**UNITED STATES****SECURITIESAND 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 April 30, 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 markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90days.                                        Yes ýNo o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct).                                     Yes oNo ý

 

As of June 16, 2003, theRegistrant had 12,260,291 shares of common stock, par value $0.01 per share,outstanding.

 

 

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**PARTI – FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS**

 

# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATEDBALANCE SHEETS**

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

 
|                                                                                                               |   | **(Unaudited)**     |    |               |   |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------|--------|
|                                                                                                               |   | **April 30,  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 $942 and $792, respectively |   | 10,526              |    | 16,504             |   |
|                                                                                                               |   |                |    |               |   |
| Other receivables                                                                                                  |   | 228                 |    | 360                |   |
|                                                                                                               |   |                |    |               |   |
| Inventories                                                                                                        |   | 29,272              |    | 19,636             |   |
|                                                                                                               |   |                |    |               |   |
| Prepaid expenses                                                                                                   |   | 4,220               |    | 2,258              |   |
|                                                                                                               |   |                |    |               |   |
| Deferred income taxes                                                                                              |   | 466                 |    | 466                |   |
|                                                                                                               |   |                |    |               |   |
| Total current assets                                                                                               |   | 44,717              |    | 44,064             |   |
|                                                                                                               |   |                |    |               |   |
| PROPERTY AND EQUIPMENT                                                                                             |   |                |    |               |   |
| In service                                                                                                         |   | 108,100             |    | 106,885            |   |
| Construction in process                                                                                            |   | 377                 |    | 371                |   |
|                                                                                                               |   | 108,477             |    | 107,256            |   |
| Less accumulated depreciation                                                                                      |   | (40,361             | )       | (35,762            | )      |
|                                                                                                               |   |                |    |               |   |
| Net property and equipment                                                                                         |   | 68,116              |    | 71,494             |   |
|                                                                                                               |   |                |    |               |   |
| INVESTMENT IN COOPERATIVE BANKS                                                                                    |   | 2,413               |    | 2,350              |   |
|                                                                                                               |   |                |    |               |   |
| INTANGIBLE ASSETS                                                                                                  |   | 576                 |    | 686                |   |
|                                                                                                               |   |                |    |               |   |
| OTHER ASSETS                                                                                                       |   | 8,746               |    | 6,947              |   |
|                                                                                                               |   |                |    |               |   |
|                                                                                                               |   | $                   | 124,568 |               | $      | 125,541 |   |

 

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATEDBALANCE SHEETS**

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

 
|                                                                                                                                                              |   | **(Unaudited)**     |    |               |   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|--------------------|--------|
|                                                                                                                                                              |   | **April 30,  2003** |    | **July 31,  2002** |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                    |   |                |    |               |   |
|                                                                                                                                                              |   |                |    |               |   |
| CURRENT LIABILITIES                                                                                                                                               |   |                |    |               |   |
| Notes payable                                                                                                                                                     |   | $                   | 10,200  |               | $      | — |   |
| Current portion of long-term debt                                                                                                                                 |   | 10,011              |    | 9,320              |   |
| Accounts payable                                                                                                                                                  |   | 4,744               |    | 6,471              |   |
| Excess outstanding checks over cash on deposit                                                                                                                    |   | 661                 |    | —             |   |
| Accrued liabilities                                                                                                                                               |   | 3,413               |    | 5,260              |   |
|                                                                                                                                                              |   |                |    |               |   |
| Total current liabilities                                                                                                                                         |   | 29,029              |    | 21,051             |   |
|                                                                                                                                                              |   |                |    |               |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                     |   | —              |    | —             |   |
| LONG-TERM DEBT, net of current portion                                                                                                                            |   | 29,573              |    | 38,274             |   |
| DEFERRED INCOME TAXES                                                                                                                                             |   | 10,117              |    | 9,833              |   |
| OTHER LIABILITIES                                                                                                                                                 |   | 200                 |    | 239                |   |
|                                                                                                                                                              |   |                |    |               |   |
| Total liabilities                                                                                                                                                 |   | 68,919              |    | 69,397             |   |
|                                                                                                                                                              |   |                |    |               |   |
| REDEEMABLE PREFERRED STOCK                                                                                                                                        |   |                |    |               |   |
| Series A, 6% cumulative, $100 par value, 533  shares authorized, 367 and 467 shares issued and outstanding as of April 30,  2003 and July 31, 2002, respectively  |   | 37                  |    | 47                 |   |
| Series B, 2% non-cumulative, $100 par value, 525  shares authorized, 0 and 75 shares issued and outstanding as of April 30,  2003 and July 31, 2002, respectively |   | —              |    | 7                  |   |
|                                                                                                                                                              |   |                |    |               |   |
| Total redeemable preferred stock                                                                                                                                  |   | 37                  |    | 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  April 30, 2003 and July 31, 2002, respectively                                                                |   | (1,840              | )       | —             |   |
| Accumulated deficit                                                                                                                                               |   | (2,975              | )       | (4,337             | )      |
|                                                                                                                                                              |   |                |    |               |   |
| Total stockholders’ equity                                                                                                                                   |   | 55,612              |    | 56,090             |   |
|                                                                                                                                                              |   |                |    |               |   |
| Total liabilities and stockholders’ equity                                                                                                                   |   | $                   | 124,568 |               | $      | 125,541 |   |

 

See Notes to ConsolidatedFinancial Statements

 

