**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-Q**

 

**x****     ****Quarterly Report Pursuant to Section 13 or 15(d) of theSecurities Exchange Act of 1934**

 

**For the quarterly period ended October 31,2009**

 

**or**

 

**o****        ****Transition Report Pursuant to Section 13 or 15(d) of theSecurities 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 1934during the preceding 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days.   Yes  x  No  o

 

Indicate bycheck mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files.)   Yes  o  No  o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See thedefinitions of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

| Large accelerated filer o |   | Accelerated filer o         |
|---------------------------|--------|-----------------------------|
|                      |   |                        |
| Non-Accelerated filer x   |   | Smaller reporting company o |

 

Indicate bycheck mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).   Yes o  No  x

 

As of December 15,2009, the Registrant had 10,764,932 shares of common stock, par value $0.01 pershare, outstanding.

 

 

 

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**PART I — FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                         | ** ** | **(Unaudited)**      | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                         | ** ** | **October 31,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                         | ** ** | **2009**             | ** ** | **2009**          | ** ** |
| **ASSETS**                                                                                                         |       |                 |       |              |       |
|                                                                                                               |       |                 |       |              |       |
| CURRENT ASSETS                                                                                                     |       |                 |       |              |       |
| Cash and cash equivalents                                                                                          |       | $                    | 3,148      |              | $          | 1,315 |   |
|                                                                                                               |       |                 |       |              |       |
| Trade accounts receivable, less allowance for cash  discounts and doubtful accounts of $922 and $826, respectively |       | 21,815               |       | 20,466            |       |
|                                                                                                               |       |                 |       |              |       |
| Other receivables                                                                                                  |       | 63                   |       | 67                |       |
|                                                                                                               |       |                 |       |              |       |
| Inventories                                                                                                        |       | 33,283               |       | 33,878            |       |
|                                                                                                               |       |                 |       |              |       |
| Prepaid expenses                                                                                                   |       | 1,434                |       | 799               |       |
|                                                                                                               |       |                 |       |              |       |
| Deferred income taxes                                                                                              |       | 947                  |       | 947               |       |
|                                                                                                               |       |                 |       |              |       |
| Total current assets                                                                                               |       | 60,690               |       | 57,472            |       |
|                                                                                                               |       |                 |       |              |       |
| PROPERTY AND EQUIPMENT                                                                                             |       |                 |       |              |       |
| In service                                                                                                         |       | 133,947              |       | 134,112           |       |
| Construction in progress                                                                                           |       | 4,006                |       | 975               |       |
|                                                                                                               |       | 137,953              |       | 135,087           |       |
| Less accumulated depreciation                                                                                      |       | (73,283              | )          | (71,960           | )          |
|                                                                                                               |       |                 |       |              |       |
| Net property and equipment                                                                                         |       | 64,670               |       | 63,127            |       |
|                                                                                                               |       |                 |       |              |       |
| INVESTMENT IN COOPERATIVE BANK                                                                                     |       | 1,507                |       | 1,507             |       |
|                                                                                                               |       |                 |       |              |       |
| INTANGIBLE ASSETS, NET                                                                                             |       | 2,336                |       | 2,387             |       |
|                                                                                                               |       |                 |       |              |       |
| GOODWILL                                                                                                           |       | 8,381                |       | 8,381             |       |
|                                                                                                               |       |                 |       |              |       |
| OTHER ASSETS                                                                                                       |       | 424                  |       | 421               |       |
|                                                                                                               |       |                 |       |              |       |
|                                                                                                               |       | $                    | 138,008    |              | $          | 133,295 |   |

 

(continued on next page)

 

2

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                                                        | ** ** | **(Unaudited)**      | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                                                        | ** ** | **October 31,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2009**             | ** ** | **2009**          | ** ** |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                    |       |                 |       |              |       |
|                                                                                                                                              |       |                 |       |              |       |
| CURRENT LIABILITIES                                                                                                                               |       |                 |       |              |       |
| Accounts payable                                                                                                                                  |       | $                    | 10,975     |              | $          | 9,987 |   |
| Accrued liabilities                                                                                                                               |       | 5,965                |       | 5,903             |       |
| Current portion of long-term debt                                                                                                                 |       | 5,763                |       | 5,756             |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total current liabilities                                                                                                                         |       | 22,703               |       | 21,646            |       |
|                                                                                                                                              |       |                 |       |              |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                     |       | —               |       | —            |       |
| LONG-TERM DEBT, net of current portion                                                                                                            |       | 23,225               |       | 25,418            |       |
| DEFERRED INCOME TAXES                                                                                                                             |       | 14,244               |       | 14,065            |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total liabilities                                                                                                                                 |       | 60,172               |       | 61,129            |       |
|                                                                                                                                              |       |                 |       |              |       |
| STOCKHOLDERS’ EQUITY                                                                                                                         |       |                 |       |              |       |
|                                                                                                                                              |       |                 |       |              |       |
| Series D delivery preferred stock,  non-cumulative, $.01 par value, 11,340,841 authorized, 11,275,297 shares  issued and outstanding         |       | 113                  |       | 113               |       |
| Series F convertible preferred stock,  non-cumulative, $.01 par value, 2,100,000 shares authorized, 1,065,000 shares  issued and outstanding |       | 11                   |       | 11                |       |
| Common stock, $.01 par value, 75,000,000 shares authorized,  10,203,063 shares issued and outstanding                                             |       | 102                  |       | 102               |       |
| Additional paid-in capital                                                                                                                        |       | 43,144               |       | 43,120            |       |
| Retained earnings                                                                                                                                 |       | 34,466               |       | 28,820            |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total stockholders’ equity                                                                                                                   |       | 77,836               |       | 72,166            |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total liabilities and stockholders’ equity                                                                                                   |       | $                    | 138,008    |              | $          | 133,295 |   |

