UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549-0405
DIVISION OF
CORPORATION FINANCE
April 25, 2005
via U.S. mail via facsimile
Michael Mendes Gordon K. Davidson, Esq.
President and Chief Executive Officer Kathleen Kehoe Greeson,
Esq.
Diamond Foods, Inc. (415) 281-1350
1050 South Diamond Street
Stockton, California 95205-7087
Re: Diamond Foods, Inc.
Form S-1 filed on March 25, 2005
File No. 333-123576
Form S-4 filed on March 25, 2005
File No. 333-123574
Dear Mr. Mendes:
We have reviewed your filings and have the following
comments.
We have provided comments with respect to both the Form S-1 and
Form
S-4 registration statements in this letter. Where indicated, we
think
you should revise your documents in response to these comments.
If
you disagree, we will consider your explanation as to why our
comment
is inapplicable or a revision is unnecessary. Please be as
detailed
as necessary in your explanation. In some of our comments, we may
ask you to provide us with supplemental information so we may
better
understand your disclosure. After reviewing this information, we
may
or may not raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Forms S-1 and S-4
General
1. Where comments on a section that appears in one registration
statement also could apply to disclosure that appears elsewhere in
the document or in the other registration statement, please make
parallel changes to all affected disclosure. This will eliminate
the
need for us to repeat similar comments.
2. Update the documents to provide the latest available
information.
For example, please update the information regarding the status of
your application for quotation on the Nasdaq National Market, as
well
as the date by which you "expect" to complete the conversion.
3. Fill in all information you currently omit. For example, you
must
identify any new directors or nominees when their identities
become
known. You need to identify how long your directors and nominees
have served as directors. You need to cover all employment in the
five year period, for example in the sketch you provide for Mr.
Warren. And you should eliminate blanks where they currently
appear
in your documents, such as at pages 66 and 67 of the Form S-1 and
page 95 of the Form S-4.
4. We will need time to review all omitted exhibits, including the
opinions of counsel, form of proxy and "conversion election form."
You can expedite the review process by providing all this
information
and all these documents promptly. We may have additional
comments.
5. Throughout the Form S-1 and S-4 disclosure, you make reference
to
the 606,460 shares of restricted stock that will be awarded to
executive officers under the 2005 Equity Incentive Plan for a
"nominal price" concurrently with the completion of the IPO.
Revise
this disclosure to disclose the nominal price or the basis upon
which
such price will be determined and the possible discount this will
represent to the IPO price as currently estimated. Also, please
provide the disclosure required by Item 506 of Regulation S-K with
respect to dilution and the impact to investors as a result of the
share issuances to insiders of the company. We may have further
comments.
6. Explain in context technical or industry terms like
"patronage",
"patronage business" and "non-patronage business" at first usage.
7. The suggestion that the disclosure "is accurate only as of the
date on the front cover" is inappropriate. Please revise to
remove
this suggestion.
8. Monitor your need to update your financial statements, as
required
by Regulation S-X, Rule 3-12.
9. Please insert bold vertical lines to separate audited
information
from unaudited information wherever financial statements or charts
are presented.
10. Provide updated consents from your independent accountants in
the
next amendment.
Summary Consolidated Financial Data
11. Eliminate the "Supplemental condensed financial information"
for
2003 and 2002 and identify the 2004 information as "pro forma."
Information regarding what your margins might have been in 2003
and
2002 after adjustments for estimated purchase costs of walnut
inventories and full income tax expense as if you had been a
public
for-profit company in those years should be limited to the
Business
and/or Management`s Discussion and Analysis sections.
12. Move the "balance sheet data" directly below the "statement of
net proceeds data" and before the "other data."
Unaudited Pro Forma Condensed Financial Statements
13. Please add disclosure that explains why you do not believe it
appropriate to provide a pro forma condensed statement of
operations
for the interim period ended January 31, 2005. Also add
disclosure
explaining why it is inappropriate to adjust the inventory balance
in
your pro forma balance sheet at January 31, 2005.
14. Please disclose the average price and quantity of walnuts used
by
you to determine estimated walnut acquisition costs for each
period
presented.
15. Tell us how you arrived at 12,666,667 shares used for
calculating
pro forma net income per share. In this regard, also support your
conclusion not to include restricted stock grants to be granted to
management upon the effectiveness of your offering.
