**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

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

 

**For the quarterly period ended October 31,2005**

 

**or**

 

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

 

----

 

**Commission File No. 000-50111**

 

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

(Exact name ofregistrant as specified in its charter)

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

 

**One Pasta Avenue, Carrington, ND58421**

(Address of principalexecutive offices including zip code)

 

**(701) 652-2855**

(Registrant’s telephonenumber, including area code)

 

**NOT APPLICABLE**

(Former name, formeraddress and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes  ý    No  o

 

Indicate by check mark whether the registrant isan accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes  o    No  ý

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

Yes  o    No  ý

 

As of December 15,2005, the Registrant had 13,169,382 shares of common stock, par value $0.01 pershare, outstanding.

 

 

----

 

**PART I– FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                              | ** ** | **(Unaudited)**            | ** ** | ** **              | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                                                              | ** ** | **October 31,  2005** | ** ** | **July 31,  2005** | ** ** |
| **ASSETS**                                                                                                              |       |                       |       |                    |       |
|                                                                                                                    |       |                       |       |                    |       |
| CURRENT  ASSETS                                                                                                         |       |                       |       |                    |       |
| Cash and  cash equivalents                                                                                              |       | $                          | 345        |                    | $          | 229 |   |
|                                                                                                                    |       |                       |       |                    |       |
| Trade  accounts receivable, less allowance for cash discounts and doubtful accounts  of $1,571 and $1,507, respectively |       | 17,449                     |       | 16,188                  |       |
|                                                                                                                    |       |                       |       |                    |       |
| Other  receivables                                                                                                      |       | 136                        |       | 411                     |       |
|                                                                                                                    |       |                       |       |                    |       |
| Inventories                                                                                                             |       | 25,502                     |       | 28,102                  |       |
|                                                                                                                    |       |                       |       |                    |       |
| Prepaid  expenses                                                                                                       |       | 3,484                      |       | 2,578                   |       |
|                                                                                                                    |       |                       |       |                    |       |
| Deferred  income taxes                                                                                                  |       | 955                        |       | 955                     |       |
|                                                                                                                    |       |                       |       |                    |       |
| Total  current assets                                                                                                   |       | 47,871                     |       | 48,463                  |       |
|                                                                                                                    |       |                       |       |                    |       |
| PROPERTY AND  EQUIPMENT                                                                                                 |       |                       |       |                    |       |
| In service                                                                                                              |       | 110,407                    |       | 111,394                 |       |
| Construction  in progress                                                                                               |       | 13,733                     |       | 7,350                   |       |
|                                                                                                                    |       | 124,140                    |       | 118,744                 |       |
| Less  accumulated depreciation                                                                                          |       | (52,855                    | )          | (52,286                 | )          |
|                                                                                                                    |       |                       |       |                    |       |
| Net property  and equipment                                                                                             |       | 71,285                     |       | 66,458                  |       |
|                                                                                                                    |       |                       |       |                    |       |
| INVESTMENT  IN COOPERATIVE BANK                                                                                         |       | 1,947                      |       | 2,054                   |       |
|                                                                                                                    |       |                       |       |                    |       |
| GOODWILL                                                                                                                |       | 16,654                     |       | 16,654                  |       |
|                                                                                                                    |       |                       |       |                    |       |
| OTHER ASSETS                                                                                                            |       | 1,158                      |       | 1,501                   |       |
|                                                                                                                    |       |                       |       |                    |       |
|                                                                                                                    |       | $                          | 138,915    |                    | $          | 135,130 |   |

 