 

See Notes to ConsolidatedFinancial Statements

 

3

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                                         | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                         | ** ** | **October 31,**   | ** ** |
| ** **                                                                         | ** ** | **2009**               | ** ** | **2008** | ** ** |
| Net revenues (net of discounts and allowances of  $7,568 and $7,117, respectively) |       | $                      | 63,764     |   | $ | 87,145 |   |
|                                                                               |       |                   |       |   |   |
| Cost of goods sold                                                                 |       | 48,978                 |       | 78,519 |   |
|                                                                               |       |                   |       |   |   |
| Gross profit                                                                       |       | 14,786                 |       | 8,626 |   |
|                                                                               |       |                   |       |   |   |
| Marketing, general and administrative expenses                                     |       | 5,456                  |       | 5,133 |   |
|                                                                               |       |                   |       |   |   |
| Operating income                                                                   |       | 9,330                  |       | 3,493 |   |
|                                                                               |       |                   |       |   |   |
| Other income (expense)                                                             |       |                   |       |   |   |
| Interest and other income                                                          |       | 22                     |       | 36 |   |
| Loss on disposition of property, equipment and  other assets                       |       | (32                    | )          | — |   |
| Interest expense, net                                                              |       | (214                   | )          | (855 | ) |
|                                                                               |       |                   |       |   |   |
| Income before income taxes                                                         |       | 9,106                  |       | 2,674 |   |
|                                                                               |       |                   |       |   |   |
| Income tax expense                                                                 |       | 3,460                  |       | 982 |   |
|                                                                               |       |                   |       |   |   |
| Net income                                                                         |       | $                      | 5,646      |   | $ | 1,692 |   |
|                                                                               |       |                   |       |   |   |
| Net income per common share                                                        |       |                   |       |   |   |
| Basic                                                                              |       | $                      | 0.55       |   | $ | 0.17 |   |
|                                                                               |       |                   |       |   |   |
| Diluted                                                                            |       | $                      | 0.47       |   | $ | 0.14 |   |
|                                                                               |       |                   |       |   |   |
| Weighted average common shares outstanding                                         |       |                   |       |   |   |
| Basic                                                                              |       | 10,203                 |       | 10,192 |   |
|                                                                               |       |                   |       |   |   |
| Diluted                                                                            |       | 11,958                 |       | 11,958 |   |

 

See Notes to ConsolidatedFinancial Statements

 

4

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                  | ** ** | **October 31,**   | ** ** |
| ** **                                                                  | ** ** | **2009**               | ** ** | **2008** | ** ** |
| OPERATING ACTIVITIES                                                        |       |                   |       |   |   |
| Net income                                                                  |       | $                      | 5,646      |   | $ | 1,692 |   |
| Adjustments to reconcile net income to net cash  from operating activities: |       |                   |       |   |   |
| Depreciation and amortization                                               |       | 1,641                  |       | 1,638 |   |
| Loss on disposition of property, equipment and  other assets                |       | 32                     |       | — |   |
| Deferred income taxes                                                       |       | 179                    |       | 390 |   |
| Stock-based employee compensation                                           |       | 24                     |       | 34 |   |
| Changes in assets and liabilities                                           |       |                   |       |   |   |
| Trade receivables                                                           |       | (1,349                 | )          | (2,353 | ) |
| Other receivables                                                           |       | 4                      |       | (860 | ) |
| Inventories                                                                 |       | 595                    |       | 12,065 |   |
| Prepaid expenses                                                            |       | (635                   | )          | 105 |   |
| Other assets                                                                |       | 3                      |       | 3 |   |
| Accounts payable                                                            |       | 988                    |       | (6,847 | ) |
| Other accrued liabilities                                                   |       | 62                     |       | (435 | ) |
| NET CASH FROM OPERATING ACTIVITIES                                          |       | 7,190                  |       | 5,432 |   |
|                                                                        |       |                   |       |   |   |
| INVESTING ACTIVITIES                                                        |       |                   |       |   |   |
| Purchases of property and equipment                                         |       | (3,107                 | )          | (552 | ) |
| Proceeds from sale of property, equipment and  other assets                 |       | 2                      |       | — |   |
| Payments for package design costs                                           |       | (66                    | )          | (48 | ) |
| NET CASH USED FOR INVESTING ACTIVITIES                                      |       | (3,171                 | )          | (600 | ) |
|                                                                        |       |                   |       |   |   |
| FINANCING ACTIVITIES                                                        |       |                   |       |   |   |
| Net change in excess outstanding checks over cash  on deposit               |       | —                 |       | 4,304 |   |
| Net change in short-term notes payable                                      |       | —                 |       | (3,300 | ) |
| Payments on long-term debt                                                  |       | (2,186                 | )          | (5,956 | ) |
| NET CASH USED FOR FINANCING ACTIVITIES                                      |       | (2,186                 | )          | (4,952 | ) |
|                                                                        |       |                   |       |   |   |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                     |       | 1,833                  |       | (120 | ) |
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                              |       | 1,315                  |       | 125 |   |
|                                                                        |       |                   |       |   |   |
| CASH AND CASH EQUIVALENTS, END OF PERIOD                                    |       | $                      | 3,148      |   | $ | 5 |   |
|                                                                        |       |                   |       |   |   |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                           |       |                   |       |   |   |
| Cash payments for                                                           |       |                   |       |   |   |
| Interest (net of amounts capitalized)                                       |       | $                      | 278        |   | $ | 1,009 |   |
|                                                                        |       |                   |       |   |   |
| Income taxes                                                                |       | $                      | 4,052      |   | $ | 2,654 |   |

 

SeeNotes to Consolidated Financial Statements

 

5

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notes should beread in conjunction with the notes to the financial statements for the yearended July 31, 2009 as filed in the Company’s Form 10-K.

