** **

**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 thefiscal year ended July 31, 2009**

 

**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 offices includingzip code)

 

**(701) 652-2855**

(Registrant’s telephone number, including area 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 pershare**

**Series D Delivery PreferredStock, $.01 par 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 whether the registranthas submitted electronically and posted on its corporate Website, if any, everyInteractive Data File required to be submitted and posted pursuant to Rule 405of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (orfor such shorter period that the registrant was required to submit and postsuch files).  Yes o  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 registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  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 29,2009, the Registrant had 10,203,063 shares of common stock, par value $0.01 pershare, outstanding.

 

**DOCUMENTS INCORPORATED BY REFERENCE**

 

None.

 

 

 

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**PART I.**

 

**Forward-LookingStatements**

 

This report contains forward-looking statementsbased upon assumptions by the management of Dakota Growers Pasta Company, Inc.(the “Company”, “Dakota Growers” or “we”), a North Dakota corporation, as ofthe date of this Annual Report, including assumptions about risks and uncertaintiesfaced by the Company. When used in this report, the words “believe,” “expect,” “anticipate,”“will,” “estimate” and similar verbs or expressions are intended to identifysuch forward-looking statements. If management’s assumptions prove incorrect orshould unanticipated circumstances arise, the Company’s actual results coulddiffer materially from those anticipated. These differences could be caused bya number of factors or combination of factors including, but not limited to,those factors described in the “Risk Factors” section of this report. Readersare strongly urged to consider such factors when evaluating any forward-lookingstatement. The Company undertakes no obligation to update any forward-lookingstatements in this report to reflect future events or developments.

 

**ITEM1.  BUSINESS**

 

**Introduction**

 

The Company is a North Dakota corporation that wasorganized 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 Company owns andoperates a vertically integrated, state-of-the-art durum wheat milling andpasta 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. DNA Dreamfields Company, LLC (“DNA Dreamfields”)became a wholly-owned subsidiary on September 21, 2007 (See Note 2).

 

**PastaIndustry and Markets**

 

The Company estimates North American annual drypasta demand to be roughly 4.0 billion pounds, including pasta used in dinners,side dishes and meal solutions. In addition to the domestic market for drypasta, much smaller domestic markets exist for refrigerated and frozen pasta.

 

The Pasta industry identifies domestic dry pastainto two basic markets: retail and institutional. The Company recognizes theinstitutional market as being comprised of ingredient and foodservice sales.

 

*RetailMarket*

 

The Retail market includessales of branded and private label pasta to grocery stores, club stores, massmerchants and other consumer retail operations. A significant portion of the Retailmarket is represented by established national or regional pasta brands. TheCompany estimates that Barilla, New World Pasta Company and American ItalianPasta Company account for over 75% of the branded retail market. The Companyfocuses a majority of its Retail marketing efforts on private label sales. Themarket leaders in private label sales are American Italian Pasta Company andDakota Growers.

 

DNA Dreamfields Company, LLClaunched 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.

 

In 2005, a trend toward highfiber products developed. While still small relative to the total pastacategory, the consumption of these whole wheat/whole grain products continues togrow.  *Dreamfields*pasta offers fiber

 

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benefits similar to the levels of other wholewheat/whole grain pastas while maintaining the integrity of the taste and lowcarbohydrate traits.  Dakota Growers alsomanufactures and sells traditional whole wheat/whole grain pastas.

 

*InstitutionalMarket*

 

Ingredient sales consist ofpasta used by food processors as an ingredient or component in afurther-processed or combination food product. Such food products include drypasta dinners, including macaroni and cheese, frozen entrees, refrigeratedsalads, canned entrees, baby food, and canned and dry soups. The size of theIngredient market is influenced by the number of food processors that choose toproduce pasta internally rather than outsource.

 

Foodservice sales are tocommercial and non-commercial eating establishments such as restaurants,business and industry cafeterias, managed services, hotels and motels, retailvending, recreation, mobile and other away-from-home eating outlets. Marketingdry pasta to this market generally consists of selling to a network ofcompetitive distribution organizations and buying groups, and selling dry pastato individual restaurant chains and other operator organizations.

 

**Co-Pack Arrangements**

 

A portion of each end-usermarket is supplied under “co-pack” arrangements between pasta manufacturers.These agreements involve the sale of dry pasta products between pastamanufacturers 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 4% ofthe Company’s net revenues for the year ended July 31, 2009 and 5% foreach of the years ended July 31, 2008 and 2007.

 

**Production and Products**

 

The Company purchases durum wheat which isprocessed through its milling facility into semolina and durum wheat floursthat are then used by the Company to produce dry pasta products.

 

Pasta production is basically a mixing, extrusionand drying process. The primary ingredients are semolina and water, althoughegg, tomato, spinach or other ingredients may be added to produce certainproducts. The finished dry pasta is packed to meet different markets andcustomer requirements.

 

The pasta products manufactured by the Companyconsist of over 100 different shapes and are sold to customers in all markets.In addition to the dry pasta produced by the Company, it purchases additionaldry pasta shapes from other manufacturers and resells them. This practice iswidely followed by many pasta manufacturers for efficiency and productioncapacity reasons, and allows distribution of wider product lines to the Company’scustomers. Outside purchases of pasta, excluding imports, comprised over 2% ofnet sales for the year ended July 31, 2009 and 2007, and 1% for the yearended July 31, 2008.

 

The Company’s identity preservation programprovides our customers with food safety, traceability and quality from thefield to the plate.  The Company’sproximity to the durum growing regions, its milling and production facilities,and its information technology systems allow the Company to produce productsunder an identity preservation program.

 

The Company’s Carrington, North Dakota facilitiesare certified by the Organic Crop Improvement Association, which allows theCompany to offer 100% organic pasta and semolina. The Company’s facilitiesallow for the isolation of the durum, semolina and pasta to enable thiscertification.

 

The Company’s products are manufactured using acomprehensive Hazard Analysis Critical Control Point (HACCP) program, whichrequires strict monitoring in all aspects of the manufacturing process, toensure food

 

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quality and safety. We believe that meeting HACCPstandards strengthens customer confidence in the quality of our products. TheCompany undergoes food safety and product quality audits at various timesthroughout the year and has consistently received high scores.

 

In addition to its pasta products, the Companymarkets semolina, durum wheat flour and other flour blends to other foodproduct manufacturers as market conditions allow. Lower grade second clearflours and millfeed by-products of the durum milling process are sold primarilyfor animal feed. Revenues from mill product sales represented approximately 8%,12% and 8% of the Company’s net revenues for the years ended July 31,2009, 2008 and 2007, respectively.

 

**Sales,Marketing and Customers**

 

The Company markets its products through directsales, supplemented by the efforts of third party brokers retained by theCompany. 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 7%, 9% and 12% of net revenues for the years ended July 31,2009, 2008 and 2007, respectively. The Company’s top 10 customers accounted for44% of net revenues in fiscal year 2009, 45% of net revenues in fiscal year 2008 and 50% of net revenues forfiscal year 2007.  Pasta revenuesconsisted of 48% Retail and 52% Institutional for fiscal year 2009, 44% Retailand 56% Institutional for fiscal year 2008, and 49% Retail and 51%Institutional for fiscal year 2007.

 

We do not have long-term supply contracts with asubstantial number of our customers. The Company sells most of its pasta under “purchaseorders”, whereby the customer and the Company are not obligated for anypre-determined length of time, or under pricing commitments agreed to withterms of one year or less.

 

**Series DDelivery Preferred Stock Delivery Rights**

 

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 fiscal year on a “first-come, first-served”basis.  From time to time the Company maypost notices to the market on its Web site (holders may also telephone theCompany for information on market notices) for the purchase of durum wheat.During the 24-hour period following the posting of any market notice and to theextent that the Company’s durum wheat requirements as set forth in the marketnotice have not been fulfilled by other holders of Series D DeliveryPreferred Stock, holders of Series D Delivery Preferred Stock have theright to (i) accept the Company’s offer to purchase durum wheat and (ii) deliverdurum wheat to the Company on such terms and conditions as are set forth in themarket notice.  However, in any givenfiscal year of the Company, the first-come, first-served privilege to deliverdurum wheat shall be exercisable to deliver one bushel of durum wheat****only once with respect to each share of Series DDelivery Preferred Stock. During the 24-hour period following the posting ofany market notice, the Company will not purchase durum wheat from non-holdersof Series D Delivery Preferred Stock to fulfill the Company’s durum wheatrequirements as set forth in the market notice. If, after the lapse of a certain amount of time (not less than one day),holders of Series D Delivery Preferred Stock have not sold to the Companyall of the durum wheat requested in the notice, the Company will fulfill itsremaining requirements outside of the Series D Delivery Preferred Stockdelivery privilege.

 

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 primarily on theopen 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 for pasta andsemolina/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 market is highlycompetitive 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 Company markets itsproducts in the Retail market primarily as a private label supplier. TheCompany’s *Dakota Growers Pasta Co.* label to datehas slight penetration in local area markets in the Dakotas and Minnesota andits *Pasta Sanita* label is sold in smallniches ranging from the upper Midwest to select markets in other 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’s competition inthe private label retail market is primarily American Italian Pasta Companyand, to a lesser extent, New World Pasta Company. These private label retailsales compete with retail branded products distributed primarily by Barilla,New World Pasta Company *(Ronzoni, San Giorgio,Creamette, American Beauty, Skinner, Prince* brands et al), AmericanItalian Pasta Company (*Muellers, Anthony’s,Golden Grain/Mission, Ronco* brands et al) and a variety of smallerdomestic and imported brands.

 

In the Foodservice market, the Company alsomarkets its pasta primarily as a private label supplier, including sales tothree of the largest foodservice distributors in the country under theirlabels. The Company’s main competitors in the Foodservice market are AmericanItalian Pasta Company, A. Zerega’s Sons, Inc., and Barilla, as well asforeign competitors that sell product in the United States. The Company’s *Dakota Growers Pasta Co.*,*Pasta Sanita* and *PastaGrowers* foodservice brands are sold throughout the United States toindependent distributors and national chain accounts. The Company has anexclusive distribution agreement with New World Pasta under which the Companyis licensed to use the *Ronzoni, Prince, SanGiorgio*and*Mrs. Weiss*brands in the Foodservice market.

 

The Company’s ingredient sales have continued to grow in the past threeyears.  The Company’s top competitors inthe Ingredient market include American Italian Pasta Company, PhiladelphiaMacaroni Co. Inc., and A. Zerega’s Sons, Inc. A large portion of theIngredient market production capacity is represented by food processors thatproduce pasta internally.

 

The competitive environment in the pasta industrydepends largely on aggregate industry capacity relative to aggregate demand forpasta products.  According toA.C. Nielsen (which data does not include Walmart), dry pasta retail marketvolumes grew at a rate of approximately 2.4% and 2.1% during the 52 and 13 weekperiods ending August 8, 2009, respectively, when compared to the prior yearperiods. Sales of private label dry pasta products accounted for much of theincrease as private label volumes grew 7.0% and 12.1% for the 52 and 13 weekperiods ending August 8, 2009, respectively.

 

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*Competition in the Semolina and Durum Wheat Flour 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 by competition from foreignpasta producers, and as such, by the trade policies of both the U.S. governmentand foreign governments. U.S. Customs and Border Protection (Customs) hasdistributed antidumping and countervailing duties assessed on certain pastaimported from Italy and Turkey to affected domestic producers pursuant to theContinued Dumping and Subsidy Offset Act of 2000 (the “Offset Act”). TheCompany received net payments of $0.4 million, $2.2 million and $1.3 million infiscal years 2009, 2008 and 2007, respectively, under the Offset Act. Theseamounts have been classified as other income. The Company cannot reasonably estimate the potential amount, if any, thatit may receive under the Offset Act in future periods as any such amount willbe based upon future events over which the Company has little or no control,including, but not limited to, the amount of expenditures by domestic pastaproducers and the amount of antidumping and countervailing duties collected byCustoms.  The Act, also known as the ByrdAmendment, has been repealed and therefore, duties assessed on pasta importsafter September 30, 2007 will no longer be distributed to domesticproducers.  However, amounts collected(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 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 extensive federal andstate environmental laws and regulations with respect to water and air quality,solid waste disposal and odor and noise control. The Company conducts anon-going control program designed to meet these environmental laws andregulations. There are no pending regulatory enforcement actions and theCompany believes that it is in substantial compliance with applicableenvironmental laws and regulations.

 

The Company cannot predict whether future changes inenvironmental laws or regulations might increase the cost of operating itsfacilities and conducting its business. Any such changes could have adversefinancial consequences for the Company.

 

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**Intellectual Property Rights**

 

The Company relies on a combination of trade secret,trademark law, nondisclosure agreements and technical measures to establish andprotect its proprietary rights to its products and processes. The Company ownsthe following trademarks that have been registered with the United StatesPatent and Trademark Office for the sale of dry pasta: Dreamfields®, PastaGrowers®, Pasta Sanita®, Zia Briosa®, Primo Piatto® and Dakota Growers PastaCo.®.

 

**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 conducts small plot, replicatedvariety trial research, as well as field-scale fungicide research. Inconnection with plant breeders and researchers, the Company is working todevelop scab-resistant, high-gluten durum varieties.

 

As a result of the creation of DNA DreamfieldsCompany, 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 amodern, well-equipped laboratory facility designed primarily to evaluate andmaintain high quality standards for incoming raw materials, ongoing productmanufacturing, and development of new pasta shapes.

 

**Employees**

 

As of October 6, 2009, the Company had 439 fulltime employees, 140 of which are covered by collective bargaining agreements atits Primo Piatto, Inc. subsidiary. These collective bargaining agreementsexpire on December 1, 2010 and September 30, 2011. The Company considersits employee relations 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 “Investor Relations” portion of our website, the Company’s annualreports on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, and amendments to those reports filed or furnished pursuantto Section 13(a) or 15(d) of the Securities Exchange Act of 1934(the “1934 Act”) as soon as reasonably practicable after we electronically filesuch materials with, or furnish such materials to, the Securities and ExchangeCommission. Reports of beneficial ownership filed pursuant to Section 16(a) ofthe 1934 Act are also available through our website.

 

The Securities and Exchange Commission maintains anInternet site that contains reports, proxy, and information statements andother information regarding issuers that file electronically with theSecurities 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 is applicableto all of our employees, and the Charters of the Committees of our Board ofDirectors are available under the “Investor Relations” 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:

 

Investor Relations

Dakota Growers Pasta Company, Inc.

One Pasta Avenue

Carrington, ND 58421

 

**ITEM 1A. RISK FACTORS**

 

The following are important factors that could causeactual results to differ materially from those expressed in any forward-lookingstatements made by or on behalf of the Company. Additional risks that we do notyet know of, or currently believe are immaterial, may also impair the businessoperations of the Company.

 

***Consumer Trends***

 

As the Company competesexclusively in the dry pasta industry, changes in consumer trends that resultin lowered demand for dry pasta may have a material adverse effect on theCompany’s financial condition and results of operations.

 

***CompetitiveEnvironment***

 

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 PublicMarket for Shares of the Company’s Common Stock and Preferred Stock***

 

No established public tradingmarket currently exists for the shares of Common Stock and Preferred Stock ofthe Company, and an active trading market may never develop. The Companymaintains no obligation to seek or to obtain a listing on a national market. As a result, you may not be able to readilyresell your shares in the Company.

 

***Technology***

 

The Company believes that its overall commitment tomaintaining and upgrading pasta manufacturing, milling and packaging equipmentis necessary to keep a competitive edge in the pasta industry. In addition, italso acknowledges that ongoing computer system upgrades to better service thedemands of its customers are important to long-term success and profitability.The Company may be negatively impacted if its information technology systemsfail to perform adequately.

 

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

 

The Company’s profitability is directly related tothe market price of dry pasta, semolina, durum wheat and mill feed by-products.The supply and price of durum wheat are subject to market conditions and areinfluenced by many factors beyond the Company’s control including weatherpatterns affecting durum wheat production, governmental programs andregulations, insects, and plant diseases. Such volatility with respect to theprice of the basic raw material for the Company’s products leaves the Companysubject to wide variation in its costs from year to year. Durum market pricesincreased dramatically during fiscal year 2008 but have decreased andstabilized during fiscal year 2009. Future increases in durum costs could havea material adverse effect on operating profits unless we are able to pass costincreases on to our customers. By-products of the milling process compete withother feed products, and fluctuate significantly in price with the availabilityof these competing feed products.

 

Increases in other inputcosts, such as packaging materials, ingredients and energy costs (includingtransportation costs), could adversely affect us. The costs of packagingmaterials, ingredients and energy have varied widely in recent years, andfuture changes in such costs may cause our results of operations and ouroperating margins to fluctuate significantly.

 

Changes in sales prices of our products often lagbehind 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.

 

***ProductConcentration***

 

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

 

***ProductLiability***

 

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

 

***Product Recall***

 

Wemay need to recall some of our products if they become adulterated, infested,misbranded or mislabeled. A widespread product recall could cause products tobe unavailable for a period of time and result in a loss of consumer confidencein our food products and could have a material adverse effect on our business.We carry insurance for product recall; however, our insurance coverage may notbe adequate. In addition, because we often indemnify our customers for costsrelated to product recalls, we could be subject to additional expenses that maynot be covered by insurance and could have a material adverse impact onbusiness, results of operations, and financial condition.

 

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***GovernmentRegulation and Trade Policies***

 

Dakota Growers is subject to extensive federal andstate environmental laws and regulations with respect to water and air quality,solid-waste disposal and odor and noise control. The Company conducts anon-going program designed to comply with these laws and regulations. There areno pending regulatory enforcement actions against the Company, and the Companybelieves that it currently is and will continue to be in substantial compliancewith 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.

 

The operations of the Company may be affected bygovernmental 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.

 

If existing anti-dumping measures imposedagainst certain foreign imports terminate, the Company will face increasedcompetition from foreign companies and profit margins or market share may beadversely affected. Anti-dumping and countervailing duties on certainItalian and Turkish imports imposed by the Department of Commerce in 1996enable us and our domestic competitors to compete more favorably againstItalian and Turkish producers in the U.S. pasta market. In September 2007,the U.S. International Trade Commission extended the antidumping andcountervailing duty orders for an additional five years through 2011. If theanti-dumping and countervailing duty orders are repealed or foreign producerssell competing products in the United States at prices lower than ours or enterthe U.S. market by establishing production facilities in the United States, theresult would further increase competition in the U.S. pasta market. We may beunable to compete effectively with these competitors.  This could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

***Intangible Assets***

 

Goodwill is tested for impairment annually or ifevents 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.

 

***RestrictiveLoan 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 ofDirectors Discretion Regarding Dividends***

 

The Board of Directors of the Company has absolutediscretion to determine the manner and amount of payment of dividends on sharesof Common Stock and, subject to certain exceptions, Preferred Stock.

 

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**ITEM 2.  PROPERTIES**

 

Dakota Growers owns and operates a milling facilityin North Dakota, and pasta production plants in North Dakota and Minnesota. TheCompany currently has annual capacity to grind in excess of 12 million bushelsof grain and to produce approximately 500 million pounds of pasta.  The Company is in the process of expandingits Carrington facility, which will increase pasta production capacity byapproximately 60 million pounds when completed.

