** **

**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 October 31, 2008**                                               |
|       |       |                                                                                                    |
| ** ** | ** ** | **or**                                                                                                  |
|       |       |                                                                                                    |
| **o**      | ** ** | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |

 

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**Commission File No. 000-50111**

 

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**DAKOTA GROWERS PASTA COMPANY, INC.**

(Exactname of registrant as specified in its charter)

 

| **North Dakota**         | ** ** | **45-0423511**                    |
|--------------------------|------------|-----------------------------------|
| (State of incorporation) |       | (IRS Employer Identification No.) |

 

**One Pasta Avenue, Carrington, ND 58421**

(Addressof principal executive offices including zip code)

 

**(701) 652-2855**

(Registrant’stelephone number, including area code)

 

**NOT APPLICABLE**

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

 

Indicate by check mark whether theregistrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.                                 Yesx No o

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

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

 

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

YesoNo x

 

As of December 15, 2008, the Registrant had10,192,413 shares of common stock, par value $0.01 per share, outstanding.

 

 

 

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** **

**PART I – FINANCIAL INFORMATION**

 

**ITEM 1.FINANCIAL STATEMENTS**

 

**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                              | ** ** | **(Unaudited)**      | ** ** | ** **        | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                              | ** ** | **October 31,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                              | ** ** | **2008**             | ** ** | **2008**          | ** ** |
| **ASSETS**                                                                                                              |       |                 |       |              |       |
|                                                                                                                    |       |                 |       |              |       |
| CURRENT ASSETS                                                                                                          |       |                 |       |              |       |
| Cash and cash  equivalents                                                                                              |       | $                    | 5          |              | $          | 125 |   |
|                                                                                                                    |       |                 |       |              |       |
| Trade accounts  receivable, less allowance for cash discounts and doubtful accounts of $1,298  and $1,294, respectively |       | 29,668               |       | 27,315            |       |
|                                                                                                                    |       |                 |       |              |       |
| Other  receivables                                                                                                      |       | 1,710                |       | 850               |       |
|                                                                                                                    |       |                 |       |              |       |
| Inventories                                                                                                             |       | 39,891               |       | 51,956            |       |
|                                                                                                                    |       |                 |       |              |       |
| Prepaid expenses                                                                                                        |       | 935                  |       | 1,040             |       |
|                                                                                                                    |       |                 |       |              |       |
| Deferred income  taxes                                                                                                  |       | 1,053                |       | 1,053             |       |
|                                                                                                                    |       |                 |       |              |       |
| Total current  assets                                                                                                   |       | 73,262               |       | 82,339            |       |
|                                                                                                                    |       |                 |       |              |       |
| PROPERTY AND  EQUIPMENT                                                                                                 |       |                 |       |              |       |
| In service                                                                                                              |       | 133,495              |       | 132,815           |       |
| Construction in  progress                                                                                               |       | 418                  |       | 546               |       |
|                                                                                                                    |       | 133,913              |       | 133,361           |       |
| Less accumulated  depreciation                                                                                          |       | (67,508              | )          | (65,983           | )          |
|                                                                                                                    |       |                 |       |              |       |
| Net property and  equipment                                                                                             |       | 66,405               |       | 67,378            |       |
|                                                                                                                    |       |                 |       |              |       |
| INVESTMENT IN  COOPERATIVE BANK                                                                                         |       | 1,355                |       | 1,355             |       |
|                                                                                                                    |       |                 |       |              |       |
| INTANGIBLE  ASSETS, NET                                                                                                 |       | 2,539                |       | 2,590             |       |
|                                                                                                                    |       |                 |       |              |       |
| GOODWILL                                                                                                                |       | 8,381                |       | 8,381             |       |
|                                                                                                                    |       |                 |       |              |       |
| OTHER ASSETS                                                                                                            |       | 908                  |       | 925               |       |
|                                                                                                                    |       |                 |       |              |       |
|                                                                                                                    |       | $                    | 152,850    |              | $          | 162,968 |   |

 

(continuedon next page)

 

2

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDBALANCE SHEETS**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                                                        | ** ** | **(Unaudited)**      | ** ** | ** **        | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------|------------|-------------------|------------|
| ** **                                                                                                                                        | ** ** | **October 31,** | ** ** | **July 31,** | ** ** |
| ** **                                                                                                                                        | ** ** | **2008**             | ** ** | **2008**          | ** ** |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                                                    |       |                 |       |              |       |
|                                                                                                                                              |       |                 |       |              |       |
| CURRENT  LIABILITIES                                                                                                                              |       |                 |       |              |       |
| Excess  outstanding checks over cash on deposit                                                                                                   |       | $                    | 7,434      |              | $          | 3,130 |   |
| Accounts payable                                                                                                                                  |       | 8,510                |       | 15,357            |       |
| Accrued  liabilities                                                                                                                              |       | 6,809                |       | 7,244             |       |
| Notes payable                                                                                                                                     |       | 22,450               |       | 25,750            |       |
| Current portion  of long-term debt                                                                                                                |       | 5,738                |       | 9,507             |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total current  liabilities                                                                                                                        |       | 50,941               |       | 60,988            |       |
|                                                                                                                                              |       |                 |       |              |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                    |       | —               |       | —            |       |
| LONG-TERM DEBT,  net of current portion                                                                                                           |       | 28,987               |       | 31,174            |       |
| DEFERRED INCOME  TAXES                                                                                                                            |       | 14,509               |       | 14,119            |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total  liabilities                                                                                                                                |       | 94,437               |       | 106,281           |       |
|                                                                                                                                              |       |                 |       |              |       |
| STOCKHOLDERS’  EQUITY                                                                                                                        |       |                 |       |              |       |
|                                                                                                                                              |       |                 |       |              |       |
| Series D  delivery preferred stock, non-cumulative, $.01 par value, 11,340,841  authorized, 11,275,297 shares issued and outstanding         |       | 113                  |       | 113               |       |
| Series F  convertible preferred stock, non-cumulative, $.01 par value, 2,100,000 shares  authorized, 1,065,000 shares issued and outstanding |       | 11                   |       | 11                |       |
| Common stock,  $.01 par value, 75,000,000 shares authorized, 10,192,413 shares issued and  outstanding                                            |       | 102                  |       | 102               |       |
| Additional  paid-in capital                                                                                                                       |       | 42,992               |       | 42,958            |       |
| Retained  earnings                                                                                                                                |       | 15,195               |       | 13,503            |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total  stockholders’ equity                                                                                                                  |       | 58,413               |       | 56,687            |       |
|                                                                                                                                              |       |                 |       |              |       |
| Total  liabilities and stockholders’ equity                                                                                                  |       | $                    | 152,850    |              | $          | 162,968 |   |