 

**NOTE 1 - ORGANIZATION**

** **

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

 

**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 months ended October 31, 2009 are not necessarilyindicative of the results that may be expected for the year ended July 31,2010. The unaudited consolidated financial statements included in this Form 10-Qshould be read in conjunction with the consolidated financial statements andfootnotes included in the Company’s Form 10-K for the year ended July 31,2009. The information contained in the balance sheet as of July 31, 2009was derived from the Company’s audited annual report for fiscal year 2009.Reclassifications have been made to facilitate comparability with currentpresentation. Such reclassifications have no effect on the net results ofoperations.

 

The financialinformation presented herein includes the consolidated balance sheets andresults of operations of the Company, its wholly-owned subsidiaryPrimo Piatto, Inc., and DNA Dreamfields Company, LLC (“DNA Dreamfields”).All material inter-company accounts and transactions have been eliminated inthe preparation of the consolidated financial statements.

 

Our consolidated financialstatements for the quarter ended October 31, 2009 were evaluated forsubsequent events through December 15, 2009, the date the consolidatedfinancial statements were issued.

 

**NOTE 3 — NEW ACCOUNTING PRONOUNCEMENTS**

 

In December 2007, the FASB issued an amendment to ASC (“AccountingStandards Codification”) 805 “Business Combinations” to improve the relevance,representational faithfulness, and comparability of the information that areporting entity provides in its financial reports about a business combinationand its effects. In April 2009, the FASB further amended ASC 805 “BusinessCombinations” to address the initial recognition and measurement of an assetacquired or a liability assumed in a business combination that arises from acontingency and for which the fair value of the asset or liability on the dateof acquisition can be determined. These amendments are effective prospectivelyto business combinations on or after the beginning of the first annualreporting period beginning on or after December 15, 2008 (our fiscal year2010). The adoption of these amendments did not have a material impact on ourconsolidated financial statements.

 

InDecember 2007, the FASB issued authoritative guidance included in ASC 810,“Consolidation.”  The objective of thisguidance is to improve the relevance, comparability, and transparency of thefinancial information that a reporting entity provides in its consolidatedfinancial statements. This guidance establishes accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. This guidance also changes the way theconsolidated income statement is presented, establishes a single method ofaccounting for changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation, 

 

6

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

requiresthat a parent recognize a gain or loss in net income when a subsidiary isdeconsolidated and expanded disclosures in the consolidated financialstatements that clearly identify and distinguish between the interests of theparent’s owners and the interest of the noncontrolling owners of a subsidiary.This guidance became effective for financial statements issued for fiscal yearsbeginning on or after December 15, 2008. The adoption of this guidance didnot have a material impact on the Company’s financial statements.

 

In April 2008, the FASB issued an amendment providing additionalguidance regarding the factors that should be considered in developing renewalor extension assumptions used to determine the useful life of a recognizedintangible asset as defined in FASB ASC 275 “Risks and Uncertainties” and FASBASC 350 “Intangibles—Goodwill & Other”. The intent of this amendmentis to improve the consistency between the useful life of a recognizedintangible asset and the period of expected cash flows used to measure the fairvalue of the asset. This amendment is effective for our interim and annualfinancial statements beginning in our fiscal year 2010. The adoption of theseamendments did not have a material impact on our consolidated financialstatements.

 

InJune 2009, the FASB issued a new standard, included in ASC 810, “Consolidation,”regarding the consolidation of variable interest entities. The standardincludes guidance for determining whether an entity is a variable interestentity and replaces the quantitative-based risks and rewards approach with aqualitative approach that focuses on identifying which enterprise has the powerto direct the activities of a variable interest entity that most significantlyimpact the entity’s economic performance. It also requires an ongoingreassessment of whether an entity is the primary beneficiary, and it requiresadditional disclosures about an enterprise’s involvement in variable interestentities. This guidance becomes effective as of the beginning of the firstfiscal year that begins after November 15, 2009, our first quarter offiscal year 2011. We are currently evaluating the impact, if any, that theadoption will have on our consolidated financial statements.

 

InJune 2009, the FASB issued an accounting pronouncement regarding the FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles.  This pronouncement establishes the FASBAccounting Standards Codification (the “Codification”) as the single source ofauthoritative, nongovernmental U.S. GAAP.  The Codification iseffective for financial statements for interim or annual reporting periodsending after September 15, 2009.  All U.S. GAAP accountingliterature is now known as the “Accounting Standard Codification” (“ASC”) andupdates to the Codification are now issued as “Accounting Standards Updates” (“ASU”).As the Codification was not intended to change or alter existing U.S. GAAP, itdid not have any impact on our consolidated financial statements.

 

InJune 2009, the FASB issued new authoritative guidance, which has yet to becodified in the ASC.  This guidanceeliminates the concept of a “qualifying special-purpose entity,” changes therequirements for derecognizing financial assets, and requires additionaldisclosures. This guidance is effective for financial asset transfers occurringafter the beginning of an entity’s first fiscal year that begins after November 15,2009. This guidance becomes effective for the Company beginning in our firstquarter of fiscal year 2011.  The Companydoes not expect the adoption of this guidance will have a material impact onits financial statements.

 

InAugust 2009, the FASB issued ASU 2009-05 which provides additionalguidance on measuring the fair value of liabilities under ASC 820. ASU 2009-05clarifies that the quoted price for the identical liability, when traded as anasset in an active market, is also a Level 1 measurement for that liabilitywhen no adjustment to the quoted price is required.  Thispronouncement also requires that the fair value of a liability is measuredusing one or more of the following techniques when a quoted price in an activemarket for the identical liability is not available, (1) a valuationtechnique that uses the quoted price for the identical liability when traded asan asset, (2) quoted prices for similar liabilities or similar liabilitieswhen traded as assets, or (3) another valuation technique consistent withthe guidance in ASC 820, for example, an income approach such as a presentvalue technique.The newguidance on measuring liabilities at fair value is effective for the firstinterim or annual reporting period beginning after August 28, 2009, thesecond quarter of our fiscal year 2010. The Company does not expect theadoption of ASU 2009-05 will have a material impact on the Company’sconsolidated financial statements.

