**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 
| **ý** | **Annual Report Pursuant to Section 13 or 15(d) of  the Securities Exchange Act of 1934 for the fiscal year ended July 31, 2005** |
|------------|-----------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                                                        |
| **or**     |
| ** ** | ** **                                                                                                                        |
| **o**      | **Transition Report Pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934**                                     |

 

**Commission File No. 000-50111**

 

**DAKOTAGROWERS 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)

 

**Securities Registered Pursuant To Section 12(b) Of The Act:**

None

 

**Securities Registered Pursuant To Section 12(g) Of The Act:**

Common Stock, $.01 par value per share

Series D Delivery Preferred Stock, $.01 par valueper share

 

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Indicate by check mark whether the Registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to such filingrequirements for the past 90 days. Yes ý No o

 

        Indicate by check mark if disclosure ofdelinquent filers pursuant to Item 405 of Regulation S-K is not containedherein, and will not be contained, to the best of Registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in PartIII of this Form 10-K or any amendment to this Form 10-K.   ý

 

        Indicate by check mark whether theregistrant is an accelerated filer (as defined in Rule 12b-2 of the ExchangeAct). Yes o No ý

 

        Indicate by check mark whether theregistrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso No ý

 

        There is no established public marketfor the Registrant’s common stock. Although there is a limited, private marketfor shares of the Registrant’s common stock, the Registrant does not obtaininformation regarding the transfer price in transactions between itsshareholders and therefore is unable to estimate the aggregate market value ofthe Registrant’s common shares held by non-affiliates. As of October 28, 2005,the Registrant had 13,169,382 shares of common stock, par value $0.01 pershare, outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

        None.

 

 

 

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**PART I.**

 

**Forward-Looking Statements**

 

        This report contains forward-lookingstatements based upon assumptions by the management of Dakota Growers PastaCompany, Inc. (the “Company”, “Dakota Growers” or “we”), a North Dakotacorporation, as of the date of this Annual Report, including assumptions aboutrisks and uncertainties faced by the Company. When used in this report, thewords “believe,” “expect,” “anticipate,” “will,” “estimate” and similar verbsor expressions are intended to identify such forward-looking statements. Ifmanagement’s assumptions prove incorrect or should unanticipated circumstancesarise, the Company’s actual results could differ materially from thoseanticipated. These differences could be caused by a number of factors orcombination of factors including, but not limited to, those factors describedin the “Risk Factors” section of this report. Readers are strongly urged toconsider such factors when evaluating any forward-looking statement. TheCompany undertakes no obligation to update any forward-looking statements inthis report to reflect future events or developments.

 

 

**ITEM 1.  BUSINESS**

 

**Introduction**

 

        The Company is a North Dakotacorporation that was organized on January 30, 2002. It is the successor to andits operations are a continuance of Dakota Growers Pasta Company, a NorthDakota cooperative (the “Cooperative”), upon the conversion to a corporationeffective July 1, 2002.

 

        The Company owns and operates avertically integrated, state-of-the-art durum wheat milling and pastaproduction facility in Carrington, North Dakota. Primo Piatto, Inc. (“PrimoPiatto”), a wholly-owned subsidiary of the Company being operated as theMinnesota Division of the Company, currently operates a pasta production plantin New Hope, Minnesota. The Company currently has annual capacity to grind inexcess of 12 million bushels of grain and to produce approximately 440 millionpounds of pasta.  The Company iscurrently undertaking a $15 million capital project at its New Hope facility tobetter balance its pasta production capabilities and improve operatingcosts.  Upon completion of all phases ofthe upgrade at the New Hope facility, the overall pasta production capacitywill increase to roughly 500 million pounds.

 

**Pasta Industry and Markets**

 

        The Company estimates North Americanannual dry pasta demand to be roughly 4.0 billion pounds, including pasta usedin dinners, side dishes and meal solutions. Based on the Company’s analysis ofthe marketplace and trade and industry information, the Company believes drypasta consumption may have increased slightly last year after declining over 5%in the previous two years.  While thereseems to be a relatively stable level of consumers continuing to follow reducedcarbohydrate lifestyles, the negative pasta consumption trend associated withlow carbohydrate dieting appears to have subsided.  The company is anticipating growth in drypasta consumption between 1% and 2% in the upcoming year.  In addition to the domestic market for drypasta, much smaller domestic markets exist for refrigerated and frozen pasta.

 

        The Pasta industry identifies domesticdry pasta into two basic markets: retail and institutional. The Companyrecognizes the institutional market as being comprised of ingredient andfoodservice sales.

 

*Retail Market*

 

        TheRetail market includes sales of branded and private label pasta to grocerystores, club stores, mass merchants and other consumer retail operations. Asignificant portion of the Retail market is represented by established nationalor regional pasta brands. Barilla, New World Pasta Company and American ItalianPasta Company account for over 70% of the branded retail market. The Companyfocuses almost all of its Retail marketing efforts on private label sales. Themarket leaders in private label sales are American Italian Pasta Company andDakota Growers, together representing nearly 80% of private label demand. Asmall portion of the 

 

 

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Retail market consists of sales to federal and state governmententities. The Company estimates that the Retail market declined almost 9% from2002 to 2004 before rebounding a little over 1% in 2005, with the traditionalgrocery channels declining at a rate slightly higher due to losses toalternative channels.

 

        In 2004,DNA Dreamfields Company, LLC (“DNA Dreamfields”), of which the Companycurrently has a 47% economic ownership, launched a low digestible carbohydratepasta under the DreamfieldsTM brand name. Effectively launched inthe spring of 2004, DreamfieldsTM pasta has maintained a 1.1% dollarshare of the traditional grocery channel pasta market during the last yearbased on data from A.C. Nielsen, making it the leading pasta in the lowcarbohydrate pasta category. The Company increased  its economic ownership in DNA Dreamfieldsfrom 24% to 47% in fiscal year 2005.

 

        In 2005,a new trend toward high fiber products developed, displacing some of the lowcarbohydrate consumption.  While stillsmall relative to the total pasta category, the consumption of these wholewheat/whole grain products is growing. DreamfieldsTM pasta offers fiber benefits similar to thelevels of other whole wheat/whole grain pastas while maintaining the integrityof the taste and low carbohydrate traits. Dakota Growers also manufactures and sells traditional whole wheat/wholegrain pastas.

 

*Institutional Market*

 

        Ingredientsales consist of pasta used by food processors as an ingredient or component ina further-processed or combination food product. Such food products include drypasta dinners, including macaroni and cheese, frozen entrees, refrigeratedsalads, canned entrees, baby food, and canned and dry soups. The size of theIngredient market is influenced by the number of food processors that choose toproduce pasta internally rather than outsource. The Company estimates that the Ingredient market has experiencedconsumption losses similar to the Retail market over the last several years,and is experiencing similar growth in 2005.

 

        Foodservicesales are to commercial and non-commercial eating establishments such asrestaurants, business and industry cafeterias, managed services, hotels andmotels, retail vending, recreation, mobile and other away-from-home eatingoutlets. Marketing dry pasta to this market generally consists of selling to anetwork of competitive distribution organizations and buying groups, andselling dry pasta to individual restaurant chains and other operatororganizations. A small portion of the Foodservice market consists of sales tofederal and state government entities. The trend toward a reduced carbohydratelifestyle did not have a significant impact on the Foodservice market, whichthe company believes is stable to slight growth.

 

**Co-Pack Arrangements**

 

        Aportion of each end-user market is supplied under “co-pack” arrangementsbetween pasta manufacturers. These agreements involve the sale of dry pastaproducts between pasta manufacturers in order to supply short-term volumedeficiencies such manufacturers suffer from time to time in meeting customerrequirements, and to allow a manufacturer to draw upon particular areas ofexpertise of other manufacturers, which may be more cost beneficial thanself-manufacturing.  Co-pack salescomprised approximately 1%, 3% and 6% of the Company’s net revenues for theyears ended July 31, 2005, 2004 and 2003, respectively.

 

**Productionand Products**

 

        TheCompany purchases durum wheat which is processed through its milling facilityinto semolina and durum wheat flours that are then used by the Company toproduce dry pasta products.

 

        Pastaproduction is basically a mixing, extrusion and drying process. The primaryingredients are semolina and water, although egg, tomato, spinach or otheringredients may be added to produce certain products. The finished dry pasta ispacked to meet different markets and customer requirements.

 

 

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        The pastaproducts manufactured by the Company consist of over 80 different shapes and aresold to customers in all markets. In addition to the dry pasta produced by theCompany, it purchases additional dry pasta shapes from other manufacturers andresells them. This practice is widely followed by many pasta manufacturers forefficiency and production capacity reasons, and allows distribution of widerproduct lines to the Company’s customers. Outside purchases of pasta, excludingimports, comprised approximately 2% of net sales for the year ended July 31,2005 and 1% for the previous two fiscal years. The Company anticipates its outside purchases of pasta will decrease infiscal year 2006 when compared to fiscal year 2005.

 

        The Company has anagreement with Gruppo Euricom, an Italian pasta manufacturer, to be theexclusive distributor of Gruppo Euricom’s Italian pasta and rice products inthe United States and Canada through August 2006.  These products are primarily private labelretail and foodservice products. Sales of imported products comprisedapproximately 1% to 2% of the Company’s net revenues in each of the last threefiscal years.

 

        The Company’sidentity preservation program provides our customers with food safety,traceability and quality from the field to the plate.  The Company’s proximity to the durum growingregions, its milling and production facilities, and its information technologysystems allow the Company to produce products under an identity preservationprogram.

 

        The Company’sCarrington, North Dakota facilities have been certified by the Organic CropImprovement Association and Farm Verified Organics, which allows the Company tooffer 100% organic pasta and semolina. The Company’s facilities allow for theisolation of the durum, semolina and pasta to enable this certification.

 

        The Company’sproducts are manufactured using a comprehensive Hazard Analysis CriticalControl Point (HACCP) program, which requires strict monitoring in all aspectsof the manufacturing process, to ensure food quality and safety. We believethat meeting HACCP standards strengthens customer confidence in the quality ofour products. The Company undergoes food safety and product quality audits atvarious times throughout the year and consistently receives high scores.

 

        In additionto its pasta products, the Company markets semolina, durum wheat flour andother flour blends to other manufacturers as market conditions allow. Lowergrade flours and millfeed by-products of the durum milling process are soldprimarily for animal feed.  Non-pastasales represented approximately 7%, 10% and 9% of the Company’s net revenuesfor the years ended July 31, 2005, 2004 and 2003, respectively. The decrease in fiscal year 2005 resulted fromlower semolina sales volumes as the Company utilized a larger portion of itssemolina production for internal pasta production purposes.

 

**Sales, Marketing and Customers**

 

        The Company markets its products throughdirect sales, supplemented by the efforts of brokers retained by the Company.These brokers receive a commission upon sale of the Company’s products. TheCompany’s pasta products are distributed on a broad basis throughout the UnitedStates. The Company does not export significant quantities of its pastaproducts. One customer, U.S. Foodservice, accounted for approximately 13%, 15%and 17% of net revenues for the years ended July 31, 2005, 2004 and 2003,respectively. The Company’s top 10 customers accounted for 52% of revenues infiscal year 2005, 51% of revenues in fiscal year 2004 and 58% of revenues infiscal year 2003.  Pasta revenuesconsisted of 53% Retail and 47% Institutional for fiscal year 2005, 59% Retailand 41% Institutional for fiscal year 2004, and 63% Retail and 37%Institutional for fiscal year 2003.

 

        The Company sells most of its pastaunder “purchase orders”, whereby the customer and the Company are not obligatedfor any pre-determined length of time, or under pricing commitments agreed towith terms of one year or less. The Company has one long-term marketingagreement, including volume commitments, with Safeway, Inc. that extendsthrough August 31, 2006. The Company has entered into an agreement with GruppoEuricom (“Gruppo”), an Italian pasta manufacturer, to be the exclusivedistributor of Gruppo’s Italian pasta and rice products in the United Statesand Canada through August 2006. These products are primarily sold in theprivate label retail and foodservice markets.

 

 

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**Series D Delivery Preferred StockDelivery Rights**

 

        Each share of Series D Delivery Preferred Stock of theCompany gives its holder the privilege, but not the obligation, to deliver onebushel of durum wheat to the Company each fiscal year on a “first-come,first-served” basis.  From time to timethe Company will post notices to the market on its Web site (holders may alsotelephone the Company for information on market notices) for the purchase ofdurum wheat. During the 24-hour period following the posting of any marketnotice and to the extent that the Company’s durum wheat requirements as setforth in the market notice have not been fulfilled by other holders of Series DDelivery Preferred Stock, holders of Series D Delivery Preferred Stock have theright to (i) accept the Company’s offer to purchase durum wheat and (ii)deliver durum wheat to the Company on such terms and conditions as are setforth in the market notice.  However, inany given fiscal year of the Company, the first-come, first-served privilege todeliver durum wheat shall be exercisable to deliver one bushel of durum wheat****only once with respect to each share of Series D DeliveryPreferred Stock. During the 24-hour period following the posting of any marketnotice, the Company will not purchase durum wheat from non-holders of Series DDelivery Preferred Stock to fulfill the Company’s durum wheat requirements asset forth in the market notice.  If,after the lapse of a certain amount of time (not less than one day), holders ofSeries D Delivery Preferred Stock have not sold to the Company all of the durumwheat requested in the notice, the Company will fulfill its remaining requirementsoutside of the Series D Delivery Preferred Stock delivery privilege.

 

        Because the privilege of a holder ofSeries D Delivery Preferred Stock to deliver durum wheat to the Company onlyarises if the Company actually requires durum, the privilege is notabsolute.  Any and all durum wheatdelivered by a holder of Series D Delivery Preferred Stock to the Company shallconform to quality specifications established by the Company.

 

**       **The Company has purchaseddurum wheat primarily on the open market. Durum wheat purchases from holders ofthe Company’s Series D Delivery Preferred Stock have been negligible.

 

**Competition**

 

*Overview*

 

        Themarkets for pasta and semolina/durum wheat flour are highly competitive in mostmarkets and geographic regions. The intensity of competition varies from timeto time as a result of a number of factors, including: (1) the degree ofindustry capacity utilization, (2) comparative product distribution costs, (3)ability to render distinctive service to customers, (4) the price of rawmaterials, primarily durum wheat, and (5) a distinguishing or unique ability toprovide consistent product quality in line with customer specifications.  The Company believes that, in a broad sense,the most influential factor on the intensity of competitive conditions isindustry capacity utilization.  It shouldbe noted that detailed information regarding pasta production is somewhatdifficult to obtain, as many pasta producers are closely-held enterprises.

 

*Competitionin the Pasta Market*

 

        The pastamarket is highly competitive and includes several well-established enterprises.Those competitors are primarily independent companies and, to a lesser extent,divisions or subsidiaries of other, larger, food products companies. Inaddition, the Company competes against foreign suppliers, including Italian andTurkish enterprises, that sell pasta in the United States.

 

        TheCompany markets in the Retail market primarily as a private label supplier. TheCompany’s Dakota Growers Pasta Co.® label to date has slight penetration inlocal area markets in the Dakotas and Minnesota and its Pasta Sanita® label issold in small niches ranging from the upper Midwest to select markets in theNortheast United States.  DreamfieldsTMpasta has maintained a 1.1% dollar share of the traditional grocery channelpasta market during the last year based on data from A.C. Nielsen, making itthe leading pasta in the low carbohydrate pasta category.

 

 

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        The Company’scompetition in the private label retail market is primarily American ItalianPasta Company and, to a lesser extent, New World Pasta Company. These privatelabel retail sales compete with retail branded products distributed primarilyby Barilla, New World Pasta Company (Ronzoni, San Giorgio, Skinner, AmericanBeauty, Creamette, Prince brands et al), American Italian Pasta Company(Muellers, R&F, Anthony’s, Golden Grain/Mission brands et al)  and a variety of smaller domestic andimported brands.

 

        In theFoodservice market, the Company also markets its pasta primarily as a privatelabel supplier, including sales to three of the largest foodservicedistributors in the country under their labels. The Company’s main competitorsin the Foodservice market are American Italian Pasta Company, A. Zerega’sSons, Inc., and Barilla, as well as foreign competitors that sell product inthe United States. The Company’s “DakotaGrowers Pasta Co.®,” “Pasta Sanita®” and “Pasta Growers®” foodservice brandsare sold throughout the United States to independent distributors and nationalchain accounts. In September 2004, the Company signed an exclusive distributionagreement with New World Pasta under which the Company is licensed to use the “Ronzoni,”“Prince”, “San Giorgio” and “Mrs. Weiss” brands in the Foodservice market,effectively taking over all of New World Pasta’s foodservice operations.

 

        The Company’s ingredient sales have significantly increasedas ingredient purchasers of dry pasta have sought out more reliable low costsuppliers.  The Company’s top competitorsin the Ingredient market include American Italian Pasta Company, PhiladelphiaMacaroni Co. Inc., and A. Zerega’s Sons, Inc. A large portion of the Ingredientmarket production capacity is represented by self-suppliers, which includeKraft Foods, Campbell Soup Company, ConAgra, Inc., Luigino’s and StouffersCorporation.

 

        Thecompetitive environment in the pasta industry depends largely on aggregateindustry capacity relative to aggregate demand for pasta products. The pasta manufacturingindustry experienced capacity changes and restructuring in 2004 which reducedthe excess pasta production capacity. However, future fluctuations in capacityavailability are likely to occur as less cost-efficient capacity continues tobe replaced by upgrade and expansion projects. The Company believes that there currently exists roughly 20% overallexcess capacity in North America, most of it in older or other more inefficientfactories.  This is up slightly over thelast several years, and the company believes it will continue to increaseslightly in 2005.

 

*Competitionin the Semolina and Durum Wheat Flour Market*

 

        Given the commodity nature of the market for semolina and durum flour, salesvolume is largely dependent on delivered price when adequate supply conditionsexist. Italgrani USA, Inc., Horizon Milling, LLC and Miller Millingcollectively are believed to represent approximately 40% of total domesticmilling capacity, while the Company’s current milling operation representsabout 15%.  Most of the durum millingcapacity in the United States is either part of an integrated pasta productionfacility or in an alliance with pasta manufacturers. The Company believes thatthe integration of its milling and pasta production facilities enables it tocompete more effectively with those competitors who also have integratedfacilities.

 

**GovernmentRegulation**

 

*TradePolicies*

 

        Governmentalpolicies and regulations, including those impacting the amount of durum wheatimported from Canada, may affect the operations of the Company and the volumeof pasta imports. United States government farm policies also affect durumplantings and thus can have a significant impact on the market price of durum.

 

        Domestic pastaprices are also influenced by competition from foreign pasta producers, and assuch, by the trade policies of both the U.S. government and foreigngovernments. U.S. Customs and Border Protection (Customs) distributesantidumping and countervailing duties assessed on certain pasta imported from Italyand Turkey to affected domestic producers pursuant to the Continued Dumping andSubsidy Offset Act of 2000 (the “ Offset Act”). The Company received netpayments of $425,000 under the Offset Act in its fiscal year 2005 and $598,000in fiscal year 2004.  Although theseduties may enable the Company to compete more favorably against 

 

 

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Italianand Turkish producers in the U.S. pasta market, there is no assurance as to thelength of time these duties will be maintained, or that foreign producers willnot sell competing products in the United States at prices lower than those ofthe Company.

 

*Foodand Drug Administration Regulation*

 

        As aproducer of products intended for human consumption, the Company’s operationsare subject to certain federal and state regulations, including regulationspromulgated by the United States Food and Drug Administration. The Companybelieves that it is in material compliance with the applicable regulatoryrequirements. The FDA is currently reviewing the labeling requirements forproducts marketed as low carbohydrate and disclosures related to theterminology “net carbohydrates.” DNA Dreamfields Company, LLC does not believethat any new rule changes will have a significant impact on the DreamfieldsTMbusiness.

 

*EnvironmentalRegulation*

 

        Dakota Growers is subject to extensivefederal and state environmental laws and regulations with respect to water andair quality, solid waste disposal and odor and noise control. The Company conductsan on-going control program designed to meet these environmental laws andregulations. There are no pending regulatory enforcement actions and theCompany believes that it is in substantial compliance with applicableenvironmental laws and regulations.

 

        The Company cannot predict whetherfuture changes in environmental laws or regulations might increase the cost ofoperating its facilities and conducting its business. Any such changes couldhave adverse financial consequences for the Company.

 

**IntellectualProperty Rights**

 

        The Company relies on a combination oftrade secret, trademark law, nondisclosure agreements and technical measures toestablish and protect its proprietary rights to its products and processes. TheCompany owns the following trademarks that have been registered with the UnitedStates Patent and Trademark Office for the sale of dry pasta: Pasta Growers®,Pasta Sanita®, Zia Briosa®, Primo Piatto® and Dakota Growers Pasta Co.®.

 

**Researchand Development**

 

        The Company supports research anddevelopment programs in North Dakota that focus on improved varieties of durumwheat. Dakota Growers has an on-staff agronomist and is in the midst of along-term project of small plot, replicated variety trial research, as well asfield-scale fungicide research. In connection with plant breeders andresearchers, the Company is working to develop scab-resistant, high-glutendurum varieties.

 

        As a result of the creation of DNADreamfields Company, LLC and the introduction of the DreamfieldsTMlow digestiblecarbohydrate products, the Company is investing and participating in productand manufacturing technique research beyond the scope of traditional dry pasta.

 

        The Company, as part of its operations,maintains a modern, well-equipped laboratory facility designed primarily toevaluate and maintain high quality standards for incoming raw materials,ongoing product manufacturing, and development of new pasta shapes.

 

**Employees**

 

        As of October 1, 2005, the Company had409 employees, 120 of which are covered by collective bargaining agreements atits Primo Piatto, Inc. subsidiary. These collective bargaining agreementsexpire on November 30, 2005 and December 1, 2007. The Company considers itsemployee relations to be very good.

 

 

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**RiskFactors**

 

        The following are important factors thatcould cause actual results to differ materially from those expressed in anyforward-looking statements made by or on behalf of the Company. Additionalrisks that we do not yet know of, or currently believe are immaterial, may alsoimpair the business operations of the Company.

 

***        Consumer Trends***

 

***       ***As the Company competes exclusively in the dry pasta industry, changesin consumer trends that result in lowered demand for dry pasta may have amaterial adverse effect on the Company’s financial condition and results ofoperations.

 

***        CompetitiveEnvironment***

 

        Both the U.S. pasta industry and worldpasta industry are extremely competitive. The Company competes in all dry pastamarkets — retail store brand, foodservice and ingredient, with larger,national and international food companies. Competition within the pastaindustry is largely dependent upon the relationship of overall industryproduction capacity to overall market demand for pasta. The pasta industry inthe U.S. has, until recently, been faced with excess production capacity.Recent developments have significantly reduced this excess capacity, althoughfuture fluctuations in capacity availability are sure to occur.  Italy faces an excess capacity situationwhich may influence the availability and price of imported products.  Some competitors may have long-term, highvolume contracts, which guarantee a specified amount of volume over the term ofthe contract. Other competitors have retail brand equity and larger amounts ofmarketing dollars to compete against imported and store brand products. Thecompetitive environment, especially in the retail private label and ingredientmarkets, has in the past, and may in the future, put pressure on the Company’sprofitability and its ability to maintain market share. While the Company hasand will continue to apply, where possible, cost saving measures in an effortto remain competitive, there is no guarantee that the Company can operate profitablyin the future.