 

SeeNotes to Consolidated Financial Statements

 

3

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

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

 
| ** **                                                                         | ** ** | **Three Months Ended  October 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| Net revenues  (net of discounts and allowances of $7,117 and $7,180, respectively) |       | $                                                  | 87,145     |   | $ | 54,802 |   |
|                                                                               |       |                                               |       |   |   |
| Cost of goods  sold                                                                |       | 78,519                                             |       | 46,289 |   |
|                                                                               |       |                                               |       |   |   |
| Gross profit                                                                       |       | 8,626                                              |       | 8,513 |   |
|                                                                               |       |                                               |       |   |   |
| Marketing,  general and administrative expenses                                    |       | 5,133                                              |       | 4,769 |   |
|                                                                               |       |                                               |       |   |   |
| Operating income                                                                   |       | 3,493                                              |       | 3,744 |   |
|                                                                               |       |                                               |       |   |   |
| Other income  (expense)                                                            |       |                                               |       |   |   |
| Interest and  other income                                                         |       | 36                                                 |       | 82 |   |
| Interest  expense, net                                                             |       | (855                                               | )          | (1,051 | ) |
|                                                                               |       |                                               |       |   |   |
| Income before  noncontrolling interests and income taxes                           |       | 2,674                                              |       | 2,775 |   |
|                                                                               |       |                                               |       |   |   |
| Noncontrolling  interests                                                          |       | —                                             |       | 202 |   |
|                                                                               |       |                                               |       |   |   |
| Income before  income taxes                                                        |       | 2,674                                              |       | 2,977 |   |
|                                                                               |       |                                               |       |   |   |
| Income tax  expense                                                                |       | 982                                                |       | 1,161 |   |
|                                                                               |       |                                               |       |   |   |
| Net income                                                                         |       | $                                                  | 1,692      |   | $ | 1,816 |   |
|                                                                               |       |                                               |       |   |   |
| Net income per  common share                                                       |       |                                               |       |   |   |
| Basic                                                                              |       | $                                                  | 0.17       |   | $ | 0.18 |   |
|                                                                               |       |                                               |       |   |   |
| Diluted                                                                            |       | $                                                  | 0.14       |   | $ | 0.15 |   |
|                                                                               |       |                                               |       |   |   |
| Weighted average  common shares outstanding                                        |       |                                               |       |   |   |
| Basic                                                                              |       | 10,192                                             |       | 10,192 |   |
|                                                                               |       |                                               |       |   |   |
| Diluted                                                                            |       | 11,958                                             |       | 11,958 |   |

 

SeeNotes to Consolidated Financial Statements

 

