**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

| **ý** |   | **Quarterly Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|------------|--------|-----------------------------------------------------------------------------------------------|
|       |   | **For the quarterly period ended January 31, 2003**                                           |
|       |   |                                                                                          |
|       |   | **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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**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 reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.

Yes ý  No o

 

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

Yes o  No ý

 

As of March14, 2003, the Registrant had 12,260,291shares of common stock, par value $0.01 per share, outstanding.

 

 

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**PART 1 - FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS**

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
|                                                                                                                |   | **(Unaudited)  January 31,  2003** |    | **July 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|--------------------|--------|
| **ASSETS**                                                                                                          |   |                               |    |               |   |
|                                                                                                                |   |                               |    |               |   |
| CURRENT ASSETS                                                                                                      |   |                               |    |               |   |
| Cash and cash equivalents                                                                                           |   | $                                  | 5       |               | $      | 2,866 |   |
|                                                                                                                |   |                               |    |               |   |
| Short-term investments (restricted)                                                                                 |   | —                             |    | 1,974              |   |
|                                                                                                                |   |                               |    |               |   |
|                                                                                                                |   |                               |    |               |   |
| Trade accounts receivable,  less allowance for cash discounts and  doubtful accounts of $930 and $792, respectively |   | 16,708                             |    | 16,504             |   |
|                                                                                                                |   |                               |    |               |   |
| Other receivables                                                                                                   |   | 393                                |    | 360                |   |
|                                                                                                                |   |                               |    |               |   |
| Inventories                                                                                                         |   | 24,270                             |    | 19,636             |   |
|                                                                                                                |   |                               |    |               |   |
| Prepaid expenses                                                                                                    |   | 4,270                              |    | 2,258              |   |
|                                                                                                                |   |                               |    |               |   |
| Deferred income taxes                                                                                               |   | 466                                |    | 466                |   |
|                                                                                                                |   |                               |    |               |   |
| Total current assets                                                                                                |   | 46,112                             |    | 44,064             |   |
|                                                                                                                |   |                               |    |               |   |
| PROPERTY AND EQUIPMENT                                                                                              |   |                               |    |               |   |
| In service                                                                                                          |   | 107,519                            |    | 106,885            |   |
| Construction in process                                                                                             |   | 680                                |    | 371                |   |
|                                                                                                                |   | 108,199                            |    | 107,256            |   |
| Less accumulated depreciation                                                                                       |   | (38,837                            | )       | (35,762            | )      |
|                                                                                                                |   |                               |    |               |   |
| Net property and equipment                                                                                          |   | 69,362                             |    | 71,494             |   |
|                                                                                                                |   |                               |    |               |   |
| INVESTMENT IN COOPERATIVE BANKS                                                                                     |   | 2,350                              |    | 2,350              |   |
|                                                                                                                |   |                               |    |               |   |
| INTANGIBLE ASSETS                                                                                                   |   | 613                                |    | 686                |   |
|                                                                                                                |   |                               |    |               |   |
| OTHER ASSETS                                                                                                        |   | 9,298                              |    | 6,947              |   |
|                                                                                                                |   |                               |    |               |   |
|                                                                                                                |   | $                                  | 127,735 |               | $      | 125,541 |   |

 

2

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
|                                                                                                                                                                |   | **(Unaudited)  January 31,  2003** |    | **July 31,  2002** |   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|---------|--------------------|--------|
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                                       |   |                               |    |               |   |
|                                                                                                                                                                |   |                               |    |               |   |
| CURRENT LIABILITIES                                                                                                                                                 |   |                               |    |               |   |
| Notes payable                                                                                                                                                       |   | $                                  | 7,250   |               | $      | — |   |
| Current portion of long-term debt                                                                                                                                   |   | 10,027                             |    | 9,320              |   |
| Accounts payable                                                                                                                                                    |   | 4,990                              |    | 6,471              |   |
| Excess outstanding checks over cash on deposit                                                                                                                      |   | 2,971                              |    | —             |   |
| Accrued liabilities                                                                                                                                                 |   | 4,510                              |    | 5,260              |   |
|                                                                                                                                                                |   |                               |    |               |   |
| Total current liabilities                                                                                                                                           |   | 29,748                             |    | 21,051             |   |
|                                                                                                                                                                |   |                               |    |               |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                       |   | —                             |    | —             |   |
| LONG-TERM DEBT, net of current portion                                                                                                                              |   | 30,883                             |    | 38,274             |   |
| DEFERRED INCOME TAXES                                                                                                                                               |   | 10,311                             |    | 9,833              |   |
| OTHER LIABILITIES                                                                                                                                                   |   | 213                                |    | 239                |   |
|                                                                                                                                                                |   |                               |    |               |   |
| Total liabilities                                                                                                                                                   |   | 71,155                             |    | 69,397             |   |
|                                                                                                                                                                |   |                               |    |               |   |
| REDEEMABLE PREFERRED STOCK                                                                                                                                          |   |                               |    |               |   |
| Series A, 6% cumulative, $100 par value, 533 shares authorized, 400  and 467 shares issued and outstanding as of January 31, 2003 and July 31,  2002, respectively  |   | 40                                 |    | 47                 |   |
| Series B, 2% non-cumulative, $100 par value, 525 shares authorized, 0  and 75 shares issued and outstanding as of January 31, 2003 and July 31,  2002, respectively |   | —                             |    | 7                  |   |
|                                                                                                                                                                |   |                               |    |               |   |
| Total redeemable preferred stock                                                                                                                                    |   | 40                                 |    | 54                 |   |
|                                                                                                                                                                |   |                               |    |               |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                           |   |                               |    |               |   |
| Series D delivery preferred stock, non-cumulative, $.01 par value,  11,324,377 shares authorized, 11,275,297 shares issued and outstanding                          |   | 113                                |    | 113                |   |
| Common stock, $.01 par value, 75,000,000 shares authorized,  12,554,747 shares issued                                                                               |   | 126                                |    | 126                |   |
| Additional paid-in capital                                                                                                                                          |   | 60,188                             |    | 60,188             |   |
| Treasury stock at cost, 294,456 and 0 shares as of January 31, 2003  and July 31, 2002, respectively                                                                |   | (1,840                             | )       | —             |   |
| Accumulated deficit                                                                                                                                                 |   | (2,047                             | )       | (4,337             | )      |
|                                                                                                                                                                |   |                               |    |               |   |
| Total stockholders’ equity                                                                                                                                     |   | 56,540                             |    | 56,090             |   |
|                                                                                                                                                                |   |                               |    |               |   |
| Total liabilities and stockholders’ equity                                                                                                                     |   | $                                  | 127,735 |               | $      | 125,541 |   |

