DEFM14A 1 d199193ddefm14a.htm DEFINITIVE PROXY STATEMENT Definitive Proxy Statement
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

Proxy Statement pursuant to Section 14(a) of the
Securities Exchange Act of 1934

Filed by the Registrant  x                            Filed by a Party other than the Registrant  ¨

Check the appropriate box:

 

¨ Preliminary Proxy Statement

 

¨ Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x Definitive Proxy Statement

 

¨ Definitive Additional Materials

 

¨ Soliciting Material Pursuant to §240.14a-12

DIAMOND FOODS, INC.

 

(Name of Registrant as Specified In Its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

¨ No fee required.

 

¨ Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

 

  (1) Title of each class of securities to which transaction applies:

 

  (2) Aggregate number of securities to which transaction applies:

 

  (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):

 

  (4) Proposed maximum aggregate value of transaction:

 

  (5) Total fee paid:

 

x Fee paid previously with preliminary materials.

 

¨ Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number or the Form or Schedule and the date of its filing.

 

  (1) Amount previously paid:

 

 

  (2) Form, Schedule or Registration Statement No.:

 

 

  (3) Filing Party:

 

 

  (4) Date Filed:

 

 


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EXPLANATORY NOTE

This proxy statement relates to the special meeting of stockholders of Diamond Foods, Inc. (“Diamond”) to approve the issuance of shares of Diamond common stock in the merger (“Merger”) of The Wimble Company (the “Pringles Company”), a Delaware corporation and presently a direct wholly-owned subsidiary of The Procter & Gamble Company (“P&G”), with and into Wimbledon Acquisition LLC (“Merger Sub”), a Delaware limited liability company and a direct wholly-owned subsidiary of Diamond, with Merger Sub continuing as the surviving company and a wholly-owned subsidiary of Diamond. The Pringles Company currently is a wholly-owned subsidiary of P&G and P&G intends to distribute its shares of the Pringles Company common stock to P&G shareholders in an exchange offer (“Exchange Offer”) immediately prior to the Merger (as described in the next paragraph). Diamond has filed a registration statement on Form S-4 (Reg. No. 333-175025) to register the issuance of its shares of common stock, par value $0.001 per share, which will be issued to the stockholders of the Pringles Company in the Merger. In addition, the Pringles Company has filed a registration statement on a combined Form S-4/S-1 (Reg. No. 333-175029) to register the issuance of its shares of common stock, par value $0.01 per share, which will be distributed to P&G shareholders in an Exchange Offer or a spin-off, which shares of Pringles Company common stock will automatically convert into the right to receive Diamond common stock in the Merger.

In the Exchange Offer, P&G shareholders would have the option to exchange their shares of P&G common stock for shares of Pringles Company common stock, which will automatically convert into the right to receive Diamond common stock in the Merger, resulting in a reduction in P&G’s outstanding shares. If the Exchange Offer is completed but is not fully subscribed, P&G will distribute all of its remaining shares of Pringles Company common stock (“Remaining Shares”) as a pro rata dividend to all P&G shareholders. In this case, P&G will irrevocably deliver all of its right and title to the Remaining Shares to a distribution agent on the closing date of the Transactions, which closing shall occur immediately after the completion of the Exchange Offer. The distribution agent will hold the Remaining Shares for the benefit of P&G shareholders as of such date (after giving effect to the completion of the Exchange Offer). The distribution agent will distribute the shares of Diamond common stock, into which the Remaining Shares will be converted in the Merger, to P&G shareholders on a pro rata basis as promptly as practicable thereafter.

References in this document to “P&G shareholders participating in the Exchange Offer” are deemed to include any P&G shareholders who receive any of the Remaining Shares in the pro rata dividend described above. When the Merger is described in this document as occurring “immediately after the completion of the Distribution,” it is meant that the Merger will take place immediately after the completion of the Exchange Offer and, if applicable, the irrevocable delivery by P&G of its right and title to the Remaining Shares to a distribution agent for distribution to P&G shareholders in a pro rata dividend.


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LOGO

September 26, 2011

MERGER PROPOSED—YOUR VOTE IS IMPORTANT

You are cordially invited to attend the Special Meeting of Stockholders of Diamond Foods, Inc. at 10:00 a.m. Pacific Time, on Thursday, October 27, 2011, at 333 Battery Street, San Francisco, CA 94111. A notice of the special meeting and the proxy statement follow.

At the special meeting, you will be asked to approve a proposal to issue shares of Diamond common stock in connection with a merger of the Pringles business of The Procter & Gamble Company (“P&G”) with The Wimble Company (“Pringles Company”), a wholly-owned subsidiary of Diamond (“Merger”). You will also be asked to approve a proposal to adopt the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock, a proposal to approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies and a proposal to approve the adoption of the 2011 International Stock Purchase Plan. Immediately after the completion of the Merger and related transactions, the Pringles business of P&G will be owned by Wimbledon Acquisition LLC, which will be a wholly-owned subsidiary of Diamond. As more fully described in the accompanying proxy statement, P&G will make an offer to P&G shareholders to exchange shares of P&G common stock for shares of Pringles Company common stock (“Exchange Offer”), based upon the market prices of shares of P&G common stock and Diamond common stock calculated during a specified period pursuant to the terms of the Exchange Offer, at a discount to be set by P&G when the Exchange Offer is commenced. If the Exchange Offer is completed but not fully subscribed, any shares of Pringles Company common stock not exchanged for shares of P&G common stock in the Exchange Offer will be distributed pro rata to P&G shareholders (after giving effect to the completion of the Exchange Offer). Pursuant to the Merger, Pringles Company common stock will convert into the right to receive shares of Diamond common stock on a one-for-one basis (“Exchange Ratio”), which Exchange Ratio takes into account the acquisition of the Pringles business, including the assumption of the Pringles debt. Diamond expects to issue 29,143,190 shares of Diamond common stock in connection with the Merger. We expect that the shares of Diamond common stock outstanding immediately prior to the Merger will represent approximately 43% of the Diamond common stock that will be outstanding immediately after the Merger, and that Diamond common stock issued in connection with the conversion of Pringles Company common stock in the Merger will represent approximately 57% of the Diamond common stock that will be outstanding immediately after the Merger. All Diamond common stock issued in connection with the Merger will be listed on The NASDAQ Global Select Market under our current symbol “DMND.”

Your Board of Directors believes that the Merger and the addition of the Pringles business of P&G should enhance stockholder value by providing a platform for growth, growing revenue and earnings, improving product mix, enhancing our global reach and geographic diversity, and diversifying our customer base. Your Board of Directors unanimously recommends that you vote FOR the proposal to issue Diamond common stock in connection with the Merger, FOR the proposal to adopt the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock, FOR the proposal to approve adjournments or postponements of the special meeting for the purpose of soliciting additional proxies, if necessary, and FOR the proposal to adopt the 2011 International Stock Purchase Plan.


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Your vote is very important. Please vote by completing, signing and dating the enclosed proxy card(s) for the special meeting and mailing the proxy card(s) to us, whether or not you plan to attend the special meeting. If you sign, date and mail your proxy card without indicating how you want to vote, your proxy will be counted as a vote FOR each of the proposals presented at the special meeting. In addition, you may vote by proxy by calling the toll-free telephone number or by using the Internet as described in the instructions included with the enclosed proxy card(s). If you do not return your card, vote by telephone or by using the Internet, or if you do not specifically instruct your broker how to vote any shares held for you in “street name,” your shares will not be voted at the special meeting.

This document is a proxy statement by Diamond for its use in soliciting proxies for the special meeting. This document answers questions about the proposed Merger and related transactions and the special meeting and includes a summary description of the Merger and related transactions. We urge you to review this entire document carefully. In particular, you should also consider the matters discussed under “Risk Factors” beginning on page 25.

We thank you for your consideration and continued support.

 

Sincerely,

LOGO

Michael J. Mendes

Chairman, President and
Chief Executive Officer

This document is first being mailed to Diamond stockholders on or about September 26, 2011.


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Diamond Foods, Inc.

600 Montgomery Street, 13th Floor

San Francisco, California 94111

DIAMOND FOODS, INC.

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

A special meeting of stockholders of Diamond Foods, Inc. will be held at 10:00 a.m., Pacific Time, on Thursday, October 27, 2011 at 333 Battery Street, San Francisco, CA 94111. The special meeting will be held for the following purposes:

1. A proposal to approve the issuance of Diamond common stock in connection with a Merger of the Pringles business of P&G with a wholly-owned subsidiary of Diamond.

2. Subject to the approval of the first proposal, a proposal to approve the adoption of the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock.

3. A proposal to approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the issuance of Diamond common stock in connection with the Merger.

4. Subject to the approval of the first proposal, a proposal to approve the adoption of the 2011 International Stock Purchase Plan.

Diamond’s Board of Directors has unanimously approved the Merger and related transactions, the Transaction Agreement, the Separation Agreement and the other agreements relating to the Merger and related transactions, and determined that the Merger and the issuance of Diamond common stock in connection with the Merger, are advisable, fair to and in the best interests of Diamond and its stockholders. Diamond’s Board of Directors unanimously recommends that stockholders vote FOR the proposal to issue Diamond common stock in connection with the Merger, FOR the proposal to adopt the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock, FOR the proposal to approve adjournments or postponements of the special meeting for the purpose of soliciting additional proxies, if necessary and FOR the proposal to adopt the 2011 International Stock Purchase Plan.

All Diamond stockholders are cordially invited to attend the special meeting, although only those stockholders of record at the close of business on September 22, 2011 are entitled to notice of the special meeting and to vote at the special meeting and any adjournments or postponements of the special meeting.

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING IN PERSON, PLEASE COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD(S) IN THE ENCLOSED POSTAGE-PAID ENVELOPE OR VOTE YOUR SHARES OF COMMON STOCK BY CALLING THE TOLL-FREE TELEPHONE NUMBER OR BY USING THE INTERNET AS DESCRIBED IN THE INSTRUCTIONS INCLUDED WITH YOUR PROXY CARD(S) AT YOUR EARLIEST CONVENIENCE.

 

By order of the Board of Directors,

LOGO

Stephen E. Kim

Secretary

Please vote your shares promptly. You can find instructions for voting on the enclosed proxy card(s).

 

 

If you have questions, contact

Georgeson Inc.

Call Toll-Free: 1 (888) 607-9252

or

1 (212) 440-9800 (call collect)

 

 

San Francisco, California

September 26, 2011

Your vote is important. Please complete, date, sign and return your

proxy card(s) or vote your shares of common stock by calling the toll-free

telephone number or by using the Internet as described in the

instructions included with your proxy card(s) at your earliest convenience.


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Diamond Foods, Inc.

600 Montgomery Street, 13th Floor

San Francisco, California 94111

PROXY STATEMENT

September 26, 2011

The accompanying proxy is solicited on behalf of Diamond’s Board of Directors (“Diamond Board”) for use at a special meeting of stockholders to be held at 333 Battery Street, San Francisco, CA 94111 on Thursday, October 27, 2011 at 10:00 a.m., Pacific Time. This proxy statement and the accompanying form of proxy card were first mailed to stockholders on or about September 26, 2011.

Record Date; Quorum

Only holders of record of Diamond common stock as of the close of business on September 22, 2011, the record date, will be entitled to vote at the special meeting. At the close of business on the record date, we had 22,008,605 shares of common stock outstanding and entitled to vote. A majority of the shares outstanding on the record date, present in person or represented by proxy, will constitute a quorum for the transaction of business at the special meeting.

Purpose of the special meeting

You will be voting on the following matters at the special meeting:

1. A proposal to approve the issuance of Diamond common stock in connection with a merger of the Pringles business of P&G with a wholly-owned subsidiary of Diamond.

2. Subject to the approval of the first proposal, a proposal to approve the adoption of the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock.

3. A proposal to approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the issuance of Diamond common stock in connection with the Merger.

4. Subject to the approval of the first proposal, a proposal to approve the adoption of the 2011 International Stock Purchase Plan.

Recommendation of the Diamond Board

The Diamond Board recommends that you vote:

1. “FOR” the proposal to approve the issuance of Diamond common stock in connection with a merger of the Pringles business of P&G with a wholly-owned subsidiary of Diamond.

2. “FOR” the proposal to approve the adoption of the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock.

3. “FOR” the proposal to approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the issuance of Diamond common stock in connection with the Merger.

4. “FOR” the proposal to approve the adoption of the 2011 International Stock Purchase Plan.

Voting Rights; Required Vote

Stockholders are entitled to one vote for each share of common stock held as of the record date. Diamond common stock beneficially held by Diamond or its subsidiaries will not be voted. The affirmative vote of the holders of a majority of the shares represented and voting at the special meeting, either in person or by proxy is


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required to approve the issuance of Diamond common stock in connection with the Merger, the adjournments or postponements of the special meeting and the adoption of the 2011 International Stock Purchase Plan. The affirmative vote of the majority of the shares of common stock issued and outstanding is required to approve the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock. The inspector of elections appointed for the special meeting will separately tabulate the relevant affirmative and negative votes, abstentions and broker non-votes for each proposal. The presence in person or by proxy at the special meeting of holders of Diamond common stock entitled to exercise as of the record date at least a majority of the outstanding voting power of Diamond common stock is necessary for a quorum.

Effect of Abstentions and Broker Discretionary Voting

Shares held by a stockholder who indicates on the proxy card that he or she wishes to abstain from voting will be considered present and entitled to vote at the special meeting and will count toward determining whether or not a quorum is present. A broker is not entitled to vote shares held for a beneficial holder on any of the proposals in this proxy statement. Abstentions and broker non-votes relating to shares of Diamond common stock will not be taken into account in determining the outcome of the proposal to issue Diamond common stock in connection with the Merger, the proposal to approve adjournments or postponements of the special meeting, if necessary, and the proposal to adopt the 2011 International Stock Purchase Plan but will have the same effect as a vote AGAINST the proposal relating to adoption of the certificate of amendment to Diamond’s certificate of incorporation.

Voting of Proxies

Most stockholders have three options for submitting their votes: by Internet, telephone or mail. If you have Internet access, you may submit your proxy by following the “Vote by Internet” instructions on the proxy card. If you live in the United States or Canada, you may submit your proxy by following the “Vote by Telephone” instructions on the proxy card. If you complete and properly sign the proxy card you receive and return it to Diamond in the prepaid envelope, your shares will be voted in accordance with the specifications made on the proxy card. If no specification is made on a signed and returned proxy card, the shares represented by the proxy will be voted “FOR” each of the proposals presented. Diamond encourages stockholders with Internet access to record their votes on the Internet or, alternatively, to vote by telephone. Internet and telephone voting is convenient, saves on postage and mailing costs and is recorded immediately, minimizing risk that postal delays may cause votes to arrive late and therefore not be counted. Stockholders who attend the special meeting may vote in person, and any previously submitted votes will be superseded by the vote cast at the special meeting.

Adjournment of the Special Meeting

Any adjournment may be made from time to time by approval of the stockholders holding a majority of the voting power present in person or by proxy at the special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the special meeting.


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Additional Copy of the Proxy Materials

To receive a additional copies of the proxy materials, stockholders should contact:

Georgeson Inc.

199 Water Street, 26th Floor

Call Toll Free: 1 (888) 607-9252

or

1 (212) 440-9800 (Call Collect)

or

Diamond Foods, Inc.

600 Montgomery Street, 13th Floor

San Francisco, CA 94111

Attention: Investor Relations

Telephone: (415) 445-7444

Revocability of Proxies

If you are a record holder of Diamond common stock, you can change your vote at any time before it is voted by:

 

   

delivering a written notice to Georgeson Inc., that the proxy is revoked;

 

   

signing and dating a new proxy card(s), and submitting your proxy so that it is received prior to the special meeting or voting by telephone or by using the Internet prior to the special meeting in accordance with the instructions included with the proxy card(s); or

 

   

attending the special meeting and voting in person.

If your shares are held in street name by your broker, you will need to contact your broker to revoke your proxy, and if in the alternative you wish to vote in person at the special meeting, you must bring to the special meeting a letter from the broker confirming your beneficial ownership of the shares and that the broker is not voting the shares at the special meeting. Note that your mere presence at the special meeting will not revoke the appointment if you had previously appointed a proxy. In the event of multiple online or telephone votes by a stockholder, each vote will supersede the previous vote and the last vote cast will be deemed to be the final vote of the stockholder unless such vote is revoked in person at the special meeting.


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TABLE OF CONTENTS

 

     Page  

INFORMATION REGARDING CONTENT OF THIS DOCUMENT

     1   

Securities and Exchange Commission Filings

     1   

Sources of Information

     1   

Trademarks and Market and Industry Data

     1   

HELPFUL INFORMATION

     2   

QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS AND THE SPECIAL MEETING

     4   

The Transactions

     4   

The Special Meeting

     8   

SUMMARY

     11   

The Companies

     11   

The Transactions

     12   

Business Strategies After the Transactions

     16   

Additional Agreements

     17   

Diamond’s Financial Advisor

     17   

SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

     18   

Summary Historical Combined Financial Data of Pringles

     18   

Summary Historical Consolidated Financial Data of Diamond

     21   

Summary Unaudited Condensed Combined Pro Forma Financial Data

     22   

Comparative Historical and Pro Forma Per Share Data

     22   

Historical Market Price and Dividend Data

     23   

RISK FACTORS

     25   

Risks Relating to the Transactions

     25   

Risks Relating to Diamond, Including the Pringles Business After the Transactions

     28   

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

     39   

THE SPECIAL MEETING

     40   

Date, Time and Place of the Special Meeting

     40   

Purposes of the Special Meeting

     40   

Record Date of the Special Meeting

     40   

Outstanding Shares

     40   

Shares Entitled to Vote at the Special Meeting

     40   

Quorum Requirements for the Special Meeting

     40   

Shares Owned by Diamond’s Directors and Executive Officers as of the Record Date

     40   

Vote Necessary at the Special Meeting to Approve the Proposals

     41   

VOTING BY PROXY

     42   

Voting Your Proxy

     42   

How to Vote

     42   

Revoking Your Proxy

     43   

Other Voting Matters

     43   

Proxy Solicitations

     43   

Other Business, Adjournments and Postponements

     44   

INFORMATION ON THE DISTRIBUTION

     45   

INFORMATION ON DIAMOND

     46   

Overview

     46   

Diamond’s Business

     47   

Properties

     49   

Legal Proceedings

     50   

Directors and Officers of Diamond Before and After the Transactions

     50   

Certain Relationships and Related Party Transactions

     53   

 

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(continued)

 

     Page  

INFORMATION ON PRINGLES

     54   

General

     54   

Products

     54   

Raw Materials

     55   

Manufacturing

     55   

Sales and Distribution

     56   

Marketing

     56   

Customers

     57   

Seasonality

     57   

Competition

     57   

Research and Development

     57   

Intellectual Property

     58   

Government Regulation

     58   

Legal Proceedings

     58   

Employees

     59   

Properties

     59   

BUSINESS STRATEGIES AFTER THE TRANSACTIONS

     60   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF PRINGLES

     62   

Overview

     62   

Impact of the Distribution from P&G on Pringles’ Financial Statements

     63   

Certain Trends and Other Factors Affecting Pringles

     63   

Significant Accounting Policies and Estimates

     64   

Results of Operations

     64   

Liquidity and Capital Resources

     71   

Cash Flow

     71   

Contractual Commitments

     71   

New Accounting Pronouncements

     72   

Other Information

     72   

SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

     73   

Selected Historical Combined Financial Data of Pringles

     73   

Selected Historical Combined Financial Data of Diamond

     74   

Unaudited Condensed Combined Pro Forma Financial Statements of Diamond

     75   

HISTORICAL PER SHARE, MARKET PRICE AND DIVIDEND DATA

     83   

Comparative Historical and Pro Forma Per Share Data

     83   

Historical Market Price Data

     83   

Diamond Dividend Policy

     84   

THE TRANSACTIONS

     85   

Background of the Transactions

     89   

Diamond’s Reasons for the Transactions; Recommendation of the Diamond Board

     93   

Opinion of Diamond’s Financial Advisor

     95   

P&G’s Reasons for the Transactions

     103   

Interests of Certain Persons in the Transactions

     104   

Accounting Treatment of the Merger

     104   

Regulatory Approvals

     105   

Federal Securities Law Consequences; Resale Restrictions

     105   

THE TRANSACTION AGREEMENT

     106   

Overview

     106   

 

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(continued)

 

     Page  

Recapitalization

     106   

Distribution

     107   

The Merger

     107   

Representations and Warranties

     108   

Covenants

     110   

Conditions to the Merger

     119   

Termination of the Transaction Agreement

     121   

THE SEPARATION AGREEMENT

     123   

Overview

     123   

Transfer of the Pringles Business and Assumption of Liabilities

     123   

Intercompany Arrangements and Guaranties

     124   

Consents and Delayed Transfers

     124   

No Representations or Warranties

     125   

Mutual Releases and Indemnification

     125   

Covenants

     126   

Conditions to Separation and Distribution

     126   

Termination

     126   

Dispute Resolution

     127   

DEBT FINANCING

     128   

Diamond Debt

     128   

Pringles Debt

     130   

ADDITIONAL AGREEMENTS

     134   

Transition Services Agreement

     134   

Facilities Agreement

     134   

Split Agreement

     134   

Olestra Supply Agreement

     135   

Tax Matters Agreement

     135   

DESCRIPTION OF DIAMOND CAPITAL STOCK

     137   

Common Stock

     137   

Preferred Stock

     140   

OWNERSHIP OF DIAMOND COMMON STOCK

     142   

PROPOSAL NO. 1 TO APPROVE THE ISSUANCE OF DIAMOND COMMON STOCK IN CONNECTION WITH THE MERGER

     144   

PROPOSAL NO. 2 TO ADOPT A CERTIFICATE OF AMENDMENT TO FIRST AMENDED AND RESTATED CERTIFICATE OF INCORPORATION

     145   

PROPOSAL NO. 3 TO APPROVE ADJOURNMENTS AND POSTPONEMENTS OF THE SPECIAL MEETING

     147   

PROPOSAL NO. 4 TO APPROVE THE ADOPTION OF THE 2011 INTERNATIONAL STOCK PURCHASE PLAN

     148   

SUBMISSION OF FUTURE STOCKHOLDER PROPOSALS

     151   

WHERE YOU CAN FIND MORE INFORMATION; INCORPORATION BY REFERENCE

     152   

INDEX TO FINANCIAL STATEMENTS

     F-1   

ANNEXES

  

Transaction Agreement

     A   

Separation Agreement

     B   

Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated

     C   

Certificate of Amendment to First Amended and Restated Certificate of Incorporation

     D   

2011 International Stock Purchase Plan

     E   

 

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INFORMATION REGARDING CONTENT OF THIS DOCUMENT

Securities and Exchange Commission Filings

This document incorporates important business and financial information about Diamond from documents that Diamond has filed with the Securities and Exchange Commission but that have not been included in or delivered with this document. For a list of documents incorporated by reference into this document, see “Where You Can Find More Information; Incorporation by Reference” beginning on page 152.

This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference into this document by accessing the Securities and Exchange Commission’s website maintained at www.sec.gov.

In addition, Diamond’s Securities and Exchange Commission filings are available to the public on Diamond’s website, www.diamondfoods.com. Information contained on Diamond’s website is not incorporated by reference into this document, and you should not consider information contained on that website as a part of this document.

Diamond will provide you with copies of this information, without charge, if you request them in writing or by telephone from:

Diamond Foods, Inc.

600 Montgomery Street, 13th Floor

San Francisco, California 94111

Attention: Investor Relations

Telephone: (415) 445-7444

If you would like to request documents from Diamond, please do so by October 20, 2011 in order to receive them before the special meeting.

Sources of Information

All information contained in this document with respect to P&G, the Pringles Company (up to the closing date of the Transactions) and their subsidiaries has been provided by P&G. All other information contained or incorporated by reference in this document, including information with respect to Diamond and its subsidiaries, has been provided by Diamond.

Trademarks and Market and Industry Data

This proxy statement contains references to trademarks, trade names and service marks, including Pringles®, Eagle®, Torengos®, Mr. Moustache® and Once You Pop You Can’t Stop®, that are owned by the Pringles Business.

Unless otherwise specified in this proxy statement, all industry and market share data relating to the Pringles Business and the snacks industry included in this proxy statement are based on P&G’s market research and internally developed, proprietary analytical modeling system as well as statistical data obtained or derived from independent market research firms. Some of these third-party firms, such as Euromonitor International Limited (“Euromonitor”) and ACNielsen, categorize data differently from how the Pringles Business categorizes data. Information in this proxy statement on the snack industry is from independent market research carried out by Euromonitor but should not be relied upon in making, or refraining from making, an investment decision. Market share data is used by P&G to standardize market share information across different products and retail channels and is regularly used by P&G in the analysis of the Pringles Business. While P&G has no reason to believe any third-party information is not reliable, P&G has not independently verified this information.

 

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Diamond of California®, Emerald®, Pop Secret® and Kettle Brand® are registered trademarks of Diamond in the United States. All other trademarks or service marks appearing in this proxy statement are trademarks or service marks of others.

Some of the market and industry data and forecasts relating to Diamond included in this proxy statement are based on independent industry sources. Although Diamond believes that these independent sources are reliable, Diamond has not independently verified the accuracy and completeness of this information, nor has Diamond independently verified the underlying economic assumptions relied upon in preparing any data or forecasts.

Statements in this proxy statement about the Pringles Business that Diamond proposes to acquire are made primarily on the basis of information furnished by the owners and management of the Pringles Business. Statements in this proxy statement about Diamond are made primarily on the basis of information furnished by the owners and management of Diamond.

HELPFUL INFORMATION

In this proxy statement:

 

   

“Code” means the Internal Revenue Code of 1986, as amended.

 

   

“Diamond” means Diamond Foods, Inc., a Delaware corporation and, unless the context otherwise requires, its consolidated subsidiaries.

 

   

“Diamond common stock” means the Common Stock, par value $0.001 per share, of Diamond, including the preferred share purchase right issuable pursuant to the Rights Agreement, dated as of April 29, 2005, between Diamond and EquiServe Trust Company, N.A. entitling the holder under certain circumstances to purchase 1/100th of a share of Diamond’s Series A Junior Participating Preferred Stock for no additional consideration.

 

   

“Diamond Group” means Diamond and each of its consolidated subsidiaries including, after the completion of the Merger, the Pringles Company.

 

   

“Distribution” means the distribution by P&G of its shares of Pringles Company common stock to P&G shareholders by way of an exchange offer and, if the exchange offer is completed but is not fully subscribed, the distribution of the Remaining Shares as a pro rata dividend to P&G shareholders as described herein.

 

   

“GAAP” means accounting principles generally accepted in the United States.

 

   

“immediately after the completion of the Distribution” means immediately after notice of acceptance of the shares of P&G common stock tendered for exchange is given by P&G to the exchange agent appointed by P&G and irrevocable delivery by P&G of its right and title to all shares of Pringles Company common stock to the exchange agent for distribution to eligible P&G shareholders in the exchange offer and pursuant to a pro rata dividend, if any.

 

   

“market disruption event” with respect to either shares of P&G common stock or shares of Diamond common stock means a suspension, absence or material limitation of trading of shares of P&G common stock on the NYSE or shares of Diamond common stock on NASDAQ for more than two hours of trading or a breakdown or failure in the price and trade reporting systems of the NYSE or NASDAQ as a result of which the reported trading prices for shares of P&G common stock on the NYSE or shares of Diamond common stock on NASDAQ, respectively, during any half-hour trading period during the principal trading session of the NYSE or NASDAQ are materially inaccurate, as determined by P&G, on the day with respect to which such determination is being made. For purposes of such determination: (1) a limitation on the hours or number of days of trading will not constitute a market disruption event if it results from an announced change in the regular business hours of the

 

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NYSE or NASDAQ and (2) limitations pursuant to any applicable rule or regulation enacted or promulgated by the NYSE, NASDAQ, any other self-regulatory organization or the SEC of similar scope as determined by P&G shall constitute a suspension, absence or material limitation of trading.

 

   

“Merger” means the merger of the Pringles Company with and into Merger Sub, with Merger Sub continuing as the surviving company, as contemplated by the Transaction Agreement.

 

   

“Merger Sub” means Wimbledon Acquisition LLC, a Delaware limited liability company and direct wholly owned subsidiary of Diamond.

 

   

“NASDAQ” means the NASDAQ Global Select Market.

 

   

“NYSE” means the New York Stock Exchange.

 

   

“P&G” means The Procter & Gamble Company, an Ohio corporation, and, unless the context otherwise requires, its consolidated subsidiaries.

 

   

“P&G shareholders” means the holders of shares of P&G common stock.

 

   

“Pringles” or “Pringles Business” means the business of P&G and its subsidiaries relating to the sourcing, producing, marketing, selling, distributing and development of (1) potato snack-related products and services, including potato crisps and various flavors and product line extensions that feature different compositions and flavors, and (2) cracker stick-related products and services that will be transferred by P&G and its subsidiaries to the Pringles Company as part of the Separation, including the Pringles® brand.

 

   

“Pringles Company” means The Wimble Company, a Delaware corporation and direct wholly owned subsidiary of P&G, and, where the context requires, its consolidated subsidiaries.

 

   

“Pringles Debt” means the new senior secured bank debt in an amount between $700 million and $1.05 billion to be (1) incurred by the Pringles Company prior to the Distribution and guaranteed by all existing and future direct and indirect subsidiaries of the Pringles Company, other than certain foreign subsidiaries, (2) assumed by Merger Sub by operation of law upon consummation of the Merger and (3) guaranteed after the consummation of the Merger by (a) all existing and future direct and indirect subsidiaries of Merger Sub, other than certain foreign subsidiaries, and (b) Diamond and all subsidiaries of Diamond that guarantee the indebtedness under Diamond’s credit facilities.