4

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(InThousands)(Unaudited)**

 
| ** **                                                                  | ** ** | **Three Months Ended  October 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| OPERATING ACTIVITIES                                                        |       |                                               |       |   |   |
| Net income                                                                  |       | $                                                  | 1,692      |   | $ | 1,816 |   |
| Adjustments to  reconcile net income to net cash from operating activities: |       |                                               |       |   |   |
| Depreciation and  amortization                                              |       | 1,638                                              |       | 1,664 |   |
| Noncontrolling  interests                                                   |       | —                                             |       | (202 | ) |
| Deferred income  taxes                                                      |       | 390                                                |       | 461 |   |
| Stock-based  employee compensation                                          |       | 34                                                 |       | 58 |   |
| Changes in  assets and liabilities                                          |       |                                               |       |   |   |
| Trade  receivables                                                          |       | (2,353                                             | )          | (780 | ) |
| Other  receivables                                                          |       | (860                                               | )          | (97 | ) |
| Inventories                                                                 |       | 12,065                                             |       | (3,575 | ) |
| Prepaid expenses                                                            |       | 105                                                |       | 127 |   |
| Other assets                                                                |       | 3                                                  |       | 1 |   |
| Accounts payable                                                            |       | (6,847                                             | )          | 4,985 |   |
| Other accrued  liabilities                                                  |       | (435                                               | )          | (662 | ) |
| NET CASH FROM  OPERATING ACTIVITIES                                         |       | 5,432                                              |       | 3,796 |   |
|                                                                        |       |                                               |       |   |   |
| INVESTING  ACTIVITIES                                                       |       |                                               |       |   |   |
| Purchase of  interests in DNA Dreamfields                                   |       | —                                             |       | (2,232 | ) |
| Purchases of  property and equipment                                        |       | (552                                               | )          | (612 | ) |
| Payments for  package design costs                                          |       | (48                                                | )          | (25 | ) |
| Proceeds from  other investments                                            |       | —                                             |       | 47 |   |
| NET CASH USED  FOR INVESTING ACTIVITIES                                     |       | (600                                               | )          | (2,822 | ) |
|                                                                        |       |                                               |       |   |   |
| FINANCING  ACTIVITIES                                                       |       |                                               |       |   |   |
| Net change in  excess outstanding checks over cash on deposit               |       | 4,304                                              |       | 260 |   |
| Net change in  short-term notes payable                                     |       | (3,300                                             | )          | 4,700 |   |
| Payments on  long-term debt                                                 |       | (5,956                                             | )          | (5,946 | ) |
| NET CASH USED  FOR FINANCING ACTIVITIES                                     |       | (4,952                                             | )          | (986 | ) |
|                                                                        |       |                                               |       |   |   |
| NET CHANGE IN  CASH AND CASH EQUIVALENTS                                    |       | (120                                               | )          | (12 | ) |
| CASH AND CASH  EQUIVALENTS, BEGINNING OF PERIOD                             |       | 125                                                |       | 89 |   |
|                                                                        |       |                                               |       |   |   |
| CASH AND CASH  EQUIVALENTS, END OF PERIOD                                   |       | $                                                  | 5          |   | $ | 77 |   |
|                                                                        |       |                                               |       |   |   |
| SUPPLEMENTAL  DISCLOSURES OF CASH FLOW INFORMATION                          |       |                                               |       |   |   |
| Cash payments  for                                                          |       |                                               |       |   |   |
| Interest (net of  amounts capitalized)                                      |       | $                                                  | 1,009      |   | $ | 1,292 |   |
|                                                                        |       |                                               |       |   |   |
| Income taxes                                                                |       | $                                                  | 2,654      |   | $ | 1,205 |   |
|                                                                        |       |                                               |       |   |   |
| SUPPLEMENTAL  DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES      |       |                                               |       |   |   |
| Purchase of  interests in DNA Dreamfields                                   |       |                                               |       |   |   |
| Goodwill  reduction                                                         |       |                                               |       | $ | (8,273 | ) |
| Amortizable  intangibles                                                    |       |                                               |       | 2,759 |   |
| Noncontrolling  interests reduction                                         |       |                                               |       | 7,746 |   |
|                                                                        |       |                                               |       |   |   |
|                                                                        |       |                                               |       | $ | 2,232 |   |

 

SeeNotes to Consolidated Financial Statements

 

5

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

The following notes should be read in conjunction with the notes to thefinancial statements for the year ended July 31, 2008 as filed in the Company’sForm 10-K.

 

**NOTE 1 - ORGANIZATION**

** **

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

 

**NOTE 2 – FINANCIAL STATEMENT PRESENTATION**

** **

The unauditedconsolidated financial statements included herein have been prepared pursuantto the rules and regulations of the Securities and Exchange Commission forquarterly reporting. Accordingly, they do not include all the information andfootnotes required by accounting principles generally accepted in the UnitedStates of America for complete financial statements. In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included. Operatingresults for the three months ended October 31, 2008 are not necessarilyindicative of the results that may be expected for the year ended July 31,2009. The unaudited consolidated financial statements included in this Form 10-Qshould be read in conjunction with the consolidated financial statements andfootnotes included in the Company’s Form 10-K for the year ended July 31,2008. The information contained in the balance sheet as of July 31, 2008was derived from the Company’s audited annual report for fiscal year 2008.Reclassifications have been made to facilitate comparability with currentpresentation. Such reclassifications have no effect on the net results ofoperations.

 

The financialinformation presented herein includes the consolidated balance sheets andresults of operations of theCompany, its wholly-owned subsidiary Primo Piatto, Inc., and DNADreamfields Company, LLC (“DNA Dreamfields”), which the Company began toconsolidate in fiscal year 2005. All material inter-company accounts andtransactions have been eliminated in the preparation of the consolidatedfinancial statements.

 

**NOTE 3 – NEW ACCOUNTING PRONOUNCEMENTS**

** **

In September 2006,the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS157 defines fair value, establishes a framework for measuring fair value andexpands disclosure of fair value measurements. SFAS 157 applies under otheraccounting pronouncements that require or permit fair value measurements andaccordingly, does not require any new fair value measurements. SFAS 157 wasinitially effective for fiscal years beginning after November 15, 2007,and interim periods within those fiscal years. In February 2008, the FASBissued FASB Staff Position (FSP) FAS 157-2.  This FSP permits adelay in the effective date of SFAS 157 to fiscal years beginning after November 15,2008, for nonfinancial assets and nonfinancial liabilities,  exceptfor items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually). In October 2008, theFASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Assetwhen the Market for That Asset Is Not Active,” which clarifies the applicationof SFAS 157 for financial assets in a market that is not active. The adoptionof SFAS 157 did not have a material impact on the Company’s financialstatements.