 

See Notes to ConsolidatedFinancial Statements

 

3

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
|                                                                               |   | **Three  Months Ended  January 31,** |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------|--------|
|                                                                               |   | **2003**                             |   | **2002** |   |
| Net revenues (net of discounts and allowances of $5,034 and $4,083,  respectively) |   | $                                    | 40,740 |   | $ | 37,020 |   |
|                                                                               |   |                                 |   |   |   |
| Cost of goods sold                                                                 |   | 36,012                               |   | 32,023 |   |
|                                                                               |   |                                 |   |   |   |
| Gross profit                                                                       |   | 4,728                                |   | 4,997 |   |
|                                                                               |   |                                 |   |   |   |
| Marketing, general and administrative expenses                                     |   | 3,166                                |   | 2,381 |   |
|                                                                               |   |                                 |   |   |   |
| Operating income                                                                   |   | 1,562                                |   | 2,616 |   |
|                                                                               |   |                                 |   |   |   |
| Other income (expense)                                                             |   |                                 |   |   |   |
| Interest and other income                                                          |   | 1,035                                |   | 66 |   |
| Gain on sale of property, equipment and other assets                               |   | 11                                   |   | — |   |
| Interest expense, net                                                              |   | (895                                 | )      | (1,028 | ) |
|                                                                               |   |                                 |   |   |   |
| Income before income taxes                                                         |   | 1,713                                |   | 1,654 |   |
|                                                                               |   |                                 |   |   |   |
| Income tax expense (benefit)                                                       |   | 668                                  |   | (79 | ) |
|                                                                               |   |                                 |   |   |   |
| Net income                                                                         |   | 1,045                                |   | 1,733 |   |
| Dividends on preferred stock                                                       |   | 1                                    |   | 1 |   |
|                                                                               |   |                                 |   |   |   |
| Net earnings on common/equity stock                                                |   | $                                    | 1,044  |   | $ | 1,732 |   |
|                                                                               |   |                                 |   |   |   |
| Net earnings per common/equity share                                               |   |                                 |   |   |   |
| Basic                                                                              |   | $                                    | 0.08   |   | $ | 0.15 |   |
|                                                                               |   |                                 |   |   |   |
| Diluted                                                                            |   | $                                    | 0.08   |   | $ | 0.15 |   |
|                                                                               |   |                                 |   |   |   |
| Weighted average common/equity shares outstanding                                  |   |                                 |   |   |   |
| Basic                                                                              |   | 12,340                               |   | 11,275 |   |
|                                                                               |   |                                 |   |   |   |
| Diluted                                                                            |   | 12,593                               |   | 11,308 |   |

 

See Notes to ConsolidatedFinancial Statements

 

4

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
|                                                                               |   | **Six Months  Ended  January 31,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2003**                           |   | **2002** |   |
| Net revenues (net of discounts and allowances of $9,894 and $8,251,  respectively) |   | $                                  | 78,071 |   | $ | 74,566 |   |
|                                                                               |   |                               |   |   |   |
| Cost of goods sold                                                                 |   | 68,136                             |   | 63,665 |   |
|                                                                               |   |                               |   |   |   |
| Gross profit                                                                       |   | 9,935                              |   | 10,901 |   |
|                                                                               |   |                               |   |   |   |
| Marketing, general and administrative expenses                                     |   | 5,482                              |   | 4,810 |   |
|                                                                               |   |                               |   |   |   |
| Operating income                                                                   |   | 4,453                              |   | 6,091 |   |
|                                                                               |   |                               |   |   |   |
| Other income (expense)                                                             |   |                               |   |   |   |
| Interest and other income                                                          |   | 1,076                              |   | 178 |   |
| Gain on sale of property, equipment and other assets                               |   | 24                                 |   | 2 |   |
| Interest expense, net                                                              |   | (1,796                             | )      | (2,139 | ) |
|                                                                               |   |                               |   |   |   |
| Income before income taxes                                                         |   | 3,757                              |   | 4,132 |   |
|                                                                               |   |                               |   |   |   |
| Income tax expense (benefit)                                                       |   | 1,465                              |   | (159 | ) |
|                                                                               |   |                               |   |   |   |
| Net income                                                                         |   | 2,292                              |   | 4,291 |   |
| Dividends on preferred stock                                                       |   | 2                                  |   | 9 |   |
|                                                                               |   |                               |   |   |   |
| Net earnings on common/equity stock                                                |   | $                                  | 2,290  |   | $ | 4,282 |   |
|                                                                               |   |                               |   |   |   |
| Net earnings per common/equity share                                               |   |                               |   |   |   |
| Basic                                                                              |   | $                                  | 0.18   |   | $ | 0.38 |   |
|                                                                               |   |                               |   |   |   |
| Diluted                                                                            |   | $                                  | 0.18   |   | $ | 0.38 |   |
|                                                                               |   |                               |   |   |   |
| Weighted average common/equity shares outstanding                                  |   |                               |   |   |   |
| Basic                                                                              |   | 12,448                             |   | 11,275 |   |
|                                                                               |   |                               |   |   |   |
| Diluted                                                                            |   | 12,599                             |   | 11,292 |   |

 

See Notes to ConsolidatedFinancial Statements

 