 

   

“Remaining Shares” means any remaining shares of Pringles Company common stock held by P&G after completion of the exchange offer.

 

   

“Separation” means the transfer by P&G of certain of the assets and liabilities related to the Pringles Business, including certain subsidiaries of P&G, to the Pringles Company.

 

   

“Separation Agreement” means the Separation Agreement, dated as of April 5, 2011, by and among P&G, the Pringles Company and Diamond.

 

   

“Transaction Agreement” means the Transaction Agreement, dated as of April 5, 2011, by and among P&G, the Pringles Company, Diamond and Merger Sub.

 

   

“Transactions” means the transactions contemplated by the Transaction Agreement and the Separation Agreement, which provide, among other things, for the Separation, the Pringles Debt, the Distribution and the Merger, as described in the section “The Transactions.”

 

   

“VWAP” means the volume-weighted average price.

 

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QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS AND THE SPECIAL MEETING

The following are some of the questions that Diamond stockholders may have, and answers to those questions. These questions and answers, as well as the following summary, are not meant to be a substitute for the information contained in the remainder of this document, and this information is qualified in its entirety by the more detailed descriptions and explanations contained elsewhere in this document. Diamond urges its stockholders to read this document in its entirety prior to making any decision.

The Transactions

 

Q: Why am I receiving this document?

 

A: Diamond and P&G have entered into a Transaction Agreement under which Diamond will acquire the Pringles Company, a subsidiary of P&G that will own the Pringles Business, through the Merger of the Pringles Company with and into a subsidiary of Diamond. Diamond is holding a special meeting of its stockholders in order to obtain their approval of the issuance of Diamond common stock in connection with the Merger, and, subject to approval of the issuance of Diamond common stock in connection with the Merger, the approval of the adoption of the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock and the approval of the adoption of the 2011 International Stock Purchase Plan. Diamond cannot complete the Merger unless the issuance of Diamond common stock in connection with the Merger is approved by the affirmative vote of the holders of a majority of the shares represented and voting at the special meeting, either in person or by proxy.

This document includes important information about the Merger and the Transactions and the special meeting of the stockholders of Diamond. Diamond stockholders should read this information carefully and in its entirety. A copy of the Transaction Agreement is attached as Annex A to this document. The enclosed voting materials allow Diamond stockholders to vote their shares without attending the special meeting. The vote of Diamond stockholders is very important and Diamond encourages its stockholders to vote their proxy as soon as possible. Please follow the instructions set forth on the enclosed proxy card(s) or on the voting instruction form provided by the record holder if the shares of Diamond stockholders are held in the name of their broker or other nominee.

 

Q: What is Diamond proposing?

 

A: Diamond is proposing a business combination with the Pringles Company through a series of transactions that are described in more detail below and elsewhere in this document. At the conclusion of the Transactions:

 

   

the Pringles Business will be owned by Merger Sub, which is and will continue to be a wholly-owned subsidiary of Diamond;

 

   

the Pringles Company is expected to incur debt equal to the Recapitalization Amount. The Recapitalization Amount means $850.0 million; provided, however, that:

 

   

if the simple arithmetic average of the daily VWAPs of shares of Diamond common stock on NASDAQ for the five trading days ending the trading day which is two clear trading days prior to the commencement date of the exchange offer (the “Diamond Collar Stock Price”) is greater than $51.47 per share, then the Recapitalization Amount will be $850.0 million reduced by an amount equal to the lesser of (1) $150.0 million and (2)(a) the Diamond Collar Stock Price minus $51.47 times (b) 29,143,190; and

 

   

if the Diamond Collar Stock Price is less than $51.47, then the Recapitalization Amount will be $850.0 million increased by an amount equal to the lesser of (1) $200.0 million and (2)(a) $51.47 minus the Diamond Collar Stock Price times (b) 29,143,190.

 

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Thus, if the Diamond Collar Stock Price is greater than $56.62, the Recapitalization Amount will be $700.0 million, and if the Diamond Collar Stock Price is less than $44.61, the Recapitalization Amount will be $1.05 billion.

The Pringles Company, in connection with the Separation, will use the borrowed proceeds and any cash contributed by P&G to the Pringles Company to purchase certain Pringles Business assets from P&G affiliates;

 

   

upon consummation of the Merger, Merger Sub will assume the Pringles Company’s obligations under the Pringles Debt by operation of law, and the Pringles Debt will be guaranteed by (1) all existing and future direct and indirect subsidiaries of Merger Sub, other than certain foreign subsidiaries, and (2) Diamond and all subsidiaries of Diamond that guarantee the indebtedness under Diamond’s credit facilities; and

 

   

the Diamond common stock outstanding immediately prior to the Merger will represent approximately 43% of the Diamond common stock that will be outstanding immediately after the Merger, and the Diamond common stock issued in connection with the conversion of shares of Pringles Company common stock in the Merger will represent approximately 57% of the Diamond common stock that will be outstanding immediately after the Merger.

 

Q: What will happen in the Transactions?

 

A: Below is a summary of the key steps of the Transactions. A step-by-step description of material events relating to the Transactions is set forth under “The Transactions.”

 

   

P&G will transfer to the Pringles Company, a newly formed, direct wholly owned subsidiary of P&G, certain assets relating to the Pringles Business, including certain subsidiaries of P&G. The Pringles Company will also assume certain liabilities associated with the Pringles Business.

 

   

Prior to the Distribution, and in partial consideration for the assets of the Pringles Business transferred from P&G to the Pringles Company, the Pringles Company will be recapitalized in the following manner:

 

   

the Pringles Company will issue and deliver to P&G a number of additional shares of Pringles Company common stock such that the total number of shares of Pringles Company common stock held by P&G at the time of the Distribution will equal 29,143,190, all of which shares of Pringles Company common stock P&G will dispose of in the Distribution; and

 

   

the Pringles Company will enter into senior secured term credit facilities to borrow an amount between $700 million and $1.05 billion and will use the borrowed proceeds, along with any cash contributed by P&G to the Pringles Company, to purchase certain Pringles Business assets from P&G affiliates.

 

   

P&G will offer to P&G shareholders the right to exchange all or a portion of their shares of P&G common stock for shares of Pringles Company common stock in this exchange offer.

If the exchange offer is completed but is not fully subscribed, P&G will distribute the Remaining Shares as a pro rata dividend to P&G shareholders whose shares of P&G common stock remain outstanding after consummation of the exchange offer. If there is a pro rata dividend to be distributed, the exchange agent will calculate the exact number of shares of Pringles Company common stock not exchanged in the exchange offer and to be distributed in a pro rata dividend and that number of shares of Diamond common stock, into which the Remaining Shares will be converted in the Merger, will be transferred to P&G shareholders (after giving effect to the consummation of the exchange offer) on a pro rata basis as promptly as practicable thereafter.

The exchange agent will hold, for the account of the relevant P&G shareholders, the global certificate(s) representing all of the outstanding shares of Pringles Company common stock, pending the completion of the Merger. Shares of Pringles Company common stock will not be traded during this period.

 

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Immediately after the completion of the Distribution, on the closing date of the Transactions, the Pringles Company will merge with and into Merger Sub, with Merger Sub continuing as the surviving company.

 

   

Each share of Pringles Company common stock will be automatically converted into the right to receive one fully paid and nonassessable share of Diamond common stock.

 

   

Upon consummation of the Merger, Merger Sub will assume Pringles’ obligations under the Pringles Debt by operation of law, and the Pringles Debt will be guaranteed by (1) all existing and future direct and indirect subsidiaries of Merger Sub, other than certain foreign subsidiaries, and (2) Diamond and all subsidiaries of Diamond that guarantee the indebtedness under Diamond’s credit facilities.

 

   

The shares of Diamond common stock outstanding immediately prior to the Merger will represent approximately 43% of the shares of Diamond common stock that will be outstanding immediately after the Merger, and the shares of Diamond common stock issued in connection with the conversion of shares of Pringles Company common stock in the Merger will represent approximately 57% of the shares of Diamond common stock that will be outstanding immediately after the Merger.

In connection with the Transactions, P&G and Diamond have entered into various agreements, and will enter into additional agreements, establishing the terms of the Separation. These agreements include a transition services agreement in which P&G will agree to provide certain services to Merger Sub and Diamond for a limited period of time following the Transactions. See “Additional Agreements.”

 

Q: What will Diamond stockholders receive in the Merger?

 

A: Diamond stockholders will not directly receive any consideration in the Merger. All shares of Diamond common stock issued and outstanding immediately before the Merger will remain issued and outstanding after consummation of the Merger. Immediately after the Merger, Diamond stockholders will continue to own shares in Diamond, which will include (1) the Pringles Business, which will be owned and operated though Merger Sub, Diamond’s wholly owned subsidiary and (2) the Pringles Debt in an amount between $700 million and $1.05 billion, which upon consummation of the Merger will be assumed by Merger Sub by operation of law and guaranteed by (a) all existing and future direct and indirect subsidiaries of Merger Sub, other than certain foreign subsidiaries and (b) Diamond and all subsidiaries of Diamond that guarantee the indebtedness under Diamond’s credit facilities.

 

Q: What are the material U.S. federal income tax consequences to Diamond and Diamond stockholders resulting from the Transactions?

 

A: The Merger will not be a taxable event to Diamond, its stockholders, Merger Sub or the Pringles Company.

 

Q: What are the principal adverse consequences of the Transactions to Diamond stockholders?

 

A: Following the consummation of the Transactions, pre-Merger Diamond stockholders will be stockholders in a company that owns the Pringles Business, but their interests in Diamond will have been diluted. Diamond stockholders who owned 100% of Diamond common stock before the Merger will own approximately 43% of the Diamond common stock that will be outstanding after the Transactions.

The Pringles Company is expected to incur between $700 million and $1.05 billion of debt. The Pringles Debt will remain a debt obligation of the Pringles Company that Diamond will guarantee following completion of the Transactions.

P&G shareholders that participate in the Exchange Offer will be exchanging their shares of P&G common stock for shares of Pringles Company common stock at a discount to the per-share value of shares of Diamond common stock. The discount, along with the issuance of Diamond common stock pursuant to the Merger, may negatively affect the market price of Diamond common stock. Please see “Information on the Distribution” to obtain additional information regarding the discount. Further, Diamond anticipates that it will incur one-time charges of approximately $150 million through fiscal 2013 as a result of transaction and

 

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integration costs associated with the Transactions, the amount and timing of which could adversely affect the period to period operating results of Diamond and result in a reduction in the market price of Diamond common stock.

Please see “Risk Factors—Risks Relating to the Transactions” for a further discussion of the material risks associated with the Transactions.

 

Q: What will P&G and P&G shareholders receive in the Transactions?

 

A: P&G is offering to P&G shareholders the right to exchange all or a portion of their shares of P&G common stock for shares of Pringles Company common stock. Shares of Pringles Company common stock will be offered to P&G shareholders in the Exchange Offer based upon market prices of shares of P&G common stock and Diamond common stock calculated during a specified period pursuant to the terms of the Exchange Offer, at a discount which will be set by P&G at the time of commencement of the Exchange Offer. Promptly after the specific terms of the Exchange Offer are set, Diamond will publish a press release describing them. The press release will be filed with the SEC and available to stockholders on Diamond’s web page (www.diamondfoods.com). If the Exchange Offer is completed but not fully subscribed, any shares of Pringles Company common stock that are not subscribed for in the Exchange Offer will be distributed as a pro rata dividend to P&G shareholders (after giving effect to the completion of the Exchange Offer). In the Merger, each share of Pringles Company common stock will automatically convert into the right to receive one fully paid and nonassessable share of Diamond common stock. Diamond common stock will continue to be listed on the NASDAQ Stock Market under the symbol “DMND.”

The Pringles Company is expected to incur between $700 million and $1.05 billion of debt based on a collar mechanism based upon Diamond’s stock price during a trading period prior to the commencement of the Exchange Offer and will use the borrowed proceeds, along with any cash contributed by P&G to the Pringles Company, to purchase certain Pringles Business assets from P&G affiliates.

Upon consummation of the Merger, Merger Sub will assume the Pringles Company’s obligations under the Pringles Debt by operation of law, and the Pringles Debt will be guaranteed by (1) all existing and future direct and indirect subsidiaries of Merger Sub, other than certain foreign subsidiaries, and (2) Diamond and all subsidiaries of Diamond that guarantee the indebtedness under Diamond’s credit facilities.

 

Q: Are there any conditions to the completion of the Transactions?

 

A: Yes. The completion of the Merger is subject to a number of conditions, including:

 

   

the completion of the Separation and Distribution;

 

   

the valid tender in the Exchange Offer of a number of shares of Pringles Company common stock exceeding a specified threshold (the “Minimum Condition”), which is subject to adjustment pursuant to the terms of the Transaction Agreement;

 

   

the approval by Diamond’s stockholders of the issuance of shares of Diamond common stock in connection with the Merger;

 

   

the receipt of written tax opinions from special tax counsel to P&G and tax counsel to Diamond; and

 

   

other customary conditions.

In the event that either Diamond or P&G waive the satisfaction of a material condition to the consummation of the Transactions, Diamond will resolicit stockholder approval of the issuance of Diamond common stock in connection with the Merger if required by law to do so.

This proxy statement describes these conditions in more detail under “The Transaction Agreement—Conditions to the Merger.”

 

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Q: When will the Transactions be completed?

 

A: The Transactions are expected to be completed as soon as practicable after consummation of the exchange offer. However, it is possible that factors outside Diamond’s and P&G’s control could require the parties to complete the Transactions at a later time or not complete them at all. For a discussion of the conditions to the Transactions, see “The Transaction Agreement—Conditions to the Merger.”

 

Q: Are there risks associated with the Transactions?

 

A: Yes. You should consider all of the information included or incorporated by reference in this proxy statement, including the factors described under the heading “Risk Factors.” You are strongly encouraged to read this entire proxy statement very carefully. The risks include, among others, the possibility that Diamond may fail to realize the anticipated benefits of the acquisition, the uncertainty that Diamond will be able to integrate the Pringles Business successfully and the possibility that Diamond may be unable to provide benefits and services or access to equivalent financial strength and resources to the Pringles Business that historically have been provided by P&G.

 

Q: Will there be any change to the Diamond Board or the executive officers of Diamond after the Transactions?

 

A: No. The directors and executive officers of Diamond immediately following the closing of the Transactions are expected to be the directors and executive officers of Diamond immediately prior to the closing of the Transactions.

 

Q: What approvals of Diamond stockholders are needed in connection with the Transactions?

 

A: Diamond cannot complete the Merger unless the proposal relating to the issuance of Diamond common stock in connection with the Merger is approved by the affirmative vote of the holders of a majority of the shares represented and voting at the special meeting, either in person or by proxy. Approval of the proposal to adopt the certificate of amendment to Diamond’s certificate of incorporation in connection with the Merger and the proposal to adopt the 2011 International Stock Purchase Plan is not required to complete the Merger.

 

Q: How does the Diamond Board recommend stockholders vote?

 

A: The Diamond Board has unanimously recommended that stockholders vote FOR the proposal to issue Diamond common stock in connection with the Merger, FOR the proposal to adopt the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock, FOR the proposal to approve adjournments or postponements of the special meeting for the purpose of soliciting additional proxies, if necessary, and FOR the proposal to approve the adoption of the 2011 International Stock Purchase Plan.

 

Q: Do P&G shareholders have to vote to approve the Transactions?

 

A: No. No vote of P&G shareholders is required or being sought in connection with the Transactions.

The Special Meeting

 

Q: What should I do now?

 

A:

You should read this document carefully and return your completed, signed and dated proxy card(s) by mail in the enclosed postage-paid envelope as soon as possible so that your shares will be represented and voted at the special meeting. You may vote your shares by signing, dating and mailing the enclosed proxy card(s), by calling the toll-free telephone number or by using the Internet as described in the instructions included with the proxy card(s). We encourage stockholders with Internet access to record their votes on the Internet or, alternatively, to vote by telephone. Internet and telephone voting is convenient, saves on postage and mailing costs and is recorded immediately, minimizing risk that postal delays may cause votes to arrive late and therefore not be counted. A number of banks and brokerage firms participate in a program that also

 

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  permits stockholders whose shares are held in “street name” to direct their vote by using the Internet or telephone. This option, if available, will be reflected in the voting instructions from the bank or brokerage firm that accompany this document and will allow you to direct the vote of these shares by the Internet or telephone by following the voting instructions enclosed with the proxy form from the bank or brokerage firm. See “Voting By Proxy—Voting Your Proxy.” Stockholders who attend the special meeting may vote in person, and any previously submitted votes will be superseded by the vote cast at the special meeting.

 

Q: If I am not going to attend the special meeting, should I return my proxy card(s)?

 

A: Yes. Returning your signed and dated proxy card(s) ensures that your shares will be represented and voted at the special meeting, even if you are unable to or do not attend. Instead of returning your proxy card(s), you may vote by proxy by calling the toll-free telephone number or by using the Internet as described in the instructions included with the proxy card(s). See “Voting By Proxy—How to Vote.”

 

Q: How will my proxy be voted?

 

A: If you complete, sign and date your proxy card(s), or vote by telephone or by using the Internet, your proxy will be voted in accordance with your instructions. If you sign and date your proxy card(s) but do not indicate how you want to vote, your shares will be voted FOR the proposals at the special meeting. If you fail to submit a proxy or vote in person at the special meeting, or abstain, or you do not provide your bank, brokerage firm or other nominee with voting instructions, as applicable, your shares of Diamond common stock will not be taken into account in determining the outcome of the proposals relating to the issuance of Diamond common stock in connection with the Merger, the adjournments or postponements of the Diamond special meeting or the adoption of the 2011 International Stock Purchase Plan, but will have the same effect as a vote AGAINST the proposal relating to adoption of the certificate of amendment to Diamond’s certificate of incorporation.

 

Q: Can I change my vote after I mail my proxy card(s)?

 

A: Yes. If you are a record holder of Diamond common stock, you can change your vote at any time before it is voted by:

 

   

delivering a written notice or revocation to the corporate secretary of Diamond that is received prior to the special meeting and states that you revoke your proxy;

 

   

signing and dating a new proxy card(s) and submitting your proxy so that it is received prior to the special meeting or voting by telephone or by using the Internet prior to the special meeting in accordance with the instructions included with the proxy card(s); or

 

   

attending the special meeting and voting in person.

In the event of multiple online or telephone votes by a stockholder, each vote will supersede the previous vote and the last vote cast will be deemed to be the final vote of the stockholder unless such vote is revoked in person at the special meeting.

If your shares are held in street name by your broker, you will need to contact your broker to revoke your proxy, and if in the alternative you wish to vote in person at the special meeting, you must bring to the special meeting a letter from the broker confirming your beneficial ownership of the shares and that the broker is not voting the shares at the special meeting. Note that your mere presence at the special meeting will not revoke the appointment if you had previously appointed a proxy. In the event of multiple online or telephone votes by a stockholder, each vote will supersede the previous vote and the last vote cast will be deemed to be the final vote of the stockholder unless such vote is revoked in person at the special meeting. See “Voting By Proxy—Revoking Your Proxy.”

 

Q: What if my shares are held in “street name” by my broker?

 

A:

Your broker will vote your shares with respect to the proposals at the special meeting only if you instruct your broker how to vote. You should instruct your broker using the written instruction form and envelope

 

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  provided by your broker. If you do not provide your broker with instructions, under the rules of The NASDAQ Stock Market, your broker will not be authorized to vote with respect to any of the proposals in this proxy statement. If you hold your shares in your broker’s name and wish to vote in person at the special meeting, you must contact your broker and request a document called a “legal proxy.” You must bring this legal proxy to the special meeting in order to vote in person. See “Voting By Proxy—How to Vote.”

 

Q: What if Diamond stockholders abstain from voting or do not instruct their brokers to vote their shares?

 

A: Shares held by a Diamond stockholder who indicates on the proxy card that he or she wishes to abstain from voting will not be taken into account in determining the outcome of the proposals relating to the issuance of Diamond common stock or adjournments or postponements of the Diamond special meeting. However, those shares are considered present and entitled to vote at the special meeting and will count toward determining whether or not a quorum is present. A broker is not entitled to vote shares held for a beneficial holder on any of the proposals in this proxy statement. Abstentions and broker non-votes relating to shares of Diamond common stock will not be taken into account in determining the outcome of the proposal to issue Diamond common stock in connection with the Merger, the proposal to approve adjournments or postponements of the special meeting, if necessary, and the proposal to approve the adoption of the 2011 International Stock Purchase Plan, but will have the same effect as a vote AGAINST the proposal relating to adoption of the certificate of amendment to Diamond’s certificate of incorporation. See “The Special Meeting—Vote Necessary at the Special Meeting to Approve the Proposals.”

 

Q: What does it mean if I receive multiple proxy cards?

 

A: Your shares may be registered in more than one account, such as brokerage accounts and 401(k) accounts. It is important that you complete, sign, date and return each proxy card you receive, or vote using the telephone or by using the Internet as described in the instructions included with your proxy card(s). See “Voting By Proxy—Voting Your Proxy.”

 

Q: Who can answer my questions?

 

A: If you have any questions about the Transactions or the special meeting, need assistance in voting your shares, or need additional copies of this document or the enclosed proxy card(s) or voting instructions, you should contact:

Georgeson Inc.

199 Water Street, 26th Floor

Call Toll Free: 1 (888) 607-9252

or

1 (212) 440-9800 (Call Collect)

or

Diamond Foods, Inc.

600 Montgomery Street, 13th Floor

San Francisco, California 94111

Attention: Investor Relations

Telephone: (415) 445-7444

 

Q: Where can I find more information about Diamond and Pringles?

 

A: Diamond stockholders can find more information about Diamond and Pringles in the sections entitled “Information on Diamond” and “Information on Pringles” and, in the case of Diamond, from the various sources described under “Where You Can Find More Information; Incorporation by Reference.”

 

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SUMMARY

Unless otherwise stated in this proxy statement or the context otherwise provides, the description of the Pringles Company and the Pringles Business contained in this proxy statement is based on the assumption that the transferred assets and liabilities of the Pringles Business had been held by the Pringles Company for all of the periods discussed. The following summary contains certain information from this document. It does not contain all the details concerning the Transactions, including information that may be important to you. To better understand the Transactions, you should carefully review this entire document and the documents it refers to. See “Where You Can Find More Information; Incorporation by Reference.”

Diamond’s fiscal year begins on August 1 and ends on the following July 31. The Pringles Company’s fiscal year begins on July 1 and ends on the following June 30. For example, Diamond’s “fiscal 2011” began on August 1, 2010 and ended on July 31, 2011 and the Pringles Company’s “fiscal 2011” began on July 1, 2010, and ended on June 30, 2011.

The Companies

Diamond Foods, Inc.

Diamond Foods, Inc.

600 Montgomery Street, 13th Floor

San Francisco, California 94111

Telephone: (415) 445-7444

Diamond Foods, Inc., a Delaware corporation referred to in this proxy statement as Diamond, is an innovative packaged food company focused on building, acquiring and energizing brands. Diamond was founded in 1912 and has a proven track record of growth, which is reflected in the growth of Diamond’s revenues from approximately $201 million in fiscal 2000 to approximately $966 million in fiscal year 2011. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, Diamond complemented its strong heritage in the culinary nut market under the Diamond of California® brand by launching a full line of snack nuts under the Emerald® brand. In September 2008, Diamond acquired the Pop Secret® brand of microwave popcorn products, which provided Diamond with increased scale in the snack market, significant supply chain economies of scale and cross-promotional opportunities with Diamond’s existing brands. In March 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and United Kingdom. Diamond sells its products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores and other retail channels.

For the fiscal years ended July 31, 2011 and 2010, Diamond had $965.9 million and $680.2 million of net sales, respectively, and generated net income of $50.2 million and $26.2 million, respectively.

Wimbledon Acquisition LLC

Wimbledon Acquisition LLC

c/o Diamond Foods, Inc.

600 Montgomery Street, 13th Floor

San Francisco, California 94111

Telephone: (415) 445-7444

Wimbledon Acquisition LLC, a Delaware limited liability company referred to in this proxy statement as Merger Sub, is a newly formed, direct wholly owned subsidiary of Diamond that was organized specifically for

 

 

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the purpose of completing the Merger. Merger Sub has engaged in no business activities to date and it has no material assets or liabilities of any kind, other than those incident to its formation and in connection with the Transactions.

The Procter & Gamble Company

The Procter & Gamble Company

One Procter & Gamble Plaza

Cincinnati, Ohio 45202

Telephone: (513) 983-1100

The Procter & Gamble Company, an Ohio corporation referred to in this proxy statement as P&G, was incorporated in Ohio in 1905, having been built from a business founded in 1837 by William Procter and James Gamble. Today, P&G manufactures and markets a broad range of consumer products in many countries throughout the world. P&G has one of the strongest portfolios of trusted, quality, leadership brands, including Pampers®, Tide®, Ariel®, Always®, Whisper®, Pantene®, Mach3®, Bounty®, Dawn®, Gain®, Pringles®, Charmin®, Downy®, Lenor®, Iams®, Crest®, Oral-B®, Actonel®, Duracell®, Olay®, Head & Shoulders®, Wella®, Gillette®, Braun® and Febreze®. As of June 30, 2011, P&G owned and operated 36 manufacturing facilities in the United States located in 22 different states or territories. In addition, as of June 30, 2011, P&G owned and operated 102 manufacturing facilities in 41 other countries. Many of the domestic and international facilities produce products for multiple P&G business units.

The Wimble Company

The Wimble Company

c/o The Procter & Gamble Company

One Procter & Gamble Plaza

Cincinnati, Ohio 45202

Telephone: (513) 983-1100

The Wimble Company, a Delaware corporation referred to in this proxy statement as the Pringles Company, is a direct wholly owned subsidiary of P&G organized on April 1, 2011 for the purpose of effecting the Separation of the Pringles Business from P&G. It has no material assets or liabilities of any kind other than those incident to its formation and those acquired or incurred in connection with the Transactions.

Pringles is a combination of wholly owned subsidiaries of P&G and assets and liabilities of the Pringles Business. Pringles manufactures, markets and distributes snack foods, primarily under the Pringles® brand, and sells snacks products in over 140 countries around the world across North America, Europe, Asia and Latin America. Pringles sells its products principally to leading mass merchandisers, grocery retailers, club stores and convenience outlets globally, through the P&G sales force and third-party distributors.

For the fiscal years ended June 30, 2011 and 2010, P&G’s Pringles Business generated combined net sales of $1,445.7 million and $1,367.4 million, respectively, and operating income of $197.4 million and $166.9 million, respectively.

The Transactions

On April 5, 2011, Diamond and P&G announced that they had entered into a Transaction Agreement and a Separation Agreement, which provide for a business combination involving Diamond, P&G and Pringles. In the Transactions, P&G will contribute certain of the assets and liabilities of the Pringles Business to the Pringles Company, a newly formed wholly owned subsidiary of P&G. Prior to the Distribution, the Pringles Company is expected to be recapitalized by (1) issuing and delivering to P&G a number of additional shares of Pringles Company common stock such that the total number of shares of Pringles Company common stock held by P&G

 

 

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at the time of the Distribution will equal 29,143,190, all of which shares of Pringles Company common stock P&G will dispose of in the Distribution, (2) incurring new indebtedness in the form of the Pringles Debt and receiving net cash proceeds in an amount between $700 million and $1.05 billion, and (3) using such cash proceeds from the Pringles Debt, along with any cash contributed by P&G to the Pringles Company, to purchase certain Pringles Business assets from P&G affiliates.

On the closing date of the Transactions, P&G will distribute shares of Pringles Company common stock to its participating shareholders in an exchange offer. If the exchange offer is completed but is not fully subscribed, P&G will distribute all of the Remaining Shares as a pro rata dividend to P&G shareholders (after giving effect to the consummation of the exchange offer). On or prior to the consummation of the exchange offer, P&G will irrevocably deliver to the exchange agent all of the shares of Pringles Company common stock outstanding, with irrevocable instructions to hold the shares of Pringles Company common stock for the benefit of P&G shareholders whose shares of P&G common stock are being accepted for exchange in the exchange offer and, in the case of a pro rata dividend P&G shareholders whose shares of P&G common stock are outstanding after consummation of the exchange offer. If there is a pro rata dividend to be distributed, the exchange agent will calculate the exact number of shares of Pringles Company common stock not exchanged in the exchange offer and to be distributed in a pro rata dividend and that number of shares of Diamond common stock, into which such Remaining Shares will be converted in the Merger, will be transferred to P&G shareholders (after giving effect to the consummation of the exchange offer) on a pro rata basis as promptly as practicable thereafter. Immediately after the completion of the Distribution, the Pringles Company will merge with and into Merger Sub, a wholly owned subsidiary of Diamond, with Merger Sub continuing as the surviving company. In connection with the Merger, the shares of Pringles Company common stock distributed in connection with the Distribution will automatically convert into the right to receive shares of Diamond common stock on a one-for-one basis. See the sections of this proxy statement entitled “The Transactions,” “The Transaction Agreement” and “The Separation Agreement.”

Diamond expects to issue 29,143,190 shares of Diamond common stock in the Merger. Based upon the reported closing sales price of $90.37 per share for Diamond common stock on NASDAQ on September 23, 2011, the last NASDAQ trading day prior to the date of this proxy statement, the total value of the consideration to be paid by Diamond in the Transactions, including the Pringles Debt in an amount between $700 million and $1.05 billion to be assumed by Merger Sub after the consummation of the Transactions, would have been an amount between $3.33 billion and $3.68 billion. The value of the consideration to be paid by Diamond will depend on the market price of shares of Diamond common stock at the time of determination.

After the Merger, Diamond, through Merger Sub, its wholly owned subsidiary, will own and operate the Pringles Business under its current brand names and will also continue its current businesses. Diamond will continue to use the name “Diamond Foods, Inc.” after the Merger. All shares of Diamond common stock issued in the Merger will be listed on NASDAQ under Diamond’s current trading symbol “DMND.”