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
|                                                                               |   | **Three  Months Ended  April 30,** |   |
|------------------------------------------------------------------------------------|--------|------------------------------------|--------|
|                                                                               |   | **2003**                           |   | **2002** |   |
| Net revenues (net of discounts and allowances of  $3,433 and $4,247, respectively) |   | $                                  | 29,435 |   | $ | 37,668 |   |
|                                                                               |   |                               |   |   |   |
| Cost of goods sold                                                                 |   | 28,140                             |   | 32,014 |   |
|                                                                               |   |                               |   |   |   |
| Gross profit                                                                       |   | 1,295                              |   | 5,654 |   |
|                                                                               |   |                               |   |   |   |
| Marketing, general and administrative expenses                                     |   | 2,096                              |   | 2,474 |   |
|                                                                               |   |                               |   |   |   |
| Operating income (loss)                                                            |   | (801                               | )      | 3,180 |   |
|                                                                               |   |                               |   |   |   |
| Other income (expense)                                                             |   |                               |   |   |   |
| Interest and other income (expense)                                                |   | 12                                 |   | (49 | ) |
| Gain on sale of property, equipment and other  assets                              |   | 13                                 |   | 4 |   |
| Interest expense, net                                                              |   | (746                               | )      | (755 | ) |
|                                                                               |   |                               |   |   |   |
| Income (loss) before income taxes                                                  |   | (1,522                             | )      | 2,380 |   |
|                                                                               |   |                               |   |   |   |
| Income tax expense (benefit)                                                       |   | (594                               | )      | 176 |   |
|                                                                               |   |                               |   |   |   |
| Net income (loss)                                                                  |   | (928                               | )      | 2,204 |   |
| Dividends on preferred stock                                                       |   | 1                                  |   | 1 |   |
|                                                                               |   |                               |   |   |   |
| Net earnings (loss) on common/equity stock                                         |   | $                                  | (929   | ) | $ | 2,203 |   |
|                                                                               |   |                               |   |   |   |
| Net earnings (loss) per common/equity share                                        |   |                               |   |   |   |
| Basic                                                                              |   | $                                  | (0.08  | ) | $ | 0.20 |   |
|                                                                               |   |                               |   |   |   |
| Diluted                                                                            |   | $                                  | (0.07  | ) | $ | 0.19 |   |
|                                                                               |   |                               |   |   |   |
| Weighted average common/equity shares outstanding                                  |   |                               |   |   |   |
| Basic                                                                              |   | 12,260                             |   | 11,275 |   |
|                                                                               |   |                               |   |   |   |
| Diluted                                                                            |   | 12,620                             |   | 11,324 |   |

 

See Notes to ConsolidatedFinancial Statements

 

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
|                                                                                 |   | **Nine  Months Ended  April 30,** |       |
|--------------------------------------------------------------------------------------|--------|-----------------------------------|------------|
|                                                                                 |   | **2003**                          |       | **2002** |   |
| Net revenues (net of discounts and allowances of  $13,327 and $12,498, respectively) |   | $                                 | 107,506    |   | $ | 112,234 |   |
|                                                                                 |   |                              |       |   |   |
| Cost of goods sold                                                                   |   | 96,276                            |       | 95,679 |   |
|                                                                                 |   |                              |       |   |   |
| Gross profit                                                                         |   | 11,230                            |       | 16,555 |   |
|                                                                                 |   |                              |       |   |   |
| Marketing, general and administrative expenses                                       |   | 7,578                             |       | 7,285 |   |
|                                                                                 |   |                              |       |   |   |
| Operating income                                                                     |   | 3,652                             |       | 9,270 |   |
|                                                                                 |   |                              |       |   |   |
| Other income (expense)                                                               |   |                              |       |   |   |
| Interest and other income                                                            |   | 1,089                             |       | 129 |   |
| Gain on sale of property, equipment and other  assets                                |   | 36                                |       | 6 |   |
| Interest expense, net                                                                |   | (2,542                            | )          | (2,895 | ) |
|                                                                                 |   |                              |       |   |   |
| Income before income taxes                                                           |   | 2,235                             |       | 6,510 |   |
|                                                                                 |   |                              |       |   |   |
| Income tax expense                                                                   |   | 871                               |       | 17 |   |
|                                                                                 |   |                              |       |   |   |
| Net income                                                                           |   | 1,364                             |       | 6,493 |   |
| Dividends on preferred stock                                                         |   | 2                                 |       | 9 |   |
|                                                                                 |   |                              |       |   |   |
| Net earnings per common/equity stock                                                 |   | $                                 | 1,362      |   | $ | 6,484 |   |
|                                                                                 |   |                              |       |   |   |
| Net earnings per common/equity share                                                 |   |                              |       |   |   |
| Basic                                                                                |   | $                                 | 0.11       |   | $ | 0.58 |   |
|                                                                                 |   |                              |       |   |   |
| Diluted                                                                              |   | $                                 | 0.11       |   | $ | 0.57 |   |
|                                                                                 |   |                              |       |   |   |
| Weighted average common/equity shares outstanding                                    |   |                              | ** ** |   | ** ** |
| Basic                                                                                |   | 12,386                            |       | 11,275 |   |
|                                                                                 |   |                              |       |   |   |
| Diluted                                                                              |   | 12,606                            |       | 11,303 |   |

 

See Notes to ConsolidatedFinancial Statements

 

