**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 
|       | x      | **Quarterly  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934**  |
|------------|--------|----------------------------------------------------------------------------------------------------------|
|       |   | ** **                                                                                               |
|       |   | **For  the quarterly period ended April 30, 2008**                                                  |
|       |   |                                                                                                     |
|       |   | **or**                                                                                                   |
|       |   |                                                                                                     |
| ** ** | **o**  | **Transition  Report Pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |

 

----

 

**Commission File No. 000-50111**

 

----

 

**DAKOTA GROWERS 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, ND 58421**

(Addressof principal executive offices including zip code)

 

**(701) 652-2855**

(Registrant’stelephone number, including area code)

 

**NOT APPLICABLE**

(Formername, former address and former fiscal year, if changed since last report)

 

Indicate bycheck mark whether the registrant (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.       YesxNo o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratedfiler, or a smaller reporting company. See definitions of “large acceleratedfiler,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

| Large accelerated filer  o                     |   | Accelerated filer o          |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated filer x                        |   | Smaller reporting  company o |
| (Do not check if a  smaller reporting company) |   |                              |

 

Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).
|   | Yes o No x |
|--------|------------|

 

As of June 16,2008, the Registrant had 10,192,413 shares of common stock, par value $0.01 pershare, outstanding.

 

 

----

 

**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                              | ** ** | **(Unaudited)**    | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                              | ** ** | **April 30,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                              | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| **ASSETS**                                                                                                              |       |               |       |              |       |
|                                                                                                                    |       |               |       |              |       |
| CURRENT ASSETS                                                                                                          |       |               |       |              |       |
| Cash and cash  equivalents                                                                                              |       | $                  | 19         |              | $          | 89 |   |
|                                                                                                                    |       |               |       |              |       |
| Trade accounts  receivable, less allowance for cash discounts and doubtful accounts of $1,182  and $1,048, respectively |       | 27,954             |       | 18,442            |       |
|                                                                                                                    |       |               |       |              |       |
| Other  receivables                                                                                                      |       | 992                |       | 360               |       |
|                                                                                                                    |       |               |       |              |       |
| Inventories                                                                                                             |       | 42,825             |       | 31,329            |       |
|                                                                                                                    |       |               |       |              |       |
| Prepaid expenses                                                                                                        |       | 1,279              |       | 1,389             |       |
|                                                                                                                    |       |               |       |              |       |
| Deferred income  taxes                                                                                                  |       | 1,104              |       | 1,104             |       |
|                                                                                                                    |       |               |       |              |       |
| Total current  assets                                                                                                   |       | 74,173             |       | 52,713            |       |
|                                                                                                                    |       |               |       |              |       |
| PROPERTY AND  EQUIPMENT                                                                                                 |       |               |       |              |       |
| In service                                                                                                              |       | 133,880            |       | 132,655           |       |
| Construction in  progress                                                                                               |       | 928                |       | 776               |       |
|                                                                                                                    |       | 134,808            |       | 133,431           |       |
| Less accumulated  depreciation                                                                                          |       | (66,421            | )          | (61,985           | )          |
|                                                                                                                    |       |               |       |              |       |
| Net property and  equipment                                                                                             |       | 68,387             |       | 71,446            |       |
|                                                                                                                    |       |               |       |              |       |
| INVESTMENT IN  COOPERATIVE BANK                                                                                         |       | 1,355              |       | 1,310             |       |
|                                                                                                                    |       |               |       |              |       |
| INTANGIBLE  ASSETS, NET                                                                                                 |       | 2,640              |       | —            |       |
|                                                                                                                    |       |               |       |              |       |
| GOODWILL                                                                                                                |       | 8,381              |       | 16,654            |       |
|                                                                                                                    |       |               |       |              |       |
| OTHER ASSETS                                                                                                            |       | 780                |       | 1,043             |       |
|                                                                                                                    |       |               |       |              |       |
|                                                                                                                    |       | $                  | 155,716    |              | $          | 143,166 |   |

 

(continuedon next page)

 

2

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                                                         | ** ** | **(Unaudited)**    | ** ** | ** **        | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| ** **                                                                                                                                         | ** ** | **April 30,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                                                         | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                     |       |               |       |              |       |
|                                                                                                                                               |       |               |       |              |       |
| CURRENT  LIABILITIES                                                                                                                               |       |               |       |              |       |
| Excess  outstanding checks over cash on deposit                                                                                                    |       | $                  | 2,801      |              | $          | 1,759 |   |
| Accounts payable                                                                                                                                   |       | 22,252             |       | 7,352             |       |
| Accrued  liabilities                                                                                                                               |       | 4,519              |       | 5,921             |       |
| Notes payable                                                                                                                                      |       | 17,200             |       | 7,400             |       |
| Current portion  of long-term debt                                                                                                                 |       | 9,501              |       | 9,481             |       |
|                                                                                                                                               |       |               |       |              |       |
| Total current  liabilities                                                                                                                         |       | 56,273             |       | 31,913            |       |
|                                                                                                                                               |       |               |       |              |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                     |       | —             |       | —            |       |
| LONG-TERM DEBT,  net of current portion                                                                                                            |       | 32,359             |       | 40,681            |       |
| DEFERRED INCOME  TAXES                                                                                                                             |       | 14,702             |       | 13,474            |       |
|                                                                                                                                               |       |               |       |              |       |
| Total  liabilities                                                                                                                                 |       | 103,334            |       | 86,068            |       |
|                                                                                                                                               |       |               |       |              |       |
| NONCONTROLLING  INTERESTS                                                                                                                          |       | —             |       | 7,948             |       |
|                                                                                                                                               |       |               |       |              |       |
| STOCKHOLDERS’  EQUITY                                                                                                                         |       |               |       |              |       |
| Series D  delivery preferred stock, non-cumulative, $.01 par value, 11,340,841  authorized, 11,275,297 shares issued and outstanding               |       | 113                |       | 113               |       |
| Series F  convertible preferred stock, non-cumulative, $.01 par value, 2,100,000 shares  authorized, 1,065,000 shares issued and outstanding  |       | 11            |       | 11           |       |
| Common stock,  $.01 par value, 75,000,000 shares authorized, 10,192,413 issued and  outstanding                                                    |       | 102                |       | 102               |       |
| Additional paid-in  capital                                                                                                                        |       | 42,924             |       | 42,798            |       |
| Retained  earnings                                                                                                                                 |       | 9,232              |       | 6,126             |       |
|                                                                                                                                               |       |               |       |              |       |
| Total  stockholders’ equity                                                                                                                   |       | 52,382             |       | 49,150            |       |
|                                                                                                                                               |       |               |       |              |       |
| Total  liabilities and stockholders’ equity                                                                                                   |       | $                  | 155,716    |              | $          | 143,166 |   |

 

SeeNotes to Consolidated Financial Statements

 