 

In February 2007, the FASB issued SFAS 159, The Fair Value Optionfor Financial Assets and Financial Liabilities (“SFAS 159”).  SFAS 159provides companies with an option to report selected financial assets andliabilities at fair value and establishes presentation and disclosurerequirements designed to facilitate comparisons between companies that choosedifferent measurement attributes for similar types of assets andliabilities.  SFAS 159 is effective for fiscal years beginning after November 15,2007.  The Company has elected not to apply the fair value option to thespecified financial assets and liabilities, and accordingly, the adoption ofSFAS No. 159 

 

6

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

had no financial statement impact.

 

InDecember 2007, FASB issued SFAS No. 141 (Revised 2007), “BusinessCombinations” (“SFAS 141R”). The objective of SFAS 141R is to improve therelevance, representational faithfulness, and comparability of the informationthat a reporting entity provides in its financial reports about a business combinationand its effects. SFAS 141R requires an acquirer to recognize the assetsacquired, the liabilities assumed, and any noncontrolling interest in theacquiree at the acquisition date, measured at their fair values as of thatdate. SFAS 141R also requires the acquirer to recognize and measure thegoodwill acquired in a business combination or a gain from a bargain purchaseand how to evaluate the nature and financial effects of the businesscombination. SFAS 141R is effective for financial statements issued for fiscalyears beginning after December 15, 2008. The Company is in the process ofevaluating the impact, if any, that the adoption of SFAS 141R will have on itsfinancial statements.

 

InDecember 2007, FASB issued SFAS No. 160, “Noncontrolling Interests inConsolidated Financial Statements-an Amendment of ARB No. 51” (“SFAS 160”).The objective of SFAS 160 is to improve the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements. SFAS 160 amends ARB No. 51 toestablish accounting and reporting standards for the noncontrolling interest ina subsidiary and for the deconsolidation of a subsidiary. SFAS 160 also changesthe way the consolidated income statement is presented, establishes a singlemethod of accounting for changes in a parent’s ownership interest in asubsidiary that do not result in deconsolidation, requires that a parentrecognize a gain or loss in net income when a subsidiary is deconsolidated andexpanded disclosures in the consolidated financial statements that clearlyidentify and distinguish between the interests of the parent’s owners and theinterest of the noncontrolling owners of a subsidiary. SFAS 160 is effectivefor financial statements issued for the fiscal years beginning on or after December 15,2008. The Company is in the process of evaluating the impact, if any, that theadoption of SFAS 160 will have on its financial statements.

 

InMay 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 162, “The Hierarchyof Generally Accepted Accounting Principles.” This statement identifiesthe sources of accounting principles and the framework for selecting theprinciples used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (“GAAP”) in the United States. This statement will be effective 60days following the SEC’s approval of the Public Company Accounting OversightBoard (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally AcceptedAccounting Principles.” We do not expect the adoption of this statementto have a material impact on our financial statements.

 

InApril 2008, the FASB issued FASB Staff Position No. 142-3, “Determination of the Useful Life ofIntangible Assets” (“FSP 142-3”). This FSP amends the factors thatshould be considered in developing renewal or extension assumptions used todetermine the useful life of a recognized intangible asset under FASB StatementNo. 142, “Goodwill and OtherIntangible Assets.” The intent of this FSP is to improve the consistencybetween the useful life of a recognized intangible asset under Statement 142and the period of expected cash flows used to measure the fair value of theasset under FASB Statement No. 141R, and other U.S. generally acceptedaccounting principles. FSP 142-3 is effective for our interim and annualfinancial statements beginning in fiscal 2010. The Company is in the process ofevaluating the impact, if any, that the adoption of FSP 142-3 will have on itsfinancial statements.

 

**NOTE 4 – INVENTORIES**

** **

Inventories are valued at lower of cost or market. Inventories as ofOctober 31, 2008 include raw materials and packaging of $15,470,000 andfinished goods of $24,421,000. Inventories at July 31, 2008 include rawmaterials and packaging of $18,559,000 and finished goods of $33,397,000.

 

7

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###### ** **

**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

###### **NOTE5 – LOAN AGREEMENTS**

###### ** **

The Company has a $45 million revolving credit facility with CoBankthat extends through January 15, 2009 and is collateralized by all assetsof the Company. Interest on the revolving line is at the 7-day LIBOR ratesubject to performance adjustments depending upon the Company’s ratio of totaldebt to earnings before interest, taxes, depreciation and amortization or “EBITDA.”The higher the ratio the higher the adjustment to the 7-day LIBOR rate within arange of 175 to 275 basis points above the 7-day LIBOR rate.  Fixedinterest rate options are also available. The balances outstanding under therevolving credit arrangement totaled $22.5 million and $25.8 million as of October 31,2008 and July 31, 2008, respectively. The Company had $22.5 million and $19.2 million available for borrowingsunder the line of credit as of October 31, 2008 and July 31, 2008,respectively.

 

The Company’s various debt agreements with CoBank and certaininstitutional note holders obligate the Company to maintain or achieve certainamounts of equity and certain financial ratios and impose certain restrictionson the Company. The Company was in compliance with these financial covenants asof October 31, 2008.

 

###### **NOTE6 – EARNINGS PER SHARE**

###### ** **

Basic earnings per share (EPS) is calculated by dividing net earningson common stock by the weighted average number of common shares outstandingduring the period. Diluted EPS includes the effect of all potentially dilutivesecurities, such as stock options and convertible preferred stock.  Prior to the quarter ended October 31,2008, the Company had not included nonvested stock options in the calculationof diluted EPS.  Nonvested stock optionshave been considered in the calculation of diluted EPS for the three monthsended October 31, 2008 and 2007, as presented herein.

