**UNITEDSTATESSECURITIES AND 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,  2004**                                            |
|   |                                                                                                 |
|   | **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. 000-50111**

 

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| **DAKOTA  GROWERS PASTA COMPANY, INC.**                                        |
|-------------------------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)                             |
|                                                                                |
| **North Dakota**                                                                    | ** ** | **45-0423511** |
| (State of incorporation)                                                            |   | (IRS Employer  Identification No.) |
|                                                                                |   |   |
| **One Pasta Avenue, Carrington,  ND 58421**                                    |
| (Address of principal  executive offices including zip code)                        |
|                                                                                |
| **(701) 652-2855**                                                             |
| (Registrant’s  telephone number, including area code)                          |
|                                                                                |
| **NOT APPLICABLE**                                                             |
| (Former name, former  address and former fiscal year, if changed since last report) |

 

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

Yesý  Noo

 

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

Yeso  Noý

 

As of December 15,2004, the Registrant had 13,169,382 shares of common stock, par value $0.01 pershare, outstanding.

 

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIALSTATEMENTS**

 

**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                             | ** ** | **(Unaudited)  October 31,  2004** | ** ** | **July 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------|------------|
| **ASSETS**                                                                                                             |       |                                    |       |                    |       |
|                                                                                                                   |       |                                    |       |                    |       |
| CURRENT ASSETS                                                                                                         |       |                                    |       |                    |       |
| Cash and cash equivalents                                                                                              |       | $                                       | 2          |                    | $          | 589 |   |
|                                                                                                                   |       |                                    |       |                    |       |
| Trade accounts receivable, less allowance for cash  discounts and doubtful accounts of $1,303 and $1,209, respectively |       | 17,344                                  |       | 14,043                  |       |
|                                                                                                                   |       |                                    |       |                    |       |
| Due from related parties                                                                                               |       | 82                                      |       | 703                     |       |
|                                                                                                                   |       |                                    |       |                    |       |
| Other receivables                                                                                                      |       | 324                                     |       | 299                     |       |
|                                                                                                                   |       |                                    |       |                    |       |
| Inventories                                                                                                            |       | 25,185                                  |       | 25,211                  |       |
|                                                                                                                   |       |                                    |       |                    |       |
| Prepaid expenses                                                                                                       |       | 4,391                                   |       | 3,994                   |       |
|                                                                                                                   |       |                                    |       |                    |       |
| Deferred income taxes                                                                                                  |       | 937                                     |       | 937                     |       |
|                                                                                                                   |       |                                    |       |                    |       |
| Total current assets                                                                                                   |       | 48,265                                  |       | 45,776                  |       |
|                                                                                                                   |       |                                    |       |                    |       |
| PROPERTY AND EQUIPMENT                                                                                                 |       |                                    |       |                    |       |
| In service                                                                                                             |       | 110,283                                 |       | 109,987                 |       |
| Construction in process                                                                                                |       | 292                                     |       | 18                      |       |
|                                                                                                                   |       | 110,575                                 |       | 110,005                 |       |
| Less accumulated depreciation                                                                                          |       | (48,307                                 | )          | (46,980                 | )          |
|                                                                                                                   |       |                                    |       |                    |       |
| Net property and equipment                                                                                             |       | 62,268                                  |       | 63,025                  |       |
|                                                                                                                   |       |                                    |       |                    |       |
| INVESTMENT IN JOINT VENTURE                                                                                            |       | 2,577                                   |       | 1,746                   |       |
|                                                                                                                   |       |                                    |       |                    |       |
| INVESTMENT IN COOPERATIVE BANK                                                                                         |       | 2,283                                   |       | 2,343                   |       |
|                                                                                                                   |       |                                    |       |                    |       |
| INTANGIBLE ASSETS                                                                                                      |       | 355                                     |       | 392                     |       |
|                                                                                                                   |       |                                    |       |                    |       |
| OTHER ASSETS                                                                                                           |       | 5,741                                   |       | 6,133                   |       |
|                                                                                                                   |       |                                    |       |                    |       |
|                                                                                                                   |       | $                                       | 121,489    |                    | $          | 119,415 |   |

