UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
Amendment No. 2
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2011
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 000-51439
DIAMOND FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware
20-2556965
(State of Incorporation)
(IRS Employer Identification No.)
600 Montgomery Street, 13th Floor
San Francisco, California
94111-2702
(Address of Principal Executive Offices)
(Zip Code)
415-445-7444
(Telephone No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Name of Exchange on Which Registered:
Common Stock, $0.001 par value
NASDAQ Global Select Market
Series A Junior Participating Preferred Stock Purchase Right
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
As of January 31, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,032,155,294 based on the closing sale price as reported on the NASDAQ Stock Market. As of October 31, 2012, there were 22,085,507 shares of common stock outstanding.
TABLE OF CONTENTS
Page
3
Cautionary Statement Regarding Forward-Looking Statements
4
PART I
Item 1.
5
Item 1A.
9
Item 3.
23
PART II
Item 6.
26
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
27
Item 8.
Financial Statements and Supplementary Data
36
Item 9A.
81
PART IV
Item 15.
Exhibits. Financial Statement Schedules
88
SIGNATURES
2
EXPLANATORY NOTE
On November 1, 2011, we announced that the Audit Committee of our Board of Directors was conducting an internal investigation of our accounting for certain crop payments made to walnut growers. Subsequent to fiscal year end 2011 and 2010 we made payments to walnut growers of approximately $61.5 million and $20.8 million, referred to as Momentum Payments and Continuity Payments, respectively. As a result of an evaluation of the substance of information obtained in this investigation, we determined that the Momentum Payments and Continuity Payments related to the prior year walnut crops and such payments were not accounted for in the correct periods. Further, the Company and Audit Committee concluded that the original quarterly walnut crop cost estimates used in certain interim periods of fiscal 2011 and fiscal 2010 as well as the subsequent changes to the estimates in certain interim periods were not sufficiently supported and were not based on consideration of all relevant information available at the time. Accordingly, the previously issued consolidated financial statements as of and for the fiscal years ended July 31, 2011 and 2010, as well as the interim periods ended January 31, 2010, April 30, 2010, July 31, 2010 and October 31, 2010, January 31, 2011, April 30, 2011 and July 31, 2011 needed to be restated to record these walnut grower payments and, with respect to the forgoing interim periods, correct the original quarterly walnut crop cost estimates.
In addition, we made corrections to accounts payable and accrued liabilities to record expenses in the proper periods, and other adjustments discovered subsequent to the initial filing of our Annual Report on Form10-K for the fiscal year ended July 31, 2011. Finally, we made other corrections to address items that were previously identified but that had not been deemed material individually and in the aggregate. For further information related to the restatements see Note 15 of the Notes to Consolidated Financial Statements.
Management has re-evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2011 and the effectiveness of our internal control over financial reporting as of July 31, 2011 based on the framework in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We have determined that material weaknesses in our internal controls existed as of July 31, 2011. For a description of the material weaknesses in our internal control over financial reporting and our plan to remediate those material weaknesses, see Part II – Item 9A Controls and Procedures.
We filed Amendment No. 1 to our Annual Report on Form 10-K for the fiscal year ended July 31, 2011, on November 28, 2011, to include information required pursuant to Part III, which otherwise would be found in our definitive proxy statement for our annual meeting of stockholders, and Part IV.
We are filing this Amendment No. 2 to our Annual Report on Form 10-K for the purpose of restating our audited consolidated financial statements and related disclosures for the fiscal years ended July 31, 2011 and 2010, and to revise our disclosure on our controls and procedures as of July 31, 2011. Please refer to Note 15 of the Notes to Consolidated Financial Statements and Item 9A Controls and Procedures. The following items in this report have been amended to give effect to the restatement of our consolidated financial statements:
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Item 6. Selected Financial Data
•
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 8. Financial Statements and Supplementary Data
•
Item 9A. Controls and Procedures
•
Item 15. Exhibits and Financial Statement Schedules
Concurrently with the filing of this amendment, we are filing our Quarterly Reports on Form 10-Q for each of the quarterly periods ended October 31, 2011, January 31, 2012 and April 30, 2012, which reports will include restated unaudited condensed consolidated financial statements and related financial information for the fiscal 2011 comparative periods presented in those reports, reflecting the effects of the restatement.
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This amendment to our 2011 Annual Report on Form 10-K includes forward-looking statements, including statements about our future financial and operating performance and results, business strategy, market price, brand portfolio and performance, our SEC filings, enhancing internal controls and remediating material weaknesses. These forward-looking statements are based on our assumptions, expectations and projections about future events only as of the date of this amendment, and we make such forward-looking statements pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Many of our forward-looking statements include discussions of trends and anticipated developments under the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of the periodic reports that we file with the SEC. We use the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “may” and other similar expressions to identify forward-looking statements that discuss our future expectations, contain projections of our results of operations or financial condition or state other “forward-looking” information. You also should carefully consider other cautionary statements elsewhere in this amendment and in other documents we file from time to time with the SEC. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this amendment. Actual results may differ materially from what we currently expect because of many risks and uncertainties, such as: the possibility that we may be required to file additional periodic reports and financial statements in connection with our restatement disclosures; our leverage, which may make it more difficult for us to respond to changes in our business, markets and industry; possible increased borrowing costs; potential difficulties raising additional capital if needed, and the potential dilutive impact of any such equity capital raising; uncertainty and expense related to litigation and regulatory proceedings; the possibility that our common stock will be delisted from trading on the Nasdaq Stock Market; potential difficulties in signing up growers to new walnut purchase agreements; uncertain availability and cost of walnuts and other raw materials; increasing competition and possible loss of key customers; and general economic and capital markets conditions.
As used in this Annual Report, the terms “Diamond Foods,” “Diamond,” “Company,” “Registrant,” “we,” “us,” and “our” mean Diamond Foods, Inc. and its subsidiaries unless the context indicates otherwise.
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PART I
Item 1. Business
Overview
Diamond Foods, Inc. was incorporated in Delaware in 2005 as the successor to Diamond Walnut Growers, Inc., a member-owned California agricultural cooperative association. In July 2005, Diamond Walnut Growers, Inc. merged with and into Diamond Foods, Inc., converted from a cooperative association to a Delaware corporation and completed an initial public offering of Diamond Foods’ common stock.
We are an innovative packaged food company focused on building and energizing brands. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our strong heritage in the culinary nut market under the Diamond of California ® brand by launching a line of snack nuts under the Emerald ® brand. In September 2008, we acquired the Pop Secret ® brand of microwave popcorn products, which provided us with increased scale in the snack market, additional supply chain economies of scale and cross promotional opportunities with our existing brands. In March 2010, we 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, which added the complementary premium Kettle Brand ® to our existing portfolio of leading brands in the snack industry.
We sell our products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores, other retail channels and non-retail channels. We have three product lines:
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Snack. We sell snack products under the Emerald®, Pop Secret® and Kettle Brand® brands. Emerald products include roasted, glazed and flavored nuts, trail mixes, granola, dried fruit and similar offerings that are sold where snack nuts and convenient breakfast items are sold. In September 2008, we expanded our 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. In March 2010, we complemented our 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. Our 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.
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Culinary and Retail In-shell. We sell 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. We also sell in-shell nuts under the Diamond of California ® brand, primarily during the winter holiday season. These products are typically available in produce sections of grocery stores, mass merchandisers and club stores.
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Non-retail. Our non-retail nut business includes international markets and North American ingredient customers. We market 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 our standard or customer-specified products to add flavor and texture in their product offerings.
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Our net sales were as follows (in millions):
Year Ended July 31,
2011
2010
2009
Snack
$
553.7
$
323.6
$
188.9
Culinary and Retail In-shell
263.2
249.0
276.2
Total Retail
816.9
572.6
465.1
International Non-Retail
119.0
69.2
68.9
North American Ingredient/Food Service Other
30.8
40.5
36.9
Total Non-Retail
149.8
109.7
105.8
Total Net Sales
$
966.7
$
682.3
$
570.9
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 our net sales for fiscal 2011, 2010 and 2009, respectively. Sales to Costco Wholesale Corporation accounted for 11%, 12% and 13% of our net sales for fiscal 2011, 2010 and 2009, respectively. No other single customer accounted for more than 10% of our net sales.
Marketing
We believe that our marketing efforts are fundamental to the success of our business. Advertising expenses were $45.0 million in fiscal 2011, $33.7 million in fiscal 2010 and $28.8 million in fiscal 2009. We develop marketing strategies specific to each product line, focusing on building brand awareness and attracting consumers to our offerings.
Our 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. Our television advertising airs on national network, cable channels and digital media. We design and provide point-of-purchase displays for use by our retail customers. These displays help to merchandize our products in a consistent, eye-catching manner and make our products available for sale in multiple locations in a store, which increases impulse purchase opportunities. Our public relations and event sponsorship efforts are an important component of our overall marketing and brand awareness strategy. We offer samples and support active lifestyle consumers by sponsoring events such as running events. Promotional activities associated with our ingredient/food service products include attending regional and national trade shows, trade publication advertising and customer-specific marketing efforts. These promotional efforts highlight our commitment to quality assurance, processing and storage capabilities and product customization.
Sales and Distribution
In North America, we sell our consumer products through our sales personnel directly to large national grocery, mass merchandiser, club, convenience stores and drug store chains. Our sales department also oversees our broker and distributor network. Our 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, we sell our potato chip products through our sales personnel directly to national grocery, co-op and impulse store chains.
We distribute our products from our production facilities in 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. Our sales administration and logistics departments manage the administration and fulfillment of customer orders. The majority of our products are shipped from our production, warehouse and distribution facilities by contract and common carriers.
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Product Development and Production
Our innovation program is broken down into four phases. A cross-functional team leads this process from idea generation through commercialization. Our 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 an 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. We process and package most of our nut products at the Stockton, California and Fishers, Indiana facilities; our popcorn products are primarily processed and packaged in the Van Buren, Indiana facility under a third-party co-pack arrangement; and our potato chips are processed and packaged at Salem, Oregon, Beloit, Wisconsin and Norwich, England facilities. Periodically, we may use third parties to process and package a portion of our products when warranted by demand and specific technical requirements.
Competition
We operate in a highly competitive environment. Our products compete against food products sold by many regional and national companies, some of which are larger and have substantially greater resources than we do. We believe that additional competitors will enter all of the markets in which we operate. We also compete 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 our markets is based on product value, price, brand recognition and loyalty. The combination of the strength of our brands, our product quality and differentiation, as well as our broad channel distribution, helps us to compete effectively in each of these categories. Our principal competitors are regional and national walnut handlers and nut manufacturers, national popcorn manufacturers, regional and national potato chip manufacturers, and regional, national and international food suppliers.
Raw Materials and Supplies
We obtain our raw materials from domestic and international sources. We currently obtain a majority of our walnuts from growers located in California who have entered into supply contracts with us. We also purchase walnuts from time to time from other growers and walnut processors on the open market. We purchase other nuts from domestic and international processors on the open market. For example, during fiscal 2011, all of the walnuts, peanuts and almonds we obtained were grown in the United States, most of our supply of hazelnuts came from the United States, and our supply of pecans was sourced from the United States and Mexico. With respect to nut types sourced primarily from abroad, we import Brazil nuts from the Amazon basin, cashew nuts from India, Africa, Brazil and Southeast Asia and pine nuts from China and Turkey. Outside of our nut products, we obtain corn from our primary third party co-packer in the United States, with additional sourcing capabilities, if needed, from Argentina. We obtain potatoes from the United States and the United Kingdom, with additional sourcing capabilities, if needed, from Europe.
We believe that we will be able to procure an adequate supply of raw materials for our 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.
We purchase all other supplies used in our business from third parties. Those supplies include, for example, roasting oils, seasonings, plastic containers, foil bags, labels and other packaging materials. We believe that each of these supplies is available from multiple sources and that our business is not materially dependent upon any individual supplier relationship.
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Trademarks and Patents
We market and sell our products primarily under the Diamond®, Emerald®, Pop Secret® and Kettle Brand® brands, each of which are protected with trademark registration with the U.S. Patent and Trademark Office, as well as in various other jurisdictions. Our agreement with Blue Diamond Growers limits our use of the Diamond ® brand in connection with our marketing of snack nut products, but preserves our exclusive use of our Diamond brand for all culinary and in-shell nut products. We also own 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 the acquisition of Kettle Foods related to the manufacturing of chips and tortillas. While these patents, which have various durations, are an important element of our success, our business as a whole is not materially dependent on them. We expect to continue to renew for the foreseeable future those trademarks that are important to our business.
Seasonality
We experience seasonality in our business. Demand for our in-shell and culinary products are highest during the months of October, November and December. In sourcing walnuts, we contract directly with growers for their walnut crop. We typically receive walnuts during the period from September to November, and we pay for the crop throughout the year in accordance with our walnut purchase agreements with the growers. We typically receive pecans during the period from October to March, and we pay for our pecan receipts over such period. Generally, we receive and pay for approximately 50% of the corn for popcorn in November, and approximately 50% in April. We contract for potatoes and oil annually and receive and pay for supply throughout the year. Generally, 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, our personnel, working capital requirements and inventories peak during the last four months of the calendar year. We experience seasonality in capacity utilization at our Stockton, California and Fishers, Indiana facilities associated with the annual walnut harvest and seasonal in-shell and culinary product demand.
Employees
As of July 31, 2011, we 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. Our labor requirements typically peak during the last quarter of the calendar year, when we generally use temporary labor to supplement our full-time work force. Our production and distribution employees in the Stockton, California plant are members of the International Brotherhood of Teamsters. We consider relations with our employees to be good.
Available Information
We make available, free of charge, on the Investor Relations page of our Internet website at http://www.diamondfoods.com, our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after such material is electronically filed with or furnished to the SEC. Information on our website is not incorporated into this report and is not a part of this report.
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Item 1A. Risk Factors
This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed or implied in such forward-looking statements due to such risks and uncertainties. Factors that may cause such a difference include, but are not limited to, those discussed below, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report.
Risks Related to Our Business
Diamond, and some of our current and former officers and directors, have been named as parties to various lawsuits arising out of or related to Diamond’s restatement of the consolidated financial statements, primarily resulting from our accounting for payments to walnut growers related to fiscal 2010 and fiscal 2011, and those lawsuits could adversely affect Diamond, require significant management time and attention, result in significant legal expenses or damages, and cause our business, financial condition, results of operations and cash flows to suffer.
In November 2011, December 2011 and June 2012, various putative shareholder class action and derivative complaints were filed in federal and state court against Diamond and certain current and former Diamond directors and officers.
Beginning on November 7, 2011, the first of a number of putative securities class action suits was filed in the United States District Court for the Northern District of California against Diamond and certain of its former executive officers (“defendants”). These suits allege that defendants made materially false and misleading statements, or failed to disclose material facts, regarding Diamond’s financial results, operations and prospects, including its accounting for payments to walnut growers and the anticipated closing of Diamond’s proposed merger of the Pringles business from The Procter & Gamble Company (“P&G”). The various suits assert claims covering the period from December 9, 2010 through November 4, 2011 and seek compensatory damages, interest thereon, costs and expenses incurred in such actions, as well as equitable or other relief. On January 24, 2012, these class actions were consolidated by the court as In re Diamond Foods Inc., Securities Litigation . On March 20, 2012, the court appointed a lead plaintiff, and on June 13, 2012, the court appointed lead counsel for the plaintiff. On July 30, 2012, an amended complaint was filed in the consolidated action naming Diamond, certain of its former executive officers and our outside auditor as defendants.
Beginning on November 14, 2011, three putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond Foods and naming certain executive officers and the members of our board of directors as individual defendants. On January 17, 2012, the court consolidated these actions as In re Diamond Foods, Inc., Shareholder Derivative Litigation and appointed co-lead counsel. On February 16, 2012, plaintiffs filed their consolidated complaint, naming certain current and former executive officers and members of our board, and our outside auditor, as individual defendants. The consolidated complaint arises from the same or similar alleged facts as alleged in the federal securities action and the federal derivative litigation (discussed in the next paragraph below), and purported to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement, and against the auditor for professional negligence and breach of contract. The suit seeks the recovery of unspecified damages allegedly sustained by Diamond, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, the recovery of plaintiff’s attorney’s fees and other relief.
On November 28, 2011 and December 19, 2011, two putative shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California, purportedly on behalf of Diamond Foods and naming certain current and former executive officers and members of our board of directors as individual defendants. On February 16, 2012, the court consolidated these actions as In re Diamond Foods, Inc., Derivative Litigation . Plaintiffs filed their consolidated complaint on March 1, 2012, again naming certain current and former executive officers and members of our board of directors as individual defendants, and also adding our outside auditor as a defendant. The suit was based on essentially the same allegations as those in the federal securities action and the state derivative litigation, and purported to set forth claims under Section 14 (a) of the
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Securities Exchange Act of 1934 alleging that defendants made materially false or misleading statements or omissions in proxy statements issued on or about November 26, 2010 and on or about September 26, 2011, and for breach of fiduciary duty, unjust enrichment, contribution and indemnification, gross mismanagement and, against our auditor, for professional negligence, accounting malpractice and aiding and abetting the breach of fiduciary duties of the other individual defendants. The suit sought to recover unspecified damages allegedly sustained by Diamond, which was named as a nominal defendant, corporate reforms, restitution, equitable and/or injunctive relief, to recover plaintiff’s attorney’s fees and other relief. On April 16, 2012, Diamond moved to dismiss the action. On May 29, 2012, the court granted Diamond’s motion and dismissed the action with prejudice, based on lack of subject matter jurisdiction related to deficiencies in plaintiffs’ Section 14(a) claims. The court entered judgment in favor of Diamond the same day. On June 4, 2012, one of the plaintiffs in the consolidated matter filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit, seeking to appeal the May 29, 2012 order granting Diamond’s motion to dismiss.
On February 22, 2012, an action was filed in Delaware Chancery Court by a shareholder seeking to enforce a demand to inspect certain of Diamond’s records pursuant to Section 220 of the Delaware General Corporation Law, as a possible prelude to the shareholder bringing a derivative action. This action has been stayed by the agreement of the parties.
On June 27, 2012, two putative shareholder derivative lawsuits, Board of Trustees of City of Hialeah Employees’ Retirement System v. Mendes, et al. and Lucia v. Mendes et al. , were filed in the Delaware Chancery Court purportedly on behalf of Diamond and naming certain current and former executive officers and members of our board of directors as individual defendants. On August 7, 2012 the court consolidated these actions as In re Diamond Foods, Inc., Derivative Litigation and appointed co-lead counsel. Plaintiffs filed their consolidated complaint on September 19, 2012, again naming certain current and former executive officers and members of our board of directors as individual defendants. The suit is based on essentially the same allegations as those in the federal securities action and the federal and California derivative litigation and purports to set forth claims for breach of fiduciary duty, unjust enrichment, contribution and indemnification, gross mismanagement and breach of the duty of loyalty. The suit seeks recovery of unspecified damages allegedly sustained by Diamond, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, equitable and/or injunctive relief, to recover plaintiffs’ attorney’s fees and other relief.
We cannot predict the outcome of these lawsuits. The matters which led to our Audit Committee’s investigation and the restatement of our consolidated financial statements have exposed us to greater risks associated with litigation, regulatory proceedings and government enforcement actions. We and our current and former officers and directors may, in the future, be subject to additional litigation relating to such matters. Subject to certain limitations, we are obligated to indemnify our current and former officers and directors in connection with such lawsuits and any related litigation or settlements amounts. Regardless of the outcome, these lawsuits, and any other litigation that may be brought against us or our current or former officers and directors, could be time-consuming, result in significant expense and divert the attention and resources of our management and other key employees. An unfavorable outcome in any of these matters could exceed coverage provided under potentially applicable insurance policies, which is limited. Any such unfavorable outcome could have a material effect on our business, financial condition, results of operations and cash flows. Further, we could be required to pay damages or additional penalties or have other remedies imposed against us, or our current or former directors or officers, which could harm our reputation, business, financial condition, results of operations or cash flows.
Government investigations may require significant management time and attention, result in significant legal expenses or damages and cause our business, financial condition, results of operations and cash flows to suffer. Diamond could face additional governmental investigations with respect to these matters, could incur substantial costs to defend any such investigations and be required to pay damages, fines and penalties, or incur additional expenses or be subject to injunctions as a result of the outcome of such investigations. The unfavorable resolution of one or more matters could adversely impact Diamond.
On December 14, 2011, Diamond received a formal order of investigation from the staff of the United States Securities and Exchange Commission (“SEC”). In addition, Diamond has had contact with the U.S. Attorney’s
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office for the Northern District of California (“DOJ”). We have cooperated with the government and expect to continue to do so. The amount of time needed to resolve these investigations is uncertain, and we cannot predict the outcome of these investigations or whether we will face additional government investigations, inquiries or other actions related to our accounting for payments to walnut growers or otherwise. Subject to certain limitations, we are obligated to indemnify our current and former directors, officers and employees in connection with the ongoing governmental investigation and any future government inquiries, investigations or actions. These matters could require us to expend significant management time and incur significant legal and other expenses and could result in civil and criminal actions seeking, among other things, injunctions against us and the payment of significant fines and penalties by us, which could have a material effect on our financial condition, business, results of operations and cash flow.
If the SEC or DOJ were to commence legal action, we could be required to pay significant penalties and could become subject to injunctions, a cease and desist order and other equitable remedies. The filing of our restated consolidated financial statements will not resolve the SEC investigation. We can provide no assurances as to the outcome of any governmental investigation.
We have not been in compliance with the Nasdaq Stock Market’s requirements for continued listing and as a result our common stock may be delisted from trading on Nasdaq, which would have a material effect on us and our stockholders.
We have been delinquent in the filing of our periodic reports with the SEC, and have delayed convening our annual meeting of stockholders, as a result of which we are not in compliance with the rules of the Nasdaq Stock Market and are subject to having our stock delisted from trading on Nasdaq. Nasdaq has approved our common stock for continued listing contingent upon our ability to convene our 2012 annual meeting of stockholders no later than January 14, 2013. There can be no assurance that we will be able to comply with this condition, in which case our common stock may again be subject to delisting by Nasdaq. If our common stock is delisted, there can no assurance whether or when it would again be listed for trading on Nasdaq or any other exchange. If our common stock is delisted, the market price of our shares will likely decline and become more volatile, and our stockholders may find that their ability to trade in our stock will be adversely affected. Furthermore, institutions whose charters do not allow them to hold securities in unlisted companies might sell our shares, which could have a further adverse effect on the price of our stock.
As a result of the delayed filing of our periodic reports with the SEC, we are not currently eligible to use a registration statement on Form S-3 to register the offer and sale of securities, which may adversely affect our ability to raise future capital or complete acquisitions.
As a result of the delayed filing of our periodic reports with the SEC, we will not be eligible to register the offer and sale of our securities using a registration statement on Form S-3 until we have timely filed all periodic reports required under the Securities Exchange Act of 1934 for one year and there can be no assurance that we will be able to timely file such reports in the future. Should we wish to register the offer and sale of our securities to the public, our transaction costs would increase and the amount of time required to complete the transaction could increase, making it more difficult to execute any such transaction successfully and potentially harming our financial condition.
If we do not adequately manage our financial reporting and internal control systems and processes, our ability to manage and grow our business may be harmed.
Our ability to implement our business plan and comply with regulations requires an effective planning and management process. We expect that we will need to improve existing operational and financial systems, procedures and controls, and implement new ones, to manage our future business effectively. Any implementation delays, or disruption in the transition to new or enhanced systems, procedures or controls, could harm our ability to forecast sales, manage our supply chain, and record and report financial and management information on a timely and accurate basis.
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We have determined that material weaknesses exist in our system of internal control over financial reporting, which could have a material impact on our business.
We are required to maintain internal control over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our consolidated financial statements for external purposes in accordance with generally accepted accounting principles. In connection with the Audit Committee’s investigation of the accounting for certain payments to walnut growers, and the restatement of our consolidated financial statements, we determined that we had material weaknesses in our control environment, as follows:
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Control Environment – The control environment, which includes the Company’s Code of Conduct and Ethics Policy, is the responsibility of senior management, sets the tone of the organization, influences the control consciousness of its employees, and is the foundation for the other components of internal control over financial reporting. Senior management’s operating style did not result in the open flow of information and communication and set a tone that contributed to an ineffective control environment in which dissemination of information was limited and alternative ideas were not routinely encouraged. This control environment material weakness contributed significantly to the material weaknesses related to walnut grower accounting described below.
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Walnut Grower Accounting – Senior management did not document the accounting policies or sufficiently design the processes for walnut grower payments and determination of walnut cost estimates. Further, management did not effectively or consistently communicate the nature and intent of certain walnut grower payments throughout the organization which contributed to conflicting communications with growers and incomplete and ineffective communication and flow of information throughout the company and to those charged with governance. The controls in place at the time were not designed to ensure that the annual walnut costs and the quarterly walnut cost estimates and changes in such estimates were sufficiently supported and based on consideration of all relevant information. The controls in place at that time were also not designed to provide for appropriate segregation of duties. These factors caused our controls related to accounting for walnut grower payments and quarterly walnut cost estimates to be ineffective for ensuring that walnut costs were recorded correctly within the appropriate period.
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Accounts Payable and Accrued Expenses – Our controls over invoice processing were improperly designed and were not effective in ensuring that costs were recorded within the appropriate account and period. Controls were not in place to address the volume and nature of payment processing.
Due to these material weaknesses, we have concluded that as of the end of the period covered by this report, our internal control over financial reporting, and our disclosure controls and procedures, were not effective. Until these control deficiencies are fully remediated, it may be more difficult for us to manage our business, our results of operations could be harmed, our ability to report results accurately and on time could be impaired, investors may lose faith in the reliability of our statements, and the price of our securities may be materially impacted.
We do not expect that our internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. Over time, controls may become inadequate because changes in conditions or deterioration in the degree of compliance with policies or procedures may occur. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. As a result, we cannot assure you that significant deficiencies or material weaknesses in our internal control over financial reporting will be identified in the future.
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Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to timely meet our periodic reporting obligations, or result in additional material misstatements in our consolidated financial statements. Any such failure could adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding disclosure controls and the effectiveness of our internal control over financial reporting. The existence of a material weakness could result in errors in our consolidated financial statements that could require a restatement of our consolidated financial statements, cause us to fail to timely meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price.
We may be required to conduct product recalls and concerns with the safety and quality of food products could cause consumers to avoid our products and reduce our sales, net income and liquidity.
The sale of food products for human consumption involves risk of injury to consumers. We face risks associated with product recalls and liability claims if our products become adulterated, mislabeled or misbranded, or cause injury, illness or death. Our 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 our products were to be tampered with, or otherwise tainted and we were unable to detect it prior to shipment, our products could be subject to a recall. Recalls might also be required due to usage of raw materials provided by third-party ingredient suppliers. Such suppliers are required to supply material free of contamination, but may, on occasion, identify issues after selling material to Diamond manufacturing locations. Our ability to sell products could be reduced if governmental agencies conclude that our 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 our products to be unavailable for a period of time and reduce our sales. Adverse publicity could result in a loss of consumer confidence in our products, damage to our reputation and also reduce our sales for an extended period. Product recalls and product liability claims could increase our expenses and have an adverse effect on demand for our products and, consequently, reduce our sales, net income and liquidity.
Government regulations could increase our costs of production and our business could be adversely affected.
As a food company, we are subject to extensive government regulation, including regulation of the manufacturing, importation, processing, product quality, packaging, storage, distribution and labeling of our products. Furthermore, there may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where we operate may impose new manufacturing, importation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase our costs and affect our 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, we are required to warn about the presence of acrylamide and other potential carcinogens in our products. If consumer concerns about acrylamide increase, demand for affected products could decline and our revenues and business could be harmed. Our manufacturing operations are subject to various national, regional or state and local laws and regulations that require us to obtain licenses relating to customs, health and safety, building and land use and environmental protection. We are 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 our existing facilities and our expansion into new operations and jurisdictions may require us to obtain new licenses and permits, and could require us to change our methods of operations, which could be costly. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, all of which could have an adverse effect on our business.
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A disruption at any of our production facilities would significantly decrease production, which could increase our cost of sales and reduce our net sales and income from operations.
We process and package our products in several domestic and international facilities and also have co-manufacturing agreements and co-pack arrangements with third parties. A temporary or extended interruption in operations at any of our 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 or any other reason, whether or not covered by insurance, could interrupt our manufacturing operations, disrupt communications with our customers and suppliers and cause us to lose sales and write off inventory. Any prolonged disruption in the operations of our facilities would have a significant negative impact on our ability to manufacture and package our products on our own and may cause us to seek additional third-party arrangements, thereby increasing production costs. These third parties may not be as efficient as we are and may not have the capabilities to process and package some of our products, which could adversely affect sales or operating income. Further, current and potential customers might not purchase our products if they perceive our lack of alternate manufacturing facilities to be a risk to their continuing source of products.
Changes in the food industry, including changing dietary trends and consumer preferences and adverse publicity about the Company and the health effects of consuming some products, could reduce demand for our products.
Consumer tastes can change rapidly as a result of many factors, including shifting consumer preferences, dietary trends and purchasing patterns. To address consumer preferences, we invest significant resources in research and development of new products. Dietary trends, such as the consumption of food in low carbohydrate content, have in the past, and may in the future, harm our sales. If we fail to anticipate, identify or react to consumer trends, or if new products we develop do not achieve acceptance by retailers or consumers, demand for our products could decline, which would in turn cause our revenue and profitability to be lower.
In addition, some of our 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 our sales or lead to stricter regulations and greater scrutiny of food marketing practices. Moreover, adverse publicity about regulatory or legal action against us could damage our reputation and brand image, undermine consumer confidence or customer relations, and reduce demand for our products, even if the regulatory or legal action is unfounded or not material to our operations.
Increased costs associated with product processing and transportation, such as water, electricity, natural gas and fuel costs, could increase our expenses and reduce our profitability.
We require a substantial amount of energy and water to process our products. Transportation costs, including fuel and labor, also represent a significant portion of the cost of our products, because we use third party truck and rail companies to collect our raw materials and deliver our products to our distributors and customers. These costs fluctuate significantly over time due to factors that may be beyond our control, including increased fuel prices, adverse weather conditions or natural disasters, employee strikes and increased export and import restrictions. We may not be able to pass on increased costs of production or transportation to our customers. In addition, from time to time, transportation service providers have a backlog of shipping requests, which could impact our 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 our costs of production and adversely affect our profitability.
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Raw materials that are key ingredients to our products are subject to fluctuations in availability and price that could adversely impact our business and financial results.
The availability, size, quality and cost of raw materials for the production and packaging of our products, including 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. In particular, the availability and cost of walnuts and other nuts are subject to crop size, quality, yield fluctuations, changes in governmental regulation, and the rate of supply contract renewals, as well as other factors.
We source walnuts primarily from growers with whom we have entered into walnut purchase agreements of various durations. To the extent contracted growers deliver less supply than we expected or we are unable to renew enough walnut purchase agreements or enter into such agreements with new growers in any particular year, we may not have sufficient walnut supply under contract to satisfy our business requirements, which could have an adverse effect on our sales and our results of operations. To obtain sufficient walnut supply, which represents a significant portion of our cost of goods sold, we may be required to purchase walnuts from third parties at substantially higher prices, which would reduce our profitability.
We make estimates of the price we will pay for walnuts to growers under contract starting in the first quarter of our fiscal year and, pursuant to our current accounting policies, finalize the price to be paid to growers by the end of the fiscal year. To the extent that we underestimate the price to be paid for walnuts and enter into contracts with our customers for products including walnuts at prices based on walnut cost estimates that are below the price we ultimately pay to growers, our business and results of operations could be harmed. Each year some of our walnut supply agreements are up for renewal, and significant competition among walnut handlers makes renewal with us uncertain. Disruption in our walnut supply and inability to secure walnuts cost effectively may adversely impact our business and our financial results.
Our potato chip products are dependent on suppliers providing us with an adequate supply of quality potatoes on a timely basis. The failure of our suppliers to meet the specifications, quality standards or delivery schedules could have an adverse effect on our potato chip operations. In particular, a sudden scarcity, substantial price increase, quality issues or unavailability of ingredients could adversely affect our 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 our products which might dampen growth of consumer demand for our products. If we are unable to increase productivity to offset these increased costs or increase our prices, this could substantially harm our business and results of operations.
If the parties we depend upon for raw material supplies do not perform adequately, our ability to manufacture our products may be impaired, which could harm our business and results of operations.
We rely on third-party suppliers for the raw materials we use to manufacture our products, and our ability to manufacture our products depends on receiving adequate supplies on a timely basis, which may be difficult or uneconomical to procure. If we do not maintain good relationships with suppliers that are important to us or are unable to identify a replacement supplier or develop our own sourcing capabilities, our ability to manufacture our products may be harmed, which would result in interruptions in our business. In addition, even if we are able to find replacement suppliers when needed, we may not be able to enter into agreements with them on favorable terms and conditions, which could increase our costs of production. The occurrence of any of these risks could adversely affect our business and results of operations.
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If we are unable to compete effectively in the markets in which we operate, our sales and profitability would be negatively affected.
In general, competition in our 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 the markets in which we operate, as well as challenges in establishing and maintaining profit margins. Our 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 we have. The greater scale and resources that may be available to our 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, we must be able to successfully respond to competitive factors, including pricing, promotional incentives and trade terms. We may need to reduce our prices or increase promotional incentives in response to competition or to grow or maintain our market share. Competition and customer pressures may restrict our ability to increase prices in response to commodity or other cost increases. We may also need to increase spending on marketing, advertising and new product innovation to maintain or increase our market share. If we are unable to compete effectively, we could be unable to increase the breadth of the distribution of our products or lose customers or distribution of products, which could have an adverse impact on our sales and profitability. In addition, if we are required to maintain high levels of promotional incentives or trade terms with respect to particular product lines, our margins and profitability would be adversely effected.
The loss of any major customer could decrease sales and adversely impact our net income.
We depend on a few significant customers for a large proportion of our net sales. This concentration has become more pronounced with the trend toward consolidation in the retail grocery store industry. Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 18% and 15% of our total net sales in fiscal 2012 and 2011, respectively. Sales to our second largest customer, Costco Wholesale Corporation, represented approximately 11% of our total net sales in both fiscal 2012 and 2011. The success of our business is dependent on our 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 our business. The loss of any major customers, or any other significant customer, or a material decrease in their purchases from us, could result in decreased sales and adversely impact our net income.
The consolidation of retail customers could adversely affect us.
Retail customers, such as supermarkets, warehouse clubs and food distributors, continue to consolidate, resulting in fewer customers on which we can rely for business. Consolidation also produces large, more sophisticated retail customers that can resist price increases and demand lower pricing, increased promotional programs or specifically tailored products. In addition, larger retailers have the scale to develop supply chains that permit them to operate with reduced inventories or to develop and market their own retailer brands. Further retail consolidation and increasing retail power could materially and adversely affect our product sales, financial condition and results of operations.
Retail consolidation also increases the risk that adverse changes in our customers’ business operations or financial performance will have a corresponding material effect on us. For example, if our customers cannot access sufficient funds or financing, then they may delay, decrease or cancel purchases of our products, or delay or fail to pay us for previous purchases.
We must leverage our value proposition to compete against retailer brands and other economy brands.
Our branded products face competition from private label products that are generally sold at lower price points. The impact of price gaps between our products and private label products may result in share erosion and
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harm our business. A number of our competitors have broader product lines, substantially greater financial and other resources and/or lower fixed costs than we have. Our competitors may succeed in developing new or enhanced products that are more attractive to customers or consumers than ours. These competitors may also prove to be more successful in marketing and selling their products than we are; and may be better able to increase prices to reflect cost pressures. We may not compete successfully with these other companies or maintain or grow the distribution of our products. We cannot predict the pricing or promotional activities of our competitors or whether they will have a negative effect on us. Many of our competitors engage in aggressive pricing and promotional activities. There are competitive pressures and other factors which could cause our products to lose market share or decline in sales or result in significant price or margin erosion, which would have a material effect on our business, financial condition and results of operations.
Our proprietary brands and packaging designs are essential to the value of our business, and the inability to protect, and costs associated with protecting, our intellectual property could harm the value of our brands and adversely affect our business and results of operations.
Our success depends significantly on our know-how and other intellectual property. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights and similar rights to protect our intellectual property. Our success also depends in large part on our continued ability to use existing trademarks and service marks in order to maintain and increase brand awareness and further develop our brand.
Our efforts to protect our intellectual property may not be adequate, third parties may misappropriate or infringe on our intellectual property or develop more efficient and advanced technologies, our patents expire over time and third parties may use such previously patented technology to compete against us, and our third-party manufacturers and partners may disclose our trade secrets. From time to time, we engage in litigation to protect our 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 our business and results of operations.
We depend on our key personnel and if we lose the services of any of these individuals, or fail to attract and retain additional key personnel, we may not be able to implement our business strategy or operate our business effectively.
Our future success largely depends on the contributions of our senior management team. We believe that these individuals’ expertise and knowledge about our industry and their respective fields and their relationships with other individuals in our industry are critical factors to our continued growth and success. We do not carry key person insurance. The loss of the services of any member of our senior management team and the failure to hire and retain qualified management and other key personnel could have an adverse effect on our business and prospects. Our success also depends upon our ability to attract and retain additional qualified sales, marketing and other personnel.
Economic downturns may adversely affect our business, financial condition and results of operations.
Unfavorable economic conditions may negatively affect our business and financial results. For example, instability in the global credit markets, including the recent European economic and financial turmoil, may lead to slower growth or recession in European or United States markets where we sell our products. These economic conditions could negatively impact consumer demand for our products, the mix of our products’ sales, our ability to collect accounts receivable on a timely basis, the ability of suppliers to provide the materials required in our operations, and our ability to obtain financing or to otherwise access the capital markets. Additionally, unfavorable economic conditions could have an impact on our lenders or customers, causing them to fail to meet their obligations to us. The occurrence of any of these risks could adversely affect our business, financial condition and results of operations.
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The acquisition or divestiture of other product lines or businesses could pose risks to our business and the market price of our common stock.
We may review acquisition prospects that we believe could complement our existing business. There is no assurance that we will be successful in identifying, negotiating or consummating any future acquisitions. 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 a material effect on our business and the market price of our common stock. Acquisitions entail many financial, managerial and operational risks, including difficulties integrating the acquired operations, effective and immediate implementation of internal control over financial reporting, diversion of management attention during the negotiation and integration phases, uncertainty entering markets in which we have limited prior experience and potential loss of key employees of acquired organizations. We may be unable to integrate product lines or businesses that we acquire, which could have a material effect on our business and on the market price of our common stock. We may evaluate the various components of our portfolio of businesses and may, as a result, explore divesting such products or businesses. Divestitures have inherent risks, including possible delays in closing transactions (including potential difficulties in obtaining regulatory approvals), the risk of lower-than-expected sales proceeds for the divested businesses, unexpected costs associated with the separation of the business to be sold from our integrated information technology systems and other operating systems and potential post-closing claims for indemnification. In addition, adverse economic or market conditions may result in fewer potential bidders and unsuccessful divestiture efforts. Transaction costs may be high, and expected cost savings, which are offset by revenue losses from divested businesses, may be difficult to achieve, and we may experience varying success in reducing costs or transferring liabilities previously associated with the divested businesses.
Our business and operations could be negatively impacted if we fail to maintain satisfactory labor relations.
The success of our business depends substantially upon our ability to maintain satisfactory relations with our employees. Our production workforce in one of our facilities is covered by a collective bargaining agreement. Strikes or work stoppages and interruptions could occur if we are unable to renew this agreement on satisfactory terms. If a work stoppage or slow down were to occur, it could adversely affect our business and disrupt our operations. The terms and conditions of existing or renegotiated agreements also could increase our costs or otherwise affect our ability to fully implement future operational changes to our business.
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.
We conduct a substantial amount of business with vendors and customers located outside the United States. During 2011 and 2012, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, Germany, Netherlands, Turkey, China and Spain accounted for approximately 30% and 23% of our net sales, respectively. Many factors relating to our international operations and to particular countries in which we operate could have a material negative impact on our business, financial condition and results of operations. These factors include:
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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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pandemics, such as the flu, which may adversely affect our workforce as well as our local suppliers and customers;
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earthquakes, tsunamis, floods or other major disasters that may limit the supply of nuts or other products that we purchase abroad;
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tariffs, quotas, trade barriers, other trade protection measures and import or export licensing requirements imposed by governments;
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foreign currency exchange and transfer restrictions;
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increased costs, disruptions in shipping or reduced availability of freight transportation;
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differing labor standards;
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differing levels of protection of intellectual property;
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difficulties and costs associated with complying with U.S. laws and regulations applicable to entities with overseas operations;
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the threat that our operations or property could be subject to nationalization and expropriation;
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varying regulatory, tax, judicial and administrative practices in the jurisdictions where we operate;
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difficulties associated with operating under a wide variety of complex foreign laws, treaties and regulations; and
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potentially burdensome taxation.
Any of these factors could have an adverse effect on our business, financial condition and results of operations.
A material impairment in the carrying value of acquired goodwill or other intangible assets could negatively affect our consolidated operating results and net worth.
A significant portion of our assets are 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 our 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. For example, our stock price dropped from $71.48 on August 1, 2011 to $16.27 on July 31, 2012. To the extent our market capitalization results in a fair value of our common stock that is below our net book value, or if other indicators of potential impairment are present, then we will be required to take further steps to determine if an impairment of goodwill has occurred and to calculate an impairment loss. At July 31, 2011, the carrying value of goodwill and other intangible assets totaled approximately $860.6 million, compared to total assets of approximately $1,322.9 million and total shareholders’ equity of approximately $420.5 million. At April 30, 2012, the carrying value of goodwill and other intangible assets totaled approximately $851.4 million, compared to total assets of approximately $1,375.0 million and total shareholders’ equity of approximately $366.5 million.
Risks Related to Indebtedness
We are highly leveraged and have substantial debt service requirements that could adversely affect our ability to fulfill our debt obligations, place us at a competitive disadvantage in our industry and limit our ability to react to changes in the economy or our industry.
We have incurred a substantial amount of indebtedness and our high debt service requirements could adversely affect our ability to operate our business, and might limit our ability to take advantage of potential business opportunities. Our ability to make scheduled payments or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to financial, business and other factors beyond our control. Our business may not generate cash flow in an amount sufficient to enable us to pay the principal of, or interest on, our indebtedness, or to fund our other liquidity needs, including working capital, capital expenditures, product development efforts and other general corporate requirements.
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This high degree of leverage could have other important consequences for us, including:
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increasing our vulnerability to adverse economic, industry or competitive developments;
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exposing us to the risk of increased interest rates because our Secured Credit Facility, as defined below, is at variable rates of interest;
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making it more difficult to satisfy obligations with respect to our indebtedness, including restrictive covenants and borrowing conditions, which could result in an event of default under the agreements governing the indebtedness;
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restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
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limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and
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placing us at a competitive disadvantage compared to competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from pursuing.
Our debt agreements contain representations, warranties, affirmative and negative covenants and financial ratios, and any failure to satisfy these requirements could adversely affect our business.
A breach of any of the representations, warranties or affirmative and negative covenants contained in our credit facilities and outstanding senior notes, or other financing arrangements, including our inability to comply with the financial ratios required under any of those arrangements, could trigger events of default. As a result of the errors identified causing the restatement of our consolidated financial statements, we were in default under our five-year $600 million secured credit facility (“Secured Credit Facility”) and other financing arrangements for failing to comply with certain representations and warranties and not complying with certain covenants, including delivering certain financial statements in a timely manner and maintaining specified financial ratios. These defaults were waived by the required lenders of the Secured Credit Facility on May 22, 2012 and July 31, 2012. Additional events of default associated with the accounting classification of certain capital leases were waived on July 27, 2012 and August 23, 2012 by the required lenders of the Secured Credit Facility. If any further events of default occur and we are not able either to cure it or to obtain a waiver from the requisite lenders or noteholders, our lenders or noteholders may declare outstanding obligations, with accrued interest and fees, to be immediately due and payable. Such acceleration of our outstanding financial obligations could result in additional lenders or noteholders declaring other outstanding obligations to be immediately due and payable. In addition, upon any event of default, the administrative agent under our Secured Credit Facility may, and at the request of the requisite lenders shall, terminate the lenders’ commitments under the revolving credit facility and cease making further loans and could institute foreclosure proceedings against our pledged assets.
Our debt agreements contain restrictions that may limit our flexibility in operating our business.
Our Secured Credit Facility, our outstanding senior notes and our other financing arrangements contain various covenants that may limit our ability to engage in specified types of transactions. These covenants limit our ability to, among other things:
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incur indebtedness, including capital leases;
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make investments or other capital expenditures;
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sell assets;
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create liens;
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acquire other companies and businesses;
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borrow additional funds under new revolving credit facilities;
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consolidate, merge, sell or otherwise dispose of all or substantially all of our assets;
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make restricted payments, which could limit our ability to pay dividends on our common stock; and
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enter into transactions with our affiliates.
Additionally, under our Secured Credit Facility we are required to have at least $20 million of cash, cash equivalents and revolving credit available beginning February 1, 2013.
A breach of any of these covenants could result in an event of default, which could harm our liquidity and financial condition.
We are highly leveraged and have substantial debt service obligations, which could affect our ability to raise additional capital or fund our operations.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we may be forced to reduce or delay capital expenditures, sell assets, seek additional capital, or restructure or refinance our indebtedness. We may not be able to take any of these actions, or they may not be sufficient for us to meet our scheduled debt service obligations. If our operating results are not adequate and we are not able to secure adequate capital resources, we could face liquidity problems and be required to dispose of assets or operations to meet our debt service and other obligations. Since our existing debt agreements restrict our ability to dispose of assets, we may not be able to consummate those dispositions, which could impair our ability to meet our debt service obligations.
One of our existing financing arrangements provides that if we secure a specified minimum supply of walnuts from the 2012 crop and achieve profitability targets for our nut businesses for the six-month period ending January 31, 2013, then warrants to purchase 4.4 million shares of our common stock at $10 per share that were issued to the lender will be cancelled and the lender may exchange $75 million of our senior notes for shares of our convertible preferred stock at an initial conversion price of $20.75. We believe it is unlikely that we will be able to meet those walnut crop and profitability targets, and as a result the entire $225 million principal amount of this indebtedness and the warrants would remain outstanding, which could dilute existing stockholders and impair our ability to meet our debt service obligations.
Risks Related to Our Common Stock
The market price of our common stock is volatile and may result in investors selling shares of our common stock at a loss.
The trading price of our common stock is volatile and subject to fluctuations in price in response to various factors, many of which are beyond our control, including:
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our operating performance and the performance of other similar companies;
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changes in our revenues, earnings, prospects or recommendations of securities analysts who follow our stock or our industry;
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publication of research reports about us or our industry by any securities analysts who follow our stock or our industry;
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speculation in the press or investment community;
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terrorist acts; and
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general market conditions, including economic factors unrelated to our performance.
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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 us could result in substantial costs and divert our management’s attention and resources.
The private equity firm Oaktree Capital Management may have interests that diverge from our interests and the interests of our other security holders.
Oaktree Capital Management L.P. (“Oaktree”) is one of our creditors and beneficially owns a significant equity position in Diamond through its warrant holdings and may have interests that diverge from our interests and the interests of our security holders. In addition, so long as Oaktree maintains ownership of specified thresholds of its warrant and senior note holdings, it will have the right to nominate up to two members of our board of directors and will be entitled to certain information rights and a right to participate in future offerings of our equity securities. Oaktree is in the business of investing in companies and is not restricted from investing in our current or future competitors. Future events may give rise to a divergence of interests between Oaktree and us or our other security holders.
A substantial number of shares of our common stock may be issued upon exercise of a warrant issued to Oaktree, which could cause a decline in the market price of our common stock.
Oaktree is the holder of a warrant exercisable for an aggregate of approximately 4.4 million shares of our common stock, representing approximately 16.4% of our common stock on a fully-diluted basis (after giving effect to the issuance of the shares underlying such warrant). The presence of these additional issuable shares of our common stock may have an adverse effect on the market price of our shares.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.
The timing and amount of our working capital and capital expenditure requirements may vary significantly as a result of many factors, including:
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market acceptance of our products;
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the need to make large capital expenditures to support and expand production capacity;
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the existence of opportunities for expansion; and
•
access to and availability of sufficient management, technical, marketing and financial personnel.
If our capital resources are not sufficient to satisfy our liquidity needs, we 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 our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. With the exception of the Secured Credit Facility, we have not made arrangements to obtain additional financing. We may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.
Anti-takeover provisions could make it more difficult for a third party to acquire us.
We have adopted a stockholder rights plan and will issue one preferred stock purchase right with each share of our common stock that we issue. Each right will entitle the holder to purchase one one-hundredth of a share of our Series A Junior Participating Preferred Stock. Under certain circumstances, if a person or group acquires 15% or more of our 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 our common stock or of any company into which we are merged having a value of $120.00. The rights expire in March 2015 unless extended by our board of directors. Because the rights may substantially dilute the stock ownership of a person or
22
group attempting to acquire us without the approval of our board of directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors regarding such acquisition. In connection with the sale and issuance of notes and warrants to Oaktree, we amended the stockholder rights plan to exclude such securities from triggering such rights plan.
In addition, our 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 our 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, some provisions of our 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 our management, which could have an adverse effect on the market price of our stock. Further, we are 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 us 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.
Item 3. Legal Proceedings
In November 2011, December 2011 and June 2012, various putative shareholder class action and derivative complaints were filed in federal and state court against Diamond and certain current and former Diamond directors and officers.
In re Diamond Foods, Inc., Securities Litigation
Beginning on November 7, 2011, the first of a number of putative securities class action suits was filed in the United States District Court for the Northern District of California against Diamond and certain of its former executive officers (“defendants”). These suits allege that defendants made materially false and misleading statements, or failed to disclose material facts, regarding Diamond’s financial results, operations and prospects, including its accounting for payments to walnut growers and the anticipated closing of Diamond’s proposed merger of the Pringles business from P&G. The various suits assert claims covering the period from December 9, 2010 through November 4, 2011 and seek compensatory damages, interest thereon, costs and expenses incurred in such actions, as well as equitable or other relief. On January 24, 2012, these class actions were consolidated by the court as In re Diamond Foods Inc., Securities Litigation . On March 20, 2012, the court appointed a lead plaintiff, and on June 13, 2012, the court appointed lead counsel for the plaintiff. On July 30, 2012, an amended complaint was filed in the consolidated action naming Diamond, certain of its former executive officers and our outside auditor as defendants. On September 28, 2012, Diamond moved to dismiss the action.
In re Diamond Foods Inc., Shareholder Derivative Litigation
Beginning on November 14, 2011, three putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond Foods and naming certain executive officers and the members of our board of directors as individual defendants. On January 17, 2012, the court consolidated these actions as In re Diamond Foods, Inc., Shareholder Derivative Litigation and appointed co-lead counsel. On February 16, 2012, plaintiffs filed their consolidated complaint, naming certain current and former executive officers and members of our board, and our outside auditor, as individual
23
defendants. The consolidated complaint arises from the same or similar alleged facts as alleged in the federal securities action and the federal derivative litigation (discussed in the next paragraph below), and purported to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement, and against the auditor for professional negligence and breach of contract. The suit seeks the recovery of unspecified damages allegedly sustained by Diamond, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, the recovery of plaintiff’s attorney’s fees and other relief. On August 20, 2012, Diamond filed a demurrer seeking to dismiss the action. On October 23, 2012, the court sustained Diamond’s demurrer with leave to amend the complaint excluding the gross mismanagement claim, which the court sustained with prejudice.
In re Diamond Foods, Inc., Derivative Litigation
On November 28, 2011 and December 19, 2011, two putative shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California, purportedly on behalf of Diamond Foods and naming certain current and former executive officers and members of our board of directors as individual defendants. On February 16, 2012, the court consolidated these actions as In re Diamond Foods, Inc., Derivative Litigation . Plaintiffs filed their consolidated complaint on March 1, 2012, again naming certain current and former executive officers and members of our board of directors as individual defendants, and also adding our outside auditor as a defendant. The suit was based on essentially the same allegations as those in the federal securities action and the state derivative litigation, and purported to set forth claims under Section 14 (a) of the Securities Exchange Act of 1934 alleging that defendants made materially false or misleading statements or omissions in proxy statements issued on or about November 26, 2010 and on or about September 26, 2011, and for breach of fiduciary duty, unjust enrichment, contribution and indemnification, gross mismanagement and, against our auditor, for professional negligence, accounting malpractice and aiding and abetting the breach of fiduciary duties of the other individual defendants. The suit sought to recover unspecified damages allegedly sustained by Diamond, which was named as a nominal defendant, corporate reforms, restitution, equitable and/or injunctive relief, to recover plaintiff’s attorney’s fees and other relief. On April 16, 2012, Diamond moved to dismiss the action. On May 29, 2012, the court granted Diamond’s motion and dismissed the action with prejudice, based on lack of subject matter jurisdiction related to deficiencies in plaintiffs’ Section 14(a) claims. The court entered judgment in favor of Diamond the same day. On June 4, 2012, one of the plaintiffs in the consolidated matter filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit, seeking to appeal the May 29, 2012 order granting Diamond’s motion to dismiss. On October 12, 2012, the appellant filed its opening brief.
Astor BK Realty Trust v. Diamond Foods, Inc.
