**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, 2007**                                               |
| ** ** | ** **                                                                                      |
| ** ** | **or**                                                                                          |
| ** ** | ** **                                                                                      |
| **o**      | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange   Act of 1934** |

 

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**Commission File No. 000-50111**

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**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 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes  x   No  o

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):
| Large accelerated filer  o | Accelerated filer  o | Non-accelerated filer  x |
|--------------------------------------|--------------------------------|------------------------------------|

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

Yes  o   Nox

As of June 14, 2007,the Registrant had 10,192,413 shares of common stock, par value $0.01 pershare, outstanding.

 

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**PART I —FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**DAKOTA GROWERS PASTA COMPANY,INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In Thousands, Except Share Information)**
| ** **                                                                                                                    | ** ** | **April 30,  2007** | ** ** | **July 31,  2006** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                    | ** ** | **(Unaudited)**          | ** ** | ** **              | ** ** |
| **ASSETS**                                                                                                                    |       |                     |       |                    |       |
|                                                                                                                          |       |                     |       |                    |       |
| CURRENT ASSETS                                                                                                                |       |                     |       |                    |       |
| Cash and cash  equivalents                                                                                                    |       | $                        | 219        |                    | $          | 343 |   |
|                                                                                                                          |       |                     |       |                    |       |
| Trade accounts  receivable, less allowance for  cash  discounts and doubtful accounts of $1,075 and $1,080, respectively |       | 16,707                   |       | 14,441                  |       |
|                                                                                                                          |       |                     |       |                    |       |
| Other  receivables                                                                                                            |       | 242                      |       | 91                      |       |
|                                                                                                                          |       |                     |       |                    |       |
| Inventories                                                                                                                   |       | 28,329                   |       | 26,118                  |       |
|                                                                                                                          |       |                     |       |                    |       |
| Prepaid expenses                                                                                                              |       | 1,741                    |       | 2,007                   |       |
|                                                                                                                          |       |                     |       |                    |       |
| Deferred income  taxes                                                                                                        |       | 955                      |       | 955                     |       |
|                                                                                                                          |       |                     |       |                    |       |
| Total current  assets                                                                                                         |       | 48,193                   |       | 43,955                  |       |
|                                                                                                                          |       |                     |       |                    |       |
| PROPERTY AND EQUIPMENT                                                                                                        |       |                     |       |                    |       |
| In service                                                                                                                    |       | 130,836                  |       | 124,035                 |       |
| Construction in  progress                                                                                                     |       | 1,730                    |       | 4,093                   |       |
|                                                                                                                          |       | 132,566                  |       | 128,128                 |       |
| Less accumulated  depreciation                                                                                                |       | (60,455                  | )          | (57,198                 | )          |
|                                                                                                                          |       |                     |       |                    |       |
| Net property and  equipment                                                                                                   |       | 72,111                   |       | 70,930                  |       |
|                                                                                                                          |       |                     |       |                    |       |
| INVESTMENT IN  COOPERATIVE BANK                                                                                               |       | 1,310                    |       | 1,515                   |       |
|                                                                                                                          |       |                     |       |                    |       |
| GOODWILL                                                                                                                      |       | 16,654                   |       | 16,654                  |       |
|                                                                                                                          |       |                     |       |                    |       |
| OTHER ASSETS                                                                                                                  |       | 1,123                    |       | 1,195                   |       |
|                                                                                                                          |       |                     |       |                    |       |
|                                                                                                                          |       | $                        | 139,391    |                    | $          | 134,249 |   |

 

2

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**CONSOLIDATED BALANCE SHEETS**

**(In Thousands, Except ShareInformation)**

 
| ** **                                                                                                                                                          | ** ** | **April 30,  2007** | ** ** | **July 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-------------------------|------------|
| ** **                                                                                                                                                          | ** ** | **(Unaudited)**          | ** ** | ** **              | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                                      |       |                     |       |                    |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| CURRENT  LIABILITIES                                                                                                                                                |       |                     |       |                    |       |
| Excess outstanding checks over cash on deposit                                                                                                                      |       | $                        | 2,091      |                    | $          | 704 |   |
| Accounts payable                                                                                                                                                    |       | 5,275                    |       | 7,250                   |       |
| Accrued liabilities                                                                                                                                                 |       | 5,512                    |       | 5,957                   |       |
| Notes payable                                                                                                                                                       |       | 7,200                    |       | —                  |       |
| Current portion of long-term debt                                                                                                                                   |       | 8,876                    |       | 6,771                   |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| Total current liabilities                                                                                                                                           |       | 28,954                   |       | 20,682                  |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                                      |       | —                   |       | —                  |       |
| LONG-TERM DEBT,  net of current portion                                                                                                                             |       | 21,890                   |       | 28,545                  |       |
| DEFERRED INCOME  TAXES                                                                                                                                              |       | 13,589                   |       | 12,417                  |       |
| OTHER  LIABILITIES                                                                                                                                                  |       | —                   |       | 34                      |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| Total liabilities                                                                                                                                                   |       | 64,433                   |       | 61,678                  |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| NONCONTROLLING  INTERESTS                                                                                                                                           |       | 7,875                    |       | 7,979                   |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| 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                     |       |
| Common stock, $.01 par value, 75,000,000 shares authorized,  13,174,932 and 13,169,382 issued and outstanding as of April 30, 2007 and  July 31, 2006, respectively |       | 132                      |       | 132                     |       |
| Additional paid-in capital                                                                                                                                          |       | 63,046                   |       | 62,872                  |       |
| Retained earnings                                                                                                                                                   |       | 3,792                    |       | 1,475                   |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| Total stockholders’ equity                                                                                                                                     |       | 67,083                   |       | 64,592                  |       |
|                                                                                                                                                                |       |                     |       |                    |       |
| Total  liabilities and stockholders’ equity                                                                                                                    |       | $                        | 139,391    |                    | $          | 134,249 |   |

 

SeeNotes to Consolidated Financial Statements

3

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(In Thousands, Except Per ShareAmounts)(Unaudited)**
| ** **                                                                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                          | ** ** | **April 30,**               | ** ** |
| ** **                                                                          | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| Net revenues  (net of discounts and allowances of  $5,939 and $6,130, respectively) |       | $                           | 46,084     |   | $  | 41,968 |   |
| ** **                                                                          |       |                             |       |   |   |
| Cost of goods  sold                                                                 |       | 39,250                           |       | 35,565 |   |
| ** **                                                                          |       |                             |       |   |   |
| Gross profit                                                                        |       | 6,834                            |       | 6,403 |   |
| ** **                                                                          |       |                             |       |   |   |
| Marketing,  general and administrative expenses                                     |       | 3,188                            |       | 3,356 |   |
| ** **                                                                          |       |                             |       |   |   |
| Operating income                                                                    |       | 3,646                            |       | 3,047 |   |
| ** **                                                                          |       |                             |       |   |   |
| Other income  (expense)                                                             |       |                             |       |   |   |
| Interest and other income (expense)                                                 |       | (15                              | )          | (21 | ) |
| Gain on disposition of property, equipment and other  assets                        |       | 9                                |       | 13 |   |
| Interest expense, net                                                               |       | (548                             | )          | (626 | ) |
| ** **                                                                          |       |                             |       |   |   |
| Income before  noncontrolling interests and income taxes                            |       | 3,092                            |       | 2,413 |   |
| ** **                                                                          |       |                             |       |   |   |
| Noncontrolling  interests                                                           |       | (6                               | )          | 24 |   |
| ** **                                                                          |       |                             |       |   |   |
| Income before  income taxes                                                         |       | 3,086                            |       | 2,437 |   |
| ** **                                                                          |       |                             |       |   |   |
| Income tax  expense                                                                 |       | 1,204                            |       | 950 |   |
| ** **                                                                          |       |                             |       |   |   |
| Net income                                                                          |       | $                                | 1,882      |   | $ | 1,487 |   |
| ** **                                                                          |       |                             |       |   |   |
| Net earnings per  common share                                                      |       |                             |       |   |   |
| Basic                                                                               |       | $                                | 0.14       |   | $ | 0.11 |   |
| ** **                                                                          |       |                             |       |   |   |
| Diluted                                                                             |       | $                                | 0.14       |   | $ | 0.11 |   |
| ** **                                                                          |       |                             |       |   |   |
| Weighted average  common shares outstanding                                         |       |                             |       |   |   |
| Basic                                                                               |       | 13,170                           |       | 13,169 |   |
| ** **                                                                          |       |                             |       |   |   |
| Diluted                                                                             |       | 13,540                           |       | 13,590 |   |