5

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
|                                                                                  |   | **Six Months  Ended  January 31,** |   |
|---------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                                  |   | **2003**                           |   | **2002** |   |
| OPERATING ACTIVITIES                                                                  |   |                               |   |   |   |
| Net income                                                                            |   | $                                  | 2,292  |   | $ | 4,291 |   |
| Adustments to reconcile net income to net cash from (used for)  operating activities: |   |                               |   |   |   |
| Depreciation and amortization                                                         |   | 5,093                              |   | 4,398 |   |
| Gain on sale of property, equipment and other assets                                  |   | (24                                | )      | (2 | ) |
| Deferred income taxes                                                                 |   | 478                                |   | (159 | ) |
| Payments for long-term marketing costs                                                |   | (5,000                             | )      | (2,250 | ) |
| Changes in assets and liabilities                                                     |   |                               |   |   |   |
| Trade receivables                                                                     |   | (204                               | )      | (1,818 | ) |
| Other receivables                                                                     |   | (33                                | )      | 713 |   |
| Inventories                                                                           |   | (4,634                             | )      | 945 |   |
| Prepaid expenses                                                                      |   | (1,076                             | )      | 221 |   |
| Other assets                                                                          |   | 5                                  |   | — |   |
| Accounts payable                                                                      |   | (1,481                             | )      | (1,066 | ) |
| Excess outstanding checks over cash on deposit                                        |   | 2,971                              |   | 1,166 |   |
| Grower payables                                                                       |   | —                             |   | (89 | ) |
| Other accrued liabilities                                                             |   | (750                               | )      | 15 |   |
|                                                                                  |   |                               |   |   |   |
| NET CASH FROM (USED FOR) OPERATING ACTIVITIES                                         |   | (2,363                             | )      | 6,365 |   |
|                                                                                  |   |                               |   |   |   |
| INVESTING ACTIVITIES                                                                  |   |                               |   |   |   |
| Purchases of property and equipment                                                   |   | (949                               | )      | (223 | ) |
| Proceeds on sale of property, equipment, and other assets                             |   | 3                                  |   | 53 |   |
| Redemption of short term investments                                                  |   | 1,974                              |   | — |   |
| Payments for package design costs                                                     |   | (236                               | )      | (221 | ) |
|                                                                                  |   |                               |   |   |   |
| NET CASH FROM (USED FOR) INVESTING ACTIVITIES                                         |   | 792                                |   | (391 | ) |
|                                                                                  |   |                               |   |   |   |
| FINANCING ACTIVITIES                                                                  |   |                               |   |   |   |
| Net change in short-term notes payable                                                |   | 7,250                              |   | (4,600 | ) |
| Principal payments on long-term debt                                                  |   | (6,684                             | )      | (1,358 | ) |
| Preferred stock retirements                                                           |   | (14                                | )      | (7 | ) |
| Dividends paid on preferred stock                                                     |   | (2                                 | )      | (9 | ) |
| Purchase of treasury stock                                                            |   | (1,840                             | )      | — |   |
|                                                                                  |   |                               |   |   |   |
| NET CASH USED FOR FINANCING ACTIVITIES                                                |   | (1,290                             | )      | (5,974 | ) |
|                                                                                  |   |                               |   |   |   |
| 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 |   |
|                                                                                  |   |                               |   |   |   |
| SUPPLEMENTAL DISCLOSURES   OF CASH FLOW INFORMATION                                   |   |                               |   |   |   |
| Cash payments for                                                                     |   |                               |   |   |   |
| Interest (net of amounts capitalized)                                                 |   | $                                  | 1,945  |   | $ | 2,035 |   |
|                                                                                  |   |                               |   |   |   |
| Income taxes                                                                          |   | $                                  | 1,160  |   | $ | 10 |   |

 

See Notes to ConsolidatedFinancial Statements

 

6

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notes should beread in conjunction with the notes to the financial statements for the yearended July 31, 2002 as filed in 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 January 30, 2002 for thespecific purpose of consummating the conversion of Dakota Growers PastaCompany, a North Dakota cooperative (the “Cooperative”), into a corporation.The conversion of the Cooperative from a cooperative to a corporation wascompleted effective July 1, 2002, with the Company being the ultimate survivingentity in the conversion. The Company operates as the Cooperative’s successorand its operations are a continuance of the operations of the Cooperative.

 

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

 

**NOTE 2 – FINANCIALSTATEMENT PRESENTATION**

 

The unaudited consolidated financial statements included herein havebeen prepared pursuant to the rules and regulations of the Securities andExchange Commission. Accordingly, they do not include all the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three and six month periods ended January 31, 2003 are notnecessarily indicative of the results that may be expected for the year endedJuly 31, 2003. The information included in this Form 10-Q should be read inconjunction with Management’s Discussion and Analysis and the consolidatedfinancial statements and footnotes included in the Company’s Form 10-K for theyear ended July 31, 2002. The information contained in the balance sheet as ofJuly 31, 2002 was derived from the Company’s audited annual report for fiscal2002. Reclassifications have been made to facilitate comparability with currentpresentation. Such reclassifications have no effect on the net results ofoperations.

 

The financial information presented herein includes the consolidatedbalances and results of operations of Dakota Growers Pasta Company, Inc. andits wholly owned subsidiary. All significant intercompany balances andtransactions have been eliminated.

 

###### **NOTE 3 – INVENTORIES**

 

Inventoriesare valued at lower of cost or market. Inventories as of January 31, 2003include raw materials of $5,785,000 and finished goods of $18,485,000.Inventories at July 31, 2002 include raw materials of $5,293,000 and finishedgoods of $14,343,000.

 

**NOTE4 – LOAN AGREEMENTS**

 

In February 2003, the Company secured a $19 million revolving creditfacility with CoBank covering the period from February 25, 2003 throughFebruary 23, 2004. The revolving line has a variable interest rate establishedby CoBank based on CoBank’s cost of funds. The balance outstanding under theCompany’s line of credit at January 31, 2003 totaled $7,250,000.

 

The variousdebt agreements with CoBank and the institutional investors obligate theCompany to maintain or achieve certain amounts of equity and certain financialratios and impose certain restrictions on the Company. The Company was incompliance with these financial covenants as of January 31, 2003. The Companyand CoBank 

 

7

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entered intoan Amendment as of February 11, 2003 to the Master Loan Agreement dated June20, 2001. The Amendment replaced the debt service coverage ratio with aconsolidated funded debt to consolidated cash flow ratio. The Company isrequired to maintain a consolidated funded debt to consolidated cash flow ratioof not more than 3.0 to 1.0 at the end of each fiscal quarter calculated on atrailing four quarter basis under the Amendment.

 

The Companyalso entered into new Term Loan Supplements to the Master Loan Agreement, aswell as an updated Security Agreement and Guarantee Agreement, primarily toupdate such agreements for certain items in conjunction with the conversionfrom a cooperative to a corporation.

 

###### **NOTE 5 – INCOME TAXES**

 

Incometax expense of $668,000 for the three months ended January 31, 2003 and$1,465,000 for the six months ended January 31, 2003 reflects the applicationof the estimated annual effective income tax rate of 39% for the U.S. andapplicable states to the respective net income before income taxes.

 

The conversion from a cooperative to a corporation effectuated via aseries of mergers is treated under Section 368(a)(1)(F) of the Internal RevenueCode (the “Code”) as a reorganization. A corporation that survives areorganization defined in Code Section 368(a)(1)(F) is treated for tax purposesas a continuation of its predecessor, accordingly, the Company will retain thefiscal year, accounting methods, tax elections and other tax attributes of theCooperative.  However, because theCompany does not operate on a cooperative basis after the conversion, theCompany is taxable as a “C corporation.” As such, it will no longer paydeductible patronage dividends and any distributions to the shareholders willbe treated as nondeductible dividends. This is the primary reason for thesignificant difference between the income tax amounts recorded for the threeand six month periods ended January 31, 2003 compared to the correspondingperiods of the prior year.