 

The Company owns the warehouse facilities at thepasta plants. These facilities are supplemented by third party warehouses inCalifornia, Kansas, Illinois, Missouri, Minnesota, New York, North Dakota,Oregon, Ohio and Washington where inventory is maintained and redistributed forthe needs of specific customers.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

From time to time and in the ordinary course of itsbusiness, the Company is named as a defendant in legal proceedings related tovarious issues, including worker’s compensation claims, tort claims andcontractual disputes. Other than such routine litigation, the Company is notcurrently involved in any material legal proceedings. In addition, the Companyis not aware of other potential claims that could result in the commencement oflegal proceedings. The Company carries insurance that provides protectionagainst certain types of claims, up to the policy limits of the Company’sinsurance.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

No matters were submitted to a vote of our securityholders during the fourth quarter of fiscal year 2009.

 

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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 market forthe Company’s Common Stock or Preferred Stock. As of October 14, 2009there were 1,241 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 anAlternative Trading System (ATS) to facilitate trading of the Company’s CommonStock. We do not implicitly or explicitly endorse VIA or their web site, and weare not responsible for products and services that VIA provides. We do notstand behind VIA or receive any fees from them in connection with the servicesoffered on their web site. A link to the web site of VIA is available throughthe “Investor Relations” portion of the Company’s website at *www.dakotagrowers.com*. VIA has been instructed by theCompany to suspend trading on the ATS until further notice as the Companyconsiders strategic alternatives.

 

Trading volumes of the Company’s Common Stock have been minimal to dateand trading on the ATS remains suspended.

 

On February 9, 2007 the Company entered into aStock Purchase Agreement (“Agreement”) with MVC Capital, Inc. (“MVC”) andLa 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.

 

During April 2009, one of the Company’semployees exercised options for the purchase of 10,650 shares of the Company’scommon stock.  The aggregateconsideration received by the Company for the issuance of those shares was$49,690.  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 18, 2008, the Company’s Board ofDirectors authorized the payment of non-periodic dividends of 1 cent per shareon its Series D Delivery Preferred Stock, 20 cents per share on its CommonStock and 20 cents per share on its Series F Convertible Preferred Stock,payable on January 7, 2009 to shareholders of record as of December 26,2008.

 

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On December 20, 2007, the Company’s Board ofDirectors authorized the payment of non-periodic dividends of 1 cent per shareon its Series D Delivery Preferred Stock, 16 cents per share on its CommonStock and 16 cents per share on its Series F Convertible Preferred Stock,payable on January 15, 2008 to shareholders of record as of December 31,2007.

 

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**ITEM 6.  SELECTED FINANCIAL DATA**

 

The selected financial data presented below for thefiscal years ended July 31, 2005 through 2009 has been derived from theaudited consolidated financial statements of the Company.

 

Effective May 1, 2005, the Company began toinclude DNA Dreamfields Company, LLC in its consolidated financialstatements. See Note 2 of the consolidated financial statements foradditional information.

 

The selected financial data set forth in thissection should be read in conjunction with the Company’s consolidated financialstatements and related notes and “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” included elsewhere in thisreport.

 

**SELECTED FINANCIAL DATA**

**(In thousands, except per sharedata and ratios)**

 
| ** **                                          | ** ** | **Fiscal year ended July 31** | ** ** |
|-----------------------------------------------------|------------|------------------------------------|------------|
| ** **                                          | ** ** | **2009**                           | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **INCOME STATEMENT DATA**                           |       |                               |       |   |   |   |   |   |   |   |   |
| Net  revenues                                       |       | $                                  | 297,438    |   | $ | 280,199 |   | $ | 191,062 |   | $ | 171,509 |   | $ | 155,619 |   |
| Cost  of goods sold                                 |       | 248,792                            |       | 246,709 |   | 165,575 |   | 148,904 |   | 136,179 |   |
| Gross  profit                                       |       | 48,646                             |       | 33,490 |   | 25,487 |   | 22,605 |   | 19,440 |   |
| Marketing,  general and administrative expenses     |       | 19,205                             |       | 17,450 |   | 12,973 |   | 14,190 |   | 16,507 |   |
| Operating  income                                   |       | 29,441                             |       | 16,040 |   | 12,514 |   | 8,415 |   | 2,933 |   |
| Other  expense - net                                |       | (1,418                             | )          | (1,571 | ) | (2,199 | ) | (2,143 | ) | (1,817 | ) |
| Noncontrolling  interests                           |       | —                             |       | 202 |   | 52 |   | 894 |   | 3,003 |   |
| Income  before income taxes                         |       | 28,023                             |       | 14,671 |   | 10,367 |   | 7,166 |   | 4,119 |   |
| Income  tax expense                                 |       | 10,342                             |       | 5,380 |   | 3,759 |   | 2,793 |   | 1,606 |   |
| Net  income                                         |       | 17,681                             |       | 9,291 |   | 6,608 |   | 4,373 |   | 2,513 |   |
| Dividends  on preferred stock                       |       | 326                                |       | 283 |   | 113 |   | 451 |   | — |   |
|                                                |       |                               |       |   |   |   |   |   |   |   |   |
| Net  earnings on common stock                       |       | $                                  | 17,355     |   | $ | 9,008 |   | $ | 6,495 |   | $ | 3,922 |   | $ | 2,513 |   |
|                                                |       |                               |       |   |   |   |   |   |   |   |   |
| Net  earnings per common share - Basic              |       | $                                  | 1.70       |   | $ | 0.88 |   | $ | 0.52 |   | $ | 0.30 |   | $ | 0.19 |   |
|                                                |       |                               |       |   |   |   |   |   |   |   |   |
| Weighted  average common shares outstanding - Basic |       | 10,196                             |       | 10,192 |   | 12,501 |   | 13,169 |   | 13,169 |   |
|                                                |       |                               |       |   |   |   |   |   |   |   |   |
| Cash  dividends declared per common share           |       | $                                  | 0.20       |   | $ | 0.16 |   | $ | 0.14 |   | $ | 0.04 |   | $ | — |   |

 

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**SELECTED FINANCIAL DATA -continued**

**(In thousands, except per sharedata and ratios)**

 
| ** **                                            | ** ** | **As of July 31** | ** ** |
|-------------------------------------------------------|------------|------------------------|------------|
| ** **                                            | ** ** | **2009**               | ** ** | **2008** | ** ** | **2007** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **BALANCE SHEET DATA**                                |       |                   |       |   |   |   |   |   |   |   |   |
| Cash                                                  |       | $                      | 1,315      |   | $ | 125 |   | $ | 89 |   | $ | 343 |   | $ | 229 |   |
| Working  capital                                      |       | 35,826                 |       | 21,351 |   | 20,800 |   | 23,273 |   | 20,156 |   |
| Total  assets                                         |       | 133,295                |       | 162,968 |   | 143,166 |   | 134,249 |   | 135,130 |   |
| Long-term  debt (excluding current maturities)        |       | 25,418                 |       | 31,174 |   | 40,681 |   | 28,545 |   | 25,385 |   |
| Redeemable  preferred stock                           |       | —                 |       | — |   | — |   | — |   | 7 |   |
| Stockholders’  equity                            |       | 72,166                 |       | 56,687 |   | 49,150 |   | 64,592 |   | 61,132 |   |
|                                                  |       |                   |       |   |   |   |   |   |   |   |   |
| **OPERATING DATA**                                    |       |                   |       |   |   |   |   |   |   |   |   |
| Ratio  of long-term debt to stockholders’ equity |       | .35                    | x          | .55 | x | .83 | x | .44 | x | .42 | x |
|                                                       |            |                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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| **ITEM  7.** | **MANAGEMENT’S  DISCUSSION 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.

 

Netincome for the year ended July 31, 2009 totaled $17.7 million compared tonet income of $9.3 million for the year ended July 31, 2008.  Net earnings per basic common share, afterthe effect of dividends paid on preferred stock, were $1.70 per share for theyear ended July 31, 2009 compared to $0.88 for the year ended July 31,2008. The Company recorded a $1.7 million non-recurring pre-tax charge infiscal year 2008 to reflect the costs associated with the withdrawal from theCentral States Southeast and Southwest Areas Pension Fund. The Company paiddividends of $0.01 per share on its Series D Delivery Preferred Stock,$0.20 per share on its Series F Convertible Preferred Stock and $0.20 pershare on its Common Stock during the second quarter of fiscal year 2009 and$0.01 per share on its Series D Delivery Preferred Stock, $0.16 per shareon its Series F Convertible Preferred Stock and $0.16 per share on itsCommon Stock during the second quarter of fiscal year 2008.

 

The Company’s net revenues increased 6.2% for the year ended July 31,2009 when compared to the year ended July 31, 2008. The increase resultedprimarily from higher pasta per unit selling prices and, to a lesser extent,higher sales volumes.

 

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 purchaseprice of $2.2 million.  In conjunctionwith this purchase, the Company eliminated the noncontrolling interests andreduced recorded goodwill associated with DNA Dreamfields in the Company’sfirst quarter of fiscal year 2008.

 

The Company believes that the *Dreamfields* line of productsis well suited for consumers seeking healthy eating alternatives. *Dreamfields* pasta hasa 65% lower glycemic index than regular pasta as well as 5 grams of digestiblecarbs and 5 grams of fiber per serving. The *Dreamfields* pasta products carry a higher sellingprice and higher profit margins than traditional pasta.

 

Asthe trend toward high fiber products developed, some of the low carbohydrateconsumption was displaced.  While stillsmall relative to the total pasta category, the consumption of these wholewheat/whole grain products continues to grow. *Dreamfields* pasta offers fiber benefitssimilar to the levels of other whole wheat/whole grain pastas while maintainingthe integrity of the taste and low carbohydrate traits.  Dakota Growers also manufactures and sellstraditional whole wheat/whole grain pastas.

 

Thecost of production of dry pasta is significantly impacted by changes in durumwheat market prices, which have varied widely in recent years. The Companyattempts to manage the risk associated with durum wheat cost fluctuationsthrough cost pass-through mechanisms with our customers and forward purchasecontracts for durum

 

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wheat.Volatility with respect to the price of the basic raw material for the Company’sproducts leaves it subject to wide variation in its costs from year to year. Asa result, factors which impact the size and quality of the durum wheat crop andthe availability of such wheat in the United States and Canada can have amaterial adverse impact on the Company. Those factors include such variables asproducer strategies, the weather in durum wheat production areas in the UnitedStates, Canada and other parts of the world, and import and export policies andregulations. Durum market prices escalated during fiscal years 2007 and 2008,but have decreased in fiscal year 2009 from historically high levels.

 

**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 principlesgenerally accepted in the United States. The preparation of these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosure of contingent assets and liabilities. These estimates form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. We base our estimates andjudgments on historical experience and on various other assumptions that webelieve are reasonable under the circumstances. However, future events aresubject to change and the best estimates and judgments may require adjustment.For a complete description of the Company’s significant accounting policies,please see Note 1 to the consolidated financial statements. Our criticalaccounting policies are those that have meaningful impact on the reporting ofour financial 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 tothe amount 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 future operatingresults.

 

*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 2009 and 2008 and determined that no impairment charges were necessary.Future events could cause management to conclude that impairment indicatorsexist and that the value of certain long-lived assets is impaired.

 

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*IncomeTaxes*

 

In determining income (loss) for financial statement purposes,management must make certain estimates and judgments in calculating taxliabilities and in determining the recoverability of certain deferred taxassets. Deferred tax assets must be reduced by a valuation allowance, if basedon the weight of available evidence, it is more likely than not that someportion or all of the recorded deferred tax assets will not be realized infuture periods. Management believes it is likely that the deferred tax assetsas of July 31, 2009 will be realized through the generation of futuretaxable income and tax planning strategies.

 

**Results of Operations.**

 

*Comparison of Fiscal Years ended July 31, 2009 and 2008*

 

***Net Revenues.***Net revenues increased $17.2 million, or 6.2%, to $297.4 million for theyear ended July 31, 2009, from $280.2 million for the year ended July 31,2008. The increase resulted primarily from higher per unit selling pricesassociated with the pass through of higher durum costs as well as higher pastasales volumes in the retail and ingredient markets.

 

Revenues from the retail market, a portion of which includes co-pack and governmental sales, increased $22.1 million, or 20.3%, for the year ended July 31, 2009 due to a 14.2% increase in average selling prices and a 5.3 % increase in volume. Foodservice revenues decreased $1.3 million, or 1.8%, for the year ended July 31, 2009 due to a 5.3% decrease in volume offset by a 3.7% increase in average selling prices. Ingredient revenues increased $6.5 million, or 9.5%, due to a 5.0% increase in volume and a 4.3% increase in average selling price.

 

The Company markets semolinaproduction in excess of its own requirements as well as durum wheat flour,other flour blends and by-products of the durum milling process. Revenues from mill product sales for the yearended July 31, 2009 totaled $23.8 million, a decrease of $10.1 millionfrom the prior year. The decline resulted primarily from a decrease in salesvolumes.

 

***Cost of Goods Sold.***Cost of goodssold totaled $248.8 million for the year ended July 31, 2009, an increaseof 0.8% compared to the $246.7 million reported for the year ended July 31,2008. The increase was primarily due to an increase in sales volumes, offset bylower durum costs. Gross profit as a percentage of net revenues increased to16.4% in fiscal year 2009 compared to 12.0% in fiscal year 2008.

 

The Company reached an agreement on January 16,2008 with the Teamsters Local No. 120, affiliated with the InternationalBrotherhood of Teamsters, on a three-year contract covering the period from December 1,2007 through December 1, 2010.  The contract allowed the Company towithdraw employees from the Central States Southeast and Southwest AreasPension Fund (the “Fund”), a multi-employer pension plan.  The withdrawal liability totaled $1,573,000with an additional $124,000 payment into the Company’s 401(k) plan fornon-vested employee amounts in the Fund.   The Company recorded a$1,697,000 non-recurring pre-tax charge for the year ended July 31, 2008to reflect these costs associated with the withdrawal from the Fund.

 

***Marketing, General andAdministrative (“MG&A”) Expenses.*** MG&A expenses increased 10%, to $19.2million for the year ended July 31, 2009, from $17.5 million for the yearended July 31, 2008. The increase was primarily related to higherbrokerage commission costs associated with higher revenues as well as increasedcompensation costs and higher professional fees. MG&A expenses as apercentage of net revenues increased to 6.5% for the year ended July 31, 2009,compared to 6.2% for the year ended July 31, 2008.

 

***Interest Expense.***Interestexpense for the year ended July 31, 2009 totaled $1.4 million, down $2.2million from $3.6 million for the year ended July 31, 2008.  The decrease was related to lower interestrates, lower outstanding debt and higher patronage refunds.  Cash and equity patronage refunds receivedfrom CoBank totaling $435,000 and $225,000 have been netted against interestexpense for the years ended July 31, 2009 and 2008, respectively.

 

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***Loss on Disposition of Property,Equipment and Other Assets. ***The Companyincurred losses on disposition of $38,000 and $94,000 during fiscal years 2009and 2008, respectively.  The losses wererelated to retirements of certain equipment in conjunction with capitalprojects.

 

***Other Income, net.*** Other income totaled $27,000 for the yearended July 31, 2009 and $2.1 million for the year ended July 31,2008. 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 net payments in the amount of $0.4 million and $2.2million in fiscal years 2009 and 2008, respectively, under the Offset Act.These amounts have been classified as other income. The Company cannotreasonably estimate the potential amount, if any, that it may receive under theOffset Act in future periods as any such amount will be based upon futureevents over which the Company has little or no control, including but notlimited to federal legislation, the amount of expenditures by domestic pasta producersand the amount of antidumping and countervailing duties collected byCustoms.  The Act, also known as the ByrdAmendment, has been repealed and therefore, duties assessed on pasta importsafter September 30, 2007 will no longer be distributed to domesticproducers.  However, amounts collected(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 domestic producers.

 

***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 forthe year ended July 31, 2008.

 

***Income Taxes. ***Income tax expense for theyears ended July 31, 2009 and 2008 totaled $10.3 million and $5.4 million,respectively, reflecting an effective corporate income tax rate ofapproximately 36.9% and 36.7%, respectively.

 

***Net Income. ***Net income for the yearended July 31, 2009 totaled $17.7 million, an increase of $8.4 millioncompared to net income of $9.3 million for the year ended July 31, 2008.  Net earnings available to common shareholdersfor the years ended July 31, 2009 and 2008 totaled $17.4 million and $9.0million, respectively, after reducing net income for dividends declared onpreferred stock.

 

*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.

 

The Company markets semolina production in excessof its own requirements as well as durum wheat flour, other flour blends andby-products of the durum milling process. Revenues from mill product sales for the year endedJuly 31, 2008 totaled $33.9 million, an increase of $18.6 million from theprior year. The increase is due to increases in both sales volumes and per unitselling 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 otherproduction inputs such as eggs.  Gross

 

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profitas a percentage of net revenues decreased to 12.0% in fiscal year 2008 comparedto 13.3% in fiscal year 2007 as higher revenues largely resulted from the passthrough of higher durum costs.

 

The Company reached an agreement on January 16,2008 with the Teamsters Local No. 120, affiliated with the InternationalBrotherhood of Teamsters, on a three-year contract covering the period from December 1,2007 through December 1, 2010.  The contract allowed the Company towithdraw employees from the Central States Southeast and Southwest AreasPension Fund, a multi-employer pension plan. The withdrawal liability totaled $1,573,000 with an additional $124,000payment into the Company’s 401(k) plan for non-vested employee amounts inthe Fund.   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%.

 

***Interest Expense.***Interest expensefor the year ended July 31, 2008 totaled $3.6 million, up $0.8 millionfrom $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. The Company received net payments in the amount of $2.2 million and $1.3million in fiscal years 2008 and 2007, 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 $0.2 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.

 

**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, 2009 was $35.8 million compared to $21.4million as of July 31, 2008.

 

The Company has a $45 million revolving creditfacility with CoBank that extends through January 13, 2010 and iscollateralized by all assets of the Company. Interest on the revolving line ofcredit is at the 7-day LIBOR rate subject to performance adjustments dependingupon the Company’s ratio of total debt to earnings before interest, taxes,depreciation and amortization or “EBITDA.” The higher the ratio the higher theadjustment to the

 

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7-dayLIBOR rate within a range of 200 to 300 basis points above the 7-day LIBORrate.  Fixed interest rate options are also available. The balancesoutstanding under the revolving credit arrangements totaled $0 and $25.8million as of July 31, 2009 and 2008, respectively.  The Company had $45 million and $19.2 millionavailable for borrowings under the revolving line of credit as of July 31,2009 and 2008, respectively.

 

Balances outstanding under term loans with CoBanktotaled $28.2 million and $33.8 million as of July 31, 2009 and 2008,respectively.  No further borrowings areavailable under these term loans. During the second quarter of fiscal year2009, the Company entered into amendments to its existing CoBank term loanagreements with respect to debt previously incurred by the Company.  These modifications increased the performancepricing adjustment schedule by 25 basis points.

 

TheMaster Loan Agreement with CoBank contains certain restrictive covenantsincluding, but not limited to, financial covenants which require the Company tomaintain, at the end of each of the Company’s fiscal quarters, a minimumcurrent 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 unpaid balancebe increased by one percent at any time that either (a) the ratio of theCompany’s consolidated funded debt to consolidated cash flow is greater than3.0 to 1.0 as of the end of each fiscal quarter for the immediately precedingfour fiscal quarters or (b) the Securities Valuation Office of theNational Association of Insurance Commissioners has not assigned a designationcategory of “1” or “2” to the Notes.

 

The Company was in compliance with all debtcovenants as of July 31, 2009 and the date of this filing.

 

Net cash from operations totaled $44.0 million and$6.0 million for the year ended July 31, 2009 and July 31, 2007,respectively.  Net cash used by operations totaled $3.7 million for the year ended July 31,2008. The $47.7 million net increase from fiscal year 2008 to 2009 wasprimarily attributable to an increase in net income along with decreases inreceivables and inventories.  Thedecrease in accounts receivable, inventories and accounts payable as of July 31,2009 was driven by working capital changes associated with lower raw materialcosts and related sales price adjustments.