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(In Thousands)(Unaudited)**

 
|                                                                                   |   | **Nine  Months Ended  April 30,** |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                   |   | **2003**                          |   | **2002** |   |
| OPERATING ACTIVITIES                                                                   |   |                              |   |   |   |
| Net income                                                                             |   | $                                 | 1,364  |   | $ | 6,493 |   |
| Adjustments to reconcile net income to net cash  from (used for) operating activities: |   |                              |   |   |   |
| Depreciation and amortization                                                          |   | 7,262                             |   | 6,645 |   |
| Undistributed patronage capital from cooperatives                                      |   | (63                               | )      | (139 | ) |
| Gain on sale of property, equipment and other  assets                                  |   | (36                               | )      | (6 | ) |
| Deferred income taxes                                                                  |   | 284                               |   | (206 | ) |
| Payments for long-term prepaid marketing costs                                         |   | (5,000                            | )      | (2,250 | ) |
| Changes in assets and liabilities:                                                     |   |                              |   |   |   |
| Trade receivables                                                                      |   | 5,978                             |   | (972 | ) |
| Other receivables                                                                      |   | 132                               |   | 749 |   |
| Inventories                                                                            |   | (9,636                            | )      | (1,213 | ) |
| Prepaid expenses                                                                       |   | (1,068                            | )      | 149 |   |
| Other assets                                                                           |   | 8                                 |   | 47 |   |
| Accounts payable                                                                       |   | (1,727                            | )      | 532 |   |
| Excess outstanding checks over cash on deposit                                         |   | 661                               |   | (1,072 | ) |
| Grower payables                                                                        |   | —                            |   | (969 | ) |
| Other accrued liabilities                                                              |   | (1,847                            | )      | (300 | ) |
|                                                                                   |   |                              |   |   |   |
| NET CASH FROM (USED FOR) OPERATING ACTIVITIES                                          |   | (3,688                            | )      | 7,488 |   |
|                                                                                   |   |                              |   |   |   |
| INVESTING ACTIVITIES                                                                   |   |                              |   |   |   |
| Purchases of property and equipment                                                    |   | (1,232                            | )      | (446 | ) |
| Proceeds from sale of property, equipment and  other assets                            |   | 3                                 |   | 5,053 |   |
| Purchase of intangible assets                                                          |   | —                            |   | (735 | ) |
| Redemption of short term investments                                                   |   | 1,974                             |   | — |   |
| Payments for package design costs                                                      |   | (249                              | )      | (287 | ) |
|                                                                                   |   |                              |   |   |   |
| NET CASH FROM INVESTING ACTIVITIES                                                     |   | 496                               |   | 3,585 |   |
|                                                                                   |   |                              |   |   |   |
| FINANCING ACTIVITIES                                                                   |   |                              |   |   |   |
| Net change in short-term notes payable                                                 |   | 10,200                            |   | (8,100 | ) |
| Principal payments on long-term debt                                                   |   | (8,010                            | )      | (2,016 | ) |
| Preferred stock retirements                                                            |   | (17                               | )      | (10 | ) |
| Dividends paid on preferred stock                                                      |   | (2                                | )      | (9 | ) |
| Memberships issued                                                                     |   | —                            |   | 1 |   |
| Memberships retired                                                                    |   | —                            |   | (2 | ) |
| Purchase of treasury stock                                                             |   | (1,840                            | )      | — |   |
|                                                                                   |   |                              |   |   |   |
| NET CASH FROM (USED FOR) FINANCING ACTIVITIES                                          |   | 331                               |   | (10,136 | ) |
|                                                                                   |   |                              |   |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                                |   | (2,861                            | )      | 937 |   |
|                                                                                   |   |                              |   |   |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                                         |   | 2,866                             |   | 3 |   |
|                                                                                   |   |                              |   |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                               |   | $                                 | 5      |   | $ | 940 |   |
|                                                                                   |   |                              |   |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                                      |   |                              |   |   |   |
| Cash payments for                                                                      |   |                              |   |   |   |
| Interest (net of amounts capitalized)                                                  |   | $                                 | 3,169  |   | $ | 3,348 |   |
|                                                                                   |   |                              |   |   |   |
| Income taxes                                                                           |   | $                                 | 1,192  |   | $ | 10 |   |

 

See Notes to ConsolidatedFinancial Statements

 

6

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notesshould be read in conjunction with the notes to the financial statements forthe year ended July 31, 2002 as filed in the Company’s Form 10-K.

 

**NOTE 1 -ORGANIZATION**

 

Dakota Growers PastaCompany, Inc. (“Dakota Growers” or “the Company”) is a North Dakota corporationthat was organized on January 30, 2002 for the specific purpose of consummatingthe conversion of Dakota Growers Pasta Company, a North Dakota cooperative (the“Cooperative”), into a corporation. The conversion of the Cooperative from acooperative to a corporation was completed by means of a series of mergers, thelast of which was effective July 1, 2002, with the Company being the ultimatesurviving entity in the conversion. The Company operates as the Cooperative’ssuccessor and its operations are a continuance of the operations of theCooperative.

 

The Company operatesmilling and pasta manufacturing facilities in Carrington, North Dakota. Inaddition, the Company’s wholly owned subsidiary, Primo Piatto, Inc., aMinnesota corporation, operates pasta manufacturing facilities in New Hope,Minnesota.

 

**NOTE 2 –FINANCIAL STATEMENT PRESENTATION**

 

The unaudited consolidatedfinancial statements included herein have been prepared pursuant to the rulesand regulations of the Securities and Exchange Commission. Accordingly, they donot include all the information and footnotes required by accounting principlesgenerally accepted in the United States of America for complete financialstatements. In the opinion of management, all adjustments (consisting of normalrecurring accruals) considered necessary for a fair presentation have beenincluded. Operating results for the three and nine-month periods ended April30, 2003 are not necessarily indicative of the results that may be expected forthe year ended July 31, 2003. The information included in this Form 10-Q shouldbe read in conjunction with Management’s Discussion and Analysis and theconsolidated financial statements and footnotes included in the Company’s Form10-K for the year ended July 31, 2002. The information contained in the balancesheet as of July 31, 2002 was derived from the Company’s audited annual reportfor fiscal 2002. Reclassifications have been made to facilitate comparabilitywith current presentation. Such reclassifications have no effect on the netresults of operations.

 

The financial informationpresented herein includes the consolidated balances and results of operationsof Dakota Growers Pasta Company, Inc. and its wholly-owned subsidiary. Allsignificant intercompany balances and transactions have been eliminated.

 

###### **NOTE 3 – INVENTORIES**

 

Inventories are valued atlower of cost or market. Inventories as of April 30, 2003 include raw materialsof $6,563,000 and finished goods of $22,709,000. Inventories at July 31, 2002include raw materials of $5,293,000 and finished goods of $14,343,000.

 

###### **NOTE4 – LOAN AGREEMENTS**

 

In February 2003, theCompany secured a $19 million revolving credit facility with CoBank coveringthe period from February 25, 2003 through February 23, 2004. The revolving linehas a variable interest rate established by CoBank based on CoBank’s cost offunds. The balance outstanding under the Company’s line of credit at April 30,2003 totaled $10,200,000.

 

The various debtagreements with CoBank and the institutional investors obligate the Company tomaintain or achieve certain amounts of equity and certain financial ratios andimpose certain restrictions on the Company. The Company was in compliance withthese financial covenants as of April 30, 2003. The Company and CoBank

 

7

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entered into an Amendmentas of February 11, 2003 to the Master Loan Agreement dated June 20, 2001. TheAmendment replaced the debt service coverage ratio with a consolidated fundeddebt to consolidated cash flow ratio. The Company is required to maintain aconsolidated funded debt to consolidated cash flow ratio of not more than 3.0to 1.0 at the end of each fiscal quarter calculated on a trailing four quarterbasis under the Amendment.