3

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                         | ** ** | **April 30,**               | ** ** |
| ** **                                                                         | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Net revenues  (net of discounts and allowances of $6,572 and $5,939, respectively) |       | $                                | 78,538     |   | $ | 46,084 |   |
|                                                                               |       |                             |       |   |   |
| Cost of goods  sold                                                                |       | 70,823                           |       | 39,250 |   |
|                                                                               |       |                             |       |   |   |
| Gross profit                                                                       |       | 7,715                            |       | 6,834 |   |
|                                                                               |       |                             |       |   |   |
| Marketing,  general and administrative expenses                                    |       | 4,297                            |       | 3,188 |   |
|                                                                               |       |                             |       |   |   |
| Operating income                                                                   |       | 3,418                            |       | 3,646 |   |
|                                                                               |       |                             |       |   |   |
| Other income  (expense)                                                            |       |                             |       |   |   |
| Interest and  other income (expense)                                               |       | 8                                |       | (15 | ) |
| Gain on  disposition of property, equipment and other assets                       |       | —                           |       | 9 |   |
| Interest  expense, net                                                             |       | (706                             | )          | (548 | ) |
|                                                                               |       |                             |       |   |   |
| Income before  noncontrolling interests and income taxes                           |       | 2,720                            |       | 3,092 |   |
|                                                                               |       |                             |       |   |   |
| Noncontrolling  interests                                                          |       | —                           |       | (6 | ) |
|                                                                               |       |                             |       |   |   |
| Income before  income taxes                                                        |       | 2,720                            |       | 3,086 |   |
|                                                                               |       |                             |       |   |   |
| Income tax  expense                                                                |       | 979                              |       | 1,204 |   |
|                                                                               |       |                             |       |   |   |
| Net income                                                                         |       | $                                | 1,741      |   | $ | 1,882 |   |
|                                                                               |       |                             |       |   |   |
| Net earnings per  common share                                                     |       |                             |       |   |   |
| Basic                                                                              |       | $                                | 0.17       |   | $ | 0.14 |   |
|                                                                               |       |                             |       |   |   |
| Diluted                                                                            |       | $                                | 0.15       |   | $ | 0.14 |   |
|                                                                               |       |                             |       |   |   |
| Weighted average  common shares outstanding                                        |       |                             |       |   |   |
| Basic                                                                              |       | 10,192                           |       | 13,170 |   |
|                                                                               |       |                             |       |   |   |
| Diluted                                                                            |       | 11,790                           |       | 13,540 |   |

 

SeeNotes to Consolidated Financial Statements

 

4

----

** **

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                                           | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                           | ** ** | **April 30,**              | ** ** |
| ** **                                                                           | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Net revenues  (net of discounts and allowances of $20,724 and $18,495, respectively) |       | $                               | 195,330    |   | $ | 142,190 |   |
|                                                                                 |       |                            |       |   |   |
| Cost of goods  sold                                                                  |       | 172,964                         |       | 124,178 |   |
|                                                                                 |       |                            |       |   |   |
| Gross profit                                                                         |       | 22,366                          |       | 18,012 |   |
|                                                                                 |       |                            |       |   |   |
| Marketing,  general and administrative expenses                                      |       | 13,832                          |       | 9,908 |   |
|                                                                                 |       |                            |       |   |   |
| Operating income                                                                     |       | 8,534                           |       | 8,104 |   |
|                                                                                 |       |                            |       |   |   |
| Other income  (expense)                                                              |       |                            |       |   |   |
| Interest and  other income                                                           |       | 2,122                           |       | 1,193 |   |
| Loss on  disposition of property, equipment and other assets                         |       | (9                              | )          | (649 | ) |
| Interest  expense, net                                                               |       | (2,757                          | )          | (1,767 | ) |
|                                                                                 |       |                            |       |   |   |
| Income before  noncontrolling interests and income taxes                             |       | 7,890                           |       | 6,881 |   |
|                                                                                 |       |                            |       |   |   |
| Noncontrolling  interests                                                            |       | 202                             |       | 125 |   |
|                                                                                 |       |                            |       |   |   |
| Income before  income taxes                                                          |       | 8,092                           |       | 7,006 |   |
|                                                                                 |       |                            |       |   |   |
| Income tax  expense                                                                  |       | 3,073                           |       | 2,733 |   |
|                                                                                 |       |                            |       |   |   |
| Net income                                                                           |       | 5,019                           |       | 4,273 |   |
| Dividends on  preferred stock                                                        |       | (283                            | )          | (113 | ) |
|                                                                                 |       |                            |       |   |   |
| Net earnings on  common stock                                                        |       | $                               | 4,736      |   | $ | 4,160 |   |
|                                                                                 |       |                            |       |   |   |
| Net earnings per  common share                                                       |       |                            |       |   |   |
| Basic                                                                                |       | $                               | 0.46       |   | $ | 0.32 |   |
|                                                                                 |       |                            |       |   |   |
| Diluted                                                                              |       | $                               | 0.41       |   | $ | 0.32 |   |
|                                                                                 |       |                            |       |   |   |
| Weighted average  common shares outstanding                                          |       |                            |       |   |   |
| Basic                                                                                |       | 10,192                          |       | 13,170 |   |
|                                                                                 |       |                            |       |   |   |
| Diluted                                                                              |       | 11,734                          |       | 13,495 |   |
|                                                                                 |       |                            |       |   |   |
| Dividends per  common share                                                          |       | $                               | 0.16       |   | $ | 0.14 |   |

 

SeeNotes to Consolidated Financial Statements

 

5

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
| ** **                                                                  | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                  | ** ** | **April 30,**              | ** ** |
| ** **                                                                  | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| OPERATING  ACTIVITIES                                                       |       |                            |       |   |   |
| Net income                                                                  |       | $                               | 5,019      |   | $ | 4,273 |   |
| Adjustments to  reconcile net income to net cash from operating activities: |       |                            |       |   |   |
| Depreciation and  amortization                                              |       | 5,016                           |       | 5,298 |   |
| Undistributed  patronage capital from cooperatives                          |       | (45                             | )          | (27 | ) |
| Loss on  disposition of property, equipment and other assets                |       | 9                               |       | 649 |   |
| Noncontrolling  interests                                                   |       | (202                            | )          | (125 | ) |
| Deferred income  taxes                                                      |       | 1,228                           |       | 1,172 |   |
| Stock-based  employee compensation                                          |       | 126                             |       | 152 |   |
| Changes in  assets and liabilities                                          |       |                            |       |   |   |
| Trade  receivables                                                          |       | (9,512                          | )          | (2,266 | ) |
| Other  receivables                                                          |       | (632                            | )          | (151 | ) |
| Inventories                                                                 |       | (11,496                         | )          | (2,211 | ) |
| Prepaid expenses                                                            |       | 52                              |       | (131 | ) |
| Other assets                                                                |       | —                          |       | (23 | ) |
| Accounts payable                                                            |       | 14,900                          |       | (1,975 | ) |
| Other accrued  liabilities                                                  |       | (1,402                          | )          | (445 | ) |
| NET CASH FROM  OPERATING ACTIVITIES                                         |       | 3,061                           |       | 4,190 |   |
|                                                                        |       |                            |       |   |   |
| INVESTING  ACTIVITIES                                                       |       |                            |       |   |   |
| Purchase of  interests in DNA Dreamfields Company, LLC                      |       | (2,232                          | )          | — |   |
| Purchases of  property and equipment                                        |       | (1,555                          | )          | (4,591 | ) |
| Proceeds from  sale of property, equipment and other assets                 |       | 53                              |       | — |   |
| Payments for  package design costs                                          |       | (81                             | )          | (398 | ) |
| Proceeds from  cooperative bank equity retirements                          |       | —                          |       | 232 |   |
| Proceeds from  other investments                                            |       | 57                              |       | 116 |   |
| Other  investments                                                          |       | —                          |       | (47 | ) |
| NET CASH USED  FOR INVESTING ACTIVITIES                                     |       | (3,758                          | )          | (4,688 | ) |
|                                                                        |       |                            |       |   |   |
| FINANCING  ACTIVITIES                                                       |       |                            |       |   |   |
| Net change in  excess outstanding checks over cash on deposit               |       | 1,042                           |       | 1,387 |   |
| Net change in  short-term notes payable                                     |       | 9,800                           |       | 7,200 |   |
| Principal  payments on long-term debt                                       |       | (8,071                          | )          | (6,271 | ) |
| Principal  payments under capital lease obligation                          |       | (231                            | )          | (59 | ) |
| Proceeds from  long-term debt borrowings                                    |       | —                          |       | 30 |   |
| Dividends paid  on common stock                                             |       | (1,630                          | )          | (1,843 | ) |
| Dividends paid  on preferred stock                                          |       | (283                            | )          | (113 | ) |
| Issuance of  common stock                                                   |       | —                          |       | 22 |   |
| Investments by  noncontrolling interests                                    |       | —                          |       | 21 |   |
| NET CASH FROM  FINANCING ACTIVITIES                                         |       | 627                             |       | 374 |   |
|                                                                        |       |                            |       |   |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                    |       | (70                             | )          | (124 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                             |       | 89                              |       | 343 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                   |       | $                               | 19         |   | $ | 219 |   |
|                                                                        |       |                            |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                          |       |                            |       |   |   |
| Cash payments  for                                                          |       |                            |       |   |   |
| Interest (net of  amounts capitalized)                                      |       | $                               | 3,044      |   | $ | 2,086 |   |
|                                                                        |       |                            |       |   |   |
| Income taxes                                                                |       | $                               | 2,954      |   | $ | 2,119 |   |
|                                                                        |       |                            |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES     |       |                            |       |   |   |
|                                                                        |       |                            |       |   |   |
| Acquisition of  pasta equipment through capital lease obligation            |       |                            |       | $ | 1,750 |   |
|                                                                        |       |                            |       |   |   |
| Purchase of  interests in DNA Dreamfields Company, LLC                      |       |                            |       |   |   |
| Goodwill  reduction                                                         |       | $                               | (8,273     | ) |   |   |
| Amortizable  intangibles                                                    |       | 2,759                           |       |   |   |
| Noncontrolling  interests reduction                                         |       | 7,746                           |       |   |   |
|                                                                        |       |                            |       |   |   |
|                                                                        |       | $                               | 2,232      |   |   |   |

