**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 

| **ý**                         |   | **Annual Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934**     |
|------------------------------------|--------|----------------------------------------------------------------------------------------------------|
|                               |   |                                                                                               |
|                               |   | **For the fiscal year ended July 31, 2003**                                                   |
|                               |   |                                                                                               |
|                               |   | **or**                                                                                             |
|                               |   |                                                                                               |
| **o**                              |   | **Transition Report Pursuant to  Section 13 or 15(d) of the Securities Exchange Act of 1934** |
|                               |   |                                                                                               |
| **Commission  File No. 000-50111** |

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

(Exactname of registrant as specified in its charter)

 

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

 

**One Pasta Avenue, Carrington, ND58421**

(Addressof principal executive offices including zip code)

 

**(701) 652-2855**

(Registrant’stelephone number, including area code)

 

Securities Registered Pursuant To Section 12(b)Of The Act:

**None**

 

Securities Registered Pursuant To Section 12(g)Of The Act:

**Common Stock, $.01 par value pershareSeries D Delivery Preferred Stock, $.01 par value per share**

 

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Indicate by checkmark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months, and (2) has been subject to such filing requirements forthe past 90 days.    Yes ý  No o

 

Indicate by checkmark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-Kis not contained herein, and will not be contained, to the best of Registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).   Yes o    No ý

 

There is noestablished public market for the Registrant’s common stock. Although there isa limited, private market for shares of the Registrant’s common stock, theRegistrant does not obtain information regarding the transfer price intransactions between its shareholders and therefore is unable to estimate theaggregate market value of the Registrant’s common shares held bynon-affiliates. As ofOctober 27, 2003, the Registrant had 12,260,291 shares of common stock,par value $0.01 per share, outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

**None.**

 

 

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**PART I.**

 

**Forward-Looking Statements**

 

This report containsforward-looking statements based upon assumptions by the management of DakotaGrowers Pasta Company, Inc. (the “Company”, “Dakota Growers” or “we”), a NorthDakota corporation, as of the date of this Annual Report, including assumptionsabout risks and uncertainties faced by the Company. When used in this report,the words “believe,” “expect,” “anticipate,” “will,” “estimate” and similarverbs or expressions are intended to identify such forward-looking statements.If management’s assumptions prove incorrect or should unanticipatedcircumstances arise, the Company’s actual results could differ materially fromthose anticipated. These differences could be caused by a number of factors orcombination of factors including, but not limited to, those factors describedin the “Risk Factors” section of this report. Readers are strongly urgedto consider such factors when evaluating any forward-looking statement. TheCompany undertakes no obligation to update any forward-looking statements inthis report to reflect future events or developments.

 

 

**ITEM 1.  BUSINESS**

 

**Introduction**

 

The Company is aNorth 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 ultimatesurviving entity in the conversion. The Company operates as the Cooperative’ssuccessor and its operations are a continuance of the operations of theCooperative.

 

As part of theconversion, members of the Cooperative and other holders of equity rightsreceived shares of Common Stock, Series D Delivery Preferred Stock, or both, inexchange for their Membership Stock, Equity Stock and other equity rights inthe Cooperative.

 

Membership underthe Cooperative was limited to agricultural producers, and each member wasrequired to enter into a Growers Agreement with the Cooperative. The GrowersAgreement obligated the member to deliver one bushel of durum wheat during eachprocessing year for each share of cooperative Equity Stock owned by thatmember, subject to a pro rata downward adjustment depending on the production needsof the Cooperative. The obligation to deliver durum wheat ceased uponconversion to a corporation. The ownership limitations associated withmembership under the Cooperative were removed with the conversion. Ownership ofshares of Common Stock may be transferred subject only to the requirements ofthe applicable securities laws. Holders of Series D Delivery Preferred Stockhave a delivery right, but not a delivery obligation, to sell durum to theCompany. The Company must approve all transfers of shares of Series D DeliveryPreferred Stock.

 

For more information regarding the Company’s conversion from a NorthDakota cooperative to a North Dakota corporation please refer to the Company’sRegistration Statement on Form S-4 (File No. 333-81946) filed with the UnitedStates Securities and Exchange Commission.

 

The Company ownsand operates a vertically integrated, state-of-the-art durum wheat milling andpasta production facility in Carrington, North Dakota. The facility, whichbecame operational in 1994, currently has the capacity to grind in excess oftwelve million bushels of grain annually and to produce approximately 275million pounds of pasta annually. In February 1998, the Company acquiredall of the outstanding stock of Primo Piatto, Inc. (“Primo Piatto”) a Minnesotacorporation engaged in pasta manufacturing. Primo Piatto, being operated as theMinnesota Division of the Company, currently operates a pasta production plantin New Hope, Minnesota. The Company closed its Minneapolis, Minnesota factory infiscal year 2001. The Company currently has annual pasta production capacity ofapproximately 440 million pounds.

 

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**Pasta Industry and Markets**

 

The Companyestimates North American annual dry pasta consumption to be 4.0 to 4.5 billionpounds. According to the U.S. Department of Commerce, American consumersincreased their average consumption of pasta during the 1990’s at an annualizedgrowth rate of approximately 2% to 3%. However, based on the Company’s analysisof the marketplace and trade and industry information, the Company believes drypasta consumption is currently flat due to consumer trends, of which the mostsignificant appears to be the trend toward a low carbohydrate lifestyle. Inaddition to the domestic market for dry pasta, much smaller domestic marketsexist for refrigerated and frozen pasta.

 

The Pasta industryidentifies domestic dry pasta into two basic markets: retail and institutional.The Company recognizes the institutional market as being comprised ofingredient and foodservice sales.

 

*Retail Market*

 

The Retail market includes sales of branded and private label pasta togrocery stores, club stores, mass merchants and other consumer retailoperations. A significant portion of the Retail market is represented byestablished national or regional pasta brands. New World Pasta Company,American Italian Pasta Company, and Barilla account for a majority of thebranded retail market. The Company focuses almost all of its Retail marketing effortson private label sales. The market leaders in private label sales are DakotaGrowers and American Italian Pasta Company. A small portion of the Retailmarket consists of sales to federal and state government entities.

 

*Ingredient Market*

 

The Ingredient market of the dry pasta industry consists of pasta used byfood processors. Those entities use dry pasta as an ingredient or component ina further-processed or combination food product. Such food products include drypasta dinners, including macaroni and cheese, frozen entrees, refrigeratedsalads, canned entrees, baby food, and canned and dry soups. The size of theIngredient market is influenced by the number of food processors that choose toproduce pasta internally rather than outsource.

 

*Foodservice Market*

 

The Foodservice market consists of sales of dry pasta to food preparationoperations such as restaurants, hotels, colleges and universities, elementaryand secondary schools, airlines, in-plant and in-office cafeteria facilities,transportation services, and other away-from-home eating places. Marketing drypasta to this market generally consists of selling to a network of competitivedistribution organizations and buying groups, and selling dry pasta toindividual restaurant chains and other operator organizations. A small portionof the Foodservice market consists of sales to federal and state governmententities.

 

**Co-Pack Arrangements**

 

A portion of each end-user market is supplied under “co-pack”arrangements between pasta manufacturers. These agreements involve the sale ofdry pasta products between pasta manufacturers in order to supply short-termvolume deficiencies such manufacturers suffer from time to time in meetingcustomer requirements, and to allow a manufacturer to draw upon particular areasof expertise of other manufacturers, which may be more cost beneficial thanself-manufacturing.  Co-pack salescomprised approximately 6% of the Company’s net revenues for the years endedJuly 31, 2003 and 2002, although co-pack sales represented only 2% of theCompany’s net revenues for the third and fourth quarters of fiscal 2003.

 

**Production and Products**

 

The Company purchases durum wheat fromholders of the Company’s Series D Delivery Preferred Stock and on the openmarket. The durum wheat is used in the production of semolina that is then usedby the Company to

 

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producedry pasta products.

 

Upon delivery, the durum wheat is sampled,weighed, pre-cleaned and unloaded into the mill’s grain silos. From the grainsilos, the durum wheat is pre-blended and conveyed into the mill’s final mixbins, which use electronic mass flow controllers for precision blending andflow rate control. The wheat then proceeds to the cleaning and temperingsections of the mill. In those sections of the process, foreign grains and weedseeds are removed and the durum wheat is dampened to the optimum moisture levelrequired for milling. From the tempering bins, the cleaned and tempered durumwheat is conveyed to the mill section where grinding, sifting andpurifying is completed to produce a high quality semolina. In addition to thesemolina, five additional categories of product result from the overall durumwheat milling and blending process: granulars, first clear (higher grade)flour, second clear (lower grade) flour, semolina/durum wheat flour blends, andmill feed.  Mill feed and most secondclear flour are sold primarily for animal feed.

 

The semolina is then conveyed to theCompany’s pasta production facilities or transferred to truck and rail load-outfacilities for shipment to the Company’s Minnesota operations or sale to otherU.S. pasta manufacturers. The first clear flour is either blended with semolinaor transferred to rail and truck load-out bulk bins for sale to other users.

 

Pasta production is basically a mixing,extrusion and drying process. The primary ingredients are semolina and water,although egg, tomato, spinach or other ingredients may be added to producecertain products.  Individual shapes arethe result of extruding this pasta “dough” through different dies.  Each pasta production line operatesindependently and produces either long or short good items, the differencebeing in the way they are conveyed through the drying operation. Both processesutilize continuous ultra high temperature dryers and coolers.  Consistent monitoring and control is a keyelement in this process. The entire pasta production process is controlled byprogrammable logic controllers located in control panels at the beginning of eachproduction line, allowing for efficient operation and monitoring.

 

The finished dry pasta is conveyed to variouscontinuous box and film packaging machines. Dry pasta is packed to meetdifferent markets and customer requirements, with containers ranging in sizefrom 8-ounce cartons and bags to 2,000 pound totes. The packaged product isconveyed through metal detectors, check weighers and automatic case packers.From the case packers, the case travels past jet print coders to automatedpalletizing and stretch wrapping operations.

 

The pasta products manufactured by theCompany consist of over 80 different shapes and are sold to customers in allmarkets. In addition to the dry pasta produced by the Company, it purchasesadditional dry pasta shapes from other manufacturers and resells them. Thispractice is widely followed by many pasta manufacturers for efficiency reasonsand allows distribution of wider product lines to the Company’s customers.Outside purchases of pasta, excluding imports, comprised approximately 1% ofnet sales for each of the Company’s last three fiscal years. The Company doesnot anticipate any significant change in its outside purchases of pasta in theforeseeable future.

 

The Company has an agreement with Gruppo Euricom, the second largestpasta manufacturer in Italy, to be the exclusive distributor of GruppoEuricom’s Italian pasta and rice products in the United States and Canada.  These products are primarily private labelretail and foodservice products. Sales of imported products comprisedapproximately 1% to 2% of the Company’s net revenues in each of the last threefiscal years.

 

The Company’s Carrington, North Dakotafacilities have been certified by Farm Verified Organics, which allows theCompany to offer 100% organic pasta and semolina. The Company’s facilitiesallow for the isolation of the durum, semolina and pasta to enable thiscertification.

 

The Company’s products are manufactured usinga comprehensive Hazard Analysis Critical Control Point (HACCP) program, whichrequires strict monitoring in all aspects of the manufacturing process, toensure food quality and safety. We believe that meeting HACCP standardsstrengthens customer confidence in the quality of our products. The Companyundergoes food safety and product quality audits at various times throughoutthe year

 

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andconsistently receives high scores.

 

In addition to its pasta products, theCompany has in the past sold semolina and durum wheat flour to other pasta manufacturersin bulk truckload or railcar quantities. Such sales represented approximately3% of the Company’s net revenues in fiscal years 2003 and 2002, andapproximately 1% of the Company’s net revenues in fiscal 2001.

 

The cost of production of dry pasta is significantlyimpacted by changes in durum wheat prices, which have varied widely in recentyears. During fiscal year 2003, the cost of durum wheat representedapproximately one-third of the Company’s cost of goods sold. We attempt tomanage the risk associated with durum wheat cost fluctuations through costpass-through mechanisms with our customers and forward purchase contracts fordurum wheat. Volatility with respect to the price of the basic raw material forthe Company’s products leaves it subject to wide variation in its costs fromyear to year. As a result, factors which impact the size and quality of thedurum wheat crop and the availability of such wheat in the United States andCanada can have a material adverse impact on the Company. Those factors includesuch variables as the weather in durum wheat production areas in the UnitedStates, Canada and other parts of the world, and import and export policies andregulations.

 

Due to the intense competition present in the market for pasta productsover the last several years, pasta manufacturers have, at times, been unable tofully implement price increases for their dry pasta products in periods whenhigher durum wheat prices or other input costs impacted the cost of pastaproduction. The Company believes that the competitive environment resultsprimarily from excess production capacity in the domestic pasta industry inrelation to total market demand and from strategic actions relating to marketshare.

 

**Sales, Marketing and Customers**

 

The Company marketsits products through direct sales, supplemented by the efforts of brokersretained by the Company. These brokers receive a commission upon sale of theCompany’s products. The Company’s pasta products are distributed on a broadbasis throughout the United States. The Company does not export significantquantities of its pasta products.  U.S.Foodservice accounted for approximately 17% and 12% of net revenues for theyears ended July 31, 2003 and 2002, respectively. No customer representedgreater than 10% of revenues for the year ended July 31, 2001. TheCompany’s top 10 customers accounted for 58% of revenues in fiscal year 2003,51% of revenues in fiscal year 2002, and 48% of revenues in fiscal year 2001.Pasta sales volumes consisted of 63% Retail and 37% Institutional for fiscalyear 2003, 66% Retail and 34% Institutional for fiscal year 2002, and 63%Retail and 37% Institutional for fiscal year 2001.

 

The Company sellsmost of its pasta under “purchase orders”, whereby the customer and the Companyare not obligated for any pre-determined length of time. Occasionally, apricing commitment is agreed to with a term of one year or less. The Companyhas entered into long-term marketing agreements, including volume and pricingcommitments, with U.S. Foodservice and Safeway, Inc. through December 31,2006 and August 31, 2006, respectively. The Company has entered into anagreement with Gruppo Euricom (“EU”) to be the exclusive distributor of EU’sItalian pasta and rice products in the United States and Canada with an initialterm through August 2006. These products are primarily sold in the privatelabel retail and foodservice markets.

 

**Series D Delivery Preferred Stock Delivery Rights**

 

Each share of Series D Delivery Preferred Stock of the Company givesits holder the privilege, but not the obligation, to deliver one bushel ofdurum wheat to the Company each fiscal year on a “first-come, first-served”basis.  From time to time the Companywill post notices to the market on its Web site (holders may also telephone theCompany for information on market notices) for the purchase of durum wheat.During the 24-hour period following the posting of any market notice and to theextent that the Company’s durum wheat requirements as set forth in the marketnotice have not been fulfilled by other holders of Series D Delivery PreferredStock, holders of Series D Delivery Preferred Stock have the right to (i)accept the Company’s offer to purchase durum wheat and

 

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(ii) deliver durum wheat to theCompany on such terms and conditions as are set forth in the marketnotice.  However, in any given fiscalyear of the Company, the first-come, first-served privilege to deliver durumwheat shall be exercisable to deliver one bushel of durum wheat****onlyonce with respect to each share of Series D Delivery Preferred Stock. Duringthe 24-hour period following the posting of any market notice, the Company willnot purchase durum wheat from non-holders of Series D Delivery Preferred Stockto fulfill the Company’s durum wheat requirements as set forth in the marketnotice.  If, after the lapse of a certainamount of time (not less than one day), holders of Series D Delivery PreferredStock have not sold to the Company all of the durum wheat requested in thenotice, the Company will fulfill its remaining requirements outside of theSeries D Delivery Preferred Stock delivery privilege.

 

Because theprivilege of a holder of Series D Delivery Preferred Stock to deliver durumwheat to the Company only arises if the Company actually requires durum, theprivilege is not absolute.  Any and alldurum wheat delivered by a holder of Series D Delivery Preferred Stock to theCompany shall conform to quality specifications established by the Company.

 

**Competition**

 

*Overview*

 

The markets for semolina/durum wheat flour and pasta are highlycompetitive in most markets and geographic regions. The intensity of competitionvaries from time to time as a result of a number of factors, including: (1) thedegree of industry capacity utilization, (2) comparative product distributioncosts, (3) ability to render distinctive service to customers, (4) the price ofraw materials, primarily durum wheat, and (5) a distinguishing or uniqueability to provide consistent product quality in line with customerspecifications.  The Company believesthat, in a broad sense, the most influential factor on the intensity ofcompetitive conditions is industry capacity utilization.  It should be noted that detailed informationregarding pasta production is somewhat difficult to obtain, as many pastaproducers are closely-held enterprises.

 

*Competition in the Pasta Market*

 

The pasta market is highly competitive and includes severalwell-established enterprises. Those competitors are primarily independentcompanies and, to a lesser extent, divisions or subsidiaries of other, larger,food products companies. In addition, the Company competes against foreignsuppliers, including Italian and Turkish enterprises, that sell pasta in theUnited States.

 

The Company markets in the Retail market primarily as a private labelsupplier. The Company’s Dakota Growers Pasta Co. label to date has slightpenetration in local area markets in the Dakotas and Minnesota. The Zia Briosalabel is marketed through club stores on the West Coast and its Pasta Sanitalabel is sold in small niches ranging from the upper Midwest to select marketsin the Northeast United States.

 

The Company’s top competitors in the private label retail market includeAmerican Italian Pasta Company and New World Pasta Company. These private labelretail sales compete with retail branded products distributed primarily byAmerican Italian Pasta Company (Muellers, R&F, Anthony’s, GoldenGrain/Mission brands et al), New World Pasta Company (Ronzoni, San Georgio,Skinner, American Beauty, Creamette, Prince brands et al), Barilla and avariety of smaller domestic and imported brands.

 

In the Foodservice market, the Company alsomarkets its pasta primarily as a private label supplier, including sales tothree of the largest foodservice distributors in the country under theirlabels. The Company’s “Dakota Growers” foodservice brand is sold throughout theUnited States to independent distributors and national chain accounts.

 

TheCompany focuses a majority of its ingredient marketing efforts on companiesthat do not also manufacture the dry pasta ingredient for their end-products.The Company’s top competitors in the Ingredient market include American ItalianPasta Company, Philadelphia Macaroni Co. Inc., and A. Zerega’s Sons, Inc., as

 

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well as foreign competitorsthat sell product in the United States. A large portion of the Ingredientmarket production capacity is represented by self-suppliers, which includeKraft Foods, Campbell Soup Company, ConAgra, Inc., General Mill, Inc. andStouffers Corporation.

 

The competitive environment in our industry depends largely on aggregateindustry capacity relative to aggregate demand for pasta products. The pastamanufacturing industry has experienced capacity changes and restructuring inrecent years. American Italian Pasta Company opened a pasta production facilityin Arizona while New World Pasta Company closed certain pasta manufacturingfacilities during the past year. The Company believes that current pastaproduction capacity continues to exceed the current demand for pasta.

 

*Competition in the Semolina and Durum Wheat Flour Market*

 

Given the commodity nature of the market for semolinaand durum flour, sales volume is largely dependent on delivered price whenadequate supply conditions exist. Italgrani USA, Inc., Horizon Milling, LLC andMiller Milling collectively are believed to represent approximately 40% oftotal domestic milling capacity. The Company’s current milling operationrepresents about 15% of total domestic milling capacity. Most of the durummilling capacity in the United States is either part of an integrated pastaproduction facility or in an alliance with pasta manufacturers. The Companybelieves that the integration of its milling and pasta production facilitiesenables it to compete more effectively with those competitors who also haveintegrated facilities.

 

**Government Regulation**

 

*Trade Policies*

 

Governmental policies and regulations, includingthose impacting the amount of durum wheat imported from Canada, may affect theoperations of the Company and the volume of pasta imports. United States governmentfarm policies also affect durum plantings and thus can have a significantimpact on the market price of durum.

 

In September 2002, the U.S. Durum Growers Association and the NorthDakota Wheat Commission filed petitions for the imposition of countervailingand antidumping duties on durum and hard red spring wheat marketed by theCanadian Wheat Board. The U.S. International Trade Commission (“ITC”) commencedcountervailing duty and antidumping investigations in response to the petition.In October 2003, the ITC determined that U.S. industry is notmaterially injured with respect to imports of durum wheat from Canada. As aresult of the ITC’s determinations, no countervailing duty or antidumping dutyorder has been issued on imports of durum wheat from Canada.

 

Domestic pastaprices are also influenced by competition from foreign pasta producers, and assuch, by the trade policies of both the U.S. government and foreigngovernments. The U.S. Customs Service (Customs) distributes antidumping andcountervailing duties assessed on certain pasta imported from Italy and Turkeyto affected domestic producers pursuant to the Continued Dumping and SubsidyOffset Act of 2000 (the “Act”). The Company received a payment of approximately$1.0 million under the Act in its fiscal year 2003. Although these duties mayenable the Company to compete more favorably against Italian and Turkishproducers in the U.S. pasta market, there is no assurance as to the length oftime these duties will be maintained, or that foreign producers will not sellcompeting products in the United States at prices lower than those of theCompany.

 

*Food and Drug Administration Regulation*

 

As a producer ofproducts intended for human consumption, the Company’s operations are subjectto certain federal and state regulations, including regulations promulgated bythe United States Food and Drug Administration. The Company believes that it isin material compliance with the applicable regulatory requirements.

 

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*Environmental Regulation*

 

Dakota Growers issubject to extensive federal and state environmental laws and regulations withrespect to water and air quality, solid waste disposal and odor and noisecontrol. The Company conducts an on-going control program designed to meetthese environmental laws and regulations. There are no pending regulatoryenforcement actions and the Company believes that it is in substantialcompliance with applicable environmental laws and regulations.

 

The Company cannotpredict whether future changes in environmental laws or regulations mightincrease the cost of operating its facilities and conducting its business. Anysuch changes could have adverse financial consequences for the Company and itsmembers.

 

**Intellectual Property Rights**

 

The Company relieson a combination of trade secret, trademark law, nondisclosure agreements andtechnical measures to establish and protect its proprietary rights to itsproducts and processes. The Company owns the following trademarks that havebeen registered with the United States Patent and Trademark Office for the saleof dry pasta: Pasta Growers®, Pasta Sanita®, Zia Briosa®, Primo Piatto® andDakota Growers Pasta Co.®.

 

**Research and Development**

 

The Companysupports research and development programs in North Dakota that focus onimproved varieties of durum wheat. In fiscal year 1999, Dakota Growers hired anagronomist and initiated a long-term project of small plot, replicated varietytrial research, as well as field-scale fungicide research. In connection withplant breeders and researchers, the Company is working to developscab-resistant, high-gluten durum varieties. The Company, as part of itsoperations, maintains a modern, well-equipped laboratory facility designedprimarily to evaluate and maintain high quality standards for incoming rawmaterials, ongoing product manufacturing, and development of new pasta shapes.

 

**Employees**

 

As ofOctober 1, 2003, the Company had 388 employees, 94 of which are covered bycollective bargaining agreements at its Primo Piatto, Inc. subsidiary. Thesecollective bargaining agreements expire on December 1, 2004 andSeptember 30, 2005. The Company considers its employee relations to bevery good.

 

**Risk Factors**

 

The following areimportant factors that could cause actual results to differ materially fromthose expressed in any forward-looking statements made by or on behalf of theCompany. Additional risks that we do not yet know of, or currently believe areimmaterial, may also impair the business operations of the Company.

 

***Consumer Trends***

 

As the Company competes exclusively in the dry pasta industry, changesin consumer trends that result in lowered demand for dry pasta may have amaterial adverse effect on the Company’s financial condition and results ofoperations. The Company believes the most significant consumer trend that maylower the overall demand for dry pasta is the move by many consumers to a lowcarbohydrate lifestyle.

 

***CompetitiveEnvironment***

 

Both the U.S.pasta industry and world pasta industry are extremely competitive. The Companycompetes in all dry pasta markets – retail store brand, foodservice andingredient, with larger, national and international food companies. Competitionwithin the pasta industry is largely dependent upon the relationship of overallindustry production capacity to overall market demand for pasta. The pastaindustry in the U.S. as well as in Italy is faced

 

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with excess productioncapacity. New World Pasta Company closedcertain production facilities while American Italian Pasta Company completedconstruction of a pasta production facility in Arizona during the past year. Somecompanies have long-term, high volume contracts, which guarantee a specifiedamount of volume over the term of the contract. Other competitors have retailbrand equity and larger amounts of marketing dollars to compete againstimported and store brand products. The competitive environment, especially inthe retail private label and ingredient markets, has in the past, and may inthe future, put pressure on the Company’s profitability and its ability tomaintain market share. While the Company has and will continue to apply, wherepossible, cost saving measures in an effort to remain competitive, there is noguarantee that the Company can operate profitably in the future.