 

Net cash used for investingactivities totaled $2.1 million, $4.6 million, and $5.6 million for the yearsended July 31, 2009, 2008 and 2007, respectively. A majority of the netcash used for fiscal year 2009 related to fixed asset expenditures.  A majority of the net cashed used for fiscalyear 2008 related to fixed asset expenditures and the purchase of the remaininginterests in DNA Dreamfields.  A majorityof the net cash used for investing activities for the year ended July 31,2007 related to capital expenditures for the New Hope facility upgrade project.The Company is currently undertaking an estimated $10 million capital projectat its Carrington facility. As of July 31, 2009, the Company had expended$0.8 million in conjunction with this project, and had entered into additionalcommitments for building construction and pasta equipment totaling $4.5 millionas of July 31, 2009. These costs are expected to be paid within one year.

 

Net cash used for financing activities totaled $40.7million and $0.7 million for the years ended July 31, 2009 and July 31,2007, respectively.  Net cash fromfinancing activities totaled $8.3 millionfor the year ended July 31, 2008.  The$40.7 million of net cash used by financing activities for the year ended July 31,2009 related to payments on short-term notes payable, long-term debt anddividends.  The $8.3 million of net cashfrom financing activities for the year ended July 31, 2008 included $18.4million in net borrowings under the revolving credit

 

21

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facilitywith CoBank offset by $9.5 million forscheduled 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.

 

Thefollowing table summarizes the Company’s contractual obligations as of July 31,2009 (in thousands):

 
| ** **                             | ** ** | ** ** | ** **   | **Payments**    | ** ** | **Payments**  | ** ** | **Payments**  | ** ** | **Payments**  | ** ** |
|----------------------------------------|------------|------------|--------------|-----------------|------------|---------------|------------|---------------|------------|---------------|------------|
| ** **                             | ** ** | ** ** | ** **   | **Due in Less** | ** ** | **Due in**    | ** ** | **Due in**    | ** ** | **Due After** | ** ** |
| **Contractual Obligations**            | ** ** | **Total**  | ** **   | **Than 1 Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **5 Years**   | ** ** |
|                                   |       |       |         |            |       |          |       |          |       |          |       |
| Long-term  debt                        |       | $          | 31,174       |            | $          | 5,756         |       | $             | 17,568     |          | $          | 7,850 |   | $ | — |   |
| Interest  on long-term obligations (1) |       | 2,040      |         | 765             |       | 1,152         |       | 123           |       | —        |       |
| Wheat  purchase obligations            |       | 16,731     |         | 16,731          |       | —        |       | —        |       | —        |       |
| Construction  obligations              |       | 4,500      |         | 4,500           |       | —        |       | —        |       | —        |       |
| Warehouse  obligations                 |       | 4,343      |         | 2,262           |       | 2,081         |       | —        |       | —        |       |
| Operating  leases                      |       | 1,280      |         | 629             |       | 625           |       | 26            |       | —        |       |
|                                   |       |       |         |            |       |          |       |          |       |          |       |
|                                   |       | $          |  60,068 |            | $          | 30,643        |       | $             | 21,426     |          | $          | 7,999 |   | $ | — |   |

 

----

(1) Based oninterest rates as of July 31, 2009

 

The Company forward contracts for a certain portionof its future wheat requirements. At July 31, 2009, the Company hadoutstanding commitments for grain purchases totaling $16.7 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***

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“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 yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. In February 2008, the FASB issued FASB Staff Position (“FSP”)FAS 157-2.  This FSP permits a delay in the effective date ofSFAS 157 to fiscal years beginning after November 15, 2008, fornonfinancial assets and nonfinancial liabilities,  except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). In October 2008, the FASB issued FSPFAS 157-3, “Determining the Fair Value of a Financial Asset when the Market forThat Asset Is Not Active,” which clarifies the application of SFAS 157 forfinancial assets in a market that is not active. The adoption of SFAS 157 didnot have a material impact on the Company’s financial statements.

 

In February 2007, FASBissued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities” (“SFAS 159”).  SFAS 159 provides companies with an option toreport selected financial assets and liabilities at fair value and establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities.  SFAS

 

22

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159 is effective for fiscal years beginning after November 15,2007.  The Company has elected not to apply the fair value option to thespecified financial assets and liabilities, and accordingly, the adoption ofSFAS No. 159 had no financial statement impact.

 

In December 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 does not expect theadoption of SFAS 141R will have a material impact on its financial statements.

 

In December 2007, FASB issued SFAS No. 160, “NoncontrollingInterests in Consolidated Financial Statements-an Amendment of ARB No. 51”(“SFAS 160”). The objective of SFAS 160 is to improve the relevance,comparability, and transparency of the financial information that a reportingentity provides in its consolidated financial statements. SFAS 160 amends ARB No. 51to establish accounting and reporting standards for the noncontrolling interestin a subsidiary and for the deconsolidation of a subsidiary. SFAS 160 alsochanges the way the consolidated income statement is presented, establishes asingle method 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 does not expect the adoption of SFAS 160 will have a materialimpact on its financial statements.

 

In May 2008, FASB issuedFASB Statement No. 162, “TheHierarchy of Generally Accepted Accounting Principles.” This statementidentifies the sources of accounting principles and the framework for selectingthe principles used in the preparation of financial statements of nongovernmentalentities that are presented in conformity with generally accepted accountingprinciples (“GAAP”) in the United States. This statement became effective 60days following the SEC’s approval of the Public Company Accounting OversightBoard (“PCAOB”) amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally AcceptedAccounting Principles.” The adoption of this statement did not have amaterial impact on our financial statements.

 

In April 2008, FASBissued FASB Staff Position No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”).This FSP amends the factors that should be considered in developing renewal orextension assumptions used to determine the useful life of a recognizedintangible asset under FASB Statement No. 142, “Goodwill and Other Intangible Assets.” The intent of this FSP isto improve the consistency between the useful life of a recognized intangibleasset under FASB Statement No. 142 and the period of expected cash flowsused to measure the fair value of the asset under FASB Statement No. 141R,and other U.S. generally accepted accounting principles. FSP 142-3 is effectivefor our interim and annual financial statements beginning in fiscal 2010. TheCompany is in the process of evaluating the impact, if any, that the adoptionof FSP 142-3 will have on its financial statements.

 

In April 2009, FASB issued FASB Staff Position No. FAS 115-2and FAS 124-2, “Recognition and Presentation of Other-Than-TemporaryImpairments” (“FSP 115-2 and 124-2”). FSP 115-2 and 124-2 amend the guidance onother-than-temporary impairment for debt securities and modifies thepresentation and disclosure of other-than-temporary impairments on debt andequity securities in the financial statements. These FSPs are effective forinterim and annual periods ending after June 15, 2009. The adoption of FSP115-2 and 124-2 did not have a material impact on our financial statements.

 

In April 2009, FASB issued FASB Staff Position No. FAS 157-4,*“*Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying

 

23

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TransactionsThat Are Not Orderly” (“FSP 157-4”) to provide guidelines for making fairvalue measurements more consistent with the principles presented inSFAS 157. FSP 157-4 is applicable to all assets and liabilities (i.e.financial and nonfinancial) and provides additional authoritative guidance todetermine whether a market is active or inactive or whether a transaction isdistressed. FSP 157-4 is effective for interim and annual periods ending after June 15,2009. The adoption of FSP 157-4 did not have a material impact on our financialstatements.

 

In April 2009, FASB issued FASB Staff Position No. FAS 107-1and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSPFAS 107-1 and APB 28-1”).   FSP FAS 107-1 and APB 28-1 amendsFASB 107, “Disclosures about Fair Value of Financial Instruments” torequire disclosures about fair value of financial instruments in interim andannual financial statements.   FSP FAS 107-1 and APB 28-1 is effective forperiods ending after June 15, 2009.  The adoption of FSP 107-1and APB 28-1 did not have a material impact on our financial statements.

 

In May 2009, the FASB issued SFAS No. 165 “Subsequent Events,”which establishes general standards of accounting for and disclosure of eventsthat occur after the balance sheet date but before the financial statements areissued or are available to be issued. It requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate. The Statement sets forth: the period after the balance sheet date duringwhich management of a reporting entity should evaluate events or transactionsthat may occur for potential recognition or disclosure in the financialstatements; the circumstances under which an entity should recognize events ortransactions occurring after the balance sheet date in its financial statements;and the disclosures that an entity should make about events or transactionsthat occurred after the balance sheet date. SFAS No. 165 is effective forinterim and annual reporting periods ending after June 15, 2009, andshould be applied prospectively. The adoption of SFAS No. 165 did not havea material impact on our financial statements.

 

In June 2009, the FASB issued SFAS No. 166, “Accounting forTransfers of Financial Assets an amendment of FASB Statement No. 140” (“SFAS166”), which amends the derecognition guidance in FASB Statement No. 140and eliminates the exemption from consolidation for qualifying special-purposeentities. This statement is effective for financial asset transfers occurringafter the beginning of an entity’s first fiscal year that begins after November 15,2009. This statement will be effective for the Company beginning in our firstquarter of fiscal year 2011.  The Companydoes not expect the adoption of SFAS 166 will have a material impact on itsfinancial statements.

 

In June 2009, the FASB issued SFAS No. 167, “Amendments toFASB Interpretation No. 46(R)” (“SFAS 167”) , which amends theconsolidation guidance applicable to variable interest entities. The amendmentswill significantly affect the overall consolidation analysis under FASBInterpretation No. 46(R). This statement is effective as of the beginningof the first fiscal year that begins after November 15,2009.  This statement will be effective for the Company beginning inour first quarter of fiscal year 2011.  TheCompany does not expect the adoption of SFAS 167 will have a material impact onits financial statements.

 

In June 2009, the FASB issued SFAS No. 168,“The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles—areplacement of FASB Statement No. 162” (“the Codification”) as thesingle source of authoritative nongovernmental GAAP. All existing accountingstandard documents, excluding guidance from the Securities and ExchangeCommission (“SEC”), will be superseded by the Codification. All othernon-grandfathered, non-SEC accounting literature not included in theCodification will become nonauthoritative. The Codification does not changeGAAP, but instead introduces a new structure that will combine all authoritativestandards into a comprehensive, topically organized online database. TheCodification will be effective for interim or annual periods ending after September 15,2009, and will impact the Company’s financial statement disclosures beginningwith the quarter ending October 31, 2009 as all future references toauthoritative accounting literature will be referenced in accordance with theCodification. There will be no changes to the content of the Company’sfinancial statements or disclosures as a result of implementing theCodification.

 

24

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**Off-BalanceSheet Arrangements**

 

AtJuly 31, 2009, 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**

 

Weexperienced input cost inflation, the most significant of which related to rawmaterial costs, in fiscal years 2008 and 2007. However, raw material costsbegan to decline in fiscal year 2009. We attempt to mitigate the impact ofinflationary pressure through cost saving measures and price adjustments.

 

## **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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**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

**INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS OF**

**DAKOTA GROWERS PASTA COMPANY, INC.**

 
| ** **                                                       | **PAGE** |
|------------------------------------------------------------------|----------|
|                                                             |     |
| Report  of Independent Registered Public Accounting Firm         | 27       |
|                                                             |     |
| Consolidated  Balance Sheets                                     | 28       |
|                                                             |     |
| Consolidated  Statements of Operations                           | 30       |
|                                                             |     |
| Consolidated Statements of Changes in Stockholders’  Equity | 31       |
|                                                             |     |
| Consolidated Statements of Cash Flows                            | 32       |
|                                                             |     |
| Notes to Consolidated Financial Statements                       | 34       |

 

26

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**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTINGFIRM**

 

To the Audit Committee,Board of Directors and Stockholders

Dakota Growers Pasta Company, Inc.

Carrington, North Dakota

 

We have audited the accompanying consolidatedbalance sheets of Dakota Growers Pasta Company, Inc. and Subsidiaries as ofJuly 31, 2009 and 2008, and the related consolidated statements of operations,changes in stockholders’ equity and cash flows for each of the years ended July31, 2009, 2008, and 2007. Dakota Growers Pasta Company, Inc. and Subsidiariesmanagement is responsible for these financial statements. Our responsibility isto express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance withthe standards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of thecompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financialstatements referred to above present fairly, in all material respects, thefinancial position of Dakota Growers Pasta Company, Inc. and Subsidiaries as ofJuly 31, 2009 and 2008, and the results of its operations and its cash flowsfor each of the years ended July 31, 2009, 2008, and 2007, in conformity withaccounting principles generally accepted in the United States of America. 

 

 

Fargo, North Dakota

October 29, 2009

 

27

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **CONSOLIDATED BALANCE SHEETS**

**JULY31, 2009 AND 2008**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                           | ** ** | **2009** | ** **    | **2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|----------|---------------|----------|------------|
|                                                                                                                 |       |     |          |     |       |
| **ASSETS**                                                                                                           |       |     |          |     |       |
|                                                                                                                 |       |     |          |     |       |
| CURRENT ASSETS                                                                                                       |       |     |          |     |       |
| Cash and cash equivalents                                                                                            |       | $        | 1,315         |     | $          | 125 |   |
|                                                                                                                 |       |     |          |     |       |
| Trade accounts receivable, less allowance for cash  discounts and doubtful accounts of $826 and $1,294, respectively |       | 20,466   |          | 27,315   |       |
|                                                                                                                 |       |     |          |     |       |
| Other receivables                                                                                                    |       | 67       |          | 850      |       |
|                                                                                                                 |       |     |          |     |       |
| Inventories                                                                                                          |       | 33,878   |          | 51,956   |       |
|                                                                                                                 |       |     |          |     |       |
| Prepaid expenses                                                                                                     |       | 799      |          | 1,040    |       |
|                                                                                                                 |       |     |          |     |       |
| Deferred income taxes                                                                                                |       | 947      |          | 1,053    |       |
|                                                                                                                 |       |     |          |     |       |
| Total current assets                                                                                                 |       | 57,472   |          | 82,339   |       |
|                                                                                                                 |       |     |          |     |       |
| PROPERTY AND EQUIPMENT                                                                                               |       |     |          |     |       |
| In service                                                                                                           |       | 134,112  |          | 132,815  |       |
| Construction in progress                                                                                             |       | 975      |          | 546      |       |
|                                                                                                                 |       | 135,087  |          | 133,361  |       |
| Less accumulated depreciation                                                                                        |       | (71,960  | )             | (65,983  | )          |
|                                                                                                                 |       |     |          |     |       |
| Net property and equipment                                                                                           |       | 63,127   |          | 67,378   |       |
|                                                                                                                 |       |     |          |     |       |
| INVESTMENT IN COOPERATIVE BANK                                                                                       |       | 1,507    |          | 1,355    |       |
|                                                                                                                 |       |     |          |     |       |
| INTANGIBLE ASSETS, NET                                                                                               |       | 2,387    |          | 2,590    |       |
|                                                                                                                 |       |     |          |     |       |
| GOODWILL                                                                                                             |       | 8,381    |          | 8,381    |       |
|                                                                                                                 |       |     |          |     |       |
| OTHER ASSETS                                                                                                         |       | 421      |          | 925      |       |
|                                                                                                                 |       |     |          |     |       |
|                                                                                                                 |       | $        |  133,295 |     | $          | 162,968 |   |

 

(continuedon next page)

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

#### **CONSOLIDATED BALANCE SHEETS**

**JULY31, 2009 AND 2008**

**(InThousands, Except Share Information)**

 
| ** **                                                                                                                                                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                |       |     |       |     |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                                      |       |     |       |     |       |
|                                                                                                                                                                                |       |     |       |     |       |
| CURRENT LIABILITIES                                                                                                                                                                 |       |     |       |     |       |
| Excess outstanding checks over cash on deposit                                                                                                                                      |       | $        | —     |     | $          | 3,130 |   |
| Accounts payable                                                                                                                                                                    |       | 9,987    |       | 16,930   |       |
| Accrued liabilities                                                                                                                                                                 |       | 5,903    |       | 5,671    |       |
| Notes payable                                                                                                                                                                       |       | —   |       | 25,750   |       |
| Current portion of long-term debt                                                                                                                                                   |       | 5,756    |       | 9,507    |       |
|                                                                                                                                                                                |       |     |       |     |       |
| Total current liabilities                                                                                                                                                           |       | 21,646   |       | 60,988   |       |
|                                                                                                                                                                                |       |     |       |     |       |
| COMMITMENTS AND CONTINGENCIES                                                                                                                                                       |       | —   |       | —   |       |
| LONG-TERM DEBT, net of current portion                                                                                                                                              |       | 25,418   |       | 31,174   |       |
| DEFERRED INCOME TAXES                                                                                                                                                               |       | 14,065   |       | 14,119   |       |
|                                                                                                                                                                                |       |     |       |     |       |
| Total liabilities                                                                                                                                                                   |       | 61,129   |       | 106,281  |       |
|                                                                                                                                                                                |       |     |       |     |       |
| STOCKHOLDERS’ EQUITY                                                                                                                                                           |       |     |       |     |       |
|                                                                                                                                                                                |       |     |       |     |       |
| Series D delivery preferred stock,  non-cumulative, $.01 par value, 11,340,841 authorized, 11,275,297 shares issued  and outstanding                                           |       | 113      |       | 113      |       |
| Series F convertible preferred stock,  non-cumulative, $.01 par value, 2,100,000 shares authorized, 1,065,000 shares  issued and outstanding                                   |       | 11       |       | 11       |       |
| Common stock, $.01 par value, 75,000,000 shares  authorized, 10,203,063 and 10,192,413 shares issued and outstanding as of  July 31, 2009 and July 31, 2008, respectively |       | 102      |       | 102      |       |
| Additional paid-in capital                                                                                                                                                          |       | 43,120   |       | 42,958   |       |
| Retained earnings                                                                                                                                                                   |       | 28,820   |       | 13,503   |       |
|                                                                                                                                                                                |       |     |       |     |       |
| Total stockholders’ equity                                                                                                                                                     |       | 72,166   |       | 56,687   |       |
|                                                                                                                                                                                |       |     |       |     |       |
| Total liabilities and stockholders’ equity                                                                                                                                     |       | $        | 133,295    |     | $          | 162,968 |   |

 

SeeNotes to Consolidated Financial Statements

 

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# **DAKOTA GROWERS PASTACOMPANY, INC.**