On February 22, 2012, an action was filed in Delaware Chancery Court by a shareholder seeking to enforce a demand to inspect certain of Diamond’s records pursuant to Section 220 of the Delaware General Corporation Law, as a possible prelude to the shareholder bringing a derivative action. This action has been stayed by the agreement of the parties.
Delaware Derivative Litigation
On June 27, 2012, two putative shareholder derivative lawsuits, Board of Trustees of City of Hialeah Employees’ Retirement System v. Mendes, et al. and Lucia v. Mendes et al. , were filed in the Delaware Chancery Court purportedly on behalf of Diamond and naming certain current and former executive officers and members of our board of directors as individual defendants. On August 7, 2012, the court consolidated these actions as In re Diamond Foods, Inc., Derivative Litigation and appointed co-lead counsel. Plaintiffs filed their consolidated complaint on September 19, 2012, again naming certain current and former executive officers and members of our board of directors as individual defendants. The suit is based on essentially the same allegations as those in the federal securities action and the federal and California derivative litigation and purports to set forth claims for
24
breach of fiduciary duty, unjust enrichment, contribution and indemnification, gross mismanagement and breach of the duty of loyalty. The suit seeks recovery of unspecified damages allegedly sustained by Diamond, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, equitable and/or injunctive relief, to recover plaintiffs’ attorney’s fees and other relief.
Governmental Proceedings
On December 14, 2011, Diamond received a formal order of investigation from the staff of the United States Securities and Exchange Commission (“SEC”). We have also had contact with the U.S. Attorney’s office for the Northern District of California (“DOJ”). We have cooperated with the government and expect to continue to do so.
Other
Diamond is involved in various legal actions in the ordinary course of our business. We do not believe it is feasible to predict or determine the outcome or resolution of the above litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against us or settlements that could require substantial payments by us, which could have a material impact on Diamond’s financial position, results of operations and cash flows.
25
PART II
Item 6. Selected Financial Data
As discussed in Note 15 of the Notes to Consolidated Financial Statements, we have restated our previously issued consolidated financial statements for fiscal 2011 and fiscal 2010; accordingly, all affected amounts included in the following Selected Financial Data have been revised to reflect the effects of the restatement.
The following table sets forth selected financial data for each of the fiscal years in the five year period ended July 31, 2011:
Year Ended July 31,
2011
2010
2009
2008
2007
(In thousands, except per share information)
Statements of operations:
Net sales
$
966,688
$
682,326
$
570,940
$
531,492
$
522,585
Cost of sales
750,209
537,484
435,344
443,490
443,945
Gross profit
216,479
144,842
135,596
88,002
78,640
Operating expenses:
Selling, general and administrative
97,506
64,551
60,971
43,613
42,541
Advertising
45,035
33,726
28,785
20,508
20,445
Loss on termination of defined benefit plan
—
—
—
—
3,054
Acquisition and integration related expenses
20,350
11,328
—
—
(15
)
Total operating expenses
162,891
109,605
89,756
64,121
66,025
Income from operations
53,588
35,237
45,840
23,881
12,615
Interest expense, net
23,918
10,180
6,255
1,040
1,291
Other expenses, net
—
1,849
898
—
98
Income before income taxes
29,670
23,208
38,687
22,841
11,226
Income taxes
3,103
7,532
14,944
8,085
2,793
Net income
$
26,567
$
15,676
$
23,743
$
14,756
$
8,433
Earnings per share
Basic
$
1.21
$
0.84
$
1.45
$
0.92
$
0.53
Diluted
$
1.17
$
0.82
$
1.42
$
0.91
$
0.53
Shares used to compute earnings per share
Basic
21,577
18,313
16,073
15,767
15,359
Diluted
22,233
18,843
16,391
15,825
15,359
Dividends declared per share
$
0.18
$
0.18
$
0.18
$
0.18
$
0.12
As of July 31,
2011
2010
2009
2008
2007
(In thousands)
Balance sheet data:
Cash and cash equivalents
$
3,112
$
5,642
$
24,802
$
74,279
$
33,755
Working capital
52,446
62,608
51,422
121,516
100,527
Total assets
1,322,907
1,236,072
394,892
273,267
236,403
Total debt, including short-term debt
531,701
556,100
115,085
20,204
20,507
Total stockholders’ equity
420,495
376,543
173,341
146,223
125,341
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary
As discussed in Note 15 of the Notes to Consolidated Financial Statements, we have restated our previously issued consolidated financial statements for fiscal 2011 and fiscal 2010; accordingly, this Management’s Discussion and Analysis of Financial Condition and Results of Operations has been revised for the effects of the restatement.
We are an innovative packaged food company founded in 1912 and currently focused on building and energizing brands. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our strong heritage in the culinary nut market under the Diamond of California ® brand by launching a line of snack nuts under the Emerald ® brand. In September 2008, we acquired the Pop Secret ® brand of microwave popcorn products, which provided us with increased scale in the snack market, supply chain economies of scale and cross promotional opportunities with our existing brands. In March 2010, we 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 our existing portfolio of brands in the snack industry. In April 2011, we announced that we entered into a definitive agreement with P&G to merge P&G’s Pringles business into Diamond. For details regarding the termination of the Pringles merger please refer to Note 17 of the Notes to Consolidated Financial Statements.
In general, we sell directly to retailers, particularly larger national grocery store and drug store chains, and indirectly through wholesale distributors to independent and small regional retail grocery store chains and convenience stores. We sell our products to global, national, regional and independent grocery, drug and convenience store chains, as well as to mass merchandisers, club stores, other retail channels and non-retail channels.
Our business is seasonal. Demand for nut products, particularly in-shell nuts and to a lesser extent culinary nuts, is highest during the months of October, November and December. In sourcing walnuts, we contract directly with growers for their walnut crop. We typically receive walnuts during the period from September to November, and we pay for the crop throughout the year in accordance with our walnut purchase agreements with the growers. We typically receive pecans during the period from October to March, and we pay for our pecan receipts over such period. As a result of this seasonality, our personnel and working capital requirements and walnut inventories peak during the last quarter of the calendar year. We experience seasonality in capacity utilization at our Stockton, California and Fishers, Indiana facilities associated with the annual walnut harvest and seasonal in-shell and culinary product demand. Generally, we receive and pay for approximately 50% of the corn for popcorn in November, and approximately 50% in April. We contract for potatoes and oil annually and receive and pay for supply throughout the year. Generally, 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. Accordingly, the working capital requirement of our popcorn and potato chip product lines is less seasonal than that of the tree nut product lines. The trends in our restated quarterly operating results for fiscal years 2010 and 2011 are generally consistent year over year.
Critical Accounting Policies
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies are set forth below.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the buyer (based upon terms of shipment), price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, introductory or slotting payments,
27
coupons, promotion and marketing allowances. The amount we accrue for promotion is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer and consumer participation and sales and payment trends with similar previously offered programs. Customers have the right to return certain products. Product returns are estimated based upon historical results and are reflected as a reduction in sales.
Inventories. All inventories are accounted for on a lower of cost (first-in, first-out or weighted average) or market basis. We have entered into walnut purchase agreements with growers, under which they deliver their walnut crop to us during the Fall harvest season, and pursuant to our walnut purchase agreement, we determine the price for this inventory after delivery and by the end of the fiscal year. This purchase price is determined by us based on our discretion provided in the agreements, taking into account market conditions, crop size, quality and nut varieties, among other relevant factors. Since the ultimate purchase price to be paid will be determined subsequent to receiving the walnut crop, we estimate the final purchase price for our interim financial statements. Those interim estimates may subsequently change due to changes in the factors described above and the effect of the change could be significant. Any such changes in estimates are accounted for in the period of change by adjusting inventory or cost of goods sold if inventory is sold through.
Valuation of Long-lived and Intangible Assets and Goodwill. We periodically review long-lived assets and certain identifiable intangible assets for impairment in accordance with Accounting Standards Codification (“ASC”) 360, “ Property, Plant, and Equipment .” Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350, “ Intangibles — Goodwill and Other, ” or more often if there are indications of possible impairment.
The analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets exceeds their carrying value based on our current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in our business or for other reasons could result in the recognition of impairment losses.
For assets to be held and used, including acquired intangible assets subject to amortization, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process.
For brand intangible assets not subject to amortization, we test for impairment annually, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In testing brand intangibles for impairment, we compare the fair value with the carrying value. The determination of fair value is based on a discounted cash flow analysis, using inputs such as forecasted future revenues attributable to the brand, assumed royalty rates and a risk-adjusted discount rate that approximates our estimated cost of capital. If the carrying value exceeds the estimated fair value, the brand intangible asset is considered impaired, and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of the brand intangible asset.
We perform our annual goodwill impairment test required by ASC 350 as of June 30th of each year. In testing goodwill for impairment, we initially compare the fair value of our single reporting unit with the net book value of the Company since it represents the carrying value of the reporting unit. We have one operating and reportable segment. If the fair value of the reporting unit is less than the carrying value of the reporting unit, we perform an additional step to determine the implied fair value of goodwill. The implied fair value of goodwill is
28
determined by first allocating the fair value of the reporting unit to all assets and liabilities and then computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, the excess represents the amount of goodwill impairment. Accordingly, we would recognize an impairment loss in the amount of such excess. We also consider the estimated fair value of our reporting unit in relation to our market capitalization.
We cannot guarantee that a material impairment charge will not be recorded in the future. To the extent our market capitalization results in a fair value of our common stock that is below our net book value, or if other indicators of potential impairment are present, then we will be required to take further steps to determine if an impairment of goodwill has occurred and to calculate an impairment loss.
Employee Benefits. We incur various employment-related benefit costs with respect to qualified and nonqualified pension and deferred compensation plans. Assumptions are made related to discount rates used to value certain liabilities, assumed rates of return on assets in the plans, compensation increases, employee turnover and mortality rates. Different assumptions could result in the recognition of differing amounts of expense over different periods of time.
Income Taxes. We account for income taxes in accordance with ASC 740, “Income Taxes.” This guidance requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at current tax rates. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both our historical and anticipated earnings levels and is reviewed periodically to determine if any additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered.
There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which we operate. We may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. We evaluate our tax positions and establish liabilities in accordance with the guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly.
Accounting for Stock-Based Compensation. We account for stock-based compensation arrangements, including stock option grants and restricted stock awards, in accordance with the provisions of ASC 718, “ Compensation — Stock Compensation .” Under this guidance, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. We use the Black-Scholes option pricing model to determine the fair value of stock options at the date of grant. This model requires us to make assumptions such as expected term, volatility and forfeiture rates that determine the stock options’ fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results are not consistent with our assumptions and judgments used in estimating these factors, we may be required to increase or decrease compensation expense, which could be material to our results of operations.
Results of Operations
Fiscal 2011 Compared to Fiscal 2010
Net sales were $966.7 million and $682.3 million for fiscal 2011 and fiscal 2010, respectively. The increase in net sales was primarily due to increased snack sales (including Kettle Foods). Sales incentives (primarily promotional allowances, coupons and slotting) as a percentage of gross sales were flat year over year. The impact of foreign exchange on our net sales was not significant for fiscal 2011 and fiscal 2010.
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Net sales by channel (in thousands):
Year Ended July 31,
% Change from
2011
2010
2010 to 2011
Snack
$
553,676
$
323,620
71.1
%
Culinary and Retail In-shell
263,161
248,960
5.7
%
Total Retail
816,837
572,580
42.7
%
International Non-Retail
119,017
69,206
72.0
%
North American Ingredient/Food Service Other
30,834
40,540
-23.9
%
Total Non-Retail
149,851
109,746
36.5
%
Total Net Sales
$
966,688
$
682,326
41.7
%
The increase in retail sales for fiscal 2011 primarily reflects higher sales of snack products (including Kettle Foods). Retail sales for fiscal 2010 included only four months of Kettle Foods sales. The volume of snack sales, other than sales of Kettle Foods products, increased by 14% from fiscal 2010 to fiscal 2011. Culinary and retail in-shell sales increased in fiscal 2011 as a result of price increases that were partially offset by an 11% decrease in volume. International non-retail sales increased in fiscal 2011 due to 28% higher sales volume, mainly as a result of a record walnut crop that was sold to customers in international markets after servicing retail customer demand. North American ingredient/food service and other sales decreased primarily because the United States Department of Agriculture school lunch program was not offered in fiscal 2011.
Gross profit. Gross profit as a percentage of net sales was 22.4% and 21.2% for fiscal 2011 and fiscal 2010, respectively. The increase was mainly due to retail sales mix, greater scale in snack products and manufacturing efficiencies, which collectively offset commodity price increases, and increased slotting and promotion for our Emerald Breakfast on the go! products.
Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation and facility costs. Selling, general and administrative expenses were $97.5 million and $64.6 million, and 10.1% and 9.5% as a percentage of net sales, for fiscal 2011 and fiscal 2010, respectively. The increase was primarily due to the addition of Kettle Foods, including the associated intangible amortization for customer relationships, as well as workforce additions.
Advertising. Advertising expenses were $45.0 million and $33.7 million, and 4.7% and 4.9% as a percentage of net sales, for fiscal 2011 and fiscal 2010, respectively. The increase was primarily due to increased media spending associated with the launch of our Emerald Breakfast on the go! products, as well as incremental Kettle Foods brand support.
Acquisition and integration related expenses. Acquisition and integration related expenses include items such as transaction related legal and consulting fees, as well as business and systems integration costs. Acquisition and integration related expenses associated with the proposed Pringles merger and Kettle Foods acquisition were $20.4 million for fiscal 2011. Acquisition and integration related expenses associated with Kettle Foods were $11.3 million for fiscal 2010.
Interest expense, net. Net interest expense was $23.9 million and $10.2 million, and 2.5% and 1.5% as a percentage of net sales, for fiscal 2011 and fiscal 2010, respectively, reflecting primarily borrowings used to fund the Kettle Foods acquisition.
Other expense, net. There was no net other expense for fiscal 2011. Net other expense for fiscal 2010 was $1.8 million, representing a loss on debt extinguishment when we replaced our existing credit facility with a new secured credit facility to fund the Kettle Foods acquisition.
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Income taxes. Our effective tax rates for fiscal 2011 and fiscal 2010 were 10.5% and 32.5%, respectively. Our effective tax rates were lower than the U.S. federal statutory rate primarily due to earnings taxed at lower rates in the United Kingdom (UK) tax jurisdiction. Our fiscal 2011 effective tax rate was also impacted by discrete tax benefits, primarily deferred tax adjustments for enacted tax law change in the UK, Wisconsin and California. In fiscal 2010, our effective tax rate was lower than the U.S. federal statutory rate due, also and primarily, to earnings taxed at lower rates in the UK. The decrease was offset, partially, by an effective tax rate increase in fiscal 2010 due to non-deductible acquisition costs related to the Kettle acquisition.
Fiscal 2010 Compared to Fiscal 2009
Net sales were $682.3 million and $570.9 million for fiscal 2010 and fiscal 2009, respectively. The increase in net sales was primarily due to increased snack sales (including Kettle Foods). This was offset in part by lower culinary and retail in-shell sales.
Our net sales were as follows (in thousands):
Year Ended July 31,
% Change from
2010
2009
2009 to 2010
Snack
$
323,620
$
188,900
71.3
%
Culinary and Retail In-shell
248,960
276,226
-9.9
%
Total Retail
572,580
465,126
23.1
%
International Non-Retail
69,206
68,890
0.5
%
North American Ingredient/Food Service Other
40,540
36,924
9.8
%
Total Non-Retail
109,746
105,814
3.7
%
Total Net Sales
$
682,326
$
570,940
19.5
%
The increase in retail sales for fiscal 2010 resulted from higher sales of snack products (including four months of sales for Kettle Foods), which increased by 71%. Excluding Kettle Foods, increases in snack net sales volume were partially offset by lower pricing. The decrease in culinary and retail in-shell sales for fiscal 2010 resulted from lower pricing and a 5% decrease in sales volume partially attributable to elimination of low value added SKUs. International non-retail sales were relatively flat despite a volume decline of 5%. North American ingredient/food service and other sales increased primarily as a result of a 50% increase in sales volume and partially offset by lower pricing.
Gross profit. Gross profit as a percentage of net sales was 21.2% and 23.7% for fiscal 2010 and fiscal 2009, respectively. Gross profit decreased mainly as a result of higher commodity costs related to walnuts.
Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation and facility costs. Selling, general and administrative expenses were $64.6 million and $61.0 million, and 9.5% and 10.7% as a percentage of net sales, for fiscal 2010 and fiscal 2009, respectively. The improvement as a percentage of net sales was primarily driven by greater scale in snack sales and higher costs during fiscal 2009 associated with the Pop Secret acquisition.
Advertising. Advertising expense was $33.7 million and $28.8 million, and 4.9% and 5.0% as a percentage of net sales, for fiscal 2010 and fiscal 2009, respectively. The increase in advertising was primarily due to increased media spending associated with the snack brands (including Kettle Foods).
Acquisition and integration related expenses. Acquisition and integration related expenses include items such as transaction related legal and consulting fees, as well as business and systems integration costs. Acquisition and integration related expenses associated with Kettle Foods were $11.3 million for fiscal 2010. There were no acquisition and integration related expenses for fiscal 2009.
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Interest expense, net. Net interest expense was $10.2 million and $6.3 million, and 1.5% and 1.1% as a percentage of net sales, for fiscal 2010 and fiscal 2009, respectively. The increase was primarily attributable to the borrowings used to fund the Kettle Foods acquisition.
Other expense, net. Net other expense was $1.8 million for fiscal 2010. The expense represented a loss on debt extinguishment when we replaced our existing credit facility with a new secured credit facility to fund the Kettle Foods acquisition. Net other expense was $0.9 million for fiscal 2009 reflecting a $2.6 million payment on the early termination of debt, partially offset by a gain on the sale of emission reduction credits of $1.7 million.
Income taxes. The combined effective federal and state tax rate for fiscal 2010 was 32.5%. Our effective tax rates were lower than the U.S. federal statutory rate primarily due to earnings taxed at lower rates in the UK tax jurisdiction. For fiscal 2009, the combined effective federal and state tax rate was 38.6%, and included the effect of discrete tax items, primarily the recognition of certain state tax credits.
Proposed Pringles Merger Subsequently Terminated
On April 5, 2011, Diamond entered into a definitive agreement with The Procter & Gamble Company (“P&G”) to merge P&G’s Pringles business into the Company; on February 15, 2012, Diamond and P&G mutually agreed to terminate this proposed merger. No “break-up” fee or other fees were paid in connection with the termination, which included a mutual release. In fiscal 2012, the Company recorded acquisition related expenses associated with the Pringles termination of $7.0 million, the majority of which were primarily capitalized in fiscal 2011 and subsequently expensed in fiscal 2012, and primarily included contract termination costs related to facilities and software that were no longer needed due to the termination of the merger.
Liquidity and Capital Resources
Our liquidity is dependent upon funds generated from operations and external sources of financing.
Cash provided by operating activities during fiscal 2011 was $66.7 million compared to $1.8 million of cash used in operating activities during fiscal 2010. The increase in cash provided by operating activities was primarily due to improved working capital as accounts payable increased by $31.5 million partly due to Pringles merger costs as well as a $20.2 million increase in accounts payable to growers driven by a larger and more costly walnut crop. Cash used in investing activities was $43.2 million in fiscal 2011 compared to $626.6 million in fiscal 2010. The higher cash used in investing activities for fiscal 2010 was mainly due to the acquisition of Kettle Foods. Fiscal 2011 investing activities included an increase in purchases of property, plant and equipment related to Kettle Foods facility expansions and software implementations. Cash used in financing activities was $26.1 million in fiscal 2011 compared to $609.1 million provided by financing activities in fiscal 2010. The change from prior year was primarily attributable to long-term borrowings and the equity offering used to fund the Kettle Foods acquisition.
Cash used in operating activities during fiscal 2010 was $1.8 million compared to $53.4 million provided by operating activities during fiscal 2009. The decrease in cash from operating activities was primarily due to increased inventory, offset by increased grower payables. Cash used in investing activities was $626.6 million in fiscal 2010 compared to $198.1 million in fiscal 2009. This increase was mainly due to the acquisition of Kettle Foods for approximately $616.2 million. Cash provided by financing activities was $609.1 million in fiscal 2010 compared to $95.2 million in fiscal 2009. The increase was primarily attributable to long-term borrowings used to fund the Kettle Foods acquisition and to our equity offering.
At July 31, 2011, we had a total of $3.1 million in cash and cash equivalents. Of this balance, $2.7 million was held in the United Kingdom in foreign currencies. It is our intention to indefinitely reinvest all current and future foreign earnings at these locations in order to ensure sufficient working capital and expand operations. We have not recorded a deferred tax liability of approximately $8.7 million related to the U.S. federal and state
32
income taxes and foreign withholding taxes on approximately $25 million of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. In the event that management elects for any reason in the future to repatriate some or all of the foreign earnings that were previously deemed to be indefinitely reinvested outside of the United States, we would incur additional tax expense upon such repatriation.
In February 2010, we entered into an agreement to replace our existing credit facility with a five-year $600 million secured credit facility (the “Secured Credit Facility”) with a syndicate of lenders. We used the borrowings under the Secured Credit Facility to fund a portion of the Kettle Foods acquisition and to fund ongoing operations. In March 2010, we issued 5,175,000 shares of common stock priced at $37.00 per share. After deducting the underwriting discount and other related expenses, we received total net proceeds from the sale of our common stock of approximately $179.7 million. The proceeds from the equity offering were used to fund a portion of the purchase price for the Kettle Foods acquisition.
Borrowings under the Secured Credit Facility initially bear interest, at our option, at either a fluctuating rate per annum (the “Base Rate”) plus a margin of 2.50%, or the London Interbank Offered Rate (“LIBOR”), plus a margin for LIBOR loans ranging from 2.25% to 3.50%, based on the consolidated leverage ratio, which is defined as the ratio of total debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). Substantially all of our tangible and intangible assets are considered collateral security under the Secured Credit Facility. Our Secured Credit Facility initially consisted of a $200 million revolving credit facility and a $400 million term loan. In March 2011, the syndicate of lenders approved our request for a $35 million increase in our revolving credit facility to $235 million, under the same terms. In August 2011, the syndicate of lenders approved our request for a $50 million increase in our revolving credit facility to $285 million, under the same terms.
On December 20, 2010, Kettle Foods obtained, and we guaranteed, a 10-year fixed rate loan with respect to our Beloit, Wisconsin plant expansion (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $20.4 million was outstanding as of July 31, 2011. Principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan is being used to purchase equipment for our Beloit, Wisconsin plant expansion. Borrowed funds were placed in an interest-bearing escrow account. Withdrawals from the escrow account were restricted to reimburse, dollar-for-dollar, approved expenditures directly related to equipment purchases. As the cash is being used to purchase non-current assets, such restricted cash is classified as non-current on the balance sheet. The Guaranteed Loan also provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility. Initially, there was a limit to our debt to EBITDA ratio to no more than 4.35 to 1.00, and our fixed charge coverage ratio to no less than 1.05 to 1.00. As a result of the errors identified causing the restatement of our consolidated financial statements, we were in default with certain financial and reporting covenants, which non-compliance was waived as of July 31, 2012. In addition, the financial covenants within the Guaranteed Loan were reset to match those in the Third Amendment, as defined below.
As of July 31, 2011, the revolving credit facility had $235 million in capacity, of which $161 million was outstanding, while the term loan facility had $400 million in capacity, of which $350 million was outstanding. Scheduled principal payments on the term loan were $40 million for fiscal 2012 and each of the succeeding two years (due quarterly), and $10 million for each of the first two quarters in fiscal 2015, with the remaining principal balance and any outstanding loans under the revolving credit facility to be repaid on the fifth anniversary of initial funding.
On March 21, 2012, we reached an agreement with our lenders to forbear from seeking any remedies under the Secured Credit Facility with respect to specified existing and anticipated non-compliance with the credit agreement and to amend our credit agreement (“Second Amendment”). Under the amended credit agreement, we had continued access to our existing revolving credit facility through a forbearance period (initially through June 18, 2012) subject to our compliance with the terms and conditions of the amended credit agreement. During the forbearance period, the interest rate on borrowings increased. The amended credit agreement required us to suspend dividend payments to stockholders. In addition, we paid a forbearance fee of 0.25% to our lenders. The forbearance period concluded on May 29, 2012, when we closed agreements to recapitalize our balance sheet with an investment by Oaktree Capital Management, L.P. (“Oaktree”).
33
The Oaktree investment initially consists of $225 million of newly-issued senior notes and warrants to purchase approximately 4.4 million shares of Diamond common stock. The senior notes will mature in 2020 and will bear interest at 12% per year that may be paid-in-kind at our option for the first two years. Oaktree’s warrants will be exercisable at $10 per share, and would constitute a fully diluted ownership level of approximately 16.4% of Diamond.
The Oaktree agreements provide that if we secure a specified minimum supply of walnuts from the 2012 crop and achieve profitability targets for our nut businesses for the six-month period ending January 31, 2013, all of the warrants will be cancelled and Oaktree may exchange $75 million of the senior notes for convertible preferred stock of Diamond (the “Special Redemption”). The convertible preferred stock would have an initial conversion price of $20.75, which represents a 3.5% discount to the closing price of Diamond common stock on April 25, 2012, the date that we entered into our commitment with Oaktree. The convertible preferred stock would pay a 10% dividend that would be paid in-kind for the first two years. Diamond does not currently anticipate that the Special Redemption will occur.
On May 22, 2012, we entered into a Waiver and Third Amendment to our Secured Credit Facility (“Third Amendment”), which provided for a lower level of total bank debt, initially at $475 million, along with substantial covenant relief until October 31, 2013. At that time, these covenants will become applicable at revised levels set forth in the Third Amendment (initially 4.70 to 1.00 for the senior leverage ratio, declining over four quarters to 3.25 to 1.00 in the quarter ending July 31, 2014 and thereafter, and 2.00 to 1.00 for the fixed charge coverage ratio for each fiscal quarter). Prior to the Third Amendment, as of July 31, 2011, our debt to EBITDA ratio was limited to no more than 4.25 to 1.00 and our fixed charge coverage ratio to no less than 1.10 to 1.00. As a result of the errors identified causing the restatement of our consolidated financial statements, we were non-compliant with these financial ratio covenants, which non-compliance was waived as a result of the Third Amendment. The Third Amendment includes a new covenant requiring that we have at least $20 million of cash, cash equivalents and revolving credit availability beginning February 1, 2013. In addition, the Third Amendment required a $100 million pre-payment of the term loan facility, while reducing the remaining scheduled principal payments on the term loan facility from $10 million to $0.9 million. The Third Amendment also amends the definition of “Applicable Rate” under the Secured Credit Agreement (which sets the margin over LIBOR and the Base Rate at which loans under the Secured Credit Agreement bear interest). Initially, Eurodollar rate loans will bear interest at 5.50% plus the LIBOR for the applicable loan period, and Base Rate loans will bear interest at 4.50% plus the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the Prime Rate, or (iii) Eurodollar Rate plus 1.00%. The LIBOR rate is subject to a LIBOR floor, initially 1.25% (the “LIBOR Floor”). The margins over LIBOR, the LIBOR floor, and the Base Rate will decline if and when we achieve specified reductions in our ratio of senior debt to EBITDA. The Third Amendment also eliminates the requirement that proceeds of future equity issuances be applied to repay outstanding loans, and waives certain covenants that we were non-compliant with in connection with our restatement of our consolidated financial statements.
The Secured Credit Facility and the Securities Purchase Agreement, dated as of May 22, 2012, by and between Diamond and OCM PF/FF Adamantine Holdings, Ltd. (the “Oaktree SPA”) provide for customary affirmative and negative covenants, and cross default provisions that may be triggered if we fail to comply with obligations under our other credit facilities or indebtedness. The Secured Credit Facility and the Oaktree SPA include a covenant that restricts the amount of other indebtedness (including capital leases and purchase money obligations for fixed or capital assets), to no more than $25 million. The accounting treatment for the seven-year equipment lease for our Salem, Oregon plant (the “Kettle US Lease”) and the five-year equipment lease for our Norfolk, UK plant (the “Kettle UK Lease”) caused us to be in default of the covenants limiting other indebtedness. These defaults were waived, with respect to the Kettle UK Lease on July 27, 2012, and with respect to the Kettle US Lease on August 23, 2012. Additionally, the Secured Credit Facility and the Oaktree SPA were each amended to allow the Company to incur up to $31 million of capital leases and purchase money obligations for fixed or capital assets, which amount will be reduced from and after December 31, 2013 (a) to $25 million under the Secured Credit Facility and (b) to $27.5 million under the Oaktree SPA.
34
Working capital and stockholders’ equity were $52.4 million and $420.5 million at July 31, 2011, compared to $62.6 million and $376.5 million at July 31, 2010. The decrease in working capital was due to an increase in accounts payable and accrued liabilities related to higher commodity costs and acquisition expenses, offset by an increase in receivables, associated with higher sales levels.
We believe our cash and cash equivalents, cash expected to be provided from our operations, in addition to borrowings available under our Secured Credit Facility, the Oaktree investment and restricted cash provided by the Guaranteed Loan, will be sufficient to fund our contractual commitments, repay obligations as required and fund our operational requirements for at least the next 12 months.
Contractual Obligations and Commitments
Contractual obligations and commitments at July 31, 2011 were as follows (in millions):
Payments Due by Period
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Revolving line of credit
$
161.3
$
—
$
—
$
161.3
$
—
Long-term obligations
370.4
41.7
83.7
234.1
10.9
Interest on long-term obligations (a)
44.0
13.3
22.0
7.4
1.3
Capital leases
6.3
0.9
1.9
1.9
1.6
Operating leases
22.0
5.3
6.2
3.8
6.7
Purchase commitments (b)
167.4
161.4
6.0
—
—
Pension liability
26.9
0.5
5.2
1.5
19.7
Long-term deferred tax liabilities (c)
132.5
—
—
—
132.5
Other long-term liabilities (d)
3.7
0.8
0.9
0.4
1.6
Total
$
934.5
$
223.9
$
125.9
$
410.4
$
174.3
(a)
Amounts represent the expected cash interest payments on our long-term debt. Interest on our variable rate debt was forecasted using a LIBOR forward curve analysis as of July 31, 2011.
(b)
Commitments to purchase inventory and equipment. Excludes purchase commitments under Walnut Purchase Agreements due to uncertainty of pricing and quantity of future deliveries, but includes payments to walnut growers for walnuts delivered prior to July 31, 2011, but paid after that date.
(c)
Primarily relates to intangible assets of Kettle Foods.
(d)
Excludes $0.7 million in deferred rent liabilities. Additionally, the liability for uncertain tax positions ($11.2 million at July 31, 2011, excluding associated interest and penalties) has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined.
Off-balance Sheet Arrangements
As of July 31, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S-K.
Effects of Inflation
The most significant inflationary factor affecting our net sales and cost of sales is the change in market prices for purchased nuts, corn, potatoes, oils and other ingredients. The prices of these commodities are affected by U.S. and world market conditions and are volatile in response to supply and demand, as well as political and economic events. The price fluctuations of these commodities do not necessarily correlate with the general inflation rate. Inflation is likely to however, adversely affect operating costs such as labor, energy and materials.
35
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, “ Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations .” This guidance was issued to clarify that pro forma disclosures should be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The disclosures should also be accompanied by a narrative description of the nature and amount of material, nonrecurring pro forma adjustments. This new guidance is effective prospectively for business combinations consummated on or after the annual reporting period beginning on or after December 15, 2010. The Company early adopted this amendment for fiscal 2011 and will apply this guidance to business combinations going forward.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ” This guidance changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This guidance requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income (OCI) in either a single continuous statement of comprehensive income or in two separate consecutive statements. The guidance does not change the components of OCI or when an item of OCI must be reclassified to net income, or the earnings per share calculation. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
Item 8. Financial Statements and Supplementary Data
36
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Diamond Foods, Inc.
San Francisco, California
We have audited the accompanying consolidated balance sheets of Diamond Foods, Inc. and subsidiaries (the “Company”) as of July 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2011. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Diamond Foods, Inc. and subsidiaries as of July 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2011, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 15 to the consolidated financial statements, the accompanying 2011 and 2010 consolidated financial statements have been restated.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of July 31, 2011, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated September 15, 2011 (November 13, 2012 as to the effects of the material weaknesses described in Management’s Report on Internal Control over Financial Reporting, as revised) expressed an adverse opinion on the Company’s internal control over financial reporting because of material weaknesses.
/s/ Deloitte & Touche LLP
San Francisco, California
September 15, 2011 (November 13, 2012 as the effects of the restatement discussed in Note 15 and subsequent events in Note 17)
37
DIAMOND FOODS, INC.
CONSOLIDATED BALANCE SHEETS
July 31,
2011
As Restated
See Note 15
2010
As Restated
See Note 15
(In thousands, except share and
per share information)
ASSETS
Current assets:
Cash and cash equivalents
$
3,112
$
5,642
Trade receivables, net
98,275
65,698
Inventories
153,534
145,832
Deferred income taxes
14,490
12,218
Prepaid income taxes
17,499
13,582
Prepaid expenses and other current assets
13,089
5,392
Total current assets
299,999
248,364
Restricted cash
15,795
—
Property, plant and equipment, net
134,275
118,235
Deferred income taxes
5,376
4,372
Goodwill
409,735
403,264
Other intangible assets, net
450,855
453,107
Other long-term assets
6,872
8,730
Total assets
$
1,322,907
$
1,236,072
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
41,700
$
40,000
Accounts payable and accrued liabilities
205,853
145,756
Total current liabilities
247,553
185,756
Long-term obligations
490,001
516,100
Deferred income taxes
132,470
139,075
Other liabilities
32,388
18,598
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding
—
—
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 22,319,016 and 22,121,534 shares issued and 22,049,636 and 21,891,928 shares outstanding at July 31, 2011 and 2010, respectively
22
22
Treasury stock, at cost: 269,380 and 229,606 shares at July 31, 2011 and 2010
(6,867
)
(5,050
)
Additional paid-in capital
318,734
307,797
Accumulated other comprehensive income
17,728
5,501
Retained earnings
90,878
68,273
Total stockholders’ equity
420,495
376,543
Total liabilities and stockholders’ equity
$
1,322,907
$
1,236,072
See notes to consolidated financial statements.
38
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended July 31,
2011
As Restated
See Note 15
2010
As Restated
See Note 15
2009
(In thousands, except per share information)
Net sales
$
966,688
$
682,326
$
570,940
Cost of sales
750,209
537,484
435,344
Gross profit
216,479
144,842
135,596
Operating expenses:
Selling, general and administrative
97,506
64,551
60,971
Advertising
45,035
33,726
28,785
Acquisition and integration related expenses
20,350
11,328
—
Total operating expenses
162,891
109,605
89,756
Income from operations
53,588
35,237
45,840
Interest expense, net
23,918
10,180
6,255
Other expense, net
—
1,849
898
Income before income taxes
29,670
23,208
38,687
Income taxes
3,103
7,532
14,944
Net income
$
26,567
$
15,676
$
23,743
Earnings per share:
Basic
$
1.21
$
0.84
$
1.45
Diluted
$
1.17
$
0.82
$
1.42
Shares used to compute earnings per share:
Basic
21,577
18,313
16,073
Diluted
22,233
18,843
16,391
Dividends declared per share
$
0.18
$
0.18
$
0.18
See notes to consolidated financial statements.
39
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Treasury
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Shares
Amount
(In thousands, except share information)
Balance, July 31, 2008
16,180,771
$
16
$
(3,203
)
$
112,550
$
35,276
$
1,584
$
146,223
Shares issued under ESPP and upon stock option exercises
298,133
1
5,299
5,300
Stock compensation expense
115,587
3,901
3,901
Tax benefit from ESPP and stock option transactions
1,067
1,067
Treasury stock repurchased
(42,472
)
(1,053
)
(1,053
)
Dividends paid
(2,960
)
(2,960
)
Comprehensive income:
Net income
23,743
23,743
Change in pension liabilities
(2,743
)
(2,743
)
Interest rate swap and other
(137
)
(137
)
Total comprehensive income:
20,863
Balance, July 31, 2009
16,552,019
17
(4,256
)
122,817
56,059
(1,296
)
173,341
Shares issued upon stock option exercises
44,574
818
818
Stock compensation expense (As Restated)
148,164
3,738
3,738
Tax benefit from stock option transactions (As Restated)
692
692
Shares issued for equity offering
5,175,000
5
191,470
191,475
Equity offering costs
(11,738
)
(11,738
)
Treasury stock repurchased
(27,829
)
(794
)
(794
)
Dividends paid
(3,462
)
(3,462
)
Comprehensive income:
Net income (As Restated)
15,676
15,676
Change in pension liabilities (As Restated)
(842
)
(842
)
Foreign currency translation adjustment (As Restated)
7,908
7,908
Interest rate swap and other (As Restated)
(269
)
(269
)
Total comprehensive income (As Restated):
22,473
40
Common Stock
Treasury
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Shares
Amount
(In thousands, except share information)
Balance, July 31, 2010 (As Restated)
21,891,928
$
22
$
(5,050
)
$
307,797
$
68,273
$
5,501
$
376,543
Shares issued upon stock option exercises
96,924
1,803
1,803
Stock compensation expense (As Restated)
100,558
7,687
7,687
Tax benefit from stock option transactions (As Restated)
1,447
1,447
Treasury stock repurchased
(39,774
)
(1,817
)
(1,817
)
Dividends paid
(3,962
)
(3,962
)
Comprehensive income:
Net income (As Restated)
26,567
26,567
Change in pension liabilities
(659
)
(659
)
Foreign currency translation adjustment (As Restated)
12,801
12,801
Interest rate swap and other (As Restated)
85
85
Total comprehensive income (As Restated):
38,794
Balance, July 31, 2011 (As Restated)
22,049,636
$
22
$
(6,867
)
$
318,734
$
90,878
$
17,728
$
420,495
See notes to consolidated financial statements.
41
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended July 31,
2011
As Restated
See Note 15
2010
As Restated
See Note 15
2009
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
26,567
$
15,676
$
23,743
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
29,865
17,154
11,362
Deferred income taxes
(10,532
)
5,977
(2,800
)
Excess tax benefit from stock option transactions
(1,447
)
(692
)
(1,067
)
Stock-based compensation
7,687
3,738
3,901
Other, net
1,055
1,109
858
Changes in assets and liabilities:
Trade receivables, net
(32,875
)
(3,018
)
12,764
Inventories
(7,703
)
(48,279
)
10,316
Prepaid expenses and other current assets and prepaid income taxes
(11,316
)
(10,419
)
1,053
Accounts payable and accrued liabilities
58,373
9,431
(6,562
)
Other, net
7,017
7,477
(200
)
Net cash provided by (used in) operating activities
66,691
(1,846
)
53,368
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(27,703
)
(11,790
)
(7,994
)
Deposits of restricted cash
(21,200
)
—
—
Proceeds from restricted cash
5,405
—
—
Acquisitions, net of cash acquired
—
(615,389
)
(190,224
)
Other, net
262
618
133
Net cash used in investing activities
(43,236
)
(626,561
)
(198,085
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving line of credit borrowings under the Secured Credit Facility
—
176,000
—
Repayment of revolving line of credit under the Secured Credit Facility
(4,800
)
(9,900
)
—
Proceeds from issuance of long-term debt
21,350
400,000
125,000
Debt issuance costs
—
(8,852
)
(1,973
)
Payment of long-term debt and notes payable
(40,799
)
(125,119
)
(30,141
)
Gross proceeds from equity offering
—
191,475
—
Equity offering costs
—
(11,738
)
—
Dividends paid
(3,962
)
(3,462
)
(2,960
)
Excess tax benefit from stock option transactions
1,447
692
1,067
Other, net
658
24
4,247
Net cash (used in) provided by financing activities
(26,106
)
609,120
95,240
Effect of exchange rate changes on cash
121
127
—
Net decrease in cash and cash equivalents
(2,530
)
(19,160
)
(49,477
)
Cash and cash equivalents:
Beginning of period
5,642
24,802
74,279
End of period
$
3,112
$
5,642
$
24,802
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
$
22,752
$
9,088
$
5,989
Income taxes
8,751
10,646
19,438
Non-cash investing activities:
Accrued capital expenditures
4,006
1,495
497
Capital lease
5,376
—
—
See notes to consolidated financial statements.
42
DIAMOND FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011 (Restated), 2010 (Restated) and 2009
(In thousands, except share and per share information unless otherwise noted)
(1) Organization and Significant Accounting Policies
Business
Diamond Foods, Inc. (the “Company” or “Diamond”) is an innovative packaged food company focused on building 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 line of snack nuts under the Emerald ® brand. In September 2008, Diamond acquired the Pop Secret ® brand of microwave popcorn products, which provided the Company with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with its 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, other retail channels and non-retail channels.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”).
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and the accompanying notes. Actual results could differ materially from these estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to inventories, trade receivables and promotional allowances, fair value of investments, useful lives of property, plant and equipment, intangible assets, goodwill and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for management’s judgments about the carrying values of assets and liabilities.
Certain Risks and Concentrations
The Company’s revenues are principally derived from the sale of snack products and culinary, in-shell and ingredient nuts. Significant changes in customer buying behavior could adversely affect the Company’s operating results. Sales to the Company’s largest customer accounted for approximately 15%, 17% and 21% of net sales in 2011, 2010 and 2009, respectively. Sales to the second largest customer accounted for approximately 11%, 12% and 13% of net sales in 2011, 2010 and 2009, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
43
Foreign Currency Translation
The functional currency of the Company’s foreign operations is the applicable local currency, the British pound. The functional currency is translated into U.S. dollars for balance sheet accounts using currency exchange rates in effect as of the balance sheet date and for revenue and expense accounts using an average exchange in effect during the applicable period. The translation adjustments are deferred as a separate component of Stockholders’ equity in Accumulated other comprehensive income.
Cash and Cash Equivalents
Cash and cash equivalents include investment of surplus cash in securities (primarily money market funds) with maturities at date of purchase of three months or less. At July 31, 2011, the Company had a total of $3.1 million in cash and cash equivalents. Of this balance, $2.7 million was held in the United Kingdom in foreign currencies. It is our intention to indefinitely reinvest all current and future foreign earnings at these locations in order to ensure sufficient working capital and expand operations.
Inventories
All inventories are accounted for at the lower of cost (first-in, first-out or weighted average) or market. The Company has entered into walnut purchase agreements with growers, under which they deliver their walnut crop to us during the Fall harvest season, and pursuant to the walnut purchase agreements, the Company determines the price for this inventory after delivery and by the end of the fiscal year. This purchase price is determined by us based on our discretion provided in the agreements, taking into account market conditions, crop size, quality and nut varieties, among other relevant factors. Since the ultimate purchase price to be paid will be determined subsequent to receiving the walnut crop, the Company estimates the final purchase price for our interim financial statements. Those interim estimates may subsequently change due to changes in the factors described above and the effect of the change could be significant. Any such changes in estimates are accounted for in the period of change by adjusting inventory on hand or cost of goods sold if the inventory is sold through.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of assets ranging from 30 to 39 years for buildings and ranging from 3 to 15 years for equipment.
Slotting and Other Contractual Arrangements
In certain situations, the Company pays slotting fees to retail customers to acquire access to shelf space. These payments are recognized as a reduction of sales. In addition, the Company makes payments pursuant to contracts that stipulate the term of the agreement, the quantity and type of products to be sold and other requirements. Payments pursuant to these agreements are capitalized and included in other current and long-term assets, and are amortized on a straight-line basis over the term of the contract. If no arrangement exists, the Company records payments as a reduction of sales.
Impairment of Long-Lived and Intangible Assets and Goodwill
Management reviews long-lived assets and certain identifiable intangible assets with finite lives for impairment in accordance with ASC 360, “ Property, Plant, and Equipment .” Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350, “ Intangibles — Goodwill and Other, ” or more often if there are indications of possible impairment.
44
The analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets exceeds their carrying value based on management’s current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in the business, increased competition or loss of market share, product innovation or obsolescence, product claims that result in a significant loss of sales or profitability over the product life or for other reasons could result in the recognition of impairment losses.
For assets to be held and used, including acquired intangible assets subject to amortization, the Company initiates a review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process.
The Company tests its brand intangible assets not subject to amortization for impairment annually, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In testing brand intangibles for impairment, Diamond compares the fair value with the carrying value. The determination of fair value is based on a discounted cash flow analysis, using inputs such as forecasted future revenues attributable to the brand, assumed royalty rates and a risk-adjusted discount rate that approximates our estimated cost of capital. If the carrying value exceeds the estimated fair value, the brand intangible asset is considered impaired and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of the brand intangible asset.
The Company performs its annual goodwill impairment test required by ASC 350 as of June 30th of each year. In testing goodwill for impairment, Diamond initially compares the fair value of the Company’s single reporting unit with the net book value of the Company because it represents the carrying value of the reporting unit. Diamond has one operating and reportable segment. If fair value of the reporting unit is less than the carrying value of the reporting unit, we perform an additional step to determine the implied fair value of goodwill. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all assets and liabilities and then computing the excess of the reporting units’ fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, the excess represents the amount of goodwill impairment. Accordingly, the Company would recognize an impairment loss in the amount of such excess. The Company considers the estimated fair value of the reporting unit in relation to the Company’s market capitalization. To the extent our market capitalization results in a fair value of our common stock that is below our net book value, or if other indicators of potential impairment are present, then we will be required to take further steps to determine if an impairment of goodwill has occurred and to calculate an impairment loss.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the buyer, price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, introductory or slotting payments, coupons, promotion and marketing allowances. The amount the Company accrues for promotion is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer and consumer participation and sales and payment trends with similar previously offered programs. Customers have the right to return certain products. Product returns are estimated based upon historical results and are reflected as a reduction in sales.
45
Promotion and Advertising Costs
Promotional allowances, customer rebates, coupons and marketing allowances are recorded at the time the related revenue is recognized and are reflected as reductions of sales. Annual volume rebates, promotion and marketing allowances are recorded based upon the terms of the arrangements. Coupon incentives are recorded at the time of distribution in amounts based on estimated redemption rates. The Company expenses advertising costs as incurred. Payments to reimburse customers for cooperative advertising programs are recorded in accordance with ASC 605-50, “ Revenue Recognition — Customer Payments and Incentives .”
Shipping and Handling Costs
Amounts billed to customers for shipping and handling costs are included in net sales. Shipping and handling costs are charged to cost of sales as incurred.
Acquisition and Integration Related Expenses
Acquisition and integration related expenses are costs incurred to effect a business combination and subsequently to integrate the acquired business into the Company. These expenses are shown as a separate line within operating expenses and are expensed as incurred. These expenses may include transaction related bank, legal, human resource, purchase price valuation and business strategy consulting fees, as well as business and systems integration costs.
Income Taxes
Diamond accounts for income taxes in accordance with ASC 740, “Income Taxes.” which requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the consolidated financial statement and tax basis of recorded assets and liabilities at current tax rates. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both the historical and anticipated earnings levels and is reviewed periodically to determine if any additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered.
There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which the Company operates. Diamond may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. Tax positions are evaluated and liabilities are established in accordance with the guidance on uncertainty in income taxes. Diamond reviews these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjusts them accordingly.
Fair Value of Financial Instruments
The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the amounts recorded in the balance sheet based on information available to Diamond with respect to current interest rates and terms for similar financial instruments.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements, including stock option grants and restricted stock awards, in accordance with ASC 718, “ Compensation — Stock Compensation .” Under this
46
guidance, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. The Black-Scholes option pricing model is used to determine the fair value of stock options at the date of grant. This model requires the Company to make assumptions such as expected term, dividends, volatility and forfeiture rates that determine the stock options fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results are not consistent with the Company’s assumptions and judgments used in estimating these factors, the Company may be required to increase or decrease compensation expense, which could be material to its results of operations.
Related Party Transactions
Two members of the Diamond Board of Directors are growers or affiliates of growers from whom Diamond has purchased walnuts in the ordinary course of business. In fiscal 2009, 2010 and 2011, costs associated with the acquisition of walnuts from these related parties were approximately $2,836 for the 2008 crop, $3,047 for the 2009 crop and $4,171 for the 2010 crop, respectively, of which $650, $1,223 and $1,805 were included in payables for fiscal 2009, 2010 and 2011, respectively, at year end.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, “ Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations .” This guidance was issued to clarify that pro forma disclosures should be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The disclosures should also be accompanied by a narrative description of the nature and amount of material, nonrecurring pro forma adjustments. This new guidance is effective prospectively for business combinations consummated on or after the annual reporting period beginning on or after December 15, 2010. The Company early adopted this amendment for fiscal 2011 and will apply this guidance to business combinations going forward.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ” This guidance changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This guidance requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income (OCI) in either a single continuous statement of comprehensive income or in two separate consecutive statements. The guidance does not change the components of OCI or when an item of OCI must be reclassified to net income, or the earnings per share calculation. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
(2) Fair Value of Financial Instruments
The Company transacts business in foreign currencies and has international sales denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency derivative contracts, generally with monthly maturities of twelve months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. The Company does not use foreign currency derivative contracts for speculative or trading purposes. On the date a foreign currency
47
hedging contract is entered into, the Company may designate the contract as a hedge, for a forecasted transaction, of the variability of cash flows to be received (“cash flow hedge”). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to anticipated transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Effective changes in derivative contracts designated and qualifying as cash flow hedges of forecasted revenue are reported in other comprehensive income. These gains and losses are reclassified into interest income or expense, as a component of revenue, in the same period as the hedged revenue is recognized. The Company includes time value in the assessment of effectiveness of the foreign currency derivatives. The ineffective portion of the hedge is recorded in interest expense or income. No hedge ineffectiveness for foreign currency derivatives was recorded for the year ended July 31, 2011. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with forecasted foreign currency transactions is less than twelve months. Within the next twelve months, amounts expected to be reclassified from other comprehensive income to revenue for foreign currency derivatives are zero.
In the three months ended July 31, 2010, the Company entered into three interest rate swap agreements in accordance with Company policy to mitigate the impact of LIBOR based interest expense fluctuations on Company profitability. These swap agreements, with a total hedged notional amount of $100 million were entered into to hedge future cash interest payments associated with a portion of the Company’s variable rate bank debt. The Company has designated these swaps as cash flow hedges of future cash flows associated with its variable rate debt. All effective changes in the fair value of the designated swaps are recorded in other comprehensive income (loss) and are released to interest income or expense on a monthly basis as the hedged debt payments are accrued. Ineffective changes, if any, are recognized in interest income or expense immediately. For the year ended July 31, 2011, the Company recognized other comprehensive income of $84 based on the change in fair value of the swap agreements; no hedge ineffectiveness for these swap agreements was recognized in interest income or expense over the same period. Other comprehensive loss of $581 is expected to be reclassified to interest expense within the next twelve months.
The fair values of the Company’s derivative instruments as of July 31were as follows:
Liability Derivatives
Balance Sheet Location
Fair Value
2011
2010
Derivatives designated as hedging
instruments under ASC 815:
Interest rate contracts
Accounts payable and accrued liabilities
$
(581
)
$
(668
)
Interest rate contracts
Other liabilities
(4
)
—
Foreign currency contracts
Accounts payable and accrued liabilities
—
(12
)
Total derivatives designated as hedging instruments under ASC 815
$
(585
)
$
(680
)
Derivatives not designated as hedging instruments under ASC 815:
Foreign currency contracts
Accounts payable and accrued liabilities
$
(11
)
$
—
Total derivatives not designated as hedging instrument under ASC 815
$
(11
)
$
—
Total derivatives
$
(596
)
$
(680
)
48
The effects of the Company’s derivative instruments on the Consolidated Statements of Operations for the years ended July 31 were as follows:
Derivatives in ASC 815 Cash
Flow Hedging Relationships
Amount of Loss
Recognized in OCI on
Derivative (Effective
Portion)
Location of Loss
Reclassified from
Accumulated OCI into
Income (Effective
Portion)
Amount of Loss
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)
Location of Loss
Recognized in
Income on
Derivative
(Ineffective
Portion)
Amount of
Loss
Recognized in
Income on
Derivative
(Ineffective
Portion)
2011
2010
2011
2010
2011
2010
Interest rate
contracts
$
(643
)
$
(479
)
Interest expense
$
(728
)
$
(52
)
Interest expense
$
—
$
—
Foreign currency contracts
(182
)
(12
)
Net sales
(194
)
—
Net sales
—
—
Total
$
(825
)
$
(491
)
$
(922
)
$
(52
)
$
—
$
—
Derivatives Not Designated as Hedging
Instruments under ASC 815
Location of Loss Recognized in
Income on Derivative
Amount of Loss Recognized in
Income on Derivative
2011
2010
Foreign currency contracts
Interest expense
$
(145
)
$
—
Total
$
(145
)
$
—
ASC 820 requires that assets and liabilities carried at fair value be measured using the following three levels of inputs:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s cash equivalents measured at fair value on a recurring basis was $586 as of July 31, 2010. These investments were classified as Level 1 based on quoted prices in active markets for identical assets, to value the cash equivalents. There were no cash equivalents as of July 31, 2011.
The Company’s derivative liabilities measured at fair value on a recurring basis were $596 and $680 as of July 31, 2011 and 2010, respectively. The Company has elected to use the income approach to value the derivative liabilities, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates). Mid-market pricing is used as a practical expedient for fair value measurements. Under Accounting Standards Codification (“ASC”) 820, “ Fair Value Measurements and Disclosures, ” the fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments.