 

***No Public Marketfor Shares of the Company’s Common Stock and Preferred Stock***

 

There is currently no established public trading market for the shares ofCommon Stock and Preferred Stock of the Company, and an active trading marketmay never develop. The Company maintains no obligation to seek or toobtain a listing on a national market. As aresult, you may not be able to readily resell your shares in the Company.

 

***Technology***

 

The Companybelieves that its overall commitment to maintaining and upgrading pastamanufacturing, milling and packaging equipment is necessary to keep acompetitive edge in the pasta industry. In addition, it also acknowledges thatongoing computer system upgrades to better service the demands of its customersare important to long-term success and profitability. The Company may benegatively impacted if it is unable to consistently keep pace with the industryin these areas.

 

***Pasta, Semolina,Durum Wheat and By-Product Prices***

 

The Company’sprofitability is directly related to the market price of dry pasta, semolina,durum wheat and mill feed by-products, matters over which the Company haslittle or no control. The supply and price of durum wheat are subject to marketconditions and are influenced by many factors beyond our control includingweather patterns affecting durum wheat production, governmental programs andregulations, insects, and plant diseases. Such volatility with respect to theprice of the basic raw material for the Company’s products leaves the Companysubject to wide variation in its costs from year to year. Future increases indurum costs could have a material adverse effect on operating profits unless weare able to pass cost increases on to our customers. Competitive pressuresoften limit our ability to increase prices in response to higher input costs.The Company has capacity to sell durum semolina to other pasta producers. Suchsales are currently being made at highly competitive prices. By-products of themilling process compete with other feed products, and fluctuate significantlyin price with the availability of these competing feed products.

 

***ProductConcentration***

 

The Companycompetes exclusively in the dry pasta industry, with a significant portion ofsales concentrated in the retail and foodservice private label markets. Anydecline in pricing or demand for dry pasta, particularly within the retail andfoodservice private label markets, could have a material adverse effect on theCompany’s financial condition and results of operations.

 

***Product Liability***

 

The sale of food products for human consumption involves the risk of injury to consumers. These injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, aflatoxin and other agents, or residues introduced during the growing, storage, handling or transportation phases. The Company has never been involved in a product liability lawsuit. We are subject to U.S. Food & Drug Administration inspection and regulations and believe our facilities comply in all material respects with all applicable laws and regulations, but we cannot be certain that we will not

 

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be subject to claims orlawsuits in the future for injuries relating to the consumption of ourproducts. The Company carries insurance for product liability claims related toour products and for the costs related to product recalls. However, we cannotbe certain that we will not incur claims or liabilities for which we are notinsured or that exceed the amount of our insurance coverage.

 

***GovernmentRegulation and Trade Policies***

 

Dakota Growers issubject to extensive federal and state environmental laws and regulations withrespect to water and air quality, solid-waste disposal and odor and noisecontrol. The Company conducts an on-going program designed to comply with theselaws and regulations. There are no pending regulatory enforcement actionsagainst the Company, and the Company believes that it currently is and willcontinue to be in substantial compliance with all applicable environmental lawsand regulations.

 

As a producer ofproducts intended for human consumption, the Company’s operations are subjectto certain federal and state regulations, including regulations promulgated bythe U.S. Food and Drug Administration. The Company believes that it is inmaterial compliance with all applicable regulatory requirements relating tofood quality and safety.

 

The operations ofthe Company may be affected by governmental trade policies and regulations,including those impacting the amount of durum wheat imported from Canada.Domestic pasta prices are also influenced by competition from foreign pastaproducers, and as such, by the trade policies of both the U.S. government andforeign governments.

 

***Restrictive LoanCovenants***

 

The Company’s loanagreements with CoBank and institutional investors obligate the Company tomaintain or achieve certain amounts of equity and working capital and achievecertain financial ratios. To the extent that the Company is unable in thefuture to satisfy the various conditions specified in the loan agreements, theCompany’s ability to distribute dividends to its shareholders may berestricted. The failure to comply with the various loan covenants may result ininterest rate penalties, restrict the Company’s corporate activities or resultin a default by the Company which may have a material adverse effect on theCompany’s liquidity.

 

***Board of DirectorsDiscretion Regarding Dividends***

 

The Board ofDirectors of the Company has absolute discretion to determine the manner andamount of payment of dividends on shares of Common Stock and, subject tocertain exceptions, Preferred Stock.

 

***Retroactive TaxTreatment***

 

Subchapter T of the InternalRevenue Code sets forth rules for the tax treatment of cooperatives and appliesboth to cooperatives exempt from tax under Section 521 of the InternalRevenue Code and to nonexempt corporations operating on a cooperative basis.The Cooperative was a nonexempt cooperative prior to conversion to acorporation on July 1, 2002. As a nonexempt cooperative, it was not taxedon amounts of patronage sourced income withheld from its members in the form ofqualified per-unit retains or on amounts distributed to its members in the formof Qualified Written Notices of Allocation. Consequently, such amounts weretaxed directly to the members. However, income attributable to non-patronage sourceswas taxed at the Cooperative level and again if distributed to theCooperative’s members as dividends. If the Cooperative was not entitled to betaxed under Subchapter T or if significant portions of income were fromnon-patronage sources, its income would be taxed when earned by the Cooperativeand the members would be taxed when dividends were distributed.

 

From time to time, the Internal Revenue Service challenges the tax statusof cooperatives, taking the position that the challenged entities are notoperating on a cooperative basis and are therefore not entitled to the taxtreatment described above. Those challenges can be based on a variety offactors, including the nature of the cooperative’s business, its interactionwith its members and the portion of its business done for or with its

 

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members.The impact of most such challenges, regardless of the factor on which thechallenge is based, is that the Internal Revenue Service seeks to assert thatsome or all of a cooperative’s income does not arise from a “patronage”transaction. As any income derived from non-patronage sources is subject totaxation at the entity level, the effect of a successful challenge is that thecooperative would be taxed as a corporation. If the Internal Revenue Servicesuccessfully challenged the Cooperative’s tax status as it was operating beforethe conversion, retroactive taxation at both the entity level and theshareholder level could have a material, adverse impact on the Company.

 

**Available Information**

 

The Company’sInternet website address is *www.dakotagrowers.com*. We make available,free of charge through the “Investors” portion of our website, the Company’sannual reports on Form 10-K, quarterly reports on Form 10-Q, current reports onForm 8-K, and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “1934Act”) as soon as reasonably practicable after we electronically file such materialswith, or furnish such materials to, the Securities and Exchange Commission.Reports of beneficial ownership filed pursuant to Section 16(a) of the1934 Act are also available through our website.

 

**ITEM 2.  PROPERTIESAND PROCESSING FACILITIES**

 

Dakota Growersoperates a vertically integrated, state of the art durum milling and pastamanufacturing plant in Carrington, North Dakota, and a pasta productionfacility in New Hope, Minnesota through its wholly owned subsidiary PrimoPiatto, Inc. The Company closed its Minneapolis, Minnesota factory inFebruary 2001 and has terminated its lease on the property.

 

The Carringtonmill became operational in January 1994, was expanded in 1996 and again in1999. It has the capacity to grind 40,000 bushels of durum per day, and overtwelve million bushels per year. It has grain silos with a capacity to hold870,000 bushels. Its semolina production capability meets the requirements ofall of the Company’s pasta manufacturing capacity, with excess capacityavailable for semolina sales to other producers.

 

The Carringtonpasta operations, initially operational in January 1994, have beenexpanded in 1997 and 1998. The plant now has seven pasta production lines,three operated as long goods lines and four of which are short goods lines.Electronic control scales are used throughout the facility to continuouslytrack production and yields. A central computer control room allows oneoperator to monitor efficiently both the milling and the pasta operations.Total dry pasta manufacturing capacity is 275 million pounds annually. TheCompany owns the physical plant in Carrington, and the land on which it islocated.

 

The Company’sPrimo Piatto, Inc. subsidiary operates a pasta production facility in New Hope,Minnesota. This facility contains six production lines capable of producingapproximately 165 million pounds of dry pasta each year, predominantly inretail packaging. A lasagna line installed at the New Hope, Minnesota plantbecame operational in February 2001. There is a direct Canadian Pacificrail line connecting the New Hope factory to the Carrington milling facility.This highly automated, cost effective processing and packaging facility hasgone through significant upgrades within the last decade. Primo Piatto owns thephysical plant and land at the New Hope facility.

 

The Company ownsthe warehouse facilities at the Carrington and New Hope plants. Thesefacilities are supplemented by public warehouses in California, Kansas,Minnesota, New York, North Dakota, Oregon and Washington where inventory ismaintained and redistributed for the needs of specific customers.

 

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**ITEM 3.  LEGALPROCEEDINGS**

 

From time to timeand in the ordinary course of its business, the Company is named as a defendantin legal proceedings related to various issues, including worker’s compensationclaims, tort claims and contractual disputes. Other than such routinelitigation, the Company is not currently involved in any material legalproceedings. In addition, the Company is not aware of other potential claimsthat could result in the commencement of legal proceedings. The Company carriesinsurance that provides protection against certain types of claims, up to thepolicy limits of the Company’s insurance.

 

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

 

No matters were submitted to a vote of our security holders during thefourth quarter of fiscal year 2003.

 

**PART II.**

 

**ITEM 5.  MARKET FORTHE REGISTRANT’S COMMON STOCK AND RELATED STOCKHOLDER MATTERS**

 

There is noestablished public trading market for the Company’s Common Stock or PreferredStock. As ofOctober 1, 2003 there were 1,305 holders of the Company’s Common Stock.

 

Twounrelated companies, Variable Investment Advisers, Inc. (VIA) and AlerusSecurities have established Alternative Trading Systems (ATS) to facilitatetrading of the Company’s Common Stock. We do not implicitly or explicitlyendorse VIA, Alerus Securities or their respective web sites, and we are notresponsible for products and services that VIA or Alerus Securities provide. Wedo not stand behind VIA or Alerus Securities or receive any fees from either ofthem in connection with the services offered on their respective web sites.Links to the respective web sites of VIA and Alerus Securities are availablethrough the “Investors” portion of the Company’s website at *www.dakotagrowers.com*.

 

As a cooperative,qualified patronage dividends had been declared and paid in prior years,although no qualified patronage dividends or corporate dividends on CommonStock have been declared within the last two fiscal years. We anticipate thatdividends paid by the Company will be lower than the patronage distributionspreviously declared and paid by the Cooperative. Corporate dividends are affectedby the amount of income taxes on corporate earnings. We anticipate thatdividends will also be reduced compared to historical cooperative patronagedistributions as the Board of Directors reinvests a larger portion of theentity’s earnings to fund debt repayments, working capital requirements,equipment acquisitions, market share retention and expansion, and cost-savingprojects.

 

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**ITEM 6.  SELECTEDFINANCIAL DATA**

 

The selectedfinancial data presented below for the fiscal years ended July 31, 2003,2002, 2001, 2000 and 1999 has been derived from the audited consolidatedfinancial statements of the Company (and the Cooperative for periods presentedprior to the conversion from a cooperative to a corporation). The conversion ofDakota Growers Pasta Company from a cooperative to a corporation was completedeffective July 1, 2002. The conversion was accounted for as an exchangebetween related parties. Therefore, no gain or loss was recognized at the timeof conversion and the book value of the assets and liabilities of theCooperative carried over to the Company. Upon conversion, the Company recordeddeferred tax assets and liabilities for the tax effects of any temporarydifferences existing between income tax and financial reporting on the date ofthe change. Prior to conversion, the Cooperative had not recorded deferredtaxes for temporary differences that were likely to be eliminated throughpatronage allocations. In recording such deferred tax assets and liabilitiesupon conversion to a corporation, the Company recorded a nonrecurring, non-cashincome tax charge of $6.1 million. The selected financial data set forth inthis section should be read in conjunction with the Company’s consolidatedfinancial statements and related notes and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included elsewherein this report.

 

**SELECTEDFINANCIAL DATA**

**(Inthousands, except per share data and ratios)**

 
|                                                                                                                |   | **Fiscal  year ended July 31** |    |
|---------------------------------------------------------------------------------------------------------------------|--------|-------------------------------------|---------|
|                                                                                                                |   | **2003**                            |    | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **INCOME STATEMENT DATA**                                                                                           |   |                                |    |   |   |   |   |   |   |   |   |
| Net revenues                                                                                                        |   | $                                   | 136,806 |   | $ | 152,465 |   | $ | 135,921 |   | $ | 136,862 |   | $ | 124,869 |   |
| Cost of goods sold                                                                                                  |   | 125,160                             |    | 130,502 |   | 124,811 |   | 116,890 |   | 106,062 |   |
| Gross profit                                                                                                        |   | 11,646                              |    | 21,963 |   | 11,110 |   | 19,972 |   | 18,807 |   |
| Marketing, general and administrative expenses                                                                      |   | 9,816                               |    | 9,382 |   | 9,631 |   | 9,713 |   | 7,886 |   |
| Operating income                                                                                                    |   | 1,830                               |    | 12,581 |   | 1,479 |   | 10,259 |   | 10,921 |   |
| Other expense                                                                                                       |   | (2,364                              | )       | (3,365 | ) | (3,574 | ) | (3,929 | ) | (2,434 | ) |
| Income (loss) before income taxes                                                                                   |   | (534                                | )       | 9,216 |   | (2,095 | ) | 6,330 |   | 8,487 |   |
| Charge to record deferred taxes upon conversion  from a cooperative to a corporation (3)                            |   | —                              |    | 6,105 |   | — |   | — |   | — |   |
| Income tax expense (benefit)                                                                                        |   | (105                                | )       | 1,277 |   | (311 | ) | (1,298 | ) | 499 |   |
| Income (loss) before cumulative effect of change  in accounting principle                                           |   | (429                                | )       | 1,834 |   | (1,784 | ) | 7,628 |   | 7,988 |   |
| Cumulative effect on prior years (to July 31,  1998) of changing to a different inventory valuation method (2) |   | —                              |    | — |   | — |   | — |   | (3,429 | ) |
| Net income (loss)                                                                                                   |   | (429                                | )       | 1,834 |   | (1,784 | ) | 7,628 |   | 4,559 |   |
| Dividends on preferred stock                                                                                        |   | 3                                   |    | 10 |   | 15 |   | 4 |   | 143 |   |
| Net earnings (loss) on common/equity stock                                                                          |   | $                                   | (432    | ) | $ | 1,824 |   | $ | (1,799 | ) | $ | 7,624 |   | $ | 4,416 |   |
|                                                                                                                |   |                                |    |   |   |   |   |   |   |   |   |
| Weighted average common/equity shares outstanding                                                                   |   | 12,355                              |    | 11,382 |   | 11,253 |   | 11,166 |   | 8,603 |   |
| Net earnings (loss) per common/equity share  outstanding before cumulative effect of accounting change              |   | $                                   | (0.03   | ) | $ | 0.16 |   | $ | (0.16 | ) | $ | 0.68 |   | $ | 0.91 |   |
|                                                                                                                |   |                                |    |   |   |   |   |   |   |   |   |
| Patronage and other dividends per average  common/equity share outstanding                                          |   |                                |    |   |   |   |   |   |   |   |   |
| Declared (1)                                                                                                        |   | $                                   | —  |   | $ | — |   | $ | — |   | $ | 0.40 |   | $ | 0.86 |   |
| Distributed (1)                                                                                                     |   | —                              |    | — |   | — |   | 0.40 |   | 0.86 |   |
|                                                                                                                |   |                                |    |   |   |   |   |   |   |   |   |

 

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|                                                 |   | **As of  July 31** |   |
|------------------------------------------------------|--------|-------------------------|--------|
|                                                 |   | **2003**                |   | **2002** |   | **2001** |   | **2000** |   | **1999** |   |
| **BALANCE SHEET DATA**                               |   |                    |   |   |   |   |   |   |   |   |   |
| Cash                                                 |   | $                       | 5      |   | $ | 2,866 |   | $ | 3 |   | $ | 1,725 |   | $ | 3,425 |   |
| Working capital                                      |   | 13,429                  |   | 23,013 |   | 14,420 |   | 25,089 |   | 31,065 |   |
| Total assets                                         |   | 122,390                 |   | 125,541 |   | 128,658 |   | 131,857 |   | 135,873 |   |
| Long-term debt (excluding current maturities)        |   | 28,263                  |   | 38,274 |   | 47,594 |   | 51,626 |   | 59,116 |   |
| Redeemable preferred stock                           |   | 33                      |   | 54 |   | 113 |   | 126 |   | 53 |   |
| Stockholders’ equity                            |   | 53,818                  |   | 56,090 |   | 54,267 |   | 60,533 |   | 58,982 |   |
|                                                 |   |                    |   |   |   |   |   |   |   |   |   |
| **OPERATING DATA**                                   |   |                    |   |   |   |   |   |   |   |   |   |
| Ratio of long-term debt to stockholders’ equity |   | .53                     | x      | .68 | x | .88 | x | .85 | x | 1.00 | x |
|                                                      |        |                         |        |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)                      As acooperative, qualified patronage declarations were made in October of eachyear based on the patronage earnings and average shares for the prior fiscalyear ending July 31. Amounts shown for each fiscal year were declared andpaid in the following fiscal year. Amounts reflected above include onlydividends on equity stock and qualified patronage declarations, and excludeNon-Qualified Written Notices of Allocation to each member’s account as acooperative.

 

(2)                      The Companychanged its method of computing inventory valuations in the third quarter offiscal year 1999 from the net realizable value method to the lower of cost ormarket method, determined on a first-in, first-out basis, using productspecific standard costs. The impact of the change on prior years (toJuly 31, 1998) of $3,429,000 was included as a charge against income forthe year ended July 31, 1999.

 

(3)                      Uponconversion from a cooperative to a corporation effective July 1, 2002, theCompany recorded deferred tax assets and liabilities for the tax effects of anytemporary differences existing between income tax and financial reporting onthe date of the change. Prior to conversion, the Cooperative had not recordeddeferred taxes for temporary differences that were likely to be eliminatedthrough patronage allocations. In recording such deferred tax assets andliabilities upon conversion to a corporation, the Company recorded anonrecurring, non-cash income tax charge of $6,105,000 during the year endedJuly 31, 2002.

 

**ITEM 7.****          MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

The followingdiscussion contains forward-looking statements. Such statements are based onassumptions by the Company’s management, as of the date of this report, and aresubject to risks and uncertainties, including those discussed under “RiskFactors” in this report, that could cause actual results to differ materiallyfrom those anticipated. The Company cautions readers not to place unduereliance on such forward-looking statements.

 

**Summary**

 

Dakota Growers isthe third largest pasta manufacturer in North America, and is the successor tothe Cooperative by virtue of the Cooperative’s conversion to a corporation. TheCompany generates a majority of its revenues from manufacturing pasta for theretail store brand and foodservice markets, though we serve and continuallylook for opportunities in the entire dry pasta industry. We have implemented anidentity preservation program to provide our customers food safety,traceability and quality during every step from the field to the plate. TheCompany also has a certified organic program and markets organic pasta throughits Dakota Growers

 

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Pasta Co.® retaillabel, as well as into the private label retail, foodservice, and ingredientmarkets. Imported pasta is distributed via an exclusive agreement with GruppoEuricom, the second largest pasta manufacturer in Italy.

 

The Companyincurred a net loss of $0.4 million for the year ended July 31, 2003,compared to net earnings of $1.8 million for the year ended July 31, 2002.The net loss before income taxes totaled $0.5 million for fiscal year 2003compared to income before income taxes of $9.2 million for fiscal year 2002.The major factorscontributing to the decrease in net earnings include lower pasta sales volumes,increased durum and per unit manufacturing costs, increased inventory carryingcosts associated with higher inventory levels during the second half of fiscal2003, and costs associated with the restructuring of certain forward warehousearrangements. Although the Company was generally successful inincreasing sales prices to pass-through the higher cost of durum, the timing ofthe sales price adjustments realized lagged behind the increase in durum costs.Therefore, the Company was unable to fully recover the increase in durum coststhrough timely sales price increases.

 

The Company experienced a considerable drop in net earnings during thelast six months of fiscal year 2003 primarily due to lower pasta sales volumes.Net income for first six months of fiscal year 2003 totaled $2.3 millioncompared to a net loss of $2.7 million incurred during the last six months offiscal 2003. Foodservice sales decreased significantly in the second half offiscal 2003 compared to first half of fiscal 2003, primarily due to the factthat sales volumes to U.S. Foodservice were down 67%. Sales to U.S. Foodserviceduring the Company’s second fiscal quarter 2003 were inordinately high relativeto prior periods, which the Company was led to believe was being fueled byincreased demand by U.S. Foodservice customers for dry pasta products. Inaddition, the Company had received information suggesting that its third fiscalquarter 2003 sales to U.S. Foodservice, while below second fiscal quarter 2003levels, would be relatively consistent with historical third quarter U.S.Foodservice sales. While the Company had no reason to question the reliabilityof this information at that time, it has since learned that the information wasinaccurate. The Company now believes that demand by U.S. Foodservice customersduring the Company’s second fiscal quarter 2003 had not increased appreciablyrelative to prior periods, that U.S. Foodservice over-purchased product fromthe Company during the second quarter of fiscal 2003 and that, as a result,U.S. Foodservice maintained excess inventories of the Company’s product duringthe Company’s third and fourth fiscal quarters of 2003. Based on published newsreports, it is the Company’s understanding that certain procurement executivesof U.S. Foodservice have been terminated following an internal U.S. Foodserviceinvestigation for alleged accounting improprieties, and that the Securities andExchange Commission is now conducting an investigation related to those allegedimproprieties. Sales to U.S. Foodservice have gradually returned to normalizedhistorical levels.

 

Co-pack sales to New World Pasta Company also decreased significantlyand unexpectedly in the third quarter of fiscal 2003. New World Pasta was thesecond largest customer of the Company in the first two quarters of fiscal2003. Co-pack sales comprisedapproximately 6% of the Company’s net revenues for the year ended July 31,2003, although co-pack sales represented only 2% of the Company’s net revenuesfor the third and fourth quarters of fiscal 2003. The Company believes that the sudden decreasein sales volumes to New World Pasta was attributable to several factors,including overpurchasing of product in earlier quarters, a decrease in demandfor New World Pasta products and a change in management at New World Pastaresulting in what the Company understands was a decision to temporarilyemphasize “in-house” manufacturing over outsourcing. Although the Company isagain co-packing for New World Pasta, the Company is unable to reliablyforecast if sales to New World Pasta will continue at current levels, if atall, in the future.

 

The Company had not anticipated as severe a decrease in sales volumesbeginning in its third fiscal quarter 2003 based on information provided to itby its customers prior to the third quarter, and the Company based itsproduction output on that information. This, in turn, resulted in increasedinventories as well as manufacturing and logistical inefficiencies. The Companyhas reduced labor costs to better match production with current demand andcontinues to evaluate further revenue enhancement and cost reductionopportunities. Highly competitive pricing continues in a majority of the drypasta industry markets. Therefore, the Company is likely to face furtherpricing pressure to maintain or gain market share, and opportunities to passthrough increases in input costs in the short-term, other than undercontractual pass-through arrangements, appear to be limited.

 

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**Conversion**

 

The Company is aNorth Dakota corporation that was organized on January 30, 2002 for thespecific purpose of consummating the conversion of the Cooperative into acorporation. The conversion of the Cooperative from a cooperative to acorporation was completed effective July 1, 2002, with the Company beingthe ultimate surviving entity in the conversion. The Company operates as theCooperative’s successor and its operations are a continuance of the operationsof the Cooperative.

 

The conversion wasaccounted for as an exchange between related parties. Therefore, no gain orloss was recognized at the time of conversion and the book value of the assetsand liabilities of the Cooperative carried over to the Company. Uponconversion, 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 conversion, theCooperative had not recorded deferred taxes for temporary differences that werelikely to be eliminated through patronage allocations. In recording such deferredtax assets and liabilities upon conversion to a corporation, the Companyrecorded a nonrecurring, non-cash income tax charge of $6.1 million in fiscalyear 2002.

 

The comparabilityof results after the conversion versus those in prior periods was affected bythe income tax status change associated with the conversion from a cooperativeto a corporation.

 

**Critical Accounting Policies**

 

Theaccompanying discussion and analysis of our results of operations and financialcondition are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. We base our estimates and judgments onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances. However, future events are subject tochange and the best estimates and judgments may require adjustment. For acomplete description of the Company’s significant accounting policies, pleasesee Note 1 to the consolidated financial statements. Our critical accountingpolicies are those that have meaningful impact on the reporting of our financialcondition and results, and that require significant management judgment andestimates. These policies include our accounting for (a) allowance for doubtfulaccounts, (b) asset impairment, and (c) income taxes.

