 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
  ý

  Quarterly Report Pursuant to Section 13 or 15(d) of the

  Securities Exchange Act of 1934

  For the quarterly period ended January 31, 2002

  or

  o

  Transition Report Pursuant to Section 13 or 15(d) of the

  Securities Exchange Act of 1934

Commission File No. 33-99834
 
DAKOTA GROWERS PASTA COMPANY
(Exact

name of registrant as specified in its charter)
 
  North

  Dakota

  45-0423511

  (State

  of incorporation)

  (IRS

  Employer Identification No.)

One

Pasta Avenue, P.O. Box 21, Carrington, ND 58421-0021
(Address

of principal executive offices including zip code)
 
(701)

652-2855
(Registrant’s

telephone number, including area code)
 
NOT APPLICABLE
(Former

name, former address and former fiscal year, if changed since last report)
 
Indicate

by check mark whether the registrant (1) has filed all reports required to be

filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the

preceding 12 months (or for such shorter period that the registrant was

required to file such reports), and (2) has been subject to such filing

requirements for the past 90 days.       Yes  ý  No  o
 
        The number of shares outstanding of the

Registrant’s classes of common stock were 1,155 shares of membership stock, par

value $125.00, and 11,275,297 shares of equity stock, par value $2.50, as of

March 14, 2002.
 
PART I — FINANCIAL INFORMATION
 
ITEM 1.

FINANCIAL STATEMENTS
 
DAKOTA

GROWERS PASTA COMPANY
CONSOLIDATED

BALANCE SHEETS
(In

Thousands, Except Share Information)
 
  January

  31,

  2002 

  July 31,

  2001 

  (Unaudited)

  ASSETS

  CURRENT

  ASSETS

  Cash

  and cash equivalents

  $

  3

  $

  3

  Short-term

  investments (restricted)

  1,974

  1,974

  Trade

  accounts receivable,  
less allowance for cash

  discounts and  
doubtful accounts of $588 and

  $610, respectively 

  13,378 

  11,560 

  Other

  receivables

  425

  1,138

  Inventories

  20,105

  21,050

  Prepaid

  expenses

  2,137

  1,602

  Total

  current assets

  38,022

  37,327

  PROPERTY

  AND EQUIPMENT

  In

  service

  115,276

  114,984

  Construction

  in process

  39

  108

  115,315

  115,092

  Less

  accumulated depreciation

  (36,755

  )

  (33,367

  )

  Net

  property and equipment

  78,560

  81,725

  INVESTMENT

  IN COOPERATIVE BANKS

  2,211

  2,211

  OTHER

  ASSETS

  8,049

  7,395

  $

  126,842

  $

  128,658

2

DAKOTA

GROWERS PASTA COMPANY
CONSOLIDATED

BALANCE SHEETS
(In

Thousands, Except Share Information)
 
  January

  31,

  2002 

  July 31,

  2001 

  (Unaudited)

  LIABILITIES AND MEMBERS’ INVESTMENT

  CURRENT

  LIABILITIES

  Notes

  payable

  $

  3,500

  $

  8,100

  Current

  portion of long-term debt

  7,983

  2,657

  Accounts

  payable

  3,334

  4,400

  Excess

  outstanding checks over cash on deposit

  2,238

  1,072

  Accrued

  grower payments

  880

  969

  Accrued

  liabilities

  5,724

  5,709

  Total

  current liabilities

  23,659

  22,907

  COMMITMENTS

  AND CONTINGENCIES

  —

  —

  LONG-TERM

  DEBT, net of current portion

  40,910

  47,594

  DEFERRED

  INCOME TAXES

  3,618

  3,777

  Total

  liabilities

  68,187

  74,278

  REDEEMABLE

  PREFERRED STOCK

  Series

  A, 6% non-cumulative, $100 par value, 800 shares authorized, 533 and 600

  shares issued and outstanding as of January 31, 2002 and July 31, 2001,

  respectively 

  53 

  60 

  Series

  B, 2% non-cumulative, $100 par value, 2,700 shares authorized, 525 shares

  issued and outstanding 

  53 

  53 

  Total

  redeemable preferred stock

  106

  113

  MEMBERS’

  INVESTMENT

  Convertible

  preferred stock

  Series

  C, 6% non-cumulative, $100 par value, 15,000 shares authorized, 924 shares

  issued and outstanding as of July 31, 2001 

  — 

  92 

  Membership

  stock, $125 par value, 2,000 shares authorized, 1,155 and 1,156 shares issued

  and outstanding as of January 31, 2002 and July 31, 2001, respectively 

  144 

  144 

  Equity

  stock, $2.50 par value, 25,000,000 shares authorized, 11,275,297 and

  11,253,121 shares issued and outstanding as of January 31, 2002 and July 31,

  2001, respectively 

  28,188 

  28,133 

  Additional

  paid-in capital

  22,913

  22,876

  Accumulated

  allocated earnings

  4,596

  4,596

  Accumulated

  unallocated earnings (deficit)