49
(3) Equity Offering and Stock-Based Compensation
In March 2010, the Company issued and sold 5,175,000 shares of its common stock for $37.00 per share. After deducting the underwriting discount and other related expenses, the Company received total net proceeds from the sale of its common stock of approximately $179.7 million. The proceeds from the equity offering were used to fund a portion of the purchase price for the Kettle Foods acquisition.
The Company uses a broad based equity incentive plan to help align employee and director incentives with stockholders’ interests. The 2005 Equity Incentive Plan (the “Plan”) was approved in March 2005 and provides for the awarding of options, restricted stock, stock bonuses, restricted stock units, and stock appreciation rights. The Compensation Committee of the Board of Directors administers the Plan. A total of 2,500,000 shares of common stock were initially reserved for issuance under the Plan, and the number of shares available for issuance under the Plan is increased by an amount equal to 2% of the Company’s total outstanding shares as of July 31 each year.
In 2005, the Company began granting shares of restricted stock and stock options under the Plan. The shares of restricted stock vest over three, four or five-year periods. The stock options expire in ten years and vest over three, four or five years. As of July 31, 2011, options to purchase 1,771,253 shares of common stock were outstanding, of which 1,235,297 were exercisable. At July 31, 2011, the Company had 685,187 shares available for future grant under the Plan.
ASC 718, “Compensation — Stock Compensation,” requires the recognition of compensation expense in an amount equal to the fair value of share-based awards. Beginning with the Company’s adoption of ASC 718 in August 2005, the fair value of all stock options granted subsequent to August 1, 2005 is recognized as an expense in the Company’s statement of operations, typically over the related vesting period of the options. The guidance requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period, generally three, four or five years from date of grant or award. The Company recorded total stock-based compensation expense of $7,680, $5,796, and $3,901 for the years ended July 31, 2011, 2010, and 2009, respectively.
Stock Option Awards: The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted is based on the simplified method due to the lack of historical Company information. Forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For purposes of this valuation model, dividends are based on the historical rate.
Assumptions used in the Black-Scholes model are presented below (for the year ended July 31):
2011
2010
2009
Average expected life, in years
6
6
6
Expected volatility
41.63
%
43.77
%
38.50
%
Risk-free interest rate
2.10
%
3.04
%
3.23
%
Dividend rate
0.34
%
0.50
%
0.70
%
50
The following table summarizes option activity during the years ended July 31, 2011, 2010 and 2009:
Number of
Shares
Weighted
Average Exercise
Price Per Share
Average
Remaining
Contractual Life
Aggregate
Intrinsic Value
(In thousands)
(In years)
(In thousands)
Outstanding at July 31, 2008
1,510
$
17.74
7.5
$9,979
Granted
128
26.06
Exercised
(294
)
17.78
Cancelled
(12
)
17.24
Outstanding at July 31, 2009
1,332
18.54
6.9
$
12,871
Granted
191
40.79
Exercised
(45
)
18.35
Cancelled
(26
)
38.64
Outstanding at July 31, 2010
1,452
21.11
6.4
$
34,027
Granted
442
46.59
Exercised
(97
)
18.61
Cancelled
(26
)
38.61
Outstanding at July 31, 2011
1,771
27.34
6.3
$
78,551
Exercisable at July 31, 2009
1,107
17.76
6.6
$
11,562
Exercisable at July 31, 2010
1,218
18.32
5.9
$
31,939
Exercisable at July 31, 2011
1,235
19.98
5.1
$
63,756
The weighted average fair value of options granted during 2011, 2010 and 2009 was $18.95, $18.18 and $10.67, respectively. The total intrinsic value of options exercised during 2011, 2010 and 2009 was $3,035, $829 and $2,816, respectively. The total fair value of options vested during 2011, 2010 and 2009 was $2,076, $1,378 and $1,402, respectively.
Changes in the Company’s nonvested options during 2011 are summarized as follows:
Number of
Shares
Weighted
Average Grant
Date Fair Value
(In thousands)
Nonvested at July 31, 2010
234
$
15.28
Granted
442
18.95
Vested
(130
)
15.98
Cancelled
(10
)
17.53
Nonvested at July 31, 2011
536
18.09
As of July 31, 2011, there was $7.7 million of total unrecognized compensation cost net of forfeitures related to nonvested stock options, which is expected to be recognized over a weighted average period of 2.7 years.
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Restricted Stock Awards: Restricted stock activity during 2011, 2010 and 2009 is summarized as follows:
Number of
Shares
Weighted
Average Grant
Date Fair Value
Per Share
(In thousands)
Outstanding at July 31, 2008
332
$
17.74
Granted
194
25.80
Vested
(111
)
18.02
Cancelled
(79
)
19.94
Outstanding at July 31, 2009
336
21.79
Granted
193
34.29
Vested
(76
)
20.92
Cancelled
(45
)
31.60
Outstanding at July 31, 2010
408
26.78
Granted
115
47.04
Vested
(115
)
24.51
Cancelled
(15
)
38.44
Outstanding at July 31, 2011
393
32.96
The total intrinsic value of restricted stock vested in 2011, 2010 and 2009 was $5,482, $2,192 and $2,771, respectively.
As of July 31, 2011, there was $8.2 million of unrecognized compensation cost net of forfeitures related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of 2.2 years.
(4) Earnings Per Share
ASC 260-10, “Earnings Per Share” impacted the determination and reporting of earnings per share by requiring the inclusion of restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. Participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). Including these shares in the Company’s earnings per share calculation during periods of net income has the effect of diluting both basic and diluted earnings per share.
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The computations for basic and diluted earnings per share are as follows:
Year Ended July 31,
2011
2010
2009
Numerator:
Net income
$
26,567
$
15,676
$
23,743
Less: income allocated to participating securities
(482
)
(310
)
(486
)
Income attributable to common shareholders - basic
26,085
15,366
23,257
Add: undistributed income attributable to participating securities
412
295
469
Less: undistributed income reallocated to participating securities
(400
)
(287
)
(460
)
Income attributable to common shareholders - diluted
$
26,097
$
15,374
$
23,266
Denominator:
Weighted average shares outstanding - basic
21,577
18,313
16,073
Dilutive shares - stock options
656
530
318
Weighted average shares outstanding - diluted
22,233
18,843
16,391
Income per share attributable to common shareholders (1):
Basic
$
1.21
$
0.84
$
1.45
Diluted
$
1.17
$
0.82
$
1.42
(1)
Computations may reflect rounding adjustments.
Options to purchase 1,771,253, 1,451,963 and 1,331,737 shares of common stock were outstanding at July 31, 2011, 2010 and 2009, respectively. Options to purchase 87,500, 156,000 and 48,000 shares of common stock were not included in the computation of diluted earnings per share for 2011, 2010 and 2009 because their exercise prices were greater than the average market price of Diamond’s common stock of $54.62, $36.43 and $25.87, and therefore their effect would be antidilutive.
(5) Acquisitions
Kettle Foods
In March 2010, Diamond completed its acquisition of Kettle Foods for a purchase price of approximately $616.2 million in cash. The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805, “ Business Combinations .”
The total purchase price has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
Accounts receivable
$
29,188
Inventory
12,526
Deferred tax asset
1,017
Prepaid expenses and other assets
3,617
Property, plant and equipment
66,289
Brand intangibles
235,000
Customer relationships
120,000
Goodwill
323,565
Assumed liabilities
(39,211
)
Deferred tax liabilities
(135,769
)
Purchase price
$
616,222
53
Goodwill associated with the Kettle Foods acquisition is not amortized and is not deductible for tax purposes.
Customer relationships of Kettle Foods will be amortized on a straight-line basis over an estimated life of 20 years. Brand intangibles relate to the “Kettle Foods” brand name, which has an indefinite life based on the lack of contractual or economic limitations of use as well as the Company’s intent to use the brand indefinitely, and therefore is not amortizable.
Pro Forma — Financial Information
The following reflects the unaudited pro forma combined results of operations of the Company and Kettle Foods as if the acquisition had taken place at the beginning of the fiscal years presented:
Year Ended July 31,
2010
2009
Net sales
$
856,743
$
828,863
Net income
$
27,764
$
28,753
Diluted earnings per share
$
1.24
$
1.31
The Company incurred a loss on extinguishment of debt of $1.8 million when Diamond replaced an existing credit facility with a new secured credit facility to fund the Kettle Foods acquisition. Additionally, the Company incurred acquisition and integration costs of $11.3 million during the year ended July 31, 2010. These amounts are included in the above pro forma results of operations for the twelve month periods for fiscal 2010 and fiscal 2009.
Kettle Foods contributed net sales of $97.0 million for the year ended July 31, 2010. The earnings Kettle Foods has contributed to Diamond’s results of operations are not determinable as certain operational and go-to-market activities of Kettle Foods have been integrated into Diamond.
(6) Intangible Assets and Goodwill
The changes in the carrying amount of goodwill were as follows:
Balance as of July 31, 2009:
$
76,076
Pop Secret purchase price allocation changes
(833
)
Acquisition of Kettle Foods
323,565
Translation adjustments
4,456
Balance as of July 31, 2010:
403,264
Translation adjustments
6,471
Balance as of July 31, 2011:
$
409,735
Other intangible assets consisted of the following at July 31:
2011
2010
Brand intangibles (not subject to amortization)
$
301,148
$
298,988
Intangible assets subject to amortization:
Customer contracts and related relationships
163,786
159,901
Total other intangible assets, gross
464,934
458,889
Less accumulated amortization on intangible assets:
Customer contracts and related relationships
(14,079
)
(5,782
)
Total other intangible assets, net
$
450,855
$
453,107
54
During the quarter ended July 31, 2009, the Company recorded a $1.2 million non-cash impairment charge to write off the unamortized balance of the Harmony/Homa trademark and trade names, since we no longer utilize them as primary trade dress and concluded that they have no future value. This amount was included in selling, general and administrative expenses on the Consolidated Statements of Operations.
Identifiable intangible asset amortization expense in each of the five succeeding years will amount to approximately $8,189.
For the years ended July 31, 2011, 2010 and 2009, the amortization period for identifiable intangible assets was approximately 20 years with amortization expense of approximately $8,079, $3,865 and $1,761, respectively, recognized in selling, general and administrative expenses on the Consolidated Statements of Operations.
The Company also performed its 2011 annual impairment test of goodwill and non-amortizing intangible assets required by ASC 350 as of June 30, 2011. There were no goodwill or indefinite lived intangible asset impairments during 2011, 2010 and 2009.
(7) Notes Payable and Long-Term Obligations
In February 2010, Diamond entered into an agreement to replace an existing credit facility with a five-year $600 million secured credit facility (the “Secured Credit Facility”) with a syndicate of lenders. The Company used the borrowings under the Secured Credit Facility to fund a portion of the Kettle Foods acquisition and to fund ongoing operations.
Borrowings under the Secured Credit Facility initially bear interest, at Diamond’s option, at either the agent’s Base Rate plus a margin of 2.50%, or the London Interbank Offered Rate (“LIBOR”), plus a margin for LIBOR loans ranging from 2.25% to 3.50%, based on the consolidated leverage ratio, which is defined as the ratio of total debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). For the year ended July 31, 2011, the blended interest rate was 3.92% for the Company’s consolidated borrowings. Substantially all of the Company’s tangible and intangible assets are considered collateral security under the Secured Credit Facility. Diamond’s Secured Credit Facility initially consisted of a $200 million revolving credit facility and a $400 million term loan. In March 2011, the syndicate of lenders approved Diamond’s request for a $35 million increase in our revolving credit facility to $235 million, under the same terms. In August 2011, the syndicate of lenders approved Diamond’s request for a $50 million increase in our revolving credit facility to $285 million, under the same terms.
As of July 31, 2011, the revolving credit facility had $235 million in capacity, of which $161 million was outstanding, and the term loan facility had $400 million in capacity, of which $350 million outstanding. Scheduled principal payments on the term loan were $40 million for fiscal 2012 and each of the succeeding two years (due quarterly), and $10 million for each of the first two quarters in fiscal 2015, with the remaining principal balance and any outstanding loans under the revolving credit facility to be repaid on the fifth anniversary of initial funding.
On December 20, 2010, Kettle Foods obtained, and Diamond guaranteed, a 10-year fixed rate loan with respect to the Beloit, Wisconsin plant expansion (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $20.4 million was outstanding as of July 31, 2011. Principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan is being used to purchase equipment for the Beloit, Wisconsin plant expansion. Borrowed funds were placed in an interest-bearing escrow account. Withdrawals from the escrow account were restricted to reimburse, dollar-for-dollar, approved expenditures directly related to equipment purchases. As the cash is being used to purchase non-current assets, such restricted cash is classified as non-current on the balance sheet. The Guaranteed Loan also provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility.
55
Initially, there was a limit to the debt to EBITDA ratio to no more than 4.35 to 1.00, and the fixed charge coverage ratio to no less than 1.05 to 1.00. As a result of the errors identified causing the restatement of the consolidated financial statements, we were in default with certain financial and reporting covenants, which non-compliance was waived as of July 31, 2012. In addition, the financial covenants within the Guaranteed Loan were reset to match those in the Third Amendment, as defined below.
The Secured Credit Facility provides for customary affirmative and negative covenants and cross default provisions that may be triggered if Diamond fails to comply with obligations under their other credit facilities or indebtedness. The Secured Credit Facility initially included a covenant that restricts the amount of indebtedness (including capital leases and purchase money obligations for fixed or capital assets) to no more than $25 million. On April 30, 2011, Diamond entered into a seven-year equipment lease for its Salem, Oregon plant (the “Kettle US Lease”) that has been treated as a capital lease for accounting purposes. This accounting treatment caused the Company to be in default of the Secured Credit Facility covenant limiting other indebtedness. These defaults were waived, with respect to the Kettle US Lease on August 23, 2012. Additionally, the Secured Credit Facility and the OCM PF/FF Adamantine Holdings, Ltd. (the “Oaktree SPA”) were each amended to allow the Company to incur up to $31 million of capital leases and purchase money obligations for fixed or capital assets, which amount will be reduced from and after December 31, 2013 (a) to $25 million under the Secured Credit Facility and (b) to $27.5 million under the Oaktree SPA.
As of July 31, 2011, our debt to EBITDA ratio was limited to no more than 4.25 to 1.00 and our fixed charge coverage ratio to no less than 1.10 to 1.00. As a result of the errors identified causing the restatement of our consolidated financial statements, Diamond was non-compliant with certain financial and reporting covenants, which non-compliance was waived as a result of the Third Amendment. Please refer to Note 17 of the Notes to Consolidated Financial Statements for information regarding the Forbearance agreement and the Third Amendment to the Secured Credit Facility.
Please refer to Note 17 of the Notes to Consolidated Financial Statements for information regarding developments related to the Company’s recapitalization.
(8) Balance Sheet Items
Inventories consisted of the following at July 31:
2011
2010
Raw materials and supplies
$
64,060
$
64,700
Work in process
25,031
24,899
Finished goods
64,443
56,233
Total
$
153,534
$
145,832
Accounts payable and accrued liabilities consisted of the following at July 31:
2011
2010
Accounts payable
$
74,471
$
42,964
Payable to growers
76,700
56,505
Accrued salaries and benefits
16,616
17,587
Accrued promotion
27,358
22,544
Accrued taxes
4,099
731
Other
6,609
5,425
Total
$
205,853
$
145,756
56
(9) Property, Plant and Equipment
Property, plant and equipment consisted of the following at July 31:
2011
2010
Land and improvements
$
10,822
$
10,012
Buildings and improvements
41,303
38,231
Machinery, equipment and software
168,974
164,926
Construction in progress
28,230
7,633
Capital leases of equipment
5,376
—
Total
254,705
220,802
Less accumulated depreciation
(120,238
)
(102,567
)
Less accumulated amortization
(192
)
—
Property, plant and equipment, net
$
134,275
$
118,235
(10) Income Taxes
The components of income before income taxes, by tax jurisdiction, are as follows for the fiscal years ended July 31:
2011
2010
2009
United States
$
42,269
$
25,242
$
38,687
Foreign
(12,599
)
(2,034
)
—
Total
$
29,670
$
23,208
$
38,687
Income tax expense consisted of the following for the fiscal years ended July 31:
2011
2010
2009
Current
Federal
$
7,250
$
887
$
14,831
State
785
(1,020
)
2,913
Foreign
5,600
1,688
—
Total current
13,635
1,555
17,744
Deferred
Federal
(3,389
)
7,171
(2,830
)
State
(2,719
)
274
30
Foreign
(4,424
)
(1,468
)
—
Total deferred
(10,532
)
5,977
(2,800
)
Total tax provision
$
3,103
$
7,532
$
14,944
57
A reconciliation of the statutory federal income tax rate of 35% to Diamond’s effective income tax rate is as follows for the fiscal years ended July 31:
2011
2010
2009
Federal tax at statutory rate
$
10,385
$
8,124
$
13,540
State tax, net of federal benefit
(255
)
(530
)
1,908
Net tax benefit of earnings at lower rates
(10,489
)
(3,197
)
—
Accrual for uncertain tax positions
7,507
2,026
—
Acquisition costs
—
2,282
—
Compensation
897
744
297
Domestic production activities deduction
(600
)
(89
)
(894
)
Impact of tax law changes
(3,972
)
(1,271
)
—
Changes in estimates
300
(712
)
—
Other
(670
)
155
93
Income tax expense
$
3,103
$
7,532
$
14,944
Applicable U.S. income taxes have not been provided on approximately $24,968 of undistributed earnings of certain foreign subsidiaries at July 31, 2011, because these earnings are considered indefinitely reinvested. The net federal income tax liability that would arise if these earnings were not indefinitely reinvested is approximately $8,739.
With respect to the Company’s stock option plans, realized tax benefits in excess of tax benefits recognized in net earnings are recorded as increases to additional paid-in capital. Excess tax benefits of approximately $1,447, $692, and $1,067, were realized and recorded to additional paid-in capital for fiscal 2011, 2010 and 2009, respectively.
The tax effect of temporary differences and net operating losses which give rise to deferred tax assets and liabilities consist of the following as of July 31:
2011
2010
Deferred tax assets:
Current:
Inventories
$
2,033
$
943
Receivables
253
378
Accruals
7,816
6,506
Compensation
3,896
3,661
State tax
48
95
Other
11
102
Total current
14,057
11,685
Non-current:
State tax credits
6,328
5,627
Retirement benefits
3,938
4,341
Other comprehensive income
2,013
1,530
Net operating loss carryover
1,863
2,006
Employee stock compensation benefits
4,351
2,609
Acquisition and integration related expenses
6,133
380
Other
1,403
874
Subtotal
26,029
17,367
Valuation allowance
—
(944
)
Total non-current
$
26,029
$
16,423
58
2011
2010
Deferred tax liabilities:
Current
$
—
$
14
Non-current:
Property, plant and equipment
13,617
11,272
Intangibles
129,358
129,769
Foreign unremitted earnings
9,019
8,483
Other
692
1,055
Total non-current
152,686
150,579
Total deferred taxes, net
$
(112,600
)
$
(122,485
)
Composed of:
Net current deferred taxes
$
14,057
$
11,671
Net non-current deferred taxes
(126,657
)
(134,156
)
Total deferred taxes, net
$
(112,600
)
$
(122,485
)
Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. The Company’s valuation allowance was zero as of July 31, 2011 and $944 as of July 31, 2010.
As of July 31, 2011, the Company had no cumulative federal tax loss carryforwards and $19,328 of cumulative state tax loss carryforwards. State tax loss carryforwards will expire beginning fiscal 2017 through fiscal 2023. As of July 31, 2011, the Company also has a foreign net operating loss carryforward of $7,540 with no expiration period.
As of July 31, 2011, the state tax credits of $10,863 are California Enterprise Zone Credits, which have no expiration date.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
2011
2010
2009
Balance, beginning of year
$
5,454
$
313
$
233
Tax position related to current year:
Additions
7,977
5,429
—
Tax positions related to prior years:
Additions
840
10
227
Reductions
(11
)
—
—
Settlements
—
(269
)
(46
)
Statute of limitations closures
—
(29
)
(101
)
Balance, end of year
$
14,260
$
5,454
$
313
Included in the balance of unrecognized tax benefits at July 31, 2011, July 31, 2010 and July 31, 2009, respectively, are potential benefits of $9,065, $2,611, and $313, respectively, that if recognized, would affect the effective tax rate on earnings.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company accrued $65, $49 and $40, net of federal benefit, in interest and $64, $12 and $1 in penalties associated with uncertain tax positions for each of the years ended July 31, 2011, 2010 and 2009.
59
In the twelve months following July 31, 2011, audit resolutions, lapse of statute of limitations, and filing the amended returns could potentially reduce total unrecognized tax benefits by up to $11,244, substantially all of which would impact the effective tax rate.
The Company files income tax returns in the U.S. federal and various states, local and foreign jurisdictions. The Company’s income tax returns for fiscal 2006 through fiscal 2011 remain open to examination.
(11) Commitments and Contingencies
In November 2011, December 2011 and June 2012, various putative shareholder class action and derivative complaints were filed in federal and state court against Diamond and certain current and former Diamond directors and officers.
In re Diamond Foods, Inc., Securities Litigation
Beginning on November 7, 2011, the first of a number of putative securities class action suits was filed in the United States District Court for the Northern District of California against Diamond and certain of its former executive officers (“defendants”). These suits allege that defendants made materially false and misleading statements, or failed to disclose material facts, regarding Diamond’s financial results, operations and prospects, including its accounting for payments to walnut growers and the anticipated closing of Diamond’s proposed acquisition of the Pringles business from The Procter & Gamble Company (“P&G”). The various suits assert claims covering the period from December 9, 2010 through November 4, 2011 and seek compensatory damages, interest thereon, costs and expenses incurred in such actions, as well as equitable or other relief. On January 24, 2012, these class actions were consolidated by the court as In re Diamond Foods Inc., Securities Litigation . On March 20, 2012, the court appointed a lead plaintiff, and on June 13, 2012, the court appointed legal counsel for the plaintiff. On July 30, 2012, an amended complaint was filed in the consolidated action naming Diamond, certain of its former executive officers and our outside auditor as defendants. On September 28, 2012, Diamond moved to dismiss the action.
In re Diamond Foods Inc. Shareholder Derivative Litigation
Beginning on November 14, 2011, three putative shareholder derivative lawsuits were filed in the Superior Court for the State of California, San Francisco County, purportedly on behalf of Diamond Foods and naming certain executive officers and the members of the Company’s board of directors as individual defendants. On January 17, 2012, the court consolidated these actions as In re Diamond Foods, Inc. Shareholder Derivative Litigation and appointed co-lead counsel. On February 16, 2012 plaintiffs filed their consolidated complaint, naming certain current and former executive officers and members of the Company’s board, and the Company’s outside auditor, as individual defendants. The consolidated complaint arises from the same or similar alleged facts as alleged in the federal securities action and the federal derivative litigation (discussed in the next paragraph below), and purported to set forth claims for breach of fiduciary duty, unjust enrichment, abuse of control and gross mismanagement, and against the auditor for professional negligence and breach of contract. The suit seeks the recovery of unspecified damages allegedly sustained by Diamond, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, the recovery of plaintiff’s attorney’s fees and other relief. On August 20, 2012, Diamond filed a demurrer seeking to dismiss the action. On October 23, 2012, the court sustained the Company’s demurrer with leave to amend the complaint excluding the gross mismanagement claim, which the court sustained with prejudice.
In re Diamond Foods, Inc., Derivative Litigation
On November 28, 2011 and December 19, 2011, two putative shareholder derivative lawsuits were filed in the United States District Court for the Northern District of California, purportedly on behalf of Diamond Foods and naming certain current and former executive officers and members of the Company’s board of directors as
60
individual defendants. On February 16, 2012, the court consolidated these actions as In re Diamond Foods, Inc., Derivative Litigation. Plaintiffs filed their consolidated complaint on March 1, 2012, again naming certain current and former executive officers and members of the Company’s board of directors as individual defendants, and also adding the Company’s outside auditor as a defendant. The suit was based on essentially the same allegations as those in the federal securities action and the state derivative litigation, and purported to set forth claims under Section 14 (a) of the Securities Exchange Act of 1934 alleging that defendants made materially false or misleading statements or omissions in proxy statements issued on or about November 26, 2010 and on or about September 26, 2011, and for breach of fiduciary duty, unjust enrichment, contribution and indemnification, gross mismanagement, and, against the Company’s auditor, for professional negligence, accounting malpractice and aiding and abetting the breach of fiduciary duties of the other individual defendants. The suit sought to recover unspecified damages allegedly sustained by Diamond, which was named as a nominal defendant, corporate reforms, restitution, equitable and/or injunctive relief, to recover plaintiff’s attorney’s fees and other relief. On April 16, 2012, Diamond moved to dismiss the action. On May 29, 2012, the court granted Diamond’s motion and dismissed the action with prejudice, based on lack of subject matter jurisdiction related to deficiencies in plaintiffs’ Section 14(a) claims. The court entered judgment in favor of Diamond the same day. On June 4, 2012, one of the plaintiffs in the consolidated matter filed a Notice of Appeal with the United States Court of Appeals for the Ninth Circuit, seeking to appeal the May 29, 2012 order granting Diamond’s motion to dismiss. On October 12, 2012, the appellant filed its opening brief.
Astor BK Realty Trust v. Diamond Foods, Inc.
On February 22, 2012, an action was filed in Delaware Chancery Court by a shareholder seeking to enforce a demand to inspect certain of Diamond’s records pursuant to Section 220 of the Delaware General Corporation Law, as a possible prelude to the shareholder bringing a derivative action. This action has been stayed by the agreement of the parties.
Delaware Derivative Litigation
On June 27, 2012, two putative shareholder derivative lawsuits, Board of Trustees of City of Hialeah Employees’ Retirement System v. Mendes, et al. and Lucia v. Mendes et al. , were filed in the Delaware Chancery Court purportedly on behalf of the Company and naming certain current and former executive officers and members of the Company’s board of directors as individual defendants. On August 7, 2012, the court consolidated these actions as In re Diamond Foods, Inc. Derivative Litigation and appointed co-lead counsel. Plaintiffs filed their consolidated complaint on September 19, 2012, again naming certain current and former executive officers and members of our board of directors as individual defendants. The suit is based on essentially the same allegations as those in the federal securities action and the federal and California derivative litigation and purports to set forth claims for breach of fiduciary duty, unjust enrichment, contribution and indemnification, gross mismanagement and breach of the duty of loyalty. The suit seeks recovery of unspecified damages allegedly sustained by the Company, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, equitable and/or injunctive relief, to recover plaintiffs’ attorney’s fees and other relief.
Governmental Proceedings
On December 14, 2011, Diamond received a formal order of investigation from the staff of the United States Securities and Exchange Commission (“SEC”). Diamond also has had contact with the U.S. Attorney’s office for the Northern District of California (“DOJ”). We have cooperated with the government and expect to continue to do so.
Other
The Company is involved in other various legal actions in the ordinary course of our business. Such matters are subject to many uncertainties that make their outcomes, and any potential liability we may incur, unpredictable.
61
We do not believe it is feasible to predict or determine the outcome or resolution of the above litigation proceedings, or to estimate the amounts of, or potential range of, loss with respect to those proceedings. In addition, the timing of the final resolution of these proceedings is uncertain. The range of possible resolutions of these proceedings could include judgments against the Company or settlements that could require substantial payments by the Company, which could have a material impact on Diamond’s financial position, results of operations and cash flows.
At July 31, 2011, the Company had $2.6 million of letters of credit outstanding related to normal business transactions and commitments of $10.9 million to purchase new equipment.
Operating lease expense for the year ended July 31, 2011, 2010 and 2009 was $4.7 million, $3.2 million and $2.5 million, respectively.
At July 31, 2011, future minimum payments under non-cancelable operating leases (primarily for real property) were as follows:
2012
$
5,260
2013
3,769
2014
2,423
2015
2,190
2016
1,600
Thereafter
6,672
Total
$
21,914
The current and long term portion of capital leases are reflected as Accounts payable and accrued liabilities and Other liabilities, respectively, on the Consolidated Balance Sheets. At July 31, 2011, future minimum payments under non-cancelable capital leases (primarily for real property) were as follows:
2012
$
938
2013
938
2014
938
2015
938
2016
938
Thereafter
1,643
Total
$
6,333
(12) Segment Reporting
The Company operates in a single reportable segment: the processing, marketing and distribution of culinary, in-shell and ingredient/food service nuts and snack products. The geographic presentation of net sales below is based on the destination of the sale. The “Europe” category consists primarily of United Kingdom, Germany, Netherlands and Spain. The “Other” category consists primarily of Canada, South Korea, Japan, Turkey and China. The geographic distributions of the Company’s net sales were as follows for the year ended July 31:
2011
2010
2009
United States
$
676,829
$
556,141
$
486,614
Europe
161,365
64,909
33,743
Other
128,494
61,276
50,583
Total
$
966,688
$
682,326
$
570,940
62
Net sales by channel:
Year Ended July 31,
2011
2010
2009
Snack
$
553,676
$
323,620
$
188,900
Culinary and Retail In-shell
263,161
248,960
276,226
Total Retail
816,837
572,580
465,126
International Non-Retail
119,017
69,206
68,890
North American Ingredient/Food Service Other
30,834
40,540
36,924
Total Non-Retail
149,851
109,746
105,814
Total Net Sales
$
966,688
$
682,326
$
570,940
The geographic distributions of the Company’s long-lived assets as of July 31 were as follows:
2011
2010
United States
$
107,077
$
90,289
United Kingdom
27,198
27,946
Total
$
134,275
$
118,235
(13) Valuation Reserves and Qualifying Accounts
Beginning
of Period
Charged to
Expense
Charged to
Reserve
End of
Period
Allowance for Doubtful Accounts
Year ended July 31, 2009
$
441
$
269
$
(210
)
$
500
Year ended July 31, 2010
500
106
—
606
Year ended July 31, 2011
606
55
(19
)
642
(14) Retirement Plans
Diamond provides retiree medical benefits and sponsors two defined benefit pension plans. One of the defined benefit plans is a qualified plan covering all bargaining unit employees and the other is a nonqualified plan for certain salaried employees. The amounts shown for pension benefits are combined amounts for all plans. Diamond uses a July 31 measurement date for its plans. Plan assets are held in trust and primarily include mutual funds and money market accounts. Any employee who joined the Company after January 15, 1999 is not entitled to retiree medical benefits.
In March 2010, the Company determined that the defined benefit pension plan for the bargaining unit employees would be frozen at July 31, 2010 in conjunction with the execution of a new union contract. This amendment was accounted for in accordance with ASC 715, “ Compensation — Retirement Benefits .”
63
Obligations and funded status of the remaining benefit plans at July 31 were:
Pension Benefits
Other Benefits
Change in Benefit Obligation
2011
2010
2011
2010
Benefit obligation at beginning of year
$
24,186
$
20,832
$
2,204
$
2,360
Service cost
79
728
65
63
Interest cost
1,258
1,198
107
133
Plan participants’ contributions
—
—
27
74
Plan amendments
—
(412
)
—
—
Actuarial loss (gain)
1,809
2,253
61
(267
)
Benefits paid
(464
)
(413
)
(195
)
(159
)
Benefit obligation at end of year
$
26,868
$
24,186
$
2,269
$
2,204
Pension Benefits
Other Benefits
Change in Plan Assets
2011
2010
2011
2010
Fair value of plan assets at beginning of year
$
13,144
$
12,120
$
—
$
—
Actual return on plan assets
1,771
1,320
—
—
Employer contribution
—
117
168
85
Plan participants’ contributions
—
—
27
74
Benefits paid
(464
)
(413
)
(195
)
(159
)
Fair value of plan assets at end of year
$
14,451
$
13,144
$
—
$
—
Funded status at end of year
$
(12,417
)
$
(11,042
)
$
(2,269
)
$
(2,204
)
Assets (liabilities) recognized in the consolidated balance sheets at July 31 consisted of:
Pension Benefits
Other Benefits
2011
2010
2011
2010
Current liabilities
$
—
$
—
$
(114
)
$
(117
)
Noncurrent liabilities
(12,417
)
(11,042
)
(2,155
)
(2,087
)
Total
$
(12,417
)
$
(11,042
)
$
(2,269
)
$
(2,204
)
Amounts recognized in accumulated other comprehensive income (pre-tax) as of July 31 consisted of:
Pension Benefits
Other Benefits
2011
2010
2011
2010
Net loss (gain)
$
9,545
$
9,120
$
(5,086
)
$
(5,942
)
Prior service cost
87
102
—
—
Total
$
9,632
$
9,222
$
(5,086
)
$
(5,942
)
The accumulated benefit obligation for all defined benefit pension plans was $24.4 million and $21.8 million at July 31, 2011 and 2010.
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of July 31 was as follows:
2011
2010
Projected benefit obligation
$
26,868
$
24,186
Accumulated benefit obligation
24,400
21,772
Fair value of plan assets
14,451
13,144
64
Components of net periodic benefit cost for the fiscal years ended July 31 were as follows:
Pension Benefits
Other Benefits
2011
2010
2009
2011
2010
2009
Net Periodic Benefit Cost / (Income)
Service cost
$
79
$
728
$
475
$
65
$
63
$
103
Interest cost
1,258
1,198
1,062
107
133
284
Expected return on plan assets
(1,031
)
(952
)
(1,059
)
—
—
—
Amortization of prior service cost
16
26
26
—
—
—
Amortization of net (gain) loss
643
517
37
(795
)
(824
)
(539
)
Curtailment cost
—
3
—
—
—
—
Net periodic benefit cost / (income)
$
965
$
1,520
$
541
$
(623
)
$
(628
)
$
(152
)
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.8 million and zero, respectively. The estimated net gain and prior service cost for the other defined benefit postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $0.8 million and zero, respectively.
For calculation of retiree medical benefit cost, prior service cost is amortized on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants. For calculation of net periodic pension cost, prior service cost is amortized on a straight-line basis over the average remaining years of service of the active plan participants.
Assumptions
Weighted-average assumptions used to determine benefit obligations at July 31 were as follows:
Pension Benefits
Other Benefits
2011
2010
2009
2011
2010
2009
Discount rate
5.00
%
5.28
%
5.80
%
4.70
%
5.00
%
5.80
%
Rate of compensation increase
5.50
5.50
5.50
N/A
N/A
N/A
Weighted-average assumptions used to determine net periodic benefit cost for the fiscal years ended July 31 were as follows:
Pension Benefits
Other Benefits
2011
2010
2009
2011
2010
2009
Discount rate
5.28
%
5.80
%
7.00
%
5.00
%
5.80
%
7.00
%
Expected long-term return on plan assets
8.00
8.00
8.00
N/A
N/A
N/A
Rate of compensation increase
5.50
5.50
5.50
N/A
N/A
N/A
The expected long-term rate of return on plan assets is based on the established asset allocation.
Assumed trend rates for medical plans were as follows:
2011
2010
2009
Health care cost trend rate assumed for next year
9.0
%
9.5
%
10.0
%
Rate to which the cost trend rate assumed to decline (the ultimate trend rate)
5.0
5.0
5.0
Year the rate reaches ultimate trend rate
2028
2020
2020
65
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
One
Percentage
Point
Increase
One
Percentage
Point
Decrease
Effect on total of service and interest cost
$
24
$
(20
)
Effect on post-retirement benefit obligation
250
(215
)
Plan Assets
The fair values of the Company’s pension plan assets by asset category were as follows (see Note 2 for description of levels):
Fair Value Measurements at July 31, 2011
Total
Level 1
Level 2
Level 3
Asset Category:
Cash and cash equivalents
$
419
$
—
$
419
$
—
Mutual funds - equity:
Domestic
5,681
5,681
—
—
International
2,180
2,180
—
—
Mutual funds - debt:
Government
1,909
1,909
—
—
Corporate
3,547
3,547
—
—
Other
715
715
—
—
Total
$
14,451
$
14,032
$
419
$
—
Fair Value Measurements at July 31, 2010
Total
Level 1
Level 2
Level 3
Asset Category:
Cash and cash equivalents
$
178
$
—
$
178
$
—
Mutual funds - equity:
Domestic
5,445
—
5,445
—
International
1,456
—
1,456
—
Pooled Funds
6,065
—
6,065
—
Total
$
13,144
$
—
$
13,144
$
—
Pension obligations and expenses are most sensitive to the expected return on pension plan assets and discount rate assumptions. Other post retirement benefit obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rate. Diamond determines the expected return on pension plan assets based on an expectation of the average annual returns over an extended period of time. This expectation is based, in part, on the actual returns achieved by the Company’s pension plan in prior periods. The Company also considers the weighted average historical rates of return on securities with similar characteristics to those in which the Company’s pension assets are invested.
The investment objectives for the Diamond plans are to maximize total returns within reasonable and prudent levels of risk. The plan asset allocation is a key element in achieving the expected investment returns on plan assets. The current asset allocation strategy targets an allocation of 60% for equity securities and 40% for debt securities with adequate liquidity to meet expected cash flow needs. Actual asset allocation may fluctuate within acceptable ranges due to market value variability. If fluctuations cause an asset class to fall outside its strategic asset allocation range, the portfolio will be rebalanced as appropriate.
66
Cash Flows
Estimated future benefit payments, which reflect expected future service, as appropriate, expected to be paid are as follows:
Pension
Benefits
Other
Benefits
2012
$
549
$
114
2013
4,515
126
2014
648
155
2015
738
162
2016
753
159
2017 - 2021
4,481
826
Defined Contribution Plan
The Company also recognized defined contribution plan expenses of $1.4 million, $0.7 million and $0.5 million for the years ended July 31, 2011, 2010 and 2009, respectively. The Company expects to contribute approximately $1.8 million to the defined contribution plan during fiscal 2012.
(15)
Restatement of Consolidated Financial Statements
Walnut Correction
Subsequent to the issuance of the fiscal 2011 consolidated financial statements, the Audit Committee initiated an independent investigation into walnut grower payments made subsequent to fiscal year end 2011 and 2010, of approximately $61.5 million (the “Momentum Payments”) and $20.8 million (the “Continuity Payments”), respectively. The Company previously accounted for those walnut grower payments as expenses in the fiscal years when the payments were made (fiscal 2012 and fiscal 2011, respectively), reflecting the payments as pre-payments for the walnut crop to be delivered in the respective fiscal years. As a result of an evaluation of the substance of information obtained in this investigation, we determined that the Momentum Payments and Continuity Payments related to the prior year walnut crops and such payments were not accounted for in the correct periods. The Company and Audit Committee concluded that the original accounting for the walnut grower payments in fiscal 2011 and fiscal 2010 was not sufficiently supported and was not based on consideration of all relevant information available at the time. Accordingly, the previously issued consolidated financial statements as of and for the years ended July 31, 2011 and 2010 needed to be restated to record these walnut grower payments in the appropriate periods.
For fiscal 2011, the corrected walnut costs increased cost of sales by $35.6 million for inventories sold during the fiscal year ended July 31, 2011, increased inventories by $7.7 million for inventories not sold as of July 31, 2011 and increased accounts payable and accrued liabilities by $61.5 million. For fiscal 2010, the corrected walnut costs increased cost of sales by $18.3 million for inventories sold during the fiscal year ended July 31, 2010, increased inventories by $2.5 million for inventories not sold as of July 31, 2010 and increased accounts payable and accrued liabilities by $20.8 million. The effect of correcting these errors for the fiscal years ended July 31, 2011 and 2010 is summarized below. The corrections summarized below include consideration of the income tax effect of the restatement adjustments. The corrections summarized below include consideration of the income tax effect of the restatement adjustments.
Accounts Payable and Accrued Expenses Correction
Subsequent to the issuance of the consolidated financial statements for the fiscal year ended July 31, 2011, an invoice for services related to the then-pending Pringles merger was identified as not properly accrued for as of July 31, 2011. In response to this information, the Company performed an extensive review of vendor invoices
67
and supporting documentation to determine whether other unrecorded liabilities existed for the periods in the fiscal years ended July 31, 2011 and 2010. The review identified certain expenses that were not properly reflected in accounts payable and accrued liabilities as of July 31, 2011 and 2010. Accordingly, we restated net income with a decrease of $3.5 million and $0.1 million for fiscal 2011 and fiscal 2010, respectively, to correct accounts payable and accrued liabilities and related expenses or capitalized costs. The effect of correcting these errors for the fiscal years ended July 31, 2011 and 2010 is summarized below. The corrections summarized below include consideration of the income tax effect of the restatement adjustments. The corrections summarized below include consideration of the income tax effect of the restatement adjustments.
Other Corrections
In addition to the restatements described above, the Company has made other corrections, some of which were previously identified, but were not corrected because management had determined they were not material, individually or in the aggregate, to our consolidated financial statements. These corrections related to stock-based compensation, foreign currency translation, timing of prepaid and expense recognition, capital lease designation, and deferred income tax. The effect of correcting these errors for the fiscal years ended July 31, 2011 and 2010 is summarized below. The corrections summarized below include consideration of the income tax effect of the restatement adjustments. The corrections summarized below include consideration of the income tax effect of the restatement adjustments.
Additionally, the Company has corrected certain disclosures, the most significant of which are discussed below:
•
Expected volatility assumptions used in the Black-Scholes model for the fiscal years ended July 31, 2011 and July 31, 2010, were previously reported as 35.25% and 46.00%, respectively, and were restated to 41.63% and 43.77%, respectively. This change impacted several disclosures in Note 3 to the Notes to Consolidated Financial Statements. The weighted average fair value per share of options granted during 2011 was previously reported as $16.37 and restated to $18.95. The total fair value of options vested during 2011 was previously reported as $2.0 million and restated to $2.1 million. The unrecognized compensation cost net of forfeitures related to nonvested stock options as of July 31, 2011 was previously reported as $7.2 million and restated to $7.7 million. The unrecognized compensation cost net of forfeitures related to nonvested restricted stock awards as of July 31, 2011 was previously reported as $9.9 million and restated to $8.2 million. Finally, the change in expected volatility impacted the calculation of diluted shares for the year ended July 31, 2011 resulting in a decrease from 22,241,581 previously reported to 22,233,143 as restated.
•
As of July 31, 2011, the weighted average period over which total unrecognized compensation cost net of forfeitures related to nonvested stock options is expected to be recognized was previously reported as 2.2 years and was restated to 2.7 years.
•
Note 1 to the Notes to Consolidated Financial Statements includes previously omitted disclosures related to related party transactions and our foreign currency translation policy.
•
Note 14 to the Notes to Consolidated Financial Statements includes a disclosure for expected contributions to the defined contribution plan. Additionally, the defined contribution plan expenses for the year ended July 31, 2011 were previously reported as $1.2 million and were restated to $1.4 million.
68
The effects of the restatement on the consolidated balance sheet as of July 31, 2011 are summarized in the following table:
July 31, 2011
(In thousands, except share and
per share information)
Previously
Reported
Walnut
Correction
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
ASSETS
Current assets:
Cash and cash equivalents
$
3,112
$
—
$
—
$
—
$
3,112
Trade receivables, net
98,218
—
—
57
98,275
Inventories
145,575
7,678
8
273
153,534
Deferred income taxes
13,249
—
—
1,241
14,490
Prepaid income taxes
2,783
17,611
1,455
(4,350
)
17,499
Prepaid expenses and other current assets
13,102
—
—
(13
)
13,089
Total current assets
276,039
25,289
1,463
(2,792
)
299,999
Restricted cash
15,795
—
—
—
15,795
Property, plant and equipment, net
127,407
—
1,683
5,185
134,275
Deferred income taxes
3,870
—
—
1,506
5,376
Goodwill
407,587
—
—
2,148
409,735
Other intangible assets, net
450,855
—
—
—
450,855
Other long-term assets
6,842
—
30
—
6,872
Total assets
$
1,288,395
$
25,289
$
3,176
$
6,047
$
1,322,907
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
41,700
$
—
$
—
$
—
$
41,700
Accounts payable and accrued liabilities
144,060
61,514
6,826
(6,547
)
205,853
Total current liabilities
185,760
61,514
6,826
(6,547
)
247,553
Long-term obligations
490,001
—
—
—
490,001
Deferred income taxes
131,870
—
—
600
132,470
Other liabilities
25,969
—
—
6,419
32,388
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding
—
—
—
—
—
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 22,319,016 and 22,121,534 shares issued and 22,049,636 and 21,891,928 shares outstanding at July 31, 2011 and 2010, respectively
22
—
—
—
22
Treasury stock, at cost: 269,380 and 229,606 shares at July 31, 2011 and 2010, respectively
(6,867
)
—
—
—
(6,867
)
Additional paid-in capital
318,083
—
—
651
318,734
Accumulated other comprehensive income
18,500
—
—
(772
)
17,728
Retained earnings
125,057
(36,225
)
(3,650
)
5,696
90,878
Total stockholders’ equity
454,795
(36,225
)
(3,650
)
5,575
420,495
Total liabilities and stockholders’ equity
$
1,288,395
$
25,289
$
3,176
$
6,047
$
1,322,907
69
The effects of the restatement on the consolidated balance sheet as of July 31, 2010 are summarized in the following table:
July 31, 2010
(In thousands, except share and
per share information)
Previously
Reported
Walnut
Correction
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
ASSETS
Current assets:
Cash and cash equivalents
$
5,642
$
—
$
—
$
—
$
5,642
Trade receivables, net
65,553
—
—
145
65,698
Inventories
143,405
2,480
—
(53
)
145,832
Deferred income taxes
10,497
—
—
1,721
12,218
Prepaid income taxes
9,225
5,913
24
(1,580
)
13,582
Prepaid expenses and other current assets
5,767
—
—
(375
)
5,392
Total current assets
240,089
8,393
24
(142
)
248,364
Property, plant and equipment, net
117,816
—
419
—
118,235
Deferred income taxes
13,625
—
—
(9,253
)
4,372
Goodwill
396,788
—
—
6,476
403,264
Other intangible assets, net
449,018
—
—
4,089
453,107
Other long-term assets
8,536
—
—
194
8,730
Total assets
$
1,225,872
$
8,393
$
443
$
1,364
$
1,236,072
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
40,000
$
—
$
—
$
—
$
40,000
Accounts payable and accrued liabilities
127,921
20,750
549
(3,464
)
145,756
Total current liabilities
167,921
20,750
549
(3,464
)
185,756
Long-term obligations
516,100
—
—
—
516,100
Deferred income taxes
144,755
—
—
(5,680
)
139,075
Other liabilities
17,153
—
—
1,445
18,598
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding
—
—
—
—
—
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 22,121,534 and 16,753,796 shares issued and 21,891,928 and 16,552,019 shares outstanding at July 31, 2010 and 2009, respectively
22
—
—
—
22
Treasury stock, at cost: 229,606 and 201,777 shares at July 31, 2010 and 2009, respectively
(5,050
)
—
—
—
(5,050
)
Additional paid-in capital
307,032
—
—
765
307,797
Accumulated other comprehensive income (loss)
(869
)
—
—
6,370
5,501
Retained earnings
78,808
(12,357
)
(106
)
1,928
68,273
Total stockholders’ equity
379,943
(12,357
)
(106
)
9,063
376,543
Total liabilities and stockholders’ equity
$
1,225,872
$
8,393
$
443
$
1,364
$
1,236,072
70
The effects of the restatement on the consolidated statement of operations for the year ended July 31, 2011 are summarized in the following table:
Year Ended July 31, 2011
(In thousands, except per share information)
Previously
Reported
Walnut
Correction
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
Net sales
$
965,922
$
—
$
—
$
766
$
966,688
Cost of sales
714,775
35,566
341
(473
)
750,209
Gross profit
251,147
(35,566
)
(341
)
1,239
216,479
Operating expenses:
Selling, general and administrative
96,960
—
161
385
97,506
Advertising
44,415
—
620
—
45,035
Acquisition and integration related expenses
16,792
—
3,853
(295
)
20,350
Total operating expenses
158,167
—
4,634
90
162,891
Income from operations
92,980
(35,566
)
(4,975
)
1,149
53,588
Interest expense, net
23,840
—
—
78
23,918
Income before income taxes
69,140
(35,566
)
(4,975
)
1,071
29,670
Income taxes
18,929
(11,698
)
(1,431
)
(2,697
)
3,103
Net income
$
50,211
$
(23,868
)
$
(3,544
)
$
3,768
$
26,567
Earnings per share:
Basic
$
2.28
$
(1.08
)
$
(0.16
)
$
0.17
$
1.21
Diluted
$
2.22
$
(1.06
)
$
(0.16
)
$
0.17
$
1.17
Shares used to compute earnings per share:
Basic
21,577
—
—
—
21,577
Diluted
22,242
—
—
(9
)
22,233
Dividends declared per share
$
0.18
$
—
$
—
$
—
$
0.18
71
The effects of the restatement on the consolidated statement of operations for the year ended July 31, 2010 are summarized in the following table:
Year Ended July 31, 2010
(In thousands, except per share information)
Previously
Reported
Walnut
Correction
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
Net sales
$
680,162
$
—
$
—
$
2,164
$
682,326
Cost of sales
519,161
18,270
—
53
537,484
Gross profit
161,001
(18,270
)
—
2,111
144,842
Operating expenses:
Selling, general and administrative
64,301
—
130
120
64,551
Advertising
32,962
—
—
764
33,726
Acquisition and integration related expenses
11,508
—
—
(180
)
11,328
Total operating expenses
108,771
—
130
704
109,605
Income from operations
52,230
(18,270
)
(130
)
1,407
35,237
Interest expense, net
10,180
—
—
—
10,180
Other expense, net
1,849
—
—
—
1,849
Income before income taxes
40,201
(18,270
)
(130
)
1,407
23,208
Income taxes
13,990
(5,913
)
(24
)
(521
)
7,532
Net income
$
26,211
$
(12,357
)
$
(106
)
$
1,928
$
15,676
Earnings per share:
Basic
$
1.40
$
(0.66
)
$
—
$
0.10
$
0.84
Diluted
$
1.36
$
(0.63
)
$
(0.01
)
$
0.10
$
0.82
Shares used to compute earnings per share:
Basic
18,313
—
—
—
18,313
Diluted
18,843
—
—
—
18,843
Dividends declared per share
$
0.18
$
—
$
—
$
—
$
0.18
72
The effects of the restatement on the consolidated statement of cash flows for the year ended July 31, 2011 are summarized in the following table:
Year Ended July 31, 2011
(In thousands)
Previously
Reported
Walnut
Correction
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
50,211
$
(23,868
)
$
(3,544
)
$
3,768
$
26,567
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
29,465
—
—
400
29,865
Deferred income taxes
(7,534
)
—
—
(2,998
)
(10,532
)
Excess tax benefit from stock option transactions
(2,274
)
—
—
827
(1,447
)
Stock-based compensation
6,974
—
—
713
7,687
Other, net
1,055
—
—
—
1,055
Changes in assets and liabilities:
Trade receivables
(32,665
)
—
—
(210
)
(32,875
)
Inventories
(2,170
)
(5,198
)
(8
)
(327
)
(7,703
)
Prepaid expenses and other current assets and income taxes
(893
)
(11,698
)
(1,431
)
2,706
(11,316
)
Accounts payable and accrued liabilities
17,577
40,764
5,013
(4,981
)
58,373
Other, net
5,921
—
(30
)
1,126
7,017
Net cash provided by operating activities
65,667
—
—
1,024
66,691
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(27,703
)
—
—
—
(27,703
)
Deposits of restricted cash
(21,200
)
—
—
—
(21,200
)
Proceeds from restricted cash
5,405
—
—
—
5,405
Other, net
262
—
—
—
262
Net cash used in investing activities
(43,236
)
—
—
—
(43,236
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of revolving line of credit under the Secured Credit Facility
(4,800
)
—
—
—
(4,800
)
Proceeds from issuance of long-term debt
21,350
—
—
—
21,350
Payment of long-term debt and notes payable
(40,884
)
—
—
85
(40,799
)
Dividends paid
(3,962
)
—
—
—
(3,962
)
Excess tax benefit from stock option transactions
2,274
—
—
(827
)
1,447
Other, net
940
—
—
(282
)
658
Net cash used in financing activities
(25,082
)
—
—
(1,024
)
(26,106
)
Effect of exchange rate changes on cash
121
—
—
—
121
Net decrease in cash and cash equivalents
(2,530
)
—
—
—
(2,530
)
Cash and cash equivalents:
Beginning of period
5,642
—
—
—
5,642
End of period
$
3,112
$
—
$
—
$
—
$
3,112
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
$
21,998
$
—
$
—
$
754
$
22,752
Income taxes
8,751
—
—
—
8,751
Non-cash investing activities:
Accrued capital expenditures
2,323
—
1,683
—
4,006
Capital lease
—
—
—
5,376
5,376
73
The effects of the restatement on the consolidated statement of cash flows for the year ended July 31, 2010 are summarized in the following table:
Year Ended July 31, 2010
(In thousands)
Previously
Reported
Walnut
Correction
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
26,211
$
(12,357
)
$
(106
)
$
1,928
$
15,676
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization
17,154
—
—
—
17,154
Deferred income taxes
7,072
—
—
(1,095
)
5,977
Excess tax benefit from stock option transactions
(434
)
—
—
(258
)
(692
)
Stock-based compensation
3,231
—
—
507
3,738
Other, net
1,109
—
—
—
1,109
Changes in assets and liabilities:
Trade receivables, net
(2,873
)
—
—
(145
)
(3,018
)
Inventories
(45,852
)
(2,480
)
—
53
(48,279
)
Prepaid expenses and other current assets and income taxes
(6,437
)
(5,913
)
(24
)
1,955
(10,419
)
Accounts payable and accrued liabilities
(5,462
)
20,750
130
(5,987
)
9,431
Other, net
4,693
—
—
2,784
7,477
Net cash used in operating activities
(1,588
)
—
—
(258
)
(1,846
)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(11,790
)
—
—
—
(11,790
)
Acquisitions, net of cash acquired
(615,389
)
—
—
—
(615,389
)
Other, net
618
—
—
—
618
Net cash used in investing activities
(626,561
)
—
—
—
(626,561
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving line of credit borrowings under the Secured Credit Facility
176,000
—
—
—
176,000
Repayment of revolving line of credit under the Secured Credit Facility
(9,900
)
—
—
—
(9,900
)
Proceeds from issuance of long-term debt
400,000
—
—
—
400,000
Debt issuance costs
(8,852
)
—
—
—
(8,852
)
Payment of long-term debt and notes payable
(125,119
)
—
—
—
(125,119
)
Gross proceeds from equity offering
191,475
—
—
—
191,475
Equity offering costs
(11,738
)
—
—
—
(11,738
)
Dividends paid
(3,462
)
—
—
—
(3,462
)
Excess tax benefit from stock option transactions
434
—
—
258
692
Other, net
24
—
—
—
24
Net cash provided by financing activities
608,862
—
—
258
609,120
Effect of exchange rate changes on cash
127
—
—
—
127
Net decrease in cash and cash equivalents
(19,160
)
—
—
—
(19,160
)
Cash and cash equivalents:
Beginning of period
24,802
—
—
—
24,802
End of period
$
5,642
$
—
$
—
$
—
$
5,642
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
$
9,088
$
—
$
—
$
—
$
9,088
Income taxes
11,113
—
—
(467
)
10,646
Non-cash investing activities:
Accrued capital expenditures
1,076
—
419
—
1,495
74
(16) Quarterly Financial Information (unaudited)
Subsequent to the issuance of the fiscal 2011 consolidated financial statements, the Company identified Walnut Correction errors as described in Note 15 of the Notes to Consolidated Financial Statements that affected the interim condensed consolidated financial statements as of and for the interim periods within the years ended July 31, 2011 and 2010. Additionally, as a result of this error in walnut cost for inventories not sold as of July 31, 2010, cost of sales for the interim period ended October 31, 2010 was affected for the related inventories sold during the period. Further, the Company and Audit Committee concluded that the original quarterly walnut crop cost estimates used in certain interim periods of fiscal 2011 and fiscal 2010 as well as the subsequent changes to the estimates in certain interim periods were not sufficiently supported and were not based on consideration of all relevant information available at the time. Accordingly, the previously issued condensed consolidated financial statements as of and for the periods ended January 31, 2010, April 30, 2010, July 31, 2010 and October 31, 2010, January 31, 2011, April 30, 2011 and July 31, 2011 are restated to correct for these errors.
