Debt-for-equity swap depended on meeting profit, supply goals


Capital Press

The Diamond Foods snack company expects to fall short of its walnut purchase targets under a credit agreement, potentially triggering a higher debt load for the company.

Earlier this year, the company entered into a financing deal with one of its creditors that contained profitability and walnut supply goals, according to filings with the U.S. Securities and Exchange Commission.

Accounting problems for walnut payments had disrupted the publicly traded company's ability to file accurate financial reports, causing it to violate financial covenants with creditors.

To pay off some of those loans and shore up its financial situation, Diamond Foods sold $225 million worth of bonds to one of its creditors, Oaktree Capital Management.

As part of the deal, Oaktree agreed to exchange one-third of that debt for Diamond Foods stock if the company were able to meet certain conditions.

It would have to secure at least 125 million pounds of walnuts from the 2012 crop and earn $54.4 million in gross profit from some of its business segments before the end of the year.

The company now believes "it is unlikely that we will be able to meet those walnut crop and profitability targets," according to its most recent quarterly financial report.

As a result, Diamond Foods will owe the full $225 million with 12 percent annual interest, which could "impair our ability to meet our debt service obligations," the report said.

The most recent financial statement includes information about its financial performance for the nine months leading up to April 30, during which time Diamond Foods lost about $53.4 million on total sales of $757.4 million.

The company also restated financial results for its prior two fiscal years, acknowledging that profits were actually $39.5 million lower in fiscal 2011 and $17 million lower in fiscal 2010.

Diamond Foods' accounting problems have opened it to allegations of securities fraud from investors who claim it delayed reporting walnut payments to artificially inflate its net income.

The complaint seeks certification as a class action as well as compensation for the drop in Diamond Foods' stock price, which has fallen precipitously since the accounting problems were revealed a year ago.

In its recent financial report, the company also said it received a "formal order of investigation from the staff of the United States Securities and Exchange Commission" and has been in contact with the U.S. attorney's office for the Northern District of California.

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