 

(continuedon next page)

 

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                                                                   | ** ** | **(Unaudited)  October 31,  2004** | ** ** | **July 31,  2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|-------------------------|------------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                                |       |                                    |       |                    |       |
|                                                                                                                                                                         |       |                                    |       |                    |       |
| CURRENT LIABILITIES                                                                                                                                                          |       |                                    |       |                    |       |
| Notes payable                                                                                                                                                                |       | $                                       | 16,700     |                    | $          | 12,200 |   |
| Current portion of long-term debt                                                                                                                                            |       | 5,866                                   |       | 7,176                   |       |
| Accounts payable                                                                                                                                                             |       | 3,670                                   |       | 4,969                   |       |
| Excess outstanding checks over cash on deposit                                                                                                                               |       | 3,463                                   |       | —                  |       |
| Due to related parties                                                                                                                                                       |       | 281                                     |       | —                  |       |
| Accrued liabilities                                                                                                                                                          |       | 6,374                                   |       | 4,845                   |       |
|                                                                                                                                                                         |       |                                    |       |                    |       |
| Total current liabilities                                                                                                                                                    |       | 36,354                                  |       | 29,190                  |       |
|                                                                                                                                                                         |       |                                    |       |                    |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                |       | —                                  |       | —                  |       |
| LONG-TERM DEBT, net of current portion                                                                                                                                       |       | 16,316                                  |       | 21,087                  |       |
| DEFERRED INCOME TAXES                                                                                                                                                        |       | 10,245                                  |       | 10,363                  |       |
| OTHER LIABILITIES                                                                                                                                                            |       | 123                                     |       | 136                     |       |
| MANDATORILY REDEEMABLE PREFERRED STOCK                                                                                                                                       |       |                                    |       |                    |       |
| Series A, 6% cumulative, $100 par value, 533 shares  authorized, 167 and 200 shares issued and outstanding as of October 31,  2004 and July 31, 2004, respectively |       | 17                                      |       | 20                      |       |
|                                                                                                                                                                         |       |                                    |       |                    |       |
| Total liabilities                                                                                                                                                            |       | 63,055                                  |       | 60,796                  |       |
|                                                                                                                                                                         |       |                                    |       |                    |       |
| 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                                                                                                                                                   |       | 62,807                                  |       | 62,807                  |       |
| Accumulated deficit                                                                                                                                                          |       | (4,618                                  | )          | (4,433                  | )          |
|                                                                                                                                                                         |       |                                    |       |                    |       |
| Total stockholders’ equity                                                                                                                                              |       | 58,434                                  |       | 58,619                  |       |
|                                                                                                                                                                         |       |                                    |       |                    |       |
| Total liabilities and stockholders’ equity                                                                                                                              |       | $                                       | 121,489    |                    | $          | 119,415 |   |

 

SeeNotes to Consolidated Financial Statements

 