2

----

 
| ** **                                                                                                                                                                       | ** ** | **(Unaudited)**            | ** ** | ** **              | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                                       | ** ** | **October 31,  2005** | ** ** | **July 31,  2005** | ** ** |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                    |       |                       |       |                    |       |
|                                                                                                                                                                             |       |                       |       |                    |       |
| CURRENT  LIABILITIES                                                                                                                                                             |       |                       |       |                    |       |
| Excess  outstanding checks over cash on deposit                                                                                                                                  |       | $                          | 2,527      |                    | $          | 3,110 |   |
| Accounts  payable                                                                                                                                                                |       | 5,925                      |       | 4,197                   |       |
| Accrued  liabilities                                                                                                                                                             |       | 5,981                      |       | 6,229                   |       |
| Notes  payable                                                                                                                                                                   |       | 12,600                     |       | 10,000                  |       |
| Current  portion of long-term debt                                                                                                                                               |       | 5,271                      |       | 4,771                   |       |
|                                                                                                                                                                             |       |                       |       |                    |       |
| Total  current liabilities                                                                                                                                                       |       | 32,304                     |       | 28,307                  |       |
|                                                                                                                                                                             |       |                       |       |                    |       |
| COMMITMENTS  AND CONTINGENCIES                                                                                                                                                   |       | —                     |       | —                  |       |
| LONG-TERM  DEBT, net of current portion                                                                                                                                          |       | 25,045                     |       | 25,385                  |       |
| DEFERRED  INCOME TAXES                                                                                                                                                           |       | 11,520                     |       | 11,419                  |       |
| OTHER  LIABILITIES                                                                                                                                                               |       | 73                         |       | 85                      |       |
| MANDATORILY  REDEEMABLE PREFERRED STOCK                                                                                                                                          |       |                       |       |                    |       |
| Series A,  6% cumulative, $100 par value, 533 shares authorized, 33 and 67 shares issued  and outstanding as of October 31, 2005 and July 31, 2005,  respectively |       | 3                          |       | 7                       |       |
|                                                                                                                                                                             |       |                       |       |                    |       |
| Total  liabilities                                                                                                                                                               |       | 68,945                     |       | 65,203                  |       |
|                                                                                                                                                                             |       |                       |       |                    |       |
| NONCONTROLLING  INTERESTS                                                                                                                                                        |       | 8,434                      |       | 8,795                   |       |
|                                                                                                                                                                             |       |                       |       |                    |       |
| STOCKHOLDERS’  EQUITY                                                                                                                                                       |       |                       |       |                    |       |
| Series D  delivery preferred stock, non-cumulative, $.01 par value, 11,340,841  authorized, 11,275,297 shares issued and outstanding                                        |       | 113                        |       | 113                     |       |
| Common  stock, $.01 par value, 75,000,000 shares authorized, 13,169,382 issued and  outstanding                                                                                  |       | 132                        |       | 132                     |       |
| Additional  paid-in capital                                                                                                                                                      |       | 62,812                     |       | 62,807                  |       |
| Accumulated  deficit                                                                                                                                                             |       | (1,521                     | )          | (1,920                  | )          |
|                                                                                                                                                                             |       |                       |       |                    |       |
| Total  stockholders’ equity                                                                                                                                                 |       | 61,536                     |       | 61,132                  |       |
|                                                                                                                                                                             |       |                       |       |                    |       |
| Total  liabilities and stockholders’ equity                                                                                                                                 |       | $                          | 138,915    |                    | $          | 135,130 |   |

 

SeeNotes to Consolidated Financial Statements

 

3

----

 

**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                         | ** ** | **Three Months Ended  October 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| Net revenues  (net of discounts and allowances of $7,126 and $6,261, respectively) |       | $                                        | 44,072     |   | $ | 35,877 |   |
|                                                                               |       |                                     |       |   |   |
| Cost of  goods sold                                                                |       | 38,832                                   |       | 31,897 |   |
|                                                                               |       |                                     |       |   |   |
| Gross profit                                                                       |       | 5,240                                    |       | 3,980 |   |
|                                                                               |       |                                     |       |   |   |
| Marketing,  general and administrative expenses                                    |       | 3,868                                    |       | 5,684 |   |
|                                                                               |       |                                     |       |   |   |
| Operating  income (loss)                                                           |       | 1,372                                    |       | (1,704 | ) |
|                                                                               |       |                                     |       |   |   |
| Other income  (expense)                                                            |       |                                     |       |   |   |
| Interest and  other income                                                         |       | 30                                       |       | 9 |   |
| (Loss) gain  on disposition of property, equipment and other assets                |       | (585                                     | )          | 9 |   |
| Interest  expense, net                                                             |       | (549                                     | )          | (638 | ) |
|                                                                               |       |                                     |       |   |   |
| Income  (loss) before noncontrolling interests and income taxes                    |       | 268                                      |       | (2,324 | ) |
|                                                                               |       |                                     |       |   |   |
| Noncontrolling  interests                                                          |       | 386                                      |       | 2,021 |   |
|                                                                               |       |                                     |       |   |   |
| Income  (loss) before income taxes                                                 |       | 654                                      |       | (303 | ) |
|                                                                               |       |                                     |       |   |   |
| Income tax  expense (benefit)                                                      |       | 255                                      |       | (118 | ) |
|                                                                               |       |                                     |       |   |   |
| Net income  (loss)                                                                 |       | $                                        | 399        |   | $ | (185 | ) |
|                                                                               |       |                                     |       |   |   |
| Net income  (loss) per common share                                                |       |                                     |       |   |   |
| Basic                                                                              |       | $                                        | 0.03       |   | $ | (0.01 | ) |
|                                                                               |       |                                     |       |   |   |
| Diluted                                                                            |       | $                                        | 0.03       |   | $ | (0.01 | ) |
|                                                                               |       |                                     |       |   |   |
| Weighted  average common shares outstanding                                        |       |                                     |       |   |   |
| Basic                                                                              |       | 13,169                                   |       | 13,169 |   |
|                                                                               |       |                                     |       |   |   |
| Diluted                                                                            |       | 13,570                                   |       | 13,529 |   |

 

SeeNotes to Consolidated Financial Statements

 

