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**UNITEDSTATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM 10-K**

 
| x      | ** ** | **Annual Report Pursuant to  Section 13 or 15(d) of the Securities Exchange   Act of 1934**     |
|--------|------------|-----------------------------------------------------------------------------------------------------------|
|   |       |                                                                                                      |
|   |       | **for  the fiscal year ended July 31, 2008**                                                         |
|   |       | ** **                                                                                                |
|   |       | **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.**

(Exact name of registrant as specified in itscharter)

 

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

 

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

(Address of principal executive officesincluding zip code)

 

**(701) 652-2855**

(Registrant’s telephone number, includingarea code)

 

Securities Registered Pursuant To Section 12(b) OfThe Act:

**None**

 

Securities Registered Pursuant To Section 12(g) OfThe Act:

**Common Stock, $.01 par value per share**

**Series D Delivery Preferred Stock, $.01par value per share**

 

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Indicate by check mark if the registrant is awell-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes o  No x

 

Indicate by check mark if the Registrant isnot required to file reports pursuant to Section 13 or Section 15(d) ofthe Act.

Yes o  No x

 

Indicate by check mark whether the Registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) hasbeen subject to such filing requirements for the past 90 days.

Yes x  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 Part IIIof this Form 10-K or any amendment to this Form 10-K. x

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See the definitions of “large accelerated filer,” “acceleratedfiler” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act).  Yeso  No x

 

There is no established public market for theRegistrant’s common stock. Although there is a limited, private market forshares 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 29,2008, the Registrant had 10,192,413 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 Dakota corporationthat was organized on January 30, 2002. It is the successor to and its operationsare a continuance of Dakota Growers Pasta Company, a North Dakota cooperative(the “Cooperative”), upon the conversion to a corporation effective July 1,2002.

 

The Companyowns and operates a vertically integrated, state-of-the-art durum wheat millingand pasta production facility in Carrington, North Dakota. Primo Piatto, Inc.(“Primo Piatto”), a wholly-owned subsidiary of the Company being operated asthe Minnesota Division of the Company, currently operates a pasta productionplant in New Hope, Minnesota. The Company currently has annual capacity togrind in excess of 12 million bushels of grain and to produce approximately 500million pounds of pasta.  DNA DreamfieldsCompany, LLC (“DNA Dreamfields”) became a wholly-owned subsidiary on September 21,2007 (See Note 2).

 

**Pasta Industry and Markets**

 

The Company estimates North American annualdry pasta demand to be roughly 4.0 billion pounds, including pasta used indinners, side dishes and meal solutions. In addition to the domestic market fordry pasta, much smaller domestic markets exist for refrigerated and frozenpasta.

 

The Pasta industry identifies domestic drypasta into two basic markets: retail and institutional. The Company recognizesthe institutional market as being comprised of ingredient and foodservicesales.

 

*Retail Market*

 

The Retailmarket includes sales of branded and private label pasta to grocery stores,club stores, mass merchants and other consumer retail operations. A significantportion of the Retail market is represented by established national or regionalpasta brands. The Company estimates that Barilla, New World Pasta Company andAmerican Italian Pasta Company account for over 70% of the branded retailmarket. The Company focuses a majority of its Retail marketing efforts onprivate label sales. The market leaders in private label sales are AmericanItalian Pasta Company and Dakota Growers.

 

DNA DreamfieldsCompany, LLC launched a low digestible carbohydrate pasta under the *Dreamfields* brand name in 2004.  *Dreamfields*  pasta has maintained slightly over a 1% dollarshare of the traditional grocery channel pasta market during the last threeyears based on data from A.C. Nielsen, making it the leading pasta in the lowcarbohydrate pasta category.  *Dreamfields* pasta also has a 65% lower glycemic index thanregular pasta.

 

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In 2005, a newtrend toward high fiber products developed. While still small relative to thetotal pasta category, the consumption of these whole wheat/whole grain productscontinues to grow.  *Dreamfields*pasta offers fiber benefits similar to the levels of other whole wheat/wholegrain pastas while maintaining the integrity of the taste and low carbohydratetraits.  Dakota Growers also manufacturesand sells traditional whole wheat/whole grain pastas.

 

*Institutional Market*

 

Ingredient salesconsist of pasta used by food processors as an ingredient or component in a further-processedor combination food product. Such food products include dry pasta dinners,including macaroni and cheese, frozen entrees, refrigerated salads, cannedentrees, baby food, and canned and dry soups. The size of the Ingredient marketis influenced by the number of food processors that choose to produce pastainternally rather than outsource.

 

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.

 

**Co-PackArrangements**

 

A portion ofeach end-user market is supplied under “co-pack” arrangements between pastamanufacturers. These agreements involve the sale of dry pasta products betweenpasta manufacturers in order to supply short-term volume deficiencies suchmanufacturers suffer from time to time in meeting customer requirements, and toallow a manufacturer to draw upon particular areas of expertise of othermanufacturers, which may be more cost beneficial than self-manufacturing.  Co-pack sales comprised approximately 5% ofthe Company’s net revenues for each of the years ended July 31, 2008 and2007 and 3% for the year ended July 31, 2006.

 

**Production and Products**

 

The Companypurchases durum wheat which is processed through its milling facility intosemolina and durum wheat flours that are then used by the Company to producedry pasta products.

 

Pasta productionis basically a mixing, extrusion and drying process. The primary ingredients aresemolina and water, although egg, tomato, spinach or other ingredients may beadded to produce certain products. The finished dry pasta is packed to meetdifferent markets and customer requirements.

 

The pastaproducts manufactured by the Company consist of over 100 different shapes andare sold to customers in all markets. In addition to the dry pasta produced bythe Company, it purchases additional dry pasta shapes from other manufacturersand resells them. This practice is widely followed by many pasta manufacturersfor efficiency and production capacity reasons, and allows distribution ofwider product lines to the Company’s customers. Outside purchases of pasta,excluding imports, comprised approximately 1% of net sales for the year ended July 31,2008 and 2% for each of the years ended July 31, 2007 and 2006.

 

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 are certified by the Organic CropImprovement Association, which allows the Company to offer 100% organic pastaand semolina. The Company’s facilities allow for the isolation of the durum,semolina and pasta to enable this certification.

 

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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 has consistently received high scores.

 

In addition toits pasta products, the Company markets semolina, durum wheat flour and otherflour blends to other food product manufacturers as market conditions allow.Lower grade second clear flours and millfeed by-products of the durum millingprocess are sold primarily for animal feed. Revenues from mill product salesrepresented approximately 12%, 8% and 7% of the Company’s net revenues for theyears ended July 31, 2008, 2007 and 2006, respectively.

 

**Sales, Marketing and Customers**

 

The Company markets its products throughdirect sales, supplemented by the efforts of third party brokers retained bythe Company. These brokers receive commissions based upon sales of the Company’sproducts. The Company’s pasta products are distributed on a broad basisthroughout the United States. The Company does not export significantquantities of its pasta products. One customer, U.S. Foodservice, accounted forapproximately 9%, 12% and 12% of net revenues for the years ended July 31,2008, 2007 and 2006, respectively. The Company’s top 10 customers accounted for45% of net revenues in fiscal year 2008 and 50% of net revenues in fiscal years2007 and 2006.  Pasta revenues consistedof 44% Retail and 56% Institutional for fiscal year 2008, 49% Retail and 51%Institutional for fiscal year 2007, and 51% Retail and 49% Institutional forfiscal year 2006.

 

We do not have long-term supply contractswith a substantial number of our customers. 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.

 

**Series D Delivery Preferred Stock Delivery Rights**

 

Each share of Series D DeliveryPreferred Stock of the Company gives its holder the privilege, but not theobligation, to deliver one bushel of durum wheat to the Company each fiscalyear on a “first-come, first-served” basis. From time to time the Company will post notices to the market on its Website (holders may also telephone the Company for information on market notices)for the purchase of durum wheat. During the 24-hour period following theposting of any market notice and to the extent that the Company’s durum wheatrequirements as set forth in the market notice have not been fulfilled by otherholders of Series D Delivery Preferred Stock, holders of Series DDelivery Preferred Stock have the right to (i) accept the Company’s offerto purchase durum wheat and (ii) deliver durum wheat to the Company onsuch terms and conditions as are set forth in the market notice.  However, in any given fiscal year of theCompany, the first-come, first-served privilege to deliver durum wheat shall beexercisable to deliver one bushel of durum wheat****onlyonce with respect to each share of Series D Delivery Preferred Stock.During the 24-hour period following the posting of any market notice, theCompany 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 thedurum wheat requested in the notice, the Company will fulfill its remainingrequirements outside of the Series D Delivery Preferred Stock deliveryprivilege.

 

Because the privilege of a holder of Series DDelivery Preferred Stock to deliver durum wheat to the Company only arises ifthe Company actually requires durum, the privilege is not absolute.  Any and all durum wheat delivered by a holderof Series D Delivery Preferred Stock to the Company must conform toquality specifications established by the Company.

 

The Company purchases durum wheat primarilyon the open market. Durum wheat purchases from holders of the Company’s Series DDelivery Preferred Stock have been negligible.

 

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**Competition**

 

*Overview*

 

The markets forpasta and semolina/durum wheat flour are highly competitive in most markets andgeographic regions. The intensity of competition varies from time to time as aresult of a number of factors, including: (1) the degree of industrycapacity utilization, (2) comparative product distribution costs, (3) abilityto render distinctive service to customers, (4) the price of rawmaterials, primarily durum wheat, and (5) a distinguishing or uniqueability to provide consistent product quality in line with customerspecifications.  The Company believesthat, in a broad sense, the most influential factor on the intensity ofcompetitive conditions is industry capacity utilization.  It should be noted that detailed informationregarding pasta production is somewhat difficult to obtain, as many pastaproducers are closely-held enterprises.

 

*Competition in the Pasta Market*

 

The pasta marketis highly competitive and includes several well-established enterprises. Thosecompetitors 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.

 

The Companymarkets its products in the Retail market primarily as a private labelsupplier. The Company’s *Dakota Growers Pasta Co.*label to date has slight penetration in local area markets in the Dakotas andMinnesota and its *Pasta Sanita* label is sold insmall niches ranging from the upper Midwest to select markets in parts of theUnited States. *Dreamfields*  pasta has maintained slightly over a 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’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, American Beauty, Creamette, Prince* brands et al), AmericanItalian Pasta Company (*Muellers, R&F, Anthony’s,Golden Grain/Mission* brands et al) and a variety of smaller domesticand imported brands.

 

In the Foodservice market,the Company also markets its pasta primarily as a private label supplier,including sales to three of the largest foodservice distributors in the countryunder their labels. The Company’s main competitors in the Foodservice marketare American Italian Pasta Company, A. Zerega’s Sons, Inc., and Barilla,as well as foreign competitors that sell product in the United States. TheCompany’s *Dakota Growers Pasta Co.*, *Pasta Sanita* and *Pasta Growers*foodservice brands are sold throughout the United States to independentdistributors and national chain accounts. The Company has an exclusivedistribution agreement with New World Pasta under which the Company is licensedto use the *Ronzoni, Prince, San Giorgio*and*Mrs. Weiss* brands in the Foodservicemarket.

 

The Company’singredient sales have continued to grow in the past year.  The Company’s top competitors in theIngredient market include American Italian Pasta Company, Philadelphia MacaroniCo. Inc., and A. Zerega’s Sons, Inc. A large portion of the Ingredientmarket production capacity is represented by food processors that produce pastainternally.

 

The competitive environment in the pasta industry depends largely onaggregate industry capacity relative to aggregate demand for pasta products.The pasta manufacturing industry experienced restructuring over the past fewyears which reduced the excess pasta production capacity.  Barilla’s second U.S. manufacturing facilitybecame operational in mid–2007.

 

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*Competition in the Semolina and Durum WheatFlour Market*

 

Given thecommodity nature of the market for semolina and durum flour, sales volume islargely dependent on delivered price when adequate supply conditions exist.Italgrani USA, Inc., Horizon Milling, LLC and Miller Milling collectivelyare believed to represent approximately 40% of total domestic durum millingcapacity, while the Company’s current milling operation represents about15%.  Most of the durum milling capacityin the United States is either part of an integrated pasta production facilityor in an alliance with pasta manufacturers. The Company believes that theintegration of its milling and pasta production facilities enables it tocompete more effectively with those competitors who also have integratedfacilities.

 

**Government Regulation**

 

*Trade Policies*

 

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 pasta prices are also influenced bycompetition from foreign pasta producers, and as such, by the trade policies ofboth the U.S. government and foreign governments. U.S. Customs and BorderProtection (Customs) distributes antidumping and countervailing duties assessedon certain pasta imported from Italy and Turkey to affected domestic producerspursuant to the Continued Dumping and Subsidy Offset Act of 2000 (the “OffsetAct”). The Company received net payments of $2.2 million, $1.3 million and $1.1million in fiscal years 2008, 2007 and 2006, respectively, under the OffsetAct. These amounts have been classified as other income.  The company cannot reasonably estimate thepotential amount, if any, that it may receive under the Offset Act in futureperiods as any such amount will be based upon futures events over which theCompany has little or no control, including, but not limited to, the amount ofexpenditures by domestic pasta producers and the amount of antidumping andcountervailing duties collected by Customs. The Act, also known as the Byrd Amendment, has been repealed and therefore,duties assessed on pasta imports after September 30, 2007 will no longerbe distributed to domestic producers. However, amounts collected (whether such collections occur before orafter September 30, 2007) related to duties assessed on pasta entriesprior to September 30, 2007, are expected to be available for futuredistribution to domestic producers.

 

*Food and Drug Administration Regulation*

 

As a producer of products intended for humanconsumption, the Company’s operations are subject to certain federal and stateregulations, including regulations promulgated by the United States Food andDrug Administration. The Company believes that it is in material compliancewith the applicable regulatory requirements.

 

*Environmental Regulation*

 

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 control program designed to meet these environmental lawsand regulations. 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 whether futurechanges 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.

 

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**Intellectual Property Rights**

** **

The Company relies on a combination of tradesecret, 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: Dreamfields®,Pasta Growers®, Pasta Sanita®, Zia Briosa®, Primo Piatto® and Dakota GrowersPasta Co.®.

 

**Research and Development**

** **

The Company supports research and developmentprograms in North Dakota that focus on improved varieties of durum wheat.Dakota Growers has an on-staff agronomist and is in the midst of a long-termproject 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 *Dreamfields*pasta products, the Company is investing and participating in product andmanufacturing 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 September 26, 2008, the Companyhad 433 employees, 146 of which are covered by collective bargaining agreementsat its Primo Piatto, Inc. subsidiary. These collective bargainingagreements expire on December 1, 2010 and September 30, 2008.  Approximately 28% of the Company’s workforceis covered by the collective bargaining agreement that was to expire on September 30,2008; however, the Company and union have mutually agreed to extend thecontract while negotiations continue. The Company considers its employeerelations to be very good.

** **

**Available Information**

** **

*SEC Filings*

* *

The Company’s Internet website address is *www.dakotagrowers.com*. We make available, free of chargethrough the “Investors” portion of our website, the Company’s annual reports onForm 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K,and amendments to those reports filed or furnished pursuant to Section 13(a) or15(d) of the Securities Exchange Act of 1934 (the “1934 Act”) as soon asreasonably practicable after we electronically file such materials with, orfurnish such materials to, the Securities and Exchange Commission. Reports ofbeneficial ownership filed pursuant to Section 16(a) of the 1934 Actare 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 is *www.sec.gov*.

 

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*Corporate Governance*

* *

The Company’s Code of Conduct, which isapplicable to all of our employees, and the Charters of the Committees of ourBoard of Directors are available under the “Investors” portion of the Company’swebsite at *www.dakotagrowers.com. *Any of these items or any of theCompany’s filings with the Securities and Exchange Commission will be provided,without charge, upon written request to:

 
|   | Investors Relations                     |
|--------|-----------------------------------------|
|   | Dakota Growers Pasta Company, Inc. |
|   | One Pasta Ave                           |
|   | Carrington, ND 58421                    |

 

**ITEM 1A. RISK FACTORS**

** **

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 theCompany competes exclusively in the dry pasta industry, changes in consumertrends that result in lowered demand for dry pasta may have a material adverseeffect on the Company’s financial condition and results of operations.

 

***Competitive Environment***

*** ***

Both the U.S. pasta industry and global pastaindustry are extremely competitive. The Company competes in all dry pastamarkets – retail store brand, foodservice and ingredient, with larger, wellestablished national and international food companies. Competition within thepasta industry is largely dependent upon the relationship of overall industryproduction capacity to overall market demand for pasta. Some competitors mayhave long-term, high volume contracts, which guarantee a specified amount ofvolume over the term of the contract. Other competitors have retail brandequity and larger amounts of marketing dollars to compete against imported andstore brand products. The competitive environment has in the past, and may inthe future, put pressure on the Company’s profitability and its ability tomaintain market share. While the Company has and will continue to apply, wherepossible, cost saving measures in an effort to remain competitive, there is noguarantee that the Company can operate profitably in the future.

 

***No Public Market for Shares of the Company’s Common Stock and PreferredStock***

*** ***

No established publictrading market currently exists for the shares of Common Stock and PreferredStock of the Company, and an active trading market may never develop. TheCompany maintains no obligation to seek or to obtain a listing on a nationalmarket. As a result, you may not be able to readily resell your shares in theCompany.

 

***Technology***

*** ***

The Companybelieves that its overall commitment to maintaining and upgrading pastamanufacturing, milling and packaging equipment is necessary to keep acompetitive edge in the pasta industry. In addition, it also acknowledges thatongoing computer system upgrades to better service the demands of its customersare important to long-term success and profitability. The Company may benegatively impacted if its information technology systems fail to performadequately.

 

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***Pasta, Semolina,Mill By-Product Prices; Durum Wheat and Other Input Costs***

*** ***

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.Durum market prices increased dramatically during fiscal year 2008 but havedecreased and stabilized in recent months. Future increases in durum costscould have a material adverse effect on operating profits unless we are able topass cost increases on to our customers. By-products of the milling processcompete with other feed products, and fluctuate significantly in price with theavailability of these competing feed products.

 

Increases inother input costs, such as packaging materials, ingredients and energy costs(including transportation costs), could adversely affect us. The costs ofpackaging materials, ingredients and energy have varied widely in recent years,and future changes in such costs may cause our results of operations and ouroperating margins to fluctuate significantly.

 

Changes in sales prices of our products oftenlag behind changes in input costs. Competitive pressures may also limit our ability to increase salesprices timely in response to higher input costs.  If the Company is unable to increase salesprices to offset increases in raw materials, packaging, energy costs or otherinput costs, operating margins and profits could be materially adverselyaffected.

 

***Product Concentration***

*** ***

The Company competes almost exclusively inthe dry pasta industry and related flours and by-product markets. Any declinein pricing or demand for dry pasta could have a material adverse effect on theCompany’s financial condition and results of operations.

 

***Product Liability***

*** ***

The sale of food products for humanconsumption involves the risk of injury to consumers. These injuries may resultfrom tampering by unauthorized third parties, product contamination orspoilage, 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 aproduct liability lawsuit. The Company is subject to U.S. Food and DrugAdministration inspection and regulations and we believe the Company’sfacilities 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 inthe future for injuries relating to the consumption of the Company’s products.The Company carries insurance for product liability claims related to itsproducts and for the costs related to product recalls. However, we cannot becertain that the Company will not incur claims or liabilities for which it isnot insured or that exceed the amount of its insurance coverage.

 

***Government Regulation 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 and regulations.There are no pending regulatory enforcement actions against the Company, andthe Company believes that it currently is and will continue to be insubstantial compliance with all applicable environmental laws and regulations.

 

As a producer of products intended for humanconsumption, the Company’s operations are subject to certain federal and stateregulations, including regulations promulgated by the U.S. Food and DrugAdministration. The Company believes that it is in material compliance with allapplicable regulatory requirements relating to food quality and safety.

 

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The operations of the Company may be affectedby governmental trade policies and regulations, including those impacting theamount of durum wheat imported from Canada. Domestic pasta prices are alsoinfluenced by competition from foreign pasta producers, and as such, by thetrade policies of both the U.S. government and foreign governments.

 

Ifexisting anti-dumping measures imposed against certain foreign importsterminate, the Company will face increased competition from foreign companiesand profit margins or market share may be adversely affected. Anti-dumping andcountervailing duties on certain Italian and Turkish imports imposed by theDepartment of Commerce in 1996 enable us and our domestic competitors tocompete more favorably against Italian and Turkish producers in the U.S. pastamarket. In September 2007, the U.S. International Trade Commissionextended the antidumping and countervailing duty orders for an additional fiveyears through 2011. If the anti-dumping and countervailing duty orders arerepealed or foreign producers sell competing products in the United States atprices lower than ours or enter the U.S. market by establishing productionfacilities in the United States, the result would further increase competitionin the U.S. pasta market. We may be unable to compete effectively with thesecompetitors.  This could have a materialadverse effect on our business, financial condition and results of operations.

 

***Intangible Assets***

*** ***

Goodwill is tested for impairment annually orif events or changes in circumstances indicate that the asset might beimpaired.  Impairment is the conditionthat exists when the carrying amount of goodwill exceeds its implied fairvalue.  Our estimate of fair value isdetermined based on a discounted cash flow model using inputs includingprojected revenues and expenses, discount rates and other factors. We also haveamortizable intangible assets consisting of covenants not to compete and atechnology license. While we currently believe that our goodwill andamortizable intangible assets are not impaired, a determination requiring thewrite-off of a significant portion of our intangible assets would have amaterial negative impact on our consolidated results of operations and networth.

 

***Restrictive Loan Covenants***

*** ***

The Company’s loan agreements with CoBank andinstitutional investors obligate the Company to maintain or achieve certainamounts 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 of Directors Discretion Regarding Dividends***

*** ***

The Board of Directors of the Company hasabsolute discretion to determine the manner and amount of payment of dividendson shares of Common Stock and, subject to certain exceptions, Preferred Stock.

 

**ITEM 2. PROPERTIES**

** **

Dakota Growers owns and operates a millingfacility in North Dakota, and pasta production plants in North Dakota andMinnesota. The Company owns the warehouse facilities at the pasta plants. Thesefacilities are supplemented by third party warehouses in California, Kansas,Illinois, Minnesota, New York, North Dakota, Oregon, Ohio and Washington whereinventory is maintained and redistributed for the needs of specific customers.

 

**ITEM 3. LEGAL PROCEEDINGS**

** **

From time to time and in the ordinary courseof 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 the 

 

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commencement of legal proceedings. The Company carries insurance thatprovides protection against certain types of claims, up to the policy limits ofthe Company’s insurance.

 

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

** **

No matters were submitted to a vote of our security holders during thefourth quarter of fiscal year 2008.

 

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**PART II.**

** **
| **ITEM 5.** | **MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER  MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|-------------|----------------------------------------------------------------------------------------------------------------------------|

** **

There is no established public trading marketfor the Company’s Common Stock or Preferred Stock. As of October 20, 2008there were 1,249 holders of the Company’s Common Stock.

 

Ownership of shares of Common Stock may betransferred 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.