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                                                         | ** ** | **Three Months Ended  October 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
| Net revenues (net of discounts and allowances of  $6,261 and $4,742, respectively) |       | $                                        | 35,923     |   | $ | 37,649 |   |
|                                                                               |       |                                     |       |   |   |
| Cost of goods sold                                                                 |       | 32,609                                   |       | 35,738 |   |
|                                                                               |       |                                     |       |   |   |
| Gross profit                                                                       |       | 3,314                                    |       | 1,911 |   |
|                                                                               |       |                                     |       |   |   |
| Marketing, general and administrative expenses                                     |       | 2,370                                    |       | 2,003 |   |
|                                                                               |       |                                     |       |   |   |
| Operating income (loss)                                                            |       | 944                                      |       | (92 | ) |
|                                                                               |       |                                     |       |   |   |
| Other income (expense)                                                             |       |                                     |       |   |   |
| Interest and other income                                                          |       | 20                                       |       | 1 |   |
| Gain on disposition of property, equipment and other  assets                       |       | 9                                        |       | 13 |   |
| Net loss allocated from joint venture                                              |       | (638                                     | )          | — |   |
| Interest expense, net                                                              |       | (638                                     | )          | (806 | ) |
|                                                                               |       |                                     |       |   |   |
| Loss before income taxes                                                           |       | (303                                     | )          | (884 | ) |
|                                                                               |       |                                     |       |   |   |
| Income tax benefit                                                                 |       | (118                                     | )          | (345 | ) |
|                                                                               |       |                                     |       |   |   |
| Net loss                                                                           |       | $                                        | (185       | ) | $ | (539 | ) |
|                                                                               |       |                                     |       |   |   |
| Net loss per common share                                                          |       |                                     |       |   |   |
| Basic                                                                              |       | $                                        | (0.01      | ) | $ | (0.04 | ) |
|                                                                               |       |                                     |       |   |   |
| Diluted                                                                            |       | $                                        | (0.01      | ) | $ | (0.04 | ) |
|                                                                               |       |                                     |       |   |   |
| Weighted average common shares outstanding                                         |       |                                     |       |   |   |
| Basic                                                                              |       | 13,169                                   |       | 12,260 |   |
|                                                                               |       |                                     |       |   |   |
| Diluted                                                                            |       | 13,529                                   |       | 12,620 |   |

 

SeeNotes to Consolidated Financial Statements

 

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands)(Unaudited)**

 
| ** **                                                                           | ** ** | **Three Months Ended  October 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|------------------------------------------|------------|
| ** **                                                                           | ** ** | **2004**                                 | ** ** | **2003** | ** ** |
| OPERATING ACTIVITIES                                                                 |       |                                     |       |   |   |
| Net loss                                                                             |       | $                                        | (185       | ) | $ | (539 | ) |
| Adjustments to reconcile net loss to net cash from  (used for) operating activities: |       |                                     |       |   |   |
| Depreciation and amortization                                                        |       | 1,998                                    |       | 2,229 |   |
| Gain on disposition of property, equipment and other  assets                         |       | (9                                       | )          | (13 | ) |
| Net loss allocated from joint venture                                                |       | 638                                      |       | — |   |
| Deferred income taxes                                                                |       | (118                                     | )          | (345 | ) |
| Payments for long-term marketing costs                                               |       | —                                   |       | (125 | ) |
| Changes in assets and liabilities                                                    |       |                                     |       |   |   |
| Trade receivables                                                                    |       | (3,301                                   | )          | (4,074 | ) |
| Due from related parties                                                             |       | 621                                      |       | — |   |
| Other receivables                                                                    |       | (25                                      | )          | 972 |   |
| Inventories                                                                          |       | 26                                       |       | 3,207 |   |
| Prepaid expenses                                                                     |       | (353                                     | )          | (14 | ) |
| Other assets                                                                         |       | 2                                        |       | 2 |   |
| Accounts payable                                                                     |       | (1,299                                   | )          | 853 |   |
| Due to related parties                                                               |       | 281                                      |       | — |   |
| Other accrued liabilities                                                            |       | 1,529                                    |       | (306 | ) |
| NET CASH FROM (USED FOR) OPERATING ACTIVITIES                                        |       | (195                                     | )          | 1,847 |   |
|                                                                                 |       |                                     |       |   |   |
| INVESTING ACTIVITIES                                                                 |       |                                     |       |   |   |
| Purchases of property and equipment                                                  |       | (598                                     | )          | (433 | ) |
| Payments for package design costs                                                    |       | (264                                     | )          | (179 | ) |
| Proceeds from cooperative bank equity retirements                                    |       | 60                                       |       | — |   |
| Investments in joint venture                                                         |       | (1,469                                   | )          | — |   |
| NET CASH USED FOR INVESTING ACTIVITIES                                               |       | (2,271                                   | )          | (612 | ) |
|                                                                                 |       |                                     |       |   |   |
| FINANCING ACTIVITIES                                                                 |       |                                     |       |   |   |
| Net change in excess outstanding checks over cash on  deposit                        |       | 3,463                                    |       | 454 |   |
| Net change in short-term notes payable                                               |       | 4,500                                    |       | 4,395 |   |
| Payments on long-term debt                                                           |       | (6,081                                   | )          | (6,081 | ) |
| Preferred stock retirements                                                          |       | (3                                       | )          | (3 | ) |
| NET CASH FROM (USED FOR) FINANCING ACTIVITIES                                        |       | 1,879                                    |       | (1,235 | ) |
|                                                                                 |       |                                     |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                              |       | (587                                     | )          | — |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                       |       | 589                                      |       | 5 |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                             |       | $                                        | 2          |   | $ | 5 |   |
|                                                                                 |       |                                     |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                    |       |                                     |       |   |   |
| Cash payments (refunds) for                                                          |       |                                     |       |   |   |
| Interest (net of amounts capitalized)                                                |       | $                                        | 1,091      |   | $ | 1,366 |   |
|                                                                                 |       |                                     |       |   |   |
| Income taxes                                                                         |       | $                                        | 63         |   | $ | (972 | ) |