 

SeeNotes to Consolidated Financial Statements

4

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

**(InThousands, Except Per Share Amounts)(Unaudited)**
| ** **                                                                            | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                            | ** ** | **April 30,**              | ** ** |
| ** **                                                                            | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| Net revenues  (net of discounts and allowances of  $18,495 and $19,949, respectively) |       | $                          | 142,190    |   | $  | 128,530 |   |
| ** **                                                                            |       |                            |       |   |   |
| Cost of goods  sold                                                                   |       | 124,178                         |       | 112,521 |   |
| ** **                                                                            |       |                            |       |   |   |
| Gross profit                                                                          |       | 18,012                          |       | 16,009 |   |
| ** **                                                                            |       |                            |       |   |   |
| Marketing,  general and administrative expenses                                       |       | 9,908                           |       | 11,469 |   |
| ** **                                                                            |       |                            |       |   |   |
| Operating income                                                                      |       | 8,104                           |       | 4,540 |   |
| ** **                                                                            |       |                            |       |   |   |
| Other income  (expense)                                                               |       |                            |       |   |   |
| Interest and other income                                                             |       | 1,193                           |       | 1,041 |   |
| Loss on disposition of property, equipment and other  assets                          |       | (649                            | )          | (559 | ) |
| Interest expense, net                                                                 |       | (1,767                          | )          | (1,850 | ) |
| ** **                                                                            |       |                            |       |   |   |
| Income before  noncontrolling interests and income taxes                              |       | 6,881                           |       | 3,172 |   |
| ** **                                                                            |       |                            |       |   |   |
| Noncontrolling  interests                                                             |       | 125                             |       | 931 |   |
| ** **                                                                            |       |                            |       |   |   |
| Income before  income taxes                                                           |       | 7,006                           |       | 4,103 |   |
| ** **                                                                            |       |                            |       |   |   |
| Income tax  expense                                                                   |       | 2,733                           |       | 1,599 |   |
| ** **                                                                            |       |                            |       |   |   |
| Net income                                                                            |       | 4,273                           |       | 2,504 |   |
| Dividends on  preferred stock                                                         |       | (113                            | )          | (451 | ) |
| ** **                                                                            |       |                            |       |   |   |
| Net earnings on  common stock                                                         |       | $                               | 4,160      |   | $ | 2,053 |   |
| ** **                                                                            |       |                            |       |   |   |
| Net earnings per  common share                                                        |       |                            |       |   |   |
| Basic                                                                                 |       | $                               | 0.32       |   | $ | 0.16 |   |
| ** **                                                                            |       |                            |       |   |   |
| Diluted                                                                               |       | $                               | 0.32       |   | $ | 0.16 |   |
| ** **                                                                            |       |                            |       |   |   |
| Weighted average  common shares outstanding                                           |       |                            |       |   |   |
| Basic                                                                                 |       | 13,170                          |       | 13,169 |   |
| ** **                                                                            |       |                            |       |   |   |
| Diluted                                                                               |       | 13,495                          |       | 13,576 |   |
| ** **                                                                            |       |                            |       |   |   |
| Dividends per common  share                                                           |       | $                               | 0.14       |   | $ | 0.04 |   |

 

SeeNotes to Consolidated Financial Statements

5

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands)(Unaudited)**
| ** **                                                                 | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                 | ** ** | **April 30,**              | ** ** |
| ** **                                                                 | ** ** | **2007**                        | ** ** | **2006** | ** ** |
| OPERATING  ACTIVITIES                                                      |       |                            |       |   |   |
| Net income                                                                 |       | $                               | 4,273      |   | $ | 2,504 |   |
| Adjustments to reconcile net income to net cash from operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                              |       | 5,298                           |       | 5,366 |   |
| Undistributed patronage capital from cooperatives                          |       | (27                             | )          | (29 | ) |
| Loss on disposition of property, equipment and other  assets               |       | 649                             |       | 559 |   |
| Noncontrolling interests                                                   |       | (125                            | )          | (931 | ) |
| Deferred income taxes                                                      |       | 1,172                           |       | 634 |   |
| Stock-based employee compensation                                          |       | 152                             |       | 41 |   |
| Changes in assets and liabilities                                          |       |                            |       |   |   |
| Trade receivables                                                          |       | (2,266                          | )          | (1,502 | ) |
| Other receivables                                                          |       | (151                            | )          | 308 |   |
| Inventories                                                                |       | (2,211                          | )          | 3,719 |   |
| Prepaid expenses                                                           |       | (131                            | )          | (846 | ) |
| Other assets                                                               |       | (23                             | )          | 36 |   |
| Accounts payable                                                           |       | (1,975                          | )          | (420 | ) |
| Other accrued liabilities                                                  |       | (445                            | )          | (319 | ) |
| NET CASH FROM  OPERATING ACTIVITIES                                        |       | 4,190                           |       | 9,120 |   |
| ** **                                                                 |       |                            |       |   |   |
| INVESTING  ACTIVITIES                                                      |       |                            |       |   |   |
| Purchases of property and equipment                                        |       | (4,591                          | )          | (9,673 | ) |
| Payments for package design costs                                          |       | (398                            | )          | (135 | ) |
| Proceeds from cooperative bank equity retirements                          |       | 232                             |       | 568 |   |
| Proceeds from other investments                                            |       | 116                             |       | — |   |
| Other investments                                                          |       | (47                             | )          | — |   |
| NET CASH USED  FOR INVESTING ACTIVITIES                                    |       | (4,688                          | )          | (9,240 | ) |
| ** **                                                                 |       |                            |       |   |   |
| FINANCING  ACTIVITIES                                                      |       |                            |       |   |   |
| Net change in excess outstanding checks over cash on  deposit              |       | 1,387                           |       | (62 | ) |
| Net change in short-term notes payable                                     |       | 7,200                           |       | (4,000 | ) |
| Principal payments on long-term debt                                       |       | (6,271                          | )          | (4,771 | ) |
| Principal payments under capital lease obligation                          |       | (59                             | )          | — |   |
| Proceeds from long-term debt borrowings                                    |       | 30                              |       | 9,931 |   |
| Dividends paid on common stock                                             |       | (1,843                          | )          | (527 | ) |
| Dividends paid on preferred stock                                          |       | (113                            | )          | (451 | ) |
| Preferred stock retirements                                                |       | —                          |       | (7 | ) |
| Issuance of common stock                                                   |       | 22                              |       | — |   |
| Investments by noncontrolling interests                                    |       | 21                              |       | 77 |   |
| NET CASH FROM  FINANCING ACTIVITIES                                        |       | 374                             |       | 190 |   |
| ** **                                                                 |       |                            |       |   |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                   |       | (124                            | )          | 70 |   |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                            |       | 343                             |       | 229 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                  |       | $                               | 219        |   | $ | 299 |   |
| ** **                                                                 |       |                            |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                         |       |                            |       |   |   |
| Cash payments for                                                          |       |                            |       |   |   |
| Interest (net of amounts capitalized)                                      |       | $                               | 2,086      |   | $ | 2,201 |   |
| ** **                                                                 |       |                            |       |   |   |
| Income taxes                                                               |       | $                               | 2,119      |   | $ | 903 |   |
| ** **                                                                 |       |                            |       |   |   |
| SUPPLEMENTAL  SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES       |       |                            |       |   |   |
| ** **                                                                 |       |                            |       |   |   |
| Acquisition of  pasta equipment through capital lease obligation           |       | $                               | 1,750      |   | $ | — |   |