 

Variable Investment Advisers, Inc. (VIA)has established an Alternative Trading System (ATS) to facilitate trading ofthe Company’s Common Stock. We do not implicitly or explicitly endorse VIA ortheir web site, and we are not responsible for products and services that VIAprovides. We do not stand behind VIA or receive any fees from them inconnection with the services offered on their web site. A link to the web siteof VIA is available through the “Investors” portion of the Company’s website at*www.dakotagrowers.com*. VIA has beeninstructed by the Company to suspend trading on the ATS until further notice asthe Company considers strategic alternatives.

 

Trading volumes of the Company’s Common Stockhave been minimal to date and trading on the ATS remains suspended.

 

On February 9, 2007 the Company enteredinto a Stock Purchase Agreement (“Agreement”) with MVC Capital, Inc. (“MVC”)and La Bella Holdings, LLC (“LBH”).  On May 10,2007, the Company completed the transactions pursuant to the Agreement, inwhich MVC acquired 1,000,000 shares of Series F Convertible PreferredStock and LBH acquired 1,000,000 shares of common stock for a price of $10 pershare. The proceeds from the sale of shares to MVC and LBH were used tofund, in part, a repurchase of 3,917,519 shares of common stock at $10 pershare from the Company’s stockholders (other than MVC and LBH) pursuant to atender offer made to stockholders. The Company completed the purchase of sharespursuant to the tender offer in May 2007. Based on the manner of sale andrepresentations of MVC and LBH in the Stock Purchase Agreement,  includinga representation by each as to its status as an accredited investor within themeaning of Rule 501 of Regulation D, the Company believes that theissuance of securities to MVC Capital, Inc. and La Bella Holdings,LLC were private placements not involving any public offering within themeaning of Section 4(2) of the Securities Act of 1933, as amended(the “Securities Act”), pursuant to Regulation D thereof.  The Company therefore believes the offer andsale of the shares to MVC and LBH were exempt from the registrationrequirements of the Securities Act.

 

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

 

On December 20, 2007, the Company’sBoard of Directors authorized the payment of non-periodic dividends of 1 centper share on its Series D Delivery Preferred Stock, 16 cents per share onits Common Stock and 16 cents per share on its Series F ConvertiblePreferred Stock, payable on January 15, 2008 to shareholders of record asof December 31, 2007.

 

On December 14, 2006, the Company’sBoard of Directors authorized the payment of non-periodic dividends of 1 centper share on its Series D Delivery Preferred Stock and 14 cents per shareon its Common Stock, payable on January 3, 2007 to shareholders of recordas of December 20, 2006.

 

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**ITEM 6. SELECTED FINANCIAL DATA**

** **

The selected financial data presented belowfor the fiscal years ended July 31, 2004 through 2008 has been derivedfrom the audited consolidated financial statements of the Company.

 

Effective May 1, 2005, the Company beganto 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 years ending July 31, 2008, 2007, 2006 and2005. See Note 2 of the consolidated financial statements for additionalinformation.

 

        The selectedfinancial data set forth in this section should be read in conjunction with theCompany’s consolidated financial statements and related notes and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”included elsewhere in this report.

 

**SELECTEDFINANCIAL DATA**

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

** **
| ** **                                          | ** ** | **Fiscal year ended July 31** | ** ** |
|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                          | ** ** | **2008**                                          | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **INCOME STATEMENT DATA**                           |       |                                              |       |   |   |   |   |   |   |   |   |
| Net revenues                                        |       | $                                                 | 280,199    |   | $ | 191,062 |   | $ | 171,509 |   | $ | 155,619 |   | $ | 144,679 |   |
| Cost of goods sold                                  |       | 246,709                                           |       | 165,575 |   | 148,904 |   | 136,179 |   | 132,245 |   |
| Gross profit                                        |       | 33,490                                            |       | 25,487 |   | 22,605 |   | 19,440 |   | 12,434 |   |
| Marketing, general and administrative  expenses     |       | 17,450                                            |       | 12,973 |   | 14,190 |   | 16,507 |   | 8,345 |   |
| Loss on asset impairment                            |       | —                                            |       | — |   | — |   | — |   | 704 |   |
| Operating income                                    |       | 16,040                                            |       | 12,514 |   | 8,415 |   | 2,933 |   | 3,385 |   |
| Other expense - net                                 |       | (1,571                                            | )          | (2,199 | ) | (2,143 | ) | (1,817 | ) | (2,835 | ) |
| Noncontrolling interests                            |       | 202                                               |       | 52 |   | 894 |   | 3,003 |   | — |   |
| Income before income taxes                          |       | 14,671                                            |       | 10,367 |   | 7,166 |   | 4,119 |   | 550 |   |
| Income tax expense                                  |       | 5,380                                             |       | 3,759 |   | 2,793 |   | 1,606 |   | 214 |   |
| Net income                                          |       | 9,291                                             |       | 6,608 |   | 4,373 |   | 2,513 |   | 336 |   |
| Dividends on preferred stock                        |       | 283                                               |       | 113 |   | 451 |   | — |   | — |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Net earnings on common stock                        |       | $                                                 | 9,008      |   | $ | 6,495 |   | $ | 3,922 |   | $ | 2,513 |   | $ | 336 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Net earnings per common share - Basic               |       | $                                                 | 0.88       |   | $ | 0.52 |   | $ | 0.30 |   | $ | 0.19 |   | $ | 0.03 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Weighted average common shares outstanding  - Basic |       | 10,192                                            |       | 12,501 |   | 13,169 |   | 13,169 |   | 12,265 |   |
|                                                |       |                                              |       |   |   |   |   |   |   |   |   |
| Cash dividends declared per common share            |       | $                                                 | 0.16       |   | $ | 0.14 |   | $ | 0.04 |   | $ | — |   | $ | — |   |

 

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**SELECTEDFINANCIAL DATA - continued**

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

** **
| ** **                                            | ** ** | **As of July 31** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **BALANCE SHEET DATA**                                |       |                             |       |   |   |   |   |   |   |   |   |
| Cash                                                  |       | $                                | 125        |   | $ | 89 |   | $ | 343 |   | $ | 229 |   | $ | 589 |   |
| Working capital                                       |       | 21,351                           |       | 20,800 |   | 23,273 |   | 20,156 |   | 16,586 |   |
| Total assets                                          |       | 162,968                          |       | 143,166 |   | 134,249 |   | 135,130 |   | 119,415 |   |
| Long-term debt (excluding current  maturities)        |       | 31,174                           |       | 40,681 |   | 28,545 |   | 25,385 |   | 21,087 |   |
| Redeemable preferred stock                            |       | —                           |       | — |   | — |   | 7 |   | 20 |   |
| Stockholders’ equity                             |       | 56,687                           |       | 49,150 |   | 64,592 |   | 61,132 |   | 58,619 |   |
|                                                  |       |                             |       |   |   |   |   |   |   |   |   |
| **OPERATING DATA**                                    |       |                             |       |   |   |   |   |   |   |   |   |
| Ratio of long-term debt to stockholders’  equity |       | .55                              | x          | .83 | x | .44 | x | .42 | x | .36 | x |
|                                                       |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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** **

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

 

**Forward-Looking Statements**

 

The following discussion contains forward-lookingstatements. Such statements are based on assumptions by the Company’smanagement, as of the date of this report, and are subject to risks anduncertainties, including those discussed under “Risk Factors” in this report,that could cause actual results to differ materially from those anticipated.The Company cautions readers not to place undue reliance on suchforward-looking statements.

 

**Summary**

 

Dakota Growers is the third largest pastamanufacturer in North America. The Company has two production plants, locatedin Carrington, North Dakota and New Hope, Minnesota and generates a majority ofits revenues from manufacturing pasta for the retail store brand andinstitutional markets, although we serve and continually look for opportunitiesin the entire dry pasta industry. Our identity preservation program providesour customers food safety, traceability and quality from the field to theplate. The Company also has a certified organic program and markets organicpasta into the retail, foodservice, and ingredient markets.  The Company competes through low costproduction, high product quality, flexibility and customer service.

 

Net income for the year ended July 31, 2008 totaled $9.3 millioncompared to net income of $6.6 million for the year ended July 31,2007.  Net earnings per basic commonshare, after the effect of dividends paid on preferred stock, were $0.88 pershare for the year ended July 31, 2008 compared to $0.52 for the yearended July 31, 2007. The Company recorded a $1.7 million non-recurringpre-tax charge in fiscal year 2008 to reflect the costs associated with thewithdrawal from the Central States Southeast and Southwest Areas Pension Fund.The Company paid dividends of $0.01 per share on its Series D DeliveryPreferred Stock, $0.16 per share on its Series F Convertible PreferredStock and $0.16 per share on its Common Stock during the second quarter offiscal year 2008 and $0.01 per share on its Series D Delivery PreferredStock and $0.14 per share on its Common Stock during the second quarter offiscal year 2007.

 

The Company’s net revenuesincreased 46.7% for the year ended July 31, 2008 when compared to the yearended July 31, 2007. The increase resulted primarily from higher pasta perunit selling prices and, to a lesser extent, higher mill sales prices.  Benefits derived from higher selling priceswere partially offset by higher raw material costs, primarily durum wheat.Durum prices increased significantly to record high levels during fiscal year2008.

 

Effective September 21, 2007, the Company acquired the remainingunits of DNA Dreamfields, increasing its ownership to 100%.  Pursuant to the terms of the purchaseagreement, the Company acquired the remaining units for an aggregate purchase priceof $2,231,614.  In conjunction with thispurchase, the Company eliminated the noncontrolling interests and reducedrecorded goodwill associated with DNA Dreamfields in the Company’s firstquarter of fiscal year 2008.

 

The Company believes that the *Dreamfields* line of products is wellsuited for consumers seeking healthy eating alternatives. *Dreamfields* pasta has a 65% lower glycemic index thanregular pasta as well as 5 grams of digestible carbs and 5 grams of fiber perserving.  The *Dreamfields* pastaproducts carry a higher selling price and higher profit margins thantraditional pasta.

 

As the trend toward high fiber products developed, some of the lowcarbohydrate consumption was displaced. While still small relative to the total pasta category, the consumptionof these whole wheat/whole grain products continues to grow.  *Dreamfields*pasta offers fiber benefits similar to the levels of other whole wheat/wholegrain pastas while maintaining the integrity of the taste and low carbohydratetraits.  Dakota Growers also manufacturesand sells traditional whole wheat/whole grain pastas.

 

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The cost of production of dry pasta is significantly impacted bychanges in durum wheat market prices, which have varied widely in recent years.The Company attempts 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. Durum market pricesescalated during fiscal years 2007 and 2008, but have decreased in recentmonths from historically high levels. The Company was generally successful in obtaining price increases tooffset the higher cost of durum. However, any inability by the Company to obtain sales price increases tooffset increases in durum costs or other input costs on a timely basis maynegatively impact the Company’s future financial results.

 

**CriticalAccounting Policies**

 

The accompanying discussion and analysis of the Company’s results ofoperations and financial condition are based upon its consolidated financialstatements, which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. These estimates form the basis for makingjudgments about the carrying values of assets and liabilities that are notreadily apparent from other sources. We base our estimates and judgments onhistorical experience and on various other assumptions that we believe arereasonable under the circumstances. However, future events are subject tochange and the best estimates and judgments may require adjustment. For acomplete description of the Company’s significant accounting policies, pleasesee Note 1 to the consolidated financial statements. Our critical accountingpolicies are those that have meaningful impact on the reporting of ourfinancial condition and results, and that require significant managementjudgment and estimates. These policies include our accounting for (a) allowancefor doubtful accounts, (b) inventory valuation, (c) asset impairment,and (d) income taxes.

 

*Allowance for Doubtful Accounts*

 

We evaluate thecollectability of our accounts receivable based on a combination of factors. Incases where we are aware of circumstances that may impair a specific customer’sability to meet its financial obligations to us, we record a specific allowanceagainst amounts due to us, and thereby reduce the net recognized receivable to theamount we reasonably believe will be collected. For all other customers, werecognize allowances for doubtful accounts based on the length of time thereceivables are past due and our historical experience. If the financialcondition of our customers would deteriorate, additional allowances may berequired in the future which could have an adverse impact on our futureoperating results.

 

*InventoryValuation*

 

Inventories are stated at the lower of cost or market, determined on afirst-in, first-out (FIFO) basis, using product specific standard costs. TheCompany analyzes variances between actual manufacturing costs incurred andamounts absorbed at inventory standard costs. Inventory valuations are adjustedfor these variances as applicable. The Company regularly evaluates itsinventories and recognizes inventory allowances for discontinued andslow-moving inventories based upon these evaluations.

 

*Asset Impairment*

 

We are required to evaluateour long-lived assets, including goodwill, for impairment and write down thevalue of any assets if they are determined to be impaired. Evaluating theimpairment of long-lived assets involves management judgment in estimating thefair values and future cash flows related to these assets. The Company used adiscounted cash flow analysis in evaluating goodwill for impairment in fiscalyears 2008 and 2007 and 

 

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determinedthat no impairment charges were necessary. Future events could cause managementto conclude that impairment indicators exist and that the value of certainlong-lived assets is impaired.

 

*IncomeTaxes*

 

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

 

**Results of Operations**

 

*Comparison of Fiscal Years ended July 31, 2008 and 2007*

 

***Net Revenues.***Net revenues increased $89.1 million, or 46.7%, to $280.2 million forthe year ended July 31, 2008, from $191.1 million for the year ended July 31,2007. The increase resulted primarily from higher per unit selling pricesassociated with the pass through of higher durum costs. Higher pasta salesvolumes in the ingredient market and higher mill sales also contributed to theincrease.

 

Revenues from the retail market, a portion of which includes co-pack and governmental sales, increased $23.0 million, or 26.6%, for the year ended July 31, 2008 due to a 35.2% increase in average selling prices offset by a 6.4% decrease in volume. Foodservice revenues increased $13.8 million, or 25.4%, for the year ended July 31, 2008 due to a 33.5% increase in average selling prices offset by a 6.0% decrease in volume. Ingredient revenues increased $33.8 million, or 95.6%, due to a 56.3% increase in average selling prices and a 25.2% increase in volume.

 

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 millproduct sales for the year ended July 31, 2008 totaled $33.9 million, anincrease of $18.6 million from the prior year. The increase is due to increasesin both sales volumes and per unit selling prices.

 

***Cost of Goods Sold.***Cost of goodssold totaled $246.7 million for the year ended July 31, 2008, an increaseof 49.0% compared to the $165.6 million reported for the year ended July 31,2007.  The increase was primarily due tohigher durum costs and, to a lesser extent, increased costs for other productioninputs such as eggs.  Gross profit as apercentage of net revenues decreased to 12.0% in fiscal year 2008 compared to13.3% in fiscal year 2007 as higher revenues largely resulted from the passthrough of higher durum costs.

 

TheCompany reached an agreement on January 16, 2008 with the Teamsters Local No. 120,affiliated with the International Brotherhood of Teamsters, on a three-yearcontract covering the period from December 1, 2007 through December 1,2010.  The contract allows the Company to withdraw employees from theCentral States Southeast and Southwest Areas Pension Fund (the “Fund”), amulti-employer pension plan.  Thewithdrawal liability totaled $1,573,000 with an additional $124,000 paymentinto the Company’s 401(k) plan for non-vested employee amounts in theFund.   The Company recorded a $1,697,000 non-recurring pre-taxcharge for the year ended July 31, 2008 to reflect these costs associatedwith the withdrawal from the Fund.

 

***Marketing, General andAdministrative (“MG&A”) Expenses.*** MG&A expenses increased $4.5 million, or34.5%, to $17.5 million for the year ended July 31, 2008, from $13.0million for the year ended July 31, 2007. The increase was primarily dueto higher consumer advertising costs associated with *Dreamfields*pasta products and to a lesser extent, higher brokerage commission costs.  MG&A expenses as a percentage of netrevenues decreased from 6.8% to 6.2%.

 

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***Interest Expense.***Interestexpense for the year ended July 31, 2008 totaled $3.6 million, up $0.8million from $2.8 million for the year ended July 31, 2007.  The increase is primarily related to higheroutstanding debt levels resulting from debt incurred to finance a portion ofthe Company’s tender offer for its shares that was completed in May 2007.  Cash and equity patronage refunds receivedfrom CoBank totaling $225,000 and $132,000 have been netted against interestexpense for the years ended July 31, 2008 and 2007, respectively.

 

***Loss on Disposition of Property,Equipment and Other Assets. ***The Companyincurred losses on disposition of $0.1 million and $0.6 million during fiscalyears 2008 and 2007, respectively.  Thelosses were related to retirements of certain equipment in conjunction withcapital projects at the New Hope, Minnesota facility.

 

***Other Income, net.*** Other income totaled $2.1 million for the yearended July 31, 2008 and $1.2 million for the year ended July 31,2007. U.S. Customs and Border Protection (“Customs”) has distributedantidumping and countervailing duties assessed on certain pasta imported fromItaly and Turkey to affected domestic producers pursuant to the ContinuedDumping and Subsidy Offset Act of 2000 (the “Offset Act”), which was enacted inOctober 2000. The Company received net payments in the amount of $2.2million and $1.3 million in fiscal years 2008 and 2007, respectively, under theOffset Act. These amounts have been classified as other income. 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 federal legislation, the amount of expenditures by domesticpasta producers and the amount of antidumping and countervailing dutiescollected by Customs.  The Act, alsoknown as the Byrd Amendment, has been repealed and therefore, duties assessed onpasta imports after September 30, 2007 will no longer be distributed todomestic producers.  However, amountscollected (whether such collections occur before or after September 30,2007) related to duties assessed on pasta entries prior to September 30,2007, are expected to be available for future distribution to domesticproducers.

 

***Noncontrolling Interests.*** Noncontrolling interests reflects the portionof the DNA Dreamfields net loss allocable to the other members of DNADreamfields. The loss allocated to those other members totaled $0.2 million and$0.1 million for the years ended July 31, 2008 and 2007, respectively.

 

***Income Taxes. ***Income tax expense for theyears ended July 31, 2008 and 2007 totaled $5.4 million and $3.8 million,respectively, reflecting an effective corporate income tax rate ofapproximately 36.7% and 36.3%, respectively.

 

***Net Income. ***Net income for the yearended July 31, 2008 totaled $9.3 million, an increase of $2.7 millioncompared to net income of $6.6 million for the year ended July 31, 2007.  Net earnings available to common shareholdersfor the years ended July 31, 2008 and 2007 totaled $9.0 million and $6.5million, respectively, after reducing net income for dividends declared onpreferred stock.

 

*Comparison of Fiscal Years ended July 31, 2007 and 2006*

 

***Net Revenues.***Net revenues increased $19.6 million, or 11.4%, to $191.1 million forthe year ended July 31, 2007, from $171.5 million for the year ended July 31,2006. The increase resulted from higher per unit selling prices and higherpasta sales volumes, particularly in the ingredient market.

 

Revenues from the retail market, a portion of which includes co-pack and governmental sales, increased $4.6 million, or 5.6%, for the year ended July 31, 2007 due to a 7.8% increase in average selling prices offset by a 2.1% decrease in volume. Foodservice revenues increased $4.3 million, or 8.6%, for the year ended July 31, 2007 due to a 6.2% increase in average selling prices and a 2.3% increase in volume. Ingredient revenues increased $7.1 million, or 25.1%, due to a 7.7% increase in average selling prices and a 16.2% increase in volume.

 

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 millproduct sales for the year ended July 31, 2007 totaled $15.3 million, anincrease of $3.6 million from the prior year. The increase was primarily due tohigher per unit selling prices of millfeed and semolina and to a lesser degreean increase in 

 

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semolinaand millfeed sales volumes.

 

***Cost of Goods Sold.***Cost of goodssold totaled $165.6 million for the year ended July 31, 2007, an increaseof 11.2% compared to the $148.9 million reported for the year ended July 31,2006. The increase was primarily due to higher durum costs and higher salesvolumes. Gross profit as a percentage of net revenues increased to 13.3% infiscal year 2007 compared to 13.2% in fiscal year 2006 as benefits realizedfrom sales price increases were partially offset by higher durum costs.

 

***Marketing, General andAdministrative (“MG&A”) Expenses.*** MG&A expenses decreased $1.2 million, or8.5%, to $13.0 million for the year ended July 31, 2007, from $14.2million for the year ended July 31, 2006. The decrease is primarily due tothe reduction in consumer advertising for *Dreamfields*pasta products. MG&A expenses as a percentage of net revenues decreasedfrom 8.3% to 6.8%.

 

***Interest Expense.***Interest expense for theyear ended July 31, 2007 totaled $2.8 million, up $0.2 million from $2.6million for the year ended July 31, 2006. The increase was due to higher interest rates as well as an increase inoutstanding debt as a result of the tender offer that occurred during fiscalyear 2007. Cash and equity patronage refunds received from CoBank totaling$132,000 and $144,000 have been netted against interest expense for the yearsended July 31, 2007 and 2006, respectively.

 

***Loss on Disposition of Property,Equipment and Other Assets. ***The Companyincurred losses on disposition of $0.6 million and $0.5 million during fiscalyears 2007 and 2006, respectively.  Virtuallyall of the losses were related to the retirement of certain equipment inconjunction with capital projects at the New Hope, Minnesota facility.

 

***Other Income, net.*** Other income totaled $1.2 million for the yearended July 31, 2007 and $1.0 million for the year ended July 31,2006. The Company received net payments in the amount of $1.3 million and $1.1million in fiscal years 2007 and 2006, respectively, under the Offset Act.

 

***Noncontrolling Interests.*** Noncontrolling interests reflects the portionof the DNA Dreamfields net loss allocable to the other members of DNADreamfields. The loss allocated to those other members totaled $0.1 million and$0.9 million for the years ended July 31, 2007 and 2006, respectively. The$0.8 million decrease was due to a reduction in the net loss reported by DNADreamfields for the year ended July 31, 2007, when compared to the prioryear.

 

***Income Taxes. ***Income tax expense for theyears ended July 31, 2007 and 2006 totaled $3.8 million and $2.8 million,respectively, reflecting an effective corporate income tax rate ofapproximately 36% and 39%, respectively.

 

***Net Income. ***Net income for the yearended July 31, 2007 totaled $6.6 million, an increase of $2.2 millioncompared to net income of $4.4 million for the year ended July 31, 2006.  Net earnings available to common shareholdersfor the years ended July 31, 2007 and 2006 totaled $6.5 million and $3.9million, respectively, after reducing net income for dividends declared onpreferred stock.

 

**Liquidity and Capital Resources**

 

The Company’s primary sources of liquidity are cashprovided by operations and borrowings under its revolving credit facility. Networking capital as of July 31, 2008 was $21.4 million compared to $20.8million as of July 31, 2007.

 

In January 2008, the Company increased itsrevolving credit facility with CoBank to $45 million from the prior facility of$25 million. This facility extends through January 15, 2009. Interest onthe revolving line is at the 7-day LIBOR rate subject to performance adjustmentsdepending upon the Company’s ratio of total debt to earnings before interest,taxes, depreciation and amortization or “EBITDA.” The higher the ratio thehigher the adjustment to the 7-day LIBOR rate within a range of 175 to 275basis points above the 7-day LIBOR rate.  Fixed 

 

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interestrate options are also available. The primary purpose of the revolving creditfacility is to finance inventory and receivables. The balances outstandingunder the revolving credit arrangements totaled $25.8 million and $7.4 millionas of July 31, 2008 and 2007, respectively.  The Company had $19.2 million and $17.6million available for borrowings under the line of credit as of July 31,2008 and 2007, respectively.