 

The Company and CoBankalso 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**

 

TheCompany had an income tax benefit of $594,000 for the three months ended April30, 2003 and income tax expense of $871,000 for the nine months ended April 30,2003, reflecting the application of the estimated combined federal and stateannual effective income tax rate of 39% to the respective net income (loss)before income taxes.

 

The conversion from acooperative to a corporation effectuated via a series of mergers is treatedunder Section 368(a)(1)(F) of the Internal Revenue Code (the “Code”) as areorganization. A corporation that survives a reorganization defined in CodeSection 368(a)(1)(F) is treated for tax purposes as a continuation of itspredecessor, accordingly, the Company will retain the fiscal year, accountingmethods, tax elections and other tax attributes of the Cooperative.  However, because the Company does notoperate on a cooperative basis after the conversion, the Company is taxable asa “C corporation.” As such, it will no longer pay deductible patronagedividends and any distributions to the shareholders will be treated asnondeductible dividends. This is the primary reason for the significantdifference between the income tax amounts recorded for the three and nine monthperiods ended April 30, 2003 compared to the corresponding periods of the prioryear.

 

The Cooperative was anon-exempt cooperative as defined by Section 1381(a)(2) of the Code.Accordingly, net margins from business done with member patrons, which wereallocated and paid as prescribed in Section 1382 of the Code (hereafterreferred to as “qualified”), were taxable to the members and not to theCooperative. Net margins and member allocations were determined on the basis ofaccounting used for financial reporting purposes. To the extent that netmargins were not qualified as stated above or arose from business done withnon-members, the Cooperative had taxable income subject to corporate income taxrates.

 

###### **NOTE 6 – EARNINGS (LOSS)PER SHARE**

 

Basic earnings (loss) pershare (EPS) is calculated by dividing net earnings (loss) on common/equitystock by 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.

 

Dilutivesecurities, consisting of stock options and convertible preferred stock,included in the calculation of diluted weighted average common/equity sharestotaled 360,000 and 49,000 for the three months ended April 30, 2003 and 2002,respectively. Dilutive securities included in the calculation of dilutedweighted average common/equity shares totaled 220,000 and 28,000 for the ninemonths ended April 30, 2003 and 2002, respectively. Because the Company’s stockis currently only traded in a small secondary market, the Company has assumedthe proceeds from the exercise of stock options would reduce debt and, thus,interest expense.

 

**NOTE 7 – STOCK OPTIONS**

 

During the Company’squarter ended January 31 2003, the Company’s Board of Directors approved theissuance of non-qualified stock options for 294,456 shares of the Company’scommon stock with an exercise price of $6.25

 

8

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per share in conjunctionwith the repurchase of shares of common stock from certain of the Company’sofficers (See Note 9 – Related Party Transactions). In addition, the Board ofDirectors approved the issuance of non-qualified stock options for 686 sharesof the Company’s Series C 6% convertible non-cumulative preferred stock with anexercise price of $150 per share. Each share of Series C 6% convertible non-cumulativepreferred stock is convertible into 24 shares of common stock and 24 shares ofSeries D delivery preferred stock.

 

On November 21, 2002 theBoard of Directors adopted the Dakota Growers Pasta Company, Inc. 2003 StockOption Plan (the “Plan”), which was approved by the Company’s shareholders atthe Annual Meeting on January 11, 2003. No options have yet been granted underthe Plan. The Plan covers 500,000 shares of the Company’s common stock. Thepurposes of the Plan are to provide a continuing, long-term incentive toselected eligible officers, directors and key employees, vendors or consultantsof the Company and of any subsidiary company of the Company; to provide a meansof rewarding outstanding performance; and to enable the Company to maintain acompetitive position to attract and retain key personnel necessary forcontinued growth and profitability. The Company believes that the granting ofoptions for the purchase of the Company’s common stock under the Plan willserve to meet the foregoing objectives. Options granted under the Plan may beincentive stock options (as defined under Section 422 of the Code) ornon-qualified stock options, as determined by the Plan administrator at thetime of grant of an option and subject to the applicable provisions of Section422 of the Code and the regulations promulgated thereunder. The grant ofoptions will be by a committee (the “Committee”) subject to the provisions ofthe Plan. The Committee will report its actions to the Board of Directors ofthe Company.

 

###### **NOTE 8 – COMMITMENTS**

 

The Company forwardcontracts for a certain portion of its future durum wheat requirements. TheCompany had outstanding commitments for grain purchases totaling $15,266,000 atApril 30, 2003. These contracts are set price contracts to deliver to theCompany’s mill, and are not derivative in nature as they have no net settlementprovision and are not transferable.

 

TheCompany paid $5 million under long-term customer marketing agreements duringthe nine months ended April 30, 2003 and had no other significant commitmentsrelated to such agreements as of April 30, 2003.

 

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

 

The Company had pledged certificates of deposit assecurity for loans, totaling approximately $1,974,000, made by a financial institutionto Timothy J. Dodd, President and Chief Executive Officer, and Thomas P.Friezen, Chief Financial Officer, to exercise stock options. These loansmatured December 1, 2002.

 

In accordance with theprovisions of the Sarbanes-Oxley Act of 2002, the Board of Directors approvedthe repurchase of 190,800 and 103,656 shares of the Company’s common stock fromMessrs. Dodd and Friezen, respectively. The repurchase was completed inNovember 2002. In conjunction with the repurchase of these shares at $6.25 pershare, Messrs. Dodd and Friezen received proceeds of $1,192,500 and $647,850, respectively. In addition, Mr.Friezen received additional gross proceeds of $229,993 under a compensatorytransaction in conjunction with the unwinding of previous stock optionexercises and related officer loans. The proceeds received by Messrs. Dodd andFriezen were used to pay off their loans with the financial institution. As aresult, the Company’s certificates of deposit were no longer restricted. TheCompany redeemed the certificates of deposit in December 2002. Finally, Messrs.Dodd and Friezen were granted stock options to purchase 190,800 and 103,656shares, respectively, of the Company’s common stock with an exercise price of$6.25 per share. Such options were first exercisable on December 2, 2002.