 

SeeNotes to Consolidated Financial Statements

 

6

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notes should be read in conjunction with the notes to thefinancial statements for the year ended July 31, 2007 as filed in the Company’sForm 10-K.

 

**NOTE 1 - ORGANIZATION**

** **

Dakota GrowersPasta Company, Inc. (“Dakota Growers” or “the Company”) is a North Dakotacorporation that operates a milling and pasta manufacturing facility inCarrington, North Dakota. The Company’s wholly-owned subsidiary, Primo Piatto, Inc.(“Primo Piatto”), a Minnesota corporation, operates a pasta manufacturingfacility in New Hope, Minnesota.  DNADreamfields Company, LLC (“DNADreamfields”) became a wholly-owned subsidiary on September 21, 2007 (SeeNote 7).

 

**NOTE 2 – FINANCIAL STATEMENT PRESENTATION**

** **

The unauditedconsolidated financial statements included herein have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission forquarterly reporting. Accordingly, they do not include all the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals except forthe pension accrual as disclosed in Note 13) considered necessary for a fairpresentation have been included. Operating results for the three and nine monthperiods ended April 30, 2008 are not necessarily indicative of the resultsthat may be expected for the year ended July 31, 2008. The unauditedconsolidated financial statements included in this Form 10-Q should beread in conjunction with the consolidated financial statements and footnotesincluded in the Company’s Form 10-K for the year ended July 31, 2007.The information contained in the balance sheet as of July 31, 2007 wasderived from the Company’s audited annual report for fiscal year 2007.Reclassifications have been made to facilitate comparability with currentpresentation. Such reclassifications have no effect on the net results ofoperations.

 

The financialinformation presented herein includes the consolidated balance sheets andresults of operations of theCompany, its wholly-owned subsidiary, Primo Piatto, Inc., and DNADreamfields Company, LLC, which the Company began to consolidate in fiscal year2005. All material inter-company accounts and transactions have been eliminatedin the preparation of the consolidated financial statements.

 

**NOTE 3 – NEW ACCOUNTING STANDARDS**

** **

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).SFAS No. 157 defines fair value, establishes a framework for measuringfair value and expands disclosure of fair value measurements. SFAS No. 157applies under other accounting pronouncements that require or permit fair valuemeasurements and accordingly, does not require any new fair valuemeasurements.  The provisions of SFAS No. 157,as amended by FSP No. 157-2 are effective for the specified fair valuemeasures for financial statements issued for fiscal years beginning after November 15,2008 and interim periods within those fiscal years for items within scope. Wehave not yet assessed the impact, if any, that the implementation of SFAS No. 157will have on our consolidated results of operations or financial condition.

 

In September 2006, the U.S. Securities and Exchange Commission(SEC) issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year Financial Statements*”*(SAB 108). SAB 108 addresses thediversity in practice of quantifying financial statement misstatementsresulting in the potential build up of improper amounts on the balance sheet.SAB 108 provides interpretive guidance on how the effects of the carryover orreversal of prior year misstatements should be considered in quantifying acurrent year misstatement. The SEC staff believes that registrants shouldquantify errors using both a balance sheet and an income statement approach andevaluate whether either approach results in quantifying a misstatement that,when all relevant quantitative and qualitative factors are considered, is 

 

7

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

material. SAB 108 is effective in fiscal year 2007. SAB 108 allows aone-time transitional cumulative effect adjustment to beginning retainedearnings for errors that were not previously deemed material, but are materialunder the guidance in SAB 108. The adoption of SAB 108 did not have a materialeffect on the Company’s financial statements.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities—Including an amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair valueaccounting but does not affect existing standards which require assets orliabilities to be carried at fair value. Under SFAS 159, a company may elect touse fair value to measure accounts and loans receivable, available-for-sale andheld-to-maturity securities, equity method investments, accounts payable,guarantees and issued debt. Other eligible items include firm commitments. SFASNo. 159 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactthat FAS 159 will have on our financial statements.

 

InDecember 2007, FASB issued SFAS 141 (Revised 2007), “Business Combinations”.The objective of SFAS 141 (Revised 2007) is to improve the relevance,representational faithfulness, and comparability of the information that areporting entity provides in its financial reports about a business combinationand its effects. SFAS 141 (Revised 2007) requires an acquirer to recognize theassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree at the acquisition date, measured at their fair values as of thatdate. SFAS 141 (Revised 2007) also requires the acquirer to recognize and measurethe goodwill acquired in a business combination or a gain from a bargainpurchase and how to evaluate the nature and financial effects of the businesscombination. SFAS 141 (Revised 2007) is effective for financial statementsissued for fiscal years beginning after December 15, 2008. The Company isin the process of evaluating the impact, if any, that the adoption of SFAS 141(Revised 2007) will have on its financial statements.

 

InDecember 2007, FASB issued SFAS 160, “Noncontrolling Interests in ConsolidatedFinancial Statements-an amendment of ARB No. 51”. The objective of SFAS160 is to improve the relevance, comparability, and transparency of thefinancial information that a reporting entity provides in its consolidatedfinancial statements. SFAS 160 amends ARB No. 51 to establish accountingand reporting standards for the noncontrolling interest in a subsidiary and forthe deconsolidation of a subsidiary. SFAS 160 also changes the way theconsolidated income statement is presented, establishes a single method ofaccounting for changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation, requires that a parent recognize a gain or lossin net income when a subsidiary is deconsolidated and expanded disclosures inthe consolidated financial statements that clearly identify and distinguishbetween the interests of the parent’s owners and the interest of thenoncontrolling owners of a subsidiary. SFAS 160 is effective for financialstatements issued for the fiscal years beginning on or after December 15,2008. The Company is in the process of evaluating the impact, if any, that theadoption of SFAS 160 will have on its financial statements.