 

***        No PublicMarket for Shares of the Company’s Common Stock and Preferred Stock***

 

        There iscurrently no established public trading market for the shares of Common Stockand Preferred Stock of the Company, and an active trading market may neverdevelop. The Company maintains no obligation to seek or to obtain a listing on anational market. As a result, you may notbe able to readily resell your shares in the Company.

 

        ***Technology***

 

        The Company believes that its overallcommitment to maintaining and upgrading pasta manufacturing, milling andpackaging equipment is necessary to keep a competitive edge in the pastaindustry. In addition, it also acknowledges that ongoing computer systemupgrades to better service the demands of its customers are important tolong-term success and profitability. The Company may be negatively impacted ifit is unable to consistently keep pace with the industry in these areas.

 

***        Pasta,Semolina, Durum Wheat and By-Product Prices***

 

        The Company’s profitability is directlyrelated to the market price of dry pasta, semolina, durum wheat and mill feedby-products. The supply and price of durum wheat are subject to marketconditions and are influenced by many factors beyond the Company’s controlincluding weather patterns affecting durum wheat production, governmentalprograms and regulations, insects, and plant diseases. Such volatility withrespect to the price of the basic raw material for the Company’s productsleaves the Company subject to wide variation in its costs from year to year.Future increases in durum costs could have a material adverse effect onoperating profits unless we are able to pass cost increases on to ourcustomers. Competitive pressures often limit our ability to increase prices inresponse to higher input costs. By-products of the milling process compete withother feed products, and fluctuate significantly in price with the availabilityof these competing feed products.

 

 

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        ***ProductConcentration***

 

        The Company competes almost exclusivelyin the dry pasta industry and related flours and by-product markets, with asignificant portion of pasta sales concentrated in the retail and foodserviceprivate label markets. Any decline in pricing or demand for dry pasta,particularly within the retail and foodservice private label markets, couldhave a material adverse effect on the Company’s financial condition and resultsof operations.

 

***        ProductLiability***

 

        The sale of food products for human consumption involves the risk of injury to consumers. These injuries may result from tampering by unauthorized third parties, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, aflatoxin and other agents, or residues introduced during the growing, storage, handling or transportation phases. The Company has never been involved in a product liability lawsuit. The Company is subject to U.S. Food and Drug Administration inspection and regulations and we believe the Company’s facilities comply in all material respects with all applicable laws and regulations, but we cannot be certain that we will not be subject to claims or lawsuits in the future for injuries relating to the consumption of the Company’s products. The Company carries insurance for product liability claims related to its products and for the costs related to product recalls. However, we cannot be certain that the Company will not incur claims or liabilities for which it is not insured or that exceed the amount of its insurance coverage.

 

        ***GovernmentRegulation and Trade Policies***

 

        Dakota Growers is subject to extensivefederal and state environmental laws and regulations with respect to water andair quality, solid-waste disposal and odor and noise control. The Companyconducts an on-going program designed to comply with these laws andregulations. There are no pending regulatory enforcement actions against theCompany, and the Company believes that it currently is and will continue to bein substantial compliance with all applicable environmental laws andregulations.

 

        As a producer of products intended forhuman consumption, the Company’s operations are subject to certain federal andstate regulations, including regulations promulgated by the U.S. Food and Drug Administration.The Company believes that it is in material compliance with all applicableregulatory requirements relating to food quality and safety.

 

        The operations of the Company may beaffected by governmental trade policies and regulations, including thoseimpacting the amount of durum wheat imported from Canada. Domestic pasta pricesare also influenced by competition from foreign pasta producers, and as such,by the trade policies of both the U.S. government and foreign governments.

 

***        Restrictive LoanCovenants***

 

        The Company’s loan agreements withCoBank and institutional investors obligate the Company to maintain or achievecertain amounts of equity and working capital and achieve certain financialratios.  The failure to comply with thevarious loan covenants may result in interest rate penalties, restrict theCompany’s corporate activities or result in a default by the Company which mayhave a material adverse effect on the Company’s liquidity.

 

        ***Board ofDirectors Discretion Regarding Dividends***

 

        The Board of Directors of the Companyhas absolute discretion to determine the manner and amount of payment ofdividends on shares of Common Stock and, subject to certain exceptions,Preferred Stock.

 

 

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**AvailableInformation**

 

**       **The Company’s Internetwebsite address is *www.dakotagrowers.com*.We make available, free of charge through the “Investors” portion of ourwebsite, the Company’s annual reports on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed orfurnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of1934 (the “1934 Act”) as soon as reasonably practicable after we electronicallyfile such materials with, or furnish such materials to, the Securities andExchange Commission. Reports of beneficial ownership filed pursuant to Section16(a) of the 1934 Act are also available through our website.

 

        The Securities and Exchange Commissionmaintains an Internet site that contains reports, proxy, and informationstatements and other information regarding issuers that file electronicallywith the Securities and Exchange Commission. The address of that site ishttp://www.sec.gov.

 

 

**ITEM2.  PROPERTIES AND PROCESSING FACILITIES**

 

        Dakota Growers owns and operates amilling facility in North Dakota, and pasta plants in North Dakota andMinnesota. The Company owns the warehouse facilities at the pasta plants. Thesefacilities are supplemented by public warehouses in California, Kansas,Minnesota, New York, North Carolina, North Dakota, Oregon and Washington whereinventory is maintained and redistributed for the needs of specific customers.

 

Dakota Growers continues toinvest in technologies to improve operational efficiencies, and informationtechnology to provide enterprise visibility to all facilities and activitieswithin the supply chain. These information systems encompass communications,data collection, data storage, process management and record management toensure the Company is providing a superior level of service to our customerswhile reducing operating and administrative expenses.

 

 

**ITEM3.  LEGAL PROCEEDINGS**

 

        From time to time and in the ordinarycourse of its business, the Company is named as a defendant in legal proceedingsrelated to various issues, including worker’s compensation claims, tort claimsand contractual disputes. Other than such routine litigation, the Company isnot currently involved in any material legal proceedings. In addition, theCompany is not aware of other potential claims that could result in thecommencement of legal proceedings. The Company carries insurance that providesprotection against certain types of claims, up to the policy limits of theCompany’s insurance.

 

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

                        No matters weresubmitted to a vote of our security holders during the fourth quarter of fiscalyear 2005.

 

 

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**PART II.**

 

**ITEM5.  MARKET FOR THE REGISTRANT’S COMMONSTOCK AND RELATED STOCKHOLDER**

**          MATTERS**

 

        There is no established public tradingmarket for the Company’s Common Stock or Preferred Stock. As of October 7, 2005there were 1,322 holders of the Company’s Common Stock.

 

        Ownership of shares of Common Stock maybe transferred subject only to the requirements of the applicable securitieslaws.  Holders of Series D DeliveryPreferred Stock have a delivery right, but not a delivery obligation, to selldurum to the Company.  The Company mustapprove all transfers of shares of Series D Delivery Preferred Stock.

 

        Two unrelated companies, Variable Investment Advisers, Inc.(VIA) and Alerus Securities have established Alternative Trading Systems (ATS)to facilitate trading of the Company’s Common Stock. We do not implicitly orexplicitly endorse VIA, Alerus Securities or their respective web sites, and weare not responsible for products and services that VIA or Alerus Securitiesprovide. We do not stand behind VIA or Alerus Securities or receive any feesfrom either of them in connection with the services offered on their respectiveweb sites. Links to the respective web sites of VIA and Alerus Securities areavailable through the “Investors” portion of the Company’s website at *www.dakotagrowers.com*.

 

        Trading volumes of the Company’s Common Stock have beenminimal to date.

 

        The Company has not declared or paid anydividends in the last two fiscal years.

 

** **

 

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** **

**ITEM6.  SELECTED FINANCIAL DATA**

 

        The selected financial data presentedbelow for the fiscal years ended July 31, 2001 through 2005 has been derivedfrom the audited consolidated financial statements of the Company (and theCooperative for periods presented prior to the conversion to a corporation).The conversion of Dakota Growers Pasta Company from a cooperative to acorporation, completed effective July 1, 2002, was accounted for as an exchangebetween related parties; therefore, no gain or loss was recognized at the timeof conversion and the book value of the assets and liabilities of theCooperative carried over to the Company. The comparability of results after theconversion versus those in prior periods is affected by the income tax statuschange associated with the conversion.

 

        Effective May 1, 2005, the Companybegan to include DNA Dreamfields Company, LLC in its consolidated financialstatements.  The financial statements for prior fiscal years have not beenrestated and therefore do not include consolidated data pertaining to DNADreamfields. The Company has included consolidated amounts for DNA Dreamfieldsin the income statement for the year ending July 31, 2005. See Note 2 of theconsolidated financial statements for additional information.

 

        The selected financial data set forth inthis section should be read in conjunction with the Company’s consolidatedfinancial statements and related notes and “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” included elsewherein this report.

 

 

**SELECTEDFINANCIAL DATA**

**(Inthousands, except per share data and ratios)**

** **
| ** **                                                                               | ** ** | **Fiscal year ended July 31** | ** ** |
|------------------------------------------------------------------------------------------|------------|-------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                      | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **INCOME STATEMENT DATA**                                                                |       |                          |       |   |   |   |   |   |   |   |   |
| Net revenues                                                                             |       | $                             | 155,619    |   | $ | 144,679 |   | $ | 136,806 |   | $ | 152,465 |   | $ | 135,921 |   |
| Cost of goods sold                                                                       |       | 136,179                       |       | 132,245 |   | 125,160 |   | 130,502 |   | 124,811 |   |
| Gross profit                                                                             |       | 19,440                        |       | 12,434 |   | 11,646 |   | 21,963 |   | 11,110 |   |
| Marketing, general and administrative expenses                                           |       | 16,507                        |       | 8,345 |   | 9,816 |   | 9,382 |   | 9,631 |   |
| Loss on asset impairment                                                                 |       | —                        |       | 704 |   | — |   | — |   | — |   |
| Operating income                                                                         |       | 2,933                         |       | 3,385 |   | 1,830 |   | 12,581 |   | 1,479 |   |
| Other expense - net                                                                      |       | (1,817                        | )          | (2,835 | ) | (2,364 | ) | (3,365 | ) | (3,574 | ) |
| Noncontrolling interests                                                                 |       | 3,003                         |       | — |   | — |   | — |   | — |   |
| Income (loss) before income taxes                                                        |       | 4,119                         |       | 550 |   | (534 | ) | 9,216 |   | (2,095 | ) |
| Charge to record deferred taxes upon conversion from a cooperative to  a corporation (1) |       | —                        |       | — |   | — |   | 6,105 |   | — |   |
| Income tax expense (benefit)                                                             |       | 1,606                         |       | 214 |   | (105 | ) | 1,277 |   | (311 | ) |
| Net income (loss)                                                                        |       | 2,513                         |       | 336 |   | (429 | ) | 1,834 |   | (1,784 | ) |
| Dividends on preferred stock                                                             |       | —                        |       | — |   | 3 |   | 10 |   | 15 |   |
| Net earnings (loss) on common/equity stock                                               |       | $                             | 2,513      |   | $ | 336 |   | $ | (432 | ) | $ | 1,824 |   | $ | (1,799 | ) |
|                                                                                     |       |                          |       |   |   |   |   |   |   |   |   |
| Net earnings (loss) per common/equity share - Basic                                      |       | $                             | 0.19       |   | $ | 0.03 |   | $ | (0.03 | ) | $ | 0.16 |   | $ | (0.16 | ) |
| Weighted average common/equity shares outstanding - Basic                                |       | 13,169                        |       | 12,265 |   | 12,355 |   | 11,382 |   | 11,253 |   |
|                                                                                          |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

 

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| ** **                                           | ** ** | **As of July 31** | ** ** |
|------------------------------------------------------|------------|-------------------|------------|
| ** **                                           | ** ** | **2005**          | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** | **2001** | ** ** |
| **BALANCE SHEET DATA**                               |       |              |       |   |   |   |   |   |   |   |   |
| Cash                                                 |       | $                 | 229        |   | $ | 589 |   | $ | 5 |   | $ | 2,866 |   | $ | 3 |   |
| Working capital                                      |       | 20,156            |       | 16,586 |   | 13,429 |   | 23,013 |   | 14,420 |   |
| Total assets                                         |       | 135,130           |       | 119,415 |   | 122,390 |   | 125,541 |   | 128,658 |   |
| Long-term debt (excluding current maturities)        |       | 25,385            |       | 21,087 |   | 28,263 |   | 38,274 |   | 47,594 |   |
| Redeemable preferred stock                           |       | 7                 |       | 20 |   | 33 |   | 54 |   | 113 |   |
| Stockholders’ equity                            |       | 61,132            |       | 58,619 |   | 53,818 |   | 56,090 |   | 54,267 |   |
|                                                 |       |              |       |   |   |   |   |   |   |   |   |
| **OPERATING DATA**                                   |       |              |       |   |   |   |   |   |   |   |   |
| Ratio of long-term debt to stockholders’ equity |       | .42x              |       | .36x |   | .53x |   | .68x |   | .88x |   |
|                                                      |            |                   |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)                      Prior to conversion, theCooperative had not recorded deferred taxes for temporary differences that werelikely to be eliminated through patronage allocations.  Upon conversion to a corporation effectiveJuly 1, 2002, the Company recorded deferred tax assets and liabilities for thetax effects of any temporary differences existing between income tax andfinancial reporting on the date of the change. In recording such deferred tax assets and liabilities upon conversion toa corporation, the Company recorded a nonrecurring, non-cash income tax chargeof $6,105,000 during the year ended July 31, 2002.

 

 

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**ITEM 7.****            ****MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-LookingStatements**

 

        The following discussion containsforward-looking statements. Such statements are based on assumptions by theCompany’s management, as of the date of this report, and are subject to risksand uncertainties, including those discussed under “Risk Factors” in thisreport, that could cause actual results to differ materially from thoseanticipated. The Company cautions readers not to place undue reliance on suchforward-looking statements.

 

**Summary**

 

        DakotaGrowers is the third largest pasta manufacturer in North America. The Companyhas two production plants, located in Carrington, North Dakota and New Hope,Minnesota and generates a majority of its revenues from manufacturing pasta forthe retail store brand and foodservice markets, although we serve andcontinually look for opportunities in the entire dry pasta industry. Ouridentity preservation program provides our customers food safety, traceabilityand quality from the field to the plate. The Company also has a certifiedorganic program and markets organic pasta through its Dakota Growers Pasta Co.®retail label, as well as into the private label retail, foodservice, andingredient markets.  The Company competesthrough low cost production, high product quality, flexibility and customerservice.

 

        Netincome for the year ended July 31, 2005 totaled $2.5 million compared to netincome of $0.3 million for the year ended July 31, 2004.

 

        TheCompany secured new business in its first fiscal quarter 2005 and beganrealizing increased revenues as a result of these new customer rollouts in itssecond fiscal quarter 2005.  The growthin new customers continued throughout the year. Pasta revenues for the last three quarters of fiscal 2005 tracked 17%higher than the comparable period of the previous year.  With this increase in demand, the Company wasable to more efficiently operate its production facilities resulting inconversion costs per unit running 4.6% lower than fiscal year 2004.  As a result of a supply/demand imbalance inthe Company’s fourth fiscal quarter of 2004, the Company reduced productionduring this period to keep its inventories at proper levels, resulting inhigher per unit conversion costs. A significant portion of these increased perunit costs flowed through cost of goods sold in the Company’s first fiscalquarter of 2005.

 

        TheCompany increased its economic ownership in DNA Dreamfields to 47% effectiveMay 2005.  DNA Dreamfields was formed bythe Company and other food technology, manufacturing and consumer productsmarketing enterprises to develop, manufacture and sell low digestiblecarbohydrate pasta, rice and potatoes under the DreamfieldsTM brandname.  In conjunction with the Company’sincrease in ownership in DNA Dreamfields, the DNA Dreamfields operatingagreement was amended whereby Dakota Growers was named the managing member ofDNA Dreamfields.  The Company is theexclusive manufacturer of DreamfieldsTM low digestible carbohydratepasta, and provides administrative, accounting, information technology, sales,customer service and distribution services to DNA Dreamfields.

 

        TheCompany believes that the DreamfieldsTM line of products is wellsuited for consumers seeking healthy low carbohydrate alternatives. TheDreamfieldsTM low digestible carbohydrate pasta products carry ahigher selling price and higher profit margins than traditional pasta.  DreamfieldsTM pasta is currentlydistributed in over 11,000 grocery outlets nationwide. Initial shipments tocustomer distribution centers began in February 2004.

 

        In 2005,a new trend toward high fiber products developed, displacing some of the lowcarbohydrate consumption.  While stillsmall relative to the total pasta category, the consumption of these wholewheat/whole grain products is growing. DreamfieldsTM pasta offers fiber benefits similar to thelevels of other whole wheat/whole grain pastas while maintaining the integrityof the taste and low carbohydrate traits.  Dakota Growers also manufactures and sellstraditional whole wheat/whole grain pastas.

 

 

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        The cost of production of dry pasta issignificantly impacted by changes in durum wheat prices, which have variedwidely in recent years.  Durum wheatcosts per bushel declined by 4% from fiscal year 2004 to 2005, and representapproximately one-third of the Company’s cost of goods sold. The Companyattempts to manage the risk associated with durum wheat cost fluctuationsthrough cost pass-through mechanisms with our customers and forward purchasecontracts for durum wheat. Volatility with respect to the price of the basicraw material for the Company’s products leaves it subject to wide variation inits costs from year to year. As a result, factors which impact the size andquality of the durum wheat crop and the availability of such wheat in theUnited States and Canada can have a material adverse impact on the Company.Those factors include such variables as producer strategies, the weather indurum wheat production areas in the United States, Canada and other parts ofthe world, and import and export policies and regulations.

 

        Freight costs represent approximately15% of cost of goods sold.  Beginning incalendar year 2004, new regulations in the trucking industry and significantincreases in fuel costs, which have accelerated in 2005, have dramaticallyimpacted the Company’s costs.  Naturaldisasters such as the hurricanes of the last several years also have majorshort-term impacts on freight costs due to increased demands.  The Company utilizes its forward warehousingand rail programs to offset the effects of these increases.  The effectiveness of the Company’s railprograms has diminished over the last several years as the Company believes theimproved economy has increased competition for available rail capacity, therebyincreasing costs.  Additionally,packaging material costs, which traditionally represent 15% of cost of goodssold, continue to increase due to oil and other raw material price increases,fuel costs and other input costs passed on by our packaging suppliers.

 

         Due to the intense competition presentin the market for pasta products over the last several years, pastamanufacturers have, at times, been unable to fully implement price increasesfor their dry pasta products in periods when higher durum wheat prices or otherinput costs impacted the cost of pasta production. The Company believes thatthe competitive environment results primarily from excess production capacityin the domestic pasta industry in relation to total market demand and fromstrategic actions relating to market share. The industry experienced somecapacity rationalization within the past several years, with both New World PastaCompany and American Italian Pasta Company implementing permanent or temporaryshutdowns of certain pasta production facilities. In May 2004, New World PastaCompany filed for Chapter 11 bankruptcy protection.

 

**Critical Accounting Policies**

 

        The accompanying discussion and analysis of the Company’sresults of operations and financial condition are based upon its consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States. The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosure of contingent assets and liabilities. These estimates formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources. We base ourestimates 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 consolidated financialstatements. Our critical accounting policies are those that have meaningfulimpact on the reporting of our financial condition and results, and thatrequire significant management judgment and estimates. These policies includeour accounting for (a) allowance for doubtful accounts, (b) inventoryvaluation, (c) asset impairment, and (d) income taxes.

 

*Allowance for Doubtful Accounts*

 

        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 

 

 

 

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conditionof our customers would deteriorate, additional allowances may be required inthe future which could have an adverse impact on our future operating results.

 

*Inventory Valuation*

 

*       *Inventories are stated at the lower of cost ormarket, determined on a first-in, first-out (FIFO) basis, using productspecific standard costs. The Company analyzes variances between actualmanufacturing costs incurred and amounts absorbed at inventory standard costs.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*

 

        We arerequired to evaluate our long-lived assets, including goodwill, for impairmentand write down the value of any assets if they are determined to be impaired.Evaluating the impairment of long-lived assets involves management judgment inestimating the fair values and future cash flows related to these assets. TheCompany recognized a loss on asset impairment related to certain pastaproduction equipment totaling $704,000 during the year ended July 31, 2004.Future events could cause management to conclude that impairment indicatorsexist and that the value of certain long-lived assets is impaired.

 

*Income Taxes*

 

        In determining income (loss) for financial statementpurposes, management must make certain estimates and judgments in calculatingtax liabilities and in determining the recoverability of certain deferred taxassets. Deferred tax assets must be reduced by a valuation allowance, if basedon the weight of available evidence, it is more likely than not that someportion or all of the recorded deferred tax assets will not be realized infuture periods. Management believes it is likely that the deferred tax assetsas of July 31, 2004 will be realized through the generation of future taxableincome and tax planning strategies.

 

**Basisof Presentation**

 

        Effective May 1, 2005, the Companybegan to include DNA Dreamfields in its consolidated financialstatements.  The financial statements for prior fiscal years have not beenrestated and therefore do not include consolidated data pertaining to DNADreamfields. The Company has included consolidated amounts for DNA Dreamfieldsin the income statement for the year ending July 31, 2005. See Note 2 of theconsolidated financial statements for additional information.

 

**Resultsof Operations**

 

*Comparisonof Fiscal Years ended July 31, 2005 and 2004*

 

**       *****Net Revenues.***Net revenuesincreased $10.9 million, or 7.6%, to $155.6 million for the year ended July 31,2005, from $144.7 million for the year ended July 31, 2004. The increaseresulted from higher pasta sales volumes, particularly in the foodservice andingredient markets.

 

        Revenues from the retail market, a portion of which includes co-pack and governmental sales, increased $0.2 million, or 0.3%, for the year ended July 31, 2005 due to a 7.7% increase in average selling prices offset by volume declines. A significant factor contributing to retail volume declines was a decrease in co-pack sales, primarily to New World Pasta Company. Foodservice revenues increased $6.1 million, or 14.9%, primarily due to sales volume growth associated with sales under the New World Pasta license agreement combined with new customer sales. The Company entered into a license agreement with New World Pasta Company in September 2004, which gave the Company the exclusive right to produce and market pasta products bearing the *Ronzoni*, 

 

 

16

 

*Prince*, *San Giorgio* and *Mrs. Weiss*brands in the foodservice market. Ingredient revenues increased $8.7 million, or 67.4%, due to sales volume increases primarily associated with the addition of one customer in this market.

 

        The Companymarkets semolina production in excess of its own requirements as well as durumwheat flour, other flour blends and by-products of the durum milling process. Revenues from mill product sales for the yearended July 31, 2005 totaled $10.6 million, down $3.9 million from the prioryear. The decrease resulted from lower semolina sales volumes as the Companyutilized a larger portion of its semolina production for internal pastaproduction purposes.

 

        The consolidation of DNA Dreamfields inthe Company’s consolidated financial statements for fiscal year 2005 did nothave a material impact on net revenues when compared to fiscal year 2004.

 

        ***Costof Goods Sold.***Cost of goods sold totaled $136.2 million for theyear ended July 31, 2005, an increase of 3.0% compared to the $132.2 million reported for the year ended July 31,2004, mainly due to higher sales volumes relative to the prior year. Grossprofit as a percentage of net revenues increased to 12.5% in fiscal year 2005compared to 8.6% in fiscal year 2004 due to various factors including lower perunit manufacturing costs resulting from increased factory utilization. Thesepositive factors were partially offset by the negative impacts of higherfreight costs. The impact of including DNA Dreamfields in the Company’sconsolidated financial statements for fiscal year 2005 accounted forapproximately one-half of the 3.9% change in gross profit percentageimprovement.

