**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

 

**FORM10-Q**

 

 
| ý | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|--------|-----------------------------------------------------------------------------------------------|
|   | **For the quarterly period  ended October 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. 333-81946**

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

(Exactname of registrant as specified in its charter)

 

 

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

 

**One Pasta Avenue, Carrington,ND 58421**

(Addressof principal executive offices including zip code)

 

**(701) 652-2855**

(Registrant’stelephone number, including area code)

 

NOTAPPLICABLE

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

 

 

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.       Yes ý No o

 

 

 

As of December 11, 2002,the Registrant had 12,554,747 shares of common stock, par value $0.01 per share,outstanding.

 

 

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

** **

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
|                                                                                                                            | ** ** | **(Unaudited)  October 31,  2002** | ** ** | **July 31,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------|------------|
|                                                                                                                            |       |                               |       |               |       |
| **ASSETS**                                                                                                                      |       |                               |       |               |       |
|                                                                                                                            |       |                               |       |               |       |
| CURRENT ASSETS                                                                                                                  |       |                               |       |               |       |
| Cash and cash equivalents                                                                                                       |       | $                                  | 5          |               | $          | 2,866 |   |
|                                                                                                                            |       |                               |       |               |       |
| Short-term investments  (restricted)                                                                                            |       | 1,974                              |       | 1,974              |       |
|                                                                                                                            |       |                               |       |               |       |
| Trade accounts receivable,  less allowance for cash  discounts and doubtful accounts of   $854 and $792, respectively |       | 15,396                             |       | 16,504             |       |
|                                                                                                                            |       |                               |       |               |       |
| Other receivables                                                                                                               |       | 327                                |       | 360                |       |
|                                                                                                                            |       |                               |       |               |       |
| Inventories                                                                                                                     |       | 21,450                             |       | 19,636             |       |
|                                                                                                                            |       |                               |       |               |       |
| Prepaid expenses                                                                                                                |       | 3,230                              |       | 2,258              |       |
|                                                                                                                            |       |                               |       |               |       |
| Deferred income taxes                                                                                                           |       | 466                                |       | 466                |       |
|                                                                                                                            |       |                               |       |               |       |
| Total current assets                                                                                                            |       | 42,848                             |       | 44,064             |       |
|                                                                                                                            |       |                               |       |               |       |
| PROPERTY AND EQUIPMENT                                                                                                          |       |                               |       |               |       |
| In service                                                                                                                      |       | 107,119                            |       | 106,885            |       |
| Construction in process                                                                                                         |       | 627                                |       | 371                |       |
|                                                                                                                            |       | 107,746                            |       | 107,256            |       |
| Less accumulated  depreciation                                                                                                  |       | (37,299                            | )          | (35,762            | )          |
|                                                                                                                            |       |                               |       |               |       |
| Net property and equipment                                                                                                      |       | 70,447                             |       | 71,494             |       |
|                                                                                                                            |       |                               |       |               |       |
| INVESTMENT IN COOPERATIVE  BANKS                                                                                                |       | 2,350                              |       | 2,350              |       |
|                                                                                                                            |       |                               |       |               |       |
| INTANGIBLE ASSETS                                                                                                               |       | 649                                |       | 686                |       |
|                                                                                                                            |       |                               |       |               |       |
| OTHER ASSETS                                                                                                                    |       | 9,278                              |       | 6,947              |       |
|                                                                                                                            |       |                               |       |               |       |
|                                                                                                                            |       | $                                  | 125,572    |               | $          | 125,541 |   |

 

(continued on next page)

 

 