  2,708

  (1,574

  )

  Total

  members’ investment

  58,549

  54,267

  Total

  liabilities and members’ investment

  $

  126,842

  $

  128,658

See Notes to

Consolidated Financial Statements
 
3

DAKOTA

GROWERS PASTA COMPANY
CONSOLIDATED

STATEMENTS OF OPERATIONS
(In

Thousands, Except Per Share Amounts)(Unaudited)
 
  Three

  Months Ended

  January 31, 

  2002

  2001

  Net

  revenues (net of discounts and allowances of $4,083 and $4,537, respectively)

  $

  37,020 

  $

  31,632 

  Cost

  of product sold

  32,023

  30,010

  Gross

  proceeds

  4,997

  1,622

  Marketing,

  general and administrative expenses

  2,381

  2,469

  Operating

  proceeds (loss)

  2,616

  (847

  )

  Other

  income (expense)

  Interest

  and other income

  66

  46

  Interest

  expense, net

  (1,028

  )

  (1,062

  )

  Income

  (loss) before income taxes

  1,654

  (1,863

  )

  Income

  tax benefit

  79

  80

  Net

  income (loss) from patronage and non-patronage business 

  1,733 

  (1,783 

  ) 

  Dividends

  on preferred stock

  1

  1

  Net

  earnings (loss) from patronage and non-patronage business available for

  members

  $

  1,732

  $

  (1,784

  )

  Average

  equity shares outstanding

  11,275

  11,253

  Net

  earnings (loss) from patronage and non-patronage business per average equity

  share outstanding 

  Basic

  $

  0.15

  $

  (0.16

  )

See Notes to Consolidated

Financial Statements
 
4

DAKOTA

GROWERS PASTA COMPANY
CONSOLIDATED

STATEMENTS OF OPERATIONS
(In

Thousands, Except Per Share Amounts)(Unaudited)
 
  Six Months

  Ended

  January 31, 

  2002

  2001

  Net

  revenues (net of discounts and allowances of $8,251 and $9,401, respectively)

  $

  74,566 

  $

  64,915 

  Cost

  of product sold

  63,665

  60,957

  Gross

  proceeds

  10,901

  3,958

  Marketing,

  general and administrative expenses

  4,810

  5,071

  Operating

  proceeds (loss)

  6,091

  (1,113

  )

  Other

  income (expense)

  Interest

  and other income

  178

  185

  Gain

  on sale of other assets

  2

  —

  Interest

  expense, net

  (2,139

  )

  (2,115

  )

  Income

  (loss) before income taxes

  4,132

  (3,043

  )

  Income

  tax benefit

  159

  159

  Net

  income (loss) from patronage and non-patronage business 

  4,291 

  (2,884 

  ) 

  Dividends

  on preferred stock

  9

  13

  Net

  earnings (loss) from patronage and non-patronage business available for

  members 

  $

  4,282 

  $

  (2,897 

  ) 

  Average

  equity shares outstanding

  11,275

  11,253

  Net

  earnings (loss) from patronage and non-patronage business per average equity

  share outstanding 

  Basic

  $

  0.38

  $

  (0.26

  )

See Notes to

Consolidated Financial Statements
 
5

DAKOTA

GROWERS PASTA COMPANY
CONSOLIDATED

STATEMENTS OF CASH FLOWS
(In

Thousands)(Unaudited)
 
  Six Months

  Ended

  January 31, 

  2002

  2001

  OPERATING

  ACTIVITIES

  Net

  income (loss)

  $

  4,291

  $

  (2,884

  )

  Adjustments

  to reconcile net income (loss) to net cash from (used in) operating

  activities: 

  Depreciation

  and amortization

  4,398

  4,403

  Gain

  on sale of other assets

  (2

  )

  —

  Deferred

  income taxes

  (159

  )

  (159

  )

  Payments

  for long-term prepaid marketing costs

  (2,250

  )

  (5,038

  )

  Changes

  in assets and liabilities:

  Trade

  receivables

  (1,818

  )

  1,125

  Other

  receivables

  713

  130

  Inventories

  945

  (2,574

  )

  Prepaid

  expenses

  221

  178

  Other

  assets

  —

  2

  Accounts

  payable

  (1,066

  )

  141

  Excess

  outstanding checks over cash deposits

  1,166

  1,459

  Growers

  payables

  (89

  )

  (130

  )

  Other

  accrued liabilities

  15

  497

  NET

  CASH FROM (USED IN) OPERATING ACTIVITIES

  6,365

  (2,850

  )

  INVESTING

  ACTIVITIES

  Purchases

  of property and equipment

  (223

  )

  (2,415

  )

  Proceeds

  from sale of other assets

  53

  —

  Payments

  for package design costs

  (221

  )