 

SeeNotes to Consolidated Financial Statements

6

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

The following notes should be read in conjunction with the notes to thefinancial statements for the year ended July 31, 2006 as filed in the Company’sForm 10-K.

 

**NOTE 1**- ORGANIZATION

Dakota Growers PastaCompany, Inc. (“Dakota Growers” or “the Company”) is a North Dakota corporationthat operates a milling and pasta manufacturing facility in Carrington, NorthDakota. In addition, the Company’s wholly-owned subsidiary, Primo Piatto, Inc.(“Primo Piatto”), a Minnesota corporation, operates a pasta manufacturingfacility in New Hope, Minnesota.

**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)considered necessary for a fair presentation have been included. Operatingresults for the three and nine month periods ended April 30, 2007 are notnecessarily indicative of the results that may be expected for the year endedJuly 31, 2007. The unaudited consolidated financial statements included in thisForm 10-Q should be read in conjunction with the consolidated financialstatements and footnotes included in the Company’s Form 10-K for the year endedJuly 31, 2006. The information contained in the balance sheet as of July 31,2006 was derived from the Company’s audited annual report for fiscal year 2006.Reclassifications have been made to facilitate comparability with currentpresentation. Such reclassifications have no effect on the net results ofoperations.

The financial informationpresented herein includes the consolidated balance sheets and results ofoperations of theCompany, its wholly-owned subsidiary, Primo Piatto, Inc., and DNA DreamfieldsCompany, LLC (“DNA Dreamfields”), which the Company began to consolidate infiscal year 2005. All material inter-company accounts and transactions havebeen eliminated in the preparation of the consolidated financial statements.

**NOTE 3 — NEW ACCOUNTING STANDARDS**

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections”. SFAS 154replaces Accounting Principles Board Opinion No. 20, “Accounting Changes”and SFAS No. 3, “Reporting Accounting Changes in Interim FinancialStatements-An Amendment of APB Opinion No. 28”. SFAS 154 provides guidanceon the accounting for and reporting of accounting changes and errorcorrections. SFAS 154 requires “retrospective application” of the direct effectof a voluntary change in accounting principle to prior periods’ financialstatements where it is practicable to do so. SFAS 154 also redefines the term “restatement”to mean the correction of an error by revising previously issued financialstatements. SFAS 154 is effective for accounting changes and error correctionsmade in fiscal years beginning after December 15, 2005 unless adoptedearly. The adoption of this accounting standard did not have a material impacton the consolidated financial position, results of operations or cash flows,except to the extent that the statement subsequently requires retrospectiveapplication of a future item.

In June 2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48), “Accountingfor Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,”which clarifies the accounting for uncertainty in income taxes recognized inaccordance with SFAS No. 109, Accounting for Income Taxes. FIN No. 48 clarifiesthe application of SFAS No. 109 by defining criteria that an individual taxposition must meet for any part of the benefit of that position to berecognized in the financial statements. FIN No. 48 also provides guidance on the measurement, de-recognition,classification and disclosure of tax positions along with the accounting forthe

7

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

related interest and penalties. The provisions of FIN No. 48 areeffective for the fiscal years beginning after December 15, 2006, with thecumulative effect of the change in accounting principle recorded as anadjustment to opening retained earnings. The Company will be required to adoptFIN No. 48 for the fiscal year beginning August 1, 2007. The Company does not expect thisStatement to have a material impact on its financial statements uponadoption.  However, future changes in theCompany’s income tax situation may have a material impact on the Company’sfinancial statements as a result of this Statement.

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFASNo. 157 defines fair value, establishes a framework for measuring fair valueand expands disclosure of fair value measurements. SFAS No. 157 applies underother accounting pronouncements that require or permit fair value measurementsand accordingly, does not require any new fair value measurements. SFAS No. 157is effective for financial statements issued for fiscal years beginning afterNovember 15, 2007. We have not yet assessed the impact, if any, that theimplementation of SFAS No. 157 will have on our consolidated results ofoperations 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 FinancialStatements*”*(SAB 108). SAB108 addresses the diversity in practice of quantifying financial statementmisstatements resulting in the potential build up of improper amounts on thebalance sheet. SAB 108 provides interpretive guidance on how the effects of thecarryover or reversal of prior year misstatements should be considered inquantifying a current year misstatement. The SEC staff believes thatregistrants should quantify errors using both a balance sheet and an incomestatement approach and evaluate whether either approach results in quantifyinga misstatement that, when all relevant quantitative and qualitative factors areconsidered, is material. SAB 108 is effective in fiscal year 2007. SAB 108allows a one-time transitional cumulative effect adjustment to beginningretained earnings for errors that were not previously deemed material, but arematerial under the guidance in SAB 108. The adoption of SAB 108 did not have amaterial effect on the Company’s financial statements.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities—Including an amendment of FASB Statement No. 115” (“SFAS159”). SFAS 159 expands the use of fair value accounting but does not affectexisting standards which require assets or liabilities to be carried at fairvalue. Under SFAS 159, a company may elect to use fair value to measureaccounts and loans receivable, available-for-sale and held-to-maturitysecurities, equity method investments, accounts payable, guarantees and issueddebt. Other eligible items include firm commitments. SFAS No. 159 is effectivefor financial statements issued for fiscal years beginning after November 15,2007. We are currently evaluating the impact that FAS 159 will have on ourfinancial statements.

**NOTE 4 — INVENTORIES**

Inventories are valued at lower of cost or market. Inventories as ofApril 30, 2007 include raw materials and packaging of $7,870,000 and finishedgoods of $20,459,000. Inventories at July 31, 2006 include raw materials andpackaging of $6,529,000 and finished goods of $19,589,000.