 

InDecember 2007, the SEC published the Staff Accounting Bulletin (“SAB”) No. 110,which amends SAB No. 107 by extending the usage of a “simplified” method,as discussed in SAB No. 107, in developing an estimate of expected term of“plain vanilla” share options in accordance with SFAS No. 123 (revised2004), Share-Based Payment. In particular, the staff indicated in SAB 107 thatit will accept a company’s election to use the simplified method, regardless ofwhether the company has sufficient information to make more refined estimatesof expected term. We are evaluating SAB 110 and its impact on future employeestock option grants.

 

InMay 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 162, “The Hierarchyof Generally Accepted Accounting Principles.” This statement identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (“GAAP”) in the United States. This statement will be effective 60days following the SEC’s approval of the 

 

8

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

PublicCompany Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,“The Meaning of Present Fairly inConformity with Generally Accepted Accounting Principles.” We do notexpect the adoption of this statement to have a material impact on ourfinancial statements.

 

InApril 2008, the FASB issued FASB Staff Position (“FSP”) FAS 142-3, “Determination of the Useful Life ofIntangible Assets*.*” ThisFSP amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognized intangibleasset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP isto improve the consistency between the useful life of a recognized intangibleasset under Statement 142 and the period of expected cash flows used to measurethe fair value of the asset under FASB Statement No. 141R, and other U.S.generally accepted accounting principles. This FSP is effective for our interimand annual financial statements beginning in fiscal 2010. The Company is in theprocess of evaluating the impact, if any, that the adoption of FSP No. FAS142-3 will have on its financial statements.

 

**NOTE 4 –INVENTORIES**

** **

Inventories are valued at lower of cost or market. Inventories as ofApril 30, 2008 include raw materials and packaging of $11,033,000 and finishedgoods of $31,792,000. Inventories at July 31, 2007 include raw materials andpackaging of $8,456,000 and finished goods of $22,873,000.

 

###### **NOTE5 – LOAN AGREEMENTS**

###### ** **

In January 2008, the Company increased its revolving creditfacility with CoBank to $45 million from the prior facility of $25 million.This facility extends through January 15, 2009. Interest on the revolvingline is at the 7-day LIBOR rate subject to performance adjustments dependingupon the Company’s ratio of total debt to earnings before interest, taxes,depreciation and amortization or “EBITDA.” The higher the ratio the higher theadjustment to the 7-day LIBOR rate within a range of 175 to 275 basis pointsabove the 7-day LIBOR rate.  Fixed interest rate options are alsoavailable. The balances outstanding under the revolving credit arrangementstotaled $17.2 million and $7.4 million as of April 30, 2008 and July 31,2007, respectively.  The Company had$27.8 million and $17.6 million available for borrowings under the line ofcredit as of April 30, 2008 and July 31, 2007, respectively.

 

The Company’s various debt agreements with CoBank and certaininstitutional note holders obligate the Company to maintain or achieve certainamounts of equity and certain financial ratios and impose certain restrictionson the Company. The Company was in compliance with these financial covenants asof April 30, 2008.

 

###### **NOTE6 – EARNINGS PER SHARE**

###### ** **

Basic earnings per share (EPS) is calculated by dividing net earningson Common Stock by the weighted average number of common shares outstandingduring the period. Diluted EPS includes the effect of all potentially dilutivesecurities, such as stock options and convertible preferred stock.

 

Dilutive securities, consisting of stock options and convertiblepreferred stock, included in the calculation of diluted weighted average commonshares totaled 1,598,000 and 370,000 for the three months ended April 30,2008 and 2007, respectively. Dilutive securities totaled 1,542,000 and 325,000for the nine months ended April 30, 2008 and 2007, respectively. The Series FConvertible Preferred Stock is included in the fully diluted EPS calculationand not included in the basic EPS calculation. As there is currently noestablished public trading market for the Company’s Common Stock, the Companyhas assumed the proceeds from the exercise of stock options would reduce debtand, thus, interest expense.

 

9

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 7 – DNA DREAMFIELDS COMPANY, LLC**

 

Effective May 1,2005, the Company’s ownership in DNA Dreamfields increased to 46.7%. In conjunction with the Company’s increase inownership in DNA Dreamfields and changes in the DNA Dreamfieldsoperating agreement and other contractual arrangements, the Company determined that DNA Dreamfields was a variableinterest entity under FASB Interpretation No. 46(R), “Consolidation ofVariable Interest Entities,” and that the Company was the primary beneficiary.Therefore, effective May 1, 2005, the Company began to include DNADreamfields in its consolidated financial statements.

 

Effective September 21, 2007, the Companyacquired the remaining units of DNA Dreamfields, increasing its ownership to100%.  Pursuant to the terms of thepurchase agreement, the Company acquired the remaining units for an aggregatepurchase price of $2,231,614 or $37,393 per purchased unit.  In conjunction with this purchase, theCompany eliminated the noncontrolling interests, recorded amortizableintangible assets (covenants not-to-compete and technology license) and reducedrecorded goodwill associated with the buyout of DNA Dreamfields in the Company’sfirst quarter of fiscal year 2008. The Company will continue to include DNADreamfields in its consolidated financial statements.

 

###### **NOTE8**– DIVIDENDS

###### ** **

OnDecember 20, 2007, the Company’s Board of Directors authorized the paymentof non-periodic dividends of 1 cent per share on its Series D DeliveryPreferred Stock, 16 cents per share on its Common Stock and 16 cents per shareon its Series F Convertible Preferred Stock, payable on January 15,2008 to shareholders of record as of December 31, 2007.

 

OnDecember 14, 2006, the Company’s Board of Directors authorized the paymentof non-periodic dividends of 1 cent per share on its Series D DeliveryPreferred Stock and 14 cents per share on its Common Stock, payable on January 3,2007 to shareholders of record as of December 20, 2006.

 

**NOTE 9 –****GOODWILL AND OTHER INTANGIBLE ASSETS**

 

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” goodwill and intangible assets with indefinite useful lives are to be tested for impairment at least annually. As of April 30, 2008, the value of goodwill was $8.4 million.

 

Amortizable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the estimated period over which economic benefits are expected to be provided. In conjunction with the acquisition of the remaining units of DNA Dreamfields (See Note 7), the Company recorded amortizable intangible assets including covenants not-to-compete and a technology license.  The covenants not-to-compete totaling $112,000 will be amortized over 36 months. The technology license totaling $2.6 million will be amortized over its estimated useful life of approximately 16 years.

 

10

----

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 
| ** **                            | ** ** | **As of April 30, 2008 (in thousands)** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Gross Carrying**                                               | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                            | ** ** | **Amount**                                                            | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                  |       |                                                                  |       |   |   |   |   |
| Covenants  not-to-compete             |       | $                                                                     | 112        |   | $ | (22 | ) | $ | 90 |   |
| Technology  license                   |       | 2,647                                                                 |       | (97 | ) | 2,550 |   |
|                                  |       |                                                                  |       |   |   |   |   |
| Total intangible  assets              |       | 2,759                                                                 |       | (119 | ) | 2,640 |   |
|                                  |       |                                                                  |       |   |   |   |   |
| Goodwill                              |       | 8,381                                                                 |       | — |   | 8,381 |   |
|                                  |       |                                                                  |       |   |   |   |   |
| Total goodwill  and intangible assets |       | $                                                                     | 11,140     |   | $ | (119 | ) | $ | 11,021 |   |

 

Amortization expense of intangible assets for the nine months ended April 30, 2008 was $119,000.