 

On February 14, 2007 the Company entered into a$20 million term loan agreement with CoBank to partially fund the tender offerto purchase up to 3,920,000 shares of our common stock at $10.00 per share incash. Availability under the term loan was contingent upon at least 50% of theaggregate purchase price of the shares in the tender offer coming from proceedsof the sale of equity securities to MVC Capital, Inc. and La BellaHoldings, LLC. The Company must repay this term loan in 14 equal quarterlyinstallments beginning in May 2011 and concluding in November 2014. Interest on the term loan is at the 7-day LIBOR rate subject to performanceadjustments depending upon the Company’s ratio of total debt to EBITDA. Thehigher the ratio the higher the adjustment to the 7-day LIBOR rate within arange of 175 to 275 basis points above the 7-day LIBOR rate.  Fixedinterest rate options are also available.

 

OnMay 10, 2007, the Company closed the sale of 1 million shares of Series FConvertible Preferred Stock to MVC Capital, Inc. and the sale of 1 millionshares of common stock to LaBella Holdings, LLC at a purchase price of $10.00per share.  The Company also received $20million in loan proceeds under a term loan agreement with CoBank.  Withthe net proceeds of $38.8 million from these financing transactions and workingcapital provided by the Company, Dakota Growers accepted 3,917,519 shares ofcommon stock that had been properly tendered to the Company at $10.00 per sharenet in cash pursuant to the Company’s tender offer, which expired on April 27,2007.

 

The Company also has a $19.0 million term loanfacility with CoBank. The balance outstanding under the term loan was $12.6million as of July 31, 2008 and no further borrowings are available underthis term loan facility.

 

The Master Loan Agreement with CoBank contains certain restrictivecovenants including, but not limited to, financial covenants which require theCompany to maintain, at the end of each of the Company’s fiscal quarters, aminimum current ratio of 1.20 to 1.00, a maximum total debt to earnings beforeinterest, taxes, depreciation and amortization (“EBITDA”)  of 4.25 to 1.00, a minimum fixed charge ratioof 1.15 to 1.00, and a minimum tangible net worth level of at least $25 millionadjusted for subsequent earnings and capital contributions.

 

The Company’s long-term financing is also providedthrough secured notes held by institutional investors. The Note PurchaseAgreement (as amended) with the institutional investors requires the Company tomaintain the following: (a) consolidated net worth of not less than thesum 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 consolidatedfunded debt to consolidated cash flow ratio not to exceed 3.0 to 1.0 determinedat the end of each fiscal quarter for the immediately preceding four fiscalquarters. The Notes (as amended) require the rate of interest on the unpaidbalance be increased by one percent at any time that either (a) the ratioof the Company’s consolidated funded debt to consolidated cash flow is greaterthan 3.0 to 1.0 as of the end of each fiscal quarter for the immediatelypreceding four fiscal quarters or (b) the Securities Valuation Office ofthe National Association of Insurance Commissioners has not assigned adesignation category of “1” or “2” to the Notes.

 

The Company was in compliance with all debtcovenants as of July 31, 2008 and the date of this filing.

 

Net cash used for operations totaled $3.7 millionfor the year ended July 31, 2008.  Net cash from operations totaled $6.0 million and$19.1 million for the years ended July 31, 2007 and 2006, respectively. The$9.8 million net decrease from fiscal year 2007 to 2008 and the $13.1 millionnet decrease for fiscal year 2006 to 2007 were primarily attributable toincreases in receivables and inventories offset by increases in net income andaccounts payable. The increase in accounts receivable, inventories and accountspayable as of July 31, 2008 was driven by working capital changes associatedwith higher raw material costs and related sales price adjustments.

 

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Net cash used for investing activities totaled $4.6million, $5.6 million, and $10.8 million for the years ended July 31,2008, 2007 and 2006, respectively. A majority of the net cashed used for fiscalyear 2008 related to increased fixed asset expenditures and the purchase of theremaining interests in DNA Dreamfields. A majority of the net cash used for investing activities for the yearended July 31, 2007 and 2006 related to capital expenditures for the NewHope facility upgrade project.

 

Net cash from financing activities totaled $8.3 million for the year ended July 31,2008. Net cash used for financing activities totaled $0.7 million and$8.2 million for the years ended July 31, 2007 and 2006.  The $8.3million of net cash from financing activities for the year ended July 31,2008 included $18.4 million in net borrowings under the revolving creditfacility with CoBank offset by $9.2 millionfor scheduled long-term debt principal payments.  The $0.7million of net cash used for financing activities for the year ended July 31,2007 related to payments on long-term debt and dividends. Also included are thepurchase of common stock and the costs associated with issuing and purchasingstock in conjunction with the tender offer in fiscal year 2007. These outlayswere offset by the proceeds on long-term debt and the issuance of common stockand series F preferred stock.  The $8.2million of net cash used for financing activities for the year ended July 31,2006 related primarily to principal payments on short-term and long-term debt.

 

Effective September 21,2007, the Company acquired the remaining units of DNA Dreamfields, increasingits ownership to 100%.  Pursuant to theterms of the Purchase Agreement, the Company acquired the remaining units foran aggregate purchase price of $2,231,614. In conjunction with this purchase, the Company eliminated thenoncontrolling interests and reduced recorded goodwill associated with DNADreamfields in the Company’s first quarter of fiscal year 2008.

 

Thefollowing table summarizes the Company’s contractual obligations as of July 31,2008 (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                        |       | $          | 39,374     |                      | $          | 9,174              |       | $                  | 16,950     |               | $          | 10,800 |   | $ | 2,450 |   |
| Capital leases                        |       | 1,307      |       | 333                       |       | 974                |       | —             |       | —             |       |
| Interest on long-term obligations (1) |       | 5,480      |       | 1,743                     |       | 3,040              |       | 676                |       | 21                 |       |
| Durum purchase obligations            |       | 33,073     |       | 33,073                    |       | —             |       | —             |       | —             |       |
| Warehouse obligations                 |       | 5,525      |       | 2,424                     |       | 2,547              |       | 554                |       | —             |       |
| Operating leases                      |       | 986        |       | 454                       |       | 493                |       | 39                 |       | —             |       |
|                                  |       |       |       |                      |       |               |       |               |       |               |       |
|                                  |       | $          | 85,745     |                      | $          | 47,201             |       | $                  | 24,004     |               | $          | 12,069 |   | $ | 2,471 |   |

 

----

(1) Based oninterest rates as of July 31, 2008.

 

The Company forward contracts for a certain portionof its future durum wheat requirements. At July 31, 2008, the Company hadoutstanding commitments for grain purchases totaling $33.1 million related toforward purchase contracts. These contracts are set price contracts to delivergrain to the Company’s mill, and are not derivative in nature as they have nonet settlement provision and are not transferable.

 

We believe that net cash expected to be provided byoperating activities, along with amounts available under our line of creditwill be sufficient to meet the Company’s expected capital and liquidityrequirements for the foreseeable future.

 

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

##### * *

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 

 

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defines fair value, establishes a framework for measuring fair valueand expands disclosure of fair value measurements. SFAS 157 applies under otheraccounting pronouncements that require or permit fair value measurements andaccordingly, does not require any new fair value measurements.SFAS 157 was initiallyeffective for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. In February 2008, the FASB issued FASBStaff Position (FSP) FAS 157-2.  This FSP permits a delay in theeffective date of SFAS 157 to fiscal years beginning after November 15,2008, for nonfinancial assets and nonfinancial liabilities,  exceptfor items that are recognized or disclosed at fair value in the financialstatements on a recurring basis (at least annually). In October 2008, theFASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Assetwhen the Market for That Asset Is Not Active,” which clarifies the applicationof SFAS 157 for financial assets in a market that is not active. We arecurrently evaluating the impact, if any, that the implementation of SFAS 157will have on our consolidated results of operations or financial condition.

 

In February 2007, the FASB issued SFAS No. 159,“The Fair Value Option for Financial Assets and Financial Liabilities—Includingan Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159 expands theuse of fair value accounting but does not affect existing standards whichrequire assets or liabilities to be carried at fair value. Under SFAS 159, acompany may elect to use fair value to measure accounts and loans receivable,available-for-sale and held-to-maturity securities, equity method investments,accounts payable, guarantees and issued debt. Other eligible items include firmcommitments. SFAS 159 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. We are currently evaluating the impactthat SFAS 159 will have on our financial statements.

 

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

 

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

 

In December 2007, the SEC published the StaffAccounting Bulletin No. 110 (“SAB 110”), which amends SAB No. 107 byextending the usage of a “simplified” method, as discussed in SAB No. 107,in developing an estimate of the expected life of “plain vanilla” share optionsin accordance with SFAS No. 123 (revised 2004), Share-Based Payment. Inparticular, the staff indicated in SAB 107 that it will accept a company’selection to use the simplified method, regardless of whether the company hassufficient information to make more refined estimates of expected life. We areevaluating SAB 110 and its impact on future employee stock option grants.

 

In May 2008, the Financial Accounting StandardsBoard (“FASB”) issued FASB Statement No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” Thisstatement identifies the sources of accounting principles and the framework forselecting the principles used in the preparation of financial statements ofnongovernmental entities that are presented in conformity with generallyaccepted accounting principles (“GAAP”) in the United States. This statementwill be effective 60 days following the SEC’s approval of the 

 

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PublicCompany Accounting Oversight Board (“PCAOB”) amendments to AU Section 411,“The Meaning of Present Fairly inConformity with Generally Accepted Accounting Principles.” We do notexpect the adoption of this statement to have a material impact on ourfinancial statements.

 

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

 

**Off-BalanceSheet Arrangements**

 

AtJuly 31, 2008, the Company had no off-balance sheet arrangements that haveor are likely to have a material current or future effect on our financialcondition, revenues or expenses, results of operations, liquidity, capitalexpenditures, or capital resources.

 

**Impactof Inflation**

 

Wehave experienced input cost inflation, the most significant of which related toraw material costs, in fiscal years 2008, 2007 and 2006. We attempt to mitigatethe impact of inflationary pressure through cost saving measures and priceadjustments.

 

## **ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

## ** **

Marketrisk is the potential loss to future earnings, fair values or cash flowsresulting from adverse changes in interest rates, commodity prices, exchangerates, equity prices and other market changes.

 

TheCompany is exposed to market risk from changes in interest rates. For fixedrate debt, interest rate changes affect the fair value of financial instrumentsbut do not impact earnings or cash flows. Conversely, for variable rate debt,interest rate changes generally do not affect the fair market value but doimpact future earnings and cash flows, assuming other factors are heldconstant. A majority of the balances outstanding under the Company’s currentdebt agreements are subject to variable interest rates.

 

The Company is exposed to certain fluctuations in commodityprices.  The Company forward contractsfor a certain portion of its future durum wheat requirements. 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.

 

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**ITEM 8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF**

**DAKOTA GROWERS PASTA COMPANY, INC.**

 
| ** **                                                       | **PAGE** |
|------------------------------------------------------------------|----------|
|                                                             |     |
| Report of Independent  Registered Public Accounting Firm         | 25       |
|                                                             |     |
| Consolidated  Balance Sheets                                     | 26       |
|                                                             |     |
| Consolidated  Statements of Operations                           | 28       |
|                                                             |     |
| Consolidated Statements of Changes in Stockholders’  Equity | 29       |
|                                                             |     |
| Consolidated Statements of Cash Flows                            | 30       |
|                                                             |     |
| Notes to Consolidated Financial Statements                       | 32       |

 

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**REPORT OF INDEPENDENT REGISTEREDPUBLIC ACCOUNTING FIRM**

 

Tothe Audit Committee, Board of Directors and Stockholders

DakotaGrowers Pasta Company, Inc.

Carrington,North Dakota

 

Wehave audited the accompanying consolidated balance sheets of Dakota GrowersPasta Company, Inc. and Subsidiaries as of July 31, 2008 and 2007, andthe related consolidated statements of operations, changes in stockholders’equity and cash flows for each of the years ended July 31, 2008, 2007, and2006. These financial statements are the responsibility of the company’smanagement. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform the audit to obtain reasonable assurance about whether thefinancial statements are free of material misstatement. An audit includesconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we do not express suchan opinion. An audit also includes examining, on a test basis, evidence supportingthe amounts and disclosures in the financial statements. An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.

 

Inour opinion, the consolidated financial statements referred to above presentfairly, in all material respects, the financial position of Dakota GrowersPasta Company, Inc. and Subsidiaries as of July 31, 2008 and 2007,and the results of its operations and its cash flows for each of the yearsended July 31, 2008, 2007, and 2006, in conformity with accountingprinciples generally accepted in the United States of America.

 

 

/s/Eide Bailly LLP

 

Minneapolis,Minnesota

October 27,2008

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **CONSOLIDATED BALANCE SHEETS**

**JULY31, 2008 AND 2007**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |
| **ASSETS**                                                                                                             |       |     |       |     |       |
|                                                                                                                   |       |     |       |     |       |
| CURRENT ASSETS                                                                                                         |       |     |       |     |       |
| Cash and cash equivalents                                                                                              |       | $        | 125        |     | $          | 89 |   |
|                                                                                                                   |       |     |       |     |       |
| Trade accounts receivable, less allowance for cash discounts and  doubtful accounts of $1,294 and $1,048, respectively |       | 27,315   |       | 18,442   |       |
|                                                                                                                   |       |     |       |     |       |
| Other receivables                                                                                                      |       | 850      |       | 360      |       |
|                                                                                                                   |       |     |       |     |       |
| Inventories                                                                                                            |       | 51,956   |       | 31,329   |       |
|                                                                                                                   |       |     |       |     |       |
| Prepaid expenses                                                                                                       |       | 1,040    |       | 1,389    |       |
|                                                                                                                   |       |     |       |     |       |
| Deferred income taxes                                                                                                  |       | 1,053    |       | 1,104    |       |
|                                                                                                                   |       |     |       |     |       |
| Total current assets                                                                                                   |       | 82,339   |       | 52,713   |       |
|                                                                                                                   |       |     |       |     |       |
| PROPERTY AND EQUIPMENT                                                                                                 |       |     |       |     |       |
| In service                                                                                                             |       | 132,815  |       | 132,655  |       |
| Construction in progress                                                                                               |       | 546      |       | 776      |       |
|                                                                                                                   |       | 133,361  |       | 133,431  |       |
| Less accumulated depreciation                                                                                          |       | (65,983  | )          | (61,985  | )          |
|                                                                                                                   |       |     |       |     |       |
| Net property and equipment                                                                                             |       | 67,378   |       | 71,446   |       |
|                                                                                                                   |       |     |       |     |       |
| INVESTMENT IN COOPERATIVE BANK                                                                                         |       | 1,355    |       | 1,310    |       |
|                                                                                                                   |       |     |       |     |       |
| INTANGIBLE ASSETS, NET                                                                                                 |       | 2,590    |       | —   |       |
|                                                                                                                   |       |     |       |     |       |
| GOODWILL                                                                                                               |       | 8,381    |       | 16,654   |       |
|                                                                                                                   |       |     |       |     |       |
| OTHER ASSETS                                                                                                           |       | 925      |       | 1,043    |       |
|                                                                                                                   |       |     |       |     |       |
|                                                                                                                   |       | $        | 162,968    |     | $          | 143,166 |   |

 

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| ** **                                                                                                                                       | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                             |       |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                                                    |       |     |       |     |       |
|                                                                                                                                             |       |     |       |     |       |
| CURRENT LIABILITIES                                                                                                                              |       |     |       |     |       |
| Notes payable                                                                                                                                    |       | $        | 25,750     |     | $          | 7,400 |   |
| Current portion of long-term debt                                                                                                                |       | 9,507    |       | 9,481    |       |
| Accounts payable                                                                                                                                 |       | 16,930   |       | 7,352    |       |
| Excess outstanding checks over cash on deposit                                                                                                   |       | 3,130    |       | 1,759    |       |
| Accrued liabilities                                                                                                                              |       | 5,671    |       | 5,921    |       |
|                                                                                                                                             |       |     |       |     |       |
| Total current liabilities                                                                                                                        |       | 60,988   |       | 31,913   |       |
|                                                                                                                                             |       |     |       |     |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                    |       | —   |       | —   |       |
| LONG-TERM DEBT, net of current portion                                                                                                           |       | 31,174   |       | 40,681   |       |
| DEFERRED INCOME TAXES                                                                                                                            |       | 14,119   |       | 13,474   |       |
|                                                                                                                                             |       |     |       |     |       |
| Total liabilities                                                                                                                                |       | 106,281  |       | 86,068   |       |
|                                                                                                                                             |       |     |       |     |       |
| NONCONTROLLING INTERESTS                                                                                                                         |       | —   |       | 7,948    |       |
|                                                                                                                                             |       |     |       |     |       |
| STOCKHOLDERS’ EQUITY                                                                                                                        |       |     |       |     |       |
|                                                                                                                                             |       |     |       |     |       |
| Series D delivery preferred stock, non-cumulative, $.01 par value,  11,340,841 authorized, 11,275,297 shares issued and outstanding         |       | 113      |       | 113      |       |
| Series F convertible preferred stock, non-cumulative, $.01 par value,  2,100,000 shares authorized, 1,065,000 shares issued and outstanding |       | 11       |       | 11       |       |
| Common stock, $.01 par value, 75,000,000 shares authorized, 10,192,413  shares issued and outstanding                                            |       | 102      |       | 102      |       |
| Additional paid-in capital                                                                                                                       |       | 42,958   |       | 42,798   |       |
| Retained earnings                                                                                                                                |       | 13,503   |       | 6,126    |       |
|                                                                                                                                             |       |     |       |     |       |
| Total stockholders’ equity                                                                                                                  |       | 56,687   |       | 49,150   |       |
|                                                                                                                                             |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                                                                  |       | $        | 162,968    |     | $          | 143,166 |   |

 

SeeNotes to Consolidated Financial Statements

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

###### **YEARSENDED JULY 31, 2008, 2007 AND 2006**

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

 
| ** **                                                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |     |       |
| Net revenues (net of discounts and allowances of $26,647, $23,953,  and $26,474 for 2008, 2007 and 2006, respectively) |       | $        | 280,199    |     | $          | 191,062  |       | $ | 171,509 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Cost of goods sold                                                                                                     |       | 246,709  |       | 165,575  |       | 148,904  |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Gross profit                                                                                                           |       | 33,490   |       | 25,487   |       | 22,605   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Marketing, general and administrative expenses                                                                         |       | 17,450   |       | 12,973   |       | 14,190   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Operating income                                                                                                       |       | 16,040   |       | 12,514   |       | 8,415    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Other income (expense)                                                                                                 |       |     |       |     |       |     |       |
| Interest expense, net                                                                                                  |       | (3,615   | )          | (2,772   | )          | (2,573   | )          |
| Loss on disposition of property, equipment and other assets                                                            |       | (94      | )          | (649     | )          | (546     | )          |
| Other income, net                                                                                                      |       | 2,138    |       | 1,222    |       | 976      |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Income before noncontrolling interests and income taxes                                                                |       | 14,469   |       | 10,315   |       | 6,272    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Noncontrolling interests                                                                                               |       | 202      |       | 52       |       | 894      |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Income before income taxes                                                                                             |       | 14,671   |       | 10,367   |       | 7,166    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Income tax expense                                                                                                     |       | 5,380    |       | 3,759    |       | 2,793    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Net income                                                                                                             |       | 9,291    |       | 6,608    |       | 4,373    |       |
| Dividends on preferred stock                                                                                           |       | 283      |       | 113      |       | 451      |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Net earnings on common stock                                                                                           |       | $        | 9,008      |     | $          | 6,495    |       | $ | 3,922 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Net earnings per common share                                                                                          |       |     |       |     |       |     |       |
| Basic                                                                                                                  |       | $        | 0.88       |     | $          | 0.52     |       | $ | 0.30 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Diluted                                                                                                                |       | $        | 0.78       |     | $          | 0.51     |       | $ | 0.30 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Weighted average common shares outstanding                                                                             |       |     |       |     |       |     |       |
| Basic                                                                                                                  |       | 10,192   |       | 12,501   |       | 13,169   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Diluted                                                                                                                |       | 11,748   |       | 13,076   |       | 13,555   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Dividends per common share                                                                                             |       | $        | 0.16       |     | $          | 0.14     |       | $ | 0.04 |   |

 

SeeNotes to Consolidated Financial Statements

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

###### **YEARSENDED JULY 31, 2008, 2007 AND 2006**

**(In Thousands)**

 
| ** **                                       | ** ** | **Series D Delivery** | ** ** | **Series F Convertible** | ** ** | ** **            | ** ** | ** **  | ** ** | **Additional**  | ** ** | ** ** | ** ** | ** **  | ** ** |
|--------------------------------------------------|------------|---------------------------------|------------|------------------------------------|------------|-----------------------|------------|-------------|------------|-----------------|------------|------------|------------|-------------|------------|
| ** **                                       | ** ** | **Preferred Stock**        | ** ** | **Preferred Stock**           | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Shares**                      | ** ** | **Amount**                         | ** ** | **Shares**            | ** ** | **Amount**  | ** ** | **Shares**      | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Earnings (Deficit)** | ** ** | **Total** | ** ** |
|                                             |       |                            |       |                               |       |                  |       |        |       |            |       |       |       |        |       |   |   |   |   |
| BALANCE, JULY 31, 2005                           |       | 11,275                          |       | $                                  | 113        |                  | —     |        | $          | —          |       | 13,169     |       | $           | 132        |   | $ | 62,807 |   | $ | (1,920 | ) | $ | 61,132 |   |
| Dividends on common stock                        |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | (527 | ) | (527 | ) |
| Dividends on preferred stock                     |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | (451 | ) | (451 | ) |
| Stock-based employee compensation                |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | 65          |       | — |   | 65 |   |
| Net income for the year ended July 31, 2006 |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | 4,373 |   | 4,373 |   |
| BALANCE, JULY 31, 2006                           |       | 11,275                          |       | $                                  | 113        |                  | —     |        | $          | —          |       | 13,169     |       | $           | 132        |   | $ | 62,872 |   | $ | 1,475 |   | $ | 64,592 |   |
| Dividends on common stock                        |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | (1,844 | ) | (1,844 | ) |
| Dividends on preferred stock                     |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | (113 | ) | (113 | ) |
| Stock-based employee compensation                |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | 210         |       | — |   | 210 |   |
| Exercise of stock options                        |       | —                          |       | —                             |       | —                |       | —      |       | 6               |       | —     |       | 22          |       | — |   | 22 |   |
| Issuance of common stock                         |       | —                          |       | —                             |       | —                |       | —      |       | 1,000           |       | 10         |       | 9,990       |       | — |   | 10,000 |   |
| Purchase of common stock                         |       | —                          |       | —                             |       | —                |       | —      |       | (3,918          | )          | (39        | )          | (39,136     | )          | — |   | (39,175 | ) |
| Costs associated with issuing stock              |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | (1,150      | )          | — |   | (1,150 | ) |
| Issuance of series F preferred stock             |       | —                          |       | —                             |       | 1,000                 |       | 10          |       | —          |       | —     |       | 9,990       |       | — |   | 10,000 |   |
| Conversion of common stock to series F preferred |       | —                          |       | —                             |       | 65                    |       | 1           |       | (65             | )          | (1         | )          | —      |       | — |   | — |   |
| Net income for the year ended July 31, 2007 |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | 6,608 |   | 6,608 |   |
| BALANCE, JULY 31, 2007                           |       | 11,275                          |       | $                                  | 113        |                  | 1,065      |        | $          | 11              |       | 10,192     |       | $           | 102        |   | $ | 42,798 |   | $ | 6,126 |   | $ | 49,150 |   |
| Dividends on common stock                        |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | (1,631 | ) | (1,631 | ) |
| Dividends on preferred stock                     |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | (283 | ) | (283 | ) |
| Stock-based employee compensation                |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | 160         |       | — |   | 160 |   |
| Net income for the year ended July 31, 2008 |       | —                          |       | —                             |       | —                |       | —      |       | —          |       | —     |       | —      |       | 9,291 |   | 9,291 |   |
| BALANCE, JULY 31, 2008                           |       | 11,275                          |       | $                                  | 113        |                  | 1,065      |        | $          | 11              |       | 10,192     |       | $           | 102        |   | $ | 42,958 |   | $ | 13,503 |   | $ | 56,687 |   |