 

*Allowance for Doubtful Accounts*

 

We evaluate the collectibility of our accountsreceivable based on a combination of factors. In cases where we are aware ofcircumstances that may impair a specific customer’s ability to meet itsfinancial obligations to us, we record a specific allowance against amounts dueto us, and thereby reduce the net recognized receivable to the amount wereasonably believe will be collected. For all other customers, we recognizeallowances for doubtful accounts based on the length of time the receivablesare past due and our historical experience. If the financial condition of ourcustomers would deteriorate, additional allowances may be required in thefuture which could have an adverse impact on our future operating results.

 

*Asset Impairment*

 

We are required to evaluate our long-livedassets for impairment whenever indicators of impairment exist, and write downthe value of any assets if they are determined to be impaired. Evaluating theimpairment of long-lived assets involves management judgment in estimating thefuture cash flows and fair values related to these assets. Future events couldcause management to conclude that impairment indicators exist and that thevalue of certain long-lived assets is impaired.

 

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*Income Taxes*

 

Indetermining income (loss) for financial statement purposes, management mustmake certain estimates and judgments in calculating tax liabilities and indetermining the recoverability of certain deferred tax assets. Deferred taxassets must be reduced by a valuation allowance, if based on the weight ofavailable evidence, it is more likely than not that some portion or all of therecorded deferred tax assets will not be realized in future periods. Managementbelieves it is more likely than not that the deferred tax assets as ofJuly 31, 2003 will be realized through the generation of future taxableincome and tax planning strategies.

 

**Results of Operations**

 

*Comparison of Fiscal Years ended July 31, 2003 and 2002*

 

***Net Revenues.*** Net revenues totaled $136.8 millionfor the year ended July 31, 2003, a decrease of $15.7 million, or 10.3%,compared to $152.5 million for the year ended July 31, 2002. The decreasewas primarily due to lower pasta sales volumes offset partially by higher perunit selling prices related mainly to the pass through of durum cost increases.

 

Revenuesfrom the retail market, a portion of which includes co-pack and governmentalsales, decreased $13.6 million, or 14.7%, primarily as a result of a 15.6%decrease in sales volume. The loss of two larger retail customers from theprior year combined with a decrease in co-pack sales accounted for much of theretail sales volume decrease. Foodservice revenues increased $2.4 million, or7.5%, primarily driven by a 6.1% increase in per unit selling prices.Ingredient revenues decreased $2.7 million, or 20.3%, resulting mainly from a 26.4%decrease in sales volumes offset partially by higher per unit sales prices. Thedecline in ingredient sales resulted primarily from the loss of one customer inthis market due to competitive pricing issues.

 

The Company markets semolina production in excess of itsown requirements as well as by-products of the durum milling process. Revenues from semolina and by-product sales for the year endedJuly 31, 2003, decreased $1.8 million from the prior year. The decreaseresulted primarily from lower sales volumes.

 

***Cost of Goods Sold.***Cost of goods soldtotaled $125.2 million for the year ended July 31, 2003, a decrease of4.1% compared to the $130.5 million reported for the year ended July 31,2002. The $5.3 million decrease resulted mainly from lower sales volumes offsetby higher durum wheat costs, higher per unit manufacturing costs, increased inventory carrying costsassociated with higher inventory levels during the second half of fiscal 2003,and costs associated with the restructuring of certain forward warehousearrangements. Gross profit as a percentage of net revenues decreasedfrom 14.4% to 8.5% primarily as a result of these factors.

 

***Marketing, General and Administrative (“MG&A”) Expenses.***MG&A expenses for the year ended July 31, 2003totaled $9.8 million compared to $9.4 million for the year ended July 31,2002. The $0.4 million increase was primarily the result of costs associatedwith compliance under the Sarbanes-Oxley Act of 2002. MG&A expenses as apercentage of net revenues increased from 6.2% to 7.2% primarily due to thedecrease in net revenues.

 

***Interest Expense.***Interest expense forthe year ended July 31, 2003, totaled $3.4 million, down slightly from$3.9 million for the year ended July 31, 2002. The decrease was due tolower average outstanding debt levels combined with lower interest rates. Cashand equity patronage refunds received from CoBank totaling $126,000 and$228,000 have been netted against interest expense for the years endedJuly 31, 2003 and 2002, respectively.

 

***Interest and Other Income.*** Interestand other income totaled $1.1 million for the year ended July 31, 2003compared to $0.5 million for year ended July 31, 2002. The increaseresulted primarily from a net payment of approximately $1.0 million received bythe Company during fiscal year 2003 from the U.S. Customs Service (“Customs”)pursuant to the Continued Dumping and Subsidy Offset Act of 2000 (the “OffsetAct”). The payment was received in conjunction with the distribution by Customsof antidumping and countervailing duties assessed on certain pasta importedfrom Italy and Turkey from October 1, 2001 to September 30, 2002, to

 

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affected domestic producerspursuant to the Offset Act. 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.

 

***Income Taxes.***The income tax benefitfor the year ended July 31, 2003 was $0.1 million. Upon conversion to acorporation in fiscal year 2002, 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. Inrecording such deferred tax assets and liabilities upon conversion to acorporation, the Company recorded a nonrecurring, non-cash income tax charge of$6.1 million for the year ended July 31, 2002. Income tax expense for theyear ending July 31, 2002, excluding the charge to record deferred taxesupon conversion noted above, was $1.3 million. Such expense related to incometaxes on nonpatronage net earnings while a cooperative and corporate netincome.

 

***Net Income (Loss).*** The Companyincurred a netloss of $0.4 million for the year ended July 31, 2003 compared to netincome of $1.8 million for the year ended July 31, 2002. The decrease inearnings resulted primarily from lower sales volumes combined withmanufacturing and distribution cost increases as noted above.

 

*Comparison of Fiscal Years endedJuly 31, 2002 and 2001*

 

***Net Revenues.*** Net revenues totaled $152.5 millionfor the year ended July 31, 2002, an increase of $16.6 million, or 12.2%,compared to $135.9 million for the year ended July 31, 2001. The increasewas primarily due to higher pasta sales volumes.

 

Revenues from the retail market, a portion of which includes co-packand governmental sales, increased $8.3 million, or 9.9%, as a result of a 12.0%increase in sales volumes offset by lower per unit selling prices.  Foodservice revenues increased $4.8 million,or 17.4%, primarily due to volume growth of 16.6%. Growth in the foodservicemarket was drivenby expansions and acquisitions by our customers. Ingredient revenues decreased $1.8million, or 12.0%, mainly as a result of a 13.4% decrease in sales volumes. Theingredient sales volume decline resulted primarily from the loss of twocustomers in this market due to competitive pricing issues. The Companyanticipates highly competitive pricing will continue in the ingredient market.

 

The Company markets semolina production inexcess of its own requirements as well as by-products of the durum millingprocess. Revenues from semolina and by-product sales for the year endedJuly 31, 2002, increased $5.3 million from the prior year as a result ofincreases in both sales volumes and per unit selling prices.

 

***Cost of Goods Sold.***Cost of goods soldtotaled $130.5 million for the year ended July 31, 2002, an increase of4.6% compared to the $124.8 million reported for the year ended July 31,2001. The $5.7 million increase resulted mainly from revenue growth offset bylower conversion costs, due to operational improvements, and logistics savings.Gross profit as a percentage of net revenues increased from 8.2% to 14.4% as aresult of these factors.

 

***Marketing, General and Administrative (“MG&A”) Expenses.***MG&A expenses for the year ended July 31, 2002totaled $9.4 million, down slightly from $9.6 million for the year endedJuly 31, 2001. MG&A expenses as a percentage of net revenues decreasedfrom 7.1% to 6.2%.

 

***Interest Expense.***Interest expense forthe year ended July 31, 2002, was $3.9 million, down slightly from theprior year primarily due to lower average outstanding debt levels. Cash andequity patronage refunds received from CoBank totaling $228,000 and $248,000have been netted against interest expense for the years ended July 31,2002 and 2001, 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 conversion, theCooperative had not recorded deferred taxes for temporary differences that were

 

18

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likely to be eliminated throughpatronage allocations. In recording such deferred tax assets and liabilitiesupon conversion to a corporation, the Company recorded a nonrecurring, non-cashincome tax charge of $6.1 million. Income tax expense for the year endingJuly 31, 2002, excluding the charge to record deferred taxes upon conversionnoted above, was $1.3 million. Such expense related to income taxes onnonpatronage net earnings while a cooperative and corporate net income.

 

***Net Income (Loss).*** Net income for theyear ended July 31, 2002 was $1.8 million compared to a $1.8 million netloss incurred for the year ended July 31, 2001. The $3.6 million increase resultedprimarily from higher sales volumes combined with increased gross margins dueto cost reductions, offset by the $6.1 million deferred income tax charge notedabove.

 

**Liquidity and Capital Resources**

 

The Company meetsits liquidity requirements from cash provided by operations, short-termborrowings under its credit facility, and outside debt financing. Workingcapital as of July 31, 2003 was $13.4 million compared to $23.0 million asof July 31, 2002.

 

The Companysecured a $19 million revolving credit facility with CoBank inFebruary 2003, covering the period from February 25, 2003 throughFebruary 23, 2004. The revolving line has a variable interest rateestablished by CoBank based on CoBank’s cost of funds and is secured byproperty, equipment, and current assets of the Company. The balance outstandingunder the revolving line of credit as of July 31, 2003 totaled $9.7million. The Company had no balance outstanding under its revolving line ofcredit at July 31, 2002.

 

The Company’slong-term financing is provided through various secured term loans and securednotes with CoBank and institutional investors. A majority of the Company’slong-term debt is fixed-rate with a small portion being variable. Variableinterest rates on term loans are based on CoBank’s cost of funds.

 

The various debtagreements with CoBank and institutional investors obligate the Company tomaintain or achieve certain amounts of equity and certain financial ratios andimpose restrictions on the Company. The Master Loan Agreement (as amended) withCoBank requires the Company to maintain the following ratios: (a) a currentratio of not less than 1.20 to 1.0 through and including April 30, 2004,and of not less than 1.35 to 1.0 thereafter, (b) a long term debt to net worthratio (adjusted to reflect a current ratio of 1.35:1.00) of not greater than1.10 to 1.00, and (c) a consolidated funded debt to consolidated cash flowratio of not more than 4.0 to 1.0 calculated on a trailing four quarter basisthrough and including April 30, 2004, and of not more than 3.0 to 1.0thereafter. The Company cannot pay dividends on capital stock in excess ofminimum requirements if such action will cause noncompliance with any financialcondition, without the prior written consent of CoBank. The Note PurchaseAgreement (as amended) with the institutional investors requires the Company tomaintain the following: (a) consolidated net worth of not less than the sum of(1) $27,000,000 plus (2) an aggregate amount equal to 30% of consolidated netincome for each completed fiscal year beginning with the fiscal year endedJuly 31, 1998, (b) a trailing twelve month ratio of consolidated cash flowto consolidated fixed charges of not less than 2.0 to 1.0 at the end of eachfiscal quarter, and (c) a ratio of consolidated funded debt to consolidatedcash flow ratio not to exceed 3.0 to 1.0 determined at the end of each fiscalquarter for the immediately preceding four fiscal quarters. The Notes (asamended) require the rate of interest on the unpaid balance be increased by onepercent at any time that either (a) the ratio of the Company’s consolidatedfunded debt to consolidated cash flow is greater than 3.0 to 1.0 as of the endof each fiscal quarter for the immediately preceding four fiscal quarters or(b) the Securities Valuation Office of the National Association of InsuranceCommissioners has not assigned a designation category of “1” or “2” to theNotes. The Company was in compliance with all debt covenants (as amended) as ofJuly 31, 2003 and the date of this filing.

 

We anticipate thatdividends paid by the Company will be lower than the patronage distributionspreviously received from the Cooperative. Corporate dividends are affected bythe amount of income taxes on corporate earnings. We anticipate that dividendswill also be reduced compared to historical cooperative patronage distributionsas the Board of Directors reinvests a larger portion of the entity’s earningsto fund debt repayments,

 

19

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working capital requirements,equipment acquisitions, market share retention and expansion, and cost-savingprojects.

 

Net cash used for operations totaled $1.0 million for the year endedJuly 31, 2003 compared to net cash provided by operations of $10.8 millionand $4.4 million for the years ended July 31, 2002 and 2001, respectively.The $11.8 million decrease from fiscal year 2002 to 2003 was primarily due to the decrease in net income,increases in payments made under long-term marketing agreements and higherworking capital requirements mainly related to inventory. The $6.4 million increase from fiscal 2001 tofiscal 2002 was mainly due to the increase in net income (excluding non-cashdeferred income tax adjustments).

 

Net cash used forinvesting activities totaled $0.4 million for the year ended July 31,2003. The Companyredeemed short-term investments of $2.0 million during fiscal 2003 which werepreviously restricted (See Note 13 – 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 totaled $2.9 million for the year endedJuly 31, 2002, and resulted primarily from proceeds received on the saleof certain pasta production equipment under a sale-leaseback transaction,offset by payments made for milling and pasta equipment, intangible assets andpackage design costs. The sale-leaseback transaction generated $5.0 million inavailable funds, which were used at the time to secure and expand the Company’ssales efforts. Net cash used in investing activities totaled $3.4 million forthe year ended July 31, 2001 related primarily to the purchase of pastaproduction equipment. A significant portion of the equipment expenditures forfiscal year 2001 related to the installation of a lasagna line in the New Hope,Minnesota plant. Most of the Company’s technology assets are under leaseagreements, which allow the Company to stay relatively current with changingtechnologies.

 

Net cash used for financing activities totaled $1.5 million for the yearended July 31, 2003. TheCompany paid $1.8 million for the repurchase of stock during the year ended July 31,2003 (See Note 13 — Related Party Transactions to the consolidated financialstatements). The remaining cash used for the fiscal year 2003 related to debtprincipal payments offset by net borrowings under our revolving creditfacility.  Net cash used for financing activities totaled $10.8 million forthe year ended July 31, 2002, mainly related to payments made onour credit facility and long-term debt. Netcash used for financing activities was $2.7 million for the year endedJuly 31, 2001, and related primarily to payments for long term debt andpatronage distributions offset by proceeds from short term financing. Cashpatronage distributions to members of the Cooperative totaled $4.5 million forthe year ended July 31, 2001.

 

The Companyforward contracts for a certain portion of its future durum wheat requirements.At July 31, 2003, the Company had outstanding commitments for grainpurchases totaling $7.4 million related to forward purchase contracts. Thesecontracts are set price contracts to deliver grain to the Company’s mill, andare not derivative in nature as they have no net settlement provision and arenot transferable. Pursuant to a warehouseagreement with Sky Logistics & Distribution, Inc. (Sky), the Company isobligated to minimum monthly storage and handling volumes totalingapproximately $1.3 million for fiscal year 2004 and $0.3 million for fiscalyear 2005. This agreement expires October 31, 2004. The Company has alsotransferred the obligation for a certain building lease to Sky. If Sky wereunable to perform under the existing lease, the Company would be obligated tomake payments under this lease over the remaining term. Current monthlypayments under this lease total approximately $67,000, and the lease expiresApril 30, 2004. The Company paid $5.0 million under long-termcustomer marketing agreements during fiscal year 2003 and had no othersignificant commitments related to such agreements as of July 31, 2003.

 

20

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The followingtable summarizes the Company’s contractual obligations as of July 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              |   | $         | 38,274 |                                   | $      | 10,011                          |   | $                               | 16,718 |                             | $      | 9,545 |   | $ | 2,000 |   |
| Durum purchase obligations  |   | 7,355     |   | 7,355                                  |   | —                          |   | —                          |   | —                           |   |
| Operating leases            |   | 3,991     |   | 1,166                                  |   | 2,723                           |   | 102                             |   | —                           |   |
|                        |   |      |   |                                   |   |                            |   |                            |   |                             |   |
|                        |   | $         | 49,620 |                                   | $      | 18,532                          |   | $                               | 19,441 |                             | $      | 9,647 |   | $ | 2,000 |   |

 

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

 

##### ***Recently Issued Accounting Standards***

 

InMay 2003, the FASB issued SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity.” SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. Manyof these instruments were previously classified as equity. SFAS No. 150requires that an issuer classify a financial instrument that is within itsscope as a liability, or as an asset in some circumstances. This Statementapplies to three types of freestanding financial instruments, other thanoutstanding shares. One type is mandatorily redeemable shares, which theissuing company is obligated to buy back in exchange for cash or assets; asecond type includes put options and forward purchase contracts that require ormay require the issuer to buy back some of its shares in exchange for cash orother assets; the third type is obligations that can be settled with shares,the monetary value of which is fixed, ties solely or predominantly to avariable such as a market index, or varies inversely with the value of theissuers’ shares. SFAS No. 150 does not apply to features embedded in afinancial instrument that is not a derivative in its entirety. SFAS No. 150 is effective for financialinstruments entered into or modified after May 31, 2003, and otherwise iseffective at the beginning of the first interim period beginning afterJune 15, 2003. The adoption of this Statement is not expected to have amaterial impact on the Company’s financial statements.

 

## **ITEM7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

The Company forward contracts for a certainportion of its future durum wheat requirements. These contracts are set pricecontracts to deliver grain to the Company’s mill, and are not derivative innature as they have no net settlement provision and are not transferable. TheCompany does not believe it is subject to any material market risk exposurewith respect to interest rates, commodity prices, exchange rates, equityprices, or other market changes that would require disclosure under this item.

 

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**ITEM 8.  FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATED FINANCIALSTATEMENTS OFDAKOTA GROWERS PASTA COMPANY, INC.**

 
| Report of Independent  Auditors                                  |
|------------------------------------------------------------------|
|                                                             |
| Consolidated Balance Sheets                                      |
|                                                             |
| Consolidated  Statements of Operations                           |
|                                                             |
| Consolidated  Statements of Changes in Stockholders’ Equity |
|                                                             |
| Consolidated  Statements of Cash Flows                           |
|                                                             |
| Notes to  Consolidated Financial Statements                      |

 

22

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## **INDEPENDENTAUDITOR’S REPORT**

## ** **

The Board of DirectorsDakota Growers Pasta Company, Inc.Carrington, North Dakota

 

 

We have audited the accompanying consolidated balance sheets of Dakota Growers Pasta Company, Inc. (aNorth Dakota corporation) as of July 31, 2003 and 2002, and the relatedconsolidated statements of operations, changes in stockholders’ equity and cashflows for the years ended July 31, 2003, 2002 and 2001. These consolidatedfinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these consolidated financial statementsbased on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we planand perform the audit to obtain reasonable assurance about whether the consolidatedfinancial statements are free of material misstatement. An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe consolidated financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, aswell as evaluating the overall consolidated financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the financial position of Dakota Growers Pasta Company, Inc.****asof July 31, 2003 and 2002, and the results of their operations and theircash flows for the years ended July 31, 2003, 2002 and 2001, in conformitywith accounting principles generally accepted in the United States of America.

 

 
| /s/ Eide Bailly LLP  |   |
|----------------------|--------|
|                 |
| Fargo, North Dakota  |
| August 27, 2003 |

 

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**DAKOTA GROWERS PASTA COMPANY, INC.CONSOLIDATED BALANCE SHEETSJULY 31, 2003 AND 2002(In Thousands, Except Share Information)**

 
|                                                                                                   |   | **2003** |    | **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 $1,012 and $792 |   | 9,852    |    | 16,504   |   |
|                                                                                                   |   |     |    |     |   |
| Other receivables                                                                                      |   | 1,225    |    | 360      |   |
|                                                                                                   |   |     |    |     |   |
| Inventories                                                                                            |   | 28,082   |    | 19,636   |   |
|                                                                                                   |   |     |    |     |   |
| Prepaid expenses                                                                                       |   | 3,940    |    | 2,258    |   |
|                                                                                                   |   |     |    |     |   |
| Deferred income taxes                                                                                  |   | 569      |    | 466      |   |
|                                                                                                   |   |     |    |     |   |
| Total current assets                                                                                   |   | 43,673   |    | 44,064   |   |
|                                                                                                   |   |     |    |     |   |
| PROPERTY AND EQUIPMENT                                                                                 |   |     |    |     |   |
| In service                                                                                             |   | 108,263  |    | 106,885  |   |
| Construction in process                                                                                |   | 868      |    | 371      |   |
|                                                                                                   |   | 109,131  |    | 107,256  |   |
| Less accumulated depreciation                                                                          |   | (41,799  | )       | (35,762  | )      |
|                                                                                                   |   |     |    |     |   |
| Net property and equipment                                                                             |   | 67,332   |    | 71,494   |   |
|                                                                                                   |   |     |    |     |   |
| INVESTMENTS IN COOPERATIVE BANKS                                                                       |   | 2,413    |    | 2,350    |   |
|                                                                                                   |   |     |    |     |   |
| INTANGIBLE ASSETS                                                                                      |   | 539      |    | 686      |   |
|                                                                                                   |   |     |    |     |   |
| OTHER ASSETS                                                                                           |   | 8,433    |    | 6,947    |   |
|                                                                                                   |   |     |    |     |   |
|                                                                                                   |   | $        | 122,390 |     | $      | 125,541 |   |

 

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|                                                                                                                                                         |   | **2003** |    | **2002** |   |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|
|                                                                                                                                                         |   |     |    |     |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                               |   |     |    |     |   |
|                                                                                                                                                         |   |     |    |     |   |
| CURRENT LIABILITIES                                                                                                                                          |   |     |    |     |   |
| Notes payable                                                                                                                                                |   | $        | 9,705   |     | $      | — |   |
| Current portion of long-term debt                                                                                                                            |   | 10,011   |    | 9,320    |   |
| Accounts payable                                                                                                                                             |   | 3,793    |    | 6,471    |   |
| Excess outstanding checks over cash on deposit                                                                                                               |   | 2,219    |    | —   |   |
| Accrued liabilities                                                                                                                                          |   | 4,516    |    | 5,260    |   |
|                                                                                                                                                         |   |     |    |     |   |
| Total current liabilities                                                                                                                                    |   | 30,244   |    | 21,051   |   |
|                                                                                                                                                         |   |     |    |     |   |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                |   | —   |    | —   |   |
| LONG-TERM DEBT, net of current portion                                                                                                                       |   | 28,263   |    | 38,274   |   |
| DEFERRED INCOME TAXES                                                                                                                                        |   | 9,845    |    | 9,833    |   |
| OTHER LIABILITIES                                                                                                                                            |   | 187      |    | 239      |   |
|                                                                                                                                                         |   |     |    |     |   |
| Total liabilities                                                                                                                                            |   | 68,539   |    | 69,397   |   |
|                                                                                                                                                         |   |     |    |     |   |
| REDEEMABLE PREFERRED STOCK                                                                                                                                   |   |     |    |     |   |
|                                                                                                                                                         |   |     |    |     |   |
| Series A, 6% cumulative, $100 par value, 533  shares authorized, 333 and 467 shares issued and outstanding as of  July 31, 2003 and 2002, respectively  |   | 33       |    | 47       |   |
| Series B, 2% non-cumulative, $100 par value, 525  shares authorized, 0 and 75 shares issued and outstanding as of July 31,  2003 and 2002, respectively |   | —   |    | 7        |   |
|                                                                                                                                                         |   |     |    |     |   |
| Total redeemable preferred stock                                                                                                                             |   | 33       |    | 54       |   |
|                                                                                                                                                         |   |     |    |     |   |
| STOCKHOLDERS’ EQUITY                                                                                                                                    |   |     |    |     |   |
|                                                                                                                                                         |   |     |    |     |   |
| Series D delivery preferred stock, non-cumulative,  $.01 par value, 11,324,377 authorized, 11,275,297 shares issued and  outstanding                         |   | 113      |    | 113      |   |
| Common stock, $.01 par value, 75,000,000 shares  authorized, 12,554,747 shares issued                                                                        |   | 126      |    | 126      |   |
| Additional paid-in capital                                                                                                                                   |   | 60,188   |    | 60,188   |   |
| Treasury stock at cost, 294,456 and 0 shares as of  July 31, 2003 and 2002, respectively                                                                |   | (1,840   | )       | —   |   |
| Accumulated deficit                                                                                                                                          |   | (4,769   | )       | (4,337   | )      |
|                                                                                                                                                         |   |     |    |     |   |
| Total stockholders’ equity                                                                                                                              |   | 53,818   |    | 56,090   |   |
|                                                                                                                                                         |   |     |    |     |   |
| Total liabilities and stockholders’ equity                                                                                                              |   | $        | 122,390 |     | $      | 125,541 |   |

 

See Notes to ConsolidatedFinancial Statements

 