 

The following table estimates amortization expense for the next five fiscal years (in thousands):

 
| ** **                                           | ** ** | **Covenants**      | ** ** | **Technology** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|----------------|------------|
| **Fiscal years ending July 31,** | ** ** | **Not-To-Compete** | ** ** | **License**    | ** ** |
|                                                 |       |               |       |           |       |
| 2008                                                 |       | $                  | 31         |           | $          | 138 |   |
| 2009                                                 |       | 37                 |       | 165            |       |
| 2010                                                 |       | 37                 |       | 165            |       |
| 2011                                                 |       | 7                  |       | 165            |       |
| 2012                                                 |       | —             |       | 165            |       |
| 2013 and thereafter                                  |       | —             |       | 1,849          |       |
|                                                 |       |               |       |           |       |
|                                                 |       | $                  | 112        |           | $          | 2,647 |   |

 

**NOTE 10****–****STOCKOPTIONS**

 

Effective August 1,2005, the Company adopted Statement of Financial Accounting Standard No. 123(revised 2004), “Share Based Payment” (SFAS No. 123R). Under SFAS No. 123R,the Company is required to recognize, as expense, the estimated fair value ofall share based payments to employees. In accordance with this standard, theCompany has elected to recognize the compensation cost of all service basedawards on a straight-line basis over the vesting period of the award.Performance based awards are recognized ratably for each vesting tranche. TheCompany recorded stock-based employee compensation expense of $126,000 and$152,000 for the nine months ended April 30, 2008 and 2007, respectively.

 

11

----

 

**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following tables set forth information regardingstock options outstanding and exercisable:

 
| ** **                     | ** ** | **Options to purchase Series C Convertible Preferred Stock** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                     | ** ** | **Number of**                                                                              | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Series C**                                                                               | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Convertible**                                                                                 | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Preferred Shares**                                                                       | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                           |       |                                                                                            |       |   |   |   |   |   |   |
| Outstanding at  July 31, 2007  |       | 1,977                                                                                           |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |
| Exercised                      |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                        |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired              |       | —                                                                                          |       |   |   |   |   |   |   |
| Outstanding at  April 30, 2008 |       | 1,977                                                                                           |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |

 
| ** **                     | ** ** | **Options to purchase Common Stock** | ** ** |
|--------------------------------|------------|----------------------------------------------------------|------------|
| ** **                     | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | ** **                                               | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Number of**                                       | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                     | ** ** | **Common Shares**                                   | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                           |       |                                                     |       |   |   |   |   |   |   |
| Outstanding at  July 31, 2007  |       | 653,013                                                  |       | $4.00-$6.25 |   | $ | 5.10 |   | 317,243 |   |
| Exercised                      |       | —                                                   |       |   |   |   |   |   |   |
| Granted                        |       | —                                                   |       |   |   |   |   |   |   |
| Forfeited/Expired              |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at  April 30, 2008 |       | 653,013                                                  |       | $4.00-$6.25 |   | $ | 5.10 |   | 485,128 |   |

 

A summary of the status of theCompany’s issued but nonvested stock options as of July 31, 2007, andchanges during the nine months ended April 30, 2008, is presented below:

 
| ** **                   | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|------------------------------|------------|------------|------------|----------------------|------------|
| ** **                   | ** ** | **Common** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Stock Options**  | ** ** | **Shares** | ** ** | **Fair Value**       | ** ** |
|                         |       |       |       |                 |       |
| Nonvested at  July 31, 2007  |       | 335,770    |       | $4.81                |       |
| Granted                      |       | —     |       |                 |       |
| Vested                       |       | (167,885   | )          | $4.81                |       |
| Forfeited/Expired            |       | —     |       |                 |       |
| Nonvested at  April 30, 2008 |       | 167,885    |       | $4.81                |       |

 

As of April 30, 2008, there was approximately $170,000of total unrecognized compensation cost related to nonvested employee stockoptions.  That cost is expected to be recognized over a period of 1.50years.

 

**NOTE 11 – CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000**

 

U.S.Customs and Border Protection (“Customs”) has distributed 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 “Offset Act”), which was enacted in October 2000.The Company received payments in the amount of $2,200,000 and $1,300,000 in December 2007and 2006, respectively, under the Offset Act. These amounts have beenclassified as other income. The Company cannot reasonably estimate the 

 

12

----

 

**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

potentialamount, if any, that it may receive under the Offset Act in future periods asany such amount will be based upon future events over which the Company haslittle or no control, including but not limited to federal legislation, theamount of expenditures by domestic pasta producers and the amount ofantidumping and countervailing duties collected by Customs.  The Act, also known as the Byrd Amendment,has been repealed and therefore, duties assessed on pasta imports after September 30,2007 will no longer be distributed to domestic producers.  However, amounts collected (whether suchcollections occur before or after September 30, 2007) related to dutiesassessed on pasta entries prior to September 30, 2007, are expected to beavailable for future distribution to domestic producers.

 

###### **NOTE12 – COMMITMENTS**

###### ** **

The Company forward contracts for a certain portion of its future durumwheat requirements. The Company had outstanding commitments for grain purchasestotaling $74,282,000 as of April 30, 2008, related to forward purchasecontracts. These contracts are set price contracts to deliver grain to theCompany’s mill, and are not derivative in nature as they have no net settlementprovision and are not transferable.

 

**NOTE 13 -  EMPLOYEEBENEFIT PLANS**

** **

In January 2008, the Company reached an agreement with theTeamsters Local No. 120, affiliated with the International Brotherhood ofTeamsters, on a three-year contract covering the period from December 1,2007 through December 1, 2010.  Thecontract allows the Company to withdraw employees from the Central StatesSoutheast and Southwest Areas Pension Fund (the “Fund”), a multi-employerpension plan.  In conjunction with theCompany’s withdrawal, it will make an $850,000 estimated payment to cover thewithdrawal liability and has made an additional $110,000 payment into theCompany’s 401(k) plan for non-vested employee amounts in the Fund.  The Company recorded a $960,000 non-recurringpre-tax charge in its fiscal second quarter ending January 31, 2008 toreflect these costs associated with the withdrawal from the Fund.

 

**NOTE 14 – INCOME TAXES**

 

The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty of Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”) on August 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the implementation of FIN 48, the Company recorded no increase in the liability for unrecognized tax benefits and the balance of unrecognized tax benefits was zero at August 1, 2007 and as of April 30, 2008.

 

The Company has adopted the accounting policy that interest recognizedin accordance with Paragraph 15 of FIN 48 and penalty recognized in accordancewith Paragraph 16 of FIN 48 are classified as part of income taxes. The totalamount of interest and penalty recognized in the statements of financialposition and statements of operations was zero as of August 1, 2007 and April 30,2008 and for the nine-months ended April 30, 2008. The Company does notanticipate any significant change within 12 months of this reporting date ofits uncertain tax positions. The Company is subject to taxation in the UnitedStates and various state jurisdictions. There are no ongoing income taxexaminations by taxing authorities at this time. The Company’s various taxyears starting 2002 to 2007 remain open in various taxing jurisdictions.

 

13

----

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS**

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) should be read in conjunction with the MD&A includedin the Company’s Form 10-K for the year ended July 31, 2007.

 

**Forward-Looking Statements**

 

Thefollowing discussion contains forward-looking statements. Such forward-lookingstatements include, among others, those statements including the words “expect”,“anticipate”, “believe”, “may” and similar expressions. Such statements arebased on assumptions by the Company’s management as of the date of thisQuarterly Report, and are subject to risks and uncertainties, including thosediscussed in the Company’s Form 10-K for the year ended July 31, 2007under “Risk Factors,” that could cause actual results to differ materially fromthose anticipated. The Company cautions readers not to place undue reliance onsuch forward-looking statements. The Company will not update anyforward-looking statements in this Quarterly Report to reflect future events ordevelopments.