Below is a step-by-step description of the sequence of material events relating to the Transactions.

 

Step 1    Separation
   P&G will transfer to the Pringles Company, a newly formed, direct wholly owned subsidiary of P&G, certain assets relating to the Pringles Business, including certain subsidiaries of P&G. The Pringles Company will also assume certain liabilities associated with the Pringles Business.

 

 

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Step 2    Pringles Company Recapitalization
  

Prior to the Distribution, and in partial consideration for the assets of the Pringles Business transferred from P&G to the Pringles Company, the Pringles Company will be recapitalized in the following manner:

 

•    the Pringles Company will issue and deliver to P&G a number of additional shares of Pringles Company common stock such that the total number of shares of Pringles Company common stock held by P&G at the time of the Distribution will equal 29,143,190, all of which shares of Pringles Company common stock P&G will dispose of in the Distribution; and

 

•    the Pringles Company will enter into senior secured term credit facilities to borrow an amount between $700 million and $1.05 billion and will use the borrowed proceeds, along with any cash contributed by P&G to the Pringles Company, to purchase certain Pringles Business assets from P&G affiliates.

Step 3    Distribution—Exchange Offer
  

P&G will offer to P&G shareholders the right to exchange all or a portion of their shares of P&G common stock for shares of Pringles Company common stock in this exchange offer.

 

If the exchange offer is completed but is not fully subscribed, P&G will distribute the Remaining Shares as a pro rata dividend to P&G shareholders whose shares of P&G common stock remain outstanding after consummation of the exchange offer. If there is a pro rata dividend to be distributed, the exchange agent will calculate the exact number of shares of Pringles Company common stock not exchanged in the exchange offer and to be distributed in a pro rata dividend and that number of shares of Diamond common stock, into which the Remaining Shares will be converted in the Merger, will be transferred to P&G shareholders (after giving effect to the consummation of the exchange offer) on a pro rata basis as promptly as practicable thereafter.

 

The exchange agent will hold, for the account of the relevant P&G shareholders, the global certificate(s) representing all of the outstanding shares of Pringles Company common stock, pending the completion of the Merger. Shares of Pringles Company common stock will not be traded during this period.

Step 4    Merger
  

Immediately after the completion of the Distribution, on the closing date of the Transactions, the Pringles Company will merge with and into Merger Sub, with Merger Sub continuing as the surviving company.

 

Each share of Pringles Company common stock will be automatically converted into the right to receive one fully paid and nonassessable share of Diamond common stock.

 

 

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Set forth below are diagrams that graphically illustrate, in simplified form, the existing corporate structure, the corporate structure immediately following the Distribution but prior to the Merger, and the corporate structure immediately following the consummation of the Transactions.

LOGO

LOGO

 

 

 

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After completion of the steps mentioned above, the shares of Diamond common stock outstanding immediately prior to the Merger will represent approximately 43% of the shares of Diamond common stock that will be outstanding immediately after the Merger, and the shares of Diamond common stock issued in connection with the conversion of shares of Pringles Company common stock in the Merger will represent approximately 57% of the shares of Diamond common stock that will be outstanding immediately after the Merger.

After completion of all of the Merger and the other steps mentioned above, the Pringles Business will be owned and operated by Diamond through Merger Sub, its direct wholly owned subsidiary; Merger Sub will be the obligor on the Pringles Debt in an amount between $700 million and $1.05 billion; the Pringles Debt will be guaranteed by all existing and future direct and indirect subsidiaries of Merger Sub, other than certain foreign subsidiaries, and Diamond and all subsidiaries of Diamond that guarantee the indebtedness under Diamond’s credit facilities; and P&G’s affiliates will have received proceeds from the sale of certain Pringles Business assets to the Pringles Company funded from the net proceeds of the Pringles Debt and from any cash contributed by P&G to the Pringles Company, in each case, consummated prior to the Distribution. See “The Transactions—Number of Shares of Pringles Company Common Stock to be Distributed to P&G Shareholders.”

Various factors were considered by Diamond and P&G in negotiating the terms of the Transactions, including the equity ownership levels of Diamond stockholders and current and former P&G shareholders receiving shares of Diamond common stock in the Distribution. The principal factors considered by the parties negotiating the allocation of equity ownership following the Transactions were the relative actual results of operations of Diamond and the Pringles Business, the opportunities expected to be obtained from combining Diamond and the Pringles Business and the enhancements to Diamond’s strategic global growth objectives as a result of acquiring the Pringles Business. Diamond also considered, among other things, the expected impacts of the integration of the Pringles Business with Diamond and the other factors identified under “The Transactions—Background of the Transactions—Diamond’s Reasons for the Transactions.” P&G also considered, among other things, the relative sales, earnings and cash flow growth rates of the Pringles Business, the value to P&G shareholders that could be realized in the Transactions and the other factors identified under “The Transactions—Background of the Transactions—P&G’s Reasons for the Transactions.”

Business Strategies After the Transactions

Diamond is an innovative packaged foods company focused on building, acquiring and energizing brands. Diamond focuses on organic growth in its product lines, and will consider acquiring brands to improve its overall portfolio and competitive position. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts.

Diamond has demonstrated that it can grow both organically and through acquisitions. Between fiscal 2003 and fiscal 2011, Diamond’s retail sales grew at a 23% compounded annual growth rate. In the past five fiscal years, Diamond’s gross margin improved from 15% to 26%, operating margin grew from 3% to 11% and earnings per share have grown four-fold. Diamond’s profitable growth has been driven by its ability to expand distribution, and to contribute to category growth with high quality and innovative new products. Diamond competes based on product quality, innovation and differentiation as well as support of its brands among consumers and retailers.

Diamond expects the addition of Pringles, an iconic, global snack brand, to increase its scale in the snack aisle and provide opportunities to expand distribution and cross-promotional activities for Diamond’s entire snack portfolio. As with its previous acquisitions, Diamond plans to invest in the Pringles® brand to grow and leverage its increased scale to benefit its entire snack portfolio. In markets where Diamond currently sells snack products, Pringles would extend distribution reach into channels such as mass merchandisers, discount and

 

 

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convenience stores. These are channels where Diamond’s existing portfolio is more limited. Diamond is strongest in the grocery channel where Pringles is under-represented, which may provide the brand an opportunity for growth.

The acquisition of Pringles is attractive to Diamond because of its distribution strength in both developed and emerging markets. Pringles products are sold in 140 countries around the world, including developed countries and emerging markets across Asia, Latin America, Central Europe, the Middle East and Africa. These markets often experience higher growth rates than more developed markets, and Diamond plans to focus on and invest in the Pringles® brand, to grow the brand and to create new growth opportunities for other Diamond products as well.

Additional Agreements

In connection with the Transactions, P&G, the Pringles Company and Diamond will also enter into other agreements at the time of the Separation relating to: the provision of Olestra, an ingredient used in some Pringles products; certain transition services for a limited period of time following the completion of the Transactions; the use of specified facilities; and tax matters. See “Additional Agreements.”

Number of Shares of Pringles Company Common Stock to be Distributed to P&G Shareholders

As part of the Separation, the Pringles Company will issue to P&G additional shares of Pringles Company common stock so that the total number of shares of Pringles Company common stock issued and outstanding will be 29,143,190. This will result in the shares of Pringles Company common stock, when converted into shares of Diamond common stock and combined with the existing shares of Diamond common stock, being equal to approximately 57% of the combined total immediately upon completion of the Merger.

Diamond’s Financial Advisor

Diamond retained Merrill Lynch, Pierce, Fenner & Smith Incorporated (“BofA Merrill Lynch”) to act as financial advisor in connection with a possible transaction with P&G.

Opinion of Diamond’s Financial Advisor

In connection with the Transactions, BofA Merrill Lynch, Diamond’s financial advisor, delivered to the Diamond Board a written opinion, dated April 4, 2011, as to the fairness, from a financial point of view and as of the date of the opinion, of the Exchange Ratio to Diamond. The full text of the written opinion, dated April 4, 2011, of BofA Merrill Lynch, which describes, among other things, the assumptions made, procedures followed, factors considered and limitations on the review undertaken, is attached as Annex C to this proxy statement and is incorporated by reference herein in its entirety. BofA Merrill Lynch provided its opinion to the Diamond Board (in its capacity as such) for the benefit and use of the Diamond Board in connection with and for purposes of its evaluation of the Exchange Ratio from a financial point of view. BofA Merrill Lynch’s opinion does not address any other aspect of the Transactions and no opinion or view was expressed as to the relative merits of the Transactions in comparison to other strategies or transactions that might be available to Diamond or in which Diamond might engage or as to the underlying business decision of Diamond to proceed with or effect the Transactions. BofA Merrill Lynch’s opinion does not constitute a recommendation to any stockholder as to how to vote or act in connection with the Transactions or any related matter.

 

 

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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA

The following summary historical combined financial data of Pringles summary historical consolidated financial data of Diamond, summary unaudited condensed combined pro forma financial data of Diamond and comparative historical and pro forma per share data of Diamond are being provided to help you in your analysis of the financial aspects of the Transactions. The summary historical combined financial data of Pringles assumes that the transferred assets and liabilities of the Pringles Business had been held by the Pringles Company for all of the periods presented. The summary unaudited condensed combined pro forma financial data of Diamond and comparative historical and pro forma per share data of Diamond have been prepared by Diamond for illustrative purposes only and are not necessarily indicative of the operating results or financial position of Diamond or the Pringles Company had the Transactions been completed at the beginning of the periods or on the dates indicated, nor are they necessarily indicative of any future operating results or financial position. You should read this information in conjunction with the financial information included elsewhere and incorporated by reference in this proxy statement. See “Where You Can Find More Information; Incorporation by Reference,” “Information on Pringles,” “Information on Diamond” and “Selected Historical and Pro Forma Financial Data.”

Summary Historical Combined Financial Data of Pringles

Pringles’ combined balance sheet data presented below as of June 30, 2011 and 2010 and statement of income and cash flows data for the three fiscal years ended June 30, 2011, 2010 and 2009 have been derived from Pringles’ audited combined financial statements, included elsewhere in this proxy statement. The summary historical combined financial data below is not necessarily indicative of the results that may be expected for any future period. This information is only a summary and should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Pringles” and the financial statements of Pringles and the notes thereto included elsewhere in this proxy statement.

 

 

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The financial information of Pringles included in this proxy statement has been derived from the consolidated financial statements and accounting records of P&G and reflects assumptions and allocations made by P&G, and do not include any interest expense as no debt was recorded at Pringles for the periods presented. The financial position, results of operations and cash flows of Pringles presented may be different from those that would have resulted had the Pringles Company been operated as a standalone company or been a subsidiary of Diamond. As a result, the historical financial information of Pringles is not a reliable indicator of future results. See “Risk Factors.”

 

      Fiscal Year Ended
June 30,
 
      2011      2010     2009  
     (Dollars in millions)  

Statement of Income Data:

       

Net sales

   $ 1,455.7       $ 1,367.4     $ 1,396.4  

Cost of products sold

     924.0         886.9       1,049.3  
  

 

 

    

 

 

   

 

 

 

Gross profit

     531.7         480.5       347.1  

Selling, general and administrative expense

     333.5         314.1       279.8  

Other operating expense

     0.8         (0.5     7.4  
  

 

 

    

 

 

   

 

 

 

Operating income

     197.4         166.9       59.9  

Income taxes

     44.6         40.0       19.6  
  

 

 

    

 

 

   

 

 

 

Net income

   $ 152.8      $ 126.9     $ 40.3  
  

 

 

    

 

 

   

 

 

 

 

      As of
June 30,
 
      2011      2010  
     (Dollars in millions)  

Balance Sheet Data:

     

Total assets

   $ 580.7       $ 533.3  

Long-term debt

     —           —     

Noncurrent deferred income tax liabilities

     33.4         36.5  

Total equity

     365.3         338.0  

 

      Fiscal Year Ended
June 30,
 
      2011     2010     2009  
     (Dollars in millions)  

Statement of Cash Flows Data:

      

Cash provided by (used in):

      

Operating activities

   $ 191.1      $ 212.8     $ 105.1  

Investing activities

     (41.1     (27.2     (24.4

Financing activities

     (150.0     (185.6     (80.7

Depreciation and amortization expense

     45.9        46.5       74.2  

Capital expenditures

     (41.2     (28.1     (24.9

Other Financial Data:

      

EBITDA(1)

   $ 243.3      $ 213.4     $ 134.1  

 

(1)

EBITDA is a financial measure not prepared in accordance with GAAP and is defined as income before interest expense, interest income, provision for income taxes, depreciation and amortization. EBITDA is not adjusted for one-time charges such as restructuring costs. EBITDA is not adjusted for one-time charges such as restructuring costs. EBITDA is not, and should not, be used as a substitute for net income as

 

 

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  determined in accordance with GAAP. Pringles believes EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the branded food and beverage industry. However, EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of Pringles’ results as reported under GAAP. Other companies may calculate EBITDA differently from how Pringles calculates EBITDA, limiting its utility as a comparative measure. A reconciliation of EBITDA to net income appears below.

 

      Fiscal Year Ended
June 30,
 
      2011      2010      2009  
     (Dollars in millions)  

Net income

   $ 152.8       $ 126.9      $ 40.3  

Interest expense

     —           —           —     

Income taxes

     44.6         40.0        19.6  

Depreciation and amortization expense

     45.9         46.5        74.2  
  

 

 

    

 

 

    

 

 

 

EBITDA

   $ 243.3      $ 213.4      $ 134.1  
  

 

 

    

 

 

    

 

 

 

 

 

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Summary Historical Consolidated Financial Data of Diamond

The summary historical consolidated financial data presented below have been derived from, and should be read together with, Diamond’s consolidated financial statements and the accompanying notes and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections included in Diamond’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011, which is incorporated by reference into this proxy statement. The summary historical consolidated financial data as of July 31, 2011 and 2010 and for the fiscal years ended July 31, 2011, 2010 and 2009 have been derived from audited financial statements incorporated by reference in this prospectus. The data shown below is not necessarily indicative of results to be expected for any future period. To find out where you can obtain copies of Diamond’s documents that have been incorporated by reference, see “Where You Can Find More Information; Incorporation by Reference.”

 

      Fiscal Year Ended
July 31,
 
      2011      2010      2009  
     (Dollars in millions, except
per share data)
 

Consolidated Statement of Income Data:

        

Net sales

   $ 965.9       $ 680.2      $ 570.9   

Cost of sales

     714.8         519.2        435.3  
  

 

 

    

 

 

    

 

 

 

Gross profit

     251.1         161.0        135.6  

Operating expenses:

        

Selling, general and administrative

     97.0         64.3        61.0  

Advertising

     44.4         33.0        28.8  

Acquisition and integration related expenses

     16.8         11.5        —     
  

 

 

    

 

 

    

 

 

 

Total operating expenses

     158.2        108.8        89.8  
  

 

 

    

 

 

    

 

 

 

Income from operations

     92.9         52.2        45.8  

Interest expense, net

     23.8         10.2        6.3  

Other expenses, net

     —           1.8        0.9  
  

 

 

    

 

 

    

 

 

 

Income before income taxes

     69.1         40.2        38.6  

Income taxes

     18.9         14.0        14.9  
  

 

 

    

 

 

    

 

 

 

Net income

   $ 50.2      $ 26.2      $ 23.7  
  

 

 

    

 

 

    

 

 

 

Earnings per share:

        

Basic

   $ 2.28       $ 1.40      $ 1.45  

Diluted

   $ 2.22       $ 1.36      $ 1.42  

 

      As of
July 31,
 
      2011      2010  
     (Dollars in millions)  

Consolidated Balance Sheet Data:

     

Total assets

   $ 1,288.4       $ 1,225.9  

Long-term debt, including current portion

     531.7         556.1  

Total stockholders’ equity

   $ 454.8       $ 379.9  

 

 

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Summary Unaudited Condensed Combined Pro Forma Financial Data

This summary unaudited condensed combined pro forma financial data presented below have been prepared by Diamond and are being provided for illustrative purposes only and are not necessarily indicative of what the operating results or financial position of Diamond or Pringles would have been had the Transactions been completed at the beginning of the periods or on the dates indicated, nor are they necessarily indicative of any future operating results or financial position. Diamond and Pringles may have performed differently had they actually been combined during the periods presented.

 

      For the Fiscal Year
Ended July 31, 2011 for

Pro Forma Combined
Diamond and Pringles
 
    

(Dollars in millions,
except per share data)

 

Statement of Income Data:

  

Net sales

   $ 2,421.6   

Gross profit

     782.8   

Net income

     147.5   

Other Data:

  

Net income per share of common stock, basic

   $ 2.89   

Net income per share of common stock, diluted

   $ 2.85   

Weighted-average shares of common stock outstanding, basic

     50.7   

Weighted-average shares of common stock outstanding, diluted

     51.3   

Financial Position (at period end):

  

Cash and cash equivalents

   $ 6.8   

Total assets

     4,913.7   

Long-term debt

     1,194.7   

Other noncurrent liabilities

     679.4   

Total stockholders’ equity

     2,512.0   

Comparative Historical and Pro Forma Per Share Data

The following tables set forth historical and pro forma per share data for Diamond. The Diamond historical data have been derived from, and should be read together with, the audited consolidated financial statements of Diamond and the related notes thereto contained in Diamond’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011 and incorporated by reference into this proxy statement. The Diamond pro forma data have been derived from the unaudited condensed combined pro forma financial data of Diamond included elsewhere in this proxy statement. See “Where You Can Find More Information; Incorporation by Reference.”

This summary of comparative historical and pro forma per share data is being provided for illustrative purposes only and is not necessarily indicative of the results that would have been achieved had the Transactions been completed during the period presented, nor are they necessarily indicative of any future results. Diamond and Pringles may have performed differently had the Transactions occurred prior to the period presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had Diamond and Pringles been combined during the period presented or of the future results of Diamond following the Transactions.

 

 

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The following table presents certain historical and pro forma per share data for Diamond:

 

      As of and for the Fiscal Year Ended
July 31, 2011
 
      Historical      Pro Forma  

Diamond:

     

Earnings Per Share Data:

     

Basic

   $ 2.28       $ 2.89   

Diluted

   $ 2.22       $ 2.85   

Shares of common stock used to compute earnings per share (in millions):

     

Basic

     21.6         50.7   

Diluted

     22.2         51.3   

Book value per share of common stock

   $ 21.08       $ 49.57   

Cash dividends declared per share of common stock

   $ 0.18       $ 0.18   

Historical Market Price and Dividend Data

Historical Market Price

Historical market price data for the Pringles Company does not exist as the Pringles Company currently is a wholly owned subsidiary of P&G. As such, shares of Pringles Company common stock are not currently listed on a public stock exchange and are not publicly traded. Therefore, no market data is available for the Pringles Company.

Shares of Diamond common stock are currently traded on NASDAQ under the symbol “DMND.” On April 4, 2011, the last trading day before the announcement of the Transactions, the last sale price of shares of Diamond common stock reported by NASDAQ was $57.22. On September 23, 2011, the last sale price of shares of Diamond common stock reported by NASDAQ was $90.37 The following table sets forth the high and low sale prices of shares of Diamond common stock and the dividends declared for the periods indicated. For current price information, Diamond stockholders are urged to consult publicly available sources.

 

     Diamond Common Stock  
     High      Low      Dividends  

Fiscal Year Ended July 31, 2010

        

First Quarter

   $ 34.07       $ 26.21       $ 0.045   

Second Quarter

     37.24         29.10         0.045   

Third Quarter

     46.36         34.27         0.045   

Fourth Quarter

     46.67         36.72         0.045   

Fiscal Year Ended July 31, 2011

        

First Quarter

   $ 45.24       $ 37.91       $ 0.045   

Second Quarter

     55.97         42.96         0.045   

Third Quarter

     65.92         48.01         0.045   

Fourth Quarter

     79.37         62.78         0.045   

Fiscal Year Ending July 31, 2012

        

First Quarter (through September 23, 2011)

    
96.13
  
    
62.00
  
    
0.045
  

 

 

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Dividend Policy

Diamond currently has a policy of paying an annual dividend of $0.18 per share, payable in four equal installments. The payment of cash dividends in the future will be at the discretion of Diamond’s board of directors. The declaration of any cash dividends, and the amount thereof, will depend on many factors, including Diamond’s financial condition, capital requirements, funds from operations, the dividend taxation level, Diamond’s stock price, future business prospects, and any other factors as Diamond’s board of directors may deem relevant. Additionally, Diamond’s existing credit facilities place significant restrictions on Diamond’s ability to pay dividends. The credit facility to be entered into in connection with the Transactions will contain similar restrictions, and other indebtedness Diamond may incur in the future may contain similar restrictions.

 

 

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RISK FACTORS

You should carefully consider each of the following risks and all of the other information contained or incorporated by reference in this proxy statement, including the risks related to an investment in shares of Diamond common stock set forth in Part I, Item 1A of Diamond’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011. The occurrence of one or more of the events described in such risk factors could have a material adverse effect on the Transactions as well as the business, prospects, financial condition, results of operations and/or cash flow, as well as the investment profile, of the Pringles Company or Diamond. In such a case, the market price of shares of Diamond common stock may decline and you could lose all or part of your investment in Diamond. Furthermore, other unknown or unexpected economic, business, competitive, regulatory, geopolitical or other factors could also have a material adverse effect on the Pringles Company or Diamond.

Risks Relating to the Transactions

If the IRS successfully challenges the tax-free treatment of the Transactions, P&G and possibly its shareholders may incur substantial U.S. federal income tax liability, and Diamond may have substantial indemnification obligations to P&G under the Tax Matters Agreement.

P&G will receive a written opinion from Cadwalader, Wickersham & Taft LLP, special tax counsel to P&G, to the effect that the Distribution, together with certain related transactions, should qualify for federal income tax purposes as a reorganization under sections 355 and 368(a)(1)(D) of the Code, and that the Merger should not cause section 355(e) of the Code to apply to the Distribution. In addition, the completion of the Merger is conditioned on the receipt by P&G of a tax opinion from Cadwalader, Wickersham & Taft LLP, special tax counsel to P&G, and by Diamond of a tax opinion from Fenwick & West LLP, tax counsel to Diamond, in each case, to the effect that the Merger will qualify for U.S. federal income tax purposes as a reorganization within the meaning of section 368(a) of the Code. The opinions will be based on, among other things, certain assumptions and representations as to factual matters made by P&G, the Pringles Company, Diamond and Merger Sub which, if incorrect or inaccurate in any material respect, would jeopardize the conclusions reached by special tax counsel in their opinions. None of P&G, the Pringles Company, Diamond or Merger Sub is aware of any facts or circumstances that would cause the assumptions or representations to be relied upon in the above-described tax opinions to be untrue or incomplete in any material respect. It should be noted that there is a lack of binding administrative and judicial authority addressing the qualification under sections 355 and 368(a)(1)(D) of the Code of transactions substantially similar to the Distribution and the Merger, that the opinions will not be binding on the IRS or a court and that the IRS or a court may not agree with the opinions. As a result, while it is impossible to determine the likelihood that the IRS or a court could disagree with the conclusions of the above-described opinions, the IRS could assert, and a court could determine, that the Transactions should be treated as taxable transactions. The opinions will not be binding on the IRS or a court, and the IRS or a court may not agree with the opinions. Notwithstanding receipt of the above-described opinions, the IRS could determine that the Transactions should be treated as taxable transactions. If, notwithstanding the receipt of the above-described opinions, the Distribution is determined to be a taxable transaction, each P&G shareholder who receives shares of Pringles Company common stock in the Distribution would generally be treated as recognizing taxable gain equal to the difference between the fair market value of the shares of Pringles Company common stock received by the shareholder and its tax basis in the shares of P&G common stock exchanged therefor and/or receiving a taxable distribution equal to the fair market value of the shares of Pringles Company common stock received by the shareholder. Additionally, in such case, P&G would generally recognize taxable gain equal to the excess of the fair market value of the assets transferred to the Pringles Company plus liabilities assumed by the Pringles Company over P&G’s tax basis in such assets, and this would likely produce substantial income tax adjustments to P&G.

Even if the Distribution generally qualified as a reorganization under sections 368 and 355 of the Code, the Distribution would become taxable to P&G under section 355(e) of the Code if a 50% or greater interest (by vote or value) of P&G stock, Pringles Company stock or Diamond stock were treated as acquired directly or indirectly by certain persons as part of a plan or series of related transactions that included the Distribution. Because P&G

 

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shareholders should be treated as owning more than 50% of the shares of Diamond common stock following the Merger, the Merger, by itself, should not cause the Distribution to be taxable to P&G under section 355(e) of the Code. However, if the IRS were to determine that other acquisitions of Diamond shares after the Distribution were part of a plan or series of related transactions that included the Distribution for purposes of section 355(e) of the Code, such determination could result in the recognition of gain by P&G under section 355(e) of the Code. In such case, P&G would recognize gain as if it had sold the shares of Pringles Company common stock distributed to P&G shareholders for an amount equal to the fair market value of such stock, and this would likely produce substantial income tax adjustments to P&G.

Under the Tax Matters Agreement among P&G, the Pringles Company, Diamond and Merger Sub, the Diamond Group would be required to indemnify P&G against tax-related losses (e.g., increased taxes, penalties and interest required to be paid by P&G) if the Distribution were taxable to P&G as a result of the acquisition of a 50% or greater interest in Diamond as part of a plan or series of related transactions that included the Distribution to the extent that such tax-related losses were attributable to a breach of certain representations and warranties by Diamond described in the Tax Matters Agreement or actions or omissions of the Diamond Group, other than actions or omissions taken in reliance on a covenant, representation or warranty by P&G described in the Tax Matters Agreement that was breached or incorrect. In addition, the Diamond Group would be required to indemnify P&G for any tax liabilities resulting from the failure of the Merger to qualify as a reorganization under section 368(a) of the Code or the failure of the Distribution to qualify as a tax-free distribution under section 355 of the Code (including, in each case, failure to so qualify under a similar provision of state or local law) to the extent that such failure is attributable to a breach of certain representations and warranties by Diamond described in the Tax Matters Agreement or actions or omissions of the Diamond Group, other than actions or omissions taken in reliance on a covenant, representation or warranty by P&G described in the Tax Matters Agreement that was breached or incorrect. If the Diamond Group is required to indemnify P&G in the event of a taxable Distribution, this indemnification obligation would be substantial and could have a material adverse effect on Diamond.

If P&G recognizes gain on the Distribution attributable solely to P&G’s breach of any representation and/or covenant described in the Tax Matters Agreement, P&G would not be entitled to indemnification under such agreement. Additionally, tax-related losses attributable both to actions or omissions by the Diamond Group (other than those taken in reliance on a covenant, representation or warranty by P&G that was breached or incorrect), on the one hand, and actions or omissions by P&G or any other factor, on the other, would be shared according to the relative fault of Diamond and P&G. Except as described above, P&G would not be entitled to indemnification under the Tax Matters Agreement with respect to any gain recognized in the Distribution. To the extent that Diamond has any liability for any taxes of P&G, the Pringles Company or any of their affiliates with respect to the Transactions that do not result from actions or omissions for which the Diamond Group is liable as described above, P&G shall indemnify Diamond for such tax-related losses.

Sales of shares of Diamond common stock after the Transactions may negatively affect the market price of Diamond common stock.

The shares of Diamond common stock issued in the Transactions to holders of shares of Pringles Company common stock will generally be eligible for immediate resale. Currently, P&G shareholders include index funds that have performance tied to the Standard & Poor’s 500 Index, the Dow Jones Industrial Average or other stock indices, and institutional investors subject to various investing guidelines. Because Diamond may not be included in these indices following completion of the Transactions or may not meet the investing guidelines of some of these institutional investors, these index funds and institutional investors may decide not to participate in the exchange offer or may decide to or may be required to sell the shares of Diamond common stock that they receive in any subsequent pro rata distribution of the Remaining Shares. These sales, or the possibility that these sales may occur, could negatively affect the market price of Diamond common stock.

 

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The historical financial information of Pringles may not be representative of its results if it had been operated independently of P&G and, as a result, may not be a reliable indicator of its future results.

The financial information of Pringles included in this proxy statement has been derived from the consolidated financial statements and accounting records of P&G and reflects assumptions and allocations made by P&G. The financial position, results of operations and cash flows of Pringles presented may be different from those that would have resulted had Pringles been operated as a standalone company or by a company other than P&G. For example, in preparing Pringles’ financial statements, P&G made an allocation of costs and expenses that are attributable to the Pringles Business. However, these costs and expenses reflect the costs and expenses attributable to the Pringles Business operated as part of a larger organization and do not reflect costs and expenses that would be incurred by Pringles had it been operated independently and may not reflect costs and expenses that would have been incurred had Pringles been supported as a subsidiary of Diamond. As a result, the historical financial information of Pringles may not be a reliable indicator of future results.

Diamond may be unable to provide benefits and services or access to equivalent financial strength and resources to the Pringles Business that historically have been provided by P&G.

The Pringles Business has been able to receive benefits and services from P&G and has been able to benefit from P&G’s financial strength and extensive business relationships. After the Transactions, the Pringles Business will be owned by a subsidiary of Diamond and will no longer benefit from P&G’s resources. While Diamond has entered into separation-related agreements and P&G has agreed to provide certain transition services for a period of up to 12 months following the Transactions, it cannot be assured that Diamond will be able to adequately replace those resources or replace them at the same cost. If Diamond is not able to replace the resources provided by P&G or is unable to replace them at the same cost or is delayed in replacing the resources provided by P&G, Diamond’s results of operations may be negatively impacted.

Diamond may be affected by significant restrictions following the Transactions in order to avoid tax-related liabilities.

Even if the Distribution otherwise qualifies for tax-free treatment under section 355 of the Code, the Distribution generally would not qualify as a transaction that is tax-free to P&G if a 50% or greater interest (by vote or value) of P&G stock, Pringles Company stock or Diamond stock were treated under section 355(e) of the Code as acquired directly or indirectly by certain persons as part of a plan or series of related transactions that included the Distribution.