  (173

  )

  NET

  CASH USED IN INVESTING ACTIVITIES

  (391

  )

  (2,588

  )

  FINANCING

  ACTIVITIES

  Net

  change in short-term debt

  (4,600

  )

  12,525

  Payments

  on long-term debt

  (1,358

  )

  (4,327

  )

  Preferred

  stock retirements

  (7

  )

  (6

  )

  Dividends

  paid on preferred stock

  (9

  )

  (13

  )

  Patronage

  distributions

  —

  (4,466

  )

  NET CASH FROM (USED IN) FINANCING

  ACTIVITIES

  (5,974

  )

  3,713

(continued on next page)
 
6

DAKOTA

GROWERS PASTA COMPANY
CONSOLIDATED

STATEMENTS OF CASH FLOWS
(In

Thousands)(Unaudited)
 
  Six Months

  Ended

  January 31, 

  2002

  2001

  NET

  CHANGE IN CASH AND CASH EQUIVALENTS

  —

  (1,725

  )

  CASH

  AND CASH EQUIVALENTS, BEGINNING OF PERIOD 

  3 

  1,725 

  CASH

  AND CASH EQUIVALENTS, END OF PERIOD 

  $

  3 

  $

  — 

  SUPPLEMENTAL

  DISCLOSURES OF CASH FLOW INFORMATION 

  Cash payments for

  Interest

  (net of amounts capitalized)

  $

  2,035

  $

  2,056

  Income

  taxes

  $

  10

  $

  4

See Notes to

Consolidated Financial Statements
 
7

DAKOTA

GROWERS PASTA COMPANY
NOTES

TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 
The following notes should be read in conjunction with

the notes to the financial statements for the year ended July 31, 2001 as filed

in the Company’s Form 10-K.
 
NOTE 1 —

ORGANIZATION
 
Dakota Growers Pasta Company (“Dakota Growers”, “the Company” or “the

Cooperative”) is organized as a farmers’ cooperative for purposes of manufacturing

food for human consumption from durum and other grain products. Net proceeds

are allocated to patrons who are members on the basis of their participation in

the Cooperative.
 
The ownership of membership stock, which signifies membership in the

Cooperative, is restricted to producers of agricultural products. The ownership

of equity stock is restricted to members of the Cooperative. Preferred stock

may be held by persons who are not members of the Cooperative.
 
The Company formed three wholly owned subsidiaries in January 2002. On

February 1, 2002, Dakota Growers Restructuring Company, Inc, one of the wholly

owned subsidiaries created by the Company, filed a Registration Statement on

Form S-4 with the United States Securities and Exchange Commission. The S-4

describes the proposed conversion of the Company from a North Dakota

cooperative into a North Dakota corporation. Subject to the approval of the

members of the Company, the proposed conversion will be effected by a series of

mergers, via the newly created wholly owned subsidiaries, as described within

the S-4.  If the proposed conversion is

completed, the Company’s wholly owned subsidiary, Dakota Growers Restructuring

Company, Inc., would be the surviving entity, conducting the Company’s on-going

business.  Upon completion of the

conversion, the surviving entity would adopt the name Dakota Growers Pasta

Company, Inc. Please see the aforementioned Form S-4 for more information

regarding the proposed transaction.
 
NOTE 2 —

FINANCIAL STATEMENT PRESENTATION
 
The unaudited consolidated financial

statements included herein have been prepared pursuant to the rules and

regulations of the Securities and Exchange Commission. Accordingly, they do not

include all the information and footnotes required by accounting principles

generally accepted in the United States of America for complete financial

statements. In the opinion of management, all adjustments (consisting of normal

recurring accruals) considered necessary for a fair presentation have been

included. Operating results for the three and six month periods ended January

31, 2002 are not necessarily indicative of the results that may be expected for

the year ended July 31, 2002. The information included in this Form 10-Q should

be read in conjunction with Management’s Discussion and Analysis and the

consolidated financial statements and footnotes included in the Company’s Form

10-K for the year ended July 31, 2001. The information contained in the balance

sheet as of July 31, 2001 was derived from the Company’s audited annual report

for fiscal 2001. Reclassifications have been made to facilitate comparability

with current presentation. Such reclassifications have no effect on the net

results of operations.
 
The financial information presented herein

includes the consolidated balances and results of operations of Dakota Growers

Pasta Company and its wholly owned subsidiaries. All significant intercompany

balances and transactions have been eliminated.
 
NOTE 3 — INVENTORIES 
Inventories are valued at lower of cost or

market. Inventories as of January 31, 2002 include raw materials of $5,813,000

and finished goods of $14,292,000. Inventories at July 31, 2001 include raw

materials of $5,710,000 and finished goods of $15,340,000.
 