 

The Cooperative was a non-exempt cooperative as defined by Section1381(a)(2) of the Code. Accordingly, net margins from business done with memberpatrons, which were allocated and paid as prescribed in Section 1382 of theCode (hereafter referred to as “qualified”), were taxable to the members andnot to the Cooperative. Net margins and member allocations were determined onthe basis of accounting used for financial reporting purposes. To the extentthat net margins were not qualified as stated above or arose from business donewith non-members, the Cooperative had taxable income subject to corporateincome tax rates.

###### ** **

Upon conversion from a cooperative to a corporation, the Companyrecorded 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 recordeddeferred taxes for temporary differences that were likely to be eliminatedthrough patronage allocations.

 

###### **NOTE 6 – EARNINGS PERSHARE**

 

Basic earningsper share (EPS) is calculated by dividing net earnings on common/equity stockby the weighted average number of common/equity 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 convertible preferred stock, included in thecalculation of diluted weighted average common/equity shares totaled 253,000and 33,000 for the three months ended January 31, 2003 and 2002, respectively.Dilutive securities included in the calculation of diluted weighted averagecommon/equity shares totaled 151,000 and 17,000 for the six months ended January31, 2003 and 2002, respectively. Because the Company’s stock is currently onlytraded in a small secondary market, the Company has assumed the proceeds fromthe exercise of stock options would reduce debt and, thus, interest expense.

 

8

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**NOTE 7 – STOCK OPTIONS**

 

During the second quarter of fiscal 2003, the Board of Directorsapproved the issuance of non-qualified stock options for 294,456 shares of theCompany’s common stock with an exercise price of $6.25 per share in conjunctionwith the repurchase shares of common stock from certain of the Company’sofficers (See Note 9 – Related Party Transactions). In addition, the Boardapproved the issuance of non-qualified stock options for 686 shares of theCompany’s Series C 6% convertible non-cumulative preferred stock with anexercise price of $150 per share. Each share of Series C 6% convertiblenon-cumulative preferred stock is convertible into 24 shares of common stockand 24 shares of Series D delivery preferred stock.

 

On November 21, 2002 the Boardof Directors adopted the Dakota Growers Pasta Company, Inc. 2003 Stock OptionPlan (the “Plan”), which was approved by the shareholders at the Annual Meetingon January 11, 2003. No options have been granted under the Plan at this time.The Plan covers 500,000 shares of the Company’s common stock. The purposes ofthe Dakota Growers Pasta Company, Inc. 2003 Stock Option Plan are to provide acontinuing, long-term incentive to selected eligible officers, directors andkey employees, vendors or consultants of the Company and of any subsidiarycompany of the Company; to provide a means of rewarding outstandingperformance; and to enable the Company to maintain a competitive position toattract and retain key personnel necessary for continued growth andprofitability. This will be done by granting options of common stock of theCompany. Options granted under the Plan may be incentive stock options (asdefined under Section 422 of the Code) or non-qualified stock options, asdetermined by the Administrator at the time of grant of an option and subjectto the applicable 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 – COMMITMENTS**

 

The Companyforward contracts for a certain portion of its future durum wheat requirements.The Company had outstanding commitments for grain purchases totaling$18,453,000 related to forward purchase contracts as of January 31, 2003. 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 arenot transferable.

 

The Companypaid $5.0 million under long-term customer marketing agreements during the sixmonths ended January 31, 2003 and had no other significant commitments relatedto such agreements as of January 31, 2003.

 

**NOTE 9 –****RELATED PARTY TRANSACTIONS**

 

The Companyhad pledged certificates of deposit as security for loans, totalingapproximately $1,974,000, made by a financial institution to Timothy J. Dodd,President and Chief Executive Officer, and Thomas P. Friezen, Chief FinancialOfficer, to exercise stock options. These loans matured December 1, 2002.

 

In response tothe Sarbanes-Oxley Act of 2002, the Board of Directors approved the repurchaseof 190,800 and 103,656 shares of the Company’s common stock from Messrs. Doddand Friezen, respectively. The repurchase was completed in November 2002. Inconjunction with the repurchase of these shares at $6.25 per share, Messrs.Dodd and Friezen received proceeds of $1,192,500 and $647,850, respectively. In addition, Mr. Friezen received additionalgross proceeds of $229,993 under a compensatory transaction in conjunction withthe unwinding of previous stock option exercises and related officer loans. Theproceeds received by Messrs. Dodd and Friezen were used to pay off theexecutive officers’ loans with the financial institution and the Company’scertificates of deposit were no longer restricted. The Company redeemed thecertificates of deposit in December 2002. Finally, Messrs. Dodd and Friezenwere granted stock options to purchase 190,800 and 103,656 shares,respectively, of 

 

9

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the Company’s common stock with an exercise price of $6.25 per share.Such options were first exercisable on December 2, 2002.

 

**NOTE 10 – CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000**

 

The U.S.Customs Service (“Customs”) published, on July 3, 2002, a notice of intentionto distribute antidumping and countervailing duties assessed on certain pastaimported from Italy and Turkey from October 1, 2001 to September 30, 2002, toaffected domestic producers pursuant to the Continued Dumping and SubsidyOffset Act of 2000 (the “Offset Act”). The Company received a payment ofapproximately $1 million from Customs under the Offset Act in December 2002. These proceeds have been classified as otherincome. The Company cannot reasonably estimate the potential amount, ifany, that may be received in future periods as these receipts are based uponfuture events over which we have little or no control, including, but notlimited to, the amount of expenditures by domestic pasta producers and theamount of antidumping and countervailing duties collected by Customs.

 

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

 

**Forward-LookingStatements**

 

The following discussion contains forward-looking statements. Suchforward-looking statements include, among others, those statements includingthe words “expect”, “anticipate”, “believe”, “may” and similar expressions.Such statements are based on assumptions by the Company’s management, as of thedate of this Quarterly Report, and are subject to risks and uncertainties,including but not limited to, those discussed in the Company’s 2002 Form 10-Kunder “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 any forward-lookingstatements in the Quarterly Report to reflect future events or developments.

 

**Summary**

 

Dakota Growers is the third largest producer of dry pasta products inNorth America. The pasta industry identifies domestic dry pasta into two basicmarkets: retail and institutional. The Company recognizes the institutionalmarket as being comprised of foodservice and ingredient sales. We participatein each of the retail, foodservice and ingredient markets. The Company has twoproduction plants, located in Carrington, North Dakota and New Hope, Minnesota.