The Tax Matters Agreement will require that the Diamond Group, for a two-year period following the closing of the Transactions, generally avoid taking certain actions. These limitations are designed to restrict actions that might cause the Distribution to be treated under section 355(e) of the Code as part of a plan under which a 50% or greater interest (by vote or value) in Diamond is acquired or that could otherwise cause the Distribution to become taxable to P&G. Unless Diamond delivers certain unqualified opinions of tax counsel or a ruling from the IRS reasonably acceptable to P&G, in each case, confirming that a proposed action would not cause the Transactions to become taxable, Diamond and Merger Sub are each prohibited during the two-year period following the closing of the Transactions from:

 

   

subject to certain exceptions, issuing stock (or stock equivalents) in excess of a limited amount of Diamond shares and stock equivalents as determined under the Tax Matters Agreement;

 

   

subject to certain exceptions, recapitalizing, repurchasing, redeeming or otherwise participating in acquisitions of its stock;

 

   

amending its certificate of incorporation or other organizational documents to affect the voting rights of its stock;

 

   

merging or consolidating with another entity, or liquidating or partially liquidating, except as provided in the Transaction Agreement;

 

   

discontinuing, selling, transferring or ceasing to maintain its active business;

 

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soliciting a tender offer for its stock, participating in or supporting an unsolicited tender offer, or redeeming rights under a shareholder rights plan; and

 

   

engaging in other actions or transactions that could jeopardize the tax-free status of the Distribution and certain related transactions.

If Diamond or the Pringles Company takes any of the actions above and such actions result in tax-related losses to P&G, then the Diamond Group generally would be required to indemnify P&G for such losses.

Due to these restrictions and indemnification obligations under the Tax Matters Agreement, Diamond may be limited, during the two-year period following the closing of the Transactions, in its ability to pursue strategic transactions, equity or convertible debt financings or other transactions that may maximize the value of Diamond’s business. Also, Diamond’s potential indemnity obligation to P&G might discourage, delay or prevent a change of control transaction of Diamond during this two-year period that Diamond shareholders may consider favorable.

Diamond expects to incur significant one-time costs associated with the Transactions that could affect the period-to-period operating results of Diamond following the completion of the Transactions.

Diamond anticipates that it will incur one-time charges of approximately $150 million as a result of costs associated with the Transactions. Diamond will not be able to quantify the exact amount of this charge or the period in which it will be incurred until after the Transactions are completed. Some of the factors affecting the costs associated with the Transactions include the timing of the completion of the Transactions, the resources required in integrating the Pringles Business with Diamond’s existing businesses and the length of time during which transition services are provided to Diamond by P&G. The amount and timing of this charge could adversely affect the period-to-period operating results of Diamond, which could result in a reduction in the market price of shares of Diamond common stock.

Risks Relating to Diamond, Including the Pringles Business After the Transactions

The integration of the Pringles Business with Diamond may not be successful or anticipated benefits from the Transactions may not be realized.

After completion of the Transactions, Diamond will have significantly more sales, assets and employees than it did prior to the Transactions. The integration process will require Diamond to expand the scope of its operations and financial, accounting and control systems. Diamond’s management will be required to devote a substantial amount of time and attention to the process of integrating the Pringles Business with Diamond’s business operations. There is a significant degree of difficulty and management involvement inherent in that process. These difficulties include:

 

   

integrating the operations of the Pringles Business while carrying on the ongoing operations of Diamond’s business;

 

   

managing a significantly larger company than before the Transactions;

 

   

coordinating businesses located in new geographic regions, including significantly increased international operations;

 

   

operating two additional large manufacturing facilities in Tennessee and Belgium;

 

   

maintaining and protecting the competitive advantages of the Pringles Business, including the trade secrets, know-how and intellectual property related to its production processes;

 

   

integrating two distinct business cultures;

 

   

retaining personnel associated with the Pringles Business;

 

   

creating a new system for the distribution and sale of Pringles products to replace the P&G direct sales force, and integrating that system with Diamond’s current sales and distribution organization;

 

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creating uniform standards, controls, procedures, policies and information systems and minimizing costs associated with such matters; and

 

   

integrating information, purchasing, accounting, finance, sales, billing, payroll and regulatory compliance systems.

Diamond may not be able to successfully or cost-effectively integrate the Pringles Business. The process of integrating the Pringles Business into Diamond’s operations may cause an interruption of, or loss of momentum in, the activities of the Pringles Business or Diamond’s business. If Diamond management is not able to effectively manage the integration process, or if any significant business activities are interrupted as a result of the integration process, Diamond’s business could suffer and its results of operations and financial condition could be harmed.

Even if Diamond is able to combine the two business operations, it may not be possible to realize the full benefits of the increased sales volume and other benefits that are currently expected to result from the Transactions, or to realize those benefits within the time frame that is currently expected. For example, the elimination of duplicative costs may not be possible or may take longer than anticipated, or the benefits from the Transactions may be offset by unanticipated costs or integration delays. In addition, the benefits of the Transactions may be offset by increased operating costs relating to changes in commodity or energy prices, increased competition or other risks and uncertainties. If Diamond fails to realize the anticipated benefits of the Transactions, Diamond’s results of operations may be adversely affected.

If the operating results for the Pringles Business following the Transactions are poor, Diamond may not achieve the increases in revenues and net earnings that Diamond expects as a result of the Transactions.

Diamond has projected that it will derive a large portion of its revenues and net earnings from the operations of the Pringles Business after the Transactions. Therefore, any negative impact on those business operations could harm Diamond’s operating results. Some of the significant factors that could harm the operations of the Pringles Business, and therefore harm the future combined operating results of Diamond after the Transactions, include:

 

   

increases in raw materials, energy and packaging costs for the Pringles Business, including the cost of potatoes, vegetable oil and corrugate;

 

   

more intense competitive pressure from existing or new companies;

 

   

difficulties meeting demand for Pringles products;

 

   

increases in promotional costs for the Pringles Business; and

 

   

a decline in the markets served by the Pringles Business.

Diamond may be unable to manage its growth effectively, which would harm its business, results of operations and financial condition.

Following the Transactions, Diamond plans to invest in the Pringles® brand to grow and leverage its increased scale to benefit its entire snack portfolio. Diamond’s growth strategy, including its strategy with respect to the Pringles Business, may place a strain on its management team, information systems, labor, manufacturing and distribution capacity. The Pringles Business has experienced in the past, and may experience in the future, manufacturing capacity constraints, particularly in periods where customer demand exceeds management’s expectations. Diamond may determine that it is necessary to invest substantial capital in order to secure additional manufacturing and distribution capacity to accommodate the expected growth of its business. There may also be a delay between Diamond’s decision to invest in such manufacturing and distribution capacity and the time when such capacity is available for use. If Diamond does not make, or is unable to make, the necessary expenditures to accommodate its future growth, or if a significant amount of time passes between Diamond’s decision to invest and the time in which such capacity is available for use, it may not be successful in

 

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executing its growth strategy. If Diamond is unable to effectively address any future capacity constraints within its business, or otherwise manage its future growth, its business, results of operations and financial condition may be adversely affected.

Diamond may be required to conduct product recalls, and concerns with the safety and quality of food products could cause consumers to avoid Diamond’s products and reduce Diamond’s sales, net income and liquidity.

The sale of food products for human consumption involves risk of injury to consumers. Diamond faces risks associated with product recalls and liability claims if Diamond’s products become adulterated, mislabeled or misbranded, or cause injury, illness or death. Diamond’s products may be subject to product tampering and to contamination and spoilage risks, such as mold, bacteria, insects and other pests, shell fragments, cross-contamination and off-flavor contamination. If any of Diamond’s products were to be tampered with or otherwise tainted and Diamond is unable to detect it prior to shipment, Diamond’s products could be subject to a recall. Diamond’s ability to sell products could be reduced if governmental agencies conclude that Diamond’s products have been tampered with, or that certain pesticides, herbicides or other chemicals used by growers have left harmful residues on portions of the crop or that the crop has been contaminated by aflatoxin or other agents. A significant product recall could cause Diamond’s products to be unavailable for a period of time and reduce Diamond’s sales. Adverse publicity could result in a loss of consumer confidence in Diamond’s products, damage to Diamond’s reputation and also reduce Diamond’s sales for an extended period. Product recalls and product liability claims could increase Diamond’s expenses and have an adverse effect on demand for Diamond’s products and, consequently, reduce Diamond’s sales, net income and liquidity.

Government regulations could increase Diamond’s costs of production and Diamond’s business could be adversely affected.

As a food company, Diamond is subject to extensive government regulation, including regulation of the manufacturing, importation, processing, product quality, packaging, storage, distribution and labeling of Diamond’s products. Furthermore, there may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where Diamond operates may impose new manufacturing, importation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase Diamond’s costs and affect its profitability. For example, various regulatory authorities and others have paid increasing attention to the effect on humans due to the consumption of acrylamide—a naturally-occurring chemical compound that is formed in the process of cooking many foods, including potato chips, and a potential carcinogen—and have imposed additional regulatory requirements. In the State of California, Diamond is required to warn about the presence of acrylamide and other potential carcinogens in its products. If consumer concerns about acrylamide increase, demand for affected products could decline and Diamond’s revenues and business could be harmed.

The manufacturing operations of Diamond are subject to various national, regional or state and local laws and regulations that require Diamond to obtain licenses relating to customs, health and safety, building and land use and environmental protection. Diamond is also subject to environmental regulations governing the discharge into the air, and the generation, handling, storage, transportation, treatment and disposal of waste materials. New or amended statutes and regulations, increased production at existing facilities, and Diamond’s expansion into new operations and jurisdictions may require Diamond to obtain new licenses and permits, and could require Diamond to change its methods of operations, which could be costly. Failure to comply with applicable laws and regulations could subject Diamond to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, all of which could have an adverse effect on Diamond’s business.

A disruption at any of Diamond’s production facilities would significantly decrease production, which could increase Diamond’s cost of sales and reduce Diamond’s net sales and income from operations.

Diamond processes and packages its products in several domestic and international facilities and also has co-manufacturing agreements and co-pack arrangements with third parties. With the acquisition of the Pringles

 

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Business, Diamond expects to add two large manufacturing facilities in Tennessee and Belgium, as well as additional co-manufacturing arrangements with third-party suppliers in China and Malaysia. A temporary or extended interruption in operations at any of Diamond’s facilities, whether due to technical or labor difficulties, destruction or damage from fire, flood or earthquake, infrastructure failures such as power or water shortages, raw material shortage, terrorism or any other reason, whether or not covered by insurance, could interrupt Diamond’s manufacturing operations, disrupt communications with customers and suppliers, and cause Diamond to lose sales and write off inventory. Any prolonged disruption in the operations of its facilities would have a significant negative impact on the ability of Diamond to manufacture and package its products on its own and may cause it to seek additional third-party arrangements, thereby increasing production costs. These third parties may not be as efficient as Diamond and may not have the capabilities to process and package some of Diamond’s products, which could adversely affect sales or operating income. Further, current and potential customers might not purchase Diamond’s products if they perceive Diamond’s lack of alternate manufacturing facilities to be a risk to their continuing source of products.

The acquisition of other product lines or businesses could pose risks to Diamond’s business and the market price of its common stock.

Diamond intends to continue to review acquisition prospects that Diamond believes could complement its existing business. Any such future acquisitions could result in accounting charges, potentially dilutive issuances of stock, and increased debt and contingent liabilities, any of which could have an adverse effect on Diamond’s business and the market price of Diamond’s common stock. Acquisitions entail many financial, managerial and operational risks, including difficulties integrating the acquired operations, effective and immediate implementation of internal controls over financial reporting, diversion of management attention during the negotiation and integration phases, uncertainty entering markets in which Diamond has limited prior experience, and potential loss of key employees of acquired organizations. Diamond may be unable to integrate product lines or businesses that Diamond acquires, which could have an adverse effect on its business and on the market price of its common stock.

Changes in the food industry, including changing dietary trends, consumer preferences and adverse publicity about the health effects of consuming some products, could reduce demand for Diamond’s products.

Consumer tastes can change rapidly as a result of many factors, including shifting consumer preferences, dietary trends and purchasing patterns. Diamond’s growth is largely dependent on the snack market, where consumer preferences are particularly unpredictable. To address consumer preferences, Diamond invests significant resources in research and development of new products. If Diamond fails to anticipate, identify or react to consumer trends, or if new products Diamond develops do not achieve acceptance by retailers or consumers, demand for Diamond’s products could decline, which would in turn cause Diamond’s revenue and profitability to be lower.

In addition, some of Diamond’s products, including Pringles® brand products, contain sodium, preservatives and other ingredients, the health effects of which are the subject of increasing public scrutiny, including the suggestion that excessive consumption of these ingredients can lead to a variety of adverse health effects. In the United States and other countries, there is increasing consumer awareness of health risks, including obesity, associated with consumption of these ingredients, as well as increased consumer litigation based on alleged adverse health impacts of consumption of various food products. A continuing global focus on health and wellness, including weight management, and increasing media attention to the role of food marketing, could adversely affect Diamond’s brand image or lead to stricter regulations and greater scrutiny of food marketing practices. Increased legal or regulatory restrictions on Diamond’s advertising, consumer promotions and marketing, or the response of Diamond to such restrictions, could limit its efforts to maintain, extend and expand its brands. Moreover, adverse publicity about regulatory or legal action against Diamond could damage its reputation and brand image, undermine customers’ confidence and reduce long-term demand for its products, even if the regulatory or legal action is unfounded or not material to Diamond’s operations.

 

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Increased costs associated with product processing and transportation, such as water, electricity, natural gas and fuel costs, could increase Diamond’s expenses and reduce its profitability.

Diamond requires a substantial amount of energy and water to process its products. Transportation costs, including fuel and labor, also represent a significant portion of the cost of Diamond’s products, because Diamond uses third-party truck and rail companies to collect its raw materials and deliver its products to its distributors and customers. These costs fluctuate significantly over time due to factors that may be beyond Diamond’s control, including increased fuel prices, adverse weather conditions or natural disasters, employee strikes and increased export and import restrictions. Diamond may not be able to pass on increased costs of production or transportation to its customers. In addition, from time to time, transportation service providers have a backlog of shipping requests, which could impact Diamond’s ability to ship products in a timely fashion. Increases in the cost of water, electricity, natural gas, fuel or labor, and failure to ship products on time, could increase Diamond’s costs of production and adversely affect its profitability.

Diamond’s raw materials are subject to fluctuations in availability and price.

The availability, size, quality and cost of raw materials for the production and packaging of Diamond’s products, including potato flakes, nuts, potatoes, corn and corn products, cooking and vegetable oils, corrugate, resins and other commodities, are subject to price volatility and fluctuations in availability caused by changes in global supply and demand, weather conditions, governmental agricultural and energy programs, exchange rates for foreign currencies and consumer demand. For example, Diamond’s potato chip and other potato snack-related products are dependent on suppliers providing Diamond with an adequate supply of quality potatoes and potato flakes on a timely basis. The failure of suppliers to meet the specifications, quality standards or delivery schedules could have an adverse effect on Diamond’s potato chip and other potato snack-related operations. In particular, a sudden scarcity, substantial price increase, or unavailability of ingredients could adversely affect Diamond’s operating results. There can be no assurance that alternative ingredients would be available when needed on commercially attractive terms, if at all. In addition, high commodity prices could lead to unexpected costs and price increases of Diamond’s products which might dampen growth of consumer demand for Diamond’s products. Currently, Diamond does not hedge against changes in commodity prices. If Diamond is unable to increase productivity to offset these increased costs or increase its prices, this could substantially harm Diamond’s business and results of operations.

If the parties Diamond depends upon for raw material supplies do not perform adequately, Diamond’s ability to manufacture its products may be impaired, which could harm Diamond’s business and results of operations.

Diamond relies on third-party suppliers for the raw materials it uses to manufacture its products, and Diamond’s ability to manufacture its products depends on receiving adequate supplies on a timely basis, which may be difficult or uneconomical to procure. In some cases, such as the supply of canisters for its potato crisps, the Pringles Business is dependent upon single canister suppliers in the United States and Europe. If Diamond does not maintain good relationships with suppliers that are important to it or is unable to identify a replacement supplier or develop its own sourcing capabilities, its ability to manufacture its products may be harmed, which would result in interruptions in Diamond’s business. In addition, even if Diamond is able to find replacement suppliers when needed, it may not be able to enter into agreements with them on favorable terms and conditions, which could increase Diamond’s costs of production. The occurrence of any of these risks could adversely affect Diamond’s business and results of operations.

If Diamond is unable to compete effectively in the markets in which it operates, its sales and profitability would be negatively affected.

In general, competition in Diamond’s markets is highly competitive and based on product quality, price, brand recognition and brand loyalty. As a result, there are ongoing competitive product and pricing pressures in

 

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the markets in which Diamond operates, as well as challenges in maintaining profit margins. Diamond’s products compete against food and snack products sold by many regional and national companies, some of which are substantially larger and have greater resources than Diamond has. The greater scale and resources that may be available to Diamond’s competitors could provide them with the ability to lower prices or increase their promotional or marketing spending to compete more effectively. To address these challenges, Diamond must be able to successfully respond to competitive factors, including pricing, promotional incentives and trade terms. Diamond may need to reduce its prices in response to competition and to maintain its market share. Competition and customer pressures may restrict its ability to increase prices in response to commodity or other cost increases. Diamond may also need to increase spending on marketing, advertising and new product innovation to maintain or increase its market share. If Diamond is unable to compete effectively, Diamond could be unable to increase the breadth of the distribution of its products or lose customers or distribution of products, which could have an adverse impact on its sales and profitability.

The loss of any major customer could decrease sales and adversely impact Diamond’s net income.

Diamond depends on a few significant customers for a large proportion of its net sales. This concentration has become more pronounced with the trend toward consolidation in the retail grocery store industry. Sales to Diamond’s top customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 15% and 17% of Diamond’s net sales for the fiscal years ended July 31, 2011 and 2010, respectively. Sales to Wal-Mart Stores, Inc., accounted for approximately 13% and 12% of Pringles Business’ net sales for the fiscal years ended June 30, 2011 and 2010, respectively. Sales to Costco Wholesale Corporation represented 11% and 12% of Diamond’s net sales for the fiscal years ended July 31, 2011 and 2010, respectively. The success of Diamond’s business is dependent on its ability to successfully manage relationships with these customers, or any other significant customer. Further, there is a continuing trend towards retail trade consolidation, which can create significant cost and margin pressure on Diamond’s business. The loss of any major customers, or any other significant customer, or a material decrease in their purchases from Diamond, could result in decreased sales and adversely impact Diamond’s net income.

Diamond’s proprietary brands and packaging designs are essential to the value of its business, and the inability to protect , and costs associated with protecting, its intellectual property could harm the value of its brands and adversely affect its business and results of operations.

The success of Diamond depends significantly on its know-how and other intellectual property. For example, the Pringle Business established its leading market position in the stackable crisp segment of the potato chip market and developed its signature stackable crisp using proven, patented technology. Diamond also relies on a combination of trademarks, service marks, trade secrets, patents, copyrights and similar rights to protect its intellectual property. Diamond’s success also depends in large part on its continued ability to use existing trademarks and service marks in order to maintain and increase brand awareness and further develop its brand. Diamond’s efforts to protect its intellectual property may not be adequate, third parties may misappropriate or infringe on Diamond’s intellectual property or develop more efficient and advanced technologies, Diamond’s patents expire over time and third parties may use such previously patented technology to compete against Diamond, and its third-party manufacturers and partners may disclose Diamond’s trade secrets. From time to time, Diamond is engaged in litigation to protect its intellectual property, which could result in substantial costs as well as diversion of management attention. The occurrence of any of these risks could adversely affect Diamond’s business and results of operations.

Diamond depends on its key personnel and if it loses the services of any of these individuals, or fails to attract and retain additional key personnel, it may not be able to implement its business strategy or operate its business effectively.

Diamond’s future success largely depends on the contributions of its senior management team. Diamond believes that these individuals’ expertise and knowledge about Diamond’s industry and their respective fields and

 

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their relationships with other individuals in Diamond’s industry are critical factors to Diamond’s continued growth and success. Diamond does not carry key person insurance. The loss of the services of any member of Diamond’s senior management team could have an adverse effect on Diamond’s business and prospects. Diamond’s success also depends upon its ability to attract and retain additional qualified sales, marketing and other personnel.

Economic downturns may adversely affect Diamond’s business, financial condition and results of operations.

Unfavorable economic conditions may negatively affect Diamond’s business and financial results. These economic conditions could negatively impact consumer demand for Diamond’s products, the mix of its products’ sales, its ability to collect accounts receivable on a timely basis, the ability of suppliers to provide the materials required in its operations and its ability to obtain financing or to otherwise access the capital markets. Additionally, unfavorable economic conditions could have an impact on Diamond’s lenders or customers, causing them to fail to meet their obligations to Diamond. The occurrence of any of these risks could adversely affect Diamond’s business, financial condition and results of operations.

Diamond’s business and operations could be negatively impacted if it fails to maintain satisfactory labor relations.

The success of Diamond’s business depends substantially upon Diamond’s ability to maintain satisfactory relations with Diamond’s employees. Diamond’s production workforce in one of its facilities belongs to a union and is covered by a collective bargaining agreement. Strikes or work stoppages and interruptions could occur if Diamond is unable to renew this agreement on satisfactory terms. If a work stoppage or slow down were to occur, it could adversely affect Diamond’s business and disrupt Diamond’s operations. The terms and conditions of existing or renegotiated agreements also could increase Diamond’s costs or otherwise affect Diamond’s ability to fully implement future operational changes to its business.

Diamond’s business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which it conducts business and other factors related to its international operations.

Diamond conducts a substantial amount of its business with vendors and customers located outside the United States. During fiscal 2011, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, Germany, Netherlands, Turkey, China and Spain, accounted for approximately 30% of Diamond’s net sales. During fiscal 2011, sales of the Pringles Business outside of the United States represented over half of its net sales. With the acquisition of the Pringles Business, Diamond expects a substantial increase in the percentage of its products sold in countries other than the United States. In addition, Diamond expects a substantial increase of its operations and employees that are located outside of the United States, including in Belgium. As a result of its significant international operations, Diamond is subject to a number of risks, including, but not limited to, changes in exchange rates for foreign currencies, which may reduce the U.S. dollar value of revenues and earnings received, as well as exchange controls and other limits on its ability to repatriate earnings from outside the United States. Diamond maintains local currency cash balances in a number of foreign countries with exchange controls.

Further, Diamond expects to achieve growth, in part, by achieving disproportionate growth in developing regions. Should growth rates or the market share of Diamond’s products fall substantially below expected levels in these regions, its financial condition could be adversely affected.

In addition, many factors relating to Diamond’s international operations and to particular countries in which Diamond operates could have a negative impact on its business, financial condition and results of operations. These factors include:

 

   

negative economic developments in economies around the world and the instability of governments, including the threat of war, terrorist attacks, epidemic or civil unrest;

 

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adverse changes in laws and governmental policies, especially those affecting trade and investment;

 

   

pandemics, such as the flu, which may adversely affect Diamond’s workforce as well as its local suppliers and customers;

 

   

earthquakes, tsunamis, floods or other major disasters which may limit the supply of nuts or other products that Diamond purchases abroad;

 

   

tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements imposed by governments;

 

   

foreign currency exchange and transfer restrictions;

 

   

increased costs, disruptions in shipping or reduced availability of freight transportation;

 

   

differing labor standards;

 

   

differing levels of protection of intellectual property;

 

   

difficulties and costs associated with complying with U.S. laws and regulations applicable to entities with overseas operations;

 

   

the threat that Diamond’s operations or property could be subject to nationalization and expropriation;

 

   

varying practices of the regulatory, tax, judicial and administrative bodies in the jurisdictions where Diamond operates, including without limitation potentially negative consequences from changes in anti-competition laws;

 

   

difficulties and costs associated with complying with, and enforcing remedies under, a wide variety of complex foreign laws, treaties and regulations; and

 

   

potentially burdensome taxation and changes in foreign tax laws.

The occurrence of any of these international business risks could have an adverse effect on Diamond’s business, financial condition and results of operations.

A material impairment in the carrying value of acquired goodwill or other intangible assets could negatively affect Diamond’s consolidated operating results and net worth.

A significant portion of Diamond’s assets is goodwill and other intangible assets, the majority of which are not amortized but are reviewed at least annually for impairment. If the carrying value of these assets exceeds the current fair value, the asset is considered impaired and is reduced to fair value resulting in a non-cash charge to earnings. Events and conditions that could result in impairment include a sustained drop in the market price of Diamond’s common stock, increased competition or loss of market share, product innovation or obsolescence, or product claims that result in a significant loss of sales or profitability over the product life. At July 31, 2011, the carrying value of goodwill and other intangible assets totaled $858.4 million, compared to total assets of $1,288.4 million and total stockholders’ equity of $454.8 million.

Upon conclusion of the Transactions, Diamond will have incurred a substantial amount of indebtedness, which could adversely affect its ability to raise additional capital to fund its operations and limit its ability to react to changes in the economy or its industry.

Upon conclusion of the Transactions, Diamond will have incurred a substantial amount of debt. Diamond’s ability to make scheduled payments or to refinance its indebtedness depends on its financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond Diamond’s control. Diamond may not be able to maintain a level of cash flow from operations sufficient to permit it to pay the principal, premium, if any, and interest on its indebtedness. If Diamond’s cash flows and capital resources are insufficient to fund its debt service obligations, Diamond may be

 

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forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance its indebtedness. Diamond may not be able to take any of these actions, and these actions may not be successful or permit it to meet its scheduled debt service obligations and these actions may not be permitted under the terms of its existing or future debt agreements. In the absence of such operating results and resources, Diamond could face liquidity problems and might be required to dispose of material assets or operations to meet its debt service and other obligations. Since Diamond’s debt agreements restrict its ability to dispose of assets, it may not be able to consummate such dispositions, and this could result in its inability to meet its debt service obligations.

This indebtedness could have other important consequences, including:

 

   

increasing Diamond’s vulnerability to adverse economic, industry or competitive developments;

 

   

exposing Diamond to the risk of increased interest rates to the extent that its indebtedness bears interest at variable rates;

 

   

making it more difficult to satisfy obligations with respect to Diamond’s indebtedness, and any failure to comply with the obligations of any of its debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing the indebtedness;

 

   

restricting Diamond from making strategic acquisitions or causing it to make non-strategic divestitures;

 

   

limiting Diamond’s ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and

 

   

placing Diamond at a competitive disadvantage compared to competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that its leverage prevents it from pursuing.

In addition, Diamond may be able to incur substantial additional indebtedness in the future. Although existing agreements governing its indebtedness contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of significant qualifications and exceptions, and under certain circumstances, the amount of indebtedness that could be incurred in compliance with these restrictions could be substantial. If new debt is added to Diamond’s and its subsidiaries’ existing debt levels, the related risks that it now faces would increase.

Diamond expects the debt agreements that will be entered into in conjunction with the Transactions will contain restrictions limiting Diamond’s flexibility in operating its business.

Diamond’s credit facilities will contain various covenants that limit Diamond’s ability to engage in specified types of transactions. These covenants may limit Diamond’s ability to, among other things:

 

   

make certain investments or other capital expenditures;

 

   

sell assets;

 

   

create liens;

 

   

acquire other companies and businesses;

 

   

borrow additional funds under new revolving credit facilities;

 

   

consolidate, merge, sell or otherwise dispose of all or substantially all of Diamond’s assets; and

 

   

enter into transactions with Diamond’s affiliates.

 

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A breach of any of these covenants could result in a default under Diamond’s credit facilities. Upon the occurrence of an event of default, the lenders could elect to declare all amounts outstanding under the credit facilities to be immediately due and payable and terminate all commitments to extend further credit. To the extent any of these credit facilities are secured, if Diamond was unable to repay those amounts, the lenders under these credit facilities could proceed against the collateral granted to them to secure that indebtedness.

The voting power of pre-Merger Diamond stockholders will be reduced as a result of the Transactions.

Following the Transactions, the Diamond common stock outstanding immediately prior to the Merger will represent approximately 43% of the Diamond common stock that will be outstanding immediately after the Merger, and the Diamond common stock issued in connection with the conversion of shares of Pringles Company common stock in the Merger will represent approximately 57% of the Diamond common stock that will be outstanding immediately after the Merger.

The market price of Diamond’s common stock is volatile and may result in investors selling shares of its common stock at a loss.

The trading price of Diamond’s common stock is volatile and subject to fluctuations in price in response to various factors, many of which are beyond Diamond’s control, including:

 

   

Diamond’s operating performance and the performance of other similar companies;

 

   

changes in Diamond’s revenues or earnings estimates or recommendations by any securities analysts who may decide to follow its stock or its industry;

 

   

publication of research reports about Diamond or its industry by any securities analysts who may decide to follow its stock or its industry;

 

   

speculation in the press or investment community;

 

   

terrorist acts; and

 

   

general market conditions, including economic factors unrelated to Diamond’s performance.

In the past, securities class action litigation has often been instituted against companies following periods of volatility in their stock price. This type of litigation against Diamond could result in substantial costs and divert its management’s attention and resources.

Diamond’s ability to raise capital in the future may be limited, and its failure to raise capital when needed could prevent it from executing its growth strategy.

The timing and amount of Diamond’s working capital and capital expenditure requirements may vary significantly depending on many factors, including:

 

   

market acceptance of its products;

 

   

the need to make large capital expenditures to support and expand production capacity;

 

   

the existence of opportunities for expansion; and

 

   

access to and availability of sufficient management, technical, marketing and financial personnel.