 

        ***Marketing, General and Administrative (“MG&A”)Expenses.***  MG&Aexpenses increased $8.2 million, or 97.8%, to $16.5 million for the year endedJuly 31, 2005, from $8.3 million for the year ended July 31, 2004. The impactof including DNA Dreamfields in the Company’s consolidated financial statementsfor the year ended July 31, 2005 accounted for 75% of the increase in MG&Aexpenses, and related primarily to consumer advertising. The remainder of theincrease in MG&A resulted from a variety of factors, the most significantof which were increased customer marketing support associated with DreamfieldsTMpasta products and increased research and development costs. MG&Aexpenses as a percentage of net revenues increased from 5.8% to 10.6%.

 

        ***Losson Asset Impairment. ***The Companyrecorded a loss on asset impairment of $0.7 million during the year ended July31, 2004. The impairment loss related to certain pasta production equipmentwhich was under a purchase option agreement that expired in July 2004. Uponreview, the Company determined the asset was impaired and adjusted to fairvalue which was estimated based on the current market conditions for similarequipment.

 

***        Net Loss Allocated fromJoint Venture***.  The Companydid not report a net loss allocation from joint venture for the year ended July31, 2005 as the Company included DNA Dreamfields in the consolidated financialstatements for fiscal year 2005 (See also Note 2 — DNA Dreamfields Company, LLCof the consolidated financial statements).**The net lossallocated from joint venture totaled $0.6 million for the year ended July 31,2004, and represents the Company’s allocable share of net losses from DNADreamfields Company, LLC based upon its 24% ownership interest during thatperiod.

 

***        Interest Expense.***Interestexpense for the year ended July 31, 2005, totaled $2.3 million, down $0.5million from $2.8 million for the year ended July 31, 2004.  The decrease was mainly due to lower averageoutstanding debt levels. Cash and equity patronage refunds received from CoBanktotaling $114,000 and $103,000 have been netted against interest expense forthe years ended July 31, 2005 and 2004, respectively.

 

***        Other Income.*** Other income totaled $0.5 million for both ofthe years ended July 31, 2005 and 2004. U.S. Customs and Border Protection (“Customs”)has distributed antidumping and countervailing duties assessed on certain pastaimported from Italy and Turkey to affected domestic producers pursuant to theContinued Dumping and Subsidy Offset Act of 2000 (the “Offset Act”), which wasenacted in October 2000. The Company received net payments in the amount of$0.4 million and $0.6 million in fiscal years 2005 and 2004, respectively,under the Offset Act. These amounts have been classified as other income. TheCompany cannot reasonably estimate the potential amount, if any, that it mayreceive under the Offset Act in future periods as any such amount will be 

 

 

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basedupon future events over which the Company has little or no control, including,but not limited to, the amount of expenditures by domestic pasta producers andthe amount of antidumping and countervailing duties collected by Customs.

 

        ***Noncontrolling Interests.*** Noncontrolling interests reflects the portionof the DNA Dreamfields net loss allocable to the other members of DNADreamfields for the year ended July 31, 2005.

 

***        Income Taxes. ***Income tax expense for theyears ended July 31, 2005 and 2004 totaled $1.6 million and $0.2 million,respectively, reflecting an effective corporate income tax rate ofapproximately 39%.

 

        ***Net Income (Loss). ***Net income for the year endedJuly 31, 2005 totaled $2.5 million, an increase of $2.2 million compared to netincome of $0.3million for the year ended July 31, 2004.

 

*Comparisonof Fiscal Years ended July 31, 2004 and 2003*

 

***        NetRevenues.*** Netrevenues increased $7.9 million, or 5.8%, to $144.7 million for the year endedJuly 31, 2004, from $136.8 million for the year ended July 31, 2003. Theincrease was primarily due to higher sales volumes in the foodservice marketand sales related to the introduction of DreamfieldsTM pastaproducts into the marketplace.

 

        Revenuesfrom the retail market, a portion of which includes co-pack and governmentalsales, decreased $2.2 million, or 2.7%, as a result of a 6.8% decrease in salesvolume offset by higher per unit selling prices. The volume declines weremainly in co-pack and governmental sales. Sales of DreamfieldsTM lowdigestible carbohydrate pasta, which have significantly higher per unit salesprices than the Company’s other products, accounted for a majority of theaverage sales price increase in the retail market. Foodservice revenuesincreased $5.7 million, or 16.2%, primarily driven by a 13.7% increase in salesvolumes. Ingredient revenues increased $2.3 million, or 21.3%, resulting mainlyfrom a 14.1% increase in sales volumes combined with higher per unit salesprices.

 

        TheCompany markets semolina production in excess of its own requirements as wellas durum wheat flour, other flour blends and by-products of the durum millingprocess. Revenues from mill product sales for the year ended July 31, 2004,increased $2.0 million from the prior year. The increase resulted primarilyfrom higher mill product sales volumes.

 

***        Costof Goods Sold.***Cost of goods sold totaled $132.2 million for the year ended July 31, 2004, anincrease of $7.0 million or 5.7% compared to the $125.2 million reported forthe year ended July 31, 2003. This increase was primarily due to revenuegrowth. Gross profit as a percentage of net revenues remained relativelyconstant at 8.6% in fiscal year 2004 compared to 8.5% in fiscal year 2003.Durum cost decreases were offset by increases in egg ingredients and the higheringredient costs associated with DreamfieldsTM pasta products. TheCompany utilized its forward warehousing and rail programs to reduce the effectsof freight industry cost increases resulting from higher fuel prices andregulation changes.

 

***        Marketing, General andAdministrative (“MG&A”) Expenses.*** MG&A expenses decreased $1.5 million, or15.0%, to $8.3 million for the year ended July 31, 2004, from $9.8 million forthe year ended July 31, 2003.  MG&Aexpenses as a percentage of net revenues decreased from 7.2% to 5.8%. Thedecrease in MG&A expenses was primarily due to lower incentive compensationcosts. A portion of the incentive compensation for the year ended July 31, 2003related to a compensatory transaction in conjunction with the unwinding ofprevious stock option exercises and related officer loans in response to theSarbanes-Oxley Act of 2002.

 

        ***Losson Asset Impairment. ***The Company recordeda loss on asset impairment of $0.7 million during the year ended July 31, 2004.The impairment loss related to certain pasta production equipment which wasunder a purchase option agreement that expired in July 2004. Upon review, theCompany determined the asset was impaired and adjusted to fair value which wasestimated based on the current market conditions for similar equipment.

 

 

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***        Net Loss Allocated fromJoint Venture. ***The net lossallocated from joint venture totaled $0.6 million for the year ended July 31,2004, and represents the Company’s allocable share of net losses from DNADreamfields Company, LLC based upon its 24% ownership interest during thatperiod.

 

***        Interest Expense.***Interest expensefor the year ended July 31, 2004, totaled $2.8 million, down $0.6 million from$3.4 million for the year ended July 31, 2003. The decrease was mainly due tolower average outstanding debt levels. Cash and equity patronage refundsreceived from CoBank totaling $103,000 and $126,000 have been netted againstinterest expense for the years ended July 31, 2004 and 2003, respectively.

 

***        Other Income.*** Other income totaled $0.5 million for the yearended July 31, 2004 compared to $1.1 million for the year ended July 31, 2003.The Company received payments in the amount of $0.9 million and $1.0 million inDecember 2003 and 2002, respectively, under the Offset Act, based on dutiesassessed from October 1, 2001 to September 30, 2003. The Company repaid $0.3million to Customs in April 2004 pursuant to a reclamation request fromCustoms. The reclamation request noted Customs had inadvertently left out anaffected domestic producer that had timely filed a valid claim in theallocation calculation, resulting in the initial overpayment to the Company.The Company cannot reasonably estimate the potential amount, if any, that itmay receive under the Offset Act in future periods as any such amount will bebased upon future events over which the Company has little or no control,including, but not limited to, the amount of expenditures by domestic pastaproducers and the amount of antidumping and countervailing duties collected byCustoms.

 

***        Income Taxes. ***Income tax expense for theyear ended July 31, 2004 was $0.2 million, reflecting an effective corporateincome tax rate of approximately 39%. The income tax benefit for the year endedJuly 31, 2003 was $0.1 million.

 

        ***Net Income (Loss). ***Net income for the year endedJuly 31, 2004 totaled $0.3 million, an increase of $0.7 million compared to thenet loss of $0.4million incurred for the year ended July 31, 2003.

 

**Liquidityand Capital Resources**

 

        The Company’s primary sources ofliquidity are cash provided by operations and borrowings under its revolvingcredit facility. Net working capital as of July 31, 2005 was $20.2 millioncompared to $16.6 million as of July 31, 2004.

 

        On June 30, 2005, theCompany entered into various agreements with CoBank. The agreements include aMaster Loan Agreement, a Statused Revolving Credit Supplement, a Non-RevolvingCredit Supplement, and a Multiple Advance Term Loan Supplement. Primo Piatto,Inc., a wholly-owned subsidiary of the Company, also entered into a ContinuingGuarantee Agreement and a Security Agreement with CoBank on June 30, 2005.

 

        The Company has a revolving creditfacility with CoBank under which it may borrow an aggregate principal amountnot to exceed, at any one time outstanding, the lesser of $25.0 million or aborrowing base established by CoBank based upon the Company’s accountsreceivable and inventory amount. The primary purpose of the revolving creditfacility is to finance inventory and receivables. The revolving credit facilityallows for both variable and fixed interest rate options and extends throughMay 31, 2006. The balance outstanding under line of credit arrangements was$10.0 million and $12.2 million as of July 31, 2005 and 2004, respectively.$15.0 million was available for borrowing as of July 31, 2005.

 

        Under the term loanfacility with CoBank, the Company may borrow an aggregate principal amount ofup to $19 million through May 1, 2006. The primary purpose of the term loanfacility is to finance the capital project currently in process at the NewHope, Minnesota facility. The term loan facility allows for both variable andfixed interest rate options, requires minimum principal payments beginningAugust 20, 2006, and matures May 20, 2011. The balance outstanding under theterm loan was $9.1 million as of July 31, 2005.

 

 

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        The Master Loan Agreementwith CoBank contains certain restrictive covenants including, but not limitedto, financial covenants which require the Company to maintain, at the end ofeach of the Company’s fiscal quarters, a minimum current ratio of 1.20 to 1.0,a maximum total debt to earnings before interest, taxes, depreciation andamortization (“EBITDA”)  of 4.25 to 1.0,a minimum fixed charge ratio of 1.15 to 1.0, and a minimum tangible net worthlevel of at least $40 million adjusted for subsequent earnings and capitalcontributions.

 

        The Company’s long-term financing isalso provided through secured notes held by institutional investors. The NotePurchase Agreement (as amended) with the institutional investors requires theCompany to maintain the following: (a) consolidated net worth of not less thanthe sum of (1) $27,000,000 plus (2) an aggregate amount equal to 30% ofconsolidated net income for each completed fiscal year beginning with thefiscal year ended July 31, 1998, (b) a trailing twelve month ratio ofconsolidated cash flow to consolidated fixed charges of not less than 2.0 to1.0 at the end of each fiscal quarter, and (c) a ratio of consolidated fundeddebt to consolidated cash flow ratio not to exceed 3.0 to 1.0 determined at theend of each fiscal quarter for the immediately preceding four fiscal quarters.The Notes (as amended) require the rate of interest on the unpaid balance beincreased by one percent at any time that either (a) the ratio of the Company’sconsolidated funded debt to consolidated cash flow is greater than 3.0 to 1.0as of the end of each fiscal quarter for the immediately preceding four fiscalquarters or (b) the Securities Valuation Office of the National Association ofInsurance Commissioners has not assigned a designation category of “1” or “2”to the Notes.

 

        The Company was in compliance with alldebt covenants as of July 31, 2005 and the date of this filing.

 

        Netcash from operations totaled $12.7 million and $10.6 million for the yearsended July 31, 2005 and 2004, respectively. Net cash used for operationstotaled $3.2 million for the year ended July 31, 2003. The $2.1 millionnet increase from fiscal year 2004 to 2005 was attributable to a $2.2 millionincrease in net income and $5.4 million of accrued promotional costs applied tomarketing prepayments related to U.S. Foodservice, offset partially by anincrease in inventories. In March 2005, the Company entered into an agreementwith U.S. Foodservice which finalized the economic terms and conditionsgoverning the purchase of dry pasta products by U.S. Foodservice from theCompany. The agreement includes provisions to apply accrued promotional amountsto marketing prepayments which the Company anticipates will lessen the time torecover the unamortized portion of these marketing prepayments made to U.S.Foodservice. The agreement also eliminated the Company’s right to be theexclusive supplier of dry pasta products to U.S. Foodservice and does notprovide for minimum purchase commitments by U.S. Foodservice. The increase ininventories primarily related to inventory build-up during the latter portionof 2005 to allow for reduced pasta production volumes while the productionupgrade project at the New Hope, Minnesota manufacturing facility is in process.The $13.8 million increase from fiscal 2003to fiscal year 2004 was mainly driven by reductions in inventory and lowerpayments for long-term marketing costs offset by increases in tradereceivables.

 

        Net cash used for investing activitiestotaled $16.0 million, $4.8 million, and $0.4 million for the years ended July31, 2005, 2004 and 2003, respectively. The $11.2 million increase in net cashused for investing activities for fiscal year 2005 when compared to last yearrelated to increased fixed asset expenditures in conjunction with the New Hopeproduction upgrade project and increased investments in DNA Dreamfields. TheCompany is currently undertaking a $15.0 million capital project at its NewHope facility to better balance its pasta production capabilities and improveoperating costs. As of July 31, 2005, the Company had expended $6.7 million inconjunction with this project, and had entered into additional commitments topurchase pasta equipment totaling $4.4 million related to the New Hope project.The Company made aggregate investments in DNA Dreamfields Company, LLC totaling$7.0 million and $2.5 million during fiscal years 2005 and 2004, respectively.The Company redeemed short-term investments of $2.0 million during fiscal 2003which were previously restricted (See Note 14 — Related Party Transactions tothe consolidated financial statements).

 

        Net cash from financing activitiestotaled $2.9 million and $0.7 million for the years ended July 31, 2005 and2003.  Net cash used for financing activitiestotaled $5.3 million for the year endedJuly 31, 2004. The $2.9 million of net cash from financing activities for theyear ended July 31, 2005 included $9.1 million in borrowings under the CoBanksecured term loan facility to finance the New Hope production upgrade projectand investments in DNA Dreamfields and $7.2 million for scheduled debtprincipal payments. The $5.3 million of net cash used 

 

 

20

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forfinancing activities for the year ended July 31, 2004 related primarily toprincipal payments on long-term debt offset by net proceeds of $4.5 millionreceived upon the issuance of common stock to MVC Capital, Inc.  TheCompany paid $1.8 million for the repurchase of stock during the year ended July31, 2003 (See Note 14 — Related Party Transactions to the consolidatedfinancial statements). The remaining cash used for the fiscal year 2003 relatedto debt principal payments offset by net borrowings under the Company’srevolving credit facility.

 

        TheCompany increased its economic ownership in DNA Dreamfields from 24% to 30%effective November 2004, and to 47% effective May 2005. In connectionwith the latest investment in DNA Dreamfields, the Company and the othermember/owners of DNA Dreamfields also entered into an Amended and Restated DNADreamfields Company, LLC Operating Agreement, under which the Company was namedas the “Managing Member” of DNA Dreamfields.  As such, the Company hasauthority to make all decisions with respect to DNA Dreamfields, its business,assets and operations that do not expressly require either a unanimous vote ofthe member/owners of DNA Dreamfields or a “Super Majority” vote of the holdersof 75% of the outstanding Membership Units in DNA Dreamfields.

 

        The Company also entered into a “2005Line of Credit Loan Agreement” with DNA Dreamfields in the fourth quarter offiscal year 2005.  Under that Agreement, the Company has agreed to loan upto $5,000,000 to DNA Dreamfields, with DNA Dreamfields able to repay andreborrow amounts under the Line of Credit Loan Agreement from time totime.  Interest on amounts outstanding under the Line of Credit LoanAgreement will accrue from the date of any advance at a variable rate rangingfrom a high of the then-current LIBOR thirty day rate plus 8.0% per annum to alow of the then-current LIBOR thirty day rate plus 5.0% per annum based on theadjusted income of DNA Dreamfields.  Interest will be payable on a monthlybasis, but payments of outstanding principal amounts will not begin until theearlier of ten months after the date of the first advance under the Line ofCredit Loan Agreement or the date on which the principal amount outstandingequals the maximum loan amount of $5.0 million.  Once DNA Dreamfields isobligated to commence payments of principal, the amounts due to the Company ona monthly basis will equal DNA Dreamfields monthly net income (as determined inaccordance with generally accepted accounting principles) reduced by any cashor other reserves established by DNA upon the decision of the Company as themanaging member of DNA Dreamfields.  The Line of Credit Loan Agreementmatures on May 31, 2010.  DNA Dreamfields is also required to complywith certain financial covenants under the Line of Credit Loan Agreement. Tosecure DNA Dreamfield’s obligations under the 2005 Line of Credit LoanAgreement, the member/owners of DNA Dreamfields other than the Company havepledged their Membership Units in DNA Dreamfields to the Company pursuant to a “LLCUnit Pledge Agreement”.

 

        The following table summarizes theCompany’s contractual obligations as of July 31, 2005 (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              |       | $          | 30,156     |            | $          | 4,771         |       | $             | 23,385     |          | $          | 2,000 |   | $ | — |   |
| Durum purchase obligations  |       | 6,785      |       | 6,785           |       | —        |       | —        |       | —        |       |
| Warehouse obligations       |       | 5,119      |       | 1,881           |       | 3,238         |       | —        |       | —        |       |
| Operating leases            |       | 2,483      |       | 1,177           |       | 1,220         |       | 86            |       | —        |       |
|                        |       |       |       |            |       |          |       |          |       |          |       |
|                        |       | $          | 44,543     |            | $          | 14,614        |       | $             | 27,843     |          | $          | 2,086 |   | $ | — |   |
|                             |            |            |            |                 |            |               |            |               |            |               |            |  |  |  |  |  |  |  |  |  |

 

        The Companyforward contracts for a certain portion of its future durum wheat requirements.At July 31, 2005, the Company had outstanding commitments for grain purchasestotaling $6.8 million related to forward purchase contracts. These contractsare set price contracts to deliver grain to the Company’s mill, and are notderivative in nature as they have no net settlement provision and are nottransferable.

 

        Pursuant to certain warehouse agreements,the Company is obligated to minimum monthly storage and handling amountstotaling $1,881,000, $1,701,000 and $1,537,000 for the years endingJuly 31, 2006, 2007 and 2008, respectively.

 

 

21

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        Management believes that net cash to beprovided by operating activities, along with amounts available under its lineof credit and term loan facilities, will be sufficient to meet the Company’sexpected capital and liquidity requirements for the foreseeable future.

 

##### ***Recently Issued Accounting Standards***

 

        The FASB issued SFAS No. 123(R), “Share-BasedPayment” in December 2004. SFAS No. 123(R) is a revision of SFAS No. 123, “Accountingfor Stock Based Compensation” and is effective for fiscal quarters beginning afterJune 15, 2005. SFAS No. 123(R) requires the cost of share-based payments toemployees, including grants of employee stock options, to be measured based ongrant-date fair values. That cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award,usually the vesting period. SFAS No. 123(R) will become effective for theCompany beginning with its first fiscal quarter 2006. The Company does notexpect this Statement to have a material impact on its financial statementsupon adoption. However, future employee stock option grants may have a materialimpact on the Company’s financial statements as a result of this statement.

 

        The FASB issued SFAS No. 151, “InventoryCosts, an amendment of ARB 43, Chapter 4” in November 2004. This Statementamends the guidance in ARB No. 43, Chapter 4, “Inventory  Pricing,” to clarify the accounting forabnormal amounts of idle facility expense, freight, handling costs, and wastedmaterial (spoilage) so as to require such costs to be treated as current periodcharges. Further, this Statement requires that the allocation of fixed overheadcosts to the inventoriable production costs be based on the normal capacity ofthe production facilities.  Theprovisions of this Statement are effective for inventory costs incurred duringfiscal years beginning after June 15, 2005 and will become effective for theCompany beginning with its first fiscal quarter 2006. The Company does notexpect this Statement to have a material impact on its financial statementsupon adoption. However, future changes in the Company’s production or logisticscould have a material impact on the Company’s financial statements as a resultof this statement.

 

 

## **ITEM 7A. QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

        Market risk is the risk ofloss to future earnings, to fair values or to future cash flows that may resultfrom changes in the price of a financial instrument. The value of a financialinstrument may change as a result of changes in interest rates, commodityprices, exchange rates, equity prices and other market changes. Market risk isattributed to all market-risk sensitive financial instruments, includinglong-term debt.

 

        The Company forwardcontracts for a certain portion of its future durum wheat requirements. Thesecontracts are set price contracts to deliver grain to the Company’s mill, andare not derivative in nature as they have no net settlement provision and arenot transferable. The Company does not believe it is subject to any materialmarket risk exposure with respect to interest rates, commodity prices, exchangerates, equity prices, or other market changes that would require disclosureunder this item.

 

 

22

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**ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF**

**DAKOTA GROWERS PASTA COMPANY, INC.**

 
|                                                             | **PAGE** |
|------------------------------------------------------------------|----------|
|                                                             |     |
| Report of Independent  Registered Public Accounting Firm         | 24       |
|                                                             |     |
| Consolidated Balance  Sheets                                     | 25       |
|                                                             |     |
| Consolidated Statements of  Operations                           | 27       |
|                                                             |     |
| Consolidated Statements of  Changes in Stockholders’ Equity | 28       |
|                                                             |     |
| Consolidated Statements of  Cash Flows                           | 29       |
|                                                             |     |
| Notes to Consolidated  Financial Statements                      | 31       |

 

 

 

23

----

 

 

 

**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

** **

 

The Audit Committee

Dakota GrowersPasta Company, Inc.