 

7

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 4 — FAIR VALUE MEASURES**

 

The fair value of a financial instrument is generallydefined as the price that would be received to sell an asset or paid totransfer a liability in an orderly transaction between market participants atthe measurement date. Quoted market prices are generally not available for theCompany’s financial instruments. Accordingly, fair values are based onjudgments regarding anticipated cash flows, future expected loss experience,current economic conditions, risk characteristics of various financialinstruments and other factors. These estimates involve uncertainties andmatters of judgment, and therefore cannot be determined with precision. Changesin assumptions could significantly affect the estimates.

 

FASB ASC 820 “Financial Value Measures andDisclosures” establishes a fair value hierarchy which requires an entity tomaximize the use of observable inputs and minimize the use of unobservableinputs when measuring fair value. The standard describes three levels of inputsthat may be used to measure fair value:

 

Level 1—Quoted prices in active markets for identicalassets or liabilities;

 

Level 2—Observable inputs other than Level 1 prices,such as quoted prices for similar assets or liabilities; quoted prices inmarkets that are not active; or other inputs that are observable or can becorroborated by observable market data for substantially the full term of theassets or liabilities; and

 

Level 3—Unobservable inputs that are supported bylittle or no market activity and that are significant to the fair value of theassets or liabilities.

 

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

 

The Company believes it is not practical to estimatethe fair value of the securities of non-subsidiary cooperatives withoutincurring excessive costs because there is no established market for thesesecurities and it is inappropriate to estimate future cash flows, which arelargely dependent on future patronage earnings of the non-subsidiarycooperatives.

 

Based upon current borrowing rates with similar maturities, the fairvalue of the long-term debt approximates the carrying value as ofOctober 31, 2009 and July 31, 2009.

 

**NOTE 5 — INVENTORIES**

** **

Inventoriesare valued at lower of cost or market. Inventories as of October 31, 2009include raw materials and packaging of $10,560,000 and finished goods of$22,723,000. Inventories at July 31, 2009 include raw materials andpackaging of $10,672,000 and finished goods of $23,206,000.

 

###### **NOTE 6 — LOAN AGREEMENTS**

###### ** **

The Company has a $45 million revolving credit facility with CoBankthat extends through January 13, 2010 and is collateralized by all assetsof the Company. Interest on the revolving line is at the 7-day LIBOR ratesubject to performance adjustments depending upon the Company’s ratio of totaldebt to earnings before interest, taxes, depreciation and amortization or “EBITDA.”The higher the ratio the higher the adjustment to the 7-day LIBOR rate within arange of 200 to 300 basis points above the 7-day LIBOR rate.  Fixedinterest rate options are also available. There were no balances outstandingunder the revolving credit arrangement as of October 31, 2009 and July 31,2009.  The Company had $45 millionavailable for borrowings under the line of credit as of October 31, 2009and July 31, 2009.

 

The Company’s various debt agreements with CoBank and certaininstitutional note holders obligate the Company to maintain or achieve certainamounts of equity and certain financial ratios and impose certain restrictionson the Company. The Company was in compliance with these financial covenants asof October 31, 2009.

 

###### **NOTE 7 — EARNINGS PER SHARE**

###### ** **

Basic earnings per share (EPS)is calculated by dividing net earnings on common stock by the weighted averagenumber of common shares outstanding during the period. Diluted EPS includes theeffect of all potentially dilutive securities, such as stock options andconvertible preferred stock.

 

Dilutive securities, consisting of stock options and convertiblepreferred stock, included in the calculation of diluted weighted average commonshares totaled 1,755,000 and 1,766,000 for the three months ended October 31,2009 and October 31, 2008, respectively. The Series F ConvertiblePreferred Stock is included in the fully diluted EPS calculation and notincluded in the basic EPS calculation. As there is currently no establishedpublic trading market for the Company’s common stock, the Company has assumedthe proceeds from the exercise of stock options would reduce debt and, thus,interest expense.

 

The components of basic earnings per share are as follows (inthousands, except per share amounts):

** **
| ** **                                    | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------|------------|------------------------|------------|
| ** **                                    | ** ** | **October 31,**   | ** ** |
| **Earnings per share - Basic**                | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                          |       |                   |       |   |   |
| Net earnings available to common stockholders |       | $                      | 5,646      |   | $ | 1,692 |   |
|                                          |       |                   |       |   |   |
| Basic weighted-average shares outstanding     |       | 10,203                 |       | 10,192 |   |
|                                          |       |                   |       |   |   |
| Earnings per share - Basic                    |       | $                      | 0.55       |   | $ | 0.17 |   |

 