If Diamond’s capital resources are not sufficient to satisfy its liquidity needs, it may seek to sell additional equity or debt securities or obtain other debt financing. The sale of additional equity or convertible debt securities would result in additional dilution to its stockholders. Additional debt would result in increased expenses and could result in covenants that would further restrict its operations. Diamond may not be able to obtain additional financing, if required, in amounts or on terms acceptable to Diamond, or at all.

 

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Anti-takeover provisions could make it more difficult for a third party to acquire Diamond.

Diamond has adopted a stockholder rights plan and will issue one preferred stock purchase right with each share of Diamond common stock that it issues. Each right will entitle the holder to purchase one one-hundredth of a share of Diamond’s Series A Junior Participating Preferred Stock. Under certain circumstances, if a person or group acquires 15% or more of Diamond’s outstanding common stock, holders of the rights (other than the person or group triggering their exercise) will be able to purchase, in exchange for the $60.00 exercise price, shares of Diamond’s common stock or of any company into which Diamond is merged having a value of $120.00. In addition, this exercise price may be increased by Diamond’s board of directors in the future, which would increase the resulting effect of triggering the rights plan. The rights expire in March 2015 unless extended by Diamond’s board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to acquire Diamond without the approval of Diamond’s board of directors, Diamond’s rights plan could make it more difficult for a third party to acquire Diamond (or a significant percentage of its outstanding capital stock) without first negotiating with Diamond’s board of directors regarding such acquisition.

In addition, Diamond’s board of directors has the authority to issue up to 5,000,000 shares of preferred stock (of which 500,000 shares have been designated as Series A Junior Participating Preferred Stock) and to determine the price, rights, preferences, privileges and restrictions, including voting rights, of those shares without any further vote or action by the stockholders. The rights of the holders of Diamond common stock may be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future.

Further, certain provisions of Diamond’s charter documents, including provisions establishing a classified board of directors, eliminating the ability of stockholders to take action by written consent and limiting the ability of stockholders to raise matters at a meeting of stockholders without giving advance notice, may have the effect of delaying or preventing changes in control or Diamond’s management, which could have an adverse effect on the market price of Diamond’s common stock. Further, Diamond is subject to the anti-takeover provisions of section 203 of the Delaware General Corporation Law, which will prohibit an “interested stockholder” from engaging in a “business combination” with Diamond for a period of three years after the date of the transaction in which the person became an interested stockholder, even if such combination is favored by a majority of stockholders, unless the business combination is approved in a prescribed manner. All of the foregoing could have the effect of delaying or preventing a change in control or management.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This proxy statement, including the information incorporated by reference into this proxy statement, contains forward-looking statements, such as projected operating results, earnings and cash flows, that are subject to known and unknown risks and uncertainties that could cause actual results to differ materially from any future results, performance or achievements expressed or implied by those forward-looking statements.

You should understand that the risks, uncertainties, factors and assumptions listed and discussed in this proxy statement, including the following important factors and assumptions, could affect the future results of Diamond following the Transactions and could cause actual results to differ materially from those expressed in the forward-looking statements:

 

   

volatility of commodity markets from which raw materials and packaging materials, particularly potato flakes, nuts, potatoes, corn and corn products, cooking and vegetable oils, corrugate and resins, are procured and the related impact on costs;

 

   

the integration of the Pringles Business with Diamond’s business, operations and culture and the ability to realize synergies and other potential benefits of the Transactions within the time frames currently contemplated;

 

   

the inability of Diamond to manage its growth effectively;

 

   

a disruption at any of Diamond’s production facilities;

 

   

increased water, electricity, natural gas and fuel costs and their impact on transportation, manufacturing and packaging costs;

 

   

the ability to successfully implement price changes;

 

   

the success and cost of marketing and sales programs and strategies intended to promote growth in Diamond’s business, which will include the Pringles Business after the completion of the Transactions;

 

   

general competitive activity in the market, including competitors’ pricing practices and promotional spending levels;

 

   

the concentration of Diamond’s business, which will include the Pringles Business after the completion of the Transactions, with key customers and the ability to manage and maintain key customer relationships;

 

   

the loss of significant customers or a substantial reduction in orders from these customers or the bankruptcy of any such customer;

 

   

changes in the food industry, including changing dietary trends, consumer snack preferences and adverse publicity about the health effects of consuming Diamond’s products;

 

   

the ability of Diamond and Pringles to obtain any required financing;

 

   

the timing and amount of Diamond’s capital expenditures, restructuring and merger and integration costs;

 

   

the outcome of current and future tax examinations and other tax matters, and their related impact on Diamond’s tax positions;

 

   

foreign currency and interest rate fluctuations;

 

   

other factors affecting share prices and capital markets generally; and

 

   

the other factors described under “Risk Factors.”

You are cautioned not to unduly rely on such forward-looking statements, which speak only as of the date made, when evaluating the information presented in this proxy statement. None of P&G, the Pringles Company, Diamond or the dealer manager assumes any obligation to update or revise these forward-looking statements to reflect new events or circumstances, except as required by law.

 

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THE SPECIAL MEETING

Date, Time and Place of the Special Meeting

The special meeting will be held at 333 Battery Street, San Francisco, CA 94111 on Thursday, October 27, 2011, at 10:00 a.m., Pacific Time. This proxy statement and the accompanying form of proxy card were first mailed to stockholders on or about September 26, 2011.

Purposes of the Special Meeting

The purposes of the special meeting are for you to consider and vote upon:

 

   

a proposal to approve the issuance of Diamond common stock in connection with the Merger;

 

   

subject to the above proposal, a proposal to approve the adoption of the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock in the form attached as Annex D to this document;

 

   

a proposal to approve adjournments or postponements of the special meeting, if necessary, to permit further solicitation of proxies if there are not sufficient votes at the time of the special meeting to approve the proposal to issue Diamond common stock in connection with the Merger; and

 

   

a proposal to approve the adoption of the 2011 International Stock Purchase Plan

No business may be transacted at the special meeting other than the matters set forth in this proxy statement.

Record Date of the Special Meeting

Holders of record of Diamond common stock at the close of business on September 22, 2011 will be entitled to notice of the special meeting and to vote at the special meeting or any adjournment or postponement of the special meeting.

Outstanding Shares

As of the close of business on the record date, there were 22,008,605 outstanding shares of Diamond common stock that are entitled to vote at the special meeting.

Shares Entitled to Vote at the Special Meeting

You are entitled to one vote for each share of Diamond common stock held as of the record date. Diamond common stock beneficially held by Diamond or its subsidiaries will not be voted.

Quorum Requirements for the Special Meeting

A quorum of Diamond stockholders is necessary to hold a valid special meeting.

The presence in person or by proxy at the special meeting of holders of Diamond common stock entitled to exercise as of the record date at least a majority of the outstanding voting power of Diamond common stock is necessary for a quorum. Abstentions and broker non-votes count as present for establishing a quorum. Diamond common stock held by Diamond or its subsidiaries do not count toward a quorum. A “broker non-vote” occurs with respect to a proposal when a broker is not permitted to vote on that proposal without instruction from the beneficial owner of the Diamond common stock and no instruction is given.

Shares Owned by Diamond’s Directors and Executive Officers as of the Record Date

As of the record date, Diamond directors and executive officers as a group owned and were entitled to vote approximately     % of the outstanding Diamond common stock.

 

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Vote Necessary at the Special Meeting to Approve the Proposals

The proposal relating to the approval of the issuance of Diamond common stock in connection with the Merger requires the affirmative vote of the holders of a majority of the shares represented and voting at the special meeting, either in person or by proxy.

The proposal relating to the adoption of the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock requires the approval of at least a majority of the outstanding voting power of Diamond common stock.

The proposal relating to the approval of adjournments or postponements of the special meeting to permit further solicitation of proxies, in necessary, requires the affirmative vote of the holders of a majority of the shares represented and voting at the special meeting, either in person or by proxy.

The proposal relating to the approval of the adoption of the 2011 International Stock Purchase Plan requires the affirmative vote of the holders of a majority of the shares represented and voting at the special meeting, either in person or by proxy.

Abstentions and broker non-votes will have the same effect as a vote against the proposal relating to the adoption of the certificate of amendment to Diamond’s certificate of incorporation, but abstentions and broker non-votes will have no effect on the outcome of the proposals relating to issuance of Diamond common stock in connection with the Merger, adjournments or postponements of the Diamond special meeting, if necessary, to permit further solicitation of proxies, and adoption of the 2011 International Stock Purchase Plan, in each case, so long as a majority of the outstanding shares of Diamond common stock have voted on the proposal.

 

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VOTING BY PROXY

Voting Your Proxy

Most stockholders have three options for submitting their votes: by internet, telephone or mail. If you have Internet access, you may submit your proxy by following the “Vote by Internet” instructions on the proxy card. If you live in the United States or Canada, you may submit your proxy by following the “Vote by Telephone” instructions on the proxy card. If you complete and properly sign the proxy card you receive and return it to us in the prepaid envelope, your shares will be voted in accordance with the specifications made on the proxy card. If no specification is made on a signed and returned proxy card, the shares represented by the proxy will be voted “FOR” each of the proposals presented. We encourage stockholders with Internet access to record their votes on the Internet or, alternatively, to vote by telephone. Internet and telephone voting is convenient, saves on postage and mailing costs and is recorded immediately, minimizing risk that postal delays may cause votes to arrive late and therefore not be counted. Stockholders who attend the special meeting may vote in person, and any previously submitted votes will be superseded by the vote cast at the special meeting.

How to Vote

Complete, sign, date and return your proxy card(s) in the enclosed envelope or call the toll-free telephone number or use the Internet as described in the instructions included with your proxy card(s).

If you hold Diamond common stock through a broker or other custodian, please follow the voting instructions provided by that firm. If you do not sign, date and return your proxy card(s), or vote by telephone or by using the Internet, or if your shares are held in a stock brokerage account or held by a bank, broker or other nominee, or, in other words, in “street name” and you do not instruct your bank, broker or other nominee how to vote those shares, those shares will not be voted at the special meeting for the proposals in this proxy statement.

A number of banks and brokerage firms participate in a program that also permits stockholders whose shares are held in “street name” to direct their vote by telephone or by using the Internet. This option, if available, will be reflected in the voting instructions from the bank or brokerage firm that accompany this document. If your shares are held in an account at a bank or brokerage firm that participates in such a program, you may direct the vote of these shares by telephone or by using the Internet by following the voting instructions enclosed with the proxy form from the bank or brokerage firm. The telephone and Internet proxy procedures are designed to authenticate stockholders’ identities, to allow stockholders to give their proxy voting instructions and to confirm that those instructions have been properly recorded. The Internet and telephone proxy procedures for Diamond stockholders are also designed to obtain proof of beneficial ownership of Diamond common stock. Votes directed by telephone or by using the Internet through such a program must be received by 1:00 a.m., Central time, on October 27, 2011. Requesting a legal proxy prior to the deadline described above will automatically cancel any voting directions you have previously given by telephone or by using the Internet with respect to your shares.

Directing the voting of your shares will not affect your right to vote in person if you decide to attend the special meeting; however, you must first obtain a signed and properly executed legal proxy from your bank, broker or other nominee to vote your shares held in street name and bring it to the special meeting.

If you sign and submit your proxy but do not make specific choices, your proxy will be voted FOR each of the proposals presented.

The Diamond Board has unanimously approved the Transactions, the Transaction Agreement, and the other agreements relating to the Transactions, and determined that the Transactions, including the issuance of Diamond common stock in connection with the Merger, are advisable, fair to and in the best

 

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interests of Diamond and its stockholders. The Diamond Board unanimously recommends that stockholders vote FOR the proposal to issue Diamond common stock in connection with the Merger, FOR the proposal to adopt the certificate of amendment to Diamond’s certificate of incorporation to increase the authorized number of shares of Diamond common stock, FOR the proposal to approve adjournments or postponements of the special meeting for the purpose of soliciting additional proxies, if necessary, and FOR the proposal to approve the adoption of the 2011 International Stock Purchase Plan.

Revoking Your Proxy

If you are a record holder of Diamond common stock, you can change your vote at any time before it is voted by:

 

   

delivering a written notice to Georgeson Inc., that the proxy is revoked;

 

   

signing and dating a new proxy card(s), and submitting your proxy so that it is received prior to the special meeting or voting by telephone or by using the Internet prior to the special meeting in accordance with the instructions included with the proxy card(s); or

 

   

attending the special meeting and voting in person.

If your shares are held in street name by your broker, you will need to contact your broker to revoke your proxy, and if in the alternative you wish to vote in person at the special meeting, you must bring to the special meeting a letter from the broker confirming your beneficial ownership of the shares and that the broker is not voting the shares at the special meeting. Note that your mere presence at the special meeting will not revoke the appointment if you had previously appointed a proxy. In the event of multiple online or telephone votes by a stockholder, each vote will supersede the previous vote and the last vote cast will be deemed to be the final vote of the stockholder unless such vote is revoked in person at the special meeting.

Other Voting Matters

Voting in Person

If you plan to attend the special meeting and wish to vote in person, we will give you a ballot at the special meeting. However, if your Diamond common stock is held in street name, you must first obtain a legal proxy from your broker authorizing you to vote the shares in person, which you must bring with you to the special meeting.

People with Disabilities

We can provide reasonable assistance to help you participate in the special meeting if you tell us about your disability and how you plan to attend. Please call or write the corporate secretary of Diamond at least two weeks before the special meeting at the number or address provided in the section of this document captioned “Where You Can Find More Information; Incorporation by Reference.”

Proxy Solicitations

This document is being furnished to you in connection with the Diamond Board’s solicitation of proxies from the holders of Diamond common stock for the special meeting. In addition to this mailing, Diamond’s directors, officers and employees (who will not receive any additional compensation for such services) may solicit proxies personally, electronically or by mail, facsimile or telephone. We will pay the costs of soliciting proxies. We have also engaged Georgeson Inc. to assist in the solicitation of proxies. We will pay this firm a fee of approximately $25,000, plus certain other customary fees and expenses. We will also reimburse brokerage houses and other custodians, nominees and fiduciaries for their reasonable expenses for sending proxy materials to the beneficial owners of Diamond common stock. The extent to which these proxy-soliciting efforts will be necessary depends upon how promptly proxies are submitted. You should submit your completed proxy card(s) without delay by mail or vote by telephone or by using the Internet if available.

 

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Other Business, Adjournments and Postponements

Other Business

No business may be transacted at the special meeting other than the matters set forth in this proxy statement.

Adjournments of the Special Meeting

Any adjournment may be made from time to time by approval of the stockholders holding a majority of the voting power present in person or by proxy at the special meeting, whether or not a quorum exists, without further notice other than by an announcement made at the special meeting.

Postponements of the Special Meeting

If a quorum is not present at the special meeting, stockholders may be asked to vote on a proposal to adjourn or postpone the special meeting to solicit additional proxies. If a quorum is not present at the special meeting, the officers of the company or the holders of a majority of the Diamond common stock entitled to vote who are present in person or by proxy at the special meeting may adjourn or postpone the meeting. If a quorum is present at the special meeting but there are not sufficient votes at the time of the special meeting to approve the other proposal(s), holders of Diamond common stock may also be asked to vote on a proposal to approve the adjournment or postponement of the special meeting to permit further solicitation of proxies.

 

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INFORMATION ON THE DISTRIBUTION

P&G expects that the shares of Pringles Company common stock will be distributed to P&G shareholders in an Exchange Offer in which P&G shareholders would have the option to exchange their shares of P&G common stock for shares of Pringles Company common stock (and any subsequent pro rata dividend if the Exchange Offer is consummated but not fully subscribed), as described in the next paragraph. Shares of Pringles Company common stock will be offered to P&G shareholders in the Exchange Offer based upon the market prices of shares of P&G common stock and Diamond common stock calculated during a specified period pursuant to the terms of the Exchange Offer, at a discount which will be set by P&G at the time of commencement of the Exchange Offer. Promptly after the specific terms of the Exchange Offer are set, Diamond will publish a press release describing them. The press release will be filed with the SEC and available to stockholders on Diamond’s web page (www.diamondfoods.com).

On or prior to the expiration of the Exchange Offer, P&G will irrevocably deliver to the exchange agent all of the shares of Pringles Company common stock outstanding, with irrevocable instructions to hold the shares of Pringles Company common stock in trust for P&G shareholders whose shares of P&G common stock are being accepted for exchange in the Exchange Offer and, in the case of a pro rata dividend, P&G shareholders whose shares of P&G common stock are outstanding after the consummation of the Exchange Offer. If the Exchange Offer is completed but is not fully subscribed, P&G will distribute all of the Remaining Shares in a pro rata dividend to all P&G shareholders whose shares of P&G common stock remain outstanding after consummation of the Exchange Offer. If there is a pro rata dividend to be distributed, the exchange agent will calculate the exact number of shares of Pringles Company common stock not exchanged in the Exchange Offer and to be distributed in a pro rata dividend and that number of Diamond common stock, into which such Remaining Shares will be converted in the Merger, will be transferred to P&G shareholders (after giving effect to the consummation of the Exchange Offer) on a pro rata basis as promptly as practicable thereafter.

Diamond and Diamond stockholders are not a party to the Distribution and are not being asked to separately vote on the Distribution or to otherwise participate in the Distribution.

Diamond expects to issue 29,143,190 shares of Diamond common stock in the Merger. Based upon the reported closing sales price of $90.37 per share for shares of Diamond common stock on NASDAQ on September 23, 2011, the last NASDAQ trading day prior to the date of this proxy statement, the total value of the consideration to be paid by Diamond in the Transactions, including Pringles Debt in an amount between $700 million and $1.05 billion to be assumed by Merger Sub after the consummation of the Transactions, would have been an amount between $3.33 billion and $3.68 billion. The value of the consideration to be paid by Diamond will depend on the market price of Diamond common stock at the time of determination.

P&G’s Exchange Offer will be subject to various conditions that will be described in the Pringles Company’s registration statement and Diamond’s registration statement.

The information included in this section regarding P&G’s Exchange Offer is being provided to Diamond’s stockholders for informational purposes only and is not complete. For additional information on P&G’s Exchange Offer and the terms and conditions of P&G’s Exchange Offer, Diamond stockholders are urged to read the Pringles Company’s registration statement on Form S-4/S-1 or Diamond’s registration statement on Form S-4.

 

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INFORMATION ON DIAMOND

Overview

Diamond is an innovative packaged food company focused on building, acquiring and energizing brands. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, Diamond complemented its strong heritage in the culinary nut market under the Diamond of California® brand by launching a full line of snack nuts under the Emerald® brand. In September 2008, Diamond acquired the Pop Secret® brand of microwave popcorn products, which provided Diamond with increased scale in the snack market, significant supply chain economies of scale and cross-promotional opportunities with Diamond’s existing brands. In March, 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and United Kingdom, which added the complementary premium Kettle Brand® to Diamond’s existing portfolio of leading brands in the snack industry. Diamond sells its products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores and other retail channels. Diamond’s principal executive offices are located at 600 Montgomery Street, 13th Floor, San Francisco, California 94111-2702.

During fiscal 2011, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, Germany, Netherlands, Turkey, China and Spain accounted for approximately 30% of Diamond’s net sales. For the fiscal years ended July 31, 2011 and 2010, Diamond had $965.9 million and $680.2 million of net sales, respectively, and generated net income of $50.2 million and $26.2 million, respectively.

Diamond has three product lines:

 

   

Snack. Diamond sells snack products under the Emerald®, Pop Secret® and Kettle Brand® brands and after the completion of the Transactions will sell snack products under the Pringles® brand. Emerald products include roasted, glazed and flavored nuts, trail mixes, seeds, dried fruit and similar offerings packaged in innovative resealable containers. In September 2008, Diamond expanded its snack product line with the acquisition of the Pop Secret microwave popcorn from General Mills, Inc. Microwave popcorn products are offered in a variety of traditional flavors, as well as a “better-for-you” product offering featuring 100-calorie packs. On March 31, 2010, Diamond complemented its snack portfolio with the acquisition of Kettle Foods, a leading premium potato and tortilla chip company. Kettle Foods products are offered in a variety of flavors and sizes. Diamond’s snack products are typically available in grocery store snack, natural and produce aisles, mass merchandisers, club stores, convenience stores, drug stores, natural food stores and other places where snacks are sold.

 

   

Culinary and Retail In-shell. Diamond sells culinary nuts under the Diamond of California® brand in grocery store baking aisles and produce aisles and through mass merchandisers and club stores. Culinary nuts are marketed to individuals who prepare meals or baked goods at home and who value fresh, high-quality products. Diamond also sells in-shell nuts under the Diamond of California® brand, primarily during the winter holiday season. These products are typically available in grocery store produce sections, mass merchandisers and club stores.

 

   

Non-Retail. Diamond’s non-retail nut business includes international markets and North American ingredient customers. Diamond markets ingredient nuts internationally under the Diamond of California® brand to food processors, restaurants, bakeries and food service companies and their suppliers. Diamond’s institutional and industrial customers use Diamond’s standard or customer-specified products to add flavor and enhance nutritional value and texture in their product offerings.

 

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Diamond’s net sales were as follows (in millions):

 

     Year Ended July 31,  
     2011      2010      2009  

Snack

   $ 553.2       $ 321.4         188.9   

Culinary and Retail In-shell

     262.9         249.0         276.2   
  

 

 

    

 

 

    

 

 

 

Total Retail

     816.1         570.4         465.1   
  

 

 

    

 

 

    

 

 

 

International Non-Retail

     119.0         69.2         68.9   

North American Ingredient/Food Service and Other

     30.8         40.6         36.9   
  

 

 

    

 

 

    

 

 

 

Total Non-Retail

     149.8         109.8         105.8   
  

 

 

    

 

 

    

 

 

 

Total Net Sales

   $ 965.9       $ 680.2         570.9   
  

 

 

    

 

 

    

 

 

 

Diamond’s fiscal year begins on August 1 and ends on the following July 31. For example, Diamond’s “fiscal 2011” began on August 1, 2010 and ended on July 31, 2011.

Diamond’s Business

Marketing

Diamond believes that its marketing efforts are fundamental to the success of its business. Advertising expenses were $44.4 million in fiscal year 2011, $33.0 million in fiscal year 2010 and $28.8 million in fiscal year 2009. Diamond develops marketing strategies specific to each product line, focusing on building brand awareness and attracting consumers to its offerings. To maintain good customer relationships, these efforts are designed to establish a premium value proposition to minimize the impact on Diamond’s customers’ private label sales.

Diamond’s consumer-targeted marketing campaigns include television, print and digital advertisements, coupons, co-marketing arrangements with complementary consumer product companies, and cooperative advertising with select retail customers. Diamond’s television advertising airs on national network and cable channels and often are aired during key sporting events suited to Diamond’s product demographic. Diamond designs and provides point-of-purchase displays for use by its retail customers. These displays help to merchandize Diamond’s products in a consistent, eye-catching manner and make Diamond’s products available for sale in multiple locations in a store, which increases impulse purchase opportunities. Diamond’s public relations and event sponsorship efforts are an important component of Diamond’s overall marketing and brand awareness strategy. Diamond offers samples and supports active lifestyle consumers by sponsoring events such as marathons and other running events. Promotional activities associated with Diamond’s ingredient/food service products include attending regional and national trade shows, trade publication advertising, and customer-specific marketing efforts. These promotional efforts highlight Diamond’s commitment to quality assurance, processing and storage capabilities and product customization.

Sales and Distribution

In North America, Diamond markets its consumer products through its sales personnel directly to large national grocery, mass merchandiser, club, convenience stores and drug store chains. Diamond’s sales department also oversees Diamond’s broker and distributor network. Diamond’s distributor network carries Kettle Brand® potato chips to grocery, convenience and natural food stores in various parts of the United States and Canada. In the United Kingdom, Diamond markets its potato chip products through Diamond’s sales personnel directly to national grocery, co-op and impulse store chains.

Diamond distributes its products from its own production facilities in Alabama, California, Indiana, Oregon, Wisconsin, and Norwich, England, and from leased warehouse and distribution facilities in California, Georgia, Illinois, Indiana, New Jersey, Oregon, Wisconsin, Ontario, Canada and Snetterton, England. Diamond’s sales administration and logistics departments manage the administration and fulfillment of customer orders. The majority of Diamond’s products are shipped from Diamond’s production, warehouse and distribution facilities by contract and common carriers.

 

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Product Development and Production

Diamond’s innovation program is broken down into four phases. A cross-functional team leads this process from idea generation through commercialization. The Diamond team utilizes outside partners to bring additional expertise as well as resources to the front end of this development process. Once new products have been identified and developed, Diamond’s internal cross-functional commercialization team manages the process from inception to large-scale production and is responsible for consistently delivering high-quality products to market. Diamond processes and packages most of its nut products at the Stockton, California, Robertsdale, Alabama, and Fishers, Indiana facilities; Diamond’s popcorn products are primarily processed and packaged in the Van Buren, Indiana facility under a third-party co-pack arrangement; and Diamond’s potato chips are processed and packaged at Salem, Oregon, Beloit, Wisconsin, and Norwich, England facilities. Periodically, Diamond may use third parties to process and package a portion of its products when warranted by demand and specific technical requirements.

Competition

Diamond operates in a highly competitive environment. Diamond’s products compete against food products sold by many regional and national companies, some of which are larger and have substantially greater resources than Diamond does. Diamond believes that additional competitors will enter the snack product market as large food companies begin to offer products that directly compete with Diamond’s snack product offerings. Diamond also competes for shelf space of retail grocers, convenience stores, drug stores, mass merchandisers, natural food and club stores. As these retailers consolidate, the number of customers and potential customers declines and their purchasing power increases. As a result, there is greater pressure to manage distribution capabilities in ways that increase efficiency for these large retailers, especially on a national scale. In general, competition in Diamond’s markets is based on product quality, price, brand recognition and loyalty. The combination of the strength of Diamond’s brands, Diamond’s product quality and differentiation, as well as Diamond’s broad channel distribution helps Diamond to compete effectively in each of these categories. Diamond’s principal competitors are regional and national nut manufacturers, national popcorn manufacturers, regional and national potato chip manufacturers and regional, national and international food suppliers.

Raw Materials and Supplies

Diamond obtains its raw materials from domestic and international sources. Diamond currently purchases a majority of its walnuts from growers located in California who have entered into long-term supply contracts with Diamond. Additional walnuts may be purchased from time to time from other California walnut processors. Diamond purchases its other nut requirements from domestic and international processors on the open market. For example, during fiscal 2011, all of the walnuts, peanuts and almonds Diamond obtained were grown in the United States, most of Diamond’s supply of hazelnuts came from the United States and Diamond’s supply of pecans were sourced from the United States and northern Mexico. With respect to nut types sourced primarily from abroad, Diamond imports Brazil nuts from the Amazon basin, cashew nuts from India, Africa, Brazil and Southeast Asia, hazelnuts from Turkey and pine nuts from China and Turkey. Outside of Diamond’s nut products, Diamond obtains corn from its primary third-party co-packer in the United States, with additional sourcing capabilities, if needed, from Argentina. Diamond obtains potatoes from the United States and the United Kingdom, with additional sourcing capabilities, if needed, from Continental Europe.

Diamond believes that it will be able to procure an adequate supply of raw materials for its products in the future, although the availability and cost of raw materials are subject to crop size, quality, yield fluctuations, changes in governmental regulation, and the rate of supply contract renewals, as well as other factors.

Diamond purchases all other supplies used in its business from third parties, including roasting oils, seasonings, plastic containers, foil bags, labels and other packaging materials. Diamond believes that each of these supplies is available from multiple sources and that Diamond’s business is not materially dependent upon any individual supplier relationship.

 

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Trademarks and Patents

Diamond markets its products primarily under the Diamond®, Emerald®, Pop Secret® and Kettle Brand® brands, each of which is protected with trademark registration with the U.S. Patent and Trademark Office, as well as in various other jurisdictions. Diamond’s agreement with Blue Diamond Growers limits Diamond’s use of the Diamond® brand in connection with its marketing of snack nut products, but preserves its exclusive use of the Diamond® brand for all culinary and in-shell nut products. Diamond also owns two U.S. patents related to nut processing methods, a number of U.S. patents acquired from General Mills related to popcorn pouches, flavoring and microwave technologies and patents acquired through its acquisition of Kettle Foods related to the manufacturing of chips and tortillas. While these patents, which have various durations, are an important element of Diamond’s success, Diamond’s business as a whole is not materially dependent on them. Diamond expects to continue to renew for the foreseeable future those trademarks that are important to Diamond’s business.

Seasonality

Diamond experiences seasonality in its business. Demand for Diamond’s in-shell and culinary products is highest during the months of October, November and December. Diamond purchases walnuts and pecans between August and February, and processes them throughout the year until the following harvest. Diamond purchases potatoes throughout the year, and demand for potato chips is highest in the months of June, July and August in the United States and November and December in the United Kingdom. As a result of this seasonality, Diamond’s personnel, working capital requirements and inventories peak during the last four months of the calendar year. Diamond experiences seasonality in capacity utilization at its Stockton, California and Fishers, Indiana facilities associated with the annual walnut harvest.

Customers

Sales to Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), accounted for approximately 15%, 17% and 21% of Diamond’s net sales for the fiscal years ended July 31, 2011, 2010 and 2009, respectively. Sales to Costco Wholesale Corporation accounted for 11%, 12% and 13% of Diamond’s net sales for the fiscal years ended July 31, 2011, 2010 and 2009, respectively. No other single customer accounted for more than 10% of Diamond’s net sales.

Employees

As of July 31, 2011, Diamond had 1,797 full-time employees consisting of 1,310 production and distribution employees, 393 administrative and corporate employees, and 94 sales and marketing employees. Diamond’s labor requirements typically peak during the last quarter of the calendar year, when Diamond generally uses temporary labor to supplement its full-time work force. Diamond’s production and distribution employees in the Stockton, California plant are members of the International Brotherhood of Teamsters. Diamond considers relations with its employees to be good.