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**DAKOTAGROWERS PASTA COMPANY, INC.CONSOLIDATED STATEMENTS OFOPERATIONS YEARS ENDED JULY 31, 2003, 2002, AND 2001(In Thousands, Except Per Share Amounts)**

 
|                                                                                                                  |   | **2003** |    | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------------------------------------------|--------|----------|---------|----------|--------|----------|--------|
|                                                                                                                  |   |     |    |     |   |     |   |
| Net revenues (net of discounts and allowances of  $16,706, $17,056 and $17,312 for 2003, 2002 and 2001, respectively) |   | $        | 136,806 |     | $      | 152,465  |   | $ | 135,921 |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Cost of goods sold                                                                                                    |   | 125,160  |    | 130,502  |   | 124,811  |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Gross profit                                                                                                          |   | 11,646   |    | 21,963   |   | 11,110   |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Marketing, general and administrative expenses                                                                        |   | 9,816    |    | 9,382    |   | 9,631    |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Operating income                                                                                                      |   | 1,830    |    | 12,581   |   | 1,479    |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Other income (expense)                                                                                                |   |     |    |     |   |     |   |
| Interest and other income                                                                                             |   | 1,063    |    | 477      |   | 373      |   |
| Gain (loss) on disposition of property, equipment  and other assets                                                   |   | (13      | )       | 23       |   | 201      |   |
| Interest expense, net                                                                                                 |   | (3,414   | )       | (3,865   | )      | (4,148   | )      |
|                                                                                                                  |   |     |    |     |   |     |   |
| Income (loss) before income taxes                                                                                     |   | (534     | )       | 9,216    |   | (2,095   | )      |
|                                                                                                                  |   |     |    |     |   |     |   |
| Charge to record deferred taxes upon conversion  from a cooperative to a corporation                                  |   | —   |    | 6,105    |   | —   |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Income tax expense (benefit)                                                                                          |   | (105     | )       | 1,277    |   | (311     | )      |
|                                                                                                                  |   |     |    |     |   |     |   |
| Net income (loss)                                                                                                     |   | (429     | )       | 1,834    |   | (1,784   | )      |
| Dividends on preferred stock                                                                                          |   | 3        |    | 10       |   | 15       |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Net earnings (loss) on common/equity stock                                                                            |   | $        | (432    | )        | $      | 1,824    |   | $ | (1,799 | ) |
|                                                                                                                  |   |     |    |     |   |     |   |
| Net earnings (loss) per common/equity share                                                                           |   |     |    |     |   |     |   |
| Basic                                                                                                                 |   | $        | (0.03   | )        | $      | 0.16     |   | $ | (0.16 | ) |
|                                                                                                                  |   |     |    |     |   |     |   |
| Diluted                                                                                                               |   | $        | (0.03   | )        | $      | 0.16     |   | $ | (0.16 | ) |
|                                                                                                                  |   |     |    |     |   |     |   |
| Weighted average common/equity shares outstanding                                                                     |   |     |    |     |   |     |   |
| Basic                                                                                                                 |   | 12,355   |    | 11,382   |   | 11,253   |   |
|                                                                                                                  |   |     |    |     |   |     |   |
| Diluted                                                                                                               |   | 12,609   |    | 11,415   |   | 11,275   |   |

 

See Notes to ConsolidatedFinancial Statements

 

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**DAKOTAGROWERS PASTA COMPANY, INC.CONSOLIDATED STATEMENTS OF CHANGESIN STOCKHOLDERS’ EQUITYYEARS ENDED JULY 31, 2003, 2002 AND 2001(In Thousands, Except Share Information)**

 
|                                                                   |   | **Number of shares**                        |   |
|------------------------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                                   |   | **Series C  Convertible  Preferred  Stock** |   | **Series D  Delivery  Preferred  Stock** |   | **Membership  Stock** |   | **Equity  Stock** |   | **Common  Stock** |   | **Treasury  Stock** |   |
|                                                                   |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, JULY 31, 2000                                            |   | 924                                         |   | — |   | 1,158 |   | 11,253,121 |   | — |   | — |   |
| Net membership stock retired                                           |   | —                                      |   | — |   | (2 | ) | — |   | — |   | — |   |
|                                                                   |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, JULY 31, 2001                                            |   | 924                                         |   | — |   | 1,156 |   | 11,253,121 |   | — |   | — |   |
| Net membership stock retired                                           |   | —                                      |   | — |   | (9 | ) | — |   | — |   | — |   |
| Series C preferred stock converted to equity stock                     |   | (924                                        | )      | — |   | — |   | 22,176 |   | — |   | — |   |
| Equity adjustments for conversion from a  cooperative to a corporation |   | —                                      |   | 11,275,297 |   | (1,147 | ) | (11,275,297 | ) | 12,554,747 |   | — |   |
|                                                                   |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, JULY 31, 2002                                            |   | —                                      |   | 11,275,297 |   | — |   | — |   | 12,554,747 |   | — |   |
| Purchase of treasury stock                                             |   | —                                      |   | — |   | — |   | — |   | — |   | 294,456 |   |
|                                                                   |   |                                        |   |   |   |   |   |   |   |   |   |   |   |
| BALANCE, JULY 31, 2003                                            |   | —                                      |   | 11,275,297 |   | — |   | — |   | 12,554,747 |   | 294,456 |   |

 

27

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|                                                                                                                                                                  |   | **Series C  Convertible  Preferred Stock** |          | **Series D  Delivery  Preferred Stock** |           | **Membership  Stock** |   | **Equity  Stock** |   | **Common  Stock** |   | **Additional  Paid-in  Capital** |   | **Treasury  Stock** |   | **Accumulated  Deficit** |   | **Allocated  Accumulated Earnings** |   | **Unallocated Accumulated  Earnings (Deficit)** |   | **Total** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------|---------------|-----------------------------------------|----------------|-----------------------|--------|-------------------|--------|-------------------|--------|----------------------------------|--------|---------------------|--------|--------------------------|--------|-------------------------------------|--------|-------------------------------------------------|--------|-----------|--------|
| **Qualified**                                                                                                                                                         |   | **Non-Qualified**                          | **Patronage** |                                    | **Non-member** |
|                                                                                                                                                                  |   |                                       |          |                                    |           |                  |   |              |   |              |   |                             |   |                |   |                     |   |                                |   |                                            |   |      |   |   |   |   |   |
| BALANCE, JULY 31, 2000                                                                                                                                           |   | $                                          | 92            |                                    | $              | —                |   | $                 | 145    |              | $      | 28,133                           |   | $                   | — |                     | $      | 22,876                              |   | $                                               | — |      | $      | — |   | $ | — |   | $ | 1,931 |   | $ | 7,589 |   | $ | (233 | ) | $ | 60,533 |   |
| Preferred  dividends declared                                                                                                                                         |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | —                   |   | —                              |   | —                                          |   | (15       | )      | — |   | (15 | ) |
| Net  membership stock retired                                                                                                                                         |   | —                                     |          | —                                  |           | (1                    | )      | —            |   | —            |   | —                           |   | —              |   | —                   |   | —                              |   | —                                          |   | —    |   | — |   | (1 | ) |
| Net  loss for the year ended July 31, 2001                                                                                                                       |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | —                   |   | —                              |   | —                                          |   | (1,542    | )      | (242 | ) | (1,784 | ) |
| Patronage  allocations                                                                                                                                                |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | —                   |   | 4,466                               |   | 2,665                                           |   | (7,131    | )      | — |   | — |   |
| Patronage  paid                                                                                                                                                       |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | —                   |   | (4,466                              | )      | —                                          |   | —    |   | — |   | (4,466 | ) |
| BALANCE,  JULY 31, 2001                                                                                                                                          |   | $                                          | 92            |                                    | $              | —                |   | $                 | 144    |              | $      | 28,133                           |   | $                   | — |                     | $      | 22,876                              |   | $                                               | — |      | $      | — |   | $ | — |   | $ | 4,596 |   | $ | (1,099 | ) | $ | (475 | ) | $ | 54,267 |   |
| Preferred  dividends declared                                                                                                                                         |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | —                   |   | —                              |   | —                                          |   | (9        | )      | (1 | ) | (10 | ) |
| Net  membership stock retired                                                                                                                                         |   | —                                     |          | —                                  |           | (1                    | )      | —            |   | —            |   | —                           |   | —              |   | —                   |   | —                              |   | —                                          |   | —    |   | — |   | (1 | ) |
| Series  C preferred stock converted to equity stock                                                                                                                   |   | (92                                        | )             | —                                  |           | —                |   | 55                |   | —            |   | 37                               |   | —              |   | —                   |   | —                              |   | —                                          |   | —    |   | — |   | — |   |
| Net  income for the eleven months ended June 30, 2002 (represents net income  while a cooperative)                                                               |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | —                   |   | —                              |   | —                                          |   | 6,137     |   | 1,419 |   | 7,556 |   |
| Patronage  allocations                                                                                                                                                |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | —                   |   | —                              |   | 4,586                                           |   | (4,586    | )      | — |   | — |   |
| Equity  adjustments for conversion from a cooperative to a corporation                                                                                                |   | —                                     |          | 113                                     |           | (143                  | )      | (28,188           | )      | 126               |   | 37,275                           |   | —              |   | 1,385                    |   | —                              |   | (9,182                                          | )      | (443      | )      | (943 | ) | — |   |
| Net  loss for the month ended July 31, 2002 (represents net loss after  conversion to a corporation, including charge to record deferred taxes upon  conversion) |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | (5,722                   | )      | —                              |   | —                                          |   | —    |   | — |   | (5,722 | ) |
| BALANCE,  JULY 31, 2002                                                                                                                                          |   | $                                          | —        |                                    | $              | 113                   |   | $                 | — |              | $      | —                           |   | $                   | 126    |                     | $      | 60,188                              |   | $                                               | — |      | $      | (4,337 | ) | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 56,090 |   |
| Preferred  dividends declared                                                                                                                                         |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | (3                       | )      | —                              |   | —                                          |   | —    |   | — |   | (3 | ) |
| Purchase  of treasury stock                                                                                                                                           |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | (1,840              | )      | —                   |   | —                              |   | —                                          |   | —    |   | — |   | (1,840 | ) |
| Net  loss for the year ended July 31, 2003                                                                                                                       |   | —                                     |          | —                                  |           | —                |   | —            |   | —            |   | —                           |   | —              |   | (429                     | )      | —                              |   | —                                          |   | —    |   | — |   | (429 | ) |
| BALANCE,  JULY 31, 2003                                                                                                                                          |   | $                                          | —        |                                    | $              | 113                   |   | $                 | — |              | $      | —                           |   | $                   | 126    |                     | $      | 60,188                              |   | $                                               | (1,840 | )         | $      | (4,769 | ) | $ | — |   | $ | — |   | $ | — |   | $ | — |   | $ | 53,818 |   |

 

See Notes to ConsolidatedFinancial Statements

 

28

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**DAKOTAGROWERS PASTA COMPANY, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSYEARS ENDED JULY 31, 2003, 2002 AND 2001(In Thousands)**

 
|                                                                                          |   | **2003** |   | **2002** |   | **2001** |   |
|-----------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                          |   |     |   |     |   |     |   |
| OPERATING ACTIVITIES                                                                          |   |     |   |     |   |     |   |
| Net income (loss)                                                                             |   | $        | (429   | )        | $      | 1,834    |   | $ | (1,784 | ) |
| Adjustments to reconcile net income (loss) to net  cash from (used for) operating activities: |   |     |   |     |   |     |   |
| Depreciation and amortization                                                                 |   | 9,249    |   | 8,813    |   | 8,859    |   |
| Undistributed patronage capital from cooperatives                                             |   | (63      | )      | (139     | )      | (204     | )      |
| (Gain) loss on disposition of property, equipment  and other assets                           |   | 13       |   | (23      | )      | (201     | )      |
| Deferred income taxes                                                                         |   | (91      | )      | 5,590    |   | (318     | )      |
| Payments for long-term marketing costs                                                        |   | (5,000   | )      | (2,250   | )      | (5,038   | )      |
| Changes in assets and liabilities                                                             |   |     |   |     |   |     |   |
| Trade receivables                                                                             |   | 6,652    |   | (4,944   | )      | 1,330    |   |
| Other receivables                                                                             |   | (865     | )      | 778      |   | (545     | )      |
| Inventories                                                                                   |   | (8,446   | )      | 1,414    |   | 731      |   |
| Prepaid expenses                                                                              |   | (790     | )      | 71       |   | 40       |   |
| Other assets                                                                                  |   | 10       |   | 49       |   | (100     | )      |
| Accounts payable                                                                              |   | (2,678   | )      | 2,071    |   | 296      |   |
| Excess outstanding checks over cash on deposit                                                |   | 2,219    |   | (1,072   | )      | 1,072    |   |
| Grower payables                                                                               |   | —   |   | (969     | )      | (318     | )      |
| Other accrued liabilities                                                                     |   | (744     | )      | (449     | )      | 602      |   |
|                                                                                          |   |     |   |     |   |     |   |
| NET CASH FROM (USED FOR) OPERATING ACTIVITIES                                                 |   | (963     | )      | 10,774   |   | 4,422    |   |
|                                                                                          |   |     |   |     |   |     |   |
| INVESTING ACTIVITIES                                                                          |   |     |   |     |   |     |   |
| Purchases of property and equipment                                                           |   | (2,006   | )      | (1,085   | )      | (4,005   | )      |
| Proceeds from sale of property, equipment and  other assets                                   |   | 3        |   | 5,079    |   | 1,050    |   |
| Purchases of intangible assets                                                                |   | —   |   | (735     | )      | —   |   |
| Redemption of short term investments                                                          |   | 1,974    |   | —   |   | —   |   |
| Payments for package design costs                                                             |   | (390     | )      | (343     | )      | (440     | )      |
|                                                                                          |   |     |   |     |   |     |   |
| NET CASH FROM (USED FOR) INVESTING ACTIVITIES                                                 |   | (419     | )      | 2,916    |   | (3,395   | )      |
|                                                                                               |        |          |        |          |        |          |        |  |  |  |

 

29

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|                                                                    |   | **2003** |   | **2002** |   | **2001** |   |
|-------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                    |   |     |   |     |   |     |   |
| FINANCING ACTIVITIES                                                    |   |     |   |     |   |     |   |
| Net change in short-term notes payable                                  |   | 9,705    |   | (8,100   | )      | 6,225    |   |
| Payments on long-term debt                                              |   | (9,320   | )      | (2,657   | )      | (4,479   | )      |
| Preferred stock issued                                                  |   | —   |   | —   |   | —   |   |
| Preferred stock retirements                                             |   | (21      | )      | (59      | )      | (13      | )      |
| Dividends paid on preferred stock                                       |   | (3       | )      | (10      | )      | (15      | )      |
| Memberships issued                                                      |   | —   |   | 1        |   | —   |   |
| Memberships retired                                                     |   | —   |   | (2       | )      | (1       | )      |
| Patronage distributions                                                 |   | —   |   | —   |   | (4,466   | )      |
| Purchase of treasury stock                                              |   | (1,840   | )      | —   |   | —   |   |
|                                                                    |   |     |   |     |   |     |   |
| NET CASH USED FOR FINANCING ACTIVITIES                                  |   | (1,479   | )      | (10,827  | )      | (2,749   | )      |
|                                                                    |   |     |   |     |   |     |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |   | (2,861   | )      | 2,863    |   | (1,722   | )      |
|                                                                    |   |     |   |     |   |     |   |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                            |   | 2,866    |   | 3        |   | 1,725    |   |
|                                                                    |   |     |   |     |   |     |   |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                  |   | $        | 5      |     | $      | 2,866    |   | $ | 3 |   |
|                                                                    |   |     |   |     |   |     |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                       |   |     |   |     |   |     |   |
| Cash payments for                                                       |   |     |   |     |   |     |   |
| Interest (net of amounts capitalized)                                   |   | $        | 3,544  |     | $      | 3,742    |   | $ | 4,375 |   |
|                                                                    |   |     |   |     |   |     |   |
| Income taxes (refunded)                                                 |   | $        | 1,193  |     | $      | 1,720    |   | $ | (21 | ) |
|                                                                    |   |     |   |     |   |     |   |
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND  FINANCING ACTIVITIES |   |     |   |     |   |     |   |
| Deferred gain on sale-leaseback transaction                             |   | $        | — |     | $      | 256      |   | $ | — |   |

 

See Notes to ConsolidatedFinancial Statements

 

30

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**DAKOTAGROWERS PASTA COMPANY, INC.NOTES TO CONSOLIDATED FINANCIALSTATEMENTSYEARS ENDED JULY 31, 2003, 2002 AND 2001**

 

**NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTINGPOLICIES**

** **

*Conversion and Nature of Business*

 

Dakota Growers Pasta Company, Inc. (“Dakota Growers” or “the Company”)is a North Dakota corporation that was organized on January 30, 2002 forthe specific 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 by means of a series of mergers, the last of which was effectiveJuly 1, 2002, with the Company being the ultimate surviving entity in theconversion. The Company operates as the Cooperative’s successor and itsoperations are a continuance of the operations of the Cooperative

 

The aforementioned conversion was accounted for as an exchange betweenrelated parties. Therefore, no gain or loss was recognized at the time ofconversion and the book value of the assets and liabilities of the Cooperativecarried over to the Company. Upon conversion, the Company recorded deferred taxassets and liabilities for the tax effects of any temporary differences existingbetween income 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. Inrecording such deferred tax assets and liabilities upon conversion to acorporation, the Company recorded a nonrecurring, non-cash income tax charge ofapproximately $6.1 million (see Note 7 – Income Taxes).

 

The Company operates milling and pasta manufacturing facilities in Carrington,North Dakota. In addition, the Company’s wholly owned subsidiary, Primo Piatto,Inc. (“Primo Piatto”), a Minnesota corporation, operates pasta manufacturingfacilities in New Hope, Minnesota.

 

*Principles of Consolidation*

 

The consolidated financial statements includethe accounts of the Company and Primo Piatto, Inc., its wholly ownedsubsidiary. All significant inter-company accounts and transactions have beeneliminated in the preparation of the consolidated financial statements.

 

*Estimates*

 

The preparation of consolidated financialstatements in conformity with generally accepted accounting principles requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities at the date of the consolidated financial statementsand reported amounts of revenues and expenses during the reporting period.Actual results could differ from those estimates.

 

*Reclassifications*

 

Reclassificationshave been made to the financial statements as of July 31, 2002 and for theyears ended July 31, 2002 and 2001 to facilitate comparability with thestatements as of and for the year ended July 31, 2003. Suchreclassifications have no effect on the net result of operations.

 

31

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*Risks and Uncertainties*

 

The Company attempts to minimize the effectsof durum wheat cost fluctuations mainly through forward contracting and throughagreements with certain customers that provide for price adjustments based onraw material cost changes. Such efforts, while undertaken to attempt tominimize the risks associated with increasing durum costs on profitability, maytemporarily prevent the Company from recognizing the benefits of decliningdurum prices.

 

Most of the Company’s currently outstanding debtinstruments have fixed interest rates to maturity. If the Company’s operationsrequire additional debt issuance, any changes in interest rates may have animpact on future results.

 

The Company’s cash balances are maintained invarious bank deposit accounts. The deposit accounts may exceed federallyinsured limits at various times throughout the year.

 

##### *Impairment and Disposal ofLong-Lived Assets*

##### * *

TheCompany accounts for impairment or disposal of long-lived assets in accordancewith the provisions of SFAS No. 144, “Accounting for the Impairment or Disposalof Long-Lived Assets” which supersedes SFAS No. 121. SFAS No. 144 requires thatlong-lived assets be reviewed for impairment whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Recoverability of long-lived assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset. If such assets are considered to beimpaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of the assets.Long-lived assets to be disposed of by sale are reported at the lower of thecarrying amount or fair value less costs to sell, and will cease to bedepreciated. SFAS No. 144 also requires long-lived assets to be disposed ofother than by sale to be considered as held and used until disposed of,requiring the depreciable life to be adjusted as an accounting change.

 

*Revenue Recognition*

 

Revenues are recognized when risk of losstransfers, which occurs when goods are shipped. Pricing terms, includingpromotions and rebates, are final at that time. Revenues include amounts billedfor products as well as any associated shipping costs billed to deliver suchproducts.

 

The Company provides allowances for annualpromotional programs based upon annual sales volumes. Revenues are presentednet of discounts and allowances of $16,706,000, $17,056,000 and $17,312,000 forthe years ended July 31, 2003, 2002 and 2001, respectively.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents include cash onhand and in financial institutions, and investments with maturities of lessthan 90 days.

 

*Short-term Investments (Restricted)*

 

Short-term investments (restricted) at July 31, 2002 representcertificates of deposit that were pledged as security for loans made by afinancial institution, which had restricted such investments, to certainofficers of the Company to exercise stock options. The Company repurchased aportion of the Company’s common stock held by these officers inNovember 2002 (see also Note 13 – Related PartyTransactions). The proceeds received by

 

32

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the officers in conjunctionwith the repurchase were used to pay off their loans with the financialinstitution. As a result, the Company’s certificates of deposit were no longerrestricted.

 

*Trade Accounts Receivable and Major Customers*

 

The Company grants unsecured credit tocertain customers who meet the Company’s credit requirements. Trade accountsreceivable are uncollateralized customer obligations due under normal terms andare generally non-interest bearing. Payments on trade receivables are allocatedto specific invoices identified on a customer’s remittance advice or, ifunspecified, are generally applied to the earliest unpaid invoices. Thecarrying amount of the receivables is reduced by an amount that reflectsmanagement’s best estimate of amounts that will not be collected. Tradeaccounts receivable are presented net of allowances for cash discounts anddoubtful accounts, which totaled $1,012,000 and $792,000 as of July 31,2003 and 2002, respectively.

 

One customer accounted for 17% of accountsreceivable as of July 31, 2003. A separate customer accounted for 33% ofaccounts receivable as of July 31, 2002. Sales to one customer represented17% and 12% of net revenues for the years ended July 31, 2003 and 2002,respectively. No customer represented greater than 10% of accounts receivableor net revenues as of and for the year ended July 31, 2001.

 

Thefollowing summarizes balance and activity information related to the allowancefor cash discounts and doubtful accounts (in thousands):

 
|                                                 |   | **Balance  at Beginning  of Year** |   | **Charged to  Costs and  Expenses** |   | **Deductions  from  Allowance** |   | **Balance  at End  of Year** |   |
|------------------------------------------------------|--------|------------------------------------|--------|-------------------------------------|--------|---------------------------------|--------|------------------------------|--------|
|                                                 |   |                               |   |                                |   |                            |   |                         |   |
| Allowance for cash discounts:                        |   |                               |   |                                |   |                            |   |                         |   |
| Year ended July 31, 2003                        |   | $                                  | 185    |                                | $      | 2,089                           |   | $                            | (2,148 | ) | $ | 126 |   |
| Year ended July 31, 2002                        |   | 150                                |   | 2,365                               |   | (2,330                          | )      | 185                          |   |
| Year ended July 31, 2001                        |   | 148                                |   | 2,346                               |   | (2,344                          | )      | 150                          |   |
|                                                 |   |                               |   |                                |   |                            |   |                         |   |
| Allowance for doubtful accounts:                     |   |                               |   |                                |   |                            |   |                         |   |
| Year ended July 31, 2003                        |   | $                                  | 607    |                                | $      | 281                             |   | $                            | (2     | ) | $ | 886 |   |
| Year ended July 31, 2002                        |   | 460                                |   | 405                                 |   | (258                            | )      | 607                          |   |
| Year ended July 31, 2001                        |   | 200                                |   | 260                                 |   | —                          |   | 460                          |   |
|                                                 |   |                               |   |                                |   |                            |   |                         |   |
| Allowance for cash discounts and doubtful  accounts: |   |                               |   |                                |   |                            |   |                         |   |
| Year ended July 31, 2003                        |   | $                                  | 792    |                                | $      | 2,370                           |   | $                            | (2,150 | ) | $ | 1,012 |   |
| Year ended July 31, 2002                        |   | 610                                |   | 2,770                               |   | (2,588                          | )      | 792                          |   |
| Year ended July 31, 2001                        |   | 348                                |   | 2,606                               |   | (2,344                          | )      | 610                          |   |

 

33

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##### *Inventories*

##### * *

Inventories are stated at the lower of costor market, determined on a first-in, first-out (FIFO) basis, using productspecific standard costs. The major components of inventories as ofJuly 31, 2003 and 2002 are as follows (in thousands):

 
|                        |   | **2003** |   | **2002** |   |
|-----------------------------|--------|----------|--------|----------|--------|
|                        |   |     |   |     |   |
| Finished goods              |   | $        | 22,549 |     | $      | 14,343 |   |
| Raw materials and packaging |   | 5,533    |   | 5,293    |   |
|                        |   |     |   |     |   |
|                        |   | $        | 28,082 |     | $      | 19,636 |   |

 

*Property and Equipment*

 

Property and equipment are stated at cost.Expenditures for renewals and improvements that significantly add to theproductive capacity or extend the useful life of an asset are capitalized.Expenditures for maintenance and repairs are charged to expense as incurred.When depreciable properties are retired or sold, the cost and relatedaccumulated depreciation are eliminated from the accounts and the resultantgain or loss is reflected in income.