 

SeeNotes to Consolidated Financial Statements

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notes should be read in conjunctionwith the notes to the financial statements for the year ended July 31,2004 as filed in the Company’s Form 10-K.

 

**NOTE1 - ORGANIZATION**

** **

Dakota GrowersPasta Company, Inc. (“Dakota Growers” or “the Company”) is a North Dakotacorporation that operates milling and pasta manufacturing facilities inCarrington, North Dakota. In addition, the Company’s wholly-owned subsidiary,Primo Piatto, Inc. (“Primo Piatto”), a Minnesota corporation, operates pastamanufacturing facilities in New Hope, Minnesota.

 

**NOTE2 – FINANCIAL STATEMENT PRESENTATION**

** **

The unauditedconsolidated financial statements included herein have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission for quarterlyreporting. Accordingly, they do not include all the information and footnotesrequired by accounting principles generally accepted in the United States ofAmerica for complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the three monthsended October 31, 2004 are not necessarily indicative of the results thatmay be expected for the year ended July 31, 2005. The unauditedconsolidated financial statements included in this Form 10-Q should be read inconjunction with the consolidated financial statements and footnotes includedin the Company’s Form 10-K for the year ended July 31, 2004. The informationcontained in the balance sheet as of July 31, 2004 was derived from theCompany’s audited annual report for fiscal year 2004. Reclassifications havebeen made to facilitate comparability with current presentation. Suchreclassifications have no effect on the net results of operations.

 

The financial informationpresented herein includes the consolidated balance sheets and results ofoperations of Dakota Growers Pasta Company, Inc. and its wholly ownedsubsidiary. All significant intercompany balances and transactions have beeneliminated.

 

**NOTE3 – INVENTORIES**

 

Inventories are valued at lower of cost or market. Inventories as ofOctober 31, 2004 include raw materials and packaging of $6,718,000 and finishedgoods of $18,467,000. Inventories at July 31, 2004 include raw materials andpackaging of $6,396,000 and finished goods of $18,815,000.

 

###### **NOTE 4 – EARNINGSPER SHARE**

 

Basic earnings per share (EPS) is calculated by dividing net earningson common stock by the weighted average number of common shares effective andoutstanding during the period. Diluted EPS includes the effect of allpotentially dilutive securities, such as stock options and convertiblepreferred stock.

 

Dilutive securities, consisting of stock options and convertiblepreferred stock, included in the calculation of diluted weighted average commonshares totaled 360,000 for the three months ended October 31, 2004 and 2003. Asthere is currently no established public trading market for the Company’scommon stock, the Company has assumed the proceeds from the exercise of stockoptions would reduce debt and, thus, interest expense.