 

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**NOTE 10 – CONTINUED DUMPING ANDSUBSIDY OFFSET ACT OF 2000**

 

The U.S. Customs Service(“Customs”) published, on July 3, 2002, a notice of intention to distributeantidumping and countervailing duties assessed on certain pasta imported fromItaly and Turkey from October 1, 2001 to September 30, 2002, to affecteddomestic producers pursuant to the Continued Dumping and Subsidy Offset Act of2000 (the “Offset Act”). The Company received a payment of approximately $1million 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’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

The following discussioncontains forward-looking statements. Such forward-looking statements include,among others, those statements including the words “expect”, “anticipate”,“believe”, “may” and similar expressions. Such statements are based onassumptions by the Company’s management, as of the date of this QuarterlyReport, and are subject to risks and uncertainties, including those discussedin the Company’s Form 10-K for the year ended July 31, 2002 under “RiskFactors”, that could cause actual results to differ materially from thoseanticipated. The Company cautions readers not to place undue reliance on suchforward-looking statements. The Company will not update any forward-lookingstatements in this Quarterly Report to reflect future events or developments.

 

**Summary**

 

Dakota Growers is thethird largest producer of dry pasta products in North America. The pastaindustry identifies domestic dry pasta into two basic markets: retail andinstitutional. The Company recognizes the institutional market as beingcomprised of foodservice and ingredient sales. We participate in each of theretail, foodservice and ingredient markets. The Company has two productionplants, located in Carrington, North Dakota and New Hope, Minnesota. TheCompany’s cost of goods sold consists mainly of raw materials (primarily durumwheat), packaging, and manufacturing and distribution costs.

 

The comparability of theresults for the three and nine-month periods ended April 30, 2003 versus thosefor the corresponding periods of the prior year was affected by the income taxstatus change associated with the Company’s conversion from a cooperative to acorporation in July 2002.

 

The Company incurred anet loss of $0.9 million ($1.5 million loss before income taxes) for thequarter ended April 30, 2003, compared to net earnings of $2.2 million ($2.4million income before income taxes) for the corresponding period of the prioryear. Net income totaled $1.4 million ($2.2 million before income taxes) forthe nine months ended April 30, 2003, down from net income of $6.5 million forthe nine months ended April 30, 2002.

 

Lowerpasta sales volumes were a main factor leading to the net loss incurred for thequarter ended April 30, 2003. In particular, foodservice sales decreasedsignificantly in the third quarter of fiscal 2003, with sales volumes to U.S.Foodservice down 65% compared to the corresponding quarter of the prior yearand down 82% from the second quarter of fiscal 2003. The Company’s sales toU.S. Foodservice during the Company’s second fiscal quarter 2003 wereinordinately high relative to prior periods, which the Company was led tobelieve was being fueled by increased demand by U.S. Foodservice customers fordry pasta products. In addition, the Company had received informationsuggesting that its third fiscal quarter 2003 sales to U.S. Foodservice, whilebelow second fiscal quarter 2003 levels, would be substantially consistent withhistorical third quarter U.S. Foodservice sales. While the Company had noreason to question the reliability of this information at that time, it hassince learned that the information was inaccurate. The Company now believesthat demand by U.S. Foodservice customers during the Company’s second fiscalquarter 2003 had not increased appreciably relative to prior periods, that U.S.Foodservice over-purchased product from the Company during the second quarterof fiscal 2003 and that, as a result, U.S. Foodservice maintained excessinventories of the Company’s product during the Company’s third fiscal quarter2003. Based on published news reports, it is the Company’s understanding that,since the commencement of the Company’s third fiscal quarter 2003, certainprocurement executives of U.S. Foodservice have been terminated following aninternal U.S. Foodservice investigation for alleged accounting improprieties,and that the Securities and Exchange Commission is now conducting aninvestigation related to those alleged improprieties. The Company expects thatsales to U.S. Foodservice will gradually return to historical levels.

 

Co-packsales to New World Pasta Company also experienced a significant, unexpecteddrop in the third quarter of fiscal 2003. New World Pasta was the secondlargest customer of the Company in the first two quarters of

 

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fiscal2003. The Company believes that the sudden decrease in sales volumes to NewWorld Pasta was attributable to several factors, including high levels ofpurchases in earlier quarters, a decrease in demand for New World Pastaproducts and a change in management at New World Pasta resulting in what theCompany understands was a decision to temporarily emphasize “in-house”manufacturing over outsourcing. Given the foregoing, the Company cannotreliably forecast its future sales to New World Pasta at this time.

 

TheCompany had not anticipated as severe a decrease in third quarter sales volumesbased on information provided to it by its customers prior to the thirdquarter, and the Company based its production output on that information. This,in turn, resulted in increased inventories as well as manufacturing andlogistical inefficiencies. The Company has recently reduced its labor force andcut its production schedule from seven to five days per week at the New Hopefacility to better match production with current demand.

 

Factorscontributing to the decrease in net earnings for the nine months ended April30, 2003 compared to the corresponding period of the prior year includeincreased durum and per unit manufacturing costs, increased marketing, generaland administrative costs, costs associated with the restructuring of certainforward warehouse arrangements, and the effect of income taxes following thechange in income tax status upon the conversion to a corporation. Although theCompany has generally been successful in increasing sales prices topass-through the higher cost of durum, the timing of the sales priceadjustments realized generally lagged behind the increase in durum costs.Therefore, the Company was not able to fully recover the increase in durumcosts through timely sales price increases.

 

Althoughthe Company has reduced labor costs and continues to evaluate further revenueenhancement and cost reduction opportunities, the Company expects to incur anet loss in the fourth quarter of fiscal 2003 as well. Highly competitivepricing continues in a majority of the dry pasta industry markets; therefore,opportunities to pass through higher per unit operating costs during this timeperiod may be limited.

