**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 January 31, 2007**                               |
| ** ** |   | ** **                                                                        |
| ** ** |   | **or**                                                                            |
| ** ** |   | ** **                                                                        |
| **o**      |   | **Transition Report  Pursuant to Section 13 or 15(d) of the Securities Exchange** |
|       |   | **Act of 1934**                                                                   |

 

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**CommissionFile 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 by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to such filing requirements for the past 90days.  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 by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).                                                          Yeso No x

As of March 19, 2007, theRegistrant had 13,169,382 shares of common stock, par value $0.01 per share,outstanding.

 

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**PART I –FINANCIAL INFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**DAKOTA GROWERS PASTA COMPANY,INC.**

**CONSOLIDATED BALANCE SHEETS**

**(InThousands, Except Share Information)**
| ** **                                                                                                              | ** ** | **(Unaudited)**      | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                              | ** ** | **January 31,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                              | ** ** | **2007**             | ** ** | **2006**          | ** ** |
| **ASSETS**                                                                                                              | ** ** | ** **           | ** ** | ** **        | ** ** |
|                                                                                                                    |       |                 |       |              |       |
| CURRENT ASSETS                                                                                                          |       |                 |       |              |       |
| Cash and cash  equivalents                                                                                              |       | $                    | 35         |              | $          | 343 |   |
|                                                                                                                    |       |                 |       |              |       |
| Trade accounts  receivable, less allowance for cash discounts and doubtful accounts of $1,135  and $1,080, respectively |       | 19,160               |       | 14,441            |       |
|                                                                                                                    |       |                 |       |              |       |
| Other receivables                                                                                                       |       | 314                  |       | 91                |       |
|                                                                                                                    |       |                 |       |              |       |
| Inventories                                                                                                             |       | 24,551               |       | 26,118            |       |
|                                                                                                                    |       |                 |       |              |       |
| Prepaid expenses                                                                                                        |       | 1,594                |       | 2,007             |       |
|                                                                                                                    |       |                 |       |              |       |
| Deferred income taxes                                                                                                   |       | 955                  |       | 955               |       |
|                                                                                                                    |       |                 |       |              |       |
| Total current assets                                                                                                    |       | 46,609               |       | 43,955            |       |
|                                                                                                                    |       |                 |       |              |       |
| PROPERTY AND EQUIPMENT                                                                                                  |       |                 |       |              |       |
| In service                                                                                                              |       | 123,231              |       | 124,035           |       |
| Construction in  progress                                                                                               |       | 6,639                |       | 4,093             |       |
|                                                                                                                    |       | 129,870              |       | 128,128           |       |
| Less accumulated  depreciation                                                                                          |       | (58,931              | )          | (57,198           | )          |
|                                                                                                                    |       |                 |       |              |       |
| Net property and  equipment                                                                                             |       | 70,939               |       | 70,930            |       |
|                                                                                                                    |       |                 |       |              |       |
| INVESTMENT IN  COOPERATIVE BANK                                                                                         |       | 1,515                |       | 1,515             |       |
|                                                                                                                    |       |                 |       |              |       |
| GOODWILL                                                                                                                |       | 16,654               |       | 16,654            |       |
|                                                                                                                    |       |                 |       |              |       |
| OTHER ASSETS                                                                                                            |       | 1,059                |       | 1,195             |       |
|                                                                                                                    |       | $                    | 136,776    |              | $          | 134,249 |   |

 

(continued on next page)

 

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**CONSOLIDATED BALANCE SHEETS**

**(InThousands, Except Share Information)**
| ** **                                                                                                                           | ** ** | **(Unaudited)**      | ** ** | ** **        | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                                           | ** ** | **January 31,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                                           | ** ** | **2007**             | ** ** | **2006**          | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                       | ** ** | ** **           | ** ** | ** **        | ** ** |
|                                                                                                                                 |       |                 |       |              |       |
| CURRENT LIABILITIES                                                                                                                  |       |                 |       |              |       |
| Excess  outstanding checks over cash on deposit                                                                                      |       | $                    | 1,476      |              | $          | 704 |   |
| Accounts payable                                                                                                                     |       | 6,083                |       | 7,250             |       |
| Accrued  liabilities                                                                                                                 |       | 5,465                |       | 5,957             |       |
| Notes payable                                                                                                                        |       | 8,100                |       | —            |       |
| Current portion  of long-term debt                                                                                                   |       | 7,971                |       | 6,771             |       |
|                                                                                                                                 |       |                 |       |              |       |
| Total current  liabilities                                                                                                           |       | 29,095               |       | 20,682            |       |
|                                                                                                                                 |       |                 |       |              |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                       |       | —               |       | —            |       |
| LONG-TERM DEBT,  net of current portion                                                                                              |       | 21,574               |       | 28,545            |       |
| DEFERRED INCOME  TAXES                                                                                                               |       | 13,111               |       | 12,417            |       |
| OTHER  LIABILITIES                                                                                                                   |       | 8                    |       | 34                |       |
|                                                                                                                                 |       |                 |       |              |       |
| Total liabilities                                                                                                                    |       | 63,788               |       | 61,678            |       |
|                                                                                                                                 |       |                 |       |              |       |
| NONCONTROLLING INTERESTS                                                                                                             |       | 7,869                |       | 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, 13,169,382 issued and  outstanding                                      |       | 132                  |       | 132               |       |
| Additional  paid-in capital                                                                                                          |       | 62,964               |       | 62,872            |       |
| Retained  earnings                                                                                                                   |       | 1,910                |       | 1,475             |       |
|                                                                                                                                 |       |                 |       |              |       |
| Total  stockholders’ equity                                                                                                     |       | 65,119               |       | 64,592            |       |
|                                                                                                                                 |       |                 |       |              |       |
| Total liabilities and  stockholders’ equity                                                                                     |       | $                    | 136,776    |              | $          | 134,249 |   |