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| ** **                                                                                                                                                          | ** ** | **(Unaudited)  October 31,  2002** | ** ** | **July 31,  2002** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|--------------------|------------|
|                                                                                                                                                                |       |                               |       |               |       |
| **LIABILITIES  AND STOCKHOLDERS' EQUITY**                                                                                                                           |       |                               |       |               |       |
|                                                                                                                                                                |       |                               |       |               |       |
| CURRENT LIABILITIES                                                                                                                                                 |       |                               |       |               |       |
| Notes payable                                                                                                                                                       |       | $                                  | 4,000      |               | $          | - |   |
| Current portion of long-term  debt                                                                                                                                  |       | 9,989                              |       | 9,320              |       |
| Accounts payable                                                                                                                                                    |       | 3,839                              |       | 6,471              |       |
| Excess outstanding checks  over cash on deposit                                                                                                                     |       | 2,157                              |       | -                  |       |
| Accrued liabilities                                                                                                                                                 |       | 5,688                              |       | 5,260              |       |
|                                                                                                                                                                |       |                               |       |               |       |
| Total current liabilities                                                                                                                                           |       | 25,673                             |       | 21,051             |       |
|                                                                                                                                                                |       |                               |       |               |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                      |       | -                                  |       | -                  |       |
| LONG-TERM DEBT, net of  current portion                                                                                                                             |       | 32,193                             |       | 38,274             |       |
| DEFERRED INCOME TAXES                                                                                                                                               |       | 10,093                             |       | 9,833              |       |
| OTHER LIABILITIES                                                                                                                                                   |       | 226                                |       | 239                |       |
|                                                                                                                                                                |       |                               |       |               |       |
| Total liabilities                                                                                                                                                   |       | 68,185                             |       | 69,397             |       |
|                                                                                                                                                                |       |                               |       |               |       |
| REDEEMABLE PREFERRED STOCK                                                                                                                                          |       |                               |       |               |       |
| Series A, 6% cumulative,  $100 par value, 533 shares authorized, 433 and 467 shares issued and  outstanding as  of October 31, 2002 and July 31, 2002, respectively |       | 44                                 |       | 47                 |       |
| Series B, 2% non-cumulative,  $100 par value, 525 shares authorized, 75 shares issued and outstanding                                                               |       | 7                                  |       | 7                  |       |
|                                                                                                                                                                |       |                               |       |               |       |
| Total redeemable preferred  stock                                                                                                                                   |       | 51                                 |       | 54                 |       |
|                                                                                                                                                                |       |                               |       |               |       |
| STOCKHOLDERS' EQUITY                                                                                                                                                |       |                               |       |               |       |
| Series D delivery preferred  stock, non-cumulative, $.01 par value, 11,324,377 authorized, 11,275,297 shares  issued and  outstanding                               |       | 113                                |       | 113                |       |
| Common stock, $.01 par  value, 75,000,000 shares authorized, 12,554,747 issued and outstanding                                                                      |       | 126                                |       | 126                |       |
| Additional paid-in capital                                                                                                                                          |       | 60,188                             |       | 60,188             |       |
| Accumulated deficit                                                                                                                                                 |       | (3,091                             | )          | (4,337             | )          |
|                                                                                                                                                                |       |                               |       |               |       |
| Total stockholders' equity                                                                                                                                          |       | 57,336                             |       | 56,090             |       |
|                                                                                                                                                                |       |                               |       |               |       |
| Total liabilities and  stockholders' equity                                                                                                                         |       | $                                  | 125,572    |               | $          | 125,541 |   |

 

See Notes to Consolidated FinancialStatements

 

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                                         | ** ** | **Three  Months Ended  October 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
|                                                                               |       | **2002**                             |       | **2001** |   |
| Net revenues (net of  discounts and allowances of $4,860 and $4,168, respectively) |       | $                                    | 37,331     |   | $ | 37,546 |   |
|                                                                               |       |                                 |       |   |   |
| Cost of goods sold                                                                 |       | 32,124                               |       | 31,642 |   |
|                                                                               |       |                                 |       |   |   |
| Gross profit                                                                       |       | 5,207                                |       | 5,904 |   |
|                                                                               |       |                                 |       |   |   |
| Marketing, general and  administrative expenses                                    |       | 2,316                                |       | 2,429 |   |
|                                                                               |       |                                 |       |   |   |
| Operating income                                                                   |       | 2,891                                |       | 3,475 |   |
|                                                                               |       |                                 |       |   |   |
| Other income (expense)                                                             |       |                                 |       |   |   |
| Interest and other income                                                          |       | 41                                   |       | 112 |   |
| Gain on sale of property,  equipment and other assets                              |       | 13                                   |       | 2 |   |
| Interest expense, net                                                              |       | (901                                 | )          | (1,111 | ) |
|                                                                               |       |                                 |       |   |   |
| Income before income taxes                                                         |       | 2,044                                |       | 2,478 |   |
|                                                                               |       |                                 |       |   |   |
| Income tax expense (benefit)                                                       |       | 797                                  |       | (80 | ) |
|                                                                               |       |                                 |       |   |   |
| Net income                                                                         |       | 1,247                                |       | 2,558 |   |
| Dividends on preferred stock                                                       |       | 1                                    |       | 8 |   |
|                                                                               |       |                                 |       |   |   |
| Net earnings on  common/equity stock                                               |       | $                                    | 1,246      |   | $ | 2,550 |   |
|                                                                               |       |                                 |       |   |   |
| Net earnings per  common/equity share                                              |       |                                 |       |   |   |
| Basic                                                                              |       | $                                    | 0.10       |   | $ | 0.23 |   |
|                                                                               |       |                                 |       |   |   |
| Diluted                                                                            |       | $                                    | 0.10       |   | $ | 0.23 |   |
|                                                                               |       |                                 |       |   |   |
| Weighted average  common/equity shares outstanding                                 |       |                                 |       |   |   |
| Basic                                                                              |       | 12,555                               |       | 11,275 |   |
|                                                                               |       |                                 |       |   |   |
| Diluted                                                                            |       | 12,604                               |       | 11,275 |   |