 

Interest is capitalized on constructionprojects of higher cost and longer duration. Interest capitalized totaled$7,000, $6,000 and $112,000 for the years ended July 31, 2003, 2002 and2001.

 

The initial acquisition of land by theCompany is stated at the estimated fair value of the land at acquisition.Subsequent land acquisitions are recorded at cost.

 

Depreciation is provided for over theestimated useful lives of the individual assets using the straight-line method.The estimated useful lives used in the computation of depreciation expenserange from 3 to 40 years. Depreciation expense totaled $6,100,000, $6,572,000and $7,003,000 for the years ended July 31, 2003, 2002 and 2001,respectively.

 

Details relative to property and equipment are as follows (inthousands):

 
|                              |   | **2003** |   | **2002** |   |
|-----------------------------------|--------|----------|--------|----------|--------|
|                              |   |     |   |     |   |
| Land and improvements             |   | $        | 2,893  |     | $      | 2,865 |   |
| Buildings                         |   | 22,213   |   | 22,003   |   |
| Equipment                         |   | 83,157   |   | 82,017   |   |
|                              |   |     |   |     |   |
| Property and equipment in service |   | 108,263  |   | 106,885  |   |
| Construction in process           |   | 868      |   | 371      |   |
| Less accumulated depreciation     |   | (41,799  | )      | (35,762  | )      |
|                              |   |     |   |     |   |
|                              |   | $        | 67,332 |     | $      | 71,494 |   |

 

*Investments in CooperativeBanks*

 

Investments in cooperative banks are statedat cost, plus unredeemed patronage refunds received in the form of capitalstock. Patronage refunds estimated to be received are shown as otherreceivables or other assets.

 

34

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*Intangible Assets*

 

The Company acquired certain intangible assetsfor $735,000 in fiscal year 2002. Such intangibles consisted mainly ofcustomer-based intangibles and covenants not to compete. The Companybelieves these assets have a finite life and, in accordance with SFAS No. 142,“Goodwill and Other Intangible Assets,” is amortizing the amounts on a straight-line basis over a five-yearestimated useful life. Amortization expense for the years ended July 31,2003 and 2002 totaled $147,000 and $49,000, respectively.

 

Details relative to intangible assets are asfollows (in thousands):

 
|                       |   | **2003** |       | **2002** |       |
|----------------------------|--------|----------|------------|----------|------------|
|                       |   |     |       |     |       |
| Gross Amount:              |   |     |       |     |       |
| Customer-based intangibles |   | $        | 405        |     | $          | 405 |   |
| Covenants not to compete   |   | 330      |       | 330      |       |
|                       |   | 735      |       | 735      |       |
| Accumulated Amortization:  |   |     |       |     |       |
| Customer-based intangibles |   | (108     | )          | (27      | )          |
| Covenants not to compete   |   | (88      | )          | (22      | )          |
|                       |   | (196     | )          | (49      | )          |
| Net:                       |   |     | ** ** |     | ** ** |
| Customer-based intangibles |   | 297      |       | 378      |       |
| Covenants not to compete   |   | 242      |       | 308      |       |
|                       |   |     |       |     |       |
|                       |   | $        | 539        |     | $          | 686 |   |

 

The estimated amortization expense foreach of the fiscal years ending July 31 is as follows (in thousands):

 
| 2004   |   | $      | 147    |   |
|--------|--------|--------|--------|--------|
| 2005   |   | 147    |   |
| 2006   |   | 147    |   |
| 2007   |   | 98     |   |
|   |   |   |   |
|   |   | $      | 539    |   |

 

*Other Assets*

 

The Company capitalizes package design costs,which relate to certain third party costs to design artwork and to produce dieplates and negatives necessary to manufacture and print packaging materialsaccording to Company and customer specifications. These costs are amortizedratably over three to five year periods based on estimated useful life. Minorrevisions are expensed as incurred. If a product design is discontinued orreplaced prior to the end of the amortization period, the remaining unamortizedbalance is charged to expense. Package design costs are presented net of accumulated amortizationtotaling $3,536,000 and $2,918,000 as of July 31, 2003 and 2002,respectively.

 

Prepaid marketing costs relate to paymentsmade to certain customers covering contract terms and pricing for varyingperiods extending beyond one year. These costs are amortized in proportion tosales volumes over the term of the agreement.

 

35

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The debt issuance costs relate toexpenditures incurred in obtaining long-term debt. These costs are beingamortized over the term of the related debt based on the effective interestrate.

 

The breakdown of other assets, net ofaccumulated amortization, is as follows (in thousands):

 
|                    |   | **2003** |   | **2002** |   |
|-------------------------|--------|----------|--------|----------|--------|
|                    |   |     |   |     |   |
| Package design costs    |   | $        | 597    |     | $      | 821 |   |
| Prepaid marketing costs |   | 7,606    |   | 5,855    |   |
| Debt issuance costs     |   | 91       |   | 122      |   |
| Other                   |   | 139      |   | 149      |   |
|                    |   |     |   |     |   |
|                    |   | $        | 8,433  |     | $      | 6,947 |   |

 

*Accrued Liabilities*

 

Accrued liabilities consisted of the following (in thousands):

 
|                      |   | **2003** |   | **2002** |   |
|---------------------------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |
| Accrued promotional costs |   | $        | 1,217  |     | $      | 1,519 |   |
| Accrued interest          |   | 1,091    |   | 1,252    |   |
| Accrued freight           |   | 706      |   | 733      |   |
| Other                     |   | 1,502    |   | 1,756    |   |
|                      |   |     |   |     |   |
|                      |   | $        | 4,516  |     | $      | 5,260 |   |

 

*Shipping and Handling Costs*

 

Shipping and handling costs areincluded in cost of goods sold upon shipment of the Company’sproduct to its customers.

 

*Advertising*

 

Costs of advertising are immaterial andexpensed as incurred.

 

*Interest Expense, Net*

 

The Company earns patronage refunds from itspatronage-based debt issued through cooperative banks based on its share of thenet interest income earned by the banks. These patronage refunds received orestimated to be received are applied against interest expense.

 

*Income Taxes*

 

Income taxes are provided for the tax effectsof transactions reported in the financial statements and consist of taxescurrently due plus deferred taxes. Deferred tax assets and liabilities aredetermined based on differences between the financial reporting and tax basesof assets and liabilities, and are measured using the enacted tax ratesexpected to apply when the differences are expected to reverse. Deferred taxassets and liabilities represent the future tax return consequences of thosedifferences, which will either be taxable or deductible when the assets andliabilities are recovered or settled.

 

36

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Prior to the conversion from acooperative to a corporation, the Company was taxed as a non-exempt cooperativefor federal income tax purposes. Business conducted with the Cooperative’smembers constituted patronage business as defined by the Internal Revenue Code.The Cooperative calculated income from patronage sources based on incomederived from bushels of durum delivered by Cooperative members. Non-patronageincome was derived from the resale of wheat flour containing spring wheat flourpurchased from non-members, the resale of pasta purchased from non-members, theresale of semolina purchased from non-members, rental income, certain amountsof interest income, and any income taxes assessed on non-member business.

 

The Cooperative was subject to income taxeson earnings from non-patronage sources and patronage earnings not qualified tothe Cooperative’s members. Cooperative organizations have 8 1⁄2 months aftertheir fiscal year-end to make qualified patronage allocations in the form ofwritten notices of allocation or cash. As a cooperative, the provision forincome taxes related to the results of operations from non-patronage business,state income taxes and certain other permanent and temporary differencesbetween financial and income tax reporting.

 

*Stockholders’ Equity/Members’ Investment*

 

Under the cooperative structure, accumulatedunallocated earnings represented cumulative net income which had not beenallocated to members, while accumulated non-qualified allocated earningsrepresented earnings which had been allocated to members based on patronage butnot distributed or qualified for income tax purposes. Patronage allocations arereflected in the financial statements in the period in which such allocationswere declared by the Board of Directors.

 

*Stock Options*

 

The Company has elected to follow AccountingPrinciples Board Opinion (APB) No. 25, “Accounting for Stock Issued toEmployees” and related interpretations in accounting for its employee stockoptions and has adopted the pro forma disclosure requirements under SFAS No.123, “Accounting for Stock-Based Compensation.” The Company has not recognizedany compensation expense under APB No. 25 upon the granting or exercise ofstock options because the exercise price is equal to or greater than the marketprice of the underlying stock on the date of grant.

 

*Earnings per Share*

 

The Company has presented earnings per share (EPS) for the years endedJuly 31, 2003, 2002 and 2001 using the guidelines established in Statementof Financial Accounting Standards No. 128, “Earnings per Share.” Basic EPS iscalculated by dividing net earnings on common/equity stock by the weightedaverage number of common/equity shares effective and outstanding during theperiod. Diluted EPS includes the effect of all potentially dilutive securities,such as options and convertible preferred stock.

 

Dilutive securities, consisting of optionsand convertible preferred stock, included in the calculation of dilutedweighted average common/equity shares totaled 254,000 shares, 33,000 shares and22,000 shares for the years ended July 31, 2003, 2002 and 2001,respectively. As the Company’s stock is only traded in a small secondarymarket, the Company has assumed the proceeds from the exercise of stock optionswould reduce debt and, thus, interest expense.

 

37

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##### *Recently Issued AccountingStandards*

 

In May 2003, the FASBissued SFAS No. 150, “Accounting for Certain Financial Instruments withCharacteristics of Both Liabilities and Equity.” SFAS No. 150 establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity. Many of theseinstruments were previously classified as equity. SFAS No. 150 requires that anissuer classify a financial instrument that is within its scope as a liability,or as an asset in some circumstances. This Statement applies to three types offreestanding financial instruments, other than outstanding shares. One type ismandatorily redeemable shares, which the issuing company is obligated to buyback in exchange for cash or assets; a second type includes put options andforward purchase contracts that require or may require the issuer to buy backsome of its shares in exchange for cash or other assets; the third type isobligations that can be settled with shares, the monetary value of which isfixed, ties solely or predominantly to a variable such as a market index, orvaries inversely with the value of the issuers’ shares. SFAS No. 150 does notapply to features embedded in a financial instrument that is not a derivativein its entirety. SFAS No. 150 is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective at the beginning of the first interim period beginningafter June 15, 2003. The adoption of this Statement is not expected tohave a material impact on the Company’s financial statements.

 

**NOTE 2 - SHORT-TERM NOTES PAYABLE**

** **

The Company has a $19 million revolving credit facility with CoBank,which matures on February 23, 2004. The revolving line has a variableinterest rate (3.47% at July 31, 2003) not to exceed CoBank’s NationalVariable Rate plus 1% and is secured by property, equipment, and current assetsof the Company. The balance outstanding on the revolving line of credit as ofJuly 31, 2003 was $9,705,000. There was no balance outstanding on the lineat July 31, 2002.

 

Weighted average interest rates on short-term borrowings were 3.67%,5.12% and 6.97% for the years ended July 31, 2003, 2002 and 2001,respectively.

 

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**NOTE 3 - LONG-TERM DEBT**

** **

Information regarding long-term debt atJuly 31, 2003 and 2002 is as follows (in thousands):

 
|                                                                                                                                                                                                                                                 |   | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Term loans from CoBank due in quarterly  installments of $685,000 plus interest through December 31, 2004,  variable interest on $20,000 (3.92% at July 31, 2003), remainder at  8.68% to 8.76%, collateralized by property and equipment  |   | $        | 4,020  |     | $      | 6,000 |   |
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Term loans from CoBank due in quarterly  installments of $625,000 plus interest through December 31, 2004,  variable interest on $625,000 (3.92% at July 31, 2003), remainder at  8.68% to 8.76%, collateralized by property and equipment |   | 3,625    |   | 6,125    |   |
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Non-patronage term loan from CoBank due in annual  principal installments of $1,200,000 through September 30, 2008,  interest at 5.71%, collateralized by property and equipment                                                                |   | 7,200    |   | 8,400    |   |
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Senior Secured Guaranteed Notes, Series A, due in  annual principal installments of $2,571,000 commencing August 1, 2002  through August 1, 2008, interest at 8.04%, collateralized by property  and equipment                             |   | 15,429   |   | 18,000   |   |
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Senior Secured Guaranteed Notes, Series B, due in  annual principal installments of $1,000,000 commencing August 1, 2002  through August 1, 2010, interest at 8.14%, collateralized by property  and equipment                             |   | 8,000    |   | 9,000    |   |
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Notes paid in full during fiscal year 2003                                                                                                                                                                                                           |   | —   |   | 69       |   |
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Total long-term debt                                                                                                                                                                                                                                 |   | 38,274   |   | 47,594   |   |
| Less current portion                                                                                                                                                                                                                                 |   | 10,011   |   | 9,320    |   |
|                                                                                                                                                                                                                                                 |   |     |   |     |   |
| Net long-term debt                                                                                                                                                                                                                                   |   | $        | 28,263 |     | $      | 38,274 |   |

 

39

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Aggregate future maturities required on long-termdebt are as follows (in thousands):

 
| **Years ending July 31,** |   |   |   |
|--------------------------------|--------|--------|--------|
|                           |   |   |   |
| 2004                           |   | $      | 10,011 |   |
| 2005                           |   | 7,176  |   |
| 2006                           |   | 4,771  |   |
| 2007                           |   | 4,771  |   |
| 2008                           |   | 4,771  |   |
| Thereafter                     |   | 6,774  |   |
|                           |   |   |   |
|                           |   | $      | 38,274 |   |

 

The Company has a $7,200,000 letter of credit commitment with CoBank,securing the non-patronage loan from CoBank. The letter of credit commitment issubject to a commitment fee of 1.0% on an annualized basis and expiresDecember 31, 2008. Advances on the letter of credit commitment are payableon demand.

 

The Company’s loan agreements with its lenders contain certaincovenants related to, among other matters, the maintenance of certain workingcapital, leverage, and debt service ratios and a minimum net worth requirement.The Company was incompliance with these loan covenants (as amended) as of July 31, 2003.

 

The Company incurred $3,547,000, $4,099,000 and $4,508,000 of intereston long and short-term debt and other obligations in fiscal years 2003, 2002and 2001, respectively, of which $7,000, $6,000 and $112,000 was capitalized inthe respective periods. Patronage income from cooperative banks of $126,000,$228,000 and $248,000 was netted against interest expense on the statement ofoperations for the years ended July 31, 2003, 2002 and 2001, respectively.

 

**NOTE 4 - STOCKHOLDERS’ EQUITY**

** **

Following the conversion from acooperative to a corporation, the Company is authorized to issue 75,000,000shares of Common Stock, $.01 par value per share, 533 shares of Series APreferred Stock, $100 par value per share, 525****shares of Series B PreferredStock, $100 par value per share, 2,045 shares of Series C Preferred Stock, $100par value per share, 11,324,377 shares of Series D Delivery Preferred Stock,$.01 par value per share, 130,000 shares of Series E Junior ParticipatingPreferred Stock, $.01 par value per share, and 13,672,520****shares of undesignatedpreferred stock, $.01 par value per share.

 

As a result of the mergers undertaken to effect the change from acooperative to a corporation, members of the Cooperative received: (i)twenty-five shares of Common Stock of the Company for each share of theCooperative’s Membership Stock they held as of the effective date of theconversion; (ii) a number of shares of Common Stock, $.01 par value per share,of the Company equal to the number of shares of the Cooperative’s Equity Stockthey held as of the effective date of the conversion; (iii) a number of sharesof Series D Delivery Preferred Stock, $.01 par value per share, of the Companyequal to the number of shares of the Cooperative’s Equity Stock they held as ofthe effective date of the conversion; and (iv) one share of Common Stock of theCompany for each $7.36 of Non-Qualified Written Notices of Allocation held inthe member’s name on the records of the Cooperative. To the extent thatshareholders of the Cooperative held Series A Preferred Stock or Series BPreferred Stock of the Cooperative as of the effective date of the conversion,they received a number of shares of Series A Preferred Stock or Series BPreferred Stock, as applicable, of the Company equal to the number of shares ofthe Cooperative’s Series A Preferred Stock or Series B Preferred Stock, asapplicable, held as of such effective date. Persons who held options to acquireSeries C Preferred Stock of the Cooperative had those options

 

40

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converted automatically into options containing the same terms withregard to Series C Preferred Stock of the Company.

 

Prior to the conversion, underthe terms of the Cooperative’s bylaws, the Cooperative’s net income, determinedin accordance with generally accepted accounting principles consistentlyapplied, was distributed annually based on the volume of patronage business(bushels of durum delivered, which approximates one bushel of durum per equityshare). The distribution was in the form of cash or credits to eachmember-producer’s patronage credit account, which was established on the booksof the Cooperative as determined by the Board of Directors. Equity requirementsof the Cooperative could be retained as unallocated earnings, or retained fromamounts due to patrons and credited to members’ investments in the form of unitretains or undistributed allocated patronage. In the event of a net loss in anyfiscal year under the cooperative structure, the Cooperative could first offsetthe net loss against any earned unallocated surplus. If the net loss exceededthe earned unallocated surplus, the Cooperative could elect to recover the netloss from prior or subsequent years net margins or savings.

 

Prior to conversion to a corporation, the netincome allocable to patronage business totaled $6,137,000 for the year endedJuly 31, 2002. The net loss allocable to patronage business totaled$1,542,000 for the year ended July 31, 2001.

 

In April 2002, the Cooperative’s Boardof Directors authorized a non-qualified patronage allocation of $4,586,000representing the patronage earnings as a cooperative for fiscal 2002 offset bythe patronage net loss for fiscal year 2001.

 

The Board of Directors of the Cooperativeauthorized a qualified patronage allocation of $4,466,000 ($.4284 per bushelacquired or $.40 per average outstanding equity share) for fiscal year 2000 atits November 2000 meeting. The total qualified patronage allocation waspaid in cash on November 30, 2000. The Board also voted to allocate, on anon-qualified basis, the remainder of the fiscal 2000 patronage earningstotaling $2,665,000. In taking these actions, the Board of Directors rescindedthe patronage allocations authorized at the October 2000 meeting asreported in the Company’s Form 10-K for the year ended July 31, 2000.

 

Holders of Series C Preferred Stock shallreceive payment of a non-cumulative annual dividend at the rate of 6% of the$100 par value on each share of Series C Preferred Stock. Each share of SeriesC Preferred Stock is convertible into 24 shares of Common Stock and 24 sharesof Series D Delivery Preferred Stock of the Company. The conversion ratio shallbe proportionately adjusted at any time the outstanding shares of Common Stockare increased or decreased without payment by or to the Company or theCompany’s shareholders.

 

Each share of Series D Delivery PreferredStock of the Company gives its holder the privilege, but not the obligation, todeliver one bushel of durum wheat to the Company each year on a “first-come,first-served” basis. Because the privilege of a holder of Series D DeliveryPreferred Stock to deliver durum wheat to the Company only arises if theCompany requires durum, the privilege is not absolute. Holders of Series D Delivery Preferred Stock will be entitled to receive,if and when declared by the Board of Directors, a non-cumulative annualdividend of up to $.04 per share on each share of Series D Delivery PreferredStock held by such holder.  The Companymust pay holders of Series D Delivery Preferred Stock a dividend of at least$.01 per share before paying any dividends on Common Stock.

 

The Board of Directors of theCompany adopted a Rights Plan that became effective upon consummation of theconversion. Under the Rights Plan, the Board of Directors of the Company hasdeclared a dividend of one purchase right (a “Right”) for each outstandingshare of Common Stock held of record immediately following the conversion.  Each Right will entitle the holder topurchase from the Company one-hundredth of one share of Series E JuniorParticipating Preferred Stock at a specified price, subject to certainadjustments. The Rights will

 

41

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not become exercisable, andwill not be transferable apart from the Company’s shares of Common Stock, untila person or group has acquired 15% or more of the Company’s Common Stock or hascommenced a tender or exchange offer for 15% or more of the Company’s CommonStock.  In those events, each Right willentitle the holder (other than the acquiring person or group) to receive, uponexercise, common shares of either the Company or the acquiring company havingvalue equal to two times the exercise price of the Right. The Rights issuedunder the Rights Plan will be redeemable by the Company’s Board of Directors incertain circumstances and will expire ten years from the date of adoption.

 

InNovember 2002, the Board of Directors approved the repurchase of 294,456shares of the Company’s common stock from certain executive officers of theCompany. The Company purchased these shares for $1,840,350 or $6.25 per share (see also Note 13 –Related Party Transactions).These shares were held in treasury as of July 31, 2003.

 

**NOTE 5 - REDEEMABLE PREFERRED STOCK**

** **

The Cooperative issued 800 shares of Series APreferred Stock in fiscal 2000, of which 467 shares had been redeemed as ofJuly 31, 2003. Each share of Series A Preferred Stock entitles its holderto receive a cumulative annual dividend of 6% of the $100 par value per share.The Series A Preferred Stock is scheduled to be redeemed ratably on a quarterlybasis through December 2005.

 

Each share of Series B Preferred Stockentitles its holder to receive a non-cumulative annual dividend of 2% of the$100 par value per share when and as declared by the Board of Directors. Allshares of the Series B Preferred Stock were redeemed as of July 31, 2003.

 

**NOTE 6 - EMPLOYEE BENEFIT PLANS**

** **

Dakota Growers Pasta Company, Inc. and Primo Piatto,Inc. have a 401(k) plan that covers employees who have met age and servicerequirements. The plan covers employees who have reached 21 years of age andcompleted six months of service as defined in the plan document. EffectiveJanuary 1, 2003, the 401(k) plan was amended, and the Company match waschanged to 100% on the first 3% of the employees’ elected deferral and 50% onthe next 2%.Previously the Company matched 100% on the first 2% of the employees’ electeddeferral, 50% on the next 1%, and 25% on the next 4%. Employer contributions tothe plan totaled $345,000, $319,000 and $342,000 for the years endedJuly 31, 2003, 2002 and 2001, respectively.

 

Primo Piatto, Inc. is also required to contribute to a multi-employerpension plan covering certain hourly employees subject to a collectivebargaining agreement. Such employees may also participate in the 401(k) planbut are excluded from amounts contributed by Primo Piatto. Contributions forthe years ended July 31, 2003, 2002 and 2001 totaled $81,000, $72,000 and$99,000, respectively.

 

**NOTE 7 - INCOME TAXES**

** **

The conversion from a cooperative to acorporation effectuated via a series of mergers, the last of which wascompleted July 1, 2002, is treated under Code Section 368(a)(1)(F) asa reorganization. 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 retained the fiscal year, accountingmethods, tax elections and other tax attributes of the Cooperative.  However, because it no longer operates on acooperative basis after the conversion, the Company is taxable as a “Ccorporation.” As such, it will no longer pay deductible patronage dividends andany distributions to the shareholders will be treated as nondeductibledividends.

 

42

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The Cooperative was a non-exempt cooperativeas defined by Section 1381(a)(2) of the Internal Revenue 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.

 

Upon conversion to a corporation,the Company recorded deferred tax assets and liabilities for the tax effects ofany temporary differences existing between income tax and financial reportingon the date of the change. Prior to conversion, the Cooperative had notrecorded deferred taxes for temporary differences that were likely to beeliminated through patronage allocations. In recording such deferred tax assetsand liabilities upon conversion to a corporation, the Company recorded anonrecurring, non-cash income tax charge of $6,105,000 during the year endedJuly 31, 2002.

 

Significant components of the Company’s deferred tax assets andliabilities as of July 31, 2003 and 2002 related to temporary differencesare as follows (in thousands):

 
|                                |   | **2003** |   | **2002** |   |
|-------------------------------------|--------|----------|--------|----------|--------|
|                                |   |     |   |     |   |
| Deferred tax assets                 |   |     |   |     |   |
| AMT credit carryforward             |   | $        | 1,221  |     | $      | 831 |   |
| Accounts receivable allowances      |   | 346      |   | 237      |   |
| Accrued expenses and other reserves |   | 223      |   | 323      |   |
| Total deferred tax assets           |   | 1,790    |   | 1,391    |   |
|                                |   |     |   |     |   |
| Deferred tax liabilities            |   |     |   |     |   |
| Property and equipment              |   | (11,066  | )      | (10,758  | )      |
|                                |   |     |   |     |   |
| Net deferred tax liabilities        |   | $        | (9,276 | )        | $      | (9,367 | ) |

 

Classified in the accompanying balance sheets as follows:

 
|                         |   | **2003** |   | **2002** |   |
|------------------------------|--------|----------|--------|----------|--------|
|                         |   |     |   |     |   |
| Current assets               |   | $        | 569    |     | $      | 466 |   |
| Noncurrent liabilities       |   | (9,845   | )      | (9,833   | )      |
|                         |   |     |   |     |   |
| Net deferred tax liabilities |   | $        | (9,276 | )        | $      | (9,367 | ) |

 

The Company has an AMT credit carryforward of$1,221,000 at July 31, 2003, which may be carried forward indefinitely.Management believes it is more likely than not that the deferred tax assets as ofJuly 31, 2003 will be realized through the generation of future taxableincome and tax planning strategies.