Properties

Diamond owns its facility located on 70 acres in Stockton, California. This facility consists of approximately 635,000 square feet of office and production space and 120,000 square feet of refrigerated storage space. Diamond acquired three production facilities in the Kettle Foods transaction consisting of approximately 70,000 square feet of office and production space in Salem, Oregon, approximately 123,000 square feet of office and production space in Norwich, England, and 68,000 square feet of office and production space in Beloit, Wisconsin. Diamond leases office space in San Francisco, California. Three additional production facilities are located in Robertsdale, Alabama, Fishers, Indiana and Van Buren, Indiana. The Robertsdale facility is owned by Diamond. It consists of approximately 55,000 square feet of office and production space and 15,000 square feet of refrigerated storage space. The Fishers facility is leased and consists of approximately 117,000 square feet of office and production space and 60,000 square feet of warehouse/storage space. The leases on the Fishers facility

 

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are non-cancellable operating leases which expire in 2015 and 2019. Diamond owns the Van Buren facility, in which a co-packer manufactures Diamond’s popcorn products, which consists of approximately 40,000 square feet and is located on the co-packer’s manufacturing campus. Finally, Diamond leases warehousing facilities in California, Georgia, Illinois, Indiana, New Jersey, Oregon, Wisconsin, Canada and the United Kingdom.

Diamond believes that its facilities are generally well maintained and are in good operating condition, and will be adequate for Diamond’s needs for the foreseeable future.

Legal Proceedings

Diamond is the subject of various legal actions in the ordinary course of its business. All such matters, and the matter described above, are subject to many uncertainties that make their outcomes unpredictable. Diamond believes that resolution of these matters will not have a material adverse effect on Diamond’s financial condition, operating results or cash flows.

Directors and Officers of Diamond Before and After the Transactions

Board of Directors

The directors of Diamond immediately following the closing of the Transactions are expected to be the directors of Diamond immediately prior to the closing of the Transactions. The members of the Diamond Board are classified into three classes pursuant to Diamond’s bylaws.

Listed below is the biographical information for each person who is currently a member of the Diamond Board.

Laurence M. Baer. Mr. Baer, 54, has served as a director of Diamond since 2005. He has served as the President of the San Francisco Giants Baseball Club, a major league baseball team, since October 2008. Prior to becoming President, Mr. Baer was Executive Vice President of the San Francisco Giants Baseball Club since 1992 and was its Chief Operating Officer since 1996. From 1985 through 1989, Mr. Baer served in marketing positions at Westinghouse Broadcasting. From 1990 until 1992, Mr. Baer served as Assistant to the Chairman of CBS, Inc., a media and entertainment corporation. Mr. Baer holds a B.A. from the University of California, Berkeley, and an M.B.A. from Harvard Business School.

Edward A. Blechschmidt. Mr. Blechschmidt, 59, has served as a director of Diamond since 2008. He was Chief Executive Officer of Novelis Corp. from December 2006 until its sale to the Birla Group on May 2007. Mr. Blechschmidt was Chairman, Chief Executive Officer and President of Gentiva Health Services, Inc., a leading provider of specialty pharmaceutical and home health care services, from 2000 to 2002. From 1999 to 2000, Mr. Blechschmidt served as Chief Executive Officer and a director of Olsten Corporation, the conglomerate from which Gentiva Health Services was split off and taken public. He served as President of Olsten from 1998 to 1999. Mr. Blechschmidt also served as President and Chief Executive Officer of Siemens Nixdorf America and Siemens Pyramid Technologies from 1996 to 1998. Prior to Siemens, he spent more than 20 years with Unisys Corporation, including serving as its Chief Financial Officer. Mr. Blechschmidt serves as a director of Healthsouth Corp., Lionbridge Technologies, Inc., and Columbia Laboratories, Inc. In addition, he served on the Board of Directors of Neoforma, Inc. from 2003 to 2006 and Option Care, Inc. from 2005 to 2007.

John J. Gilbert. Mr. Gilbert, 68, has served as a director of Diamond since 2005 and as Diamond’s Chairman Emeritus since January 2010. He served as the Chairman of the Diamond Board from 2005 to January 2010 and was Chairman of the Board of Diamond’s predecessor company, Diamond Walnut Growers, from 1996 to 2005. Since 1983, Mr. Gilbert has been the owner and President of Gilbert Orchards and Rio Oso Groves, Inc., each of which is a family corporation focusing on walnuts. Mr. Gilbert holds a B.S. from California Polytechnic State University, San Luis Obispo.

 

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Robert M. Lea. Mr. Lea, 68, has served as a director of Diamond since 2005 and was a member of the Board of Directors of Diamond’s predecessor company, Diamond Walnut Growers, from 1993 to 2005. Since 2004, Mr. Lea has practiced law as a solo practitioner with the Law Offices of Robert Lea, which he founded. During 2004, Mr. Lea served as the Managing Partner of Lea and Shepherd, a law firm. From 1984 to 2003, Mr. Lea was a partner of the law firm Lea & Arruti. Mr. Lea holds a B.A. from the University of California, Davis and a J.D. from the University of California, Berkeley, School of Law (Boalt Hall).

Michael J. Mendes. Mr. Mendes, 48, has served as a director of Diamond since 2005, as Diamond’s Chairman, President and Chief Executive Officer since January 2010 and as Diamond’s President and Chief Executive Officer since 1997. Mr. Mendes joined Diamond in 1991 and served as Diamond’s Vice President of International Sales and Marketing prior to being appointed as Diamond’s Chief Executive Officer. Mr. Mendes served as Manager of International Marketing of the Dole Food Company from 1989 to 1991. Mr. Mendes currently serves on the Grocery Manufacturers Association (“GMA”) Board of Directors and served as Chairman of the President’s Advisory Council of the GMA. Mr. Mendes has also served on the Board of Directors of the California Chamber of Commerce and on the advisory board for The Wine Group, a wine company. Mr. Mendes received an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Steven M. Neil. Mr. Neil, 59, has served as a director of Diamond since 2005 and as Diamond’s Executive Vice President, Chief Financial and Administrative Officer since March 2008. In addition, Mr. Neil has served on the Diamond Board since 2005. Prior to joining Diamond, Mr. Neil was Executive Vice President and Chief Financial Officer of The Cooper Companies, Inc., a company that manufactures specialty healthcare products, from April 2007 until March 2008. From 2005 to April 2007, Mr. Neil was Vice President and Chief Financial Officer of The Cooper Companies. From 2003 to 2005, Mr. Neil served as Executive Vice President, Chief Financial Officer and Secretary of Ocular Sciences, Inc., a contact lens company. From 1997 to 2003, Mr. Neil was Executive Vice President, Finance, Chief Financial Officer, Treasurer and Secretary of Sola International, a marketer of eyeglass lenses. Mr. Neil holds a B.A. from the University of California, Santa Barbara, and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Joseph P. Silveira. Mr. Silveira, 64, has served as a director of Diamond since 2005 and was a member of the Board of Directors of Diamond’s predecessor company, Diamond Walnut Growers, from 2002 to 2005. Mr. Silveira also served on the Board of Valley Fig Growers from 1992 to 2004, an agricultural cooperative, and while on that Board, he also served on the Board of Directors of Sun Diamond, a master cooperative organization that included Diamond Walnut Growers. Since 1994, Mr. Silveira has served as President of Farmland Management Services, Inc., an agricultural services company, directing property acquisitions, operations, leases and sales on behalf of clients including large institutional investors. Mr. Silveira holds a B.S. from California Polytechnic State University, San Luis Obispo.

Glen C. Warren, Jr. Mr. Warren, 55, has served as a director of Diamond since 2005. He has served as President, Chief Financial Officer and a director of Antero Resources LLC, a natural gas exploration and production company, since 2002. Prior to joining Antero Resources LLC, Mr. Warren served as a Managing Director of Concert Energy Advisors, an investment banking advisory firm to energy companies, from 2001 to 2002. From 1998 to 2001, Mr. Warren served as Chief Financial Officer, Executive Vice President and a member of the Board of Directors of Pennaco Energy, Inc., an energy exploration and production company. From 1989 to 1998, Mr. Warren was an investment banker with Dillon, Read & Co., Inc., Kidder, Peabody & Co. Incorporated and Lehman Brothers Inc. From 2004 to May 2007, Mr. Warren served on the board of Venoco, Inc. Mr. Warren holds a B.A. from the University of Mississippi, a J.D. from the University of Mississippi School of Law and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Richard G. Wolford. Mr. Wolford, 66, has served as a director of Diamond since April 2011. Mr. Wolford began his career in 1967 in the food industry at Dole Foods, a producer and marketer of fresh and packaged fruit and vegetables, where he held a range of management positions, including President of Dole Packaged Foods from 1982 to 1987. From 1988 to 1996, he was Chief Executive Officer of HK Acquisition Corp. where he developed food industry investments with venture capital investors. In 1996, he worked with TPG Capital, a private equity

 

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partnership, to acquire Del Monte Foods, a manufacturer, distributor and marketer of premium quality, branded food and pet products. On completion of the acquisition, he was named Chief Executive Officer and a director of Del Monte Foods in 1997, and then subsequently was named President of Del Monte Foods in 1998 and elected Chairman of Del Monte Foods in 2000, and held these positions until March 2011. Since September 2011, Mr. Wolford has served on the board of directors of Schiff Nutrition International, Inc., a provider of vitamins, nutritional supplements and nutrition bars. Mr. Wolford holds a B.A. from Harvard University.

Robert J. Zollars. Mr. Zollars, 54, has served as a director of Diamond since 2005. He has served as Chairman and Chief Executive Officer of Vocera Communications, Inc., a company providing instant wireless communications solutions, since June 2007. From 2006 to June 2007, Mr. Zollars was President and Chief Executive Officer of Wound Care Solutions, LLC, a holding company that operates chronic wound care centers in partnership with hospitals in the United States. From 1999 to 2006, Mr. Zollars was chairman of the Board of Directors and Chief Executive Officer of Neoforma, Inc., a provider of supply chain management solutions for the healthcare industry. From 1997 to 1999, Mr. Zollars served as Executive Vice President and Group President of Cardinal Health, Inc., a healthcare products and services company. Earlier in his career, while employed at Baxter International, a healthcare products and services company, Mr. Zollars served as President of a dietary products joint venture between Baxter International and Kraft General Foods. Mr. Zollars holds a B.S. from Arizona State University and an M.B.A. from John F. Kennedy University.

Diamond Executive Officers

The executive officers of Diamond immediately following the closing of the Transactions are expected to be the executive officers of Diamond immediately prior to the closing of the Transactions. Set forth below is information concerning the background of each of Diamond’s executive officers.

Michael J. Mendes. Mr. Mendes, 48, has served as Diamond’s Chairman, President and Chief Executive Officer since January 2010 and served as Diamond’s President and Chief Executive Officer since 1997. Mr. Mendes joined Diamond in 1991 and served as Diamond’s Vice President of International Sales and Marketing prior to being appointed as Diamond’s Chief Executive Officer. Mr. Mendes served as Manager of International Marketing of the Dole Food Company from 1989 to 1991. Mr. Mendes currently serves on the GMA Board of Directors and served as Chairman of the President’s Advisory Council of the GMA. Mr. Mendes has also served on the Board of Directors of the California Chamber of Commerce and on the advisory board for The Wine Group, a wine company. Mr. Mendes received an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Steven M. Neil. Mr. Neil, 59, has served as Diamond’s Executive Vice President, Chief Financial and Administrative Officer since March 2008. In addition, Mr. Neil has served on the Diamond Board since 2005. Prior to joining Diamond, Mr. Neil was Executive Vice President and Chief Financial Officer of The Cooper Companies, Inc., a company that manufactures specialty healthcare products, from April 2007 until March 2008. From 2005 to April 2007, Mr. Neil was Vice President and Chief Financial Officer of The Cooper Companies. From 2003 to 2005, Mr. Neil served as Executive Vice President, Chief Financial Officer and Secretary of Ocular Sciences, Inc., a contact lens company. From 1997 to 2003, Mr. Neil was Executive Vice President, Finance, Chief Financial Officer, Treasurer and Secretary of Sola International, a marketer of eyeglass lenses. Mr. Neil holds a B.A. from the University of California, Santa Barbara, and an M.B.A. from the Anderson School of Management at the University of California, Los Angeles.

Lloyd J. Johnson. Mr. Johnson, 48, has served as Diamond’s Executive Vice President and Chief Sales Officer since September 2008. From 2005 until August 2008, Mr. Johnson was a Senior Vice President for Expedia Inc., an online travel service company, during which time he managed various divisions within the Partner Services Group. Prior to joining Expedia, Mr. Johnson was employed at Kraft Foods, Inc., a food company, where he was Vice President, Sales and Customer Development, Kraft Canada from January 2005 to June 2005, and Customer Vice President, Kroger, from 2001 to 2004. Earlier in his career, Mr. Johnson held a variety of sales and sales management positions of increasing responsibility at Nabisco Biscuit Company and Ernest & Julio Gallo Winery. Mr. Johnson holds a B.A. from Eastern Washington University.

 

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Andrew Burke. Mr. Burke, 45, has served as Diamond’s Executive Vice President, Chief Marketing Officer since January 2010. From March 2007 until January 2010, Mr. Burke was Diamond’s Senior Vice President of Marketing, and from June 2006 to March 2007, Mr. Burke was Diamond’s Vice President of Marketing. From 2004 until June 2006, Mr. Burke served as Vice President, Marketing for Economy Wine, Spirits, Sparkling Wine and Beverages, at Ernest & Julio Gallo Winery. From 1997 until 2004, Mr. Burke worked at Kraft Foods, Inc. in a variety of capacities, including as a Category Business Director from 2003 to 2004 and a Senior Brand Manager from 2001 until 2003. Prior to Kraft, Mr. Burke worked at Young & Rubicam, Inc., as an Account Supervisor and Financial Analyst, and Laura Ashley, as a financial and inventory analyst. Mr. Burke holds an M.B.A from Fordham University and a B.A. from Rutgers University.

Linda B. Segre. Ms. Segre, 51, has served as Diamond’s Senior Vice President, Corporate Strategy and Communications since August 2009. From September 2006 until April 2009, Ms. Segre was a Managing Director at Google.org, the corporate philanthropy organization of Google Inc., where she oversaw the climate change and global development initiatives and managed all operational aspects of the organization. From 1995 until September 2006, Ms. Segre was Vice President, Officer and Director at The Boston Consulting Group, a global management consulting firm, and served as the Managing Director of the San Francisco office from 2001 until 2005. She first joined The Boston Consulting Group in 1987 and worked in a number of roles with increasing responsibilities until she became a Vice President in 1995. During her tenure at The Boston Consulting Group, she focused on serving clients in the consumer goods and financial services sectors. From 1981 until 1985, Ms. Segre was a touring golf professional in the United States, Europe and Asia. Ms. Segre holds a B.A. from Stanford University and an M.B.A. from the Stanford Graduate School of Business.

Stephen E. Kim. Mr. Kim, 42, has served as Diamond’s Senior Vice President, General Counsel and Human Resources since January 2010. From January 2008 until January 2010, Mr. Kim was Diamond’s Vice President, General Counsel, and Human Resources, and from 2005 to January 2008, he served as Diamond’s Vice President, General Counsel. Previously, Mr. Kim served as General Counsel for Oblix, Inc., a software company in Cupertino, California, from 2000 to 2005. Before joining Oblix, Inc., Mr. Kim was an attorney with Wilson, Sonsini, Goodrich and Rosati, a law firm located in Palo Alto, California, from 1996 to 1999 and Weil Gotshal & Manages, a law firm located in New York, New York, from 1994 to 1996. Mr. Kim holds a B.A. from Johns Hopkins University and a J.D. from New York University School of Law.

Certain Relationships and Related Party Transactions

Any related party transactions must be reviewed and approved by the Audit Committee or another independent body of the Diamond Board in accordance with the written Audit Committee Charter.

Grower Payments

Diamond has paid members of the Diamond Board who are currently growers from whom Diamond purchases walnuts, or an affiliate of such growers, for walnut products Diamond received from them in the ordinary course of business.

The following table shows the payments received by the directors who sold walnuts to Diamond in fiscal 2010 and fiscal 2011:

 

Name

   Fiscal
Year
     Grower
Payments
 

John J. Gilbert(1)

     2011       $ 2,744,476   
     2010       $ 1,916,048   

Robert M. Lea

     2011       $ 844,487   
     2010       $ 557,853   

 

(1) Represents amounts paid to Rio Oso Groves, Inc., of which Mr. Gilbert is an owner and executive officer, and to Gilbert Orchards, a corporation of which Mr. Gilbert is an owner and executive officer.

 

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INFORMATION ON PRINGLES

General

Pringles manufactures, markets and distributes snack foods, primarily under the Pringles® brand. It sells its products principally to mass merchandisers, grocery retailers, club stores and convenience stores with sales in 140 countries in North America, Europe, Asia and Latin America. Pringles’ fiscal year begins on July 1 and ends on the following June 30. For example, “fiscal 2011” began on July 1, 2010 and ended on June 30, 2011.

Pringles, a global billion dollar snack business with an iconic brand, has a rich heritage and a high level of consumer recognition and loyalty for its distinct saddle-shaped potato crisp, canister packaging and Mr. Pringle logo. Pringles is the leading stackable crisp globally based on data provided by Euromonitor. The original Pringles product was developed by P&G over 40 years ago and is currently sold in over 140 countries worldwide. Pringles’ product portfolio includes the core Pringles potato crisps in a canister, product line extensions featuring different crisp compositions and flavors, referred to as “Extensions,” as well as “Stix,” a unique cracker product.

According to Euromonitor, in calendar year 2010, Pringles was the number four brand in the global potato/tortilla/corn chip and extruded snack market. Pringles also has the top 1 or 2 brand awareness within the potato chip market (as the category is defined above) in the United States, the United Kingdom and Germany according to internal P&G consumer research studies. For fiscal 2011 and 2010, Pringles generated net sales of $1,455.7 million and $1,367.4 million, respectively, and operating income of $197.4 million and $166.9 million, respectively.

Products

Pringles’ products include a range of products built around the iconic stacked potato crisps sold in a canister. Pringles “Core” products are available in a variety of can sizes and over 40 flavors, including core flavors such as Original, Salt and Vinegar, Sour Cream and Onion, and BBQ. Some flavors are produced as limited-edition runs while others may be distributed only in select market areas. For example, Prawn Cocktail and some curry flavors are available only in the United Kingdom. Pringles’ “Extensions” products are also sold in a variety of canister sizes and to target markets. These extensions of the Core product line use different crisp formulations, such as the “Multigrain” offering, or more intense flavor, such as the “Xtreme” flavors. In recent years, Pringles expanded its product line beyond the traditional stacked crisps in a canister offering by launching “Stix.”

 

    

Core

  

Extensions

  

Stix

Fiscal 2011 Net Sales

   ~$1,341 million    ~$90 million    ~$25 million

Percentage of Total Fiscal 2011 Net Sales

   92%    6%    2%

Product Form

   Original Flavors
   Rice, Light/Fat-Free,
Xtreme, Multigrain
   Cracker Sticks

Core

Core products accounted for approximately 92% of Pringles’ net sales in fiscal 2011. Core products consist of the traditional Pringles canister of stacked potato crisps, in more than 40 flavors. Canisters are primarily sold in four sizes:

 

   

Small cans (40–43 grams) for single serve and “on-the-go” snacking;

 

   

“Classic” cans (120–140 grams), primarily for the North America and Asia markets;

 

   

Medium cans (150–180 grams), primarily for the European market; and

 

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“King”/“Super Stack” cans (185–230 grams), sold in both North America and Europe.

Extensions

“Extensions” of the Pringles Core product line are targeted for specific consumer segments. For example, the Pringles “Xtreme” collection of boldly flavored potato crisps such as Wasabi, Screamin’ Dill Pickle, and Blazing Buffalo Wing is targeted toward younger consumers in North America and Western Europe, and the recently-launched “Multigrain” crisps target health conscious consumers.

Stix

In an effort to expand beyond potato crisps, Pringles introduced a baked cracker called Pringles “Stix” in fiscal 2007. “Stix” are available in a number of package sizes, and in Honey Butter, Pizza, Cheddar Cheese and Jalepeño flavors.

Pringles products are designed to be used with a warehouse distribution model, which Pringles believes provides cost advantages over direct store delivery distribution typically used by traditional potato chip companies due to the delicate handling requirements and relatively short shelf life limits of traditional bagged potato chip products. The sturdy Pringles canisters enable cases of products to be stacked and palletized. Multiple pallets can be consolidated as part of a direct shipment to warehouses. Pringles’ air-tight canister gives the crisps an 18-month shelf life, compared to the typical three-month shelf life for bagged chips.

Raw Materials

Pringles purchases the raw materials used to manufacture its products, including dehydrated potato flakes, wheat flour, seasonings and cooking oils, from suppliers primarily located in Europe and North America. Necessary raw materials are widely available and easy to transport. Most raw material purchase contracts are renewed annually, and prices are typically negotiated on a quarterly or biannual basis. Raw materials are shipped to Pringles’ manufacturing facilities and stored on site until used in production.

Canisters are purchased from a supplier in the United States and a supplier in Belgium, under three-year contracts, with pricing negotiated every six months. Both suppliers have facilities that are located in close proximity to the Pringles manufacturing plants.

Manufacturing

Unlike the traditional “slice and fry” method of potato chip production, Pringles uses a proprietary manufacturing process to produce its signature stackable crisp. Developed in the 1960s, the Pringles high-speed manufacturing process blends dehydrated potatoes and water into a dough that is rolled, sheeted, cut, saddled, quickly cooked and seasoned. Canister packaging allows the individual crisps to be stacked and packed in nitrogen, significantly improving shelf life compared with ordinary bagged chips and allowing for widespread warehouse-based distribution.

The Pringles production process involves the following steps:

 

   

Receiving—Raw materials (e.g., potato flakes, oils, rice and corn) are delivered by suppliers and unloaded into storage silos or bins at the Pringles facility. Seasonings are delivered in bags and stored in an air conditioned warehouse on site.

 

   

Blending—Materials are mixed together and transferred to a production line where dough is made, forming the base for the potato crisps.

 

   

Cut and Transfer—Dough is rolled into a sheet from which individual crisps are cut before being transferred to the oven where they are fried. Once cooked, the crisps are cooled and seasoning and salt are added.

 

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Packaging—Seasoned crisps are transferred through the line and placed into canisters. Canisters are weighed, scanned, and automatically packed into cases.

 

   

Shipping—Cases are automatically packed onto pallets and shipped to the warehouse for storage and distribution to customers.

Manufacturing Facilities

Jackson. The Pringles plant in Jackson, Tennessee was constructed in 1971 and occupies approximately 7.4 million square feet (1.6 million square feet of building). The highly-automated plant is solely dedicated to the preparation and packaging of Pringles products. Fiscal 2011 output of approximately 247 million pounds represented approximately 84% of the plant’s total capacity. As of August 9, 2011, the Jackson facility had 734 employees, including a plant manager and nine managers. The Jackson facility currently operates seven days a week with three shifts per day.

Mechelen. The Pringles plant in Mechelen, Belgium was constructed in 1956 and upgraded in 1995. It occupies approximately 1.7 million square feet (1.4 million square feet of building). This facility, which shares a site with facilities that are used to manufacture other P&G products, is subject to a “split” agreement between Diamond and P&G, so that as of the closing of the Transactions, the Pringles operations and non-Pringles operations will be owned and operated separately. See “Additional Agreements—Split Agreement.” Fiscal 2011 output of approximately 201 million pounds represented approximately 97% of the facility’s total capacity. As of August 9, 2011, the Mechelen facility employed 573 employees, including a plant manager, two dedicated operation and engineering head managers and six additional managers. The Mechelen facility currently operates seven days a week with three shifts per day. The Mechelen facility has a separate area for “one-off” special packaging requirements, which operates five days a week with three shifts per day.

Outsourced Manufacturing

Pringles produces products and supplies Asian markets through co-manufacturing arrangements with third-party suppliers in China and Malaysia. These arrangements reduce up-front capital requirements to develop manufacturing facilities, allowing Pringles to lower its costs to do business in these markets. During fiscal 2011, the production at these facilities was approximately 19.3 million pounds. These outsourced manufacturing arrangements are governed by contracts with terms of three years, expiring on January 31, 2013 (China) and June  30, 2014 (Malaysia).

Sales and Distribution

Pringles sells its products principally to mass merchandisers, grocery retailers, club stores and convenience outlets in nearly every country of the world. In fiscal 2011, the geographic distribution of Pringles sales was as follows: North America (39%); Europe, Middle East and Africa (43%); Asia (14%) and Other (4%). Pringles markets its products through a combination of a direct sales force and a network of brokers and distributors. The majority of its products are shipped from production, warehouse and distribution facilities by contract and common carriers.

Marketing

As a result of its marketing activities over the last 40 years, Pringles has developed into an iconic brand that P&G believes is synonymous with the stackable potato crisp category. Principal features of the Pringles® brand include the distinctive Pringles logo featuring a mustachioed character named Mr. Pringle® and the Pringles canister packaging, including its foil-lined interior and a resealable plastic lid. In fiscal 2010 and fiscal 2011, Pringles commenced a series of marketing initiatives, including:

 

   

redesigned product artwork to increase shelf visibility;

 

   

introduction of reduced saturated fat formulation for certain products to meet the growing consumer demand for healthier snacks;

 

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product innovation that supports premium pricing; and

 

   

increased advertising expenditures, utilizing savings from manufacturing improvements.

Pringles seeks to increase brand awareness and marketing through campaigns themed around seasonal activities such as winter holidays (“Merry Pringles”) and sporting events such as soccer (“Pringoals”). In conjunction with the introduction of “Xtreme” and “Multigrain” products, Pringles launched holistic marketing campaigns that included digital, outdoor and event promotion to build product trial and awareness.

Customers

Sales to Wal-Mart Stores, Inc. (including both Sam’s Club and Wal-Mart), accounted for approximately 13% of Pringles’ net sales on a global basis in fiscal 2011, and no other customer accounted for more than 10% of Pringles’ net sales. Sales to Pringles’ top ten customers accounted for approximately 34% of Pringles’ net sales in fiscal 2011.

Seasonality

Sales in North America are generally modestly higher in summer months, and sales in Europe are generally modestly higher in the winter.

Competition

Pringles operates in a highly competitive environment. Pringles products compete with savory snacks offered by many companies, including large companies such as PepsiCo, Inc. (Frito-Lay division) and Kraft Foods Inc., as well as a large number of smaller competitors in various markets. More directly, Pringles products compete with other products offered by distributors of potato chips, such as Frito-Lay. In the United States and worldwide, Frito-Lay brands accounted for 72% and 44%, respectively, and Pringles accounted for 5% and 4%, of calendar 2009 sales in the potato/tortilla/corn chip and extruded snack market according to Euromonitor. No other company accounted for more than 3% in either market. Pringles also competes for shelf space and prominence at mass merchandisers, grocery retailers, club stores and convenience outlets.

In general, Pringles faces competition on the basis of product quality and innovation, price, brand recognition and consumer loyalty. Pringles believes that its competitive strengths include:

 

   

Established Global Brand—Pringles is a global snack brand sold in more than 140 countries worldwide, with high consumer recognition and distinctive packaging.

 

   

Product Differentiation—Pringles stackable crisps and extended shelf life provide differentiation when compared to other snack products.

 

   

Global Manufacturing Capability—Pringles operates large and highly efficient manufacturing facilities in the United States and Europe and contract facilities in Asia.

 

   

Well-positioned for Emerging Markets—Pringles outsourced manufacturing and distribution model enables it to penetrate emerging markets that may experience higher growth than markets in developed countries.

Research and Development

The Pringles research and development organization is responsible for the design of new products, consumer testing and the implementation of new products into production. The research and development organization is also responsible for implementing savings programs to reduce costs for packaging and raw materials.

 

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The research and development organization is composed of four main groups with the following responsibilities:

 

   

Product Research—consumer studies and testing;

 

   

Formula Design—development of product formulations;

 

   

Process Development—application of new products on the production lines; and

 

   

Packaging—packaging-related developments, including sizes and material design.

As of August 9, 2011, Pringles’ research and development organization consisted of 77 employees, of whom 54 were based in Cincinnati, Ohio, 12 were based in Brussels, Belgium and 11 were based in Beijing, China. Research and development expenditures were $22 million in fiscal 2011, $23 million in fiscal 2010 and, $24 million in fiscal 2009.

Intellectual Property

Pringles markets its products primarily under the Pringles® brand, which is registered with the U.S. Patent and Trademark Office and in various other jurisdictions. Pringles owns over 370 patents worldwide, of various durations, primarily related to the formulation and production of its products. Pringles also maintains proprietary trade secrets, technology, know-how processes and other intellectual property rights that are not registered but that are important to its success.

Government Regulation

As a producer and marketer of food items, Pringles is subject to regulation by various governmental agencies, including the Food and Drug Administration, the Department of Agriculture, the Federal Trade Commission, the Environmental Protection Agency, the Department of Labor and the Department of Commerce and various state agencies with respect to production processes, product quality, packaging, labeling, storage and distribution. Pringles is also subject to regulation by governmental agencies worldwide. These agencies prescribe requirements and establish standards for quality, purity and labeling. Failure to comply with one or more regulatory requirements can result in a variety of sanctions, including monetary fines or compulsory withdrawal of products from store shelves.

Pringles’ advertising is subject to regulation by the Federal Trade Commission. Pringles is also subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act.

Pringles’ manufacturing operations are subject to various federal, state and local laws and regulations, which require Pringles to obtain licenses relating to customs, health and safety, building and land use and environmental protection. Pringles’ manufacturing facilities are subject to state and local air quality and emissions regulation. If Pringles encounters difficulties in obtaining any necessary licenses or if it has difficulty complying with these laws and regulations, it could be subject to fines and penalties.