 

See Notes to ConsolidatedFinancial Statements

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In Thousands, Except Per ShareAmounts)(Unaudited)**

 
| ** **                                                                         | ** ** | **Three Months Ended  January 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2007**                                           | ** ** | **2006** | ** ** |
| Net revenues  (net of discounts and allowances of $5,837 and $6,693, respectively) |       | $                                                  | 47,174     |   | $ | 42,490 |   |
|                                                                               |       |                                               |       |   |   |
| Cost of goods  sold                                                                |       | 42,072                                             |       | 38,124 |   |
|                                                                               |       |                                               |       |   |   |
| Gross profit                                                                       |       | 5,102                                              |       | 4,366 |   |
|                                                                               |       |                                               |       |   |   |
| Marketing,  general and administrative expenses                                    |       | 3,476                                              |       | 4,246 |   |
|                                                                               |       |                                               |       |   |   |
| Operating income                                                                   |       | 1,626                                              |       | 120 |   |
|                                                                               |       |                                               |       |   |   |
| Other income  (expense)                                                            |       |                                               |       |   |   |
| Interest and  other income                                                         |       | 1,201                                              |       | 1,032 |   |
| Gain on  disposition of property, equipment and other assets                       |       | 13                                                 |       | 13 |   |
| Interest  expense, net                                                             |       | (556                                               | )          | (676 | ) |
|                                                                               |       |                                               |       |   |   |
| Income before  noncontrolling interests and income taxes                           |       | 2,284                                              |       | 489 |   |
|                                                                               |       |                                               |       |   |   |
| Noncontrolling  interests                                                          |       | 171                                                |       | 522 |   |
|                                                                               |       |                                               |       |   |   |
| Income before  income taxes                                                        |       | 2,455                                              |       | 1,011 |   |
|                                                                               |       |                                               |       |   |   |
| Income tax  expense                                                                |       | 958                                                |       | 394 |   |
|                                                                               |       |                                               |       |   |   |
| Net income                                                                         |       | 1,497                                              |       | 617 |   |
| Dividends on  preferred stock                                                      |       | 113                                                |       | 451 |   |
|                                                                               |       |                                               |       |   |   |
| Net earnings on  common stock                                                      |       | $                                                  | 1,384      |   | $ | 166 |   |
|                                                                               |       |                                               |       |   |   |
| Net earnings per  common share                                                     |       |                                               |       |   |   |
| Basic                                                                              |       | $                                                  | 0.11       |   | $ | 0.01 |   |
|                                                                               |       |                                               |       |   |   |
| Diluted                                                                            |       | $                                                  | 0.11       |   | $ | 0.01 |   |
|                                                                               |       |                                               |       |   |   |
| Weighted average  common shares outstanding                                        |       |                                               |       |   |   |
| Basic                                                                              |       | 13,169                                             |       | 13,169 |   |
|                                                                               |       |                                               |       |   |   |
| Diluted                                                                            |       | 13,487                                             |       | 13,570 |   |
|                                                                               |       |                                               |       |   |   |
| Dividends per common  share                                                        |       | $                                                  | 0.14       |   | $ | 0.04 |   |

 