 

43

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Income tax expense (benefit) for the yearsended July 31, 2003, 2002 and 2001 consists of the following (inthousands):

 
|                                                                                 |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                 |   |     |   |     |   |     |   |
| Current income tax expense (benefit)                                                 |   | $        | (78    | )        | $      | 1,792    |   | $ | 7 |   |
| Prior year underaccrual                                                              |   | 64       |   | —   |   | —   |   |
| Deferred income taxes                                                                |   | (91      | )      | (515     | )      | (318     | )      |
|                                                                                 |   | (105     | )      | 1,277    |   | (311     | )      |
| Charge to record deferred taxes upon conversion  from a cooperative to a corporation |   | —   |   | 6,105    |   | —   |   |
|                                                                                 |   |     |   |     |   |     |   |
| Income tax expense (benefit)                                                         |   | $        | (105   | )        | $      | 7,382    |   | $ | (311 | ) |

 

The reconciliation of the federal statutoryincome tax rate to the effective income tax rate for the years endedJuly 31, 2003, 2002 and 2001 is as follows:

 
|                                                                                 |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                                                                                 |   |     |   |     |   |     |   |
| Federal statutory income tax rate                                                    |   | (34.0    | )%     | 34.0     | %      | (34.0    | )%     |
| Adjustment of prior year accrual                                                     |   | 12.0     |   | —   |   | —   |   |
| State income taxes, net of federal income tax  effect                                |   | (5.0     | )      | 5.0      |   | (5.0     | )      |
| Patronage (earnings) loss                                                            |   | —   |   | (25.1    | )      | 34.5     |   |
| Adjustment of deferred taxes (patronage versus  nonpatronage use of property)        |   | —   |   | —   |   | (15.2    | )      |
| Charge to record deferred taxes upon conversion  from a cooperative to a corporation |   | —   |   | 66.0     |   | —   |   |
| Other (net)                                                                          |   | 7.0      |   | 0.2      |   | 4.9      |   |
|                                                                                 |   |     |   |     |   |     |   |
| Effective income tax rate                                                            |   | (20.0    | )%     | 80.1     | %      | (14.8    | )%     |

 

**NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS**

** **

The fair value of a financial instrument isgenerally defined as the amount at which the instrument could be exchanged in acurrent transaction between willing parties, other than in a forced liquidationsale. Quoted market prices are generally not available for the Company’sfinancial instruments. Accordingly, fair values are based on judgmentsregarding anticipated cash flows, future expected loss experience, currenteconomic conditions, risk characteristics of various financial instruments andother factors. These estimates involve uncertainties and matters of judgment,and therefore cannot be determined with precision. Changes in assumptions couldsignificantly affect the estimates.

 

The carrying amount of cash and cash equivalents, receivables,payables, short-term debt and other current assets and liabilities approximatesfair value because of the short maturity and/or frequent repricing of thoseinstruments.

 

The Company believes it is not practical toestimate the fair value of the securities of non-subsidiary cooperativeswithout incurring excessive costs because there is no established market forthese securities and it is inappropriate

 

44

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to estimate future cash flows, which are largely dependent on futurepatronage earnings of the non-subsidiary cooperatives.

 

Based upon current borrowing rates with similar maturities, the fairvalue of the long-term debt approximates the carrying value as of July 31,2003 and 2002.

 

**NOTE 9 - OPERATING LEASES**

** **

The Company leases various items of equipment, primarily rail cars,pasta equipment, forklifts and computers.

 

Future obligations for the above leases for the fiscal years endedJuly 31 are as follows (in thousands):

 
| 2004       |   | $      | 1,166  |   |
|------------|--------|--------|--------|--------|
| 2005       |   | 1,067  |   |
| 2006       |   | 985    |   |
| 2007       |   | 671    |   |
| 2008       |   | 60     |   |
| Thereafter |   | 42     |   |
|       |   |   |   |
|       |   | $      | 3,991  |   |

 

Lease expense totaled $1,485,000, $1,014,000 and $988,000 for the yearsended July 31, 2003, 2002 and 2001, respectively.

 

**NOTE 10 - SALE-LEASEBACK**

** **

The Company entered into a sale-leasebacktransaction effective March 29, 2002, for certain pasta productionequipment. Proceeds from the sale totaled $5 million. The lease, which isclassified as operating, sets forth an initial term of five years and calls forlease payments of $72,000 per month. At the end of the initial lease term, theCompany may renew the lease at fair rental value, terminate the lease andsurrender the equipment with the payment of a 10% of equipment cost remarketingfee, or purchase the equipment for $1,750,000. The Company realized a gain on the sale of $255,000, which was deferredand will be amortized in proportion to the gross rentals charged to expenseover the five-year lease term. Minimum rentals required under the lease, whichare also included in the future lease obligations disclosed in Note 9, forfiscal years ending July 31 are as follows (in thousands):

 
| 2004   |   | $      | 863    |   |
|--------|--------|--------|--------|--------|
| 2005   |   | 863    |   |
| 2006   |   | 863    |   |
| 2007   |   | 576    |   |
|   |   |   |   |
|   |   | $      | 3,165  |   |

 

**NOTE11 - COMMITMENTS AND CONTINGENCIES**

** **

The Company forward contractsfor a certain portion of its future durum wheat requirements. At July 31,2003, the Company had outstanding commitments for grain purchases totaling$7,355,000 related to forward purchase contracts. These contracts are set pricecontracts to deliver grain to the Company’s mill, and are not derivative innature as they have no net settlement provision and are not transferable.

 

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Pursuant to a warehouseagreement with Sky Logistics & Distribution, Inc. (Sky), the Company isobligated to minimum monthly storage and handling volumes totalingapproximately $1,318,000 for fiscal year 2004 and $330,000 for fiscal year2005. This agreement expires October 31, 2004. The Company has alsotransferred the obligation for a certain building lease to Sky. If Sky wereunable to perform under the existing lease, the Company would be obligated to makepayments under this lease over the remaining term. Current monthly paymentsunder this lease total approximately $67,000, and the lease expiresApril 30, 2004.

 

The Company has entered into long-termmarketing agreements, which include volume and pricing commitments, with U.S.Foodservice and Safeway, Inc. through December 31, 2006 andAugust 31, 2006, respectively. The Company has also entered into anagreement with Gruppo Euricom (“EU”), an Italian pasta manufacturer, to be theexclusive distributor of EU’s Italian pasta and rice products in the UnitedStates and Canada with an initial term through August 2006. These productsare primarily sold in the private label retail and foodservice markets.

 

The Company is subject to various lawsuits and claims which arise inthe ordinary course of its business. While the results of such litigation andclaims cannot be predicted with certainty, management believes the dispositionof all such proceedings, individually or in aggregate, should not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

 

**NOTE12 - STOCK OPTION PLANS**

** **

OnJanuary 31, 1997 the Cooperative’s Compensation Committee of the Board ofDirectors (the “Compensation Committee”) adopted the Dakota Growers IncentiveStock Option Plan (the “Plan”). The Plan was ratified by the Cooperativemembers at the annual meeting in January 1998. The Compensation Committeeor the Board of Directors has the power to determine the key managementemployees of the Company to receive options and the number of shares to beoptioned to each of the employees. Options granted under the Plan are for thepurchase of Series C Convertible Preferred Stock at fair market value, whichwere convertible into Equity Stock as a cooperative, and are now convertibleinto Common Stock and Series D Delivery Preferred Stock as a corporation at theoption of the employee, under the applicable conversion ratio. The maximumnumber of preferred shares that may be issued pursuant to options granted underthe Plan is 15,000, all of which have been issued as of July 31, 2003.Each share of Series C Preferred Stock is convertible into 24 shares of CommonStock and 24 shares of Series D Delivery Preferred Stock of the Company. Theconversion ratio is proportionately adjusted if the Company increases theoutstanding shares of Common Stock or Series D Delivery Preferred Stock, asapplicable, without payment by or to the Company or the Company’s shareholdersfor such additional shares (e.g. stock split, stock dividend or other action).Options granted under the Plan must be exercised within ten years from the datesuch options are granted. In the event of the employee’s termination with theCompany, all exercisable options may be exercised within 90 days of thetermination date. If not exercised, such options lapse.

 

The Company’s 2002 Stock Option Plan (the“2002 Plan”) was adopted by the Board of Directors on November 21, 2002.All options granted under the 2002 Plan are non-qualified stock options and arefor the purchase of the Company’s Common Stock. The maximum number of shares ofCommon Stock that may be issued pursuant to options granted under the 2002 Planis 294,456 shares, all of which have been issued as of July 31, 2003.Stock options granted under the 2002 Plan expire 10 years from the date ofgrant.

 

OnNovember 21, 2002 the Board of Directors adopted the Dakota Growers PastaCompany, Inc. 2003 Stock Option Plan (the “2003 Plan”), which was approved bythe Company’s shareholders at the Annual Meeting on January 11, 2003. Nooptions have yet been granted under the 2003 Plan. The 2003 Plan covers 500,000shares of the Company’s Common Stock. Participation in this Plan shall belimited to officers, directors, employees, vendors or consultants of theCompany or any subsidiary of the Company. Options granted under the 2003 Planmay be incentive stock options (as defined under Section 422 of the Code)or non-qualified stock options, as determined by the 2003 Plan administrator atthe time of grant of an option and subject to the applicable

 

46

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provisionsof Section 422 of the Code and the regulations promulgated there under.The stock options generally expire 10 years from the date of grant. If the employmentof the Optionee is terminated by any reason other than his or her death ordisability, all exercisable options may be exercised within 90 days of thetermination date. If not exercised, such options lapse.

 

The following table sets forth information regarding stock optionsoutstanding and exercisable:

 
|                              |   | **Options to  purchase Series C Convertible Preferred Stock** |   |
|-----------------------------------|--------|---------------------------------------------------------------|--------|
|                              |   | **Number of  Series C  ConvertiblePreferred Shares**          |   | **Option  Priceper Share** |   | **Weighted  Average  ExercisePrice** |   | **Exercisable** |   |
| Outstanding at July 31, 2001 |   | —                                                        |   |   |   |   |   |   |   |
| Exercised                         |   | —                                                        |   |   |   |   |   |   |   |
| Granted                           |   | 2,045                                                         |   | $100 |   | $ | 100.00 |   |   |   |
| Canceled/Expired                  |   | —                                                        |   |   |   |   |   |   |   |
|                              |   |                                                          |   |   |   |   |   |   |   |
| Outstanding at July 31, 2002 |   | 2,045                                                         |   | $100 |   | $ | 100.00 |   | 2,045 |   |
| Exercised                         |   | —                                                        |   |   |   |   |   |   |   |
| Granted                           |   | 686                                                           |   | $150 |   | $ | 150.00 |   |   |   |
| Canceled/Expired                  |   | —                                                        |   |   |   |   |   |   |   |
|                              |   |                                                          |   |   |   |   |   |   |   |
| Outstanding at July 31, 2003 |   | 2,731                                                         |   | $100 - $150 |   | $ | 112.56 |   | 2,731 |   |

 
|                              |   | **Options to  purchase Common Stock** |   |
|-----------------------------------|--------|---------------------------------------|--------|
|                              |   | **Number of  Common Shares**          |   | **OptionPrice  per Share** |   | **Weighted  AverageExercise  Price** |   | **Exercisable** |   |
| Outstanding at July 31, 2002 |   | —                                |   |   |   |   |   |   |   |
| Exercised                         |   | —                                |   |   |   |   |   |   |   |
| Granted                           |   | 294,456                               |   | $ | 6.25 |   | $ | 6.25 |   |   |   |
| Canceled/Expired                  |   | —                                |   |   |   |   |   |   |   |
|                              |   |                                  |   |   |   |   |   |   |   |
| Outstanding at July 31, 2003 |   | 294,456                               |   | $ | 6.25 |   | $ | 6.25 |   | 294,456 |   |

 

The Company applies APB No. 25in accounting for employee stock options. Accordingly, no compensation expensewas recorded during the years ended July 31, 2003, 2002 and 2001 relatedto the issuance or exercise of stock options. The fair value of the stockoptions granted during fiscal years 2003 and 2002 was estimated at the date ofgrant using the Black-Scholes option pricing model with the following weightedaverage assumptions (excluding a volatility assumption): 2003 - risk freeinterest rate of 2.5%, expected dividend yield of zero and an expected life of3 years; 2002 - risk free interest rate of 3.6%, expected dividend yield ofzero and an expected life of 3 years. The pro forma application of Statement ofFinancial Accounting Standard (SFAS) No. 123 “Accounting for Stock-BasedCompensation” would not have had a material impact on net income and earningsper share for the periods presented.

 

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**NOTE 13 - RELATED PARTY TRANSACTIONS**

** **

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

 

In accordance with the provisions of the Sarbanes-Oxley Act of 2002,the Board of Directors approved the repurchase of 190,800 and 103,656 shares ofthe Company’s Common Stock from Messrs. Dodd and Friezen, respectively. Therepurchase was completed in November 2002. In conjunction with therepurchase of these shares at $6.25 per share, Messrs. Dodd and Friezenreceived proceeds of $1,192,500 and $647,850,respectively. In addition, Mr. Friezen received additional gross proceeds of$229,993 under a compensatory transaction in conjunction with the unwinding ofprevious stock option exercises and related officer loans. Messrs. Dodd andFriezen also received $81,311 and $53,425, respectively, under compensatorytransactions for the interest on the loans made by the financial institution toexercise stock options. The proceeds received by Messrs. Dodd and Friezen wereused to pay off their loans with the financial institution. As a result, theCompany’s certificates of deposit were no longer restricted. The Companyredeemed 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.

 

The Company had advanced funds to Mr. Dodd and Mr. Friezenunder promissory agreements to cover personal (unaudited) alternative minimumtaxes and other costs generated as a result of these officers exercising stockoptions. Interest on the advances is charged at the applicable federal rate aspublished by the Internal Revenue Service. Certain of these promissory notesbecame due in conjunction with the repurchase of Common Stock from Messrs. Doddand Friezen noted above. The Compensation Committee approved forgiving theprincipal ($92,153) and interest ($11,093) on these promissory notes along withan additional compensatory transaction of $63,292 to cover estimated personalincome taxes the officers incurred on the promissory note forgiveness.

 

Amounts due from officers as of July 31, 2003 and2002 totaled $82,000 and $190,000, respectively.

 

Prior to the conversion to a corporation,each of the Cooperative’sdirectors and those officers who held membership in the Cooperative were also agricultural producers and members ofthe Cooperative.  By virtue of their membership status andownership of cooperative Equity Stock, each such director and officer wasobligated to deliver durum wheat to the Cooperative. However, the amount and terms of the paymentsreceived by those directors and officers (or the entities they represent) weremade on exactly the same basis as those received by other members of the Cooperative for the delivery of their durum wheat.

 

**NOTE14 - CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000**

** **

The U.S. Customs Service (“Customs”) published, on July 3, 2002, anotice of intention to distribute antidumping and countervailing dutiesassessed on certain pasta imported from Italy and Turkey from October 1,2001 to September 30, 2002, to affected domestic producers pursuant to theContinued Dumping and Subsidy Offset Act of 2000 (the “Offset Act”). TheCompany received a payment of approximately $1,000,000 from Customs under the OffsetAct in December 2002. In June 2003, the Company repaid Customsapproximately $34,000 pursuant to a reclamation request from Customs. The net proceeds of $966,000 have beenclassified as other income. The Company cannot reasonably estimate thepotential amount, if any, that may be received in future periods as thesereceipts are based upon future events over which we have little or no control,including, but not limited to, the amount of expenditures by domestic pastaproducers and the amount of antidumping and countervailing duties collected byCustoms.

 

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**NOTE15 -  QUARTERLY FINANCIAL DATA (UNAUDITED)**

** **

Summary quarterly results are as follows (inthousands, except per share amounts):

 
|                                              |   | **First  Quarter** |   | **Second  Quarter** |   | **Third  Quarter** |   | **Fourth  Quarter** |   |
|---------------------------------------------------|--------|--------------------|--------|---------------------|--------|--------------------|--------|---------------------|--------|
|                                              |   |               |   |                |   |               |   |                |   |
| Year ended July 31, 2003:                    |   |               |   |                |   |               |   |                |   |
|                                              |   |               |   |                |   |               |   |                |   |
| Net revenues                                      |   | $                  | 37,331 |                | $      | 40,740             |   | $                   | 29,435 |   | $ | 29,300 |   |
| Gross profit                                      |   | 5,207              |   | 4,728               |   | 1,295              |   | 416                 |   |
| Operating income (loss)                           |   | 2,891              |   | 1,562               |   | (801               | )      | (1,822              | )      |
| Net income (loss)                                 |   | 1,247              |   | 1,045               |   | (928               | )      | (1,793              | )      |
| Basic net earnings (loss) per common/equity share |   | 0.10               |   | 0.08                |   | (0.08              | )      | (0.15               | )      |
|                                              |   |               |   |                |   |               |   |                |   |
| Year ended July 31, 2002:                    |   |               |   |                |   |               |   |                |   |
|                                              |   |               |   |                |   |               |   |                |   |
| Net revenues                                      |   | $                  | 37,546 |                | $      | 37,020             |   | $                   | 37,668 |   | $ | 40,231 |   |
| Gross profit                                      |   | 5,904              |   | 4,997               |   | 5,654              |   | 5,408               |   |
| Operating income                                  |   | 3,475              |   | 2,616               |   | 3,180              |   | 3,310               |   |
| Net income (loss)                                 |   | 2,558              |   | 1,733               |   | 2,204              |   | (4,661              | )      |
| Basic net earnings (loss) per common/equity share |   | 0.23               |   | 0.15                |   | 0.20               |   | (0.40               | )      |

 

The above quarterly financial data isunaudited, but in the opinion of management, all adjustments necessary for afair presentation of the selected data for these interim periods presented havebeen included. A non-cash, nonrecurring charge of $6.1 million to recorddeferred taxes upon conversion from a cooperative to a corporation was recordedin the fourth quarter of fiscal year 2002.

 

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**ITEM 9.  DISAGREEMENTSON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A.  CONTROLS ANDPROCEDURES**

 

***Evaluation of Disclosure Controls andProcedures***

 

The Company’sChief Executive Officer, Timothy Dodd, and Chief Financial Officer, ThomasFriezen, have reviewed the Company’s disclosure controls and procedures within90 days prior to the filing of this report. Based upon this review, theseofficers believe that the Company’s disclosure controls and procedures areeffective in ensuring that material information related to the Company is madeknown to them by others within the Company.

 

***Changes in Internal Controls***

 

There were no significant changes in the Company’s internal controls orin other factors that could significantly affect these controls during thefiscal year covered by this report or from the end of the period to the date ofthis Form 10-K.

 

**PART III.**

 

**ITEM 10.  DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Board of Directors**

 

The Board ofDirectors currently consists of nine members. The Board may consist of aminimum of seven members and a maximum of fifteen members. The Articles ofIncorporation and Bylaws of the Company require that at least five members ofthe Board of Directors be residents of the State of North Dakota and that atleast three members be agricultural producers. Each of the current directorswas previously a director of the Cooperative. The Board of Directors is divided into three classes: Class I, Class IIand Class III. There is an equal number of directors in each of Class I,Class II and Class III, except that, if the Board of Directors consists of anumber of directors such that mathematically there cannot be a equal number ofdirectors in each of Class I, Class II and Class III, then the one remainingdirector shall be made a member of Class I and, if there is more than one remainingdirector, the first remaining director shall be made a member of Class I andthe second remaining director shall be made a member of Class II.  Each director in each of Class I, Class IIand Class III will hold office until the third regular meeting of shareholdersfollowing the regular meeting of the shareholders at which such director orsuch director’s predecessor was elected, until his successor shall have beenelected and shall qualify, or until he resigns or is removed.

 

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The tablebelow sets forth certain information concerning the directors of the Company.The directors have been elected to serve three-year terms expiring at theannual meeting in the calendar years indicated in the table below.

 
| **Name**              |   | **Age** |   | **Term Expires** |   | **Class** |   |
|-----------------------|--------|---------|--------|------------------|--------|-----------|--------|
|                  |   |    |   |             |   |      |   |
| John S. Dalrymple III |   | 55      |   | 2006             |   | I         |   |
| Allyn K. Hart         |   | 64      |   | 2005             |   | III       |   |
| Roger A. Kenner (1)   |   | 54      |   | 2004             |   | II        |   |
| James F. Link         |   | 76      |   | 2006             |   | I         |   |
| Eugene J. Nicholas    |   | 58      |   | 2004             |   | II        |   |
| John D. Rice, Jr. (1) |   | 49      |   | 2006             |   | I         |   |
| Jeffrey O. Topp       |   | 44      |   | 2004             |   | II        |   |
| Curtis R. Trulson     |   | 51      |   | 2005             |   | III       |   |
| Michael E. Warner     |   | 53      |   | 2005             |   | III       |   |

 

----

(1) Mr. Kenner and Mr. Rice arefirst cousins.

 

**John S. DalrympleIII.**  Mr. Dalrymple has been Chairman of the Board ofDirectors since 1991. He became Lieutenant Governor of North Dakota in 2000.Mr. Dalrymple had been a state representative since 1984 and served as Chairmanof the House Appropriations Committee and of the Budget Section of theNorth Dakota House of Representatives. He previously served on the board ofdirectors of the U.S. Durum Growers Association. He has been a farmer in theCasselton area since 1971.  Heserves on the board of directors of the U.S. Chamber of Commerce.

 

**Allyn K. Hart.**  Mr. Hart has been a director of the Company since 1991. He hasbeen a farmer in the Cavalier County area since 1961.

 

**Roger A. Kenner.**  Mr.Kenner has been a director of the Company since 1991. Mr. Kenner is chairman ofGolden Plains Frozen Foods LLC and is a director of Blue Cross Blue Shield ofNorth Dakota. He has been a farmer and certified seed producer in the Leedsarea since 1964.

 

**James F. Link.**  Mr. Link has been a directorof the Company since 1991. Mr. Link has served on the boards of directors ofFarm Credit and Minn-Dak Farmers cooperative, including 15 years as itschairman. He has been a farmer in the Wahpeton area since 1947.

 

**Eugene J. Nicholas.**  Mr.Nicholas has been a director of the Company since 1991.  Mr. Nicholas has been a state representativesince 1974, and serves as chairman of the North Dakota House of RepresentativesAgriculture Committee. Mr. Nicholas also serves on the board of directors ofCountry Bank USA, Cando, North Dakota, and the board of governors of GoldenPlains Frozen Foods LLC. Mr. Nicholas previously served on the board ofdirectors of the U.S. Durum Growers Association.

 

**John D. Rice, Jr.**  Mr. Rice is the vice-chairmanof the Board of Directors and has been a director of the Company since1991.  He also served on the boards ofdirectors of National Pasta Association and U.S. Durum Growers Association. Hehas been a farmer in the Maddock, North Dakota area since 1968.

 

**Jeffrey O. Topp.** Mr. Topp has been a directorof the Company since 1991. He serves on the board of directors of FarmersElevator, Inc. in Grace City, North Dakota. He is a partner in T-T Ranch andhas been a farmer in the Grace City area since 1978.

 

51

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**Curtis R. Trulson.** Mr.Trulson has been a director of the Company since 1991. He previously served onthe boards of directors of the National Association of Wheat Growers and theNorth Dakota Grain Growers Association including service as its President.  He has been a farmer in Mountrail County,North Dakota, since 1975.

 

**Michael E. Warner.**  Mr. Warnerhas been a director of the Company since 1992. Mr. Warner has been a farmer inthe Hillsboro, North Dakota area since 1967. He serves on the board ofdirectors of Warner Equipment Co., and as a  trustee of Meritcare Health Systems of Fargo, North Dakota. Mr. Warnerserved on the board of directors of American Crystal Sugar Company from 1989through 1996.

 

**Committeesof the Board of Directors**

 

The Audit Committee is responsible for assessing andensuring the independence of the independent auditor, evaluating auditperformance, approving the services to be provided by the independent auditor,evaluating policies and procedures relating to internal accounting function andcontrols, and reviewing and approving the Company’s annual audited financialstatements before issuance, subject to approval by the Board of Directors. Themembers of the Audit Committee are Messrs. Trulson, Dalrymple and Warner, eachof whom is independent, as they are not employees of the Company and have noother relationships which would prevent them from being considered independentpursuant to the Company’s policies and applicable laws and regulations. TheBoard of Directors has determined that Mr. Trulson qualifies as an “auditcommittee financial expert” within the meaning of Securities and ExchangeCommission regulations.