 

See Notes to Consolidated FinancialStatements

 

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
| ** **                                                 | ** ** | **Three  Months Ended  October 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|
|                                                       |       | **2002**                             |       | **2001** |   |
| OPERATING ACTIVITIES                                       |       |                                 |       |   |   |
| Net income                                                 |       | $                                    | 1,247      |   | $ | 2,558 |   |
| Add (deduct) non-cash items                                |       |                                 |       |   |   |
| Depreciation and  amortization                             |       | 2,400                                |       | 2,223 |   |
| Gain on sale of property,  equipment and other assets      |       | (13                                  | )          | (2 | ) |
| Deferred income taxes                                      |       | 260                                  |       | (80 | ) |
| Payments for long-term  marketing costs                    |       | (4,000                               | )          | (250 | ) |
| Changes in assets and  liabilities                         |       |                                 |       |   |   |
| Trade receivables                                          |       | 1,108                                |       | (440 | ) |
| Other receivables                                          |       | 33                                   |       | 173 |   |
| Inventories                                                |       | (1,814                               | )          | 1,050 |   |
| Prepaid expenses                                           |       | (2                                   | )          | 7 |   |
| Other assets                                               |       | 2                                    |       | — |   |
| Accounts payable                                           |       | (2,632                               | )          | 193 |   |
| Excess outstanding checks  over cash on deposit            |       | 2,157                                |       | (695 | ) |
| Grower payables                                            |       | —                               |       | 376 |   |
| Other accrued liabilities                                  |       | 428                                  |       | (366 | ) |
|                                                       |       |                                 |       |   |   |
| NET CASH FROM (USED FOR)  OPERATING ACTIVITIES             |       | (826                                 | )          | 4,747 |   |
|                                                       |       |                                 |       |   |   |
| INVESTING ACTIVITIES                                       |       |                                 |       |   |   |
| Purchases of property and  equipment                       |       | (490                                 | )          | (162 | ) |
| Proceeds on sale of  property, equipment, and other assets |       | —                               |       | 53 |   |
| Payments for package design  costs                         |       | (129                                 | )          | (66 | ) |
|                                                       |       |                                 |       |   |   |
| NET CASH USED FOR INVESTING  ACTIVITIES                    |       | (619                                 | )          | (175 | ) |
|                                                       |       |                                 |       |   |   |
| FINANCING ACTIVITIES                                       |       |                                 |       |   |   |
| Net change in short-term  notes payable                    |       | 4,000                                |       | (3,300 | ) |
| Payments on long-term debt                                 |       | (5,412                               | )          | (1,268 | ) |
| Preferred stock retirements                                |       | (3                                   | )          | (3 | ) |
| Dividends paid on preferred  stock                         |       | (1                                   | )          | (1 | ) |
|                                                       |       |                                 |       |   |   |
| NET CASH USED FOR FINANCING  ACTIVITIES                    |       | (1,416                               | )          | (4,572 | ) |
|                                                       |       |                                 |       |   |   |
| NET CHANGE IN CASH AND CASH  EQUIVALENTS                   |       | (2,861                               | )          | — |   |
|                                                       |       |                                 |       |   |   |
| CASH AND CASH EQUIVALENTS,BEGINNING OF PERIOD              |       | 2,866                                |       | 3 |   |
|                                                       |       |                                 |       |   |   |
| CASH AND CASH EQUIVALENTS,END OF PERIOD                    |       | $                                    | 5          |   | $ | 3 |   |

 

(continued on next page)

 

 

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| ** **                                                                    | ** ** | **Three  Months Ended  October 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|--------------------------------------|------------|
|                                                                          |       | **2002**                             |       | **2001** |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW  INFORMATION                            |       |                                 |       |   |   |
| Cash payments for                                                             |       |                                 |       |   |   |
| Interest (net of amounts  capitalized)                                        |       | $                                    | 1,533      |   | $ | 1,541 |   |
|                                                                          |       |                                 |       |   |   |
| Income taxes                                                                  |       | $                                    | 168        |   | $ | 8 |   |
|                                                                          |       |                                 |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF  NONCASH  INVESTING AND FINANCING ACTIVITIES |       |                                 |       |   |   |
| Declaration of dividends on  preferred stock                                  |       | $                                    | —     |   | $ | 7 |   |

 

See Notes to Consolidated FinancialStatements

 

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**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, 2002 as filedin the Company’s Form 10-K.

