS**

 

The Company forward contracts for a certainportion of its future durum wheat requirements. The Company had outstandingcommitments for grain purchases totaling $7,612,000 at January 31, 2002. TheCompany also has a commitment to pay $1.0 million under a long-term customermarketing agreement by December 31, 2002.

 

 

10

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

Thefollowing discussion contains forward-looking statements. Such forward-lookingstatements include, among others, those statements including the words“expect”, “anticipate”, “believe”, “may” and similar expressions. Suchstatements are based on assumptions by the Company’s management, as of the dateof this Quarterly Report, and are subject to risks and uncertainties, includingthose discussed in the Company’s 2001 Form 10-K under “Risk Factors”, thatcould cause actual results to differ materially from those anticipated. TheCompany cautions readers not to place undue reliance on such forward-lookingstatements. The Company will not update any forward-looking statements in theQuarterly Report to reflect future events or developments.

 

**Summary**

 

DakotaGrowers Pasta Company reported net earnings of $4.3 million for the six monthsended January 31, 2002, compared to the $2.9 million net loss incurred for thesix months ended January 31, 2001.

 

Increasesin sales volumes and per unit prices combined with various cost cuttingmeasures contributed to the increase in profitability. The Company realizedvolume and pricing gains in the foodservice and retail markets during the sixmonths ended January 31, 2002 when compared to the corresponding period of theprior year. Though pricing within the dry pasta industry remains highlycompetitive, industry changes within the past six months have expandedopportunities for co-pack arrangements, which involve the sale of dry pastaproducts to other pasta manufacturers. The Company continues to exploreopportunities in the co-pack area. Cost efficiencies have been realized fromthe closure of the Minneapolis factory in conjunction with the completion ofthe lasagna line in New Hope. The Company has also realized savings in thefirst half of fiscal 2002 by reducing its labor force where necessary to matchproduct demand levels.

 

TheCompany formed three wholly owned subsidiaries in January 2002. On February 1,2002, Dakota Growers Restructuring Company, Inc, one of the wholly ownedsubsidiaries created by the Company, filed a Registration Statement on Form S-4with the United States Securities and Exchange Commission. The S-4 describesthe proposed conversion of the Company from a North Dakota cooperative into aNorth Dakota corporation. Subject to the approval of the members of theCompany, the proposed conversion will be effected by a series of mergers, viathe newly created wholly owned subsidiaries, as described within the S-4.  If the proposed conversion is completed, theCompany’s wholly owned subsidiary, Dakota Growers Restructuring Company, Inc.,would be the surviving entity, conducting the Company’s on-going business.  Upon completion of the conversion, thesurviving entity would adopt the name Dakota Growers Pasta Company, Inc. Pleasesee the aforementioned Form S-4 for more information regarding the proposedtransaction.

 

**Results of Operations**

 

*Comparison of the Three MonthsEnded January 31, 2002 and 2001*

 

***Net Revenues. ***Net revenues increased $5.4 million, or 17.0%, to $37.0 millionfor the quarter ended January 31, 2002, compared to $31.6 million for thequarter ended January 31, 2001. The increase was primarily due to higher pastaand semolina sales volumes.

 

Revenuesfrom the retail market increased $2.3 million, or 11.7%, mainly as a result ofa 12.6% increase in sales volumes. Foodservice revenues increased $1.5 million,or 23.6%, primarily due to volume growth driven by expansions and acquisitions by ourcustomers. Ingredient revenues decreased $0.5 million, or 14.8%, mainly as aresult of a 16.8% decrease in sales volumes. The ingredient sales volumedecline primarily resulted from the loss of one customer in this market due tocompetitive pricing issues.

 

 

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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 sales were up$2.1 million from the prior year primarily as a result of increased semolinasales volumes.

 

***Cost of Product Sold.*** Cost ofproduct sold increased $2.0 million, or 6.7%, to $32.2 million for the quarterended January 31, 2002. The increase resulted mainly from revenue growth offsetby lower conversion costs due to labor reductions and other cost cuttinginitiatives. Gross margin as a percentage of net revenues increased from 5.1%to 13.5% as a result of these factors.