8

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The components of diluted earnings per share are as follows (inthousands, except per share amounts):

 
| ** **                                                                     | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                     | ** ** | **October 31,**   | ** ** |
| **Earnings per share - Diluted**                                               | ** ** | **2009**               | ** ** | **2008** | ** ** |
|                                                                           |       |                   |       |   |   |
| Net earnings available to common stockholders                                  |       | $                      | 5,646      |   | $ | 1,692 |   |
| Plus: Impact of interest expense on the exercise  of options, net of taxes (1) |       | 12                     |       | 23 |   |
| Net earnings available to common stockholders                                  |       | $                      | 5,658      |   | $ | 1,715 |   |
|                                                                           |       |                   |       |   |   |
| Diluted weighted-average shares outstanding:                                   |       |                   |       |   |   |
| Basic weighted-average shares outstanding                                      |       | 10,203                 |       | 10,192 |   |
| Plus: Incremental shares from assumed conversions                              |       |                   |       |   |   |
| Options                                                                        |       | 690                    |       | 701 |   |
| Convertible preferred shares                                                   |       | 1,065                  |       | 1,065 |   |
| Diluted weighted-average shares outstanding                                    |       | 11,958                 |       | 11,958 |   |
|                                                                           |       |                   |       |   |   |
| Earnings per share - Diluted                                                   |       | $                      | 0.47       |   | $ | 0.14 |   |

 

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(1)   Asthere is currently no established public trading market for the Company’scommon stock, the Company has assumed the proceeds from the exercise of stockoptions would reduce debt and, thus, interest expense.

 

**NOTE 8 — STOCK OPTIONS**

 

The Company accounts forshare based payments in accordance with ASC Topic 718 “Compensation — StockCompensation.” Under ASC 718, the Company is required to recognize, as expense,the estimated fair value of all share based payments to employees. Inaccordance with this guidance, the Company has elected to recognize thecompensation cost of all service based awards on a straight-line basis over thevesting period of the award. Performance based awards are recognized ratablyfor each vesting tranche. The Company recorded stock-based employeecompensation expense of $24,000 and $34,000, for the three months ended October 31,2009 and October 31, 2008, respectively.

 

9

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 
| ** **                           | ** ** | **Options to purchase Series C Convertible Preferred Stock** | ** ** |
|--------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Number of**                                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Series C**                                                 | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Convertible**                                                   | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                           | ** ** | **Preferred Shares**                                              | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                                 |       |                                                              |       |   |   |   |   |   |   |
| Outstanding at July 31, 2009    |       | 1,977                                                             |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |
| Exercised                            |       | —                                                            |       |   |   |   |   |   |   |
| Granted                              |       | —                                                            |       |   |   |   |   |   |   |
| Forfeited/Expired                    |       | —                                                            |       |   |   |   |   |   |   |
| Outstanding at October 31, 2009 |       | 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, 2009    |       | 642,363                                                           |       | $4.00-$6.25 |   | $ | 5.11 |   | 574,182 |   |
| Exercised                            |       | —                                                            |       |   |   |   |   |   |   |
| Granted                              |       | —                                                            |       |   |   |   |   |   |   |
| Forfeited/Expired                    |       | —                                                            |       |   |   |   |   |   |   |
| Outstanding at October 31, 2009 |       | 642,363                                                           |       | $4.00-$6.25 |   | $ | 5.11 |   | 642,363 |   |

 

A summary of the status of theCompany’s issued but nonvested stock options as of October 31, 2009, andchanges during the three months ended October 31, 2009, is presentedbelow:

 
| ** **                         | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                         | ** ** | **Common** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Stock Options**        | ** ** | **Shares** | ** ** | **Fair Value**       | ** ** |
|                               |       |       |       |                 |       |
| Nonvested at July 31, 2009    |       | 68,181     |       | $                    | 5.00       |   |
| Granted                            |       | —     |       |                 |       |
| Vested                             |       | (68,181    | )          | $                    | 5.00       |   |
| Forfeited/Expired                  |       | —     |       |                 |       |
| Nonvested at October 31, 2009 |       | —     |       |                 |       |

 

**NOTE 9 — COMMITMENTS**

 

The Company forward contracts for a certain portion of its future durumwheat requirements. The Company had outstanding commitments for grain purchasestotaling $13,646,000 as of October 31, 2009, related to forward purchase contracts.These contracts are set price contracts to deliver grain to the Company’s mill,and are not derivative in nature as they have no net settlement provision andare not transferable.

 

10

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The Company is currentlyundertaking an estimated $10 million capital project at its Carringtonfacility. As of October 31, 2009, the Company had expended $3.7 million inconjunction with this project, and had entered into additional commitments forbuilding construction and pasta equipment totaling $5.0 million as of October 31,2009. These costs are expected to be paid within one year.

 

**NOTE 10 — RELATED PARTYTRANSACTIONS**

 

Jeffrey Topp, a director ofthe Company, sold wheat to the Company through an affiliated entity in thefirst quarters of fiscal years 2010 and 2009. Those sales totaled $177,000 and$473,000 at market prices for the quarters ended October 31, 2009 and2008, respectively. The Company had a commitment to purchase wheat totaling$9,000 and $187,500 from Mr. Topp and/or his affiliated entity as of October 31,2009 and July 31, 2009, respectively.

 

**NOTE 11 — SUBSEQUENT EVENTS**

 

During December 2009,certain executive officers and employees of the Company exercised options forthe purchase of 561,869 shares of the Company’s Common Stock and 47,448 sharesof the Company’s Series D Delivery Preferred Stock. The aggregateconsideration received by the Company for the issuance of those shares was $2.9million. The shares were issued in private placement transactions exempt fromthe registration requirements of the Securities Act, pursuant to Section 4(2) ofthe Securities Act.

 

On November 19, 2009, the Company’s Board of Directors authorizedthe payment of non-periodic dividends of $0.01 per share on its Series DDelivery Preferred Stock, $0.62 per share on its Common Stock and $0.62 pershare on its Series F Convertible Preferred Stock, payable on January 5,2010 to stockholders of record as of December 4, 2009.

 

11

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) should be read in conjunction with the MD&A includedin the Company’s Form 10-K for the fiscal year ended July 31, 2009.