Fiscal 2011 Quarterly Walnut Estimate Correction
The Company’s original walnut cost estimates used for the periods ended October 31, 2010, January 31, 2011, and April 30, 2011 were not sufficiently supported and were not based on consideration of all relevant information available at the time. We have determined that the contemporaneously available relevant information supports a correction of the original walnut cost estimates in those periods. The Company’s consolidated financial statements for the interim period and fiscal year ended July 31, 2011 are restated to record the Momentum Payments as a cost for fiscal 2011 as it related to the fiscal 2011 walnut crop. The effect of correcting these errors on each of the applicable interim periods in the fiscal year ended July 31, 2011 is summarized in the tables below. The corrections summarized below include consideration of the income tax effect of the restatement adjustments.
Fiscal 2010 Quarterly Walnut Estimate Correction
The Company’s original walnut cost estimate used for the periods ended January 31, 2010 and April 30, 2010 were not sufficiently supported and were not based on consideration of all relevant information available at the time. We have determined that the contemporaneously available relevant information supports a correction of the original walnut cost estimates in those periods. The Company’s consolidated financial statements for the interim period and fiscal year ended July 31, 2010 are restated to record the Continuity Payments as a cost for fiscal 2010 as it related to the fiscal 2010 walnut crop. The effect of correcting these errors on each of the applicable interim periods in the fiscal year ended July 31, 2010 is summarized in the tables below. The corrections summarized below include consideration of the income tax effect of the restatement adjustments.
Accounts Payable and Accrued Expenses Correction
Subsequent to the issuance of the consolidated financial statements for the fiscal year ended July 31, 2011, an invoice for services related to the then-pending Pringles merger was identified as not properly accrued for as of July 31, 2011. In response to this information, the Company performed an extensive review of vendor invoices and supporting documentation to determine whether other unrecorded liabilities existed in the interim periods or the fiscal years ended July 31, 2011 and 2010. The review identified certain expenses that were not properly reflected in accounts payable and accrued liabilities as of July 31, 2011 and 2010 and the associated interim periods. The effect of correcting these errors on each of the applicable interim periods in the fiscal years ended July 31, 2011 and 2010 are summarized below. The corrections summarized below include consideration of the income tax effect of the restatement adjustments.
75
Other Corrections
In addition to the restatements described above, the Company has made other corrections, some of which were previously identified, but were not corrected because management had determined they were not material, individually or in the aggregate, to our consolidated financial statements. These corrections related to stock-based compensation, foreign currency translation, timing of prepaid and expense recognition, capital lease designation, pecan inventory valuation, and deferred income tax. The Company also determined that a pecan inventory purchase price variance related to the second quarter of fiscal 2011 that had been previously recorded as an out of period adjustment in the third quarter of fiscal 2011 should be corrected. The Company has corrected this amount by decreasing pecan inventories by $3.0 million and increasing cost of sales by $3.0 million in the second quarter of fiscal 2011 to properly reflect the purchase price variance in the second quarter. The effect of correcting these errors on each of the applicable interim periods in the fiscal years ended July 31, 2011 and 2010 are summarized below. The corrections summarized below include consideration of the income tax effect of the restatement adjustments.
4th Quarter
(Condensed and unaudited)
Previously
Reported
Walnut
Corrections
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
For the three months ended July 31, 2011
Net sales
$
232,773
$
—
$
—
$
1,944
$
234,717
Gross profit (1)
57,107
(10,227
)
(341
)
2,364
48,903
Operating expenses (2)
45,145
—
4,764
(498
)
49,411
Income from operations
11,962
(10,227
)
(5,105
)
2,862
(508
)
Net income (loss)
8,544
(7,239
)
(3,614
)
5,145
2,836
Basic earnings (loss) per share
0.39
(0.33
)
(0.16
)
0.23
0.13
Basic shares (in thousands)
21,652
—
—
—
21,652
Diluted earnings (loss) per share
0.37
(0.32
)
(0.16
)
0.23
0.12
Diluted shares (in thousands)
22,577
—
—
(8
)
22,569
3rd Quarter
(Condensed and unaudited)
Previously
Reported
Walnut
Corrections
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
For the three months ended April 30, 2011
Net sales
$
222,991
$
—
$
—
$
75
$
223,066
Gross profit (1)
59,588
(10,162
)
—
3,064
52,490
Operating expenses (2)
42,035
—
(288
)
151
41,898
Income from operations
17,553
(10,162
)
288
2,913
10,592
Net income
7,733
(6,397
)
181
1,834
3,351
Basic earnings per share
0.35
(0.29
)
0.01
0.08
0.15
Basic shares (in thousands)
21,604
—
—
—
21,604
Diluted earnings per share
0.34
(0.28
)
0.01
0.08
0.15
Diluted shares (in thousands)
22,341
—
—
(9
)
22,332
76
2nd Quarter
(Condensed and unaudited)
Previously
Reported
Walnut
Corrections
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
For the three months ended January 31, 2011
Net sales
$
257,592
$
—
$
—
$
(748
)
$
256,844
Gross profit (1)
70,856
(8,225
)
—
(3,653
)
58,978
Operating expenses (2)
34,916
—
158
171
35,245
Income from operations
35,940
(8,225
)
(158
)
(3,824
)
23,733
Net income
19,720
(5,809
)
(112
)
(2,701
)
11,098
Basic earnings per share
0.90
(0.26
)
(0.01
)
(0.12
)
0.51
Basic shares (in thousands)
21,565
—
—
—
21,565
Diluted earnings per share
0.87
(0.26
)
—
(0.12
)
0.49
Diluted shares (in thousands)
22,221
—
—
(9
)
22,212
1st Quarter
(Condensed and unaudited)
Previously
Reported
Walnut
Corrections
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
For the three months ended October 31, 2010
Net sales
$
252,566
$
—
$
—
$
(505
)
$
252,061
Gross profit (1)
63,596
(6,952
)
—
(536
)
56,108
Operating expenses (2)
36,071
—
—
266
36,337
Income from operations
27,525
(6,952
)
—
(802
)
19,771
Net income
14,214
(4,422
)
—
(510
)
9,282
Basic earnings per share
0.65
(0.21
)
—
(0.02
)
0.42
Basic shares (in thousands)
21,489
—
—
—
21,489
Diluted earnings per share
0.64
(0.20
)
—
(0.02
)
0.42
Diluted shares (in thousands)
21,947
—
—
(14
)
21,933
4th Quarter
(Condensed and unaudited)
Previously
Reported
Walnut
Corrections
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
For the three months ended July 31, 2010
Net sales
$
176,618
$
—
$
—
$
1,972
$
178,590
Gross profit
43,839
(2,876
)
—
1,919
42,882
Operating expenses (3)
28,503
—
130
687
29,320
Income from operations
15,336
(2,876
)
(130
)
1,232
13,562
Net income (loss)
6,740
(2,345
)
(106
)
1,837
6,126
Basic earnings (loss) per share
0.31
(0.11
)
(0.01
)
0.09
0.28
Basic shares (in thousands)
21,503
—
—
—
21,503
Diluted earnings (loss) per share
0.30
(0.11
)
(0.01
)
0.09
0.27
Diluted shares (in thousands)
22,097
—
—
—
22,097
77
3rd Quarter
(Condensed and unaudited)
Previously
Reported
Walnut
Corrections
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
For the three months ended April 30, 2010
Net sales and other revenues
$
138,734
$
—
$
—
$
75
$
138,809
Gross profit
31,093
(4,709
)
—
75
26,459
Operating expenses (3)
32,991
—
—
263
33,254
Income from operations
(1,898
)
(4,709
)
—
(188
)
(6,795
)
Net income
(4,273
)
(3,385
)
—
(135
)
(7,793
)
Basic earnings per share
(0.22
)
(0.17
)
—
(0.01
)
(0.40
)
Basic shares (in thousands)
19,313
—
—
—
19,313
Diluted earnings per share
(0.22
)
(0.17
)
—
(0.01
)
(0.40
)
Diluted shares (in thousands)
19,313
—
—
—
19,313
In March 2010, Diamond completed its acquisition of Kettle Foods. For details regarding the Kettle Foods acquisition please refer to Note 5 of the Notes to Consolidated Financial Statements.
2nd Quarter
(Condensed and unaudited)
Previously
Reported
Walnut
Corrections
Accounts
Payable and
Accrued
Expenses
Correction
Other
Corrections
Restated
For the three months ended January 31, 2010
Net sales and other revenues
$
184,169
$
—
$
—
$
117
$
184,286
Gross profit
40,578
(10,685
)
—
117
30,010
Operating expenses (3)
27,488
—
—
(246
)
27,242
Income from operations
13,090
(10,685
)
—
363
2,768
Net income
8,814
(6,627
)
—
226
2,413
Basic earnings per share
0.53
(0.39
)
—
0.01
0.15
Basic shares (in thousands)
16,280
—
—
—
16,280
Diluted earnings per share
0.52
(0.39
)
—
0.01
0.14
Diluted shares (in thousands)
16,764
—
—
—
16,764
1st Quarter
(Condensed and unaudited)
For the three months ended October 31, 2009
Net sales
$
180,641
Gross profit
45,491
Operating expenses (3)
19,789
Income from operations
25,702
Net income (loss)
14,930
Basic earnings (loss) per share
0.90
Basic shares (in thousands)
16,269
Diluted earnings (loss) per share
0.88
Diluted shares (in thousands)
16,685
(1)
A change in the cost of inventories sold during the previous quarters in the fiscal year results in a pre-tax increase or decrease in cost of sales. Diamond routinely revises its estimate for expected walnut costs to
78
reflect changes in market conditions and other factors. In the quarter ended July 31, 2011, there was a pre-tax increase in cost of sales of approximately $1.6 million, due to the increase in estimated cost of inventories sold during the previous quarters of fiscal 2011. There were no such changes in estimates in the quarters ended January 31, 2011 and April 30, 2011.
(2)
Includes acquisition and integration related expenses of $12.9 million, $5.9 million, $1.0 million and $0.6 million for the quarters ended July 31, 2011, April 30, 2011, January 31, 2011 and October 31, 2010, respectively.
(3)
Includes acquisition and integration related expenses of $10.2 million and $1.1 million for the quarters ended April 30, 2010 and July 31, 2010, respectively.
(17)
Subsequent Events
On February 8, 2012, the Audit Committee of Diamond’s Board of Directors substantially completed its investigation of the Company’s accounting for certain crop payments to walnut growers. The Audit Committee concluded that Diamond’s consolidated financial statements for fiscal 2010 and fiscal 2011 would need to be restated and identified material weaknesses in the Company’s internal control over financial reporting.
On April 5, 2011, Diamond entered into a definitive agreement with P&G to merge P&G’s Pringles business into the Company. On February 15, 2012, Diamond and P&G mutually agreed to terminate this transaction. No “break-up” fee or other fees were paid to P&G in connection with the termination, which included a mutual release. Acquisition related expenses associated with the proposed transaction of $7.0 million, the majority of which were primarily capitalized in fiscal 2011 and subsequently expensed in fiscal 2012, and primarily included contract termination costs related to facilities, a lease for an office in London and software that were no longer needed due to the termination of the merger.
On March 21, 2012, Diamond reached an agreement with its lenders to forbear from seeking any remedies under Secured Credit Facility with respect to specified existing and anticipated non-compliance with the credit agreement and to amend its credit agreement. Under the amended credit agreement, Diamond had continued access to its existing revolving credit facility through a forbearance period (initially through June 18, 2012) subject to Diamond’s compliance with the terms and conditions of the amended credit agreement. During the forbearance period, the interest rate on borrowings increased. The amended credit agreement required Diamond to suspend dividend payments to stockholders. In addition, Diamond paid a forbearance fee of 0.25% to its lenders. The forbearance period concluded on May 29, 2012, when Diamond closed agreements to recapitalize its balance sheet with an investment by Oaktree Capital Management, L.P. (“Oaktree”).
The Oaktree investment initially consists of $225 million of newly-issued senior notes and warrants to purchase approximately 4.4 million shares of Diamond common stock. The senior notes will mature in 2020 and will bear interest at 12% per year that may be paid-in-kind at Diamond’s option for the first two years. Oaktree’s warrants will be exercisable at $10 per share, and would constitute a fully diluted ownership level of approximately 16.4% of the Company. The Oaktree agreements provide that if Diamond secures a specified minimum supply of walnuts from the 2012 crop and achieves profitability targets for its nut businesses for the six-month period ending January 31, 2013, all of the warrants will be cancelled and Oaktree may exchange $75 million of the senior notes for convertible preferred stock of Diamond (the “Special Redemption”). The convertible preferred stock would have an initial conversion price of $20.75, which represents a 3.5% discount to the closing price of Diamond common stock on April 25, 2012, the date that the Company entered into its commitment with Oaktree. The convertible preferred stock would pay a 10% dividend that would be paid in-kind for the first two years. Diamond does not currently anticipate that the Special Redemption will occur.
79
The Secured Credit Facility initially included a covenant that restricts the amount of indebtedness (including capital leases and purchase money obligations for fixed or capital assets) to no more than $25 million. On January 30, 2012, Diamond entered into a five-year equipment lease for its Norfolk, UK plant (the “Kettle UK Lease”) that has been treated as a capital lease for accounting purposes. The accounting treatment for the Kettle US Lease and the Kettle UK Lease caused the Company to be in default of the Secured Credit Facility covenant limiting other indebtedness. These defaults were waived, with respect to the Kettle UK Lease on July 27, 2012, and with respect to the Kettle US Lease on August 23, 2012. Additionally, the Secured Credit Facility and the Oaktree agreement were each amended to allow Diamond to incur up to $31 million of capital leases and purchase money obligations for fixed or capital assets, which amount will be reduced from and after December 31, 2013 (a) to $25 million under the Secured Credit Facility and (b) to $27.5 million under the Oaktree agreement.
On December 20, 2010, Kettle Foods obtained, and Diamond guaranteed, Guaranteed Loan in the principal amount of $21.2 million, of which $20.4 million was outstanding as of July 31, 2011. Principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan is being used to purchase equipment for our Beloit, Wisconsin plant expansion. Borrowed funds were placed in an interest-bearing escrow account. Withdrawals from the escrow account were restricted to reimburse, dollar-for-dollar, approved expenditures directly related to equipment purchases. As the cash is being used to purchase non-current assets, such restricted cash is classified as non-current on the balance sheet. The Guaranteed Loan also provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility. Initially, there was a limit to the debt to EBITDA ratio to no more than 4.35 to 1.00, and the fixed charge coverage ratio to no less than 1.05 to 1.00. As a result of the errors identified causing the restatement of the consolidated financial statements, we were in default with certain financial and reporting covenants, which non-compliance was waived as of July 31, 2012. In addition, the financial covenants within the Guaranteed Loan were reset to match those in the Third Amendment.
On May 22, 2012, Diamond entered into the Third Amendment, which provided for a lower level of total bank debt, initially at $475 million, along with substantial covenant relief until October 31, 2013. At that time, these covenants will become applicable at revised levels set forth in the Third Amendment (initially 4.70 to 1.00 for the senior leverage ratio, declining over four quarters to 3.25 to 1.00 in the quarter ending July 31, 2014 and thereafter, and 2.00 to 1.00 for the fixed charge coverage ratio). The Third Amendment includes a new covenant requiring that Diamond have at least $20 million of cash, cash equivalents and revolving credit availability beginning February 1, 2013. In addition, the Third Amendment required a $100 million pre-payment of the term loan facility, while reducing the remaining scheduled principal payments from $10 million to $0.9 million. The Third Amendment also amends the definition of “Applicable Rate” under the Secured Credit Agreement (which sets the margin over the London Interbank Offered Rate (“LIBOR”) and the Base Rate at which loans under the Secured Credit Agreement bear interest). Initially, Eurodollar rate loans will bear interest at 5.50% plus the LIBOR for the applicable loan period, and Base Rate loans will bear interest at 4.50% plus the highest of (i) the Federal Funds Rate plus 0.50%, (ii) the Prime Rate, (iii) Eurodollar Rates plus 1.00%. The LIBOR rate is subject to a LIBOR floor, initially 1.25% (the “LIBOR Floor”). The margins over LIBOR and the Base Rate, and the LIBOR Floor, and the Base Rate will decline if and when Diamond achieves reductions in its ratio of senior debt to EBITDA. The Third Amendment also eliminates the requirement that proceeds of future equity issuances be applied to repay outstanding loans, and waives certain covenants that the Company was non-compliant with in connection with Diamond’s restatement of its consolidated financial statements.
On October 25, 2012, Diamond announced a plan to consolidate its manufacturing operations and will close its leased facility in Fishers, Indiana. Certain manufacturing equipment at Fishers will be relocated to our facility in Stockton, California. Additionally, the Company will record an impairment charge of approximately $4 million associated with Fishers’ equipment that will not be utilized.
80
Item 9A. Controls and Procedures
We have established and currently maintain disclosure controls and procedures that are designed to provide reasonable assurance that material information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission, and that any material information relating to the Company is recorded, processed, summarized and reported to our principal officers to allow timely decisions regarding required disclosures.
Restatement of Prior Period Financial Statements
On November 1, 2011, we announced that the Audit Committee of our Board of Directors was conducting an internal investigation of our accounting for certain crop payments made to walnut growers. Subsequent to fiscal year end 2011 and 2010 we made payments to walnut growers of approximately $61.5 million and $20.8 million, referred to as Momentum Payments and Continuity Payments, respectively. As a result of an evaluation of the substance of information obtained in this investigation, we determined that the Momentum Payments and Continuity Payments related to the prior year walnut crops and such payments were not accounted for in the correct periods. Accordingly, the previously issued consolidated financial statements as of and for the fiscal years ended July 31, 2011 and 2010 needed to be restated to record these walnut grower payments in the appropriate periods.
The Company has determined that it is appropriate to restate the consolidated financial statements to reflect the Momentum and Continuity Payments as payments for the walnut crop delivered in the prior fiscal year (fiscal 2011 and fiscal 2010, respectively). In determining which quarters should reflect the corrections, the Company and Audit Committee concluded that the original quarterly walnut crop cost estimates used in certain interim periods of fiscal 2011 and 2010 were not sufficiently supported and were not based on consideration of all relevant information available at the time. In addition, we made corrections to accounts payable and accrued liabilities to record expenses in the proper periods, and other adjustments discovered subsequent to the initial filing of our Annual Report on Form10-K for the fiscal year ended July 31, 2011. Finally, we made other corrections to address items that were previously identified but that had not been deemed material individually and in the aggregate. For further information related to the restatements see Note 15 of the Notes to Consolidated Financial Statements.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that information relating to the Company is accumulated and communicated to our principal officers as appropriate to allow timely decisions regarding required disclosure. In connection with the September 2011 filing of our original Annual Report on Form 10-K for the year ended July 31, 2011, our former Chief Executive Officer and former Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2011, and based on that evaluation they concluded that our disclosure controls and procedures were effective. In connection with the restatement of our consolidated financial statements described in Note 15 of our Notes to Consolidated Financial Statements, our current President and Chief Executive Officer and our Interim Chief Financial Officer re-evaluated the effectiveness of our disclosure controls and procedures as of July 31, 2011. As a result of that re-evaluation, management determined that due to the material weaknesses in our internal control over financial reporting described below, the Company’s disclosure controls and procedures were not effective as of July 31, 2011. Notwithstanding the material weaknesses, management, including our current President and Chief Executive Officer and Interim Chief Financial Officer, has concluded that the consolidated financial statements included in this amendment present fairly, in all material respects, our financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States.
81
Changes in Internal Control Over Financial Reporting
We acquired Kettle Foods on March 31, 2010, and as a result, we updated our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our fiscal year ended July 31, 2011, to include specific controls for Kettle Foods. Otherwise, there were no changes in our internal control over financial reporting during the three months ended July 31, 2011 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. The material weaknesses in our internal control over financial reporting discussed below were identified after the original filing of our Annual Report on Form 10-K for the year ended July 31, 2011, and we have begun remediating those control deficiencies, as discussed below.
82
Management’s Report on Internal Control Over Financial Reporting (As Revised)
Company management is responsible for establishing and maintaining adequate internal control over financial reporting (as is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934). Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of our financial statements in accordance with generally accepted accounting principles. A system of internal control over financial reporting has inherent limitations and may not prevent or detect all misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. We used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting as of July 31, 2011. Based on the initial evaluation of the effectiveness of our internal control over financial reporting as of July 31, 2011, our former management concluded that our internal control over financial reporting was effective as of July 31, 2011 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. However, in connection with the internal investigation and the related restatements of our consolidated financial statements described in Note 15 to the Notes to Consolidated Financial Statements, current management re-evaluated the effectiveness of our internal control over financial reporting and determined that material weaknesses in our internal control over financial reporting existed as of July 31, 2011, as described below. As a result of these items, current management has concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2011. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses in our internal control over financial reporting are identified as follows:
•
Control Environment – The control environment, which includes the Company’s Code of Conduct and Ethics Policy, is the responsibility of senior management, sets the tone of the organization, influences the control consciousness of its employees, and is the foundation for the other components of internal control over financial reporting. Senior management’s operating style did not result in the open flow of information and communication and set a tone that contributed to an ineffective control environment in which dissemination of information was limited and alternative ideas were not routinely encouraged. This control environment material weakness contributed significantly to the material weaknesses related to walnut grower accounting described below.
•
Walnut Grower Accounting – Senior management did not document the accounting policies or sufficiently design the processes for walnut grower payments and determination of walnut cost estimates. Further, management did not effectively or consistently communicate the nature and intent of certain walnut grower payments throughout the organization which contributed to conflicting communications with growers and incomplete and ineffective communication and flow of information throughout the company and to those charged with governance. The controls in place at the time were not designed to ensure that the annual walnut costs and the quarterly walnut cost estimates and changes in such estimates were sufficiently supported and based on consideration of all relevant information. The controls in place at that time were also not designed to provide for appropriate segregation of duties. These factors caused our controls related to accounting for walnut grower payments and quarterly walnut cost estimates to be ineffective for ensuring that walnut costs were recorded correctly within the appropriate period.
•
Accounts Payable and Accrued Expenses – Our controls over invoice processing were improperly designed and were not effective in ensuring that costs were recorded within the appropriate account and period. Controls were not in place to address the volume and nature of payment processing.
83
Deloitte & Touche LLP, our independent registered public accounting firm, which audited our consolidated financial statements included in this amendment, has issued an updated attestation report on our internal control over financial reporting, which is included in this amendment.
As a result of the restatement of our consolidated financial statements and the related reassessment of our internal control over financial reporting, we have developed certain remediation steps to address the material weaknesses discussed above, to reinforce a control environment that facilitates internal and external communications, and to improve our internal control over financial reporting. If not remediated, these control deficiencies could result in further material misstatements to our financial statements. The Company and the Board take the control and integrity of the Company’s financial statements seriously and believe that the remediation steps described below, including with respect to personnel changes, and the planned additional remedial actions are essential to maintaining a strong internal control environment. The following steps are among the measures that either have already been implemented or will be implemented as soon as practicable:
Control Environment
•
Replacement of former CEO;
•
Replacement of former CFO;
•
Hiring of a new Controller;
•
Enhanced monthly financial and operational reporting packages with detailed financial analysis and identification of significant and non-routine transactions which are circulated for review by management; and
•
Development and implementation of training, led by the CEO and reinforced by finance executives with appropriate accounting expertise, for executives, finance personnel and grower accounting to enhance awareness and understanding of standards and principles for accounting and financial reporting as well as the importance of financial reporting integrity and the Company’s Code of Conduct and Ethics Policy.
Walnut Grower Accounting
•
Revised the walnut cost estimation policy to incorporate a wide variety of inputs each quarter with review and sign-off by cross-functional management;
•
Enhanced documentation, oversight and monitoring of accounting policies and procedures relating to walnut grower payments and walnut grower accounting;
•
Reassessment of responsibilities and realignment of reporting relationships within the walnut operations and grower accounting function;
•
Revised grower contracts and enhanced review and oversight of grower communications;
•
Creation of a Grower Advisory Board including members from a cross section of Diamond’s grower base to provide a forum for input from growers and communication between Diamond senior management and growers;
•
Implementation of quarterly representations by grower services regarding compliance with grower contracting procedures; and
•
Update and revision of Sarbanes-Oxley internal control narratives related to grower accounting.
84
Accounts Payable and Accrued Expenses
•
Enhanced month-end accounting close processes with increased visibility in finance and accounting organization;
•
Enhanced period-end controls and procedures to improve recording of all outstanding accounts payable and accrued expenses;
•
Requiring all existing and new vendors to remit invoices directly to the Company’s central accounts payable department;
•
Communication throughout the organization to ensure that information related to all vendors engaged, services incurred, and invoices received in the current or prior month are captured; and
•
Update and revision of Sarbanes-Oxley internal control narratives related to accounts payable and accrued expenses.
The Audit Committee has directed management to develop a detailed plan and timetable for the implementation of the foregoing remedial measures (to the extent not already completed) and will monitor their implementation. In addition, under the direction of the Audit Committee, management will continue to review and make necessary changes to the overall design of our internal control environment, as well as policies and procedures to improve the overall effectiveness of internal control over financial reporting.
We are committed to maintaining a strong internal control environment, and believe that these remediation actions will represent significant improvements in our controls when they are fully implemented. Additional remediation measures may be required, which may require additional implementation time. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluations of internal control over financial reporting.
/s/ Brian Driscoll
/s/ Michael Murphy
President and Chief Executive
Interim Chief Financial
Officer
Officer
November 14, 2012
85
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Diamond Foods, Inc.
San Francisco, California
We have audited Diamond Foods, Inc. and subsidiaries’ (the “Company’s”) internal control over financial reporting as of July 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our report dated September 15, 2011, we expressed an unqualified opinion on internal control over financial reporting. As described in the following paragraphs, material weaknesses were subsequently identified in connection with the restatement of the previously issued financial statements. Accordingly, management has revised its assessment about the effectiveness of the Company’s internal control over financial reporting and our present opinion on the effectiveness of the Company’s internal control over financial reporting as of July 31, 2011, as expressed herein, is different from that expressed in our previous report.
86
A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management’s assessment:
•
Control Environment: The control environment, which includes the Company’s Code of Conduct and Ethics Policy, is the responsibility of senior management, sets the tone of the organization, influences the actions of its employees, and is the foundation for all other components of internal control over financial reporting. The Company did not maintain an effective control environment. Management’s operating style and concentrated decision making increased the risk of management override of certain controls, limited effective communication and flow of information throughout the organization and to those charged with governance and did not provide an environment that consistently encouraged open discussion of alternate views or opinions.
•
Walnut Grower Accounting: The above material weakness in the control environment contributed to material weaknesses in walnut grower accounting control activities. Management did not effectively or consistently communicate the nature and intent of certain walnut grower payments throughout the organization, to growers, and to those charged with governance. Controls were not designed to ensure that the annual walnut costs and quarterly walnut cost estimates and changes in such estimates were sufficiently supported and based on consideration of all relevant information. Controls over walnut costs and accounting for certain grower payments were improperly designed, were not designed to provide appropriate segregation of duties, and were not operating effectively in ensuring that walnut costs and payments were recorded correctly in the appropriate period.
•
Accounts Payable and Accrued Expenses: The controls over recording accounts payable and accrued expenses were improperly designed and were not operating effectively to ensure that all expenditures were identified and recorded in the appropriate account and period. Controls were not in place to address the volume and nature of invoice processing.
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audits of the consolidated financial statements as of and for the year ended July 31, 2011, of the Company and this report does not affect our report on such financial statements.
In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained, in all material respects, effective internal control over financial reporting as of July 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended July 31, 2011, of the Company and our report dated September 15, 2011, (November 13, 2012 as to the effects of the restatement discussed in Note 15 and subsequent events in Note 17) expressed an unqualified opinion on those financial statements and included an explanatory paragraph relating to the restatement.
/s/ Deloitte & Touche LLP
San Francisco, California
September 15, 2011 (November 13, 2012 as to the effects of the material weaknesses described in Management’s Report on Internal Control over Financial Reporting as revised)
87
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)
Documents filed as part of this report:
1.
Financial Statements.
(a)
Report of Independent Registered Public Accounting Firm
(b)
Consolidated Balance Sheets at July 31, 2011 and 2010
(c)
Consolidated Statements of Operations for the years ended July 31, 2011, 2010 and 2009
(d)
Consolidated Statements of Stockholders’ Equity for the years ended July 31, 2011, 2010 and 2009
(e)
Consolidated Statements of Cash Flows for the years ended July 31, 2011, 2010 and 2009
(f)
Notes to Consolidated Financial Statements
2.
Financial Statement Schedules.
All schedules are omitted because the required information is included with the Consolidated Financial Statements or notes thereto.
3.
Exhibits required by Item 601 of Regulation S-K.
The following exhibits are filed as part of this report or are incorporated by reference to exhibits previously filed with the SEC.
Filed with
This Report
Incorporated by Reference
Number
Exhibit Title
Form
File No.
Date Filed
3.01
Certificate of Incorporation, as amended
S-1/A
333-123576
July 15, 2005
3.02
Restated Bylaws
S-1
333-123576
March 25, 2005
4.01
Form of Certificate for common stock
S-1/A
333-123576
July 18, 2005
4.02
Rights Agreement, dated as of April 29, 2005, by and between Registrant and EquiServe Trust Company, N.A
S-1/A
333-123576
May 3, 2005
4.03
Amendment No. 1 to Rights Agreement between Registrant and Equiserve Trust Company, N.A., dated April 5, 2011
8-A/A
000-51439
April 5, 2011
4.04
Amendment No. 2 to the Rights Agreement dated May 22, 2012 by and between Diamond Foods, Inc. and Computershare Trust Company, N.A.
8-A/A
000-51439
May 30, 2012
4.05
Senior Note issued to OCM PF/FF Adamantine Holdings, Ltd., dated May 29, 2012.
8-K
000-51439
May 30, 2012
4.06
Redeemable Note issued to OCM PF/FF Adamantine Holdings, Ltd., dated May 29, 2012.
8-K
000-51439
May 30, 2012
88
Filed with
This Report
Incorporated by Reference
Number
Exhibit Title
Form
File No.
Date Filed
4.07
Warrant to Purchase Common Stock issued to OCM PF/FF Adamantine Holdings, Ltd., dated May 29, 2012.
8-K
000-51439
May 30, 2012
10.01*
2005 Equity Incentive Plan and forms of stock option agreement, stock option exercise agreement and restricted stock purchase agreement
S-1
333-123576
March 25, 2005
10.02*
Form of Tax Withholding Agreement
8-K
000-51439
July 20, 2007
10.03*
Form of Stock Withholding Agreement
8-K
000-51439
January 10, 2007
10.04*
2005 Employee Stock Purchase Plan and form of subscription agreement
S-1
333-123576
March 25, 2005
10.05*
Diamond Walnut Growers, Inc. 401(k) Plan
S-1
333-123576
March 25, 2005
10.06*
Diamond Walnut Growers, Inc. Retirement Restoration Plan
S-1
333-123576
March 25, 2005
10.07*
Diamond of California Management Pension Plan
S-1
333-123576
March 25, 2005
10.08*
Diamond Walnut Growers, Inc. Pension Plan, as restated
S-1
333-123576
March 25, 2005
10.09*
Form of Indemnity Agreement between Registrant and each of its directors and executive officers
S-1
333-123576
March 25, 2005
10.10*
Form of Change of Control and Retention Agreement between Registrant and each of its executive officers
S-1/A
333-123576
May 3, 2005
10.11*
Diamond Foods, Inc. Key Executive Retention Plan
8-K
000-51439
February 24, 2012
10.12*
Summary of Non-Employee Director Compensation Arrangements
10-K/A
000-51439
November 28, 2011
10.13*
Employment Agreement, dated
March 25, 1997, between Registrant and Michael J. Mendes
S-1
333-123576
March 25, 2005
10.14*
Employment Agreement, dated
May 4, 2012, between Diamond Foods, Inc. and Brian Driscoll
8-K
000-51439
May 7, 2012
10.15*
Offer Letter between Steven M. Neil and Diamond Foods, Inc.
10-Q
000-51439
March 11, 2008
10.16*
Offer Letter between Lloyd Johnson and Diamond Foods, Inc.
10-K
000-51439
September 25, 2008
89
Filed with
This Report
Incorporated by Reference
Number
Exhibit Title
Form
File No.
Date Filed
10.17*
Offer Letter between Linda Segre and Diamond Foods, Inc.
10-K
000-51439
September 30, 2009
10.18
Form of Walnut Purchase Agreement
S-1/A
333-123576
May 3, 2005
10.19
Form of Walnut Purchase Agreement introduced on May 18, 2012
8-K
000-51439
May 23, 2012
10.20
Credit Agreement, dated as of February 25, 2010, by and among Diamond Foods, Inc., the Lenders party thereto, Bank of America, N.A., Banc of America Securities LLC and Barclays Capital
X
10.21
Letter Agreement amending Credit Agreement between Diamond Foods, Inc. and Bank of America N.A., dated March 26, 2010
X
10.22
Forbearance Agreement and Second Amendment to Credit Agreement between Diamond Foods, Inc., Bank of America N.A. and the lenders thereto, dated March 21, 2012
8-K
000-51439
March 21, 2012
10.23
Waiver and Third Amendment to Credit Agreement between Diamond Foods, Inc., Bank of America, N.A. and the lenders thereto, dated May 22, 2012
8-K
000-51439
May 23, 2012
10.24
Waiver and Fourth Amendment to Credit Agreement between Diamond Foods, Inc., Bank of America, N.A. and lenders thereto, dated July 27, 2012
X
10.25
Waiver and Fifth Amendment to Credit Agreement between Diamond Foods, Inc., Bank of America, N.A. and lenders thereto, dated August 23, 2012
X
10.26
Securities Purchase Agreement, dated May 22, 2012, by and among Diamond Foods, Inc., OCM PF/FF Adamantine Holdings, Ltd. and the other Purchasers party thereto.
8-K
000-51439
May 23, 2012
10.27
Amendment to Securities Purchase Agreement, dated May 29, 2012, by and between Diamond Foods, Inc. and OCM PF/FF Adamantine Holdings, Ltd.
8-K
000-51439
May 30, 2012
10.28
Registration Rights Agreement, dated May 29, 2012, by and among Diamond Foods, Inc., OCM PF/FF Adamantine Holdings, Ltd. and the other Purchasers party to the Securities Purchase Agreement, dated May 22, 2012.
8-K
000-51439
May 30, 2012
90
Filed with
This Report
Incorporated by Reference
Number
Exhibit Title
Form
File No.
Date Filed
10.29
Transaction Agreement, dated April 5, 2011, by and among The Procter & Gamble Company, The Wimble Company, Diamond Foods, Inc. and Wimbledon Acquisition LLC
8-K
000-51439
April 5, 2011
10.30
Separation Agreement, dated April 5, 2011, by and among The Procter & Gamble Company, The Wimble Company and Diamond Foods, Inc.
8-K
000-51439
April 5, 2011
21.01
List of Subsidiaries of Diamond Foods, Inc.
X
23.01
Consent of Independent Registered Public Accounting Firm
X
31.01
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
X
31.02
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
X
32.01
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
X
*
Indicates management contract or compensatory plan or arrangement
All other schedules, which are included in the applicable accounting regulations of the Securities and Exchange Commission, are not required here because they are not applicable.
91
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DIAMOND FOODS, INC.
By:
/s/ Michael Murphy
Michael Murphy
Interim Chief Financial Officer
Date: November 14, 2012
92
Exhibit 10.20
Published CUSIP Number: 25260EAD3
Revolving Credit CUSIP Number: 25260EAE1
Term Loan CUSIP Number: 25260EAF8
CREDIT AGREEMENT
Dated as of February 25, 2010
among
DIAMOND FOODS, INC.,
as the Borrower,
BANK OF AMERICA, N.A.,
as Administrative Agent, Swing Line Lender
and
L/C Issuer,
BARCLAYS CAPITAL, COÖPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. “RABOBANK NEDERLAND”, NEW YORK BRANCH, and
BANK OF MONTREAL,
as Joint Syndication Agents
and
The Other Lenders Party Hereto
BANC OF AMERICA SECURITIES LLC, and BARCLAYS CAPITAL
as
Joint Lead Arrangers and Joint Book Managers
TABLE OF CONTENTS
Section
Page
ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMS
1
1.01
Defined Terms
1
1.02
Other Interpretive Provisions
31
1.03
Accounting Terms
31
1.04
Rounding
32
1.05
Times of Day
32
1.06
Letter of Credit Amounts
32
ARTICLE II.
THE COMMITMENTS AND CREDIT EXTENSIONS
32
2.01
The Loans
32
2.02
Borrowings, Conversions and Continuations of Loans
33
2.03
Letters of Credit
34
2.04
Swing Line Loans
42
2.05
Prepayments
45
2.06
Termination or Reduction of Commitments
48
2.07
Repayment of Loans
48
2.08
Interest
49
2.09
Fees
49
2.10
Computation of Interest and Fees; Retroactive Adjustments of Applicable Rate
50
2.11
Evidence of Debt
51
2.12
Payments Generally; Administrative Agent’s Clawback
51
2.13
Sharing of Payments by Lenders
53
2.14
Increase in Revolving Credit Facility
54
2.15
Increase in Term Loan Facility
56
2.16
Cash Collateral
57
2.17
Defaulting Lenders
58
ARTICLE III.
TAXES, YIELD PROTECTION AND ILLEGALITY
60
3.01
Taxes
60
3.02
Illegality
64
3.03
Inability to Determine Rates
64
3.04
Increased Costs; Reserves on Eurodollar Rate Loans
65
3.05
Compensation for Losses
66
3.06
Mitigation Obligations; Replacement of Lenders
67
3.07
Survival
67
ARTICLE IV.
CONDITIONS PRECEDENT
68
4.01
Conditions Precedent
68
4.02
Conditions to all Credit Extensions after the Initial Funding Date
68
ARTICLE V.
REPRESENTATIONS AND WARRANTIES
69
5.01
Existence, Qualification and Power
69
i
Section
Page
5.02
Authorization; No Contravention
69
5.03
Governmental Authorization; Other Consents
69
5.04
Binding Effect
69
5.05
Financial Statements; No Material Adverse Effect
70
5.06
Litigation
71
5.07
No Default
71
5.08
Ownership of Property; Liens
71
5.09
Environmental Compliance
72
5.10
Insurance
72
5.11
Taxes
72
5.12
ERISA Compliance
73
5.13
Subsidiaries; Equity Interests
74
5.14
Margin Regulations; Investment Company Act
74
5.15
Disclosure
74
5.16
Compliance with Laws
75
5.17
Taxpayer Identification Number
75
5.18
Intellectual Property; Licenses, Etc.
75
5.19
Solvency
75
5.20
Collateral Documents
75
ARTICLE VI.
AFFIRMATIVE COVENANTS
75
6.01
Financial Statements
75
6.02
Certificates; Other Information
76
6.03
Notices
78
6.04
Payment of Obligations
79
6.05
Preservation of Existence, Etc.
79
6.06
Maintenance of Properties
79
6.07
Maintenance of Insurance
79
6.08
Compliance with Laws
80
6.09
Books and Records
80
6.10
Inspection Rights
80
6.11
Use of Proceeds
80
6.12
Covenant to Guarantee Obligations and Give Security
80
6.13
Compliance with Environmental Laws
83
6.14
Preparation of Environmental Reports
83
6.15
Compliance with Environmental Laws
84
6.16
Further Assurances
84
6.17
Material Contracts
84
6.18
Compliance with Terms of Leaseholds
85
6.19
Hedging Agreement
85
6.20
Post-Closing Covenant
85
ARTICLE VII.
NEGATIVE COVENANTS
87
7.01
Liens
87
7.02
Investments
88
7.03
Indebtedness
89
7.04
Fundamental Changes
90
ii
Section
Page
7.05
Dispositions
90
7.06
Restricted Payments
91
7.07
Change in Nature of Business
92
7.08
Transactions with Affiliates
92
7.09
Burdensome Agreements
92
7.10
Use of Proceeds
93
7.11
Financial Covenants
93
7.12
Amendments of Organization Documents
94
7.13
Accounting Changes
94
7.14
Prepayments of Indebtedness
94
7.15
Amendment of Acquisition Agreement and Indebtedness
94
7.16
Inactive Subsidiary
94
ARTICLE VIII.
EVENTS OF DEFAULT AND REMEDIES
94
8.01
Events of Default
94
8.02
Remedies Upon Event of Default
96
8.03
Application of Funds
97
ARTICLE IX.
ADMINISTRATIVE AGENT
98
9.01
Appointment and Authority
98
9.02
Rights as a Lender
99
9.03
Exculpatory Provisions
99
9.04
Reliance by Administrative Agent
100
9.05
Delegation of Duties
100
9.06
Resignation of Administrative Agent
100
9.07
Non-Reliance on Administrative Agent and Other Lenders
101
9.08
No Other Duties, Etc.
101
9.09
Administrative Agent May File Proofs of Claim
102
9.10
Collateral and Guaranty Matters
102
9.11
Secured Cash Management Agreements and Secured Hedge Agreements
103
ARTICLE X.
MISCELLANEOUS
104
10.01
Amendments, Etc.
104
10.02
Notices; Effectiveness; Electronic Communication
106
10.03
No Waiver; Cumulative Remedies; Enforcement
108
10.04
Expenses; Indemnity; Damage Waiver
108
10.05
Payments Set Aside
110
10.06
Successors and Assigns
111
10.07
Treatment of Certain Information; Confidentiality
115
10.08
Right of Setoff
116
10.09
Interest Rate Limitation
117
10.10
Counterparts; Integration; Effectiveness
117
10.11
Survival of Representations and Warranties
117
10.12
Severability
117
10.13
Replacement of Lenders
118
10.14
Governing Law; Jurisdiction; Etc.
118
iii
Section
Page
10.15
Waiver of Jury Trial
119
10.16
California Judicial Reference
119
10.17
No Advisory or Fiduciary Responsibility
120
10.18
Electronic Execution of Assignments and Certain Other Documents
120
10.19
USA PATRIOT Act
120
SIGNATURES
S-1
iv
SCHEDULES
1.01
Existing Letters of Credit
2.01
Commitments and Applicable Percentages
5.08(b)
Liens
5.08(c)
Owned Real Property
5.08(d)(i)
Leased Real Property (Lessee)
5.08(d)(ii)
Leased Real Property (Lessor)
5.08(e)
Existing Investments
5.13
Subsidiaries; Other Equity Investments
6.20
Real Property Subject to Mortgages
7.03
Existing Indebtedness
10.02
Administrative Agent’s Office; Certain Addresses for Notices
EXHIBITS
Form of
A
Committed Loan Notice
B
Swing Line Loan Notice
C-1
Term Note
C-2
Revolving Credit Note
D
Compliance Certificate
E-1
Assignment and Assumption
E-2
Administrative Questionnaire
F
Guaranty
G
Collateral Agreement
v
CREDIT AGREEMENT
This CREDIT AGREEMENT (“Agreement”) is entered into as of February 25, 2010, among DIAMOND FOODS, INC., a Delaware corporation (the “ Borrower ”), each lender from time to time party hereto (collectively, the “ Lenders ” and individually, a “ Lender ”), and BANK OF AMERICA, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer.
The Borrower has requested that the Lenders provide a term loan facility and a revolving credit facility, and the Lenders have indicated their willingness to lend and the L/C Issuer has indicated its willingness to issue letters of credit, in each case, on the terms and subject to the conditions set forth herein.
In consideration of the mutual covenants and agreements herein contained, the parties hereto covenant and agree as follows:
ARTICLE I.
DEFINITIONS AND ACCOUNTING TERMS
1.01 Defined Terms. As used in this Agreement, the following terms shall have the meanings set forth below:
“Acquired Business” means Lion/Stove Luxembourg Investment 2 S.a.r.l. and its subsidiaries to be acquired pursuant to the Acquisition Agreement.
“Acquisition” means the acquisition by the Borrower of all of the issued and outstanding Equity Interests of Lion/Stove Luxembourg Investment 2 S.a.r.l. and its/their respective subsidiaries pursuant to the Acquisition Agreement.
“Acquisition Agreement” means that certain stock purchase agreement dated as of February 25, 2010 by and among the Borrower, Acquisition Company, as the buyer and the Seller (including all schedules and exhibits thereto).
“Acquisition Company” means DFKA Ltd., a corporation organized under the laws of England and Wales, and a wholly-owned subsidiary of the Borrower.
“Administrative Agent” means Bank of America in its capacity as administrative agent under any of the Loan Documents, or any successor administrative agent.
“Administrative Agent’s Office” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 10.02 , or such other address or account as the Administrative Agent may from time to time notify to the Borrower and the Lenders.
“Administrative Questionnaire” means an Administrative Questionnaire in substantially the form of Exhibit E-2 or any other form approved by the Administrative Agent.
“Affiliate” means, with respect to any Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
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“Aggregate Commitments” means the Commitments of all the Lenders.
“Agreement” means this Credit Agreement.
“Applicable Percentage” means (a) in respect of the Term Loan Facility, with respect to any Term Loan Lender at any time, the percentage (carried out to the ninth decimal place) of the Term Loan Facility represented by (i) on or prior to the Initial Funding Date, such Term Loan Lender’s Term Loan Commitment at such time and (ii) thereafter, the principal amount of such Term Loan Lender’s Term Loans at such time, and (b) in respect of the Revolving Credit Facility, with respect to any Revolving Credit Lender at any time, the percentage (carried out to the ninth decimal place) of the Revolving Credit Facility represented by such Revolving Credit Lender’s Revolving Credit Commitment at such time. If the commitment of each Revolving Credit Lender to make Revolving Credit Loans and the obligation of the L/C Issuer to make L/C Credit Extensions have been terminated pursuant to Section 8.02 , or if the Revolving Credit Commitments have expired, then the Applicable Percentage of each Revolving Credit Lender in respect of the Revolving Credit Facility shall be determined based on the Applicable Percentage of such Revolving Credit Lender in respect of the Revolving Credit Facility most recently in effect, giving effect to any subsequent assignments. The initial Applicable Percentage of each Lender in respect of each Facility is set forth opposite the name of such Lender on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable. The Applicable Percentage of any Lender is subject to adjustment as provided in Section 2.17 .
“Applicable Rate” means in respect of the Term Loan Facility and the Revolving Credit Facility, (i) from the Initial Funding Date to the date on which the Administrative Agent receives a Compliance Certificate pursuant to Section 6.02(b) for the fiscal quarter ending October 31, 2010, 2.50% per annum for Base Rate Loans, 3.50% per annum for Eurodollar Rate Loans and Letter of Credit Fees and 0.50% per annum for the Commitment Fee and (ii) thereafter, the applicable percentage per annum set forth below determined by reference to the Consolidated Leverage Ratio as set forth in the most recent Compliance Certificate received by the Administrative Agent pursuant to Section 6.02(b) :
Applicable Rate
Pricing
Level
Consolidated
Leverage Ratio
Eurodollar
Rate (Letters
of Credit)
Base
Rate
Commitment
Fee
1
> 4.00: 1.00
3.50%
2.50%
0.50%
2
£ 4.00: 1.00 but ³ 3.50: 1.00
3.25%
2.25%
0.50%
3
< 3.50: 1.00 but ³ 3.00: 1.00
3.00%
2.00%
0.50%
4
< 3.00: 1.00 but ³ 2.50: 1.00
2.75%
1.75%
0.50%
5
<2.50: 1.00 but ³ 2.00: 1.00
2.50%
1.50%
0.375%
6
<2.00: 1.00
2.25%
1.25%
0.375%
2
Any increase or decrease in the Applicable Rate resulting from a change in the Consolidated Leverage Ratio shall become effective as of the first Business Day immediately following the date a Compliance Certificate is delivered pursuant to Section 6.02(b) ; provided , however , that if a Compliance Certificate is not delivered when due in accordance with such Section, then, upon the request of the Required Term Loan Lenders and the Required Revolving Lenders, Pricing Level 1 shall apply in respect of the Term Loan Facility and the Revolving Credit Facility, as of the first Business Day after the date on which such Compliance Certificate was required to have been delivered and shall remain in effect until the date on which such Compliance Certificate is delivered (and thereafter the Pricing Level otherwise determined in accordance with this definition shall apply).
Notwithstanding anything to the contrary contained in this definition, the determination of the Applicable Rate for any period shall be subject to the provisions of Section 2.10(b) .
“Applicable Revolving Credit Percentage” means with respect to any Revolving Credit Lender at any time, such Revolving Credit Lender’s Applicable Percentage in respect of the Revolving Credit Facility at such time.
“Appropriate Lender” means, at any time, (a) with respect to any of the Term Loan Facility, or the Revolving Credit Facility, a Lender that has a Commitment with respect to such Facility or holds a Term Loan or a Revolving Credit Loan, respectively, at such time, (b) with respect to the Letter of Credit Sublimit, (i) the L/C Issuer and (ii) if any Letters of Credit have been issued pursuant to Section 2.03(a) , the Revolving Credit Lenders and (c) with respect to the Swing Line Sublimit, (i) the Swing Line Lender and (ii) if any Swing Line Loans are outstanding pursuant to Section 2.04(a) , the Revolving Credit Lenders.
“Approved Fund” means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
“Arrangers” means Banc of America Securities LLC and Barclays Capital, in their capacity as joint lead arrangers and joint book managers.
“Assignee Group” means two or more Eligible Assignees that are Affiliates of one another or two or more Approved Funds managed by the same investment advisor.
“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 10.06(b) ), and accepted by the Administrative Agent, in substantially the form of Exhibit E-1 or any other form approved by the Administrative Agent.
“Attributable Indebtedness” means, on any date, (a) in respect of any capital lease of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease Obligation, the capitalized amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a capital lease.
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“Audited Financial Statements” means the collective reference to (a) the audited consolidated balance sheet of the Borrower and its Subsidiaries for the fiscal years ended July 31, 2008 and July 31, 2009, and the related consolidated statements of income or operations, Stockholders’ Equity and cash flows for such fiscal year of the Borrower and its Subsidiaries, including the notes thereto and (b) the audited consolidated balance sheet of the Acquired Business for the fiscal years ended September 30, 2007, September 30, 2008 and September 30, 2009, and the related consolidated statements of income or operations and cash flows for such fiscal year of the Acquired Business.
“Availability Period” means in respect of the Revolving Credit Facility, the period from and including the Initial Funding Date to the earliest of (i) the Maturity Date for the Revolving Credit Facility, (ii) the date of termination of the Revolving Credit Commitments pursuant to Section 2.06 , and (iii) the date of termination of the commitment of each Revolving Credit Lender to make Revolving Credit Loans and of the obligation of the L/C Issuer to make L/C Credit Extensions pursuant to Section 8.02.
“Bank of America” means Bank of America, N.A. and its successors.