Carrington, North Dakota

 

 

We have audited the accompanying consolidatedbalance sheets of Dakota Growers PastaCompany, Inc. (a North Dakota corporation) as of July 31, 2005 and 2004,and the related consolidated statements of operations, changes in stockholders’equity and cash flows for the years ended July 31, 2005, 2004 and 2003. Theseconsolidated financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these consolidated financialstatements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the consolidated financial statements are free ofmaterial misstatement. An audit includes examining, on a test basis, evidencesupporting the amounts and disclosures in the consolidated financialstatements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallconsolidated financial statement presentation. We believe that our auditsprovide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Dakota GrowersPasta Company, Inc.****as of July 31,2005 and 2004, and the results of their operations and their cash flows for theyears ended July 31, 2005, 2004 and 2003, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

 

/s/ Eide Bailly LLP

 

Fargo, North Dakota

September 1, 2005

 

 

 

 

24

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATED BALANCE SHEETS**

**JULY 31, 2005 AND 2004**

**(In Thousands, Except ShareInformation)**

 

 
| ** **                                                                                                             | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| **ASSETS**                                                                                                             |       |     |       |     |       |
|                                                                                                                   |       |     |       |     |       |
| CURRENT ASSETS                                                                                                         |       |     |       |     |       |
| Cash and cash equivalents                                                                                              |       | $        | 229        |     | $          | 589 |   |
|                                                                                                                   |       |     |       |     |       |
| Trade accounts receivable, less allowance for cash discounts and  doubtful accounts of $1,507 and $1,209, respectively |       | 16,188   |       | 14,043   |       |
|                                                                                                                   |       |     |       |     |       |
| Other receivables                                                                                                      |       | 411      |       | 1,002    |       |
|                                                                                                                   |       |     |       |     |       |
| Inventories                                                                                                            |       | 28,102   |       | 25,211   |       |
|                                                                                                                   |       |     |       |     |       |
| Prepaid expenses                                                                                                       |       | 2,578    |       | 3,994    |       |
|                                                                                                                   |       |     |       |     |       |
| Deferred income taxes                                                                                                  |       | 955      |       | 937      |       |
|                                                                                                                   |       |     |       |     |       |
| Total current assets                                                                                                   |       | 48,463   |       | 45,776   |       |
|                                                                                                                   |       |     |       |     |       |
| PROPERTY AND EQUIPMENT                                                                                                 |       |     |       |     |       |
| In service                                                                                                             |       | 111,394  |       | 109,987  |       |
| Construction in progress                                                                                               |       | 7,350    |       | 18       |       |
|                                                                                                                   |       | 118,744  |       | 110,005  |       |
| Less accumulated depreciation                                                                                          |       | (52,286  | )          | (46,980  | )          |
|                                                                                                                   |       |     |       |     |       |
| Net property and equipment                                                                                             |       | 66,458   |       | 63,025   |       |
|                                                                                                                   |       |     |       |     |       |
| INVESTMENT IN JOINT  VENTURE                                                                                           |       | —   |       | 1,746    |       |
|                                                                                                                   |       |     |       |     |       |
| INVESTMENT IN COOPERATIVE  BANK                                                                                        |       | 2,054    |       | 2,343    |       |
|                                                                                                                   |       |     |       |     |       |
| GOODWILL                                                                                                               |       | 16,654   |       | —   |       |
|                                                                                                                   |       |     |       |     |       |
| OTHER ASSETS                                                                                                           |       | 1,501    |       | 6,525    |       |
|                                                                                                                   |       |     |       |     |       |
|                                                                                                                   |       | $        | 135,130    |     | $          | 119,415 |   |

 

 

 

25

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| ** **                                                                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                  |       |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                        |       |     |       |     |       |
|                                                                                                                                                  |       |     |       |     |       |
| CURRENT LIABILITIES                                                                                                                                   |       |     |       |     |       |
| Notes payable                                                                                                                                         |       | $        | 10,000     |     | $          | 12,200 |   |
| Current portion of long-term debt                                                                                                                     |       | 4,771    |       | 7,176    |       |
| Accounts payable                                                                                                                                      |       | 4,197    |       | 4,969    |       |
| Excess outstanding checks over cash on deposit                                                                                                        |       | 3,110    |       | —   |       |
| Accrued liabilities                                                                                                                                   |       | 6,229    |       | 4,845    |       |
|                                                                                                                                                  |       |     |       |     |       |
| Total current liabilities                                                                                                                             |       | 28,307   |       | 29,190   |       |
|                                                                                                                                                  |       |     |       |     |       |
| COMMITMENTS AND  CONTINGENCIES                                                                                                                        |       | —   |       | —   |       |
| LONG-TERM DEBT, net of  current portion                                                                                                               |       | 25,385   |       | 21,087   |       |
| DEFERRED INCOME TAXES                                                                                                                                 |       | 11,419   |       | 10,363   |       |
| OTHER LIABILITIES                                                                                                                                     |       | 85       |       | 136      |       |
| MANDATORILY REDEEMABLE  PREFERRED STOCK                                                                                                               |       |     |       |     |       |
| Series A, 6% cumulative, $100 par value, 533 shares authorized, 67  and 200 shares issued and outstanding as of July 31, 2005 and 2004,  respectively |       | 7        |       | 20       |       |
|                                                                                                                                                  |       |     |       |     |       |
| Total liabilities                                                                                                                                     |       | 65,203   |       | 60,796   |       |
|                                                                                                                                                  |       |     |       |     |       |
| NONCONTROLLING INTERESTS                                                                                                                              |       | 8,795    |       | —   |       |
|                                                                                                                                                  |       |     |       |     |       |
| 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  shares issued and outstanding                                                 |       | 132      |       | 132      |       |
| Additional paid-in capital                                                                                                                            |       | 62,807   |       | 62,807   |       |
| Accumulated deficit                                                                                                                                   |       | (1,920   | )          | (4,433   | )          |
|                                                                                                                                                  |       |     |       |     |       |
| Total stockholders’ equity                                                                                                                       |       | 61,132   |       | 58,619   |       |
|                                                                                                                                                  |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                                                                       |       | $        | 135,130    |     | $          | 119,415 |   |

 

 

See Notes to ConsolidatedFinancial Statements

 

 

 

26

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATED STATEMENTS OF OPERATIONS**

###### **YEARS ENDED JULY 31, 2005, 2004 AND 2003**

**(In Thousands,Except Per Share Amounts)**

 

 

 
| ** **                                                                                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Net revenues (net of discounts and allowances of $24,184, $21,188 and  $16,706 for 2005, 2004 and 2003, respectively) |       | $        | 155,619    |     | $          | 144,679  |       | $ | 136,806 |   |
|                                                                                                                  |       |     |       |     |       |     |       |
| Cost of goods sold                                                                                                    |       | 136,179  |       | 132,245  |       | 125,160  |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Gross profit                                                                                                          |       | 19,440   |       | 12,434   |       | 11,646   |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Marketing, general and  administrative expenses                                                                       |       | 16,507   |       | 8,345    |       | 9,816    |       |
| Loss on asset impairment                                                                                              |       | —   |       | 704      |       | —   |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Operating income                                                                                                      |       | 2,933    |       | 3,385    |       | 1,830    |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Other income (expense)                                                                                                |       |     |       |     |       |     |       |
| Interest expense, net                                                                                                 |       | (2,283   | )          | (2,762   | )          | (3,414   | )          |
| Net loss allocated from joint venture                                                                                 |       | —   |       | (622     | )          | —   |       |
| Other income, net                                                                                                     |       | 466      |       | 549      |       | 1,050    |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Income (loss) before noncontrolling interests and income taxes                                                        |       | 1,116    |       | 550      |       | (534     | )          |
|                                                                                                                  |       |     |       |     |       |     |       |
| Noncontrolling interests                                                                                              |       | 3,003    |       | —   |       | —   |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Income (loss) before  income taxes                                                                                    |       | 4,119    |       | 550      |       | (534     | )          |
|                                                                                                                  |       |     |       |     |       |     |       |
| Income tax expense  (benefit)                                                                                         |       | 1,606    |       | 214      |       | (105     | )          |
|                                                                                                                  |       |     |       |     |       |     |       |
| Net income (loss)                                                                                                     |       | 2,513    |       | 336      |       | (429     | )          |
| Dividends on preferred  stock                                                                                         |       | —   |       | —   |       | 3        |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Net earnings (loss) on  common stock                                                                                  |       | $        | 2,513      |     | $          | 336      |       | $ | (432 | ) |
|                                                                                                                  |       |     |       |     |       |     |       |
| Net earnings (loss) per  common share                                                                                 |       |     |       |     |       |     |       |
| Basic                                                                                                                 |       | $        | 0.19       |     | $          | 0.03     |       | $ | (0.03 | ) |
|                                                                                                                  |       |     |       |     |       |     |       |
| Diluted                                                                                                               |       | $        | 0.19       |     | $          | 0.03     |       | $ | (0.03 | ) |
|                                                                                                                  |       |     |       |     |       |     |       |
| Weighted average common  shares outstanding                                                                           |       |     |       |     |       |     |       |
| Basic                                                                                                                 |       | 13,169   |       | 12,265   |       | 12,355   |       |
|                                                                                                                  |       |     |       |     |       |     |       |
| Diluted                                                                                                               |       | 13,549   |       | 12,625   |       | 12,609   |       |

 

 

See Notes to ConsolidatedFinancial Statements

 

 

27

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’EQUITY**

###### **YEARS ENDED JULY 31, 2005, 2004 AND 2003**

**(InThousands)**

 

 
| ** **                                   | ** ** | **Series D  Delivery** | ** ** | ** **        | ** ** | **Additional** | ** ** | ** **               | ** ** | ** **      | ** ** | ** ** | ** ** |
|----------------------------------------------|------------|------------------------|------------|-------------------|------------|----------------|------------|--------------------------|------------|-----------------|------------|------------|------------|
| ** **                                   | ** ** | **Preferred  Stock**   | ** ** | **Common  Stock** | ** ** | **Paid-in**    | ** ** | **Treasury  Stock** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                   | ** ** | **Shares**             | ** ** | **Amount**        | ** ** | **Shares**     | ** ** | **Amount**               | ** ** | **Capital**     | ** ** | **Shares** | ** ** | **Amount** | ** ** | **Deficit** | ** ** | **Total** | ** ** |
|                                         |       |                   |       |              |       |           |       |                     |       |            |       |       |       |   |   |   |   |   |   |
| BALANCE, JULY 31, 2002                       |       | 11,275                 |       | $                 | 113        |           | 12,555     |                     | $          | 126             |       | $          | 60,188     |   | — |   | $ | — |   | $ | (4,337 | ) | $ | 56,090 |   |
| Preferred dividends  declared                |       | —                 |       | —            |       | —         |       | —                   |       | —          |       | —     |       | — |   | (3 | ) | (3 | ) |
| Purchase of  treasury stock                  |       | —                 |       | —            |       | —         |       | —                   |       | —          |       | 294        |       | (1,840 | ) | — |   | (1,840 | ) |
| Net loss for the  year ended July 31, 2003   |       | —                 |       | —            |       | —         |       | —                   |       | —          |       | —     |       | — |   | (429 | ) | (429 | ) |
| BALANCE, JULY 31, 2003                       |       | 11,275                 |       | $                 | 113        |           | 12,555     |                     | $          | 126             |       | $          | 60,188     |   | 294 |   | $ | (1,840 | ) | $ | (4,769 | ) | $ | 53,818 |   |
| Issuance of  common stock                    |       | —                 |       | —            |       | 614            |       | 6                        |       | 3,154           |       | (294       | )          | 1,840 |   | — |   | 5,000 |   |
| Costs associated  with issuing common stock  |       | —                 |       | —            |       | —         |       | —                   |       | (535            | )          | —     |       | — |   | — |   | (535 | ) |
| Net income for  the year ended July 31, 2004 |       | —                 |       | —            |       | —         |       | —                   |       | —          |       | —     |       | — |   | 336 |   | 336 |   |
| BALANCE, JULY 31, 2004                       |       | 11,275                 |       | $                 | 113        |           | 13,169     |                     | $          | 132             |       | $          | 62,807     |   | — |   | $ | — |   | $ | (4,433 | ) | $ | 58,619 |   |
| Net income for  the year ended July 31, 2005 |       | —                 |       | —            |       | —         |       | —                   |       | —          |       | —     |       | — |   | 2,513 |   | 2,513 |   |
| BALANCE, JULY 31, 2005                       |       | 11,275                 |       | $                 | 113        |           | 13,169     |                     | $          | 132             |       | $          | 62,807     |   | — |   | $ | — |   | $ | (1,920 | ) | $ | 61,132 |   |
|                                              |            |                        |            |                   |            |                |            |                          |            |                 |            |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements

 

 

28

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARS ENDED JULY 31, 2005, 2004AND 2003**

**(In Thousands)**

 
| ** **                                                                                    | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                          |       |     |       |     |       |     |       |
| OPERATING ACTIVITIES                                                                          |       |     |       |     |       |     |       |
| Net income (loss)                                                                             |       | $        | 2,513      |     | $          | 336      |       | $ | (429 | ) |
| Adjustments to reconcile net income (loss) to net  cash from (used for) operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                                 |       | 7,675    |       | 8,350    |       | 9,249    |       |
| Undistributed patronage capital from cooperatives                                             |       | (46      | )          | (51      | )          | (63      | )          |
| (Gain) loss on disposition of property, equipment and other assets                            |       | (38      | )          | (40      | )          | 13       |       |
| Loss on asset impairment                                                                      |       | —   |       | 704      |       | —   |       |
| Net loss allocated from joint venture under equity method                                     |       | 914      |       | 622      |       | —   |       |
| Deferred income taxes                                                                         |       | 1,038    |       | 150      |       | (91      | )          |
| Payments for long-term marketing costs                                                        |       | —   |       | (125     | )          | (5,000   | )          |
| Accrued promotional costs applied to marketing prepayments                                    |       | 5,442    |       | —   |       | —   |       |
| Noncontrolling interests                                                                      |       | (219     | )          | —   |       | —   |       |
| Changes in assets and liabilities                                                             |       |     |       |     |       |     |       |
| Trade receivables                                                                             |       | (2,145   | )          | (4,191   | )          | 6,652    |       |
| Other receivables                                                                             |       | 626      |       | 223      |       | (865     | )          |
| Inventories                                                                                   |       | (2,891   | )          | 2,871    |       | (8,446   | )          |
| Prepaid expenses                                                                              |       | (508     | )          | 156      |       | (790     | )          |
| Other assets                                                                                  |       | (36      | )          | 110      |       | 10       |       |
| Accounts payable                                                                              |       | (899     | )          | 1,176    |       | (2,678   | )          |
| Other accrued liabilities                                                                     |       | 1,273    |       | 329      |       | (744     | )          |
|                                                                                          |       |     |       |     |       |     |       |
| NET CASH FROM (USED FOR) OPERATING  ACTIVITIES                                                |       | 12,699   |       | 10,620   |       | (3,182   | )          |
|                                                                                          |       |     |       |     |       |     |       |
| INVESTING ACTIVITIES                                                                          |       |     |       |     |       |     |       |
| Redemption of short term investments                                                          |       | —   |       | —   |       | 1,974    |       |
| Purchases of property and equipment                                                           |       | (8,803   | )          | (2,169   | )          | (2,006   | )          |
| Proceeds from sale of property, equipment and other assets                                    |       | —   |       | 8        |       | 3        |       |
| Investments in joint venture                                                                  |       | (2,970   | )          | (2,492   | )          | —   |       |
| Distributions from joint venture                                                              |       | —   |       | 124      |       | —   |       |
| Proceeds from cooperative bank equity retirements                                             |       | 335      |       | 121      |       | —   |       |
| Acquisition of controlling interest in joint venture, net of cash  acquired                   |       | (3,771   | )          | —   |       | —   |       |
| Payments for package design costs                                                             |       | (773     | )          | (345     | )          | (390     | )          |
|                                                                                          |       |     |       |     |       |     |       |
| NET CASH FROM (USED FOR) INVESTING  ACTIVITIES                                                |       | (15,982  | )          | (4,753   | )          | (419     | )          |
|                                                                                               |            |          |            |          |            |          |            |  |  |  |

 

 

 

29

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|                                                                    |   | **2005** | ** ** | **2004** | ** ** | **2003** |   |
|-------------------------------------------------------------------------|--------|----------|------------|----------|------------|----------|--------|
| FINANCING ACTIVITIES                                                    |   |     |       |     |       |     |   |
| Net change in excess outstanding checks over cash on deposit            |   | 3,110    |       | (2,219   | )          | 2,219    |   |
| Net change in short-term notes payable                                  |   | (2,200   | )          | 2,495    |       | 9,705    |   |
| Payments on long-term debt                                              |   | (7,176   | )          | (10,011  | )          | (9,320   | )      |
| Proceeds from long-term debt                                            |   | 9,069    |       | —   |       | —   |   |
| Preferred stock retirements                                             |   | (13      | )          | (13      | )          | (21      | )      |
| Investments by noncontrolling interests                                 |   | 133      |       | —   |       | —   |   |
| Dividends paid on preferred stock                                       |   | —   |       | —   |       | (3       | )      |
| Issuance of common stock                                                |   | —   |       | 5,000    |       | —   |   |
| Costs associated with issuing common stock                              |   | —   |       | (535     | )          | —   |   |
| Purchase of treasury stock                                              |   | —   |       | —   |       | (1,840   | )      |
|                                                                    |   |     |       |     |       |     |   |
| NET CASH FROM (USED FOR) FINANCING  ACTIVITIES                          |   | 2,923    |       | (5,283   | )          | 740      |   |
|                                                                    |   |     |       |     |       |     |   |
| NET CHANGE IN CASH AND  CASH EQUIVALENTS                                |   | (360     | )          | 584      |       | (2,861   | )      |
|                                                                    |   |     |       |     |       |     |   |
| CASH AND CASH EQUIVALENTS,  BEGINNING OF YEAR                           |   | 589      |       | 5        |       | 2,866    |   |
|                                                                    |   |     |       |     |       |     |   |
| CASH AND CASH EQUIVALENTS,  END OF YEAR                                 |   | $        | 229        |     | $          | 589      |   | $ | 5 |   |
|                                                                    |   |     |       |     |       |     |   |
| SUPPLEMENTAL DISCLOSURES  OF CASH FLOW INFORMATION                      |   |     |       |     |       |     |   |
|                                                                    |   |     |       |     |       |     |   |
| Cash payments for                                                       |   |     |       |     |       |     |   |
| Interest (net of amounts capitalized)                                   |   | $        | 2,363      |     | $          | 2,932    |   | $ | 3,544 |   |
|                                                                    |   |     |       |     |       |     |   |
| Income taxes (refunded)                                                 |   | $        | 79         |     | $          | (842     | )      | $ | 1,193 |   |
|                                                                    |   |     |       |     |       |     |   |
| SUPPLEMENTAL DISCLOSURES  OF NONCASH INVESTING AND FINANCING ACTIVITIES |   |     |       |     |       |     |   |
|                                                                    |   |     |       |     |       |     |   |
| Acquisition of controlling interest in joint venture:                   |   |     |       |     |       |     |   |
| Current assets less cash                                                |   | $        | 38         |     |       |     |   |   |
| Current liabilities                                                     |   | (238     | )          |     |       |     |   |
| Goodwill                                                                |   | 16,654   |       |     |       |     |   |
| Reported amount of previously held interests in joint venture           |   | (3,802   | )          |     |       |     |   |
| Noncontrolling interests                                                |   | (8,881   | )          |     |       |     |   |
|                                                                    |   |     |       |     |       |     |   |
|                                                                    |   | $        | 3,771      |     |       |     |   |   |
|                                                                         |        |          |            |          |            |          |        |  |  |  |  |  |  |

 

See Notes to ConsolidatedFinancial Statements

** **

 

30

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# **DAKOTA GROWERS PASTA COMPANY, INC.**

#### **NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2005, 2004AND 2003**

** **

**NOTE 1 -NATURE OF BUSINESS ANDSUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

*Conversion and Nature of Business*

 

Dakota Growers Pasta Company, Inc. (“Dakota Growers” or “the Company”)is a North Dakota corporation that operates milling and pasta manufacturingfacilities in Carrington, North Dakota. In addition, the Company’s wholly ownedsubsidiary, Primo Piatto, Inc. (“Primo Piatto”), a Minnesota corporation,operates pasta manufacturing facilities in New Hope, Minnesota.

 

*Principles of Consolidation*

 

The consolidated financial statements are comprised of the Company, itswholly-owned subsidiary Primo Piatto, Inc., and DNA Dreamfields Company, LLC (“DNADreamfields”), which the Company began to consolidate in fiscal year 2005. Allmaterial inter-company accounts and transactions have been eliminated in thepreparation of the consolidated financial statements.

 

The Company acquired an additional 17.25% ownership interest in DNADreamfields, effective May 1, 2005, resulting in an increase in theCompany’s ownership in DNA Dreamfields to 46.7 %. As a result of the ownershipincrease and changes in the DNA Dreamfields operating agreement and othercontractual agreements, the Company reevaluated whether DNA Dreamfields was avariable interest entity under FASB Interpretation No. 46(R), “Consolidation ofVariable Interest Entities,” (FIN 46(R)). The Company determined that DNADreamfields was a variable interest entity and that the Company was the primarybeneficiary. Therefore, effective May 1, 2005, the Company began toinclude DNA Dreamfields in its consolidated financial statements.  Thefinancial statements for prior fiscal years have not been restated andtherefore do not include consolidated data pertaining to DNA Dreamfields. TheCompany has included consolidated amounts for DNA Dreamfields in the incomestatement for the year ending July 31, 2005. The Company had previouslyaccounted for its investment in and share of net earnings or losses of itsownership interest in DNA Dreamfields Company, LLC under the equity method.

 

*Estimates*

 

The preparation of consolidated financial statements in conformity withgenerally accepted accounting principles requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities atthe date of the consolidated financial statements and reported amounts ofrevenues and expenses during the reporting period. Actual results could differfrom those estimates.

 

*Reclassifications*

 

Reclassifications have been made to the financial statements as of July31, 2004 and for the years ended July 31, 2004 and 2003 to facilitatecomparability with the statements as of and for the year ended July 31, 2005.Such reclassifications have no effect on the net result of operations.

 

*Risks and Uncertainties*

 

The Company attempts to minimize the effects of durum wheat costfluctuations mainly through forward contracting and through agreements withcertain customers that provide for price adjustments based on raw material costchanges. Such efforts, while undertaken to attempt to minimize the risksassociated with increasing durum costs on profitability, may temporarilyprevent the Company from recognizing the benefits of declining durum prices.

 

31

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Most of the Company’s currently outstanding debt instruments have fixedinterest rates to maturity. If the Company’s operations require additional debtissuance, any changes in interest rates may have an impact on future results.

 

The Company’s cash balances are maintained in various bank depositaccounts. The deposit accounts may exceed federally insured limits at varioustimes throughout the year.

 

##### *Impairmentand Disposal of Long-Lived Assets*

 

The Company accounts for impairment ordisposal of long-lived assets in accordance with the provisions of Statement ofFinancial Accounting Standards (SFAS) No. 144, “Accounting for the Impairmentor Disposal of Long-Lived Assets.” SFAS No. 144 requires that long-lived assetsbe reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. Recoverability oflong-lived assets to be held and used is measured by a comparison of thecarrying amount of an asset to future net cash flows expected to be generatedby the asset. If such assets are considered to be impaired, the impairment tobe recognized is measured by the amount by which the carrying amount of theassets exceeds the fair value of the assets. Long-lived assets to be disposedof by sale are reported at the lower of the carrying amount or fair value lesscosts to sell, and will cease to be depreciated. SFAS No. 144 also requireslong-lived assets to be disposed of other than by sale to be considered as heldand used until disposed of, requiring the depreciable life to be adjusted as anaccounting change.

 

The Company recorded a loss on asset impairment of $704,000 during theyear ended July 31, 2004. The impairment loss related to certain pastaproduction equipment which was under a purchase option agreement that expiredin July 2004. Upon review, the Company determined the asset was impaired andadjusted to fair value which was estimated based on the current marketconditions for similar equipment.

 

##### *Goodwill*

 

In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,”the Company does not amortize goodwill. SFAS No. 142 requires that goodwill beevaluated for impairment at least annually or whenever events or changes incircumstances indicate that the carrying amount of an asset may not be fullyrecoverable. The Company used a discounted cash flow analysis in evaluatinggoodwill for impairment in fiscal year 2005 and determined that no impairmentcharge was necessary.

 

*Revenue Recognition*

 

Revenues are recognized when risk of loss transfers, which occurs whengoods are shipped. Pricing terms, including promotions and rebates, are finalat that time. Revenues include amounts billed for products as well as anyassociated shipping costs billed to deliver such products.