4

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
| ** **                                                                                     | ** ** | **Three Months Ended  October 31,** | ** ** |
|------------------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                                     | ** ** | **2005**                                 | ** ** | **2004** | ** ** |
| OPERATING  ACTIVITIES                                                                          |       |                                     |       |   |   |
| Net income  (loss)                                                                             |       | $                                        | 399        |   | $ | (185 | ) |
| Adjustments  to reconcile net income (loss) to net cash from (used for) operating  activities: |       |                                     |       |   |   |
| Depreciation  and amortization                                                                 |       | 1,734                                    |       | 1,998 |   |
| Loss (gain)  on disposition of property, equipment and other assets                            |       | 585                                      |       | (9 | ) |
| Net loss  allocated from joint venture under equity method                                     |       | —                                   |       | 638 |   |
| Noncontrolling  interests                                                                      |       | (386                                     | )          | — |   |
| Deferred  income taxes                                                                         |       | 101                                      |       | (118 | ) |
| Stock-based  employee compensation                                                             |       | 5                                        |       | — |   |
| Changes in  assets and liabilities                                                             |       |                                     |       |   |   |
| Trade  receivables                                                                             |       | (1,261                                   | )          | (3,301 | ) |
| Other  receivables                                                                             |       | 275                                      |       | 596 |   |
| Inventories                                                                                    |       | 2,600                                    |       | 26 |   |
| Prepaid  expenses                                                                              |       | (917                                     | )          | (353 | ) |
| Other assets                                                                                   |       | 12                                       |       | 2 |   |
| Accounts  payable                                                                              |       | 1,728                                    |       | (1,299 | ) |
| Other  accrued liabilities                                                                     |       | (248                                     | )          | 1,810 |   |
| NET CASH  FROM (USED FOR) OPERATING ACTIVITIES                                                 |       | 4,627                                    |       | (195 | ) |
|                                                                                           |       |                                     |       |   |   |
| INVESTING  ACTIVITIES                                                                          |       |                                     |       |   |   |
| Purchases of  property and equipment                                                           |       | (6,766                                   | )          | (598 | ) |
| Payments for  package design costs                                                             |       | (50                                      | )          | (264 | ) |
| Proceeds  from cooperative bank equity retirements                                             |       | 107                                      |       | 60 |   |
| Investments  in joint venture                                                                  |       | —                                   |       | (1,469 | ) |
| NET CASH  USED FOR INVESTING ACTIVITIES                                                        |       | (6,709                                   | )          | (2,271 | ) |
|                                                                                           |       |                                     |       |   |   |
| FINANCING  ACTIVITIES                                                                          |       |                                     |       |   |   |
| Net change  in excess outstanding checks over cash on deposit                                  |       | (583                                     | )          | 3,463 |   |
| Net change  in short-term notes payable                                                        |       | 2,600                                    |       | 4,500 |   |
| Payments on  long-term debt                                                                    |       | (4,771                                   | )          | (6,081 | ) |
| Proceeds  from long-term debt                                                                  |       | 4,931                                    |       | — |   |
| Preferred  stock retirements                                                                   |       | (4                                       | )          | (3 | ) |
| Investments  by noncontrolling interests                                                       |       | 25                                       |       | — |   |
| NET CASH  FROM FINANCING ACTIVITIES                                                            |       | 2,198                                    |       | 1,879 |   |
|                                                                                           |       |                                     |       |   |   |
| NET CHANGE  IN CASH AND CASH EQUIVALENTS                                                       |       | 116                                      |       | (587 | ) |
| CASH AND  CASH EQUIVALENTS, BEGINNING OF PERIOD                                                |       | 229                                      |       | 589 |   |
| CASH AND  CASH EQUIVALENTS, END OF PERIOD                                                      |       | $                                        | 345        |   | $ | 2 |   |
|                                                                                           |       |                                     |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                                             |       |                                     |       |   |   |
| Cash  payments for                                                                             |       |                                     |       |   |   |
| Interest  (net of amounts capitalized)                                                         |       | $                                        | 906        |   | $ | 1,091 |   |
|                                                                                           |       |                                     |       |   |   |
| Income taxes                                                                                   |       | $                                        | 252        |   | $ | 63 |   |

 

SeeNotes to Consolidated Financial Statements

 

5

----

 

**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notes should beread in conjunction with the notes to the financial statements for the yearended July 31, 2005 as filed in the Company’s Form 10-K.

 

**NOTE1 - ORGANIZATION**

 

Dakota Growers Pasta Company, Inc. (“DakotaGrowers” or “the Company”) is a North Dakota corporation that operates amilling and pasta manufacturing facility in Carrington, North Dakota. In addition,the Company’s wholly-owned subsidiary, Primo Piatto, Inc. (“Primo Piatto”),a Minnesota corporation, operates a pasta manufacturing facility in New Hope,Minnesota.