 

###### **NOTE5 — LOAN AGREEMENTS**

Effective May 31, 2007, the Company secured a $25 million revolvingcredit facility with CoBank that extends through May 29, 2008. Interest on therevolving line is at the 7-day LIBOR rate subject to performance adjustmentsdepending upon the Company’s ratio of total debt to earnings before interest,taxes, depreciation and amortization or “EBITDA.” The higher the ratio thehigher the adjustment to the 7-day LIBOR rate within a range of 175 to 275basis points above the 7-day LIBOR rate.  Fixed interest rate options arealso available. Balances

8

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(Unaudited)**

outstanding under this revolving line of credit arrangement totaled$7.2 million as of April 30, 2007. There was no balance outstanding under thisrevolving line of credit arrangement as of July 31, 2006. The Company had $17.8million available for borrowings under the line of credit as of April 30, 2007.

On February 14, 2007 theCompany entered into a $20 million term loan agreement with CoBank to partiallyfund the tender offer to purchase up to 3,920,000 shares of the Company’scommon stock at $10.00 per share in cash. Availability under the term loan wascontingent upon at least 50% of the aggregate purchase price of the shares inthe tender offer coming from proceeds of the sale of equity securities to MVCCapital, Inc. and La Bella Holdings LLC. The Company must repay this term loanin 14 equal quarterly installments beginning in May 2011 and concluding inAugust 2014.  Interest on the term loan is at the 7-day LIBOR rate subjectto performance adjustments depending upon the Company’s ratio of total debt toEBITDA. The higher the ratio the higher the adjustment to the 7-day LIBOR ratewithin a range of 175 to 275 basis points above the 7-day LIBOR rate. Fixed interest rate options are also available.

The Company’s various debtagreements with CoBank and certain institutional note holders obligate theCompany to maintain or achieve certain amounts of equity and certain financialratios and impose certain restrictions on the Company. In connection with theterm loan agreement noted above, the Company entered into an amendment of itsMaster Loan Agreement with CoBank which changed certain loan covenantrequirements.  The Company was in compliancewith all financial covenants required under debt agreements as of April 30,2007.

###### **NOTE6 — EARNINGS PER SHARE**

 Basic earnings per share (EPS) is calculated bydividing net earnings on common stock by the weighted average number of commonshares outstanding during the period. Diluted EPS includes the effect of allpotentially dilutive securities, such as stock options and convertiblepreferred stock.

Dilutivesecurities, consisting of stock options and convertible preferred stock,included in the calculation of diluted weighted average common shares totaled370,000 and 421,000 for the three months ended April 30, 2007 and 2006,respectively. Dilutive securities included in the calculation of dilutedweighted average common shares totaled 325,000 and 407,000 for the nine monthsended April 30, 2007 and 2006, respectively. As there is currently no established public trading market for theCompany’s common stock, the Company has assumed the proceeds from the exerciseof stock options would reduce debt and, thus, interest expense.

**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 of VariableInterest 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.

TheCompany entered into a “2005 Line of Credit Loan Agreement” with DNADreamfields in the fourth quarter of fiscal year 2005. Under thatAgreement, the Company will loan up to $5,000,000 to DNA Dreamfields, with DNADreamfields able to repay and reborrow amounts under the Line of Credit LoanAgreement from time to time. The Line of Credit Loan Agreement matures onMay 31, 2010. The balance outstanding related to advances to DNADreamfields under the Line of Credit Loan Agreement totaled $2,424,000 and$2,184,000 as of April 30, 2007 and July 31, 2006, respectively.  These inter-company amounts have beeneliminated in the preparation of the consolidated financial statements.

9

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

###### **(Unaudited)**

###### **NOTE 8****—****DIVIDENDS**

On December 20, 2006, the Company’s Boardof Directors authorized the payment of 1 cent per share dividend on its SeriesD Delivery Preferred Stock and a non-periodic dividend payment of 14 cents pershare on its common stock, payable on January 3, 2007 to shareholders of recordas of December 20, 2006.

On December 15, 2005, the Company’s Boardof Directors authorized the payment of a 4 cents per share dividend on itsSeries D Delivery Preferred Stock and a non-periodic dividend payment of 4cents per share on its common stock, payable on January 10, 2006 toshareholders of record as of December 19, 2005.

**NOTE 9 —****STOCKOPTIONS**

Effective August 1, 2005, the Company adoptedStatement of Financial Accounting Standard No. 123 (revised 2004), “ShareBased Payment” (SFAS No. 123R). Under SFAS No. 123R, the Company isrequired to recognize, as expense, the estimated fair value of all share basedpayments to employees. In accordance with this standard, the Company haselected to recognize the compensation cost of all service based awards on astraight-line basis over the vesting period of the award. Performance basedawards are recognized ratably for each vesting tranche. The Company recordedstock-based employee compensation expense of $152,000 and $41,000 for the ninemonths ended April 30, 2007 and 2006, respectively.

On October 19, 2006, theBoard of Directors granted incentive stock options to purchase 272,726 sharesof the Company’s common stock at a per share exercise price of $5.00. Thevesting of these options is subject to certain qualifications, including butnot limited to, the continued employment of the optionee with the Company.Subject to the foregoing qualifications and certain other qualifications, fifty percent ofthese options vest on October 19, 2007, twenty-five percent vest on October 19,2008, and twenty-five percent vest on October 19, 2009.

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

Thefollowing tables set forth information regarding stock options outstanding andexercisable:
| ** **                     | ** ** | **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, 2006  |       | 1,977                                                                                           |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |
| Exercised                      |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                        |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired              |       | —                                                                                          |       |   |   |   |   |   |   |
| Outstanding at April  30, 2007 |       | 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, 2006  |       | 385,837                                                  |       | $4.00-$6.25 |   | $ | 5.16 |   | 242,517 |   |
| Exercised                      |       | (5,550                                                   | )          | $4.00 |   | $ | 4.00 |   |   |   |
| Granted                        |       | 272,726                                                  |       | $5.00 |   | $ | 5.00 |   |   |   |
| Forfeited/Expired              |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at  April 30, 2007 |       | 653,013                                                  |       | $4.00-$6.25 |   | $ | 5.10 |   | 317,243 |   |

 

The fair value of the stock options granted on October 19, 2006 wasestimated at the date of grant using the Black-Scholes option pricing modelwith the following weighted average assumptions: risk free interest rate of4.7%, expected dividend yield of 1.0%, expected life of 5 years and volatilityof 25%.

 

A summary of the status of the Company’s issued but nonvested stockoptions as of July 31, 2006, and changes during the nine months ended April 30,2007, is presented below:

 
| ** **                            | ** ** | ** ** | ** ** | ** **           | ** ** |
|---------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                            | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
| ** **                            | ** ** | **Common** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Stock Options** | ** ** | **Shares** | ** ** | **Fair Value**  | ** ** |
|                                  |       |       |       |                 |       |
| Nonvested at  July 31, 2006           |       | 143,320    |       | $                    | 4.03       |   |
| Granted                               |       | 272,726    |       | $                    | 5.00       |   |
| Vested                                |       | (80,276    | )          | $                    | 4.05       |   |
| Forfeited/Expired                     |       | —     |       |                 |       |
| Nonvested at  April 30, 2007          |       | 335,770    |       | $                    | 4.81       |   |

 

As of April 30, 2007, there was approximately $354,000 of totalunrecognized compensation cost related to nonvested employee stockoptions.  That cost is expected to be recognized over a period of 2.5years.

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

**NOTE 10—****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. TheCompany received payments in the amount of $1,300,000 and $1,103,000 inDecember 2006 and 2005, respectively, under the Offset Act. These amounts havebeen classified as other income. The Company cannot reasonably estimate thepotential amount, if any, that it may receive under the Offset Act in futureperiods as any such amount will be based upon future events over which theCompany has little or no control, including, but not limited to, the amount ofexpenditures by domestic pasta producers and the amount of antidumping andcountervailing duties collected by Customs.