 

**NOTE 1**—**ORGANIZATION**

 

Dakota Growers Pasta Company, Inc. (“Dakota Growers”or “the Company”) is a North Dakota corporation that was organized on January30, 2002 for the specific purpose of consummating the conversion of DakotaGrowers Pasta Company, a North Dakota cooperative (the “Cooperative”), into acorporation. The conversion of the Cooperative from a cooperative to acorporation was completed effective July 1, 2002, with the Company being theultimate surviving entity in the conversion. The Company operates as theCooperative’s successor and its operations are a continuance of the operationsof the Cooperative.

 

The Company operates milling facilities in Carrington,North Dakota, and pasta manufacturing facilities in Carrington, North Dakotaand New Hope, Minnesota.

 

**NOTE 2 — FINANCIAL STATEMENTPRESENTATION**

 

Theunaudited consolidated financial statements included herein have been preparedpursuant to the rules and regulations of the Securities and Exchange Commission.Accordingly, they do not include all the information and footnotes required byaccounting principles generally accepted in the United States of America forcomplete financial statements. In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the three months endedOctober 31, 2002 are not necessarily indicative of the results that may beexpected for the year ended July 31, 2003. The information included in thisForm 10-Q should be read in conjunction with Management’s Discussion andAnalysis and the consolidated financial statements and footnotes included inthe Company’s Form 10-K for the year ended July 31, 2002. The information containedin the balance sheet as of July 31, 2002 was derived from the Company’s auditedannual report for fiscal 2002. Reclassifications have been made to facilitatecomparability with current presentation. Such reclassifications have no effecton the net results of operations.

 

Thefinancial information presented herein includes the consolidated balances andresults of operations of Dakota Growers Pasta Company, Inc. and its whollyowned subsidiary. All significant intercompany balances and transactions havebeen eliminated.

 

**NOTE 3 — INVENTORIES**

 

Inventories are valued at lower of cost or market.Inventories as of October 31, 2002 include raw materials of $5,279,000 andfinished goods of $16,171,000. Inventories at July 31, 2002 include rawmaterials of $5,293,000 and finished goods of $14,343,000.

 

###### **NOTE 4 — INCOMETAXES**

 

The income tax expense of $797,000 for the threemonths ended October 31, 2002 reflects the application of the estimated annualeffective income tax rate of 39% for the U.S. and applicable states to therespective year-to-date net income before income taxes.

 

The conversion from a cooperative to a corporationeffectuated via a series of mergers is treated under Code Section 368(a)(1)(F)as a reorganization. A corporation that survives a reorganization defined inCode Section 368(a)(1)(F) is treated for tax purposes as a continuation of itspredecessor, accordingly, the Company will retain the fiscal year, accountingmethods, tax elections and other tax attributes of the Cooperative.  However, because the Company does notoperate on a cooperative basis after the conversion, the Company is taxable asa “C corporation.” As such, it will no longer pay deductible patronagedividends and any distributions to the 

 

 

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shareholders will be treated as nondeductibledividends. This is the primary reason for the significant difference betweenthe income tax amounts recorded for the three months ended October 31, 2002compared to the corresponding period of the prior year.

 

The Cooperative was a non-exempt cooperative asdefined by Section 1381(a)(2) of the Internal Revenue Code. Accordingly, netmargins from business done with member patrons, which were allocated and paidas prescribed in Section 1382 of the Code (hereafter referred to as“qualified”), were taxable to the members and not to the Cooperative. Netmargins and member allocations were determined on the basis of accounting usedfor financial reporting purposes. To the extent that net margins were notqualified as stated above or arose from business done with non-members, theCooperative had taxable income subject to corporate income tax rates.

###### ** **

Uponconversion from a cooperative to a corporation, the Company recorded deferredtax assets and liabilities for the tax effects of any temporary differencesexisting between income tax and financial reporting on the date of the change.Prior to conversion, the Cooperative had not recorded deferred taxes fortemporary differences that were likely to be eliminated through patronageallocations.

 

###### **NOTE 5 —EARNINGS PER SHARE**

 

Basicearnings per share (EPS) is calculated by dividing net earnings oncommon/equity stock by the weighted average number of common/equity shareseffective and outstanding during the period. Diluted EPS includes the effect ofall potentially dilutive securities, such as stock options and convertiblepreferred stock.

 

Dilutive securities, consisting of stock options andconvertible preferred stock, included in the calculation of diluted weightedaverage common/equity shares were 49,000 for the three months ended October 31,2002. No dilutive securities were outstanding during the three months endedOctober 31, 2001. Because the Company’s stock is only traded in a smallsecondary market through private transactions, the Company has assumed theproceeds from the exercise of stock options would reduce debt and, thus,interest expense.

 

###### **NOTE 6 —COMMITMENTS**

 

TheCompany forward contracts for a certain portion of its future durum wheatrequirements. The Company had outstanding commitments for grain purchasestotaling $11,165,000 related to forward purchase contracts as of October 31,2002. These contracts are set price contracts to deliver grain to the Company’smill, and are not derivative in nature as they have no net settlement provisionand are not transferable.