“Barclays Capital” means Barclays Capital, the investment banking division of Barclays Bank PLC.
“Base Rate” means for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its “prime rate”, and (c) the Eurodollar Rate plus 1.00% The “prime rate” is a rate set by Bank of America based upon various factors including Bank of America’s costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such prime rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change.
“Base Rate Loan” means a Revolving Credit Loan or a Term Loan that bears interest based on the Base Rate.
“Borrower” has the meaning specified in the introductory paragraph hereto.
“Borrower Materials” has the meaning specified in Section 6.02.
“Borrowing” means a Revolving Credit Borrowing, a Swing Line Borrowing, or a Term Loan Borrowing, as the context may require.
“Bridge Commitment Letter” means that certain commitment letter (with exhibits) of even date herewith by and among Barclays Capital, Barclays Bank PLC, Banc of America Securities LLC, Banc of America Bridge LLC, and the Borrower setting forth the key terms and provisions for a senior unsecured bridge loan facility in an aggregate amount not to exceed $150,000,000 and to be used to finance a portion of the purchase price payable for the Acquisition.
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“Bridge Facility” means that certain “Bridge Facility” referenced in the Bridge Commitment Letter.
“Business Day” means any day other than a Saturday, Sunday or other day on which commercial banks are authorized to close under the Laws of, or are in fact closed in, the state where the Administrative Agent’s Office is located and, if such day relates to any Eurodollar Rate Loan, means any such day on which dealings in Dollar deposits are conducted by and between banks in the London interbank Eurodollar market.
“Capital Expenditures” means, with respect to any Person for any period, any expenditure in respect of the purchase or other acquisition or maintenance of any fixed or capital asset, in each case, that are capitalized in accordance with GAAP.
“Cash Collateralize” means to pledge and deposit with or deliver to the Administrative Agent, for the benefit of the Administrative Agent, L/C Issuer or Swing Line Lender (as applicable) and the Lenders, as collateral for L/C Obligations, Obligations in respect of Swing Line Loans, or obligations of Lenders to fund participations in respect of either thereof (as the context may require), cash or deposit account balances or, if the L/C Issuer or Swing Line Lender benefiting from such collateral shall agree in its sole discretion, other credit support, in each case pursuant to documentation in form and substance satisfactory to (a) the Administrative Agent and (b) the L/C Issuer or the Swing Line Lender (as applicable). “ Cash Collateral ” shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.
“Cash Equivalents” means any of the following types of Investments, to the extent owned by the Borrower or any of its Subsidiaries free and clear of all Liens (other than Liens created under the Collateral Documents and other Liens permitted hereunder):
(a) readily marketable obligations issued or directly and fully guaranteed or insured by the United States of America or any agency or instrumentality thereof having maturities of not more than 360 days from the date of acquisition thereof; provided that the full faith and credit of the United States of America is pledged in support thereof;
(b) time deposits with, or insured certificates of deposit or bankers’ acceptances of, any commercial bank that (i) (A) is a Lender or (B) is organized under the laws of the United States of America, any state thereof or the District of Columbia or is the principal banking subsidiary of a bank holding company organized under the laws of the United States of America, any state thereof or the District of Columbia, and is a member of the Federal Reserve System, (ii) issues (or the parent of which issues) commercial paper rated as described in clause (c) of this definition and (iii) has combined capital and surplus of at least $1,000,000,000, in each case with maturities of not more than 365 days from the date of acquisition thereof;
(c) commercial paper issued by any Person organized under the laws of any state of the United States of America and maturing no more than 365 days from the time of the acquisition thereof, and having, at the time of acquisition thereof, a rating of A-1 (or the then equivalent grade) or better from S&P or P-1 (or the then equivalent grade) or better from Moody’s; and
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(d) Investments, classified in accordance with GAAP as current assets of the Borrower or any of its Subsidiaries, in money market investment programs registered under the Investment Company Act of 1940, which are administered by financial institutions that have the highest rating obtainable from either Moody’s or S&P, and the portfolios of which are limited solely to Investments of the character, quality and maturity described in clauses (a), (b) and (c) of this definition.
“Cash Management Agreement” means any agreement to provide cash management services, including treasury, depository, overdraft, card services (including services related to credit cards, including purchasing and commercial cards, prepaid cards, including payroll, stored value and gift cards, merchant services processing and debit cards), electronic funds transfer and other cash management arrangements.
“Cash Management Bank” means any Person that, at the time it enters into a Cash Management Agreement, is a Lender or an Affiliate of a Lender, in its capacity as a party to such Cash Management Agreement.
“Change in Law” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation or application thereof by any Governmental Authority or (c) the making or issuance of any request, guideline or directive (whether or not having the force of law) by any Governmental Authority.
“Change of Control” means an event or series of events by which:
(a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, but excluding any employee benefit plan of the Borrower or its Subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) becomes the “beneficial owner” (as defined in Rules 13d-3 and 13d-5 under the Securities Exchange Act of 1934, except that a person or group shall be deemed to have “beneficial ownership” of all securities that such person or group has the right to acquire, whether such right is exercisable immediately or only after the passage of time (such right, an “ option right ”)), directly or indirectly, of 35% or more of the equity securities of the Borrower entitled to vote for members of the board of directors or equivalent governing body of the Borrower on a fully-diluted basis (and taking into account all such securities that such person or group has the right to acquire pursuant to any option right); or
(b) during any period of 12 consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower cease to be composed of individuals (i) who were members of that board or equivalent governing body on the first day of such period, (ii) whose election or nomination to that board or equivalent governing body was approved by individuals referred to in clause (i) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body or (iii) whose election or nomination to that board or other equivalent governing body was approved by individuals
6
referred to in clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that board or equivalent governing body (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors).
“Closing Date” means the first date all the conditions precedent referred to in Section 2 of the Effectiveness Agreement are satisfied or waived in accordance with Section 10.01 .
“Code” means the Internal Revenue Code of 1986.
“Collateral” means all of the “Collateral” and “Mortgaged Property” referred to in the Collateral Documents and all of the other property provided as collateral security under the terms of the Collateral Documents.
“Collateral Agreement” means the collateral agreement of even date herewith executed and delivered by the Loan Parties in favor of the Secured Parties and substantially in the form of Exhibit G , as amended, restated, supplemented or otherwise modified from time to time.
“Collateral Documents” means, collectively, the Collateral Agreement, the Mortgages (if any), the Foreign Security Documents, each of the mortgages, collateral assignments, supplements to all of the foregoing, security agreements, pledge agreements or other similar agreements delivered to the Administrative Agent pursuant to Section 6.12 , and each of the other agreements, instruments or documents that creates or purports to create a Lien in favor of the Administrative Agent for the benefit of the Secured Parties, in each case, as amended, restated, supplemented or otherwise modified from time to time.
“Commitment” means a Term Loan Commitment or a Revolving Credit Commitment, as the context may require.
“Committed Loan Notice” means a notice of (a) a Term Loan Borrowing, (b) a Revolving Credit Borrowing, (c) a conversion of Term Loans from one Type to the other, or (d) a continuation of Eurodollar Rate Loans, pursuant to Section 2.02(a) , which, if in writing, shall be substantially in the form of Exhibit A .
“Compliance Certificate” means a certificate substantially in the form of Exhibit D.
“Consolidated Current Assets” means, as at any date of determination, the total assets of a Person and its Subsidiaries on a consolidated basis that may properly be classified as current assets in conformity with GAAP, excluding cash and cash equivalents.
“Consolidated Current Liabilities” means, as at any date of determination, the total liabilities of a Person and its Subsidiaries on a consolidated basis that may properly be classified as current liabilities in conformity with GAAP, excluding the current portion of long term debt.
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“Consolidated EBITDA” means, at any date of determination, an amount equal to Consolidated Net Income of the Borrower and its Subsidiaries on a Consolidated basis, for the most recently completed Measurement Period plus the following, without duplication, to the extent deducted in calculating such Consolidated Net Income: (a) Consolidated Interest Charges, (b) the provision for Federal, state, local and foreign income taxes payable (calculated net of Federal, state, local and foreign income tax credits), (c) depreciation and amortization expenses, (d) other non-recurring expenses reducing such Consolidated Net Income which do not represent a cash item in such period (or any future period) in each case of or by the Borrower and its Subsidiaries for such Measurement Period), (e) non-cash charges or expenses related to stock-based compensation, (f) cash or non-cash charges in connection with Permitted Acquisitions (other than the Acquisition), not to exceed $1,000,000 in any fiscal year, (g) cash or non-cash charges in connection with the Acquisition (i) incurred prior to the later to occur of (A) April 30, 2010 and (B) the Initial Funding Date, in an amount not to exceed $16,300,000 in the aggregate and (ii) without duplication of the preceding clause (i), incurred in connection with severance or restructuring costs by the end of the fiscal year ending July 31, 2011 with respect to the personnel, assets and operations of the Acquired Business in an amount not to exceed $5,000,000 in the aggregate, and (h) the amount of the purchase price and related transaction costs of any acquisition required to be expensed during such period that would otherwise have been classified as goodwill prior to the implementation of FAS 141R; provided such expense is non-cash; provided that, for each of the four fiscal quarters set forth below, Consolidated EBITDA shall be deemed to equal the amount set forth below opposite such fiscal quarter:
Consolidated
Fiscal Quarter
EBITDA
April 30, 2009
$
23,156,000
July 31, 2009
$
29,421,000
October 31, 2009
$
43,710,000
January 31, 2010
$
34,545,000
Solely for the purpose of the computations of the Consolidated Leverage Ratio and the Consolidated Fixed Charge Coverage Ratio, if there has occurred a Permitted Acquisition during the relevant period, or, with respect to the Acquisition for the period beginning February 1, 2010 until the Initial Funding Date, Consolidated EBITDA shall be calculated on a Pro Forma Basis (as defined below) pursuant to this definition. For purposes of this definition, “ Pro Forma Basis ” means, with respect to the preparation of pro forma financial statements for the purpose of the adjustment to Consolidated EBITDA (1) relating to any acquisition other than the Acquisition (except to the extent provided above), and for any other purpose related to any Permitted Acquisition, on the basis that (A) any Indebtedness incurred or assumed in connection with such acquisition or consolidation was incurred or assumed on the first day of the applicable period, (B) if such Indebtedness bears a floating interest rate, such interest shall be paid over the pro forma period either at the rate in effect on the date of such acquisition or the applicable rate experienced over the period, and (C) all income and expense associated with the assets or entity acquired in connection with such Permitted Acquisition for the most recently ended four fiscal quarter period for which such income and expense amounts are available shall be treated as
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being earned or incurred by the Borrower and its Subsidiaries on a pro forma basis for the portion of the applicable period occurring prior to the date such acquisition or consolidation has occurred without giving effect to any cost savings, except such cost savings as would be permitted in a pro forma financial statement prepared in compliance with SEC Regulation S-X and (2) relating to any Disposition of assets, a pro forma adjustment of Consolidated EBITDA, in a manner reasonably acceptable to the Administrative Agent, to include, as of the first day of any applicable period, such Dispositions, including, without limitation, adjustments reflecting any non-recurring costs and any extraordinary expenses of any such permitted asset dispositions consummated during such period calculated on a basis consistent with GAAP and SEC Regulation S-X of the Securities Exchange Act of 1934, as amended, or as approved by the Administrative Agent.
“Consolidated Excess Cash Flow” means, for any fiscal year of the Borrower and its Subsidiaries on a consolidated basis, an amount (if positive) equal to the sum, without duplication, of (a) Consolidated EBITDA, plus (b) the amount of any decrease in Consolidated Working Capital for such fiscal year, minus (c) the amount of any increase in Consolidated Working Capital for such fiscal year, minus (d) consolidated Capital Expenditures paid in cash minus (e) the cash portion of Consolidated Interest Charges minus (f) cash income taxes paid minus (g) scheduled principal repayments, to the extent actually made, of (i) Term Loans pursuant to Section 2.07 and (ii) other Indebtedness (including the principal component of capitalized leases), minus (h) the amount of any charges or expenses described in clauses (e) through (g) of the definition of Consolidated EBITDA that are paid (or reasonably expected to be paid) in cash, minus (i) the amount of any cash expenditures in connection with Permitted Acquisitions.
“Consolidated Fixed Charge Coverage Ratio” means, at any date of determination, the ratio of (a) (i) Consolidated EBITDA less (ii) the aggregate amount of all Capital Expenditures less (iii) the aggregate amount of Federal, state, local and foreign income taxes paid in cash, in each case, of or by the Borrower and its Subsidiaries to (b) the sum of (i) Consolidated Interest Charges, (ii) the aggregate principal amount of all regularly scheduled principal payments or redemptions of Indebtedness and (iii) the aggregate amount of all Restricted Payments made by the Borrower, in each case in clauses (a) and (b) above, for the most recently completed Measurement Period.
“Consolidated Funded Indebtedness” means, as of any date of determination, for the Borrower and its Subsidiaries on a consolidated basis, the sum of (a) the outstanding principal amount of all obligations, whether current or long-term, for borrowed money (including Obligations hereunder) and all obligations evidenced by bonds, debentures, notes, loan agreements or other similar instruments, (b) all purchase money Indebtedness, (c) all direct non-contingent obligations arising in connection with letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments, (d) all obligations in respect of the deferred purchase price of property or services (other than (i) trade accounts payable in the ordinary course of business and (ii) earn-outs, hold-backs and other deferred payment of consideration in Permitted Acquisitions to the extent not required to be reflected as liabilities on the balance sheet of the Borrower and its Subsidiaries in accordance with GAAP), (e) Attributable Indebtedness in respect of capital leases and Synthetic Lease Obligations, (f) without duplication, all Guarantees with respect to outstanding Indebtedness of
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the types specified in clauses (a) through (e) above of Persons other than the Borrower or any Subsidiary, and (g) all Indebtedness of the types referred to in clauses (a) through (f) above of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which the Borrower or a Subsidiary is a general partner or joint venturer, unless such Indebtedness is expressly made non-recourse to the Borrower or such Subsidiary.
“Consolidated Interest Charges” means, for any Measurement Period, the sum of (a) all interest, premium payments, debt discount, fees, charges and related expenses in connection with borrowed money (including capitalized interest) or in connection with the deferred purchase price of assets, in each case to the extent treated as interest in accordance with GAAP, (b) all interest paid or payable with respect to discontinued operations and (c) the portion of rent expense under capitalized leases that is treated as interest in accordance with GAAP, in each case, of or by the Borrower and its Subsidiaries on a consolidated basis for the most recently completed Measurement Period.
“Consolidated Leverage Ratio” means, as of any date of determination, the ratio of (a) Consolidated Funded Indebtedness as of such date to (b) Consolidated EBITDA for the most recently completed Measurement Period.
“Consolidated Net Income” means, at any date of determination, the net income (or loss) of the Borrower and its Subsidiaries on a consolidated basis for the most recently completed Measurement Period; provided that Consolidated Net Income shall exclude (a) extraordinary gains and extraordinary non-cash losses for such Measurement Period, (b) the net income of any Subsidiary during such Measurement Period to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary of such income is not permitted by operation of the terms of its Organization Documents or any agreement, instrument or Law applicable to such Subsidiary during such Measurement Period, except that the Borrower’s equity in any net loss of any such Subsidiary for such Measurement Period shall be included in determining Consolidated Net Income, and (c) any income (or loss) for such Measurement Period of any Person if such Person is not a Subsidiary, except that the Borrower’s equity in the net income of any such Person for such Measurement Period shall be included in Consolidated Net Income up to the aggregate amount of cash actually distributed by such Person during such Measurement Period to the Borrower or a Subsidiary as a dividend or other distribution (and in the case of a dividend or other distribution to a Subsidiary, such Subsidiary is not precluded from further distributing such amount to the Borrower as described in clause (b) of this proviso).
“Consolidated Working Capital” means, as at any date of determination, the excess of Consolidated Current Assets of the Borrower and its Subsidiaries over Consolidated Current Liabilities of the Borrower and its Subsidiaries.
“Contractual Obligation” means, as to any Person, any provision of any security issued by such Person or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any of its property is bound.
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. “ Controlling ” and “ Controlled ” have meanings correlative thereto.
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“Credit Extension” means each of the following: (a) a Borrowing and (b) an L/C Credit Extension.
“Debtor Relief Laws” means the Bankruptcy Code of the United States, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief Laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
“Default” means any event or condition that constitutes an Event of Default or that, with the giving of any notice, the passage of time, or both, would be an Event of Default.
“Default Rate” means (a) when used with respect to Obligations other than Letter of Credit Fees, an interest rate equal to (i) the Base Rate plus (ii) the Applicable Rate, if any, applicable to Base Rate Loans plus (iii) 2% per annum; provided , however , that with respect to a Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the interest rate (including any Applicable Rate) otherwise applicable to such Loan plus 2% per annum, and (b) when used with respect to Letter of Credit Fees, a rate equal to the Applicable Rate plus 2% per annum.
“Defaulting Lender” means, subject to Section 2.17(b), any Lender that, as determined by the Administrative Agent, (a) has failed to perform any of its funding obligations hereunder, including in respect of its Loans or participations in respect of Letters of Credit or Swing Line Loans, within three Business Days of the date required to be funded by it hereunder, (b) has notified the Borrower, or the Administrative Agent that it does not intend to comply with its funding obligations or has made a public statement to that effect with respect to its funding obligations hereunder or under other agreements in which it commits to extend credit, (c) has failed, within three Business Days after request by the Administrative Agent, to confirm in a manner satisfactory to the Administrative Agent that it will comply with its funding obligations, or (d) has, or has a direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief Law, (ii) had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or a custodian appointed for it, or (iii) taken any action in furtherance of, or indicated its consent to, approval of or acquiescence in any such proceeding or appointment; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority.
“Disposition” or “Dispose” means the sale, transfer, license, lease or other disposition (including any sale and leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any notes or accounts receivable or any rights and claims associated therewith.
“Dollar” and “$” mean lawful money of the United States.
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“Domestic Subsidiary” means any Subsidiary that is organized under the laws of any political subdivision of the United States.
“Effectiveness Agreement” means the effectiveness agreement of even date herewith between and among the Loan Parties party to the Credit Agreement as of the Closing Date, the Lenders and the Administrative Agent.
“Eligible Assignee” means any Person that meets the requirements to be an assignee under Section 10.06(b)(iii), (v) and (vi) (subject to such consents, if any, as may be required under Section 10.06(b)(iii) ).
“Engagement Letter” means the letter agreement, dated February 12, 2010, among the Borrower and Banc of America Securities LLC.
“Environmental Laws” means any and all Federal, state, local, and foreign statutes, laws, regulations, ordinances, rules, judgments, orders, decrees, permits, concessions, grants, franchises, licenses, agreements or governmental restrictions relating to pollution and the protection of the environment or the release of any materials into the environment, including those related to hazardous substances or wastes, air emissions and discharges to waste or public systems.
“Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower, any other Loan Party or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
“Environmental Permit” means any permit, approval, identification number, license or other authorization required under any Environmental Law.
“Equity Interests” means, with respect to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.
“Equity Issuance” means the issuance by the Borrower of its common equity to be used by the Borrower to fund a portion of the Acquisition purchase price on the Initial Funding Date.
“ERISA” means the Employee Retirement Income Security Act of 1974.
“ERISA Affiliate” means any trade or business (whether or not incorporated) under common control with the Borrower within the meaning of Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for purposes of provisions relating to Section 412 of the Code).
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“ERISA Event” means (a) a Reportable Event with respect to a Pension Plan; (b) the withdrawal of the Borrower or any ERISA Affiliate from a Pension Plan subject to Section 4063 of ERISA during a plan year in which such entity was a substantial employer (as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the Borrower or any ERISA Affiliate from a Multiemployer Plan or notification that a Multiemployer Plan is in reorganization; (d) the filing of a notice of intent to terminate, the treatment of a Pension Plan amendment as a termination under Section 4041 or 4041A of ERISA, or (e) the institution by the PBGC of proceedings to terminate a Pension Plan; (f) any event or condition which constitutes grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan; (g) the determination that any Pension Plan is considered an at-risk plan or a plan in endangered or critical status within the meaning of Sections 430, 431 and 432 of the Code or Sections 303, 304 and 305 of ERISA; or (h) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate.
“Eurodollar Rate” means:
(a) for any Interest Period with respect to a Eurodollar Rate Loan, the rate per annum equal to (i) the British Bankers Association LIBOR Rate (“ BBA LIBOR ”), as published by Reuters (or such other commercially available source providing quotations of BBA LIBOR as may be designated by the Administrative Agent from time to time) at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for Dollar deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period or (ii), if such rate is not available at such time for any reason, the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the first day of such Interest Period in same day funds in the approximate amount of the Eurodollar Rate Loan being made, continued or converted and with a term equivalent to such Interest Period would be offered by Bank of America’s London Branch to major banks in the London interbank eurodollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the commencement of such Interest Period; and
(b) for any interest calculation with respect to a Base Rate Loan on any date, the rate per annum equal to (i) BBA LIBOR, at approximately 11:00 a.m., London time determined two Business Days prior to such date for Dollar deposits being delivered in the London interbank market for a term of one month commencing that day or (ii) if such published rate is not available at such time for any reason, the rate per annum determined by the Administrative Agent to be the rate at which deposits in Dollars for delivery on the date of determination in same day funds in the approximate amount of the Base Rate Loan being made or maintained and with a term equal to one month would be offered by Bank of America’s London Branch to major banks in the London interbank Eurodollar market at their request at the date and time of determination.
“Eurodollar Rate Loan” means a Committed Revolving Credit Loan or a Term Loan that bears interest at a rate based on clause (a) of the definition of “Eurodollar Rate.”
“Event of Default” has the meaning specified in Section 8.01.
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“Excluded Issuance” means the issuance by the Borrower of its common Equity Interests (a) pursuant to employee equity compensation and incentive programs (including the exercise of options granted thereunder), (b) in connection with a Permitted Acquisition (other than the Acquisition), and (c) up to $150,000,000 of the Equity Issuance in connection with the Acquisition.
“Excluded Taxes” means, with respect to the Administrative Agent, any Lender, the L/C Issuer or any other recipient of any payment to be made by or on account of any obligation of the Borrower hereunder, (a) taxes imposed on or measured by its overall net income (however denominated), and franchise taxes imposed on it (in lieu of net income taxes), by the jurisdiction (or any political subdivision thereof) under the Laws of which such recipient is organized or in which its principal office is located or, in the case of any Lender, in which its applicable Lending Office is located, or as a result of any connection between such Person and the taxing jurisdiction (other than any such connection arising from such Person having executed, delivered or performed its obligations or received a payment under, or enforced by, this Agreement), (b) any branch profits taxes imposed by the United States or any similar tax imposed by any other jurisdiction in which the Borrower is located, (c) any backup withholding, tax that is required by the Code to be withheld from amounts payable to a Lender that has failed to comply with clause (A) of Section 3.01(e)(ii) , and (d) in the case of a Foreign Lender (other than an assignee pursuant to a request by the Borrower under Section 10.13 ), any United States withholding tax that (i) is required to be imposed on amounts payable to such Foreign Lender pursuant to the Laws in force at the time such Foreign Lender becomes a party hereto (or designates a new Lending Office) or (ii) is attributable to such Foreign Lender’s failure or inability (other than as a result of a Change in Law) to comply with clause (B) of Section 3.01(e)(ii) , except to the extent that such Foreign Lender (or its assignor, if any) was entitled, at the time of designation of a new Lending Office (or assignment), to receive additional amounts from the Borrower with respect to such withholding tax pursuant to Section 3.01(a)(ii) or (iii) .
“Existing Credit Facilities” means the credit facilities evidenced by (a) that certain Credit Agreement dated as of September 15, 2008 (as amended, restated, supplemented or otherwise modified), by and between the Borrower, the Lenders party thereto and Bank of America, as Administrative Agent, (b) that certain Senior Credit Facilities Agreement dated as of September 8, 2006 by and among Lion/Stove Holdings Limited and others, the Lenders party thereto, Citibank International Plc as Agent and Citicorp Trustee Company Limited as Security Agent and (c) that certain Mezzanine Credit Facility Agreement dated as of September 8, 2006 by and among Lion/Stove Holdings Limited and others, the Lenders party thereto, Citibank International Plc as Agent and Citicorp Trustee Company Limited as Security Agent, as each of the foregoing may have been amended, restated, modified or otherwise supplemented from time to time.
“Existing Letters of Credit” means the collective reference to the existing letters of credit identified on Schedule 1.01.
“Extraordinary Receipt” means any cash received by or paid to any Person as a result of tax refunds, pension plan reversions, proceeds of insurance (other than proceeds of business interruption insurance to the extent such proceeds constitute compensation for lost earnings) and condemnation awards (and payments in lieu thereof); provided , however , that an Extraordinary Receipt shall not include cash receipts from proceeds of insurance or condemnation awards (or
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payments in lieu thereof) or indemnity payments to the extent that such proceeds or awards (a) in respect of loss or damage to equipment, fixed assets or real property are applied (or in respect of which expenditures were previously incurred) to replace or repair the equipment, fixed assets or real property in respect of which such proceeds were received in accordance with the terms of Section 2.05(b)(v ) or (b) are received by any Person in respect of any third party claim against, or liability of, such Person and applied to pay (or to reimburse such Person for its prior payment of) such claim or liability and the costs and expenses of such Person with respect thereto.
“Facility” means the Term Loan Facility, or the Revolving Credit Facility, as the context may require.
“FASB ASC” means the Accounting Standards Codification of the Financial Accounting Standards Board.
“Federal Funds Rate” means, for any day, the rate per annum equal to the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers on such day, as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to a whole multiple of 1/100 of 1%) charged to Bank of America on such day on such transactions as determined by the Administrative Agent.
“Foreign Security Documents” means the collective reference to the security agreements, debentures, pledge agreements, charges, and other similar documents and agreements pursuant to which any Loan Party purports to pledge or grant a security interest in any property or assets located outside the United States securing the Obligations, each as may be amended, restated, supplemented or otherwise modified from time to time, including but not limited to an English law share pledge dated on or about the date of this Agreement.
“Foreign Subsidiary” means any Subsidiary that is not a Domestic Subsidiary.
“Foreign Lender” means any Lender that is organized under the Laws of a jurisdiction other than that in which the Borrower is resident for tax purposes (including such a Lender when acting in the capacity of the L/C Issuer). For purposes of this definition, the United States, each State thereof and the District of Columbia shall be deemed to constitute a single jurisdiction.
“FRB” means the Board of Governors of the Federal Reserve System of the United States.
“Fronting Exposure” means, at any time there is a Defaulting Lender, (a) with respect to the L/C Issuer, such Defaulting Lender’s Applicable Percentage of the outstanding L/C Obligations other than L/C Obligations as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the Swing Line Lender, such Defaulting Lender’s Applicable Percentage of Swing Line Loans other than Swing Line Loans as to which such Defaulting Lender’s participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof.
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“Fund” means any Person (other than a natural person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course of its activities.
“Funding Deadline” has the meaning assigned thereto in the Effectiveness Agreement.
“GAAP” means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied.
“Governmental Authority” means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including the National Association of Insurance Commissioners and any supra-national bodies such as the European Union or the European Central Bank).
“Guarantee” means, as to any Person, any (a) any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation payable or performable by another Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of such Person, direct or indirect, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation, (ii) to purchase or lease property, securities or services for the purpose of assuring the obligee in respect of such Indebtedness or other obligation of the payment or performance of such Indebtedness or other obligation, (iii) to maintain working capital, equity capital or any other financial statement condition or liquidity or level of income or cash flow of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, or (iv) entered into for the purpose of assuring in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (in whole or in part), or (b) any Lien on any assets of such Person securing any Indebtedness or other obligation of any other Person, whether or not such Indebtedness or other obligation is assumed by such Person (or any right, contingent or otherwise, of any holder of such Indebtedness to obtain any such Lien); provided that the term “Guarantee” shall not include endorsements for collection or deposit, in either case in the ordinary course of business, or customary and reasonable indemnity obligations in effect on the Closing Date or entered into in connection with any acquisition or disposition of assets or Permitted Acquisitions permitted under this Agreement (other than such obligations with respect to Indebtedness). The amount of any Guarantee shall be deemed to be an amount equal to the stated or determinable amount of the related primary obligation, or portion thereof, in respect of which such Guarantee is made or, if not stated or determinable, the maximum reasonably anticipated liability in respect thereof as determined by the guaranteeing Person in good faith. The term “Guarantee” as a verb has a corresponding meaning.
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“Guarantors” means, collectively, each existing and future direct or indirect Material Domestic Subsidiary of the Borrower and, to the extent no material adverse tax consequences would result, each existing and future direct or indirect Material Foreign Subsidiary of the Borrower (excluding the Inactive Subsidiary for so long as such Subsidiary remains inactive).
“Guaranty” means the guaranty agreement dated of even date herewith executed and delivered by any Guarantors in favor of the Secured Parties substantially in the form of Exhibit F , as may be amended, restated supplemented or other modified from time to time.
“Hazardous Materials” means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos-containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law.
“Hedge Bank” means any Person that, at the time it enters into a Swap Contract required or permitted under Article VI or VII, is a Lender or an Affiliate of a Lender, in its capacity as a party to such Swap Contract.
“Inactive Subsidiary” means Diamond of Europe, a corporation organized under the laws of the Federal Republic of Germany, and its successors and assigns; provided that at such time (if any) as any such Person commences any activities or operations, such Person shall cease to be an Inactive Subsidiary.
“Indebtedness” means, as to any Person at a particular time, without duplication, all of the following, whether or not included as indebtedness or liabilities in accordance with GAAP:
(a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes, loan agreements or other similar instruments;
(b) the maximum amount of all direct or contingent obligations of such Person arising under letters of credit (including standby and commercial), bankers’ acceptances, bank guaranties, surety bonds and similar instruments;
(c) net obligations of such Person under any Swap Contract;
(d) all obligations of such Person to pay the deferred purchase price of property or services (other than (i) trade accounts payable in the ordinary course of business and not past due for more than 60 days after the date on which such trade account is payable (unless being contested in good faith and by appropriate proceedings) and (ii) earn-outs, hold-backs and other deferred payment of consideration in Permitted Acquisitions to the extent not required to be reflected as liabilities on the balance sheet of the Borrower and its Subsidiaries in accordance with GAAP);
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(e) indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse;
(f) capital leases and Synthetic Lease Obligations;
(g) all obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in respect of any Equity Interest in such Person or any other Person, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends; and
(h) all Guarantees of such Person in respect of any of the foregoing.
For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Swap Contract on any date shall be deemed to be the Swap Termination Value thereof as of such date. The amount of any capital lease or Synthetic Lease Obligation as of any date shall be deemed to be the amount of Attributable Indebtedness in respect thereof as of such date.
“Indemnified Taxes” means Taxes other than Excluded Taxes.
“Indemnitees” has the meaning specified in Section 10.04(b).
“Information” has the meaning specified in Section 10.07.
“Initial Financial Projections” means the consolidated forecasted balance sheet and statements of income and cash flows of the Borrower and its Subsidiaries for fiscal years 2010-2015 in the most recent form provided to the Administrative Agent prior to the date hereof.
“Initial Funding Date” means the first date following the Closing Date that all the conditions precedent referred to in Sections 3 of the Effectiveness Agreement are satisfied or waived in accordance with Section 10.01 .
“Intangible Assets” means assets that are considered to be intangible assets under GAAP, including customer lists, goodwill, computer software, copyrights, trade names, trademarks, patents, franchises, licenses, unamortized deferred charges, unamortized debt discount and capitalized research and development costs.
“Interest Payment Date” means, (a) as to any Eurodollar Rate Loan, the last day of each Interest Period applicable to such Loan and the Maturity Date of the Facility under which such Loan was made; provided , however , that if any Interest Period for a Eurodollar Rate Loan exceeds three months, the respective dates that fall every three months after the beginning of such Interest Period shall also be Interest Payment Dates; and (b) as to any Base Rate Loan or Swing Line Loan, the last Business Day of each January, April, July and October and the Maturity Date of the Facility under which such Loan was made (with Swing Line Loans being deemed made under the Revolving Credit Facility for purposes of this definition).
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“Interest Period” means, as to each Eurodollar Rate Loan, the period commencing on the date such Eurodollar Rate Loan is disbursed or converted to or continued as a Eurodollar Rate Loan and ending on the date one week, two weeks or one, two, three or six months thereafter, as selected by the Borrower in its Committed Loan Notice; provided that:
(i) any Interest Period that would otherwise end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall end on the next preceding Business Day;
(ii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of the calendar month at the end of such Interest Period; and
(iii) no Interest Period shall extend beyond the Maturity Date of the Facility under which such Loan was made.
“Investment” means, as to any Person, any direct or indirect acquisition or investment by such Person, whether by means of (a) the purchase or other acquisition of Equity Interests of another Person, (b) a loan, advance or capital contribution to, Guarantee or assumption of debt of, or purchase or other acquisition of any other debt or interest in, another Person, or (c) the purchase or other acquisition (in one transaction or a series of transactions) of assets of another Person that constitute a business unit. For purposes of covenant compliance, the amount of any Investment shall be the amount actually invested, without adjustment for subsequent increases or decreases in the value of such Investment.
“IP Rights” has the meaning specified in Section 5.18.
“IRS” means the United States Internal Revenue Service.
“ISP” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice, Inc. (or such later version thereof as may be in effect at the time of issuance).
“Issuer Documents” means with respect to any Letter of Credit, the Letter of Credit Application, and any other document, agreement and instrument entered into by the L/C Issuer and the Borrower (or any Subsidiary) or in favor of the L/C Issuer and relating to such Letter of Credit.
“Laws” means, collectively, all international, foreign, Federal, state and local statutes, treaties, rules, guidelines, regulations, ordinances, codes and administrative or judicial precedents or authorities, including the interpretation or administration thereof by any Governmental Authority charged with the enforcement, interpretation or administration thereof, and all applicable administrative orders, directed duties, requests, licenses, authorizations and permits of, and agreements with, any Governmental Authority, in each case whether or not having the force of law.
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“L/C Advance” means, with respect to each Revolving Credit Lender, such Lender’s funding of its participation in any L/C Borrowing in accordance with its Applicable Revolving Credit Percentage.
“L/C Borrowing” means an extension of credit resulting from a drawing under any Letter of Credit which has not been reimbursed on the date when made or refinanced as a Revolving Credit Borrowing.
“L/C Credit Extension” means, with respect to any Letter of Credit, the issuance thereof or extension of the expiry date thereof, or the increase of the amount thereof.
“L/C Issuer” means with respect to the Existing Letters of Credit and Letters of Credit issued hereunder on or after the Initial Funding Date, Bank of America in its capacity as issuer thereof, or any successor issuer of Letters of Credit hereunder.
“L/C Obligations” means, as at any date of determination, the aggregate amount available to be drawn under all outstanding Letters of Credit plus the aggregate of all Unreimbursed Amounts, including all L/C Borrowings. For purposes of computing the amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06 . For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.
“Lender” has the meaning specified in the introductory paragraph hereto and, as the context requires, includes the Swing Line Lender.
“Lending Office” means, as to any Lender, the office or offices of such Lender described as such in such Lender’s Administrative Questionnaire, or such other office or offices as a Lender may from time to time notify the Borrower and the Administrative Agent.
“Letter of Credit” means any standby letter of credit issued hereunder and shall include the Existing Letters of Credit.
“Letter of Credit Application” means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by the L/C Issuer.
“Letter of Credit Expiration Date” means the day that is seven days prior to the Maturity Date then in effect for the Revolving Credit Facility (or, if such day is not a Business Day, the next preceding Business Day).
“Letter of Credit Fee” has the meaning specified in Section 2.03(h).
“Letter of Credit Sublimit” means an amount equal to $20,000,000.00. The Letter of Credit Sublimit is part of, and not in addition to, the Revolving Credit Facility.
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“Lien” means any mortgage, pledge, hypothecation, assignment, deposit arrangement, encumbrance, lien (statutory or other), charge, or preference, priority or other security interest or preferential arrangement in the nature of a security interest of any kind or nature whatsoever (including any conditional sale or other title retention agreement, any easement, right of way or other encumbrance on title to real property, and any financing lease having substantially the same economic effect as any of the foregoing).
“Loan” means an extension of credit by a Lender to the Borrower under Article II in the form of a Term Loan, a Revolving Credit Loan or a Swing Line Loan.
“Loan Documents” means this Agreement, each Note, each Issuer Document, the Engagement Letter, each Guaranty, the Collateral Documents, the Foreign Security Documents and each agreement creating or perfecting rights in Cash Collateral pursuant to the provisions of Section 2.16 of this Agreement.
“Loan Parties” means, collectively, the Borrower and each Guarantor (as applicable).
“Material Adverse Effect” means (a) a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole; (b) a material impairment of the rights and remedies of the Administrative Agent or any Lender under any Loan Document; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against any Loan Party of any Loan Document to which it is a party.
“Material Contract” means, with respect to any Person, each contract to which such Person is a party involving aggregate consideration payable to or by such Person of $5,000,000 or more in any year or otherwise material to the business, condition (financial or otherwise), operations, performance, properties or prospects of such Person.
“Material Subsidiary” means any direct or indirect Subsidiary of the Borrower (a) with unconsolidated assets representing five percent (5%) or more of the consolidated total assets of the Borrower, (b) with unconsolidated revenues representing five percent (5%) or more of the consolidated revenues of the Borrower, in each of the foregoing clauses (a) and (b), measured as of the date of the most recent financial statements provided pursuant to Section 6.01 , or (c) otherwise designated by the Borrower as a “Material Subsidiary.”
“Material Domestic Subsidiary” means any Domestic Subsidiary that is a Material Subsidiary.
“Material Foreign Subsidiary” means any Foreign Subsidiary that is a Material Subsidiary.
“Maturity Date” means (a) with respect to the Revolving Credit Facility, February 25, 2015 and (b) with respect to the Term Loan Facility, February 25, 2015; provided , however , that, in each case, if such date is not a Business Day, the Maturity Date shall be the next preceding Business Day.
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“Measurement Period” means, at any date of determination, the most recently completed four fiscal quarters of the Borrower or, if fewer than four consecutive fiscal quarters of the Borrower have been completed since the Initial Funding Date, the fiscal quarters of the Borrower that have been completed since the Initial Funding Date; provided that: (a) for purposes of determining an amount of any item included in the calculation of a financial ratio or financial covenant (other than Consolidated EBITDA) for the fiscal quarter ended April 30, 2010, such amount for the Measurement Period then ended shall equal such item for such fiscal quarter multiplied by four; (b) for purposes determining an amount of any item included in the calculation of a financial ratio or financial covenant (other than Consolidated EBITDA) for the fiscal quarter ended July 31, 2010, such amount for the Measurement Period then ended shall equal such item for the two fiscal quarters then ended multiplied by two; and (c) for purposes of determining an amount of any item included in the calculation of a financial ratio or financial covenant (other than Consolidated EBITDA) for the fiscal quarter ended October 31, 2010, such amount for the Measurement Period then ended shall equal such item for the three fiscal quarters then ended multiplied by 4/3. Consolidated EBITDA for periods ending prior to the Initial Funding Date shall equal the amounts set forth in the table included in the definition thereof.
“Minor Acquisition” means any investment by the Borrower or any Guarantor in the form of acquisitions of all or substantially all of the business or a line of business (whether by the acquisition of capital stock, assets or any combination thereof) of any other Person; provided that the total cash and non-cash consideration for such acquisition shall not exceed $10,000,000.
“Moody’s” means Moody’s Investors Service, Inc. and any successor thereto.
“Multiemployer Plan” means any employee benefit plan of the type described in Section 4001(a)(3) of ERISA, to which the Borrower or any ERISA Affiliate makes or is obligated to make contributions, or during the preceding five plan years, has made or been obligated to make contributions.
“Multiple Employer Plan” means a Plan which has two or more contributing sponsors (including the Borrower or any ERISA Affiliate) at least two of whom are not under common control, as such a plan is described in Section 4064 of ERISA.
“Net Cash Proceeds” means:
(a) with respect to any Disposition by the Borrower or any of its Subsidiaries, or any Extraordinary Receipt received or paid to the account of the Borrower or any of its Subsidiaries, the excess, if any, of (i) the sum of cash and Cash Equivalents received in connection with such transaction (including any cash or Cash Equivalents received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) over (ii) the sum of (A) the principal amount of any Indebtedness that is secured by the applicable asset and that is required to be repaid in connection with such transaction (other than Indebtedness under the Loan Documents), (B) the out-of-pocket expenses incurred (or reasonably expected to be incurred) by the Borrower or such Subsidiary in connection with such transaction and (C) taxes reasonably estimated to be actually payable within two years of the date of the relevant transaction, including any taxes payable as a result of any gain recognized in connection therewith; provided that, if the amount of any estimated taxes pursuant to subclause (C) exceeds the amount of taxes actually required to be paid in cash in respect of such Disposition, the aggregate amount of such excess shall constitute Net Cash Proceeds; and
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(b) with respect to the sale or issuance of any Equity Interest by the Borrower or any of its Subsidiaries, or the incurrence or issuance of any Indebtedness by the Borrower or any of its Subsidiaries, the excess of (i) the sum of the cash and Cash Equivalents received in connection with such transaction over (ii) the underwriting discounts and commissions, and other out-of-pocket expenses, incurred by the Borrower or such Subsidiary in connection therewith.
“Note” means a Term Loan Note or a Revolving Credit Note, as the context may require.
“Obligations” means all advances to, and debts, liabilities, obligations, covenants and duties of, any Loan Party arising under any Loan Document or otherwise with respect to any Loan, Letter of Credit, Secured Cash Management Agreement or Secured Hedge Agreement, in each case, whether direct or indirect (including those acquired by assumption), absolute or contingent, due or to become due, now existing or hereafter arising and including interest and fees that accrue after the commencement by or against any Loan Party or any Affiliate thereof of any proceeding under any Debtor Relief Laws naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.
“Organization Documents” means, (a) with respect to any corporation, the certificate or articles of incorporation and the bylaws (or equivalent or comparable constitutive documents with respect to any non-U.S. jurisdiction); (b) with respect to any limited liability company, the certificate or articles of formation or organization and operating agreement; and (c) with respect to any partnership, joint venture, trust or other form of business entity, the partnership, joint venture or other applicable agreement of formation or organization and any agreement, instrument, filing or notice with respect thereto filed in connection with its formation or organization with the applicable Governmental Authority in the jurisdiction of its formation or organization and, if applicable, any certificate or articles of formation or organization of such entity.
“Other Taxes” means all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or under any other Loan Document or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.
“Outstanding Amount” means (a) with respect to Term Loans, Revolving Credit Loans and Swing Line Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Term Loans, Revolving Credit Loans and Swing Line Loans, as the case may be, occurring on such date; and (b) with respect to any L/C Obligations on any date, the amount of such L/C Obligations on such date after giving effect to any L/C Credit Extension occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements by the Borrower of Unreimbursed Amounts.
“Participant” has the meaning specified in Section 10.06(d).
“PBGC” means the Pension Benefit Guaranty Corporation.
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“Pension Act” means the Pension Protection Act of 2006.
“Pension Funding Rules” means the rules of the Code and ERISA regarding minimum required contributions (including any installment payment thereof) to Pension Plans and set forth in, with respect to plan years ending prior to the effective date of the Pension Act, Section 412 of the Code and Section 302 of ERISA, each as in effect prior to the Pension Act and, thereafter, Section 412, 430, 431, 432 and 436 of the Code and Sections 302, 303, 304 and 305 of ERISA.
“Pension Plan” means any employee pension benefit plan (including a Multiple Employer Plan or a Multiemployer Plan) that is maintained or is contributed to by the Borrower and any ERISA Affiliate and is either covered by Title IV of ERISA or is subject to the minimum funding standards under Section 412 of the Code
“Permitted Acquisition” means any investment by the Borrower or any Guarantor in the form of acquisitions of all or substantially all of the business or a line of business or a separate operation (whether by the acquisition of capital stock, assets or any combination thereof) of any other Person if each such acquisition meets all of the following requirements:
(a) the Administrative Agent and the Lenders (or only the Administrative Agent with respect to any Minor Acquisition) shall receive written notice of such acquisition not less than twenty (20) days prior to closing, together with a reasonable summary description of the relevant acquisition, pro forma projections and financial statements;
(b) if the survivor/acquired entity or assets shall be (or shall be owned by) a Subsidiary following such transaction, the survivor/acquired entity becomes a Guarantor and a party to the then current Loan Documents in accordance with the terms of such Loan Documents;
(c) the acquired entity, assets or operations shall be in a substantially similar line of business as the Borrower and its subsidiaries, or a line of business reasonably related thereto;
(d) the Lenders shall receive resolutions of the board of directors of the acquired company approving the acquisition prior to closing (except in the case of an acquisition of a Subsidiary of an entity, or of assets of an entity);
(e) with respect to any acquisition (other than a Minor Acquisition) the Borrower shall provide to the Lenders evidence that the acquired company had positive EBITDA for the four consecutive fiscal quarter period ending on or immediately prior to the consummation of the proposed acquisition;
(f) the total cash and non-cash consideration (including the fair market value of all Equity Interests issued or transferred to the sellers thereof, and all earnouts and other contingent payment obligations to the sellers thereof, and all assumptions of Indebtedness in connection therewith) for such acquisition (or series of related acquisitions) together with the total cash and non-cash consideration for all prior acquisitions consummated during the four consecutive fiscal quarter period ending on or immediately prior to the consummation of the proposed acquisition, shall not exceed 50% of Consolidated Excess Cash Flow permitted to be retained by the Borrower and its Subsidiaries pursuant to the terms hereof on a consolidated basis for the fiscal year ending on or immediately prior to the consummation of the proposed acquisition, so long as the Borrower has delivered a written calculation of Consolidated Excess Cash Flow for such fiscal year in form and substance reasonably acceptable to the Administrative Agent;
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(g) there shall be at least $50,000,000 of availability under the Revolving Credit Facility after making such acquisition;
(h) the Borrower shall deliver to the Administrative Agent and the Lenders, at least five (5) Business Days prior to closing, a certificate of a Responsible Officer evidencing pro forma compliance with the financial covenants set forth in Section 7.11 (both before and after giving effect to the proposed acquisition);
(i) no Default or Event of Default shall have occurred and be continuing as of the closing date of the proposed acquisition; and
(j) no such acquisition shall be permitted prior to July 31, 2011 without the consent of the Required Lenders.
“Permitted Liens” means those Liens permitted pursuant to Section 7.01.
“Person” means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
“Plan” means any employee benefit plan within the meaning of Section 3(3) of ERISA (including a Pension Plan), maintained for employees of the Borrower or any ERISA Affiliate or any such Plan to which the Borrower or any ERISA Affiliate is required to contribute on behalf of any of its employees.
“Platform” has the meaning specified in Section 6.02.
“Public Lender” has the meaning specified in Section 6.02.
“Reduction Amount” has the meaning set forth in Section 2.05(b)(viii).
“Register” has the meaning specified in Section 10.06(c).
“Related Parties” means, with respect to any Person, such Person’s Affiliates and the partners, directors, officers, employees, agents, trustees and advisors of such Person and of such Person’s Affiliates.
“Reportable Event” means any of the events set forth in Section 4043(c) of ERISA, other than events for which the 30 day notice period has been waived.
“Request for Credit Extension” means (a) with respect to a Borrowing, conversion or continuation of Term Loans or Revolving Credit Loans, a Committed Loan Notice, (b) with respect to an L/C Credit Extension, a Letter of Credit Application, and (c) with respect to a Swing Line Loan, a Swing Line Loan Notice.
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“Required Lenders” means, as of any date of determination, Lenders holding more than 50% of the sum of the (a) Total Outstandings (with the aggregate amount of each Revolving Credit Lender’s risk participation and funded participation in L/C Obligations and Swing Line Loans being deemed “held” by such Revolving Credit Lender for purposes of this definition) and (b) aggregate unused Revolving Credit Commitments; provided that the unused Revolving Credit Commitment of, and the portion of the Total Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Lenders.
“Required Revolving Lenders” means, as of any date of determination, Revolving Credit Lenders holding more than 50% of the sum of the (a) Total Revolving Credit Outstandings (with the aggregate amount of each Revolving Credit Lender’s risk participation and funded participation in L/C Obligations and Swing Line Loans being deemed “held” by such Revolving Credit Lender for purposes of this definition) and (b) aggregate unused Revolving Credit Commitments; provided that the unused Revolving Credit Commitment of, and the portion of the Total Revolving Credit Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Revolving Lenders.
“Required Term Loan Lenders” means, as of any date of determination, Term Loan Lenders holding more than 50% of the Term Loan Facility on such date; provided that the portion of the Term Loan Facility held by any Defaulting Lender shall be excluded for purposes of making a determination of Required Term Loan Lenders.
“Responsible Officer” means the chief executive officer, president, chief financial officer, treasurer, assistant treasurer or controller of a Loan Party. Any document delivered hereunder that is signed by a Responsible Officer of a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Loan Party and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Loan Party.
“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any capital stock or other Equity Interest of any Person or any of its Subsidiaries, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, defeasance, acquisition, cancellation or termination of any such capital stock or other Equity Interest, or on account of any return of capital to any Person’s stockholders, partners or members (or the equivalent or any thereof) or any option, warrant or other right to acquire any such dividend or other distribution or payment.
“Revolving Credit Borrowing” means a borrowing consisting of simultaneous Revolving Credit Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Revolving Credit Lenders pursuant to Section 2.01(b) .
“Revolving Credit Commitment” means, as to each Revolving Credit Lender, its obligation to (a) make Revolving Credit Loans to the Borrower pursuant to Section 2.01(b) , (b) purchase participations in L/C Obligations, and (c) purchase participations in Swing Line Loans, in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Lender’s name on Schedule 2.01 under the caption “Revolving Credit Commitment” or opposite such caption in the Assignment and Assumption pursuant to which such Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement.
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“Revolving Credit Facility” means, at any time, the aggregate amount of the Revolving Credit Lenders’ Revolving Credit Commitments at such time.
“Revolving Credit Lender” means, at any time, any Lender that has a Revolving Credit Commitment at such time.
“Revolving Credit Loan” has the meaning specified in Section 2.01(b).
“Revolving Credit Note” means a promissory note made by the Borrower in favor of a Revolving Credit Lender evidencing Revolving Credit Loans or Swing Line Loans, as the case may be, made by such Revolving Credit Lender, substantially in the form of Exhibit C-2 .
“Salem, Oregon Facility” means the real property located at 3125 Kettle Court Southeast, Salem, Oregon 97301-5572.
“S&P” means Standard & Poor’s Ratings Services, a division of The McGraw-Hill Companies, Inc., and any successor thereto.
“Seller” means Lion Capital LLP (or an Affiliate thereof).
“SEC” means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.
“Secured Cash Management Agreement” means any Cash Management Agreement that is entered into by and between any Loan Party and any Cash Management Bank.
“Secured Hedge Agreement” means any interest rate Swap Contract or foreign exchange and currency Swap Contract permitted under or required by this Agreement that is entered into by and between a Loan Party and any Hedge Bank.
“Secured Parties” means, collectively, the Administrative Agent, the Lenders, the L/C Issuer, the Hedge Banks, the Cash Management Banks, each co-agent or sub-agent appointed by the Administrative Agent from time to time pursuant to Section 9.05 , and the other Persons the Obligations owing to which are or are purported to be secured by the Collateral under the terms of the Collateral Documents.
“Solvent” and “Solvency” mean, with respect to any Person on any date of determination, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Person’s ability to pay such debts and liabilities as they mature, (d) such Person is not engaged in business
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or a transaction, and is not about to engage in business or a transaction, for which such Person’s property would constitute an unreasonably small capital, and (e) such Person is able to pay its debts and liabilities, contingent obligations and other commitments as they mature in the ordinary course of business. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
“Stockholders’ Equity” means, as of any date of determination, consolidated stockholders’ equity of the Borrower and its Subsidiaries as of that date determined in accordance with GAAP.
“Subsidiary” of a Person means a corporation, partnership, joint venture, limited liability company or other business entity of which a majority of the shares of securities or other interests having ordinary voting power for the election of directors or other governing body (other than securities or interests having such power only by reason of the happening of a contingency) are at the time beneficially owned, or the management of which is otherwise controlled, directly, or indirectly through one or more intermediaries, or both, by such Person. Unless otherwise specified, all references herein to a “Subsidiary” or to “Subsidiaries” shall refer to a Subsidiary or Subsidiaries of the Borrower.
“Swap Contract” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other similar master agreement relating to a transaction described in clause (a) (any such master agreement, together with any related schedules, a “ Master Agreement ”), including any such obligations or liabilities under any Master Agreement.
“Swap Termination Value” means, in respect of any one or more Swap Contracts, after taking into account the effect of any legally enforceable netting agreement relating to such Swap Contracts, (a) for any date on or after the date such Swap Contracts have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Swap Contracts, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Swap Contracts (which may include a Lender or any Affiliate of a Lender).
“Swing Line Borrowing” means a borrowing of a Swing Line Loan pursuant to Section 2.04.
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“Swing Line Lender” means Bank of America in its capacity as provider of Swing Line Loans, or any successor swing line lender hereunder.
“Swing Line Loan” has the meaning specified in Section 2.04(a).
“Swing Line Loan Notice” means a notice of a Swing Line Borrowing pursuant to Section 2.04(b), which, if in writing, shall be substantially in the form of Exhibit B .
“Swing Line Sublimit” means an amount equal to the lesser of (a) $20,000,000 and (b) the Revolving Credit Facility. The Swing Line Sublimit is part of, and not in addition to, the Revolving Credit Facility.