See Notes to ConsolidatedFinancial Statements

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

**(In Thousands, Except Per ShareAmounts)(Unaudited)**

 
| ** **                                                                           | ** ** | **Six Months Ended  January 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                           | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                                                 |       |                                             |       |   |   |
| Net revenues  (net of discounts and allowances of $12,556 and $13,819, respectively) |       | $                                                | 96,106     |   | $ | 86,562 |   |
|                                                                                 |       |                                             |       |   |   |
| Cost of goods  sold                                                                  |       | 84,931                                           |       | 76,956 |   |
|                                                                                 |       |                                             |       |   |   |
| Gross profit                                                                         |       | 11,175                                           |       | 9,606 |   |
|                                                                                 |       |                                             |       |   |   |
| Marketing,  general and administrative expenses                                      |       | 6,717                                            |       | 8,113 |   |
|                                                                                 |       |                                             |       |   |   |
| Operating income                                                                     |       | 4,458                                            |       | 1,493 |   |
|                                                                                 |       |                                             |       |   |   |
| Other income  (expense)                                                              |       |                                             |       |   |   |
| Interest and  other income                                                           |       | 1,208                                            |       | 1,061 |   |
| Loss on  disposition of property, equipment and other assets                         |       | (657                                             | )          | (572 | ) |
| Interest  expense, net                                                               |       | (1,220                                           | )          | (1,225 | ) |
|                                                                                 |       |                                             |       |   |   |
| Income before  noncontrolling interests and income taxes                             |       | 3,789                                            |       | 757 |   |
|                                                                                 |       |                                             |       |   |   |
| Noncontrolling  interests                                                            |       | 131                                              |       | 908 |   |
|                                                                                 |       |                                             |       |   |   |
| Income before  income taxes                                                          |       | 3,920                                            |       | 1,665 |   |
|                                                                                 |       |                                             |       |   |   |
| Income tax  expense                                                                  |       | 1,529                                            |       | 649 |   |
|                                                                                 |       |                                             |       |   |   |
| Net income                                                                           |       | 2,391                                            |       | 1,016 |   |
| Dividends on  preferred stock                                                        |       | 113                                              |       | 451 |   |
|                                                                                 |       |                                             |       |   |   |
| Net earnings on  common stock                                                        |       | $                                                | 2,278      |   | $ | 565 |   |
|                                                                                 |       |                                             |       |   |   |
| Net earnings per  common share                                                       |       |                                             |       |   |   |
| Basic                                                                                |       | $                                                | 0.17       |   | $ | 0.04 |   |
|                                                                                 |       |                                             |       |   |   |
| Diluted                                                                              |       | $                                                | 0.17       |   | $ | 0.04 |   |
|                                                                                 |       |                                             |       |   |   |
| Weighted average  common shares outstanding                                          |       |                                             |       |   |   |
| Basic                                                                                |       | 13,169                                           |       | 13,169 |   |
|                                                                                 |       |                                             |       |   |   |
| Diluted                                                                              |       | 13,473                                           |       | 13,570 |   |
|                                                                                 |       |                                             |       |   |   |
| Dividends per common  share                                                          |       | $                                                | 0.14       |   | $ | 0.04 |   |

 

See Notes to ConsolidatedFinancial Statements

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(In Thousands)(Unaudited)**

 
| ** **                                                                  | ** ** | **Six Months Ended  January 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| OPERATING  ACTIVITIES                                                       |       |                                             |       |   |   |
| Net income                                                                  |       | $                                                | 2,391      |   | $ | 1,016 |   |
| Adjustments to  reconcile net income to net cash from operating activities: |       |                                             |       |   |   |
| Depreciation and  amortization                                              |       | 3,727                                            |       | 3,540 |   |
| Loss on  disposition of property, equipment and other assets                |       | 657                                              |       | 572 |   |
| Noncontrolling  interests                                                   |       | (131                                             | )          | (908 | ) |
| Deferred income  taxes                                                      |       | 694                                              |       | 257 |   |
| Stock-based  employee compensation                                          |       | 92                                               |       | 16 |   |
| Changes in  assets and liabilities                                          |       |                                             |       |   |   |
| Trade  receivables                                                          |       | (4,719                                           | )          | (762 | ) |
| Other  receivables                                                          |       | (223                                             | )          | 205 |   |
| Inventories                                                                 |       | 1,567                                            |       | 4,089 |   |
| Prepaid expenses                                                            |       | (85                                              | )          | (756 | ) |
| Other assets                                                                |       | 6                                                |       | 25 |   |
| Accounts payable                                                            |       | (1,167                                           | )          | 1,916 |   |
| Other accrued  liabilities                                                  |       | (492                                             | )          | (236 | ) |
| NET CASH FROM  OPERATING ACTIVITIES                                         |       | 2,317                                            |       | 8,974 |   |
|                                                                        |       |                                             |       |   |   |
| INVESTING  ACTIVITIES                                                       |       |                                             |       |   |   |
| Purchases of  property and equipment                                        |       | (3,638                                           | )          | (9,031 | ) |
| Payments for  package design costs                                          |       | (222                                             | )          | (89 | ) |
| Proceeds from  cooperative bank equity retirements                          |       | —                                           |       | 214 |   |
| Proceeds from  other investments                                            |       | 116                                              |       | — |   |
| Other  investments                                                          |       | (47                                              | )          | — |   |
| NET CASH USED  FOR INVESTING ACTIVITIES                                     |       | (3,791                                           | )          | (8,906 | ) |
|                                                                        |       |                                             |       |   |   |
| FINANCING  ACTIVITIES                                                       |       |                                             |       |   |   |
| Net change in  excess outstanding checks over cash on deposit               |       | 772                                              |       | 59 |   |
| Net change in  short-term notes payable                                     |       | 8,100                                            |       | (2,500 | ) |
| Principal  payments on long-term debt                                       |       | (5,771                                           | )          | (4,771 | ) |
| Proceeds from  long-term debt borrowings                                    |       | —                                           |       | 7,931 |   |
| Dividends paid  on common stock                                             |       | (1,843                                           | )          | (527 | ) |
| Dividends paid  on preferred stock                                          |       | (113                                             | )          | (451 | ) |
| Preferred stock  retirements                                                |       | —                                           |       | (7 | ) |
| Investments by  noncontrolling interests                                    |       | 21                                               |       | 76 |   |
| NET CASH FROM  (USED FOR) FINANCING ACTIVITIES                              |       | 1,166                                            |       | (190 | ) |
|                                                                        |       |                                             |       |   |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                    |       | (308                                             | )          | (122 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                             |       | 343                                              |       | 229 |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                   |       | $                                                | 35         |   | $ | 107 |   |
|                                                                        |       |                                             |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                          |       |                                             |       |   |   |
| Cash payments  for                                                          |       |                                             |       |   |   |
| Interest (net of  amounts capitalized)                                      |       | $                                                | 1,343      |   | $ | 1,316 |   |
|                                                                        |       |                                             |       |   |   |
| Income taxes                                                                |       | $                                                | 1,559      |   | $ | 740 |   |