 

The Company provides allowances for annual promotional programs basedupon annual sales volumes. Revenues are presented net of discounts andallowances of $24,184,000, $21,188,000 and $16,706,000 for the years ended July31, 2005, 2004 and 2003, respectively.

 

*Cash and Cash Equivalents*

 

Cash and cash equivalents include cash on hand and in financialinstitutions, and investments with maturities of less than 90 days.

 

32

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*Trade Accounts Receivable and Major Customers*

 

The Company grants unsecured credit to certain customers who meet theCompany’s credit requirements. Trade accounts receivable are uncollateralizedcustomer obligations due under normal terms and are generally non-interestbearing. Payments on trade receivables are allocated to specific invoicesidentified on a customer’s remittance advice or, if unspecified, are generallyapplied to the earliest unpaid invoices. The carrying amount of the receivablesis reduced by an amount that reflects management’s best estimate of amountsthat will not be collected. Trade accounts receivable are presented net ofallowances for cash discounts and doubtful accounts, which totaled $1,507,000and $1,209,000 as of July 31, 2005 and 2004, respectively.

 

One customer accounted for 17% and 18% of accounts receivable as ofJuly 31, 2005 and 2004, respectively and 13%, 15% and 17% of net revenues forthe years ended July 31, 2005, 2004 and 2003, respectively.

 

The following summarizes balance and activityinformation related to the allowance for cash discounts and doubtful accounts(in thousands):

 
| ** **                                           | ** ** | **Balance**      | ** ** | **Charged to** | ** ** | **Deductions** | ** ** | **Balance** | ** ** |
|------------------------------------------------------|------------|------------------|------------|----------------|------------|----------------|------------|-------------|------------|
| ** **                                           | ** ** | **at Beginning** | ** ** | **Costs and**  | ** ** | **from**       | ** ** | **at End**  | ** ** |
| ** **                                           | ** ** | **of Year**      | ** ** | **Expenses**   | ** ** | **Allowance**  | ** ** | **of Year** | ** ** |
|                                                 |       |             |       |           |       |           |       |        |       |
| Allowance for cash  discounts:                       |       |             |       |           |       |           |       |        |       |
| Year ended July 31, 2005                             |       | $                | 159        |           | $          | 2,560          |       | $           | (2,562     | ) | $ | 157 |   |
| Year ended July 31, 2004                             |       | 126              |       | 2,334          |       | (2,301         | )          | 159         |       |
| Year ended July 31, 2003                             |       | 185              |       | 2,089          |       | (2,148         | )          | 126         |       |
|                                                 |       |             |       |           |       |           |       |        |       |
| Allowance for doubtful  accounts:                    |       |             |       |           |       |           |       |        |       |
| Year ended July 31, 2005                             |       | $                | 1,050      |           | $          | 399            |       | $           | (99        | ) | $ | 1,350 |   |
| Year ended July 31, 2004                             |       | 886              |       | 283            |       | (119           | )          | 1,050       |       |
| Year ended July 31, 2003                             |       | 607              |       | 281            |       | (2             | )          | 886         |       |
|                                                 |       |             |       |           |       |           |       |        |       |
| Allowance for cash  discounts and doubtful accounts: |       |             |       |           |       |           |       |        |       |
| Year ended July 31, 2005                             |       | $                | 1,209      |           | $          | 2,959          |       | $           | (2,661     | ) | $ | 1,507 |   |
| Year ended July 31, 2004                             |       | 1,012            |       | 2,617          |       | (2,420         | )          | 1,209       |       |
| Year ended July 31, 2003                             |       | 792              |       | 2,370          |       | (2,150         | )          | 1,012       |       |

 

*Inventories*

 

Inventories are stated at the lower of cost or market, determined on afirst-in, first-out (FIFO) basis, using product specific standard costs. Themajor components of inventories as of July 31, 2005 and 2004 are as follows (inthousands):

 
| ** **                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Finished goods               |       | $        | 20,840     |     | $          | 18,815 |   |
| Raw materials and  packaging |       | 7,262    |       | 6,396    |       |
|                         |       |     |       |     |       |
|                         |       | $        | 28,102     |     | $          | 25,211 |   |
|                              |            |          |            |          |            |  |  |  |

 

 

33

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*Concentration of Sources of Labor*

 

The Company’s total hourly and salaried workforce consists ofapproximately 409 employees, of which 29% are covered by collective bargainingagreements. Approximately 25% of the Company’s workforce is covered by acollective bargaining agreement expiring November 30, 2005.

 

*Property and Equipment*

 

Property and equipment are stated at cost. Expenditures for renewalsand improvements that significantly add to the productive capacity or extendthe useful life of an asset are capitalized. Expenditures for maintenance andrepairs are charged to expense as incurred. When depreciable properties areretired or sold, the cost and related accumulated depreciation are eliminatedfrom the accounts and the resultant gain or loss is reflected in income.Interest is capitalized on construction projects of higher cost and longerduration.

 

The initial acquisition of land by the Company was stated at theestimated fair value of the land at acquisition. Subsequent land acquisitionsare recorded at cost.

 

Depreciation is provided for over the estimated useful lives of theindividual assets using the straight-line method. The estimated useful livesused in the computation of depreciation expense range from 3 to 40 years.Depreciation expense totaled $5,357,000, $5,759,000 and $6,100,000 for theyears ended July 31, 2005, 2004 and 2003, respectively.

 

Details relative to property and equipment are asfollows (in thousands):

* *
| ** **                        | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Land and improvements             |       | $        | 2,934      |     | $          | 2,934 |   |
| Buildings                         |       | 22,713   |       | 22,713   |       |
| Equipment                         |       | 85,747   |       | 84,340   |       |
|                              |       |     |       |     |       |
| Property and equipment in service |       | 111,394  |       | 109,987  |       |
| Construction in progress          |       | 7,350    |       | 18       |       |
| Less accumulated depreciation     |       | (52,286  | )          | (46,980  | )          |
|                              |       |     |       |     |       |
|                              |       | $        | 66,458     |     | $          | 63,025 |   |
|                                   |            |          |            |          |            |  |  |  |  |

 

*Investmentin Cooperative Bank*

 

Investment in cooperative bank is stated at cost, plus unredeemedpatronage refunds received in the form of capital stock.

 

*Other Assets*

 

The Company capitalizes package design costs, which relate to certainthird party costs to design artwork and to produce die plates and negativesnecessary to manufacture and print packaging materials according to Company andcustomer specifications. These costs are amortized ratably over three to five yearperiods based on estimated useful life. Minor revisions are expensed asincurred. If a product design is discontinued or replaced prior to the end ofthe amortization period, the remaining unamortized balance is charged toexpense. Package design costs are presented net of accumulated amortizationtotaling $4,381,000 and $3,949,000 as of July 31, 2005 and 2004, respectively.

 

34

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Prepaid marketing costs relate to payments made to certain customerscovering contract terms and pricing for varying periods extending beyond oneyear. These costs are amortized in proportion to sales volumes over the term ofthe agreement.  In fiscal year 2005, theCompany entered into an agreement with U.S. Foodservice that includedprovisions to apply accrued promotional amounts to marketing prepayments, whichresulted in the significant decrease in prepaid marketing costs as of July 31,2005 when compared to July 31, 2004.

 

The breakdown of other assets, net of accumulated amortization, is asfollows (in thousands):

 
| ** **              | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------|------------|----------|------------|----------|------------|
|                    |       |     |       |     |       |
| Package design costs    |       | $        | 862        |     | $          | 522 |   |
| Prepaid marketing costs |       | 300      |       | 5,521    |       |
| Other                   |       | 339      |       | 482      |       |
|                    |       |     |       |     |       |
|                    |       | $        | 1,501      |     | $          | 6,525 |   |
|                         |            |          |            |          |            |  |  |  |  |

 

*Accrued Liabilities*

 

Accrued liabilities consist of the following (inthousands):

 
| ** **                | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Accrued promotional costs |       | $        | 2,752      |     | $          | 1,741 |   |
| Accrued interest          |       | 778      |       | 891      |       |
| Accrued freight           |       | 527      |       | 709      |       |
| Other                     |       | 2,172    |       | 1,504    |       |
|                      |       |     |       |     |       |
|                      |       | $        | 6,229      |     | $          | 4,845 |   |
|                           |            |          |            |          |            |  |  |  |

 

*Shipping and Handling Costs*

 

Shipping and handling costs are included incost of goods sold upon shipment of the Company’s product to itscustomers.

 

*Advertising*

 

Costs of advertising are expensed as incurred. Advertising expensesincluded in the consolidated income statement totaled $5,062,000 (primarilyrelated to consumer advertising for DreamfieldsTM  pasta products) for the year ended July31, 2005, and were immaterial for the years ended July 31, 2004 and 2003.

 

*Research and Development*

 

Research and development costs are expensed as incurred. Research anddevelopment expenses included in the consolidated income statement for the yearended July 31, 2005 totaled $1,059,000, including $551,000 incurred by DNADreamfields which the Company began to consolidate in fiscal year 2005.  Research and development expenses totaled$152,000 and $109,000 for the years ended July 31, 2004 and 2003, respectively.

 

 

35

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*Interest Expense, Net*

 

The Company earns patronage refunds from its patronage-based debtissued through cooperative banks based on its share of the net interest incomeearned by the banks. These patronage refunds received are applied againstinterest expense.

 

*Income Taxes*

 

Income taxes are provided for the tax effects of transactions reportedin the financial statements and consist of taxes currently due plus deferredtaxes. Deferred tax assets and liabilities are determined based on differencesbetween the financial reporting and tax bases of assets and liabilities, andare measured using the enacted tax rates expected to apply when the differencesare expected to reverse. Deferred tax assets and liabilities represent thefuture tax return consequences of those differences, which will either betaxable or deductible when the assets and liabilities are recovered or settled.

 

*Stock Options*

 

The Company has elected to follow Accounting Principles Board Opinion(APB) No. 25, “Accounting for Stock Issued to Employees” and relatedinterpretations in accounting for its employee stock options and has adopted thepro forma disclosure requirements under SFAS No. 123, “Accounting forStock-Based Compensation.” The Company has not recognized any compensationexpense under APB No. 25 upon the granting or exercise of stock options becausethe exercise price is equal to or greater than the market price of theunderlying stock on the date of grant.

 

*Earnings per Share*

 

Basic Earnings per Share (EPS) is calculated by dividing net earningson common stock by the weighted average number of common shares effective andoutstanding during the period. Diluted EPS includes the effect of allpotentially dilutive securities, such as options and convertible preferredstock.

 

Dilutive securities, consisting of stock options and convertiblepreferred stock, included in the calculation of diluted weighted average commonshares totaled 380,000 shares, 360,000 shares and 254,000 shares for the yearsended July 31, 2005, 2004 and 2003, respectively. As there is currently noestablished public trading market for the Company’s common stock, for purposesof calculating Diluted EPS the Company has assumed the proceeds from theexercise of stock options would reduce debt and, thus, interest expense.

##### * *

##### *RecentlyIssued Accounting Standards*

##### * *

The FASB issued SFAS No. 123(R), “Share-Based Payment” in December2004. SFAS No. 123(R) is a revision of SFAS No. 123, “Accounting for StockBased Compensation” and is effective for fiscal quarters beginning after June15, 2005. SFAS No. 123(R) requires the cost of share-based payments toemployees, including grants of employee stock options, to be measured based ongrant-date fair values. That cost will be recognized over the period duringwhich an employee is required to provide service in exchange for the award,usually the vesting period. SFAS No. 123(R) will become effective for theCompany beginning with its first fiscal quarter 2006. The Company does notexpect this Statement to have a material impact on its financial statementsupon adoption. However, future employee stock option grants may have a materialimpact on the Company’s financial statements as a result of this statement.

 

The FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB 43,Chapter 4” in November 2004. This Statement amends the guidance in ARB No. 43,Chapter 4, “Inventory  Pricing,” toclarify the accounting for 

 

36

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abnormal amounts of idle facility expense, freight, handling costs, andwasted material (spoilage) so as to require such costs to be treated as currentperiod charges. Further, this Statement requires that the allocation of fixedoverhead costs to the inventoriable production costs be based on the normalcapacity of the production facilities. The provisions of this Statement are effective for inventory costsincurred during fiscal years beginning after June 15, 2005 and will becomeeffective for the Company beginning with its first fiscal quarter 2006. TheCompany does not expect this Statement to have a material impact on itsfinancial statements upon adoption. However, future changes in the Company’sproduction or logistics could have a material impact on the Company’s financialstatements as a result of this statement.

 

**NOTE 2 -DNA DREAMFIELDS COMPANY, LLC**

 

DNA Dreamfields was formed by the Company andother food technology, manufacturing and consumer products marketingenterprises to develop, manufacture and sell low digestible carbohydrate pasta,rice and potatoes under the DreamfieldsTM brand name. The Companyinitially acquired a 24% ownership interest in DNA Dreamfields during fiscalyear 2004. At that time, the Company accounted for the investment using theequity method after reviewing the applicability of FIN 46(R) to the Company’sinterest in DNA Dreamfields. The Company increased it economic ownership in DNADreamfields to 29.5% in November 2004.

 

The Company acquired an additional 17.25% ownership interest in DNADreamfields effective May 1, 2005, resulting in an increase in the Company’sownership in DNA Dreamfields to 46.7%. Inconjunction with the Company’s increase in ownership in DNA Dreamfields, theDNA Dreamfields operating agreement was amended whereby Dakota Growers wasnamed the managing member of DNA Dreamfields. As a result of theownership increase and changes in the DNA Dreamfields operating agreement andother contractual agreements, the Company reevaluated whether DNA Dreamfieldswas a variable interest entity under FIN 46(R). The Company determined that DNADreamfields was a variable interest entity and that the Company was the primarybeneficiary. Therefore, effective May 1, 2005, the Company began toinclude DNA Dreamfields in its consolidated financial statements.  Goodwilltotaling $16,654,000 was recorded in conjunction with the Company’sconsolidation of DNA Dreamfields.  Thefinancial statements for prior fiscal years have not been restated andtherefore do not include consolidated data pertaining to DNA Dreamfields. TheCompany has included consolidated amounts for DNA Dreamfields in the incomestatement for the year ending July 31, 2005. The Company had previouslyaccounted for its investment in and share of net earnings or losses of itsownership interest in DNA Dreamfields Company, LLC under the equity method. Theinvestment in joint venture on the balance sheet as of July 31, 2004 and netloss allocated from joint venture on the income statement for the year endedJuly 31, 2004 represent amounts reported under the equity method.

 

Following is summary balance sheet information for DNA Dreamfields asof April 30, 2005 prior to consolidation (in thousands):

 
| Current assets                             |   | $      | 267    |   |
|--------------------------------------------|--------|--------|--------|--------|
|                                       |   |   |   |
| Current liabilities                        |   | $      | 239    |   |
| Members’ equity                       |   | 28     |   |
|                                       |   |   |   |
| Total liabilities and members’ equity |   | $      | 267    |   |
|                                            |        |        |        |        |  |

 

 

37

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Following are summary pro forma consolidated results of operations asif DNA Dreamfields were consolidated for the year ended July 31, 2004 (inthousands except earnings per share):

 
| Net revenues                         |   | $      | 144,560 |   |
|--------------------------------------|--------|--------|---------|--------|
| Gross profit                         |   | 14,879 |    |
| Operating income                     |   | 806    |    |
| Net income                           |   | 336    |    |
| Basic net earnings per  common share |   | 0.03   |    |

 

TheCompany has entered into a manufacturing agreement with DNA Dreamfields wherebyDakota Growers is the exclusive manufacturer of DreamfieldsTM lowdigestible carbohydrate pasta. The Company has also entered into a servicesagreement with DNA Dreamfields under which the Company provides administrative,accounting, information technology, sales, customer service and distributionservices to DNA Dreamfields. Shipments of DreamfieldsTM lowdigestible carbohydrate pasta began in February 2004.

 

Pursuantto the terms of the services agreement with DNA Dreamfields, sales ofDreamfieldsTM products are included in the Company’s net revenues.Manufacturing, distribution, and promotional costs incurred by the Companyrelated to DreamfieldsTM products are included in the applicableline items of the Company’s income statement. The Company calculates a net amount due to DNA Dreamfields based on thetotal sales of DreamfieldsTM product less related DreamfieldsTMproduct and selling costs, as outlined in the manufacturingagreement.  Prior to consolidating DNADreamfields in its financial statements, the Company presented this net amountdue to DNA Dreamfields, which totaled $2,712,000 for the year ended July 31,2004, in the Company’s cost of goods sold. Service fee income from DNADreamfields totaling $119,000 for the year ended July 31, 2004 is included innet revenues. The net amount due from DNA Dreamfields as of July 31, 2004 was$621,000, which is included in other receivables on the balance sheet.  All material inter-company accounts andtransactions have been eliminated in the preparation of the consolidatedfinancial statements as of and for the year ended July 31, 2005.

 

TheCompany entered into a “2005 Line of Credit Loan Agreement” with DNADreamfields in the fourth quarter of fiscal year 2005. Under thatAgreement, the Company has agreed to loan up to $5,000,000 to DNA Dreamfields,with DNA Dreamfields able to repay and reborrow amounts under the Line ofCredit Loan Agreement from time to time. The Line of Credit Loan Agreementmatures on May 31, 2010. The balance outstanding related to advancesto DNA Dreamfields under the Line of Credit Loan Agreement totaled $465,000 asof July 31, 2005, which has been eliminated in the preparation of theconsolidated financial statements. To secure the obligations of DNA Dreamfieldsunder the 2005 Line of Credit Loan Agreement, the other member/owners of DNADreamfields have pledged their Membership Units in DNA Dreamfields to theCompany.

 

**NOTE 3 -SHORT-TERM NOTES PAYABLE**

 

The Company has a $25 million revolving credit facility with CoBankwhich matures on May 31, 2006. The revolving line has a variable interest rate(5.59% at July 31, 2005) established by CoBank based on CoBank’s cost of funds.The facility is secured by property, equipment, and current assets of theCompany. The balance outstanding on the revolving line of credit was$10,000,000 and $12,200,000 as of July 31, 2005 and 2004, respectively.  Weighted average interest rates on short-termborrowings were 4.84%, 3.50% and 3.67% for the years ended July 31, 2005, 2004and 2003, respectively.

 

 

38

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**NOTE 4 -LONG-TERM DEBT**

 

Information regarding long-term debt at July 31, 2005 and 2004 is asfollows (in thousands):

 

 
| ** **                                                                                                                                                                                                                                                          | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Term loans from CoBank due  in quarterly installments of $685,000 plus interest through December 31, 2004                                                                                                                                                           |       | $        | —     |     | $          | 1,280 |   |
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Term loans from CoBank due  in quarterly installments of $625,000 plus interest through December 31, 2004                                                                                                                                                           |       | —   |       | 1,125    |       |
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Non-patronage term loan  from CoBank due in annual principal installments of $1,200,000 through  September 30, 2008, interest at 5.71%, collateralized by all assets of the  Company                                                                                |       | 4,800    |       | 6,000    |       |
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Senior Secured Guaranteed  Notes, Series A, due in annual principal installments of $2,571,000 through  August 1, 2008, interest at 8.04%, collateralized by all assets of the  Company                                                                             |       | 10,287   |       | 12,858   |       |
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Senior Secured Guaranteed  Notes, Series B, due in annual principal installments of $1,000,000 through  August 1, 2010, interest at 8.14%, collateralized by all assets of the  Company                                                                             |       | 6,000    |       | 7,000    |       |
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Term loan from CoBank due  in quarterly installments of $500,000 for four quarters starting August 20,  2006 and of $1,100,000 quarterly thereafter through May 20, 2011, variable  interest (5.59% at July 31, 2005), collateralized by all assets of the  Company |       | 9,069    |       | —   |       |
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Total long-term debt                                                                                                                                                                                                                                                |       | 30,156   |       | 28,263   |       |
| Less current portion                                                                                                                                                                                                                                                |       | 4,771    |       | 7,176    |       |
|                                                                                                                                                                                                                                                                |       |     |       |     |       |
| Net long-term debt                                                                                                                                                                                                                                                  |       | $        | 25,385     |     | $          | 21,087 |   |
|                                                                                                                                                                                                                                                                     |            |          |            |          |            |  |  |  |

 

 

39

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 Aggregate future maturitiesrequired on long-term debt are as follows (in thousands):

 
| **Years ending July 31,** | ** ** | ** ** | ** ** | ** ** |
|---------------------------|------------|------------|------------|------------|
|                      |       |       |       |       |
| 2006                      |       |       | $          | 4,771      |   |
| 2007                      |       |       | 6,771      |       |
| 2008                      |       |       | 9,171      |       |
| 2009                      |       |       | 7,443      |       |
| 2010                      |       |       | 1,000      |       |
| Thereafter                |       |       | 1,000      |       |
|                      |       |       |       |       |
|                      |       |       | $          | 30,156     |   |

 

The Company has a $4,800,000 letter of credit commitment with CoBank,securing the non-patronage loan from CoBank. The letter of credit commitment issubject to a commitment fee of 1.0% on an annualized basis and expires December31, 2008. Advances on the letter of credit commitment are payable on demand.

 

TheCompany’s debt agreements with CoBank and the institutional note holdersobligate the Company to maintain or achieve certain amounts of equity andfinancial ratios and impose restrictions on the Company. The Company was incompliance with these financial covenants as of July 31, 2005.

 

TheCompany incurred $2,518,000, $2,879,000 and $3,547,000 of interest on long andshort-term debt and other obligations in fiscal years 2005, 2004 and 2003,respectively, of which $121,000, $14,000 and $7,000 was capitalized in therespective periods. Patronage income from CoBank of $114,000, $103,000 and$126,000 was netted against interest expense on the statement of operations forthe years ended July 31, 2005, 2004 and 2003, respectively.

 

**NOTE 5 -STOCKHOLDERS’ EQUITY**

 

TheCompany is authorized to issue 75,000,000 shares of Common Stock, $.01 parvalue per share, 2,731 shares of Series C Preferred Stock, $100 par value pershare, 11,340,841 shares of Series D Delivery Preferred Stock, $.01 par valueper share, 130,000 shares of Series E Junior Participating Preferred Stock,$.01 par value per share, and 13,525,370****shares ofundesignated preferred stock, $.01 par value per share.

 

Holders of Series C Preferred Stock shall receivepayment of a non-cumulative annual dividend at the rate of 6% of the $100 parvalue on each share of Series C Preferred Stock. Each share of Series CPreferred Stock is convertible into 24 shares of Common Stock and 24 shares ofSeries D Delivery Preferred Stock of the Company. The conversion ratio shall beproportionately adjusted at any time the outstanding shares of Common Stock areincreased or decreased without payment by or to the Company or the Company’sshareholders.

 

Each share of Series D Delivery Preferred Stock of the Company givesits holder the privilege, but not the obligation, to deliver one bushel ofdurum wheat to the Company each year on a “first-come, first-served” basis.Because the privilege of a holder of Series D Delivery Preferred Stock todeliver durum wheat to the Company only arises if the Company requires durum,the privilege is not absolute. Holders ofSeries D Delivery Preferred Stock will be entitled to receive, if and whendeclared by the Board of Directors, a non-cumulative annual dividend of up to$.04 per share on each share of Series D Delivery Preferred Stock held by suchholder.  The Company must pay holders ofSeries D Delivery Preferred Stock a dividend of at least $.01 per share beforepaying any dividends on Common Stock.