 

###### **NOTE 5 – COMMITMENTS**

 

The Company forwardcontracts for a certain portion of its future durum wheat requirements. TheCompany had outstanding commitments for grain purchases totaling $14,406,000 asof October 31, 2004, related to forward purchase contracts. Thesecontracts are set price contracts to deliver grain to the Company’s mill, andare not derivative in nature as they have no net settlement provision and are nottransferable.

 

 

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**NOTE 6 –INVESTMENT IN JOINT VENTURE**

 

TheCompany acquired a 24% ownership interest in DNA Dreamfields Company, LLC (“DNADreamfields”) during fiscal year 2004. The Company has accounted for theinvestment in DNA Dreamfields using the equity method. DNA Dreamfields wasformed by the Company and other food technology, manufacturing and consumerproducts marketing enterprises to develop, manufacture and sell low digestiblecarbohydrate pasta, rice and potatoes under the DreamfieldsTM brandname. The Company met its initial $3,962,000 aggregate investment commitment inDNA Dreamfields during the fiscal quarter ended October 31, 2004.

 

On November 3, 2004,the Company and the other members of DNA Dreamfields entered into Amendment No.3 to the DNA Dreamfields Operating Agreement. Under the terms of the Amendment,the Company contributed an additional $1,500,000 into DNA Dreamfields, whichincreased its economic ownership in DNA Dreamfields to 29.5%.

 

**NOTE 7 –RELATED PARTY TRANSACTIONS**

 

The Company has entered intoa manufacturing agreement with DNA Dreamfields whereby Dakota Growers is theexclusive manufacturer of DreamfieldsTM low digestible carbohydratepasta. The Company has also entered into a services agreement with DNADreamfields under which the Company provides administrative, accounting,information technology, sales, customer service and distribution services toDNA Dreamfields. Shipments of DreamfieldsTM low digestiblecarbohydrate pasta began in February 2004.

 

Pursuant to the servicesagreement with DNA Dreamfields, to the extent the Company supplies logisticsservices for the delivery and billing of DreamfieldsTM product, thetitle in and to the DreamfieldsTM product shall remain with DakotaGrowers, and the risk of loss shall pass from Dakota Growers to Dakota Grower’scustomers in accordance with terms and conditions set forth in purchase ordersor agreements between Dakota Growers and its customers. Sales of DreamfieldsTMproducts are included in the Company’s net revenues. Manufacturing,distribution, and promotional costs incurred by the Company related toDreamfieldsTM products are included in the applicable line items ofthe Company’s income statement. On a monthly basis, the Company calculates anet amount due to DNA Dreamfields based on the total sales of DreamfieldsTMproduct less related DreamfieldsTM product costs, whichinclude cash discounts, promotion and allowances, brokerage fees, bad debtwrite-offs, freight costs, storage and handling fees, and the transfer priceestablished between the Company and DNA Dreamfields (as outlined in themanufacturing agreement). This net amount due to DNA Dreamfields, which totaled$712,000 for the three months ended October 31, 2004, is included in theCompany’s cost of goods sold. Service fee income from DNA Dreamfields totaling$46,000 for the three months ended October 31, 2004 is included in netrevenues. The net amount due to DNA Dreamfields was $281,000 as of October 31,2004, while the net amount due from DNA Dreamfields was $621,000 as of July 31,2004.

 

Amountsdue from officers totaled $82,000 as of October 31, 2004 and July 31,2004.

 

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**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, 2004.

 

**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, 2004under “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 generates a majority of its revenuesfrom manufacturing pasta for the retail store brand and foodservice markets,although we serve and continually look for opportunities in the entire drypasta industry. The Company has two production plants, located in Carrington,North Dakota and New Hope, Minnesota. The Company’s cost of goods sold consistsmainly of raw materials (primarily durum wheat), packaging, and manufacturingand distribution costs.