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

###### **YEARSENDED JULY 31, 2009, 2008 AND 2007**

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

 
| ** **                                                                                                             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                   |       |     |       |     |       |     |       |
| Net revenues (net of discounts and allowances of  $27,300, $26,647, and $23,953 for 2009, 2008 and 2007, respectively) |       | $        | 297,438    |     | $          | 280,199  |       | $ | 191,062 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Cost of goods sold                                                                                                     |       | 248,792  |       | 246,709  |       | 165,575  |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Gross profit                                                                                                           |       | 48,646   |       | 33,490   |       | 25,487   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Marketing, general and administrative expenses                                                                         |       | 19,205   |       | 17,450   |       | 12,973   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Operating income                                                                                                       |       | 29,441   |       | 16,040   |       | 12,514   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Other income (expense)                                                                                                 |       |     |       |     |       |     |       |
| Interest expense, net                                                                                                  |       | (1,407   | )          | (3,615   | )          | (2,772   | )          |
| Loss on disposition of property, equipment and  other assets                                                           |       | (38      | )          | (94      | )          | (649     | )          |
| Other income, net                                                                                                      |       | 27       |       | 2,138    |       | 1,222    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Income before noncontrolling interests and income  taxes                                                               |       | 28,023   |       | 14,469   |       | 10,315   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Noncontrolling interests                                                                                               |       | —   |       | 202      |       | 52       |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Income before income taxes                                                                                             |       | 28,023   |       | 14,671   |       | 10,367   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Income tax expense                                                                                                     |       | 10,342   |       | 5,380    |       | 3,759    |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Net income                                                                                                             |       | 17,681   |       | 9,291    |       | 6,608    |       |
| Dividends on preferred stock                                                                                           |       | 326      |       | 283      |       | 113      |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Net earnings on common stock                                                                                           |       | $        | 17,355     |     | $          | 9,008    |       | $ | 6,495 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Net earnings per common share                                                                                          |       |     |       |     |       |     |       |
| Basic                                                                                                                  |       | $        | 1.70       |     | $          | 0.88     |       | $ | 0.52 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Diluted                                                                                                                |       | $        | 1.47       |     | $          | 0.78     |       | $ | 0.50 |   |
|                                                                                                                   |       |     |       |     |       |     |       |
| Weighted average common shares outstanding                                                                             |       |     |       |     |       |     |       |
| Basic                                                                                                                  |       | 10,196   |       | 10,192   |       | 12,501   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Diluted                                                                                                                |       | 11,951   |       | 11,958   |       | 13,381   |       |
|                                                                                                                   |       |     |       |     |       |     |       |
| Dividends per common share                                                                                             |       | $        | 0.20       |     | $          | 0.16     |       | $ | 0.14 |   |

 

SeeNotes to Consolidated Financial Statements

 

30

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**DAKOTAGROWERS PASTA COMPANY, INC.**

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

**(InThousands)**

 
|                                             |       |                       |       |                          |       |             |       |        |       |           |       |       |       |        |       |         |       |      |       |   |   |   |   |   |   |
|--------------------------------------------------|------------|----------------------------|------------|-------------------------------|------------|------------------|------------|-------------|------------|----------------|------------|------------|------------|-------------|------------|--------------|------------|-----------|------------|--------|--------|--------|--------|--------|--------|
| ** **                                       | ** ** | **Series D Delivery** | ** ** | **Series F Convertible** | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional** | ** ** | ** ** | ** ** | ** **  | ** ** |
| ** **                                       | ** ** | **Preferred Stock**        | ** ** | **Preferred Stock**           | ** ** | **Common Stock** | ** ** | **Paid-in** | ** ** | **Retained**   | ** ** | ** ** | ** ** |
| ** **                                       | ** ** | **Shares**                 | ** ** | **Amount**                    | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Shares**     | ** ** | **Amount** | ** ** | **Capital** | ** ** | **Earnings** | ** ** | **Total** | ** ** |
|                                             |       |                       |       |                          |       |             |       |        |       |           |       |       |       |        |       |         |       |      |       |
| 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 |   |
| Dividends on common stock                        |       | —                     |       | —                        |       | —           |       | —      |       | —         |       | —     |       | —      |       | (2,038       | )          | (2,038    | )          |
| Dividends on preferred stock                     |       | —                     |       | —                        |       | —           |       | —      |       | —         |       | —     |       | —      |       | (326         | )          | (326      | )          |
| Stock-based employee compensation                |       | —                     |       | —                        |       | —           |       | —      |       | —         |       | —     |       | 112         |       | —       |       | 112       |       |
| Exercise of stock options                        |       | —                     |       | —                        |       | —           |       | —      |       | 11             |       | —     |       | 50          |       | —       |       | 50        |       |
| Net income for the year ended July 31, 2009 |       | —                     |       | —                        |       | —           |       | —      |       | —         |       | —     |       | —      |       | 17,681       |       | 17,681    |       |
| BALANCE, JULY 31, 2009                           |       | 11,275                     |       | $                             | 113        |             | 1,065      |        | $          | 11             |       | 10,203     |       | $           | 102        |         | $          | 43,120    |       | $      | 28,820 |   | $      | 72,166 |   |

 

See Notes to Consolidated FinancialStatements

 

31

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

**(InThousands)**

 
| ** **                                                                             | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                   |       |     |       |     |       |     |       |
| OPERATING ACTIVITIES                                                                   |       |     |       |     |       |     |       |
| Net income                                                                             |       | $        | 17,681     |     | $          | 9,291    |       | $ | 6,608 |   |
| Adjustments to reconcile net income to net cash  from (used for) operating activities: |       |     |       |     |       |     |       |
| Depreciation and amortization                                                          |       | 6,569    |       | 6,571    |       | 6,951    |       |
| Undistributed patronage capital from cooperatives                                      |       | (152     | )          | (45      | )          | (27      | )          |
| Loss on disposition of property, equipment and  other assets                           |       | 38       |       | 94       |       | 649      |       |
| Deferred income taxes                                                                  |       | 52       |       | 696      |       | 908      |       |
| Stock-based employee compensation                                                      |       | 112      |       | 160      |       | 210      |       |
| Noncontrolling interests                                                               |       | —   |       | (202     | )          | (52      | )          |
| Changes in assets and liabilities                                                      |       |     |       |     |       |     |       |
| Trade receivables                                                                      |       | 6,849    |       | (8,873   | )          | (4,001   | )          |
| Other receivables                                                                      |       | 783      |       | (490     | )          | (269     | )          |
| Inventories                                                                            |       | 18,078   |       | (20,627  | )          | (5,211   | )          |
| Prepaid expenses                                                                       |       | 241      |       | 349      |       | 214      |       |
| Other assets                                                                           |       | 466      |       | 11       |       | (24      | )          |
| Accounts payable                                                                       |       | (6,943   | )          | 9,578    |       | 102      |       |
| Other accrued liabilities                                                              |       | 232      |       | (250     | )          | (36      | )          |
|                                                                                   |       |     |       |     |       |     |       |
| NET CASH FROM (USED FOR) OPERATING ACTIVITIES                                          |       | 44,006   |       | (3,737   | )          | 6,022    |       |
|                                                                                   |       |     |       |     |       |     |       |
| INVESTING ACTIVITIES                                                                   |       |     |       |     |       |     |       |
| Purchase of interests in DNA Dreamfields Company,  LLC                                 |       | —   |       | (2,232   | )          | —   |       |
| Purchases of property and equipment                                                    |       | (1,936   | )          | (2,143   | )          | (5,456   | )          |
| Proceeds from sale of property, equipment and  other assets                            |       | 25       |       | 56       |       | —   |       |
| Other investments                                                                      |       | —   |       | (175     | )          | (47      | )          |
| Proceeds from cooperative bank equity retirements                                      |       | —   |       | —   |       | 232      |       |
| Proceeds from other investments                                                        |       | —   |       | 57       |       | 116      |       |
| Payments for package design costs                                                      |       | (204     | )          | (116     | )          | (433     | )          |
|                                                                                   |       |     |       |     |       |     |       |
| NET CASH USED FOR INVESTING ACTIVITIES                                                 |       | (2,115   | )          | (4,553   | )          | (5,588   | )          |
|                                                                                        |            |          |            |          |            |          |            |  |  |  |

 

(Continued on next page)

 

32

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**DAKOTAGROWERS PASTA COMPANY, INC.**

**CONSOLIDATED STATEMENTS OF CASH FLOWS**

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

**(InThousands)**

 
| ** **                                                              | ** ** | **2009** | ** ** | **2008** | ** **  | **2007** | ** ** |
|-------------------------------------------------------------------------|------------|----------|------------|----------|-------------|----------|------------|
|                                                                    |       |     |       |     |        |     |       |
| FINANCING ACTIVITIES                                                    |       |     |       |     |        |     |       |
| Net change in excess outstanding checks over cash  on deposit           |       | (3,130   | )          | 1,371    |        | 1,055    |       |
| Net change in short-term notes payable                                  |       | (25,750  | )          | 18,350   |        | 7,400    |       |
| Payments on long-term debt                                              |       | (9,507   | )          | (9,481   | )           | (6,904   | )          |
| Proceeds from long-term debt                                            |       | —   |       | —   |        | 20,000   |       |
| Investments by noncontrolling interests                                 |       | —   |       | —   |        | 21       |       |
| Dividends paid on common stock                                          |       | (2,038   | )          | (1,631   | )           | (1,844   | )          |
| Dividends paid on preferred stock                                       |       | (326     | )          | (283     | )           | (113     | )          |
| Issuance of common stock                                                |       | 50       |       | —   |        | 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                           |       | (40,701  | )          | 8,326    |        | (688     | )          |
|                                                                    |       |     |       |     |        |     |       |
| NET CHANGE IN CASH AND CASH EQUIVALENTS                                 |       | 1,190    |       | 36       |        | (254     | )          |
|                                                                    |       |     |       |     |        |     |       |
| CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR                            |       | 125      |       | 89       |        | 343      |       |
|                                                                    |       |     |       |     |        |     |       |
| CASH AND CASH EQUIVALENTS, END OF YEAR                                  |       | $        | 1,315      |     | $           | 125      |       | $ | 89 |   |
|                                                                    |       |     |       |     |        |     |       |
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                       |       |     |       |     |        |     |       |
|                                                                    |       |     |       |     |        |     |       |
| Cash payments for                                                       |       |     |       |     |        |     |       |
| Interest (net of amounts capitalized)                                   |       | $        | 1,730      |     | $           | 3,782    |       | $ | 2,780 |   |
|                                                                    |       |     |       |     |        |     |       |
| Income taxes                                                            |       | $        | 10,345     |     | $           | 3,752    |       | $ | 2,989 |   |
|                                                                    |       |     |       |     |        |     |       |
| 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 |     |       |   |

 

See Notes to Consolidated FinancialStatements

 

33

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

**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 subsidiaries Primo Piatto, Inc. and DNA Dreamfields Company,LLC. All material inter-company accounts and transactions have been eliminatedin the preparation of the consolidated financial statements. Our consolidatedfinancial statements for the year ended July 31, 2009 were evaluated forsubsequent events through October 29, 2009, the date the consolidatedfinancial statements were issued.

 

*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*

 

Reclassificationshave been made to the financial statements as of July 31, 2008 and for theyears ended July 31, 2008 and 2007 to facilitate comparability with thestatements as of and for the years ended July 31, 2009. Such reclassificationshave no effect on the net result of operations.

 

*Risksand 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 Disposalof 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 

 

34

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

tobe recognized is measured by the amount by which the carrying amount of theassets exceeds the fair value of the assets. Long-lived assets to be disposedof by sale are reported at the lower of the carrying amount or fair value lesscosts to sell, and will cease to be depreciated. SFAS No. 144 alsorequires long-lived assets to be disposed of other than by sale to beconsidered as held and used until disposed of, requiring the depreciable lifeto 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 2009 and 2008 and determinedthat no impairment charges were necessary.

 

*Revenue Recognition*

 

Revenues are recognized when risk of loss transfers, which occurs whengoods are shipped. Pricing terms are final at that time. Revenues includeamounts billed for products as well as any associated shipping costs billed todeliver such products.

 

The Company provides allowances for annual promotional programs basedupon annual sales volumes. Revenues are presented net of discounts andallowances of $27,300,000, $26,647,000 and $23,953,000 for the years ended July 31,2009, 2008 and 2007, 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 $826,000 and$1,294,000 as of July 31, 2009 and 2008, respectively.

 

One customer accounted for 12% and 11% of accounts receivable as of July 31,2009 and 2008, respectively and 7%, 9% and 12% of net revenues for the yearsended July 31, 2009, 2008 and 2007, respectively.

 

35

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

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, 2009                        |       | $                | 329        |           | $          | 3,670          |       | $           | (3,748     | ) | $ | 251 |   |
| Year ended July 31, 2008                        |       | 213              |       | 3,347          |       | (3,231         | )          | 329         |       |
| Year ended July 31, 2007                        |       | 180              |       | 2,592          |       | (2,559         | )          | 213         |       |
|                                                 |       |             |       |           |       |           |       |        |       |
| Allowance for doubtful accounts:                     |       |             |       |           |       |           |       |        |       |
| Year ended July 31, 2009                        |       | $                | 965        |           | $          | (293           | )          | $           | (97        | ) | $ | 575 |   |
| Year ended July 31, 2008                        |       | 835              |       | 232            |       | (102           | )          | 965         |       |
| Year ended July 31, 2007                        |       | 900              |       | 9              |       | (74            | )          | 835         |       |
|                                                 |       |             |       |           |       |           |       |        |       |
| Allowance for cash discounts and doubtful  accounts: |       |             |       |           |       |           |       |        |       |
| Year ended July 31, 2009                        |       | $                | 1,294      |           | $          | 3,377          |       | $           | (3,845     | ) | $ | 826 |   |
| 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       |       |

 

*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, 2009 and 2008 are asfollows (in thousands):

 
| ** **                                   | ** ** | **2009** | ** **   | **2008** | ** ** |
|----------------------------------------------|------------|----------|--------------|----------|------------|
|                                         |       |     |         |     |       |
| Finished goods                               |       | $        | 23,206       |     | $          | 33,397 |   |
| Raw materials, packaging and work-in-process |       | 10,672   |         | 18,559   |       |
|                                         |       |     |         |     |       |
|                                         |       | $        |  33,878 |     | $          | 51,956 |   |

 

*Concentration of Sources of Labor*

 

The Company’s total hourly and salaried workforce consisted of approximately439 employees, of which 32% are covered by collective bargaining agreements.The expiration dates of the union contracts are December 1, 2010 and September 30,2011.

 

*Property and Equipment*

 

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

 

The initial acquisition of land by the Company was stated at theestimated fair value of the land at acquisition. Subsequent land acquisitionsare recorded at cost.Depreciation is provided for over the estimated usefullives of

 

36

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**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

the individual assets using the straight-line method. The estimateduseful lives used in the computation of depreciation expense range from 3 to 40years. Depreciation expense totaled $6,124,000, $6,061,000 and $6,007,000 forthe years ended July 31, 2009, 2008 and 2007, respectively.

 

Details relative to property and equipment are as follows (inthousands):

 
| ** **                        | ** ** | **2009** | ** **   | **2008** | ** ** |
|-----------------------------------|------------|----------|--------------|----------|------------|
|                              |       |     |         |     |       |
| Land and improvements             |       | $        | 2,952        |     | $          | 2,952 |   |
| Buildings                         |       | 23,127   |         | 23,120   |       |
| Equipment                         |       | 108,033  |         | 106,743  |       |
|                              |       |     |         |     |       |
| Property and equipment in service |       | 134,112  |         | 132,815  |       |
| Construction in progress          |       | 975      |         | 546      |       |
| Less accumulated depreciation     |       | (71,960  | )            | (65,983  | )          |
|                              |       |     |         |     |       |
|                              |       | $        |  63,127 |     | $          | 67,378 |   |

 

*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 certain thirdparty costs to design artwork and to produce die plates and negatives necessaryto manufacture and print packaging materials according to Company and customerspecifications. These costs are amortized ratably over three to five yearperiods based on estimated useful life. Minor revisions are expensed asincurred. If a product design is discontinued or replaced prior to the end ofthe amortization period, the remaining unamortized balance is charged toexpense. Package design costs are presented net of accumulated amortizationtotaling $5,864,000 and $5,623,000 as of July 31, 2009 and 2008,respectively.

 

Thebreakdown of other assets, net of accumulated amortization, is as follows (inthousands):

 
| ** **           | ** ** | **2009** | ** ** | **2008** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
|                 |       |     |       |     |       |
| Package design costs |       | $        | 312        |     | $          | 350 |   |
| Other                |       | 109      |       | 575      |       |
|                 |       |     |       |     |       |
|                 |       | $        |  421  |     | $          | 925 |   |

 

37

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

*Accrued Liabilities*

 

Accrued liabilities consist of the following (in thousands):

 
| ** **                | ** ** | **2009** | ** **  | **2008** | ** ** |
|---------------------------|------------|----------|-------------|----------|------------|
|                      |       |     |        |     |       |
| Accrued promotional costs |       | $        | 1,694       |     | $          | 1,136 |   |
| Accrued income taxes      |       | 1,338    |        | 1,393    |       |
| Accrued interest          |       | 146      |        | 469      |       |
| Accrued freight           |       | 561      |        | 470      |       |
| Other                     |       | 2,164    |        | 2,203    |       |
|                      |       |     |        |     |       |
|                      |       | $        |  5,903 |     | $          | 5,671 |   |

 

*Shipping and Handling Costs*

 

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

 

*Advertising*

 

Costs of advertising are expensed as incurred. Advertising expensesincluded in the consolidated income statement totaled $3,842,000, $4,523,000and $2,089,000 (primarily related to consumer advertising for *Dreamfields* pastaproducts) for the years ended July 31, 2009, 2008 and 2007, 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, 2009, 2008 and 2007 totaled $490,000, $500,000 and$602,000, respectively.

 

*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 be taxableor deductible when the assets and liabilities are recovered or settled.

 

38

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

*Stock Options*

 

Effective August 1, 2005, the Companyadopted Statement of Financial Accounting Standard No. 123 (revised 2004),“Share Based Payment” (SFAS No. 123R). Under SFAS No. 123R, theCompany is required to recognize, as expense, the estimated fair value of allshare based payments to employees. In accordance with this standard, 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.

 

*Earnings per Share*

 

Basic Earnings per Share (EPS) is calculated by dividing net earningson common stock by the weighted average number of common shares effective andoutstanding during the period. Diluted EPS includes the effect of allpotentially dilutive securities, such as options and convertible preferredstock.  Prior to August 1, 2008, theCompany had not included nonvested stock options in the calculation of dilutedEPS.  Nonvested stock options have been consideredin the calculation of diluted EPS for the years ended July 31, 2009, 2008and 2007, as presented herein.

 

Dilutive securities, consisting of stock options and convertiblepreferred stock, included in the calculation of diluted weighted average commonshares totaled 1,755,000 shares, 1,766,000 shares and 880,000 shares for theyears ended July 31, 2009, 2008 and 2007, respectively. The Series FConvertible Preferred Stock is included in the fully diluted EPS calculationand not included in the basic EPS calculation. As there is currently noestablished public trading market for the Company’s common stock, the Companyhas assumed the proceeds from the exercise of stock options would reduce debtand, thus, interest expense for purposes of calculating diluted EPS.