###### **NOTE 11****—****COMMITMENTS**

The Company forward contracts for a certain portion of its future durumwheat requirements. The Company had outstanding commitments for grain purchasestotaling $12,384,000 as of April 30, 2007, 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 12 —****CAPITALLEASE**

On March 30, 2007, the Company entered into a lease agreement forcertain pasta equipment valued at $1.75 million.  The equipment lease, which has a term of 5years expiring on March 31, 2012, is classified as a capital lease.

 

The following is a schedule by years of the future minimum leasepayments under the capital lease together with the present value of the netminimum lease payments as of April 30, 2007 (in thousands):

 
| Year ending July 31:                         | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------|------------|
| 2007                                         |       | $          | 103        |   |
| 2008                                         |       | 413        |       |
| 2009                                         |       | 413        |       |
| 2010                                         |       | 413        |       |
| 2011                                         |       | 413        |       |
| Later Years                                  |       | 241        |       |
| Total Minimum lease payments                 |       | 1,996      |       |
| Less: Amount representing interest           |       | (305       | )          |
| Present value of  net minimum lease payments |       | $          | 1,691      |   |

 

**NOTE 13 —****SUBSEQUENTEVENTS**

On May 10, 2007, the Company closed the sale of 1million shares of Series F convertible preferred stock to MVC Capital, Inc. (“MVC”)and the sale of 1 million shares of common stock to LaBella Holdings, LLC at apurchase price of $10.00 per share. The Company also received $20 million inloan proceeds under a term loan agreement with CoBank.  With the netproceeds of $38.8 million from these financing transactions and working capitalprovided by the Company, Dakota Growers purchased 3,917,519 shares of commonstock that had been

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

properly tendered to the Company at $10.00 per sharenet in cash pursuant to the Company’s tender offer, which expired on April 27,2007.

The Series F convertiblepreferred stock issued to MVC was created by the Company’s Board of Directorsthrough the adoption of a Certificate of Designation creating such series ofstock from the Company’s undesignated preferred stock.  The Series Fconvertible preferred stock carries the same economic entitlements and rightswith respect to the Company as does the common stock, with the exception thatthe Series F convertible preferred stock does not carry any voting right.  The Series F convertible preferred stock doesnot carry any liquidation preference.  The Series F convertible preferredstock may be converted into common stock at any time in the discretion of theholder, MVC, upon 65 days written notice to the Company; the Series Fconvertible preferred stock may be converted immediately upon the occurrence ofcertain circumstances described in the Certificate of Designation.  MVC converted 65,000 shares of common stockto Series F convertible preferred stock on May 8, 2007.

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

This Management’s Discussion and Analysisof Financial Condition and Results of Operations (MD&A) should be read inconjunction with the MD&A included in the Company’s Form 10-K for the yearended July 31, 2006.

**Forward-Looking Statements**

The following discussion containsforward-looking statements. Such forward-looking statements include, amongothers, those statements including the words “expect”, “anticipate”, “believe”,“may” and similar expressions. Such statements are based on assumptions by theCompany’s management as of the date of this Quarterly Report, and are subjectto risks and uncertainties, including those discussed in the Company’s Form10-K for the year ended July 31, 2006 under “Risk Factors,” that could causeactual results to differ materially from those anticipated. The Companycautions readers not to place undue reliance on such forward-lookingstatements. The Company will not update any forward-looking statements in thisQuarterly Report to reflect future events or developments.

**Summary**

Dakota Growersis the third largest pasta manufacturer in North America. The Company has twoproduction plants, located in Carrington, North Dakota and New Hope, Minnesota,and generates a majority of its revenues from manufacturing dry pasta for theretail store brand, foodservice and ingredient markets.  The Company’s cost of goods sold consistsmainly of raw materials (primarily durum wheat), packaging, and manufacturingand distribution costs.  The Companycompetes through low cost production, high product quality, flexibility andcustomer service.

Net income for the quarter ended April 30, 2007 totaled $1,882,000compared to net income of $1,487,000 for the quarter ended April 30, 2006.  Net income for the nine months ended April30, 2007 totaled $4,273,000 versus $2,504,000 for the nine months ended April30, 2006. Net earnings per basic common share for the quarter ended April 30,2007 were $0.14 per share compared to $0.11 per share for the quarter endedApril 30, 2006. Net earnings per basic common share, after the effect ofdividends on the Company’s Series D Delivery Preferred Stock, were $0.32 pershare for the nine months ended April 30, 2007 and $0.16 per share for the ninemonths ended April 30, 2006.  TheCompany paid dividends of $113,000 ($0.01 per share) on its Series D DeliveryPreferred Stock and $1,843,000 ($0.14 per share) on its common stock during thesecond quarter of fiscal year 2007.

The Company’s net revenuesincreased 9.8% for the quarter ended April 30, 2007 and 10.6% for the ninemonths ended April 30, 2007 when compared to the same periods of the prioryear. The increase resulted from higher pasta per unit selling prices andhigher pasta sales volumes. Benefits derived from increased sales werepartially offset by higher durum costs. Durum prices have increased significantly during fiscal year 2007 whencompared to fiscal year 2006 prices.  TheCompany has generally been successful in obtaining sales price increases tooffset the higher durum cost.  However,the Company is uncertain whether it will be able to pass through higher durumor other input costs on a timely basis in the future. Higher mill by-productsales prices in fiscal 2007 have helped to offset the negative impact of higherdurum costs. The Company believes that the trend of higher durum costs is alsobeing experienced by its competitors.

**Critical Accounting Policies**

The accompanying discussion and analysisof our results of operations and financial condition are based upon ourconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosure of contingent assets and liabilities. Theseestimates form the basis for making judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Webase our estimates and judgments on historical experience and on various otherassumptions that we believe are reasonable under the circumstances. However,future events are subject to change and the best estimates and judgments mayrequire

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adjustment. For a complete description ofthe Company’s significant accounting policies, please see Note 1 to theconsolidated financial statements included in the Company’s Form 10-K for theyear ended July 31, 2006. 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 policiesinclude our accounting for (a) allowance for doubtful accounts, (b) inventoryvaluation, (c) asset impairment, and (d) income taxes.

*Allowancefor Doubtful Accounts*

We evaluate the collectibility of ouraccounts receivable based on a combination of factors. In cases where we areaware of circumstances that may impair a specific customer’s ability to meetits financial obligations to us, we record a specific allowance against amountsdue to us, and thereby reduce the net recognized receivable to the amount wereasonably believe will be collected. For all other customers, we recognizeallowances for doubtful accounts based on the length of time the receivablesare past due and our historical experience. If the financial condition of ourcustomers deteriorates, additional allowances may be required in the future.Any such additional allowances could have an adverse impact on our futureoperating results.

*Inventory Valuation*

Inventoriesare stated at the lower of cost or market, determined on a first-in, first-out(FIFO) basis, using product specific standard costs. The Company analyzesvariances between actual manufacturing costs incurred and amounts absorbed atinventory standard costs. Inventory valuations are adjusted for these variancesas applicable. The Company regularly evaluates its inventories and recognizesinventory allowances for discontinued and slow-moving inventories based uponthese evaluations.