 

**NOTE2 – FINANCIAL STATEMENT PRESENTATION**

 

The unaudited consolidated financial statements included herein havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission for quarterly reporting. Accordingly, they do not includeall the information and footnotes required by accounting principles generallyaccepted in the United States of America for complete financial statements. Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.Operating results for the three months ended October 31, 2005 are notnecessarily indicative of the results that may be expected for the year ended July 31,2006. The unaudited consolidated financial statements included in this Form 10-Qshould be read in conjunction with the consolidated financial statements andfootnotes included in the Company’s Form 10-K for the year ended July 31,2005. The information contained in the balance sheet as of July 31, 2005was derived from the Company’s audited annual report for fiscal year 2005. Reclassificationshave been made to facilitate comparability with current presentation. Suchreclassifications have no effect on the net results of operations.

 

The financial information presented hereinincludes the consolidated balance sheets and results of operations of the Company, its wholly-owned subsidiaryPrimo Piatto, Inc., and DNA Dreamfields Company, LLC (“DNA Dreamfields”),which the Company began to consolidate in fiscal year 2005. All materialinter-company accounts and transactions have been eliminated in the preparationof the consolidated financial statements.

 

**NOTE3 – NEW ACCOUNTING STANDARDS**

 

The FASB issued SFAS No. 123(R), “Share-BasedPayment” in December 2004. SFAS No. 123(R) is a revision of SFAS No. 123,“Accounting for Stock Based Compensation” and is effective for fiscal quartersbeginning after June 15, 2005. SFAS No. 123(R) requires the cost ofshare-based payments to employees, including grants of employee stock options,to be measured based on grant-date fair values. That cost is recognized overthe period during which an employee is required to provide service in exchangefor the award, usually the vesting period. The Company adopted SFAS No. 123(R)in the quarter ended October 31, 2005. The adoption of this statement didnot have a material impact on the Company’s financial statements. However,future employee stock option grants may have a material impact on the Company’sfinancial statements as a result of SFAS No. 123(R).

 

The FASB issued SFAS No. 151, “Inventory Costs,an amendment of ARB 43, Chapter 4” in November 2004. SFAS No. 151amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” toclarify the accounting for abnormal amounts of idle facility expense, freight,handling costs, and wasted material (spoilage) so as to require such costs tobe treated as current period charges. Further, this statement requires that theallocation of fixed overhead costs to inventoriable production costs be basedon the normal capacity of the production facilities.  The provisions ofthis Statement are effective for inventory costs incurred during fiscal yearsbeginning after June 15, 2005. The Company adopted SFAS No. 151 inthe quarter ended October 31, 2005. The adoption of this statement did nothave a material impact on the Company’s financial statements. However, futurechanges in the Company’s production or logistics could have a material impacton the Company’s financial statements as a result of SFAS No. 151.

 

6

----

 

**NOTE4 – INVENTORIES**

 

Inventories are valued at lowerof cost or market. Inventories as of October 31, 2005 include rawmaterials and packaging of $7,686,000 and finished goods of $17,816,000.Inventories at July 31, 2005 include raw materials and packaging of $7,262,000and finished goods of $20,840,000.

 

###### **NOTE 5 – LOANAGREEMENTS**

 

The Company has a $25 million revolving credit facility with CoBankwhich matures on May 31, 2006. Balances outstanding under revolving lineof credit arrangements totaled $12.6 million as of October 31, 2005, and$10.0 million as of July 31, 2005. The Company had $12.4 million availablefor borrowings under the line of credit as of October 31, 2005.

 

The Company also has a term loan facility with CoBank under which theCompany may borrow an aggregate principal amount of up to $19 million through May 1,2006. Balances outstanding under the term loan were $14.0 million and $9.1million as of October 31, 2005 and July 31, 2005, respectively.

 

The Company’s various debt agreements with CoBank and certaininstitutional note holders obligate the Company to maintain or achieve certainamounts of equity and certain financial ratios and impose certain restrictionson the Company. The Company was in compliance with these financial covenants asof October 31, 2005.

 

###### **NOTE 6 – EARNINGSPER SHARE**

 

Basic earnings per share (EPS)is calculated by dividing net earnings on common stock by the weighted averagenumber of common shares outstanding during the period. Diluted EPS includes theeffect of all potentially dilutive securities, such as stock options andconvertible preferred stock.

 

Dilutive securities, consisting of stock options and convertiblepreferred stock, included in the calculation of diluted weighted average commonshares totaled 401,000 and 360,000 for the three months ended October 31,2005 and 2004, respectively. As there is currently no established publictrading market for the Company’s common stock, the Company has assumed theproceeds from the exercise of stock options would reduce debt and, thus,interest expense.

 

**NOTE 7 – DNA DREAMFIELDS COMPANY, LLC**

 

Effective May 1, 2005, theCompany’s ownership in DNA Dreamfields increased to 46.7%. In conjunction with the Company’s increase inownership in DNA Dreamfields and changes in the DNA Dreamfieldsoperating agreement and other contractual agreements, the Company determined that DNA Dreamfields was a variableinterest entity under FASB Interpretation No. 46(R), “Consolidation ofVariable Interest Entities,” and that the Company was the primary beneficiary.Therefore, effective May 1, 2005, the Company began to include DNADreamfields in its consolidated financial statements. The results for thequarter ended October 31, 2004 are presented to include the results ofoperations of DNA Dreamfields in the consolidated income statement.