Pringles believes it is in compliance in all material respects with all such laws and regulations and that it has obtained all material licenses and permits that are required for the operation of its business. Pringles is not aware of any environmental regulations that have or that it believes will have a material adverse effect on its operations.

Legal Proceedings

On March 8, 2010, P&G announced a voluntary recall of two Pringles flavors, Pringles “Restaurant Cravers Cheeseburger” potato crisps and Pringles “Family Faves Taco Night” potato crisps, as part of an industry recall of an ingredient from a third-party supplier to protect consumers from potential salmonella exposure. There have

 

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been no reports of salmonella-related illness in relation to these products, and the two recalled flavors together represent less than 0.5% of Pringles’ U.S. volume. None of the affected products were shipped outside of the United States.

P&G was notified by one of its suppliers that a seasoning used in these two products contains hydrolyzed vegetable protein (“HVP”) manufactured by Basic Food Flavors, Inc., which in turn recalled several lots of this ingredient because of potential salmonella exposure. As a result, the U.S. Food and Drug Administration recommended that food manufacturers voluntarily recall certain types of products containing HVP manufactured by Basic Food Flavors, and P&G has complied with this guidance. This event had a minimal cost impact on fiscal 2010 financial results related to destruction of impacted product, but was mostly offset by insurance proceeds from the suppliers related to the recall.

Pringles is subject to various claims and legal actions during the ordinary course of its business. Pringles believes that there are currently no claims, legal actions, or issues that would have a material impact on its financial position, operations or potential performance.

Pringles believes that it complies with environmental regulations and has no significant environmental issues at this time.

Employees

As of August 9, 2011, Pringles employed 1,611 people. The majority of Pringles’ employees are located in the United States, Belgium, Switzerland and Singapore. Other than employees who are represented by workers’ councils outside of the United States, none of Pringles’ employees is represented by a labor union. Pringles believes that relations with its employees are good.

Properties

Pringles owns two manufacturing facilities, both of which it believes are in good condition, well maintained and sufficient for its current operations. The following table shows properties used by Pringles in connection with its operations:

 

Location

   Approximate Square Footage  

Jackson, Tennessee

     7.4 million  

Mechelen, Belgium

     1.7 million  

 

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BUSINESS STRATEGIES AFTER THE TRANSACTIONS

Diamond Foods is an innovative packaged foods company focused on building, acquiring and energizing brands. Diamond focuses on organic growth in its product lines, and will consider acquiring brands to improve its overall portfolio and competitive position. Diamond specializes in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts.

Diamond has a strong heritage in the culinary nut market with its Diamond of California® brand, which is the leading culinary nut brand, with a U.S. Grocery market share ten times larger than the next branded competitor, according to ACNielsen. In 2004, Diamond leveraged its experience in culinary nuts to enter the snack nut category with its launch of the Emerald® brand. Diamond has focused on investing in and developing the Emerald® brand with distinct product quality and innovative packaging and marketing. The Emerald® brand has been a key driver of snack nut category growth and has a 10% U.S. Grocery market share, according to ACNielsen. In 2008, Diamond acquired Pop Secret® microwave popcorn from General Mills, providing increased scale in the snack market, expanded reach in distribution channels, supply chain economies of scale and cross-promotional opportunities with its Emerald® brand. With Diamond’s investments in brand support, Pop Secret has gained market share. In 2010, Diamond acquired Kettle Foods, a leading premium potato chip company in the two largest potato chip markets in the world, the United States and the United Kingdom. Kettle Brand® potato chips increased Diamond’s presence in the snack aisle, with cross portfolio benefits in promotion activity and supply chain. The acquisition of Kettle Foods also expanded Diamond’s distribution opportunities in terms of channels and geographic reach and provided an international infrastructure. Within ten months after acquiring the brand, Diamond announced over $50 million of capital investments to increase capacity at all three Kettle Foods plants, to help support potential growth in the brand franchise.

Diamond has demonstrated that it can grow both organically and through acquisitions. Between fiscal 2003 and fiscal 2011, Diamond’s retail sales grew at a 23% compounded annual growth rate. In the past five fiscal years, Diamond’s gross margin improved from 15% to 26%, operating margin grew from 3% to 11% and earnings per share have grown four-fold. Diamond’s profitable growth has been driven by its ability to expand distribution, and to contribute to category growth with high quality and innovative new products. Diamond competes based on product quality, innovation and differentiation as well as support of its brands among consumers and retailers.

The key elements of Diamond’s strategy after the Transactions are as follows:

Leverage the Pringles® Brand to Increase Scale in Snack Aisle and Provide Cross Promotional Opportunities. Diamond expects the addition of Pringles, an iconic, global snack brand, to increase its scale in the snack aisle and provide opportunities to expand distribution and cross-promotional activities for Diamond’s entire snack portfolio. As with its previous acquisitions, Diamond plans to invest in the Pringles® brand to grow and leverage its increased scale to benefit its entire snack portfolio. In markets where Diamond currently sells snack products, Pringles would extend distribution reach into channels such as mass merchandisers, discount and convenience stores. These are channels where Diamond’s existing portfolio is more limited. Diamond is strongest in the grocery channel where Pringles is under-represented, which may provide the brand an opportunity for growth.

Expand Penetration in International Snack Markets. In Western Europe, Pringles has a significant retail presence across all European countries. Investment in the Pringles® brand, and the potential to leverage Pringles’ distribution scale for the benefit of other Diamond snack products, provide opportunities for growth across the Diamond portfolio. In developing markets, Diamond plans to focus on and invest in the Pringles® brand, to grow that brand and to create new growth opportunities for other Diamond products. Pringles is sold in 140 countries around the world, including countries across Asia, Latin America, Central Europe, the Middle East and Africa, which often experience higher growth rates than more developed markets.

 

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Continue to Invest in Brands. After completion of the Transactions, Pringles® will be Diamond’s largest selling product line and its first $1 billion brand. Diamond is expected to have significantly increased revenues, margins and cash flow driven by the strength of the combined businesses. Diamond expects that the financial benefits of the combined business will allow it to continue its strategy of investing in its brands to introduce high quality, innovative products to drive increased market share and category growth in partnership with its customers.

Improve margins. Diamond intends to increase its margins by optimizing product mix, investing in capital improvements, leveraging the global infrastructure provided by the Pringles Business in operating expenses and engaging in other cost reduction and efficiency activities. Diamond expects higher-margin products, including snack products, to represent a greater proportion of its sales in the future. Diamond plans to invest in projects designed to lower its costs and to optimize the location, function and utilization of its manufacturing and distribution facilities. Diamond believes that these investments will increase the productivity and flexibility of its business, enabling Diamond to improve its margins while serving its customers better.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS OF PRINGLES

The following discussion and analysis is intended to provide investors with an understanding of the historical performance of Pringles and its financial condition. This discussion and analysis presents the factors that had a material effect on the results of operations of Pringles for the fiscal years ended June 30, 2011, 2010 and 2009. The following discussion and analysis and the historical combined financial statements of Pringles discussed herein assume that the transferred assets and liabilities of the Pringles Business had been held by Pringles for all of the periods discussed.

The financial statements of Pringles have been derived from P&G’s historical accounting records and reflect significant allocations of direct costs and expenses. All of the allocations and estimates in these financial statements are based on assumptions that management of P&G believes are reasonable and have been consistently applied to all periods. However, the financial statements do not necessarily represent the financial results or position of Pringles had it been operated as a separate independent entity.

You should read this discussion in conjunction with the historical combined financial statements of Pringles and the notes to those statements.

The following discussion and analysis contains forward-looking statements. See “Cautionary Statement on Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

Pringles manufactures, markets and distributes snack foods, primarily under the Pringles® brand, in over 140 countries around the world across North America, Europe, Asia and Latin America. Pringles sells its products principally to mass merchandisers, grocery retailers, club stores and convenience outlets, either via P&G sales force or via third-party distributors and brokers.

Pringles has three geography-based reportable segments: North America, EMEA (Europe, Middle East and Africa) and Asia. The reportable segments are each managed separately based upon geography and each segment derives its revenues from the sale of snack foods under the Pringles® brand.

North America, which generated 39% of Pringles’ combined net sales in fiscal 2011, includes the United States, Canada and Puerto Rico as well as sales to non-retail customers such as hotels and airports. Products sold include Core, Extensions and Stix.

EMEA, which generated 43% of Pringles’ combined net sales in fiscal 2011, includes the countries of Europe, Middle Eastern countries (most notably Saudi Arabia, Israel and the United Arab Emirates) and Africa. Products sold include Core and Extensions.

Asia, which generated 14% of Pringles’ combined net sales in fiscal 2011, includes Japan, South Korea, China, Australia, Malaysia, Thailand, and Singapore. Products sold include Core.

Latin America sales (Core products primarily in Mexico, Brazil and the Caribbean) and corporate activities are included in Other, which generated 4% of Pringles’ combined net sales in fiscal 2011. Corporate activities include non-recurring business impacts such as restructuring expenses. Restructuring had a significant negative impact on fiscal 2009 operating income related to product discontinuation, but was not material during the 2010 and 2011 fiscal years.

 

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Impact of the Distribution from P&G on Pringles Financial Statements

Pringles’ historical combined financial statements reflect the historical financial position, results of operations and cash flow of Pringles to be transferred to the Pringles Company by P&G. P&G did not account for Pringles as, and Pringles was not operated as, a standalone company for the periods presented. Pringles’ financial statements have been “carved out” from P&G’s consolidated financial statements and reflect assumptions and allocations made by P&G. The combined financial statements do not fully reflect what Pringles’ financial position and results of operations would have been had Pringles been a standalone company during the periods presented. Pringles has not made adjustments to reflect significant changes that may occur to Pringles as a result of Pringles’ Separation from P&G and the completion of the Transactions. As a result, this historical combined financial information is not necessarily indicative of what Pringles’ operating results or financial position would have been had the Transactions been completed during the periods presented or will be after the completion of the Transactions.

Pringles’ historical combined financial statements were prepared using P&G’s historical basis in the assets and liabilities of the Pringles Business. Pringles’ historical combined financial statements include revenues, costs, assets and liabilities directly attributable to Pringles. In addition, certain expenses reflected in the combined financial statements, as more fully described in Note 3 to Pringles’ audited combined financial statements included elsewhere in this prospectus, include reasonable allocations of corporate expenses from P&G. All such costs and expenses have been deemed to have been paid by Pringles to P&G in the period in which the costs were recorded. Allocations of current income taxes receivable or payable are deemed to have been remitted, in cash, by or to P&G in the period in which the related income taxes were recorded.

Until the Distribution, P&G performed and will continue to perform significant corporate and operational functions for Pringles, as well as for its other businesses. Pringles’ combined financial statements reflect an allocation of these costs. Expenses allocated to Pringles include costs related to human resources, legal, treasury, insurance, accounting, information technology, internal audit and other similar services. Following the Distribution, expenses incurred by Diamond to replace some of these functions may differ from Pringles’ historically allocated expense levels.

In addition, following the Distribution and completion of the Transactions, P&G has agreed to provide certain transition services to Diamond and Merger Sub, while Pringles is being integrated into Diamond. These services will be provided for a limited period of time after the completion of the Transactions pursuant to the Transition Services Agreement described in “Additional Agreements—Transition Services Agreement.”

Certain Trends and Other Factors Affecting Pringles

Commodities

Raw and packaging materials together represent a significant portion of Pringles’ cost of product sold and are exposed to crude oil and agricultural commodity price fluctuations. Increases in commodity costs adversely affected Pringles’ results in fiscal 2009. As a result, Pringles implemented price increases in all markets and an extensive three-year cost savings program. These initiatives delivered operating margin improvements in fiscal years 2010 and 2011 compared to fiscal 2009.

Restructuring

Pringles initiated a portfolio rationalization effort in fiscal 2008, focusing the business back to the core canister products. The primary focus of this effort was the discontinuation of the Pringles Mini business, launched in 2005 to introduce multipack and single serve products. The portfolio rationalization resulted in corporate restructuring charges before tax of $34.2 million in fiscal 2009. These costs were primarily associated with the cancellation of a contract with a third-party manufacturer in Corby, England; the impairment of all the assets dedicated to the production of Minis both in Corby and in Jackson, Tennessee; and the scrapping costs for the finished product remnants.

 

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Recall

On March 8, 2010, P&G announced a voluntary recall of two Pringles flavors, Pringles “Restaurant Cravers Cheeseburger” potato crisps and Pringles “Family Faves Taco Night” potato crisps, as part of an industry recall of an ingredient from a third-party supplier to protect consumers from potential salmonella exposure. Pringles incurred costs of $1.0 million before tax to recall and destroy the recalled products at Pringles and customer locations, which was primarily offset by a $0.9 million insurance payment received from a supplier in fiscal 2010.

Significant Accounting Policies and Estimates

In preparing Pringles combined financial statements in accordance with GAAP, certain accounting policies are particularly important. These include policies related to revenue recognition and inventory valuation. These significant accounting policies, and others set forth in Note 3 to Pringles’ audited combined financial statements included elsewhere in this prospectus, should be reviewed as they are integral to understanding the results of operations and financial condition of Pringles. Due to the nature of Pringles’ business, estimates generally are not considered highly uncertain at the time of the estimation, as they are not expected to result in changes that would materially affect Pringles’ results of operations or financial condition in any given year.

Revenue Recognition

Sales are recognized when revenue is realized or realizable and has been earned. The revenue recorded is presented net of sales and other taxes Pringles collects on behalf of governmental authorities and includes shipping and handling costs, which generally are included in the invoice price to the customer. Pringles’ policy is to recognize revenue when title to the product, ownership and risk of loss are transferred to the customer, which can either be on the date of shipment or the date of receipt by the customer. Payment discounts and product returns are recorded as a reduction of sales in the same period that the revenue is recognized. Trade promotions, consisting primarily of customer pricing allowances, merchandising funds and consumer coupons, are offered through various programs to customers and consumers. Sales are recorded net of trade promotion spending, which is recognized as incurred, generally at the time of the sale. Most of these arrangements have terms of approximately one year. Accruals for expected payments under these programs are included as accrued marketing and promotion expense in the accrued expenses and other liabilities line item in the combined balance sheets.

Inventory Valuation

Inventories are valued at the lower of cost or market value and are primarily maintained using the first-in, first-out method.

Results of Operations

Pringles’ fiscal year begins on July 1 and ends on the following June 30. For example, “fiscal 2011” began on July 1, 2010 and ended on June 30, 2011.

 

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The following table presents information about Pringles’ results of operations, in dollar amounts and expressed as a percentage of net sales, for the fiscal years 2011, 2010 and 2009.

 

     Fiscal Year Ended June 30,  
     2011     2010     2009  
     (Dollars in millions)  

Net sales

   $ 1,455.7         100   $ 1,367.4        100   $ 1,396.4         100

Cost of products sold

     924.0         64     886.9        65     1,049.3         75
  

 

 

      

 

 

     

 

 

    

Gross profit

     531.7         36     480.5        35     347.1         25

Selling, general and administrative expense

     333.5         23     314.1        23     279.8         20

Other operating expense

     0.8         0     (0.5     0     7.4         1
  

 

 

      

 

 

     

 

 

    

Operating income

     197.4         13     166.9        12     59.9         4

Income taxes

     44.6         3     40.0        3     19.6         1
  

 

 

      

 

 

     

 

 

    

Net income

   $ 152.8         10   $ 126.9        9   $ 40.3         3
  

 

 

      

 

 

     

 

 

    

Fiscal 2011 Compared to Fiscal 2010

Net Sales

 

     Fiscal
2011
     Fiscal
2010
     Percent
Change
 
     (Dollars in millions)  

North America

   $ 571.3       $ 549.4         4

EMEA

     629.6         604.8         4

Asia

     194.1         167.6         16

Other

     60.7         45.6         33
  

 

 

    

 

 

    

Combined

   $ 1,455.7       $ 1,367.4         6
  

 

 

    

 

 

    

Combined

Combined net sales for fiscal 2011 increased 6% to $1,455.7 million compared to fiscal 2010. Volume increased 7%, primarily as a result of continued focus on core canister marketing and merchandising, including the expansion of the Multigrain product line. Geographic expansion in developing regions also contributed to the volume growth. Region mix reduced net sales 1% due to disproportionate growth in emerging markets, which have lower than average selling prices. Lower pricing offset the effect of foreign exchange on net sales.

North America

North America net sales increased 4% to $571.3 million in fiscal 2011 compared to fiscal 2010 on a volume increase of 6%, primarily as a result of increased customer promotional events behind the Super Stack canister product. This was offset by product mix, and lower pricing.

EMEA

EMEA net sales increased 4% to $629.6 million in fiscal 2011 compared to fiscal 2010 on volume growth of 6%, primarily as a result of geographic expansion in emerging markets as well as the launch of Multigrain in Western Europe markets. Pricing reduced net sales 1%. Country mix reduced net sales 1% due to faster emerging market growth, which has lower than average selling prices.

 

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Asia

Asia net sales increased 16% to $194.1 million in fiscal 2011 compared to fiscal 2010 on volume growth of 9%, primarily as a result of emerging market growth as well as distribution expansion in key developed markets. The full year impact of price increases implemented in fiscal 2010 increased net sales by 2%. Country mix reduced net sales 3% due to disproportionate growth in emerging markets, which have lower than average selling prices. Foreign exchange improved net sales 8%.

Other

Other net sales consists of the Latin America market. Latin America region sales increased 33% to $60.7 million in fiscal 2011 compared to fiscal 2010. Volume increased 34%, primarily as a result of broad-based growth across the Latin America region. Pricing reduced net sales 1% and mix reduced net sales by 1%. Foreign exchange improved net sales by 1%.

Operating Income

 

     Operating Income     Operating Margin  
      Fiscal
2011
     Fiscal
2010
     Percent
Change
    Fiscal
2011
    Fiscal
2010
 
     (Dollars in millions)  

North America

   $ 93.2       $ 76.7         22     16     14

EMEA

     73.9         68.5         8     12     11

Asia

     24.2         14.8         64     12     9

Other

     6.1         6.9         -12     10     15
  

 

 

    

 

 

        

Combined

   $ 197.4       $ 166.9         18     13     12
  

 

 

    

 

 

        

Combined

Combined operating income increased 18% to $197.4 million in fiscal 2011 compared to fiscal 2010, as a result of the increase in net sales and manufacturing cost savings. These were partially offset by increased marketing investment. Operating margin improved to 13% for fiscal 2011, compared to 12% in fiscal 2010, returning to more normalized historical margin levels.

Combined gross margin increased to 36% in fiscal 2011 compared to 35% in fiscal 2010. The increase was a result of the scale benefits of higher volumes and manufacturing cost savings. Cost savings were generated behind the full year impact of fiscal 2010 savings programs, and the impact of current year savings programs. Manufacturing savings were partially offset by increased oil and agricultural commodity costs compared to the prior period.

Combined selling, general and administrative expense (“SG&A”) was $333.5 million in fiscal 2011 compared to $314.1 million in fiscal 2010 as the result of higher marketing spending (+10%) and higher other overhead (+3%). SG&A as a percent of combined net sales stayed consistent at 23% in both fiscal 2011 and 2010.

North America

North America operating income increased 22% to $93.2 million in fiscal 2011 compared to fiscal 2010 as a result of reduced manufacturing and overhead costs and increased net sales. These were partially offset by increased marketing spending (+15%) and unfavorable product mix impact from the discontinuation of non-canister products. Operating margin improved to 16% in fiscal 2011 from 14% in fiscal 2010, driven by higher gross margin as a percent of net sales.

 

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North America gross margin increased to 36% in fiscal 2011 from 34% in fiscal 2010. The increase was a result of the scale benefit of higher volume and manufacturing cost savings.

North America SG&A spending was $113.2 million in fiscal 2011 compared to $110.1 million in fiscal 2010 due to higher marketing spending (+15%) to support base brand-building awareness. This was partially offset by lower other overhead costs (-6%). North America SG&A as a percentage of net sales stayed consistent at 20% in both fiscal 2011 and 2010.

EMEA

EMEA operating income increased 8% to $73.9 million in fiscal 2011 compared to fiscal 2010 as a result of the cost of product sold savings program and an increase in net sales. These were partially offset by increased marketing support for brand-building efforts and increased commodity costs. Operating margin improved to 12% in fiscal 2011 from 11% in fiscal 2010, as manufacturing cost savings were partially offset by increased marketing expense and commodity costs.

EMEA gross margin increased to 38% in fiscal 2011 as compared to 37% in fiscal 2010 primarily driven by the benefits of the manufacturing cost savings program and scale benefits from increased volume, partially offset by increased costs of agricultural commodities.

EMEA SG&A spending was $164.5 million in fiscal 2011 compared to $158.7 million in fiscal 2010 due to higher marketing spending (+1%) for brand-building and merchandising support and higher other overhead costs (+6%). EMEA SG&A as a percentage of net sales stayed consistent at 26% in both fiscal 2011 and 2010.

Asia

Asia operating income increased 64% to $24.2 million in fiscal 2011 compared to $14.8 million in fiscal 2010, primarily driven by increased net sales. Operating margin improved to 12% in fiscal 2011 from 9% in fiscal 2010, primarily driven by scale benefits from increased volume.

Asia gross margin increased to 36% in fiscal 2011 compared to 33% in fiscal 2010, as volume scale benefits were partially offset by increased commodity costs.

Asia SG&A spending was $45.0 million in fiscal 2011 compared to $39.5 million in fiscal 2010 due to higher marketing spending (+32%) for brand building awareness and higher overhead costs (+5%). Asia SG&A as a percentage of net sales decreased to 23% in fiscal 2011 from 24% in fiscal 2010.

Other

Other operating income decreased to $6.1 million in fiscal 2011 compared to other operating income of $6.9 million in fiscal 2010, primarily as a result of increased overhead allocations. Gross margin increased to 29% in fiscal 2011 from 28% in fiscal 2010.

Income Taxes

Pringles’ effective tax rate decreased from 24% in fiscal 2010 to 23% in fiscal 2011 primarily due to geographic mix of earnings.

 

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Fiscal 2010 Compared to Fiscal 2009

Net Sales

 

     Fiscal
2010
     Fiscal
2009
     Percent
Change
 
     (Dollars in millions)  

North America

   $ 549.4       $ 599.5         -8

EMEA

     604.8         590.6         2

Asia

     167.6         168.4         0

Other

     45.6         37.9         20
  

 

 

    

 

 

    

Combined

   $ 1,367.4       $ 1,396.4         -2
  

 

 

    

 

 

    

Combined

Combined net sales for fiscal 2010 declined 2% to $1,367.4 million compared to fiscal 2009. Volume declined 5%, primarily as a result of the discontinuation of the Mini non-canister products. Price increases also contributed to the volume decline. Unfavorable region mix due to faster emerging market growth, which has lower than average selling prices, reduced net sales 2%. These were partially offset by higher selling prices from the full-year impact of U.S. pricing in fiscal 2009, plus new pricing in other major markets, which improved net sales by 4%. The price increases were implemented as part of a restage of the base canister products, which included crunchier crisps and new canister sizes. Favorable foreign exchange added 1% to net sales.

North America

North America net sales decreased 8% to $549.4 million in fiscal 2010 compared to fiscal 2009 on a volume decline of 12% as a result of the full year effect of the price increases implemented in February 2009 and the discontinuation and reduced focus on the Mini and Select non-canister products. The price increases resulted in fewer customer promotional events at some customers in the first half of the fiscal year as they transitioned to the larger canister and new pricing. A shift in product mix reduced net sales an additional 2%. The volume decline and mix impacts were partially offset by 5% sales growth from higher selling prices of the Super Stack canister. After sales declines in July through March, promotional activity began to increase in April to June 2010, and net sales on the core canister products grew in the fourth quarter compared to the prior period. Favorable foreign exchange improved net sales by 1%.

EMEA

EMEA net sales increased by 2% to $604.8 million in fiscal 2010 compared to fiscal 2009 on volume growth of 1%, despite losses from the non-canister product discontinuation and the volume impact of price increases across all markets. Volume from the discontinued Mini products reduced net sales by 4%, but core canister volume increased 5% due to increased distribution and additional customer support of merchandising events in Western Europe. Price increases implemented in the first half of fiscal 2010 to recover rising commodity costs, in conjunction with the canister restage in the first half of fiscal 2010, added 4% to net sales. This was partially offset by unfavorable mix impact of 2% as a result of disproportionate growth in developing markets that have lower than average selling prices. Foreign exchange also reduced net sales by 1%.

Asia

Asia net sales of $167.6 million were relatively unchanged in fiscal 2010 compared to fiscal 2009. Price increases implemented to compensate for increased commodity costs resulted in increased sales of 8%, which were offset with reduced volume of 8%. Mix negatively impacted sales by 5% due to disproportionately higher volume reductions in developed countries, which have higher average selling prices. Favorable foreign exchange increased net sales by 5%.

 

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Other

Other net sales consists of the Latin America market. Latin America region sales increased 20% to $45.6 million in fiscal 2010 compared to fiscal 2009. Volume increased 17% behind the addition of new third-party distributors in Latin America, as well as broad-based volume growth across the region as the result of improved in-store execution and promotional activity. Higher sales prices improved net sales by 6%, which were offset by 3% of unfavorable country and product mix impacts.

Operating Income

 

     Operating Income     Operating Margin  
      Fiscal
2010
     Fiscal
2009
    Percent
Change
    Fiscal
2010
    Fiscal
2009
 
     (Dollars in millions)  

North America

   $ 76.7       $ 58.0        32     14     10

EMEA

     68.5         30.5        125     11     5

Asia

     14.8         1.9        679     9     1

Other

     6.9         (30.5     N/A        15     -80
  

 

 

    

 

 

       

Combined

   $ 166.9       $ 59.9        179     12     4
  

 

 

    

 

 

       

Combined

Combined operating income increased 179% to $166.9 million in fiscal 2010 compared to fiscal 2009, as the reduction in net sales was more than offset by margin expansion. Operating margin improved to 12% for fiscal 2010, compared to 4% in fiscal 2009, returning to more normalized historical margin levels. The operating margin improvement was driven by a decrease in cost of goods sold and the benefit of higher prices for Pringles’ products, partially offset by lower volumes as a result of the price increases.

Combined gross margin increased to 35% in fiscal 2010 compared to 25% in fiscal 2009. The increase was a result of price increases, the impact of discontinuation of the non-canister Extensions, and cost savings programs. Cost savings were generated behind the full year impact of fiscal 2009 savings programs, the impact of current year product formulation projects, savings from re-negotiated materials contracts and reduction in transportation and warehousing expense. Commodity costs slightly improved after three years of escalation. Cost of product sold savings were partially offset by higher relative fixed costs due to reduced leverage from the impact of lower volume compared to the prior period.

Combined SG&A was $314.1 million in fiscal 2010 compared to $279.8 million in fiscal 2009 on higher marketing spending (+34%) and lower other overhead (-1%). Higher selling prices combined with manufacturing cost savings and continued focus on overhead cost controls enabled the increase in marketing spending to more normalized historical levels. SG&A as a percent of combined net sales increased to 23% in fiscal 2010 compared to 20% in fiscal 2009.

North America

North America operating income increased 32% to $76.7 million in fiscal 2010 compared to fiscal 2009 as a result of the full year impact of higher selling prices from the Super Stack canister, as well as manufacturing cost savings. These were partially offset by a 12% reduction in volume, increased marketing spending (+24%) and unfavorable product mix impact from the discontinuation and reduced support for Mini non-canister products. Operating margin improved to 14% in fiscal 2010 from 10% in fiscal 2009, driven by lower cost of goods sold, the benefit of higher selling prices and no impairment charges compared to fiscal 2009.

 

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North America gross margin increased to 34% in fiscal 2010 from 27% in fiscal 2009 as a result of higher selling prices and a second year of broad-based manufacturing cost savings, partially offset by higher unit costs due to the fixed costs being applied to a lower volume base.

North America SG&A spending was $110.1 million in fiscal 2010 compared to $100.0 million in fiscal 2009 behind higher marketing spending to support base brand-building and the launch of Multigrain in February 2010. North America SG&A as a percentage of net sales increased to 20% in fiscal 2010 compared to 17% in fiscal 2009.

EMEA

EMEA operating income increased 125% to $68.5 million in fiscal 2010, following the implementation of the new pricing strategy and the cost of product sold savings program. These were partially offset by increased investment in SG&A to more normalized historical levels following a decrease in fiscal 2009 marketing expenditures. Operating margin improved to 11% in fiscal 2010 from 5% in fiscal 2009. This operating margin improvement was a result of higher selling prices and lower cost of goods sold.

EMEA gross margin increased to 37% in fiscal 2010 compared to 28% in fiscal 2009, primarily driven by higher selling prices and the second year of the cost of product sold savings program.

EMEA SG&A spending was $158.7 million in fiscal 2010 compared to $134.2 million in fiscal 2009, a result of increased marketing spending enabled by higher selling prices and cost of product sold improvement. Marketing spending increased 52% for brand-building and merchandising support, and other overhead declined 4%. EMEA SG&A as a percentage of net sales increased to 26% in fiscal 2010 compared to 23% in fiscal 2009.

Asia

Asia operating income increased 679% to $14.8 million in fiscal 2010 compared to fiscal 2009. This increase was driven by higher selling prices across most major markets, cost of product sold improvements and favorable foreign exchange, partially offset by volume decline as a result of higher prices. Operating margin improved to 9% in fiscal 2010 from 1% in fiscal 2009. Operating margin improvement was driven by lower cost of goods sold and higher selling prices, partially offset by lower volumes as a result of the price increases.

Asia gross margin increased to 33% in fiscal 2010 compared to 26% in fiscal 2009 as a result of the second year of the broad-based cost savings program as well as a change to local Asia sourcing for some markets from North America and EMEA to Asia. Gross margin also improved as a result of higher selling prices.