*Asset Impairment*

We are required to evaluate ourlong-lived assets, including goodwill, for impairment and write down the valueof any assets if they are determined to be impaired. Evaluating the impairmentof long-lived assets involves management judgment in estimating the future cashflows and fair values related to these assets. Future events could causemanagement to conclude that impairment indicators exist and that the value ofcertain long-lived assets is impaired.

*Income Taxes*

In determining income (loss) forfinancial statement purposes, management must make certain estimates andjudgments in calculating tax liabilities and in determining the recoverabilityof certain deferred tax assets. Deferred tax assets must be reduced by avaluation allowance if, based on the weight of available evidence, it is morelikely than not that some portion or all of the recorded deferred tax assetswill not be realized in future periods. Management believes it is likely thatthe deferred tax assets as of April 30, 2007 will be realized through thegeneration of future taxable income and tax planning strategies.

**Results of Operations**

*Comparison of the Three MonthsEnded April 30, 2007 and 2006*

***Net Revenues.***Netrevenues totaled $46.1 million for the three months ended April 30, 2007, anincrease of 9.8%, compared to $42.0 million for the three months ended April30, 2006. Pasta per unit selling prices increased 7.7% while pasta salesvolumes increased 0.7%.  Retail revenuesduring the three months ended April 30, 2007 increased $0.9 million, or 4.6% incomparison to the comparable period in 2006, due to a 9.0% increase in averageselling prices offset by a 4.0% decrease in volume.  Foodservice revenues increased $1.7 million,or 14.0%, due to a 9.5% increase in sales volumes and a 4.1% increase inaverage selling prices. Co-pack and governmental sales included in the retailand foodservice amounts contributed to the increases in each of thosecategories. Ingredient revenues increased $0.7 million, or 9.5%, due to a 10.9%increase in average selling prices offset by a 1.2% decrease in volume.

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The Company markets semolina production in excess of its ownrequirements as well as durum wheat flour, other flour blends and by-productsof the durum milling process. Revenues from such mill product sales totaled$3.8 million for the three months ended April 30, 2007, an increase of $0.8million when compared to the same period of the prior year, primarily due tohigher mill product sales prices.

***Cost of Goods Sold.*** Cost ofgoods sold increased $3.7 million, or 10.4%, to $39.3 million for the threemonths ended April 30, 2007, compared to $35.6 million for the three monthsended April 30, 2006. The increase was primarily due to higher durumcosts.  Gross profit as a percentage ofnet revenues decreased to 14.8% for the three months ended April 30, 2007 from15.3% for the three months ended April 30, 2006 as revenue gains were largelyoffset by higher durum costs.

***Marketing, General, andAdministrative (“MG&A”) Expenses.*** MG&Aexpenses decreased 5.0% to $3.2 million for the three months ended April 30,2006, compared to $3.4 million for the three months ended April 30, 2007. Thedecrease was partially attributable to costs recognized in the third quarter offiscal year 2006 related to the severance agreement with Thomas P. Friezen, whoresigned as the Company’s Chief Financial Officer in February 2006. MG&A expensesas a percentage of net revenues decreased to 6.9% for the three months endedApril 30, 2007, from 8.0% for the comparable quarter of the prior year.

 ***Interest Expense.*** Interest expensefor the three months ended April 30, 2007 totaled $0.5 million, down $0.1million from $0.6 million for the corresponding period of the prior year.

***Noncontrolling Interests. ***Noncontrollinginterests reflect the portion of the DNA Dreamfields Company, LLC netincome/loss allocable to other members of DNA Dreamfields.  The income allocated to other members for thethree months ended April 30, 2007 totaled $6,000 compared to the loss allocatedto the other members of $24,000 for the three months ended April 30, 2006.

***Income Taxes.***Income tax expense for thethree month periods ended April 30, 2007 and 2006 totaled $1.2 million and $1.0million, respectively, and reflects an effective corporate income tax rate ofapproximately 39%.

***Net Income. ***Net income for the three months ended April30, 2007 totaled $1.9 million compared to net income of $1.5 million for thethree months ended April 30, 2006.

*Comparison of the Nine MonthsEnded April 30, 2007 and 2006*

***Net Revenues.***Netrevenues totaled $142.2 million for the nine months ended April 30, 2007, anincrease of $13.7 million, compared to $128.5 million for the nine months endedApril 30, 2006.  Total pasta salesvolumes increased 4.1% with ingredient and foodservice sales volumes up 21.3%and 0.9%, respectively, while retail sales volumes were down by 2.4%. Overall,pasta per unit selling prices increased 5.0% with retail selling prices up7.0%, ingredient selling prices up 6.6% and foodservice selling prices up 5.7%.

The Company markets semolina production in excess of its ownrequirements as well as durum wheat flour, other flour blends and by-productsof the durum milling process. Revenues from such mill product sales totaled$10.8 million and $8.4 million for the nine months ended April 30, 2007 and2006, respectively. The increase was primarily related to higher mill productsales prices.

***Cost of Goods Sold.*** Cost ofgoods sold increased $11.7 million, or 10.4%, to $124.2 million for the ninemonths ended April 30, 2007, compared to $112.5 million for the nine monthsended April 30, 2006.  The increase wasprimarily due to higher durum costs and higher sales volumes. Gross profit as apercentage of net revenues increased to 12.7% for the nine months ended April30, 2007, compared to 12.5% for the nine months ended April 30, 2006.  Benefitsrealized were offset by higher durum costs which negatively impacted grossprofit.

***Marketing, General, andAdministrative (“MG&A”) Expenses.*** MG&Aexpenses decreased $1.6 million, or 13.6%, to $9.9 million for the nine monthsended April 30, 2007, compared to $11.5 million for the nine months ended April30, 2006. The decrease was primarily due to lower consumer advertising andmarketing costs associated with DreamfieldsTMpastaproducts. MG&A expenses as a percentage of net revenues decreased to 7.0%for the nine months ended April 30, 2007, from 8.9% for the comparable periodof last year.

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***Interest and Other Income.***Interestand other income totaled $1.2 million for the nine months ended April 30, 2007compared to $1.0 million for the nine months ended April 30, 2006. U.S. Customsand 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. TheCompany received payments in the amount of $1.3 million and $1.1 million inDecember 2006 and 2005, respectively, under the Offset Act. These amounts havebeen classified as other income. The Company cannot reasonably estimate thepotential amount, if any, that it may receive under the Offset Act in futureperiods as any such amount will be based upon future events over which theCompany has little or no control, including, but not limited to, the amount ofexpenditures by domestic pasta producers and the amount of antidumping andcountervailing duties collected by Customs.

***Loss on Disposition of Property,Equipment and Other Assets (“Loss on Disposition”). ***The Companyincurred losses on disposition of $0.6 million during the nine months endedApril 30, 2007 and 2006.  The losses wererelated to retirements of certain equipment in conjunction with the capitalprojects at the New Hope, Minnesota facility.

***Interest Expense.*** Interestexpense for the nine months ended April 30, 2007 and 2006 totaled $1.8 millionand $1.9 million, respectively.

***Noncontrolling Interests. ***Noncontrollinginterests reflect the portion of the DNA Dreamfields Company, LLC net lossallocable to other members of DNA Dreamfields and totaled $0.1 million and $0.9million for the nine months ended April 30, 2007 and 2006, respectively. The$.8 million decrease was due to a reduction in the net loss reported by DNADreamfields for the nine months ended April 30, 2007 when compared to lastyear.