 

7

----

 

The Company entered into a “2005Line of Credit Loan Agreement” with DNA Dreamfields in the fourth quarter offiscal year 2005. Under that Agreement, the Company will loan up to$5,000,000 to DNA Dreamfields, with DNA Dreamfields able to repay and reborrowamounts under the Line of Credit Loan Agreement from time to time. TheLine of Credit Loan Agreement matures on May 31, 2010. The balanceoutstanding related to advances to DNA Dreamfields under the Line of CreditLoan Agreement totaled $1,165,000 and $465,000 as of October 31, 2005 and July 31,2005, respectively.  These inter-companyamounts have been eliminated in the preparation of the consolidated financialstatements.

 

###### **NOTE 8 – COMMITMENTS**

 

The Company forward contractsfor a certain portion of its future durum wheat requirements. The Company hadoutstanding commitments for grain purchases totaling $12,460,000 as of October 31,2005, related to forward purchase contracts. These contracts are set pricecontracts to deliver grain to the Company’s mill, and are not derivative innature as they have no net settlement provision and are not transferable.

 

The Company had commitments topurchase pasta equipment totaling $682,000 as of October 31, 2005. Theseamounts are expected to be paid within one year.

 

8

----

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) should be read in conjunction with the MD&A includedin the Company’s Form 10-K for the year ended July 31, 2005.

 

**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. Such statements arebased on assumptions by the Company’s management as of the date of thisQuarterly Report, and are subject to risks and uncertainties, including thosediscussed in the Company’s Form 10-K for the year ended July 31, 2005under “Risk Factors,” that could cause actual results to differ materially fromthose anticipated. The Company cautions readers not to place undue reliance onsuch forward-looking statements. The Company will not update anyforward-looking statements in this Quarterly Report to reflect future events ordevelopments.

 

**Summary**

 

Dakota Growers is the third largest pastamanufacturer in North America. The Company has two production plants, locatedin Carrington, North Dakota and New Hope, Minnesota, and generates a majorityof its revenues from manufacturing pasta for the retail store brand and foodservicemarkets, although we serve and continually look for opportunities in the entiredry pasta industry.  The Company’s costof goods sold consists mainly of raw materials (primarily durum wheat),packaging, and manufacturing and distribution costs.  The Company competes through low costproduction, high product quality, flexibility and customer service.

 

Netincome for the quarter ended October 31, 2005 totaled $399,000 compared toa net loss of $185,000 for the quarter ended October 31, 2004.  Net earnings per basic common share for thequarter ended October 31, 2005 were $0.03 per share compared to a $0.01per share loss for the quarter ended October 31, 2004.  The Company recorded a $598,000 losson disposal during the quarter ended October 31, 2005 related to theretirement of certain equipment in conjunction with the capital project at theNew Hope, Minnesota facility. Excluding the impact of this non-cash charge, netearnings for the quarter ended October 31, 2005 were $0.06 per share.

 

TheCompany’s net revenues increased 22.8% for the quarter ended October 31,2005 when compared to the same period of last year, due primarily to increasedsales volumes. A significant portion of the new volume increases were in placefor the last three quarters of fiscal year 2005. Therefore, the Companyanticipates that its net revenue growth in the second, third and fourthquarters of fiscal year 2006, while still substantive, will not show percentageincreases comparable to that displayed by the comparison of the first quarterof fiscal year 2006 to the first quarter of fiscal year 2005. Benefits derivedfrom increased sales along with lower durum costs were partially offset bycontinued higher transportation costs. Freight cost increases were driven by acombination of higher diesel fuel prices and reduced rail and truckavailability, and are expected to have a continuing negative impact in theCompany’s second quarter of fiscal year 2006. Sales price increases starting inthe second quarter of fiscal year 2006 are expected to partially mitigate theimpact of these higher costs.

 

A$15.0 million capital project is currently in progress at the Company’s NewHope, Minnesota facility to better balance its pasta production capabilitiesand improve operating costs. A main component of this project is theinstallation of a new, state-of-the-art short goods production line. The newshort goods line, which became operational during the Company’s second fiscalquarter 2006, increased the New Hope plant’s capacity by 35% to approximately230 million pounds annually. However, higher conversion costs per unit at theNew Hope facility during the installation and start-up of the new productionline negatively impacted the Company’s results for the first quarter of fiscalyear 2006 and are expected to negatively impact results for the second quarterof fiscal year 2006 as well.