 

TheCompany paid $4.0 million under long-term customer marketing agreements duringthe first quarter of fiscal year 2003. As of October 31, 2002, the Company hascommitments to pay $1.0 million under long-term customer marketing agreementsby December 31, 2002.

 

**NOTE 7 — 2003STOCK OPTION PLAN**

 

OnNovember 21, 2002 the Board of Directors adopted the Dakota Growers PastaCompany, Inc. 2003 Stock Option Plan (the “Plan”), which is to be submitted forapproval by the shareholders at the Annual Meeting to be held January 11, 2003.No options have been granted under the Plan at this time. The Plan covers500,000 shares of the Company’s common stock. The purpose of the Dakota GrowersPasta Company, Inc. 2003 Stock Option Plan is to provide a continuing,long-term incentive to selected eligible officers, directors and key employees,vendors or consultants of the Company and of any subsidiary company of theCompany; to provide a means of rewarding outstanding performance; and to enablethe Company to maintain a competitive position to attract and retain keypersonnel necessary for continued growth and profitability. This will be doneby granting options of common stock of the Company. Options granted under thePlan may be incentive stock options (as defined under 

 

 

8

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Section 422 of the Code) or non-qualified stock options, as determinedby the Administrator at the time of grant of an option and subject to theapplicable provisions of Section 422 of the Code, as amended, and theregulations promulgated thereunder. The grant of options will be by a committee(the “Committee”) subject to the provisions of the plan. The Committee willreport its actions to the Board of Directors of the Company.

 

**NOTE 8 —SUBSEQUENT EVENT**

 

The Company had pledged certificates of deposit as security for loans,totaling approximately $1,974,000, made by a financial institution to TimothyJ. Dodd, President and Chief Executive Officer, and Thomas P. Friezen, ChiefFinancial Officer, to exercise stock options. These loans were scheduled tomature December 1, 2002.

 

In response to the Sarbanes-Oxley Act of 2002, the Board of Directorsapproved the repurchase of 190,800 and 103,656 shares of the Company’s CommonStock from Messrs. Dodd and Friezen, respectively. The repurchase was completedin November 2002. In conjunction with the repurchase of these shares at $6.25per share, Messrs. Dodd and Friezen received proceeds of $1,192,500 and $647,850, respectively. Mr. Friezen receivedadditional proceeds of $134,706, after taxes, in conjunction with the unwindingof previous stock option exercises and related officer loans. The proceedsreceived by Messrs. Dodd and Friezen were used to pay off the executiveofficers’ loans with the financial institution and the Company’s certificatesof deposit are no longer restricted. Finally, Messrs. Dodd and Friezen weregranted stock options to purchase 190,800 and 103,656 shares, respectively, ofthe Company’s Common Stock with an exercise price of $6.25 per share. Suchoptions are first exercisable on December 2, 2002.

 

 

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**ITEM 2.  MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

The following discussion containsforward-looking statements. Such forward-looking statements include, amongothers, those statements including the words “expect”, “anticipate”, “believe”,“may” and similar expressions. Such statements are based on assumptions by theCompany’s management, as of the date of this Quarterly Report, and are subjectto risks and uncertainties, including those discussed in the Company’s 2002Form 10-K under “Risk Factors”, that could cause actual results to differmaterially from those anticipated. The Company cautions readers not to placeundue reliance on such forward-looking statements. The Company will not updateany forward-looking statements in the Quarterly Report to reflect future eventsor developments.

 

**Summary**

 

Dakota Growers is the third largestproducer of dry pasta products in North America. The pasta industry identifiesdomestic dry pasta into two basic markets: retail and institutional. TheCompany recognizes the institutional market as being comprised of foodserviceand ingredient sales. We participate in each of the retail, foodservice andingredient markets. The Company has two production plants located inCarrington, North Dakota and New Hope, Minnesota.

 

The comparability of the results for thethree months ended October 31, 2002 versus those for the corresponding periodof the prior year was affected by the income tax status change associated withthe conversion from a cooperative to a corporation.

 

Income before income taxes totaled $2.0million for the three months ended October 31, 2002, compared to $2.5 millionfor the three months ended October 31, 2001. Net income totaled $1.2 millionfor the quarter ended October 31, 2002, down from net income of $2.6 millionfor the quarter ended October 31, 2001.

 

Contributingfactors to the decrease in net earnings for the first quarter of fiscal 2003compared to the first quarter fiscal 2002 include increased durum costs,increased costs associated with the restructuring of certain forward warehousearrangements, and the effect of income taxes following the change in income taxstatus upon the conversion to a corporation. We intend topass-through the higher cost of durum via increased sales prices, though thereis uncertainty as to whether the Company will be able to fully recover higherdurum costs on a timely basis. We anticipate the forward warehouserestructuring will allow us to realize further supply chain efficiencies andbetter serve our customers.