“Syndication Agents” means, collectively, Barclays Capital, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York Branch, and Bank of Montreal.
“Synthetic Lease Obligation” means the monetary obligation of a Person under (a) a so-called synthetic, off-balance sheet or tax retention lease, or (b) an agreement for the use or possession of property (including sale and leaseback transactions) creating obligations that do not appear on the balance sheet of such Person but which, upon the application of any Debtor Relief Laws to such Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).
“Target Material Adverse Effect” means a material adverse change in, or a material adverse effect upon, the operations, business, properties, liabilities (actual or contingent), condition (financial or otherwise) or prospects of the Acquired Business taken as a whole.
“Taxes” means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“Term Loan Borrowing” means a borrowing consisting of simultaneous Term Loans of the same Type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by each of the Term Loan Lenders pursuant to Section 2.01(a) .
“Term Loan Commitment” means, as to each Term Loan Lender, its obligation to make Term Loans to the Borrower pursuant to Section 2.01(a) in an aggregate principal amount at any one time outstanding not to exceed the amount set forth opposite such Term Loan Lender’s name on Schedule 2.01 under the caption “Term Loan Commitment” or opposite such caption in the Assignment and Assumption pursuant to which such Term Loan Lender becomes a party hereto, as applicable, as such amount may be adjusted from time to time in accordance with this Agreement.
“Term Loan Facility” means, at any time, (a) on or prior to the Initial Funding Date, the aggregate amount of the Term Loan Commitments at such time and (b) thereafter, the aggregate principal amount of the Term Loans of all Term Loan Lenders outstanding at such time.
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“Term Loan Lender” means (a) at any time on or prior to the Initial Funding Date, any Lender that has a Term Loan Commitment at such time and (b) at any time after the Initial Funding Date, any Lender that holds Term Loans at such time.
“Term Loan” means an advance made by any Term Loan Lender under the Term Loan Facility.
“Term Note” means a promissory note made by the Borrower in favor of a Term Loan Lender evidencing Term Loans made by such Term Loan Lender, substantially in the form of Exhibit C-1 .
“Threshold Amount” means $10,000,000.
“Total Revolving Credit Outstandings” means the aggregate Outstanding Amount of all Revolving Credit Loans, Swing Line Loans and L/C Obligations.
“Total Outstandings” means the aggregate Outstanding Amount of all Loans and all L/C Obligations.
“Transaction” means, collectively, (a) the consummation of the Acquisition, (b) the entering into by the Borrower and its Subsidiaries of the Loan Documents to which they are or are intended to be a party, (c) the refinancing of certain outstanding Indebtedness of the Borrower and its Subsidiaries and the termination of all commitments with respect thereto, (d) the execution and delivery of commitment documents and/or definitive documentation for the Bridge Facility, (e) the consummation of (i) the Equity Issuance and/or (ii) a borrowing under the Bridge Facility, and (f) the payment of the fees and expenses incurred in connection with the consummation of the foregoing.
“Type” means, with respect to a Loan, its character as a Base Rate Loan or a Eurodollar Rate Loan.
“UCC” means the Uniform Commercial Code as in effect in the State of New York; provided that, if perfection or the effect of perfection or non-perfection or the priority of any security interest in any Collateral is governed by the Uniform Commercial Code as in effect in a jurisdiction other than the State of New York, “UCC” means the Uniform Commercial Code as in effect from time to time in such other jurisdiction for purposes of the provisions hereof relating to such perfection, effect of perfection or non-perfection or priority.
“United States” and “U.S.” mean the United States of America.
“Unreimbursed Amount” has the meaning specified in Section 2.03(c)(i).
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1.02 Other Interpretive Provisions. With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document:
(a) The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “ include ,” “ includes ” and “ including ” shall be deemed to be followed by the phrase “without limitation.” The word “ will ” shall be construed to have the same meaning and effect as the word “ shall .” Unless the context requires otherwise, (i) any definition of or reference to any agreement, instrument or other document (including any Organization Document) shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein or in any other Loan Document), (ii) any reference herein to any Person shall be construed to include such Person’s successors and assigns, (iii) the words “ herein ,” “ hereof ” and “ hereunder ,” and words of similar import when used in any Loan Document, shall be construed to refer to such Loan Document in its entirety and not to any particular provision thereof, (iv) all references in a Loan Document to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, the Loan Document in which such references appear, (v) any reference to any law shall include all statutory and regulatory provisions consolidating, amending, replacing or interpreting such law and any reference to any law or regulation shall, unless otherwise specified, refer to such law or regulation as amended, modified or supplemented from time to time, and (vi) the words “ asset ” and “ property ” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
(b) In the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including ;” the words “ to ” and “ until ” each mean “ to but excluding; ” and the word “ through ” means “ to and including .”
(c) Section headings herein and in the other Loan Documents are included for convenience of reference only and shall not affect the interpretation of this Agreement or any other Loan Document.
1.03 Accounting Terms. (a) Generally. All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with GAAP applied on a consistent basis, as in effect from time to time, applied in a manner consistent with that used in preparing the Audited Financial Statements, except as otherwise specifically prescribed herein. Notwithstanding the foregoing, for purposes of determining compliance with any covenant (including the computation of any financial covenant) contained herein, Indebtedness of the Borrower and its Subsidiaries shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects of FASB ASC 825 on financial liabilities shall be disregarded.
(b) Changes in GAAP. If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Required Lenders shall so request, the Administrative Agent, the Lenders and the Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Lenders); provided that , until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (ii) the Borrower shall provide to the Administrative Agent and the Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.
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1.04 Rounding. Any financial ratios required to be maintained by the Borrower pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
1.05 Times of Day. Unless otherwise specified, all references herein to times of day shall be references to Pacific time (daylight or standard, as applicable).
1.06 Letter of Credit Amounts. Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided , however , that with respect to any Letter of Credit that, by its terms or the terms of any Issuer Document related thereto, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time.
ARTICLE II.
THE COMMITMENTS AND CREDIT EXTENSIONS
2.01 The Loans. (a) The Term Loan Borrowing. Subject to the terms and conditions set forth herein, each Term Loan Lender severally agrees to make a single loan to the Borrower on the Initial Funding Date in an amount not to exceed such Term Loan Lender’s Term Loan Commitment Percentage of the Term Loan Facility. The Term Loan Borrowing shall consist of Term Loans made simultaneously by the Term Loan Lenders in accordance with their respective Applicable Percentage of the Term Loan Facility. Amounts borrowed under this Section 2.01(a) and repaid or prepaid may not be reborrowed. Term Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein.
(b) The Revolving Credit Borrowings. Subject to the terms and conditions set forth herein, each Revolving Credit Lender severally agrees to make loans (each such loan, a “ Revolving Credit Loan ”) to the Borrower from time to time, on any Business Day during the Availability Period, in an amount not to exceed such Lender’s Revolving Credit Commitment Percentage of each Revolving Credit Loan; provided , however , that after giving effect to any Revolving Credit Borrowing, (i) the Total Revolving Credit Outstandings shall not exceed the Revolving Credit Facility, and (ii) the aggregate Outstanding Amount of the Revolving Credit Loans of any Lender, plus such Revolving Credit Lender’s Applicable Revolving Credit Percentage of the Outstanding Amount of all L/C Obligations, plus such Revolving Credit Lender’s Applicable Revolving Credit Percentage of the Outstanding Amount of all Swing Line Loans shall not exceed such Revolving Credit Lender’s Revolving Credit Commitment. Within the limits of each Revolving Credit Lender’s Revolving Credit Commitment, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.01(b) , prepay under Section 2.05 , and reborrow under this Section 2.01(b) . Revolving Credit Loans may be Base Rate Loans or Eurodollar Rate Loans, as further provided herein.
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2.02 Borrowings, Conversions and Continuations of Loans. (a) Each Term Loan Borrowing, each Revolving Credit Borrowing, each conversion of Term Loans or Revolving Credit Loans from one Type to the other, and each continuation of Eurodollar Rate Loans shall be made upon the Borrower’s irrevocable notice to the Administrative Agent, which may be given by telephone. Each such notice must be received by the Administrative Agent not later than 11:00 a.m. (i) three Business Days prior to the requested date of any Borrowing of, conversion to or continuation of Eurodollar Rate Loans or of any conversion of Eurodollar Rate Loans to Base Rate Loans, and (ii) on the requested date of any Borrowing of Base Rate Loans. Each telephonic notice by the Borrower pursuant to this Section 2.02(a) must be confirmed promptly by delivery to the Administrative Agent of a written Committed Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Each Borrowing of, conversion to or continuation of Eurodollar Rate Loans shall be in a principal amount of $2,000,000 or a whole multiple of $250,000 in excess thereof. Except as provided in Sections 2.03(c) and 2.04(c) , each Borrowing of or conversion to Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $250,000 in excess thereof. Each Committed Loan Notice (whether telephonic or written) shall specify (i) whether the Borrower is requesting a Term Loan Borrowing, a Revolving Credit Borrowing, a conversion of Term Loans or Revolving Credit Loans from one Type to the other, or a continuation of Eurodollar Rate Loans, (ii) the requested date of the Borrowing, conversion or continuation, as the case may be (which shall be a Business Day), (iii) the principal amount of Loans to be borrowed, converted or continued, (iv) the Type of Loans to be borrowed or to which existing Term Loans or Revolving Credit Loans are to be converted, and (v) if applicable, the duration of the Interest Period with respect thereto. If the Borrower fails to specify a Type of Loan in a Committed Loan Notice or if the Borrower fails to give a timely notice requesting a conversion or continuation, then the applicable Term Loans or Revolving Credit Loans shall be made as, or converted to, Base Rate Loans. Any such automatic conversion to Base Rate Loans shall be effective as of the last day of the Interest Period then in effect with respect to the applicable Eurodollar Rate Loans. If the Borrower requests a Borrowing of, conversion to, or continuation of Eurodollar Rate Loans in any such Committed Loan Notice, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month. Notwithstanding anything to the contrary herein, a Swing Line Loan may not be converted to a Eurodollar Rate Loan.
(b) Following receipt of a Committed Loan Notice, the Administrative Agent shall promptly notify each Lender of the amount of its Applicable Percentage under the applicable Facility of the applicable Term Loans or Revolving Credit Loans, and if no timely notice of a conversion or continuation is provided by the Borrower, the Administrative Agent shall notify each Lender of the details of any automatic conversion to Base Rate Loans described in Section 2.02(a) . In the case of a Term Loan Borrowing or a Revolving Credit Borrowing, each Appropriate Lender shall make the amount of its Loan available to the Administrative Agent in immediately available funds at the Administrative Agent’s Office not later than 1:00 p.m. on the Business Day specified in the applicable Committed Loan Notice. Upon satisfaction of the applicable conditions set forth in Section 3 of the effectiveness agreement (and, if such Borrowing is the initial Credit Extension, Section 4.01 ), the Administrative Agent shall make all funds so received available to the Borrower in like funds as received by the Administrative Agent either by (i) crediting the
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account of the Borrower on the books of Bank of America with the amount of such funds or (ii) wire transfer of such funds, in each case in accordance with instructions provided to (and reasonably acceptable to) the Administrative Agent by the Borrower; provided , however , that if, on the date a Committed Loan Notice with respect to a Revolving Credit Borrowing is given by the Borrower, there are L/C Borrowings outstanding, then the proceeds of such Revolving Credit Borrowing, first , shall be applied to the payment in full of any such L/C Borrowings, and second , shall be made available to the Borrower as provided above.
(c) Except as otherwise provided herein, a Eurodollar Rate Loan may be continued or converted only on the last day of an Interest Period for such Eurodollar Rate Loan. During the existence of a Default, no Loans may be requested as, converted to or continued as Eurodollar Rate Loans without the consent of the Required Lenders.
(d) The Administrative Agent shall promptly notify the Borrower and the Lenders of the interest rate applicable to any Interest Period for Eurodollar Rate Loans upon determination of such interest rate. At any time that Base Rate Loans are outstanding, the Administrative Agent shall notify the Borrower and the Lenders of any change in Bank of America’s prime rate used in determining the Base Rate promptly following the public announcement of such change.
(e) After giving effect to all Term Loan Borrowings, all conversions of Term Loans from one Type to the other, and all continuations of Term Loans as the same Type, there shall not be more than ten (10) Interest Periods in effect in respect of the Term Loan Facility at any one time. After giving effect to all Revolving Credit Borrowings, all conversions of Revolving Credit Loans from one Type to the other, and all continuations of Revolving Credit Loans as the same Type, there shall not be more than ten (10) Interest Periods in effect in respect of the Revolving Credit Facility at any one time.
2.03 Letters of Credit. (a) The Letter of Credit Commitment. (i) Subject to the terms and conditions set forth herein, (A) the L/C Issuer agrees, in reliance upon the agreements of the Revolving Credit Lenders set forth in this Section 2.03 , (1) from time to time on any Business Day during the period from the Initial Funding Date until the Letter of Credit Expiration Date, to issue Letters of Credit for the account of the Borrower, and to amend or extend Letters of Credit previously issued by it, in accordance with Section 2.03(b) , and (2) to honor drawings under the Letters of Credit; and (B) the Revolving Credit Lenders severally agree to participate in Letters of Credit issued for the account of the Borrower and any drawings thereunder; provided that after giving effect to any L/C Credit Extension with respect to any Letter of Credit, (x) the Total Revolving Credit Outstandings shall not exceed the Revolving Credit Facility, (y) the aggregate Outstanding Amount of the Revolving Credit Loans of any Revolving Credit Lender, plus such Lender’s Applicable Revolving Credit Percentage of the Outstanding Amount of all L/C Obligations, plus such Lender’s Applicable Revolving Credit Percentage of the Outstanding Amount of all Swing Line Loans shall not exceed such Lender’s Revolving Credit Commitment, and (z) the Outstanding Amount of the L/C Obligations shall not exceed the Letter of Credit Sublimit. Each request by the Borrower for the issuance or amendment of a Letter of Credit shall be deemed to be a representation by the Borrower that the L/C Credit Extension so requested complies with the conditions set forth in the proviso to the preceding sentence. Within the foregoing limits, and subject to the terms and conditions hereof, the Borrower’s ability to obtain Letters of Credit shall be fully revolving, and accordingly the
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Borrower may, during the foregoing period, obtain Letters of Credit to replace Letters of Credit that have expired or that have been drawn upon and reimbursed. All Existing Letters of Credit shall be deemed to have been issued pursuant hereto, and from and after the Initial Funding Date shall be subject to and governed by the terms and conditions hereof.
(ii) The L/C Issuer shall not issue any Letter of Credit if:
(A) subject to Section 2.03(b)(iii), the expiry date of such requested Letter of Credit would occur more than twelve months after the date of issuance or last extension, unless the Required Revolving Lenders have approved such expiry date; or
(B) the expiry date of such requested Letter of Credit would occur after the Letter of Credit Expiration Date, unless all the Revolving Credit Lenders have approved such expiry date.
(iii) The L/C Issuer shall not be under any obligation to issue any Letter of Credit if:
(A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain the L/C Issuer from issuing such Letter of Credit, or any Law applicable to the L/C Issuer or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the L/C Issuer shall prohibit, or request that the L/C Issuer refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon the L/C Issuer with respect to such Letter of Credit any restriction, reserve or capital requirement (for which the L/C Issuer is not otherwise compensated hereunder) not in effect on the Initial Funding Date, or shall impose upon the L/C Issuer any unreimbursed loss, cost or expense which was not applicable on the Initial Funding Date and which the L/C Issuer in good faith deems material to it;
(B) the issuance of such Letter of Credit would violate one or more policies of the L/C Issuer applicable to letters of credit generally;
(C) except as otherwise agreed by the Administrative Agent and the L/C Issuer, such Letter of Credit is in an initial stated amount less than $100,000; provided that such initial minimum amount shall not apply to any Existing Letter of Credit;
(D) such Letter of Credit is to be denominated in a currency other than Dollars;
(E) such Letter of Credit contains any provisions for automatic reinstatement of the stated amount after any drawing thereunder; or
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(F) any Lender is at that time a Defaulting Lender, unless the L/C Issuer has entered into arrangements, including the delivery of Cash Collateral, satisfactory to the L/C Issuer (in its sole discretion) with the Borrower or such Lender to eliminate the L/C Issuer’s actual or potential Fronting Exposure (after giving effect to Section 2.17(a)(iv) ) with respect to the Defaulting Lender arising from either the Letter of Credit then proposed to be issued or that Letter of Credit and all other L/C Obligations as to which the L/C Issuer has actual or potential Fronting Exposure, as it may elect in its sole discretion.
(iv) The L/C Issuer shall not amend any Letter of Credit if the L/C Issuer would not be permitted at such time to issue such Letter of Credit in its amended form under the terms hereof.
(v) The L/C Issuer shall be under no obligation to amend any Letter of Credit if (A) the L/C Issuer would have no obligation at such time to issue such Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of such Letter of Credit does not accept the proposed amendment to such Letter of Credit.
(vi) The L/C Issuer shall act on behalf of the Revolving Credit Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and the L/C Issuer shall have all of the benefits and immunities (A) provided to the Administrative Agent in Article IX with respect to any acts taken or omissions suffered by the L/C Issuer in connection with Letters of Credit issued by it or proposed to be issued by it and Issuer Documents pertaining to such Letters of Credit as fully as if the term “Administrative Agent” as used in Article IX included the L/C Issuer with respect to such acts or omissions, and (B) as additionally provided herein with respect to the L/C Issuer.
(b) Procedures for Issuance and Amendment of Letters of Credit; Auto-Extension Letters of Credit. (i) Each Letter of Credit shall be issued or amended, as the case may be, upon the request of the Borrower delivered to the L/C Issuer (with a copy to the Administrative Agent) in the form of a Letter of Credit Application, appropriately completed and signed by a Responsible Officer of the Borrower. Such Letter of Credit Application must be received by the L/C Issuer and the Administrative Agent not later than 11:00 a.m. at least two Business Days (or such later date and time as the Administrative Agent and the L/C Issuer may agree in a particular instance in their sole discretion) prior to the proposed issuance date or date of amendment, as the case may be. In the case of a request for an initial issuance of a Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer: (A) the proposed issuance date of the requested Letter of Credit (which shall be a Business Day); (B) the amount thereof; (C) the expiry date thereof; (D) the name and address of the beneficiary thereof; (E) the documents to be presented by such beneficiary in case of any drawing thereunder; (F) the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder; (G) the purpose and nature of the requested Letter of Credit; and (H) such other matters as the L/C Issuer may require. In the case of a request for an amendment of any outstanding Letter of Credit, such Letter of Credit Application shall specify in form and detail satisfactory to the L/C Issuer (1) the Letter of Credit to be amended; (2) the proposed date of amendment thereof (which shall be a Business Day); (3) the nature of the proposed amendment; and (4) such other matters as the L/C Issuer may require. Additionally, the Borrower shall furnish to the L/C Issuer and the Administrative Agent such other documents and information pertaining to such requested Letter of Credit issuance or amendment, including any Issuer Documents, as the L/C Issuer or the Administrative Agent may require.
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(ii) Promptly after receipt of any Letter of Credit Application, the L/C Issuer will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received a copy of such Letter of Credit Application from the Borrower and, if not, the L/C Issuer will provide the Administrative Agent with a copy thereof. Unless the L/C Issuer has received written notice from any Revolving Credit Lender, the Administrative Agent or any Loan Party, at least one Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit, that one or more applicable conditions contained in Article IV shall not then be satisfied, then, subject to the terms and conditions hereof, the L/C Issuer shall, on the requested date, issue a Letter of Credit for the account of the Borrower or enter into the applicable amendment, as the case may be, in each case in accordance with the L/C Issuer’s usual and customary business practices. Immediately upon the issuance of each Letter of Credit, each Revolving Credit Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the L/C Issuer a risk participation in such Letter of Credit in an amount equal to the product of such Revolving Credit Lender’s Applicable Revolving Credit Percentage times the amount of such Letter of Credit.
(iii) If the Borrower so requests in any applicable Letter of Credit Application, the L/C Issuer may, in its sole and absolute discretion, agree to issue a Letter of Credit that has automatic extension provisions (each, an “ Auto-Extension Letter of Credit ”); provided that any such Auto-Extension Letter of Credit must permit the L/C Issuer to prevent any such extension at least once in each twelve-month period (commencing with the date of issuance of such Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the “ Non-Extension Notice Date ”) in each such twelve-month period to be agreed upon at the time such Letter of Credit is issued. Unless otherwise directed by the L/C Issuer, the Borrower shall not be required to make a specific request to the L/C Issuer for any such extension. Once an Auto-Extension Letter of Credit has been issued, the Revolving Credit Lenders shall be deemed to have authorized (but may not require) the L/C Issuer to permit the extension of such Letter of Credit at any time to an expiry date not later than the Letter of Credit Expiration Date; provided, however , that the L/C Issuer shall not permit any such extension if (A) the L/C Issuer has determined that it would not be permitted, or would have no obligation at such time to issue such Letter of Credit in its revised form (as extended) under the terms hereof (by reason of the provisions of clause (ii) or (iii) of Section 2.03(a) or otherwise), or (B) it has received notice (which may be by telephone or in writing) on or before the day that is seven Business Days before the Non-Extension Notice Date (1) from the Administrative Agent that the Required Revolving Lenders have elected not to permit such extension or (2) from the Administrative Agent, any Revolving Credit Lender or the Borrower that one or more of the applicable conditions specified in Section 4.02 is not then satisfied, and in each such case directing the L/C Issuer not to permit such extension.
(iv) Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising bank with respect thereto or to the beneficiary thereof, the L/C Issuer will also deliver to the Borrower and the Administrative Agent a true and complete copy of such Letter of Credit or amendment.
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(c) Drawings and Reimbursements; Funding of Participations. (i) Upon receipt from the beneficiary of any Letter of Credit of any notice of a drawing under such Letter of Credit, the L/C Issuer shall notify the Borrower and the Administrative Agent thereof. Not later than 11:00 a.m. on the date of any payment by the L/C Issuer under a Letter of Credit (each such date, an “ Honor Date ”), the Borrower shall reimburse the L/C Issuer through the Administrative Agent in an amount equal to the amount of such drawing. If the Borrower fails to so reimburse the L/C Issuer by such time, the Administrative Agent shall promptly notify each Revolving Credit Lender of the Honor Date, the amount of the unreimbursed drawing (the “ Unreimbursed Amount ”), and the amount of such Revolving Credit Lender’s Applicable Revolving Credit Percentage thereof. In such event, the Borrower shall be deemed to have requested a Revolving Credit Borrowing of Base Rate Loans to be disbursed on the Honor Date in an amount equal to the Unreimbursed Amount, without regard to the minimum and multiples specified in Section 2.02 for the principal amount of Base Rate Loans, but subject to the amount of the unutilized portion of the Revolving Credit Commitments and the conditions set forth in Section 4.02 (other than the delivery of a Committed Loan Notice). Any notice given by the L/C Issuer or the Administrative Agent pursuant to this Section 2.03(c)(i) may be given by telephone if immediately confirmed in writing; provided that the lack of such an immediate confirmation shall not affect the conclusiveness or binding effect of such notice.
(ii) Each Revolving Credit Lender shall upon any notice pursuant to Section 2.03(c)(i) make funds available (and the Administrative Agent may apply Cash Collateral provided for this purpose) for the account of the L/C Issuer at the Administrative Agent’s Office in an amount equal to its Applicable Revolving Credit Percentage of the Unreimbursed Amount not later than 1:00 p.m. on the Business Day specified in such notice by the Administrative Agent, whereupon, subject to the provisions of Section 2.03(c)(iii) , each Revolving Credit Lender that so makes funds available shall be deemed to have made a Base Rate Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the L/C Issuer.
(iii) With respect to any Unreimbursed Amount that is not fully refinanced by a Revolving Credit Borrowing of Base Rate Loans because the conditions set forth in Section 4.02 cannot be satisfied or for any other reason, the Borrower shall be deemed to have incurred from the L/C Issuer an L/C Borrowing in the amount of the Unreimbursed Amount that is not so refinanced, which L/C Borrowing shall be due and payable on demand (together with interest) and shall bear interest at the Default Rate. In such event, each Revolving Credit Lender’s payment to the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(ii ) shall be deemed payment in respect of its participation in such L/C Borrowing and shall constitute an L/C Advance from such Lender in satisfaction of its participation obligation under this Section 2.03 .
(iv) Until each Revolving Credit Lender funds its Revolving Credit Loan or L/C Advance pursuant to this Section 2.03(c) to reimburse the L/C Issuer for any amount drawn under any Letter of Credit, interest in respect of such Lender’s Applicable Revolving Credit Percentage of such amount shall be solely for the account of the L/C Issuer.
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(v) Each Revolving Credit Lender’s obligation to make Revolving Credit Loans or L/C Advances to reimburse the L/C Issuer for amounts drawn under Letters of Credit, as contemplated by this Section 2.03(c) , shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the L/C Issuer, the Borrower or any other Person for any reason whatsoever; (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided, however , that each Revolving Credit Lender’s obligation to make Revolving Credit Loans pursuant to this Section 2.03(c) is subject to the conditions set forth in Section 4.02 (other than delivery by the Borrower of a Committed Loan Notice ). No such making of an L/C Advance shall relieve or otherwise impair the obligation of the Borrower to reimburse the L/C Issuer for the amount of any payment made by the L/C Issuer under any Letter of Credit, together with interest as provided herein.
(vi) If any Revolving Credit Lender fails to make available to the Administrative Agent for the account of the L/C Issuer any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.03(c) by the time specified in Section 2.03(c)(ii) , the L/C Issuer shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the L/C Issuer at a rate per annum equal to the greater of the Federal Funds Rate and a rate determined by the L/C Issuer in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the L/C Issuer in connection with the foregoing. If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Loan included in the relevant Borrowing or L/C Advance in respect of the relevant L/C Borrowing, as the case may be. A certificate of the L/C Issuer submitted to any Revolving Credit Lender (through the Administrative Agent) with respect to any amounts owing under this Section 2.03(c)(vi) shall be conclusive absent manifest error.
(d) Repayment of Participations. (i) At any time after the L/C Issuer has made a payment under any Letter of Credit and has received from any Revolving Credit Lender such Lender’s L/C Advance in respect of such payment in accordance with Section 2.03(c) , if the Administrative Agent receives for the account of the L/C Issuer any payment in respect of the related Unreimbursed Amount or interest thereon (whether directly from the Borrower or otherwise, including proceeds of Cash Collateral applied thereto by the Administrative Agent), the Administrative Agent will promptly distribute to such Lender its Applicable Revolving Credit Percentage thereof in the same funds as those received by the Administrative Agent.
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(ii) If any payment received by the Administrative Agent for the account of the L/C Issuer pursuant to Section 2.03(c)(i) is required to be returned under any of the circumstances described in Section 10.05 (including pursuant to any settlement entered into by the L/C Issuer in its discretion), each Revolving Credit Lender shall pay to the Administrative Agent for the account of the L/C Issuer its Applicable Revolving Credit Percentage thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Lender, at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders under this clause shall survive the payment in full of the Obligations and the termination of this Agreement.
(e) Obligations Absolute. The obligation of the Borrower to reimburse the L/C Issuer for each drawing under each Letter of Credit and to repay each L/C Borrowing shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including the following:
(i) any lack of validity or enforceability of such Letter of Credit, this Agreement, or any other Loan Document;
(ii) the existence of any claim, counterclaim, setoff, defense or other right that the Borrower or any Subsidiary may have at any time against any beneficiary or any transferee of such Letter of Credit (or any Person for whom any such beneficiary or any such transferee may be acting), the L/C Issuer or any other Person, whether in connection with this Agreement, the transactions contemplated hereby or by such Letter of Credit or any agreement or instrument relating thereto, or any unrelated transaction;
(iii) any draft, demand, certificate or other document presented under such Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; or any loss or delay in the transmission or otherwise of any document required in order to make a drawing under such Letter of Credit;
(iv) any payment by the L/C Issuer under such Letter of Credit against presentation of a draft or certificate that does not strictly comply with the terms of such Letter of Credit; or any payment made by the L/C Issuer under such Letter of Credit to any Person purporting to be a trustee in bankruptcy, debtor-in-possession, assignee for the benefit of creditors, liquidator, receiver or other representative of or successor to any beneficiary or any transferee of such Letter of Credit, including any arising in connection with any proceeding under any Debtor Relief Law; or
(v) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing, including any other circumstance that might otherwise constitute a defense available to, or a discharge of, the Borrower or any of its Subsidiaries.
The Borrower shall promptly examine a copy of each Letter of Credit and each amendment thereto that is delivered to it and, in the event of any claim of noncompliance with the Borrower’s instructions or other irregularity, the Borrower will immediately notify the L/C Issuer. The Borrower shall be conclusively deemed to have waived any such claim against the L/C Issuer and its correspondents unless such notice is given as aforesaid.
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(f) Role of L/C Issuer. Each Lender and the Borrower agree that, in paying any drawing under a Letter of Credit, the L/C Issuer shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. None of the L/C Issuer, the Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the L/C Issuer shall be liable to any Lender for (i) any action taken or omitted in connection herewith at the request or with the approval of the Revolving Credit Lenders or the Required Revolving Lenders, as applicable; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Issuer Document. The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided , however , that this assumption is not intended to, and shall not, preclude the Borrower’s pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement. None of the L/C Issuer, the Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the L/C Issuer shall be liable or responsible for any of the matters described in clauses (i) through (v) of Section 2.03(e) ; provided , however , that anything in such clauses to the contrary notwithstanding, the Borrower may have a claim against the L/C Issuer, and the L/C Issuer may be liable to the Borrower, to the extent, but only to the extent, of any direct, as opposed to consequential or exemplary, damages suffered by the Borrower which the Borrower proves were caused by the L/C Issuer’s willful misconduct or gross negligence or the L/C Issuer’s willful failure to pay under any Letter of Credit after the presentation to it by the beneficiary of a sight draft and certificate(s) strictly complying with the terms and conditions of a Letter of Credit. In furtherance and not in limitation of the foregoing, the L/C Issuer may accept documents that appear on their face to be in order, without responsibility for further investigation, regardless of any notice or information to the contrary, and the L/C Issuer shall not be responsible for the validity or sufficiency of any instrument transferring or assigning or purporting to transfer or assign a Letter of Credit or the rights or benefits thereunder or proceeds thereof, in whole or in part, which may prove to be invalid or ineffective for any reason.
(g) Applicability of ISP. Unless otherwise expressly agreed by the L/C Issuer and the Borrower when a Letter of Credit is issued (including any such agreement applicable to an Existing Letter of Credit), the rules of the ISP shall apply to each Letter of Credit.
(h) Letter of Credit Fees. The Borrower shall pay to the Administrative Agent for the account of each Revolving Credit Lender in accordance with its Applicable Revolving Credit Percentage a Letter of Credit fee (the “ Letter of Credit Fee ”) for each Letter of Credit equal to the Applicable Rate times the daily amount available to be drawn under such Letter of Credit; provided that any Letter of Credit Fees otherwise payable for the account of a Defaulting Lender with respect to any Letter of Credit as to which such Defaulting Lender has not provided Cash Collateral satisfactory to the L/C Issuer pursuant to this Section 2.03 shall be payable, to the maximum extent permitted by applicable Law, to the other Lenders in accordance with the upward adjustments in their respective Applicable Percentages allocable to such Letter of Credit pursuant to Section 2.17(a)(iv) , with the balance of such fee, if any, payable to the L/C Issuer for its own account. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with
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Section 1.06; provided that with respect to all Existing Letters of Credit, the Administrative Agent shall be entitled to rely conclusively on the most recent information provided with respect to such Existing Letters of Credit pursuant to Section 2.03(k) . Letter of Credit Fees shall be (i) due and payable on the first Business Day after the end of each January, April, July and October, commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on demand and (ii) computed on a quarterly basis in arrears. If there is any change in the Applicable Rate during any quarter, the daily amount available to be drawn under each Letter of Credit shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect. Notwithstanding anything to the contrary contained herein, upon the request of the Required Revolving Lenders, while any Event of Default exists, all Letter of Credit Fees shall accrue at the Default Rate.
(i) Fronting Fee and Documentary and Processing Charges Payable to L/C Issuer. The Borrower shall pay directly to the L/C Issuer for its own account a fronting fee with respect to each Letter of Credit, at the rate per annum specified in the Engagement Letter, computed on the daily amount available to be drawn under such Letter of Credit on a quarterly basis in arrears. Such fronting fee shall be due and payable on the tenth Business Day after the end of each January, April, July and October in respect of the most recently-ended quarterly period (or portion thereof, in the case of the first payment), commencing with the first such date to occur after the issuance of such Letter of Credit, on the Letter of Credit Expiration Date and thereafter on demand. For purposes of computing the daily amount available to be drawn under any Letter of Credit, the amount of such Letter of Credit shall be determined in accordance with Section 1.06 . In addition, the Borrower shall pay directly to the L/C Issuer for its own account the customary issuance, presentation, amendment and other processing fees, and other standard costs and charges, of the L/C Issuer relating to letters of credit as from time to time in effect. Such customary fees and standard costs and charges are due and payable on demand and are nonrefundable.
(j) Conflict with Issuer Documents. In the event of any conflict between the terms hereof and the terms of any Issuer Document, the terms hereof shall control.
(k) Reporting Requirements Regarding Existing Letters of Credit. The Borrower and any issuer of an Existing Letter of Credit shall promptly notify the L/C Issuer and the Administrative Agent of any amendment of, modification of, or drawing of such Existing Letter of Credit, including, without limitation, any increase, decrease, extension, renewal, or cancellation of such Existing Letter of Credit.
2.04 Swing Line Loans. (a) The Swing Line. Subject to the terms and conditions set forth herein, the Swing Line Lender, in reliance upon the agreements of the other Lenders set forth in this Section 2.04 , may in its sole discretion make loans (each such loan, a “ Swing Line Loan ”) to the Borrower from time to time on any Business Day during the Availability Period in an aggregate amount not to exceed at any time outstanding the amount of the Swing Line Sublimit, notwithstanding the fact that such Swing Line Loans, when aggregated with the Applicable Revolving Credit Percentage of the Outstanding Amount of Revolving Credit Loans and L/C Obligations of the Lender acting as Swing Line Lender, may exceed the amount of such Lender’s Revolving Credit Commitment; provided , however, that after giving effect to any
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Swing Line Loan, (i) the Total Revolving Credit Outstandings shall not exceed the Revolving Credit Facility at such time, and (ii) the aggregate Outstanding Amount of the Revolving Credit Loans of any Revolving Credit Lender at such time, plus such Revolving Credit Lender’s Applicable Revolving Credit Percentage of the Outstanding Amount of all L/C Obligations at such time, plus such Revolving Credit Lender’s Applicable Revolving Credit Percentage of the Outstanding Amount of all Swing Line Loans at such time shall not exceed such Lender’s Revolving Credit Commitment, and provided further that the Borrower shall not use the proceeds of any Swing Line Loan to refinance any outstanding Swing Line Loan. Within the foregoing limits, and subject to the other terms and conditions hereof, the Borrower may borrow under this Section 2.04 , prepay under Section 2.05 , and reborrow under this Section 2.04 . Each Swing Line Loan shall bear interest only at a rate based on the Base Rate. Immediately upon the making of a Swing Line Loan, each Revolving Credit Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Swing Line Lender a risk participation in such Swing Line Loan in an amount equal to the product of such Revolving Credit Lender’s Applicable Revolving Credit Percentage times the amount of such Swing Line Loan.
(b) Borrowing Procedures. Each Swing Line Borrowing shall be made upon the Borrower’s irrevocable notice to the Swing Line Lender and the Administrative Agent, which may be given by telephone. Each such notice must be received by the Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on the requested borrowing date, and shall specify (i) the amount to be borrowed, which shall be a minimum of $100,000, and (ii) the requested borrowing date, which shall be a Business Day. Each such telephonic notice must be confirmed promptly by delivery to the Swing Line Lender and the Administrative Agent of a written Swing Line Loan Notice, appropriately completed and signed by a Responsible Officer of the Borrower. Promptly after receipt by the Swing Line Lender of any telephonic Swing Line Loan Notice, the Swing Line Lender will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has also received such Swing Line Loan Notice and, if not, the Swing Line Lender will notify the Administrative Agent (by telephone or in writing) of the contents thereof. Unless the Swing Line Lender has received notice (by telephone or in writing) from the Administrative Agent (including at the request of any Revolving Credit Lender) prior to 2:00 p.m. on the date of the proposed Swing Line Borrowing (A) directing the Swing Line Lender not to make such Swing Line Loan as a result of the limitations set forth in the first proviso to the first sentence of Section 2.04(a) , or (B) that one or more of the applicable conditions specified in Article IV is not then satisfied, then, subject to the terms and conditions hereof, the Swing Line Lender will, not later than 3:00 p.m. on the borrowing date specified in such Swing Line Loan Notice, make the amount of its Swing Line Loan available to the Borrower at its office by crediting the account of the Borrower on the books of the Swing Line Lender in immediately available funds.
(c) Refinancing of Swing Line Loans. (i) The Swing Line Lender at any time in its sole and absolute discretion may request, on behalf of the Borrower (which hereby irrevocably authorizes the Swing Line Lender to so request on its behalf), that each Revolving Credit Lender make a Base Rate Loan in an amount equal to such Lender’s Applicable Revolving Credit Percentage of the amount of Swing Line Loans then outstanding. Such request shall be made in writing (which written request shall be deemed to be a Committed Loan Notice for purposes hereof) and in accordance with the requirements of Section 2.02 , without regard to the minimum and multiples specified therein for the principal amount of Base Rate Loans, but subject to the
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unutilized portion of the Revolving Credit Facility and the conditions set forth in Section 4.02. The Swing Line Lender shall furnish the Borrower with a copy of the applicable Committed Loan Notice promptly after delivering such notice to the Administrative Agent. Each Revolving Credit Lender shall make an amount equal to its Applicable Revolving Credit Percentage of the amount specified in such Committed Loan Notice available to the Administrative Agent in immediately available funds (and the Administrative Agent may apply Cash Collateral available with respect to the applicable Swing Line Loan) for the account of the Swing Line Lender at the Administrative Agent’s Office not later than 1:00 p.m. on the day specified in such Committed Loan Notice, whereupon, subject to Section 2.04(c)(ii) , each Revolving Credit Lender that so makes funds available shall be deemed to have made a Base Rate Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the Swing Line Lender.
(ii) If for any reason any Swing Line Loan cannot be refinanced by such a Revolving Credit Borrowing in accordance with Section 2.04(c)(i), the request for Base Rate Loans submitted by the Swing Line Lender as set forth herein shall be deemed to be a request by the Swing Line Lender that each of the Revolving Credit Lenders fund its risk participation in the relevant Swing Line Loan and each Revolving Credit Lender’s payment to the Administrative Agent for the account of the Swing Line Lender pursuant to Section 2.04(c)(i) shall be deemed payment in respect of such participation.
(iii) If any Revolving Credit Lender fails to make available to the Administrative Agent for the account of the Swing Line Lender any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.04(c) by the time specified in Section 2.04(c)(i) , the Swing Line Lender shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Swing Line Lender at a rate per annum equal to the greater of the Federal Funds Rate and a rate determined by the Swing Line Lender in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the Swing Line Lender in connection with the foregoing. If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Loan included in the relevant Borrowing or funded participation in the relevant Swing Line Loan, as the case may be. A certificate of the Swing Line Lender submitted to any Lender (through the Administrative Agent) with respect to any amounts owing under this clause (iii) shall be conclusive absent manifest error.
(iv) Each Revolving Credit Lender’s obligation to make Revolving Credit Loans or to purchase and fund risk participations in Swing Line Loans pursuant to this Section 2.04(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swing Line Lender, the Borrower or any other Person for any reason whatsoever, (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided , however , that each Revolving Credit Lender’s obligation to make Revolving Credit Loans pursuant to this Section 2.04(c) is subject to the conditions set forth in Section 4.02 . No such funding of risk participations shall relieve or otherwise impair the obligation of the Borrower to repay Swing Line Loans, together with interest as provided herein.
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(d) Repayment of Participations. (i) At any time after any Revolving Credit Lender has purchased and funded a risk participation in a Swing Line Loan, if the Swing Line Lender receives any payment on account of such Swing Line Loan, the Swing Line Lender will distribute to such Revolving Credit Lender its Applicable Revolving Credit Percentage thereof in the same funds as those received by the Swing Line Lender.
(ii) If any payment received by the Swing Line Lender in respect of principal or interest on any Swing Line Loan is required to be returned by the Swing Line Lender under any of the circumstances described in Section 10.05 (including pursuant to any settlement entered into by the Swing Line Lender in its discretion), each Revolving Credit Lender shall pay to the Swing Line Lender its Applicable Revolving Credit Percentage thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned, at a rate per annum equal to the Federal Funds Rate. The Administrative Agent will make such demand upon the request of the Swing Line Lender. The obligations of the Lenders under this clause shall survive the payment in full of the Obligations and the termination of this Agreement.
(e) Interest for Account of Swing Line Lender. The Swing Line Lender shall be responsible for invoicing the Borrower for interest on the Swing Line Loans. Until each Revolving Credit Lender funds its Base Rate Loan or risk participation pursuant to this Section 2.04 to refinance such Revolving Credit Lender’s Applicable Revolving Credit Percentage of any Swing Line Loan, interest in respect of such Applicable Revolving Credit Percentage shall be solely for the account of the Swing Line Lender.
(f) Payments Directly to Swing Line Lender. The Borrower shall make all payments of principal and interest in respect of the Swing Line Loans directly to the Swing Line Lender.
2.05 Prepayments. (a) Optional. (i) Subject to the last sentence of this Section 2.05(a)(i), the Borrower may, upon notice to the Administrative Agent, at any time or from time to time voluntarily prepay Term Loans and Revolving Credit Loans in whole or in part without premium or penalty; provided that (A) such notice must be received by the Administrative Agent not later than 11:00 a.m. (1) three Business Days prior to any date of prepayment of Eurodollar Rate Loans and (2) on the date of prepayment of Base Rate Loans; (B) any prepayment of Eurodollar Rate Loans shall be in a principal amount of $2,500,000 or a whole multiple of $250,000 in excess thereof; and (C) any prepayment of Base Rate Loans shall be in a principal amount of $500,000 or a whole multiple of $250,000 in excess thereof or, in each case, if less, the entire principal amount thereof then outstanding. Each such notice shall specify the date and amount of such prepayment and the Type(s) of Loans to be prepaid and, if Eurodollar Rate Loans are to be prepaid, the Interest Period(s) of such Loans. The Administrative Agent will promptly notify each Lender of its receipt of each such notice, and of the amount of such Lender’s ratable portion of such prepayment (based on such Lender’s Applicable Percentage in respect of the relevant Facility). If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein. Any prepayment of a Eurodollar Rate Loan shall be
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accompanied by all accrued interest on the amount prepaid, together with any additional amounts required pursuant to Section 3.05. Subject to Section 2.17 , each such prepayment of the outstanding Term Loans pursuant to this Section 2.05(a) shall be applied as follows: first to the principal repayment installment thereof due as of the end of the fiscal quarter in which such prepayment is made, until such principal installment has been reduced to zero ($0) and second to the remaining principal repayment installments thereof on a pro-rata basis, and each such prepayment shall be paid to the Lenders in accordance with their respective Applicable Percentages in respect of each of the relevant Facilities.
(ii) The Borrower may, upon notice to the Swing Line Lender (with a copy to the Administrative Agent), at any time or from time to time, voluntarily prepay Swing Line Loans in whole or in part without premium or penalty; provided that (A) such notice must be received by the Swing Line Lender and the Administrative Agent not later than 1:00 p.m. on the date of the prepayment, and (B) any such prepayment shall be in a minimum principal amount of $100,000. Each such notice shall specify the date and amount of such prepayment. If such notice is given by the Borrower, the Borrower shall make such prepayment and the payment amount specified in such notice shall be due and payable on the date specified therein.
(b) Mandatory. (i) Within five Business Days after financial statements have been delivered pursuant to Section 6.01(a) and the related Compliance Certificate has been delivered pursuant to Section 6.02(b) , the Borrower shall prepay an aggregate principal amount of Loans equal to the excess (if any) of (A) 50% of Consolidated Excess Cash Flow for the fiscal year covered by such financial statements minus (B) the aggregate principal amount of Term Loans prepaid pursuant to Section 2.05(a)(i) and Revolving Credit Loans prepaid pursuant to Section 2.05(a)(i) (to the extent that such repayment is accompanied by a reduction in the Revolving Credit Commitment), such prepayments to be applied as set forth in clauses (vi) and (viii) below; provided that (1) such percentage shall be reduced to zero during such times as the Consolidated Leverage Ratio of the Borrower and its Subsidiaries is less than 3.00 to 1.00, as evidenced by the most recently delivered Compliance Certificate and (2) any such prepayment shall be pro rated for the fiscal year ending July 31, 2010 to reflect that portion of such fiscal year that occurred during the term of this Agreement.
(ii) If the Borrower or any of its Subsidiaries Disposes of any property (other than any Disposition of any property permitted by Section 7.05 (except pursuant to Section 7.05(h) , solely to the extent required therein)) which results in the realization by such Person of Net Cash Proceeds in excess of an aggregate amount of $5,000,000 per fiscal year, the Borrower shall prepay an aggregate principal amount of Loans equal to 100% of such Net Cash Proceeds in excess of such $5,000,000 immediately upon receipt thereof by such Person (such prepayments to be applied as set forth in clauses (vi) and (viii) below).
(iii) Upon the sale or issuance by the Borrower or any of its Subsidiaries of any of its Equity Interests (other than the Excluded Issuances and any sales or issuances of Equity Interests to another Loan Party), the Borrower shall prepay an aggregate principal amount of Loans equal to 100% of all Net Cash Proceeds received therefrom immediately upon receipt thereof by the Borrower or such Subsidiary (such prepayments to be applied as set forth in clauses (vi) and (viii) below).
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(iv) Upon the incurrence or issuance by the Borrower or any of its Subsidiaries of any Indebtedness (other than Indebtedness expressly permitted to be incurred or issued pursuant to Section 7.03) , the Borrower shall prepay an aggregate principal amount of Loans equal to 100% of all Net Cash Proceeds received therefrom immediately upon receipt thereof by the Borrower or such Subsidiary (such prepayments to be applied as set forth in clauses (vi) and (viii) below).
(v) Upon any Extraordinary Receipt received by or paid to or for the account of the Borrower or any of its Subsidiaries, and not otherwise included in clause (ii), (iii) or (iv) of this Section 2.05(b) , the Borrower shall prepay an aggregate principal amount of Loans equal to 100% of all Net Cash Proceeds received therefrom immediately upon receipt thereof by the Borrower or such Subsidiary (such prepayments to be applied as set forth in clauses (vi) and (viii) below).
(vi) Each prepayment of Loans pursuant to the foregoing provisions of this Section 2.05(b) shall be applied, first, ratably to the Term Loan Facility (or if such prepayment occurs prior to the Initial Funding Date, the Term Loan Commitment shall be reduced by an amount equal to such required prepayment) and to the principal repayment installments thereof on a pro-rata basis and, second , to the Revolving Credit Facility in the manner set forth in clause (viii) of this Section 2.05(b) .
(vii) If for any reason the Total Revolving Credit Outstandings at any time exceed the Revolving Credit Facility at such time, the Borrower shall immediately prepay Revolving Credit Loans, Swing Line Loans and L/C Borrowings and/or Cash Collateralize the L/C Obligations (other than the L/C Borrowings) in an aggregate amount equal to such excess.
(viii) Prepayments of the Revolving Credit Facility made pursuant to this Section 2.05(b), first, shall be applied ratably to the L/C Borrowings and the Swing Line Loans, second , shall be applied ratably to the outstanding Revolving Credit Loans, and, third, shall be used to Cash Collateralize the remaining L/C Obligations; and, in the case of prepayments of the Revolving Credit Facility required pursuant to clause (i), (ii), (iii), (iv) or (v) of this Section 2.05(b) , the amount remaining, if any, after the prepayment in full of all L/C Borrowings, Swing Line Loans and Revolving Credit Loans outstanding at such time and the Cash Collateralization of the remaining L/C Obligations in full (the sum of such prepayment amounts, cash collateralization amounts and remaining amount being, collectively, the “ Reduction Amount ”) may be retained by the Borrower for use in the ordinary course of its business. Upon the drawing of any Letter of Credit that has been Cash Collateralized, the funds held as Cash Collateral shall be applied (without any further action by or notice to or from the Borrower or any other Loan Party) to reimburse the L/C Issuer or the Revolving Credit Lenders, as applicable.
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2.06 Termination or Reduction of Commitments. (a) Optional. The Borrower may, upon notice to the Administrative Agent, terminate the Revolving Credit Facility, the Letter of Credit Sublimit or the Swing Line Sublimit, or from time to time permanently reduce the Revolving Credit Facility, the Letter of Credit Sublimit or the Swing Line Sublimit; provided that (i) any such notice shall be received by the Administrative Agent not later than 11:00 a.m. five Business Days prior to the date of termination or reduction, (ii) any such partial reduction shall be in an aggregate amount of $5,000,000 or any whole multiple of $1,000,000 in excess thereof and (iii) the Borrower shall not terminate or reduce (A) the Revolving Credit Facility if, after giving effect thereto and to any concurrent prepayments hereunder, the Total Revolving Credit Outstandings would exceed the Revolving Credit Facility, (B) the Letter of Credit Sublimit if, after giving effect thereto, the Outstanding Amount of L/C Obligations not fully Cash Collateralized hereunder would exceed the Letter of Credit Sublimit, or (C) the Swing Line Sublimit if, after giving effect thereto and to any concurrent prepayments hereunder, the Outstanding Amount of Swing Line Loans would exceed the Letter of Credit Sublimit.
(b) Mandatory. (i) The aggregate Term Loan Commitments shall be automatically and permanently reduced to zero on the date of the Term Loan Borrowing.
(ii) If after giving effect to any reduction or termination of Revolving Credit Commitments under this Section 2.06, the Letter of Credit Sublimit or the Swing Line Sublimit exceeds the Revolving Credit Facility at such time, the Letter of Credit Sublimit or the Swing Line Sublimit, as the case may be, shall be automatically reduced by the amount of such excess.
(c) Application of Commitment Reductions; Payment of Fees. The Administrative Agent will promptly notify the Lenders of any termination or reduction of the Letter of Credit Sublimit, Swing Line Sublimit or the Revolving Credit Commitment under this Section 2.06 . Upon any reduction of the Revolving Credit Commitments, the Revolving Credit Commitment of each Revolving Credit Lender shall be reduced by such Lender’s Applicable Revolving Credit Percentage of such reduction amount. All fees in respect of the Revolving Credit Facility accrued until the effective date of any termination of the Revolving Credit Facility shall be paid on the effective date of such termination.
2.07 Repayment of Loans. (a) Term Loans. Subject to the last sentence of Section 2.05(a)(i), commencing July 31, 2010, on the last Business Day of each January, April, July and October, the Borrower shall repay the Term Loans and shall make principal repayment installments to the Administrative Agent, for the ratable benefit of the Term Loan Lenders, in the amount of $10,000,000 on each such date (such amount subject to adjustment as the aggregate outstanding amounts of the Term Loans shall be reduced as a result of the application of such prepayments in accordance with the order of priority set forth in Section 2.05 ); provided , however , that the final principal repayment installment of the Term Loans shall be repaid on the Maturity Date for the Term Loan Facility and shall be in an amount equal to the aggregate principal amount of all Term Loans outstanding on such date.
(b) Revolving Credit Loans. The Borrower shall repay to the Revolving Credit Lenders on the Maturity Date for the Revolving Credit Facility the aggregate principal amount of all Revolving Credit Loans outstanding on such date.
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(c) Swing Line Loans. The Borrower shall repay each Swing Line Loan on the earlier to occur of (i) the date ten Business Days after such Loan is made and (ii) the Maturity Date for the Revolving Credit Facility.
2.08 Interest. (a) Subject to the provisions of Section 2.08(b), (i) each Eurodollar Rate Loan under a Facility shall bear interest on the outstanding principal amount thereof for each Interest Period at a rate per annum equal to the Eurodollar Rate for such Interest Period plus the Applicable Rate for such Facility; (ii) each Base Rate Loan under a Facility shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for such Facility; and (iii) each Swing Line Loan shall bear interest on the outstanding principal amount thereof from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for the Revolving Credit Facility.
(b) (i) If any amount of principal of any Loan is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(ii) If any amount (other than principal of any Loan) payable by the Borrower under any Loan Document is not paid when due (without regard to any applicable grace periods), whether at stated maturity, by acceleration or otherwise, then upon the request of the Required Lenders such amount shall thereafter bear interest at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(iii) Upon the request of the Required Lenders, while any Event of Default exists, the Borrower shall pay interest on the principal amount of all outstanding Obligations hereunder at a fluctuating interest rate per annum at all times equal to the Default Rate to the fullest extent permitted by applicable Laws.
(iv) Accrued and unpaid interest on past due amounts (including interest on past due interest) shall be due and payable upon demand.
(c) Interest on each Loan shall be due and payable in arrears on each Interest Payment Date applicable thereto and at such other times as may be specified herein. Interest hereunder shall be due and payable in accordance with the terms hereof before and after judgment, and before and after the commencement of any proceeding under any Debtor Relief Law.