 

**Summary**

 

Dakota Growers is the third largest pastamanufacturer in North America. The Company has two production plants, locatedin Carrington, North Dakota and New Hope, Minnesota, and generates a majorityof its revenues from manufacturing dry pasta for the retail store brand,foodservice and ingredient markets.  TheCompany’s cost of goods sold consists mainly of raw materials (primarily durumwheat), packaging, and manufacturing and distribution costs.  The Company competes through low costproduction, high product quality, flexibility and customer service.

 

Netincome for the quarter ended April 30, 2008 totaled $1,741,000 compared tonet income of $1,882,000 for the quarter ended April 30, 2007.  Net income for the nine months ended April 30,2008 totaled $5,019,000 compared to $4,273,000 for the nine months ended April 30,2007. The Company recorded a $960,000 non-recurring pre-tax charge in itsfiscal second quarter ending January 31, 2008 to reflect the costsassociated with the withdrawal from the Central States Southeast and SouthwestAreas Pension Fund. Net earnings per basic common share for the quarter ended April 30,2008 were $0.17 per share compared to $0.14 per share for the quarter ended April 30,2007. Net earnings per basic common share, after the effect of dividends onPreferred Stock, were $0.46 per share for the nine months ended April 30,2008 and $0.32 per share for the nine months ended April 30, 2007.  The Company paid dividends of $0.01per share on its Series D Delivery Preferred Stock, $0.16 per share on itsSeries F Convertible Preferred Stock and $0.16 per share on its CommonStock during the second quarter of fiscal year 2008.

 

The Company’s net revenues increased 70.4% for thequarter ended April 30, 2008 and 37.4% for the nine months ended April 30,2008 when compared to the same periods of the prior year. The increase resultedprimarily from higher pasta per unit selling prices and, to a lesser extent,higher mill sales prices.  Benefitsderived from higher selling prices were partially offset by higher durum costs.  Durum prices have continued to increasesignificantly during fiscal year 2008 when compared to fiscal year 2007prices.  The Company has generally beensuccessful in obtaining sales price increases to offset higher durum and otherinput costs.  However, if the Company isunable to pass through higher durum, other input costs or transportation costson a timely basis, our financial results may be adversely affected.

 

**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 

 

14

----

 

circumstances.However, future events are subject to change and the best estimates andjudgments may require adjustment. For a complete description of the Company’ssignificant accounting policies, please see Note 1 to the consolidatedfinancial statements included in the Company’s Form 10-K for the yearended July 31, 2007. Our critical accounting policies are those that havemeaningful impact on the reporting of our financial condition and results, andthat require significant management judgment and estimates. These policies includeour accounting for (a) allowance for doubtful accounts, (b) inventoryvaluation, (c) asset impairment, and (d) income taxes.

 

*Allowance for Doubtful Accounts*

 

Weevaluate the collectibility of our accounts receivable based on a combinationof factors. In cases where we are aware of circumstances that may impair aspecific customer’s ability to meet its financial obligations to us, we recorda specific allowance against amounts due to us, and thereby reduce the netrecognized receivable to the amount we reasonably believe will be collected.For all other customers, we recognize allowances for doubtful accounts based onthe length of time the receivables are past due and our historical experience.If the financial condition of our customers deteriorates, additional allowancesmay be required in the future. Any such additional allowances could have anadverse impact on our future operating results.

 

*InventoryValuation*

 

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

 

*Asset Impairment*

 

Weare required to evaluate our long-lived assets, including goodwill, forimpairment and write down the value of any assets if they are determined to beimpaired. Evaluating the impairment of long-lived assets involves managementjudgment in estimating the future cash flows and fair values related to theseassets. Future events could cause management to conclude that impairmentindicators exist and that the value of certain long-lived assets is impaired.

 

*Income Taxes*

 

Indetermining income (loss) for financial statement purposes, management mustmake certain estimates and judgments in calculating tax liabilities and indetermining the recoverability of certain deferred tax assets. Deferred taxassets must be reduced by a valuation allowance if, based on the weight ofavailable evidence, it is more likely than not that some portion or all of therecorded deferred tax assets will not be realized in future periods. Managementbelieves it is likely that the deferred tax assets as of April 30, 2008will be realized through the generation of future taxable income and taxplanning strategies.

 

**Results of Operations**

 

*Comparison of the Three Months Ended April 30,2008 and 2007*

 

***Net Revenues.***Netrevenues totaled $78.5 million for the three months ended April 30, 2008,an increase of 70.4%, compared to net revenues of $46.1 million for the threemonths ended April 30, 2007. Overall pasta per unit selling pricesincreased 43.6% while pasta sales volumes increased 11.2% in comparison to thecomparable period in 2007.  Retailrevenues during the three months ended April 30, 2008 increased $9.5million, or 46.7% in comparison to the comparable period in 2007, due to a43.3% increase in average selling prices and a 2.4% increase in volume.  Foodservice revenues increased $4.5 million,or 32.3%, due to a 52.7% increase in average selling prices offset by a 13.4%decrease in volume. Ingredient revenues increased $11.3 million, or 139.3%, dueto a 55.8% increase in volume and a 53.6% increase in average selling prices.

 

15

----

 

The Company markets durumand semolina in excess of its own requirements as well as durum wheatflour,  other flour blends andby-products of the durum milling process. Revenues from mill product salestotaled $11.0 million for the three months ended April 30, 2008, anincrease of $7.2 million when compared to the same period of the prioryear.  The increase is due to increasesin both sales volumes and per unit selling prices.

 

***Cost of Goods Sold.*** Cost of goods sold increased 80.4% to$70.8 million for the three months ended April 30, 2008, compared to $39.3million for the three months ended April 30, 2007. The increase wasprimarily due to higher durum costs and, to a lesser extent, increased costsfor other production inputs such as eggs. Gross profit as a percentage of net revenues decreased to 9.8% for thethree months ended April 30, 2008 from 14.8% for the three months ended April 30,2007 as higher revenues largelyresulted from the pass through of higher durum costs.

 

***Marketing, General, and Administrative (“MG&A”) Expenses.*** MG&Aexpenses increased 34.8% to $4.3 million for the three months ended April 30,2008, compared to $3.2 million for the three months ended April 30, 2007.The increase was primarily due to higher consumer advertising costs associatedwith DreamfieldsTM pasta products. MG&A expenses as a percentageof net revenues decreased to 5.5% for the three months ended April 30,2008, from 6.9% for the comparable quarter of the prior year.

 

***Interest Expense.*** Interest expense for the three monthsended April 30, 2008 totaled $0.7 million, up $0.2 million from $0.5million for the corresponding period of the prior year. The increase isprimarily related to higher outstandingdebt levels as a result of debt incurred to finance a portion of the Company’s tenderoffer for a portion of the Company’s outstanding shares that was completed in May 2007.

 

***Income Taxes.***Income taxexpense for the three month periods ended April 30, 2008 and 2007 totaled$1.0 million and $1.2 million, respectively. The Company’s effective income taxrate was 36% for the three months ended April 30, 2008 compared to 39% forthe three months ended April 30, 2007. During the quarter ended April 30,2008, the Company updated its estimated tax rate for the year ending July 31,2008 to 38.2% from 39.0%.

 

***Net Income. ***Net income for the three months ended April 30,2008 totaled $1.7 million compared to net income of $1.9 million for the threemonths ended April 30, 2007.