 

The comparability of the results for the three and six month periodsended January 31, 2003 versus those for the corresponding periods of the prioryear was affected by the income tax status change associated with theconversion from a cooperative to a corporation.

 

Income before income taxes totaled $3.8 million for the six monthsended January 31, 2003, compared to $4.1 million for the six months endedJanuary 31, 2002. Net income totaled $2.3 million for the six months endedJanuary 31, 2003, down from net income of $4.3 million for the six months endedJanuary 31, 2002.

 

Factors contributing to thedecrease in net earnings for the six months ended January 31, 2003 compared tothe corresponding period of the prior year include increased durum costs,increased marketing, general and administrative costs, costs associated withthe restructuring of certain forward warehouse arrangements, and the effect ofincome taxes following the change in income tax status upon the conversion to acorporation. The Company has generally been successful in increasing salesprices to pass-through the higher cost of durum, although the timing of thesales price adjustments has generally lagged behind the increase in durumcosts. Therefore, the Company was not able to fully recover the increase indurum costs through sales price increases during the second quarter of fiscal2003.

 

Co-pack sales accounted for approximately 8.3% of net revenues for thesix months ended January 31, 2003. We anticipate co-pack sales will decreaseand account for a smaller percentage of net revenues for the remainder offiscal year 2003.

 

**Results of Operations**

 

*Comparison of theThree Months Ended January 31, 2003 and 2002*

 

***Net Revenues.***Netrevenues increased $3.7 million, or 10.0%, to $40.7 million for the threemonths ended January 31, 2003, from $37.0 million for the three months endedJanuary 31, 2002. The increase for the three months ended January 31, 2003resulted from increases in both pasta sales volumes and per unit sellingprices.  Increases in per unit sellingprices primarily related to the pass-through of higher durum costs.

 

Revenuesfrom the retail market, a portion of which includes co-pack and governmentalsales, decreased $0.5 million, or 2.0%, primarily as a result of a 3.5%decrease in sales volumes offset slightly by higher per unit selling prices.Foodservice revenues increased $5.3 million, or 65.9%, as a result of a 52.1%increase in sales volumes 

 

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combinedwith increases in per unit selling prices. The large increase in sales volumesin the foodservice market primarily resulted from promotional programs withU.S. Foodservice during the second quarter of fiscal 2003. The Company anticipatesfoodservice volumes will decrease significantly from the second quarter to thethird quarter of fiscal 2003 as inventories from the second quarter promotionalsales are depleted by U.S. Foodservice. Ingredient revenues decreased $0.9 million, or 31.4%, mainly as aresult of a 36.9% decrease in sales volumes offset partially by higher per unitselling prices. The ingredient sales volume decline resulted primarilyfrom the loss of one customer in this market due to competitive pricing issues.The Company anticipates highly competitive pricing conditions will continue inthe ingredient market.

 

The Company marketssemolina production in excess of its own requirements as well as by-products ofthe durum milling process. Revenues from semolina and by-product salesdecreased $0.2 million to $3.7 million for the three months ended January 31,2003, compared to $3.9 million for the three months ended January 31, 2002. Thechange primarily resulted from lower sales volumes offset partially by higherper unit selling prices.

 

***Cost of Goods Sold.***Cost of goods sold increased $4.0 million, or 12.5%, to $36.0 million for thethree months ended January 31, 2003, from $32.0 million for the three monthsended January 31, 2002. The increaseresulted mainly from sales growth and higher durum wheat costs. Grossmargin as a percentage of net revenues decreased from 13.5% to 11.6% primarily due to the increase in durum wheatcosts.

 

***Marketing, General,and Administrative (“MG&A”) Expenses.*** MG&Aexpenses totaled $3.2 million for the three months ended January 31, 2003, up34.9% from $2.4 million for the three months ended January 31, 2002. MG&Aexpenses as a percentage of net revenues increased from 6.4% to 7.8%. Theincrease in MG&A expenses was primarily due to incentive compensationcosts, a portion of which resulted from a compensatory transaction inconjunction with the unwinding ofprevious stock option exercises and related officer loans in response to theSarbanes-Oxley Act of 2002 (See Note 9 – Related Party Transactions to theconsolidated financials statements).

 

***Interest Expense.***Interest expense for the three months ended January 31, 2003 totaled $0.9million, down $0.1 million from $1.0 million for the three months ended January31, 2002. The decrease was due to lower average outstanding debt levelscombined with lower interest rates.

 

***Interest and OtherIncome.*** Interest and other income totaled $1.0million for the three months ended January 31, 2003 compared to $0.1 millionfor the three months ended January 31, 2002. The increase resulted from apayment of approximately $1 million received by the Company in December 2002from the U.S. Customs Service (“Customs”) pursuant to the Continued Dumping andSubsidy Offset Act of 2000 (the “Offset Act”). The payment was in conjunctionwith the distribution by Customs of antidumping and countervailing dutiesassessed on certain pasta imported from Italy and Turkey from October 1, 2001to September 30, 2002, to affected domestic producers pursuant to the OffsetAct. The Company cannotreasonably estimate the potential amount, if any, that may be received infuture periods as these receipts are based upon future events over which wehave little or no control, including, but not limited to, the amount ofexpenditures by domestic pasta producers and the amount of antidumping andcountervailing duties collected by Customs.

 

***Income Taxes.***Uponconversion to a corporation, the Company recorded deferred tax assets andliabilities for the tax effects of any temporary differences existing betweenincome tax and financial reporting on the date of the change. Prior toconversion, the Cooperative had not recorded deferred taxes for temporarydifferences that were likely to be eliminated through patronage allocations. Asthe Company no longer operates on a cooperative basis after the conversion, itis taxed as a “C corporation.” As such, it will no longer pay deductiblepatronage dividends and any distributions to the shareholders will be treatedas nondeductible dividends. Income tax expense for the three months endingJanuary 31, 2003, was $0.7 million, reflecting an effective corporate incometax rate of approximately 39%. The income tax benefit of $79,000 for thequarter ended January 31, 2002 relatedto the reduction of certain deferred tax liabilities associated withdifferences between the book and tax basis of property and equipment.

 

***Net Income.***Net income for thethree months ending January 31, 2003 totaled $1.0 million compared to $1.7million for the three months ending January 31, 2002. The $0.7 million decreasein net income resulted primarily 

 

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from theeffects of the change in income tax status upon the conversion from a cooperative to acorporation. Thedecrease in operating income, primarily the result of higher durum wheat andMG&A costs, was largely offset by the approximately $1.0 million paymentreceived from Customs under the Offset Act, as noted above.