 

SeeNotes to Consolidated Financial Statements

 

29

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# **Table of Contents**

 

# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

**(InThousands)**

 
| ** **                                                                             | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                   |       |     |       |     |       |     |       |
| OPERATING ACTIVITIES                                                                   |       |     |       |     |       |     |       |
| Net income                                                                             |       | $        | 9,291      |     | $          | 6,608    |       | $ | 4,373 |   |
| Adjustments to reconcile net income to net cash from (used for)  operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                          |       | 6,571    |       | 6,951    |       | 7,234    |       |
| Undistributed patronage capital from cooperatives                                      |       | (45      | )          | (27      | )          | (29      | )          |
| Loss on disposition of property, equipment and other assets                            |       | 94       |       | 649      |       | 546      |       |
| Deferred income taxes                                                                  |       | 696      |       | 908      |       | 998      |       |
| Stock-based employee compensation                                                      |       | 160      |       | 210      |       | 65       |       |
| Noncontrolling interests                                                               |       | (202     | )          | (52      | )          | (894     | )          |
| Changes in assets and liabilities                                                      |       |     |       |     |       |     |       |
| Trade receivables                                                                      |       | (8,873   | )          | (4,001   | )          | 1,747    |       |
| Other receivables                                                                      |       | (490     | )          | (269     | )          | 320      |       |
| Inventories                                                                            |       | (20,627  | )          | (5,211   | )          | 1,984    |       |
| Prepaid expenses                                                                       |       | 349      |       | 214      |       | (63      | )          |
| Other assets                                                                           |       | 11       |       | (24      | )          | 48       |       |
| Accounts payable                                                                       |       | 9,578    |       | 102      |       | 3,053    |       |
| Other accrued liabilities                                                              |       | (250     | )          | (36      | )          | (272     | )          |
|                                                                                   |       |     |       |     |       |     |       |
| NET CASH FROM (USED FOR) OPERATING ACTIVITIES                                          |       | (3,737   | )          | 6,022    |       | 19,110   |       |
|                                                                                   |       |     |       |     |       |     |       |
| INVESTING ACTIVITIES                                                                   |       |     |       |     |       |     |       |
| Purchase of interests in DNA Dreamfields Company, LLC                                  |       | (2,232   | )          | —   |       | —   |       |
| Purchases of property and equipment                                                    |       | (2,143   | )          | (5,456   | )          | (10,755  | )          |
| Proceeds from sale of property, equipment and other assets                             |       | 56       |       | —   |       | —   |       |
| Other investments                                                                      |       | (175     | )          | (47      | )          | (476     | )          |
| Proceeds from cooperative bank equity retirements                                      |       | —   |       | 232      |       | 568      |       |
| Proceeds from other investments                                                        |       | 57       |       | 116      |       | —   |       |
| Payments for package design costs                                                      |       | (116     | )          | (433     | )          | (180     | )          |
|                                                                                   |       |     |       |     |       |     |       |
| NET CASH USED FOR INVESTING ACTIVITIES                                                 |       | (4,553   | )          | (5,588   | )          | (10,843  | )          |
|                                                                                        |            |          |            |          |            |          |            |  |  |  |

 

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| ** **                                                              | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                    |       |     |       |     |       |     |       |
| FINANCING ACTIVITIES                                                    |       |     |       |     |       |     |       |
| Net change in excess outstanding checks over cash on deposit            |       | 1,371    |       | 1,055    |       | (2,406   | )          |
| Net change in short-term notes payable                                  |       | 18,350   |       | 7,400    |       | (10,000  | )          |
| Payments on long-term debt                                              |       | (9,171   | )          | (6,771   | )          | (4,771   | )          |
| Principal payments under capital lease obligation                       |       | (310     | )          | (133     | )          | —   |       |
| Proceeds from long-term debt                                            |       | —   |       | 20,000   |       | 9,931    |       |
| Preferred stock retirements                                             |       | —   |       | —   |       | (7       | )          |
| Investments by noncontrolling interests                                 |       | —   |       | 21       |       | 78       |       |
| Dividends paid on common stock                                          |       | (1,631   | )          | (1,844   | )          | (527     | )          |
| Dividends paid on preferred stock                                       |       | (283     | )          | (113     | )          | (451     | )          |
| Issuance of common stock                                                |       | —   |       | 10,022   |       | —   |       |
| Issuance of series F preferred stock                                    |       | —   |       | 10,000   |       | —   |       |
| Purchase of common stock                                                |       | —   |       | (39,175  | )          | —   |       |
| Costs associated with issuing and purchasing stock                      |       | —   |       | (1,150   | )          | —   |       |
|                                                                    |       |     |       |     |       |     |       |
| NET CASH FROM (USED FOR) FINANCING ACTIVITIES                           |       | 8,326    |       | (688     | )          | (8,153   | )          |
|                                                                    |       |     |       |     |       |     |       |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |       | 36       |       | (254     | )          | 114      |       |
|                                                                    |       |     |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                            |       | 89       |       | 343      |       | 229      |       |
|                                                                    |       |     |       |     |       |     |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                  |       | $        | 125        |     | $          | 89       |       | $ | 343 |   |
|                                                                    |       |     |       |     |       |     |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                       |       |     |       |     |       |     |       |
|                                                                    |       |     |       |     |       |     |       |
| Cash payments for                                                       |       |     |       |     |       |     |       |
| Interest (net of amounts capitalized)                                   |       | $        | 3,782      |     | $          | 2,780    |       | $ | 2,649 |   |
|                                                                    |       |     |       |     |       |     |       |
| Income taxes                                                            |       | $        | 3,752      |     | $          | 2,989    |       | $ | 1,451 |   |
|                                                                    |       |     |       |     |       |     |       |
| SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING  ACTIVITIES |       |     |       |     |       |     |       |
|                                                                    |       |     |       |     |       |     |       |
| Acquisition of pasta equipment through capital lease obligation         |       | $        | —     |     | $          | 1,750    |       | $ | — |   |
|                                                                    |       |     |       |     |       |     |       |
| Purchase of interests in DNA Dreamfields Company, LLC                   |       |     |       |     |       |     |       |
| Goodwill reduction                                                      |       | $        | (8,273     | )        |       |     |       |   |
| Amortizable intangibles                                                 |       | 2,759    |       |     |       |     |       |
| Noncontrolling interests reduction                                      |       | 7,746    |       |     |       |     |       |
|                                                                    |       |     |       |     |       |     |       |
|                                                                    |       | $        | 2,232      |     |       |     |       |   |

 

SeeNotes to Consolidated Financial Statements

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

** **

**NOTE 1 -**                          NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

** **

*Nature of Business*

 

Dakota Growers Pasta Company, Inc. (“Dakota Growers” or “theCompany”) is a North Dakota corporation that operates milling and pastamanufacturing facilities in Carrington, North Dakota. In addition, the Company’swholly-owned subsidiary, Primo Piatto, Inc. (“Primo Piatto”), a Minnesotacorporation, operates pasta manufacturing facilities in New Hope,Minnesota.  DNA Dreamfields Company, LLC(“DNA Dreamfields”) became a wholly-owned subsidiary on September 21, 2007(See Note 2).

 

*Principles of Consolidation*

 

The consolidated financial statements are comprised of the Company, itswholly-owned subsidiary Primo Piatto, Inc., and DNA Dreamfields Company,LLC, which the Company began to consolidate in fiscal year 2005 (See Note 2).All material inter-company accounts and transactions have been eliminated inthe preparation of the consolidated financial statements.

 

*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 thefinancial statements as of July 31, 2007 and for the years ended July 31,2007 and 2006 to facilitate comparability with the statements as of and for theyears ended July 31, 2008. Such reclassifications have no effect on thenet 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.

 

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

 

##### *Impairment and Disposal of Long-Lived Assets*

##### * *

TheCompany accounts for impairment or disposal of long-lived assets in accordancewith the provisions of Statement of Financial Accounting Standards (SFAS) No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144requires that long-lived assets be reviewed for impairment whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Recoverability of long-lived assets to be held and used ismeasured by a comparison of the carrying amount of an asset to future net cashflows expected to be generated by the asset. If such assets are considered tobe impaired, the impairment to be recognized is measured by the amount by whichthe carrying amount of the assets exceeds the fair value of 

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

theassets. Long-lived assets to be disposed of by sale are reported at the lowerof the carrying amount or fair value less costs to sell, and will cease to bedepreciated. SFAS No. 144 also requires long-lived assets to be disposedof other than by sale to be considered as held and used until disposed of,requiring the depreciable life to be adjusted as an accounting change.

 

##### *Goodwill*

##### * *

In accordance with SFAS No. 142, “Goodwill and Other IntangibleAssets,” the Company does not amortize goodwill. SFAS No. 142 requiresthat goodwill be evaluated for impairment at least annually or whenever eventsor changes in circumstances indicate that the carrying amount of an asset maynot be fully recoverable. The Company used a discounted cash flow analysis inevaluating goodwill for impairment in fiscal years 2008 and 2007 and determinedthat no impairment charges were 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 $26,647,000, $23,953,000 and $26,474,000 for the years ended July 31,2008, 2007 and 2006, 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.

 

*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 $1,294,000and $1,048,000 as of July 31, 2008 and 2007, respectively.

 

One customer accounted for 11% and 22% of accounts receivable as of July 31,2008 and 2007, respectively and 9%, 12% and 12% of net revenues for the yearsended July 31, 2008, 2007 and 2006, respectively.

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARS ENDED JULY 31, 2008, 2007 AND 2006**

 

Thefollowing summarizes balance and activity information related to the allowancefor 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, 2008                       |       | $                     | 213        |                | $          | 3,347          |       | $                | (3,231     | ) | $ | 329 |   |
| Year ended July 31, 2007                       |       | 180                   |       | 2,592               |       | (2,559         | )          | 213              |       |
| Year ended July 31, 2006                       |       | 157                   |       | 2,695               |       | (2,672         | )          | 180              |       |
|                                                |       |                  |       |                |       |           |       |             |       |
| Allowance for doubtful accounts:                    |       |                  |       |                |       |           |       |             |       |
| Year ended July 31, 2008                       |       | $                     | 835        |                | $          | 232            |       | $                | (102       | ) | $ | 965 |   |
| Year ended July 31, 2007                       |       | 900                   |       | 9                   |       | (74            | )          | 835              |       |
| Year ended July 31, 2006                       |       | 1,350                 |       | 640                 |       | (1,090         | )          | 900              |       |
|                                                |       |                  |       |                |       |           |       |             |       |
| Allowance for cash discounts and doubtful accounts: |       |                  |       |                |       |           |       |             |       |
| Year ended July 31, 2008                       |       | $                     | 1,048      |                | $          | 3,579          |       | $                | (3,333     | ) | $ | 1,294 |   |
| Year ended July 31, 2007                       |       | 1,080                 |       | 2,601               |       | (2,633         | )          | 1,048            |       |
| Year ended July 31, 2006                       |       | 1,507                 |       | 3,335               |       | (3,762         | )          | 1,080            |       |

 

*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, 2008 and 2007 are asfollows (in thousands):

 
| ** **                                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------|------------|----------|------------|----------|------------|
|                                         |       |     |       |     |       |
| Finished goods                               |       | $        | 33,397     |     | $          | 22,873 |   |
| Raw materials, packaging and work-in-process |       | 18,559   |       | 8,456    |       |
|                                         |       |     |       |     |       |
|                                         |       | $        | 51,956     |     | $          | 31,329 |   |

 

*Concentration of Sources of Labor*

 

The Company’s total hourly and salaried workforce consists ofapproximately 433 employees, of which 34% are covered by collective bargainingagreements. The expiration dates of the union contracts are December 1,2010 and September 30, 2008.  Approximately28% of the Company’s workforce is covered by the collective bargainingagreement that was to expire on September 30, 2008; however, the Companyand union have mutually agreed to extend the contract while negotiationscontinue.

 

*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.

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARS ENDED JULY 31, 2008, 2007 AND 2006**

 

The initial acquisition of land by the Company was stated at theestimated fair value of the land at acquisition.   Subsequent land acquisitions are recorded atcost.

 

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 $6,061,000, $6,007,000 and $5,686,000 for theyears ended July 31, 2008, 2007 and 2006, respectively.

 

Details relative to propertyand equipment are as follows (in thousands):

* *
| ** **                        | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------|------------|----------|------------|----------|------------|
|                              |       |     |       |     |       |
| Land and improvements             |       | $        | 2,952      |     | $          | 2,952 |   |
| Buildings                         |       | 23,120   |       | 23,114   |       |
| Equipment                         |       | 106,743  |       | 106,589  |       |
|                              |       |     |       |     |       |
| Property and equipment in service |       | 132,815  |       | 132,655  |       |
| Construction in progress          |       | 546      |       | 776      |       |
| Less accumulated depreciation     |       | (65,983  | )          | (61,985  | )          |
|                              |       |     |       |     |       |
|                              |       | $        | 67,378     |     | $          | 71,446 |   |

 

*Investment in 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 fiveyear periods 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 $5,623,000 and $5,281,000 as of July 31, 2008 and 2007,respectively.

 

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

 
| ** **           | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |
| Package design costs |       | $        | 350        |     | $          | 575 |   |
| Other                |       | 575      |       | 468      |       |
|                 |       |     |       |     |       |
|                 |       | $        | 925        |     | $          | 1,043 |   |

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARS ENDED JULY 31, 2008, 2007 AND 2006**

 

*Accrued Liabilities*

 

Accrued liabilities consistof the following (in thousands):

 
| ** **                | ** ** | **2008** | ** ** | **2007** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |
| Accrued promotional costs |       | $        | 1,136      |     | $          | 2,151 |   |
| Accrued income taxes      |       | 1,393    |       | 461      |       |
| Accrued interest          |       | 469      |       | 647      |       |
| Accrued freight           |       | 470      |       | 582      |       |
| Other                     |       | 2,203    |       | 2,080    |       |
|                      |       |     |       |     |       |
|                      |       | $        | 5,671      |     | $          | 5,921 |   |

 

*Shippingand 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 $4,523,000, $2,089,000and $2,808,000 (primarily related to consumer advertising for *Dreamfields* pastaproducts) for the years ended July 31, 2008, 2007 and 2006, respectively.

 

*Research and Development*

 

Research and development costs are expensed as incurred. Research anddevelopment expenses included in the consolidated income statement for theyears ended July 31, 2008, 2007 and 2006 totaled $500,000, $602,000 and$730,000, respectively, including $307,000, $415,000 and $229,000,respectively, incurred by DNA Dreamfields which the Company began toconsolidate in fiscal year 2005.

 

*Interest Expense, Net*

 

The Company earns patronage refunds from its patronage-based debtissued through CoBank based on its share of the net interest income earned byCoBank. These patronage refunds received are applied against interest 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 basis 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*

 

EffectiveAugust 1, 2005, the Company adopted Statement of Financial AccountingStandard No. 123 (revised 2004), “Share Based Payment” (SFAS No. 123R).Under SFAS No. 123R, the Company is required to recognize, as expense, theestimated fair value of all share based payments to employees. In accordancewith this standard, 

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

theCompany has elected to recognize the compensation cost of all service basedawards on a straight-line basis over the vesting period of the award.Performance based awards are recognized ratably for each vesting tranche.

 

*Earningsper Share*

 

Basic Earnings per Share (EPS) is calculatedby dividing net earnings on common stock by the weighted average number ofcommon shares effective and outstanding during the period. Diluted EPS includesthe effect of all potentially dilutive securities, such as options andconvertible preferred stock.

 

Dilutive securities, consisting of stockoptions and convertible preferred stock, included in the calculation of dilutedweighted average common shares totaled 1,556,000 shares, 575,000 shares and386,000 shares for the years ended July 31, 2008, 2007 and 2006,respectively. The series F Convertible Preferred Stock is included in the fullydiluted EPS calculation and not included in the basic EPS calculation. As thereis currently no established public trading market for the Company’s commonstock, the Company has assumed the proceeds from the exercise of stock optionswould reduce debt and, thus, interest expense for purposes of calculatingdiluted EPS.

 

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

 

**Earnings per share - Basic**

 
| ** **                                    | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| Net income                                    |       | $        | 9,291      |     | $          | 6,608    |       | $ | 4,373 |   |
| Less: Preferred stock dividends               |       | (283     | )          | (113     | )          | (451     | )          |
| Net earnings available to common stockholders |       | $        | 9,008      |     | $          | 6,495    |       | $ | 3,922 |   |
|                                          |       |     |       |     |       |     |       |
| Basic weighted-average shares outstanding     |       | 10,192   |       | 12,501   |       | 13,169   |       |
|                                          |       |     |       |     |       |     |       |
| Earnings per share - Basic                    |       | $        | 0.88       |     | $          | 0.52     |       | $ | 0.30 |   |

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARS ENDED JULY 31, 2008,2007 AND 2006**

 

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

 

**Earningsper share - Diluted**

 
| ** **                                                      | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-----------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                            |       |     |       |     |       |     |       |
| Net earnings available to common stockholders                   |       | $        | 9,008      |     | $          | 6,495    |       | $ | 3,922 |   |
| Plus: Impact of interest expense on the exercise of options (1) |       | 113      |       | 129      |       | 168      |       |
| Net earnings available to common stockholders                   |       | $        | 9,121      |     | $          | 6,624    |       | $ | 4,090 |   |
|                                                            |       |     |       |     |       |     |       |
| Diluted weighted-average shares outstanding:                    |       |     |       |     |       |     |       |
| Basic weighted-average shares outstanding                       |       | 10,192   |       | 12,501   |       | 13,169   |       |
| Plus: Incremental shares from assumed conversions               |       |     |       |     |       |     |       |
| Options                                                         |       | 491      |       | 335      |       | 386      |       |
| Convertible preferred shares                                    |       | 1,065    |       | 240      |       | —   |       |
| Diluted weighted-average shares outstanding                     |       | 11,748   |       | 13,076   |       | 13,555   |       |
|                                                            |       |     |       |     |       |     |       |
| Earnings per share - Diluted                                    |       | $        | 0.78       |     | $          | 0.51     |       | $ | 0.30 |   |

 

----

(1)  Assume fundsfrom exercise of stock options would be used to pay down debt and thereforereduce interest expense.

 

*RecentlyIssued Accounting Standards*

 

In September 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishes aframework for measuring fair value and expands disclosure of fair valuemeasurements. SFAS 157 applies under other accounting pronouncements thatrequire or permit fair value measurements and accordingly, does not require anynew fair value measurements.SFAS 157 was initially effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. In February 2008, theFASB issued FASB Staff Position (FSP) FAS 157-2.  This FSPpermits a delay in the effective date of SFAS 157 to fiscal yearsbeginning after November 15, 2008, for nonfinancial assets andnonfinancial liabilities,  except for items that are recognized ordisclosed at fair value in the financial statements on a recurring basis (at leastannually). In October 2008, the FASB issued FSP FAS 157-3, “Determiningthe Fair Value of a Financial Asset when the Market for That Asset Is NotActive,” which clarifies the application of SFAS 157 for financial assets in amarket that is not active. We are currently evaluating the impact, if any, thatthe implementation of SFAS 157 will have on our consolidated results ofoperations or financial condition.

 

InFebruary 2007, the FASB issued SFAS No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities—Including an Amendment of FASBStatement No. 115” (“SFAS 159”). SFAS 159 expands the use of fair valueaccounting but does not affect existing standards which require assets orliabilities to be carried at fair value. Under SFAS 159, a company may elect touse fair value to measure accounts and loans receivable, available-for-sale andheld-to-maturity securities, equity method investments, accounts payable,guarantees and issued debt. Other eligible items include firm commitments. SFAS159 is effective for financial statements issued for fiscal years beginningafter November 15, 2007. We are currently evaluating the impact that SFAS159 will have on our financial statements.

 

InDecember 2007, FASB issued SFAS No. 141 (Revised 2007), “BusinessCombinations” (“SFAS 141R”). The objective of SFAS 141R is to improve therelevance, representational faithfulness, and comparability of the informationthat a reporting entity provides in its financial reports about a businesscombination and its effects. SFAS 141R requires an acquirer to recognize theassets acquired, the liabilities assumed, and any noncontrolling interest inthe acquiree at the acquisition date, measured at their fair values as of thatdate. SFAS 141R also requires the acquirer to recognize and measure thegoodwill acquired in a business combination or a gain from a bargain purchaseand how to evaluate the nature and financial effects of the businesscombination. SFAS 141R is 

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

effectivefor financial statements issued for fiscal years beginning after December 15,2008. The Company is in the process of evaluating the impact, if any, that theadoption of SFAS 141R will have on its financial statements.

 

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

 

InDecember 2007, the SEC published the Staff Accounting Bulletin No. 110(“SAB 110”), which amends SAB No. 107 by extending the usage of a “simplified”method, as discussed in SAB No. 107, in developing an estimate of theexpected life of “plain vanilla” share options in accordance with SFAS No. 123(revised 2004), Share-Based Payment. In particular, the staff indicated in SAB107 that it will accept a company’s election to use the simplified method,regardless of whether the company has sufficient information to make morerefined estimates of expected life. We are evaluating SAB 110 and its impact onfuture employee stock option grants.

 

InMay 2008, the Financial Accounting Standards Board (“FASB”) issued FASBStatement No. 162, “The Hierarchyof Generally Accepted Accounting Principles.” This statement identifies thesources of accounting principles and the framework for selecting the principlesused in the preparation of financial statements of nongovernmental entitiesthat are presented in conformity with generally accepted accounting principles(“GAAP”) in the United States. This statement will be effective 60 daysfollowing the SEC’s approval of the Public Company Accounting Oversight Board (“PCAOB”)amendments to AU Section 411, “TheMeaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.”We do not expect the adoption of this statement to have a material impact onour financial statements.

 

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

 

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

** **

Effective May 1, 2005, the Company’s ownership in DNA Dreamfieldsincreased to 46.7%. In conjunction withthe Company’s increase in ownership in DNA Dreamfields and changes inthe DNA Dreamfields operating agreement and other contractual arrangements, the Company determined that DNADreamfields was a variable interest entity under FASB Interpretation No. 46(R),“Consolidation of Variable Interest Entities,” and that the Company was theprimary beneficiary. Therefore, effective May 1, 2005, the Company beganto include DNA Dreamfields in its consolidated financial statements.