8

NOTE

4 — LOAN AGREEMENTS 
On February 15, 2002, the Company secured a $19 million revolving

credit facility with CoBank covering the period from March 1, 2002 through

February 25, 2003. The revolving line has a variable interest rate not to exceed

CoBank’s National Variable Rate plus 1% and is secured by property, equipment,

and current assets of the Company. The balance outstanding under the Company’s

previous line of credit agreements totaled $3.5 million and $8.1 million as of

January 31, 2002 and July 31, 2001, respectively.
 
The

various debt agreements with the Bank and institutional investors obligate the

Company to maintain or achieve certain amounts of equity and certain financial

ratios and impose certain restrictions on the Company. The Company was in

compliance with these financial covenants as of January 31, 2002. On January

24, 2002, the Company and CoBank entered into an amendment of the Master Loan

Agreement, which requires the Company to maintain a debt service coverage

ratio, measured at the end of each fiscal year, of 1.25 to 1. The Company had

previously been required to maintain a debt service coverage ratio of 1.50 to

1.
 
NOTE 5 — STOCK OPTIONS
 
In December 2001, the Board of

Directors approved the issuance of non-qualified stock options for 2,045 shares

of Series C convertible preferred stock with a total exercise price of

$204,500. Each share of Series C convertible preferred stock may be converted

into 24 shares of equity stock at the option of the holder.
 
NOTE 6 — INCOME TAXES 
The Company is a non-exempt cooperative as defined by Section

1381(a)(2) of the Internal Revenue Code (“Code”). Accordingly, net margins from

business transacted with its member patrons which are allocated, qualified, and

paid as prescribed in Section 1382 of the Code will be taxable to the members

and not to the Company. Net margins and member allocations are determined on

the basis of accounting used for financial reporting purposes. To the extent

that net margins are not allocated and paid as stated above or arise from

business done with non-members, the Company shall have taxable income subject

to corporate income tax rates. Cooperative organizations have 8 ½ months after

their fiscal year end to make such allocations in the form of written notices

of allocation or cash.
 
Income tax benefit amounts shown for the

periods presented resulted from reductions in deferred tax liabilities

associated with differences between the book and tax basis of property and

equipment.
 
NOTE 7 — PATRONAGE BUSINESS 
The Company’s business is conducted on a cooperative basis. The Company

calculates income from patronage sources based on income derived from bushels

of durum delivered by members. Non-patronage income is derived from the resale

of pasta purchased from non-members, the resale of semolina purchased from

non-members, certain amounts of interest income and any income taxes assessed

on non-member business. Net income allocable to patronage business totaled

$4,381,000 for the six months ended January 31, 2002, compared to a net loss

allocable to patronage business of $2,720,000 for the six months ended January

31, 2001.
 
NOTE 8 — EARNINGS (LOSS) PER

SHARE 
The Company allocates its earnings (loss) and patronage distributions

based on patronage business (bushels of durum delivered, which approximates one

bushel of durum per equity share). For presentation purposes, it has calculated

basic net earnings (loss) per share by dividing earnings (loss) from patronage

and non-patronage 
 
9

business available for members (net income (loss) less preferred

dividends) by the weighted average number of equity shares effective and

outstanding during the period.
 
The Company had convertible preferred stock and stock options for convertible

preferred stock outstanding during the periods presented. Fully diluted

earnings (loss) per share are calculated for the assumed conversion of these

dilutive securities. As the Company’s stock is only traded in a small secondary

market through private transactions, the Company has assumed the proceeds from

the exercise of stock options would reduce debt and, thus, interest expense.

Fully diluted earnings (loss) per share are not presented, as the dilutive

effect of outstanding convertible preferred stock and stock options is not

material for the periods presented.
 
NOTE 9 — COMMITMENTS 
The Company forward contracts for a certain

portion of its future durum wheat requirements. The Company had outstanding

commitments for grain purchases totaling $7,612,000 at January 31, 2002. The

Company also has a commitment to pay $1.0 million under a long-term customer

marketing agreement by December 31, 2002.
 
10

ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS
 
Forward-Looking Statements
 
The

following discussion contains forward-looking statements. Such forward-looking

statements include, among others, those statements including the words

“expect”, “anticipate”, “believe”, “may” and similar expressions. Such

statements are based on assumptions by the Company’s management, as of the date

of this Quarterly Report, and are subject to risks and uncertainties, including

those discussed in the Company’s 2001 Form 10-K under “Risk Factors”, that

could cause actual results to differ materially from those anticipated. The

Company cautions readers not to place undue reliance on such forward-looking

statements. The Company will not update any forward-looking statements in the

Quarterly Report to reflect future events or developments.
 
Summary
 
Dakota

Growers Pasta Company reported net earnings of $4.3 million for the six months

ended January 31, 2002, compared to the $2.9 million net loss incurred for the

six months ended January 31, 2001.
 