16. We note a line item of $2.1 million for an investment in
CoBank.
The notes to the unaudited financial statements do not adequately
explain what this investment is, nor do you identify Co-Bank in
the
Liquidity and Capital Resources discussion of MD&A. Please revise
your disclosure to explain in greater detail, what this investment
consists of. We may have further comments.
Management`s Discussion of Analysis and Financial Condition and
Results of Operations
Supplemental Financial Information
17. Clearly identify in the header of your chart that the figures
provided are unaudited and pro forma. Additionally, provide the
average price and quantity of walnuts used by you to determine
estimated walnut acquisition costs for each period presented.
Please
review your current presentation for conformity with the related
instructions provided to you in our letter dated February 25,
2005,
for other required disclosure.
18. Please tell us why you do not believe inventory valuation is a
critical accounting policy.
Historical Financial Statements
Consolidated Statements of Cash Flows, page F-6
19. Please present additions to long-term obligations separate
from
payments of long-term obligations. Refer to FAS 95, paragraph 31.
Note 1 - Business and Significant Accounting Policies, page F-7
Slotting and Other Contractual Arrangements, page
F-9
20. Tell us why you believe it is appropriate to characterize
slotting fee payments as expense rather than as a reduction of
revenue. Please discuss the specific accounting literature upon
which you relied.
Note 6 - Segment Disclosures, page F-13
21. Supplementally support your conclusion that you operate in a
single segment. Please provide us with your detailed analysis.
This
would include your analysis of whether your business is comprised
of
multiple operating segments meeting the definition provided in FAS
131, paragraph 10 and, if so, how those operating segments meet
the
aggregation criteria described in paragraph 17. Submit to us all
reports, financial summaries, schedules and information memoranda
given, during the fourth quarter of your most recently completed
fiscal year and during your most recent quarter, to your chief
operating decision makers and board members who are responsible
for
allocating resources and assessing performance of the enterprise.
Identify the frequency with which each of these documents is
prepared
and to whom they are delivered. Provide us with an organizational
chart showing all personnel involved in managing your organization
at
the executive and senior executive levels, indicating the name of
the
employee and job function.
Form S-1
Prospectus Summary, page 1
22. Provide us with objective support for subjective/comparative
statements you make throughout your disclosure. Also clarify in
context what terms like "leading" signify. It appears that you
use
the term with more than one connotation. Clarify in each case
whether you intend it to refer to market share or some other
measurement standard. This is not a complete list, but examples
of
assertions that require support or further clarification include
the
following:
(a) "we are the leading domestic and international marketer of a
broad range of culinary nuts" (where you fail to discuss your
international market share);
(b) "Diamond California is the leading brand of culinary and in-
shell
nuts in the United States;" and
(c) "we are the leading innovator of nut products..."
Unless you can provide objective supplemental support for
statements,
including your market share and market growth forecasts, this type
of
language and terminology generally is not appropriate. Additional
examples of subjective language or statements attributed to
unnamed
third parties include the following:
(d) the fat in nuts "is beneficial unsaturated fat, which has been
demonstrated to lower cholesterol;"
(e) omega-3 "has been shown to help reduce cholesterol, blood
pressure and the risk of heart disease" (more complete disclosure
would address who demonstrated this and whether there are other
studies that suggest otherwise);
(f) the company is "associated with reliably high-quality, healthy
products" (it is unclear who makes this association); and
(g) "our advanced processing capabilities differentiate us from
our
competition by allowing us to offer higher quality and more
innovative products."
23. Provide a concise and balanced summary of the material
information you disclose elsewhere. If you emphasize your
strategy
and strengths, balance that with the attendant risks, drawbacks
and
challenges you face.
24. Eliminate repetition in this section and elsewhere. For
example,
you mention at both pages 1 and 2 that you are the "leading brand"
of
culinary nuts with a market share more than three times that of
your
nearest competitor.
Liquidity and Capital Resources, page 31
25. Provide a more complete discussion of the timetable during
which
you expect your funds to be sufficient, rather than only through
July
31. If you are unable to include this information, describe in
necessary detail the reasons for your uncertainty in that regard.
We
note the disclosure in the first sentence in the Risk Factor
captioned "Our ability to raise capital." We may have additional
comments.