 

See Notes to Consolidated Financial Statements

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**DAKOTA GROWERS PASTA COMPANY, INC.**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

The following notes should be read in conjunctionwith the notes to the financial statements for the year ended July 31, 2006 asfiled 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. In addition, the Company’s wholly-owned subsidiary,Primo Piatto, Inc. (“Primo Piatto”), a Minnesota corporation, operates a pastamanufacturing facility 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 six month periods ended January 31, 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. Additional, FIN No. 48 provides guidance on the measurement,de-recognition, classification and disclosure of tax positions along with theaccounting for the

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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 upon adoption.  However, future changes in the Company’sincome tax situation may have a material impact on the Company’s financialstatements 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 Company has adopted SAB 108 anddoes not expect that it will have a material effect on its financialstatements.

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-maturity securities,equity method investments, accounts payable, guarantees and issued debt. Othereligible items include firm commitments. SFAS No. 159 is effective forfinancial statements issued for fiscal years beginning after November 15, 2007.We are currently evaluating the impact that FAS 159 will have on our financialstatements.

**NOTE 4 – INVENTORIES**

Inventories are valuedat lower of cost or market. Inventories as of January 31, 2007 include rawmaterials and packaging of $8,958,000 and finished goods of $15,593,000.Inventories at July 31, 2006 include raw materials and packaging of $6,529,000and finished goods of $19,589,000.

###### **NOTE 5 – LOAN AGREEMENTS**

TheCompany has a $25 million revolving credit facility with CoBank that extendsthrough May 30, 2007. Interest on the revolving line is currently charged at avariable rate established by CoBank based on CoBank’s cost of funds, althoughthe facility also allows for a fixed rate option. The balance outstanding underthis revolving line of credit arrangement totaled $8.1 million as of January31, 2007. There was no balance

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outstandingunder this revolving line of credit arrangement as of July 31, 2006. TheCompany had $16.9 million available for borrowings under the line of credit asof January 31, 2007.

TheCompany’s various debt agreements with CoBank and certain institutional noteholders 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 January 31,2007.

###### **NOTE 6 – EARNINGS PER SHARE**

Basic earnings per share (EPS) is calculated by dividingnet earnings on common stock by the weighted average number of common sharesoutstanding 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 totaled318,000 and 401,000 for the three months ended January 31, 2007 and 2006,respectively. Dilutive securities totaled 304,000 and 401,000 for the sixmonths ended January 31, 2007 and 2006, respectively. As there is currently noestablished public trading market for the Company’s common stock, the Companyhas assumed the proceeds from the exercise of stock options would reduce debtand, thus, interest expense.

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

EffectiveMay 1, 2005, the Company’s ownership in DNA Dreamfields increased to46.7%. In conjunction with the Company’sincrease in ownership in DNA Dreamfields and changes in the DNADreamfields operating agreement and other contractual arrangements, the Company determined that DNADreamfields was a variable interest entity under FASB Interpretation No. 46(R),“Consolidation of Variable Interest Entities,” and that the Company was theprimary beneficiary. Therefore, effective May 1, 2005, the Company beganto include DNA Dreamfields 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 $2,379,000 and$2,184,000 as of January 31, 2007 and July 31, 2006, respectively.  These inter-company amounts have beeneliminated in the preparation of the consolidated financial statements.

###### **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 4 cents per share dividend on its SeriesD Delivery Preferred Stock and a non-periodic dividend payment of 4 cents pershare on its common stock, payable on January 10, 2006 to shareholders ofrecord as of December 19, 2005.

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**NOTE 9 – STOCK OPTIONS**

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 $92,000 and $16,000, for the sixmonths ended January 31, 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.

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-$1500 |   | $ | 117.35 |   | 1,977 |   |
| Exercised                        |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                          |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired                |       | —                                                                                          |       |   |   |   |   |   |   |
| Outstanding at January  31, 2007 |       | 1,977                                                                                           |       | $100-$1500 |   | $ | 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                        |       | —                                                   |       |   |   |   |   |   |   |
| Granted                          |       | 272,726                                                  |       | $5.00 |   | $ | 5.00 |   |   |   |
| Forfeited/Expired                |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at January  31, 2007 |       | 658,563                                                  |       | $4.00-$6.25 |   | $ | 5.09 |   | 305,561 |   |

 

The fair value of the stock options granted onOctober 19, 2006 was estimated at the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions: risk freeinterest rate of 4.7%, expected dividend yield of 1.0%, expected life of 5years and volatility of 25%.