 

**Results of Operations**

 

*Comparison of the Three Months Ended April 30, 2003 and 2002*

 

***Net Revenues. ***Netrevenues decreased $8.2 million, or 21.9%, to $29.4 million for the threemonths ended April 30, 2003, compared to the $37.7 million for the three monthsended April 30, 2002. The decrease was primarily due to lower sales volumesoffset somewhat by higher selling prices resulting from the pass through ofdurum cost increases.

 

Revenuesfrom the retail market, a portion of which includes co-pack and governmentalsales, decreased $3.5 million, or 15.8%, primarily as a result of a 16.8% decreasein sales volumes offset slightly by higher per unit selling prices. The loss oftwo larger retail customers from the prior year combined with a decrease inco-pack sales accounted for much of the decrease. Foodservice revenuesdecreased $3.0 million, or 38.2%, as a result of a 40.8% decrease in salesvolumes partially offset by an increase in per unit selling prices. The largedecrease in foodservice sales volumes primarily resulted from a 65% reductionin sales volumes to U.S. Foodservice in the third quarter of fiscal 2003 whencompared to the corresponding quarter of fiscal 2002. Ingredient revenuesdecreased $1.0 million, or 25.6%, mainly as a result of a 33.2% decrease insales volumes offset partially by higher per unit selling prices. The ingredientsales volume decline resulted primarily from the loss of one customer in thismarket due to competitive pricing issues.

 

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 $0.7 million for the three months ended April 30, 2003, when comparedto the same period of the prior year. The decrease primarily resulted fromlower sales volumes.

 

***Cost of Goods Sold.*** Cost of goods solddecreased $3.9 million, or 12.1%, to $28.1 million for the three months endedApril 30, 2003, compared to $32.0 million for the three months ended April 30,2002. The decrease resulted from lower sales volumes offset by higher durumwheat and per unit manufacturing costs. Gross margin

 

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as a percentage of netrevenues decreased to 4.4% for the three months ended April 30, 2003 from 15.0%for the three months ended April 30, 2002, primarily due to the increases indurum costs and per unit manufacturing costs.

 

***Marketing, General, and Administrative (“MG&A”)Expenses.*** MG&A expenses decreased $0.4 million, or15.3%, to $2.1 million for the quarter ended April 30, 2003, compared to $2.5million for the quarter ended April 30, 2002. MG&A expenses as a percentage of net revenues increased from 6.6% to7.1% primarily as a result of lower sales during the quarter ended April 30,2003 relative to the quarter ended April 30, 2002.

 

***Interest Expense.*** Interest expense forthe three months ended April 30, 2003 totaled $0.7 million, which wascomparable to the corresponding period of the prior year. Cash and equitypatronage refunds received from CoBank totaling $126,000 and $228,000 have beennetted against interest expense for the three months ended April 30, 2003 and2002, respectively.

 

***Income Taxes.***Upon conversion to acorporation, the Company recorded deferred tax assets and liabilities for thetax effects of any temporary differences existing between income tax andfinancial reporting on the date of the change. Prior to the conversion, theCooperative had not recorded deferred taxes for temporary differences that werelikely to be eliminated through patronage allocations. As the Company no longeroperates on a cooperative basis after the conversion, it is taxed as a “Ccorporation.” As such, it will no longer pay deductible patronage dividends andany distributions to the shareholders will be treated as nondeductibledividends. The income tax benefit for the three months ending April 30, 2003totaled $594,000, reflecting an effective corporate income tax rate ofapproximately 39%. Income tax expense for the quarter ended April 30, 2002totaled $176,000 and related to currentincome taxes on non-patronage business offset by reductions in deferred taxliabilities associated with differences between the book and tax basis ofproperty and equipment.

 

***Net Income (Loss).***The net loss forthe three months ended April 30, 2003 totaled $0.9 million compared to netincome of $2.2 million for the three months ended April 30, 2002. The $3.1million decrease resulted primarily from decreased sales volumescombined with increased durum and per unit manufacturing costs.

 

*Comparison of the Nine Months Ended April 30, 2003 and 2002*

 

***Net Revenues.***Net revenues decreased$4.7 million, or 4.2%, to $107.5 million for the nine months ended April 30,2003, from $112.2 million for the nine months ended April 30, 2002. Thedecrease for the nine-month period ended April 30, 2003 was primarily due tolower pasta sales volumes offset partially by higher per unit selling pricesrelated mainly to the pass through of durum cost increases.

 

Revenuesfrom the retail market, a portion of which includes co-pack and governmentalsales, decreased $4.8 million, or 7.2%, primarily as a result of a 5.8%decrease in sales volume. Foodservice revenues increased $3.1 million, or12.5%, due to volume growth of 6.4% as well as higher selling prices. Ingredientrevenuesdecreased $2.6 million, or 26.8%, mainly as a result of a 33.7% decrease insales volumes offset partially by higher selling prices. The ingredient salesvolume decline primarily resulted from the loss of one customer in this marketdue to competitive pricing issues.

 

Revenues from semolinaand by-product sales decreased $0.4 million for the nine months ended April 30,2003, when compared to the same period of the prior year. The decreaseprimarily resulted from lower sales volumes.

 

***Cost of Goods Sold.*** Cost of goods soldincreased $0.6 million, or 0.6%, to $96.3 million for the nine months endedApril 30, 2003 from $95.7 million for the nine months ended April 30, 2002. Theincrease resulted mainly from higher durum wheat and per unit manufacturingcosts as well as costs associated with the restructuring of certain forwardwarehouse arrangements offset by lower sales volumes.  Gross margin as a percentage of net revenues decreased from 14.8%for the nine months ended April 30, 2002 to 10.4% for the nine months endedApril 30, 2003 as a result of the factors noted above.

 

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***Marketing, General, and Administrative (“MG&A”)Expenses.*** MG&A expenses for the nine months endedApril 30, 2003 totaled $7.6 million, up 4.0% from $7.3 million for the ninemonths ended April 30, 2002.  MG&Aexpenses as a percentage of net revenues increased from 6.5% to 7.0%.  The increase in MG&A expenses wasprimarily due to incentive compensation costs incurred in the second quarter offiscal 2003, a portion of which resulted from a compensatory transaction inconjunction with the unwinding of previous stock option exercises and relatedofficer loans in response to the Sarbanes-Oxley Act of 2002 (See Note 9 – Related Party Transactions tothe consolidated financial statements).