***Income Taxes. ***Income taxexpense for the nine months ended April 30, 2007 totaled $2.7 million comparedto $1.6 million for the nine months ended April 30, 2006, and reflects aneffective corporate income tax rate of approximately 39%.

***Net Income. ***Net income for the nine months ended April 30,2007 totaled $4.3 million, compared to $2.5 million for the nine months endedApril 30, 2006.  Net earnings availableto common shareholders for the nine months ended April 30, 2007 totaled $4.2 million,compared to $2.1 million for the nine months ended April 30, 2006, afterreducing net income for dividends declared on preferred stock.

**Liquidity and Capital Resources**

The Company’s primary sources ofliquidity are cash provided by operations and borrowings under its revolvingcredit facility. Working capital as of April 30, 2007 totaled $19.2 millioncompared to $23.3 million as of July 31, 2006.

Effective May 31, 2007, the Company secured a $25 million revolvingcredit facility with CoBank that extends through May 29, 2008. Interest on therevolving line is at the 7-day LIBOR rate subject to performance adjustmentsdepending upon the Company’s ratio of total debt to earnings before interest,taxes, depreciation and amortization or “EBITDA.” The higher the ratio thehigher the adjustment to the 7-day LIBOR rate within a range of 175 to 275basis points above the 7-day LIBOR rate.  Fixed interest rate options arealso available. Balances outstanding under this revolving line of creditarrangement totaled $7.2 million as of April 30, 2007. There was no balanceoutstanding under this revolving line of credit arrangement as of July 31,2006. The Company had $17.8 million available for borrowings under the line ofcredit as of April 30, 2007.

On February 14, 2007 theCompany entered into a $20 million term loan agreement with CoBank to partiallyfund the tender offer to purchase up to 3,920,000 shares of our common stock at$10.00 per share in cash. Availability under the term loan was contingent uponat least 50% of the aggregate purchase price of the shares in the tender offercoming from proceeds of the sale of equity securities to MVC Capital, Inc. andLa Bella Holdings, LLC. The Company must repay this term loan in 14 equalquarterly installments beginning in May 2011 and concluding in August2014.  Interest on the term loan is at the 7-day LIBOR rate subject toperformance adjustments depending upon the Company’s ratio of total debt toEBITDA. The higher the ratio the higher the adjustment to 

17

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the 7-day LIBOR rate withina range of 175 to 275 basis points above the 7-day LIBOR rate.  Fixedinterest rate options are also available.

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. In connection with the term loan agreement noted above, theCompany entered into an amendment of its Master Loan Agreement with CoBankwhich changed certain loan covenant requirements. The Company was in compliancewith all financial covenants required under debt agreements as of April 30,2007.

On May 10, 2007, the Company closed the sale of 1 million shares ofSeries F convertible preferred stock to MVC Capital, Inc. and the sale of 1million shares of common stock to LaBella Holdings, LLC at a purchase price of$10.00 per share.  The Company alsoreceived $20 million in loan proceeds under a term loan agreement withCoBank.  With the net proceeds of $38.8 million from these financingtransactions and working capital provided by the Company, Dakota Growersaccepted 3,917,519 shares of common stock that had been properly tendered tothe Company at $10.00 per share net in cash pursuant to the Company’s tenderoffer, which expired on April 27, 2007.

Net cash from operating activitiestotaled $4.2 million and $9.1 million for the nine months ended April 30, 2007and 2006, respectively. Significant items contributing to this decrease werechanges in inventories, trade receivables and accounts payable.

Net cash usedfor investing activities totaled $4.7 million and $9.2 million for the ninemonths ended April 30, 2007 and 2006, respectively.  The majority of these cash outlays related tocapital expenditures for equipment at the New Hope facility.

Net cash from financing activitiestotaled $0.4 million and $0.2 million for the nine months ended April 30, 2007and 2006, respectively.  The $0.4 millionof net cash from financing activities for the nine months ended April 30, 2007included $7.2 million in borrowings under the revolving credit facility withCoBank.  The Company paid dividends of$0.1 million ($0.01 per share) on its Series D Delivery Preferred Stock and $1.8million ($0.14 per share) on its common stock during the second quarter offiscal year 2007. The Company paid dividends of $0.5 million ($0.04 per share)on its Series D Delivery Preferred Stock and $0.5 million ($0.04 per share) onits common stock during the second quarter of fiscal year 2006.

The Company entered into a “2005 Line ofCredit Loan Agreement” with DNA Dreamfields in the fourth quarter of fiscalyear 2005, under which the Company will loan up to $5.0 million to DNADreamfields on a revolving basis through May 31, 2010. The balances outstandingrelated to advances to DNA Dreamfields under the Line of Credit Loan Agreementtotaled $2.4 million and $2.2 million as of April 30, 2007 and July 31, 2006,respectively. These inter-company amounts have been eliminated in thepreparation of the consolidated financial statements.

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The following table summarizes the Company’s contractualobligations as of April 30, 2007 (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                         |       | $          | 29,075     |                      | $          | 8,571              |       | $                  | 19,974     |               | $          | 530 |   | $ | — |   |
| Capital leases                         |       | 1,691      |       | 305                       |       | 1,052              |       | 334                |       | —             |       |
| Interest on  long-term obligations (1) |       | 3,882      |       | 1,750                     |       | 2,118              |       | 14                 |       | —             |       |
| Durum purchase  obligations            |       | 12,384     |       | 12,384                    |       | —             |       | —             |       | —             |       |
| Warehouse  obligations                 |       | 1,981      |       | 1,720                     |       | 261                |       | —             |       | —             |       |
| Operating leases                       |       | 668        |       | 369                       |       | 299                |       | —             |       | —             |       |
|                                   |       |       |       |                      |       |               |       |               |       |               |       |
|                                   |       | $          | 49,681     |                      | $          | 25,099             |       | $                  | 23,704     |               | $          | 878 |   | $ | — |   |

 

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(1) Based oninterest rates as of April 30, 2007.

The Company forward contracts for acertain portion of its future durum wheat requirements. At April 30, 2007, theCompany had outstanding commitments for grain purchases totaling $12.4 millionrelated to forward purchase contracts. These contracts are set price contractsto deliver grain to the Company’s mill, and are not derivative in nature asthey have no net settlement provision and are not transferable.

Management believes that net cashcurrently available and to be provided by operating activities, along withamounts available under the Company’s line of credit, will be sufficient tomeet the Company’s expected capital and liquidity requirements for theforeseeable future.

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**ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

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

The Company forward contracts for a certain portion of its future durumwheat requirements. These contracts are set price contracts to deliver grain tothe Company’s mill, and are not derivative in nature as they have no netsettlement provision and are not transferable. The Company does not believe itis subject to any material market risk exposure with respect to interest rates,commodity prices, exchange rates, equity prices, or other market changes thatwould require disclosure under this item.

**ITEM 4.  CONTROLS AND PROCEDURES**

***Evaluation ofDisclosure Controls and Procedures***

The Company’s ChiefExecutive Officer, Timothy J. Dodd, and Chief Financial Officer, Edward O.Irion, have evaluated the effectiveness of the Company’s disclosure controlsand procedures (as defined in Securities Exchange Act of 1934 Rules 13a-15(e)and 15d-15(e)) as of the end of the period covered by this report. Based uponthe review, they have concluded that these controls and procedures areeffective in alerting them, in a timely fashion, to information required to beincluded in the Company’s periodic Securities and Exchange Commission filings.  The design of any system of controls andprocedures is based in part upon certain assumptions about the likelihood offuture events.