 

Dilutive securities, consisting of stock options and convertiblepreferred stock, included in the calculation of diluted weighted average commonshares totaled 1,766,000 for the three months ended October 31, 2008 and2007. The Series F Convertible Preferred Stock is included in the fullydiluted EPS calculation and not included in the basic EPS calculation. As thereis currently no established public trading market for the Company’s commonstock, the Company has assumed the proceeds from the exercise of stock optionswould reduce debt and, thus, interest expense.

 

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

** **
| ** **                                         | ** ** | **Three Months Ended  October 31,** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                         | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| **Earnings per share - Basic** | ** ** | ** **                                         | ** ** | ** ** | ** ** |
|                                               |       |                                               |       |   |   |
| Net earnings  available to common stockholders     |       | $                                                  | 1,692      |   | $ | 1,816 |   |
|                                               |       |                                               |       |   |   |
| Basic  weighted-average shares outstanding         |       | 10,192                                             |       | 10,192 |   |
|                                               |       |                                               |       |   |   |
| Earnings per  share - Basic                        |       | $                                                  | 0.17       |   | $ | 0.18 |   |

 

8

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 
| ** **                                                                     | ** ** | **Three Months Ended  October 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                                                     | ** ** | **2008**                                           | ** ** | **2007** | ** ** |
| **Earnings per share - Diluted**                           | ** ** | ** **                                         | ** ** | ** ** | ** ** |
|                                                                           |       |                                               |       |   |   |
| Net earnings  available to common stockholders                                 |       | $                                                  | 1,692      |   | $ | 1,816 |   |
| Plus: Impact of  interest expense on the exercise of options, net of taxes (1) |       | 23                                                 |       | 36 |   |
| Net earnings  available to common stockholders                                 |       | $                                                  | 1,715      |   | $ | 1,852 |   |
|                                                                           |       |                                               |       |   |   |
| Diluted  weighted-average shares outstanding:                                  |       |                                               |       |   |   |
| Basic  weighted-average shares outstanding                                     |       | 10,192                                             |       | 10,192 |   |
| Plus:  Incremental shares from assumed conversions                             |       | 701                                                |       | 701 |   |
| Options                                                                        |       |                                               |       |   |   |
| Convertible  preferred shares                                                  |       | 1,065                                              |       | 1,065 |   |
| Diluted  weighted-average shares outstanding                                   |       | 11,958                                             |       | 11,958 |   |
|                                                                           |       |                                               |       |   |   |
| Earnings per  share - Diluted                                                  |       | $                                                  | 0.14       |   | $ | 0.15 |   |

 

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(1)  As there is currently no established publictrading market for the Company’s common stock, the Company has assumed theproceeds from the exercise of stock options would reduce debt and, thus,interest expense.

 

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

 

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

 

Effective September 21, 2007, the Companyacquired the remaining units of DNA Dreamfields, increasing its ownership to100%.  Pursuant to the terms of thepurchase agreement, the Company acquired the remaining units for an aggregatepurchase price of $2.2 million.  Inconjunction with this purchase, the Company eliminated the noncontrollinginterests, recorded amortizable intangible assets (covenants not-to-compete andtechnology license) and reduced recorded goodwill associated with the buyout ofDNA Dreamfields in the Company’s first quarter of fiscal year 2008.

 

**NOTE 8 – GOODWILL AND OTHER INTANGIBLE ASSETS**

 

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” goodwill and intangible assets with indefinite useful lives are to be tested for impairment at least annually. As of October 31, 2008, the value of goodwill was $8.4 million.

 

Amortizable intangible assets are amortized using the straight-line method over their estimated useful lives, which is the estimated period over which economic benefits are expected to be provided. In conjunction with the acquisition of the remaining units of DNA Dreamfields (See Note 7), the Company recorded amortizable intangible assets including covenants not-to-compete and a technology license.  The covenants not-to-compete 

 

9

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

totaling $112,000 are being amortized over 36 months. The technology license totaling $2.6 million is being amortized over its estimated useful life of approximately 16 years.

 
| ** **                            | ** ** | **As of October 31, 2008 (in thousands)** | ** ** |
|---------------------------------------|------------|-------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **Gross Carrying**                                                 | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                            | ** ** | **Amount**                                                              | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                  |       |                                                                    |       |   |   |   |   |
| Covenants  not-to-compete             |       | $                                                                       | 112        |   | $ | (41 | ) | $ | 71 |   |
| Technology  license                   |       | 2,647                                                                   |       | (179 | ) | 2,468 |   |
|                                  |       |                                                                    |       |   |   |   |   |
| Total intangible  assets              |       | 2,759                                                                   |       | (220 | ) | 2,539 |   |
|                                  |       |                                                                    |       |   |   |   |   |
| Goodwill                              |       | 8,381                                                                   |       | — |   | 8,381 |   |
|                                  |       |                                                                    |       |   |   |   |   |
| Total goodwill  and intangible assets |       | $                                                                       | 11,140     |   | $ | (220 | ) | $ | 10,920 |   |

 

The Company recorded amortization expense of $51,000 for the three months ended October 31, 2008.

 

**NOTE 9 – STOCK OPTIONS**

 

The Company accounts forshare based payments in accordance with Statement of Financial AccountingStandard No. 123 (revised 2004), “Share Based Payment” (SFAS No. 123R).Under SFAS No. 123R, the Company is required to recognize, as expense, theestimated fair value of all share based payments to employees. In accordancewith this standard, the Company has elected to recognize the compensation costof all service based awards on a straight-line basis over the vesting period ofthe award. Performance based awards are recognized ratably for each vestingtranche. The Company recorded stock-based employee compensation expense of$34,000 and $58,000, for the three months ended October 31, 2008 and October 31,2007, respectively.