 

The Compensation Committee makes recommendations tothe Board of Directors of the Company regarding stock and compensation plans,approves transactions of certain officers and authorizes the granting stockoptions.  Messrs. Dalrymple, Trulson andWarner are members of the Compensation Committee.

 

TheNomination Committee is responsible for recommending nominees to the Board ofDirectors of the Company. Under the Company’s current bylaws, the NominationCommittee consists of the Company’s Chairman, Vice Chairman, and ChiefExecutive Officer.

 

The Policy Committeeprovides oversight of the Company’s governance obligations to assure compliancewith all applicable laws, regulations, Articles of Incorporation and By-laws, operatingpursuant to a written Policy Committee Charter adopted by the Company’s Boardof Directors. Messrs. Hart, Trulson and Link are member of the PolicyCommittee.

 

**Compensation of Directors**

 

The Company provides its directors with minimalcompensation, consisting of (i) a per diem payment of $200 (except for theChairman who will receive $250 per day) for any day on which a directorundertakes activities on the Company’s behalf, including board meetings andother functions of the Company, (ii) a monthly fee of $450 (except for theChairman who receives $500 per month), and (iii) reimbursement forout-of-pocket expenses incurred on behalf of the Company.

 

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**Executive Officers**

 

The tablebelow lists the executive officers of the Company. Officers are electedannually by the Board of Directors.

 
| **Name**           |   | **Age** |   | **Position**                                          |
|--------------------|--------|---------|--------|-------------------------------------------------------|
|               |   |    |   |                                                  |
| Timothy  J. Dodd   |   | 48      |   | President  and Chief Executive Officer                |
| Thomas  P. Friezen |   | 44      |   | Chief  Financial Officer                              |
| Eldon  Buschbom    |   | 55      |   | Vice  President, Operations (Minnesota)               |
| Susan  M. Clemens  |   | 42      |   | Vice  President, Human Resources and Administration   |
| James  D. Cochran  |   | 35      |   | Vice  President, Supply Chain                         |
| Jack  B. Hasper    |   | 62      |   | Vice  President, Sales and Marketing                  |
| Radwan  Ibrahim    |   | 59      |   | Vice  President, Quality Assurance                    |
| Edward  O. Irion   |   | 32      |   | Vice  President, Finance and Chief Accounting Officer |
| David  E. Tressler |   | 49      |   | Vice  President, Operations (North Dakota)            |

 

**Timothy J. Dodd.** Mr. Doddis the President and Chief Executive Officer of the Company. Prior to joiningthe Company in December 1991, he had been the Vice President ofManufacturing for American Italian Pasta Company since 1988. Previously,Mr. Dodd participated in the construction and management of two other grainprocessing facilities, one in Texas and one in Cando, North Dakota. Mr. Dodd serves on the board of directors ofCountry Bank USA, Cando, North Dakota.

 

**Thomas P. Friezen.** Mr.Friezen is the Chief Financial Officer of the Company. Mr. Friezen joined theCompany in April 1995 as Vice President, Finance and became ChiefFinancial Officer in August 2000. Mr. Friezen is a member of the board ofdirectors of CDT, Inc., a development stage water technology company. Mr.Friezen is a certified public accountant.

 

**Eldon F. Buschbom.**  Mr.Buschbom has been Vice President, Operations (Minnesota) since May 30,2000. He joined Borden Foods in February 1996 as Engineering Manager. Mr.Buschbom served as Vice President of Engineering and Manufacturing Technologyfor Primo Piatto, Inc. from August 1997 to February 1998.  Prior to joining the Company, Mr. Buschbomwas Plant Manager for Steel Prep, Inc., and during the previous 14 years, heldvarious engineering and manufacturing operations management positions with divisionsof Pillsbury including American Beauty Pasta, Green Giant Frozen Vegetables,Totino’s Pizza and the International Foods Division.

 

**Susan M. Clemens.** Ms. Clemenshas been Vice President, Human Resources and Administration sinceFebruary 20, 1998. From August 1997 to February 1998, she wasVice President of Human Resources and Administration at Primo Piatto, Inc. Ms.Clemens was Senior Human Resources Manager at Borden Foods fromJanuary 1993 to August 1997.

 

**James D. Cochran.**  Mr.Cochran has been Vice President, Supply Chain since February 20, 1998.From 1997 to 1998, he was Vice President of New Business Development at PrimoPiatto, Inc. Mr. Cochran held various positions with Borden Foods from 1990 to1997, most recently as Materials Manager.

 

**Jack B. Hasper. **Mr.Hasper has been Vice President, Sales and Marketing since January 2002. Heserved as Vice President of Retail Private Label Sales of the Company fromMay 1997 until January 2002. Mr. Hasper has 39 years of experience inthe food business and held various marketing and sales positions with BordenFoods, Super Valu, Pillsbury and General Mills prior to joining the Company.

 

**Radwan Ibrahim.**  Mr.Ibrahim has been Vice President, Quality Control since February 20, 1998.From August 1997 to February 1998, he served as Chief Technical Officerand Vice President of Primo Piatto, Inc. Mr. Ibrahim was Group Quality ControlManager at Borden Foods from 1992 to 1997. Mr. Ibrahim holds a Ph.D. degree incereal chemistry from North Dakota State University.

 

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**Edward O. Irion.** Mr. Irionis Vice President, Finance and Chief Accounting Officer of the Company.  Mr. Irion joined the Company inDecember 1999 as Assistant Vice President, Planning and Control and becameVice President, Finance and Chief Accounting Officer in August 2000. Priorto joining the Company, he spent six years with the regional accounting firm ofEide Bailly LLP in Fargo, North Dakota. Mr. Irion’s most recent position withEide Bailly LLP prior to joining the Company was Senior Associate. Mr. Irion isa certified public accountant.

 

**David E. Tressler.**  Mr.Tressler is the Vice President, Operations (North Dakota) of the Company. Mr.Tressler joined the Company in February 1992 as a Project Engineer. Priorto joining the Company, Mr. Tressler was a director of engineering at AmericanItalian Pasta Company, where he was responsible for monitoring the completionof the initial pasta plant. From 1977 to 1988 he was plant engineer atInternational Multi-Foods, Inc.

 

**Code of Conduct**

 

The Company adopted a Code of Conduct during fiscal 2003 applicable toall employees. A Code of Ethics certification for senior financial officers,including the principal executive officer, principal financial officer andprincipal accounting officer, is included within the Code of Conduct.

 

A copy of the Company’s Code of Conduct will be provided, withoutcharge, upon written request to:

 

Investor Relations

Dakota GrowersPasta Company, Inc.

One Pasta Avenue

Carrington, ND58421

 

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**ITEM 11.  EXECUTIVECOMPENSATION**

 

The followingtable summarizes the amount of compensation paid to the Company’s President andChief Executive Officer and each of the four next highest paid officers for thefiscal year ended July 31, 2003 and the two prior fiscal years.

 

**Summary Compensation Table**

** **
|                             |   |                     |   |                                                          |    |                                                   |   |                                |   | **Long-Term  Compensation Awards** |   |    |   |
|----------------------------------|--------|--------------------------|--------|---------------------------------------------------------------|---------|--------------------------------------------------------|--------|-------------------------------------|--------|------------------------------------|--------|---------|--------|
| **Name and  Principal Position** |   | **Annual  Compensation** |   | **Series  C  Preferred  Securities  Underlying  Options (#)** |    | **Common  Stock  Securities  Underlying  Options (#)** |   | **All  Other  Compen-  sation (2)** |   |
| **Fiscal  Year**                 |   | **Salary**               |   | **Bonus**                                                     |    | **Other  Annual  Compen-  sation (1)**                 |
|                             |   |                     |   |                                                          |    |                                                   |   |                                |   |                               |   |    |   |   |   |
| Timothy J. Dodd                  |   | 2003                     |   | $                                                             | 202,566 |                                                   | $      | 112,130                             |   | $                                  | 9,273  |    | 686    |   | 190,800 |   | $ | 221,716 |   |
| President and Chief              |   | 2002                     |   | 192,920                                                       |    | 63,534                                                 |   | 5,936                               |   | 1,291                              |   | —  |   | — |   |
| Executive Officer                |   | 2001                     |   | 185,652                                                       |    | —                                                 |   | 6,234                               |   | —                             |   | —  |   | — |   |
|                             |   |                     |   |                                                          |    |                                                   |   |                                |   |                               |   |    |   |   |   |
| Thomas P. Friezen                |   | 2003                     |   | 173,628                                                       |    | 34,540                                                 |   | 9,670                               |   | —                             |   | 103,656 |   | 309,551 |   |
| Chief Financial Officer          |   | 2002                     |   | 172,310                                                       |    | 16,263                                                 |   | 5,658                               |   | 754                                |   | —  |   | — |   |
|                             |   | 2001                     |   | 137,955                                                       |    | —                                                 |   | 4,813                               |   | —                             |   | —  |   | — |   |
|                             |   |                     |   |                                                          |    |                                                   |   |                                |   |                               |   |    |   |   |   |
| Jack B. Hasper (3)               |   | 2003                     |   | 136,500                                                       |    | 25,169                                                 |   | 14,440                              |   | —                             |   | —  |   | — |   |
| Vice President,                  |   | 2002                     |   | 45,000                                                        |    | —                                                 |   | 3,736                               |   | —                             |   | —  |   | — |   |
| Sales and Marketing              |   | 2001                     |   | —                                                        |    | —                                                 |   | —                              |   | —                             |   | —  |   | — |   |
|                             |   |                     |   |                                                          |    |                                                   |   |                                |   |                               |   |    |   |   |   |
| David E. Tressler                |   | 2003                     |   | 115,840                                                       |    | 22,214                                                 |   | 9,203                               |   | —                             |   | —  |   | — |   |
| Vice President, Operations       |   | 2002                     |   | 110,295                                                       |    | 11,196                                                 |   | 4,003                               |   | —                             |   | —  |   | — |   |
| (North Dakota)                   |   | 2001                     |   | 106,152                                                       |    | —                                                 |   | 1,378                               |   | —                             |   | —  |   | — |   |
|                             |   |                     |   |                                                          |    |                                                   |   |                                |   |                               |   |    |   |   |   |
| James D. Cochran                 |   | 2003                     |   | 115,840                                                       |    | 22,234                                                 |   | 4,580                               |   | —                             |   | —  |   | — |   |
| Vice President,                  |   | 2002                     |   | 110,323                                                       |    | 6,790                                                  |   | 3,822                               |   | —                             |   | —  |   | — |   |
| Supply Chain                     |   | 2001                     |   | 106,217                                                       |    | —                                                 |   | 3,881                               |   | —                             |   | —  |   | — |   |
|                                  |        |                          |        |                                                               |         |                                                        |        |                                     |        |                                    |        |         |        |  |  |  |  |  |  |  |

 

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(1)          Includesthe Company’s 401(k) matching contribution, excess life insurance and thetaxable portion of reimbursable business expenses.

(2)          Compensationresulting from transactions to effect compliance with the Sarbanes-Oxley Act of2002. See “Transactions with Executive Officers” under “Item 13. CertainRelationships and Related Transactions” for further information.

(3)          Mr.Hasper became an employee of the Company in March 2002.

 

**Option Grants in Fiscal Year 2003**

 

The followingtable sets forth certain information with respect to stock options granted topurchase Series C Convertible Preferred Stock during the fiscal year endedJuly 31, 2003.

 
| **Name**        |   | **Preferred  Shares  Underlying  Options  Granted** |   | **Percent  of Total  Options  Granted** |   | **Exercise  Price  ($/SH)** |   | **Expiration  Date** |       | **Potential Realized Value  at Assumed Annual Rates  of Stock Price Appreciation********for   Option Term (1)** |   |
|-----------------|--------|-----------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------|--------|----------------------|------------|-----------------------------------------------------------------------------------------------------------------|--------|
| **5%**          |   | **10%**                                             |
|            |   |                                                |   |                                    |   |                        |   |                 |       |                                                                                                            |   |   |   |
| Timothy J. Dodd |   | 686                                                 |   | 100                                     | %      | $                           | 150.00 |                 | 01/01/2013 |                                                                                                            | $      | 66,577 |   | $ | 175,655 |   |
|                 |        |                                                     |        |                                         |        |                             |        |                      |            |                                                                                                                 |        |  |  |  |  |  |  |

 

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The following table sets forthcertain information with respect to stock options granted to purchase CommonStock during the fiscal year ended July 31, 2003.

 
| **Name**          |   | **Common  Shares  Underlying  Options  Granted** |   | **Percent  of Total  Options  Granted** |   | **Exercise  Price  ($/SH)** |   | **Expiration  Date** |       | **Potential Realized Value  at Assumed Annual Rates  of Stock Price Appreciation********for   Option Term (1)** |   |
|-------------------|--------|--------------------------------------------------|--------|-----------------------------------------|--------|-----------------------------|--------|----------------------|------------|-----------------------------------------------------------------------------------------------------------------|--------|
| **5%**            |   | **10%**                                          |
|              |   |                                             |   |                                    |   |                        |   |                 |       |                                                                                                            |   |   |   |
| Timothy J. Dodd   |   | 190,800                                          |   | 65                                      | %      | $                           | 6.25   |                 | 12/01/2012 |                                                                                                            | $      | 771,559 |   | $ | 2,035,647 |   |
| Thomas P. Friezen |   | 103,656                                          |   | 35                                      | %      | $                           | 6.25   |                 | 12/01/2012 |                                                                                                            | $      | 419,165 |   | $ | 1,105,907 |   |
|                   |        |                                                  |        |                                         |        |                             |        |                      |            |                                                                                                                 |        |  |  |  |  |  |  |

 

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(1) The amounts shown as potential realizable value illustrate whatmight be realized upon exercise immediately prior to expiration of the optionterm using the 5% and 10% appreciation rates established in SEC regulations, compoundedannually. The potential realizable value is not intended to predict futureappreciation of the price of the stock. The values shown do not considernontransferability or termination of the unexercisable options upon terminationof such employee’s service relationship with the Company.

 

**Options Exercised inFiscal Year 2003 and Unexercised Options at July 31, 2003**

 

The following tablesummarizes stock option exercises and total number of options held for Series CConvertible Preferred Stock at the end of fiscal year 2003.

 
|              |   | **Series C  Convertible  Preferred  Stock Acquired** |   | **Value**    |   | **Number of Series C  Convertible Preferred Shares  Underlying Unexercised  Options at July 31, 2003** |   | **Value of Unexercised  In-the-Money  Options at July 31, 2003 (1)** |   |
|-------------------|--------|------------------------------------------------------|--------|--------------|--------|-------------------------------------------------------------------------------------------------------------|--------|---------------------------------------------------------------------------|--------|
| **Name**          |   | **on Exercise**                                      |   | **Realized** |   | **Exercisable**                                                                                             |   | **Unexercisable**                                                         |   | **Exercisable** |   | **Unexercisable** |   |
|              |   |                                                 |   |         |   |                                                                                                        |   |                                                                      |   |   |   |   |   |
| Timothy J. Dodd   |   | —                                               |   | $            | — |                                                                                                        | 1,977  |                                                                      | — |   | $ | — |   | $ | — |   |
| Thomas P. Friezen |   | —                                               |   | —       |   | 754                                                                                                         |   | —                                                                    |   | — |   | — |   |
|                   |        |                                                      |        |              |        |                                                                                                             |        |                                                                           |        |  |  |  |  |  |  |  |

 

The following table summarizesstock option exercises and total number of options held for Common Stock at theend of fiscal year 2003.

 
|              |   | **Common  Stock  Acquired** |   | **Value**    |   | **Number of  Common Shares  Underlying Unexercised  Options at July 31, 2003** |    | **Value of Unexercised  In-the-Money  Options at July 31, 2003 (1)** |
|-------------------|--------|-----------------------------|--------|--------------|--------|-------------------------------------------------------------------------------------|---------|---------------------------------------------------------------------------|
| **Name**          |   | **on Exercise**             |   | **Realized** |   | **Exercisable**                                                                     |    | **Unexercisable**                                                         |   | **Exercisable** |   | **Unexercisable** |
|              |   |                        |   |         |   |                                                                                |    |                                                                      |   |   |   |   |
| Timothy J. Dodd   |   | —                      |   | $            | — |                                                                                | 190,800 |                                                                      | — |   | $ | — |   | $ | — |
| Thomas P. Friezen |   | —                      |   | —       |   | 103,656                                                                             |    | —                                                                    |   | — |   | — |
|                   |        |                             |        |              |        |                                                                                     |         |                                                                           |  |  |  |  |  |  |  |

 

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(1) There is no established public trading market for the Company’ssecurities; therefore, the Company is unable to estimate the value ofunexercised options as of July 31, 2003.

 

**Employment Agreements**

 

The Company entered into anemployment agreement, dated March 25, 2002, with its Vice President ofSales and Marketing, Jack B. Hasper. The agreement provides for Mr. Hasper’semployment for a period of thirty-six months commencing on March 25, 2002.The Company will pay him an annual salary of $130,000 under the employmentagreement.  His salary will be reviewedannually and, based upon his performance, may be increased each year by theBoard of Directors. In addition, Mr. Hasper will be entitled to receive bonusesand other fringe

 

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benefits consistent with theCompany’s bonus and benefit plans that are in effect during the term of hisemployment agreement.

 

Mr. Hasper will be entitledto the following compensation and benefits if his employment is terminatedunder the circumstances noted prior to the expiration of the thirty-six monthemployment period:

 

•                  If the Companyterminates Mr. Hasper with cause, then he will be entitled to receive anyearned but unpaid bonuses, any accrued but unused vacation pay and anythen-existing but unreimbursed business expenses.

 

•                  If the Companyterminates Mr. Hasper’s employment without cause or Mr. Hasper resigns from hisemployment for good cause, Mr. Hasper will be entitled to receive his salarythen in effect for a period of six months (or twelve months, in the case of histermination without cause or his resignation for good cause following a changeof control of the Company) following such termination or such resignation, inaddition to any earned but unpaid bonuses, any accrued but unused vacation payand any then-existing but unreimbursed business expenses. However, Mr. Hasperwill only receive the compensation and benefits described in theimmediately-preceding sentence if, upon his termination or resignation, hereleases any and all claims that he might have against the Company.

 

•                  If Mr. Hasperresigns from his employment for any reason other than for good cause, he willbe entitled to receive his salary earned through the date of such resignation,any earned but unpaid bonuses, any accrued but unused vacation pay and any then-existingbut unreimbursed business expenses. Again, he will only receive thecompensation and benefits described in the immediately-preceding sentence if,upon his resignation, he releases any and all claims he might have against theCompany.

 

•                  In the eventthat Mr. Hasper’s employment is terminated due to his death or disability, heor his estate will receive his salary then in effect accrued up to andincluding the date of termination, any earned but unpaid bonuses, any accruedbut unused vacation pay and any then-existing but unreimbursed businessexpenses.

 

The Company may terminateMr. Hasper for “cause” if he: (i) commits an act of fraud, embezzlement ormisappropriation involving the Company; (ii) is convicted of any felony; (iii)commits an act, or fails to commit an act, involving the Company that amountsto willful misconduct or gross negligence; (iv) intentionally engages in anyactivity that is adverse to the interests of the Company; (v) commits an act ofdishonesty in connection with his employment; (vi) breaches his fiduciary dutyto the Company; (vii) commits an act of self-dealing; (viii) materiallybreaches his employment agreement; or (ix) commits an act that brings theCompany into substantial public disgrace or disrespect.

 

Mr. Hasper’s employment agreement prohibits the disclosure to thirdparties of information, observations and data obtained while he is employed bythe Company concerning the business and affairs of the Company and itsaffiliates. It also contains provisions that prohibit Mr. Hasper, at any timeafter the termination of his employment, from using confidential information tocompete with the Company or disclosing confidential information to thirdparties that do or will compete with the Company. In addition, at any timeafter the termination of his employment, Mr. Hasper may not solicit or recruitemployees or customers of the Company.

 

**Stock Option Plans**

 

On January 31, 1997 the Cooperative’s Compensation Committee ofthe Board of Directors (the “Compensation Committee”) adopted the DakotaGrowers Incentive Stock Option Plan (the “Plan”). The Plan was ratified by theCooperative members at the annual meeting in January 1998. TheCompensation Committee or the Board of Directors has the power to determine thekey management employees of the Company to receive options and the number ofshares to be optioned to each of the employees. Options granted under the Planare for the purchase of Series C Convertible Preferred Stock at fair marketvalue, which were convertible into Equity Stock as a cooperative, and are nowconvertible into Common Stock and Series D Delivery Preferred Stock as a

 

57

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corporation at the option of the employee, under the applicableconversion ratio. The maximum number of preferred shares that may be issuedpursuant to options granted under the Plan is 15,000, all of which have beenissued as of July 31, 2003. Each share of Series C Preferred Stock isconvertible into 24 shares of Common Stock and 24 shares of Series D DeliveryPreferred Stock of the Company. The conversion ratio is proportionatelyadjusted if the Company increases the outstanding shares of Common Stock orSeries D Delivery Preferred Stock, as applicable, without payment by or to theCompany or the Company’s shareholders for such additional shares (e.g. stocksplit, stock dividend or other action). Options granted under the Plan must beexercised within ten years from the date such options are granted. In the eventof the employee’s termination with the Company, all exercisable options may beexercised within 90 days of the termination date. If not exercised, suchoptions lapse.

 

The Company’s 2002 StockOption Plan (the “2002 Plan”) was adopted by the Board of Directors onNovember 21, 2002. All options granted under the 2002 Plan arenon-qualified stock options and are for the purchase of the Company’s CommonStock. The maximum number of shares of Common Stock that may be issued pursuantto options granted under the 2002 Plan is 294,456 shares, all of which havebeen issued as of July 31, 2003. Stock options granted under the 2002 Planexpire 10 years from the date of grant.

 

On November 21, 2002 the Board of Directorsadopted the Dakota Growers Pasta Company, Inc. 2003 Stock Option Plan (the “2003Plan”), which was approved by the Company’s shareholders at the Annual Meetingon January 11, 2003. No options have been granted under the 2003 Plan. The2003 Plan covers 500,000 shares of the Company’s Common Stock. Participation inthis Plan shall be limited to officers, directors, employees, vendors orconsultants of the Company or any subsidiary of the Company. Options grantedunder the 2003 Plan may be incentive stock options (as defined underSection 422 of the Code) or non-qualified stock options, as determined bythe 2003 Plan administrator at the time of grant of an option and subject tothe applicable provisions of Section 422 of the Code and the regulationspromulgated there under. The stock options generally expire 10 years from the dateof grant. If the employment of the Optionee is terminated by any reason otherthan his or her death or disability, all exercisable options may be exercisedwithin 90 days of the termination date. If not exercised, such options lapse.

 

**Employee Benefit Plans**

 

The Company and its subsidiary, Primo Piatto, Inc., have a 401(k) planthat covers employees who have met age and service requirements. The plancovers employees who have reached 21 years of age and completed six months ofservice as defined in the plan document. Effective January 1, 2003, the401(k) plan was amended, and the Company match was changed to 100% on the first3% of the employees’ elected deferral and 50% on the next 2%. Previously theCompany matched 100% on the first 2% of the employees’ elected deferral, 50% onthe next 1%, and 25% on the next 4%. Employer contributions to the plan totaled$345,000, $319,000 and $342,000 for the years ended July 31, 2003, 2002and 2001, respectively.

 

PrimoPiatto, Inc. is also required to contribute to a multi-employer pension plancovering certain hourly employees subject to a collective bargaining agreement.Such employees may also participate in the 401(k) plan but are excluded fromamounts contributed by Primo Piatto. Contributions for the years ended July 31,2003, 2002 and 2001 totaled $81,000, $72,000 and $99,000, respectively.

 

**Compensation Committee Interlocks and Insider Participation**

 

The members of theCompensation Committee are John S. Dalrymple III, Curtis R. Trulson and MichaelE. Warner. None of these directors are or have been an officer or employee ofthe Company. During fiscal year 2003, no executive officer of the Companyserved as a director or member of the Compensation Committee (or othercommittee serving an equivalent function) of any other entity, one of whoseexecutive officers served as a director of or member of the CompensationCommittee of the Company.

 

58

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**ITEM 12.  SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table furnishes information as to the beneficialownership of the Company’s Common Stock, Series C Convertible Preferred Stockand Series D Delivery Preferred Stock by (a) each person known by us tobeneficially own more than 5% of the issued and outstanding shares of theCompany’s voting securities, (b) each of the Company’s executive officers, (c)each of the Company’s directors and (d) all of the Company’s directors andexecutive officers as a group.