Increases

in sales volumes and per unit prices combined with various cost cutting

measures contributed to the increase in profitability. The Company realized

volume and pricing gains in the foodservice and retail markets during the six

months ended January 31, 2002 when compared to the corresponding period of the

prior year. Though pricing within the dry pasta industry remains highly

competitive, industry changes within the past six months have expanded

opportunities for co-pack arrangements, which involve the sale of dry pasta

products to other pasta manufacturers. The Company continues to explore

opportunities in the co-pack area. Cost efficiencies have been realized from

the closure of the Minneapolis factory in conjunction with the completion of

the lasagna line in New Hope. The Company has also realized savings in the

first half of fiscal 2002 by reducing its labor force where necessary to match

product demand levels.
 
The

Company formed three wholly owned subsidiaries in January 2002. On February 1,

2002, Dakota Growers Restructuring Company, Inc, one of the wholly owned

subsidiaries created by the Company, filed a Registration Statement on Form S-4

with the United States Securities and Exchange Commission. The S-4 describes

the proposed conversion of the Company from a North Dakota cooperative into a

North Dakota corporation. Subject to the approval of the members of the

Company, the proposed conversion will be effected by a series of mergers, via

the newly created wholly owned subsidiaries, as described within the S-4.  If the proposed conversion is completed, the

Company’s wholly owned subsidiary, Dakota Growers Restructuring Company, Inc.,

would be the surviving entity, conducting the Company’s on-going business.  Upon completion of the conversion, the

surviving entity would adopt the name Dakota Growers Pasta Company, Inc. Please

see the aforementioned Form S-4 for more information regarding the proposed

transaction.
 
Results of Operations
 
Comparison of the Three Months

Ended January 31, 2002 and 2001
 
Net Revenues.  Net revenues increased $5.4 million, or 17.0%, to $37.0 million

for the quarter ended January 31, 2002, compared to $31.6 million for the

quarter ended January 31, 2001. The increase was primarily due to higher pasta

and semolina sales volumes.
 
Revenues

from the retail market increased $2.3 million, or 11.7%, mainly as a result of

a 12.6% increase in sales volumes. Foodservice revenues increased $1.5 million,

or 23.6%, primarily due to volume growth driven by expansions and acquisitions by our

customers. Ingredient revenues decreased $0.5 million, or 14.8%, mainly as a

result of a 16.8% decrease in sales volumes. The ingredient sales volume

decline primarily resulted from the loss of one customer in this market due to

competitive pricing issues.
 
11

The Company markets

semolina production in excess of its own requirements as well as by-products of

the durum milling process. Revenues from semolina and by-product sales were up

$2.1 million from the prior year primarily as a result of increased semolina

sales volumes.
 
Cost of Product Sold. Cost of

product sold increased $2.0 million, or 6.7%, to $32.2 million for the quarter

ended January 31, 2002. The increase resulted mainly from revenue growth offset

by lower conversion costs due to labor reductions and other cost cutting

initiatives. Gross margin as a percentage of net revenues increased from 5.1%

to 13.5% as a result of these factors.
 
Marketing, General, and Administrative

(“MG&A”) Expenses. MG&A expenses for the quarter ended

January 31, 2002 decreased by $88,000, or 3.6%, from the quarter ended January

31, 2001. MG&A expenses as a percentage of net revenues decreased from 7.8%

to 6.4%.
 
Interest Expense. Interest

expense for the three months ended January 31, 2002, was $1.0 million,

relatively unchanged from the corresponding period of the prior year.
 
Income Taxes. The Company

has recorded an income tax benefit of $79,000 and $80,000 for the quarters

ended January 31, 2002 and 2001, respectively, relating to the reduction in

deferred tax liabilities associated with differences between the book and tax

basis of property and equipment.
 
Net Income. Net income for the three months ended January

31, 2002 totaled $1.7 million compared to the $1.8 million net loss incurred

for the three months ended January 31, 2001. The $3.5 million increase in net

earnings resulted from increases in sales volumes combined with cost

reductions as noted above.
 
Comparison of the Six Months

Ended January 31, 2002 and 2001
 
Net Revenues. Net revenues

increased $9.7 million, or 14.9%, to $74.6 million for the six months ended

January 31, 2002, from $64.9 million for the six months ended January 31, 2001.

Higher sales volumes as well as higher per unit selling prices contributed to

the increase over the corresponding period of the prior year as pasta sales

volumes increased 7.4% while pasta per unit selling prices increased 3.5%.

Higher semolina sales volumes also contributed to the revenue increase.
 
Revenues

from the retail market increased $4.5 million, or 11.2%, as a result of an 8.3%

increase in sales volumes combined with a 2.9% increase in per unit selling

prices. Foodservice revenues increased $3.7 million, or 28.5%, primarily due to

volume growth of 25.5% driven by expansions and acquisitions by our customers.