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

**YEARS ENDED JULY 31, 2008, 2007AND 2006**

 

EffectiveSeptember 21, 2007, the Company acquired the remaining units of DNADreamfields, increasing its ownership to 100%. Pursuant to the terms of the purchase agreement, the Company acquiredthe remaining units for an aggregate purchase price of $2,231,614.  In conjunction with this purchase, theCompany eliminated the noncontrolling interests, recorded amortizableintangible assets (covenants not-to-compete and technology license) and reducedrecorded goodwill associated with the buyout of DNA Dreamfields in the Company’sfirst quarter of fiscal year 2008.

 

**NOTE 3 -**                          GOODWILL AND OTHER INTANGIBLE ASSETS

** **

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

 

Amortizableintangible assets are amortized using the straight-line method over theirestimated useful lives, which is the estimated period over which economicbenefits are expected to be provided. In conjunction with the acquisition ofthe remaining units of DNA Dreamfields (See Note 2), the Company recordedamortizable intangible assets including covenants not-to-compete and atechnology license.  The covenantsnot-to-compete totaling $112,000 are being amortized over 36 months. Thetechnology license totaling $2.6 million is being amortized over its estimateduseful life of approximately 16 years.

 
| ** **                           | ** ** | **As of July 31, 2008 (in thousands)** | ** ** |
|--------------------------------------|------------|----------------------------------------------------------------------|------------|
| ** **                           | ** ** | **Gross Carrying**                                              | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                           | ** ** | **Amount**                                                           | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                 |       |                                                                 |       |   |   |   |   |
| Covenants not-to-compete             |       | $                                                                    | 112        |   | $ | (31 | ) | $ | 81 |   |
| Technology license                   |       | 2,647                                                                |       | (138 | ) | 2,509 |   |
|                                 |       |                                                                 |       |   |   |   |   |
| Total intangible assets              |       | 2,759                                                                |       | (169 | ) | 2,590 |   |
|                                 |       |                                                                 |       |   |   |   |   |
| Goodwill                             |       | 8,381                                                                |       | — |   | 8,381 |   |
|                                 |       |                                                                 |       |   |   |   |   |
| Total goodwill and intangible assets |       | $                                                                    | 11,140     |   | $ | (169 | ) | $ | 10,971 |   |

 

Amortization expense relating to intangible assets totaled $169,000 for fiscal year 2008.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

The following table estimates amortization expense for the next five fiscal years (in thousands):

 
| ** **                                           | ** ** | **Covenants**      | ** ** | **Technology** | ** ** |
|------------------------------------------------------|------------|--------------------|------------|----------------|------------|
| **Fiscal years ending July 31,** | ** ** | **Not-To-Compete** | ** ** | **License**    | ** ** |
|                                                 |       |               |       |           |       |
| 2009                                                 |       | $                  | 37         |           | $          | 165 |   |
| 2010                                                 |       | 37                 |       | 165            |       |
| 2011                                                 |       | 7                  |       | 165            |       |
| 2012                                                 |       | —             |       | 165            |       |
| 2013                                                 |       | —             |       | 165            |       |
| 2014 and  thereafter                                 |       | —             |       | 1,684          |       |
|                                                 |       |               |       |           |       |
|                                                 |       | $                  | 81         |           | $          | 2,509 |   |

 

**NOTE 4 -**                          SHORT-TERM NOTES PAYABLE

** **

In January 2008, the Company increased its revolving creditfacility with CoBank to $45 million from the prior facility of $25 million.This facility extends through January 15, 2009 and is collateralized byall assets of the Company. Interest on the revolving line is at the 7-day LIBORrate subject to performance adjustments depending upon the Company’s ratio oftotal debt to earnings before interest, taxes, depreciation and amortization or“EBITDA.” The higher the ratio the higher the adjustment to the 7-day LIBORrate within a range of 175 to 275 basis points above the 7-day LIBORrate.  Fixed interest rate options are also available. The primary purposeof the revolving credit facility is to finance inventory and receivables. Thebalances outstanding under the revolving credit arrangements totaled $25.8million and $7.4 million as July 31, 2008 and 2007, respectively.  The Company had $19.2 million and $17.6million available for borrowings under line of credit agreements as of July 31,2008 and 2007, respectively.  Weightedaverage interest rates on short-term borrowings were 5.36%, 7.48% and 6.40% forthe years ended July 31, 2008, 2007 and 2006, respectively.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

**NOTE 5 -**                          LONG-TERM DEBT

** **

Information regarding long-term debt at July 31, 2008 and 2007 isas follows (in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                      | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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                                                                                                                        |       | $        | 1,200      |     | $          | 2,400 |   |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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                                                                                                               |       | 2,574    |       | 5,145    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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                                                                                                               |       | 3,000    |       | 4,000    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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 (7.07% at July 31, 2007; 4.43% at July 31, 2008),  collateralized by all assets of the Company |       | 12,600   |       | 17,000   |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| Term loan from CoBank due in quarterly  installments of $1,350,000 for fourteen quarters starting May 2011 and a  $1,100,000 final payment on November 20, 2014, variable interest (7.07%  at July 31, 2007; 4.43% at July 31, 2008), collateralized by all  assets of the Company          |       | 20,000   |       | 20,000   |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| Capital lease, five year term through  March 31, 2012, fixed interest at 6.98%                                                                                                                                                                                                                             |       | 1,307    |       | 1,617    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| Total long-term debt                                                                                                                                                                                                                                                                                            |       | 40,681   |       | 50,162   |       |
| Less current portion                                                                                                                                                                                                                                                                                            |       | 9,507    |       | 9,481    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| Net long-term debt                                                                                                                                                                                                                                                                                              |       | $        | 31,174     |     | $          | 40,681 |   |

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

Aggregate future maturities required on long-term debt and capitalleases are as follows (in thousands):

 
| **Years ending July 31,** | ** ** | ** ** | ** ** |
|------------------------------------------|------------|------------|------------|
|                                     |       |       |       |
| 2009                                     |       | 9,507      |       |
| 2010                                     |       | 5,756      |       |
| 2011                                     |       | 6,532      |       |
| 2012                                     |       | 5,636      |       |
| 2013                                     |       | 5,400      |       |
| Thereafter                               |       | 7,850      |       |
|                                     |       |       |       |
|                                     |       | $          | 40,681     |   |
|                                          |            |            |            |  |

 

The Company has a $1,200,000 letter of creditcommitment with CoBank, securing the non-patronage loan from CoBank. The letterof credit commitment is subject to a commitment fee of 1.0% on an annualizedbasis and expires December 31, 2008. Advances on the letter of creditcommitment are payable on demand.

 

The Company’s debt agreementswith CoBank and the institutional note holders obligate the Company to maintainor achieve certain amounts of equity and financial ratios and imposerestrictions on the Company. The Company was in compliance with these financialcovenants as of July 31, 2008.

 

TheCompany incurred $3,849,000, $3,013,000 and $2,960,000 of interest on long and short-termdebt and other obligations in fiscal years 2008, 2007 and 2006, respectively,of which $9,000, $109,000 and $243,000 was capitalized in the respectiveperiods. Patronage income from CoBank of $225,000, $132,000 and $144,000 wasnetted against interest expense on the statement of operations for the yearsended July 31, 2008, 2007 and 2006, respectively.

 

OnFebruary 14, 2007 the Company entered into a $20 million term loanagreement with CoBank to partially fund a tender offer to purchase up to 3,920,000shares of the Company’s common stock at $10.00 per share in cash. Availabilityunder the term loan was contingent upon at least 50% of the aggregate purchaseprice of the shares in the tender offer coming from proceeds of the sale ofequity securities to MVC Capital, Inc. and La Bella Holdings LLC. TheCompany must repay this term loan in quarterly installments beginning in May 2011and concluding in November 2014. Interest on the term loan is at the 7-dayLIBOR rate subject to performance adjustments depending upon the Company’sratio of total debt to EBITDA. The higher the ratio the higher the adjustmentto the 7-day LIBOR rate within a range of 175 to 275 basis points above the7-day LIBOR rate. Fixed interest rate options are also available.

 

**NOTE 6 -**                          STOCKHOLDERS’ EQUITY

** **

TheCompany is authorized to issue 75,000,000 shares of Common Stock, $.01 parvalue per share, 533 shares of Series A Preferred Stock, $100 par valueper share, 525 shares of Series B Preferred Stock, $100 par value pershare, 2,731 shares of Series C Preferred Stock, $100 par value per share,11,340,841 shares of Series D Delivery Preferred Stock, $.01 par value pershare, 130,000 shares of Series E Junior Participating Preferred Stock,$.01 par value per share, 2,100,000 shares of Series F ConvertiblePreferred Stock, $.01 par value per share and 11,425,370****sharesof undesignated preferred stock, $.01 par value per share.

 

Holders of Series C Preferred Stock shall receive payment of anon-cumulative annual dividend at the rate of 6% of the $100 par value on eachshare of Series C Preferred Stock. Each share of Series C PreferredStock is convertible into 24 shares of Common Stock and 24 shares of Series DDelivery Preferred Stock of the Company. The conversion ratio shall be proportionatelyadjusted at any time the outstanding shares of Common Stock are increased ordecreased without payment by or to the Company or the Company’s shareholders.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

Each share of Series D Delivery Preferred Stock of the Companygives its holder the privilege, but not the obligation, to deliver one bushelof durum 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 of Series DDelivery Preferred Stock will be entitled to receive, if and when declared bythe Board of Directors, a non-cumulative annual dividend of up to $.04 pershare on each share of Series D Delivery Preferred Stock held by suchholder. The Company must pay holders of Series D Delivery Preferred Stocka dividend of at least $.01 per share before paying any dividends on CommonStock.

 

Holders of Series F Convertible Preferred Stock have the right,exercisable at any time upon sixty-five (65) days’ written notice to theCompany, to convert any number of the holder’s shares of Series FPreferred Stock into an equal number of shares of the Company’s Common Stock,par value $.01 per share. Series F Convertible Preferred Stock shall notcarry the right to vote on matters submitted to the vote of the shareholders ofthe Company. Except as otherwise provided, the Series F Preferred Stockshall have all rights of the Common Stock, including but not limited to anyrights to dividends or to distributions upon liquidation.

 

The Board of Directors ofthe Company adopted a Rights Plan that became effective July 1, 2002.Under the Rights Plan, the Board of Directors of the Company has declared adividend of one purchase right (a “Right”) for each outstanding share of CommonStock held. Each Right will entitle the holder to purchase from the Companyone-hundredth of one share of Series E Junior Participating PreferredStock at a specified price, subject to certain adjustments. The Rights will notbecome exercisable, and will not be transferable apart from the Company’sshares of Common Stock, until a person or group has acquired 15% or more of theCompany’s Common Stock or has commenced a tender or exchange offer for 15% ormore of the Company’s Common Stock. In those events, each Right will entitlethe holder (other than the acquiring person or group) to receive, uponexercise, common shares of either the Company or the acquiring company having valueequal to 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.

 

OnMay 10, 2007, the Company closed the sale of 1 million shares of Series FConvertible Preferred Stock to MVC Capital, Inc. (“MVC”) and the sale of 1million shares of common stock to LaBella Holdings, LLC at a purchase price of$10.00 per share. The Company also received $20 million in loan proceeds undera term loan agreement with CoBank. With the net proceeds of $38.8 million fromthese financing transactions and working capital provided by the Company,Dakota Growers purchased 3,917,519 shares of common stock that had been properlytendered to the Company at $10.00 per share net in cash pursuant to the Company’stender offer, which expired on April 27, 2007.

 

On December 20, 2007, the Company’s Board of Directors authorizedthe payment of non-periodic dividends of 1 cent per share on its Series DDelivery Preferred Stock, 16 cents per share on its Common Stock and 16 centsper share on its Series F Convertible Preferred Stock, payable on January 15,2008 to shareholders of record as of December 31, 2007.

 

OnDecember 14, 2006, the Company’s Board of Directors authorized the paymentof non-periodic dividends of 1 cent per share on its Series D DeliveryPreferred Stock and 14 cents per share on its Common Stock, payable on January 3,2007 to shareholders of record as of December 20, 2006.

 

On December 15, 2005, the Company’s Board of Directors authorizedthe payment of non-periodic dividends of 4 cents per share on its Series DDelivery Preferred Stock and 4 cents per share on its Common Stock, payable on January 10,2006 to shareholders of record as of December 19, 2005.

 

**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 servicerequirements. The plan covers employees who have reached 18 years of age andwho have completed 500 hours of service within six months. The Company matches100% on the first 3% of the

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

employees’ elected deferral and 50% on the next 2%. Employercontributions to the plan totaled $706,000, $537,000 and $499,000 for the yearsended July 31, 2008, 2007 and 2006, respectively.

 

PrimoPiatto, Inc. was also required to contribute to a multi-employer pensionplan covering certain hourly employees subject to a collective bargainingagreement. Such employees could also participate in the 401(k) plan butwere excluded from amounts contributed by Primo Piatto. Contributions to thepension plan for the years ended July 31, 2008, 2007 and 2006 totaled$1,637,000, $106,000 and $83,000, respectively.

 

The Company reached an agreement on January 16, 2008 with theTeamsters Local No. 120, affiliated with the International Brotherhood ofTeamsters, on a three-year contract covering the period from December 1,2007 through December 1, 2010. The contract allows the Company to withdrawemployees from the Central States Southeast and Southwest Areas Pension Fund(the “Fund”), a multi-employer pension plan. The withdrawal liability totaled$1,573,000 with an additional $124,000 payment into the Company’s 401(k) planfor non-vested employee amounts in the Fund. The Company recorded a $1,697,000non-recurring pre-tax charge for the year ended July 31, 2008 to reflectthese costs associated with the withdrawal from the Fund. There were nopayments made on the $1,573,000 withdrawal liability as of July 31, 2008and that amount was included in accounts payable in the Company’s consolidatedfinancial statements.

 

**NOTE 8 -**                          INCOME TAXES

 

Significant components of theCompany’s deferred tax assets and liabilities as of July 31, 2008 and 2007related to temporary differences are as follows (in thousands):

 
| ** **                           | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Deferred tax assets                  |       |     |       |     |       |
| Accounts receivable allowances       |       | $        | 504        |     | $          | 409 |   |
| Accrued expenses and other reserves  |       | 549      |       | 695      |       |
| Total deferred tax assets            |       | 1,053    |       | 1,104    |       |
|                                 |       |     |       |     |       |
| Deferred tax liabilities             |       |     |       |     |       |
| Property, equipment and other assets |       | (14,119  | )          | (13,264  | )          |
| Other                                |       | —   |       | (210     | )          |
|                                 |       |     |       |     |       |
| Net deferred tax liabilities         |       | $        | (13,066    | )        | $          | (12,370 | ) |

 

Classified in theaccompanying balance sheets as follows:

 
| ** **                   | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Current assets               |       | $        | 1,053      |     | $          | 1,104 |   |
| Noncurrent liabilities       |       | (14,119  | )          | (13,474  | )          |
|                         |       |     |       |     |       |
| Net deferred tax liabilities |       | $        | (13,066    | )        | $          | (12,370 | ) |

 

Management believes it is more likely than not that the deferred taxassets as of July 31, 2008 will be realized through the generation offuture taxable income and tax planning strategies.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

Income tax expense for the years ended July 31, 2008, 2007 and2006 consists of the following (in thousands):

 
| ** **                 | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |     |       |
| Current income tax expense |       | $        | 4,684      |     | $          | 2,851    |       | $ | 1,795 |   |
| Deferred income taxes      |       | 696      |       | 908      |       | 998      |       |
|                       |       |     |       |     |       |     |       |
| Income tax expense         |       | $        | 5,380      |     | $          | 3,759    |       | $ | 2,793 |   |

 

The reconciliation of thefederal statutory income tax rate to the effective income tax rate for theyears ended July 31, 2008, 2007 and 2006 is as follows:

 
| ** **                                            | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |     |       |
| Federal statutory income tax rate                     |       | 34.0     | %          | 34.0     | %          | 34.0     | %          |
| State income taxes, net of federal income  tax effect |       | 5.0      |       | 5.0      |       | 5.0      |       |
| Other                                                 |       | (2.3     | )          | (2.7     | )          | —   |       |
|                                                  |       |     |       |     |       |     |       |
| Effective income tax rate                             |       | 36.7     | %          | 36.3     | %          | 39.0     | %          |

 

The Company adopted theprovisions of FASB Interpretation No. 48 “Accounting for Uncertainty ofIncome Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”) on August 1,2007. FIN 48 clarifies the accounting for uncertainty in income taxesrecognized in an enterprise’s financial statements in accordance with Statementof Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS109”). This interpretation prescribes a recognition threshold and measurementattribute for the financial statement recognition and measurement of a taxposition taken or expected to be taken in a tax return. FIN 48 also providesguidance on derecognition of tax benefits, classification on the balance sheet,interest and penalties, accounting in interim periods, disclosure, andtransition. As a result of the implementation of FIN 48, the Company recordedno increase in the liability for unrecognized tax benefits and the balance ofunrecognized tax benefits was zero at August 1, 2007 and as of July 31,2008.

 

TheCompany has adopted the accounting policy that interest recognized inaccordance with Paragraph 15 of FIN 48 and penalty recognized in accordancewith Paragraph 16 of FIN 48 are classified as part of income taxes. The totalamount of interest and penalty recognized in the statements of financialposition and statements of operations was zero as of August 1, 2007 and July 31,2008. The Company does not anticipate any significant change within 12 monthsof this reporting date of its uncertain tax positions. The Company is subjectto taxation in the United States and various state jurisdictions. There are noongoing income tax examinations by taxing authorities at this time. The Company’svarious tax years starting 2003 to 2008 remain open in various taxingjurisdictions.

 

**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. Theseestimates involve uncertainties and matters of judgment, and therefore cannotbe determined 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.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

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 on futurepatronage earnings of the non-subsidiary cooperatives.

 

Based upon current borrowing rates withsimilar maturities, the fair value of the long-term debt approximates thecarrying value as of July 31, 2008 and 2007.

 

**NOTE 10 -**                   OPERATING LEASES

** **

The Company leases equipment and office spaceunder operating lease agreements. Future obligations for operating leases forfiscal years ended July 31 are as follows (in thousands):

 
| **Year ending July 31:** | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|------------|------------|
| 2009                                    |       | 454        |       |
| 2010                                    |       | 248        |       |
| 2011                                    |       | 153        |       |
| 2012                                    |       | 92         |       |
| 2013                                    |       | 39         |       |
| Thereafter                              |       | —     |       |
|                                    |       |       |       |
|                                    |       | $          | 986        |   |
|                                         |            |            |            |  |

 

Lease expense totaled $521,000, $1,138,000and $1,462,000 for the years ended July 31, 2008, 2007 and 2006,respectively.

 

**NOTE 11 -**                   CAPITAL LEASE

 

On March 30, 2007, the Companyentered into a lease agreement for certain pasta equipment, which hadpreviously been accounted for in a sale-leaseback transaction as discussed inNote 12, valued at $1.75 million.  Theequipment lease, which has a term of 5 years expiring on March 31, 2012, isclassified as a capital lease.

 

The following is a schedule ofthe future minimum lease payments under the capital lease together with thepresent value of the net minimum lease payments as of July 31, 2008 (inthousands):

 
| **Year ending July 31:**     | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2009                                        |       | 413        |       |
| 2010                                        |       | 413        |       |
| 2011                                        |       | 413        |       |
| 2012                                        |       | 241        |       |
| Later Years                                 |       | —     |       |
| Total minimum lease payments                |       | 1,480      |       |
| Less: Amount representing interest          |       | (173       | )          |
| Present value of net minimum lease payments |       | $          | 1,307      |   |
|                                             |            |            |            |  |

 

The equipment is being depreciated over itsestimated useful economic life.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

Certain pastaequipment under capital lease at July 31, 2008 and 2007 is as follows (inthousands):

 
| ** **                     | ** ** | **2008** | ** ** | **2007** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Equipment                      |       | 1,750    |       | 1,750    |       |
| Less: Accumulated depreciation |       | (233     | )          | (58      | )          |
| Total                          |       | 1,517    |       | 1,692    |       |

 

**NOTE 12 -**                   SALE-LEASEBACK

** **

The Company entered into a sale-leaseback transaction effective March 29,2002, for certain pasta production equipment. Proceeds from the sale totaled $5million. The lease, which was classified as operating, set forth an initialterm of five years and called for lease payments of $72,000 per month. At theend of the initial lease term, the Company could renew the lease at fair rentalvalue, terminate the lease and surrender the equipment with the payment of a10% of equipment cost remarketing fee, or purchase the equipment for$1,750,000.  The Company realized a gainon the sale of $255,000, which was deferred and was amortized in proportion tothe gross rentals charged to expense over the five-year lease term.  The Company entered into a capital lease forthis pasta production equipment on March 30, 2007 for $1.75 million asdiscussed in Note 11.

 

**NOTE 13-**                   COMMITMENTS AND CONTINGENCIES

 

The Company forward contractsfor a certain portion of its future durum wheat requirements. At July 31, 2008,the Company had outstanding commitments for grain purchases totaling$33,073,000 related to forward purchase contracts. These contracts are setprice contracts to deliver grain to the Company’s mill, and are not derivativein nature as they have no net settlement provision and are not transferable.

 

Pursuant to certain warehouseagreements, the Company is obligated to minimum monthly storage and handlingamounts totaling $2,425,000, $1,019,000, $973,000, $554,000 and $554,000 forthe years ending July 31, 2009, 2010, 2011, 2012 and 2013, respectively.

 

The Company is subject tovarious lawsuits and claims which arise in the ordinary course of its business.While the results of such litigation and claims cannot be predicted withcertainty, management believes the disposition of all such proceedings,individually or in aggregate, should not have a material adverse effect on theCompany’s financial position, results of operations or cash flows.

 

**NOTE 14 -**                   STOCK OPTION PLANS

** **

On January 31, 1997 the Company’sCompensation Committee of the Board of Directors (the “Compensation Committee”)adopted the Dakota Growers Incentive Stock Option Plan (the “Plan”). The Planwas ratified by the Company’s members at the annual meeting in January 1998.The Compensation Committee or the Board of Directors has the power to determinethe key management employees of the Company to receive options and the numberof shares to be optioned to each of the employees. Options granted under thePlan are for the purchase of Series C Convertible Preferred Stock at fairmarket value, which were convertible into Equity Stock as a cooperative, andare now convertible into Common Stock and Series D Delivery PreferredStock as a corporation at the option of the employee, under the applicableconversion ratio. The maximum number of preferred shares that may be issuedpursuant to options granted under the Plan is 15,000, all of which have beenissued.  Each share of Series CPreferred Stock is convertible into 24 shares of Common Stock and 24 shares of Series DDelivery Preferred Stock of the Company. The conversion ratio isproportionately adjusted if the Company increases the outstanding shares ofCommon Stock or Series D Delivery Preferred Stock, as applicable, withoutpayment by or to the Company or the Company’s shareholders for such additionalshares (e.g. stock split, stock dividend or other action). Options grantedunder the Plan must be exercised within ten years from the date such optionsare granted. In the event of the employee’s termination with the Company, allexercisable options may be exercised within 90 days of the termination date. Ifnot exercised, such options lapse.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

The Company’s 2002 Stock Option Plan (the “2002 Plan”) was adopted bythe Board of Directors on November 21, 2002. All options granted under the2002 Plan are non-qualified stock options and are for the purchase of theCompany’s Common Stock. The maximum number of shares of Common Stock that maybe issued pursuant to options granted under the 2002 Plan is 294,456 shares,all of which have been issued. Stock options granted under the 2002 Plan expire10 years from the date of grant.