2.09 Fees. In addition to certain fees described in Sections 2.03(h) and (i):
(a) Commitment Fee. The Borrower shall pay to the Administrative Agent for the account of each Revolving Credit Lender in accordance with its Applicable Revolving Credit Percentage, a commitment fee equal to the Applicable Rate times the actual daily amount by which the Revolving Credit Facility exceeds the sum of (i) the Outstanding Amount of Revolving Credit Loans and (ii) the Outstanding Amount of L/C Obligations, subject to adjustment as provided in Section 2.17 . The commitment fee shall accrue at all times during the
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Availability Period, including at any time during which one or more of the conditions in Article IV is not met, and shall be due and payable quarterly in arrears on the last Business Day of each January, April, July and October, commencing July 31, 2010, and on the last day of the Availability Period for the Revolving Credit Facility. The commitment fee shall be calculated quarterly in arrears, and if there is any change in the Applicable Rate during any quarter, the actual daily amount shall be computed and multiplied by the Applicable Rate separately for each period during such quarter that such Applicable Rate was in effect.
(b) Ticking Fee. The Borrower shall pay to the Administrative Agent for the account of each Lender in accordance with its Applicable Percentage, a ticking fee equal to 0.50% times the Aggregate Commitments, subject to adjustment as provided in Section 2.17 . The ticking fee shall accrue at all times commencing with April 15, 2010 and ending on the Funding Deadline. The ticking fee shall be due and payable in arrears on the Funding Deadline.
(c) Other Fees. (i) The Borrower shall pay to the Banc of America Securities LLC and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Engagement Letter. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.
(ii) The Borrower shall pay to Barclays Capital and the Lenders such fees as shall have been separately agreed upon in writing in the amounts and at the times so specified. Such fees shall be fully earned when paid and shall not be refundable for any reason whatsoever.
2.10 Computation of Interest and Fees; Retroactive Adjustments of Applicable Rate. (a) All computations of interest for Base Rate Loans (including Base Rate Loans determined by reference to the Eurodollar Rate) shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365-day year). Interest shall accrue on each Loan for the day on which the Loan is made, and shall not accrue on a Loan, or any portion thereof, for the day on which the Loan or such portion is paid, provided that any Loan that is repaid on the same day on which it is made shall, subject to Section 2.12(a) , bear interest for one day. Each determination by the Administrative Agent of an interest rate or fee hereunder shall be conclusive and binding for all purposes, absent manifest error.
(b) If, as a result of any restatement of or other adjustment to the financial statements of the Borrower or for any other reason, the Borrower, the Administrative Agent or the Required Lenders determine that (i) the Consolidated Leverage Ratio as calculated by the Borrower as of any applicable date was inaccurate and (ii) a proper calculation of the Consolidated Leverage Ratio would have resulted in higher pricing for such period, the Borrower shall immediately and retroactively be obligated to pay to the Administrative Agent for the account of the applicable Lenders or the L/C Issuer, as the case may be, promptly on demand by the Administrative Agent (or, after the occurrence of an actual or deemed entry of an order for relief with respect to the Borrower under the Bankruptcy Code of the United States, automatically and without further action by the Administrative Agent, any Lender or the L/C Issuer), an amount equal to the excess of the amount of interest and fees that should have been paid for such period over the amount of interest and fees actually paid for such period. This paragraph shall not limit the rights of the Administrative Agent, any Lender or the L/C Issuer, as the case may be, under Section 2.03(c)(iii) , 2.03(h) or 2.08(b) or under Article VIII . The Borrower’s obligations under this paragraph shall survive the termination of the Aggregate Commitments and the repayment of all other Obligations hereunder.
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2.11 Evidence of Debt. (a) The Credit Extensions made by each Lender shall be evidenced by one or more accounts or records maintained by such Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender shall be conclusive absent manifest error of the amount of the Credit Extensions made by the Lenders to the Borrower and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through the Administrative Agent) a Note, which shall evidence such Lender’s Loans in addition to such accounts or records. Each Lender may attach schedules to its Note and endorse thereon the date, Type (if applicable), amount and maturity of its Loans and payments with respect thereto.
(b) In addition to the accounts and records referred to in Section 2.11(a), each Lender and the Administrative Agent shall maintain in accordance with its usual practice accounts or records evidencing the purchases and sales by such Lender of participations in Letters of Credit and Swing Line Loans. In the event of any conflict between the accounts and records maintained by the Administrative Agent and the accounts and records of any Lender in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error.
2.12 Payments Generally; Administrative Agent’s Clawback. (a) General. All payments to be made by the Borrower shall be made without condition or deduction for any counterclaim, defense, recoupment or setoff. Except as otherwise expressly provided herein, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the Administrative Agent’s Office in Dollars and in immediately available funds not later than 2:00 p.m. on the date specified herein. The Administrative Agent will promptly distribute to each Lender its Applicable Percentage in respect of the relevant Facility (or other applicable share as provided herein) of such payment in like funds as received by wire transfer to such Lender’s Lending Office. All payments received by the Administrative Agent after 2:00 p.m. shall be deemed received on the next succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment to be made by the Borrower shall come due on a day other than a Business Day, payment shall be made on the next following Business Day, and such extension of time shall be reflected on computing interest or fees, as the case may be.
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(b) (i) Funding by Lenders; Presumption by Administrative Agent. Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing of Eurodollar Rate Loans (or, in the case of any Borrowing of Base Rate Loans, prior to 12:00 noon on the date of such Borrowing) that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Section 2.02 (or, in the case of a Borrowing of Base Rate Loans, that such Lender has made such share available in accordance with and at the time required by Section 2.02 ) and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount in immediately available funds with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (A) in the case of a payment to be made by such Lender, the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the Administrative Agent in connection with the foregoing, and (B) in the case of a payment to be made by the Borrower, the interest rate applicable to Base Rate Loans. If the Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable Borrowing to the Administrative Agent, then the amount so paid shall constitute such Lender’s Loan included in such Borrowing. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make such payment to the Administrative Agent.
(ii) Payments by Borrower; Presumptions by Administrative Agent. Unless the Administrative Agent shall have received notice from the Borrower prior to the time at which any payment is due to the Administrative Agent for the account of the Lenders or the L/C Issuer hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Appropriate Lenders or the L/C Issuer, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Appropriate Lenders or the L/C Issuer, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or the L/C Issuer, in immediately available funds with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
A notice of the Administrative Agent to any Lender or the Borrower with respect to any amount owing under this subsection (b) shall be conclusive, absent manifest error.
(c) Failure to Satisfy Conditions Precedent. If any Lender makes available to the Administrative Agent funds for any Loan to be made by such Lender as provided in the foregoing provisions of this Article II , and such funds are not made available to the Borrower by the Administrative Agent because the conditions to the applicable Credit Extension set forth in Article IV are not satisfied or waived in accordance with the terms hereof, the Administrative Agent shall promptly return such funds (in like funds as received from such Lender) to such Lender, without interest.
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(d) Obligations of Lenders Several. The obligations of the Lenders hereunder to make Term Loans and Revolving Credit Loans, to fund participations in Letters of Credit and Swing Line Loans and to make payments pursuant to Section 10.04(c) are several and not joint. The failure of any Lender to make any Loan, to fund any such participation or to make any payment under Section 10.04(c) on any date required hereunder shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall be responsible for the failure of any other Lender to so make its Loan, to purchase its participation or to make its payment under Section 10.04(c) .
(e) Funding Source. Nothing herein shall be deemed to obligate any Lender to obtain the funds for any Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained or will obtain the funds for any Loan in any particular place or manner.
(f) Insufficient Funds. If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, L/C Borrowings, interest and fees then due hereunder, such funds shall be applied (i) first , toward payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second , toward payment of principal and L/C Borrowings then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and L/C Borrowings then due to such parties.
2.13 Sharing of Payments by Lenders. If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of (a) Obligations in respect of any of the Facilities due and payable to such Lender hereunder and under the other Loan Documents at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations due and payable to such Lender at such time to (ii) the aggregate amount of the Obligations in respect of the Facilities due and payable to all Lenders hereunder and under the other Loan Documents at such time) of payments on account of the Obligations in respect of the Facilities due and payable to all Lenders hereunder and under the other Loan Documents at such time obtained by all the Lenders at such time or (b) Obligations in respect of any of the Facilities owing (but not due and payable) to such Lender hereunder and under the other Loan Documents at such time in excess of its ratable share (according to the proportion of (i) the amount of such Obligations owing (but not due and payable) to such Lender at such time to (ii) the aggregate amount of the Obligations in respect of the Facilities owing (but not due and payable) to all Lenders hereunder and under the other Loan Parties at such time) of payment on account of the Obligations in respect of the Facilities owing (but not due and payable) to all Lenders hereunder and under the other Loan Documents at such time obtained by all of the Lenders at such time then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans and subparticipations in L/C
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Obligations and Swing Line Loans of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of Obligations in respect of the Facilities then due and payable to the Lenders or owing (but not due and payable) to the Lenders, as the case may be, provided that:
(i) if any such participations or subparticipations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations or subparticipations shall be rescinded and the purchase price restored to the extent of such recovery, without interest; and
(ii) the provisions of this Section shall not be construed to apply to (A) any payment made by or on behalf of the Borrower pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender), (B) the application of Cash Collateral provided for in Section 2.16 , or (C) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or subparticipations in L/C Obligations or Swing Line Loans to any assignee or participant, other than to the Borrower or any Subsidiary or Affiliate thereof (as to which the provisions of this Section shall apply).
The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against the Borrower rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of the Borrower in the amount of such participation.
2.14 Increase in Revolving Credit Facility. (a) Request for Increase. Provided there exists no Default, upon notice to the Administrative Agent (which shall promptly notify all Revolving Credit Lenders), the Borrower may from time to time during the period of three (3) years following the Initial Funding Date, request an increase in the Revolving Credit Facility by an amount (for all such requests) not exceeding $100,000,000 less the aggregate principal amount of any prior or simultaneous increase to the Term Loan Facility made pursuant to Section 2.15 ; provided that any such request for an increase shall be in a minimum amount of $25,000,000. The then current Revolving Credit Lenders shall have the first option (but shall not be required) to provide a portion of the increase in the Revolving Credit Facility (in accordance with their respective existing Applicable Revolving Credit Percentages). At the time of sending the notice to the Revolving Credit Lenders, the Borrower (in consultation with the Administrative Agent) shall specify the time period within which each Revolving Credit Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Revolving Credit Lenders).
(b) Lender Elections to Increase. Each Revolving Credit Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Revolving Credit Commitment and, if so, whether by an amount equal to, greater than, or less than its Applicable Revolving Credit Percentage of such requested increase. Any Revolving Credit Lender not responding within such time period shall be deemed to have declined to increase its Revolving Credit Commitment.
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(c) Notification by Administrative Agent; Additional Revolving Credit Lenders. The Administrative Agent shall notify the Borrower and each Revolving Credit Lender of the Revolving Credit Lenders’ responses to each request made hereunder. To achieve the full amount of a requested increase, and subject to the approval of the Administrative Agent, the L/C Issuer and the Swing Line Lender (which approvals shall not be unreasonably withheld), the Borrower may also invite additional Eligible Assignees to become Revolving Credit Lenders pursuant to a joinder agreement in form and substance satisfactory to the Administrative Agent and its counsel.
(d) Effective Date and Allocations. If the Revolving Credit Facility is increased in accordance with this Section, the Administrative Agent and the Borrower shall determine the effective date (the “ Revolving Credit Increase Effective Date ”) and the final allocation of such increase. The Administrative Agent shall promptly notify the Borrower and the Revolving Credit Lenders of the final allocation of such increase and the Revolving Credit Increase Effective Date.
(e) Conditions to Effectiveness of Increase. As a condition precedent to such increase, the Borrower shall deliver to the Administrative Agent a certificate of each Loan Party dated as of the Revolving Credit Increase Effective Date (in sufficient copies for each Lender) signed by a Responsible Officer of such Loan Party (i) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to such increase, and (ii) in the case of the Borrower, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article V and the other Loan Documents are true and correct on and as of the Revolving Credit Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such earlier date, and except that for purposes of this Section 2.14 , the representations and warranties contained in subsections (a) and (b) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 , and (B) no Default exists. The Borrower shall prepay any Revolving Credit Loans outstanding on the Revolving Credit Increase Effective Date (and pay any additional amounts required pursuant to Section 3.05 ) to the extent necessary to keep the outstanding Revolving Credit Loans ratable with any revised Applicable Revolving Credit Percentages arising from any nonratable increase in the Revolving Credit Commitments under this Section. The Applicable Rate for any such increase will be determined by the Borrower and the Revolving Credit Lenders (including any new Revolving Credit Lenders) at the time such increase is made; provided that if such Applicable Rate would exceed the Applicable Rate for the Revolving Credit Facility or the Term Loan Facility, the Applicable Rate for the Revolving Credit Facility and the Term Loan Facility (including any prior increases to the Revolving Credit Facility or Term Loan Facility) shall be automatically increased to equal the Applicable Rate on the new Revolving Credit Loans or new Term Loans.
(f) Conflicting Provisions. This Section shall supersede any provisions in Section 2.13 or 10.01 to the contrary.
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2.15 Increase in Term Loan Facility. (a) Request for Increase. Provided there exists no Default, upon notice to the Administrative Agent (which shall promptly notify all Term Loan Lenders), the Borrower may from time to time during the period of three years following the Initial Funding Date, request an increase in the Term Loans by an amount (for all such requests) not exceeding $100,000,000 less the aggregate principal amount of any prior or simultaneous increases in the Revolving Credit Facility made pursuant to Section 2.14 ; provided that any such request for an increase shall be in a minimum amount of $25,000,000. The then current Term Loan Lenders shall have the first option (but shall not be required) to provide a portion of the increased Term Loans (in accordance with their respective existing Applicable Percentages in respect of the Term Loan Facility). At the time of sending the notice to the Term Loan Lenders, the Borrower (in consultation with the Administrative Agent) shall specify the time period within which each Term Loan Lender is requested to respond (which shall in no event be less than ten Business Days from the date of delivery of such notice to the Term Loan Lenders).
(b) Lender Elections to Increase. Each Term Loan Lender shall notify the Administrative Agent within such time period whether or not it agrees to increase its Term Loans and, if so, whether by an amount equal to, greater than, or less than its ratable portion (based on such Term Loan Lender’s Applicable Percentage in respect of the Term Loan Facility) of such requested increase. Any Term Loan Lender not responding within such time period shall be deemed to have declined to increase its Term Loans.
(c) Notification by Administrative Agent; Additional Term Loan Lenders. The Administrative Agent shall notify the Borrower and each Term Loan Lender of the Term Loan Lenders’ responses to each request made hereunder. To achieve the full amount of a requested increase, and subject to the approval of the Administrative Agent (which approval shall not be unreasonably withheld), the Borrower may also invite additional Eligible Assignees to become Term Loan Lenders pursuant to a joinder agreement in form and substance satisfactory to the Administrative Agent and its counsel.
(d) Effective Date and Allocations. If the Term Loans are increased in accordance with this Section, the Administrative Agent and the Borrower shall determine the effective date (the “ Term Loan Increase Effective Date ”) and the final allocation of such increase. The Administrative Agent shall promptly notify the Borrower and the Term Loan Lenders of the final allocation of such increase and the Term Loan Increase Effective Date. As of the Term Loan Increase Effective Date, the amortization schedule for the Term Loans set forth in Section 2.07(a) shall be amended to increase the then-remaining unpaid installments of principal by an aggregate amount equal to the additional Term Loans being made on such date, such aggregate amount to be applied to increase such installments ratably in accordance with the amounts in effect immediately prior to the Term Loan Increase Effective Date. Such amendment may be signed by the Administrative Agent on behalf of the Lenders.
(e) Conditions to Effectiveness of Increase. As a condition precedent to such increase, the Borrower shall deliver to the Administrative Agent a certificate of each Loan Party dated as of the Term Loan Increase Effective Date (in sufficient copies for each Lender) signed by a Responsible Officer of such Loan Party (i) certifying and attaching the resolutions adopted by such Loan Party approving or consenting to such increase, and (ii) in the case of the Borrower, certifying that, before and after giving effect to such increase, (A) the representations and warranties contained in Article V and the other Loan Documents are true and correct on and as of the Term Loan Increase Effective Date, except to the extent that such representations and warranties specifically refer to an earlier date, in which case they are true and correct as of such
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earlier date, and except that for purposes of this Section 2.15, the representations and warranties contained in subsections (a) and (b) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 , and (B) no Default exists. The additional Term Loans shall be made by the Term Loan Lenders participating therein pursuant to the procedures set forth in Section 2.02 and on terms and conditions reasonably satisfactory to the Administrative Agent. The Applicable Rate for any additional Term Loans will be determined by the Borrower and the Term Loan Lenders (including any new Term Loan Lenders) at the time such additional Term Loan is made; provided that if such Applicable Rate would exceed the Applicable Rate for the Term Loan Facility or the Revolving Credit Facility, the Applicable Rate for the Term Loan Facility and the Revolving Credit Facility (including any prior increases to the Revolving Credit Facility or Term Loan Facility) shall be automatically increased to equal the Applicable Rate on the new Term Loans or new Revolving Credit Loans.
(f) Conflicting Provisions. This Section shall supersede any provisions in Section 2.13 or 10.01 to the contrary.
2.16 Cash Collateral.
(a) Certain Credit Support Events. Upon the request of the Administrative Agent or the L/C Issuer (i) if the L/C Issuer has honored any full or partial drawing request under any Letter of Credit and such drawing has resulted in an L/C Borrowing, or (ii) if, as of the Letter of Credit Expiration Date, any L/C Obligation for any reason remains outstanding, the Borrower shall, in each case, immediately Cash Collateralize the then Outstanding Amount of all L/C Obligations. At any time that there shall exist a Defaulting Lender, immediately upon the request of the Administrative Agent, the L/C Issuer or the Swing Line Lender, the Borrower shall deliver to the Administrative Agent Cash Collateral in an amount sufficient to cover all Fronting Exposure (after giving effect to Section 2.17(a)(iv) and any Cash Collateral provided by the Defaulting Lender).
(b) Grant of Security Interest. All Cash Collateral (other than credit support not constituting funds subject to deposit) shall be maintained in blocked, non-interest bearing deposit accounts at Bank of America. The Borrower, and to the extent provided by any Lender, such Lender, hereby grants to (and subjects to the control of) the Administrative Agent, for the benefit of the Administrative Agent, the L/C Issuer and the Lenders (including the Swing Line Lender), and agrees to maintain, a first priority security interest in all such cash, deposit accounts and all balances therein, and all other property so provided as collateral pursuant hereto, and in all proceeds of the foregoing, all as security for the obligations to which such Cash Collateral may be applied pursuant to Section 2.16(c) . If at any time the Administrative Agent determines that Cash Collateral is subject to any right or claim of any Person other than the Administrative Agent as herein provided, or that the total amount of such Cash Collateral is less than the applicable Fronting Exposure and other obligations secured thereby, the Borrower or the relevant Defaulting Lender will, promptly upon demand by the Administrative Agent, pay or provide to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency.
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(c) Application. Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under any of this Section 2.16 or Sections 2.03 , 2.04 , 2.05 , 2.17 or 8.02 in respect of Letters of Credit or Swing Line Loans shall be held and applied to the satisfaction of the specific L/C Obligations, Swing Line Loans, obligations to fund participations therein (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) and other obligations for which the Cash Collateral was so provided, prior to any other application of such property as may be provided for herein.
(d) Release. Cash Collateral (or the appropriate portion thereof) provided to reduce Fronting Exposure or other obligations shall be released promptly following (i) the elimination of the applicable Fronting Exposure or other obligations giving rise thereto (including by the termination of Defaulting Lender status of the applicable Lender (or, as appropriate, its assignee following compliance with Section 10.06(b)(vi) )) or (ii) the Administrative Agent’s good faith determination that there exists excess Cash Collateral; provided that (x) Cash Collateral furnished by or on behalf of a Loan Party shall not be released during the continuance of a Default or Event of Default (and following application as provided in this Section 2.16 may be otherwise applied in accordance with Section 8.03 ), and (y) the Person providing Cash Collateral and the L/C Issuer or Swing Line Lender, as applicable, may agree that Cash Collateral shall not be released but instead held to support future anticipated Fronting Exposure or other obligations.
2.17 Defaulting Lenders.
(a) Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable Law:
(i) Waivers and Amendments. That Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in Section 10.01 .
(ii) Reallocation of Payments. Any payment of principal, interest, fees or other amounts received by the Administrative Agent for the account of that Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article VIII or otherwise, and including any amounts made available to the Administrative Agent by that Defaulting Lender pursuant to Section 10.08 ), shall be applied at such time or times as may be determined by the Administrative Agent as follows: first , to the payment of any amounts owing by that Defaulting Lender to the Administrative Agent hereunder; second , to the payment on a pro rata basis of any amounts owing by that Defaulting Lender to the L/C Issuer or Swing Line Lender hereunder; third , if so determined by the Administrative Agent or requested by the L/C Issuer or Swing Line Lender, to be held as Cash Collateral for future funding obligations of that Defaulting Lender of any participation in any Swing Line Loan or Letter of Credit; fourth , as the Borrower may request (so long as no Default or Event of Default exists), to the funding of any Loan in respect of which that Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as determined by the Administrative Agent; fifth , if so determined by the Administrative Agent and the Borrower, to be held in a non-interest bearing deposit account and released in order to satisfy obligations of that Defaulting Lender to fund Loans under this Agreement; sixth ,
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to the payment of any amounts owing to the Lenders, the L/C Issuer or Swing Line Lender as a result of any judgment of a court of competent jurisdiction obtained by any Lender, the L/C Issuer or Swing Line Lender against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; seventh , so long as no Default or Event of Default exists, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; and eighth , to that Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Loans or L/C Borrowings in respect of which that Defaulting Lender has not fully funded its appropriate share and (y) such Loans or L/C Borrowings were made at a time when the conditions set forth in Section 4.02 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and L/C Borrowings owed to, all non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or L/C Borrowings owed to, that Defaulting Lender. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 2.17(a)(ii) shall be deemed paid to and redirected by that Defaulting Lender, and each Lender irrevocably consents hereto.
(iii) Certain Fees. That Defaulting Lender (x) shall not be entitled to receive any commitment fee pursuant to Section 2.09(a) or any ticking fee pursuant to Section 2.09(b) for any period during which that Lender is a Defaulting Lender (and the Borrower shall not be required to pay any such fee that otherwise would have been required to have been paid to that Defaulting Lender) for any period during which that Lender is a Defaulting Lender only to extent allocable to the sum of (1) the Outstanding Amount of the Committed Loans funded by it and (2) its Applicable Percentage of the stated amount of Letters of Credit and Swing Line Loans for which it has provided Cash Collateral pursuant to Section 2.03 , Section 2.04 , Section 2.16 , or Section 2.17(a)(ii) , as applicable (and the Borrower shall (A) be required to pay to each of the L/C Issuer and the Swing Line Lender, as applicable, the amount of such fee allocable to its Fronting Exposure arising from that Defaulting Lender and (B) not be required to pay the remaining amount of such fee that otherwise would have been required to have been paid to that Defaulting Lender) and (y) shall be limited in its right to receive Letter of Credit Fees as provided in Section 2.03(h) .
(iv) Reallocation of Applicable Percentages to Reduce Fronting Exposure. During any period in which there is a Defaulting Lender, for purposes of computing the amount of the obligation of each non-Defaulting Lender to acquire, refinance or fund participations in Letters of Credit or Swing Line Loans pursuant to Sections 2.03 and 2.04 , the “Applicable Percentage” of each non-Defaulting Lender shall be computed without giving effect to the Commitment of that Defaulting Lender; provided that (i) each such reallocation shall be given effect only if, at the date the applicable Lender becomes a Defaulting Lender, no Default or Event of Default exists; and (ii) the aggregate obligation of each non-Defaulting Lender to acquire, refinance or fund participations in Letters of Credit and Swing Line Loans shall not exceed the positive difference, if any, of (1) the Commitment of that non-Defaulting Lender minus (2) the aggregate Outstanding Amount of the Committed Loans of that Lender.
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(b) Defaulting Lender Cure. If the Borrower, the Administrative Agent, Swing Line Lender and the L/C Issuer agree in writing in their sole discretion that a Defaulting Lender should no longer be deemed to be a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase that portion of outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Committed Loans and funded and unfunded participations in Letters of Credit and Swing Line Loans to be held on a pro rata basis by the Lenders in accordance with their Applicable Percentages (without giving effect to Section 2.17(a)(iv) ), whereupon that Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Lender was a Defaulting Lender; and provided , further , that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.
ARTICLE III.
TAXES, YIELD PROTECTION AND ILLEGALITY
3.01 Taxes.
(a) Payments Free of Taxes; Obligation to Withhold; Payments on Account of Taxes. (i) Any and all payments by or on account of any obligation of the Borrower hereunder or under any other Loan Document shall to the extent permitted by applicable Laws be made free and clear of and without reduction or withholding for any Taxes. If, however, applicable Laws require the Borrower or the Administrative Agent to withhold or deduct any Tax, such Tax shall be withheld or deducted in accordance with such Laws as determined by the Borrower or the Administrative Agent, as the case may be, upon the basis of the information and documentation to be delivered pursuant to subsection (e) below.
(ii) If the Borrower or the Administrative Agent shall be required by the Code to withhold or deduct any Taxes, including both United States Federal backup withholding and withholding taxes, from any payment, then (A) the Administrative Agent shall withhold or make such deductions as are determined by the Administrative Agent to be required based upon the information and documentation it has received pursuant to subsection (e) below, (B) the Administrative Agent shall timely pay the full amount withheld or deducted to the relevant Governmental Authority in accordance with the Code, and (C) to the extent that the withholding or deduction is made on account of Indemnified Taxes or Other Taxes, the sum payable by the Borrower shall be increased as necessary so that after any required withholding or the making of all required deductions (including deductions applicable to additional sums payable under this Section) the Administrative Agent, Lender or L/C Issuer, as the case may be, receives an amount equal to the sum it would have received had no such withholding or deduction been made.
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(b) Payment of Other Taxes by the Borrower. Without limiting the provisions of subsection (a) above, the Borrower shall timely pay any Other Taxes to the relevant Governmental Authority in accordance with applicable Laws.
(c) Tax Indemnifications. (i) Without limiting the provisions of subsection (a) or (b) above, the Borrower shall, and does hereby, indemnify the Administrative Agent, each Lender and the L/C Issuer, and shall make payment in respect thereof within 10 days after demand therefor, for the full amount of any Indemnified Taxes or Other Taxes (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) withheld or deducted by the Borrower or the Administrative Agent or paid by the Administrative Agent, such Lender or the L/C Issuer, as the case may be, and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. The Borrower shall also, and does hereby, indemnify the Administrative Agent, and shall make payment in respect thereof within 10 days after demand therefor, for any amount which a Lender or the L/C Issuer for any reason fails to pay indefeasibly to the Administrative Agent as required by clause (ii) of this subsection. A certificate as to the amount of any such payment or liability delivered to the Borrower by a Lender or the L/C Issuer (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Lender or the L/C Issuer, shall be conclusive absent manifest error.
(ii) Without limiting the provisions of subsection (a) or (b) above, each Lender and the L/C Issuer shall, and does hereby, indemnify the Borrower and the Administrative Agent, and shall make payment in respect thereof within 10 days after demand therefor, against any and all Taxes and any and all related losses, claims, liabilities, penalties, interest and expenses (including the fees, charges and disbursements of any counsel for the Borrower or the Administrative Agent) incurred by or asserted against the Borrower or the Administrative Agent by any Governmental Authority as a result of the failure by such Lender or the L/C Issuer, as the case may be, to deliver, or as a result of the inaccuracy, inadequacy or deficiency of, any documentation required to be delivered by such Lender or the L/C Issuer, as the case may be, to the Borrower or the Administrative Agent pursuant to subsection (e). Each Lender and the L/C Issuer hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender or the L/C Issuer, as the case may be, under this Agreement or any other Loan Document against any amount due to the Administrative Agent under this clause (ii). The agreements in this clause (ii) shall survive the resignation and/or replacement of the Administrative Agent, any assignment of rights by, or the replacement of, a Lender or the L/C Issuer, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all other Obligations.
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(d) Evidence of Payments. Upon request by the Borrower or the Administrative Agent, as the case may be, after any payment of Taxes by the Borrower or by the Administrative Agent to a Governmental Authority as provided in this Section 3.01 , the Borrower shall deliver to the Administrative Agent or the Administrative Agent shall deliver to the Borrower, as the case may be, the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of any return required by Laws to report such payment or other evidence of such payment reasonably satisfactory to the Borrower or the Administrative Agent, as the case may be.
(e) Status of Lenders; Tax Documentation. (i) Each Lender shall deliver to the Borrower and to the Administrative Agent, at the time or times prescribed by applicable Laws or when reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation prescribed by applicable Laws or by the taxing authorities of any jurisdiction and such other reasonably requested information as will permit the Borrower or the Administrative Agent, as the case may be, to determine (A) whether or not payments made hereunder or under any other Loan Document are subject to Taxes, (B) if applicable, the required rate of withholding or deduction, and (C) such Lender’s entitlement to any available exemption from, or reduction of, applicable Taxes in respect of all payments to be made to such Lender by the Borrower pursuant to this Agreement or otherwise to establish such Lender’s status for withholding tax purposes in the applicable jurisdiction.
(ii) Without limiting the generality of the foregoing, if the Borrower is resident for tax purposes in the United States,
(A) any Lender that is a “United States person” within the meaning of Section 7701(a)(30) of the Code shall deliver to the Borrower and the Administrative Agent executed originals of Internal Revenue Service Form W-9 or such other documentation or information prescribed by applicable Laws or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent, as the case may be, to determine whether or not such Lender is subject to backup withholding or information reporting requirements; and
(B) each Foreign Lender that is entitled under the Code or any applicable treaty to an exemption from or reduction of withholding tax with respect to payments hereunder or under any other Loan Document shall deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the request of the Borrower or the Administrative Agent, but only if such Foreign Lender is legally entitled to do so), whichever of the following is applicable:
(I) executed originals of Internal Revenue Service Form W-8BEN claiming eligibility for benefits of an income tax treaty to which the United States is a party,
(II) executed originals of Internal Revenue Service Form W-8ECI,
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(III) executed originals of Internal Revenue Service Form W-8IMY and all required supporting documentation,
(IV) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under section 881(c) of the Code, (x) a certificate to the effect that such Foreign Lender is not (A) a “bank” within the meaning of section 881(c)(3)(A) of the Code, (B) a “10 percent shareholder” of the Borrower within the meaning of section 881(c)(3)(B) of the Code, or (C) a “controlled foreign corporation” described in section 881(c)(3)(C) of the Code and (y) executed originals of Internal Revenue Service Form W-8BEN, or
(V) executed originals of any other form prescribed by applicable Laws as a basis for claiming exemption from or a reduction in United States Federal withholding tax together with such supplementary documentation as may be prescribed by applicable Laws to permit the Borrower or the Administrative Agent to determine the withholding or deduction required to be made.
(iii) Each Lender shall promptly (A) notify the Borrower and the Administrative Agent of any change in circumstances which would modify or render invalid any claimed exemption or reduction, and (B) take such steps as shall not be materially disadvantageous to it, in the reasonable judgment of such Lender, and as may be reasonably necessary (including the re-designation of its Lending Office) to avoid any requirement of applicable Laws of any jurisdiction that the Borrower or the Administrative Agent make any withholding or deduction for taxes from amounts payable to such Lender.
(f) Treatment of Certain Refunds. Unless required by applicable Laws, at no time shall the Administrative Agent have any obligation to file for or otherwise pursue on behalf of a Lender or the L/C Issuer, or have any obligation to pay to any Lender or the L/C Issuer, any refund of Taxes withheld or deducted from funds paid for the account of such Lender or the L/C Issuer, as the case may be. If the Administrative Agent, any Lender or the L/C Issuer determines, in its sole discretion, that it has received a refund of any Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section, it shall pay to the Borrower an amount equal to such refund (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses incurred by the Administrative Agent, such Lender or the L/C Issuer, as the case may be, and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrower, upon the request of the Administrative Agent, such Lender or the L/C Issuer, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent, such Lender or the L/C Issuer in the event the Administrative Agent, such Lender or the L/C Issuer is required to repay such refund to such Governmental Authority. This subsection shall not be construed to require the Administrative Agent, any Lender or the L/C Issuer to make available its tax returns (or any other information relating to its taxes that it deems confidential) to the Borrower or any other Person.
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3.02 Illegality. If any Lender determines that any Law has made it unlawful, or that any Governmental Authority has asserted that it is unlawful, for any Lender or its applicable Lending Office to make, maintain or fund Loans whose interest is determined by reference to the Eurodollar Rate, or to determine or charge interest rates based upon the Eurodollar Rate, or any Governmental Authority has imposed material restrictions on the authority of such Lender to purchase or sell, or to take deposits of, Dollars in the London interbank market, then, on notice thereof by such Lender to the Borrower through the Administrative Agent, (i) any obligation of such Lender to make or continue Eurodollar Rate Loans or to convert Base Rate Committed Loans to Eurodollar Rate Loans shall be suspended, and (ii) if such notice asserts the illegality of such Lender making or maintaining Base Rate Loans the interest rate on which is determined by reference to the Eurodollar Rate component of the Base Rate, the interest rate on which Base Rate Loans of such Lender shall, if necessary to avoid such illegality, be determined by the Administrative Agent without reference to the Eurodollar Rate component of the Base Rate, in each case until such Lender notifies the Administrative Agent and the Borrower that the circumstances giving rise to such determination no longer exist. Upon receipt of such notice, (x) the Borrower shall, upon demand from such Lender (with a copy to the Administrative Agent), prepay or, if applicable, convert all Eurodollar Rate Loans of such Lender to Base Rate Loans if such notice asserts the illegality of such Lender making or maintaining Base Rate Loans (the interest rate on which is determined by reference to the Eurodollar Rate component of the Base Rate), the interest rate on which Base Rate Loans of such Lender shall, if necessary to avoid such illegality, be determined by the Administrative Agent without reference to the Eurodollar Rate component of the Base Rate, in each case if such notice asserts the illegality of such Lender making or maintaining Base Rate Loans the interest rate on which is determined by reference to the Eurodollar Rate component of the Base Rate, the interest rate on which Base Rate Loans of such Lender shall, if necessary to avoid such illegality, be determined by the Administrative Agent without reference to the Eurodollar Rate component of the Base Rate, in each case, either on the last day of the Interest Period therefor, if such Lender may lawfully continue to maintain such Eurodollar Rate Loans to such day, or immediately, if such Lender may not lawfully continue to maintain such Eurodollar Rate Loans and (y) if such notice asserts the illegality of such Lender determining or charging interest rates based upon the Eurodollar Rate, the Administrative Agent shall during the period of such suspension compute the Base Rate applicable to such Lender without reference to the Eurodollar Rate component thereof until the Administrative is advised in writing by such Lender that it is no longer illegal for such Lender to determine or charge interest rates based upon the Eurodollar Rate. Upon any such prepayment or conversion, the Borrower shall also pay accrued interest on the amount so prepaid or converted.
3.03 Inability to Determine Rates. If the Required Lenders determine that for any reason in connection with any request for a Eurodollar Rate Loan or a conversion to or continuation thereof that (a) Dollar deposits are not being offered to banks in the London interbank eurodollar market for the applicable amount and Interest Period of such Eurodollar Rate Loan, or in connection with an existing or proposed Base Rate Loan (b) adequate and reasonable means do not exist for determining the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan, or (c) the Eurodollar Rate for any requested Interest Period with respect to a proposed Eurodollar Rate Loan does not adequately
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and fairly reflect the cost to such Lenders of funding such Loan, the Administrative Agent will promptly so notify the Borrower and each Lender. Thereafter, (x) the obligation of the Lenders to make or maintain Eurodollar Rate Loans shall be suspended and (y) in the event of a determination described in the preceding sentence with respect to the Eurodollar Rate component of the Base Rate, the utilization of the Eurodollar Rate component in determining the Base Rate shall be suspended, in each case until the Administrative Agent (upon the instruction of the Required Lenders) revokes such notice. Upon receipt of such notice, the Borrower may revoke any pending request for a Borrowing of, conversion to or continuation of Eurodollar Rate Loans or, failing that, will be deemed to have converted such request into a request for a Borrowing of Base Rate Loans in the amount specified therein.
3.04 Increased Costs; Reserves on Eurodollar Rate Loans.
(a) Increased Costs Generally. If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended or participated in by, any Lender (except any reserve requirement contemplated by Section 3.04(e) ) or the L/C Issuer; or
(ii) subject any Lender or the L/C Issuer to any tax of any kind whatsoever with respect to this Agreement, any Letter of Credit, any participation in a Letter of Credit or any Eurodollar Rate Loan made by it, or change the basis of taxation of payments to such Lender or the L/C Issuer in respect thereof (except for Indemnified Taxes or Other Taxes covered by Section 3.01 and the imposition of, or any change in the rate of, any Excluded Tax payable by such Lender or the L/C Issuer); or
(iii) impose on any Lender or the L/C Issuer or the London interbank market any other condition, cost or expense affecting this Agreement or Eurodollar Rate Loans made by such Lender or any Letter of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Loan the interest on which is determined by reference to the Eurodollar Rate (or of maintaining its obligation to make any such Loan), or to increase the cost to such Lender or the L/C Issuer of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by such Lender or the L/C Issuer hereunder (whether of principal, interest or any other amount) then, upon request of such Lender or the L/C Issuer, the Borrower will pay to such Lender or the L/C Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the L/C Issuer, as the case may be, for such additional costs incurred or reduction suffered.
(b) Capital Requirements. If any Lender or the L/C Issuer determines that any Change in Law affecting such Lender or the L/C Issuer or any Lending Office of such Lender or such Lender’s or the L/C Issuer’s holding company, if any, regarding capital requirements has or would have the effect of reducing the rate of return on such Lender’s or the L/C Issuer’s capital or on the capital of such Lender’s or the L/C Issuer’s holding company, if any, as a consequence
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of this Agreement, the Commitments of such Lender or the Loans made by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by the L/C Issuer, to a level below that which such Lender or the L/C Issuer or such Lender’s or the L/C Issuer’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or the L/C Issuer’s policies and the policies of such Lender’s or the L/C Issuer’s holding company with respect to capital adequacy), then from time to time the Borrower will pay to such Lender or the L/C Issuer, as the case may be, such additional amount or amounts as will compensate such Lender or the L/C Issuer or such Lender’s or the L/C Issuer’s holding company for any such reduction suffered.
(c) Certificates for Reimbursement. A certificate of a Lender or the L/C Issuer setting forth the amount or amounts necessary to compensate such Lender or the L/C Issuer or its holding company, as the case may be, as specified in subsection (a) or (b) of this Section and delivered to the Borrower shall be conclusive absent manifest error. The Borrower shall pay such Lender or the L/C Issuer, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof.
(d) Delay in Requests. Failure or delay on the part of any Lender or the L/C Issuer to demand compensation pursuant to the foregoing provisions of this Section shall not constitute a waiver of such Lender’s or the L/C Issuer’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender or the L/C Issuer pursuant to the foregoing provisions of this Section for any increased costs incurred or reductions suffered more than nine months prior to the date that such Lender or the L/C Issuer, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s or the L/C Issuer’s intention to claim compensation therefor (except that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).
(e) Reserves on Eurodollar Rate Loans. The Borrower shall pay to each Lender, as long as such Lender shall be required to maintain reserves with respect to liabilities or assets consisting of or including Eurocurrency funds or deposits (currently known as “Eurocurrency liabilities”), additional interest on the unpaid principal amount of each Eurodollar Rate Loan equal to the actual costs of such reserves allocated to such Loan by such Lender (as determined by such Lender in good faith, which determination shall be conclusive), which shall be due and payable on each date on which interest is payable on such Loan, provided the Borrower shall have received at least 10 days’ prior notice (with a copy to the Administrative Agent) of such additional interest from such Lender. If a Lender fails to give notice 10 days prior to the relevant Interest Payment Date, such additional interest shall be due and payable 10 days from receipt of such notice.
3.05 Compensation for Losses. Upon demand of any Lender (with a copy to the Administrative Agent) from time to time, the Borrower shall promptly compensate such Lender for and hold such Lender harmless from any loss, cost or expense incurred by it as a result of:
(a) any continuation, conversion, payment or prepayment of any Loan other than a Base Rate Loan on a day other than the last day of the Interest Period for such Loan (whether voluntary, mandatory, automatic, by reason of acceleration, or otherwise);
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(b) any failure by the Borrower (for a reason other than the failure of such Lender to make a Loan) to prepay, borrow, continue or convert any Loan other than a Base Rate Loan on the date or in the amount notified by the Borrower; or
(c) any assignment of a Eurodollar Rate Loan on a day other than the last day of the Interest Period therefor as a result of a request by the Borrower pursuant to Section 10.13 ;
including any loss of anticipated profits and any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain such Loan or from fees payable to terminate the deposits from which such funds were obtained. The Borrower shall also pay any customary administrative fees charged by such Lender in connection with the foregoing.
For purposes of calculating amounts payable by the Borrower to the Lenders under this Section 3.05, each Lender shall be deemed to have funded each Eurodollar Rate Loan made by it at the Eurodollar Rate for such Loan by a matching deposit or other borrowing in the London interbank eurodollar market for a comparable amount and for a comparable period, whether or not such Eurodollar Rate Loan was in fact so funded.
3.06 Mitigation Obligations; Replacement of Lenders.
(a) Designation of a Different Lending Office. If any Lender requests compensation under Section 3.04, or the Borrower is required to pay any additional amount to any Lender, the L/C Issuer, or any Governmental Authority for the account of any Lender or the L/C Issuer pursuant to Section 3.01 , or if any Lender gives a notice pursuant to Section 3.02 , then such Lender or the L/C Issuer shall, as applicable, use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender or the L/C Issuer, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.01 or 3.04 , as the case may be, in the future, or eliminate the need for the notice pursuant to Section 3.02 , as applicable, and (ii) in each case, would not subject such Lender or the L/C Issuer, as the case may be, to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender or the L/C Issuer, as the case may be. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender or the L/C Issuer in connection with any such designation or assignment.
(b) Replacement of Lenders. If any Lender requests compensation under Section 3.04, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01 , or if any Lender is a Defaulting Lender hereunder, the Borrower may replace such Lender in accordance with Section 10.13 .
3.07 Survival. All of the Borrower’s obligations under this Article III shall survive termination of the Aggregate Commitments, repayment of all other Obligations hereunder, and resignation of the Administrative Agent.
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ARTICLE IV.
CONDITIONS PRECEDENT
4.01 Conditions Precedent. The closing of the Facilities, the Initial Funding Date, and Credit Extensions shall, in each case, be subject to the following conditions:
(a) Conditions to Closing the Facilities. The effectiveness of this Agreement and the other Loan Documents shall be determined in accordance with Section 2 of the Effectiveness Agreement.
(b) Conditions to the Initial Funding Date. The obligations of the Lenders to make the initial Credit Extension following the Closing Date shall be determined in accordance with Section 3 of the Effectiveness Agreement.
4.02 Conditions to all Credit Extensions after the Initial Funding Date. The obligation of each Lender to honor any Request for Credit Extension after the Initial Funding Date (other than a Committed Loan Notice requesting only a conversion of Loans to the other Type, or a continuation of Eurodollar Rate Loans) is subject to the following conditions precedent:
(a) The representations and warranties of the Borrower and each other Loan Party contained in Article V or any other Loan Document, or which are contained in any document furnished at any time under or in connection herewith or therewith, that are qualified by materiality shall be true and correct on and as of the date of such Credit Extension, and each of the representations and warranties of the Borrower and each other Loan Party contained in any other Loan Document or in any document furnished at any time under or in connection herewith or therewith, that are not qualified by materiality shall be true and correct in all material respects on and as of the date of such Credit Extension, except in each case to the extent that such representations and warranties specifically refer to an earlier date, in which case they shall be true and correct as of such earlier date, and except that for purposes of this Section 4.02 , the representations and warranties contained in subsections (a) and (b) of Section 5.05 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.01 .
(b) No Default shall exist, or would result from such proposed Credit Extension or from the application of the proceeds thereof.
(c) The Administrative Agent and, if applicable, the L/C Issuer or the Swing Line Lender shall have received a Request for Credit Extension in accordance with the requirements hereof.
Each Request for Credit Extension (other than a Committed Loan Notice requesting only a conversion of Loans to the other Type or a continuation of Eurodollar Rate Loans) submitted by the Borrower shall be deemed to be a representation and warranty that the conditions specified in Sections 4.02(a) and (b) have been satisfied on and as of the date of the applicable Credit Extension.
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ARTICLE V.
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Administrative Agent and the Lenders that:
5.01 Existence, Qualification and Power. Each Loan Party and each Subsidiary thereof (a) is duly organized or formed, validly existing and, as applicable, in good standing under the Laws of the jurisdiction of its incorporation or organization, (b) has all requisite power and authority and all requisite governmental licenses, authorizations, consents and approvals to (i) own or lease its assets and carry on its business and (ii) execute, deliver and perform its obligations under the Loan Documents to which it is a party, and (c) is duly qualified and is licensed and, as applicable, in good standing under the Laws of each jurisdiction where its ownership, lease or operation of properties or the conduct of its business requires such qualification or license; except in each case referred to in clause (b)(i) or (c), to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect.
5.02 Authorization; No Contravention. The execution, delivery and performance by each Loan Party of each Loan Document to which such Person is party, have been duly authorized by all necessary corporate or other organizational action, and do not and will not (a) contravene the terms of any of such Person’s Organization Documents; (b) conflict with or result in any breach or contravention of, or the creation of any Lien under, or require any payment to be made under (i) any Material Contract to which such Person is a party or affecting such Person or the properties of such Person or any of its Subsidiaries or (ii) any order, injunction, writ or decree of any Governmental Authority or any arbitral award to which such Person or its property is subject; or (c) violate any Law.
5.03 Governmental Authorization; Other Consents. No approval, consent, exemption, authorization, or other action by, or notice to, or filing with, any Governmental Authority or any other Person is necessary or required in connection with (a) the execution, delivery or performance by, or enforcement against, any Loan Party of this Agreement or any other Loan Document or for the consummation of the Transaction, (b) the grant by any Loan Party of the Liens granted by it pursuant to the Collateral Documents, (c) the perfection or maintenance of the Liens created under the Collateral Documents (including the first priority nature thereof) or (d) other than pursuant to applicable Law in connection with the exercise of remedies with respect to the Collateral, the exercise by the Administrative Agent or any Lender of its rights under the Loan Documents or the remedies in respect of the Collateral pursuant to the Collateral Documents. All applicable waiting periods in connection with the Transaction have expired without any action having been taken by any Governmental Authority restraining, preventing or imposing materially adverse conditions upon the Transaction or the rights of the Loan Parties or their Subsidiaries freely to transfer or otherwise dispose of, or to create any Lien on, any properties now owned or hereafter acquired by any of them, except that as of the Closing Date (but not as of the Initial Funding Date), the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, may not have expired or been terminated.
5.04 Binding Effect. This Agreement has been, and each other Loan Document, when delivered hereunder, will have been, duly executed and delivered by each Loan Party that is party thereto. This Agreement constitutes, and each other Loan Document when so delivered will constitute, a legal, valid and binding obligation of such Loan Party, enforceable against each Loan Party that is party thereto in accordance with its terms.
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5.05 Financial Statements; No Material Adverse Effect.
(a) The Audited Financial Statements of the Borrower (i) were prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; (ii) fairly present the financial condition of the Borrower and its Subsidiaries as of the date thereof and their results of operations for the period covered thereby in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein; and (iii) show all material indebtedness and other liabilities, direct or contingent, of the Borrower and its Subsidiaries as of the date thereof, including liabilities for taxes, material commitments and Indebtedness to the extent required by GAAP.
(b) The Audited Financial Statements of the Acquired Business, and the unaudited interim financial statements of the Acquired Business dated December 31, 2009, and the related statements of earnings before taxes for the fiscal year ended on that date, each present fairly, in all material respects, the net assets of the Acquired Business as of the date thereof and their related earnings before income taxes for the period covered thereby in conformity with GAAP.
(c) The unaudited consolidated balance sheet of the Borrower and its Subsidiaries dated October 31, 2009 (and if available, January 31, 2010), and the related consolidated statements of income or operations, Stockholders’ Equity and cash flows for the fiscal quarter ended on that date (i) were each prepared in accordance with GAAP consistently applied throughout the period covered thereby, except as otherwise expressly noted therein, and (ii) fairly present the financial condition of the Borrower and its Subsidiaries, or, in the case of clause (b), of the Acquired Business, as of the date thereof and their results of operations for the period covered thereby, subject, in the case of clauses (i) and (ii), to the absence of footnotes and to normal year-end audit adjustments. Schedule 7.03 sets forth all material Indebtedness of the Borrower and its consolidated Subsidiaries and separately, of the Acquired Business.
(d) Since July 31, 2009, there has been no event or circumstance, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect.
(e) The consolidated pro forma balance sheet of the Borrower and its Subsidiaries as at January 31, 2010 (and if available by the Initial Funding Date, April 30, 2010), and the related consolidated pro forma statements of income and cash flows of the Borrower and its Subsidiaries for the twelve months then ended, certified by the chief financial officer or treasurer of the Borrower, copies of which have been furnished to each Lender, fairly present the consolidated pro forma financial condition of the Borrower and its Subsidiaries as at such date and the consolidated pro forma results of operations of the Borrower and its Subsidiaries for the period ended on such date, all in accordance with GAAP.
(f) The Initial Financial Projections and the consolidated forecasted balance sheet and statements of income and cash flows of the Borrower and its Subsidiaries delivered pursuant to Section 6.01(c) were prepared in good faith on the basis of the assumptions stated therein, which assumptions the Borrower believed to be reasonable at the time of delivery of such forecasts.
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5.06 Litigation. There are no actions, suits, proceedings, claims or disputes pending or, to the knowledge of the Borrower after due and diligent investigation, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, by or against the Borrower or any of its Subsidiaries or against any of their properties or revenues that (a) purport to affect or pertain to this Agreement or any other Loan Document, or the consummation of the Transaction, or (b) either individually or in the aggregate could reasonably be expected to have a Material Adverse Effect.
5.07 No Default. Neither any Loan Party nor any Subsidiary thereof is in default under or with respect to any Contractual Obligation that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect. No Default has occurred and is continuing or would result from the consummation of the transactions contemplated by this Agreement or any other Loan Document.
5.08 Ownership of Property; Liens.
(a) Each of the Borrower and each Subsidiary has good record and marketable title in fee simple to, or valid leasehold interests in, all real property necessary or used in the ordinary conduct of its business, except for such defects in title as could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(b) Schedule 5.08(b) sets forth a complete and accurate list of all Liens on the property or assets of each Loan Party and each of its Subsidiaries as of the date hereof, showing as of the date hereof the lienholder thereof, the principal amount of the obligations secured thereby and the property or assets of such Loan Party or such Subsidiary subject thereto. The property of each Loan Party and each of its Subsidiaries is subject to no Liens, other than Liens set forth on Schedule 5.08(b) , and as otherwise permitted by Section 7.01 .
(c) Schedule 5.08(c) sets forth a complete and accurate list of all real property owned by each Loan Party and each of its Subsidiaries as of the date hereof, showing as of the date hereof the street address, county or other relevant jurisdiction, state, record owner and book and estimated fair value thereof. Each Loan Party and each of its Subsidiaries has good, marketable and insurable fee simple title to the real property owned by such Loan Party or such Subsidiary, free and clear of all Liens, other than Liens created or permitted by the Loan Documents.
(d) Schedule 5.08(d)(i) sets forth a complete and accurate list as of the date hereof of all leases of real property under which any Loan Party or any Subsidiary of a Loan Party is the lessee, showing as of the date hereof the street address, county or other relevant jurisdiction, state, lessor, lessee, expiration date and annual rental cost thereof. Each such lease is the legal, valid and binding obligation of the lessor thereof, enforceable in accordance with its terms.
(e) Schedule 5.08(d)(ii) sets forth a complete and accurate list of all leases of real property under which any Loan Party or any Subsidiary of a Loan Party is the lessor, showing as of the date hereof the street address, county or other relevant jurisdiction, state, lessor, lessee, expiration date and annual rental cost thereof. Each such lease is the legal, valid and binding obligation of the lessee thereof, enforceable in accordance with its terms.
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(f) Schedule 5.08(e) sets forth a complete and accurate list of all Investments held by any Loan Party or any Subsidiary of a Loan Party on the date hereof, showing as of the date hereof the amount, obligor or issuer and maturity, if any, thereof.
5.09 Environmental Compliance.
(a) The Borrower and its Subsidiaries conduct in the ordinary course of business a review of the effect of existing Environmental Laws and claims alleging potential liability or responsibility for violation of any Environmental Law on their respective businesses, operations and properties, and as a result thereof the Borrower has reasonably concluded that such Environmental Laws and claims could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(b) Except as could not reasonably be expected to have a Material Adverse Effect, there are no and never have been any underground or above-ground storage tanks or any surface impoundments, septic tanks, pits, sumps or lagoons in which Hazardous Materials are being or have been treated, stored or disposed on any property currently owned or operated by any Loan Party or any of its Subsidiaries or, to the best of the knowledge of the Loan Parties, on any property formerly owned or operated by any Loan Party or any of its Subsidiaries;
(c) each of the Loan Parties is in compliance with OSHA requirements respecting friable asbestos and asbestos containing materials, if any, located on any property currently owned or operated by any Loan Party or any of its Subsidiaries or any portion thereof, except where non-compliance could not, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect;
(d) all Hazardous Materials generated, used, treated, handled or stored at, or transported to or from, any property currently or formerly owned or operated by any Loan Party or any of its Subsidiaries have been generated, used, treated, handled, stored, transformed and disposed of in compliance with Environmental Laws, except where non-compliance, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
5.10 Insurance. The properties of the Borrower and its Subsidiaries are insured with financially sound and reputable insurance companies not Affiliates of the Borrower, in such amounts, with such deductibles and covering such risks as are customarily carried by companies engaged in similar businesses and owning similar properties in localities where the Borrower or the applicable Subsidiary operates.