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A summary of the status of the Company’s issuedbut nonvested stock options as of July 31, 2006, and changes during the sixmonths ended January 31, 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                                |       | (63,044    | )          | $                    | 4.00       |   |
| Forfeited/Expired                     |       | —     |       |                 |       |
| Nonvested at January  31, 2007        |       | 353,002    |       | $                    | 4.78       |   |

 

As of January 31, 2007, there was approximately $413,000 of totalunrecognized compensation cost related to nonvested employee stockoptions.  That cost is expected to be recognized over a period of 3 years.

**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 the potentialamount, if any, that it may receive under the Offset Act in future periods asany such amount will be based upon future events over which the Company haslittle or no control, including, but not limited to, the amount of expendituresby domestic pasta producers and the amount of antidumping and countervailingduties collected by Customs.

###### **NOTE 11 – COMMITMENTS**

The Company forward contracts for a certain portion ofits future durum wheat requirements. The Company had outstanding commitmentsfor grain purchases totaling $12,586,000 as of January 31, 2007, related toforward purchase contracts. These contracts are set price contracts to delivergrain to the Company’s mill, and are not derivative in nature as they have nonet settlement provision and are not transferable.

**NOTE 12 – SUBSEQUENT EVENTS**

On February 9,2007, the Company entered into a Stock Purchase Agreement (the “Agreement”)with MVC Capital, Inc. (“MVC”) and La Bella Holdings, LLC (“LBH”). Pursuantto the Agreement, the Company has agreed to issue up to 1,000,000 shares ofSeries F Convertible Preferred Stock to MVC and up to 1,000,000 shares ofcommon stock to LBH at a purchase price of $10.00 per share for aggregate grossproceeds of up to $20,000,000.  The proceeds of the purchase of shares byMVC and LBH will be used to fund, in part, a repurchase of common stock fromthe Company’s stockholders (other than MVC and LBH) pursuant to a tender offerto be made to such stockholders in the near future. The Series F ConvertiblePreferred Stock to be issued to MVC was created by the Company’s Board ofDirectors through the adoption of a Certificate of Designation creating suchseries of stock from the Company’s undesignated preferred stock.  TheSeries F Convertible Preferred Stock carries the same economic entitlements andrights with respect to the Company as does the common stock, with the exceptionthat the Series F Convertible Preferred Stock does not carry any voting right.

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The Series FConvertible Preferred Stock does not carry any liquidation preference. The Series F Convertible Preferred Stock may be converted into common stock atany time in the discretion of the holder, MVC, upon 65 days written notice tothe Company; the Series F Convertible Preferred Stock may be converted immediatelyupon the occurrence of certain circumstances described in the Certificate ofDesignation.

On February 14, 2007 the Company entered into a $20million term loan agreement with CoBank to partially fund the tender offer topurchase up to 3,920,000 shares of our common stock at $10.00 per share incash. Availability under the term loan is contingent upon at least 50% of theaggregate purchase price of shares in the tender offer coming from proceeds ofthe sale of equity securities to MVC Capital, Inc. and La Bella Holdings LLC.

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF 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 pasta for theretail store brand, foodservice and ingredient markets. The Company’s cost ofgoods sold consists mainly of raw materials (primarily durum wheat), packaging,and manufacturing and distribution costs. The Company competes through low cost production, high product quality,flexibility and customer service.

Net income for the quarter ended January 31, 2007 totaled $1.5 millioncompared to net income of $0.6 million for the quarter ended January 31,2006.  Net income for the six monthsended January 31, 2007 totaled $2.4 million versus $1.0 million for the sixmonths ended January 31, 2006. The Company paid dividends of $0.1million ($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. Net earningsper basic common share, after the effect of dividends on preferred stock, were$0.11 per share for the quarter ended January 31, 2007, compared to $0.01 pershare for the quarter ended January 31, 2006. Net earnings per basic commonshare were $0.17 per share for the six months ended January 31, 2007 and $0.04per share for the six months ended January 31, 2006.

The Company’s net revenues increased 11.0% for thethree and six months ended January 31, 2007 when compared to the same periodsof last year.  The increase resulted fromhigher pasta per unit selling prices and higher pasta sales volumes. Benefitsderived from increased sales were partially offset by higher durum costs.  Durum prices have increased significantlyduring fiscal year 2007 when compared to fiscal year 2006 prices.  The Company has generally been successful inobtaining sales price increases to offset the higher durum cost.  However, the Company is uncertain whether itwill be able to pass through higher durum or other input costs on a timelybasis in the future. Higher mill by-product sales prices in fiscal 2007 havealso helped to offset the negative impact of higher durum costs. The Companybelieves that the trend in higher durum costs is also being experienced by itscompetitors.