 

On November 21, 2002 the Board of Directors adopted the DakotaGrowers Pasta Company, Inc. 2003 Stock Option Plan (the “2003 Plan”),which was approved by the Company’s shareholders at the Annual Meeting on January 11,2003. The 2003 Plan covers 500,000 shares of the Company’s Common Stock.Participation in this Plan shall be limited to officers, directors, employees,vendors or consultants of the Company or any subsidiary of the Company. Optionsgranted under the 2003 Plan may be incentive stock options (as defined under Section 422of the Code) or non-qualified stock options, as determined by the 2003 Planadministrator at the time of grant of an option and subject to the applicableprovisions of Section 422 of the Code and the regulations promulgatedthere under. The stock options generally expire 10 years from the date ofgrant. If the employment of the Optionee is terminated by any reason other thanhis or her death or disability, all exercisable options may be exercised within90 days of the termination date. If not exercised, such options lapse.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

The following tables set forth information regarding stock optionsoutstanding and exercisable:

 
| ** **                        | ** ** | **Options to purchase Series C Convertible Preferred Stock** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Number of**                                                                              | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Series C**                                                                               | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Convertible**                                                                                 | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Preferred Shares**                                                                       | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                              |       |                                                                                            |       |   |   |   |   |   |   |
| Outstanding at July 31, 2005 |       | 2,731                                                                                           |       | $100-$150 |   | $ | 112.56 |   | 2,731 |   |
| Exercised                         |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                           |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired                 |       | (754                                                                                            | )          | $100 |   | $ | 100.00 |   |   |   |
| Outstanding at July 31, 2006 |       | 1,977                                                                                           |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |
| Exercised                         |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                           |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired                 |       | —                                                                                          |       |   |   |   |   |   |   |
| Outstanding at July 31, 2007 |       | 1,977                                                                                           |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |
| Exercised                         |       | —                                                                                          |       |   |   |   |   |   |   |
| Granted                           |       | —                                                                                          |       |   |   |   |   |   |   |
| Forfeited/Expired                 |       | —                                                                                          |       |   |   |   |   |   |   |
| Outstanding at July 31, 2008 |       | 1,977                                                                                           |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |

 
| ** **                        | ** ** | **Options to purchase Common Stock** | ** ** |
|-----------------------------------|------------|----------------------------------------------------------|------------|
| ** **                        | ** ** | ** **                                               | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                                               | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Number of**                                       | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Common Shares**                                   | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                              |       |                                                     |       |   |   |   |   |   |   |
| Outstanding at July 31, 2005 |       | 374,980                                                  |       | $4.25-$6.25 |   | $ | 5.82 |   | 334,722 |   |
| Exercised                         |       | —                                                   |       |   |   |   |   |   |   |
| Granted                           |       | 141,256                                                  |       | $4.00 |   | $ | 4.00 |   |   |   |
| Forfeited/Expired                 |       | (130,399                                                 | )          | $4.00-$6.25 |   | $ | 5.81 |   |   |   |
| Outstanding at July 31, 2006 |       | 385,837                                                  |       | $4.00-$6.25 |   | $ | 5.16 |   | 242,517 |   |
| Exercised                         |       | (5,550                                                   | )          | $4.00 |   | $ | 4.00 |   |   |   |
| Granted                           |       | 272,726                                                  |       | $5.00 |   | $ | 5.00 |   |   |   |
| Forfeited/Expired                 |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at July 31, 2007 |       | 653,013                                                  |       | $4.00-$6.25 |   | $ | 5.10 |   | 317,243 |   |
| Exercised                         |       | —                                                   |       |   |   |   |   |   |   |
| Granted                           |       | —                                                   |       |   |   |   |   |   |   |
| Forfeited/Expired                 |       | —                                                   |       |   |   |   |   |   |   |
| Outstanding at July 31, 2008 |       | 653,013                                                  |       | $4.00-$6.25 |   | $ | 5.10 |   | 485,128 |   |

 

EffectiveAugust 1, 2005, the Company adopted Statement of Financial AccountingStandard No. 123 (revised 2004), “Share Based Payment” (SFAS No. 123R).Under SFAS No. 123R, the Company is required to recognize, as expense, theestimated fair value of all share based payments to employees. In accordancewith this standard, the Company has elected to recognize the compensation costof all service based awards on a straight-line basis over the vesting period ofthe award. Performance based awards are recognized ratably for each vestingtranche. For the years ended July 31, 2008, 2007 and 2006, the Companyrecorded stock-based employee compensation expense of $160,000, $210,000 and$65,000, respectively.

 

The fair value of the stockoptions granted was estimated at the date of grant using the Black-Scholesoption pricing model with the following weighted average assumptions:  2007 – risk free interest rate of 4.7%,expected dividend yield of 1.0%, expected life of 5 years and volatility of25%; 2006 - risk free interest rate of 4.4%, expected dividend yield of 1.0%,expected life of 5 years and volatility of 30%.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

A summary of the status of theCompany’s issued but nonvested stock options as of July 31, 2008, and changesduring the year ended July 31, 2008, is presented below:

 
| ** **                            | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|---------------------------------------|------------|------------|------------|----------------------|------------|
| ** **                            | ** ** | **Common** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Stock Options** | ** ** | **Shares** | ** ** | **Fair Value**  | ** ** |
|                                  |       |       |       |                 |       |
| Nonvested at July 31, 2007       |       | 335,770    |       | $                    | 4.81       |   |
| Granted                               |       | —     |       |                 |       |
| Vested                                |       | (167,885   | )          | $                    | 4.81       |   |
| Forfeited/Expired                     |       | —     |       |                 |       |
| Nonvested at July 31, 2008       |       | 167,885    |       | $                    | 4.81       |   |

 

As of July 31, 2008,there was approximately $137,000 of total unrecognized compensation costrelated to nonvested employee stock options.  That cost is expected to berecognized over a period of 1.25 years.

 

**NOTE 15 -**                   RELATED PARTY TRANSACTIONS

** **

Amounts due from executive officers totaled$47,000 as of July 31, 2008 and 2007.

 

Jeffrey Topp, a director of the Company, soldwheat to the Company through an affiliated entity in fiscal year 2008. Those salestotaled $263,000 at current market prices and the Company had a commitment topurchase wheat totaling $386,000 from Mr. Topp and/or his affiliated entity asof July 31, 2008.

 

In May 2007, the Company paid MVC Financial Services, Inc.and LaBella Holdings LLC $200,000 each in closing fees.  The payments were based on 2% of the issuanceof 1,000,000 shares of series F preferred stock at $10 per share and 1,000,000shares of common stock at $10 per share. See Note 6 – Stockholders’ Equity. MVCFinancial Services, Inc. is an affiliate of MVC Capital, Inc., aholder of 5% or greater of the Company’s Common Stock.  Michael T. Tokarz, a director of the Company,is a stockholder and Chairman of MVC Capital, Inc.  LaBella Holdings LLC is a holder of 5% orgreater of the Company’s Common Stock. Richard Thompson, a director of the Company, is a managing member ofLaBella Holdings LLC.

 

**NOTE 16 -**                   CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000

** **

U.S. Customs and Border Protection (“Customs”) has distributed antidumpingand countervailing duties assessed on certain pasta imported from Italy andTurkey to affected domestic producers pursuant to the Continued Dumping andSubsidy Offset Act of 2000 (the “Offset Act”), which was enacted in October 2000.The Company received payments in the amount of $2,200,000, $1,300,000 and$1,103,000 in December 2007, 2006 and 2005, respectively, under the OffsetAct.  The net proceeds received under theOffset Act have been classified as Other Income on the Income Statement. 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 basedupon future events over which the Company has little or no control, includingbut not limited to federal legislation, the amount of expenditures by domesticpasta producers and the amount of antidumping and countervailing dutiescollected by Customs.  The Act, alsoknown as the Byrd Amendment, has been repealed and therefore, duties assessedon pasta imports after September 30, 2007 will no longer be distributed todomestic producers.  However, amountscollected (whether such collections occur before or after September 30,2007) related to duties assessed on pasta entries prior to September 30,2007, are expected to be available for future distribution to domesticproducers.

 

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**YEARSENDED JULY 31, 2008, 2007 AND 2006**

 

**NOTE 17 -**                   QUARTERLY FINANCIAL DATA (UNAUDITED)

** **

Summary quarterly results are as follows (inthousands, except per share amounts):

 
| ** **                          | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                |       |        |       |        |       |        |       |        |       |
| Year ended July 31, 2008       |       |        |       |        |       |        |       |        |       |
|                                |       |        |       |        |       |        |       |        |       |
| Net revenues                        |       | $           | 54,802     |        | $          | 61,990      |       | $           | 78,538     |   | $ | 84,869 |   |
| Gross profit                        |       | 8,513       |       | 6,138       |       | 7,715       |       | 11,124      |       |
| Operating income                    |       | 3,744       |       | 1,372       |       | 3,418       |       | 7,506       |       |
| Net income                          |       | 1,816       |       | 1,461       |       | 1,741       |       | 4,273       |       |
| Basic net earnings per common share |       | 0.18        |       | 0.12        |       | 0.17        |       | 0.41        |       |
|                                |       |        |       |        |       |        |       |        |       |
| Year ended July 31, 2007       |       |        |       |        |       |        |       |        |       |
|                                |       |        |       |        |       |        |       |        |       |
| Net revenues                        |       | $           | 48,933     |        | $          | 47,174      |       | $           | 46,084     |   | $ | 48,871 |   |
| Gross profit                        |       | 6,073       |       | 5,102       |       | 6,834       |       | 7,478       |       |
| Operating income                    |       | 2,831       |       | 1,626       |       | 3,646       |       | 4,411       |       |
| Net income                          |       | 894         |       | 1,497       |       | 1,882       |       | 2,335       |       |
| Basic net earnings per common share |       | 0.07        |       | 0.11        |       | 0.14        |       | 0.20        |       |

 

The above quarterly financial data isunaudited, but in the opinion of management, all adjustments necessary for afair presentation of the selected data for these interim periods presented havebeen included.

 

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**ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A(T). CONTROLS AND PROCEDURES**

 

**Disclosure Controls and Procedures**

 

As required by Rule 13a-15(b) underthe Exchange Act, we conducted an evaluation, under the supervision and withthe participation of our management, including our Chief Executive Officer andChief Financial Officer (together the “Certifying Officers”), of theeffectiveness of the design and operation of our disclosure controls andprocedures as of July 31, 2008, the end of the period covered by thisreport. Based upon that evaluation, the Certifying Officers concluded that ourdisclosure controls and procedures were effective as of July 31, 2008 toprovide reasonable assurance that information required to be disclosed in ourExchange Act reports is recorded, processed, summarized and reported within thetime periods specified in the SEC’s rules and forms and that suchinformation is accumulated and communicated to our management, including ourCertifying Officers, as appropriate, to allow for timely decisions regardingrequired disclosure.

 

**Inherent Limitations on Effectiveness ofControls**

 

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

 

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

 

**Management’s report on internal control overfinancial reporting**

 

The following report is provided bymanagement in respect of the Company’s internal control over financialreporting (as defined in Rules 13a-15(f) and 15d-15(f) under theSecurities Exchange Act of 1934):

 

1.     TheCompany’s management is responsible for establishing and maintaining adequateinternal control over financial reporting.

 

2.     TheCompany’s management has used the Committee of Sponsoring Organizations of the TreadwayCommission (COSO) framework to evaluate the effectiveness of internal controlover financial reporting. Management believes that the COSO framework is asuitable framework for its evaluation of financial reporting because it is freefrom bias, permits reasonably consistent qualitative and quantitativemeasurements of the

 

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Company’s internal control over financialreporting, is sufficiently complete so that those relevant factors that wouldalter a conclusion about the effectiveness of the Company’s internal controlover financial reporting are not omitted and is relevant to an evaluation ofinternal control over financial reporting.

 

3.     Managementhas assessed the effectiveness of the Company’s internal control over financialreporting as of July 31, 2008 and has concluded that such internal controlover financial reporting was effective. There were no material weaknesses ininternal control over financial reporting identified by management.

 

4.     Thisannual report does not include an attestation report of the Company’sregistered public accounting firm regarding internal controls over financialreporting. Management’s report was not subject to attestation by the Company’sregistered public accounting firm pursuant to temporary rules of theSecurities and Exchange Commission that permit the Company to provide onlymanagement’s report in this annual report.

 

**Changes in Internal Control over FinancialReporting**

 

There were no changes in the Company’s internal controls over financialreporting during the Company’s most recently completed fiscal quarter that havematerially affected, or are reasonably likely to materially affect, the Company’sinternal control over financial reporting.

 

**ITEM 9B. OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM 10.  DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE**

 

**Board of Directors**

 

The Board of Directors currently consists ofeleven members. The Board may consist of a minimum of seven members and amaximum of fifteen members. The Articles of Incorporation and Bylaws of theCompany 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.Class I, Class II and Class III are to consist of anequal number of directors, except that, if the Board of Directors consists of anumber of directors such that mathematically there cannot be an equal number ofdirectors in each of Class I, Class II and Class III, then theone remaining director shall be made a member of Class I and, if there ismore than one remaining director, the first remaining director shall be made amember of Class I and the second remaining director shall be made a memberof Class II.  Each director in eachof Class I, Class II and Class III will hold office until thethird regular meeting of shareholders following the regular meeting of theshareholders at which such director or such director’s predecessor was elected,until his successor shall have been elected and shall qualify, or until heresigns or is removed.

 

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      |       | 60      |       | 2009                  |       | I         |       |
| Allyn K. Hart              |       | 69      |       | 2011                  |       | III       |       |
| Roger A. Kenner (1)        |       | 59      |       | 2010                  |       | II        |       |
| James F. Link              |       | 81      |       | 2009                  |       | I         |       |
| Eugene J. Nicholas         |       | 63      |       | 2010                  |       | II        |       |
| John D. Rice, Jr. (1) |       | 54      |       | 2009                  |       | I         |       |
| Richard Thompson           |       | 57      |       | 2010                  |       | II        |       |
| Michael T. Tokarz          |       | 58      |       | 2009                  |       | I         |       |
| Jeffrey O. Topp            |       | 49      |       | 2010                  |       | II        |       |
| Curtis R. Trulson          |       | 56      |       | 2011                  |       | III       |       |
| Michael E. Warner          |       | 58      |       | 2011                  |       | III       |       |

 

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

 

**John S.Dalrymple III.**  Mr. Dalrymple has been Chairman of the Boardof Directors of the Company since 1991. He became Lieutenant Governor of NorthDakota in 2000. Mr. Dalrymple had been a state representative since 1984and served as Chairman of the House Appropriations Committee and of the Budget Section ofthe North Dakota House of Representatives. He previously served on the board ofdirectors of the U.S. Durum Growers Association. He has been a farmer in theCasselton, North Dakota area since 1971.

 

**Allyn K.Hart.**  Mr. Harthas been a director of the Company since 1991. Mr. Hart has served on theboard of directors of Cavalier County Job Development Authority and U.S. Durum Growers Association and presentlyserves on the board of Maple Manor Care Center in Langdon, North Dakota.He has been a farmer in the Cavalier County, North Dakota area since 1961.

 

**Roger A. Kenner.**  Mr. Kennerhas 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. Link has been a director of the Companysince 1991. Mr. Link has served on the boards of directors of Farm Creditand Minn-Dak Farmers cooperative, including 15 years as its chairman. He hasbeen a farmer in the Wahpeton, North Dakota area since 1947.

 

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**Eugene J.Nicholas.**  Mr. Nicholas has been a director of theCompany since 1991.  Mr. Nicholashad been a state representative and served as chairman of the North DakotaHouse of Representatives Agriculture Committee. Mr. Nicholas also serveson the board of directors of Country Bank USA, Cando, North Dakota, and theboard of governors of Golden Plains Frozen Foods LLC. Mr. Nicholaspreviously served on the board of directors of the U.S. Durum GrowersAssociation.

 

**John D.Rice, Jr.**  Mr. Rice is the Vice Chairman of the Boardof Directors and has been a director of the Company since 1991. He also servedon the boards of directors of the National Pasta Association and U.S. DurumGrowers Association. He has been a farmer in the Maddock, North Dakota areasince 1968.

 

**Richard Thompson**.  Mr. Thompsonhas been a director of the Company since May 2007. Mr. Thompson isthe co-founder and has been a managing member and chief executive officer ofGO7 Brands, LLC since May 2006.  Hestarted American Italian Pasta Company (AIPC) in 1986 and grew it into thelargest pasta manufacturing and durum milling company in North America. He hasmade numerous appearances in the national media including speaking engagementson entrepreneurial, manufacturing, and branding topics.  He has also received positive press from avariety of national and local publications and has served on several boardsincluding public companies.  Mr. Thompsonserves or has served on various organizations board of directors such as ASPCA,Nashville Humane Association, Pet Food Institute and “ARF” Animal Rescue Fundof the Hamptons.  In addition, he is amember of Parents Campaign Development and Alumni Relations at VanderbiltUniversity, George Washington University - Parents Campaign, and GroceryManufacturing Association - President’s Advisory Council.

 

**Michael T.Tokarz. **Mr. Tokarzhas been a director of the Company since 2004. Mr. Tokarz is the Chairman of MVC Capital, a registered investmentcompany traded on the New York Stock Exchange (Ticker: MVC) that makes equityand debt investments. In addition, Mr. Tokarz is the Managing Member ofThe Tokarz Group, which manages Mr. Tokarz’s personal investments. From1985 to 2002, Mr. Tokarz was a senior General Partner and AdministrativePartner at Kohlberg Kravis Roberts & Co., a private equity firmspecializing in management buyouts. Prior to joining KKR, Mr. Tokarz waswith Continental Illinois National Bank and Trust Company of Chicago, joiningthe firm in 1973. He serves or has served on the Board of Directors of numerouscompanies, including: Conseco, Inc., Walter Industries, Inc., MuellerWater Products, Inc., Safeway, Inc., IDEX Corporation, PRIMEDIA, Inc.,Neway Anchorlok International, Inc., Flagstar Corporation, ConAgra FoodCorporation, KSL Recreation Corporation, RJR Nabisco Corp, Evenflo &Spalding Holdings Corporation, Beatrice Foods Corporation, Nexstar FinancialCorporation, Apertio Limited (UK), United Fixtures Company, StonewaterControls, Lomonosov Porcelain (Russia), Kamaz A.O. (Russia). Mr. Tokarzalso serves on the Board of the University of Illinois Foundation and itsInvestment Committee and as Chairman of its Budget and Finance Committee.  He is a member of the Board of Managers ofIllinois Ventures and Chairman of Illinois Emerging Technology Fund, bothaffiliated with the University of Illinois.

 

**Jeffrey O.Topp.** Mr. Topp has been a director of the Companysince 1991. He serves on the board of directors of Farmers Elevator, Inc.in Grace City, North Dakota and North Dakota Natural Beef, LLC. He is a partnerin T-T Ranch and has been a farmer in the Grace City area since 1978.

 

**Curtis R.Trulson.** Mr. Trulson has been a director of theCompany since 1991. He previously served on the boards of directors of theNational Association of Wheat Growers and the North Dakota Grain GrowersAssociation, including service as its President.  He has been a farmer in Mountrail County,North Dakota, since 1975.

 

**Michael E.Warner.**  Mr. Warner has been a director of theCompany since 1992. Mr. Warner has been a farmer in the Hillsboro, NorthDakota area since 1967. He also currently serves on the boards of directors ofWarner Equipment Co. and Agriceutical Resources LLC. In 2002, Mr. Warnerwas awarded a fellowship by the University of Missouri. He served on the boardof directors of American Crystal Sugar Company from 1989 through 1996, as partof a 23-year career of service to the sugar industry. He is a past member ofthe board of 

 

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trustees of Meritcare Health Systems ofFargo, North Dakota, the largest hospital/multiple clinic system betweenMinneapolis, Minnesota and Seattle, Washington.

 

**Committees of the Board of Directors**

 

The Board of Directors has established an Audit Committee, aCompensation Committee, a Nomination Committee and a Policy Committee.  The composition and function of thesecommittees are set forth below.  A copyof the current charter for each of the committees described below is availableon our website at *www.dakotagrowers.com* by clickingon the links for Investors and Corporate Governance.

 

*Audit Committee*. The AuditCommittee is responsible for overseeing the accounting and financial reportingprocesses of the Company and audits of the Company’s financial statements,including assessing and ensuring the independence of the independent auditor,evaluating audit performance and approving the services to be provided by theindependent auditor. The Audit Committee has the sole authority to retain,compensate, oversee and terminate the independent auditors. The Audit Committeereviews the Company’s annual audited financial statements, quarterly financialstatements and filings with the Securities and Exchange Commission. The AuditCommittee reviews reports on various matters, including critical accountingpolicies of the Company, significant changes in the Company’s selection orapplication of accounting principles and the Company’s internal controlprocesses. The Audit Committee also pre-approves all audit and non-auditservices performed by the independent auditor.

 

The Audit Committee operatesunder a written charter adopted by the Board of Directors. The Company’s AuditCommittee presently consists of Messrs. Curtis R. Trulson (Chair), MichaelE. Warner and John S. Dalrymple III. Under the Company’s bylaws, the Audit Committee of the Board ofDirectors must be composed of at least three directors who are not employees ofthe Company. The charter of the Audit Committee requires that members of theAudit Committee must be independent, and the Board of Directors has determinedthat all members of the Audit Committee are independent directors under the rules ofthe Nasdaq stock market and the Securities and Exchange Commission. The Boardof Directors has also determined that Mr. Trulson meets the Securities andExchange Commission definition of an “audit committee financial expert.”

 

*Compensation Committee.* TheCompensation Committee operates under a written charter and reviews andapproves the compensation and other terms of employment of the Company’s ChiefExecutive Officer and other senior management of the Company. Among its otherduties, the Compensation Committee is responsible for overseeing the Company’sstock-based compensation plans for executive officers and, in consultation withthe Nomination Committee, making recommendations on succession plans for theChief Executive Officer. The Compensation Committee is to annually review theChief Executive Officer’s compensation and evaluate the Chief Executive Officer’sperformance. The current members of the Compensation Committee are Messrs. JohnS. Dalrymple III (Chair), Curtis R. Trulson and Michael E. Warner.

 

The charter of theCompensation Committee requires that the Committee consist of independentdirectors. Each member of the Compensation Committee must also be an “outsidedirector” for purposes of Section 162(m) of the Internal RevenueCode. Each member of the Company’s Compensation Committee meets theserequirements.

 

*Nomination Committee*. The Nomination Committeeoperates under a written charter and is charged with the responsibilities ofnominating and evaluating Board member candidates and establishing criteria fornomination, developing and recommending governance guidelines and reviewingthem periodically, facilitating annual evaluations of the performance of theBoard and its members, reviewing the structure and membership of the Company’sBoard and committees, and reviewing Board compensation policies.  Additionally, the Nomination Committee, inconsultation with the Compensation Committee, facilitates development of themission and objectives of the Chief Executive Officer, succession for the ChiefExecutive Officer and annual evaluation of the performance of the ChiefExecutive Officer.