Business, page 36
26. Explain what significance "all commodity value" has and why
you
cite it at page 36. Provide us with all reports to which you
refer,
and explain whether any numbers or findings you cite are contained
in
reports you funded or were performed by organizations with which
you
are affiliated. We may have additional comments.
Management, page 46
27. Disclose in a new appropriately captioned subsection in the
Management section, the composition, function and purpose of the
Grower Executive Council that you cite at page 61. Also make
clear
where you discuss the Council that it will be comprised of all
directors who will not continue as directors. Disclose in
necessary
detail, including quantification, the compensation and benefits
members of the Council will receive.
Shares Eligible for Future Sale, page 68
28. At page 5 of the Form S-4, you indicate that your advisors
"have
recommended these restrictions ... to promote an orderly initial
trading market" for your shares. But in the fourth paragraph of
this
section, you indicate that the underwriters may in their sole
discretion at any time and without notice release all of the
shares
subject to the lock-ups. Advise us whether there are any
agreements,
understandings or intentions, tacit or explicit, to release any of
the shares from the lock-ups prior to the expiration of the
corresponding period. And emphasize in the Risk Factors
discussion
the discretionary power to release all such "locked-up" shares.
Plan of Distribution, page 71
29. We note that your underwriters will engage in an electronic
offer, sale or distribution of the shares. Please describe their
procedures to us supplementally. Please consult Release Nos. 33-
7233 and 33-7289 for guidance. Also, in your discussion of your
procedures, tell us how your procedures ensure that the
distribution
complies with Section 5 of the Securities Act. We may have
further
comments.
30. You indicate that a prospectus in electronic format may be
made
available on the websites maintained by one or more of the
underwriters. If agreements exist outlining these arrangements,
provide us a copy of such agreements and describe their material
terms. If you subsequently enter into any arrangements with a
third
party to host or access your preliminary prospectus on the
Internet,
promptly supplement your response and update your disclosure. We
may
have further comments.
Form S-4
General
31. It appears that the planned initial public offering that is a
condition to the conversion contains no minimum size, per share
price
or net proceeds provisions. But you do not adequately emphasize
this
substantial uncertainty and risk on the cover page and throughout
the
materials. You suggest at page 24 that "even if we complete" the
IPO
below the ranges you disclose, you "will not be required to, and
we
do not intend to, resolicit votes approving the conversion."
(a) Recast the disclosure throughout to apprise members of the
risks
that would result should the IPO go forward despite only resulting
in
nominal proceeds and a nominal per-share price.
(b) Make clear that members should vote assuming that the IPO
obtains
only nominal proceeds, including the ramifications on all
calculations and the implied value of the shares they would
receive.
(c) We will address other related issues on this subject in
several
comments that follow below, but we may have additional comments
once
we review the new responsive disclosure you provide.
32. Explain why you believe you would not be required to resolicit
the vote in the event that you conduct the initial public offering
at
a different prize or size than you disclose. It is unclear how
you
believe your members would be able to make an informed investment
decision under those circumstances. We may have additional
comments.
33. Substantially enhance your presentation of the consideration
members will receive to provide simple but complete illustrative
examples. Ensure that your tabular presentations provide the
possible minimum proceeds scenarios, various possibilities
regarding
the amount of cash chosen, as well as an explanation of why you
have
chosen particular data points or made certain assumptions. For
example, absent improved disclosure, the table at page 23 -
including
the unexplained entries at column 1 -- does not appear useful.
Similarly the cover page references to "estimated value" and
"average
value" appear inappropriate given the substantial uncertainty with
regard to the actual size and nature of the IPO. We may have
additional comments.
34. Expand the section in which you describe the background of the
proposed conversion. See generally Item 4 of Form S-4. Disclose
how
this idea developed, what other transactions have been considered
and
why each was rejected and why the board is recommending this
particular transaction at this point in time. We may have
additional
comments.
35. Provide the information required by Item 2 of Form S-4 on the
inside front cover page.
36. Consistent with the requirements of Item 6 of Form S-4, please
provide a description of the Marketing Agreement.
37. Provide us with all materials you have distributed or used at
the
Grower/DAC meetings, and identify any that have not yet been filed
via EDGAR. We may have further comments.
Questions and Answers ("Q&As")
Q.3 What does this conversion mean..., page 1
38. Disclose specifically how the purchase price will be
established
or the reference points that will be used to determine the prices
to
be paid under the Walnut Purchase Agreements.