***Changes inInternal Controls over Financial Reporting***

There were no changes in the Company’sinternal controls over financial reporting during the Company’s fiscal quarterended April 30, 2007 that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

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**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, 2006.

**ITEM 2. UNREGISTERED SALES OFEQUITY SECURITIES AND USE OF PROCEEDS**

On February 9, 2007 theCompany entered into a Stock Purchase Agreement (“Agreement”) with MVC Capital,Inc. (“MVC”) and La Bella Holdings, LLC (“LBH”).  On May 10, 2007, the Company completed thetransactions pursuant to the Agreement, in which MVC acquired 1,000,000 sharesof Series F Convertible Preferred Stock and LBH acquired 1,000,000 shares ofcommon stock for a price of $10 per share. The proceeds from the sale ofshares to MVC and LBH were used to fund, in part, a repurchase of common stockfrom the Company’s stockholders (other than MVC and LBH) pursuant to a tenderoffer made to stockholders.  Based on themanner of sale and representations of MVC and LBH in the Stock PurchaseAgreement,  including a representation by each as to its status as anaccredited investor within the meaning of Rule 501 of Regulation D, the Companybelieves that the issuance of securities to MVC Capital, Inc. and La BellaHoldings, LLC were private placements not involving any public offering withinthe meaning of Section 4(2) of the Securities Act of 1933, as amended (the “SecuritiesAct”), pursuant to Regulation D thereof. The Company therefore believes the offer and sale of the shares to MVCand LBH was exempt from the registration requirements of the Securities Act.

The following table provides informationabout the shares purchased by the Company in connection with the tender offer:
| ** **             | ** ** | ** **                         | ** ** | ** **                       | ** ** | **Total Number of Shares** | ** ** | **Maximum Number of Shares**       | ** ** |
|------------------------|------------|------------------------------------|------------|----------------------------------|------------|-------------------------------------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **Total Number of**      | ** ** | **Average Price Paid** | ** ** | **Purchased As Part of**   | ** ** | **That May Yet Be Purchased** | ** ** |
| **Period**             | ** ** | **Shares Purchased (1)** | ** ** | **Per Share**               | ** ** | **Publicly Announced Program**  | ** ** | **Under the Program**                   | ** ** |
| ** **             | ** ** | ** **                         | ** ** | ** **                       | ** ** | ** **                                | ** ** | ** **                                        | ** ** |
| February - April  2007 |       | Not  Applicable                    |       | Not  Applicable                  |       | Not  Applicable                           |       | Not  Applicable                                   |       |
|                   |       |                               |       |                             |       |                                      |       |                                              |       |
| May 2007               |       | 3,917,519                          |       | $                                | 10.00      |                                      | 3,917,519  |                                              | None       |   |
|                        |            |                                    |            |                                  |            |                                           |            |                                                   |            |  |

 

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(1)          On March 26, 2007, theCompany commenced a tender offer to purchase up to 3,920,000 shares of theCompany’s common stock at $10.00 per share in cash. The tender offer expired onApril 27, 2007. The Company completed the purchase of shares pursuant to thetender offer in early May 2007.

During April 2007, two of the Company’semployees exercised options for the purchase of a total of 5,550 shares of theCompany’s common stock.  The aggregateconsideration received by the Company for the issuance of those shares was$22,200.  The shares were issued inprivate placement transactions exempt from the registration requirements of theSecurities Act, pursuant to Section 4(2) of the Securities Act.

**ITEM 6. EXHIBITS**

**Exhibits**

10.1         Stock Purchase Agreement between and among Dakota Growers PastaCompany, Inc., MVC Capital, Inc. and La Bella Holdings, LLC, dated February 9,2007 (incorporated by reference to Exhibit 10.1 to the Company’s Current Reporton Form 8-K filed on February 15, 2007).

10.2         Multiple Advance Term Loan Supplement, Loan No. RIE539T07 betweenCoBank ACB and Dakota Growers Pasta Company, Inc. dated February 14, 2007(incorporated by reference to Exhibit 10.2 to the Company’s Current Report onForm 8-K filed on February 15, 2007).

10.3         Multiple Advance Term Loan Supplement, Loan No. RIE539T06A betweenCoBank ACB and Dakota Growers Pasta Company, Inc. dated February 14, 2007(incorporated by reference to Exhibit 10.3 to the Company’s Current Report onForm 8-K filed on February 15, 2007).

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10.4         Amendment to Master Loan Agreement between CoBank, ACB and DakotaGrowers Pasta Company, Inc. dated February 14, 2007 (incorporated by referenceto Exhibit 10.4 to the Company’s Current Report on Form 8-K filed on February15, 2007).

10.5         Extended Term Schedule A dated March 30, 2007 between the Company andFarm Credit Leasing Services Corporation (incorporated by reference to Exhibit10.1 to the Company’s Current Report on Form 8-K filed on April 4, 2007).

10.6         Master Lease Agreement dated March 6, 2002 and related Schedule A datedMarch 29, 2002 between Dakota Growers Pasta Company and Farm Credit LeasingServices Corporation. (incorporated by reference to Exhibit 10.2 from theCompany’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

10.7         Temporary Extension of Term Loan Supplement RIE539T07 between DakotaGrowers Pasta Company, Inc. and CoBank, ACB, dated April 26, 2007 (incorporatedby reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filedon May 1, 2007).

10.8         Amendment to the Master Loan Agreement between Dakota Growers PastaCompany, Inc. and CoBank, ACB, dated April 25, 2007 (incorporated by referenceto Exhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 1,2007).

10.9         Statused Revolving Credit Supplement between the Company and CoBank,ABC (incorporated by reference to Exhibit 10.1 to the Company’s Current Reporton Form 8-K filed on May 30, 2007).

10.10       Non-Revolving CreditSupplement between the Company and CoBank, ABC (incorporated by reference toExhibit 10.2 to the Company’s Current Report on Form 8-K filed on May 30,2007).

31.1         Certification of ChiefExecutive Officer required by Securities and Exchange Commission Rule 13a-14(a)or 15d-14(a).

31.2         Certification of ChiefFinancial Officer required by Securities and Exchange Commission Rule 13a-14(a)or 15d-14(a).

32.1         Certification of Chief Executive Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

32.2         Certification of Chief Financial Officer pursuant to Section 906 of theSarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.
|        | DAKOTA GROWERS  PASTA COMPANY, INC. |   |
|--------|-------------------------------------|--------|
|   | (Registrant)                        |

 
| Signature           | ** ** | **Title**                                     | ** ** | **Date**      |
|---------------------|------------|-----------------------------------------------|------------|---------------|
|                |       |                                          |       |          |
|                |       |                                          |       |          |
| /s/ Timothy J. Dodd |       | President and  Chief Executive Officer        |       |          |
| Timothy J. Dodd     |       | (Principal  Executive Officer)                |       | June 14, 2007 |
|                |       |                                          |       |          |
|                |       |                                          |       |          |
| /s/ Edward O. Irion |       | Chief Financial  Officer                      |       |          |
| Edward O. Irion     |       | (Principal  Financial and Accounting Officer) |       | June 14, 2007 |

 

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