 

***Interest Expense.*** Interest expense forthe nine months ended April 30, 2003 totaled $2.5 million, down $0.4 millionfrom $2.9 million for the nine months ended April 30, 2002.  The decrease was due to lower averageoutstanding debt levels combined with lower interest rates. Cash and equitypatronage refunds received from CoBank totaling $126,000 and $228,000 have beennetted against interest expense for the nine months ended April 30, 2003 and2002, respectively.

 

***Interest and Other Income.*** Interestand other income totaled $1.1 million for the nine months ended April 30, 2003compared to $0.1 million for the nine months ended April 30, 2002. The increaseresulted primarily from a payment of approximately $1 million received by theCompany in December 2002 from Customs pursuant to the Offset Act. The paymentwas received in conjunction with the distribution by Customs of antidumping andcountervailing duties assessed on certain pasta imported from Italy and Turkeyfrom October 1, 2001 to September 30, 2002, to affected domestic producerspursuant to the Offset Act. TheCompany cannot reasonably estimate the potential amount, if any, that may bereceived in future periods as these receipts are based upon future events overwhich we have little or no control, including, but not limited to, the amountof expenditures by domestic pasta producers and the amount of antidumping andcountervailing duties collected by Customs.

 

***Income Taxes.*** Upon conversion to a corporation, theCompany recorded deferred tax assets and liabilities for the tax effects of anytemporary differences existing between income tax and financial reporting onthe date of the change. Prior to the conversion, the Cooperative had notrecorded deferred taxes for temporary differences that were likely to beeliminated through patronage allocations. As the Company no longer operates ona cooperative basis after the conversion, it is taxed as a “C corporation.” Assuch, it will no longer pay deductible patronage dividends and anydistributions to the shareholders will be treated as nondeductible dividends.Income tax expense for the nine months ending April 30, 2003 totaled $0.9million, reflecting an effective corporate income tax rate of approximately39%. The income tax expense of $17,000 for the nine months ending April 30,2002 relates to current income taxes on non-patronage business offset byreductions in deferred tax liabilities associated with differences between thebook and tax basis of property and equipment.

 

***Net Income. ***Net income for the ninemonths ended April 30, 2003 totaled $1.4 million, a decrease of $5.1 million,from the $6.5 million reported for the nine months ended April 30, 2002. The $5.1 milliondecrease resulted from lower sales volumes andhigher input costs combined with the effects of the change in income tax status upon the conversion from a cooperative to acorporation.The decrease in net income attributable to the foregoing was offset by theapproximately $1.0 million payment received from Customs under the Offset Act,as noted above.

 

**Liquidity and Capital Resources**

 

Our primary sources ofliquidity are cash provided by operations and borrowings under our creditfacility with CoBank.  Working capitalas of April 30, 2003 totaled $15.7 million compared to $23.0 million as of July31, 2002.

 

The Company secured a $19million revolving credit facility with CoBank in February 2003, covering theperiod from February 25, 2003 through February 23, 2004. The revolving line hasa variable interest rate established by CoBank based on CoBank’s cost of funds.The balance outstanding under the Company’s line of credit at April 30, 2003totaled $10.2 million.

 

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The various debtagreements with CoBank and the institutional investors obligate the Company tomaintain or achieve certain amounts of equity and certain financial ratios andimpose certain restrictions on the Company. The Company was in compliance withthese financial covenants as of April 30, 2003. The Company and CoBank enteredinto an Amendment as of February 11, 2003 to the Master Loan Agreement datedJune 20, 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 Company also enteredinto new Term Loan Supplements under the CoBank Master Loan Agreement, as wellas an updated Security Agreement and Guarantee Agreement, primarily to updatesuch agreements for certain items in conjunction with the conversion from acooperative to a corporation.

 

Netcash used for operating activities totaled $3.7 million for the nine monthsended April 30, 2003 compared to net cash from operating activities of $7.5million for the nine months ended April 30, 2002. The decrease was primarilydue to the decrease in net income, increases in payments made under long-termmarketing agreements and higher working capital requirements mainly related toinventory.

 

Netcash from investing activities totaled $0.5 million for the nine months endedApril 30, 2003. The Company redeemed short-term investments of $2.0 million duringfiscal 2003 which were previously restricted (See Note 9 – Related PartyTransactions to the consolidated financial statements). Offsetting this amountwere payments for mill and pasta equipment as well as package design costs. Netcash from investing activities for the nine months ended April 30, 2002 totaled$3.6 million, and related primarily to proceeds received on the sale of certainpasta production equipment under a sale/leaseback transaction, offset bypayments made for milling and pasta equipment, intangible assets and packagedesign costs.

 

Netcash from financing activities totaled $0.3 million for the nine months endedApril 30, 2003. The Company paid $1.8 million for the repurchase of stockduring the nine months ended April 30, 2003 (See Note 9 – Related PartyTransactions to the consolidated financial statements). The remaining cash usedfor the nine months ended April 30, 2003 related to debt principal paymentsoffset by net borrowings under our revolving credit facility. Net cash used forfinancing activities for the nine months ended April 30, 2002 totaled $10.1million, substantially all of which related to payments on our revolving creditfacility and long term debt.