Asia SG&A was $39.5 million in fiscal 2010 compared to $41.1 million in fiscal 2009, a result of a continued focus on cost control and reduced marketing spending. Marketing spending declined 7% and other overhead declined 3%. Asia SG&A as a percentage of net sales remained unchanged at 24% for fiscal 2010 and fiscal 2009.

Other

Other operating income improved to $6.9 million in fiscal 2010 compared to other operating loss of $30.5 million in fiscal 2009 as a result of minimal non-recurring restructuring charges compared to the prior period, and the resumption of product sales in some Latin America markets that were previously lost as result of distributor insolvencies in fiscal 2009.

Income Taxes

Pringles’ effective tax rate decreased from 33% in fiscal 2009 to 24% in fiscal 2010 primarily due to geographic mix of earnings.

 

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Liquidity and Capital Resources

Pringles has historically generated, and prior to the Distribution is expected to continue to generate, significant cash flow from operations, the majority of which has been distributed to P&G. Cash will not be included among the assets to be transferred to Pringles in the Separation. In addition, prior to the Distribution, Pringles has participated in P&G’s cash management system and therefore no cash balances are reflected in the combined financial statements as described in Note 3 to Pringles’ audited combined financial statements included elsewhere in this prospectus.

Cash Flow

Operating Activities

Operating cash flow was $191.1 million in fiscal 2011, a decrease of 10% compared to fiscal 2010. Operating cash flow resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization). Working capital used $3.4 million of operating cash flow primarily due to increased inventories associated with volume growth.

Operating cash flow was $212.8 million in fiscal 2010, an increase of 102% compared to fiscal 2009. Operating cash flow resulted primarily from net earnings adjusted for non-cash items (depreciation and amortization, deferred income taxes and gain on the sale of businesses). Working capital provided $44.4 million of operating cash flow due to inventories, which decreased due to operational improvements, and accounts payable, which increased to support business growth and marketing spending. The increase in operating cash flow compared to fiscal 2009 was primarily driven by an increase in net earnings and a current year reduction in working capital balances.

Investing Activities

Investing activities have historically been primarily related to capital expenditures. Capital expenditures were $41.2 million, $28.1 million, and $24.9 million in fiscal 2011, fiscal 2010, and fiscal 2009, respectively.

Financing Activities

Pringles distributed excess cash to P&G of $161.1 million in fiscal 2011, $185.6 million in fiscal 2010, and $80.7 million in fiscal 2009.

Contractual Commitments

The following table provides information on the amount and payable date of Pringles’ contractual commitments as of June 30, 2011:

 

     Total      Less Than
1 Year
     1–3 Years      3–5 Years      After 5
Years
 
     (Dollars in millions)  

Uncertain tax positions(1)

   $ —         $ —         $ —         $ —         $ —     

Purchase obligations(2)

     40.6         40.6         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual commitments(3)

   $ 40.6       $ 40.6       $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) As of June 30, 2011, Pringles’ combined balance sheet reflects a liability for uncertain tax positions of $4.2 million, including $1.1 million of interest and penalties. Due to the high degree of uncertainty regarding the timing of future cash outflows of liabilities for uncertain tax positions beyond one year, a reasonable estimate of the period of cash settlement beyond twelve months from the balance sheet date of June 30, 2011, cannot be made.
(2) Pringles has purchase commitments for materials, supplies, services and property, plant and equipment as part of the normal course of business.

 

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(3) Pringles is expected to incur, and Diamond expects to assume, between $700 million and $1.05 billion of debt, with the specific amount to be determined by a collar mechanism based on Diamond’s stock price over a 5-day period prior to the commencement of the Exchange Offer. Based upon Diamond’s closing price on September 23, 2011, Diamond expects to assume $700 million of Pringles’ debt at the time of the Merger. For further information on the collar mechanism, see “The Transaction Agreement—Recapitalization”.

New Accounting Pronouncements

There were no new accounting pronouncements issued or effective during the fiscal year which have had or are expected to have a material impact on Pringles’ combined financial statements. See Note 3 to Pringles’ audited combined financial statements included elsewhere in this prospectus for a discussion of new accounting pronouncements.

Other Information

Hedging and Derivative Financial Instruments

Pringles uses raw materials that are subject to price volatility caused by weather, supply conditions, political and economic variables and other unpredictable factors. To manage the volatility related to these exposures, Pringles has historically entered into various financial transactions, which it accounts for under applicable accounting guidance for derivative instruments and hedging activities. These financial transactions are governed by Pringles’ policies covering acceptable counterparty exposure, instrument types and other hedging practices. Note 8 to Pringles’ audited combined financial statements included elsewhere in this prospectus includes a detailed discussion of Pringles’ accounting policies relating to its hedging activities.

 

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SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA

The following selected historical combined financial data of Pringles, selected historical consolidated financial data of Diamond and unaudited condensed combined pro forma financial data of Diamond are being provided to help you in your analysis of the financial aspects of the Transactions. The selected historical combined financial data of Pringles assumes that the transferred assets and liabilities of the Pringles Business had been held by Pringles for all of the periods presented. The unaudited condensed combined pro forma financial data of Diamond has been prepared by Diamond for illustrative purposes only and is not necessarily indicative of the operating results or financial position of Diamond or Pringles would have been had the Transactions been completed at the beginning of the periods or on the dates indicated, nor are they necessarily indicative of any future operating results or financial position. You should read this information in conjunction with the financial information included elsewhere and incorporated by reference in this proxy statement. See “Where You Can Find More Information; Incorporation by Reference,” “Information on Pringles,” and “Information on Diamond.”

Selected Historical Combined Financial Data of Pringles

Pringles’ selected combined balance sheet data presented below as of June 30, 2011 and 2010 and statement of income data for the three fiscal years ended June 30, 2011, 2010 and 2009 have been derived from Pringles’ audited combined financial statements, included elsewhere in this proxy statement. Pringles’ selected combined balance sheet data presented below as of June 30, 2009 and its selected statements of income data for the fiscal year ended June 30, 2008 have been derived from Pringles’ historical accounting records, which are audited and which are not included in this proxy statement. Pringles’ selected combined balance sheet data presented below as of June 30, 2008 and 2007 and its selected statements of income data for the fiscal year ended June 30, 2007 have been derived from Pringles’ historical accounting records, which are unaudited and which are not included in this proxy statement. The selected historical combined financial data below is not necessarily indicative of the results that may be expected for any future period. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations of Pringles” and the financial statements of Pringles and the notes thereto included elsewhere in this proxy statement.

The financial information of Pringles included in this proxy statement has been derived from the consolidated financial statements and accounting records of P&G and reflects assumptions and allocations made by P&G. The financial position, results of operations and cash flows of Pringles presented may be different from those that would have resulted had Pringles been operated as a standalone company or been supported as a subsidiary of Diamond. As a result, the historical financial information of Pringles is not a reliable indicator of future results. See “Risk Factors.”

 

     Fiscal Year Ended
June 30,
 
      2011      2010     2009      2008     2007  
     (Dollars in millions)  
Statement of Income Data:             

Net sales

   $ 1,455.7       $ 1,367.4     $ 1,396.4      $ 1,534.4     $ 1,339.3  

Cost of products sold

     924.0         886.9       1,049.3        1,077.9       890.9  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Gross profit

     531.7         480.5       347.1        456.5       448.4  

Selling, general and administrative expense

     333.5         314.1       279.8        334.9       301.5  

Other operating expense

     0.8         (0.5     7.4        (0.2     1.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     197.4         166.9       59.9        121.8       145.9  

Income taxes

     44.6         40.0       19.6        36.8       52.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Net income

   $ 152.8       $ 126.9     $ 40.3      $ 85.0     $ 93.7  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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     As of June 30,  
      2011      2010      2009      2008      2007  
    

(Dollars in millions)

 
Balance Sheet Data:               

Total assets

   $ 580.7       $ 533.3      $ 608.1      $ 747.3      $ 749.2  

Long-term debt

     —           —           —           2.1        2.3  

Noncurrent deferred income tax liabilities

     33.4         36.5        44.5        55.6        55.7  

Total equity

   $ 365.3       $ 338.0      $ 412.7      $ 470.3      $ 519.4  

Selected Historical Consolidated Financial Data of Diamond

The following table sets forth selected historical consolidated financial data of Diamond. The statement of income data for the fiscal years ended July 31, 2011, 2010 and 2009 and balance sheet data as of July 31, 2011 and 2010 are derived from the audited consolidated financial statements included or incorporated by reference in this proxy statement. The statement of income data for the fiscal years ended July 31, 2008 and 2007 and the balance sheet data as of July 31, 2009, 2008 and 2007 are derived from the audited consolidated financial statements contained in Diamond’s Annual Reports on Form 10-K filed with the SEC. The selected historical consolidated financial data below is not necessarily indicative of the results that may be expected for a full year or any future period. See “Where You Can Find More Information; Incorporation by Reference.” You should read the following data in conjunction with those consolidated financial statements and related notes, and in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in Diamond’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011. The historical results are not necessarily indicative of results to be expected in any future period. See “—Unaudited Condensed Combined Pro Forma Financial Data of Diamond.”

 

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     Fiscal Year Ended
July 31,
 
     2011      2010      2009      2008      2007  
    

(Dollars in millions, except per share data)

 
Consolidated Statement of Income Data:               

Net sales

   $ 965.9       $ 680.2      $ 570.9       $ 531.5      $ 522.6  

Cost of sales

     714.8         519.2        435.3        443.5        443.9  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     251.1         161.0        135.6        88.0        78.6  

Operating expenses:

              

Selling, general and administrative

     97.0         64.3        61.0        43.6        42.5  

Advertising

     44.4         33.0        28.8        20.5        20.5  

Loss on termination of defined benefit plan

     —           —           —           —           3.0  

Acquisition and integration related expenses

     16.8         11.5        —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     158.2         108.8        89.8        64.1        66.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     92.9         52.2        45.8        23.9        12.6  

Interest expense, net

     23.8         10.2        6.3        1.0        1.3  

Other expenses, net

     —           1.8        0.9        —           0.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     69.1         40.2        38.6        22.9        11.2  

Income taxes

     18.9         14.0        14.9        8.1        2.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 50.2       $ 26.2      $ 23.7      $ 14.8      $ 8.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per share:

              

Basic

   $ 2.28       $ 1.40      $ 1.45      $ 0.92      $ 0.53  

Diluted

   $ 2.22       $ 1.36      $ 1.42      $ 0.91      $ 0.53  

 

     As of July 31,  
     2011      2010      2009      2008      2007  
    

(Dollars in millions)

 
Consolidated Balance Sheet Data:               

Total assets

   $ 1,228.4       $ 1,225.9      $ 394.9      $ 273.3      $ 236.4  

Long-term debt, including current portion

     531.7         556.1        115.1        20.2        20.5  

Total stockholders’ equity

   $ 454.8       $ 379.9      $ 173.3      $ 146.2      $ 125.3  

Unaudited Condensed Combined Pro Forma Financial Statements of Diamond

The following unaudited condensed combined pro forma financial data and notes thereto have been prepared by Diamond to give effect to the proposed Merger and the consummation of Diamond’s currently contemplated financing transactions related to the proposed Merger. At the effective time of the Merger, Pringles will be merged with a wholly owned acquisition subsidiary of Diamond, with Pringles becoming a wholly owned subsidiary of Diamond. The transaction is being accounted for as a purchase business combination with Diamond as the accounting acquirer in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Under this method of accounting the purchase price will be allocated to Pringles’ assets acquired and liabilities assumed based upon their estimated fair values at the date of consummation of the Merger.

The process of valuing Pringles’ tangible and intangible assets and liabilities, as well as evaluating accounting policies for conformity, is still in the preliminary stages. Accordingly, the purchase price allocation pro forma adjustments are preliminary and have been made solely for the purpose of providing unaudited condensed combined pro forma financial information. Material revisions to Diamond’s current estimates could be necessary as the valuation process and accounting policy review are finalized. As a result, the actual amount of depreciation and amortization expense may be materially different from that presented. The process of determining fair value of the tangible and intangible assets acquired (including independent appraisals) and liabilities assumed will be completed following the Merger.

 

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The unaudited condensed combined pro forma statements of operations are presented, giving effect to (1) the completion of Merger and related purchase accounting and (2) borrowings under Diamond’s new secured credit facility and the application of the net proceeds therefrom. The unaudited condensed combined pro forma statements of operations reflect the proposed Merger as if it had occurred as of August 1, 2010, the beginning of the annual period presented. The unaudited condensed combined pro forma balance sheet reflects the proposed Merger as if it had occurred on July 31, 2011, the date of the most recent balance sheet presented. The unaudited condensed combined pro forma statements of operations for the year ended July 31, 2011 combine Pringles’ audited historical combined statement of operations for the fiscal year ended June 30, 2011 with Diamond’s audited historical statement of consolidated operations for the fiscal year ended July 31, 2011. The unaudited condensed combined pro forma balance sheet combines the audited historical combined balance sheet of Pringles as of June 30, 2011, with Diamond’s audited consolidated balance sheet as of July 31, 2011.

The historical consolidated financial information has been adjusted to give effect to pro forma adjustments that are factually supportable, directly attributable to the Merger, and expected to have a continuing impact on the statement of operations.

The unaudited condensed combined pro forma financial data should be read in conjunction with:

 

   

accompanying notes to the unaudited condensed combined pro forma financial data;

 

   

Diamond’s audited historical consolidated financial statements for the fiscal year ended July 31, 2011; and

 

   

Pringles’ audited historical combined financial statements for the fiscal year ended June 30, 2011.

The unaudited condensed combined pro forma financial data has been prepared for illustrative purposes only, and is not necessarily indicative of the operating results or financial position that would have occurred if the Merger had been consummated on the dates indicated, nor is necessarily indicative of any future operating results or financial position.

The Merger has not been consummated as of the date of the preparation of these unaudited condensed combined pro forma financial data and there can be no assurances that the Merger transaction will be consummated. See “Risk Factors” for additional discussion of risk factors associated with the unaudited condensed combined pro forma financial data.

Items Not Reflected in the Unaudited Condensed Combined Pro Forma Financial Statements

The unaudited condensed combined pro forma statement of operations does not include any adjustments related to restructuring, potential profit improvements, potential cost savings, or charges related to the Transition Services Agreement described in this prospectus under “Additional Agreements,” which may result from the Merger. The Transition Services Agreement, consists of services which were performed by P&G for Pringles prior to the Merger on a historical basis, and the costs of which were included within Pringles’ audited historical combined financial data. Since the costs of these services are expected to be similar for Diamond, no additional adjustments with respect to these costs were reflected in the unaudited condensed combined pro forma statement of operations. Diamond is currently developing plans to combine the operations of Diamond and Pringles, which may involve costs that may be material. Diamond expects that the anticipated profit improvements generated from these actions, as well as other potential synergies of approximately $25 million, are expected to be fully realized by fiscal 2013. The synergies are expected to come from efficiencies of combining Diamond and Pringles, and leveraging the current administrative, selling and marketing functions, along with Diamond’s supply-chain and distribution network. Integration teams will be formed to further develop and execute detailed implementation programs, the related costs of which have not been determined.

 

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Pringles’ historical combined financial statements have been “carved out” from P&G’s consolidated financial statements and reflect assumptions and allocations made by P&G. The combined financial statements do not necessarily reflect what Pringles’ financial position and results of operations would have been had Pringles been a standalone company during the periods presented.

Pringles’ historical combined financial statements were prepared using P&G’s historical basis in the assets and liabilities of Pringles. Pringles’ historical combined financial statements include all revenues, costs, assets and liabilities directly attributable to Pringles. In addition, certain expenses reflected in the combined financial statements include allocations of corporate expenses from P&G.

 

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Unaudited Condensed Combined Pro Forma Balance Sheet As of July 31, 2011 (Dollars in thousands)

 

     Diamond
Foods
     Pringles      Pro Forma
Adjustments
     Pro Forma
Consolidated
 

ASSETS

             

Current assets:

             

Cash and cash equivalents

   $ 3,112       $ —         $ 3,700        (a    $ 6,812   

Trade receivables, net

     98,218         111,900         (111,900     (b      98,218   

Inventories

     145,575         100,600         5,600        (c      251,775   

Deferred income taxes

     13,249         —           —             13,249   

Prepaid income taxes

     2,783         —           —             2,783   

Prepaid expenses and other current assets

     13,102         13,100         —             26,202   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total current assets

     276,039         225,600         (102,600        399,039   

Restricted cash

     15,795         —           —             15,795   

Property, plant and equipment, net

     127,407         353,500         —          (d      480,907   

Deferred income taxes

     3,870         —           —             3,870   

Goodwill

     407,587         —           1,962,571        (e      2,370,158   

Other intangible assets, net

     450,855         —           1,175,000        (e      1,625,855   

Other long-term assets

     6,842         1,600         15,000        (f      18,095   
           (5,347     (j   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total assets

   $ 1,288,395       $ 580,700       $ 3,044,624         $ 4,913,719   
  

 

 

    

 

 

    

 

 

      

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

             

Current liabilities:

             

Current portion of long-term debt

   $ 41,700       $ —         $ 20,000        (g    $ 40,700   
           19,000        (g   
           (40,000     (g   

Accounts payable and accrued liabilities

     144,060         177,800         15,000        (f      486,860   
           150,000        (n   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total current liabilities

     185,760         177,800         164,000           527,560   

Long-term obligations

     490,001         —           495,000        (g      1,194,701   
           681,000        (g   
           (471,300     (g   

Deferred income taxes

     131,870         33,400         484,034        (i      649,304   

Other liabilities

     25,969         4,200         —             30,169   

Total stockholders’ equity

     454,795         365,300         2,212,537        (h      2,511,985   
           (5,347     (j   
           (150,000     (n   
           (365,300     (o   
  

 

 

    

 

 

    

 

 

      

 

 

 

Total liabilities and stockholder’s equity

   $ 1,288,395       $ 580,700       $ 3,044,624         $ 4,913,719   
  

 

 

    

 

 

    

 

 

      

 

 

 

 

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Unaudited Condensed Combined Pro Forma Statements of Operations For the Fiscal Year Ended July 31, 2011 (Dollars in thousands, except per share data)

 

     Diamond
Foods
     Pringles      Pro Forma
Adjustments
    Pro Forma
Consolidated
 

Net sales

   $ 965,922       $ 1,455,700       $ —        $ 2,421,622   

Cost of sales

     714,775         924,000         —   (d)      1,638,775   
  

 

 

    

 

 

    

 

 

   

 

 

 

Gross profit

     251,147         531,700         —          782,847   

Operating expenses:

          

Selling, general and administrative

     96,960         333,500         28,750 (k)(d)      459,210   

Advertising

     44,415         —           —          44,415   

Acquisition and integration related expenses

     16,792         —           —          16,792   

Other operating expense

     —           800         —          800   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total operating expense

     158,167         334,300         28,750        521,217   

Income (loss) from operations

     92,980         197,400         (28,750     261,630   
  

 

 

    

 

 

    

 

 

   

 

 

 

Interest expense, net

     23,840         —           18,912 (l)      42,752   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income (loss) before income taxes

     69,140         197,400         (47,662     218,878   

Income tax expense

     18,929         44,600         7,808 (m)      71,337   
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income (loss)

   $ 50,211       $ 152,800       $ (55,470   $ 147,541   
  

 

 

    

 

 

    

 

 

   

 

 

 

Earnings per share:

          

Basic

   $ 2.28            $ 2.89   

Diluted

   $ 2.22            $ 2.85   

Shares used to compute earnings per share:

          

Basic

     21,577            29,100 (h)      50,677   

Diluted

     22,242            29,100 (h)      51,342   

 

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DIAMOND FOODS, INC.

NOTES TO UNAUDITED CONDENSED COMBINED PRO FORMA FINANCIAL DATA

(Dollars in thousands, except per share data)

Note 1—Basis of Pro Forma Presentation.

The unaudited condensed combined pro forma statements of income combine Pringles’ audited historical combined statement of income for the fiscal year ended June 30, 2011, with Diamond’s audited historical statement of consolidated income for the fiscal year ended July 31, 2011, to reflect the proposed Merger as if it had occurred as of August 1, 2010. The unaudited condensed combined pro forma balance sheet combines the audited historical combined balance sheet of Pringles as of June 30, 2011, with Diamond’s audited consolidated balance sheet as of July 31, 2011 to reflect the proposed Merger as if it had occurred as of July 31, 2011. Upon completion of the Merger, Pringles shareholders will own Diamond common shares representing approximately 57 percent of the outstanding Diamond common shares.

The Pringles acquisition is being accounted for as a purchase business combination with Diamond as the accounting acquirer. Accordingly, Diamond’s cost to purchase Pringles will be allocated to the assets acquired and the liabilities assumed based upon their respective fair values on the date the Merger is completed. Under the purchase method of accounting, the total estimated purchase price is allocated to Pringles net tangible and intangible assets and liabilities based on their estimated fair values as of the date of consummation of the Merger. The total equity purchase price will be paid with 29,143,190 shares of Diamond common stock, that will be issued in exchange for all outstanding shares of Pringles Company common stock. Additionally, Diamond will assume newly issued Pringles debt, in an amount that, when combined with the value of the share issuance, aggregates $2.9 billion. Such additional debt to be issued by Pringles is currently estimated to approximate $700 million. The amount of debt actually issued by Pringles will be determined by a reference price range of Diamond common stock prior to close of the Merger and could increase to a maximum amount of $1.050 billion or be reduced to a minimum amount of $700 million. The pro forma adjustments included herein may be revised as additional information becomes available and as additional analyses are performed. The final allocation of the purchase price will be determined after the Merger is completed and after completion of a final analysis to determine the fair values of Pringles’ tangible assets, identifiable intangible assets, and liabilities as of the date of consummation of the Merger. Accordingly, the final purchase accounting adjustments may be materially different from the pro forma adjustments presented in this document. Increases or decreases in the fair value of the net assets may change the amount of the purchase price allocated to goodwill and other acquired assets and liabilities. This may impact the unaudited condensed combined pro forma statement of income due to an increase or decrease in the amount of amortization or depreciation of the adjusted assets.

The preliminary estimated purchase price is allocated as follows:

 

Tangible assets, prepaids, and other assets

   $ 474,400   

Identifiable indefinite-lived intangible assets

     800,000   

Identifiable finite-lived intangible assets

     375,000   

Goodwill

     1,962,571   

Liabilities assumed

     (182,000

Deferred taxes

Pringles debt to be assumed

    

 

(517,434

(700,000


  

 

 

 

Total preliminary estimated purchase price allocation

   $ 2,212,537   
  

 

 

 

Diamond Foods’ fiscal year ends on July 31 and Pringles’ fiscal year ends on June 30. The pro forma condensed combined financial information presented herein combines the financial position and results of operations of Diamond Foods as of and for the fiscal year ended July 31, 2011 with the financial position and results of operations of Pringles as of and for the fiscal year ended June 30, 2011.

 

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Note 2—Pro Forma Adjustments.

(a) Adjustment reflects proceeds remaining from the issuance of debt described in (g) after repaying historical debt, which will be used to supplement working capital.

(b) Under the terms of the Merger Agreement, Diamond is not acquiring Pringles’ trade receivables.

(c) To record inventory at its estimated fair value.

(d) At this time there is insufficient information as to the specific nature, age and condition of Pringles’ property, plant and equipment to make an estimation of fair value or the corresponding adjustment to depreciation and amortization. Therefore, Diamond has used Pringles’ carrying amount at the balance sheet date as the best estimate for the unaudited condensed combined pro forma balance sheet. For each $100 million fair value adjustment to property, plant and equipment, assuming a weighted-average useful life of 10 years, depreciation expense would change by approximately $10 million.

(e) To recognize $1,963 million of Goodwill, $800 million of non-amortizable Brand Intangibles, and $375 million of amortizable intellectual property, supplier agreements and customer relationships.

(f) To record deferred financing charges incurred in connection with the issuance of the debt financing discussed in (g).

(g) To recognize the repayment of the short-term and long-term portions of the historical debt, $40 million and $471.3 million, respectively, funded through new debt financing.

These adjustments are contingent upon the closing of the Pringles acquisition and therefore may not occur in the event the Pringles acquisition is not consummated. As such, the terms of the expected financings are not complete at this time. For purposes of these unaudited pro forma condensed combined financial statements, Diamond anticipates that it will complete a debt financing at the time the Pringles acquisition closes as shown below. Diamond has obtained commitments for up to $1,000 million of debt financing consisting of Senior Credit Facilities of up to $700 million, and a Senior Bridge Facility of up to $300 million. Pringles has obtained commitments for up to $1,050 million of debt financing consisting of up to $375 million of Term Loan A and up to $675 million of Term Loan B. At this time, Diamond expects to assume $700 million of Pringles’ debt at the time of the Merger. The parties have also agreed to a collar mechanism that would adjust the amount of debt assumed by Diamond based upon Diamond’s stock price during a trading period prior to the commencement of the Exchange Offer. The amount of debt to be assumed by Diamond could increase by up to $200 million or decrease by up to $150 million based on this adjustment mechanism.

 

Diamond:

  

Debt from Revolver

   $ 115,000   
  

Debt from Term Loan A

     400,000   
     

 

 

 
  

Total

   $ 515,000   
     

 

 

 
  

Current portion of long-term debt

   $ 20,000   
  

Long-term debt

   $ 495,000   

Pringles:

  

Debt from Term Loan A

   $ 300,000   
  

Debt from Term Loan B

     400,000   
     

 

 

 
  

Total

   $ 700,000   
     

 

 

 
  

Current portion of long-term debt

   $ 19,000   
  

Long-term debt

   $ 681,000   

 

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(h) Diamond intends to exchange approximately 29.1 million shares of its common stock in this offering to fund a portion of the purchase price of the Pringles acquisition. The purchase price is based on Diamond’s closing share price at September 8, 2011 of $75.92.

(i) Represents deferred tax liabilities related to intangible assets.

(j) The $5.3 million relates to the write-off of unamortized deferred financing costs from Diamond’s existing debt that is a non-recurring expense in connection with the repayment of Diamond’s existing debt.

(k) Represents the additional straight-line amortization of supplier agreements, customer relationships and other intellectual property resulting from the Pringles acquisition. Diamond assumed a 20 year useful life for customer relationships, and a 10 year useful life for supplier agreements and intellectual property.

(l) Interest expense will increase as a result of the expected financing transactions described in (g). Adjustment to historical interest expense to reflect the incurrence of additional borrowings, including amortization of deferred debt issuance costs relating to such additional borrowings and the repayment of Diamond’s existing credit facility. The weighted average interest rate used to compute the incremental interest expense was 3.3%. An increase of 0.125% in the interest rate would increase Diamond’s annual pro forma interest expense by approximately $1.5 million.

(m) For purposes of these unaudited pro forma condensed combined financial statements, Diamond used an effective tax rate of 32.6% for the year ended July 31, 2011. This rate is an estimated effective rate for the global operations of the combined company. These rates may change as Diamond performs a complete tax analysis.

(n) Diamond expects to incur transaction and integration costs of approximately $150 million through fiscal 2013.

(o) The adjustment reflects the elimination of Pringles’ equity in connection with the Pringles acquisition.

 

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HISTORICAL PER SHARE, MARKET PRICE AND DIVIDEND DATA

Comparative Historical and Pro Forma Per Share Data

The following tables set forth certain historical and pro forma per share data for Diamond. The Diamond historical data has been derived from and should be read together with the audited consolidated financial statements of Diamond and related notes thereto contained in Diamond’s Annual Report on Form 10-K for the fiscal year ended July 31, 2011 incorporated by reference into this proxy statement. The Diamond pro forma data has been prepared by Diamond and derived from the unaudited condensed combined pro forma financial data of Diamond included elsewhere in this prospectus.

This summary of comparative historical and pro forma per share data is being provided for illustrative purposes only and is not necessarily indicative of the results that would have been achieved had the Transactions been completed during the period presented, nor are they necessarily indicative of any future results. Diamond and Pringles may have performed differently had the Transactions occurred prior to the period presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had Diamond and Pringles been combined during the period presented or of the future results of Diamond following the Transactions.

The following table presents certain historical and pro forma per share data for Diamond:

 

     As of and for the Fiscal Year Ended
July 31, 2011
 
     Historical      Pro Forma  

Diamond:

     

Earnings Per Share Data:

     

Basic

   $ 2.28       $ 2.89   

Diluted

   $ 2.22       $ 2.85   

Shares of common stock used to compute earnings per share (in millions):

     

Basic

     21.6         50.7   

Diluted

     22.2         51.3   

Book value per share of common stock

   $ 21.08       $ 49.57   

Cash dividends declared per share of common stock

   $ 0.18       $ 0.18   

Historical Market Price Data

Historical market price data for Pringles does not exist as Pringles currently is a wholly owned subsidiary of P&G. As such, shares of Pringles Company common stock are not currently listed on a public stock exchange and are not publicly traded. Therefore, no market data is available for Pringles.

 

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Shares of Diamond common stock are currently traded on NASDAQ under the symbol “DMND.” On April 4, 2011, the last trading day before the announcement of the Transactions, the last sale price of shares of Diamond common stock reported by NASDAQ was $57.22. On September 23, 2011, the last sale price of shares of Diamond common stock reported by NASDAQ was $90.37. The following table sets forth the high and low sale prices of shares of Diamond common stock and the dividends declared for the periods indicated. For current price information, Diamond stockholders are urged to consult publicly available sources.

 

      Diamond Common Stock  
   High      Low      Dividends  

Fiscal Year Ended July 31, 2010

        

First Quarter

   $ 34.07       $ 26.21       $ 0.045   

Second Quarter

     37.24         29.10         0.045   

Third Quarter

     46.36         34.27         0.045   

Fourth Quarter

     46.67         36.72         0.045   

Fiscal Year Ended July 31, 2011

        

First Quarter

   $ 45.24       $ 37.91       $ 0.045   

Second Quarter

     55.97         42.96         0.045   

Third Quarter

     65.92         48.01