 

The Company incurred a net loss of$185,000 for the three months ended October 31, 2004, compared to a netloss of $539,000 for the three months ended October 31, 2003. The decreasein net loss was largely due to higher pasta sales volumes in the foodserviceand ingredient markets. In September 2004, the Company entered into afoodservice license agreement with New World Pasta Company, giving the Companythe exclusivity to produce and market the *Ronzoni*, *Prince*, *San Giorgio* and*Mrs. Weiss*brands in the foodservicemarket. The quarter was negatively impacted by higher per unit production costsflowing out of the fourth fiscal quarter of 2004.

 

TheCompany secured new business in its first fiscal quarter 2005 and expects tobegin realizing increased revenues as a result of these new customer rolloutsin its second fiscal quarter 2005. The positive benefits of these sales will besomewhat tempered during the roll out period due to the production schedulingand distribution disruptions created. The Company has also been successful inimplementing sales price increases, most of which will take effect in theCompany’s second fiscal quarter 2005. Until these increases are fully implemented,the negative impacts of higher freight costs, packaging materials, utilities,health care and other production input costs will be felt.

 

**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 tochange and the best estimates and judgments may require adjustment. For acomplete description of the Company’s significant accounting policies, pleasesee Note 1 to the consolidated financial statements included in the Company’sForm 10-K for the year ended July 31, 2004. Our critical accountingpolicies are those that have meaningful impact on the reporting of ourfinancial condition and 

 

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results,and that require significant management judgment and estimates. These policiesinclude our accounting for (a) allowance for doubtful accounts, (b) inventoryvaluation, (c) asset impairment, and (d) income taxes.

 

*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 would deteriorate, additionalallowances may be required in the future which could have an adverse impact onour future operating results.

 

*Inventory Valuation*

 

Inventories are stated atthe lower of cost or market, determined on a first-in, first-out (FIFO) basis,using product specific standard costs. The Company analyzes variances betweenactual manufacturing costs incurred and amounts absorbed at inventory standardcosts. Inventory valuations are adjusted for these variances as applicable. TheCompany regularly evaluates its inventories and recognizes inventory allowancesfor discontinued and slow-moving inventories based upon these evaluations.

 

*Asset Impairment*

 

Weare required to evaluate our long-lived assets for impairment wheneverindicators of impairment exist, and write down the value of any assets if theyare determined to be impaired. Evaluating the impairment of long-lived assetsinvolves management judgment in estimating the future cash flows and fairvalues related to these assets. Future events could cause management toconclude that impairment indicators exist and that the value of certainlong-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, 2004will be realized through the generation of future taxable income and taxplanning strategies.

 

**Results of Operations**

 

*Comparison of the Three Months Ended October 31,2004 and 2003*

 

***Net Revenues.***Netrevenues totaled $35.9 million for the three months ended October 31,2004, a decrease of $1.7 million, or 4.6%, compared to $37.6 million for thethree months ended October 31, 2003. The decrease primarily resulted fromlower retail sales volumes, although these losses were partially offset byvolume gains in the foodservice and ingredient markets.

 

Revenuesfrom the retail market, a portion of which includes co-pack and governmentalsales, decreased $4.0 million, or 18.7%, primarily as a result of a 28.3%decrease in sales volumes offset partially by higher per unit selling prices.The retail market volume declines were mainly in co-pack sales and, to a lesserextent, private label sales. Sales of DreamfieldsTM low digestiblecarbohydrate pasta, which have significantly higher per unit sales prices thanthe Company’s other products, accounted for the average sales price increase inthe retail market. Foodservice revenues increased $1.7 million, or 16.5%, dueto a 25.0% increase in sales volumes offset by lower per unit selling prices. Increasedfoodservice volumes were derived from sales under the New World Pasta license 

 

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agreement combined withnew customer sales. Ingredientrevenuesincreased $1.3 million, or 43.9%, as a result of a 56.0% increase in salesvolumes primarily related to the addition of one customer.

 

The Company markets semolinaproduction in excess of its own requirements as well as durum wheat flour,other flour blends and by-products of the durum milling process. Revenues fromsemolina and by-product sales decreased $0.7 million for the three months endedOctober 31, 2004, when compared to the same period of the prior year. The decrease primarilyresulted from lower semolina sales volumes.