 

The following tablesummarizes the Company’s contractual obligations as of April 30, 2003 (inthousands):

 
| **Contractual Obligations** |   | **Total** |   | **Payments  Due in Less  Than 1 Year** |   | **Payments  Due in  1-3 Years** |   | **Payments  Due in  4-5 Years** |   | **Payments  Due After  5 Years** |   |
|-----------------------------|--------|-----------|--------|----------------------------------------|--------|---------------------------------|--------|---------------------------------|--------|----------------------------------|--------|
|                        |   |      |   |                                   |   |                            |   |                            |   |                             |   |
| Long-term  debt             |   | $         | 39,584 |                                   | $      | 10,011                          |   | $                               | 18,028 |                             | $      | 9,545 |   | $ | 2,000 |   |
| Durum  purchase obligations |   | 15,266    |   | 15,266                                 |   | —                          |   | —                          |   | —                           |   |
| Operating  leases           |   | 4,271     |   | 1,211                                  |   | 2,934                           |   | 126                             |   | —                           |   |
|                        |   |      |   |                                   |   |                            |   |                            |   |                             |   |
|                        |   | $         | 59,121 |                                   | $      | 26,488                          |   | $                               | 20,962 |                             | $      | 9,671 |   | $ | 2,000 |   |

 

The Company forwardcontracts for a certain portion of its future durum wheat requirements. TheCompany had outstanding commitments for grain purchases totaling $15.3 millionas of April 30, 2003 related to forward purchase contracts. These contracts areset price contracts to deliver grain to the Company’s mill, and are notderivative in nature as they have no net settlement provision and are nottransferable. The Company paid $5.0 million under long-term customer marketingagreements during the nine months ended April 30, 2003 and had no other significantcommitments related to such agreements as of April 30, 2003. The Companyanticipates capital expenditures in fiscal year 2003 will be approximately $2.5million, primarily for pasta line upgrades and cost reduction projects.

 

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Management believes thatnet cash to be provided by operating activities, along with its available lineof credit, will be sufficient to meet the Company’s expected capital andliquidity requirements for the foreseeable future.

 

InSeptember 2002, the U.S. Durum Growers Association and the North Dakota WheatCommission filed petitions for the imposition of countervailing and antidumpingduties on durum and hard red spring wheat marketed by the Canadian Wheat Board.The U.S. International Trade Commission (“ITC”) commenced countervailing dutyand antidumping investigations in response to the petition. In March 2003, theU.S. Commerce Department (“Commerce”) established a preliminary countervailingduty of 3.94%, effective upon publication in the Federal Register, on allCanadian spring wheat and durum shipped into the United States. In May 2003, Commerceissued preliminary antidumping duties of 6.12% for imports of Canadian hardspring wheat and 8.15% for Canadian durum wheat. Commerce’s ruling requiresU.S. importers to post bonds, effective upon publication in the FederalRegister, equal to the preliminary duties on all hard red spring and durumwheat purchased from Canada. These duties will be added to the preliminarycountervailing duty of 3.94% imposed in March to offset subsidies for totalbonding requirements of 10.06% for hard red spring wheat and 12.09% for durumwheat.

 

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

 

Market risk is the riskof loss to future earnings, to fair values or to future cash flows that mayresult from changes in the price of a financial instrument. The value of afinancial instrument may change as a result of changes in interest rates,commodity prices, exchange rates, equity prices, and other market changes.Market risk is attributed to all market-risk sensitive financial instruments,including long-term debt.

 

The Company does notbelieve it is subject to any material market risk exposure with respect tointerest rates, commodity prices, exchange rates, equity prices, or othermarket changes that would require disclosure under this item.

 

**ITEM 4.  CONTROLS ANDPROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

The Company’s ChiefExecutive Officer and Chief Financial Officer have reviewed the Company’sdisclosure controls and procedures within 90 days prior to the filing of thisQuarterly Report. Based upon this review, these officers believe that theCompany’s disclosure controls and procedures are effective in ensuring thatmaterial information related to the Company is made known to them by otherswithin the Company.

 

***Changes in Internal Controls***

 

Therewere no significant changes in the Company’s internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the most recent evaluation.

 

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**PART II – OTHER INFORMATION**

 

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

 

**Exhibits**

 
| 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 on Form 8-K**

 

None.

 

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or 15(d) ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 
|                                    | DAKOTA GROWERS PASTA  COMPANY, INC. |
|-----------------------------------------|-------------------------------------|
|                                    |                                |
|                                    |
|                                    | By:                            | /s/  Timothy J. Dodd |
|                                    |                                |   |
|                                    |                                | Timothy  J. Dodd, |
| PRESIDENT AND  CHIEF EXECUTIVE OFFICER, |
| AND PRINCIPAL  EXECUTIVE OFFICER        |
|                                    |
|                                    | Dated: June 16, 2003                |
|                                         |                                     |  |  |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**          |   | **Title**                              |   | **Date**      |
|------------------------|--------|----------------------------------------|--------|---------------|
|                   |   |                                   |   |          |
| /s/ Timothy J.  Dodd   |   | President and  Chief Executive Officer |   |          |
| Timothy J. Dodd        |   | (Principal  Executive                  |   | June 16, 2003 |
|                   |   | Officer)                               |   |          |
|                   |   |                                   |   |          |
| /s/ Thomas P.  Friezen |   | Chief Financial  Officer               |   |          |
| Thomas P.  Friezen     |   | (Principal  Financial                  |   | June 16, 2003 |
|                   |   | Officer)                               |   |          |
|                   |   |                                   |   |          |
| /s/ Edward O.  Irion   |   | Vice President –  Finance and     |   |          |
| Edward O. Irion        |   | Chief Accounting  Officer              |   | June 16, 2003 |
|                   |   | (Principal  Accounting Officer)        |   |          |

 

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**OFFICER CERTIFICATION**

 

I, Timothy J. Dodd, certifythat:

 

1. I have reviewed thisquarterly report on Form 10-Q of Dakota Growers Pasta Company, Inc.;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

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

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

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

 

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

 

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

 

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

 

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

 

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

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date:  June 16, 2003

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

 

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**OFFICER CERTIFICATION**

 

I, Thomas P. Friezen,certify that:

 

1. I have reviewed thisquarterly report on Form 10-Q of Dakota Growers Pasta Company, Inc.;

 

2. Based on my knowledge,this quarterly report does not contain any untrue statement of a material factor omit to state a material fact necessary to make the statements made, inlight of the circumstances under which such statements were made, notmisleading with respect to the period covered by this quarterly report;

 

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

 

4. The registrant’s othercertifying officers and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

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

 

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

 

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

 

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

 

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

 

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

 

6. The registrant’s othercertifying officers and I have indicated in this quarterly report whether ornot there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

Date:  June 16, 2003

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

 

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