 

*Comparison of the Six Months EndedJanuary 31, 2003 and 2002*

 

***Net Revenues.***Net revenues increased $3.5 million, or 4.7%,to $78.1 million for the six months ended January 31, 2003, from $74.6 millionfor the six months ended January 31, 2002. Higher sales volumes as well ashigher per unit selling prices contributed to the increase over thecorresponding period of the prior year.

 

Revenuesfrom the retail market, a portion of which includes co-pack and governmentalsales, decreased $1.5 million, or 3.3%, primarily due to a 3.1% decrease in perunit selling prices. The decrease in per unit selling prices in the retailmarket was due primarily to sales mix as core retail sales decreased whileco-pack sales increased in the current year. Foodservice revenues increased$6.2 million, or 37.5%, primarily due to volume growth of 28.0%. The growth infoodservice was driven by expansions and acquisitions by our customers as well as promotionalprograms with U.S. Foodservice during the second quarter of fiscal 2003. TheCompany anticipates foodservice volumes will decrease significantly from thesecond quarter to the third quarter of fiscal 2003 as inventories from thesecond quarter promotional sales are depleted by U.S. Foodservice. Ingredientrevenuesdecreased $1.6 million, or 27.2%, mainly as a result of a 34.0% decrease insales volumes offset partially by higher per unit selling prices. Theingredient sales volume decline resulted primarily from the loss of onecustomer in this market due to competitive pricing issues. The Companyanticipates highly competitive pricing conditions will continue in theingredient market.

 

Revenues from semolinaand by-product sales for the six months ended January 31, 2003 totaled $7.2million, up $0.4 million from $6.8 million for the six months ended January 31,2002. The change primarily resulted from higher per unit selling pricescombined with a small increase in volumes.

 

***Cost of Goods Sold.***Costof goods sold totaled $68.1 million for the six months ended January 31, 2003,up 7.0% from $63.7 million for the six months ended January 31, 2002. The increase resulted mainly from revenuegrowth, higher durum wheat costs, and costs associated with the restructuringof certain forward warehouse arrangements. Gross margin as a percentageof net revenues decreased from 14.6% to 12.7% primarily due to the increase in durum wheat costs.

 

***Marketing, General,and Administrative (“MG&A”) Expenses.*** MG&Aexpenses totaled $5.5 million for the six months ended January 31, 2003, up14.0% from $4.8 million for the six months ended January 31, 2002. MG&Aexpenses as a percentage of net revenues increased from 6.5% to 7.0%. Theincrease in MG&A expenses was primarily due to incentive compensation costsincurred in the second quarter of fiscal 2003, a portion of which resulted froma compensatory transaction in conjunction with the unwinding of previous stock option exercises and related officerloans in response to the Sarbanes-Oxley Act of 2002 (See Note 9 – Related PartyTransactions to the consolidated financials statements).

 

***Interest Expense.***Interest expense for the six months ended January 31, 2003 totaled $1.8million, down $0.3 million from $2.1 million for the six months ended January31, 2002. The decrease was due to lower average outstanding debt levelscombined with lower interest rates.

 

***Interest and OtherIncome.*** Interest and other income totaled $1.1million for the six months ended January 31, 2003 compared to $0.2 million forthe six months ended January 31, 2002. The increase resulted from anapproximately $1 million payment received by the Company in December 2002 fromCustoms pursuant to the Offset Act. The payment was in conjunction with thedistribution by Customs of antidumping and countervailing duties assessed oncertain pasta imported from Italy and Turkey from October 1, 2001 to September30, 2002, to affected domestic producers pursuant to the Offset Act. The Company cannot reasonablyestimate the potential amount, if any, that may be received in future periodsas these receipts are based upon future events over which we have little or nocontrol, including, but not limited to, the amount of expenditures by domesticpasta producers and the amount of antidumping and countervailing dutiescollected by Customs.

 

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***Income Taxes.***Uponconversion to a corporation, the Company recorded deferred tax assets andliabilities for the tax effects of any temporary differences existing betweenincome tax and financial reporting on the date of the change. Prior toconversion, the Cooperative had not recorded deferred taxes for temporarydifferences that were likely to be eliminated through patronage allocations. Asthe Company no longer operates on a cooperative basis after the conversion, itis taxed as a “C corporation.” As such, it will no longer pay deductiblepatronage dividends and any distributions to the shareholders will be treatedas nondeductible dividends. Income tax expense for the six months endingJanuary 31, 2003, totaled $1.5 million, reflecting an effective corporateincome tax rate of approximately 39%. The income tax benefit of $159,000 forthe six months ending January 31, 2002 relatedto the reduction of certain deferred tax liabilities associated withdifferences between the book and tax basis of property and equipment.

 

***Net Income. ***Net income for the sixmonths ended January 31, 2003 totaled $2.3 million compared to $4.3 million forthe six months ended January 31, 2002. Of the $2.0 million decrease in net income,approximately $1.6 million resulted from the effects of the change in income tax status upon the conversion froma cooperative to a corporation. The remaining decrease primarily resulted fromhigher durum wheat and MG&A costs. The decrease in net income attributableto the foregoing was offset by the approximately $1.0 million payment receivedfrom Customs under the Offset Act, as noted above.

 

**Liquidity and CapitalResources**

 

Our primary sources of liquidity are cash provided by operations andborrowings under our credit facility. Working capital as of January 31, 2003totaled $16.4 million compared to $23.0 million as of July 31, 2002.

 

The Companysecured a $19 million revolving credit facility with CoBank in February 2003covering the period from February 25, 2003 through February 23, 2004. Therevolving line has a variable interest rate established by CoBank based onCoBank’s cost of funds. The balance outstanding under the Company’s line ofcredit at January 31, 2003 totaled $7,250,000.

 

The variousdebt agreements with CoBank and the institutional investors obligate theCompany to maintain or achieve certain amounts of equity and certain financialratios and impose certain restrictions on the Company. The Company was incompliance with these financial covenants as of January 31, 2003. The Companyand CoBank entered into an Amendment as of February 11, 2003 to the Master LoanAgreement dated June 20, 2001. The Amendment replaced the debt service coverageratio with a consolidated funded debt to consolidated cash flow ratio. TheCompany is required to maintain a consolidated funded debt to consolidated cashflow ratio of not more than 3.0 to 1.0 at the end of each fiscal quartercalculated on a trailing four quarter basis under the Amendment.