 

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The Company’sbylaws require that the Nomination Committee be comprised of the Chairman ofthe Board, the Vice-Chairman and the Chief Executive Officer, except that ifone individual holds two of the designated offices, the Board of Directorsshall appoint a third member to the Nomination committee, who need not be adirector of the Company. Additionally, as required by its charter, theNomination Committee is composed of a majority of independent directors. Thecurrent members of the Nomination Committee are Messrs. John S. DalrympleIII (Chair), John D. Rice, Jr. and Timothy J. Dodd. The Board of Directorshas determined that Messrs. Dalrymple and Rice are independent directors.

 

*Policy Committee.*The Policy Committee operates pursuant to a written Policy Committee Charter.The Policy Committee is to provide oversight of the Company’s governanceobligations to assure compliance with all applicable laws, regulations, Articlesof Incorporation and By-laws by adoption and periodic review of a governancepolicy. The members of the Policy Committee are Allyn K. Hart (Chair), CurtisR. Trulson and James F. Link. Each member of the committee is a non-employeedirector and the Board of Directors has determined that there are norelationships that would interfere with a Policy Committee member’s exercise ofindependent judgment in carrying out his responsibilities as a member of thepolicy committee.

 

**Executive Officers**

 

The table below lists the executive officersof the Company. Officers are elected annually by the Board of Directors.

 
| **Name**        | ** ** | **Age** | ** ** | **Position**                           | ** ** |
|-----------------|------------|---------|------------|----------------------------------------|------------|
|            |       |    |       |                                   |       |
| Timothy J. Dodd |       | 53      |       | President  and Chief Executive Officer |       |
| Edward O. Irion |       | 37      |       | Chief  Financial Officer               |       |

 

**Timothy J.Dodd.** Mr. Dodd is the President and ChiefExecutive Officer of the Company. Prior to joining the Company in December 1991,he had been the Vice President of Manufacturing for American Italian PastaCompany since 1988. Previously, Mr. Dodd participated in the constructionand management of two other grain processing facilities, one in Texas and onein Cando, North Dakota. Mr. Dodd serves on the board of directors ofCountry Bank USA, Cando, North Dakota.

 

**Edward O. Irion.** Mr. Irionwas appointed as the Company’s Chief Financial Officer effective February 21,2006.  Mr. Irion joined the Companyin December 1999 and served as the Company’s Assistant Vice President —Planning and Control until August 2000.  From August 2000 untilhis appointment as Chief Financial Officer, Mr. Irion served as theCompany’s Vice President – Finance and Chief Accounting Officer.  He received a Bachelor of Science degree inaccounting from Minnesota State University-Moorhead and is a certified publicaccountant.

 

**Code of Conduct**

 

The Company has adopted a Code of Conductapplicable 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 is availableunder the “Investors” portion of the Company’s website at *www.dakotagrowers.com*. A copy of the Company’s Code ofConduct will also be provided, without charge, upon written request to:

 

Investor Relations

Dakota Growers Pasta Company, Inc.

One Pasta Avenue

Carrington, ND 58421

 

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**ITEM 11. EXECUTIVE COMPENSATION**

 

**COMPENSATION DISCUSSION AND ANALYSIS**

 

**Compensation Overview**

 

This section explains our philosophy,policies and practices relating to executive compensation and presents a reviewand analysis of the compensation earned during the fiscal year ended July 31,2008 by our Chief Executive Officer and our Chief Financial Officer to whom werefer collectively as the “named executive officers.”

 

**Compensation Philosophy and Objectives**

 

The Company’scompensation policies with respect to its executive officers, established bythe Compensation Committee, are based on the principles that compensationshould, to a significant extent, reflect the financial performance of theCompany and the individual contribution of the executives to this financialperformance. It is the policy of the committee to set executive compensation atlevels that are sufficiently competitive with food processing companies ofcomparable size to attract, retain and motivate the highest quality individualsto contribute to the Company’s goals, objectives and overall financialsuccess.  A portion of certainexecutives’ incentive compensation has historically been paid in stock optionsin order to align executive and stockholder interests.

 

**The Role of the Compensation Committee**

 

TheCompensation Committee operates under a written charter and reviews andapproves the compensation and other terms of employment of the Company’s ChiefExecutive Officer and other senior management of the Company. Among its otherduties, the Compensation Committee is responsible for overseeing the Company’sstock-based compensation plans for executive officers and, in consultation withthe Nomination Committee, making recommendations on succession plans for theChief Executive Officer. The Compensation Committee is to annually review theChief Executive Officer’s compensation and evaluate the Chief ExecutiveOfficer’s performance.

 

**Total Compensation for Executive Officers**

 

*Base Salary.* The base salary of each of our named executive officers is reviewed bythe committee as part of the overall annual review of executivecompensation.  The Compensation Committeesets executive compensation by subjective evaluation of the individualperformance of each executive and by marketplace compensation of comparableexecutives, although salary determinations are not based upon any specific orconstant criteria.

 

*Annual Incentive Bonus.*  Executives are eligible for annual incentivecash bonuses based on individual and Company performance.  As no formal criteria have yet beenestablished, these calculations are determined on a subjective basis.  These awards are not intended to be inaddition to market level compensation but instead are designed to cause asignificant part of an executive’s annual compensation to be dependent on theCompensation Committee’s assessment of the executive’s performance and theexecutive’s contributions to the Company’s financial performance and strategicobjectives.

 

*Long-Term, Equity-Based IncentiveCompensation. *Thestock option component of the executive officers’ compensation has beendesigned to provide executives with incentives for the enhancement ofstockholder value.  Options are grantedat fair market value on the date of grant and generally vest over a number ofyears.  No constant criteria are usedyear after year in the granting of stock options.  For stock option awards for executiveofficers, the Compensation Committee makes a subjective determination of theeffectiveness of the executive and the extent of the executive’s contributionsto the Company’s success and, based on that determination, option grants, ifany, are awarded to each executive. Because the options are granted with exercise prices equal to the fairmarket value of the underlying Common Stock on the date of grant, any valuethat ultimately accrues to the

 

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executive is based entirely upon the Company’s performance as perceivedby investors who establish the market price for the Common Stock.

 

*Post Retirements Benefits. *The Companymaintains a 401(k) Profit Sharing Plan, in which eligible employees mayparticipate, including the named executive officers. The Company will make amatching contribution to the Plan of 100% of the first 3% of the employees’annual compensation and 50% of the next 2%. Employee voluntary contributionsare immediately vested as well as the employer matching contributions.

 

*Other Compensation. *All full-timeemployees, including the named executive officers, may participate in theCompany’s health and welfare benefit programs, including medical and dentalcare coverage, disability insurance and life insurance.

 

**Compensation Committee Report**

 

The Committee has reviewed and discussed theCompensation Discussion and Analysis with management.  Based upon the review and discussions, theCommittee directed that the Compensation Discussion and Analysis be included inthis annual report on Form 10-K.

 

**Compensation Committee Interlocks and InsiderParticipation**

 

The members of the Compensation Committee areJohn S. Dalrymple III, Curtis R. Trulson and Michael E. Warner. None of thesedirectors are or have been an officer or employee of the Company. During fiscalyear 2008 no executive officer of the Company served as a director or member ofthe Compensation Committee (or other committee serving an equivalent function)of any other entity, one of whose executive officers served as a director of ormember of the Compensation Committee of the Company.

 

Compensation Committee:

 

John S. Dalrymple III

Curtis R. Trulson

Michael E. Warner

 

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**Summary Compensation Table**

 

The following table summarizes the amount ofcompensation paid to the Company’s President and Chief Executive Officer andChief Financial Officer for the fiscal years ended July 31, 2008 and 2007.

 

**SummaryCompensation Table**

** **
| ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **          | ** ** | **All**                   | ** ** | ** ** | ** ** |
|-----------------------------|------------|------------|------------|------------|------------|------------|------------|---------------------|------------|---------------------------|------------|------------|------------|
| **Name and**           | ** ** | **Fiscal** | ** ** | ** ** | ** ** | ** ** | ** ** | **Option**          | ** ** | **Other**                 | ** ** | ** ** | ** ** |
| **Principal Position** | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards (2)** | ** ** | **Compensation (1)** | ** ** | **Total**  | ** ** |
|                        |       |       |       |       |       |       |       |                |       |                      |       |       |       |
| Timothy J. Dodd             |       | 2008       |       | $          | 316,318    |       | $          | 149,532             |       | $                         | 38,710     |       | $          | 21,983 |   | $ | 526,543 |   |
| President and Chief         |       | 2007       |       | $          | 247,889    |       | $          | 55,300              |       | $                         | 50,803     |       | $          | 11,628 |   | $ | 365,620 |   |
| Executive Officer           |       |       |       |       |       |       |       |                |       |                      |       |       |       |
|                        |       |       |       |       |       |       |       |                |       |                      |       |       |       |
| Edward O. Irion             |       | 2008       |       | $          | 205,868    |       | $          | 96,200              |       | $                         | 20,724     |       | $          | 15,200 |   | $ | 337,992 |   |
| Chief Financial Officer     |       | 2007       |       | $          | 192,544    |       | $          | 37,000              |       | $                         | 26,718     |       | $          | 13,802 |   | $ | 270,064 |   |

 

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

(2)          The awards shownin this column include stock options granted under our 2003 Stock Option Plan.The amounts are based on the compensation expense recognized for the awardpursuant to Statement of Financial Accounting Standards No. 123R. SeeNote 14 to the consolidated financial statements for a discussion of therelevant assumptions used in calculating grant date fair value pursuant toFAS 123R.

 

**OutstandingEquity Awards at July 31, 2008**

 

The following table summarizes stock options held for Series CConvertible Preferred Stock at the end of fiscal year 2008.

 
| ** **      | ** ** | **Option Awards** | ** ** |
|-----------------|------------|------------------------|------------|
| ** **      | ** ** | **Number of**     | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Securities**         | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Underlying**         | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Unexercised**        | ** ** | **Unexercised** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Options**            | ** ** | **Options** | ** ** | **Option** | ** ** | **Option** | ** ** |
| ** **      | ** ** | **(#)**                | ** ** | **(#)** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** |
| **Name**        | ** ** | **Exercisable  (1)**   | ** ** | **Unexercisable** | ** ** | **Prices ($)** | ** ** | **Date** | ** ** |
|            |       |                   |       |   |   |   |   |   |   |
| Timothy J. Dodd |       | 506                    |       | — |   | $ | 100.00 |   | 12/1/2011 |   |
|            |       | 785                    |       | — |   | 100.00 |   | 12/1/2011 |   |
|            |       | 686                    |       | — |   | 150.00 |   | 1/1/2013 |   |
|                 |            |                        |            |  |  |  |  |  |  |  |

 

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1)              Mr. Dodd has beengranted options that are currently exercisable or exercisable within 60 days ofJuly 31, 2008, to purchase 1,977 shares of the Company’s Series CConvertible Preferred Stock. Each share of Series C Preferred Stock is convertibleinto 24 shares of Common Stock and 24 shares of Series D DeliveryPreferred Stock of the Company.

 

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The following table summarizes stock options held for Common Stock atthe end of fiscal year 2008.

** **
| ** **      | ** ** | **Option Awards** | ** ** |
|-----------------|------------|------------------------|------------|
| ** **      | ** ** | **Number of**     | ** ** | **Number of** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Securities**         | ** ** | **Securities** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Underlying**         | ** ** | **Underlying** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Unexercised**        | ** ** | **Unexercised** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **      | ** ** | **Options**            | ** ** | **Options** | ** ** | **Option** | ** ** | **Option** | ** ** |
| ** **      | ** ** | **(#)**                | ** ** | **(#)** | ** ** | **Exercise** | ** ** | **Expiration** | ** ** |
| **Name**        | ** ** | **Exercisable**        | ** ** | **Unexercisable** | ** ** | **Prices ($)** | ** ** | **Date** | ** ** |
|            |       |                   |       |   |   |   |   |   |   |
| Timothy J. Dodd |       | 190,800                |       | — |   | $ | 6.25 |   | 12/1/2012 |   |
|            |       | 13,511                 |       | — |   | 4.25 |   | 2/1/2014 |   |
|            |       | 26,544                 |       | 8,848 | (1) | 4.00 |   | 12/22/2015 |   |
|            |       | 31,376                 |       | 31,376 | (2) | 5.00 |   | 10/19/2016 |   |
|            |       |                   |       |   |   |   |   |   |   |
| Edward O. Irion |       | 7,723                  |       | — |   | $ | 4.25 |   | 2/1/2014 |   |
|            |       | 8,112                  |       | 2,704 | (1) | 4.00 |   | 12/22/2015 |   |
|            |       | 19,681                 |       | 19,681 | (2) | 5.00 |   | 10/19/2016 |   |

 

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1)              Subject to certain qualifications, includingbut not limited to, the continued employment of the optionee, the unexercisableoptions will vest on December 22, 2008.

2)              Subject to certain qualifications, includingbut not limited to, the continued employment of the optionee, fifty percent(50%) of the unexecercisable options will vest on October 19, 2008 and theremaining unexercisable options will vest on October 19, 2009.

 

**Employment Agreements**

 

The Company does not have any employmentagreements in place at the current time.

 

**Stock Option Plans**

 

On January 31, 1997 the Company’s Compensation Committee of theBoard of Directors (the “Compensation Committee”) adopted the Dakota GrowersIncentive Stock Option Plan (the “Plan”). The Plan was ratified by the Company’smembers at the annual meeting in January 1998. The Compensation Committeeor the Board of Directors has the power to determine the key managementemployees of the Company to receive options and the number of shares to beoptioned to each of the employees. Options granted under the Plan are for thepurchase of Series C Convertible Preferred Stock at fair market value andare convertible into Common Stock and Series D Delivery Preferred Stock atthe option of the employee, under the applicable conversion ratio. The maximumnumber of preferred shares that may be issued pursuant to options granted underthe Plan is 15,000, all of which have been issued. Each share of Series CPreferred Stock is convertible into 24 shares of Common Stock and 24 shares of Series DDelivery Preferred Stock of the Company. The conversion ratio isproportionately adjusted if the Company increases the outstanding shares ofCommon Stock or Series D Delivery Preferred Stock, as applicable, withoutpayment by or to the Company or the Company’s shareholders for such additionalshares (e.g. stock split, stock dividend or other action). Options grantedunder the Plan must be exercised within ten years from the date such optionsare granted. In the event of the employee’s termination with the Company, allexercisable options may be exercised within 90 days of the termination date. Ifnot exercised, such options lapse.

 

The Company’s 2002 Stock Option Plan (the “2002 Plan”) was adopted bythe Board of Directors on November 21, 2002. All options granted under the2002 Plan are non-qualified stock options and are for the purchase of theCompany’s Common Stock. The maximum number of shares of Common Stock that maybe

 

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issued pursuant to options granted under the 2002 Plan is 294,456shares, all of which have been issued. Stock options granted under the 2002Plan expire 10 years from the date of grant.

 

On November 21, 2002 the Board of Directors adopted the DakotaGrowers Pasta Company, Inc. 2003 Stock Option Plan (the “2003 Plan”),which was approved by the Company’s shareholders at the Annual Meeting on January 11,2003.  The 2003 Plan covers 500,000shares of the Company’s Common Stock. Participation in this Plan shall belimited to officers, directors, employees, vendors or consultants of theCompany or any subsidiary of the Company. Options granted under the 2003 Planmay be incentive stock options (as defined under Section 422 of the Code)or non-qualified stock options, as determined by the 2003 Plan administrator atthe time of grant of an option and subject to the applicable provisions of Section 422of the Code and the regulations promulgated there under. The stock optionsgenerally expire 10 years from the date of grant. If the employment of theOptionee is terminated by any reason other than his or her death or disability,all exercisable options may be exercised within 90 days of the terminationdate. If not exercised, such options lapse.

 

**COMPENSATION OF DIRECTORS**

 

Members of the Board of Directors receivecompensation for serving on the Board of Directors, as determined from time totime by the Nomination Committee, but with full discussion and action by theBoard.

 

**Director Compensation Table**

 

The table below summarizes the compensation paid by the Company tonon-employee Directors during the fiscal year ended July 31, 2008.

 
| ** **             | ** ** | **Fees earned**      | ** ** | **All**          | ** ** | ** ** | ** ** |
|------------------------|------------|---------------------------|------------|------------------|------------|------------|------------|
| ** **             | ** ** | **or paid**          | ** ** | **Other**        | ** ** | ** ** | ** ** |
| **Name**               | ** ** | **in cash (1)** | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
|                   |       |                      |       |             |       |       |       |
| John S. Dalrymple III  |       | $                         | 48,600     |             | $          | —     |       | $ | 48,600 |   |
| Allyn K. Hart          |       | 37,000                    |       | —           |       | 37,000     |       |
| Roger A. Kenner        |       | 35,000                    |       | —           |       | 35,000     |       |
| James F. Link          |       | 39,000                    |       | —           |       | 39,000     |       |
| Eugene J. Nicholas     |       | 37,000                    |       | —           |       | 37,000     |       |
| John D. Rice, Jr. |       | 37,000                    |       | —           |       | 37,000     |       |
| Richard Thompson       |       | 31,000                    |       | —           |       | 31,000     |       |
| Michael T. Tokarz (2)  |       | 35,000                    |       | 75,000           |       | 110,000    |       |
| Jeffrey O. Topp        |       | 37,000                    |       | —           |       | 37,000     |       |
| Curtis R. Trulson      |       | 46,200                    |       | —           |       | 46,200     |       |
| Michael E. Warner      |       | 39,000                    |       | —           |       | 39,000     |       |
|                        |            |                           |            |                  |            |            |            |  |  |  |

 

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(1)                                  This column represents annual director fees,committee chairman fees and meeting attendance fees earned in fiscal year 2008.Directors are reimbursed for out-of-pocket travel expenses which are notincluded on this table.

(2)                                  In July 2004, the Company and MVCFinancial Services, Inc. (“MVC Financial”) entered into a consultingagreement pursuant to which MVC Financial will provide certain businessconsulting services to the Company for annual compensation of $75,000 per yearand the reimbursement of expenses.  MVCFinancial Services, Inc. is an affiliate of MVC Capital, Inc., aholder of 5% or greater of the Company’s Common Stock.  Michael T. Tokarz, a director of the Company,is a stockholder and Chairman of MVC Capital, Inc.  The term of the consulting agreement shallcontinue until the earlier of (a) the occurrence of a Liquidity Event or (b) thetermination by written notice from MVC Financial to the Company.  For purposes of this consulting agreement, a “LiquidityEvent” shall have occurred on such date that MVC Capital, Inc. no longerbeneficially owns at least fifty percent (50%) of the shares of the Company’sCommon Stock acquired by MVC Capital Inc. pursuant to the Stock PurchaseAgreement dated July 30, 2004 (as adjusted for stock splits, stockdividends, share contributions and the like) or the earlier sale ofsubstantially all of the assets of the Company and the distribution ofsubstantially all of the net proceeds thereof.

 

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Effective October 2007, the Company provided its directors with compensationconsisting of (i) a per diem payment of $1,000 (except for the Chairman ofthe Board and Chairman of the Audit Committee who each receive $1,200 per day)for any day on which a director undertakes activities on the Company’s behalf,including board meetings and other functions of the Company, (ii) amonthly fee of $2,000 (except for the Chairman of the Board and Chairman of theAudit Committee who each receive $2,400 per month), and (iii) reimbursementfor out-of-pocket expenses incurred on behalf of the Company.

 

Effective October 2008,the compensation of the Company’s directors changed to (i) a per diempayment of $1,300 (except for the Chairman of the Board and Chairman of theAudit Committee who will each receive $1,560 per day) for any day on which adirector undertakes activities on the Company’s behalf, including boardmeetings and other functions of the Company, (ii) a monthly fee of $2,600(except for the Chairman of the Board and Chairman of the Audit Committee whowill each receive $3,120 per month), and (iii) reimbursement forout-of-pocket expenses incurred on behalf of the Company.

 

**ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS**

 

Thefollowing table furnishes information as to the beneficial ownership of theCompany’s Common Stock, Series C Convertible Preferred Stock, Series DDelivery Preferred Stock and Series F Convertible Preferred Stock by (a) eachperson known by us to beneficially own more than 5% of the issued andoutstanding shares of the Company’s voting securities, (b) each of theCompany’s executive officers, (c) each of the Company’s directors and (d) allof the Company’s directors and executive officers as a group.

 

Theaddress of each person listed below is c/o Dakota Growers Pasta Company, Inc.,One Pasta Avenue, Carrington, North Dakota 58421. Except as otherwise noted,each person listed below has sole investment discretion and voting power. Inaccordance with the Securities and Exchange Commission’s rules, in computingthe number of shares beneficially owned by a person and the percentageownership of that person, securities subject to options held by that personthat are currently exercisable or exercisable within 60 days of July 31,2008 are treated as outstanding. These shares, however, are not treated asoutstanding for the purpose of computing the percentage ownership of any otherperson.

 

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| ** **                     | ** ** | **Beneficially Owned Securities** | ** ** |
|--------------------------------|------------|---------------------------------------------|------------|
| ** **                     | ** ** | **Number of**                          | ** ** | **Percent of** | ** ** | **Number of** | ** ** | **Percent of** | ** ** | **Number of** | ** ** | **Percent of** | ** ** | **Number of** | ** ** | **Percent of** | ** ** |
| **Name of**               | ** ** | **Shares of**                          | ** ** | **Total Common** | ** ** | **Shares of Series** | ** ** | **Total Series** | ** ** | **Shares of Series** | ** ** | **Total Series** | ** ** | **Shares of Series** | ** ** | **Total Series** | ** ** |
| **Beneficial  Owner**          | ** ** | **Common  Stock**                           | ** ** | **Stock** | ** ** | **C  Preferred** | ** ** | **C  Preferred** | ** ** | **D  Preferred** | ** ** | **D  Preferred** | ** ** | **F  Preferred** | ** ** | **F  Preferred** | ** ** |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John S. Dalrymple  III (1)     |       | 204,731                                     |       | 2.0 | % | — |   | — |   | 315,000 |   | 2.8 | % | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Allyn K. Hart                  |       | 12,223                                      |       | 0.1 |   | — |   | — |   | 15,000 |   | 0.1 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Roger A. Kenner  (2)           |       | 109,596                                     |       | 1.1 |   | — |   | — |   | 140,000 |   | 1.2 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| James F. Link (3)              |       | 49,685                                      |       | 0.5 |   | — |   | — |   | 54,550 |   | 0.5 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Eugene J.Nicholas  (4)         |       | 53,394                                      |       | 0.5 |   | — |   | — |   | 58,951 |   | 0.5 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| John D.  Rice, Jr. (5)    |       | 17,427                                      |       | 0.2 |   | — |   | — |   | 20,200 |   | 0.2 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Jeffrey O. Topp  (6)           |       | 325,541                                     |       | 3.2 |   | — |   | — |   | 271,420 |   | 2.4 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Curtis R. Trulson  (7)         |       | 43,403                                      |       | 0.4 |   | — |   | — |   | 61,750 |   | 0.5 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael E. Warner              |       | 38,061                                      |       | 0.4 |   | — |   | — |   | 57,038 |   | 0.5 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Timothy J. Dodd  (8)           |       | 314,372                                     |       | 3.0 |   | 1,977 |   | 100 | % | 238,248 |   | 2.1 |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Edward O. Irion  (9)           |       | 35,516                                      |       | 0.3 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Michael Tokarz  (10)           |       | 1,016,195                                   |       | 10.0 |   | — |   | — |   | — |   | — |   | 1,065,000 |   | 100 | % |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| MVC  Capital, Inc. (10)   |       | 1,016,195                                   |       | 10.0 |   | — |   | — |   | — |   | — |   | 1,065,000 |   | 100 |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Richard Thompson  (11)         |       | 1,000,000                                   |       | 9.8 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| La Bella Holdings  LLC (11)    |       | 1,000,000                                   |       | 9.8 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                           |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| All directors and  officers as |       |                                        |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| a Group (13 persons)  (12)     |       | 3,220,144                                   |       | 30.6 | %  | 1,977 |   | 100 | % | 1,232,157 |   | 10.9 | % | 1,065,000 |   | 100 | %  |

 

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(1)          Includes 23,415 sharesof Common Stock and 36,000 shares of Series D Delivery Preferred Stockheld in the name of Mr. Dalrymple’s spouse and 111,121 shares of CommonStock and 171,000 shares of Series D Delivery Preferred Stock held in thename of the John S. Dalrymple III Trust, of which Mr. Dalrymple is atrustee.