 

**Forward-LookingStatements**

 

Thefollowing discussion contains forward-looking statements. Such forward-lookingstatements include, among others, those statements including the words “expect”,“anticipate”, “believe”, “may” and similar expressions. Such statements arebased on assumptions by the Company’s management as of the date of thisQuarterly Report, and are subject to risks and uncertainties, including thosediscussed in the Company’s Form 10-K for the year ended July 31, 2009under “Risk Factors,” that could cause actual results to differ materially fromthose anticipated. The Company cautions readers not to place undue reliance onsuch forward-looking statements. The Company will not update anyforward-looking statements in this Quarterly Report to reflect future events ordevelopments.

 

**Summary**

 

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

 

Netincome for the quarter ended October 31, 2009 totaled $5,646,000 comparedto $1,692,000 for the quarter ended October 31, 2008.  Net earnings per basic common share for thequarter ended October 31, 2009 were $0.55 per share compared to $0.17 pershare for the quarter ended October 31, 2008.

 

Durumprices continued to decline in the first quarter of fiscal year 2010 whencompared to fiscal year 2009. Decreases in raw material costs were partiallyoffset by lower sales as the Company’s net revenues decreased 26.8% for thequarter ended October 31, 2009 when compared to the same period of theprior year.  The decrease resultedprimarily from lower pasta per unit selling prices and, to a lesser extent,lower sales volumes.

 

**CriticalAccounting Policies**

 

Theaccompanying discussion and analysis of our results of operations and financialcondition are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are not readilyapparent from other sources. We base our estimates and judgments on historicalexperience and on various other assumptions that we believe are reasonableunder the circumstances. However, future events are subject to change and thebest estimates and judgments may require adjustment. For a complete descriptionof the Company’s significant accounting policies, please see Note 1 to theconsolidated financial statements included in the Company’s Form 10-K forthe year ended July 31, 2009. Our critical accounting policies are thosethat have meaningful impact on the reporting of our financial condition andresults, and that require significant management judgment and estimates. Thesepolicies include our accounting for (a) allowance for doubtful accounts, (b) inventoryvaluation, (c) asset impairment, and (d) income taxes.

 

*Allowance for Doubtful Accounts*

 

Weevaluate the collectability of our accounts receivable based on a combinationof factors. In cases where we are aware of circumstances that may impair aspecific customer’s ability to meet its financial obligations to us, we 

 

12

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recorda specific allowance against amounts due to us, and thereby reduce the netrecognized receivable to the amount we reasonably believe will be collected.For all other customers, we recognize allowances for doubtful accounts based onthe length of time the receivables are past due and our historical experience.If the financial condition of our customers deteriorates, additional allowancesmay be required in the future that could have an adverse impact on our futureoperating results.

 

*InventoryValuation*

 

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

 

*AssetImpairment*

 

Weare required to evaluate our long-lived assets, including goodwill and otherintangible assets, for impairment and write down the value of any assets ifthey are determined to be impaired. Evaluating the impairment of long-livedassets involves management judgment in estimating the future cash flows andfair values related to these assets. Future events could cause management toconclude that impairment indicators exist and that the value of certainlong-lived assets is impaired.

 

*IncomeTaxes*

 

Indetermining income (loss) for financial statement purposes, management mustmake certain estimates and judgments in calculating tax liabilities and indetermining the recoverability of certain deferred tax assets. Deferred taxassets must be reduced by a valuation allowance if, based on the weight ofavailable evidence, it is more likely than not that some portion or all of therecorded deferred tax assets will not be realized in future periods. Managementbelieves it is likely that the deferred tax assets as of October 31, 2009will be realized through the generation of future taxable income and taxplanning strategies.

 

**Resultsof Operations**

 

*Comparisonof the Three Months Ended October 31, 2009 and 2008*

 

***Net Revenues.***Net revenues totaled $63.8 million forthe three months ended October 31, 2009, a decrease of 26.8%, compared to$87.1 million for the three months ended October 31, 2008. Overall, pastaper unit selling prices decreased 19.2% along with a decrease in sales volumesof 7.4%.  Revenues from the retailmarket, a portion of which includes co-pack and government sales, decreased $5.4million, or 15.2%, due to a 11.0% decrease in average selling prices and a 4.7%decrease in sales volume. Foodservice revenues decreased $4.7 million, or22.8%, due to a 20.7% decrease in average selling prices and a 2.7% decrease insales volumes. Ingredient revenues decreased $10.0 million, or 42.3%, due to a32.9% decrease in average selling prices and a 14.0% decrease in sales volumes.

 

The Company marketssemolina production in excess of its own requirements as well as durum wheatflour, other flour blends and by-products of the durum milling process.Revenues from mill product sales totaled $4.0 million for the three monthsended October 31, 2009, a decrease of $3.3 million when compared to thesame period of the prior year. The decrease is due to lower semolina salesvolumes along with a decrease in per unit selling prices.

 

***Cost of Goods Sold.***Cost of goods sold decreased $29.5 million, or 37.6%, to $49.0 million for thethree months ended October 31, 2009, compared to $78.5 million for thethree months ended October 31, 2008. The decrease was primarily due to lower durum costs. Gross profit as apercentage of net revenues increased to 23.2% for the three months ended October 31,2009 from 9.9% for the three months ended October 31, 2008 due todecreases in raw material costs partially offset by lower sales prices.

 

***Marketing, General, and Administrative (“MG&A”) Expenses.***MG&A expenses increased 6.3%, to $5.5 million for the quarter ended October 31,2009, compared to $5.1 million for the quarter ended October 31, 2008. 

 

13

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Theincrease was primarily due to higher compensation costs and professional feesoffset by a reduction in consumer marketing and advertising costs associatedwith Dreamfields pasta products. MG&A expenses as a percentage of netrevenues increased to 8.6% for the quarter ended October 31, 2009, from5.9% for the comparable quarter of the prior year.