 

*Comparison of the Nine Months Ended April 30,2008 and 2007*

 

***Net Revenues.***Netrevenues totaled $195.3 million for the nine months ended April 30, 2008,an increase of $53.1 million, or 37.3% compared to $142.2 million for the ninemonths ended April 30, 2007. Overall, pasta per unit selling pricesincreased 26.5% with ingredient selling prices up 35.3%, retail selling pricesup 27.3% and foodservice selling prices up 26.0%. Pasta sales volumes increased2.7% with ingredient sales volumes up 20.4% while retail and foodservice salesvolumes were down 3.8% and 3.9%, respectively.

 

Revenues from mill productsales totaled $24.6 million and $10.8 million for the nine months ended April 30,2008 and 2007, respectively. The increase is due to increases in both salesvolumes and per unit selling prices.

 

***Cost of Goods Sold.*** Cost of goods sold increased $48.8 million,or 39.3%, to $173.0 million for the nine months ended April 30, 2008,compared to $124.2 million for the nine months ended April 30, 2007.  The increase was primarily due to higherdurum costs and, to a lesser extent, increased costs for other productioninputs such as eggs. Gross profit as a percentage of net revenues decreased to11.5% for the nine months ended April 30, 2008, compared to 12.7% for thenine months ended April 30, 2007 as benefitsrealized from sales price increases were partially offset by higher durumcosts.

 

In January 2008, the Company reached anagreement with the Teamsters Local No. 120, affiliated with theInternational Brotherhood of Teamsters, on a three-year contract covering theperiod from December 1, 2007 through December 1, 2010.  The contract allows the Company to withdrawemployees from the Central States Southeast and Southwest Areas Pension Fund(the “Fund”), a multi-employer pension plan. In conjunction with the Company’s withdrawal, it will make an $850,000estimated payment to cover the withdrawal liability and has made an additional$110,000 payment into the Company’s 401(k) plan for non-vested employeeamounts in the 

 

16

----

 

Fund.  TheCompany recorded a $960,000 non-recurring pre-tax charge in its fiscal secondquarter ending January 31, 2008 to reflect these costs associated with thewithdrawal from the Fund.

 

***Marketing, General, and Administrative (“MG&A”) Expenses.*** MG&Aexpenses increased $3.9 million, or 39.6%, to $13.8 million for the nine monthsended April 30, 2008, compared to $9.9 million for the nine months ended April 30,2007. The increase was primarily due to higher consumer advertising costsassociated with DreamfieldsTM pasta products. MG&A expenses as apercentage of net revenues increased to 7.1% for the nine months ended April 30,2008, from 7.0% for the comparable period of the prior year.

 

***Interest and Other Income.***Interestand other income totaled $2.1 million for the nine months ended April 30, 2008compared to $1.2 million for the nine months ended April 30, 2007. U.S.Customs and Border Protection (“Customs”) has distributed 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 “Offset Act”), which was enacted in October 2000.The Company received payments in the amount of $2.2 million and $1.3 million inDecember 2007 and 2006, respectively, under the Offset Act. Theseamounts have been classified as other income. The Company cannot reasonablyestimate the potential amount, if any, that it may receive under the Offset Actin future periods as any such amount will be based upon future events overwhich the Company has little or no control, including but not limited tofederal legislation, the amount of expenditures by domestic pasta producers andthe amount of antidumping and countervailing duties collected by Customs.  The Act, also known as the Byrd Amendment,has been repealed and therefore, duties assessed on pasta imports after September 30,2007 will no longer be distributed to domestic producers.  However, amounts collected (whether suchcollections occur before or after September 30, 2007) related to dutiesassessed on pasta entries prior to September 30, 2007, are expected to beavailable for future distribution to domestic producers.

 

***Loss on Disposition of Property, Equipment and Other Assets (“Loss onDisposition”). ***The Companyincurred losses on disposition of $9,000 and $649,000 during the nine monthsended April 30, 2008 and April 30, 2007, respectively.   The losses were related to retirements ofcertain equipment in conjunction with capital projects at the New Hope,Minnesota facility.

 

***Interest Expense.*** Interest expense for the nine monthsended April 30, 2008 and 2007 totaled $2.8 million and $1.8 million,respectively. The increase is primarily related to higher outstandingdebt levels as a result of debt incurred to finance a portion of the Company’s tenderoffer for its shares that was completed in May 2007.

 

***Noncontrolling Interests. ***Noncontrollinginterests reflect the portion of the DNA Dreamfields Company, LLC net lossallocable to other members of DNA Dreamfields and totaled $0.2 million and $0.1million for the nine months ended April 30, 2008 and 2007, respectively.

 

***Income Taxes. ***Income tax expense was $3.1million based on an effective income tax rate of 38.2% for the nine monthsended April 30, 2008, compared to $2.7 million based on an effectiveincome tax rate of 39.0% for the nine months ended April 30, 2007.

 

***Net Income. ***Net income for the nine months ended April 30,2008 totaled $5.0 million, compared to $4.3 million for the nine months ended April 30,2007.  Net earnings available to commonshareholders totaled $4.7 million and $4.2 million for the nine months ended April 30,2008 and 2007, respectively, after reducing net income for dividends declaredon preferred stock.

 

**Liquidity and Capital Resources**

 

TheCompany’s primary sources of liquidity are cash provided by operations andborrowings under its revolving credit facility. Working capital as of April 30,2008 totaled $17.9 million compared to $20.8 million as of July 31, 2007.

 

In January 2008, the Company increased its revolving creditfacility with CoBank to $45 million from the prior facility of $25 million.This facility extends through January 15, 2009. Interest on the revolvingline is at the 7-day LIBOR rate subject to performance adjustments dependingupon the Company’s ratio of total debt to earnings before interest, taxes,depreciation and amortization or “EBITDA.” The higher the ratio the higher theadjustment 

 

17

----

 

to the 7-day LIBOR rate within a range of 175 to 275 basis points abovethe 7-day LIBOR rate.  Fixed interest rate options are also available. Theprimary purpose of the revolving credit facility is to finance inventory andreceivables. The balances outstanding under the revolving credit arrangements totaled$17.2 million and $7.4 million as of April 30, 2008 and July 31,2007, respectively.  The Company had$27.8 million and $17.6 million available for borrowings under the line ofcredit as of April 30, 2008 and July 31, 2007, respectively.

 

TheCompany’s various debt agreements with CoBank and certain institutionalinvestors obligate the Company to maintain or achieve certain amounts of equityand certain financial ratios and impose certain restrictions on the Company.The Company was in compliance with these financial covenants as of April 30,2008 and as of the date of this filing.

 

Netcash from operating activities totaled $3.1 million and $4.2 million for thenine months ended April 30, 2008 and 2007, respectively. Significant itemscontributing to this decrease were changes in inventories, trade receivablesand accounts payable, which were partially offset by net income adjusted fornon-cash items.

 

Net cash used for investing activities totaled$3.8 million and $4.7 million for the nine months ended April 30, 2008 and2007, respectively.  A majority of thenet cash used for investing activities in the nine months ended April 30,2008 related tothe purchase of the remaining interests in DNA Dreamfields as well as fixedasset purchases.  The majority of the netcash used for investing activities for the nine months ended April 30,2007 related to capital expenditures for the New Hope facility.

 

Netcash from financing activities totaled $0.6 million and $0.4 million for thenine months ended April 30, 2008 and 2007, respectively.  The $0.6 million of net cash from financingactivities for the nine months ended April 30, 2008 included an increasein short-term notes payable of $9.8 million offset by $8.1 million in scheduledpayments on long-term debt.  The Companypaid dividends of $0.1 million ($0.01 per share) on its Series D DeliveryPreferred Stock, $0.2 million ($0.16 per share) on its Series FConvertible Preferred Stock and $1.6 million ($0.16 per share) on its CommonStock during the second quarter of fiscal year 2008. The Company paid dividendsof $0.1 million ($0.01 per share) on its Series D Delivery Preferred Stockand $1.8 million ($0.14 per share) on its Common Stock during the secondquarter of fiscal year 2007.