39. Please add another question that more specifically addresses
the
differences in the terms and conditions of between the Marketing
Agreement and the proposed Walnut Purchase Agreement. Disclose,
as
done on page 28, the consequences of failing to elect to enter
into
such agreements by the date established by the company.
Supplementally, inform us of the other market options available to
current co-op member walnut growers who choose not to sell their
product to you. What other purchasers exist in the California
market
that could be reasonably accessed current member growers? We may
have further comments.
40. Provide us with supplemental support and an explanation for
the
disclosure in the last paragraph on page 1.
Q.6- How will we determine the amount of cash..., page 2
41. We note the disclosure on page 28 in which you disclose that
the
amount of cash available for distribution could be reduced by the
amount of cash paid to shareholders who successfully assert
dissenter`s rights under California law. Revise your response and
similar disclosure throughout to indicate, as done in Answer 24,
that
successful assertion of dissenters` rights could also reduce the
amount of cash available for distribution.
Q.26- Do the directors and officers..., page 7
42. Revise the disclosure here and elsewhere in the prospectus to
specify the "favorable prices" or "nominal prices" that executive
officers will pay for shares of restricted stock granted under the
2005 Equity Incentive Plan.
Q.31-What are the material tax consequences..., page 8
43. Do not state that the reader "should consult" with its
advisors.
You may recommend that course of action.
Solicitation of Proxies, page 21
44. We note that you may employ various methods to solicit
proxies,
including telephone, telegram and "electronic means". Please
confirm
that you will file all written soliciting materials, including any
scripts to be used in soliciting proxies over the telephone, e-
mail
correspondence and information posted on web sites and chat rooms.
Refer to Proxy Rule 14a-6(b) and (c).
Risk Factors
45. Eliminate language that mitigates the risk you present,
including
"Although we have presented estimates, etc." and the first
sentence
under "Our Ability to Raise Capital." Instead state the risk and
potential harm succinctly. Similarly, eliminate suggestions that
you
cannot be certain or cannot assure a particular outcome, instead
focusing on the risk that would result.
46. Include separate risk factors to address distinct risks you
face.
Examples include those related to your substantial indebtedness,
risks that apply to particular countries in which you conduct
material business, changes to your financial statement
presentation
and any risks related to the structure of your business post-
conversion. The third paragraph of the first risk factor should
appear as a separate risk factor.
Background of the Conversion, page 24
47. Given that the terms of the Conversion Agreement permit the
board
to approve an IPO, even if the shares are sold for a price less
than
the range specified, please provide, on a supplemental basis, the
basis for the valuation of the company and price range suggested.
Effect of Conversion on the Rights of Members, page 39
48. Revise the second paragraph to refer instead to "material"
differences. Also explain in further detail those instances in
which
stockholders will have fewer rights than they currently enjoy as
members.
Closing Comments
Please amend your registration statement in response to
these
comments. You may wish to provide us with a marked copy of the
amendment to expedite our review. Please furnish a cover letter
with
your amendment that keys your responses to our comments and
provides
any requested supplemental information. Detailed cover letters
greatly facilitate our review. Please understand that we may have
additional comments after reviewing your amendment and responses
to
our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures they
have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert this action as defense in any
proceeding
initiated by the Commission or any person under the federal
securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as a confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
No other review of the registration statement has been made.
All persons who are by statute responsible for the adequacy and
accuracy of the registration statement are urged to be certain
that
all information required under the Securities Act of 1933 has been
included. You are also reminded to consider applicable
requirements
regarding distribution of the preliminary prospectus.
Please direct questions regarding accounting issues and
related
disclosures to Sandra Eisen at (202) 942-1805, or in her absence
to
Barry Stem, Senior Assistant Chief Accountant, at (202) 942-1919.
Direct all other questions to Mellissa Campbell Duru at (202) 942-
1930 or, in her absence, to Timothy Levenberg, Special Counsel, at
(202) 942-1896. Please send all correspondence to us at the
following ZIP code: 20549-0405.
Sincerely,
H. Roger Schwall
Assistant Director
cc: M.Duru
T. Levenberg
S. Eisen
B. Stem
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Diamond Foods, Inc.
April 25, 2005
page 10