 

**Results of Operations**

 

*Comparison of the Three Months Ended October 31, 2002 and2001*

 

***Net Revenues.***Net revenues totaled $37.3 million for the three monthsended October 31, 2002, a decrease of $0.2 million, or 0.6%, compared to the$37.5 million for the three months ended October 31, 2001. The decreaseprimarily resulted from slight decreases in both pasta sales volumes and perunit selling prices.

 

Revenues from the retail market, a portion of whichincludes co-pack and governmental sales, decreased $1.0 million, or 4.5%,primarily as a result of a 7.4% decrease in per unit selling prices offsetpartially by higher sales volumes. Foodservice revenues increased $0.9 million,or 11.0%, due to a 5.6% increase in per unit selling prices combined withvolume growth drivenby expansions and acquisitions by our customers. Ingredient revenues decreased $0.7million, or 23.1%, mainly as a result of a 31.2% decrease in sales volumes. Theingredient sales volume decline resulted primarily from the loss of onecustomer in this market due to competitive pricing issues. The Companyanticipates that highly competitive pricing will continue in the ingredientmarket.

 

 

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The Company markets semolina production in excess of its own requirementsas well as by-products of the durum milling process. Revenues from semolina andby-product sales increased $0.6 million for the three months ended October 31,2002, when compared to the same period of the prior year. The increaseprimarily resulted from higher sales volumes.

 

***Cost of GoodsSold.*** Cost of product sold increased $0.5 million, or 1.5%, to$32.1 million for the three months ended October 31, 2002, compared to $31.6million for the three months ended October 31, 2001. Theincrease resulted mainly from increased durum costs and increased costsassociated with the restructuring of certain forward warehouse arrangements. Grossmargin as a percentage of net revenues decreased from 15.7% to 13.9% asa result of these factors.

 

***Marketing,General, and Administrative (“MG&A”) Expenses.*** MG&Aexpenses totaled $2.3 million for the three months ended October 31, 2002, down4.7% from the corresponding period of the prior year. MG&A expenses as apercentage of net revenues decreased from 6.5% to 6.2%.

 

***InterestExpense.*** Interest expense for the three monthsended October 31, 2002 totaled $0.9 million, down $0.2 million from thecorresponding period of the prior year primarily due to lower averageoutstanding debt levels.

 

***Income Taxes.***Upon conversion to a corporation, theCompany recorded deferred tax assets and liabilities for the tax effects of anytemporary differences existing between income tax and financial reporting onthe date of the change. Prior to conversion, the Cooperative had not recorded deferredtaxes for temporary differences that were likely to be eliminated throughpatronage allocations. As the Company no longer operates on a cooperative basisafter the conversion, it is taxed as a “C corporation.” As such, it will nolonger pay deductible patronage dividends and any distributions to theshareholders will be treated as nondeductible dividends. Income tax expense forthe three months ending October 31, 2002, was $0.8 million, reflecting aneffective corporate income tax rate of approximately 39%. The income taxbenefit of $80,000 for the quarter ended October 31, 2001 related to thereduction of certain deferred tax liabilities associatedwith differences between the book and tax basis of property and equipment.

 

***Net Income.***Net income for the three months ending October31, 2002 totaled $1.2 million compared to the $2.6 million for the three monthsending October 31, 2001. Of the $1.4 million decrease in net income,approximately $0.9 million resulted from the effects of the change inincome tax status upon the conversion from a cooperative to a corporation. The remaining $0.5 million decrease in netincome primarily resulted from increaseddurum costs and increased costs associated with the restructuring of certainforward warehouse arrangements.

 

**Liquidity and Capital Resources**

 

Our primary sources of liquidity are cashprovided by operations and borrowings under our credit facility. Workingcapital as of October 31, 2002 totaled $17.2 million compared to $23.0 millionas of July 31, 2002.

 

The Company has a $19.0 million revolvingcredit facility with CoBank, ACB (“the Bank”). The balance outstanding on theline of credit was $4.0 million as of October 31, 2002. Cash, receivables andinventories secure borrowings against the line of credit.

 

The Company’s long-term financing isprovided through various secured term loans and secured notes with the Bank andinstitutional investors. Variable interest rates on term and seasonal loans arebased on the Bank’s cost of funds.

 

The various debt agreements with the Bankand institutional investors 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, 2002 and the date of this filing.

 

Net cash used for operating activitiestotaled $0.8 million for the three months ended October 31, 2002 compared tonet cash from operating activities of $4.7 million for the three months endedOctober 31, 2001. The decrease 

 

 

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was primarily due to an increase inpayments made under long-term marketing agreements and a decrease in netincome.