 

The following table summarizesthe Company’s contractual obligations as of April 30, 2008 (in thousands):

 
| ** **                             | ** ** | ** ** | ** ** | **Payments**              | ** ** | **Payments**       | ** ** | **Payments**       | ** ** | **Payments**       | ** ** |
|----------------------------------------|------------|------------|------------|---------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                             | ** ** | ** ** | ** ** | **Due in Less** | ** ** | **Due in**    | ** ** | **Due in**    | ** ** | **Due After** | ** ** |
| **Contractual Obligations**       | ** ** | **Total**  | ** ** | **Than 1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years**   | ** ** |
|                                   |       |       |       |                      |       |               |       |               |       |               |       |
| Long-term debt                         |       | $          | 40,474     |                      | $          | 9,174              |       | $                  | 16,700     |               | $          | 10,800 |   | $ | 3,800 |   |
| Capital leases                         |       | 1,386      |       | 327                       |       | 1,059              |       | —             |       | —             |       |
| Interest on  long-term obligations (1) |       | 6,143      |       | 1,831                     |       | 3,401              |       | 854                |       | 57                 |       |
| Durum purchase  obligations            |       | 74,282     |       | 74,282                    |       | —             |       | —             |       | —             |       |
| Warehouse  obligations                 |       | 1,514      |       | 931                       |       | 583                |       | —             |       | —             |       |
| Operating leases                       |       | 886        |       | 346                       |       | 479                |       | 61                 |       | —             |       |
|                                   |       |       |       |                      |       |               |       |               |       |               |       |
|                                   |       | $          | 124,685    |                      | $          | 86,891             |       | $                  | 22,222     |               | $          | 11,715 |   | $ | 3,857 |   |

 

----

(1) Based oninterest rates as of April 30, 2008

 

TheCompany forward contracts for a certain portion of its future durum wheatrequirements. At April 30, 2008, the Company had outstanding commitmentsfor grain purchases totaling $74.3 million related to forward purchasecontracts. These contracts are set price contracts to deliver grain to theCompany’s mill, and are not derivative in nature as they have no net settlementprovision and are not transferable.

 

Managementbelieves that net cash currently available and to be provided by operatingactivities, along with amounts available under the Company’s line of credit,will be sufficient to meet the Company’s expected capital and liquidityrequirements for the foreseeable future.

 

18

----

 

**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

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

 

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

 

**ITEM 4. CONTROLS AND PROCEDURES**

 

***Evaluation of DisclosureControls and Procedures***

 

TheCompany’s Chief Executive Officer, Timothy J. Dodd, and Chief FinancialOfficer, Edward O. Irion, have evaluated the effectiveness of the Company’sdisclosure controls and procedures (as defined in Securities Exchange Act of1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the periodcovered by this report. Based upon the review, they have concluded that thesecontrols and procedures are effective in alerting them, in a timely fashion, toinformation required to be included in the Company’s periodic Securities andExchange Commission filings.  The designof any system of controls and procedures is based in part upon certainassumptions about the likelihood of future events.

 

***Changes in Internal Controlsover Financial Reporting***

 

Therewere no changes in the Company’s internal controls over financial reportingduring the Company’s fiscal quarter ended April 30, 2008 thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

Not applicable.

 

19

----

 

**PART II – OTHER INFORMATION**

 

**ITEM 1A. RISK FACTORS**

 

Therehave been no material changes from the risk factors disclosed in Part I,Item 1A, of the Company’s Annual Report on Form 10-K for the fiscal yearended July 31, 2007.

 

**ITEM 6. EXHIBITS**

 

**Exhibits**

 
|   | 3.1    | Second Amended and Restated Articles of  Incorporation of the Company, formerly Dakota Growers Restructuring  Company, Inc. (Incorporated by reference to Exhibit 3.1 from the  Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration  Statement, File No. 333-81946, dated April 19, 2002).                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 3.2    | Second Amended and Restated Bylaws of the  Company, formerly Dakota Growers Restructuring Company, Inc.  (Incorporated by reference to Exhibit 3.3 from the Company’s  Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,  File No. 333-81946, dated April 19, 2002).                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 3.3    | Certificate of Designation of Series E  Junior Participating Preferred Stock of the Company, formerly Dakota Growers  Restructuring Company, Inc. (Incorporated by reference to  Exhibit 3.2 from the Company’s Pre-Effective Amendment No. 2 to  Form S-4 Registration Statement, File No. 333-81946, dated  April 19, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 3.4    | Certificate of Designation of Series F  Convertible Preferred Stock of the Company (Incorporated by reference to  Exhibit 3.1 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 15, 2007).                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.1   | Amendment to the Master Loan Agreement between  the Company and CoBank, ACB (Incorporated by reference to Exhibit 10.1  from the Company’s Report on Form 8-K, File No. 000-50111, filed  January 29, 2008).                                                                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.2   | Statused Revolving Credit Supplement between  the Company and CoBank, ACB (Incorporated by reference to Exhibit 10.2  from the Company’s Report on Form 8-K, File No. 000-50111, filed  January 29, 2008).                                                                                                                                    |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.3   | Non-Revolving Credit Supplement between the  Company and CoBank, ACB (Incorporated by reference to Exhibit 10.3 from  the Company’s Report on Form 8-K, File No. 000-50111, filed  January 29, 2008).                                                                                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.4   | Continuing Guarantee Agreement between DNA  Dreamfields Company, LLC, a wholly-owned subsidiary of the Company, and  CoBank, ACB (Incorporated by reference to Exhibit 10.4 from the  Company’s Report on Form 8-K, File No. 000-50111, filed  January 29, 2008).                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.5   | Security Agreement between DNA Dreamfields  Company, LLC and CoBank, ACB (Incorporated by reference to Exhibit 10.5  from the Company’s Report on Form 8-K, File No. 000-50111, filed  January 29, 2008).                                                                                                                                     |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 31.1   | Certification  of Chief Executive Officer required by Securities and Exchange Commission  Rule 13a-14(a) or 15d-14(a).                                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
|   | 31.2   | Certification  of Chief Financial Officer required by Securities and Exchange Commission  Rule 13a-14(a) or 15d-14(a).                                                                                                                                                                                                                                       |

 

20

----

 
|   | 32.1   | Certification of Chief Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  Section 1350. |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                    |
|   | 32.2   | Certification of Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  Section 1350. |

 

**SIGNATURES**

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|   | DAKOTA  GROWERS PASTA COMPANY, INC. |
|--------|-------------------------------------|
|   |                                |
|   | (Registrant)                        |

** **

** **
| **Signature**       | ** ** | **Title**                             | ** ** | **Date**           |
|---------------------|------------|---------------------------------------|------------|--------------------|
|                |       |                                  |       |               |
| /s/ Timothy J. Dodd |       | President and Chief Executive Officer |       |               |
|                |       | (Principal Executive                  |       | June 16, 2008 |
| Timothy J. Dodd     |       | Officer)                              |       |               |
|                |       |                                  |       |               |
|                |       |                                  |       |               |
| /s/ Edward O. Irion |       | Chief Financial Officer               |       |               |
|                |       | (Principal Financial and              |       | June 16, 2008 |
| Edward O. Irion     |       | Accounting Officer)                   |       |               |

 

21

----