 

40

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The Board of Directors of the Company adopted a Rights Plan that becameeffective July 1, 2002.  Under the RightsPlan, the Board of Directors of the Company has declared a dividend of onepurchase right (a “Right”) for each outstanding share of Common Stockheld.  Each Right will entitle the holderto purchase from the Company one-hundredth of one share of Series E JuniorParticipating Preferred Stock at a specified price, subject to certainadjustments. The Rights will not become exercisable, and will not betransferable apart from the Company’s shares of Common Stock, until a person orgroup has acquired 15% or more of the Company’s Common Stock or has commenced atender or exchange offer for 15% or more of the Company’s Common Stock.  In those events, each Right will entitle theholder (other than the acquiring person or group) to receive, upon exercise,common shares of either the Company or the acquiring company having value equalto two times the exercise price of the Right. The Rights issued under theRights Plan will be redeemable by the Company’s Board of Directors in certaincircumstances and will expire ten years from the date of adoption.

 

In November 2002, the Board of Directorsapproved the repurchase of 294,456 shares of the Company’s Common Stock fromcertain executive officers of the Company. The Company purchased these sharesfor $1,840,350 or $6.25 per share (seealso Note 14 — Related Party Transactions). These shares were held in treasury as of July 31, 2003.

 

On July 30, 2004,the Company completed the sale of 909,091 shares of Common Stock, whichincluded the 294,456 shares of Common Stock held in treasury at that time, toMVC Capital, Inc.

 

**NOTE 6 -MANDATORILY REDEEMABLE PREFERRED STOCK**

 

The Company adopted SFAS No. 150, “Accounting for Certain FinancialInstruments with Characteristics of Both Liabilities and Equity” effectiveAugust 1, 2003. SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity. Many of these instruments were previously classified asequity. SFAS No. 150 requires that an issuer classify a financial instrumentthat is within its scope as a liability, or as an asset in some circumstances.This Statement applies to three types of freestanding financial instruments.One type of financial instrument to which SFAS No. 150 applies is mandatorilyredeemable shares, which the issuing company is obligated to buy back inexchange for cash or assets.

 

The Company is authorized to issue 533 shares of Series A PreferredStock, $100 par value per share. The Company had 67 and 200 shares of Series APreferred Stock outstanding as of July 31, 2005 and 2004 respectively. TheSeries A Preferred Stock is required to be redeemed ratably on a quarterlybasis through December 2005. Each share of Series A Preferred Stock entitlesits holder to receive a cumulative annual dividend of 6% of the $100 par valueper share. As the shares of Series A Preferred Stock are mandatorilyredeemable, these shares have been classified as a liability in the Company’sconsolidated balance sheet and “dividends” paid on the Series A Preferred Stockhave been recorded as interest expense upon adoption of SFAS No. 150. “Dividends”paid on Series A Preferred Stock prior to the adoption of SFAS No. 150 have notbeen reclassified as interest cost.

 

**NOTE 7 -EMPLOYEE BENEFIT PLANS**

 

Dakota Growers Pasta Company, Inc. and Primo Piatto, Inc. have a 401(k)plan that covers employees who have met age and service requirements. The plancovers employees who have reached 21 years of age and who have completed 500hours of service within six months. Effective January 1, 2003, the 401(k) planwas amended, and the Company match was changed to 100% on the first 3% of theemployees’ elected deferral and 50% on the next 2%. Previously, the Companymatched 100% on the first 2% of the employees’ elected deferral, 50% on thenext 1%, and 25% on the next 4%. Employer contributions to the plan totaled$437,000, $377,000 and $345,000 for the years ended July 31, 2005, 2004 and2003, respectively.

 

41

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PrimoPiatto, Inc. is also required to contribute to a multi-employer pension plancovering certain hourly employees subject to a collective bargaining agreement.Such employees may also participate in the 401(k) plan but are excluded fromamounts contributed by Primo Piatto. Contributions to the pension plan for theyears ended July 31, 2005, 2004 and 2003 totaled $51,000, $60,000 and $81,000,respectively.

 

**NOTE 8 -INCOME TAXES**

 

Significantcomponents of the Company’s deferred tax assets and liabilities as of July 31,2005 and 2004 related to temporary differences are as follows (in thousands):

 
| ** **                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------------------------|------------|----------|------------|----------|------------|
|                                            |       |     |       |     |       |
| Deferred tax assets                             |       |     |       |     |       |
| AMT credit and net operating loss carryforwards |       | $        | 851        |     | $          | 1,331 |   |
| Accounts receivable allowances                  |       | 588      |       | 472      |       |
| Accrued expenses and other reserves             |       | 367      |       | 411      |       |
| Other                                           |       | 138      |       | 243      |       |
| Total deferred tax assets                       |       | 1,944    |       | 2,457    |       |
|                                            |       |     |       |     |       |
| Deferred tax liabilities                        |       |     |       |     |       |
| Property and equipment                          |       | (12,408  | )          | (11,883  | )          |
|                                            |       |     |       |     |       |
| Net deferred tax liabilities                    |       | $        | (10,464    | )        | $          | (9,426 | ) |
|                                                 |            |          |            |          |            |  |  |  |

 

Classified in theaccompanying balance sheets as follows:

 
| ** **                    | ** ** | **2005** | ** ** | **2004** | ** ** |
|-------------------------------|------------|----------|------------|----------|------------|
|                          |       |     |       |     |       |
| Current assets                |       | $        | 955        |     | $          | 937 |   |
| Noncurrent liabilities        |       | (11,419  | )          | (10,363  | )          |
|                          |       |     |       |     |       |
| Net deferred tax  liabilities |       | $        | (10,464    | )        | $          | (9,426 | ) |

 

AtJuly 31, 2005, the Company has an AMT credit carryforward of $851,000, whichmay be carried forward indefinitely. Management believes it is more likely than not that the deferred taxassets as of July 31, 2005 will be realized through the generation of futuretaxable income and tax planning strategies.

 

Income tax expense (benefit) for the years ended July 31, 2005, 2004and 2003 consists of the following (in thousands):

 
| ** **                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|---------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                  |       |     |       |     |       |     |       |
| Current income tax expense  (benefit) |       | $        | 568        |     | $          | 64       |       | $ | (78 | ) |
| Prior year underaccrual               |       | —   |       | —   |       | 64       |       |
| Deferred income taxes                 |       | 1,038    |       | 150      |       | (91      | )          |
|                                  |       |     |       |     |       |     |       |
| Income tax expense (benefit)          |       | $        | 1,606      |     | $          | 214      |       | $ | (105 | ) |
|                                       |            |          |            |          |            |          |            |  |  |  |  |  |  |

 

 

42

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The reconciliation of the federal statutory income taxrate to the effective income tax rate for the years ended July 31, 2005, 2004and 2003 is as follows:

 

| ** **                                            | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Federal statutory income  tax rate                    |       | 34.0     | %          | 34.0     | %          | (34.0    | )%         |
| Adjustment of prior year  accrual                     |       | —   |       | —   |       | 12.0     |       |
| State income taxes, net of  federal income tax effect |       | 5.0      |       | 5.0      |       | (5.0     | )          |
| Other (net)                                           |       | —   |       | —   |       | 7.0      |       |
|                                                  |       |     |       |     |       |     |       |
| Effective income tax rate                             |       | 39.0     | %          | 39.0     | %          | (20.0    | )%         |

 

**NOTE 9 -FAIR VALUE OF FINANCIAL INSTRUMENTS**

 

The fair value of a financial instrument is generally defined as theamount at which the instrument could be exchanged in a current transactionbetween willing parties, other than in a forced liquidation sale. Quoted marketprices are generally not available for the Company’s financial instruments.Accordingly, fair values are based on judgments regarding anticipated cashflows, future expected loss experience, current economic conditions, riskcharacteristics of various financial instruments and other factors. These estimatesinvolve uncertainties and matters of judgment, and therefore cannot bedetermined with precision. Changes in assumptions could significantly affectthe estimates.

 

Thecarrying amount of cash and cash equivalents, receivables, payables, short-termdebt and other current assets and liabilities approximates fair value becauseof the short maturity and/or frequent repricing of those instruments.

 

The Company believes it is not practical to estimate the fair value ofthe securities of non-subsidiary cooperatives without incurring excessive costsbecause there is no established market for these securities and it isinappropriate to estimate future cash flows, which are largely dependent onfuture patronage earnings of the non-subsidiary cooperatives.

 

Based upon current borrowing rates with similar maturities, the fairvalue of the long-term debt approximates the carrying value as of July 31, 2005and 2004.

 

**NOTE 10- OPERATING LEASES**

 

The Company leases equipment and office space under operating lease agreements.Future obligations for operating leases for fiscal years ended July 31 are asfollows (in thousands):

 

| 2006       |   | $      | 1,177  |   |
|------------|--------|--------|--------|--------|
| 2007       |   | 865    |   |
| 2008       |   | 217    |   |
| 2009       |   | 138    |   |
| 2010       |   | 74     |   |
| Thereafter |   | 12     |   |
|       |   |   |   |
|       |   | $      | 2,483  |   |

 

 

 

43

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Lease expense totaled $1,413,000, $1,402,000 and $1,485,000 for theyears ended July 31, 2005, 2004 and 2003, respectively.

 

**NOTE 11- SALE-LEASEBACK**

 

TheCompany entered into a sale-leaseback transaction effective March 29, 2002, forcertain pasta production equipment. Proceeds from the sale totaled $5 million.The lease, which is classified as operating, sets forth an initial term of fiveyears and calls for lease payments of $72,000 per month. At the end of theinitial lease term, the Company may renew the lease at fair rental value,terminate the lease and surrender the equipment with the payment of a 10% ofequipment cost remarketing fee, or purchase the equipment for $1,750,000.  The Company realized a gain on the sale of$255,000, which was deferred and is being amortized in proportion to the grossrentals charged to expense over the five-year lease term. Minimum rentalsrequired under the lease, which are also included in the future leaseobligations disclosed in Note 10, for fiscal years ending July 31 are asfollows (in thousands):

 

| 2006   |   | 863    |   |
|--------|--------|--------|--------|
| 2007   |   | 576    |   |
|   |   |   |   |
|   |   | $      | 1,439  |   |
|        |        |        |        |  |

 

 

**NOTE 12- COMMITMENTS AND CONTINGENCIES**

 

The Company forward contracts for a certain portion of its future durumwheat requirements. At July 31, 2005, the Company had outstanding commitmentsfor grain purchases totaling $6,785,000 related to forward purchase contracts.These contracts are set price contracts to deliver grain to the Company’s mill,and are not derivative in nature as they have no net settlement provision andare not transferable.

 

The Company had commitments to purchase pasta equipment totalingapproximately $4.4 million as of July 31, 2005. These amounts are expected tobe paid within one year.

 

Pursuant to certain warehouse agreements, the Company is obligated tominimum monthly storage and handling amounts totaling $1,881,000, $1,701,000and $1,537,000 for the years ending July 31, 2006, 2007 and 2008, respectively.

 

TheCompany has entered into a long-term marketing agreement, which includes volumecommitments, with Safeway, Inc. through August 31, 2006. The Company has alsoentered into an agreement with Gruppo Euricom, an Italian pasta manufacturer,to be the exclusive distributor of Gruppo Euricom’s Italian pasta and riceproducts in the United States and Canada with an initial term through August2006. These products are primarily sold in the private label retail andfoodservice markets.

 

The Company is subject to various lawsuits and claims which arise inthe ordinary course of its business. While the results of such litigation andclaims cannot be predicted with certainty, management believes the dispositionof all such proceedings, individually or in aggregate, should not have amaterial adverse effect on the Company’s financial position, results ofoperations or cash flows.

 

 

 

44

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**NOTE 13- STOCK OPTION PLANS**

 

On January 31, 1997 the Cooperative’s Compensation Committee of theBoard of Directors (the “Compensation Committee”) adopted the Dakota GrowersIncentive Stock Option Plan (the “Plan”). The Plan was ratified by theCooperative members at the annual meeting in January 1998. The CompensationCommittee or the Board of Directors has the power to determine the keymanagement employees of the Company to receive options and the number of sharesto be optioned to each of the employees. Options granted under the Plan are forthe purchase of Series C Convertible Preferred Stock at fair market value,which were convertible into Equity Stock as a cooperative, and are nowconvertible into Common Stock and Series D Delivery Preferred Stock as acorporation at the option of the employee, under the applicable conversionratio. The maximum number of preferred shares that may be issued pursuant to optionsgranted under the Plan is 15,000, all of which have been issued.  Each shareof Series C Preferred Stock is convertible into 24 shares of Common Stock and24 shares of Series D Delivery Preferred Stock of the Company. Theconversion ratio is proportionately adjusted if the Company increases theoutstanding shares of Common Stock or Series D Delivery Preferred Stock, asapplicable, without payment by or to theCompany or the Company’s shareholders for such additional shares (e.g.stock split, stock dividend or other action). Options granted under the Planmust be exercised within ten years from the date such options are granted. Inthe event of the employee’s termination with the Company, all exercisableoptions may be exercised within 90 days of the termination date. If notexercised, such options lapse.

 

TheCompany’s 2002 Stock Option Plan (the “2002 Plan”) was adopted by the Board ofDirectors on November 21, 2002. All options granted under the 2002 Plan arenon-qualified stock options and are for the purchase of the Company’s CommonStock. The maximum number of shares of Common Stock that may be issued pursuantto options granted under the 2002 Plan is 294,456 shares, all of which havebeen issued. Stock options granted under the 2002 Plan expire 10 years from thedate of grant.

 

On November 21, 2002 theBoard of Directors adopted the Dakota Growers Pasta Company, Inc. 2003 StockOption Plan (the “2003 Plan”), which was approved by the Company’s shareholdersat the Annual Meeting on January 11, 2003. The 2003 Plan covers 500,000 sharesof the Company’s Common Stock. Participation in this Plan shall be limited toofficers, directors, employees, vendors or consultants of the Company or anysubsidiary of the Company. Options granted under the 2003 Plan may be incentivestock options (as defined under Section 422 of the Code) or non-qualified stockoptions, as determined by the 2003 Plan administrator at the time of grant ofan option and subject to the applicable provisions of Section 422 of the Codeand the regulations promulgated there under. The stock options generally expire10 years from the date of grant. If the employment of the Optionee isterminated by any reason other than his or her death or disability, allexercisable options may be exercised within 90 days of the termination date. Ifnot exercised, such options lapse. Options to purchase 80,524 shares of CommonStock were granted under the 2003 Plan in fiscal year 2004.

 

 

 

45

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The following tables setforth information regarding stock 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,  2002 |       | 2,045                                                        |       | $ | 100 |   | $ | 100.00 |   | 2,045 |   |
| Exercised                     |       | —                                                       |       |   |   |   |   |   |   |
| Granted                       |       | 686                                                          |       | $ | 150 |   | $ | 150.00 |   |   |   |
| Canceled/Expired              |       | —                                                       |       |   |   |   |   |   |   |
| Outstanding at July 31,  2003 |       | 2,731                                                        |       | $ | 100-$150 |   | $ | 112.56 |   | 2,731 |   |
| Exercised                     |       | —                                                       |       |   |   |   |   |   |   |
| Granted                       |       | —                                                       |       |   |   |   |   |   |   |
| Canceled/Expired              |       | —                                                       |       |   |   |   |   |   |   |
| Outstanding at July 31,  2004 |       | 2,731                                                        |       | $ | 100-$150 |   | $ | 112.56 |   | 2,731 |   |
| Exercised                     |       | —                                                       |       |   |   |   |   |   |   |
| Granted                       |       | —                                                       |       |   |   |   |   |   |   |
| Canceled/Expired              |       | —                                                       |       |   |   |   |   |   |   |
| Outstanding at July 31,  2005 |       | 2,731                                                        |       | $ | 100-$150 |   | $ | 112.56 |   | 2,731 |   |
|                          |       |                                                         |       |   |   |   |   |   |   |
|                               |            |                                                              |            |  |  |  |  |  |  |  |  |  |  |

 
| ** **                    | ** ** | **Options  to purchase Common Stock** | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **Number  of  Common  Shares**        | ** ** | **Option  Price  per Share** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Exercisable** | ** ** |
|                          |       |                                  |       |   |   |   |   |   |   |
| Outstanding at July 31,  2002 |       | —                                |       |   |   |   |   |   |   |
| Exercised                     |       | —                                |       |   |   |   |   |   |   |
| Granted                       |       | 294,456                               |       | $ | 6.25 |   | $ | 6.25 |   |   |   |
| Canceled/Expired              |       | —                                |       |   |   |   |   |   |   |
| Outstanding at July 31,  2003 |       | 294,456                               |       | $ | 6.25 |   | $ | 6.25 |   | 294,456 |   |
| Exercised                     |       | —                                |       |   |   |   |   |   |   |
| Granted                       |       | 80,524                                |       | $ | 4.25 |   | $ | 4.25 |   |   |   |
| Canceled/Expired              |       | —                                |       |   |   |   |   |   |   |
| Outstanding at July 31,  2004 |       | 374,980                               |       | $ | 4.25-$6.25 |   | $ | 5.82 |   | 294,456 |   |
| Exercised                     |       | —                                |       |   |   |   |   |   |   |
| Granted                       |       | —                                |       |   |   |   |   |   |   |
| Canceled/Expired              |       | —                                |       |   |   |   |   |   |   |
| Outstanding at July 31,  2005 |       | 374,980                               |       | $ | 4.25-$6.25 |   | $ | 5.82 |   | 334,722 |   |

 

 

 

 

46

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The Company applied APB No. 25 in accounting for employee stockoptions. Accordingly, no compensation expense was recorded during the yearsended July 31, 2005, 2004 and 2003 related to the issuance or exercise of stockoptions. The fair value of the stock options granted was estimated at the dateof grant using the Black-Scholes option pricing model with the followingweighted average assumptions (excluding a volatility assumption): 2004 - riskfree interest rate of 2.3%, expected dividend yield of zero and an expectedlife of 3 years; 2003 - risk free interest rate of 2.5%, expected dividendyield of zero and an expected life of 3 years. The pro forma application ofStatement of Financial Accounting Standard (SFAS) No. 123 “Accounting forStock-Based Compensation” would not have had a material impact on net incomeand earnings per share for the periods presented.

 

**NOTE 14- RELATED PARTY TRANSACTIONS**

 

*Transactions with ExecutiveOfficers*

 

The Company had pledged certificates of deposit assecurity for loans, totaling approximately $1,974,000, made by a financialinstitution to Timothy J. Dodd, President and Chief Executive Officer, andThomas P. Friezen, Chief Financial Officer, to exercise stock options. Theseloans matured December 1, 2002.

 

In accordance with the provisions of theSarbanes-Oxley Act of 2002, the Board of Directors approved the repurchase of190,800 and 103,656 shares of the Company’s Common Stock from Messrs. Dodd andFriezen, respectively. The repurchase was completed in November 2002. Inconjunction with the repurchase of these shares at $6.25 per share, Messrs.Dodd and Friezen received proceeds of $1,192,500 and $647,850, respectively. In addition, Mr. Friezen received additionalgross proceeds of $229,993 under a compensatory transaction in conjunction withthe unwinding of previous stock option exercises and related officer loans.Messrs. Dodd and Friezen also received $81,311 and $53,425, respectively, undercompensatory transactions for the interest on the loans made by the financialinstitution to exercise stock options. The proceeds received by Messrs. Doddand Friezen were used to pay off their loans with the financial institution. Asa result, the Company’s certificates of deposit were no longer restricted. TheCompany redeemed the certificates of deposit in December 2002. Finally, Messrs.Dodd and Friezen were granted stock options to purchase 190,800 and 103,656shares, respectively, of the Company’s Common Stock with an exercise price of$6.25 per share. Such options were first exercisable on December 2, 2002.

 

The Company had advanced funds to Mr. Dodd and Mr. Friezenunder promissory agreements to cover personal (unaudited) alternative minimumtaxes and other costs generated as a result of these officers exercising stockoptions. Interest on the advances is charged at the applicable federal rate aspublished by the Internal Revenue Service. Certain of these promissory notesbecame due in conjunction with the repurchase of Common Stock from Messrs. Doddand Friezen noted above. The Compensation Committee approved forgiving theprincipal totaling $92,153 and interest totaling $11,093 on these promissorynotes in fiscal year 2003 as well as an additional compensatory transaction of$63,292 to cover estimated personal income taxes the officers incurred on thepromissory note forgiveness.

 

Amounts due fromofficers totaled $82,000 as of July 31, 2005 and 2004.

** **

 

47

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** **

**NOTE 15- CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000**

 

U.S. Customs and Border Protection (“Customs”)has distributed antidumping and countervailing duties assessed on certain pastaimported from Italy and Turkey to affected domestic producers pursuant to theContinued Dumping and Subsidy Offset Act of 2000 (the “Offset Act”), which wasenacted in October 2000. The Company received payments in the amount of$425,000, $903,000 and $1,000,000 in December 2004, 2003 and 2002,respectively, under the Offset Act.  TheCompany repaid $34,000 and $305,000 to Customs in June 2003 and April 2004,respectively, pursuant to reclamation requests from Customs.  The net proceeds received under the OffsetAct have been classified as Other Income on the Income Statement. The Companycannot reasonably estimate the potential amount, if any, that it may receiveunder the Offset Act in future periods as any such amount will be based uponfuture events over which the Company has little or no control, including, butnot limited to, the amount of expenditures by domestic pasta producers and theamount of antidumping and countervailing duties collected by Customs.

 

**NOTE 16- QUARTERLY FINANCIAL DATA (UNAUDITED)**

 

Summary quarterlyresults are as follows (in thousands, except per share amounts):

 
| ** **                                 | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|--------------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                 | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended July 31, 2005:                  |       |        |       |        |       |        |       |        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Net revenues                               |       | $           | 35,877     |        | $          | 40,698      |       | $           | 39,122     |   | $ | 39,922 |   |
| Gross profit                               |       | 3,980       |       | 4,915       |       | 5,117       |       | 5,428       |       |
| Operating income (loss)                    |       | (1,704      | )          | 824         |       | 1,948       |       | 1,865       |       |
| Net income (loss)                          |       | (185        | )          | 764         |       | 1,004       |       | 930         |       |
| Basic net earnings (loss) per common share |       | (0.01       | )          | 0.06        |       | 0.08        |       | 0.07        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Year ended July 31, 2004:                  |       |        |       |        |       |        |       |        |       |
|                                       |       |        |       |        |       |        |       |        |       |
| Net revenues                               |       | $           | 37,649     |        | $          | 35,403      |       | $           | 37,605     |   | $ | 34,022 |   |
| Gross profit                               |       | 1,911       |       | 3,042       |       | 4,126       |       | 3,355       |       |
| Operating income (loss)                    |       | (92         | )          | 1,035       |       | 2,139       |       | 303         |       |
| Net income (loss)                          |       | (539        | )          | 652         |       | 803         |       | (580        | )          |
| Basic net earnings (loss) per common share |       | (0.04       | )          | 0.05        |       | 0.07        |       | (0.05       | )          |
|                                            |            |             |            |             |            |             |            |             |            |  |  |  |  |  |

 

The quarterly resultsfor the year ended July 31, 2005 are presented on a proforma basis to includethe results of operations of DNA Dreamfields in the consolidated incomestatement for the entire year.

 

The above quarterlyfinancial data is unaudited, but in the opinion of management, all adjustmentsnecessary for a fair presentation of the selected data for these interimperiods presented have been included.

 

 

48

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**ITEM 9.  DISAGREEMENTS ON ACCOUNTING AND FINANCIALDISCLOSURE**

 

        None.