 

Net cash usedfor investing activities totaled $0.6 and $0.2 million for the three monthsended October 31, 2002 and 2001, respectively, and related primarily to thepurchase and installation of milling and pasta equipment.

 

Net cash used for financing activitiestotaled $1.4 million and $4.6 million for the three months ended October 31,2002 and 2001, respectively. Substantially all of these amounts related to debtpayments offset by net borrowings under our revolving credit facility for thethree months ended October 31, 2002.

 

The Company forward contracts for acertain portion of its future durum wheat requirements. At October 31, 2002,the Company had outstanding commitments for grain purchases totaling $11.2million 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. We anticipate capital expenditures in fiscalyear 2003 to total approximately $4 million, primarily for pasta line upgradesand cost reduction projects. The Company paid $4.0 million underlong-term customer marketing agreements during the first quarter of fiscal year2003. As of October 31, 2002, the Company had commitments to pay $1.0 millionunder long-term customer marketing agreements by December 31, 2002. As ofOctober 31, 2002, commitments for operating lease payments totaled $4.5****million,of which $1.2 million was due within one year.

 

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

 

The U.S. Customs Service (Customs)published, on July 3, 2002, a notice of intention to distribute antidumping andcountervailing duties assessed on certain pasta imported from Italy and Turkeyfrom October 1, 2001 to September 30, 2002, to affected domestic producerspursuant to the Continued Dumping and Subsidy Offset Act of 2000 (the “Act”). Atthis time, indications are that the Company will receive a payment under thisAct in the latter portion of calendar year 2002, though we cannot reasonablyestimate the potential amount to be received at this time or state withcertainty whether any payment will be received in future periods.

 

In September 2002,the U.S. Durum Growers Association and the North Dakota Wheat Commission filedpetitions for the imposition of countervailing and antidumping duties on durumand hard red spring wheat marketed by the Canadian Wheat Board. In response tothe petitions, the U.S. International Trade Commission  (“ITC”) commenced countervailing duty andantidumping investigations. On November 19, 2002, the ITC determinedthat there is a reasonable indication that U.S. industries are materiallyinjured by reason of imports of durum wheat and of hard red spring wheat fromCanada that are allegedly subsidized and sold in the United States at less thanfair value. As a result of the Commission’s affirmative determinations, theU.S. Department of Commerce will continue to conduct its countervailing dutyand antidumping investigations of imports of these products from Canada, withits preliminary countervailing duty determination due on or about December 27,2002, and its preliminary antidumping determination due on or about March 12,2003. At this time, we cannot predict either the final results of theproceedings or their impact on the Company or the domestic pasta industry.

 

**ITEM 3.  QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

The Company does not believe it issubject to any material market risk exposure with respect to interest rates,commodity prices, exchange rates, equity prices, or other market changes thatwould require disclosure under this item.

 

 

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**ITEM 4.  CONTROLS ANDPROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

TheCompany’s Chief Executive Officer and Chief Financial Officer have reviewed theCompany’s disclosure controls and procedures within 90 days prior to the filingof this quarterly report. Based upon this review, these officers believe thatthe Company’s disclosure controls and procedures are effective in ensuring thatmaterial information related to the Company is made known to them by otherswithin the Company.

 

***Changes in Internal Controls***

 

There were no significant changes in the Company’sinternal controls or in other factors that could significantly affect thesecontrols subsequent to the date of the most recent evaluation.

 

 

**PART II — OTHER INFORMATION**

 

**ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K**

 

**Exhibits**

 

99.1                                                   CertificationPursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002, signed by the President and Chief ExecutiveOfficer.

 

99.2                                                   CertificationPursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of theSarbanes-Oxley Act of 2002, signed by the Chief Financial Officer.

 

**Reports on Form 8-K**

 

The Company filed a Form 8-K on November15, 2002 announcing that on November 6, 2002, the holders of Dakota GrowersPasta Company, Inc. Series D Delivery Preferred Stock (“the Series D Preferred)received an Offer to Purchase (the “Offer”) up to an aggregate of 3,000,000shares of the Series D Preferred from Prairie Pasta Producers Cooperative Ltd.(the “Offeror”), a Canadian cooperative. The Offer contained the Canadiancooperative’s offer to purchase shares of the Series D Preferred at a price of$.20 per share, subject to a number of conditions and contingencies. TheOfferor did not offer to purchase any other class or series of stock issued by DakotaGrowers Pasta Company, Inc. The Series D Preferred carries, as part of itsterms, the privilege to deliver one bushel of durum wheat each year to DakotaGrowers Pasta Company, Inc. at a price and upon other terms and conditionsestablished by Dakota Growers Pasta Company, Inc.  The purpose of the Offer is to allow the Offeror to obtain theright to sell and deliver up to 3,000,000 bushels of milling quality durumwheat annually in accordance with the rights of the shares.  A copy of the Offer was included as anexhibit to the Form 8-K.