(2)          Includes 54,798 sharesof Common Stock and 70,000 shares of Series D Delivery Preferred Stockheld in the name of Mr. Kenner’s spouse.

(3)          Includes 48,052 shares of Common Stock and53,050 shares of Series D Delivery Preferred Stock held in the name ofLink Sugar Beet Farms Limited Partnership, of which Link Farms LLP is thegeneral partner. Mr. Link has been granted a proxy to vote all commonstock of the Company held by Link Sugar Beet Farms Limited Partnership. Mr. Linkis also the sole holder of the class of limited partnership interests of LinkSugar Beet Farms relating to the Company’s common stock and under the partnershipagreement, the approval of the reporting person is required with respect tocertain dispositions of the Company’s common stock by Link Sugar Beet FarmsLimited Partnership. Mr. Link disclaims beneficial ownership to the extenthis interest in Link Sugar Beet Farms Limited Partnership does not constitute apecuniary interest.

(4)          Includes 26,548 sharesof Common Stock and 23,850 shares of Series D Delivery Preferred Stockheld in the name of Mr. Nicholas’ spouse.

(5)          Includes 15,298 sharesof Common Stock and 13,750 shares of Series D Delivery Preferred Stockheld in the name of John Rice Farm.

(6)          Includes 120,000 sharesof Common Stock and 129,000 shares of Series D Delivery Preferred Stockheld in the name of T-T Ranch and 11,482 shares of Common Stock and 16,125shares of Series D Delivery Preferred Stock held in the name of Mr. Topp’sspouse and children.

(7)          Includes 2,203 shares ofCommon Stock and 6,750 shares of Series D Delivery Preferred Stock held inthe name of Trulson Brothers.

(8)          Mr. Dodd has beengranted options that are currently exercisable or exercisable within 60 days ofJuly 31, 2008, to purchase 1,977 shares of the Company’s Series CConvertible Preferred Stock and 262,231 shares of the Company’s Common Stock.Each share of Series C Preferred Stock is convertible into 24 shares ofCommon Stock and 24 shares of Series D Delivery Preferred Stock of theCompany. The number of shares of Common Stock presented for Mr. Doddincludes 47,448 shares of Common Stock issuable upon exercise of the options topurchase Series C Preferred Stock of the Company and conversion of eachsuch share of Series C Preferred Stock into 24 shares of Common Stock inthe Company. The number of shares of Series D Delivery Preferred Stockpresented for Mr. Dodd includes 47,448 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 CPreferred Stock into 24 shares of Common Stock in the Company, with one shareof Series D Delivery Preferred Stock issuable for each share of CommonStock so issued upon conversion. The number of shares of Common Stock presentedfor Mr. Dodd includes 262,231 shares of Common Stock issuable uponexercise of the options to purchase Common Stock.

(9)          Mr. Irion hasbeen granted options that are currently exercisable or exercisable within 60days of July 31, 2008. The number of

 

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sharespresented for Mr. Irion relate to Common Stock shares issuable upon theexercise of the options to purchase Common Stock.

(10)    Includes 1,016,195 shares of Common Stock and1,065,000 Series F Convertible Preferred Stock held by MVC Capital, Inc.  Mr. Tokarz is listed as a beneficialowner as he is a stockholder and Chairman of MVC Capital, Inc.  Mr. Tokarz shares voting and dispositivecontrol over all shares held by MVC Capital, Inc. Mr. Tokarzdisclaims any beneficial ownership of the Company’s securities for purposes of Section 16(a) underthe Securities Exchange Act of 1934, as amended, or otherwise, except to theextent of Mr. Tokarz’s pecuniary interests therein. (The holder of Series FConvertible Preferred Stock has the right, exercisable at any time uponsixty-five (65) days’ written notice to the Company, to convert any number ofthe holder’s shares of Series F Convertible Preferred Stock into an equalnumber of shares of the Company’s Common Stock.)

(11)    Includes 1,000,000 shares of Common Stock heldby La Bella Holdings LLC (“LBH”) of which Mr. Thompson is the ChiefExecutive Officer and is a member of the board of managers.  Mr. Thompson shares voting anddispositive control over all shares held by La Bella Holdings LLC. Mr. Thompsondisclaims any beneficial ownership of the Company’s securities for purposes of Section 16(a) underthe Securities Exchange Act of 1934, as amended, or otherwise, except to theextent of Mr. Thompson’s pecuniary interests therein.

(12)    Includes 297,747 shares of CommonStock and 1,977 shares of Series C Convertible Preferred Stock issuable upon exercise of optionsexercisable within 60 days of July 31, 2008, and includes an additional 47,448 shares of Common Stock and 47,448shares of Series D Delivery Preferred Stock issuable upon conversion ofthe Series C Preferred Stock underlying such options.

 

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**Equity Compensation 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, 2008.

 
| ** **                                              | ** ** | ** **                                                             | ** ** | ** **                      | ** ** | **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**              | ** ** |
| ** **                                              | ** ** | **Outstanding Options**                                           | ** ** | **Options**                     | ** ** | **Compensation Plans**        | ** ** |
| **Plan Category**                                  | ** ** | **Options  to purchase Series C Convertible Preferred Stock (1)** | ** ** |
| Equity compensation plans approved by security  holders |       | 1,977                                                                  |       | $                               | 117.35     |                               | —     |   |
|                                                         |            |                                                                        |            |                                 |            |                                    |            |  |

 
|                                                        |   | **Options  to purchase Common Stock** |   |
|-------------------------------------------------------------|--------|---------------------------------------|--------|
| Equity compensation plans approved by security  holders     |   | 462,213                               |   | $ | 4.63 |   | 32,237 |   |
|                                                        |   |                                  |   |   |   |   |   |
| Equity compensation plans not approved by  security holders |   | 190,800                               |   | $ | 6.25 |   | — |   |

 

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

 

**ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE**

 

**Independent Directors**

 

Although none of the Company’s securities arelisted on any stock exchange or system of dealer quotation, the Company’s Boardof Directors follow the rules of the Securities and Exchange Commissionand the Nasdaq Stock Market in determining independence for the Board ofDirectors and the Committees. Under the Nasdaq listing standards, at least amajority of the Company’s directors must meet the test of “independence” asdefined by Nasdaq. The Nasdaq standards provide that, to qualify as an “independent”director, in addition to satisfying certain bright-line criteria, the Board ofDirectors must affirmatively determine that a director has no relationshipwhich would interfere with the exercise of independent judgment in carrying outthe responsibilities of a director. The Board of Directors has determined thateach current director, other than Mr. Tokarz and Mr. Topp, is “independent”as defined by the listing standards of the Nasdaq.

 

Jeffrey Topp, a director of the Company, soldwheat to the Company through an affiliated entity in fiscal year 2008. Thosesales totaled $263,000 at current market prices and the Company had acommitment to purchase wheat totaling $386,000 from Mr. Topp and/or hisaffiliated entity as of July 31, 2008.

 

The Company has a Conflict of Interest policywhich defines areas where the directors should avoid conflicts of interest orany appearance of a conflict of interest, so that the affairs of the Companywill be carried out in an ethical manner. Pursuant to the policy, all directorsare to fully disclose to the Company any proposed transaction that may giverise to a conflict of interest before it is consummated. The Board of Directorsshall determine whether a conflict of interest exists and whether a proposedtransaction may be approved.

 

See Item 10 – Directors, Executive Officersand Corporate Governance for the discussion of the Board of Directorsindependence on each of the committees.

 

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**ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES**

 

   Thefollowing table represents aggregate fees billed (in thousands) to the Companyfor fiscal years ended July 31, 2008 and 2007 by Eide Bailly LLP, theCompany’s principal accounting firm.

 
| ** **             | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------|------------|---------------------------------|------------|
| ** **             | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| ** **             | ** ** | ** **                      | ** ** | ** ** | ** ** |
| Audit Fees             |       | $                               | 82         |   | $ | 64 |   |
| Audit-Related Fees (a) |       | 3                               |       | 10 |   |
| Tax Fees (b)           |       | 11                              |       | 16 |   |
| All Other Fees         |       | —                          |       | — |   |
|                   |       |                            |       |   |   |
| Total Fees (c)         |       | $                               | 96         |   | $ | 90 |   |

 

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(a)   Primarily benefit plan auditservices.

 

(b)   Primarily tax advisory andpreparation services.

 

(c)   The Audit Committee hasapproved all fees.

 

**Auditor Services Pre-approval Policy**

 

The AuditCommittee has a formal policy concerning pre-approval of all services to beprovided 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 2008.

 

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**PART IV**

 

**ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.**

 

(a)          The following are filedas part of this report:

 

**1. Financial Statements**

 

Report of Independent Registered PublicAccounting Firm

 

Consolidated Balance Sheets as of July 31,2008 and 2007

 

Consolidated Statements of Operations for theyears ended July 31, 2008, 2007 and 2006

 

Consolidated Statements of Changes inStockholders’ Equity for the years ended July 31, 2008, 2007 and 2006

 

Consolidated Statements of Cash Flows for theyears ended July 31, 2008, 2007 and 2006

 

Notes to Consolidated Financial Statements

 

**2. Financial Statement Schedules**

 

All schedules are omitted as the requiredinformation is inapplicable or the information is presented in the consolidatedfinancial statements or related notes.

 
| **3.** | **Exhibits** |
|--------|--------------|
|   |         |   |
|   | 2.1          | Second Amended and Restated Plan of Merger between Dakota Growers  Pasta Company and Dakota Growers Pasta Restructuring Cooperative. (Incorporated  by reference to Exhibit 2.1 from the Company’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 Merger Agreement between Dakota Growers  Pasta Restructuring Cooperative and Dakota Growers Corporation. (Incorporated  by reference to Exhibit 2.2 from the Company’s Pre-Effective Amendment  No. 2 to Form S-4 Registration Statement, File No. 333-81946,  dated April 19, 2002). |
|   |         |   |
|   | 2.3          | Second Amended and Restated Merger Agreement between Dakota Growers  Corporation and the Company, formerly Dakota Growers Restructuring  Company, Inc. (Incorporated by reference to Exhibit 2.3 from the  Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration  Statement, File No. 333-81946, dated April 19, 2002). |
|   |         |   |
|   | 2.4          | Second Amended and Restated Transaction Agreement between Dakota  Growers Pasta Company, Dakota Growers Pasta Restructuring Cooperative, Dakota  Growers Corporation and the Company, formerly Dakota Growers Restructuring  Company, Inc. (Incorporated by reference to Exhibit 2.4 from the  Company’s Pre-Effective Amendment No. 2 to   Form S-4 Registration Statement, File No. 333-81946, dated  April 19, 2002). |
|   |         |   |
|   | 3.1          | Second Amended and Restated Articles of Incorporation of the Company,  formerly Dakota Growers Restructuring Company, Inc. (Incorporated by  reference to Exhibit 3.1 from the Company’s Pre-Effective Amendment  No. 2 to   Form S-4 Registration Statement, File No. 333-81946, dated  April 19, 2002). |

 

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|   | 3.2    | Second Amended and Restated Bylaws of the Company, formerly Dakota  Growers Restructuring Company, Inc. (Incorporated by reference to  Exhibit 3.3 from the Company’s Pre-Effective Amendment No. 2 to  Form S-4 Registration Statement, File No. 333-81946, dated  April 19, 2002).                                                                                                                                |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 3.3    | Certificate of Designation of Series E Junior Participating  Preferred Stock of the Company, formerly Dakota Growers Restructuring  Company, Inc. (Incorporated by reference to Exhibit 3.2 from the  Company’s Pre-Effective Amendment No. 2 to Form S-4 Registration  Statement, File No. 333-81946, dated April 19, 2002).                                                                                  |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 3.4    | Certificate of Designation of Series F Convertible Preferred  Stock of the Company (Incorporated by reference to Exhibit 3.1 from the  Company’s Report on Form 8-K, File No. 000-50111, filed  February 15, 2007).                                                                                                                                                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 4.1    | Note Purchase Agreement dated July 15, 1998. (Incorporated by reference  to Exhibit 4.1 from Dakota Growers Pasta Company’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 Note Purchase Agreements dated November 28,  2000. (Incorporated by reference to Exhibit 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 Note Purchase Agreement and Notes  dated June 1, 2001. (Incorporated by reference to Exhibit 4.3 from  Dakota Growers Pasta Company’s Annual Report on Form 10-K for the 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’s Quarterly Report on  Form 10-Q, File No. 33-99834, for the quarter ended April 30,  1998).                                                                                                                                                                                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.2   | Master Lease Agreement dated March 6, 2002 and related Schedule  A dated March 29, 2002 between Dakota Growers Pasta Company and Farm  Credit Leasing Services Corporation. (Incorporated by reference to  Exhibit 10.2 from the Company’s Pre-Effective Amendment No. 2 to  Form S-4 Registration Statement, File No. 333-81946, dated April 19,  2002).                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.3   | Amended and Restated Share Rights Agreement, dated as of  April 19, 2002, by and among the Company, formerly Dakota Growers  Restructuring Company, Inc., and Wells Fargo Bank Minnesota, National  Association, as Rights Agent. (Incorporated by reference to Exhibit 10.1  from the Company’s Pre-Effective Amendment No. 2 to Form S-4  Registration Statement, File No. 333-81946, dated April 19, 2002). |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.4   | Dakota Growers Pasta Company, Inc. 2002 Stock Option Plan.  (Incorporated by reference to Exhibit 10.16 from the Company’s Annual  Report on Form 10-K, File No. 000-50111, for the year ended  July 31, 2003).                                                                                                                                                                                                          |
|   |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   | 10.5   | Dakota Growers Pasta Company, Inc. Amended and Restated 2003  Stock Option Plan. (Incorporated by reference 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).                                                                                                                                                                             |

 

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|   | 10.6   | Stock Purchase Agreement dated July 30, 2004 between the Company  and MVC Capital, Inc. (Incorporated by reference to Exhibit 99.2  from the Company’s Report on Form 8-K, File No. 000-50111, filed  August 6, 2004).                                                                             |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                                  |
|   | 10.7   | Registration Rights Agreement dated July 30, 2004 between the  Company and MVC Capital, Inc. (Incorporated by reference to  Exhibit 99.3 from the Company’s Report on Form 8-K, File  No. 000-50111, filed August 6, 2004).                                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
|   | 10.8   | Consulting Agreement dated July 30, 2004 between the Company and  MVC Financial Services, Inc. (Incorporated by reference to  Exhibit 99.4 from the Company’s Report on Form 8-K, File  No. 000-50111, filed August 6, 2004).                                                                      |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
|   | 10.9   | Membership Unit Purchase Agreement effective May 1, 2005 between  and among Dakota Growers Pasta Company, Inc., B-New, LLC, TechCom Group,  LLC and Buhler, Inc. (Incorporated by reference to Exhibit 10.1  from the Company’s Report on Form 8-K, File No. 000-50111, filed  July 1, 2005). |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
|   | 10.10  | Master Loan Agreement dated May 23, 2005 between the Company and  CoBank, ACB. (Incorporated by reference to Exhibit 10.1 from the  Company’s Report on Form 8-K, File No. 000-50111, filed  July 7, 2005).                                                                                             |
|   |   |                                                                                                                                                                                                                                                                                                                                  |
|   | 10.11  | Statused Revolving Credit Supplement dated January 22, 2008  between the Company and CoBank, ACB. (Incorporated by reference to  Exhibit 10.2 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 1, 2008).                                                                      |

 

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|   | 10.12  | Non-Revolving Credit Supplement dated January 22, 2008 between  the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.3  from the Company’s Report on Form 8-K, File No. 000-50111, filed  February 1, 2008).                                                                |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.13  | Multiple Advance Term Loan Supplement dated February 14, 2007  between the Company and CoBank, ACB. (Incorporated by reference to  Exhibit 10.3 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 15, 2007).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.14  | Continuing Guarantee Agreement dated May 23, 2005 between Primo  Piatto, Inc., a wholly-owned subsidiary of the Company, and CoBank, ACB.  (Incorporated by reference to Exhibit 10.5 from the Company’s Report on  Form 8-K, File No. 000-50111, filed July 7, 2005).                  |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.15  | Security Agreement dated May 23, 2005 between Primo  Piatto, Inc. and CoBank, ACB. (Incorporated by reference to  Exhibit 10.6 from the Company’s Report on Form 8-K, File  No. 000-50111, filed July 7, 2005).                                                                         |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.16  | Multiple Advance Term Loan Supplement dated February 14, 2007  between the Company and CoBank, ACB. (Incorporated by reference to  Exhibit 10.2 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 15, 2007).                                                        |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.17  | Stock Purchase Agreement dated February 9, 2007 between the  Company and MVC Capital, Inc. and La Bella Holdings, LLC. (Incorporated  by reference to Exhibit 10.1 from the Company’s Report on Form 8-K,  File No. 000-50111, filed February 15, 2007).                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.18  | Amendment to the Master Loan Agreement dated February 14, 2007  between CoBank, ACB and the Company. (Incorporated by reference to  Exhibit 10.4 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 15, 2007).                                                       |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.19  | Amendment to the Master Loan Agreement dated April 25, 2007  between CoBank, ACB and the Company. (Incorporated by reference to  Exhibit 10.2 from the Company’s Report on Form 8-K, File  No. 000-50111, filed May 1, 2007).                                                                |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.20  | Extended Term Schedule A dated March 30, 2007 of the Master  Lease Agreement dated March 6, 2002 between the Company and Farm Credit  Leasing Services Corporation. (Incorporated by reference to Exhibit 10.1  from the Company’s Report on form 8-K, File No. 000-50111, filed April  4, 2007). |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.21  | Unit Purchase Agreement dated September 21, 2007 between the  Company, TechCom Group, LLC, Buhler Inc. and B-New, LLC. (Incorporated by  reference to Exhibit 10.1 from the Company’s Report on form 8-K, File  No. 000-50111, filed September 27, 2007).                                         |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.22  | Continuing Guarantee Agreement dated January 29, 2008 between  DNA Dreamfields Company, LLC, a wholly-owned subsidiary of the Company, and  CoBank, ACB. (Incorporated by reference to Exhibit 10.4 from the  Company’s Report on Form 8-K, File No. 000-50111, filed  February 1, 2008).    |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.23  | Security Agreement dated January 22, 2008 between DNA  Dreamfields Company, LLC and CoBank, ACB. (Incorporated by reference to  Exhibit 10.5 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 1, 2008).                                                            |
|   |   |                                                                                                                                                                                                                                                                                                                       |
|   | 10.24  | Amendment to the Master Loan Agreement dated January 22, 2008  between CoBank, ACB and the Company. (Incorporated by reference to  Exhibit 10.1 from the Company’s Report on Form 8-K, File  No. 000-50111, filed February 1, 2008).                                                         |

 

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|   | 21 | Subsidiaries of the registrant. |
|--------|----|---------------------------------|

 
| **Name  of Subsidiary**                  | ** ** | **Jurisdiction of Incorporation** |
|------------------------------------------|------------|-----------------------------------|
|                                     |       |                              |
|   Primo Piatto, Inc.      |       | Minnesota                         |
|   DNA Dreamfields Company, LLC |       | Ohio                              |

 
|   | 23     | Consent of Independent Registered Public Accounting Firm; Eide Bailly  LLP.                                                            |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                   |
|   | 31.1   | Certification of Chief Executive Officer required by Securities and  Exchange Commission Rule 13a-14(a) or 15d-14(a).        |
|   |   |                                                                                                                                   |
|   | 31.2   | Certification of Chief Financial Officer required by Securities and  Exchange Commission Rule 13a-14(a) or 15d-14(a).        |
|   |   |                                                                                                                                   |
|   | 32.1   | Certification of Chief Executive Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |
|   |   |                                                                                                                                   |
|   | 32.2   | Certification of Chief Financial Officer pursuant to Section 906  of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. |

 

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** **

**SIGNATURES**

 

Pursuant to the requirements of Section 13or 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 29, 2008       |

 

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 29, 2008 |
|                       |       |                                          |       |                  |
| /s/ Edward O. Irion        |       |                                          |       |                  |
|                       |       | Chief Financial Officer                       |       |                  |
| Edward O. Irion            |       | (Principal Financial and Accounting  Officer) |       | October 29, 2008 |
|                       |       |                                          |       |                  |
| /s/ John S. Dalrymple III  |       |                                          |       |                  |
|                       |       |                                          |       |                  |
| John S. Dalrymple III      |       | Director                                      |       | October 29, 2008 |
|                       |       |                                          |       |                  |
| /s/ John D. Rice, Jr. |       |                                          |       |                  |
|                       |       |                                          |       |                  |
| John D. Rice, Jr.     |       | Director                                      |       | October 29, 2008 |

 

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**SIGNATURES- continued**

 
| **Signature**          | ** ** | **Title** | ** ** | **Date**              |
|------------------------|------------|-----------|------------|-----------------------|
|                   |       |      |       |                  |
| /s/ Curtis R. Trulson  |       |      |       |                  |
|                   |       |      |       |                  |
| Curtis R. Trulson      |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ Allyn K. Hart      |       |      |       |                  |
|                   |       |      |       |                  |
| Allyn K. Hart          |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ Roger A. Kenner    |       |      |       |                  |
|                   |       |      |       |                  |
| Roger A. Kenner        |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ James F. Link      |       |      |       |                  |
|                   |       |      |       |                  |
| James F. Link          |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ Eugene J. Nicholas |       |      |       |                  |
|                   |       |      |       |                  |
| Eugene J. Nicholas     |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ Richard Thompson   |       |      |       |                  |
|                   |       |      |       |                  |
| Richard Thompson       |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ Michael T. Tokarz  |       |      |       |                  |
|                   |       |      |       |                  |
| Michael T. Tokarz      |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ Jeffrey O. Topp    |       |      |       |                  |
|                   |       |      |       |                  |
| Jeffrey O. Topp        |       | Director  |       | October 29, 2008 |
|                   |       |      |       |                  |
| /s/ Michael E. Warner  |       |      |       |                  |
|                   |       |      |       |                  |
| Michael E. Warner      |       | Director  |       | October 29, 2008 |

 

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