 

***Marketing, General, and Administrative(“MG&A”) Expenses.*** MG&A expenses for the quarter endedJanuary 31, 2002 decreased by $88,000, or 3.6%, from the quarter ended January31, 2001. MG&A expenses as a percentage of net revenues decreased from 7.8%to 6.4%.

 

***Interest Expense.*** Interestexpense for the three months ended January 31, 2002, was $1.0 million,relatively unchanged from the corresponding period of the prior year.

 

***Income Taxes.***The Companyhas recorded an income tax benefit of $79,000 and $80,000 for the quartersended January 31, 2002 and 2001, respectively, relating to the reduction indeferred tax liabilities associated with differences between the book and taxbasis of property and equipment.

 

***Net Income.***Net income for the three months ended January31, 2002 totaled $1.7 million compared to the $1.8 million net loss incurredfor the three months ended January 31, 2001. The $3.5 million increase in netearnings resulted from increases in sales volumes combined with costreductions as noted above.

 

*Comparison of the Six MonthsEnded January 31, 2002 and 2001*

 

***Net Revenues.***Net revenuesincreased $9.7 million, or 14.9%, to $74.6 million for the six months endedJanuary 31, 2002, from $64.9 million for the six months ended January 31, 2001.Higher sales volumes as well as higher per unit selling prices contributed tothe increase over the corresponding period of the prior year as pasta salesvolumes increased 7.4% while pasta per unit selling prices increased 3.5%.Higher semolina sales volumes also contributed to the revenue increase.

 

Revenuesfrom the retail market increased $4.5 million, or 11.2%, as a result of an 8.3%increase in sales volumes combined with a 2.9% increase in per unit sellingprices. Foodservice revenues increased $3.7 million, or 28.5%, primarily due tovolume growth of 25.5% driven by expansions and acquisitions by our customers.Ingredient revenues decreased $1.4 million, or 18.8%, mainly as a result of a 19.7%decrease in sales volumes. The ingredient sales volume decline primarilyresulted from the loss of one customer in this market due to competitivepricing issues.

 

Revenues from semolinaand by-product sales for the six months ended January 31, 2002 were up $2.8million from the prior year as a result of increases in both sales volumes andper unit selling prices.

 

***Cost of Product Sold.*** Cost ofproduct sold for the six months ended January 31, 2002 totaled $63.7 million;an increase of 4.4% compared to the $61.0 million reported for the six monthsended January 31, 2001. The $2.7 million increase resulted mainly from revenuegrowth offset by lower conversion costs due to labor reductions and other costcutting and efficiency initiatives. Gross margin as a percentage of netrevenues increased from 6.1% to 14.6% as a result of these factors.

 

***Marketing, General, and Administrative(“MG&A”) Expenses.*** MG&A expenses decreased by $261,000,or 5.2%, to $4.8 million for the six months ended January 31, 2002, from $5.1million for the six months ended January 31, 2001. MG&A expenses as apercentage of net revenues decreased from 7.8% to 6.5%.

 

***Interest Expense.*** Interestexpense for the six months ended January 31, 2002, was $2.1 million,essentially unchanged from the six months ended January 31, 2001.

 

 

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***Income Taxes.***The Companyhas recorded an income tax benefit of $159,000 for each of the six monthperiods ending January 31, 2002 and 2001, relating to the reduction in deferredtax liabilities associated with differences between the book and tax basis ofproperty and equipment.

 

***Net Income. ***Net income for the six months ended January 31, 2002 was $4.3 millioncompared to the $2.9 million net loss incurred for the six months ended January31, 2001. The $7.2 million increase in net earnings resultedfrom improved gross margins from increased sales prices and volumes combinedwith cost reductions as noted above.

 

**Liquidity and Capital Resources**

 

Ourprimary sources of liquidity are cash provided by operations, short-termborrowings under our credit facility, and outside debt financing. Workingcapital as of January 31, 2002 and July 31, 2001 was $14.4 million.

 

On February 15, 2002, the Company secured a $19 million revolvingcredit facility with CoBank covering the period from March 1, 2002 throughFebruary 25, 2003. The revolving line has a variable interest rate not toexceed CoBank’s National Variable Rate plus 1% and is secured by property,equipment, and current assets of the Company. The balance outstanding under theCompany’s previous line of credit agreements totaled $3.5 million and $8.1million as of January 31, 2002 and July 31, 2001, respectively.