 

9

----

 

**Critical Accounting Policies**

 

Theaccompanying discussion and analysis of our results of operations and financialcondition are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. We base our estimates and judgments onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances. However, future events are subject to changeand the best estimates and judgments may require adjustment. For a completedescription of the Company’s significant accounting policies, please see Note 1to the consolidated financial statements included in the Company’s Form 10-Kfor the year ended July 31, 2005. Our critical accounting policies arethose that have meaningful impact on the reporting of our financial conditionand results, and that require significant management judgment and estimates.These policies include our accounting for (a) allowance for doubtfulaccounts, (b) inventory valuation, (c) asset impairment, and (d) incometaxes.

 

*Allowance for Doubtful Accounts*

 

Weevaluate the collectibility of our accounts receivable based on a combinationof factors. In cases where we are aware of circumstances that may impair aspecific customer’s ability to meet its financial obligations to us, we recorda specific allowance against amounts due to us, and thereby reduce the netrecognized receivable to the amount we reasonably believe will be collected.For all other customers, we recognize allowances for doubtful accounts based onthe length of time the receivables are past due and our historical experience.If the financial condition of our customers deteriorates, additional allowancesmay be required in the future that could have an adverse impact on our futureoperating results.

 

*Inventory Valuation*

 

Inventories are stated at the lower of cost or market, determined on afirst-in, first-out (FIFO) basis, using product specific standard costs. The Companyanalyzes variances between actual manufacturing costs incurred and amountsabsorbed at inventory standard costs. Inventory valuations are adjusted forthese variances as applicable. The Company regularly evaluates its inventoriesand recognizes inventory allowances for discontinued and slow-movinginventories based upon these evaluations.

 

*Asset Impairment*

 

Weare required to evaluate our long-lived assets, including goodwill, forimpairment and write down the value of any assets if they are determined to beimpaired. Evaluating the impairment of long-lived assets involves managementjudgment in estimating the future cash flows and fair values related to theseassets. Future events could cause management to conclude that impairmentindicators exist and that the value of certain long-lived assets is impaired.

 

*Income Taxes*

 

Indetermining income (loss) for financial statement purposes, management mustmake certain estimates and judgments in calculating tax liabilities and indetermining the recoverability of certain deferred tax assets. Deferred taxassets must be reduced by a valuation allowance if, based on the weight ofavailable evidence, it is more likely than not that some portion or all of therecorded deferred tax assets will not be realized in future periods. Managementbelieves it is likely that the deferred tax assets as of October 31, 2005will be realized through the generation of future taxable income and taxplanning strategies.

 

10

----

 

**Basis of Presentation**

 

Effective May 1, 2005, the Company began toinclude DNA Dreamfields in its consolidated financial statements.  Theresults for the quarter ended October 31, 2004 are presented to includethe results of operations of DNA Dreamfields in the consolidated incomestatement. See Note 7 of the consolidated financial statements for additionalinformation.

 

**Results of Operations**

 

*Comparison of the Three Months Ended October 31,2005 and 2004*

 

***Net Revenues.***Netrevenues totaled $44.1 million for the three months ended October 31,2005, an increase of $8.2 million, or 22.8%, compared to $35.9 million for thethree months ended October 31, 2004. Total pasta sales volumes increased 23.7% with sales in each of theretail, foodservice and ingredient markets realizing volume gains. Ingredientsales volumes had the highest percentage increase at 41.5%, while retail salesvolumes increased 24.5%, and foodservice sales volumes increased 13.6%. Theincrease in the ingredient market primarily related to one customer. A portionof the volume increases in the retail and foodservice market related toincreased governmental and co-pack sales. Per unit selling prices remained relatively flat with retail sellingprices up 2.0%, foodservice selling prices up 0.4% and ingredient sellingprices down 2.1%.

 

The Company marketssemolina production in excess of its own requirements as well as durum wheatflour, other flour blends and by-products of the durum milling process.Revenues from mill product sales totaled $2.5 million for the three monthsended October 31, 2005, an increase of $0.2 million when compared to thesame period of the prior year.

 

***Cost of Goods Sold.*** Cost of goods sold increased $6.9million, or 21.7%, to $38.8 million for the three months ended October 31,2005, compared to $31.9 million for the three months ended October 31,2004.  The increase was primarily due tohigher sales volumes.  Gross profit as apercentage of net revenues improved to 11.9% for the three months ended October 31,2005 from 11.1% for the three months ended October 31, 2004. Benefitsderived from lower durum costs were largely offsetby the negative impact of higher freight costs and higher per unit conversioncosts.

 

***Marketing, General, and Administrative (“MG&A”) Expenses.*** MG&Aexpenses decreased $1.8 million, or 31.9%, to $3.9 million for the quarterended October 31, 2005, compared to $5.7 million for the quarter ended October 31,2004. The decrease was primarily due to lower consumer advertising costsassociated with DreamfieldsTM pasta products. MG&A expenses as apercentage of net revenues decreased to 8.8% for the quarter ended October 31,2005, from 15.8% for the comparable quarter of the prior year.