 

10

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

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

 
| ** **                            | ** ** | **Options to purchase Common Stock** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                            | ** ** | **Number of  Common Shares**                   | ** ** | **Option  Price  per Share** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Exercisable** | ** ** |
|                                  |       |                                                     |       |   |   |   |   |   |   |
| Outstanding at  July 31, 2008    |       | 653,013                                                  |       | $4.00-$6.25 |   | $ | 5.10 |   | 485,128 |   |
| Exercised                             |       | —                                                   |       |   |   |   |   |   |   |
| Granted                               |       | —                                                   |       |   |   |   |   |   |   |
| Forfeited/Expired                     |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at  October 31, 2008 |       | 653,013                                                  |       | $4.00-$6.25 |   | $ | 5.10 |   | 553,310 |   |

 

A summary of the status of theCompany’s issued but nonvested stock options as of October 31, 2008, andchanges during the three months ended October 31, 2008, is presentedbelow:

 
| ** **                            | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                            | ** ** | **Common** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Stock Options** | ** ** | **Shares** | ** ** | **Fair Value**  | ** ** |
|                                  |       |       |       |                 |       |
| Nonvested at  July 31, 2008      |       | 167,885    |       | $                    | 4.81       |   |
| Granted                               |       | —     |       |                 |       |
| Vested                                |       | (68,182    | )          | $                    | 5.00       |   |
| Forfeited/Expired                     |       | —     |       |                 |       |
| Nonvested at  October 31, 2008   |       | 99,703     |       | $                    | 4.68       |   |

 

As of October 31, 2008, there was approximately$103,000 of total unrecognized compensation cost related to nonvested employeestock options.  That cost is expected to be recognized over a period of 1year.

 

###### **NOTE10 – COMMITMENTS**

###### ** **

The Company forward contracts for a certain portion of its future durumwheat requirements. The Company had outstanding commitments for grain purchasestotaling $32,156,000 as of October 31, 2008, related to forward purchasecontracts. These contracts are set price contracts to deliver grain to theCompany’s mill, and are not derivative in nature as they have no net settlementprovision and are not transferable.

 

11

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**NOTE 11 – RELATED PARTYTRANSACTIONS**

 

Jeffrey Topp, a director ofthe Company, sold wheat to the Company through an affiliated entity in thefirst quarter of fiscal year 2009. Those sales totaled $473,000 at marketprices and the Company had a commitment to purchase wheat totaling $82,000 fromMr. Topp and/or his affiliated entity as of October 31, 2008.

 

12

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

 

ThisManagement’s Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) should be read in conjunction with the MD&A includedin the Company’s Form 10-K for the year ended July 31, 2008.

 

**Forward-Looking Statements**

 

Thefollowing discussion contains forward-looking statements. Such forward-lookingstatements include, among others, those statements including the words “expect”,“anticipate”, “believe”, “may” and similar expressions. Such statements arebased on assumptions by the Company’s management as of the date of thisQuarterly Report, and are subject to risks and uncertainties, including thosediscussed in the Company’s Form 10-K for the year ended July 31, 2008under “Risk Factors,” that could cause actual results to differ materially fromthose anticipated. The Company cautions readers not to place undue reliance onsuch forward-looking statements. The Company will not update any forward-lookingstatements in this Quarterly Report to reflect future events or developments.

 

**Summary**

 

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

 

Net income for the quarter ended October 31,2008 totaled $1,692,000 compared to $1,816,000 for the quarter ended October 31,2007.  Net earnings per basic commonshare for the quarter ended October 31, 2008 were $0.17 per share comparedto $0.18 per share for the quarter ended October 31, 2007.

 

The Company’s net revenues increased 59.0% for thequarter ended October 31, 2008 when compared to the same period of theprior year.  The increase resultedprimarily from higher pasta per unit selling prices and, to a lesser extent,higher mill sales prices.  Benefitsderived from increased per unit selling prices were largely offset by higherdurum costs.  Durum prices declined inthe first quarter of fiscal year 2009 when compared to record high levelsexperienced in fiscal year 2008.

 

**Critical Accounting Policies**

 

Theaccompanying discussion and analysis of our results of operations and financialcondition are based upon our consolidated financial statements, which have beenprepared in accordance with accounting principles generally accepted in theUnited States. The preparation of these financial statements requiresmanagement to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities. These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. We base our estimates and judgments onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances. However, future events are subject tochange and the best estimates and judgments may require adjustment. For acomplete description of the Company’s significant accounting policies, pleasesee Note 1 to the consolidated financial statements included in the Company’s Form 10-Kfor the year ended July 31, 2008. Our critical accounting policies arethose that have meaningful impact on the reporting of our financial conditionand results, and that require significant management judgment and estimates.These policies include our accounting for (a) allowance for doubtfulaccounts, (b) inventory valuation, (c) asset impairment, and (d) incometaxes.