 

The address of each person listed below is c/o Dakota Growers PastaCompany, Inc., One Pasta Avenue, Carrington, North Dakota 58421. Each personlisted below has sole investment discretion and voting power. In accordancewith the Securities and Exchange Commission’s rules, in computing the number ofshares beneficially owned by a person and the percentage ownership of thatperson, securities subject to options held by that person that are currentlyexercisable or exercisable within 60 days of July 31, 2003 are treated asoutstanding. These shares, however, are not treated as outstanding for thepurpose of computing the percentage ownership of any other person.

 
|                                                    |   | **Beneficially Owned Securities**      |   |
|---------------------------------------------------------|--------|----------------------------------------|--------|
| **Name of  Beneficial Owner**                           |   | **Number of  Shares of  Common Stock** |   | **Percent of  Total Common  Stock** |   | **Number of  Shares of Series  C Preferred** |   | **Percent of  Total Series  C Preferred** |   | **Number of  Shares of Series  D Preferred (10)** |   | **Percent of  Total Series  D Preferred** |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| John S. Dalrymple III (1)                               |   | 370,368                                |   | 3.0 | % | — |   | — |   | 333,000 |   | 3.0 | % |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Allyn K. Hart                                           |   | 16,723                                 |   | 0.1 |   | — |   | — |   | 15,000 |   | 0.1 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Roger A. Kenner (2)                                     |   | 155,596                                |   | 1.3 |   | — |   | — |   | 140,000 |   | 1.2 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| James F. Link (3)                                       |   | 59,656                                 |   | 0.5 |   | — |   | — |   | 54,550 |   | 0.5 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Eugene J. Nicholas (4)                                  |   | 65,525                                 |   | 0.5 |   | — |   | — |   | 58,951 |   | 0.5 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| John D. Rice, Jr. (5)                                   |   | 22,583                                 |   | 0.2 |   | — |   | — |   | 20,200 |   | 0.2 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Jeffrey O.  Topp (6)                                    |   | 219,718                                |   | 1.8 |   | — |   | — |   | 196,420 |   | 1.7 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Curtis R. Trulson (7)                                   |   | 68,624                                 |   | 0.6 |   | — |   | — |   | 61,750 |   | 0.5 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Michael E. Warner                                       |   | 63,441                                 |   | 0.5 |   | — |   | — |   | 57,038 |   | 0.5 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Timothy J. Dodd (8)                                     |   | 252,934                                |   | 2.0 |   | 1,977 |   | 72.4 | % | 238,248 |   | 2.1 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| Thomas P. Friezen (8)                                   |   | 126,959                                |   | 1.0 |   | 754 |   | 27.6 |   | 121,752 |   | 1.1 |   |
|                                                    |   |                                   |   |   |   |   |   |   |   |   |   |   |   |
| All directors and officers as a Group (11  persons) (9) |   | 1,422,127                              |   | 11.3 |   | 2,731 |   | 100.0 |   | 1,296,909 |   | 11.4 |   |

 

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(1)          Includes shares held in the names of Mr. Dalrymple’s spouse, daughter andthe John S. Dalrymple III Trust.

(2)          Includes shares held in the name of Mr. Kenner’s spouse.

(3)          Includes shares held in the names of Link Farms LLP LSB Pasta and LinkFarms LLP.

(4)          Includes shares held in the name of Mr. Nicholas’ spouse.

(5)          Includes shares held in the name of John Rice Farm.

(6)          Includes shares held in the names of T-T Ranch and Mr. Topp’s spouse andchildren.

(7)          Includes shares held in the name of Trulson Brothers.

(8)          Messrs. Dodd and Friezen have been granted options to purchase 1,977 and754 shares, respectively, of the Company’s Series C Preferred Stock and 190,800and 103,656 shares, respectively, of the Company’s Common Stock. Each share ofSeries C Preferred Stock is convertible into 24 shares of Common Stock and 24shares of Series D Delivery Preferred Stock of the Company. The number ofshares of Common Stock presented for Messrs. Dodd and Friezen include 47,448and 18,096 shares, respectively, of Common Stock issuable upon exercise of theoptions to purchase Series C Preferred Stock of the Company and conversion ofeach such share of Series C Preferred Stock into 24 shares of Common Stock inthe Company. The number of shares of Series D Delivery Preferred Stockpresented for Messrs. Dodd and Friezen includes 47,448 and 18,096 shares,respectively, of Series D Delivery Preferred Stock issuable upon exercise of theoptions to purchase Series C Preferred Stock of the Company and conversion ofeach such share of Series C Preferred Stock into 24 shares of Common Stock inthe Company, with one share of Series D Delivery Preferred Stock issuable foreach share of Common Stock so issued upon conversion. The number of shares ofCommon Stock presented for Messrs. Dodd and Friezen also include 190,800 and103,656 shares, respectively, of Common Stock issuable upon

 

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exercise of options to purchase Common Stock.

(9)          The number of shares of Common Stock and Series D Delivery PreferredStock and the percentage of the total number of shares of Common Stock andSeries D Delivery Preferred Stock beneficially owned by all directors andexecutive officers as a group are shown on a fully-diluted basis, based upon12,620,291 shares of Common Stock and 11,340,841 shares of Series D DeliveryPreferred Stock issued and outstanding on a fully-diluted basis.

(10)    Certain of the named beneficial owners have tendered shares of theCompany’s Series D Delivery Preferred stock in response to a tender offer forup to 3,000,000 shares of the Company’s Series D Delivery Preferred Stock,which was received by the Company’s shareholders on or about November 6,2002. The deadline for shareholder responses to that tender offer wasNovember 25, 2002. (The tender offer is described in a Form 8-K filed bythe Company on November 15, 2002). As of the date of this Annual Report,the named beneficial owners do not yet have information regarding whether thetender has been or will be accepted in whole or in part by the offeror in thetender offer. In addition, completion of the sale of any shares of Series DDelivery Preferred Stock that have been tendered is subject to a variety ofcontingencies regarding the actual completion of the purchase. As a result, thenamed beneficial owners who have tendered shares of the Company’s Series DDelivery Preferred stock believe that beneficial ownership of the shares tenderedin response to the tender offer have not yet changed hands.

 

**Equity Compensation Plan Information**

 

See “Item 11. Executive Compensation” for a discussion of the materialfeatures of the Company’s Stock Option Plans. The following table providesinformation regarding the Company’s equity compensation plan as ofJuly 31, 2003.

 
| **Plan Category**                                            |   | **Number of Securities  to be Issued  Upon Exercise of  Outstanding Options** |   | **Weighted-Average  Exercise Price of  Outstanding  Options** |   | **Number of Securities  Remaining Available  for Future Issuance  Under Equity  Compensation Plans** |    |
|--------------------------------------------------------------|--------|-------------------------------------------------------------------------------|--------|---------------------------------------------------------------|--------|------------------------------------------------------------------------------------------------------|---------|
|                                                         |   |                                                                          |   |                                                          |   |                                                                                                 |    |
|                                                         |   | Options to purchase Series C Convertible Preferred Stock (1)                  |   |
| Equity compensation  plans approved by  security holders     |   | 2,731                                                                         |   | $                                                             | 112.56 |                                                                                                 | —  |   |
|                                                         |   |                                                                          |   |                                                          |   |                                                                                                 |    |
|                                                         |   | Options to purchase Common Stock                                              |   |
| Equity compensation  plans approved by  security holders     |   | —                                                                        |   | $                                                             | — |                                                                                                 | 500,000 |   |
|                                                         |   |                                                                          |   |                                                          |   |                                                                                                 |    |
| Equity compensation  plans not approved  by security holders |   | 294,456                                                                       |   | $                                                             | 6.25   |                                                                                                 | —  |   |

 

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(1) Each share of Series C Convertible PreferredStock is convertible into 24 shares of Common Stock and 24 shares of Series DDelivery Preferred Stock of the Company.

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

**Transactionswith Executive Officers**

 

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

 

In accordance with the provisions of theSarbanes-Oxley Act of 2002, the Board of Directors approved the repurchase of190,800 and 103,656 shares of the Company’s Common Stock from Messrs. Dodd andFriezen, 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.

 

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In addition, Mr. Friezenreceived additional gross proceeds of $229,993 under a compensatory transactionin conjunction with the unwinding of previous stock option exercises andrelated officer loans. Messrs. Dodd and Friezen also received $81,311 and$53,425, respectively, under compensatory transactions for the interest on theloans made by the financial institution to exercise stock options. The proceedsreceived by Messrs. Dodd and Friezen were used to pay off their loans with thefinancial institution. As a result, the Company’s certificates of deposit wereno longer restricted. The Company redeemed the certificates of deposit inDecember 2002. Finally, Messrs. Dodd and Friezen were granted stockoptions to purchase 190,800 and 103,656 shares, respectively, of the Company’sCommon Stock with an exercise price of $6.25 per share. Such options were firstexercisable on December 2, 2002.

 

The Company had advanced funds to Mr. Dodd and Mr. Friezenunder promissory agreements to cover personal alternative minimum taxes andother costs generated as a result of these officers exercising stock options.Interest on the advances is charged at the applicable federal rate as publishedby the Internal Revenue Service. Certain of these promissory notes became duein conjunction with the repurchase of Common Stock from Messrs. Dodd andFriezen noted above. The Compensation Committee approved forgiving theprincipal ($92,153) and interest ($11,093) on these promissory notes along withan additional compensatory transaction of $63,292 to cover estimated personalincome taxes the officers incurred on the promissory note forgiveness.

 

The current outstanding principal balance of funds advanced to officersand the highest amounts of outstanding advances for indebtedness of managementexceeding $60,000 at any time since the beginning of fiscal year 2003 are setforth below.

 
|              |   | **Current  Outstanding  Balance** |       | **Highest  Amounts  Outstanding** |       |
|-------------------|--------|-----------------------------------|------------|-----------------------------------|------------|
|              |   |                              | ** ** |                              | ** ** |
| Timothy J. Dodd   |   | $                                 | 47,000     |                              | $          | 123,658 |   |
| Thomas P. Friezen |   | 35,000                            |       | 66,495                            |       |
|                   |        |                                   |            |                                   |            |  |  |

 

The currentoutstanding balances of $47,000 and $35,000 for Messrs. Dodd and Friezen,respectively, were advanced subject to promissory notes in effect prior to theenactment of the Sarbanes-Oxley Act of 2002. There has been no materialmodificaion of the terms or any renewal of these promissory notes.

 

**Purchase of Certain Assets**

 

The Company’s VicePresident of Sales and Marketing is Mr. Jack B. Hasper. Prior to his employmentwith the Company, Mr. Hasper was part-owner of a sales and marketing firm fromwhich the Company purchased certain assets during fiscal year 2002. Inconjunction with the purchase of such assets, Mr. Hasper entered into aCovenant not to Compete with the Company for a period extending throughMarch 31, 2007. The Company paid Mr. Hasper $100,000 in consideration forentering into the aforementioned Covenant not to Compete.

 

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**ITEM 14.  PRINCIPALACCOUNTING FEES AND SERVICES**

 

The followingtable represents aggregate fees billed (in thousands) to the Company for fiscalyears ended July 31, 2003 and 2002 by Eide Bailly LLP, the Company’sprincipal accounting firm.

 
|                   |   | **Fiscal Year Ended** |       |
|------------------------|--------|-----------------------|------------|
|                   |   | **2003**              |       | **2002** |   |
|                   |   |                  | ** ** |   | ** ** |
| Audit Fees             |   | $                     | 54         |   | $ | 43 |   |
| Audit-Related Fees (a) |   | 10                    |       | 19 |   |
| Tax Fees (b)           |   | 26                    |       | 7 |   |
| All Other Fees         |   | —                |       | — |   |
|                   |   |                  |       |   |   |
| Total Fees (c)         |   | $                     | 90         |   | $ | 69 |   |

 

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(a)   Primarily benefit plan audit services.

 

(b)   Primarily tax advisory and preparationservices.

 

(c)   The Audit Committee and/or Board of Directorshave approved all fees.

 

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**PART IV**

 

**ITEM 15.  EXHIBITS,FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K**

 

(a)          The following are filedas part of this report:

 

**1.****         Financial Statements**

 

Independent Auditor’s Report

 

Consolidated Balance Sheetsas of July 31, 2003 and 2002

 

ConsolidatedStatements of Operations for the years ended July 31, 2003, 2002 and 2001

 

ConsolidatedStatements of Changes in Stockholders’ Equity for the years ended July 31,2003, 2002 and 2001

 

ConsolidatedStatements of Cash Flows for the years ended July 31, 2003, 2002 and 2001

 

Notes toConsolidated Financial Statements

 

**2.****         FinancialStatement Schedules**

 

Allschedules are omitted as the required information is inapplicable or theinformation is presented in the consolidated financial statements or relatednotes.

 

**3.****         Reportson Form 8-K**

 

Noreports on Form 8-K have been filed during the last quarter of the year endedJuly 31, 2003.

 

**4.****         Exhibits**

 

2.1                                 SecondAmended and Restated Plan of Merger between Dakota Growers Pasta Company andDakota Growers Pasta Restructuring Cooperative. (Incorporated by reference toExhibit 2.1 from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration Statement, File No. 333-81946, dated April 19, 2002).

 

2.2                                 SecondAmended and Restated Merger Agreement between Dakota Growers PastaRestructuring Cooperative and Dakota Growers Corporation. (Incorporated byreference to Exhibit 2.2 from the Company’s Pre-Effective Amendment No. 2 toForm S-4 Registration Statement, File No. 333-81946, dated April 19,2002).

 

2.3                                 SecondAmended and Restated Merger Agreement between Dakota Growers Corporation andthe Company, formerly Dakota Growers Restructuring Company, Inc. (Incorporatedby reference to Exhibit 2.3 from the Company’s Pre-Effective Amendment No. 2 toForm S-4 Registration Statement, File No. 333-81946, dated April 19,2002).

 

2.4                                 SecondAmended and Restated Transaction Agreement between Dakota Growers PastaCompany, Dakota Growers Pasta Restructuring Cooperative, Dakota GrowersCorporation and the Company, formerly Dakota Growers Restructuring Company,Inc. (Incorporated by reference to Exhibit 2.4 from the Company’s Pre-EffectiveAmendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, datedApril 19, 2002).

 

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3.1                                 SecondAmended and Restated Articles of Incorporation of the Company, formerly DakotaGrowers Restructuring Company, Inc. (Incorporated by reference to Exhibit 3.1from the Company’s Pre-Effective Amendment No. 2 to Form S-4 RegistrationStatement, File No. 333-81946, dated April 19, 2002).

 

3.2                                 SecondAmended and Restated Bylaws of the Company, formerly Dakota GrowersRestructuring Company, Inc. (Incorporated by reference to Exhibit 3.3 from theCompany’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

3.3                                 Certificateof Designation of Series E Junior Participating Preferred Stock of the Company,formerly Dakota Growers Restructuring Company, Inc. (Incorporated by referenceto Exhibit 3.2 from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration Statement, File No. 333-81946, dated April 19, 2002).

 

4.1                                 NotePurchase Agreement dated July 15, 1998. (Incorporated by reference toExhibit 4.1 from Dakota Growers Pasta Company’s Amendment No. 1 to Form S-1Registration Statement on Form S-1/A, File No. 333-65071, declared effectiveOctober 21, 1998).

 

4.2                                 Waiverand First Amendment to Note Purchase Agreements dated November 28, 2000.(Incorporated by reference to Exhibit 4.1 from Dakota Growers Pasta Company’sQuarterly Report on Form 10-Q, File No. 33-99834, for the quarter endedOctober 31, 2000).

 

4.3                                 Waiverand Second Amendment to Note Purchase Agreement and Notes dated June 1,2001. (Incorporated by reference to Exhibit 4.3 from Dakota Growers PastaCompany’s Annual Report on Form 10-K for the fiscal year ended July 31,2001, File No. 33-99834).

 

10.1                           Indentureof Lease between RLN Leasing, Inc. and Dakota Growers Pasta Company datedMay 1, 1997. (Incorporated by reference to Exhibit 10.10 from DakotaGrowers Pasta Company’s Annual Report on Form 10-K for the fiscal year endedJuly 31, 1997, as amended on September 30, 1998, File No. 33-99834).Confidential treatment has been granted with respect to portions of thisExhibit.

 

10.2                           IncentiveStock Option Plan. (Incorporated by reference to Exhibit 10.1 from DakotaGrowers Pasta Company’s Quarterly Report on Form 10-Q, File No. 33-99834, forthe quarter ended April 30, 1998).

 

10.3                           Distributionand Marketing Alliance Agreement between Dakota Growers Pasta Company andGruppo Euricom dated August 15, 2000. (Incorporated by reference toExhibit 10.3 from Dakota Growers Pasta Company’s Quarterly Report on Form 10-Q,File No. 33-99834, for the quarter ended January 31, 2001). Confidentialtreatment has been granted with respect to portions of this Exhibit.

 

10.4                           Five-YearContract Extension between Dakota Growers Pasta Company and U.S. Foodservicedated December 28, 2000. (Incorporated by reference to Exhibit 10.4 fromDakota Growers Pasta Company’s Quarterly Report on Form 10-Q, File No.33-99834, for the quarter ended January 31, 2001). Confidential treatmenthas been granted with respect to portions of this Exhibit.

 

10.5                           MasterLoan Agreement and Supplements dated June 20, 2001 between Dakota GrowersPasta Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.7 from DakotaGrowers Pasta Company’s Annual Report on Form 10-K, File No. 33-99834, for thefiscal year ended July 31, 2001).

 

10.6                           Amendmentto Loan Agreement dated January 24, 2002 between Dakota Growers PastaCompany and CoBank, ACB. (Incorporated by reference to Exhibit 10.2 from DakotaGrowers Pasta Company’s Quarterly Report on Form 10-Q, File No. 33-99834, forthe quarter ended January 31, 2002).

 

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10.7                           FirstAmendment: Five-Year Contract Extension between Dakota Growers Pasta Companyand U.S. Foodservice dated December 20, 2001. (Incorporated by referenceto Exhibit 10.3 from Dakota Growers Pasta Company’s Quarterly Report on Form10-Q, File No. 33-99834, for the quarter ended January 31, 2002).Confidential treatment has been granted with respect to portions of thisExhibit.

 

10.8                           Co-packingAgreement dated April 30, 2002 between Dakota Growers Pasta Company andNew World Pasta Company. (Incorporated by reference to Exhibit 10.2 from DakotaGrowers Pasta Company’s Quarterly Report on Form 10-Q, File No. 33-99834, forthe quarter ended April 30, 2002). Confidential treatment has been grantedwith respect to portions of this Exhibit.

 

10.9                           MasterLease Agreement dated March 6, 2002 and related Schedule A datedMarch 29, 2002 between Dakota Growers Pasta Company and Farm CreditLeasing Services Corporation. (Incorporated by reference to Exhibit 10.2 fromthe Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

10.10                     Amendedand Restated Share Rights Agreement, dated as of April 19, 2002, by andamong the Company, formerly Dakota Growers Restructuring Company, Inc., andWells Fargo Bank Minnesota, National Association, as Rights Agent. (Incorporatedby reference to Exhibit 10.1 from the Company’s Pre-Effective Amendment No. 2to Form S-4 Registration Statement, File No. 333-81946, dated April 19,2002).

 

10.11                     ExecutiveEmployment Agreement, dated March 25, 2002, between Dakota Growers PastaCompany and Jack Hasper. (Incorporated by reference to Exhibit 10.3 from theCompany’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

10.12                     Amendmentdated February 11, 2003 to the Master Loan Agreement dated June 20,2001 between the Company and CoBank, ACB. (Incorporated by reference to Exhibit10.1 from the Company’s Quarterly Report on Form 10-Q, File No. 000-50111, forthe quarter ended January 31, 2003).

 

10.13                     StatusedRevolving Credit Supplement and Term Supplements dated February 11, 2003between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.2from the Company’s Quarterly Report on Form 10-Q, File No. 000-50111, for thequarter ended January 31, 2003).

 

10.14                     SecurityAgreement dated February 11, 2003 between the Company and CoBank, ACB.(Incorporated by reference to Exhibit 10.3 from the Company’s Quarterly Reporton Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2003).

 

10.15                     ContinuingGuarantee Agreement dated February 11, 2003 between Primo Piatto, Inc., awholly-owned subsidiary of the Company, and CoBank, ACB. (Incorporated byreference to Exhibit 10.4 from the Company’s Quarterly Report on Form 10-Q,File No. 000-50111, for the quarter ended January 31, 2003).

 

10.16                     Dakota Growers Pasta Company, Inc. 2002 Stock Option Plan.

 

10.17                     Dakota Growers Pasta Company, Inc. 2003 Stock Option Plan.

 

10.18                     Amendmentdated July 29, 2003 to the Master Loan Agreement dated June 20, 2001between the Company and CoBank, ACB.

 

21                                    Subsidiaryof the registrant.

 
| **Name of Subsidiary** |   | **Jurisdiction of Incorporation** |
|------------------------|--------|-----------------------------------|
|                   |   |                              |
| Primo  Piatto, Inc.    |   | Minnesota                         |

 

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23                                    Consentof Independent Auditor; Eide Bailly LLP.

 

31.1                           Certificationof Chief Executive Officer required by Securities and Exchange Commission Rule13a-14(a) or 15d-14(a).

 

31.2                           Certificationof Chief Financial Officer required by Securities and Exchange Commission Rule13a-14(a) or 15d-14(a).

 

32                                    Certification of Chief Executive Officer andChief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Actof 2002, 18 U.S.C. Section 1350.

 

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**SIGNATURES**

 

Pursuant tothe requirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned, thereunto duly authorized.

 
|   | DAKOTA  GROWERS PASTA COMPANY, INC. |
|--------|-------------------------------------|
|   |                                |
|   |                                |   |
|   | By:                                 | /s/ Timothy J. Dodd |   |
|   |                                |   |   |
|   |                                | Timothy J. Dodd, |   |
|   |                                | PRESIDENT AND CHIEF EXECUTIVE OFFICER,  AND PRINCIPAL EXECUTIVE OFFICER |   |
|   |                                |
|   | Dated:  October 29, 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 |   |                  |
| Timothy J. Dodd           |   | (Principal Executive Officer)         |   | October 29, 2003 |
|                      |   |                                  |   |                  |
|                      |   |                                  |   |                  |
| /s/ Thomas P. Friezen     |   | Chief Financial Officer               |   |                  |
| Thomas P. Friezen         |   | (Principal Financial Officer)         |   | October 29, 2003 |
|                      |   |                                  |   |                  |
|                      |   |                                  |   |                  |
|                      |   | Vice President – Finance and     |   |                  |
| /s/ Edward O. Irion       |   | Chief Accounting Officer              |   |                  |
| Edward O. Irion           |   | (Principal Accounting Officer)        |   | October 29, 2003 |
|                      |   |                                  |   |                  |
|                      |   |                                  |   |                  |
| /s/ John S. Dalrymple III |   |                                  |   |                  |
| John S. Dalrymple III     |   | Director                              |   | October 29, 2003 |
|                      |   |                                  |   |                  |
|                      |   |                                  |   |                  |
| /s/ John D. Rice, Jr.     |   |                                  |   |                  |
| John D. Rice, Jr.         |   | Director                              |   | October 29, 2003 |

 

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| **Signature**          |   | **Title** |   | **Date**              |
|------------------------|--------|-----------|--------|-----------------------|
|                   |   |      |   |                  |
| /s/ Curt R. Trulson    |   |      |   |                  |
| Curt R. Trulson        |   | Director  |   | October 29, 2003 |
|                   |   |      |   |                  |
|                   |   |      |   |                  |
| /s/ Allyn K. Hart      |   |      |   |                  |
| Allyn K. Hart          |   | Director  |   | October 29, 2003 |
|                   |   |      |   |                  |
|                   |   |      |   |                  |
| /s/ Roger A. Kenner    |   |      |   |                  |
| Roger A. Kenner        |   | Director  |   | October 29, 2003 |
|                   |   |      |   |                  |
|                   |   |      |   |                  |
| /s/ James F. Link      |   |      |   |                  |
| James F. Link          |   | Director  |   | October 29, 2003 |
|                   |   |      |   |                  |
|                   |   |      |   |                  |
| /s/ Eugene J. Nicholas |   |      |   |                  |
| Eugene J. Nicholas     |   | Director  |   | October 29, 2003 |
|                   |   |      |   |                  |
|                   |   |      |   |                  |
| /s/ Jeffrey O. Topp    |   |      |   |                  |
| Jeffrey O. Topp        |   | Director  |   | October 29, 2003 |
|                   |   |      |   |                  |
|                   |   |      |   |                  |
| /s/ Michael E. Warner  |   |      |   |                  |
| Michael E. Warner      |   | Director  |   | October 29, 2003 |

 

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