 

***(Loss) Gain on Disposition of Property, Equipment and Other Assets (“Losson Disposition”). ***The Companyincurred a Loss on Disposition of $0.6 million during the three months ended October 31,2005.  Virtually all of this loss wasrelated to the retirement of certain equipment in conjunction with the capitalproject at the New Hope, Minnesota facility.

 

***Interest Expense.*** Interest expense for the three monthsended October 31, 2005 totaled $0.5 million, down $0.1 million from thecorresponding period of the prior year.

 

***Noncontrolling Interests. ***Noncontrollinginterests reflects the portion of the DNA Dreamfields Company, LLC net lossallocable to other members of DNA Dreamfields and totaled $0.4 million and $2.0million for the three months ended October 31, 2005 and 2004,respectively. The $1.6 million decrease was primarily due to the net loss ofDNA Dreamfields being significantly lower than for the comparable quarter ofthe prior year, offset somewhat by the Company’s increased ownership in DNADreamfields.

 

***Income Taxes.***The income taxexpense for the three months ended October 31, 2005 totaled $0.3 millioncompared to an income tax benefit of $0.1 million for the quarter ended October 31,2004.  Both the income tax expense andbenefit reflect an effective corporate income tax rate of approximately 39%.

 

11

----

 

***Net Income (Loss). ***Net income for the three months ended October 31,2005 totaled $0.4 million, an increase of $0.6 million compared to the net lossof $0.2 million for the three months ended October 31, 2004.

 

**Liquidity and Capital Resources**

 

TheCompany’s primary sources of liquidity are cash provided by operations andborrowings under its revolving credit facility. Working capital as of October 31,2005 totaled $15.6 million compared to $20.2 million as of July 31, 2005.

 

The Company has a $25 million revolvingcredit facility with CoBank, which extends through May 31, 2006.  The balance outstanding on the line of creditwas $12.6 million as of October 31, 2005, leaving $12.4 million availablefor borrowings as of that date.

 

TheCompany’s various debt agreements with CoBank and certain institutionalinvestors obligate the Company to maintain or achieve certain amounts of equityand certain financial ratios and impose certain restrictions on the Company.The Company was in compliance with these financial covenants as of October 31,2005 and the date of this filing.

 

Netcash provided from operating activities totaled $4.6 million for the threemonths ended October 31, 2005 compared to net cash used for operatingactivities of $0.2 million for the three months ended October 31,2004.  Significant items contributing tothis increase were changes in inventories, trade receivables and net income asadjusted for non-cash items.  Inventoriesdecreased $2.6 million for the quarter ended October 31, 2005 whileinventories remained relatively unchanged for the quarter ended October 31,2004.  The decrease in inventories forthe quarter ended October 31, 2005 related to the Company’s utilization ofinventories built-up over the latter portion of fiscal year 2005 to compensatefor reduced pasta production volumes resulting from the production upgradeproject at the New Hope manufacturing facility.

 

Net cash used for investing activitiestotaled $6.7 million and $2.3 million for the three months ended October 31,2005 and 2004, respectively.  Themajority of this increase related to capital expenditures for the New Hopeupgrade project.  As of October 31,2005, the Company had expended a total of $13.0 million and entered intoadditional equipment purchase commitments totaling $0.7 million in conjunctionwith this project. Due to current sales demand and related productioncapabilities, the Company has delayed the installation of certain pastaproduction equipment totaling approximately $4.0 million associated with theNew Hope project.

 

Netcash from financing activities totaled $2.2 million and $1.9 million for thethree months ended October 31, 2005 and 2004, respectively.  The $2.2 million of net cash from financingactivities for the quarter ended October 31, 2005 included $4.9 million inborrowings under the CoBank secured term loan facility to finance the New Hopeproduction upgrade project.

 

TheCompany entered into a “2005 Line of Credit Loan Agreement” with DNADreamfields in the fourth quarter of fiscal year 2005, under which the Companywill loan up to $5.0 million to DNA Dreamfields. The balance outstandingrelated to advances to DNA Dreamfields under the Line of Credit Loan Agreementtotaled $1.2 million and $0.5 million as of October 31, 2005 and July 31,2005, respectively.

 

U.S.Customs and Border Protection (“Customs”) has distributed antidumping andcountervailing duties assessed on certain pasta imported from Italy and Turkeyto affected domestic producers pursuant to the Continued Dumping and SubsidyOffset Act of 2000 (the “Act”). The Company received $1.1 million in December 2005under the Act, which will be recognized as other income in the Company’s fiscalsecond quarter 2006. The Company cannot reasonably estimate the potentialamount, if any, that it may receive under the Act in future periods as any suchamount will be based upon future events over which the Company has little or nocontrol, including, but not limited to, the amount of expenditures by domesticpasta producers and the amount of antidumping and countervailing dutiescollected by Customs.