 

*Allowance for Doubtful Accounts*

 

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

 

13

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

 

*InventoryValuation*

 

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

 

*Asset Impairment*

 

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

 

*Income Taxes*

 

Indetermining income (loss) for financial statement purposes, management mustmake certain estimates and judgments in calculating tax liabilities and indetermining the recoverability of certain deferred tax assets. Deferred taxassets must be reduced by a valuation allowance if, based on the weight ofavailable evidence, it is more likely than not that some portion or all of therecorded deferred tax assets will not be realized in future periods. Managementbelieves it is likely that the deferred tax assets as of October 31, 2008will be realized through the generation of future taxable income and taxplanning strategies.

 

**Results of Operations**

 

*Comparison of the Three Months Ended October 31,2008 and 2007*

 

***Net Revenues.***Netrevenues totaled $87.1 million for the three months ended October 31,2008, an increase of 59.0%, compared to $54.8 million for the three monthsended October 31, 2007. Overall, pasta per unit selling prices increased56.0% while pasta sales volumes increased 3.9%. Revenues from the retail market, a portion of which includes co-pack andgovernment sales, increased $12.1 million, or 51.3%, due to a 55.9% increase inaverage selling prices offset by a 3.0% decrease in volume. Foodservicerevenues increased $5.3 million, or 34.7%, due to a 47.1% increase in averageselling prices offset by an 8.4% decrease in sales volumes. Ingredient revenuesincreased $13.2 million, or 127.5%, due to a 78.7% increase in average sellingprices and a 27.3% increase in sales volumes.

 

The Company marketssemolina production in excess of its own requirements as well as durum wheatflour, other flour blends and by-products of the durum milling process.Revenues from mill product sales totaled $7.3 million for the three monthsended October 31, 2008, an increase of $1.8 million when compared to thesame period of the prior year. The increase is due to increases in per unitselling prices.

 

***Cost of Goods Sold.*** Cost of goods sold increased $32.2million, or 69.6%, to $78.5 million for the three months ended October 31,2008, compared to $46.3 million for the three months ended October 31,2007.  The increase was primarily due tohigher durum costs and, to a lesser extent, increased costs for otherproduction inputs. Gross profit as a percentage of net revenues decreased to9.9% for the three months ended October 31, 2008 from 15.5% for the threemonths ended October 31, 2007, as higher revenues largely resulted fromthe pass through of higher durum costs.

 

14

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***Marketing, General, and Administrative (“MG&A”) Expenses.***  MG&A expenses increased 7.6%, to $5.1million for the quarter ended October 31, 2008, compared to $4.8 millionfor the quarter ended October 31, 2007. The increase was primarily due tohigher brokerage commission costs associated with higher revenues. MG&Aexpenses as a percentage of net revenues decreased to 5.9% for the quarterended October 31, 2008, from 8.7% for the comparable quarter of the prioryear.

 

***Interest Expense.***  Interestexpense for the three months ended October 31, 2008 totaled $0.9 million,down $0.2 million from the corresponding period of the prior year.

 

***Noncontrolling Interests. ***Noncontrollinginterests reflects the portion of the DNA Dreamfields Company, LLC net incomeor net loss allocable to other members of DNA Dreamfields.  The loss allocated to other members for thethree months ended October 31, 2007 totaled $202,000.

 

***Income Taxes.  ***The income tax expense forthe three months ended October 31, 2008 and 2007 totaled $1.0 million and$1.2 million, respectively, and reflects an effective corporate income tax rateof approximately 37% and 39%, respectively.

 

***Net Income. ***Net income for the three months ended October 31,2008 totaled $1.7 million, a decrease of $0.1 million compared to the netincome of $1.8 million for the three months ended October 31, 2007.

 

**Liquidity and Capital Resources**

 

TheCompany’s primary sources of liquidity are cash provided by operations andborrowings under its revolving credit facility. Working capital as of October 31,2008 totaled $22.3 million compared to $21.4 million as of July 31, 2008.

 

The Company has a $45 million revolving credit facility with CoBankwhich extends through January 15, 2009. The balance outstanding on theline of credit was $22.5 million as of October 31, 2008, leaving $22.5million available for borrowings as of that date. The balance outstanding underthe revolving line of credit arrangement was $25.8 million as of July 31,2008.

 

TheCompany’s various debt agreements with CoBank and certain institutionalinvestors obligate the Company to maintain or achieve certain amounts of equityand certain financial ratios and impose certain restrictions on the Company.The Company was in compliance with these financial covenants as of October 31,2008 and the date of this filing.

 

Netcash provided from operating activities totaled $5.4 million for the threemonths ended October 31, 2008 compared to net cash provided by operatingactivities of $3.8 million for the three months ended October 31,2007.  Significant items contributing tothis net increase included a decrease in inventories offsetpartially by changes in accounts payable and accounts receivable.

 

Net cash used for investing activities totaled$0.6 million and $2.8 million for the three months ended October 31, 2008and 2007, respectively.  A majority ofthe net cash used for investing activities for the quarter ended October 31,2007 related to the purchase of the remaining interest in DNA Dreamfields.

 

Netcash used for financing activities totaled $5.0 million and $1.0 million forthe three months ended October 31, 2008 and 2007, respectively.  The $5.0 million of net cash used forfinancing activities for the quarter ended October 31, 2008 included $6.0million in scheduled payments on long-term debt and a decrease in short-termnotes payable offset by an increase in excess outstanding checks over cash ondeposit.