Ingredient revenues decreased $1.4 million, or 18.8%, mainly as a result of a 19.7%

decrease in sales volumes. The ingredient sales volume decline primarily

resulted from the loss of one customer in this market due to competitive

pricing issues.
 
Revenues from semolina

and by-product sales for the six months ended January 31, 2002 were up $2.8

million from the prior year as a result of increases in both sales volumes and

per unit selling prices.
 
Cost of Product Sold. Cost of

product sold for the six months ended January 31, 2002 totaled $63.7 million;

an increase of 4.4% compared to the $61.0 million reported for the six months

ended January 31, 2001. The $2.7 million increase resulted mainly from revenue

growth offset by lower conversion costs due to labor reductions and other cost

cutting and efficiency initiatives. Gross margin as a percentage of net

revenues increased from 6.1% to 14.6% as a result of these factors.
 
Marketing, General, and Administrative

(“MG&A”) Expenses. MG&A expenses decreased by $261,000,

or 5.2%, to $4.8 million for the six months ended January 31, 2002, from $5.1

million for the six months ended January 31, 2001. MG&A expenses as a

percentage of net revenues decreased from 7.8% to 6.5%.
 
Interest Expense. Interest

expense for the six months ended January 31, 2002, was $2.1 million,

essentially unchanged from the six months ended January 31, 2001.
 
12

Income Taxes. The Company

has recorded an income tax benefit of $159,000 for each of the six month

periods ending January 31, 2002 and 2001, relating to the reduction in deferred

tax liabilities associated with differences between the book and tax basis of

property and equipment.
 
Net Income.  Net income for the six months ended January 31, 2002 was $4.3 million

compared to the $2.9 million net loss incurred for the six months ended January

31, 2001. The $7.2 million increase in net earnings resulted

from improved gross margins from increased sales prices and volumes combined

with cost reductions as noted above.
 
Liquidity and Capital Resources
 
Our

primary sources of liquidity are cash provided by operations, short-term

borrowings under our credit facility, and outside debt financing. Working

capital as of January 31, 2002 and July 31, 2001 was $14.4 million.
 
On February 15, 2002, the Company secured a $19 million revolving

credit facility with CoBank covering the period from March 1, 2002 through

February 25, 2003. The revolving line has a variable interest rate not to

exceed CoBank’s National Variable Rate plus 1% and is secured by property,

equipment, and current assets of the Company. The balance outstanding under the

Company’s previous line of credit agreements totaled $3.5 million and $8.1

million as of January 31, 2002 and July 31, 2001, respectively.
 
The

Company’s long-term financing is provided through various secured term loans

and secured notes from both the Bank and certain institutional investors.

Variable interest rates on term and seasonal loans are based on the lender’s

cost of funds. Debt service requirements will be increasing beginning in fiscal

year 2003 in relation to previous years as minimum principal payments due on

long-term debt total $9.3 million for fiscal 2003, $10.0 million for fiscal

2004 and $7.2 million for fiscal 2005. The first principal payment on the

institutional senior secured notes totaling $3,571,000 is due August 1, 2002.
 
The

various debt agreements with the Bank and institutional investors obligate the

Company to maintain or achieve certain amounts of equity and certain financial

ratios and impose certain restrictions on the Company. The Company was in

compliance with these financial covenants as of January 31, 2002 and the date

of this filing. On January 24, 2002, the Company and CoBank entered into an

amendment of the Master Loan Agreement, which requires the Company to maintain

a debt service coverage ratio, measured at the end of each fiscal year, of 1.25

to 1. The Company had previously been required to maintain a debt service

coverage ratio of 1.50 to 1.
 
The

Company is currently exploring a possible sale/leaseback transaction for

certain pasta production equipment. If such a transaction is consummated, we

estimate, based on current discussions, to generate $4 million to $5 million in

funds, which we would anticipate using to secure and expand the Company’s sales

efforts.
 
Net

cash provided by operations totaled $6.4 million for the six months ended

January 31, 2002, compared to net cash used in operating activities totaling

$2.9 for the six months ended January 31, 2001. The increase in net cash

provided by operations was primarily due to an increase in net income and a

decrease in payments made under long-term marketing agreements.
 
Net

cash used in investing activities relates primarily to the construction and

installation of milling and pasta equipment and payments made for package

design costs. Net cash used in financing activities totaled $0.4 million and

$2.6 million for the six months ended January 31, 2002 and 2001, respectively.

A majority of the pasta equipment expenditures for the six months ended January

31, 2001 related to the installation of a lasagna line at the New Hope,

Minnesota plant. The lasagna line was completed and became operational in

February 2001.
 
Net

cash used in financing activities totaled $6.0 million for the six months ended

January 31, 2002 mainly related to payments made on our credit facility and

long-term debt. Net cash from financing activities totaled $3.7 million for the

six months ended January 31, 2001, mainly from borrowings on the credit

facility offset by payments for long-term debt service and patronage

distributions. The Board of Directors authorized a qualified 
 
13

patronage

allocation of $4,466,000 ($.4284 per bushel acquired or $.40 per average

outstanding equity share) for fiscal year 2000 at its November 2000 meeting.