 

 

**ITEM 9A.  CONTROLS AND PROCEDURES**

 

**(a) Evaluation of DisclosureControls and Procedures.**

 

        The Company's Chief Executive Officer,Timothy J. Dodd, and Chief Financial Officer, Thomas P. Friezen, have evaluatedthe Company's disclosure controls and procedures as of the end of the periodcovered by this report. Based upon the review, they have concluded that thesecontrols and procedures are effective.

 

**(b) Changes in Internal Controlsover Financial Reporting.**

 

        There were no changes in the Company’sinternal control over financial reporting during the Company’s fiscal quarterended July 31, 2005, that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

 

**ITEM9B.  OTHER INFORMATION**

 

**       **None.

 

**PART III.**

 

**ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THEREGISTRANT**

 

**Board of Directors**

 

        The Board of Directors currentlyconsists of ten members. The Board may consist of a minimum of seven membersand a maximum of fifteen members. The Articles of Incorporation and Bylaws ofthe Company require that at least five members of the Board of Directors beresidents of the State of North Dakota and that at least three members beagricultural producers. The Board ofDirectors is divided into three classes: Class I, Class II and Class III. ClassI, Class II and Class III will consist of an equal number of directors, exceptthat, if the Board of Directors consists of a number of directors such thatmathematically there cannot be an equal number of directors in each of Class I,Class II and Class III, then the one remaining director shall be made a memberof Class I and, if there is more than one remaining director, the firstremaining director shall be made a member of Class I and the second remainingdirector shall be made a member of Class II. Each director in each of Class I, Class II and Class III will holdoffice until the third regular meeting of shareholders following the regularmeeting of the shareholders at which such director or such director’spredecessor was elected, until his successor shall have been elected and shallqualify, or until he resigns or is removed.

 

 

 

 

49

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        The table below sets forth certaininformation concerning the directors of the Company. The directors have beenelected to serve three-year terms expiring at the annual meeting in thecalendar years indicated in the table below.

 

| **Name**              | ** ** | **Age** | ** ** | **Term  Expires** | ** ** | **Class** |
|-----------------------|------------|---------|------------|-------------------|------------|-----------|
|                  |       |    |       |              |       |      |
| John S. Dalrymple III |       | 57      |       | 2006              |       | I         |
| Allyn K. Hart         |       | 66      |       | 2008              |       | III       |
| Roger A. Kenner (1)   |       | 56      |       | 2007              |       | II        |
| James F. Link         |       | 78      |       | 2006              |       | I         |
| Eugene J. Nicholas    |       | 60      |       | 2007              |       | II        |
| John D. Rice, Jr. (1) |       | 51      |       | 2006              |       | I         |
| Michael T. Tokarz     |       | 55      |       | 2006              |       | I         |
| Jeffrey O. Topp       |       | 46      |       | 2007              |       | II        |
| Curtis R. Trulson     |       | 53      |       | 2008              |       | III       |
| Michael E. Warner     |       | 55      |       | 2008              |       | III       |

----

(1)Mr. Kenner and Mr. Rice are first cousins.

 

        **John S. Dalrymple III.**  Mr.Dalrymple has been Chairman of the Board of Directors of the Company since1991. He became Lieutenant Governor of North Dakota in 2000. Mr. Dalrymple hadbeen a state representative since 1984 and served as Chairman of the HouseAppropriations Committee and of the Budget Section of the North Dakota House ofRepresentatives. He previously served on the board of directors of the U.S.Durum Growers Association. He has been a farmer in the Casselton, North Dakotaarea since 1971.  He serves on theboard of directors of the U.S. Chamber of Commerce.

 

        **Allyn K. Hart.**  Mr. Hart has been a director of the Companysince 1991. He has been a farmer in the Cavalier County, North Dakota areasince 1961.

 

        **Roger A. Kenner.**  Mr.Kenner has been a director of the Company since 1991. Mr. Kenner is chairman ofGolden Plains Frozen Foods LLC and is a director of Blue Cross Blue Shield ofNorth Dakota. He has been a farmer and certified seed producer in the Leeds,North Dakota area since 1964.

 

        **James F. Link.**  Mr. Linkhas been a director of the Company since 1991. Mr. Link has served on theboards of directors of Farm Credit and Minn-Dak Farmers cooperative, including15 years as its chairman. He has been a farmer in the Wahpeton, North Dakotaarea since 1947.

 

        **Eugene J. Nicholas.**  Mr.Nicholas has been a director of the Company since 1991.  Mr. Nicholas has been a state representativesince 1974, and serves as chairman of the North Dakota House of RepresentativesAgriculture Committee. Mr. Nicholas also serves on the board of directors ofCountry Bank USA, Cando, North Dakota, and the board of governors of GoldenPlains Frozen Foods LLC. Mr. Nicholas previously served on the board ofdirectors of the U.S. Durum Growers Association.

 

        **John D. Rice, Jr.**  Mr. Riceis the Vice Chairman of the Board of Directors and has been a director of theCompany since 1991. He also served on the boards of directors of the NationalPasta Association and U.S. Durum Growers Association. He has been a farmer inthe Maddock, North Dakota area since 1968.

 

 

50

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        **Michael T. Tokarz. **Mr. Tokarz has been a director ofthe Company since 2004.  Mr. Tokarz isthe Chairman of MVC Capital, a registered investment company traded on the NewYork Stock Exchange (Ticker: MVC) that makes equity and debt investments. Inaddition, Mr. Tokarz is the Managing Member of The Tokarz Group, which managesMr. Tokarz’s personal investments. From 1985 to 2002, Mr. Tokarz was a seniorGeneral Partner and Administrative Partner at Kohlberg Kravis Roberts &Co., a private equity firm specializing in management buyouts. Prior to joiningKKR, Mr. Tokarz was with Continental Illinois National Bank and Trust Companyof Chicago, joining the firm in 1973. He also currently serves on the corporateboards of Conseco, Inc, Walter Industries, Inc., IDEX Corporation, TimberlandMachines & Irrigation, Inc., Ohio Medical Corporation, Baltic MotorsCompany, Stonewater Control Systems, Lomonsov, Athleta, Inc. and Apertio Ltd.Mr. Tokarz also serves on the Board of the University of Illinois Foundationand its Investment Committee and as Chairman of its Budget and FinanceCommittee.  He is a member of the Boardof Managers of Illinois Ventures and Chairman of Illinois Emerging TechnologyFund, both affiliated with the University of Illinois.

 

        **Jeffrey O. Topp.** Mr. Topphas been a director of the Company since 1991. He serves on the board of directorsof Farmers Elevator, Inc. in Grace City, North Dakota. He is a partner in T-TRanch and has been a farmer in the Grace City area since 1978.

 

        **Curtis R. Trulson.** Mr.Trulson has been a director of the Company since 1991. He previously served onthe boards of directors of the National Association of Wheat Growers and theNorth Dakota Grain Growers Association, including service as itsPresident.  He has been a farmer inMountrail County, North Dakota, since 1975.

 

        **Michael E. Warner.**  Mr.Warner has been a director of the Company since 1992. Mr. Warner has been afarmer in the Hillsboro, North Dakota area since 1967. He also currently serveson the board of directors of Warner Equipment Co. and Agriceutical ResourcesLLC. In 2002, Mr. Warner was awarded a fellowship by the University ofMissouri. He served on the board of directors of American Crystal Sugar Companyfrom 1989 through 1996, as part of a 23-year career of service to the sugarindustry. He is a past member of the board of trustees of Meritcare HealthSystems of Fargo, North Dakota, the largest hospital/multiple clinic systembetween Minneapolis, Minnesota and Seattle, Washington.

 

**Committees of the Board of Directors**

 

        The Audit Committee isresponsible for assessing and ensuring the independence of the independentauditor, evaluating audit performance, approving the services to be provided bythe independent auditor, evaluating policies and procedures relating tointernal accounting function and controls, and reviewing and approving the Company’sannual audited financial statements before issuance, subject to approval by theBoard of Directors. The members of the Audit Committee are Messrs. Trulson,Dalrymple and Warner, each of whom is independent, as they are not employees ofthe Company and have no other relationships which would prevent them from beingconsidered independent pursuant to the Company’s policies and applicable lawsand regulations. The Board of Directors has determined that Mr. Trulsonqualifies as an “audit committee financial expert” within the meaning ofSecurities and Exchange Commission regulations.

 

        The Compensation Committeemakes recommendations to the Board of Directors of the Company regarding stockand compensation plans, approves transactions of certain officers andauthorizes the granting of stock options. Messrs. Dalrymple, Trulson and Warner are members of the CompensationCommittee.

 

        TheNomination Committee is responsible for recommending nominees to the Board ofDirectors of the Company. Under the Company’s current bylaws, the NominationCommittee consists of the Company’s Chairman, Vice Chairman, and ChiefExecutive Officer.

 

 

51

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        The Policy Committee provides oversightof the Company’s governance obligations to assure compliance with allapplicable laws, regulations, Articles of Incorporation and By-laws, operatingpursuant to a written Policy Committee Charter adopted by the Company’s Boardof Directors. Messrs. Hart, Trulson and Link are members of the PolicyCommittee.

 

**Compensationof Directors**

 

        Effective August 1, 2005, the Company provides its directors with compensationconsisting of (i) a per diem payment of $500 (except for the Chairman of theBoard and Chairman of the Audit Committee who will each receive $600 per day) for any day on which a directorundertakes activities on the Company’s behalf, including board meetings andother functions of the Company, (ii) a monthly fee of $1,000 (except for theChairman of the Board and Chairman of the Audit Committee who each receive$1,200 per month), and (iii) reimbursement for out-of-pocket expenses incurredon behalf of the Company.

 

**ExecutiveOfficers**

 

        The table below lists the executiveofficers of the Company. Officers are elected annually by the Board ofDirectors.

| **Name**          | ** ** | **Age** | ** ** | **Position**                           | ** ** |
|-------------------|------------|---------|------------|----------------------------------------|------------|
|              |       |    |       |                                   |       |
| Timothy J. Dodd   |       | 50      |       | President and Chief  Executive Officer |       |
| Thomas P. Friezen |       | 46      |       | Chief Financial Officer                |       |

 

**Timothy J. Dodd.** Mr. Dodd is the President and Chief ExecutiveOfficer of the Company. Prior to joining the Company in December 1991, he hadbeen the Vice President of Manufacturing for American Italian Pasta Companysince 1988. Previously, Mr. Dodd participated in the construction andmanagement of two other grain processing facilities, one in Texas and one inCando, North Dakota. Mr. Dodd serves on the board of directors of Country BankUSA, Cando, North Dakota.

 

        **Thomas P. Friezen.** Mr.Friezen is the Chief Financial Officer of the Company. Mr. Friezen joined theCompany in April 1995 as Vice President, Finance and became Chief FinancialOfficer in August 2000. Mr. Friezen is a member of the board of directors ofCDT, Inc., a development stage water technology company for which he serves aschair of the audit committee and as a member of the compensation committee. Mr.Friezen is a certified public accountant.

 

**Code ofConduct**

 

        The Company has adopted a Code ofConduct applicable to all employees. A Code of Ethics certification for seniorfinancial officers, including the principal executive officer, principalfinancial officer and principal accounting officer, is included within the Codeof Conduct.

 

        A copy of the Code of Conduct isavailable under the “Investors” portion of the Company’s website at *www.dakotagrowers.com*.A copy of the Company’s Code of Conduct will also be provided, withoutcharge, upon written request to:

 

InvestorRelations

DakotaGrowers Pasta Company, Inc.

OnePasta Avenue

Carrington,ND 58421

 

 

 

52

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**ITEM11.  EXECUTIVE COMPENSATION**

 

        The following table summarizes theamount of compensation paid to the Company’s President and Chief ExecutiveOfficer and Chief Financial Officer for the fiscal year ended July 31, 2005 andthe two prior fiscal years.

**Summary Compensation Table**

** **
| ** **              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **   | ** ** | ** **     | ** ** | **Long-Term**           | ** ** | ** **      | ** ** |
|-------------------------|------------|------------|------------|-------------------------|------------|--------------|------------|----------------|------------|-------------------------|------------|-----------------|------------|
| ** **              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **   | ** ** | ** **     | ** ** | **Compensation Awards** | ** ** | ** **      | ** ** |
| ** **              | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Series C** | ** ** | **Common**     | ** ** | ** **              | ** ** |
| ** **              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **   | ** ** | **Other**      | ** ** | **Preferred**           | ** ** | **Stock**       | ** ** | **All** | ** ** |
| ** **              | ** ** | ** ** | ** ** | ** **              | ** ** | ** **   | ** ** | **Annual**     | ** ** | **Securities**          | ** ** | **Securities**  | ** ** | **Other** | ** ** |
| **Name and**            | ** ** | **Fiscal** | ** ** | ** **              | ** ** | ** **   | ** ** | **Compen-**    | ** ** | **Underlying**          | ** ** | **Underlying**  | ** ** | **Compen-** | ** ** |
| **Principal Position**  | ** ** | **Year**   | ** ** | **Salary**              | ** ** | **Bonus**    | ** ** | **sation (1)** | ** ** | **Options (#)**         | ** ** | **Options (#)** | ** ** | **sation (2)** | ** ** |
|                    |       |       |       |                    |       |         |       |           |       |                    |       |            |       |   |   |
| Timothy J. Dodd         |       | 2005       |       | $                       | 212,500    |         | $          | 21,413         |       | $                       | 21,290     |            | —     |   | — |   | $ | — |   |
| President and Chief     |       | 2004       |       | 202,566                 |       | —       |       | 10,552         |       | —                  |       | 13,511          |       | — |   |
| Executive Officer       |       | 2003       |       | 202,566                 |       | 112,130      |       | 9,273          |       | 686                     |       | 190,800         |       | 221,716 |   |
|                    |       |       |       |                    |       |         |       |           |       |                    |       |            |       |   |   |
| Thomas P. Friezen       |       | 2005       |       | 178,970                 |       | 18,375       |       | 27,961         |       | —                  |       | —          |       | — |   |
| Chief Financial Officer |       | 2004       |       | 173,628                 |       | —       |       | 19,438         |       | —                  |       | 11,575          |       | — |   |
|                    |       | 2003       |       | 173,628                 |       | 34,540       |       | 9,670          |       | —                  |       | 103,656         |       | 309,551 |   |
|                         |            |            |            |                         |            |              |            |                |            |                         |            |                 |            |  |  |  |  |  |  |

----

(1)      Includes the Company’s401(k) matching contribution, excess life insurance, the taxable portion ofreimbursable business expenses and the taxable portion of other benefits.

(2)          Compensation resulting from transactions to effectcompliance with the Sarbanes-Oxley Act of 2002. See “Transactions withExecutive Officers” under “Item 13. Certain Relationships and RelatedTransactions” for further information.

 

**Options Exercised in Fiscal Year2005 and Unexercised Options at July 31, 2005**

 

The following table summarizes stock option exercises and total number ofoptions held for Series C Convertible Preferred Stock at the end of fiscal year2005.

 
| ** **        | ** ** | **Series C**       | ** ** | ** **   | ** ** | **Number of Series C**           | ** ** | ** **                       | ** ** |
|-------------------|------------|--------------------|------------|--------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **        | ** ** | **Convertible**    | ** ** | ** **   | ** ** | **Convertible Preferred Shares** | ** ** | **Value of Unexercised**         | ** ** |
| ** **        | ** ** | **Preferred**      | ** ** | ** **   | ** ** | **Underlying Unexercised**       | ** ** | **In-the-Money**                 | ** ** |
| ** **        | ** ** | **Stock Acquired** | ** ** | **Value**    | ** ** | **Options at July 31, 2005**     | ** ** | **Options at July 31, 2005 (1)** | ** ** |
| **Name**          | ** ** | **on Exercise**    | ** ** | **Realized** | ** ** | **Exercisable**                  | ** ** | **Unexercisable**                | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
| Timothy J. Dodd   |       | —             |       | $            | —     |                             | 1,977      |                             | —     |   | $ | — |   | $ | — |   |
| Thomas P. Friezen |       | —             |       | —       |       | 754                              |       | —                           |       | — |   | — |   |
|                   |            |                    |            |              |            |                                  |            |                                  |            |  |  |  |  |  |  |  |

 

The following table summarizes stock option exercises andtotal number of options held for Common Stock at the end of fiscal year 2005.

 
| ** **        | ** ** | ** **      | ** ** | ** **   | ** ** | **Number of**                | ** ** | ** **                       | ** ** |
|-------------------|------------|-----------------|------------|--------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **        | ** ** | **Common**      | ** ** | ** **   | ** ** | **Common Shares**            | ** ** | **Value of Unexercised**         | ** ** |
| ** **        | ** ** | **Stock**       | ** ** | ** **   | ** ** | **Underlying Unexercised**   | ** ** | **In-the-Money**                 | ** ** |
| ** **        | ** ** | **Acquired**    | ** ** | **Value**    | ** ** | **Options at July 31, 2005** | ** ** | **Options at July 31, 2005 (1)** | ** ** |
| **Name**          | ** ** | **on Exercise** | ** ** | **Realized** | ** ** | **Exercisable**              | ** ** | **Unexercisable**                | ** ** | **Exercisable** | ** ** | **Unexercisable** | ** ** |
|              |       |            |       |         |       |                         |       |                             |       |   |   |   |   |
| Timothy J. Dodd   |       | —          |       | $            | —     |                         | 197,556    |                             | 6,755      |   | $ | — |   | $ | — |   |
| Thomas P. Friezen |       | —          |       | —       |       | 109,444                      |       | 5,787                            |       | — |   | — |   |
|                   |            |                 |            |              |            |                              |            |                                  |            |  |  |  |  |  |  |  |

----

(1) There is no establishedpublic trading market for the Company’s securities; therefore, the Company isunable to estimate the value of unexercised options as of July 31, 2005.

 

 

53

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**Employment Agreements**

 

        The Company does not have any employment agreements in placeat the current time.

** **

**Stock Option Plans**

 

        On January 31, 1997 theCooperative’s Compensation Committee of the Board of Directors (the “CompensationCommittee”) adopted the Dakota Growers Incentive Stock Option Plan (the “Plan”).The Plan was ratified by the Cooperative members at the annual meeting inJanuary 1998. The Compensation Committee or the Board of Directors has thepower to determine the key management employees of the Company to receiveoptions and the number of shares to be optioned to each of the employees.Options granted under the Plan are for the purchase of Series C ConvertiblePreferred Stock at fair market value, which were convertible into Equity Stockas a cooperative, and are now convertible into Common Stock and Series DDelivery Preferred Stock as a corporation at the option of the employee, underthe applicable conversion ratio. The maximum number of preferred shares thatmay be issued pursuant to options granted under the Plan is 15,000, all ofwhich have been issued. Each share of Series C Preferred Stock is convertibleinto 24 shares of Common Stock and 24 shares of Series D Delivery PreferredStock of the Company. The conversion ratio is proportionately adjusted if theCompany increases the outstanding shares of Common Stock or Series D DeliveryPreferred Stock, as applicable, without payment by or to the Company or theCompany’s shareholders for such additional shares (e.g. stock split, stock dividendor other action). Options granted under the Plan must be exercised within tenyears from the date such options are granted. In the event of the employee’stermination with the Company, all exercisable options may be exercised within90 days of the termination date. If not exercised, such options lapse.

 

        The Company’s 2002 Stock Option Plan(the “2002 Plan”) was adopted by the Board of Directors on November 21, 2002.All options granted under the 2002 Plan are non-qualified stock options and arefor the purchase of the Company’s Common Stock. The maximum number of shares ofCommon Stock that may be issued pursuant to options granted under the 2002 Planis 294,456 shares, all of which have been issued. Stock options granted underthe 2002 Plan expire 10 years from the date of grant.

 

        On November 21, 2002 the Board ofDirectors adopted the Dakota Growers Pasta Company, Inc. 2003 Stock Option Plan(the “2003 Plan”), which was approved by the Company’s shareholders at theAnnual Meeting on January 11, 2003. The 2003 Plan covers 500,000 shares of theCompany’s Common Stock. Participation in this Plan shall be limited toofficers, directors, employees, vendors or consultants of the Company or anysubsidiary of the Company. Options granted under the 2003 Plan may be incentivestock options (as defined under Section 422 of the Code) or non-qualified stockoptions, as determined by the 2003 Plan administrator at the time of grant ofan option and subject to the applicable provisions of Section 422 of the Codeand the regulations promulgated there under. The stock options generally expire10 years from the date of grant. If the employment of the Optionee isterminated by any reason other than his or her death or disability, allexercisable options may be exercised within 90 days of the termination date. Ifnot exercised, such options lapse. Options to purchase 80,524 shares of CommonStock were granted under the 2003 Plan in fiscal year 2004.

 

**CompensationCommittee Interlocks and Insider Participation**

 

        The members of the CompensationCommittee are John S. Dalrymple III, Curtis R. Trulson and Michael E. Warner.None of these directors are or have been an officer or employee of the Company.During fiscal year 2005, no executive officer of the Company served as a directoror member of the Compensation Committee (or other committee serving anequivalent function) of any other entity, one of whose executive officersserved as a director of or member of the Compensation Committee of the Company.

 

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**ITEM12.  SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT**

 

        The following tablefurnishes information as to the beneficial ownership of the Company’s CommonStock, Series C Convertible Preferred Stock and Series D Delivery PreferredStock by (a) each person known by us to beneficially own more than 5% of theissued and outstanding shares of the Company’s voting securities, (b) each ofthe Company’s executive officers, (c) each of the Company’s directors and (d) allof the Company’s directors and executive officers as a group.

 

        The address of each personlisted below is c/o Dakota Growers Pasta Company, Inc., One Pasta Avenue,Carrington, North Dakota 58421. Except as otherwise noted, each person listedbelow has sole investment discretion and voting power. In accordance with theSecurities and Exchange Commission’s rules, in computing the number of sharesbeneficially owned by a person and the percentage ownership of that person,securities subject to options held by that person that are currentlyexercisable or exercisable within 60 days of July 31, 2005 are treated asoutstanding. These shares, however, are not treated as outstanding for thepurpose of computing the percentage ownership of any other person.

 
| ** **                                              | ** ** | **Beneficially Owned Securities**    | ** ** |
|---------------------------------------------------------|------------|--------------------------------------|------------|
| **Name of  Beneficial Owner**                           | ** ** | **Number of Shares of Common Stock** | ** ** | **Percent of Total Common Stock** | ** ** | **Number of Shares of Series C Preferred** | ** ** | **Percent of Total Series C Preferred** | ** ** | **Number of Shares of Series D Preferred** | ** ** | **Percent of Total Series D Preferred** | ** ** |
| John S. Dalrymple III (1)                               |       | 370,368                              |       | 2.8 | % | — |   | — |   | 333,000 |   | 3.0 | % |
| Allyn K. Hart                                           |       | 16,723                               |       | 0.1 |   | — |   | — |   | 15,000 |   | 0.1 |   |
| Roger A. Kenner (2)                                     |       | 155,596                              |       | 1.2 |   | — |   | — |   | 140,000 |   | 1.2 |   |
| James F. Link (3)                                       |       | 59,656                               |       | 0.5 |   | — |   | — |   | 54,550 |   | 0.5 |   |
| Eugene J. Nicholas (4)                                  |       | 65,525                               |       | 0.5 |   | — |   | — |   | 58,951 |   | 0.5 |   |
| John D. Rice, Jr. (5)                                   |       | 22,583                               |       | 0.2 |   | — |   | — |   | 20,200 |   | 0.2 |   |
| Jeffrey  O. Topp (6)                                    |       | 302,172                              |       | 2.3 |   | — |   | — |   | 271,420 |   | 2.4 |   |
| Curtis R. Trulson (7)                                   |       | 68,624                               |       | 0.5 |   | — |   | — |   | 61,750 |   | 0.5 |   |
| Michael E. Warner                                       |       | 63,441                               |       | 0.5 |   | — |   | — |   | 57,038 |   | 0.5 |   |
| Timothy J. Dodd (8)                                     |       | 259,690                              |       | 1.9 |   | 1,977 |   | 72.4 | % | 238,248 |   | 2.1 |   |
| Thomas P. Friezen (8)                                   |       | 132,747                              |       | 1.0 |   | 754 |   | 27.6 |   | 121,752 |   | 1.1 |   |
| Michael Tokarz (10)                                     |       | 909,091                              |       | 6.9 |   | — |   | — |   | — |   | — |   |
| MVC Capital, Inc. (10)                                  |       | 909,091                              |       | 6.9 |   | — |   | — |   | — |   | — |   |
| All directors and officers  as a Group (12 persons) (9) |       | 2,426,216                            |       | 17.9 |   | 2,731 |   | 100.0 |   | 1,371,909 |   | 12.1 |   |

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(1)               Includes shares held in the names of Mr. Dalrymple’s spouse, daughter andthe John S. Dalrymple III Trust.