**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 adjustment. For a complete description of the Company’s significantaccounting policies, please see Note 1 to the

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consolidated financial statementsincluded in the Company’s Form 10-K for the year ended July 31, 2006. Ourcritical accounting policies are those that have meaningful impact on thereporting of our financial condition and results, and that require significantmanagement judgment and estimates. These policies include our accounting for(a) allowance for doubtful accounts, (b) inventory valuation, (c) assetimpairment, 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 futurethat could have an adverse impact on our future operating 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 January 31, 2007 will be realized through thegeneration of future taxable income and tax planning strategies.

**Results of Operations**

*Comparison of the Three MonthsEnded January 31, 2007 and 2006*

***Net Revenues.***Netrevenues totaled $47.2 million for the three months ended January 31, 2007, anincrease of $4.7 million, or 11.0%, compared to $42.5 million for the threemonths ended January 31, 2006.  Overall,pasta per unit selling prices increased 4.7% along with an increase in pastasales volumes of 4.5%. Retail revenues increased $1.3 million, or 6.1%, due toa 6.6% increase in average selling prices offset by a 0.5% volume decline.Foodservice revenues increased $0.5 million, or 4.5%, due to a 4.9% increase inaverage selling prices offset by a 0.5% volume decline. Ingredient revenuesincreased $1.9 million, or 29.1%, due to a 20.6% volume gain and a 7.0%increase in average selling prices.

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 mill product sales totaled $3.8million for the three months ended January 31, 2007, an increase of $1.0million when compared to the same period of the prior year, primarily due tohigher mill product sales prices.

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***Cost of Goods Sold.*** Cost ofgoods sold increased 10.4%, to $42.1 million for the three months ended January31, 2007, compared to $38.1 million for the three months ended January 31,2006. The increase was primarily due to higher durum costs and higher salesvolumes.  Gross profit as a percentage ofnet revenues increased to 10.8% for the three months ended January 31, 2007,from 10.3% for the three months ended January 31, 2006.  Benefits realizedfrom sales price increases, sales volume increases and lower per unitproduction costs were offset by higher durum costs.

***Marketing, General, andAdministrative (“MG&A”) Expenses.*** MG&Aexpenses decreased 18.1% to $3.5 million for the three months ended January 31,2007, compared to $4.2 million for the three months ended January 31, 2006. Thedecrease was primarily due to lower consumer advertising costs associated withDreamfieldsTM pasta products. MG&A expenses as apercentage of net revenues decreased to 7.4% for the three months ended January31, 2007, from 10.0% for the comparable quarter of the prior year.

***Interest and Other Income.*** Interestand other income totaled $1.2 million for the three months ended January 31,2007, compared to $1.0 million for the three months ended January 31, 2006.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 $1.3 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.

***Interest Expense.*** Interestexpense for the three months ended January 31, 2007 totaled $0.6 million, down$0.1 million from $0.7 million for the corresponding period of the prior year.

***Noncontrolling Interests. ***Noncontrollinginterests reflect the portion of the DNA Dreamfields Company, LLC net lossallocable to other members of DNA Dreamfields and totaled $0.2 million and $0.5million for the three months ended January 31, 2007 and 2006, respectively.

***Income Taxes.***Income tax expense for thethree months ended January 31, 2007 and 2006 totaled $1.0 million and $0.4million, respectively, and reflects an effective corporate income tax rate ofapproximately 39%.

***Net Income. ***Net income for the three months ended January31, 2007 totaled $1.5 million compared to net income of $0.6 million for thethree months ended January 31, 2006.  Netearnings available to common shareholders for the three months ended January31, 2007 and January 31, 2006 totaled $1.4 million and $0.2 million, respectively,after reducing net income for dividends declared on Series D Delivery PreferredStock.

*Comparison of the Six MonthsEnded January 31, 2007 and 2006*

***Net Revenues.***Netrevenues totaled $96.1 million for the six months ended January 31, 2007, anincrease of $9.5 million, or 11.0%, compared to $86.6 million for the sixmonths ended January 31, 2006.  Overall,total pasta sales volumes increased 5.8% with ingredient sales volumes up34.3%, while foodservice and retail sales volumes were down by 2.9% and 1.6%,respectively. Overall, pasta per unit selling prices increased 3.7% withfoodservice selling prices up 6.4%, retail selling prices up 6.2% andingredient selling prices up 5.1%.

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 mill product sales totaled $7.0million and $5.4 million for the six months ended January 31, 2007 and 2006,respectively. The increase was primarily related to higher mill product salesprices.

***Cost of Goods Sold.*** Cost ofgoods sold increased 10.3% to $84.9 million for the six months ended January31, 2007, compared to $77.0 million for the six months ended January 31,2006.  The increase was primarily due tohigher durum costs and higher sales volumes. Gross profit as a percentage of net revenues increased to 11.6% for

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the six months ended January 31, 2007,compared to 11.1% for the six months ended January 31, 2006. Benefitsrealized were offset by higher durum costs which negatively impacted grossprofit.