The total qualified patronage allocation was paid in cash on November 30, 2000.
 
The

Company has current commitments for $7.6 million in raw material purchases,

primarily durum purchase commitments from its members. The Company anticipates

capital expenditures to total approximately $2.0 million in fiscal year 2002.

These expenditures are primarily for pasta line upgrades and cost reduction

projects. Commitments for monthly operating lease payments for technology and

other assets total $0.6  million, of which $0.4 million is due

within one year. The Company also has a commitment to pay $1.0 million under a

long-term customer marketing agreement by December 31, 2002. We expect to fund

these commitments through cash from operations and borrowings under our credit

facility.
 
Management

believes that net cash currently available and to be provided by operating

activities, along with its available line of credit, will be sufficient to meet

the Company’s expected capital and liquidity requirements for the foreseeable

future.
 
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES

ABOUT MARKET RISK
 
Market

risk is the risk of loss to future earnings, to fair values or to future cash

flows that may result from changes in the price of a financial instrument. The

value of a financial instrument may change as a result of changes in interest

rates, commodity prices, exchange rates, equity prices, and other market

changes. Market risk is attributed to all market-risk sensitive financial

instruments, including long-term debt.
 
The

Company does not believe it is subject to any material market risk exposure

with respect to interest rates, commodity prices, exchange rates, equity

prices, or other market changes that would require disclosure under this item.
 
14

PART II

— OTHER INFORMATION
 
ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY

HOLDERS
 
Mr.

Allyn K. Hart, Mr. Michael E. Warner, and Mr. Curtis R. Trulson were re-elected

to their positions as members of the Company’s Board of Directors at Annual

District Meetings held in December 2001.
 
The

terms of office of the remaining members of the Board of Directors continue for

the terms for which they were elected in prior years as follows: Mr. John S.

Dalrymple III, Mr. James F. Link, and Mr. John D. Rice Jr. — one year

remaining; Mr. Jeffrey O. Topp, Mr. Eugene J. Nicholas, and Mr. Roger A. Kenner

— two years remaining.
 
ITEM 6. EXHIBITS AND REPORTS ON

FORM 8-K
 
Exhibits
 
10.1                           Statused

Revolving Credit Supplement dated February 15, 2002 between the Company and

CoBank.
 
10.2                           Amendment to

Loan Agreement dated January 24, 2002 between the Company and CoBank.
 
*10.3                    First

Amendment: Five-Year Contract Extension between the Company and U.S.

Foodservice dated December 20, 2001.
 
*

- Portions of this exhibit have been deleted from the publicly filed document and

have been filed separately with the Commission pursuant to a request for

confidential treatment.
 
Reports on Form 8-K
 
The

Company filed a Form 8-K on February 11, 2002 announcing that on February 1,

2002, Dakota Growers Restructuring Company, Inc, a wholly owned subsidiary of

Dakota Growers Pasta Company (the “Company”), filed a Registration Statement on

Form S-4 with the United States Securities and Exchange Commission. The S-4

describes the proposed conversion of the Company from a North Dakota cooperative

into a North Dakota corporation. Subject to the approval of the members of the

Company, the proposed conversion will be effected by a series of mergers as

described within the S-4.  If the

proposed conversion is completed, the Company’s wholly owned subsidiary, Dakota

Growers Restructuring Company, Inc., would be the surviving entity, conducting

the Company’s on-going business.  Upon

completion of the conversion, the surviving entity would adopt the name Dakota

Growers Pasta Company, Inc.
 
The

Company filed a Form 8-K/A on February 28, 2002, which included the Plan of

Merger between Dakota Growers Pasta Company and Dakota Growers Pasta

Restructuring Cooperative, the Transaction Agreement, Articles of Incorporation

of Dakota Growers Restructuring Company, Inc. and Bylaws of Dakota Growers

Restructuring Company, Inc. related to the proposed conversion noted above.
 
The

Company filed a Form 8-K on February 28, 2002 announcing that on February 27,

2002, pursuant to Rule 425 under the Securities Act of 1933, Dakota Growers

Pasta Company (“Company”) filed with the Securities and Exchange Commission a

letter from Thomas Friezen, the Chief Financial Officer of the Company, to Pam

Muslin at Farmers Union. The Letter to Farmers Union filed under Rule 425 of

the Securities Act of 1933 was included.
 
15

SIGNATURES
 
Pursuant

to the requirements of Section 13 or 15(d) of the Securities Exchange Act of

1934, the registrant has duly caused this report to be signed on its behalf by

the undersigned, thereunto duly authorized.
 