 

***Cost of Goods Sold.*** Cost of goods sold decreased $3.1million, or 8.8%, to $32.6 million for the three months ended October 31,2004, compared to $35.7 million for the three months ended October 31,2003. The decrease was primarily due to lowerrevenues for the quarter ended October 31, 2004 relative to the comparablequarter of the prior year. Gross profit as a percentage of netrevenues increased to 9.2% for the three months ended October 31, 2004from 5.1% for the three months ended October 31, 2003 primarily due tolower average manufacturing input costs.

 

As a result ofa supply/demand imbalance in the Company’s fourth fiscal quarter of 2004, theCompany reduced production to keep its inventories at proper levels, resultingin higher per unit conversion costs. A significant portion of these increasedper unit costs flowed through cost of goods sold in the first two months of theCompany’s first fiscal quarter 2005. The Company’s gross profit as a percentageof net revenues for the month ended October 31, 2004 improved to 12.3%,resulting in an overall first fiscal quarter 2005 average of 9.2%.

 

***Marketing, General, and Administrative (“MG&A”) Expenses.*** MG&Aexpenses increased $0.4 million, or 18.3%, to $2.4 million for the quarterended October 31, 2004, compared to $2.0 million for the quarter ended October 31,2003. The increase was primarily due to customer marketing support associated withDreamfieldsTM pasta products. MG&A expenses as a percentage ofnet revenues increased to 6.6% for the quarter ended October 31, 2004,from 5.3% for the comparable quarter of the prior year.

 

***Net Loss Allocated from Joint Venture. ***The net loss allocated from joint venturetotaled $0.6 million for the three months ended October 31, 2004, andrepresents the Company’s allocable share of net losses from DNA DreamfieldsCompany, LLC based upon its 24% ownership interest.

 

***Interest Expense.*** Interest expense for the three monthsended October 31, 2004 totaled $0.6 million, down $0.2 million from thecorresponding period of the prior year. The decrease was primarily due to loweraverage outstanding debt levels.

 

***Income Taxes.***The income taxbenefit for the three months ended October 31, 2004 and 2003, totaled$118,000 and $345,000, respectively. The income tax benefit reflects aneffective corporate income tax rate of approximately 39%.

 

***Net Loss.***The Company incurred net losses of $185,000 and $539,000 for the threemonths ending October 31, 2004 and 2003, respectively. The $354,000decrease in net loss for the quarter ended October 31, 2004 when comparedto the quarter ended October 31, 2003 resultedfrom the factors noted above.

 

**Liquidity and Capital Resources**

 

Ourprimary sources of liquidity are cash provided by operations and borrowingsunder our credit facility. Working capital as of October 31, 2004 totaled$11.9 million compared to $16.6 million as of July 31, 2004.

 

TheCompany has a $25 million revolving credit facility with CoBank, which extendsthrough February 21, 2005. The balance outstanding on the line of creditwas $16.7 million as of October 31, 2004.

 

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 31,2004. The Company 

 

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andCoBank entered into an Amendment to the Master Loan Agreement in December 2004under which the Company is required to maintain a current ratio of not lessthan 1.10 to 1.0 through and including April 30, 2005, and of not lessthan 1.25 to 1.0 thereafter.

 

Netcash used for operating activities totaled $0.2 million for the three monthsended October 31, 2004 compared to net cash from operating activities of$1.8 million for the three months ended October 31, 2003. The net decreasewas primarily due to a $3.2 million decrease in inventories for the quarterended October 31, 2003, while inventories remained relatively unchangedfor the quarter ended October 31, 2004.

 

Net cash used for investing activitiestotaled $2.3 million and $0.6 million for the three months ended October 31,2004 and 2003, respectively. The Company invested $1.5 million in DNADreamfields during the quarter ended October 31, 2004, which accounted fora majority of the $1.7 million change.