(2)               Includes shares held in the name of Mr. Kenner’s spouse.

(3)               Includes shares held in the names of Link Farms LLP LSB Pasta and LinkFarms LLP.

(4)               Includes shares held in the name of Mr. Nicholas’ spouse.

(5)               Includes shares held in the name of John Rice Farm.

(6)               Includes shares held in the names of T-T Ranch and Mr. Topp’s spouse andchildren.

(7)               Includes shares held in the name of Trulson Brothers.

(8)               Messrs. Dodd and Friezen have been granted options that are currentlyexercisable or exercisable within 60 days of July 31, 2005, to purchase 1,977and 754 shares, respectively, of the Company’s Series C Preferred Stock and197,556 and 109,444 shares, respectively, of the Company’s Common Stock. Eachshare of Series C Preferred Stock is convertible into 24 shares of Common Stockand 24 shares of Series D Delivery Preferred Stock of the Company. The numberof shares of Common Stock presented for Messrs. Dodd and Friezen include 47,448and 18,096 shares, respectively, of Common Stock issuable upon exercise of theoptions to purchase Series C Preferred Stock of the Company and conversion ofeach such share of Series C Preferred Stock into 24 shares of 

 

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Common Stock in the Company. The number of sharesof Series D Delivery Preferred Stock presented for Messrs. Dodd and Friezenincludes 47,448 and 18,096 shares, respectively, of Series D Delivery PreferredStock issuable upon exercise of the options to purchase Series C PreferredStock of the Company and conversion of each such share of Series C PreferredStock into 24 shares of Common Stock in the Company, with one share of Series DDelivery Preferred Stock issuable for each share of Common Stock so issued uponconversion. The number of shares of Common Stock presented for Messrs. Dodd andFriezen also includes 197,556 and 109,444 shares, respectively, of Common Stockissuable upon exercise of options to purchase Common Stock.

(9)               The number of shares of Common Stock and Series D Delivery PreferredStock and the percentage of the total number of shares of Common Stock andSeries D Delivery Preferred Stock beneficially owned by all directors andexecutive officers as a group are shown on a fully-diluted basis, based upon13,541,926 shares of Common Stock and 11,340,841 shares of Series D DeliveryPreferred Stock issued and outstanding on a fully-diluted basis.

(10)         The shares are directly ownedby MVC Capital, Inc. of which Mr. Tokarz is a stockholder, director andChairman.  Mr. Tokarz disclaims anybeneficial ownership of the Company’s securities for purposes of Section 16(a)under the Securities Exchange Act of 1934, as amended, or otherwise, except tothe extent of the Reporting Person’s pecuniary interests therein.

 

**EquityCompensation Plan Information**

 

        See “Item11. Executive Compensation” for a discussion of the material features of theCompany’s Stock Option Plans. The following table provides informationregarding the Company’s equity compensation plans as of July 31, 2005.

 
| ** **                                                 | ** ** | ** **                                                        | ** ** | ** **            | ** ** | **Number of Securities** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| ** **                                                 | ** ** | **Number of Securities**                                          | ** ** | **Weighted-Average**  | ** ** | **Remaining Available**  | ** ** |
| ** **                                                 | ** ** | **to be Issued**                                                  | ** ** | **Exercise Price of** | ** ** | **for Future Issuance**  | ** ** |
| ** **                                                 | ** ** | **Upon Exercise of**                                              | ** ** | **Outstanding**       | ** ** | **Under Equity**         | ** ** |
| **Plan Category**                                          | ** ** | **Outstanding Options**                                           | ** ** | **Options**           | ** ** | **Compensation Plans**   | ** ** |
|                                                       |       |                                                              |       |                  |       |                     |       |
|                                                       |       | **Options  to purchase Series C Convertible Preferred Stock (1)** |       |
| Equity compensation plans approved by security holders     |       | 2,731                                                             |       | $                     | 112.56     |                     | —     |   |
|                                                       |       |                                                              |       |                  |       |                     |       |
|                                                       |       | **Options  to purchase Common Stock**                             |       |
| Equity compensation plans approved by security holders     |       | 80,524                                                            |       | $                     | 4.25       |                     | 419,476    |   |
|                                                       |       |                                                              |       |                  |       |                     |       |
| Equity compensation plans not approved by security holders |       | 294,456                                                           |       | $                     | 6.25       |                     | —     |   |

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(1)Each share of Series C Convertible Preferred Stockis convertible into 24 shares of Common Stock and 24 shares of Series D DeliveryPreferred Stock of the Company.

 

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**ITEM13.  CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

**Transactions with Executive Officers**

 

        The Company had pledged certificates ofdeposit as security for loans, totaling approximately $1,974,000, made by afinancial institution to Timothy J. Dodd, President and Chief ExecutiveOfficer, and Thomas P. Friezen, Chief Financial Officer, to exercise stockoptions. These loans matured December 1, 2002.

 

        In accordance with the provisions of theSarbanes-Oxley Act of 2002, the Board of Directors approved the repurchase of190,800 and 103,656 shares of the Company’s Common Stock from Messrs. Dodd andFriezen, respectively. The repurchase was completed in November 2002. In conjunctionwith the repurchase of these shares at $6.25 per share, Messrs. Dodd andFriezen received proceeds of $1,192,500 and $647,850, respectively. In addition, Mr. Friezen received additionalgross proceeds of $229,993 under a compensatory transaction in conjunction withthe unwinding of previous stock option exercises and related officer loans.Messrs. Dodd and Friezen also received $81,311 and $53,425, respectively, undercompensatory transactions for the interest on the loans made by the financial institutionto exercise stock options. The proceeds received by Messrs. Dodd and Friezenwere used to pay off their loans with the financial institution. As a result,the Company’s certificates of deposit were no longer restricted. The Companyredeemed the certificates of deposit in December 2002. Finally, Messrs. Doddand Friezen were granted stock options to purchase 190,800 and 103,656 shares,respectively, of the Company’s Common Stock with an exercise price of $6.25 pershare. Such options were first exercisable on December 2, 2002.

 

        The Company had advanced funds to Mr. Dodd and Mr. Friezenunder promissory agreements to cover personal alternative minimum taxes andother costs generated as a result of these officers exercising stock options.Interest on the advances is charged at the applicable federal rate as publishedby the Internal Revenue Service. Certain of these promissory notes became duein conjunction with the repurchase of Common Stock from Messrs. Dodd andFriezen noted above. The Compensation Committee approved forgiving theprincipal ($92,153) and interest ($11,093) on these promissory notes along withan additional compensatory transaction of $63,292 to cover estimated personalincome taxes the officers incurred on the promissory note forgiveness.

 

**ConsultingServices**

 

        In July 2004, the Company and MVCFinancial Services, Inc. entered into a consulting agreement pursuant to whichMVC Financial Services, Inc. will provide certain business consulting servicesto the Company for annual compensation of $75,000 per year and thereimbursement of expenses.  MVC FinancialServices, Inc. is an affiliate of MVC Capital, Inc., a holder of 5% or greaterof the Company’s Common Stock.  MichaelT. Tokarz, a director of the Company, is a stockholder and Chairman of MVCCapital, Inc.

 

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**ITEM14.  PRINCIPAL ACCOUNTING FEES ANDSERVICES**

 

   The following table representsaggregate fees billed (in thousands) to the Company for fiscal years ended July31, 2005 and 2004 by Eide Bailly LLP, the Company’s principal accounting firm.

 
| ** **             | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2005**              | ** ** | **2004** | ** ** |
| ** **             | ** ** | ** **            | ** ** | ** ** | ** ** |
| Audit Fees             |       | $                     | 61         |   | $ | 54 |   |
| Audit-Related Fees (a) |       | 9                     |       | 8 |   |
| Tax Fees (b)           |       | 22                    |       | 19 |   |
| All Other Fees         |       | —                |       | — |   |
|                   |       |                  |       |   |   |
| Total Fees (c)         |       | $                     | 92         |   | $ | 81 |   |
|                   |       |                  |       |   |   |

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(a)   Primarily benefit plan audit services.

 

(b)   Primarily tax advisory and preparationservices.

 

(c)   The Audit Committee has approved all fees.

 

**Auditor Services Pre-approval Policy**

 

        TheAudit Committee has a formal policy concerning pre-approval of all services tobe provided by Eide Bailly LLP, the Company’s independent auditor, includingaudit, audit-related, tax and other services. The Chair of the Committee hasthe authority to pre-approve permitted services that require action betweenregular Committee meetings, provided a report of these services is given to thefull Committee at the next regular meeting. The Committee approved all servicesprovided by Eide Bailly LLP during fiscal year 2005.

 

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**PART IV**

 

**ITEM15.  EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

 

(a)          The following are filed as part of this report:

 

**1.     FinancialStatements**

 

        Report of Independent Registered PublicAccounting Firm

 

        Consolidated Balance Sheets as of July31, 2005 and 2004

 

        Consolidated Statements of Operationsfor the years ended July 31, 2005, 2004 and 2003

 

                        ConsolidatedStatements of Changes in Stockholders’ Equity for the years ended July 31,2005, 2004 and 2003

 

        Consolidated Statements of Cash Flowsfor the years ended July 31, 2005, 2004 and 2003

 

        Notes to Consolidated FinancialStatements

 

**2.     Financial Statement Schedules**

 

        All schedules are omitted as therequired information is inapplicable or the information is presented in theconsolidated financial statements or related notes.

 

**3.**     **Exhibits**

 

                        2.1           Second Amended and Restated Plan ofMerger between Dakota Growers Pasta Company and Dakota Growers PastaRestructuring Cooperative. (Incorporated by reference to Exhibit 2.1 from theCompany’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

                        2.2           Second Amended and Restated MergerAgreement between Dakota Growers Pasta Restructuring Cooperative and DakotaGrowers Corporation. (Incorporated by reference to Exhibit 2.2 from the Company’sPre-Effective Amendment No. 2 to Form S-4 Registration Statement, File No.333-81946, dated April 19, 2002).

 

                        2.3           Second Amended and Restated MergerAgreement between Dakota Growers Corporation and the Company, formerly DakotaGrowers Restructuring Company, Inc. (Incorporated by reference to Exhibit 2.3from the Company’s Pre-Effective Amendment No. 2 to Form S-4 RegistrationStatement, File No. 333-81946, dated April 19, 2002).

 

                        2.4           Second Amended and RestatedTransaction Agreement between Dakota Growers Pasta Company, Dakota GrowersPasta Restructuring Cooperative, Dakota Growers Corporation and the Company,formerly Dakota Growers Restructuring Company, Inc. (Incorporated by referenceto Exhibit 2.4 from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration Statement, File No. 333-81946, dated April 19, 2002).

 

                        3.1           Second Amended and Restated Articlesof Incorporation of the Company, formerly Dakota Growers Restructuring Company,Inc. (Incorporated by reference to Exhibit 3.1 from the Company’s Pre-EffectiveAmendment No. 2 to Form S-4 Registration Statement, File No. 333-81946, datedApril 19, 2002).

 

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                        3.2           Second Amended and Restated Bylaws ofthe Company, formerly Dakota Growers Restructuring Company, Inc. (Incorporatedby reference to Exhibit 3.3 from the Company’s Pre-Effective Amendment No. 2 toForm S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).

 

                        3.3           Certificate of Designation of SeriesE Junior Participating Preferred Stock of the Company, formerly Dakota GrowersRestructuring Company, Inc. (Incorporated by reference to Exhibit 3.2 from theCompany’s Pre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

                        4.1           Note Purchase Agreement dated July15, 1998. (Incorporated by reference to Exhibit 4.1 from Dakota Growers PastaCompany’s Amendment No. 1 to Form S-1 Registration Statement on Form S-1/A,File No. 333-65071, declared effective October 21, 1998).

 

                        4.2           Waiver and First Amendment to NotePurchase Agreements dated November 28, 2000. (Incorporated by reference toExhibit 4.1 from Dakota Growers Pasta Company’s Quarterly Report on Form 10-Q,File No. 33-99834, for the quarter ended October 31, 2000).

 

                        4.3           Waiver and Second Amendment to NotePurchase Agreement and Notes dated June 1, 2001. (Incorporated by reference toExhibit 4.3 from Dakota Growers Pasta Company’s Annual Report on Form 10-K forthe fiscal year ended July 31, 2001, File No. 33-99834).

 

                        10.1         Incentive Stock Option Plan.(Incorporated by reference to Exhibit 10.1 from Dakota Growers Pasta Company’sQuarterly Report on Form 10-Q, File No. 33-99834, for the quarter ended April30, 1998).

 

                        10.2         Master Lease Agreement dated March 6,2002 and related Schedule A dated March 29, 2002 between Dakota Growers PastaCompany and Farm Credit Leasing Services Corporation. (Incorporated byreference to Exhibit 10.2 from the Company’s Pre-Effective Amendment No. 2 toForm S-4 Registration Statement, File No. 333-81946, dated April 19, 2002).

 

                        10.3         Amended and Restated Share RightsAgreement, dated as of April 19, 2002, by and among the Company, formerlyDakota Growers Restructuring Company, Inc., and Wells Fargo Bank Minnesota,National Association, as Rights Agent. (Incorporated by reference to Exhibit10.1 from the Company’s Pre-Effective Amendment No. 2 to Form S-4 RegistrationStatement, File No. 333-81946, dated April 19, 2002).

 

                        10.4         Dakota Growers Pasta Company, Inc. 2002Stock Option Plan. (Incorporated by reference to Exhibit 10.16 from the Company’sAnnual Report on Form 10-K, File No. 000-50111, for the year ended July 31,2003).

 

10.5                           Dakota Growers PastaCompany, Inc. Amended and Restated 2003 Stock Option Plan. (Incorporated byreference to Exhibit 10.6 from the Company’s Quarterly Report on Form 10-Q,File No. 000-50111, for the quarter ended January 31, 2004).

 

10.6                           Manufacturing Agreementdated December 26, 2003 between the Company and DNA Dreamfields Company, LLC.(Incorporated by reference to Exhibit 10.2 from the Company’s Quarterly Reporton Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004).Confidential treatment has been granted with respect to portions of theExhibit.

 

10.7                           Services Agreement datedDecember 26, 2003 between the Company and DNA Dreamfields Company, LLC.(Incorporated by reference to Exhibit 10.3 from the Company’s Quarterly Reporton Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004).Confidential treatment has been granted with respect to portions of theExhibit.

 

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10.8                           Trademark License Agreementdated December 26, 2003 between the Company and DNA Dreamfields Company, LLC.(Incorporated by reference to Exhibit 10.4 from the Company’s Quarterly Reporton Form 10-Q, File No. 000-50111, for the quarter ended January 31, 2004).

 

10.9                           Technology SublicenseAgreement dated December 26, 2003 between the Company and DNA DreamfieldsCompany, LLC. (Incorporated by reference to Exhibit 10.5 from the Company’sQuarterly Report on Form 10-Q, File No. 000-50111, for the quarter endedJanuary 31, 2004).

 

10.10                     Stock Purchase Agreementdated July 30, 2004 between the Company and MVC Capital, Inc. (Incorporated byreference to Exhibit 99.2 from the Company’s Report on Form 8-K, File No.000-50111, filed August 6, 2004).

 

10.11                     Registration RightsAgreement dated July 30, 2004 between the Company and MVC Capital, Inc.(Incorporated by reference to Exhibit 99.3 from the Company’s Report on Form8-K, File No. 000-50111, filed August 6, 2004).

 

10.12                     Consulting Agreement datedJuly 30, 2004 between the Company and MVC Financial Services, Inc.(Incorporated by reference to Exhibit 99.4 from the Company’s Report on Form8-K, File No. 000-50111, filed August 6, 2004).

 

10.13                     Membership Unit PurchaseAgreement effective May 1, 2005 between and among Dakota Growers PastaCompany, Inc., B-New, LLC, TechCom Group, LLC and Buhler, Inc.  (Incorporated by reference to Exhibit 10.1from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).

 

10.14                     Amended and Restated DNADreamfields Company, LLC Operating Agreement effective May 1, 2005 between theCompany, B-New, LLC, TechCom Group, LLC and Buhler, Inc.  (Incorporated by reference to Exhibit 10.2from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).

 

10.15                     2005 Line of Credit LoanAgreement effective May 31, 2005 by and between the Company (“Lender”) and DNADreamfields Company, LLC (“Borrower”). (Incorporated by reference to Exhibit 10.3 from the Company’s Report onForm 8-K, File No. 000-50111, filed July 1, 2005).

 

10.16                     Promissory Note effective May31, 2005 executed by DNA Dreamfields Company, LLC.   (Incorporated by reference to Exhibit 10.4from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).

 

10.17                     LLC Unit Pledge Agreement effectiveMay 31, 2005 between and among B-New, LLC, TechCom Group, LLC,Buhler, Inc. (collectively the “Pledgors”) and the Company (“Lender”).  (Incorporated by reference to Exhibit 10.5from the Company’s Report on Form 8-K, File No. 000-50111, filed July 1, 2005).

 

10.18                     Master Loan Agreement datedMay 23, 2005 between the Company and CoBank, ACB.  (Incorporated by reference to Exhibit 10.1from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).

 

10.19                     Statused Revolving CreditSupplement dated May 23, 2005 between the Company and CoBank, ACB.  (Incorporated by reference to Exhibit 10.2from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).

 

                        10.20       Non-Revolving Credit Supplement dated May23, 2005 between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.3 from the Company’s Report onForm 8-K, File No. 000-50111, filed July 7, 2005).

 

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                        10.21       Multiple Advance Term Loan Supplementdated May 23, 2005 between the Company and CoBank, ACB.  (Incorporated by reference to Exhibit 10.4 fromthe Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).

 

                        10.22       Continuing Guarantee Agreement dated May23, 2005 between Primo Piatto, Inc., a wholly-owned subsidiary of theCompany, and CoBank, ACB.  (Incorporatedby reference to Exhibit 10.5 from the Company’s Report on Form 8-K, File No.000-50111, filed July 7, 2005).

 

                        10.23       Security Agreement dated May 23, 2005between Primo Piatto, Inc. and CoBank, ACB.  (Incorporated by reference to Exhibit 10.6from the Company’s Report on Form 8-K, File No. 000-50111, filed July 7, 2005).

 

21                                    Subsidiary ofthe registrant.

 

| **Name of  Subsidiary** | ** ** | **Jurisdiction  of Incorporation** |
|-------------------------|------------|------------------------------------|
|                    |       |                               |
| Primo  Piatto, Inc.     |       | Minnesota                          |

 

        23            Consentof Independent Registered Public Accounting Firm; Eide Bailly LLP.

 

                        31.1         Certification of Chief ExecutiveOfficer required by Securities and Exchange Commission Rule 13a-14(a) or15d-14(a).

 

                        31.2         Certification of Chief FinancialOfficer required by Securities and Exchange Commission Rule 13a-14(a) or15d-14(a).

 

32.1                           Certification of ChiefExecutive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18U.S.C. Section 1350.

 

                        32.2         Certification of Chief FinancialOfficer 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 Section13 or 15(d) 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. |
|--------|-------------------------------------|
|   |                                |
|   |                                |
|   | By:                                 | /s/  Timothy J. Dodd |
|   |                                |
|   |                                | Timothy  J. Dodd, |
|   |                                | PRESIDENT  AND CHIEF EXECUTIVE OFFICER, |
|   |                                | AND  PRINCIPAL EXECUTIVE OFFICER |
|   |                                |
|   | Dated: October 28, 2005             |

 

        Pursuant to the requirements of theSecurities Exchange Act of 1934, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.

 
| **Signature**              | ** ** | **Title**                              | ** ** | **Date**         |
|----------------------------|------------|----------------------------------------|------------|------------------|
|                       |       |                                   |       |             |
| /s/  Timothy J. Dodd       |       | President and Chief  Executive Officer |       |             |
| Timothy  J. Dodd           |       | (Principal Executive  Officer)         |       | October 28, 2005 |
|                       |       |                                   |       |             |
| /s/  Thomas P. Friezen     |       | Chief Financial Officer                |       |             |
| Thomas  P. Friezen         |       | (Principal Financial  Officer)         |       | October 28, 2005 |
|                       |       |                                   |       |             |
|                       |       | Vice President — Finance  and     |       |             |
| /s/  Edward O. Irion       |       | Chief Accounting Officer               |       |             |
| Edward  O. Irion           |       | (Principal Accounting  Officer)        |       | October 28, 2005 |
|                       |       |                                   |       |             |
| /s/  John S. Dalrymple III |       |                                   |       |             |
| John  S. Dalrymple III     |       | Director                               |       | October 28, 2005 |
|                       |       |                                   |       |             |
| /s/  John D. Rice, Jr.     |       |                                   |       |             |
| John  D. Rice, Jr.         |       | Director                               |       | October 28, 2005 |
|                       |       |                                   |       |             |

 

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|                    |   |     |   |             |
|-------------------------|--------|----------|--------|------------------|
| /s/  Curt R. Trulson    |   |     |   |             |
| Curt  R. Trulson        |   | Director |   | October 28, 2005 |
|                    |   |     |   |             |
| /s/  Allyn K. Hart      |   |     |   |             |
| Allyn  K. Hart          |   | Director |   | October 28, 2005 |
|                    |   |     |   |             |
| /s/  Roger A. Kenner    |   |     |   |             |
| Roger  A. Kenner        |   | Director |   | October 28, 2005 |
|                    |   |     |   |             |
| /s/  James F. Link      |   |     |   |             |
| James  F. Link          |   | Director |   | October 28, 2005 |
|                    |   |     |   |             |
| /s/  Eugene J. Nicholas |   |     |   |             |
| Eugene  J. Nicholas     |   | Director |   | October 28, 2005 |
|                    |   |     |   |             |
| /s/  Michael T. Tokarz  |   |     |   |             |
| Michael  T. Tokarz      |   | Director |   | October 28, 2005 |
|                    |   |     |   |             |
| /s/  Jeffrey O. Topp    |   |     |   |             |
| Jeffrey  O. Topp        |   | Director |   | October 28, 2005 |
|                    |   |     |   |             |
| /s/  Michael E. Warner  |   |     |   |             |
| Michael  E. Warner      |   | Director |   | October 28, 2005 |

 

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