 

TheCompany’s long-term financing is provided through various secured term loansand secured notes from both the Bank and certain institutional investors.Variable interest rates on term and seasonal loans are based on the lender’scost of funds. Debt service requirements will be increasing beginning in fiscalyear 2003 in relation to previous years as minimum principal payments due onlong-term debt total $9.3 million for fiscal 2003, $10.0 million for fiscal2004 and $7.2 million for fiscal 2005. The first principal payment on theinstitutional senior secured notes totaling $3,571,000 is due August 1, 2002.

 

Thevarious debt agreements with the Bank and institutional investors obligate theCompany to maintain or achieve certain amounts of equity and certain financialratios and impose certain restrictions on the Company. The Company was incompliance with these financial covenants as of January 31, 2002 and the dateof this filing. On January 24, 2002, the Company and CoBank entered into anamendment of the Master Loan Agreement, which requires the Company to maintaina debt service coverage ratio, measured at the end of each fiscal year, of 1.25to 1. The Company had previously been required to maintain a debt servicecoverage ratio of 1.50 to 1.

 

TheCompany is currently exploring a possible sale/leaseback transaction forcertain pasta production equipment. If such a transaction is consummated, weestimate, based on current discussions, to generate $4 million to $5 million infunds, which we would anticipate using to secure and expand the Company’s salesefforts.

 

Netcash provided by operations totaled $6.4 million for the six months endedJanuary 31, 2002, compared to net cash used in operating activities totaling$2.9 for the six months ended January 31, 2001. The increase in net cashprovided by operations was primarily due to an increase in net income and adecrease in payments made under long-term marketing agreements.

 

Netcash used in investing activities relates primarily to the construction andinstallation of milling and pasta equipment and payments made for packagedesign costs. Net cash used in financing activities totaled $0.4 million and$2.6 million for the six months ended January 31, 2002 and 2001, respectively.A majority of the pasta equipment expenditures for the six months ended January31, 2001 related to the installation of a lasagna line at the New Hope,Minnesota plant. The lasagna line was completed and became operational inFebruary 2001.

 

Netcash used in financing activities totaled $6.0 million for the six months endedJanuary 31, 2002 mainly related to payments made on our credit facility andlong-term debt. Net cash from financing activities totaled $3.7 million for thesix months ended January 31, 2001, mainly from borrowings on the creditfacility offset by payments for long-term debt service and patronagedistributions. The Board of Directors authorized a qualified 

 

 

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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.

 

TheCompany has current commitments for $7.6 million in raw material purchases,primarily durum purchase commitments from its members. The Company anticipatescapital expenditures to total approximately $2.0 million in fiscal year 2002.These expenditures are primarily for pasta line upgrades and cost reductionprojects. Commitments for monthly operating lease payments for technology andother assets total $0.6****million, of which $0.4 million is duewithin one year. The Company also has a commitment to pay $1.0 million under along-term customer marketing agreement by December 31, 2002. We expect to fundthese commitments through cash from operations and borrowings under our creditfacility.

 

Managementbelieves that net cash currently available and to be provided by operatingactivities, along with its available line of credit, will be sufficient to meetthe Company’s expected capital and liquidity requirements for the foreseeablefuture.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

 

Marketrisk is the risk of loss to future earnings, to fair values or to future cashflows that may result from changes in the price of a financial instrument. Thevalue of a financial instrument may change as a result of changes in interestrates, commodity prices, exchange rates, equity prices, and other marketchanges. Market risk is attributed to all market-risk sensitive financialinstruments, including long-term debt.

 

TheCompany does not believe it is subject to any material market risk exposurewith respect to interest rates, commodity prices, exchange rates, equityprices, or other market changes that would require disclosure under this item.

 

 

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**PART II— OTHER INFORMATION**

 

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

 

Mr.Allyn K. Hart, Mr. Michael E. Warner, and Mr. Curtis R. Trulson were re-electedto their positions as members of the Company’s Board of Directors at AnnualDistrict Meetings held in December 2001.