 

***Interest Expense.***Interest expense for the three months ended October 31, 2009 totaled $0.2million compared to $0.9 million for the comparable quarter of the prior year.

 

***IncomeTaxes.***Income tax expense for the three months ended October 31,2009 and 2008 totaled $3.5 million and $1.0 million, respectively, and reflectsan effective corporate income tax rate of approximately 38% and 37%,respectively.

 

***Net Income. ***Net income for the threemonths ended October 31, 2009 totaled $5.6 million compared to net incomeof $1.7 million for the three months ended October 31, 2008.

 

**Liquidityand Capital Resources**

 

TheCompany’s primary sources of liquidity are cash provided by operations andborrowings under its revolving credit facility. Working capital as of October 31,2009 totaled $38.0 million compared to $35.8 million as of July 31, 2009.

 

TheCompany has a $45 million revolving credit facility with CoBank which extendsthrough January 13, 2010. There was no balance outstanding on the line ofcredit as of October 31, 2009 and July 31, 2009.  Therefore, the Company had $45 millionavailable for borrowings under the revolving line of credit as of October 31,2009 and July 31, 2009.

 

TheCompany’s various debt agreements with CoBank and certain institutionalinvestors obligate the Company to maintain or achieve certain amounts of equityand certain financial ratios and impose certain restrictions on the Company.The Company was in compliance with these financial covenants as of October 31,2009 and the date of this filing.

 

Netcash provided from operating activities totaled $7.2 million for the threemonths ended October 31, 2009 compared to net cash provided by operatingactivities of $5.4 million for the three months ended October 31,2008.  The increase was primarilyattributable to an increase in net income.

 

Net cash used for investingactivities totaled $3.2 million and $0.6 million for the three months ended October 31,2009 and 2008, respectively.  A majorityof the net cash used for investing activities for the quarter ended October 31,2009 related to fixed asset expenditures. The Company is currently undertaking an estimated $10 million capitalproject at its Carrington facility. As of October 31, 2009, the Companyhad expended $3.7 million in conjunction with this project, and had enteredinto additional commitments for building construction and pasta equipmenttotaling $5.0 million as of October 31, 2009. These costs are expected tobe paid within one year.

 

Netcash used for financing activities totaled $2.2 million and $5.0 million forthe three months ended October 31, 2009 and 2008, respectively. The $2.2million of net cash used for financing activities for the quarter ended October 31,2009 related to scheduled payments on long-term debt.  The $5.0 million of net cash used forfinancing activities for the quarter ended October 31, 2008 included $6.0million in scheduled payments on long-term debt and a decrease in short-termnotes payable offset by an increase in excess outstanding checks over cash ondeposit.

 

On November 19, 2009, the Company’s Board of Directors authorizedthe payment of non-periodic dividends of $0.01 per share on its Series DDelivery Preferred Stock, $0.62 per share on its Common Stock and $0.62 pershare on its Series F Convertible Preferred Stock, payable on January 5,2010 to stockholders of record as of December 4, 2009.

 

14

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During December 2009, certain executiveofficers and employees of the Company exercised options for the purchase of561,869 shares of the Company’s Common Stock and 47,448 shares of the Company’sSeries D Delivery Preferred Stock. The aggregate consideration received bythe Company for the issuance of those shares was $2.9 million.

 

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 “Act”). The Company received $692,000 in November 2009under the Act, which will be recognized as other income in the Company’s secondquarter of fiscal year 2010. The Company cannot reasonably estimate thepotential amount, if any, that it may receive under the Act in future periodsas any such amount will be based upon future events over which the Company haslittle or no control, including but not limited to federal legislation, theamount of expenditures by domestic pasta producers and the amount ofantidumping and countervailing duties collected by Customs.  The Act, also known as the Byrd Amendment,has been repealed and therefore, duties assessed on pasta imports after September 30,2007 will no longer be distributed to domestic producers.  However, amounts collected (whether suchcollections occur before or after September 30, 2007) related to dutiesassessed on pasta entries prior to September 30, 2007, are expected to beavailable for future distribution to domestic producers.

 

Thefollowing table summarizes the Company’s contractual obligations as of October 31,2009 (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                        |       | $          | 28,988     |                      | $          | 5,763              |       | $                  | 16,725     |             | $          | 6,500 |   | $ | — |   |
| Interest  on long-term obligations (1) |       | 1,757      |       | 683                       |       | 992                |       | 82                 |       | —           |       |
| Wheat  purchase obligations            |       | 13,646     |       | 13,646                    |       | —             |       | —             |       | —           |       |
| Construction  obligations              |       | 5,000      |       | 5,000                     |       | —             |       | —             |       | —           |       |
| Warehouse  obligations                 |       | 3,766      |       | 1,939                     |       | 1,827              |       | —             |       | —           |       |
| Operating  leases                      |       | 1,123      |       | 557                       |       | 537                |       | 29                 |       | —           |       |
|                                   |       |       |       |                      |       |               |       |               |       |             |       |
|                                   |       | $          | 54,280     |                      | $          | 27,588             |       | $                  | 20,081     |             | $          | 6,611 |   | $ | — |   |

 

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(1) Based on interest rates as of October 31, 2009

 

TheCompany forward contracts for a certain portion of its future durum wheatrequirements. At October 31, 2009, the Company had outstanding commitmentsfor grain purchases totaling $13.6 million related to forward purchasecontracts. These contracts are set price contracts to deliver grain to theCompany’s mill, and are not derivative in nature as they have no net settlementprovision and are not transferable.

 

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

 

**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK**

 

Market risk is the potentialloss to future earnings, fair values or cash flows resulting from adversechanges in interest rates, commodity prices, exchange rates, equity prices andother market changes.