 

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

 
| ** **                                    | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-----------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                          |       |     |       |     |       |     |       |
| **Earnings per share - Basic**                |       |     |       |     |       |     |       |
|                                          |       |     |       |     |       |     |       |
| Net income                                    |       | $        | 17,681     |     | $          | 9,291    |       | $ | 6,608 |   |
| Less: Preferred stock dividends               |       | (326     | )          | (283     | )          | (113     | )          |
| Net earnings available to common stockholders |       | $        | 17,355     |     | $          | 9,008    |       | $ | 6,495 |   |
|                                          |       |     |       |     |       |     |       |
| Basic weighted-average shares outstanding     |       | 10,196   |       | 10,192   |       | 12,501   |       |
|                                          |       |     |       |     |       |     |       |
| Earnings per share - Basic                    |       | $        | 1.70       |     | $          | 0.88     |       | $ | 0.52 |   |

 

39

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

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

 
| ** **                                                       | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                             |       |     |       |     |       |     |       |
| **Earnings per share - Diluted**                                 |       |     |       |     |       |     |       |
|                                                             |       |     |       |     |       |     |       |
| Net earnings available to common stockholders                    |       | $        | 17,355     |     | $          | 9,008    |       | $ | 6,495 |   |
| Plus: Convertible preferred dividends                            |       | 213      |       | 170      |       | —   |       |
| Plus: Impact of interest expense on the exercise  of options (1) |       | 51       |       | 100      |       | 147      |       |
| Net earnings available to common stockholders                    |       | $        | 17,619     |     | $          | 9,278    |       | $ | 6,642 |   |
|                                                             |       |     |       |     |       |     |       |
| Diluted weighted-average shares outstanding:                     |       |     |       |     |       |     |       |
| Basic weighted-average shares outstanding                        |       | 10,196   |       | 10,192   |       | 12,501   |       |
| Plus: Incremental shares from assumed conversions                |       |     |       |     |       |     |       |
| Options                                                          |       | 690      |       | 701      |       | 640      |       |
| Convertible preferred shares                                     |       | 1,065    |       | 1,065    |       | 240      |       |
| Diluted weighted-average shares outstanding                      |       | 11,951   |       | 11,958   |       | 13,381   |       |
|                                                             |       |     |       |     |       |     |       |
| Earnings per share - Diluted                                     |       | $        | 1.47       |     | $          | 0.78     |       | $ | 0.50 |   |

 

----

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

 

*Recently Issued Accounting Standards*

 

InSeptember 2006, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standard (“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 yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. In February 2008, the FASB issued FASB Staff Position (“FSP”)FAS 157-2.  This FSP permits a delay in the effective date ofSFAS 157 to fiscal years beginning after November 15, 2008, fornonfinancial assets and nonfinancial liabilities,  except for itemsthat are recognized or disclosed at fair value in the financial statements on arecurring basis (at least annually). In October 2008, the FASB issued FSPFAS 157-3, “Determining the Fair Value of a Financial Asset when the Market forThat Asset Is Not Active,” which clarifies the application of SFAS 157 forfinancial assets in a market that is not active. The adoption of SFAS 157 didnot have a material impact on the Company’s financial statements.

 

InFebruary 2007, FASB issued SFAS 159, “The Fair Value Option for FinancialAssets and Financial Liabilities” (“SFAS 159”).  SFAS 159 providescompanies with an option to report selected financial assets and liabilities atfair value and establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities.  SFAS 159 iseffective for fiscal years beginning after November 15, 2007.  TheCompany has elected not to apply the fair value option to the specifiedfinancial assets and liabilities, and accordingly, the adoption of SFAS No. 159had no financial statement impact.

 

InDecember 2007, FASB issued SFAS No. 141 (Revised 2007), “BusinessCombinations” (“SFAS 141R”). The objective of SFAS 141R is to improve therelevance, representational faithfulness, and comparability of the informationthat a reporting entity provides in its financial reports about a businesscombination and its effects.

 

40

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

SFAS141R requires an acquirer to recognize the assets acquired, the liabilitiesassumed, and any noncontrolling interest in the acquiree at the acquisitiondate, measured at their fair values as of that date. SFAS 141R also requiresthe acquirer to recognize and measure the goodwill acquired in a businesscombination or a gain from a bargain purchase and how to evaluate the natureand financial effects of the business combination. SFAS 141R is effective forfinancial statements issued for fiscal years beginning after December 15,2008. The Company does not expect the adoption of SFAS 141R will have amaterial impact 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 does not expect the adoption of SFAS 160 will have a materialimpact on its financial statements.

 

InMay 2008, FASB issued FASB Statement No. 162, “The Hierarchy of Generally AcceptedAccounting Principles.” This statement identifies the sources ofaccounting principles and the framework for selecting the principles used inthe preparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles (“GAAP”)in the United States. This statement became effective 60 days following the SEC’sapproval of the Public Company Accounting Oversight Board (“PCAOB”) amendmentsto AU Section 411, “The Meaningof Present Fairly in Conformity with Generally Accepted Accounting Principles.”The adoption of this statement did not have a material impact on our financialstatements.

 

InApril 2008, 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 FASB Statement No. 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.

 

InApril 2009, FASB issued FASB Staff Position No. FAS 115-2 and FAS124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP115-2 and 124-2”). FSP 115-2 and 124-2 amend the guidance onother-than-temporary impairment for debt securities and modifies thepresentation and disclosure of other-than-temporary impairments on debt andequity securities in the financial statements. These FSPs are effective forinterim and annual periods ending after June 15, 2009. The adoption of FSP115-2 and 124-2 did not have a material impact on our financial statements.

 

InApril 2009, FASB issued FASB Staff Position No. FAS 157-4,*“*Determining Fair Value When the Volumeand Level of Activity for the Asset or Liability Have Significantly Decreasedand Identifying Transactions That Are Not Orderly” (“FSP 157-4”) toprovide guidelines for making fair value measurements more consistent with theprinciples presented in SFAS 157. FSP 157-4 is applicable to allassets and liabilities (i.e. financial and nonfinancial) and providesadditional authoritative guidance to determine whether a market is active orinactive or

 

41

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

whethera transaction is distressed. FSP 157-4 is effective for interim and annualperiods ending after June 15, 2009. The adoption of FSP 157-4 did not havea material impact on our financial statements.

 

InApril 2009, FASB issued FASB Staff Position No. FAS 107-1 and APB28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS107-1 and APB 28-1”).   FSP FAS 107-1 and APB 28-1 amends FASB 107, “Disclosuresabout Fair Value of Financial Instruments” to require disclosures about fairvalue of financial instruments in interim and annual financial statements.  FSP FAS 107-1 and APB 28-1 is effective for periods ending after June 15,2009.  The adoption of FSP 107-1 and APB 28-1 did not have a materialimpact on our financial statements.

 

InMay 2009, the FASB issued SFAS No. 165 “Subsequent Events,” whichestablishes general standards of accounting for and disclosure of events thatoccur after the balance sheet date but before the financial statements areissued or are available to be issued. It requires the disclosure of the datethrough which an entity has evaluated subsequent events and the basis for thatdate. The Statement sets forth: the period after the balance sheet date duringwhich management of a reporting entity should evaluate events or transactionsthat may occur for potential recognition or disclosure in the financialstatements; the circumstances under which an entity should recognize events ortransactions occurring after the balance sheet date in its financialstatements; and the disclosures that an entity should make about events ortransactions that occurred after the balance sheet date. SFAS No. 165 iseffective for interim and annual reporting periods ending after June 15,2009, and should be applied prospectively. The adoption of SFAS No. 165did not have a material impact on our financial statements.

 

InJune 2009, the FASB issued SFAS No. 166, “Accounting for Transfers ofFinancial Assets an amendment of FASB Statement No. 140” (“SFAS 166”),which amends the derecognition guidance in FASB Statement No. 140 andeliminates the exemption from consolidation for qualifying special-purposeentities. This statement is effective for financial asset transfers occurringafter the beginning of an entity’s first fiscal year that begins after November 15,2009. This statement will be effective for the Company beginning in our firstquarter of fiscal year 2011.  The Companydoes not expect the adoption of SFAS 166 will have a material impact on itsfinancial statements.

 

InJune 2009, the FASB issued SFAS No. 167, “Amendments to FASBInterpretation No. 46(R)” (“SFAS 167”) , which amends theconsolidation guidance applicable to variable interest entities. The amendmentswill significantly affect the overall consolidation analysis under FASBInterpretation No. 46(R). This statement is effective as of the beginningof the first fiscal year that begins after November 15,2009.  This statement will be effective for the Company beginning inour first quarter of fiscal year 2011. The Company does not expect the adoption of SFAS 167 will have amaterial impact on its financial statements.

 

InJune 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy ofGenerally Accepted Accounting Principles—a replacement of FASB Statement No. 162”(“the Codification”) as the single source of authoritative nongovernmentalGAAP. All existing accounting standard documents, excluding guidance from theSecurities and Exchange Commission (“SEC”), will be superseded by theCodification. All other non-grandfathered, non-SEC accounting literature notincluded in the Codification will become nonauthoritative. The Codificationdoes not change GAAP, but instead introduces a new structure that will combineall authoritative standards into a comprehensive, topically organized onlinedatabase. The Codification will be effective for interim or annual periodsending after September 15, 2009, and will impact the Company’s financialstatement disclosures beginning with the quarter ending October 31, 2009as all future references to authoritative accounting literature will bereferenced in accordance with the Codification. There will be no changes to thecontent of the Company’s financial statements or disclosures as a result ofimplementing the Codification.

 

42

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

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

 

EffectiveMay 1, 2005, the Company’s ownership in DNA Dreamfields increased to46.7%. In conjunction with the Company’sincrease in ownership in DNA Dreamfields and changes in the DNADreamfields operating agreement and other contractual arrangements, the Company determined that DNADreamfields was a variable interest entity under FASB Interpretation No. 46(R),“Consolidation of Variable Interest Entities,” and that the Company was theprimary beneficiary. Therefore, effective May 1, 2005, the Company beganto include DNA Dreamfields in its consolidated financial statements.

 

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, 2009, 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.

 

Amortization expense relating to intangible assets totaled $203,000 and $169,000 for the years ended July 31, 2009 and 2008, respectively.

 

Information regarding goodwill and intangible assets at July 31, 2009 and 2008 is as follows (in thousands):

 
| ** **                           | ** ** | **2009**           | ** ** | **2008**         | ** ** |
|--------------------------------------|------------|--------------------|------------|------------------|------------|
| ** **                           | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Net Carrying** | ** ** | **Gross Carrying** | ** ** | **Accumulated** | ** ** | **Net Carrying** | ** ** |
| ** **                           | ** ** | **Amount**         | ** ** | **Amortization** | ** ** | **Amount** | ** ** | **Amount** | ** ** | **Amortization** | ** ** | **Amount** | ** ** |
|                                 |       |               |       |             |       |   |   |   |   |   |   |   |   |
| Covenants not-to-compete             |       | $                  | 112        |             | $          | (68 | ) | $ | 44 |   | $ | 112 |   | $ | (31 | ) | $ | 81 |   |
| Technology license                   |       | 2,647              |       | (304             | )          | 2,343 |   | 2,647 |   | (138 | ) | 2,509 |   |
|                                 |       |               |       |             |       |   |   |   |   |   |   |   |   |
| Total intangible assets              |       | 2,759              |       | (372             | )          | 2,387 |   | 2,759 |   | (169 | ) | 2,590 |   |
|                                 |       |               |       |             |       |   |   |   |   |   |   |   |   |
| Goodwill                             |       | 8,381              |       | —           |       | 8,381 |   | 8,381 |   | — |   | 8,381 |   |
|                                 |       |               |       |             |       |   |   |   |   |   |   |   |   |
| Total goodwill and intangible assets |       | $                  | 11,140     |             | $          | (372 | ) | $ | 10,768 |   | $ | 11,140 |   | $ | (169 | ) | $ | 10,971 |   |

 

43

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

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

 
| ** **                             | ** ** | **Covenants**      | ** ** | **Technology** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------------|------------|
| **Fiscal years ending  July 31,** | ** ** | **Not-To-Compete** | ** ** | **License**    | ** ** |
|                                   |       |               |       |           |       |
| 2010                                   |       | $                  | 37         |           | $          | 165 |   |
| 2011                                   |       | 7                  |       | 165            |       |
| 2012                                   |       | —             |       | 165            |       |
| 2013                                   |       | —             |       | 165            |       |
| 2014                                   |       | —             |       | 165            |       |
| 2015 and thereafter                    |       | —             |       | 1,518          |       |
|                                   |       |               |       |           |       |
|                                   |       | $                  | 44         |           | $          | 2,343 |   |

 

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

 

TheCompany has a $45 million revolving credit facility with CoBank that extendsthrough January 13, 2010 and is collateralized by all assets of theCompany. Interest on the revolving line of credit is at the 7-day LIBOR ratesubject to performance adjustments depending upon the Company’s ratio of totaldebt to earnings before interest, taxes, depreciation and amortization or “EBITDA.”The higher the ratio the higher the adjustment to the 7-day LIBOR rate within arange of 200 to 300 basis points above the 7-day LIBOR rate.  Fixedinterest rate options are also available. The balances outstanding under therevolving credit arrangements totaled $0 and $25.8 million as of July 31,2009 and 2008, respectively.  The Companyhad $45 million and $19.2 million available for borrowings under the revolvingline of credit as of July 31, 2009 and 2008, respectively.  Weighted average interest rates on short-termborrowings were 3.66%, 5.36% and 7.48% for the years ended July 31, 2009, 2008and 2007, respectively. The interest rates on short-term borrowings were 2.27%,4.43% and 7.07% as of July 31, 2009, 2008 and 2007, respectively.

 

44

----

 

**DAKOTA GROWERS PASTA COMPANY,INC.**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**YEARS ENDED JULY 31, 2009, 2008AND 2007**

 

**NOTE 5 -**                          LONG-TERM DEBT

 

Information regarding long-term debt at July 31, 2009 and 2008 isas follows (in thousands):

 
| ** **                                                                                                                                                                                                                                                                                                      | ** ** | **2009** | ** ** | **2008** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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 |   |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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                                                                                                                |       | 2,000    |       | 3,000    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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 (4.43% at July 31, 2008; 2.27% at July 31, 2009), collateralized  by all assets of the Company |       | 8,200    |       | 12,600   |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| 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 (4.43%  at July 31, 2008; 2.27% at July 31, 2009), 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%                                                                                                                                                                                                                             |       | 974      |       | 1,307    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| Total long-term debt                                                                                                                                                                                                                                                                                            |       | 31,174   |       | 40,681   |       |
| Less current portion                                                                                                                                                                                                                                                                                            |       | 5,756    |       | 9,507    |       |
|                                                                                                                                                                                                                                                                                                            |       |     |       |     |       |
| Net long-term debt                                                                                                                                                                                                                                                                                              |       | $        | 25,418     |     | $          | 31,174 |   |

 

45

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

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

 
| **Years  ending July 31,** | ** ** | ** ** | ** **   |
|---------------------------------|------------|------------|--------------|
|                            |       |       |         |
| 2010                            |       | $          | 5,756        |   |
| 2011                            |       | 6,532      |         |
| 2012                            |       | 5,636      |         |
| 2013                            |       | 5,400      |         |
| 2014                            |       | 5,400      |         |
| Thereafter                      |       | 2,450      |         |
|                            |       |       |         |
|                            |       | $          |  31,174 |   |

 

The Company’s debt agreements with CoBank and the institutional noteholders obligate the Company to maintain or achieve certain amounts of equityand financial ratios and impose restrictions on the Company. The Company was incompliance with these financial covenants as of July 31, 2009.

 

The Company incurred $1,843,000, $3,849,000 and $3,013,000 of intereston long and short-term debt and other obligations in fiscal years 2009, 2008and 2007, respectively, of which $1,000, $9,000 and $109,000 was capitalized inthe respective periods. Patronage income from CoBank of $435,000, $225,000 and$132,000 was netted against interest expense on the statement of operations forthe years ended July 31, 2009, 2008 and 2007, respectively.

 

**NOTE 6 -**                          STOCKHOLDERS’ EQUITY

** **

The Company is authorized to issue 75,000,000 shares of Common Stock,$.01 par value per share, 533 shares of Series A Preferred Stock, $100 parvalue per share, 525 shares of Series B Preferred Stock, $100 par valueper share, 2,731 shares of Series C Preferred Stock, $100 par value pershare, 11,340,841 shares of Series D Delivery Preferred Stock, $.01 parvalue per share, 130,000 shares of Series E Junior Participating PreferredStock, $.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 beproportionately adjusted at any time the outstanding shares of Common Stock areincreased or decreased without payment by or to the Company or the Company’sshareholders.

 

Each share of Series D Delivery Preferred Stock of the 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 DDelivery Preferred Stock a dividend of at least $.01 per share before payingany dividends on Common Stock.

 

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 

 

46

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

Convertible Preferred Stock shall not carry the right to vote onmatters submitted to the vote of the shareholders of the Company.  Except as otherwise provided, the Series FPreferred Stock shall have all rights of the Common Stock, including but notlimited to any rights to dividends or to distributions upon liquidation.

 

The Board of Directors of the Company adopteda Rights Plan that became effective July 1, 2002.  Under the Rights Plan, the Board of Directorsof the Company has declared a dividend of one purchase right (a “Right”) foreach outstanding share of Common Stock held. Each Right will entitle the holder to purchase from the Companyone-hundredth of one share of Series E Junior Participating Preferred Stock ata specified price, subject to certain adjustments. The Rights will not becomeexercisable, and will not be transferable apart from the Company’s shares ofCommon Stock, until a person or group has acquired 15% or more of the Company’sCommon Stock or has commenced a tender or exchange offer for 15% or more of theCompany’s Common Stock.  In those events,each Right will entitle the holder (other than the acquiring person or group)to receive, upon exercise, common shares of either the Company or the acquiringcompany having value equal to two times the exercise price of the Right. TheRights issued under the Rights Plan will be redeemable by the Company’s Boardof Directors in certain circumstances and will expire ten years from the dateof adoption.

 

On May 10, 2007, theCompany closed the sale of 1 million shares of Series F ConvertiblePreferred Stock to MVC Capital, Inc. (“MVC”) 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 $20 million in loan proceeds under a termloan 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 beenproperly tendered to the Company at $10.00 per share net in cash pursuant tothe Company’s tender offer, which expired on April 27, 2007.

 

OnDecember 18, 2008, the Company’s Board of Directors authorized the paymentof non-periodic dividends of 1 cent per share on its Series D DeliveryPreferred Stock, 20 cents per share on its Common Stock and 20 cents per shareon its Series F Convertible Preferred Stock, payable on January 7,2009 to shareholders of record as of December 26, 2008.

 

OnDecember 20, 2007, the Company’s Board of Directors authorized the paymentof non-periodic dividends of 1 cent per share on its Series D DeliveryPreferred Stock, 16 cents per share on its Common Stock and 16 cents per shareon its Series F Convertible Preferred Stock, payable on January 15,2008 to shareholders of record as of December 31, 2007.

 

On December 14, 2006,the Company’s Board of Directors authorized the payment of non-periodicdividends of 1 cent per share on its Series D Delivery Preferred Stock and14 cents per share on its Common Stock, payable on January 3, 2007 toshareholders of record as of December 20, 2006.

 

**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 employees’ elected deferral and 50% on the next 2%.Employer contributions to the plan totaled $717,000, $706,000 and $537,000 forthe years ended July 31, 2009, 2008 and 2007, respectively.

 

Primo Piatto, Inc. was also required to contribute to amulti-employer pension plan covering certain hourly employees subject to acollective bargaining agreement. Such employees could also participate in the401(k) plan but were excluded from amounts contributed by Primo Piatto.Contributions to the pension plan for the years ended July 31, 2008 and2007 totaled $1,637,000 and $106,000, respectively.

 

47

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

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 allowed the Company to withdraw employees from the CentralStates 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 the Fund.  The Company recorded a $1,697,000 non-recurring pre-tax charge for the yearended July 31, 2008 to reflect these costs associated with the withdrawalfrom the Fund.