 

U.S.Customs and Border Protection (“Customs”) has distributed antidumping andcountervailing duties assessed on certain pasta imported from Italy and Turkeyto affected domestic producers pursuant to the Continued Dumping and SubsidyOffset Act of 2000 (the “Act”). The Company received $384,000 in December 2008under the Act, which will be recognized as other income in the Company’s secondquarter of fiscal year 2009. The Company cannot reasonably estimate thepotential amount, if any, that it may receive under the Act in future 

 

15

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

 

The following table summarizesthe Company’s contractual obligations as of October 31, 2008 (inthousands):

 
| ** **                             | ** ** | ** ** | ** ** | **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                         |       | $          | 34,725     |                      | $          | 5,738              |       | $                  | 17,087     |               | $          | 10,800 |   | $ | 1,100 |   |
| Interest on  long-term obligations (1) |       | 4,776      |       | 1,443                     |       | 2,682              |       | 631                |       | 20                 |       |
| Durum purchase  obligations            |       | 32,156     |       | 32,156                    |       | —             |       | —             |       | —             |       |
| Warehouse  obligations                 |       | 4,903      |       | 2,057                     |       | 2,430              |       | 416                |       | —             |       |
| Operating leases                       |       | 1,127      |       | 553                       |       | 557                |       | 17                 |       | —             |       |
|                                   |       |       |       |                      |       |               |       |               |       |               |       |
|                                   |       | $          | 77,687     |                      | $          | 41,947             |       | $                  | 22,756     |               | $          | 11,864 |   | $ | 1,120 |   |

 

----

(1) Based oninterest rates as of October 31, 2008

 

TheCompany forward contracts for a certain portion of its future durum wheatrequirements. At October 31, 2008, the Company had outstanding commitmentsfor grain purchases totaling $32.2 million related to forward purchasecontracts. These contracts are set price contracts to deliver grain to theCompany’s mill, and are not derivative in nature as they have no net settlementprovision and are not transferable.

 

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

 

16

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

 

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

 

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

 

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

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

***Evaluation of DisclosureControls and Procedures***

 

As required by Rule 13a-15(b) under the Exchange Act, weconducted an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer (together the “Certifying Officers”), of the effectiveness of thedesign and operation of our disclosure controls and procedures as of October 31,2008, the end of the period covered by this report. Based upon that evaluation,the Certifying Officers concluded that our disclosure controls and procedureswere effective as of October 31, 2008 to provide reasonable assurance thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicatedto our management, including our Certifying Officers, as appropriate, to allowfor timely decisions regarding required disclosure.

 

***InherentLimitations on Effectiveness of Controls***

 

Management is responsiblefor establishing and maintaining adequate internal control over financialreporting to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for externalpurposes in accordance with U.S. generally accepted accounting principles.Internal control over financial reporting includes those policies andprocedures that (i) pertain to the maintenance of records that, inreasonable detail, accurately and fairly reflect the transactions and dispositionsof assets; (ii) provide reasonable assurance that transactions arerecorded as necessary to permit preparation of financial statements inaccordance with U.S. generally accepted accounting principles, and thatreceipts and expenditures are being made only in accordance with authorizationsof the management and the Board; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of Company assets that could have a material effect on thefinancial statements.

 

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

 

17

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

 

Therewere no changes in the Company’s internal controls over financial reportingduring the Company’s fiscal quarter ended October 31, 2008 thathave materially affected, or are reasonably likely to materially affect, theCompany’s internal control over financial reporting.

 

**PART II – OTHER INFORMATION**

 

**ITEM 1A. RISK FACTORS**

 

Therehave been no material changes from the risk factors disclosed in Part I,Item 1A, of the Company’s Annual Report on Form 10-K for the fiscal yearended July 31, 2008.

 

**ITEM 6. EXHIBITS**

 

**Exhibits**

 
| 3.1    |   | Second Amended and Restated Articles of  Incorporation of the Company, formerly Dakota Growers Restructuring Company, Inc.  (Incorporated by reference to Exhibit 3.1 from the Company’s  Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,  File No. 333-81946, dated April 19, 2002).                             |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.2    |   | Second Amended and Restated Bylaws of the  Company, formerly Dakota Growers Restructuring Company, Inc.  (Incorporated by reference to Exhibit 3.3 from the Company’s  Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,  File No. 333-81946, dated April 19, 2002).                                                |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.3    |   | Certificate of Designation of Series E  Junior Participating Preferred Stock of the Company, formerly Dakota Growers  Restructuring Company, Inc. (Incorporated by reference to  Exhibit 3.2 from the Company’s Pre-Effective Amendment No. 2 to  Form S-4 Registration Statement, File No. 333-81946, dated April 19,  2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 3.4    |   | Certificate of Designation of Series F  Convertible Preferred Stock of the Company (Incorporated by reference to  Exhibit 3.1 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 15, 2007).                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                   |
| 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.                                                                                                                                                                                                                                |

 

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**SIGNATURES**

 

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

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

 

 
| **Signature**       | ** ** | **Title**                             | ** ** | **Date**                |
|---------------------|------------|---------------------------------------|------------|-------------------------|
|                |       |                                  |       |                    |
|                |       |                                  |       |                    |
| /s/ Timothy J. Dodd |       | President and Chief Executive Officer |       |                    |
| Timothy J. Dodd     |       | (Principal Executive                  |       | December 15,  2008 |
|                |       | Officer)                              |       |                    |
|                |       |                                  |       |                    |
|                |       |                                  |       |                    |
| /s/ Edward O. Irion |       | Chief Financial Officer               |       |                    |
| Edward O. Irion     |       | (Principal Financial and              |       | December 15,  2008 |
|                |       | Accounting Officer)                   |       |                    |

 

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