***Marketing, General, andAdministrative (“MG&A”) Expenses.*** MG&Aexpenses decreased $1.4 million, or 17.2%, to $6.7 million for the six monthsended January 31, 2007, compared to $8.1 million for the six months endedJanuary 31, 2006. The decrease was primarily due to lower consumer advertisingcosts associated with DreamfieldsTMpastaproducts. MG&A expenses as a percentage of net revenues decreased to 7.0%for the six months ended January 31, 2007, from 9.4% for the comparable periodof last year.

***Interest and Other Income.*** Interestand other income totaled $1.2 million for the six months ended January 31,2006, compared to $1.1 million for the six months ended January 31, 2006.Substantially all of the amounts relate to payments received by the Company inDecember 2006 and 2005 under the Offset Act. The Company cannot reasonablyestimate the potential amount, if any, that it may receive under the Offset Actin future periods as any such amount will be based upon future events overwhich the Company has little or no control, including, but not limited to, theamount of expenditures by domestic pasta producers and the amount ofantidumping and countervailing duties collected by Customs.

***Loss on Disposition of Property,Equipment and Other Assets (“Loss on Disposition”). ***The Companyincurred losses on disposition of $0.7 million and $0.6 million during the sixmonths ended January 31, 2007 and January 31, 2006, respectively.   The losses were related to retirements ofcertain equipment in conjunction with capital projects at the New Hope,Minnesota facility.

***Interest Expense.*** Interestexpense for the six months ended January 31, 2007 and 2006 totaled $1.2million.

***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 six months ended January 31, 2007 and 2006, respectively. The$0.8 million decrease was due to a reduction in the net loss reported by DNADreamfields for the six months ended January 31, 2007 when compared to lastyear.

***Income Taxes. ***Income taxexpense for the six months ended January 31, 2007 totaled $1.5 million,compared to $0.6 million for the six months ended January 31, 2006, andreflects an effective corporate income tax rate of approximately 39%.

***Net Income. ***Net income for the six months ended January31, 2007 totaled $2.4 million, compared to $1.0 million for the six monthsended January 31, 2006.  Net earningsavailable to common shareholders for the six months ended January 31, 2007totaled $2.3 million, compared to $0.6 million for the six months ended January31, 2007, after reducing 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 January 31, 2007 totaled $17.5 million,compared to $23.3 million as of July 31, 2006.

The Company hasa $25 million revolving credit facility with CoBank which extends through May30, 2007. The balance outstanding on the line of credit was $8.1 million as ofJanuary 31, 2007, leaving $16.9 million available for borrowings as of thatdate. There was no balance outstanding under this revolving line of creditarrangement as of July 31, 2006.

On February 9,2007, the Company entered into a Stock Purchase Agreement (the “Agreement”)with MVC Capital, Inc. (“MVC”) and La Bella Holdings, LLC (“LBH”). Pursuantto the Agreement, the Company has agreed to issue up to 1,000,000 shares ofSeries F Convertible Preferred Stock to MVC and up to 1,000,000 shares ofcommon stock to LBH at a purchase price of $10.00 per share for aggregate grossproceeds of up to $20,000,000.  The proceeds of the purchase of shares byMVC and LBH will be used to fund, in part, a repurchase of common stock fromthe Company’s stockholders (other than MVC and LBH) pursuant to a tender offerto be made to such stockholders in the near future. The Series F ConvertiblePreferred Stock to be issued to

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MVC was created bythe Company’s Board of Directors through the adoption of a Certificate ofDesignation creating such series of stock from the Company’s undesignatedpreferred stock.  The Series F Convertible Preferred Stock carries thesame economic entitlements and rights with respect to the Company as does thecommon stock, with the exception that the Series F Convertible Preferred Stockdoes not carry any voting right.   The Series F Convertible PreferredStock does not carry any liquidation preference.  The Series F ConvertiblePreferred Stock may be converted into common stock at any time in thediscretion of the holder, MVC, upon 65 days written notice to the Company; theSeries F Convertible Preferred Stock may be converted immediately upon theoccurrence of certain circumstances described in the Certificate ofDesignation.

On February 14, 2007, the Company entered into a $20million term loan agreement with CoBank to partially fund the tender offer topurchase up to 3,920,000 shares of our common stock at $10.00 per share incash. Availability under the term loan is contingent upon at least 50% of theaggregate purchase price of shares in the tender offer coming from proceeds ofthe sale of equity securities to MVC Capital, Inc. and La Bella Holdings LLC.

The Company’s various debt agreements with CoBank and certaininstitutional investors 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 January 31, 2007 and the date of this filing.

Net cash from operating activitiestotaled $2.3 million and $9.0 million for the six months ended January 31, 2007and 2006, respectively. Significant items contributing to this decrease werechanges in inventories, trade receivables and accounts payable.