 

12

----

 

The following table summarizesthe Company’s contractual obligations as of October 31, 2005 (inthousands):

 
| **Contractual Obligations** | ** ** | **Total** | ** ** | **Payments  Due in Less  Than 1 Year** | ** ** | **Payments  Due in  1-3 Years** | ** ** | **Payments  Due in  4-5 Years** | ** ** | **Payments  Due After  5 Years** | ** ** |
|-----------------------------|------------|-----------|------------|----------------------------------------|------------|---------------------------------|------------|---------------------------------|------------|----------------------------------|------------|
|                        |       |      |       |                                   |       |                            |       |                            |       |                             |       |
| Long-term  debt             |       | $         | 30,316     |                                   | $          | 5,271                           |       | $                               | 21,945     |                             | $          | 3,100 |   | $ | — |   |
| Durum  purchase obligations |       | 12,460    |       | 12,460                                 |       | —                          |       | —                          |       | —                           |       |
| Warehouse  obligations      |       | 4,640     |       | 1,827                                  |       | 2,813                           |       | —                          |       | —                           |       |
| Operating  leases           |       | 2,215     |       | 1,225                                  |       | 937                             |       | 53                              |       | —                           |       |
|                        |       |      |       |                                   |       |                            |       |                            |       |                             |       |
|                        |       | $         | 49,631     |                                   | $          | 20,783                          |       | $                               | 25,695     |                             | $          | 3,153 |   | $ | — |   |

 

TheCompany forward contracts for a certain portion of its future durum wheatrequirements. At October 31, 2005, the Company had outstanding commitmentsfor grain purchases totaling $12.5 million related to forward purchasecontracts. These contracts are set price contracts to deliver grain to theCompany’s mill, and are not derivative in nature as they have no net settlementprovision and are not transferable.

 

Managementbelieves that net cash currently available and to be provided by operatingactivities, along with amounts available under the Company’s line of credit andterm loan facilities, will be sufficient to meet the Company’s expected capitaland liquidity requirements for the foreseeable future.

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Market risk is the risk of loss to future earnings, to fair values orto future cash flows that may result from changes in the price of a financialinstrument. The value of a financial instrument may change as a result ofchanges in interest rates, commodity prices, exchange rates, equity prices andother market changes. Market risk is attributed to all market-risk sensitivefinancial instruments, including long-term debt.

 

The Company forward contracts for a certainportion of its future durum wheat requirements. These contracts are set pricecontracts to deliver grain to the Company’s mill, and are not derivative innature as they have no net settlement provision and are not transferable. 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.

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

***Evaluation of DisclosureControls and Procedures***

 

The Company’s Chief Executive Officer, Timothy J.Dodd, and Chief Financial Officer, Thomas P. Friezen, have evaluated theCompany’s disclosure controls and procedures as of the end of the periodcovered by this report. Based upon the review, they have concluded that thesecontrols and procedures are effective.

 

***Changes in Internal Controlsover Financial Reporting***

 

Therewere no changes in the Company’s internal controls over financial reportingduring the Company’s fiscal quarter ended October 31, 2005 thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

13

----

 

**PART II – OTHER INFORMATION**

 

**ITEM 6. EXHIBITS**

 

**Exhibits**

 
| 31.1   |   | Certification  of Chief Executive Officer required by Securities and Exchange Commission  Rule 13a-14(a) or 15d-14(a).        |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                    |
| 31.2   |   | Certification  of Chief Financial Officer required by Securities and Exchange Commission  Rule 13a-14(a) or 15d-14(a).        |
|   |   |                                                                                                                                    |
| 32.1   |   | Certification of Chief Executive  Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18  U.S.C. Section 1350. |
|   |   |                                                                                                                                    |
| 32.2   |   | Certification of Chief Financial  Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18  U.S.C. Section 1350. |

 

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|   | DAKOTA  GROWERS PASTA COMPANY, INC. |   |
|--------|-------------------------------------|--------|
|   | (Registrant)                        |

 
| **Signature**         | ** ** | **Title**                              | ** ** | **Date**               | ** ** |
|-----------------------|------------|----------------------------------------|------------|------------------------|------------|
|                  |       |                                   |       |                   |       |
| /s/ Timothy J. Dodd   |       | President and Chief  Executive Officer |       |                   |       |
| Timothy J. Dodd       |       | (Principal Executive                   |       | December 15, 2005 |       |
|                  |       | Officer)                               |       |                   |       |
|                  |       |                                   |       |                   |       |
|                  |       |                                   |       |                   |       |
| /s/ Thomas P. Friezen |       | Chief Financial  Officer               |       |                   |       |
| Thomas P. Friezen     |       | (Principal Financial                   |       | December 15, 2005 |       |
|                  |       | Officer)                               |       |                   |       |
|                  |       |                                   |       |                   |       |
|                  |       |                                   |       |                   |       |
| /s/ Edward O. Irion   |       | Vice President –  Finance and     |       |                   |       |
| Edward O. Irion       |       | Chief Accounting  Officer              |       | December 15, 2005 |       |
|                  |       | (Principal Accounting  Officer)        |       |                   |       |

 

14

----