 

The Company is exposed tomarket risk from changes in interest rates. For fixed rate debt, interest ratechanges affect the fair value of financial instruments but do not impactearnings or cash flows. Conversely, for variable rate debt, interest ratechanges generally do not affect the fair market value but do impact futureearnings and cash flows, assuming other factors are held constant. A majorityof the balances outstanding under the Company’s current debt agreements aresubject to variable interest rates.

 

15

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The Company is exposed tocertain fluctuations in commodity prices. The Company forward contracts for acertain portion of its future wheat requirements. These contracts are set pricecontracts to deliver grain to the Company’s mill, and are not derivative innature as they have no net settlement provision and are not transferable.

 

**ITEM4T.  CONTROLS AND PROCEDURES**

 

***Evaluation of Disclosure Controls and Procedures***

 

Asrequired by Rule 13a-15(b) under the Securities Exchange Act of 1934(the “Exchange Act”), we conducted an evaluation, under the supervision andwith the participation of our management, including our Chief Executive Officerand Chief Financial Officer (together the “Certifying Officers”), of theeffectiveness of the design and operation of our disclosure controls andprocedures as of October 31, 2009, the end of the period covered by thisreport. Based upon that evaluation, the Certifying Officers concluded that ourdisclosure controls and procedures were effective as of October 31, 2009to provide reasonable assurance that information required to be disclosed inour Exchange Act reports is recorded, processed, summarized and reported withinthe time periods specified in the SEC’s rules and forms and that suchinformation is accumulated and communicated to our management, including ourCertifying Officers, as appropriate, to allow for timely decisions regardingrequired disclosure.

 

***InherentLimitations on Effectiveness of Controls***

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposesin accordance with U.S. generally accepted accounting principles. Internalcontrol over financial reporting includes those policies and procedures that (i) pertainto the maintenance of records that, in reasonable detail, accurately and fairlyreflect the transactions and dispositions of assets; (ii) providereasonable assurance that transactions are recorded as necessary to permitpreparation of financial statements in accordance with U.S. generally acceptedaccounting principles, and that receipts and expenditures are being made onlyin accordance with authorizations of the management and the Board; and (iii) providereasonable assurance regarding prevention or timely detection of unauthorizedacquisition, use or disposition of Company assets that could have a materialeffect on the financial statements.

 

Management personnel,including the Certifying Officers, recognize that our internal control overfinancial reporting cannot prevent or detect all error and all fraud. A controlsystem, no matter how well designed and operated, can provide only reasonable,not absolute, assurance that the control system’s objectives will be met. Thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Further, because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that misstatements due toerror or fraud will not occur or that all control issues and instances offraud, if any, have been detected. The design of any system of controls isbased in part on certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions.

 

***Changes in Internal Controls over Financial Reporting***

 

Therewere no changes in the Company’s internal controls over financial reportingduring the Company’s fiscal quarter ended October 31, 2009 that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

16

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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, 2009.

 

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

 

During December 2009,certain executive officers and employees of the Company exercised options forthe purchase of 561,869 shares of the Company’s Common Stock and 47,448 sharesof the Company’s Series D Delivery Preferred Stock. The aggregateconsideration received by the Company for the issuance of those shares was $2.9million. The shares were issued in private placement transactions exempt fromthe registration requirements of the Securities Act, pursuant to Section 4(2) ofthe Securities Act.

 

**ITEM6. EXHIBITS**

 

**Exhibits**

 
| 3.1    | Second  Amended and Restated Articles of Incorporation of the Company, formerly  Dakota Growers Restructuring Company, Inc. (Incorporated by reference to  Exhibit 3.1 from the Company’s Pre-Effective Amendment No. 2 to  Form S-4 Registration Statement, File No. 333-81946, dated  April 19, 2002).                            |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2    | Second  Amended and Restated Bylaws of the Company, formerly Dakota Growers  Restructuring Company, Inc. (Incorporated by reference to  Exhibit 3.3 from the Company’s Pre-Effective Amendment No. 2 to  Form S-4 Registration Statement, File No. 333-81946, dated  April 19, 2002).                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.3    | Certificate  of Designation of Series E Junior Participating Preferred Stock of the  Company, formerly Dakota Growers Restructuring Company, Inc.  (Incorporated by reference to Exhibit 3.2 from the Company’s Pre-Effective  Amendment No. 2 to Form S-4 Registration Statement, File  No. 333-81946, dated April 19, 2002). |
|   |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.4    | Certificate  of Designation of Series F Convertible Preferred Stock of the Company  (Incorporated by reference to Exhibit 3.1 from the Company’s Report on  Form 8-K, File No. 000-50111, filed February 15, 2007).                                                                                                                      |
|   |                                                                                                                                                                                                                                                                                                                                                                   |
| 31.1   | Certification of Chief  Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (Exchange Act Rule 13a-14(a) or 15d-14(a)).                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                   |
| 31.2   | Certification of Chief  Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of  2002 (Exchange Act Rule 13a-14(a) or 15d-14(a)).                                                                                                                                                                                                        |
|   |                                                                                                                                                                                                                                                                                                                                                                   |
| 32.1   | Certification  of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                   |
| 32.2   | Certification of Chief Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C.  Section 1350).                                                                                                                                                                                                                               |

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

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

 
| **Signature**        | ** ** | **Title**                                    | ** ** | **Date**                |
|----------------------|------------|----------------------------------------------|------------|-------------------------|
|                 |       |                                         |       |                    |
| /s/ Timothy J.  Dodd |       | President and  Chief Executive Officer       |       |                    |
| Timothy J. Dodd      |       | (Principal  Executive Officer)               |       | December 15, 2009  |
|                 |       |                                         |       |                    |
| /s/ Edward O.  Irion |       | Chief Financial  Officer                     |       |                    |
| Edward O. Irion      |       | (Principal Financial and Accounting Officer) |       | December 15,  2009 |

 

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