 

Theterms of office of the remaining members of the Board of Directors continue forthe terms for which they were elected in prior years as follows: Mr. John S.Dalrymple III, Mr. James F. Link, and Mr. John D. Rice Jr. — one yearremaining; Mr. Jeffrey O. Topp, Mr. Eugene J. Nicholas, and Mr. Roger A. Kenner— two years remaining.

 

**ITEM 6. EXHIBITS AND REPORTS ONFORM 8-K**

 

**Exhibits**

 

10.1                           StatusedRevolving Credit Supplement dated February 15, 2002 between the Company andCoBank.

 

10.2                           Amendment toLoan Agreement dated January 24, 2002 between the Company and CoBank.

 

*10.3                    FirstAmendment: Five-Year Contract Extension between the Company and U.S.Foodservice dated December 20, 2001.

 

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*- Portions of this exhibit have been deleted from the publicly filed document andhave been filed separately with the Commission pursuant to a request forconfidential treatment.

 

**Reports on Form 8-K**

 

TheCompany filed a Form 8-K on February 11, 2002 announcing that on February 1,2002, Dakota Growers Restructuring Company, Inc, a wholly owned subsidiary ofDakota Growers Pasta Company (the “Company”), filed a Registration Statement onForm S-4 with the United States Securities and Exchange Commission. The S-4describes the proposed conversion of the Company from a North Dakota cooperativeinto a North Dakota corporation. Subject to the approval of the members of theCompany, the proposed conversion will be effected by a series of mergers asdescribed within the S-4.  If theproposed conversion is completed, the Company’s wholly owned subsidiary, DakotaGrowers Restructuring Company, Inc., would be the surviving entity, conductingthe Company’s on-going business.  Uponcompletion of the conversion, the surviving entity would adopt the name DakotaGrowers Pasta Company, Inc.

 

TheCompany filed a Form 8-K/A on February 28, 2002, which included the Plan ofMerger between Dakota Growers Pasta Company and Dakota Growers PastaRestructuring Cooperative, the Transaction Agreement, Articles of Incorporationof Dakota Growers Restructuring Company, Inc. and Bylaws of Dakota GrowersRestructuring Company, Inc. related to the proposed conversion noted above.

 

TheCompany filed a Form 8-K on February 28, 2002 announcing that on February 27,2002, pursuant to Rule 425 under the Securities Act of 1933, Dakota GrowersPasta Company (“Company”) filed with the Securities and Exchange Commission aletter from Thomas Friezen, the Chief Financial Officer of the Company, to PamMuslin at Farmers Union. The Letter to Farmers Union filed under Rule 425 ofthe Securities Act of 1933 was included.

 

 

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**SIGNATURES**

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | DAKOTA GROWERS PASTA  COMPANY |
|--------|-------------------------------|
|   |                          |
|   |                          |
|   | By:                           | /s/  Timothy J. Dodd |
|   |                          | Timothy  J. Dodd, |
|   |                          | PRESIDENT  AND GENERAL MANAGER, |
|   |                          | AND  PRINCIPAL EXECUTIVE OFFICER |
|   |                          |   |
|   | Dated: March 14, 2002         |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **Signature**          |   | **Title**                       |   | **Date**        |
|------------------------|--------|---------------------------------|--------|-----------------|
|                   |   |                            |   |            |
| /s/  Timothy J. Dodd   |   | General  Manager                |   |            |
| Timothy  J. Dodd       |   | (Principal  Executive Officer)  |   | March  14, 2002 |
|                   |   |                            |   |            |
|                   |   |                            |   |            |
|                   |   |                            |   |            |
| /s/  Thomas P. Friezen |   | Chief  Financial Officer        |   |            |
| Thomas  P. Friezen     |   | (Principal  Financial Officer)  |   | March  14, 2002 |
|                   |   |                            |   |            |
|                   |   |                            |   |            |
|                   |   |                            |   |            |
| /s/  Edward O. Irion   |   | Vice  President - Finance       |   |            |
| Edward  O. Irion       |   | (Principal  Accounting Officer) |   | March  14, 2002 |

 

 

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