 

The Company also entered into new Term Loan Supplements to the MasterLoan Agreement, as well as an updated Security Agreement and GuaranteeAgreement, primarily to update such agreements for certain items in conjunctionwith the conversion from a cooperative to a corporation.

 

Netcash used for operating activities totaled $2.4 million for the six monthsended January 31, 2003 compared to net cash from operating activities of $6.4million for the six months ended January 31, 2002. The decrease was primarilydue to a decrease in net income, an increase in payments made under long-termmarketing agreements and higher working capital requirements.

 

Netcash from investing activities totaled $0.8 million for the six months endedJanuary 31, 2003. The Company redeemed short-term investments of $2.0 millionwhich were previously restricted (See Note 9 – Related Party Transactions tothe consolidated financial statements). Offsetting this amount were paymentsfor mill and pasta equipment as well as package design costs. The $0.4 millionof net cash used for investing activities for the six months ended January 31,2002, related primarily to the purchase of milling and pasta equipment andpayments for package design costs.

 

Netcash used for financing activities totaled $1.3 million and $6.0 million forthe six months ended January 31, 2003 and 2002, respectively.  The Company paid $1.8 million for therepurchase of stock during the six months 

 

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endedJanuary 31, 2003. The remaining cash used related to debt payments offset bynet borrowings under our revolving credit facility for the six months endedJanuary 31, 2003.

 

The followingtable summarizes the Company’s contractual obligations as of January 31, 2003(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              |   | $         | 40,910 |                                   | $      | 10,027                          |   | $                               | 19,338 |                             | $      | 9,545 |   | $ | 2,000 |   |
| Durum purchase obligations  |   | 18,500    |   | 18,500                                 |   | —                          |   | —                          |   | —                           |   |
| Operating leases            |   | 4,642     |   | 1,298                                  |   | 3,050                           |   | 294                             |   | —                           |   |
|                        |   |      |   |                                   |   |                            |   |                            |   |                             |   |
|                        |   | $         | 64,052 |                                   | $      | 29,825                          |   | $                               | 22,388 |                             | $      | 9,839 |   | $ | 2,000 |   |

 

The Company forward contractsfor a certain portion of its future durum wheat requirements. The Company hadoutstanding commitments for grain purchases totaling $18.5 million as ofJanuary 31, 2003 related to forward purchase contracts. These contracts are setprice contracts to deliver grain to the Company’s mill, and are not derivativein nature as they have no net settlement provision and are not transferable.The Company paid $5.0 million under long-term customer marketing agreementsduring the six months ended January 31, 2003 and had no other significantcommitments related to such agreements as of January 31, 2003. We anticipatecapital expenditures in fiscal year 2003 will be reduced from previousestimates to approximately $3 million, primarily for pasta line upgrades andcost reduction projects.

 

Management believes that netcash to be provided by operating activities, along with its available line ofcredit, will be sufficient to meet the Company’s expected capital and liquidityrequirements for the foreseeable future.

 

In September 2002, the U.S.Durum Growers Association and the North Dakota Wheat Commission filed petitionsfor the imposition of countervailing and antidumping duties on durum and hardred spring wheat marketed by the Canadian Wheat Board. The U.S. InternationalTrade Commission  (“ITC”) commencedcountervailing duty and antidumping investigations in response to the petition.In March 2003 the U.S. Commerce Department (“Commerce”) established apreliminary tariff of 3.94%, effective upon publication in the FederalRegister, on all Canadian spring wheat and durum shipped into the UnitedStates. In establishing the tariff, Commerce ruled that the Canadian governmentprovides subsidies that give its wheat farmers an unfair advantage in the U.S.grain market. A final determination as to the nature and amount of the tariffis expected in July 2003. In addition, Commerce is still considering claimsfrom U.S. wheat growers that Canada dumps wheat into the United States at lessthan fair value. Dumping duties are added to countervailing duties imposed tooffset subsidies. A preliminary antidumping ruling is scheduled for May 2003.At this time, we cannot predict either the final results of the proceedings ortheir impact on the Company or the domestic pasta industry.

 

**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT 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 does not believe it is subject to any material market riskexposure with respect to interest rates, commodity prices, exchange rates,equity prices, or other market changes that would require disclosure under thisitem.

 

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**ITEM 4.  CONTROLS AND PROCEDURES**

 

***Evaluationof Disclosure Controls and Procedures***

 

The Company’s Chief Executive Officer and Chief Financial Officer havereviewed the Company’s disclosure controls and procedures within 90 days priorto the filing of this quarterly report. Based upon this review, these officersbelieve that the Company’s disclosure controls and procedures are effective inensuring that material information related to the Company is made known to themby others within the Company.

 

***Changesin Internal Controls***

 

There were no significant changes in theCompany’s internal controls or in other factors that could significantly affectthese controls subsequent to the date of the most recent evaluation.

 

 

**PARTII – OTHER INFORMATION**

 

**ITEM 4. SUBMISSION OFMATTERS TO A VOTE OF SECURITY HOLDERS**

 

TheAnnual Meeting of Stockholders of the Company was held on January 11, 2003. Thefollowing proposals were presented for stockholder consideration at the AnnualMeeting:

 

•                    The election of three directors to serve as“Class I” directors.

•                    Approval of the Dakota Growers Pasta Company,Inc. 2003 Stock Option Plan.

•                    Approval of the appointment of Eide BaillyLLP as the Company’s independent auditors for fiscal year 2003.

 

Atthe Annual Meeting, the Company’s stockholders elected each of the Company’snominees named in its Proxy Statement, dated December 13, 2002, to serve as“Class I” directors on the Board of Directors of the Company.  The Company’s nominees were John S.Dalrymple III, James F. Link and John D. Rice, Jr.  As newly-elected “Class I” directors, each of these individualswill serve on the Board of Directors for three-year terms ending in 2006.Following are the results for the election of directors:

 
|                  |   | **Shares  Voted For** |   | **Shares  Withheld** |   |
|-----------------------|--------|-----------------------|--------|----------------------|--------|
| John S. Dalrymple III |   | 9,022,396             |   | 408,267              |   |
| James F. Link         |   | 6,512,411             |   | 408,267              |   |
| John D. Rice, Jr.     |   | 6,696,234             |   | 408,267              |   |

 

TheCompany’s stockholders approved the Company’s 2003 Stock Option Plan, asfollows:

 
| Shares Voted For     |   | 6,457,194 |   |
|----------------------|--------|-----------|--------|
| Shares Voted Against |   | 1,219,627 |   |
| Shares Abstained     |   | 141,793   |   |

 

Inaddition, the stockholders approved the appointment of Eide Bailly LLP as theCompany’s independent auditors for fiscal year 2003, as follows:

 
| Shares Voted For     |   | 7,575,299 |   |
|----------------------|--------|-----------|--------|
| Shares Voted Against |   | 166,381   |   |
| Shares Abstained     |   | 76,934    |   |

 

The Company also communicated to stockholders at the Annual Meetingthat it continues to pursue alternatives with third parties regarding thepossibility of executing strategies to enhance the liquidity of the Company’s

 

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capital stock, but cautioned that there was no guarantee that theCompany would be successful in doing so. The Company had previously communicated the foregoing to itsstockholders in a letter dated October 31, 2002 and sent to stockholders onNovember 6, 2002. A copy of that letter was included as Exhibit 20.2 to a Form8-K filed by the Company on November 15, 2002.