  DAKOTA GROWERS PASTA

  COMPANY

  By:

  /s/

  Timothy J. Dodd

  Timothy

  J. Dodd,

  PRESIDENT

  AND GENERAL MANAGER,

  AND

  PRINCIPAL EXECUTIVE OFFICER

  Dated: March 14, 2002

Pursuant

to the requirements of the Securities Exchange Act of 1934, this report has

been signed below by the following persons on behalf of the registrant and in

the capacities and on the dates indicated.
 
  Signature

  Title

  Date

  /s/

  Timothy J. Dodd

  General

  Manager

  Timothy

  J. Dodd

  (Principal

  Executive Officer)

  March

  14, 2002

  /s/

  Thomas P. Friezen

  Chief

  Financial Officer

  Thomas

  P. Friezen

  (Principal

  Financial Officer)

  March

  14, 2002

  /s/

  Edward O. Irion

  Vice

  President - Finance

  Edward

  O. Irion

  (Principal

  Accounting Officer)

  March

  14, 2002

16
ý		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended January 31, 2002

		or

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
North Dakota		45-0423511
(State of incorporation)		(IRS Employer Identification No.)
	January 31, 2002			July 31, 2001
	(Unaudited)
ASSETS

CURRENT ASSETS
Cash and cash equivalents	$	3		$	3

Short-term investments (restricted)	1,974			1,974

Trade accounts receivable, less allowance for cash discounts and doubtful accounts of $588 and $610, respectively	13,378			11,560

Other receivables	425			1,138

Inventories	20,105			21,050

Prepaid expenses	2,137			1,602

Total current assets	38,022			37,327

PROPERTY AND EQUIPMENT
In service	115,276			114,984
Construction in process	39			108
	115,315			115,092
Less accumulated depreciation	(36,755		)	(33,367		)

Net property and equipment	78,560			81,725

INVESTMENT IN COOPERATIVE BANKS	2,211			2,211

OTHER ASSETS	8,049			7,395

	$	126,842		$	128,658
	Three Months Ended January 31,
	2002			2001
Net revenues (net of discounts and allowances of $4,083 and $4,537, respectively)	$	37,020		$	31,632

Cost of product sold	32,023			30,010

Gross proceeds	4,997			1,622

Marketing, general and administrative expenses	2,381			2,469

Operating proceeds (loss)	2,616			(847		)

Other income (expense)
Interest and other income	66			46
Interest expense, net	(1,028		)	(1,062		)

Income (loss) before income taxes	1,654			(1,863		)

Income tax benefit	79			80

Net income (loss) from patronage and non-patronage business	1,733			(1,783		)
Dividends on preferred stock	1			1

Net earnings (loss) from patronage and non-patronage business available for members	$	1,732		$	(1,784	)

Average equity shares outstanding	11,275			11,253

Net earnings (loss) from patronage and non-patronage business per average equity share outstanding

Basic	$	0.15		$	(0.16	)
	Six Months Ended January 31,
	2002			2001
Net revenues (net of discounts and allowances of $8,251 and $9,401, respectively)	$	74,566		$	64,915

Cost of product sold	63,665			60,957

Gross proceeds	10,901			3,958

Marketing, general and administrative expenses	4,810			5,071

Operating proceeds (loss)	6,091			(1,113		)

Other income (expense)
Interest and other income	178			185
Gain on sale of other assets	2			—
Interest expense, net	(2,139		)	(2,115		)

Income (loss) before income taxes	4,132			(3,043		)

Income tax benefit	159			159

Net income (loss) from patronage and non-patronage business	4,291			(2,884		)
Dividends on preferred stock	9			13

Net earnings (loss) from patronage and non-patronage business available for members	$	4,282		$	(2,897	)

Average equity shares outstanding	11,275			11,253

Net earnings (loss) from patronage and non-patronage business per average equity share outstanding

Basic	$	0.38		$	(0.26	)
	DAKOTA GROWERS PASTA COMPANY


	By:	/s/ Timothy J. Dodd
		Timothy J. Dodd,
		PRESIDENT AND GENERAL MANAGER,
		AND PRINCIPAL EXECUTIVE OFFICER

	Dated: March 14, 2002
Signature	Title	Date

/s/ Timothy J. Dodd	General Manager
Timothy J. Dodd	(Principal Executive Officer)	March 14, 2002



/s/ Thomas P. Friezen	Chief Financial Officer
Thomas P. Friezen	(Principal Financial Officer)	March 14, 2002



/s/ Edward O. Irion	Vice President - Finance
Edward O. Irion	(Principal Accounting Officer)	March 14, 2002
NOTE 3 — INVENTORIES

NOTE 4 — LOAN AGREEMENTS

NOTE 6 — INCOME TAXES

NOTE 7 — PATRONAGE BUSINESS

NOTE 8 — EARNINGS (LOSS) PER SHARE

NOTE 9 — COMMITMENTS

DAKOTA GROWERS PASTA CO 10-Q