 

Netcash from financing activities totaled $1.9 million for the three months ended October 31,2004, compared to net cash used for financing activities of $1.2 million forthe three months ended October 31, 2003. Substantially all of theseamounts related to debt principal payments offset by net borrowings under theCompany’s revolving credit facility and increases in excess outstanding checksover cash on deposit.

 

InDecember 2004, the Company entered into a letter of intent with U.S.Foodservice which outlined the economic terms and conditions under which U.S.Foodservice will purchase pasta products from the Company. This letter ofintent eliminates the Company's right to be the exclusive supplier of dry pastaproducts to U.S. Foodservice and no longer provides for minimum purchasecommitments by U.S. Foodservice. The letter of intent also includes provisionswhich the Company anticipates will lessen the time to recover the unamortizedportion of certain marketing incentive prepayments made to U.S. Foodservice.

 

TheCompany forward contracts for a certain portion of its future durum wheatrequirements. At October 31, 2004, the Company had outstanding commitmentsfor grain purchases totaling $14.4 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.

 

The following table summarizesthe Company’s contractual obligations as of October 31, 2004 (in thousands):

 
| **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              |       | $         | 22,182     |                                   | $          | 5,866                           |       | $                               | 14,316     |                             | $          | 2,000 |   | $ | — |   |
| Durum purchase obligations  |       | 14,406    |       | 14,406                                 |       | —                          |       | —                          |       | —                           |       |
| Operating leases            |       | 2,861     |       | 1,137                                  |       | 1,639                           |       | 85                              |       | —                           |       |
|                        |       |      |       |                                   |       |                            |       |                            |       |                             |       |
|                        |       | $         | 39,449     |                                   | $          | 21,409                          |       | $                               | 15,955     |                             | $          | 2,085 |   | $ | — |   |

 

Managementbelieves that net cash currently available and to be provided by operating activities,along with its available line of credit, will be sufficient to meet the Company’sexpected capital and liquidity requirements for the foreseeable future.

 

U.S. Customs and Border Protection (“Customs”)published a notice of intention to distribute antidumping and countervailingduties assessed on certain pasta imported from Italy and Turkey from October 1,2003 to September 30, 2004, to affected domestic producers pursuant to theContinued Dumping and Subsidy Offset Act of 2000 (the “Act”). The Companyreceived $425,000 in December 2004 under the Act, based on duties assessedfrom October 1, 2003 to September 30, 2004. The Company cannotreasonably estimate the potential amount, if any, that it may receive under theAct in future periods as any such amount will be based upon future events overwhich the Company has little or no control, including, but not limited to, theamount of expenditures by domestic pasta producers and the amount ofantidumping and countervailing duties collected by Customs.

 

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**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***

 

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 others withinthe Company.

 

***Changes in Internal Controls***

 

Therewere no changes in the Company’s internal controls over financial reportingduring the Company’s fiscal first quarter ended October 31, 2004 thathave materially affected or are reasonably likely to materially affect theCompany’s internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**ITEM 6. EXHIBITS**

 
| **Exhibits** |   |                                                                                                                                    |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
| ** **   |   |                                                                                                                                    |
| 10.1    |   | Amendment  effective December 1, 2004 to the Master Loan Agreement between the  Company and CoBank, ACB.                           |
|         |   |                                                                                                                                    |
| 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. |

 

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**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,  2004 |
|                  |   | Officer)                               |   |                    |
|                  |   |                                   |   |                    |
|                  |   |                                   |   |                    |
| /s/ Thomas P. Friezen |   | Chief Financial  Officer               |   |                    |
| Thomas P. Friezen     |   | (Principal Financial                   |   | December 15,  2004 |
|                  |   | Officer)                               |   |                    |
|                  |   |                                   |   |                    |
|                  |   |                                   |   |                    |
| /s/ Edward O. Irion   |   | Vice President –  Finance and     |   |                    |
| Edward O. Irion       |   | Chief Accounting  Officer              |   | December 15,  2004 |
|                  |   | (Principal Accounting  Officer)        |   |                    |

 

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