 

In the same Form 8-K, separate from andunrelated to the Offer described above, the Company reported that it hadcommunicated with all of its shareholders by letter regarding certainprocedural shareholder matters arising from the conversion from a cooperativeto a corporation. In the same letter, sent on November 6, 2002, but datedOctober 31, 2002, the Company summarized for its shareholders certaininformation previously disclosed in the Company’s report on Form 10-K.  (The Company’s Form 10-K was filed with theSecurities and Exchange Commission on October 28, 2002.)  A copy of the letter to the shareholders wasincluded as an exhibit to the Form 8-K.

 

 

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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, INC. |
|-------------------------------------|
|                                |   |
|                                |   |
| By:                                 | /s/  Timothy J. Dodd |
|                                | Timothy  J. Dodd, |
|                                | PRESIDENT  AND CHIEF EXECUTIVE OFFICER, |
|                                | AND  PRINCIPAL EXECUTIVE OFFICER |
|                                |   |
| Dated: December 13,  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   |   | President  and Chief Executive Officer |   |               |
| Timothy  J. Dodd       |   | (Principal  Executive Officer)         |   | December  13, 2002 |
|                   |   |                                   |   |               |
|                   |   |                                   |   |               |
| /s/  Thomas P. Friezen |   | Chief  Financial Officer               |   |               |
| Thomas  P. Friezen     |   | (Principal  Financial Officer)         |   | December  13, 2002 |
|                   |   |                                   |   |               |
|                   |   |                                   |   |               |
| /s/  Edward O. Irion   |   | Vice  President — Finance and     |   |               |
| Edward  O. Irion       |   | Chief  Accounting Officer              |   | December  13, 2002 |
|                   |   | (Principal  Accounting Officer)        |   |               |

 

 

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**OFFICER CERTIFICATION**

 

I, Timothy J. Dodd, certify that:

 

1. I have reviewed this quarterly reporton Form 10-Q of Dakota Growers Pasta Company, Inc.;

 

2. Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results of operationsand cash flows of the registrant as of, and for, the periods presented in thisquarterly report;

 

4. The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifying officersand I have disclosed, based on our most recent evaluation, to the registrant’sauditors and the audit committee of registrant’s board of directors (or personsperforming the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: December 13, 2002

 
| /s/  Timothy J. Dodd                   |
|----------------------------------------|
| Timothy  J. Dodd                       |
| President  and Chief Executive Officer |

 

 

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**OFFICER CERTIFICATION**

 

I, Thomas P. Friezen, certify that:

 

1. I have reviewed this quarterly reporton Form 10-Q of Dakota Growers Pasta Company, Inc.;

 

2. Based on my knowledge, this quarterlyreport does not contain any untrue statement of a material fact or omit tostate a material fact necessary to make the statements made, in light of thecircumstances under which such statements were made, not misleading withrespect to the period covered by this quarterly report;

 

3. Based on my knowledge, the financialstatements, and other financial information included in this quarterly report,fairly present in all material respects the financial condition, results ofoperations and cash flows of the registrant as of, and for, the periodspresented in this quarterly report;

 

4. The registrant’s other certifyingofficers and I are responsible for establishing and maintaining disclosurecontrols and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)for the registrant and we have:

 

a) designed suchdisclosure controls and procedures to ensure that material information relatingto the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which thisquarterly report is being prepared;

 

b) evaluated theeffectiveness of the registrant’s disclosure controls and procedures as of adate within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

c) presented in thisquarterly report our conclusions about the effectiveness of the disclosurecontrols and procedures based on our evaluation as of the Evaluation Date;

 

5. The registrant’s other certifyingofficers and I have disclosed, based on our most recent evaluation, to theregistrant’s auditors and the audit committee of registrant’s board ofdirectors (or persons performing the equivalent function):

 

a) all significantdeficiencies in the design or operation of internal controls which couldadversely affect the registrant’s ability to record, process, summarize andreport financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

b) any fraud, whether ornot material, that involves management or other employees who have asignificant role in the registrant’s internal controls; and

 

6. The registrant’s other certifyingofficers and I have indicated in this quarterly report whether or not therewere significant changes in internal controls or in other factors that couldsignificantly affect internal controls subsequent to the date of our mostrecent evaluation, including any corrective actions with regard to significantdeficiencies and material weaknesses.

 

Date: December 13, 2002

 
| /s/  Thomas P. Friezen   |
|--------------------------|
| Thomas  P. Friezen       |
| Chief  Financial Officer |

 

 

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