 

**NOTE 8 -**                          INCOME TAXES

** **

Significant components of the Company’s deferred tax assets andliabilities as of July 31, 2009 and 2008 related to temporary differencesare as follows (in thousands):

 
| ** **                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |
| Deferred tax assets                  |       |     |       |     |       |
| Accounts receivable allowances       |       | $        | 322        |     | $          | 504 |   |
| Accrued expenses and other reserves  |       | 625      |       | 549      |       |
| Total deferred tax assets            |       | 947      |       | 1,053    |       |
|                                 |       |     |       |     |       |
| Deferred tax liabilities             |       |     |       |     |       |
| Property, equipment and other assets |       | (14,065  | )          | (14,119  | )          |
|                                 |       |     |       |     |       |
| Net deferred tax liabilities         |       | $        | (13,118    | )        | $          | (13,066 | ) |

 

Classified in theaccompanying balance sheets as follows:

 
| ** **                   | ** ** | **2009** | ** ** | **2008** | ** ** |
|------------------------------|------------|----------|------------|----------|------------|
|                         |       |     |       |     |       |
| Current assets               |       | $        | 947        |     | $          | 1,053 |   |
| Noncurrent liabilities       |       | (14,065  | )          | (14,119  | )          |
|                         |       |     |       |     |       |
| Net deferred tax liabilities |       | $        | (13,118    | )        | $          | (13,066 | ) |

 

Management believes it is more likely than not that the deferred taxassets as of July 31, 2009 will be realized through the generation offuture taxable income and tax planning strategies.

 

Income tax expense for the years ended July 31, 2009, 2008 and2007 consists of the following (in thousands):

 
| ** **                 | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------|------------|----------|------------|----------|------------|----------|------------|
|                       |       |     |       |     |       |     |       |
| Current income tax expense |       | $        | 10,290     |     | $          | 4,684    |       | $ | 2,851 |   |
| Deferred income taxes      |       | 52       |       | 696      |       | 908      |       |
|                       |       |     |       |     |       |     |       |
| Income tax expense         |       | $        | 10,342     |     | $          | 5,380    |       | $ | 3,759 |   |

 

48

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

The reconciliation of the federal statutoryincome tax rate to the effective income tax rate for the years ended July 31,2009, 2008 and 2007 is as follows:

 
| ** **                                            | ** ** | **2009** | ** ** | **2008** | ** ** | **2007** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                  |       |     |       |     |       |     |       |
| Federal statutory income tax rate                     |       | 35.0     | %          | 34.0     | %          | 34.0     | %          |
| State income taxes, net of federal income tax  effect |       | 5.0      |       | 5.0      |       | 5.0      |       |
| Other                                                 |       | (3.1     | )          | (2.3     | )          | (2.7     | )          |
|                                                  |       |     |       |     |       |     |       |
| Effective income tax rate                             |       | 36.9     | %          | 36.7     | %          | 36.3     | %          |

 

The Company adopted the provisions of FASB Interpretation No. 48 “Accounting for Uncertainty of Income Taxes - An Interpretation of FASB Statement No. 109” (“FIN 48”) on August 1, 2007. FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards No. 109, “Accounting for Income Taxes” (“FAS 109”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. As a result of the implementation of FIN 48, the Company recorded no increase in the liability for unrecognized tax benefits and the balance of unrecognized tax benefits was zero as of July 31, 2009 and 2008.

 

The Company has adopted theaccounting policy that interest recognized in accordance with Paragraph 15 ofFIN 48 and penalty recognized in accordance with Paragraph 16 of FIN 48 areclassified as part of income taxes. The total amount of interest and penaltyrecognized in the statements of financial position and statements of operationswas zero as of July 31, 2009 and 2008. The Company does not anticipate anysignificant change within 12 months of this reporting date of its uncertain taxpositions. The Company is subject to taxation in the United States and variousstate jurisdictions. The Company’s July 31, 2004 through July 31,2008 North Dakota income tax returns are being reviewed by the North Dakota TaxCommissioners office.  This review is inthe early stage of gathering documentation to support the tax returns.  The Company does not believe that there willbe any material changes to the originally filed tax returns. The Company’svarious tax years starting 2004 to 2009 remain open in various taxingjurisdictions.

 

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

** **

The fair value of a financial instrument is generally defined as the pricethat would be received to sell an asset or paid to transfer a liability in anorderly transaction between market participants at the measurement date. Quotedmarket prices are generally not available for the Company’s financialinstruments. Accordingly, fair values are based on judgments regardinganticipated cash flows, future expected loss experience, current economicconditions, risk characteristics of various financial instruments and otherfactors. These estimates involve uncertainties and matters of judgment, andtherefore cannot be determined with precision. Changes in assumptions couldsignificantly affect the estimates.

 

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

 

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 

 

49

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

to estimate future cash flows, which are largely dependent on futurepatronage earnings of the non-subsidiary cooperatives.

 

Based upon current borrowing rates with similar maturities, the fairvalue of the long-term debt approximates the carrying value as of July 31,2009 and 2008.

 

**NOTE 10 -**                   OPERATING LEASES

** **

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

 
| **Year  ending July 31:** | ** ** | ** ** | ** **  |
|--------------------------------|------------|------------|-------------|
| 2010                           |       | $          | 629         |   |
| 2011                           |       | 408        |        |
| 2012                           |       | 152        |        |
| 2013                           |       | 65         |        |
| 2014                           |       | 26         |        |
| Thereafter                     |       | —     |        |
|                           |       |       |        |
|                           |       | $          |  1,280 |   |

 

Lease expense totaled $710,000, $521,000 and $1,138,000 for the yearsended July 31, 2009, 2008 and 2007, respectively.

 

**NOTE 11 -**                   CAPITAL LEASE

 

On March 30, 2007, the Company entered into alease agreement for certain pasta equipment valued at $1.75 million, which hadpreviously been accounted for in a sale-leaseback transaction. The equipmentlease, which has a term of 5 years expiring on March 31, 2012, is classified asa capital lease.

 

The following is a schedule of the futureminimum lease payments under the capital lease together with the present valueof the net minimum lease payments as of July 31, 2009 (in thousands):

 
| **Year  ending July 31:**              | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|------------|------------|
| 2010                                        |       | $          | 413        |   |
| 2011                                        |       | 413        |       |
| 2012                                        |       | 241        |       |
| Later Years                                 |       | —     |       |
| Total minimum lease payments                |       | 1,067      |       |
| Less: Amount representing interest          |       | (93        | )          |
| Present value of net minimum lease payments |       | $          | 974        |   |

 

The equipment is being depreciated over its estimated useful economiclife.

 

50

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

Information regarding certain pasta equipment under capital lease at July 31,2009 and 2008 is as follows (in thousands):

 
| ** **                     | ** ** | **2009** | ** ** | **2008** | ** ** |
|--------------------------------|------------|----------|------------|----------|------------|
|                           |       |     |       |     |       |
| Equipment                      |       | $        | 1,750      |     | $          | 1,750 |   |
| Less: Accumulated depreciation |       | (408     | )          | (233     | )          |
| Total                          |       | $        | 1,342      |     | $          | 1,517 |   |

 

**NOTE 12-      COMMITMENTS AND CONTINGENCIES**

 

The Company forward contracts for a certainportion of its future wheat requirements. At July 31, 2009, the Company hadoutstanding commitments for grain purchases totaling $16,731,000 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.

 

The Company had commitmentsfor building construction and pasta equipment purchases related to theexpansion of the Carrington, ND facility totaling approximately $4.5 million asof July 31, 2009. These costs are expected to be paid within one year.

 

Pursuant to certain warehouse agreements, theCompany is obligated to minimum monthly storage and handling amounts totaling$2,262,000, $973,000, $554,000, and $554,000 for the years ending July 31,2010, 2011, 2012 and 2013, respectively.

 

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

 

**NOTE 13 -**                   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 be optionedto each of the employees. Options granted under the Plan are for the purchaseof Series C Convertible Preferred Stock at fair market value, which wereconvertible into Equity Stock as a cooperative, and are now convertible intoCommon Stock and Series D Delivery Preferred Stock as a corporation at theoption 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 C Preferred Stockis 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.

 

51

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

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.

 

OnNovember 21, 2002 the Board of Directors adopted the Dakota Growers PastaCompany, Inc. 2003 Stock Option Plan (the “2003 Plan”), which was approvedby 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. Therewere 32,237 options available to be granted under the 2003 Plan as of July 31,2009.

 

52

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

Thefollowing tables set forth information regarding stock options outstanding andexercisable:

 
| ** **                        | ** ** | **Options to purchase Series C Convertible Preferred Stock** | ** ** |
|-----------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                        | ** ** | **Number of**                                                     | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Series C**                                                 | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Convertible**                                                   | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Preferred Shares**                                              | ** ** | **per Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                              |       |                                                              |       |   |   |   |   |   |   |
| Outstanding at July 31, 2006 |       | 1,977                                                             |       | $100-$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 |   |
| Exercised                         |       | —                                                            |       |   |   |   |   |   |   |
| Granted                           |       | —                                                            |       |   |   |   |   |   |   |
| Forfeited/Expired                 |       | —                                                            |       |   |   |   |   |   |   |
| Outstanding at July 31, 2009 |       | 1,977                                                             |       | $100-$150 |   | $ | 117.35 |   | 1,977 |   |

 
| ** **                        | ** ** | **Options to purchase Common Stock** | ** ** |
|-----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | ** **                           | ** ** | ** ** | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | ** **                           | ** ** | **Option** | ** ** | **Average** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Number of**                        | ** ** | **Price** | ** ** | **Exercise** | ** ** | ** ** | ** ** |
| ** **                        | ** ** | **Common Shares**                    | ** ** | **per  Share** | ** ** | **Price** | ** ** | **Exercisable** | ** ** |
|                              |       |                                 |       |   |   |   |   |   |   |
| Outstanding at July 31, 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 |   |
| Exercised                         |       | (10,650                              | )          | $4.00-$5.00 |   | $ | 4.67 |   |   |   |
| Granted                           |       | —                               |       |   |   |   |   |   |   |
| Forfeited/Expired                 |       | —                               |       |   |   |   |   |   |   |
| Outstanding at July 31, 2009 |       | 642,363                              |       | $4.00-$6.25 |   | $ | 5.11 |   | 574,182 |   |

 

Forthe years ended July 31, 2009, 2008 and 2007, the Company recordedstock-based employee compensation expense of $112,000, $160,000 and $210,000,respectively.

 

The fair value of the stock options grantedwas estimated at the date of grant using the Black-Scholes option pricing modelwith 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%.

 

53

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

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

A summary of the status of the Company’sissued but nonvested stock options as of July 31, 2009, and changes during theyear ended July 31, 2009, is presented below:

 
| ** **                      | ** ** | ** ** | ** ** | **Weighted-Average** | ** ** |
|---------------------------------|------------|------------|------------|----------------------|------------|
| ** **                      | ** ** | **Common** | ** ** | **Grant-Date**       | ** ** |
| **Nonvested Stock Options**     | ** ** | **Shares** | ** ** | **Fair Value**       | ** ** |
|                            |       |       |       |                 |       |
| Nonvested at July 31, 2008 |       | 167,885    |       | $                    | 4.81       |   |
| Granted                         |       | —     |       |                 |       |
| Vested                          |       | (99,704    | )          | $                    | 4.68       |   |
| Forfeited/Expired               |       | —     |       |                 |       |
| Nonvested at July 31, 2009 |       | 68,181     |       | $                    | 5.00       |   |

 

As of July 31, 2009,there was approximately $24,000 of total unrecognized compensation cost relatedto nonvested employee stock options.  That cost is expected to berecognized over a period of .25 years.

 

**NOTE 14 -**                   RELATED PARTY TRANSACTIONS

** **

Amounts due from executive officers totaled $47,000 asof July 31, 2009 and 2008.

 

JeffreyTopp, a director of the Company, sold wheat to the Company through anaffiliated entity in fiscal years 2009 and 2008.  Those sales totaled $554,000and $263,000 at market prices and the Company had a commitment to purchasewheat totaling $187,500 and $386,000 from Mr. Topp and/or his affiliatedentity as of July 31, 2009 and 2008, respectively.

 

InMay 2007, the Company paid MVC Financial Services, Inc. and LaBellaHoldings LLC $200,000 each in closing fees. The payments were based on 2% of the issuance of 1,000,000 shares ofseries F preferred stock at $10 per share and 1,000,000 shares of common stockat $10 per share. See Note 6 — Stockholders’ Equity. MVC Financial Services, Inc.is an affiliate of MVC Capital, Inc., a holder of 5% or greater of theCompany’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 15 -**                   CONTINUED DUMPING AND SUBSIDY OFFSET ACT OF 2000

** **

U.S.Customs and Border Protection (“Customs”) has distributed antidumping andcountervailing duties assessed on certain pasta imported from Italy and Turkeyto affected domestic producers pursuant to the Continued Dumping and SubsidyOffset Act of 2000 (the “Offset Act”), which was enacted in October 2000.The Company received payments in the amount of $384,000, $2,200,000 and$1,300,000 in December 2008, 2007 and 2006, 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, 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 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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# **DAKOTA GROWERS PASTA COMPANY, INC.**

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

**YEARSENDED JULY 31, 2009, 2008 AND 2007**

 

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

** **

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

 
| ** **                          | ** ** | **First**   | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                          | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
|                                |       |        |       |        |       |        |       |        |       |
| Year ended July 31, 2009       |       |        |       |        |       |        |       |        |       |
|                                |       |        |       |        |       |        |       |        |       |
| Net revenues                        |       | $           | 87,145     |        | $          | 72,067      |       | $           | 71,513     |   | $ | 66,713 |   |
| Gross profit                        |       | 8,626       |       | 11,114      |       | 14,140      |       | 14,766      |       |
| Operating income                    |       | 3,493       |       | 5,753       |       | 9,688       |       | 10,507      |       |
| Net income                          |       | 1,692       |       | 3,629       |       | 6,177       |       | 6,183       |       |
| Basic net earnings per common share |       | 0.17        |       | 0.32        |       | 0.61        |       | 0.60        |       |
|                                |       |        |       |        |       |        |       |        |       |
| 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        |       |

 

The above quarterly financial data is unaudited, but inthe opinion of management, all adjustments necessary for a fair presentation ofthe selected data for these interim periods presented have been included.

 

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**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

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

 

**Disclosure Controls and Procedures**

 

As required by Rule 13a-15(b) under the Exchange Act, weconducted an evaluation, under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer (together the “Certifying Officers”), of the effectiveness of thedesign and operation of our disclosure controls and procedures as of July 31,2009, the end of the period covered by this report. Based upon that evaluation,the Certifying Officers concluded that our disclosure controls and procedureswere effective as of July 31, 2009 to provide reasonable assurance thatinformation required to be disclosed in our Exchange Act reports is recorded,processed, summarized and reported within the time periods specified in the SEC’srules and forms and that such information is accumulated and communicatedto our management, including our Certifying Officers, as appropriate, to allowfor timely decisions regarding required disclosure.

 

**Inherent Limitations on Effectiveness of Controls**

 

Management is responsible for establishing and maintaining adequateinternal control over financial reporting to provide reasonable assuranceregarding the reliability of financial reporting and the preparation offinancial statements for external purposes in accordance with U.S. generallyaccepted accounting principles. Internal control over financial reportingincludes those policies and procedures that (i) pertain to the maintenanceof records that, in reasonable detail, accurately and fairly reflect thetransactions and dispositions of assets; (ii) provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financial statementsin accordance with U.S. generally accepted accounting principles, and thatreceipts and expenditures are being made only in accordance with authorizationsof the management and the Board; and (iii) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use ordisposition of Company assets that could have a material effect on thefinancial statements.

 

Management personnel, including the Certifying Officers, recognize thatour internal control over financial reporting cannot prevent or detect allerror and all fraud. A control system, no matter how well designed andoperated, can provide only reasonable, not absolute, assurance that the controlsystem’s objectives will be met. The design of a control system must reflectthe fact that there are resource constraints, and the benefits of controls mustbe considered relative to their costs. Further, because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that misstatements due to error or fraud will not occur orthat all control issues and instances of fraud, if any, have been detected. Thedesign of any system of controls is based in part on certain assumptions aboutthe likelihood of future events, and there can be no assurance that any designwill succeed in achieving its stated goals under all potential future conditions.

 

**Management’s report on internal control over financial reporting**

 

The following report is provided by management in respect of theCompany’s internal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934):

 

1.     The Company’s management isresponsible for establishing and maintaining adequate internal control overfinancial reporting.

 

2.     The Company’s managementhas used the Committee of Sponsoring Organizations of the Treadway Commission (COSO)framework to evaluate the effectiveness of internal control over financialreporting. Management believes that the COSO framework is a suitable frameworkfor its evaluation of financial reporting because it is free from bias, permitsreasonably consistent qualitative and quantitative measurements of the

 

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Company’s internal control over financial reporting, is sufficientlycomplete so that those relevant factors that would alter a conclusion about theeffectiveness of the Company’s internal control over financial reporting arenot omitted and is relevant to an evaluation of internal control over financialreporting.

 

3.     Management has assessed theeffectiveness of the Company’s internal control over financial reporting as of July 31,2009 and has concluded that such internal control over financial reporting waseffective. There were no material weaknesses in internal control over financialreporting identified by management.

 

4.     This annual report does notinclude an attestation report of the Company’s registered public accountingfirm regarding internal controls over financial reporting. Management’s reportwas not subject to attestation by the Company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the Company to provide only management’s report in this annualreport.

 

**Changes in Internal Control over Financial Reporting**

 

There were no changes in the Company’s internalcontrols over financial reporting during the Company’s most recently completedfiscal quarter that have materially affected, or are reasonably likely tomaterially affect, the Company’s internal control over financial reporting.

 

**ITEM 9B.  OTHER INFORMATION**

 

None.

 

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**PART III**

 

**ITEM10.  DIRECTORS, EXECUTIVE OFFICERS ANDCORPORATE GOVERNANCE**

 

**Boardof Directors**

 

The Board of Directors currently consists of elevenmembers. The Board may consist of a minimum of seven members and a maximum offifteen members. The Articles of Incorporation and Bylaws of the Companyrequire that at least five members of the Board of Directors be residents ofthe State of North Dakota and that at least three members be agriculturalproducers. The Board of Directors isdivided into three classes: Class I, Class II and Class III. Class I,Class II and Class III are to consist of an equal number ofdirectors, except that, if the Board of Directors consists of a number ofdirectors such that mathematically there cannot be an equal number of directorsin each of Class I, Class II and Class III, then the oneremaining director shall be made a member of Class I and, if there is morethan one remaining director, the first remaining director shall be made a memberof Class I and the second remaining director shall be made a member of Class II.  Each director in each of Class I, Class IIand Class III will hold office until the third regular meeting ofshareholders following the regular meeting of the shareholders at which suchdirector or such director’s predecessor was elected, until his successor shallhave been elected and shall qualify, or until he resigns or is removed.

 

The table below sets forth certain informationconcerning the directors of the Company. The directors have been elected toserve three-year terms expiring at the annual meeting in the calendar yearsindicated in the table below.

 
| **Name**                    | ** ** | **Age** | ** ** | **Term Expires** | ** ** | **Class** |
|-----------------------------|------------|---------|------------|------------------|------------|-----------|
|                        |       |    |       |             |       |      |
| John  S. Dalrymple III      |       | 61      |       | 2012             |       | I         |
| Allyn  K. Hart              |       | 70      |       | 2011             |       | III       |
| Roger  A. Kenner (1)        |       | 60      |       | 2010             |       | II        |
| James  F. Link              |       | 82      |       | 2012             |       | I         |
| Eugene  J. Nicholas         |       | 64      |       | 2010             |       | II        |
| John  D. Rice, Jr. (1) |       | 55      |       | 2012             |       | I         |
| Richard  Thompson           |       | 58      |       | 2010             |       | II        |
| Michael  T. Tokarz          |       | 59      |       | 2012             |       | I         |
| Jeffrey  O. Topp            |       | 50      |       | 2010             |       | II        |
| Curtis  R. Trulson          |       | 57      |       | 2011             |       | III       |
| Michael  E. Warner          |       | 59      |       | 2011             |       | III       |

 

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(1) Mr. Kennerand Mr. Rice are first cousins.