 

**ITEM 6. EXHIBITS ANDREPORTS ON FORM 8-K**

 
| **Exhibits** |   |                                                                                                                                                                           |
|--------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1         |   | Amendment dated February 11,  2003 to the Master Loan Agreement dated June 20, 2001 between the Company and  CoBank.                                                           |
|         |   |                                                                                                                                                                           |
| 10.2         |   | Statused Revolving Credit  Supplement and Term Supplements dated February 11, 2003 between the Company  and CoBank.                                                            |
|         |   |                                                                                                                                                                           |
| 10.3         |   | Security Agreement dated  February 11, 2003 between the Company and CoBank.                                                                                                    |
|         |   |                                                                                                                                                                           |
| 10.4         |   | Continuing Guarantee Agreement  dated February 11, 2003 between Primo Piatto, Inc., a wholly-owned subsidiary  of the Company, and CoBank.                                     |
|         |   |                                                                                                                                                                           |
| 99.1         |   | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the President and  Chief Executive Officer. |
|         |   |                                                                                                                                                                           |
| 99.2         |   | Certification Pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002, signed by the Chief  Financial Officer.               |

 

**Reports onForm 8-K**

 

The Company filed a Form 8-K on January 16, 2003 announcing the resultsof the stockholder vote on the proposals presented for consideration at theCompany’s Annual Meeting of Stockholders held on January 11, 2003. In the sameForm 8-K, the Company announced that it communicated to stockholders at theAnnual Meeting that it continues to pursue alternatives with third partiesregarding the possibility of executing strategies to enhance the liquidity ofthe Company’s capital stock, but cautioned that there was no guarantee that theCompany would be successful in doing so.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned, 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: March  17, 2003                 |

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **Signature**         |   | **Title**                             |   | **Date**       |
|-----------------------|--------|---------------------------------------|--------|----------------|
|                  |   |                                  |   |           |
| /s/ Timothy J. Dodd   |   | President and Chief Executive Officer |   | March 17, 2003 |
| Timothy J.  Dodd      |   | (Principal Executive                  |   |           |
|                  |   | Officer)                              |   |           |
|                  |   |                                  |   |           |
|                  |   |                                  |   |           |
|                  |   |                                  |   |           |
| /s/ Thomas P. Friezen |   | Chief Financial Officer               |   |           |
| Thomas P. Friezen     |   | (Principal Financial                  |   | March 17, 2003 |
|                  |   | Officer)                              |   |           |
|                  |   |                                  |   |           |
|                  |   |                                  |   |           |
| /s/ Edward O. Irion   |   | Vice President - Finance and          |   |           |
| Edward O. Irion       |   | Chief Accounting Officer              |   | March 17, 2003 |
|                  |   | (Principal Accounting Officer)        |   |           |
|                  |   |                                  |   |           |

 

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**OFFICERCERTIFICATION**

 

I, Timothy J. Dodd, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Dakota GrowersPasta Company, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about theeffectiveness of the disclosure controls and procedures based on our evaluationas of the Evaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any corrective actionswith regard to significant deficiencies and material weaknesses.

 
| Date:  March 17, 2003 |                                   |
|----------------------------|----------------------------------------|
|                       |                                   |
|                       | /s/  Timothy J. Dodd                   |   |
|                       |                                   |
|                       | Timothy  J. Dodd                       |
|                       | President  and Chief Executive Officer |

 

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**OFFICERCERTIFICATION**

 

I, Thomas P. Friezen, certify that:

 

1. I have reviewed this quarterly report on Form 10-Q of Dakota GrowersPasta Company, Inc.;

 

2. Based on my knowledge, this quarterly report does not contain anyuntrue statement of a material fact or omit to state a material fact necessaryto make the statements made, in light of the circumstances under which suchstatements were made, not misleading with respect to the period covered by thisquarterly report;

 

3. Based on my knowledge, the financial statements, and other financialinformation included in this quarterly report, fairly present in all materialrespects the financial condition, results of operations and cash flows of theregistrant as of, and for, the periods presented in this quarterly report;

 

4. The registrant’s other certifying officers and I are responsible forestablishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

 

a) designed such disclosure controls and procedures to ensure thatmaterial information relating to the registrant, including its consolidatedsubsidiaries, is made known to us by others within those entities, particularlyduring the period in which this quarterly report is being prepared;

 

b) evaluated the effectiveness of the registrant’s disclosure controlsand procedures as of a date within 90 days prior to the filing date of thisquarterly report (the “Evaluation Date”); and

 

c) presented in this quarterly report our conclusions about the effectivenessof the disclosure controls and procedures based on our evaluation as of theEvaluation Date;

 

5. The registrant’s other certifying officers and I have disclosed,based on our most recent evaluation, to the registrant’s auditors and the auditcommittee of registrant’s board of directors (or persons performing theequivalent function):

 

a) all significant deficiencies in the design or operation of internalcontrols which could adversely affect the registrant’s ability to record,process, summarize and report financial data and have identified for theregistrant’s auditors any material weaknesses in internal controls; and

 

b) any fraud, whether or not material, that involves management orother employees who have a significant role in the registrant’s internalcontrols; and

 

6. The registrant’s other certifying officers and I have indicated inthis quarterly report whether or not there were significant changes in internalcontrols or in other factors that could significantly affect internal controlssubsequent to the date of our most recent evaluation, including any correctiveactions with regard to significant deficiencies and material weaknesses.

 
| Date:  March 17, 2003 |                     |
|----------------------------|--------------------------|
|                       |                     |
|                       | /s/  Thomas P. Friezen   |   |
|                       |                     |
|                       | Thomas  P. Friezen       |
|                       | Chief  Financial Officer |

 

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