Net cash usedfor investing activities totaled $3.8 million and $8.9 million for the sixmonths ended January 31, 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 $1.2 million for the six months ended January 31, 2007, compared to netcash used for financing activities of $0.2 million for the six months endedJanuary 31, 2006.  The $1.2 million of net cash fromfinancing activities for the six months ended January 31, 2007 included $8.1million in borrowings under the revolving credit facility with CoBank.  The Company paid dividends of $0.1 million($0.01 per share) on its Series D Delivery Preferred Stock and $1.8 million($0.14 per share) on its common stock during the second quarter of fiscal year2007. The Company paid dividends of $0.5 million ($0.04 per share) on itsSeries D Delivery Preferred Stock and $0.5 million ($0.04 per share) on itscommon 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 balance outstandingrelated to advances to DNA Dreamfields under the Line of Credit Loan Agreementtotaled $2.4 million and $2.2 million as of January 31, 2007 and July 31, 2006,respectively.

The following table summarizes the Company’s contractualobligations as of January 31, 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                   |       | $          | 29,545     |                      | $          | 7,971              |       | $                  | 19,974     |               | $          | 1,600 |   | $ | — |   |
| Durum purchase  obligations      |       | 12,586     |       | 12,586                    |       | —             |       | —             |       | —             |       |
| Warehouse  obligations           |       | 2,462      |       | 1,776                     |       | 686                |       | —             |       | —             |       |
| Operating leases                 |       | 774        |       | 442                       |       | 327                |       | 5                  |       | —             |       |
|                             |       |       |       |                      |       |               |       |               |       |               |       |
|                             |       | $          | 45,367     |                      | $          | 22,775             |       | $                  | 20,987     |               | $          | 1,605 |   | $ | — |   |

 

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The Company forward contracts for acertain portion of its future durum wheat requirements. At January 31, 2007,the Company had outstanding commitments for grain purchases totaling $12.6million related to forward purchase contracts. These contracts are set pricecontracts to deliver grain to the Company’s mill and are not derivative innature as they have no net settlement provision and are not transferable.

Management believes that net cashcurrently available and to be provided by operating activities, along withamounts available under the Company’s line of credit and term loan facilities,will be sufficient to meet the Company’s expected capital and liquidityrequirements for the foreseeable future.

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**ITEM 3.   QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

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

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

**ITEM 4.   CONTROLS ANDPROCEDURES**

***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 period Securities and Exchange Commissionfilings.  The design of any system ofcontrols and procedures is based in part upon certain assumptions about thelikelihood of future 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 January 31, 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 year endedJuly 31, 2006.

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

The Annual Meeting of Stockholders of theCompany was held on January 6, 2007. The following proposals were presented forstockholder consideration at the Annual Meeting:

·                  The electionof three directors to serve as Class II directors.

·                  Approval ofthe appointment of Eide Bailly LLP as the Company’s independent auditors forfiscal year 2007.

At the Annual Meeting, the Company’sstockholders elected each of the Company’s nominees named in its ProxyStatement, dated December 5, 2006, to serve as directors on the Board ofDirectors of the Company.  Following arethe results for the election of directors:
|                      | ** ** | **Shares Voted For** | ** ** | **Shares Withheld** | ** ** |
|----------------------|------------|--------------------------------|------------|--------------------------|------------|
| Class II  directors: |       |                           |       |                     |       |
|                 |       |                           |       |                     |       |
| Roger A. Kenner      |       | 7,522,843                      |       | 631,488                  |       |
| Jeffrey O. Topp      |       | 7,467,696                      |       | 686,635                  |       |
| Eugene J.  Nicholas  |       | 7,489,146                      |       | 665,185                  |       |

 

The newly elected Class II directors,Roger A. Kenner, Jeffrey O. Topp and Eugene J. Nicholas, will serve three yearterms ending with the annual meeting in 2010. John S. Dalrymple III, James F.Link, John D. Rice, Jr. and Michael T. Tokarz will continue serving asdirectors until the annual meeting in 2009. Allyn K. Hart, Curtis R. Trulsonand Michael E. Warner will continue serving as directors until the annualmeeting in 2008.

In addition, the stockholders approvedthe appointment of Eide Bailly LLP as the Company’s independent auditors forfiscal year 2007, as follows:
| Shares Voted For      |   | 7,897,922 |   |
|-----------------------|--------|-----------|--------|
| Shares Voted  Against |   | 33,013    |   |
| Shares Abstained      |   | 223,396   |   |

 

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**ITEM 6.   EXHIBITS**
| Exhibits | ** ** | ** **                                                                                                                        |
|----------|------------|-----------------------------------------------------------------------------------------------------------------------------------|
|     |       |                                                                                                                              |
| 31.1     |       | Certification of Chief Executive Officer required by  Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a).        |
|     |       |                                                                                                                              |
| 31.2     |       | Certification of Chief Financial Officer required by  Securities and Exchange Commission Rule 13a-14(a) or 15d-14(a).        |
|     |       |                                                                                                                              |
| 32.1     |       | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|     |       |                                                                                                                              |
| 32.2     |       | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |

 

 

**SIGNATURES**

Pursuant to 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                   |       | March 19, 2007 |
|                |       | Officer)                               |       |           |
|                |       |                                   |       |           |
|                |       |                                   |       |           |
| /s/ Edward O. Irion |       | Chief Financial  Officer               |       |           |
| Edward O. Irion     |       | (Principal  Financial and              |       | March 19, 2007 |
|                |       | Accounting  Officer)                   |       |           |

 

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