 

**John S. Dalrymple III.**  Mr. Dalrymplehas been Chairman of the Board of Directors of the Company since 1991. Hebecame Lieutenant Governor of North Dakota in 2000. Mr. Dalrymple had beena state representative since 1984 and served as Chairman of the HouseAppropriations Committee and of the Budget Section of the North DakotaHouse of Representatives. He previously served on the board of directors of theU.S. Durum Growers Association. He has been a farmer in the Casselton, NorthDakota area since 1971.

 

**Allyn K. Hart.**  Mr. Hart has been a director of theCompany since 1991. Mr. Hart has served on the board of directors ofCavalier County Job Development Authority and U.S. Durum Growers Association and presently serves on the board of MapleManor Care Center in Langdon, North Dakota. He has been a farmer in theCavalier 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. Linkhas been a director of the Company since 1991. Mr. Link has served on theboards of directors of Farm Credit and Minn-Dak Farmers Cooperative, including15 years as its chairman. He has been a farmer in the Wahpeton, North Dakotaarea since 1947.

 

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**Eugene J. Nicholas.**  Mr. Nicholashas been a director of the Company since 1991. Mr. Nicholas had been a state representative and served as chairmanof the North Dakota House of Representatives Agriculture Committee. Mr. Nicholasalso serves on the board of directors of Country Bank USA, Cando, North Dakota,and the board 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. Riceis the Vice Chairman of the Board of Directors and has been a director of theCompany since 1991. He also served on the boards of directors of the NationalPasta Association and U.S. Durum Growers Association. He has been a farmer inthe Maddock, North Dakota area since 1968.

 

**Richard Thompson**.  Mr. Thompson has been adirector of the Company since May 2007. Mr. Thompson is theco-founder and has been a managing member and chief executive officer of GO7Brands, LLC since May 2006.  He startedAmerican Italian Pasta Company (AIPC) in 1986 and grew it into the largestpasta manufacturing and durum milling company in North America. He has madenumerous appearances in the national media including speaking engagements onentrepreneurial, 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 was 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. Tokarz has been adirector of the Company since 2004.  Mr. Tokarzis the Chairman of MVC Capital, a registered investment company traded on theNew York Stock Exchange (Ticker: MVC) that makes equity and debt investments.In addition, Mr. Tokarz is the Managing Member of The Tokarz Group, whichmanages Mr. Tokarz’s personal investments. From 1985 to 2002, Mr. Tokarzwas a senior General Partner and Administrative Partner at Kohlberg KravisRoberts & Co., a private equity firm specializing in managementbuyouts. Prior to joining KKR, Mr. Tokarz was with Continental IllinoisNational Bank and Trust Company of Chicago, joining the firm in 1973. He servesor has served on the Board of Directors of numerous companies, including:Conseco, Inc., Walter Industries, Inc., Mueller Water Products, Inc.,Safeway, Inc., IDEX Corporation, PRIMEDIA, Inc., Neway AnchorlokInternational, Inc., Flagstar Corporation, ConAgra Food Corporation, KSLRecreation Corporation, RJR Nabisco Corp, Evenflo & Spalding HoldingsCorporation, Beatrice Foods Corporation, Nexstar Financial Corporation, ApertioLimited (UK), United Fixtures Company, Stonewater Controls, Lomonosov Porcelain(Russia), Kamaz A.O. (Russia). Mr. Tokarz also serves on the Board of theUniversity of Illinois Foundation and its Investment Committee and as Chairmanof its Budget and Finance Committee.  Heis a member of the Board of Managers of Illinois Ventures and Chairman ofIllinois Emerging Technology Fund, both affiliated with the University ofIllinois.

 

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

 

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

 

**Michael E. Warner.**  Mr. Warnerhas been a director of the Company since 1992. Mr. Warner has been afarmer in the Hillsboro, North Dakota area since 1967. He also currently serveson the boards of directors of Warner Equipment Co. and Agriceutical ResourcesLLC. In 2002, Mr. Warner was awarded a fellowship by the University ofMissouri. He served on the board of directors of American Crystal Sugar Companyfrom 1989 through 1996, as part of a 23-year career of service to the sugarindustry. He is a past member of the board of 

 

59

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trustees of Meritcare Health Systems of Fargo, NorthDakota, the largest hospital/multiple clinic system between Minneapolis,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 Investor Relations 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*. TheNomination Committee operates under a written charter and is charged with theresponsibilities of nominating and evaluating Board member candidates andestablishing criteria for nomination, developing and recommending governanceguidelines and reviewing them periodically, facilitating annual evaluations ofthe performance of the Board and its members, reviewing the structure andmembership of the Company’s Board and committees, and reviewing Boardcompensation policies.  Additionally, theNomination Committee, in consultation with the Compensation Committee,facilitates development of the mission and objectives of the Chief ExecutiveOfficer, succession for the Chief Executive Officer and annual evaluation ofthe performance of the Chief Executive Officer.

 

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The Company’s bylaws require that the NominationCommittee be comprised of the Chairman of the Board, the Vice-Chairman and theChief Executive Officer, except that if one individual holds two of thedesignated offices, the Board of Directors shall appoint a third member to theNomination committee, who need not be a director of the Company. Additionally,as required by its charter, the Nomination Committee is composed of a majorityof independent directors. The current members of the Nomination Committee are Messrs. JohnS. Dalrymple III (Chair), John D. Rice, Jr. and Timothy J. Dodd. The Boardof Directors has determined that Messrs. Dalrymple and Rice areindependent directors.

 

*Policy Committee.* The Policy Committee operates pursuant to awritten Policy Committee Charter. The Policy Committee is to provide oversightof the Company’s governance obligations to assure compliance with allapplicable laws, regulations, Articles of Incorporation and By-laws by adoptionand periodic review of a governance policy. The members of the Policy Committeeare Allyn K. Hart (Chair), Curtis R. Trulson and James F. Link. Each member ofthe committee is a non-employee director and the Board of Directors has determinedthat there are no relationships that would interfere with a Policy Committeemember’s exercise of independent judgment in carrying out his responsibilitiesas a member of the policy committee.

 

**Executive Officers**

 

The table below lists the executive officers of theCompany. Officers are elected annually by the Board of Directors.

 
| **Name**        | ** ** | **Age** | ** ** | **Position**                           |
|-----------------|------------|---------|------------|----------------------------------------|
|            |       |    |       |                                   |
| Timothy J. Dodd |       | 54      |       | President and Chief  Executive Officer |
| Edward O. Irion |       | 38      |       | Chief Financial Officer                |

 

**Timothy J. Dodd.** Mr. Doddis the President and Chief Executive Officer of the Company. Prior to joiningthe Company in December 1991, he had been the Vice President ofManufacturing for American Italian Pasta Company since 1988. Previously, Mr. Doddparticipated in the construction and management of two other grain processingfacilities, one in Texas and one in Cando, North Dakota. Mr. Dodd serveson the board of directors of Country 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 Conduct applicableto all employees. A Code of Ethics certification for senior financial officers,including the principal executive officer, principal financial officer andprincipal accounting officer, is included within the Code of Conduct.

 

A copy of the Code of Conduct is available under the“Investor Relations” 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 andpractices relating to executive compensation and presents a review and analysisof the compensation earned during the fiscal year ended July 31, 2009 byour Chief Executive Officer and our Chief Financial Officer to whom we refercollectively as the “named executive officers.”

 

**Compensation Philosophy andObjectives**

 

The Company’s compensationpolicies with respect to its executive officers, established by theCompensation Committee, are based on the principles that compensation should,to a significant extent, reflect the financial performance of the Company andthe individual contribution of the executives to this financial performance. Itis the policy of the committee to set executive compensation at levels that aresufficiently competitive with food processing companies of comparable size toattract, retain and motivate the highest quality individuals to contribute tothe Company’s goals, objectives and overall financial success.  A portion of certain executives’ incentivecompensation has historically been paid in stock options in order to alignexecutive and stockholder interests.

 

**The Role of the Compensation Committee**

 

The Compensation Committee operates under a writtencharter and reviews and approves the compensation and other terms of employmentof the Company’s Chief Executive Officer and other senior management of theCompany. Among its other duties, the Compensation Committee is responsible foroverseeing the Company’s stock-based compensation plans for executive officersand, in consultation with the Nomination Committee, making recommendations onsuccession plans for the Chief Executive Officer. The Compensation Committee isto annually review the Chief Executive Officer’s compensation and evaluate theChief Executive Officer’s performance.

 

**Total Compensation for ExecutiveOfficers**

 

*BaseSalary*.  The base salary of each of ournamed executive officers is reviewed by the committee as part of the overallannual review of executive compensation. The Compensation Committee sets executive compensation by subjectiveevaluation of the individual performance of each executive and by marketplacecompensation of comparable executives, although salary determinations are notbased upon any specific or constant criteria.

 

*AnnualIncentive Bonus*.  Executivesare eligible for annual incentive cash bonuses based on individual and Companyperformance.  As no formal criteria haveyet been established, these calculations are determined on a subjectivebasis.  These awards are not intended tobe in addition 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 Incentive Compensation. *The stock option componentof the executive officers’ compensation has been designed to provide executiveswith incentives for the enhancement of stockholder value.  Options are granted at fair market value onthe date of grant and generally vest over a number of years.  No constant criteria are used year after yearin the granting of stock options.  Forstock option awards for executive officers, the Compensation Committee makes asubjective determination of the effectiveness of the executive and the extentof the executive’s contributions to the Company’s success and, based on thatdetermination, option grants, if any, are awarded to each executive.  Because the options are granted with exerciseprices equal to the fair market value of the underlying Common Stock on thedate of grant, any value that ultimately accrues to the 

 

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executiveis based entirely upon the Company’s performance as perceived by investors whoestablish 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 Insider Participation**

 

The members of the Compensation Committee are JohnS. 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 2009 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.

 

CompensationCommittee:

 

JohnS. Dalrymple III

CurtisR. Trulson

MichaelE. 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, 2009, 2008 and2007.

 

**Summary Compensation Table**

 
| ** **               | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** **     | ** ** | **All**              | ** ** | ** ** | ** ** |
|--------------------------|------------|------------|------------|------------|------------|------------|------------|----------------|------------|----------------------|------------|------------|------------|
| **Name and**             | ** ** | **Fiscal** | ** ** | ** ** | ** ** | ** ** | ** ** | **Option**     | ** ** | **Other**            | ** ** | ** ** | ** ** |
| **Principal Position**   | ** ** | **Year**   | ** ** | **Salary** | ** ** | **Bonus**  | ** ** | **Awards (1)** | ** ** | **Compensation (2)** | ** ** | **Total**  | ** ** |
|                     |       |       |       |       |       |       |       |           |       |                 |       |       |       |
| Timothy  J. Dodd         |       | 2009       |       | $          | 357,151    |       | $          | 224,298        |       | $                    | 26,728     |       | $          | 12,088 |   | $ | 620,265 |   |
| President  and Chief     |       | 2008       |       | $          | 316,318    |       | $          | 149,532        |       | $                    | 38,710     |       | $          | 21,983 |   | $ | 526,543 |   |
| Executive  Officer       |       | 2007       |       | $          | 247,889    |       | $          | 55,300         |       | $                    | 50,803     |       | $          | 11,628 |   | $ | 365,620 |   |
|                     |       |       |       |       |       |       |       |           |       |                 |       |       |       |
| Edward  O. Irion         |       | 2009       |       | $          | 229,820    |       | $          | 123,521        |       | $                    | 15,283     |       | $          | 15,399 |   | $ | 384,023 |   |
| Chief  Financial Officer |       | 2008       |       | $          | 205,868    |       | $          | 96,200         |       | $                    | 20,724     |       | $          | 15,200 |   | $ | 337,992 |   |
|                     |       | 2007       |       | $          | 192,544    |       | $          | 37,000         |       | $                    | 26,718     |       | $          | 13,802 |   | $ | 270,064 |   |

 

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(1)          The awards shown in thiscolumn include stock options granted under our 2003 Stock Option Plan. Theamounts are based on the compensation expense recognized for the award pursuantto Statement of Financial Accounting Standards No. 123R. See Note 13to the consolidated financial statements for a discussion of the relevantassumptions used in calculating grant date fair value pursuant toFAS 123R.

 

(2)          Includes the Company’s 401(k) matchingcontribution, excess life insurance, the taxable portion of reimbursablebusiness expenses and the taxable portion of other benefits.

 

**OutstandingEquity Awards at July 31, 2009**

 

Thefollowing table summarizes stock options held for Series C ConvertiblePreferred Stock at the end of fiscal year 2009.

 
| ** **      | ** ** | **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. Doddhas been granted options that are currently exercisable or exercisable within60 days of July 31, 2009, topurchase 1,977 shares of the Company’s Series C Convertible PreferredStock. Each share of Series C Preferred Stock is convertible into 24shares of Common Stock and 24 shares of Series D Delivery Preferred Stockof the Company.

 

64

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Thefollowing table summarizes stock options held for Common Stock at the end offiscal year 2009.

 
|            |       | **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 |   |
|            |       | 35,392             |       | — |   | 4.00 |   | 12/22/2015 |   |
|            |       | 47,064             |       | 15,688 | (1) | 5.00 |   | 10/19/2016 |   |
|            |       |               |       |   |   |   |   |   |   |
| Edward O. Irion |       | 7,723              |       | — |   | $ | 4.25 |   | 2/1/2014 |   |
|            |       | 10,816             |       | — |   | 4.00 |   | 12/22/2015 |   |
|            |       | 29,522             |       | 9,840 | (1) | 5.00 |   | 10/19/2016 |   |

 

----

(1)          Subject to certain qualifications, including but notlimited to, the continued employment of the optionee, options will vest on October 19,2009.

 

**EmploymentAgreements**

 

The Company does not have any employment agreements in place at thecurrent 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 management employeesof the Company to receive options and the number of shares to be optioned toeach of the employees. Options granted under the Plan are for the purchase of Series CConvertible Preferred Stock at fair market value and are convertible intoCommon Stock and Series D Delivery Preferred Stock at the option of theemployee, under the applicable conversion ratio. The maximum number ofpreferred shares that may be issued pursuant to options granted under the Planis 15,000, all of which have been issued. 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 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 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 

 

65

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January 11, 2003.  The 2003Plan covers 500,000 shares of the Company’s Common Stock. Participation in thisPlan shall be limited to officers, directors, employees, vendors or consultantsof the Company or any subsidiary of the Company. Options granted under the 2003Plan may be incentive stock options (as defined under Section 422 of theCode) 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.

 

**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**

 

Thetable below summarizes the compensation paid by the Company to non-employeeDirectors during the fiscal year ended July 31, 2009.

 
| ** **             | ** ** | **Fees earned** | ** ** | **All**          | ** ** | ** ** | ** ** |
|------------------------|------------|-----------------|------------|------------------|------------|------------|------------|
| ** **             | ** ** | **or paid**     | ** ** | **Other**        | ** ** | ** ** | ** ** |
| **Name**               | ** ** | **in cash (1)** | ** ** | **Compensation** | ** ** | **Total**  | ** ** |
|                   |       |            |       |             |       |       |       |
| John S. Dalrymple III  |       | $               | 61,800     |             | $          | —     |       | $ | 61,800 |   |
| Allyn K. Hart          |       | 45,300          |       | —           |       | 45,300     |       |
| Roger A. Kenner        |       | 45,000          |       | —           |       | 45,000     |       |
| James F. Link          |       | 50,550          |       | —           |       | 50,550     |       |
| Eugene J. Nicholas     |       | 46,300          |       | —           |       | 46,300     |       |
| John D. Rice, Jr. |       | 46,300          |       | —           |       | 46,300     |       |
| Richard Thompson       |       | 42,400          |       | —           |       | 42,400     |       |
| Michael T. Tokarz (2)  |       | 42,700          |       | 75,000           |       | 117,700    |       |
| Jeffrey O. Topp        |       | 46,300          |       | —           |       | 46,300     |       |
| Curtis R. Trulson      |       | 58,680          |       | —           |       | 58,680     |       |
| Michael E. Warner      |       | 47,900          |       | —           |       | 47,900     |       |
|                        |            |                 |            |                  |            |            |            |  |  |  |

 

----

(1)                                  This column represents annual directorfees, committee chairman fees and meeting attendance fees earned in fiscal year2009. 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.

 

Effective October 2008,the Company provided its directors with compensation consisting of (i) aper diem payment of $1,300 (except for the Chairman of the Board and Chairmanof the Audit Committee who will each receive $1,560 per day) for any day onwhich a director 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 

 

66

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Board and Chairman of the Audit Committee who will eachreceive $3,120 per month), and (iii) reimbursement for out-of-pocket expensesincurred on behalf of the Company.

 

**ITEM 12.  SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

The following tablefurnishes information as to the beneficial ownership of the Company’s CommonStock, Series C Convertible Preferred Stock, Series D DeliveryPreferred 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.

 

The address of each personlisted below is c/o Dakota Growers Pasta Company, Inc., One Pasta Avenue,Carrington, North Dakota 58421. Except as otherwise noted, each person listedbelow has sole investment discretion and voting power. In accordance with theSecurities and Exchange Commission’s rules, in computing the number of sharesbeneficially owned by a person and the percentage ownership of that person,securities subject to options held by that person that are currentlyexercisable or exercisable within 60 days of July 31, 2009 are treated asoutstanding. These shares, however, are not treated as outstanding for thepurpose of computing the percentage ownership of any other person.

 
| ** **                                               | ** ** | **Beneficially  Owned Securities** | ** ** |
|----------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                               | ** ** | **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)                                     |       | 338,908                            |       | 3.2 |   | 1,977 |   | 100 | % | 238,248 |   | 2.1 |   | — |   | — |   |
|                                                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Edward  O. Irion (9)                                     |       | 48,061                             |       | 0.5 |   | — |   | — |   | — |   | — |   | — |   | — |   |
|                                                     |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 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) |       | 3,257,225                          |       | 30.8 | % | 1,977 |   | 100 | % | 1,232,157 |   | 10.9 | % | 1,065,000 |   | 100 | % |

 

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| (1) |   | Includes 23,415 shares of Common Stock and  36,000 shares of Series D Delivery Preferred Stock held in the name of  Mr. Dalrymple’s spouse and 111,121 shares of Common Stock and 171,000  shares of Series D Delivery Preferred Stock held in the name of the John  S. Dalrymple III Trust, of which Mr. Dalrymple is a trustee.                                                                                                                                                                                    |
|-----|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2) |   | Includes 54,798 shares of Common Stock and  70,000 shares of Series D Delivery Preferred Stock held in the name of  Mr. Kenner’s spouse.                                                                                                                                                                                                                                                                                                                                                                                       |
| (3) |   | Includes 48,052 shares of  Common Stock and 53,050 shares of Series D Delivery Preferred Stock held  in the name of Link Sugar Beet Farms Limited Partnership, of which Link Farms  LLP is the general partner. Mr. Link has been granted a proxy to vote  all common stock of the Company held by Link Sugar Beet Farms Limited  Partnership. Mr. Link is also the sole holder of the class of limited  partnership interests of Link Sugar Beet Farms relating to the Company’s  common stock and under the partnership |

 

67

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|   |   | agreement, the approval of the reporting person is required with  respect to certain dispositions of the Company’s common stock by Link Sugar  Beet Farms Limited Partnership. Mr. Link disclaims beneficial ownership  to the extent his interest in Link Sugar Beet Farms Limited Partnership does  not constitute a pecuniary interest.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (4)    |   | Includes 26,548 shares of Common Stock and  23,850 shares of Series D Delivery Preferred Stock held in the name of  Mr. Nicholas’ spouse.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (5)    |   | Includes 15,298 shares of Common Stock and  13,750 shares of Series D Delivery Preferred Stock held in the name of  John Rice Farm.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (6)    |   | Includes 120,000 shares of Common Stock and  129,000 shares of Series D Delivery Preferred Stock held in the name of  T-T Ranch and 11,482 shares of Common Stock and 16,125 shares of  Series D Delivery Preferred Stock held in the name of Mr. Topp’s  spouse and children.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| (7)    |   | Includes 2,203 shares of Common Stock and 6,750  shares of Series D Delivery Preferred Stock held in the name of Trulson  Brothers.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| (8)    |   | Mr. Dodd has been granted options that are  currently exercisable or exercisable within 60 days of July 31, 2009, to purchase 1,977 shares of the Company’s  Series C Convertible Preferred Stock and 286,767 shares of the Company’s  Common Stock. Each share of Series C Preferred Stock is convertible into  24 shares of Common Stock and 24 shares of Series D Delivery Preferred  Stock of the Company. The number of shares of Common Stock presented for  Mr. Dodd includes 47,448 shares of Common Stock issuable upon exercise  of the options to purchase Series C Preferred Stock of the Company and  conversion of each such share of Series C Preferred Stock into 24 shares  of Common Stock in the Company. The number of shares of Series D Delivery  Preferred Stock presented for Mr. Dodd includes 47,448 of Series D  Delivery Preferred Stock issuable upon exercise of the options to purchase  Series C Preferred Stock of the Company and conversion of each such  share of Series C Preferred Stock into 24 shares of Common Stock in the  Company, with one share of Series D Delivery Preferred Stock issuable  for each share of Common Stock so issued upon conversion. The number of  shares of Common Stock presented for Mr. Dodd includes 286,767 shares of  Common Stock issuable upon exercise of the options to purchase Common Stock. |
| (9)    |   | Mr. Irion has been granted options that  are currently exercisable or exercisable within 60 days of July 31,  2009. The number of shares presented for Mr. Irion relate to Common  Stock shares issuable upon the exercise of the options to purchase Common  Stock.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| (10)   |   | Includes 1,016,195 shares of Common Stock and 1,065,000 Series F  Convertible Preferred Stock held by MVC Capital, Inc. Mr. Tokarz is  listed as a beneficial owner as he is a stockholder and Chairman of MVC  Capital, Inc. Mr. Tokarz shares voting and dispositive control over  all shares held by MVC Capital, Inc. Mr. Tokarz disclaims any  beneficial ownership of the Company’s securities for purposes of  Section 16(a) under the Securities Exchange Act of 1934, as  amended, or otherwise, except to the extent of Mr. Tokarz’s pecuniary  interests therein. (The holder of Series F Convertible Preferred Stock  has the right, exercisable at any time upon sixty-five (65) days’ written  notice to the Company, to convert any number of the holder’s shares of  Series F Convertible Preferred Stock into an equal number of shares of  the Company’s Common Stock.)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| (11)   |   | Includes 1,000,000 shares of Common Stock held by La Bella Holdings  LLC (“LBH”) of which Mr. Thompson is the Chief Executive Officer and is  a member of the board of managers. Mr. Thompson shares voting and  dispositive control over all shares held by La Bella Holdings LLC.  Mr. Thompson disclaims any beneficial ownership of the Company’s  securities for purposes of Section 16(a) under the Securities  Exchange Act of 1934, as amended, or otherwise, except to the extent of  Mr. Thompson’s pecuniary interests therein.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| (12)   |   | Includes  334,828 shares of Common Stock and 1,977 shares of Series C Convertible  Preferred Stock issuable upon exercise of options exercisable within 60 days  of July 31, 2009, and includes an additional 47,448 shares of Common  Stock and 47,448 shares of Series D Delivery Preferred Stock issuable  upon conversion of the Series C Preferred Stock underlying such options.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |

 

68

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**Equity Compensation Plan Information**

 

See “Item 11. ExecutiveCompensation” for a discussion of the material features of the Company’s StockOption Plans. The following table provides information regarding the Company’sequity compensation plans as of July 31, 2009.

 
| ** **                                              | ** ** | ** **                                                             | ** ** | ** **            | ** ** | **Number of Securities** | ** ** |
|---------------------------------------------------------|------------|------------------------------------------------------------------------|------------|-----------------------|------------|--------------------------|------------|
| ** **                                              | ** ** | **Number of Securities**                                               | ** ** | **Weighted-Average**  | ** ** | **Remaining Available**  | ** ** |
| ** **                                              | ** ** | **to be Issued**                                                       | ** ** | **Exercise Price of** | ** ** | **for Future Issuance**  | ** ** |
| ** **                                              | ** ** | **Upon Exercise of**                                                   | ** ** | **Outstanding**       | ** ** | **Under Equity**         | ** ** |
| **Plan Category**                                       | ** ** | **Outstanding Options**                                                | ** ** | **Options**           | ** ** | **Compensation Plans**   | ** ** |
| ** **                                              | ** ** | **Options  to purchase Series C Convertible Preferred Stock (1)** | ** ** |
| Equity  compensation plans approved by security holders |       | 1,977                                                                  |       | $                     | 117.35     |                     | —     | ** ** |
|                                                         |            |                                                                        |            |                       |            |                          |            |  |

 
| ** **                                                  | ** ** | **Options  to purchase Common Stock** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|
| Equity  compensation plans approved by security holders     |       | 451,563                               |       | $ | 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 CConvertible Preferred Stock is convertible into 24 shares of Common Stock and24 shares of Series D Delivery Preferred Stock of the Company.

 

**ITEM 13.  CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE**

 

**Independent Directors**

 

Although none of the Company’s securities are listed on any stockexchange or system of dealer quotation, the Company’s Board of Directorsfollows the rules of the Securities and Exchange Commission and the NasdaqStock Market in determining independence for the Board of Directors and theCommittees. Under the Nasdaq listing standards, at least a majority of theCompany’s directors must meet the test of “independence” as defined by Nasdaq.The Nasdaq standards provide that, to qualify as an “independent” director, inaddition to satisfying certain bright-line criteria, the Board of Directorsmust affirmatively determine that a director has no relationship which wouldinterfere with the exercise of independent judgment in carrying out theresponsibilities of a director. The Board of Directors has determined that eachcurrent director, other than Mr. Tokarz and Mr. Topp, is “independent”as defined by the listing standards of the Nasdaq.

 

JeffreyTopp, a director of the Company, sold wheat to the Company through anaffiliated entity in fiscal year 2009.  Those sales totaled $554,000 atcurrent market prices and the Company had a commitment to purchase wheattotaling $187,500 from Mr. Topp and/or his affiliated entity as of July 31,2009.

 

The Company has a Conflict of Interest policy which defines areas wherethe directors should avoid conflicts of interest or any appearance of aconflict of interest, so that the affairs of the Company will be carried out inan ethical manner. Pursuant to the policy, all directors are to fully discloseto the Company any proposed transaction that may give rise to a conflict ofinterest before it is consummated. The Board of Directors shall determinewhether a conflict of interest exists and whether a proposed transaction may beapproved.

 

See Item 10 — Directors, Executive Officers and Corporate Governancefor the discussion of director independence.

 

69

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**ITEM 14.  PRINCIPAL ACCOUNTINGFEES AND SERVICES**

 

The following tablerepresents aggregate fees billed (in thousands) to the Company for fiscal yearsended July 31, 2009 and 2008 by Eide Bailly LLP, the Company’s principalaccounting firm.

 
| ** **             | ** ** | **Fiscal Year Ended** | ** ** |
|------------------------|------------|-----------------------|------------|
| ** **             | ** ** | **2009**              | ** ** | **2008** | ** ** |
|                   |       |                  |       |   |   |
| Audit Fees             |       | $                     | 70         |   | $ | 77 |   |
| Audit-Related Fees (a) |       | 9                     |       | 8 |   |
| Tax Fees (b)           |       | 12                    |       | 11 |   |
| All Other Fees         |       | —                |       | — |   |
|                   |       |                  |       |   |   |
| Total Fees (c)         |       | $                     | 91         |   | $ | 96 |   |

 

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(a)   Primarily benefit plan audit services.

 

(b)   Primarily tax advisory and preparationservices.

 

(c)   The Audit Committee has approved all fees.

 

**Auditor Services Pre-approval Policy**

 

The Audit Committee has aformal policy concerning pre-approval of all services to be provided by EideBailly LLP, the Company’s independent auditor, including audit, audit-related,tax and other services. The Chair of the Committee has the authority topre-approve permitted services that require action between regular Committeemeetings, provided a report of these services is given to the full Committee atthe next regular meeting. The Committee approved all services provided by EideBailly LLP during fiscal year 2009.

 

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**PART IV**

 

**ITEM 15.  EXHIBITS, FINANCIALSTATEMENT SCHEDULES.**

 

(a)   The following are filed aspart of this report:

 

**1.  FinancialStatements**

 

Report of Independent Registered Public AccountingFirm

 

Consolidated Balance Sheets as of July 31, 2009and 2008

 

Consolidated Statements of Operations for the yearsended July 31, 2009, 2008 and 2007

 

Consolidated Statements of Changes in Stockholders’Equity for the years ended July 31, 2009, 2008 and 2007

 

Consolidated Statements of Cash Flows for the yearsended July 31, 2009, 2008 and 2007

 

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 RestatedPlan of Merger between Dakota Growers Pasta Company and Dakota Growers PastaRestructuring Cooperative. (Incorporated by reference to Exhibit 2.1 fromthe Company’s Pre-Effective Amendment No. 2 to Form S-4 RegistrationStatement, File No. 333-81946, dated April 19, 2002).

 

2.2           Second Amended and RestatedMerger Agreement between Dakota Growers Pasta Restructuring Cooperative andDakota Growers Corporation. (Incorporated by reference to Exhibit 2.2 fromthe Company’s Pre-Effective Amendment No. 2 to Form S-4 RegistrationStatement, File No. 333-81946, dated April 19, 2002).

 

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

 

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

 

3.1           Second Amended and RestatedArticles of Incorporation of the Company, formerly Dakota Growers RestructuringCompany, Inc. (Incorporated by reference to Exhibit 3.1 from theCompany’s Pre-Effective Amendment No. 2 to Form S-4 RegistrationStatement, File No. 333-81946, dated April 19, 2002).

 

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3.2           Second Amended and RestatedBylaws of the Company, formerly Dakota Growers Restructuring Company, Inc.(Incorporated by reference to Exhibit 3.3 from the Company’s Pre-EffectiveAmendment No. 2 to Form S-4 Registration Statement, File No. 333-81946,dated April 19, 2002).

 

3.3           Certificate of Designationof Series E Junior Participating Preferred Stock of the Company, formerlyDakota Growers Restructuring Company, Inc. (Incorporated by reference to Exhibit 3.2from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration Statement, File No. 333-81946, dated April 19, 2002).

 

3.4           Certificate of Designationof Series F Convertible Preferred Stock of the Company (Incorporated by referenceto Exhibit 3.1 from the Company’s Report on Form 8-K, File No. 000-50111,filed February 15, 2007).

 

4.1           Note Purchase Agreementdated July 15, 1998. (Incorporated by reference to Exhibit 4.1 fromDakota Growers Pasta Company’s Amendment No. 1 to Form S-1Registration Statement on Form S-1/A, File No. 333-65071, declaredeffective October 21, 1998).

 

4.2           Waiver and First Amendmentto Note Purchase Agreements dated November 28, 2000. (Incorporated byreference to Exhibit 4.1 from Dakota Growers Pasta Company’s QuarterlyReport on Form 10-Q, File No. 33-99834, for the quarter ended October 31,2000).

 

4.3           Waiver and Second Amendmentto Note Purchase Agreement and Notes dated June 1, 2001. (Incorporated byreference to Exhibit 4.3 from Dakota Growers Pasta Company’s Annual Reporton 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 PastaCompany’s Quarterly Report on Form 10-Q, File No. 33-99834, for thequarter ended April 30, 1998).

 

10.2         Master Lease Agreement datedMarch 6, 2002 and related Schedule A dated March 29, 2002 betweenDakota Growers Pasta Company and Farm Credit Leasing Services Corporation.(Incorporated by reference to Exhibit 10.2 from the Company’sPre-Effective Amendment No. 2 to Form S-4 Registration Statement,File No. 333-81946, dated April 19, 2002).

 

10.3         Amended and Restated ShareRights Agreement, dated as of April 19, 2002, by and among the Company,formerly Dakota Growers Restructuring Company, Inc., and Wells Fargo BankMinnesota, National Association, as Rights Agent. (Incorporated by reference toExhibit 10.1 from the Company’s Pre-Effective Amendment No. 2 to Form S-4Registration 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 fromthe Company’s Annual Report on Form 10-K, File No. 000-50111, for theyear ended July 31, 2003).

 

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

 

10.6         Stock Purchase Agreementdated 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).

 

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10.7         Registration RightsAgreement dated July 30, 2004 between the Company and MVC Capital, Inc.(Incorporated by reference to Exhibit 99.3 from the Company’s Report on 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 byreference to Exhibit 99.4 from the Company’s Report on Form 8-K, FileNo. 000-50111, filed August 6, 2004).

 

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

 

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

 

10.11       Statused Revolving CreditSupplement entered into on January 13, 2009 between the Company andCoBank, ACB.  (Incorporated by referenceto Exhibit 10.1 from the Company’s Report on Form 8-K, File No. 000-50111,filed January 16, 2009).

 

10.12       Non-Revolving CreditSupplement entered into on January 13, 2009 between the Company andCoBank, ACB.  (Incorporated by referenceto Exhibit 10.2 from the Company’s Report on Form 8-K, File No. 000-50111,filed January 16, 2009).

 

10.13       Multiple Advance Term LoanSupplement, Loan No. RIE539T07A entered into on January 13, 2009between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.3 from the Company’sReport on Form 8-K, File No. 000-50111, filed January 16, 2009).

 

10.14       Continuing GuaranteeAgreement dated May 23, 2005 between Primo Piatto, Inc., awholly-owned subsidiary of the Company, and CoBank, ACB.  (Incorporated by reference to Exhibit 10.5from 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 byreference to Exhibit 10.6 from the Company’s Report on Form 8-K, FileNo. 000-50111, filed July 7, 2005).

 

10.16       Multiple Advance Term LoanSupplement, Loan No. RIE539T06B entered into on January 13, 2009between the Company and CoBank, ACB. (Incorporated by reference to Exhibit 10.4 from the Company’sReport on Form 8-K, File No. 000-50111, January 16, 2009).

 

10.17       Stock Purchase Agreementdated February 9, 2007 between the Company and MVC Capital, Inc. and LaBella Holdings, LLC. (Incorporated by reference to Exhibit 10.1 from theCompany’s Report on Form 8-K, File No. 000-50111, filed February 15,2007).

 

10.18       Amendment to the Master LoanAgreement dated February 14, 2007 between CoBank, ACB and the Company.  (Incorporated by reference to Exhibit 10.4from the Company’s Report on Form 8-K, File No. 000-50111, filed February 15,2007).

 

10.19       Amendment to the Master LoanAgreement dated April 25, 2007 between CoBank, ACB and the Company.  (Incorporated by reference to Exhibit 10.2from the Company’s Report on Form 8-K, File No. 000-50111, filed May 1,2007).

 

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10.20       Extended Term Schedule Adated March 30, 2007 of the Master Lease Agreement dated March 6, 2002between the Company and Farm Credit Leasing Services Corporation. (Incorporatedby 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 Agreementdated September 21, 2007 between the Company, TechCom Group, LLC, BuhlerInc. and B-New, LLC. (Incorporated by reference to Exhibit 10.1 from theCompany’s Report on form 8-K, File No. 000-50111, filed September 27,2007).

 

10.22       Continuing GuaranteeAgreement dated January 29, 2008 between DNA Dreamfields Company, LLC, awholly-owned subsidiary of the Company, and CoBank, ACB.  (Incorporated by reference to Exhibit 10.4from 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 10.5from the Company’s Report on      Form 8-K,File No. 000-50111, filed February 1, 2008).

 

10.24       Amendment to the Master LoanAgreement dated January 22, 2008 between CoBank, ACB and the Company.  (Incorporated by reference to Exhibit 10.1from the Company’s Report on Form 8-K, File No. 000-50111, filed February 1,2008).

 

21            Subsidiaries of theregistrant.

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

 

23            Consent ofIndependent Registered Public Accounting Firm; Eide Bailly LLP.

 

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

 

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

 

32.1         Certification of ChiefExecutive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002, 18 U.S.C. Section 1350.

 

32.2         Certification of ChiefFinancial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of2002, 18 U.S.C. Section 1350.

 

74

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**SIGNATURES**

 

Pursuant to the requirements of Section 13 or15(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, 2009          |

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, this report has been signed below by the followingpersons on behalf of the registrant and in the capacities and on the datesindicated.

 
| **Signature**              | ** ** | **Title**                                    | ** ** | **Date**              |
|----------------------------|------------|----------------------------------------------|------------|-----------------------|
|                       |       |                                         |       |                  |
|                       |       |                                         |       |                  |
| /s/ Timothy J. Dodd        |       |                                         |       |                  |
|                       |       | President and Chief Executive Officer        |       |                  |
| Timothy J. Dodd            |       | (Principal Executive Officer)                |       | October 29, 2009 |
|                       |       |                                         |       |                  |
|                       |       |                                         |       |                  |
| /s/ Edward O. Irion        |       |                                         |       |                  |
|                       |       | Chief Financial Officer                      |       |                  |
| Edward O. Irion            |       | (Principal Financial and Accounting Officer) |       | October 29, 2009 |
|                       |       |                                         |       |                  |
|                       |       |                                         |       |                  |
| /s/ John S. Dalrymple III  |       |                                         |       |                  |
|                       |       |                                         |       |                  |
| John S. Dalrymple III      |       | Director                                     |       | October 29, 2009 |
|                       |       |                                         |       |                  |
|                       |       |                                         |       |                  |
| /s/ John D. Rice, Jr. |       |                                         |       |                  |
|                       |       |                                         |       |                  |
| John D. Rice, Jr.     |       | Director                                     |       | October 29, 2009 |

 

75

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**SIGNATURES - continued**

 
| **Signature**          | ** ** | **Title** |   | **Date**              |
|------------------------|------------|-----------|--------|-----------------------|
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ Curtis R. Trulson  |       |      |   |                  |
|                   |       |      |   |                  |
| Curtis R. Trulson      |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ Allyn K. Hart      |       |      |   |                  |
|                   |       |      |   |                  |
| Allyn K. Hart          |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ Roger A. Kenner    |       |      |   |                  |
|                   |       |      |   |                  |
| Roger A. Kenner        |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ James F. Link      |       |      |   |                  |
|                   |       |      |   |                  |
| James F. Link          |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ Eugene J. Nicholas |       |      |   |                  |
|                   |       |      |   |                  |
| Eugene J. Nicholas     |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ Richard Thompson   |       |      |   |                  |
|                   |       |      |   |                  |
| Richard Thompson       |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ Michael T. Tokarz  |       |      |   |                  |
|                   |       |      |   |                  |
| Michael T. Tokarz      |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
| /s/ Jeffrey O. Topp    |       |      |   |                  |
|                   |       |      |   |                  |
| Jeffrey O. Topp        |       | Director  |   | October 29, 2009 |
|                   |       |      |   |                  |
|                   |       |      |   |                  |
| /s/ Michael E. Warner  |       |      |   |                  |
|                   |       |      |   |                  |
| Michael E. Warner      |       | Director  |   | October 29, 2009 |

 

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