5.11 Taxes. The Borrower and its Subsidiaries have filed all Federal, state and other material tax returns and reports required to be filed, and have paid all Federal, state and other material taxes, assessments, fees and other governmental charges levied or imposed upon them or their properties, income or assets otherwise due and payable, except those which are being contested in good faith by appropriate proceedings diligently conducted and for which adequate reserves have been provided in accordance with GAAP. There is no proposed tax assessment against the Borrower or any Subsidiary that would, if made, have a Material Adverse Effect. Neither any Loan Party nor any Subsidiary thereof is party to any tax sharing agreement with any Person that is not a Loan Party or a wholly-owned Subsidiary of a Loan Party.
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5.12 ERISA Compliance.
(a) Each Plan is in compliance in all material respects with the applicable provisions of ERISA, the Code and other Federal or state laws. Each Pension Plan that is intended to be a qualified plan under Section 401(a) of the Code has received a favorable determination letter from the Internal Revenue Service to the effect that the form of such Plan is qualified under Section 401(a) of the Code and the trust related thereto has been determined by the Internal Revenue Service to be exempt from federal income tax under Section 501(a) of the Code, or an application for such a letter is currently being processed by the Internal Revenue Service. To the best knowledge of the Borrower, nothing has occurred that would prevent or cause the loss of such tax-qualified status.
(b) There are no pending or, to the best knowledge of the Borrower, threatened claims, actions or lawsuits, or action by any Governmental Authority, with respect to any Plan that could reasonably be expected to have a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan that has resulted or could reasonably be expected to result in a Material Adverse Effect.
(c) (i) No ERISA Event has occurred, and neither the Borrower nor any ERISA Affiliate is aware of any fact, event or circumstance that could reasonably be expected to constitute or result in an ERISA Event with respect to any Pension Plan; (ii) the Borrower and each ERISA Affiliate has met all applicable requirements under the Pension Funding Rules in respect of each Pension Plan, and no waiver of the minimum funding standards under the Pension Funding Rules has been applied for or obtained; (iii) as of the most recent valuation date for any Pension Plan, the funding target attainment percentage (as defined in Section 430(d)(2) of the Code) is 60% or higher and neither the Borrower nor any ERISA Affiliate knows of any facts or circumstances that could reasonably be expected to cause the funding target attainment percentage for any such plan to drop below 60% as of the most recent valuation date; (iv) neither the Borrower nor any ERISA Affiliate has incurred any liability to the PBGC other than for the payment of premiums, and there are no premium payments which have become due that are unpaid; (v) neither the Borrower nor any ERISA Affiliate has engaged in a transaction that could be subject to Section 4069 or Section 4212(c) of ERISA; and (vi) no Pension Plan has been terminated by the plan administrator thereof nor by the PBGC, and no event or circumstance has occurred or exists that could reasonably be expected to cause the PBGC to institute proceedings under Title IV of ERISA to terminate any Pension Plan.
(d) With respect to each scheme or arrangement mandated by a government other than the United States (a “Foreign Government Scheme or Arrangement ”) and with respect to each employee benefit plan maintained or contributed to by any Loan Party or any Subsidiary of any Loan Party that is not subject to United States law (a “ Foreign Plan ”):
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(i) any employer and employee contributions required by law or by the terms of any Foreign Government Scheme or Arrangement or any Foreign Plan have been made, or, if applicable, accrued, in accordance with normal accounting practices;
(ii) the fair market value of the assets of each funded Foreign Plan, the liability of each insurer for any Foreign Plan funded through insurance or the book reserve established for any Foreign Plan, together with any accrued contributions, is sufficient to procure or provide for the accrued benefit obligations, as of the date hereof, with respect to all current and former participants in such Foreign Plan according to the actuarial assumptions and valuations most recently used to account for such obligations in accordance with applicable generally accepted accounting principles; and
(iii) each Foreign Plan required to be registered has been registered and has been maintained in good standing with applicable regulatory authorities.
5.13 Subsidiaries; Equity Interests. As of the Closing Date, the Borrower has no Subsidiaries other than those specifically disclosed in Part (a) of Schedule 5.13 , and all of the outstanding Equity Interests in such Subsidiaries have been validly issued, are fully paid and nonassessable and are owned by a Loan Party in the amounts specified on Part (a) of Schedule 5.13 free and clear of all Liens. As of the Closing Date, the Borrower has no equity investments in any other corporation or entity other than (i) those specifically disclosed in Part (b) of Schedule 5.13 and (ii) investments in Subsidiaries. All of the outstanding Equity Interests in the Borrower have been validly issued and are fully paid and nonassessable.
5.14 Margin Regulations; Investment Company Act.
(a) The Borrower is not engaged and will not engage, principally or as one of its important activities, in the business of purchasing or carrying margin stock (within the meaning of Regulation U issued by the FRB), or extending credit for the purpose of purchasing or carrying margin stock.
(b) None of the Borrower, any Person Controlling the Borrower, or any Subsidiary is or is required to be registered as an “investment company” under the Investment Company Act of 1940.
5.15 Disclosure. No report, financial statement, certificate or other information furnished (whether in writing or orally) by or on behalf of any Loan Party to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder or under any other Loan Document (in each case, as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time.
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5.16 Compliance with Laws. Each Loan Party and each Subsidiary thereof is in compliance in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its properties, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted or (b) the failure to comply therewith, either individually or in the aggregate, could not reasonably be expected to have a Material Adverse Effect.
5.17 Taxpayer Identification Number. The Borrower’s true and correct U.S. taxpayer identification number is set forth on Schedule 10.02.
5.18 Intellectual Property; Licenses, Etc. The Borrower and its Subsidiaries own, or possess the right to use, all of the trademarks, service marks, trade names, copyrights, patents, patent rights, franchises, licenses and other intellectual property rights (collectively, “ IP Rights ”) that are reasonably necessary for the operation of their respective businesses, without conflict with the rights of any other Person, except where the failure to own or possess the right to use any such IP Rights would not reasonably be expected to have a Material Adverse Effect. To the knowledge of the Borrower, no slogan or other advertising device, product, process, method, substance, part or other material now employed, or now contemplated to be employed, by the Borrower or any Subsidiary infringes upon any rights held by any other Person, except where such infringement would not reasonably be expected to have a Material Adverse Effect.
5.19 Solvency. Each Loan Party is, individually and together with its Subsidiaries on a consolidated basis, Solvent.
5.20 Collateral Documents. The provisions of the Collateral Documents are effective to create in favor of the Administrative Agent for the benefit of the Secured Parties a legal, valid and enforceable first priority Lien (subject to Liens permitted by Section 7.01 ) on all right, title and interest of the respective Loan Parties in the Collateral described therein. Except for filings completed prior to the Closing Date and as contemplated hereby and by the Collateral Documents, no filing or other action will be necessary to perfect or protect such Liens
ARTICLE VI.
AFFIRMATIVE COVENANTS
So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, the Borrower shall, and shall (except in the case of the covenants set forth in Sections 6.01 , 6.02 , and 6.03 ) cause each Subsidiary to:
6.01 Financial Statements. Deliver to the Administrative Agent and each Lender, in form and detail satisfactory to the Administrative Agent and the Required Lenders:
(a) as soon as available, but in any event within 90 days after the end of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal year, and the related consolidated statements of income or operations, changes in Stockholders’ Equity, and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous fiscal year, all in reasonable detail and prepared in accordance with GAAP, audited and accompanied by a report and opinion of an independent certified public accountant of nationally recognized standing reasonably acceptable to the Required Lenders, which report and opinion shall be prepared in accordance with generally accepted auditing standards and shall not be subject to any “going concern” or like qualification or exception or any qualification or exception as to the scope of such audit;
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(b) as soon as available, but in any event within 45 days after the end of each of the first three fiscal quarters of each fiscal year of the Borrower, a consolidated balance sheet of the Borrower and its Subsidiaries as at the end of such fiscal quarter, the related consolidated statements of income or operations for such fiscal quarter and for the portion of the Borrower’s fiscal year then ended, and the related consolidated statements of changes in Stockholders’ Equity, and cash flows for the portion of the Borrower’s fiscal year then ended, in each case setting forth in comparative form, as applicable, the figures for the corresponding fiscal quarter of the previous fiscal year and the corresponding portion of the previous fiscal year, all in reasonable detail, certified by the chief executive officer, chief financial officer, treasurer or controller of the Borrower as fairly presenting the financial condition, results of operations, Stockholders’ Equity and cash flows of the Borrower and its Subsidiaries in accordance with GAAP, subject only to normal year-end audit adjustments and the absence of footnotes; and
(c) as soon as available, but in any event at least 60 days after the end of each fiscal year of the Borrower, an annual budget of the Borrower and its Subsidiaries on a consolidated basis, including forecasts for the remaining term of this Agreement prepared by management of the Borrower, in form satisfactory to the Administrative Agent and the Required Lenders, of consolidated balance sheets and statements of income or operations and cash flows of the Borrower and its Subsidiaries on a quarterly basis for the immediately following fiscal year (including the fiscal year in which the Maturity Date occurs, is such fiscal year in the immediately following fiscal year) and on an annually basis for each fiscal year thereafter.
As to any information contained in materials furnished pursuant to Section 6.02(c), the Borrower shall not be separately required to furnish such information under clause (a) or (b) above, but the foregoing shall not be in derogation of the obligation of the Borrower to furnish the information and materials described in clauses (a) and (b) above at the times specified therein.
6.02 Certificates; Other Information. Deliver to the Administrative Agent and each Lender, in form and detail satisfactory to the Administrative Agent and the Required Lenders:
(a) concurrently with the delivery of the financial statements referred to in Sections 6.01(a) and (b), a duly completed Compliance Certificate signed by the chief executive officer, chief financial officer, treasurer or controller of the Borrower (which delivery may, unless the Administrative Agent, or a Lender requests executed originals, be by electronic communication including fax or email and shall be deemed to be an original authentic counterpart thereof for all purposes);
(b) promptly after any request by the Administrative Agent or any Lender, copies of any detailed audit reports, management letters or recommendations submitted to the board of directors (or the audit committee of the board of directors) of the Borrower by independent accountants in connection with the accounts or books of the Borrower or any Subsidiary, or any audit of any of them;
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(c) promptly after the same are available, copies of each annual report, proxy or financial statement or other report or communication sent to the stockholders of the Borrower, and copies of all annual, regular, periodic and special reports and registration statements which the Borrower may file or be required to file with the SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934, and not otherwise required to be delivered to the Administrative Agent pursuant hereto;
(d) promptly after the furnishing thereof, copies of any statement or report furnished to any holder of debt securities of any Loan Party or any Subsidiary thereof pursuant to the terms of any indenture, loan or credit or similar agreement and not otherwise required to be furnished to the Lenders pursuant to Section 6.01 or any other clause of this Section 6.02 ;
(f) promptly, and in any event within five Business Days after receipt thereof by any Loan Party or any Subsidiary thereof, copies of each notice or other correspondence received from the SEC (or comparable agency in any applicable non-U.S. jurisdiction) concerning any investigation or possible investigation or other inquiry by such agency regarding financial or other operational results of any Loan Party or any Subsidiary thereof;
(g) promptly, such additional information regarding the business, financial or corporate affairs of the Borrower or any Subsidiary, or compliance with the terms of the Loan Documents, as the Administrative Agent or any Lender may from time to time reasonably request;
(h) as soon as available, but in any event within 30 days after the end of each fiscal year of the Borrower, a report summarizing the insurance coverage (specifying type, amount and carrier) in effect for each Loan Party and its Subsidiaries and containing such additional information as the Administrative Agent, or any Lender through the Administrative Agent, may reasonably specify; and
(i) promptly after the assertion or occurrence thereof, notice of any action or proceeding against or of any noncompliance by any Loan Party or any of its Subsidiaries with any Environmental Law or Environmental Permit that could (i) reasonably be expected to have a Material Adverse Effect or (ii) cause any property described in the Mortgages to be subject to any restrictions on ownership, occupancy, use or transferability under any Environmental Law.
Documents required to be delivered pursuant to Section 6.01(a) or (b) or Section 6.02(d) or referred to in Section 6.03(d) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date (i) on which the Borrower posts such documents, or provides a link thereto on the Borrower’s website on the Internet at the website address listed on Schedule 10.02 ; or (ii) on which such documents are posted on the Borrower’s behalf on an Internet or intranet website, if any, to which each Lender and the Administrative Agent have access (whether a commercial, third-party website or whether sponsored by the Administrative Agent); provided that: (i) the Borrower shall deliver paper copies of such documents to the Administrative Agent or any Lender that requests the Borrower to deliver such paper copies until a written request to cease delivering paper copies is given by the Administrative Agent or such Lender and (ii) the Borrower shall notify the Administrative Agent and each Lender (by
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telecopier or electronic mail) of the posting of any such documents and provide to the Administrative Agent by electronic mail electronic versions (i.e., soft copies) of such documents. The Administrative Agent shall have no obligation to request the delivery of or to maintain paper copies of the documents referred to above, and in any event shall have no responsibility to monitor compliance by the Borrower with any such request by a Lender for delivery, and each Lender shall be solely responsible for requesting delivery to it or maintaining its copies of such documents.
The Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arrangers will make available to the Lenders and the L/C Issuer materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “ Borrower Materials ”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “ Platform ”) and (b) certain of the Lenders (each, a “ Public Lender ”) may have personnel who do not wish to receive material non-public information with respect to the Borrower or its Affiliates, or the respective securities of any of the foregoing, and who may be engaged in investment and other market-related activities with respect to such Persons’ securities. The Borrower hereby agrees that (w) all Borrower Materials that are to be made available to Public Lenders shall be clearly and conspicuously marked “PUBLIC” which, at a minimum, shall mean that the word “PUBLIC” shall appear prominently on the first page thereof; (x) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, the Arrangers, the L/C Issuer and the Lenders to treat such Borrower Materials as not containing any material non-public information with respect to the Borrower or its securities for purposes of United States Federal and state securities laws ( provided , however , that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 10.07 ); (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated “Public Side Information;” (and the Administrative Agent agrees that only Borrower Material marked “PUBLIC” will be made available on such portion of the Platform) and (z) the Administrative Agent and the Arrangers shall be entitled to treat any Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform that is not designated “Public Side Information.”
6.03 Notices. Promptly notify the Administrative Agent and each Lender:
(a) of the occurrence of any Default;
(b) of any matter that has resulted or could reasonably be expected to result in a Material Adverse Effect, including (i) breach or non-performance of, or any default under, a Contractual Obligation of the Borrower or any Subsidiary; (ii) any dispute, litigation, investigation, proceeding or suspension between the Borrower or any Subsidiary and any Governmental Authority; or (iii) the commencement of, or any material development in, any litigation or proceeding affecting the Borrower or any Subsidiary, including pursuant to any applicable Environmental Laws (in each case to the extent that such event has resulted or could reasonably be expected to result in a Material Adverse Effect);
(c) of the occurrence of any ERISA Event;
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(d) of any material change in accounting policies or financial reporting practices by the Borrower or any Subsidiary, including any determination by the Borrower referred to in Section 2.10(b) (which requirement shall be deemed satisfied by the description thereof in a Form 10-K, Form 10-Q or Form 8-K filed with the SEC); and
(e) of the (i) occurrence of any Disposition of property or assets for which the Borrower is required to make a mandatory prepayment pursuant to Section 2.05(b)(ii) , (ii) occurrence of any sale of capital stock or other Equity Interests for which the Borrower is required to make a mandatory prepayment pursuant to Section 2.05(b)(iii) , (iii) incurrence or issuance of any Indebtedness for which the Borrower is required to make a mandatory prepayment pursuant to Section 2.05(b)(iv) , and (iv) receipt of any Extraordinary Receipt for which the Borrower is required to make a mandatory prepayment pursuant to Section 2.0(b)(v) .
Each notice pursuant to this Section 6.03 (other than Section 6.03(e)) shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken and proposes to take with respect thereto. Each notice pursuant to Section 6.03(a) shall describe with particularity any and all provisions of this Agreement and any other Loan Document that have been breached.
6.04 Payment of Obligations. Pay and discharge as the same shall become due and payable, all its material obligations and liabilities, including (a) all material tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings diligently conducted and adequate reserves in accordance with GAAP are being maintained by the Borrower or such Subsidiary; (b) all lawful material claims which, if unpaid, would by law become a Lien upon its property (other than a Lien that is permitted by Section 7.01 ); and (c) all material Indebtedness, as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness.
6.05 Preservation of Existence, Etc. (a) Preserve, renew and maintain in full force and effect its legal existence and good standing under the Laws of the jurisdiction of its organization except in a transaction permitted by Section 7.04 or 7.05 ; (b) take all reasonable action to maintain all rights, privileges, permits, licenses and franchises necessary or desirable in the normal conduct of its business, except to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; and (c) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect.
6.06 Maintenance of Properties. (a) Maintain, preserve and protect all of its material properties and equipment necessary in the operation of its business in good working order and condition, ordinary wear and tear excepted; and (b) make all necessary repairs thereto and renewals and replacements thereof except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.
6.07 Maintenance of Insurance. Maintain with financially sound and reputable insurance companies not Affiliates of the Borrower, insurance with respect to its properties and business against loss or damage of the kinds customarily insured against by Persons engaged in the same or similar business, of such types and in such amounts as are customarily carried under similar circumstances by such other Persons and providing for not less than 30 days’ prior notice to the Administrative Agent of termination, lapse or cancellation of such insurance.
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6.08 Compliance with Laws. Comply in all material respects with the requirements of all Laws and all orders, writs, injunctions and decrees applicable to it or to its business or property, except in such instances in which (a) such requirement of Law or order, writ, injunction or decree is being contested in good faith by appropriate proceedings diligently conducted; or (b) the failure to comply therewith could not reasonably be expected to have a Material Adverse Effect.
6.09 Books and Records. Maintain proper books of record and account, in which full, true and correct entries in conformity with GAAP consistently applied shall be made of all financial transactions and matters involving the assets and business of the Borrower or such Subsidiary, as the case may be.
6.10 Inspection Rights. Permit representatives and independent contractors of the Administrative Agent and each Lender to visit and inspect any of its properties, to examine its corporate, financial and operating records, and make copies thereof or abstracts therefrom, and to discuss its affairs, finances and accounts with its directors, officers, and independent public accountants, all at the expense of the Borrower and at such reasonable times during normal business hours and as often as may be reasonably desired (but in no event more than two times per fiscal year of the Borrower), upon reasonable advance notice to the Borrower; provided , however , that when an Event of Default exists the Administrative Agent or any Lender (or any of their respective representatives or independent contractors) may do any of the foregoing at the expense of the Borrower at any time during normal business hours and without advance notice, and without limitation as to frequency.
6.11 Use of Proceeds. Use the proceeds of the Credit Extensions for (a) working capital, Capital Expenditures, the issuance of Letters of Credit and for other general corporate purposes not in contravention of any Law or of any Loan Document, (b) to repay the Existing Credit Facilities, (c) to finance a portion of the Acquisition and (d) to pay fees and expenses associated with the Transaction.
6.12 Covenant to Guarantee Obligations and Give Security.
(a) Upon the formation or acquisition of any new direct or indirect Material Subsidiary by any Loan Party, the Borrower shall, at the Borrower’s expense:
(i) Within forty-five (45) days (as such time may be extended for up to an additional twenty-five (25) days by the Administrative Agent in its reasonable discretion) following the creation or acquisition of any direct or indirect Material Domestic Subsidiary of the Borrower and, to the extent no material adverse tax consequences would result, any direct or indirect Material Foreign Subsidiary of the Borrower, cause such newly created or acquired Material Domestic Subsidiary or Material Foreign Subsidiary, as applicable, (excluding the Inactive Subsidiary for so long as such Subsidiary remains inactive) to (a) become a Guarantor by executing and delivering to the Administrative Agent a counterpart of the Guaranty or such other document as the Administrative Agent shall deem appropriate for such purpose and (b) deliver to the Administrative Agent documents of the types referred to in Item 1(b) on Schedule A to the Effectiveness Agreement and Item 3 on Schedule B to the Effectiveness Agreement and favorable opinions of counsel to such Person (which shall cover, among other things, the legality, validity, binding effect and enforceability of the documentation referred to in clause (a)), all in form, content and scope reasonably satisfactory to the Administrative Agent,
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(ii) within 10 days after such formation or acquisition, furnish to the Administrative Agent a description of the real and personal properties of such Subsidiary, in detail satisfactory to the Administrative Agent,
(iii) within 45 days (as such time may be extended for up to an additional twenty-five (25) days by the Administrative Agent in its reasonable discretion) after such formation or acquisition, cause such Subsidiary and each direct and indirect parent (to the extent such parent is the Borrower or a Domestic Subsidiary) of such Subsidiary (if it has not already done so) to duly execute and deliver to the Administrative Agent deeds of trust, trust deeds, deeds to secure debt, mortgages, leasehold mortgages, leasehold deeds of trust, and other collateral and security agreements or supplements thereto, as specified by and in form and substance satisfactory to the Administrative Agent (including delivery of all pledged Equity Interests in and of such Subsidiary, and other instruments of the type specified in Schedule A and Schedule B to the Effectiveness Agreement), securing payment of all the Obligations of such Subsidiary, as the case may be, under the Loan Documents and constituting Liens on all such real and personal properties,
(iv) within 45 days (as such time may be extended for up to an additional twenty-five (25) days by the Administrative Agent in its reasonable discretion) after such formation or acquisition, cause such Subsidiary and each direct and indirect parent (to the extent such parent is the Borrower or a Domestic Subsidiary) of such Subsidiary (if it has not already done so) to take whatever action (including the recording of mortgages, the filing of Uniform Commercial Code financing statements, the giving of notices and the endorsement of notices on title documents) may be necessary or advisable in the opinion of the Administrative Agent to vest in the Administrative Agent (or in any representative of the Administrative Agent designated by it) valid and subsisting Liens on the properties purported to be subject to the deeds of trust, trust deeds, deeds to secure debt, mortgages, leasehold mortgages, leasehold deeds of trust, Collateral Agreement supplements, and security and pledge agreements delivered pursuant to this Section 6.12 , enforceable against all third parties in accordance with their terms,
(v) within 45 days (as such time may be extended for up to an additional twenty-five (25) days by the Administrative Agent in its reasonable discretion) after such formation or acquisition, deliver to the Administrative Agent, upon the request of the Administrative Agent in its sole discretion, a signed copy of a favorable opinion, addressed to the Administrative Agent and the other Secured Parties, of counsel for the Loan Parties acceptable to the Administrative Agent as to the matters contained in clauses (i), (iii) and (iv) above, and as to such other matters as the Administrative Agent may reasonably request, and
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(vi) as promptly as practicable after such formation or acquisition, deliver, upon the request of the Administrative Agent in its sole discretion, to the Administrative Agent with respect to each material parcel of real property owned by the entity that is the subject of such formation or acquisition title reports, surveys and engineering, soils and other reports, and environmental assessment reports, each in scope, form and substance reasonably satisfactory to the Administrative Agent, provided , however , that to the extent that any Loan Party or any of its Subsidiaries shall have otherwise received any of the foregoing items with respect to such real property, such items shall, promptly after the receipt thereof, be delivered to the Administrative Agent.
Notwithstanding any of the foregoing to the contrary, at no time shall more than an aggregate of ten percent (10%) of the Consolidated EBITDA of the Borrower and its Domestic Subsidiaries be generated by, or an aggregate of (10%) of the Consolidated domestic assets of the Borrower and its Domestic Subsidiaries be owned by, Subsidiaries that are not Material Domestic Subsidiaries.
(b) Upon the acquisition of any real property (other than the real property subject to the requirements of Section 6.20) by any Loan Party, if such property, in the reasonable judgment of the Administrative Agent, is material and if such property shall not already be subject to a perfected first priority security interest in favor of the Administrative Agent for the benefit of the Secured Parties, then the Borrower shall, at the Borrower’s expense:
(i) within 10 days after such acquisition, furnish to the Administrative Agent a description of the property so acquired in detail satisfactory to the Administrative Agent,
(ii) within 45 days (as such time may be extended for up to an additional twenty-five (25) days by the Administrative Agent in its reasonable discretion) after such acquisition, cause the applicable Loan Party to duly execute and deliver to the Administrative Agent deeds of trust, trust deeds, deeds to secure debt, mortgages, leasehold mortgages, leasehold deeds of trust, supplemental schedules to the credit agreement, collateral agreement supplements, and other security and pledge agreements, as specified by and in form and substance satisfactory to the Administrative Agent, securing payment of all the Obligations of the applicable Loan Party under the Loan Documents and constituting Liens on all such properties,
(iii) within 45 days (as such time may be extended for up to an additional twenty-five (25) days by the Administrative Agent in its reasonable discretion) after such acquisition, cause the applicable Loan Party to take whatever action (including the recording of mortgages, the filing of Uniform Commercial Code financing statements, the giving of notices and the endorsement of notices on title documents) may be necessary or advisable in the opinion of the Administrative Agent to vest in the Administrative Agent (or in any representative of the Administrative Agent designated by it) valid and subsisting Liens on such property, enforceable against all third parties,
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(iv) within 45 days (as such time may be extended for up to an additional twenty-five (25) days by the Administrative Agent in its reasonable discretion) after such acquisition, deliver to the Administrative Agent, upon the request of the Administrative Agent in its sole discretion, a signed copy of a favorable opinion, addressed to the Administrative Agent and the other Secured Parties, of counsel for the Loan Parties acceptable to the Administrative Agent as to the matters contained in clauses (ii) and (iii) above and as to such other matters as the Administrative Agent may reasonably request, and
(v) as promptly as practicable after any acquisition of a real property, deliver, upon the request of the Administrative Agent in its sole discretion, to the Administrative Agent with respect to such appraisals, real property title reports, surveys and engineering, soils and other reports, and environmental assessment reports, each in scope, form and substance reasonably satisfactory to the Administrative Agent, provided , however , that to the extent that any Loan Party or any of its Subsidiaries shall have otherwise received any of the foregoing items with respect to such real property, such items shall, promptly after the receipt thereof, be delivered to the Administrative Agent,
(c) At any time upon request of the Administrative Agent, promptly execute and deliver any and all further instruments and documents and take all such other action as the Administrative Agent may deem necessary or desirable in obtaining the full benefits of, or (as applicable) in perfecting and preserving the Liens of, such guaranties, deeds of trust, trust deeds, deeds to secure debt, mortgages, leasehold mortgages, leasehold deeds of trust, Security Agreement Supplements, IP Security Agreement Supplements and other security and pledge agreements.
6.13 Compliance with Environmental Laws. Comply, and cause all lessees and other Persons operating or occupying its properties to comply, in all material respects, with all applicable Environmental Laws and Environmental Permits; obtain and renew all Environmental Permits necessary for its operations and properties; and conduct any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action necessary to remove and clean up all Hazardous Materials from any of its properties, in accordance with the requirements of all Environmental Laws; provided , however , that neither the Borrower nor any of its Subsidiaries shall be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances in accordance with GAAP.
6.14 Preparation of Environmental Reports. At the request of the Required Lenders from time to time, but no more than one time for any property during the term of this Agreement (unless a Default shall have occurred and be continuing, during which time no limitation shall apply) provide to the Lenders within 60 days after such request, at the expense of the Borrower, an environmental site assessment report for any of its properties described in such request, prepared by an environmental consulting firm acceptable to the Administrative Agent, indicating the presence or absence of Hazardous Materials and the estimated cost of any compliance, removal or remedial action in connection with any Hazardous Materials on such properties; without limiting the generality of the foregoing, if the Administrative Agent determines at any
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time that a material risk exists that any such report will not be provided within the time referred to above, the Administrative Agent may retain an environmental consulting firm to prepare such report at the expense of the Borrower, and the Borrower hereby grants and agrees to cause any Subsidiary that owns any property described in such request to grant at the time of such request to the Administrative Agent, the Lenders, such firm and any agents or representatives thereof an irrevocable non-exclusive license, subject to the rights of tenants, to enter onto their respective properties to undertake such an assessment.
6.15 Compliance with Environmental Laws. Comply, and cause all lessees and other Persons operating or occupying its properties to comply, in all material respects, with all applicable Environmental Laws and Environmental Permits; obtain and renew all Environmental Permits necessary for its operations and properties; and conduct any investigation, study, sampling and testing, and undertake any cleanup, removal, remedial or other action necessary to remove and clean up all Hazardous Materials from any of its properties, in accordance with the requirements of all Environmental Laws except where the failure to do so could not reasonably be expected to result in a Material Adverse Effect; provided , however , that neither the Borrower nor any of its Subsidiaries shall be required to undertake any such cleanup, removal, remedial or other action to the extent that its obligation to do so is being contested in good faith and by proper proceedings and appropriate reserves are being maintained with respect to such circumstances in accordance with GAAP.
6.16 Further Assurances. Promptly upon request by the Administrative Agent, or any Lender through the Administrative Agent, (a) correct any material defect or error that may be discovered in any Loan Document or in the execution, acknowledgment, filing or recordation thereof, and (b) do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register any and all such further acts, deeds, certificates, assurances and other instruments as the Administrative Agent, or any Lender through the Administrative Agent, may reasonably require from time to time in order to (i) carry out more effectively the purposes of the Loan Documents, (ii) to the fullest extent permitted by applicable law, subject any Loan Party’s or any of its Subsidiaries’ properties, assets, rights or interests to the Liens now or hereafter intended to be covered by any of the Collateral Documents, (iii) perfect and maintain the validity, effectiveness and priority of any of the Collateral Documents and any of the Liens intended to be created thereunder and (iv) assure, convey, grant, assign, transfer, preserve, protect and confirm more effectively unto the Secured Parties the rights granted or now or hereafter intended to be granted to the Secured Parties under any Loan Document or under any other instrument executed in connection with any Loan Document to which any Loan Party or any of its Subsidiaries is or is to be a party, and cause each of its Subsidiaries to do so.
6.17 Material Contracts. Perform and observe all the terms and provisions of each Material Contract to be performed or observed by it, maintain each such Material Contract in full force and effect, enforce each such Material Contract in accordance with its terms, take all such action to such end as may be from time to time requested by the Administrative Agent and, upon request of the Administrative Agent, make to each other party to each such Material Contract such demands and requests for information and reports or for action as any Loan Party or any of its Subsidiaries is entitled to make under such Material Contract, and cause each of its Subsidiaries to do so, in each case except where the failure to do so could not reasonably be expected to result in a Material Adverse Effect
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6.18 Compliance with Terms of Leaseholds. Make all payments and otherwise perform all obligations in respect of all leases of real property to which the Borrower or any of its Subsidiaries is a party, keep such leases in full force and effect and not allow such leases to lapse or be terminated or any rights to renew such leases to be forfeited or cancelled, notify the Administrative Agent of any default by any party with respect to such leases and cooperate with the Administrative Agent in all respects to cure any such default, and cause each of its Subsidiaries to do so, except, in any case, where the failure to do so, either individually or in the aggregate, could not be reasonably likely to have a Material Adverse Effect.
6.19 Hedging Agreement. Enter into prior to the date that is ninety (90) days following the Funding Date, and maintain at all times thereafter, interest rate Swap Contracts with Lenders or Affiliates thereof, or other Persons acceptable to the Administrative Agent, covering a notional amount of not less than twenty-five percent (25)% of the aggregate outstanding Indebtedness for borrowed money outstanding on the Initial Funding Date (other than Revolving Credit Loans), with an average tenor of no less than two (2) years.
6.20 Post-Closing Covenant. (a) Within ninety (90) days following the Initial Funding Date (which date may be extended (x) with respect to real property other than the Salem, Oregon Facility for an additional thirty (30) days in the reasonable discretion of the Administrative Agent and as may be further extended for a reasonable period of time with the consent of the Administrative Agent (such consent to such extensions not to be unreasonably withheld) solely to permit the Borrower to deliver the third party reports referred to in Section 6.20(a)(i)(D) so long as the Borrower has delivered all other documents and instruments required with respect to such real property under this Section 6.20 and is diligently pursuing such reports and (y) with respect to the Salem, Oregon Facility for up to two hundred-seventy (270) days so long as the Borrower is diligently pursuing its obligations under this Section 6.20 with respect to the Salem, Oregon Facility to the reasonable satisfaction of the Administrative Agent), the Borrower shall have delivered to the Administrative Agent:
(i) deeds of trust, trust deeds, deeds to secure debt, mortgages, leasehold mortgages and leasehold deeds of trust, each in form and substance reasonably satisfactory to the Administrative Agent and covering the material owned and leased real properties listed on Schedule 6.20 (together with the Assignments of Leases and Rents referred to therein and each other mortgage delivered pursuant to Section 6.12 , in each case as amended, the “ Mortgages ”), duly executed by the appropriate Loan Party, together with:
(A) evidence that counterparts of the Mortgages have been duly executed, acknowledged and delivered and are in form suitable for filing or recording in all filing or recording offices that the Administrative Agent may deem necessary or desirable in order to create a valid first and subsisting Lien on the property described therein in favor of the Administrative Agent for the benefit of the Secured Parties and that all filing, documentary, stamp, intangible and recording taxes and fees have been paid,
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(B) fully paid American Land Title Association Lender’s Extended Coverage title insurance policies (the “Mortgage Policies ”), with endorsements and in amounts acceptable to the Administrative Agent, issued, coinsured and reinsured by title insurers acceptable to the Administrative Agent, insuring the Mortgages to be valid first and subsisting Liens on the property described therein, free and clear of all defects (including, but not limited to, mechanics’ and materialmen’s Liens) and encumbrances, excepting only Permitted Encumbrances and other Liens permitted under the Loan Documents, and providing for such other affirmative insurance (including endorsements for future advances under the Loan Documents, for mechanics’ and materialmen’s Liens and for zoning of the applicable property) and such coinsurance and direct access reinsurance as the Administrative Agent may deem necessary or desirable,
(C) American Land Title Association/American Congress on Surveying and Mapping form surveys, for which all necessary fees (where applicable) have been paid, and dated no more than 30 days before the day of the Initial Funding Date, certified to the Administrative Agent and the issuer of the Mortgage Policies in a manner satisfactory to the Administrative Agent by a land surveyor duly registered and licensed in the States in which the property described in such surveys is located and acceptable to the Administrative Agent, showing all buildings and other improvements, any off-site improvements, the location of any easements, parking spaces, rights of way, building set-back lines and other dimensional regulations and the absence of encroachments, either by such improvements or on to such property, and other defects, other than encroachments and other defects acceptable to the Administrative Agent,
(D) engineering, soils, and environmental and other reports as to the properties described in the Mortgages, from professional firms acceptable to the Administrative Agent,
(E) estoppel and consent agreements executed by each of the lessors of the leased real properties listed on Schedule 6.20, along with (1) a memorandum of lease in recordable form with respect to such leasehold interest, executed and acknowledged by the owner of the affected real property, as lessor, or (2) evidence that the applicable lease with respect to such leasehold interest or a memorandum thereof has been recorded in all places necessary or desirable, in the Administrative Agent’s reasonable judgment, to give constructive notice to third-party purchasers of such leasehold interest, or (3) if such leasehold interest was acquired or subleased from the holder of a recorded leasehold interest, the applicable assignment or sublease document, executed and acknowledged by such holder, in each case in form sufficient to give such constructive notice upon recordation and otherwise in form satisfactory to the Administrative Agent,
(F) without limiting Section 6.20(a)(viii) below, evidence of the insurance required by the terms of the Mortgages,
(G) an appraisal of each of the owned properties described on Schedule 6.20 complying with the requirements of the Federal Financial Institutions Reform, Recovery and Enforcement Act of 1989,
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(H) (1) a Standard Flood Hazard Determination from the National Research Center, or any successor agency thereto dated no more than 30 days before the day of the Initial Funding Date, regarding each parcel of real property subject to a Mortgage indicating whether such real property is located in a special flood hazard area, and, (2) to the extent any such real property parcels are determined to be within a special flood hazard area, (x) evidence of flood hazard insurance (naming the Administrative Agent, on behalf of the Lenders, as loss payee and mortgagee) on all certificates, (y) evidence of payment of all insurance premiums for the current policy year of each and, (z) copies (certified by a Responsible Officer) of the flood insurance policies otherwise in form and substance reasonably satisfactory to the Administrative Agent
(I) evidence that all other action that the Administrative Agent may deem necessary or desirable in order to create valid first and subsisting Liens on the property described in the Mortgages has been taken.
(b) Within forty-five (45) days following the Initial Funding Date, deliver the control agreements required pursuant to Section 4.6 of the Collateral Agreement with respect to the Loan Parties. In the event of any inconsistency between this Section 6.20(b) and the Collateral Agreement this Section 6.20(b) shall control.
ARTICLE VII.
NEGATIVE COVENANTS
So long as any Lender shall have any Commitment hereunder, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, the Borrower shall not, nor shall it permit any Subsidiary to, directly or indirectly:
7.01 Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, assets or revenues, whether now owned or hereafter acquired, other than the following:
(a) Liens pursuant to any Loan Document;
(b) Liens existing on the date hereof and listed on Schedule 5.08(b) and any renewals or extensions thereof, provided that (i) the property covered thereby is not changed, (ii) the amount secured or benefited thereby is not increased except as contemplated by Section 7.03(b) , (iii) the direct or any contingent obligor with respect thereto is not changed, and (iv) any renewal or extension of the obligations secured or benefited thereby is permitted by Section 7.03(b) ;
(c) Liens for taxes not yet due or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person in accordance with GAAP;
(d) carriers’, warehousemen’s, mechanics’, materialmen’s, repairmen’s or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 30 days or which are being contested in good faith and by appropriate proceedings diligently conducted, if adequate reserves with respect thereto are maintained on the books of the applicable Person to the extent required by GAAP;
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(e) pledges or deposits in the ordinary course of business in connection with workers’ compensation, unemployment insurance and other social security legislation, other than any Lien imposed by ERISA;
(f) deposits to secure the performance of bids, trade contracts and leases (other than Indebtedness), statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;
(g) easements, rights-of-way, restrictions and other similar encumbrances affecting real property which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or materially interfere with the ordinary conduct of the business of the applicable Person;
(h) Liens securing judgments for the payment of money not constituting an Event of Default under Section 8.01(h) or securing appeal or other surety bonds related to such judgments; and
(i) Liens securing Indebtedness permitted under Section 7.03(e); provided that (i) in the case of Liens securing purchase money Indebtedness and capital leases, (A) such Liens do not at any time encumber any property other than the property financed by such Indebtedness, and (B) the Indebtedness secured thereby does not exceed the cost of the property being acquired on the date of acquisition, improvements thereto and related expenses and (ii) with respect to any Liens existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary in connection with a Permitted Acquisition, such Lien (A) is not created in connection with such acquisition or such Person becoming a Subsidiary, as the case may be and (B) shall not encumber any other property or assets of the Borrower or any Subsidiary;
(j) precautionary filings in respect of operating leases; and leases, licenses, subleases or sublicenses granted to others in the ordinary course of business which do not (i) interfere in any material respect with the business of the Borrower or any Subsidiary or (ii) secure any Indebtedness.
7.02 Investments. Make any Investments, except:
(a) Investments held by the Borrower or such Subsidiary in the form of cash and Cash Equivalents;
(b) advances to officers, directors and employees of the Borrower and Subsidiaries in an aggregate amount not to exceed $1,000,000 at any time outstanding, for travel, entertainment, relocation and analogous ordinary business purposes;
(c) Investments (i) existing on the Closing Date in Subsidiaries existing on the Closing Date, (ii) in Domestic Subsidiaries (including those formed or acquired after the Closing Date so long as the Borrower and its Subsidiaries comply with the applicable provisions of Section 6.12 ), (iii) by the Borrower or any other Loan Party in Foreign Subsidiaries (not a Loan Party) formed or acquired after the Closing Date; provided , that (A) no Default or Event of Default shall have occurred and be continuing, (B) the Borrower and its Subsidiaries comply with the applicable provisions of Section 6.12 , and (C) the aggregate amount of all such Investments shall not exceed $25,000,000 outstanding at any time during the term of the Facilities (determined without regard to any write-downs or write-offs of such Investments), and (iv) of the Borrower in any Guarantor and Investments of any wholly-owned Subsidiary in the Borrower or in any Guarantor;
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(d) Investments consisting of extensions of credit in the nature of accounts receivable or notes receivable arising from the grant of trade credit in the ordinary course of business, and Investments received in satisfaction or partial satisfaction thereof from financially troubled account debtors to the extent reasonably necessary in order to prevent or limit loss;
(e) Investments by the Borrower or any Guarantor in the form of Permitted Acquisitions;
(f) the Acquisition on the terms and conditions set forth herein;
(g) Guarantees permitted by Section 7.03
(h) Swap Contracts to the extent permitted pursuant to Section 7.03(d); and
(i) other Investments not exceeding (i) $5,000,000 in the aggregate in any fiscal year of the Borrower prior to the fiscal quarter (if any) when the Consolidated Leverage Ratio is less than or equal to 2.00 to 1.00 as of the end of such fiscal quarter (any such date, the “ Investment Step-up Date ”) and (ii) $10,000,000 in the aggregate in any fiscal year of the Borrower after the occurrence of the Investment Step-up Date; provided that in no event shall the aggregate amount of Investments allowed pursuant to this Section 7.02(i) exceed $30,000,000 during the term of this Agreement.
7.03 Indebtedness. Create, incur, assume or suffer to exist any Indebtedness, except:
(a) Indebtedness under the Loan Documents;
(b) Indebtedness outstanding on the date hereof and listed on Schedule 7.03 and any refinancings, refundings, renewals or extensions thereof; provided that the amount of such Indebtedness is not increased at the time of such refinancing, refunding, renewal or extension except by an amount equal to a reasonable premium or other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing and by an amount equal to any existing commitments unutilized thereunder;
(c) Guarantees of the Borrower or any Guarantor in respect of Indebtedness otherwise permitted hereunder of the Borrower or any Guarantor;
(d) obligations (contingent or otherwise) of the Borrower or any Guarantor existing or arising under any Swap Contract, provided that (i) such obligations are (or were) entered into by such Person in the ordinary course of business for the purpose of directly mitigating risks associated with liabilities, commitments, investments, assets, or property held or reasonably anticipated by such Person, or changes in the value of securities issued by such Person, and not for purposes of speculation and (ii) such Swap Contract does not contain any provision exonerating the non-defaulting party from its obligation to make payments on outstanding transactions to the defaulting party (other than pursuant to customary netting or set-off provisions);
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(e) Indebtedness (i) of the Borrower or any Guarantor in respect of capital leases and purchase money obligations for fixed or capital assets or (ii) of any Person acquired in a Permitted Acquisition (so long as such Indebtedness (A) existed prior to the acquisition of such Person by the Borrower or any Subsidiary, (B) is not created in connection with such acquisition and (C) is solely the obligation of such Person, and not of the Borrower or any other Subsidiary), in each case set forth in sub-clauses (i) and (ii) within the applicable limitations set forth in Section 7.01(i) ; provided , however , that the aggregate amount of all such Indebtedness at any one time outstanding pursuant to this clause (e) shall not exceed $25,000,000;
(f) intercompany Indebtedness owed to the Borrower pursuant to unsubordinated demand promissory notes;
(g) other unsecured Indebtedness of the Borrower and its Subsidiaries in an aggregate principal amount not to exceed $25,000,000 at any time outstanding.
7.04 Fundamental Changes. Merge, dissolve, liquidate, consolidate with or into another Person, or Dispose of (whether in one transaction or in a series of transactions) all or substantially all of its assets (whether now owned or hereafter acquired) to or in favor of any Person, except that, so long as no Default exists or would result therefrom:
(a) any Subsidiary may merge with (i) the Borrower, provided that the Borrower shall be the continuing or surviving Person, (ii) any Subsidiary, provided that (A) when any wholly-owned Subsidiary is merging with another Subsidiary, the wholly-owned Subsidiary shall be the continuing or surviving Person and (B) when any Guarantor is merging with another Subsidiary, the continuing or surviving Person shall be a Guarantor;
(b) The Borrower or any Guarantor may effect any Permitted Acquisition; provided that (i) in any such transaction involving the Borrower, the Borrower shall be the continuing or surviving Person and (ii) in any such transaction involving a Guarantor, the continuing or surviving Person shall be a Guarantor; and
(c) any Subsidiary may Dispose of all or substantially all of its assets (upon voluntary liquidation, dissolution or otherwise) (i) to the Borrower or to a Guarantor, or (ii) if the transferor is not a Guarantor, to any other Subsidiary; provided in each case that if the transferor in such a transaction is a wholly-owned Subsidiary, then the transferee must either be the Borrower or a wholly-owned Subsidiary.
7.05 Dispositions. Make any Disposition or enter into any agreement to make any Disposition, except:
(a) Dispositions of obsolete or worn out property, or property no longer used or usable in the business, whether now owned or hereafter acquired, in the ordinary course of business;
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(b) Dispositions of inventory in the ordinary course of business;
(c) Dispositions of equipment or real property to the extent that (i) such property is exchanged for credit against the purchase price of similar replacement property or (ii) the proceeds of such Disposition are reasonably promptly applied to the purchase price of such replacement property;
(d) Dispositions of property by the Borrower to any Subsidiary, or by any Subsidiary to the Borrower or to a Guarantor; provided that if the transferor of such property is the Borrower or a Guarantor, the transferee thereof must either be the Borrower or a Guarantor;
(e) Dispositions of accounts receivable for purposes of collection;
(f) Dispositions of investment securities and cash equivalents in the ordinary course of business;
(g) Dispositions permitted by Section 7.04; and
(h) Dispositions by the Borrower and its Subsidiaries of property acquired after the date hereof in Permitted Acquisitions; provided that (i) the Borrower identifies any such assets to be divested in reasonable detail in writing to the Administrative Agent on or before the closing date of such Permitted Acquisition and (ii) the fair market value of the assets to be divested in connection with any Permitted Acquisition (as reasonably determined by the board of directors of the Borrower) do not exceed an amount equal to twenty-five percent (25%) of the total cash and non-cash consideration (as determined in accordance with clause (f) of the definition of “Permitted Acquisition”) for such Permitted Acquisition.
7.06 Restricted Payments. Declare or make, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, or issue or sell any Equity Interests, except that, so long as no Default shall have occurred and be continuing at the time of any action described below or would result therefrom:
(a) each Subsidiary may make Restricted Payments to the Borrower, the Guarantors and any other Person that owns an Equity Interest in such Subsidiary, ratably according to their respective holdings of the type of Equity Interest in respect of which such Restricted Payment is being made;
(b) the Borrower and each Subsidiary may declare and make dividend payments or other distributions payable solely in the common stock or other common Equity Interests of such Person;
(c) the Borrower and each Subsidiary may purchase, redeem or otherwise acquire Equity Interests issued by it with the proceeds received from the substantially concurrent issue of new shares of its common stock or other common Equity Interests;
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(d) the Borrower may (i) declare and make cash dividends to its stockholders so long as both before and after giving pro forma effect to any such dividend as if such dividend had been paid on the last day of the preceding fiscal quarter, the Borrower is in compliance with the financial covenants set forth in Section 7.11 and (ii) purchase, redeem or otherwise acquire for cash Equity Interests issued by it in an aggregate amount with respect to this clause (ii) not to exceed $10,000,000 during the term of this Agreement;
(e) the Borrower may issue and sell its common Equity Interests, so long as the Net Cash Proceeds thereof are applied to the prepayment of the Loans to the extent required by Section 2.05(b) ;
(f) Investments permitted pursuant to Section 7.02(c); and
(g) the Excluded Issuances.
7.07 Change in Nature of Business. Engage in any material line of business substantially different from those lines of business conducted by the Borrower and its Subsidiaries on the date hereof or any business reasonably related thereto.
7.08 Transactions with Affiliates. Enter into any transaction of any kind with any Affiliate of the Borrower, whether or not in the ordinary course of business, other than on fair and reasonable terms no less favorable to the Borrower or such Subsidiary than would be obtainable by the Borrower or such Subsidiary at the time in a comparable arm’s length transaction with a Person other than an Affiliate, provided that the foregoing restriction shall not apply to:
(a) transactions between or among the Borrower and any of its wholly-owned Subsidiaries or between and among any wholly-owned Subsidiaries;
(b) the payment of fees, expenses and compensation (including equity compensation) to officers and directors of the Borrower or any of its Subsidiaries and indemnification agreements entered into by the Borrower or any of its Subsidiaries; and
(c) employment and severance arrangements with officers and employees.
7.09 Burdensome Agreements. Enter into any Contractual Obligation (other than this Agreement or any other Loan Document) that (a) limits the ability (i) of any Subsidiary to make Restricted Payments to the Borrower or any Guarantor or to otherwise transfer property to the Borrower or any Guarantor, (ii) of any Subsidiary to Guarantee the Indebtedness of the Borrower or (iii) of the Borrower or any Subsidiary to create, incur, assume or suffer to exist Liens on property of such Person; provided , however , that clauses (i) and (iii) shall not prohibit any negative pledge or similar provision, or restriction on transfer of property, incurred or provided in favor of any holder of Indebtedness permitted under Section 7.03(e) solely to the extent any such negative pledge relates to the property financed by or the subject of such Indebtedness; or (b) requires the grant of a Lien to secure an obligation of such Person if a Lien is granted to secure another obligation of such Person. Notwithstanding the foregoing, this Section 7.09 will not restrict or prohibit:
(a) restrictions imposed pursuant to an agreement that has been entered into in connection with a transaction permitted pursuant to Section 7.05 with respect to the property that is subject to that transaction;
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(b) comprise restrictions imposed by any agreement relating to secured Indebtedness permitted pursuant to Section 7.03 to the extent that such restrictions apply only to the property or assets securing such Indebtedness; or
(c) are provisions restricting subletting or assignment of Contractual Obligations.
7.10 Use of Proceeds. Use the proceeds of any Credit Extension, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry margin stock (within the meaning of Regulation U of the FRB) or to extend credit to others for the purpose of purchasing or carrying margin stock or to refund indebtedness originally incurred for such purpose.
7.11 Financial Covenants.
(a) Consolidated Leverage Ratio. Permit the Consolidated Leverage Ratio at any time during any period set forth below to be greater than the ratio set forth below opposite such period:
Period
Maximum
Consolidated
Leverage Ratio
Initial Funding Date through April 29, 2011
4.75 to 1.00
April 30, 2011 through April 29, 2012
4.25 to 1.00
April 30, 2012 through April 29, 2013
3.75 to 1.00
April 30, 2013 through April 29, 2014
3.50 to 1.00
April 30, 2014 and thereafter
3.25 to 1.00
(b) Consolidated Fixed Charge Coverage Ratio. Permit the Consolidated Fixed Charge Coverage Ratio as of the end of any fiscal quarter of the Borrower to be less than the ratio set forth below opposite such fiscal quarter:
Four Fiscal Quarters Ending
Minimum
Consolidated
Fixed Charge
Coverage Ratio
Initial Funding Date through October 30, 2012
1.10 to 1.00
October 31, 2012 through October 30, 2013
1.20 to 1.00
October 31, 2013 and each fiscal quarter-end thereafter
1.25 to 1.00
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7.12 Amendments of Organization Documents. Amend any of its Organization Documents in a manner adverse to the Lenders.
7.13 Accounting Changes. Make any change in its (a) accounting policies or reporting practices, except as required by GAAP, or (b) fiscal year.
7.14 Prepayments of Indebtedness. Prepay, redeem, purchase, defease or otherwise satisfy prior to the scheduled maturity thereof in any manner, or make any payment in violation of any subordination terms of, any Indebtedness, except (a) the prepayment of the Credit Extensions in accordance with the terms of this Agreement and (b) regularly scheduled or required repayments or redemptions of Indebtedness set forth in Schedule 7.03 .
7.15 Amendment of Acquisition Agreement and Indebtedness. (a) Cancel or terminate the Acquisition Agreement or consent to or accept any cancellation or termination thereof, (b) amend, modify or change in any term or condition of the Acquisition Agreement in a manner materially adverse to the Lenders or give any consent, waiver or approval thereunder that would reasonably be expected to be materially adverse to the interests of the Lenders, (c) waive any default under or any breach of any material term or condition of the Acquisition Agreement or (d) amend, modify or change in any manner any term or condition of any Indebtedness set forth in Schedule 7.03 in a manner adverse to the Lenders
7.16 Inactive Subsidiary. Permit the Inactive Subsidiary to (a) enter into any business, operations or activities or (b) notwithstanding anything to the contrary herein, acquire any assets or incur any liabilities (other than liabilities under the Loan Documents and liabilities imposed by law, including tax liabilities and other liabilities incidental to its existence).
ARTICLE VIII.
EVENTS OF DEFAULT AND REMEDIES
8.01 Events of Default. Any of the following shall constitute an Event of Default:
(a) Non-Payment. The Borrower or any other Loan Party fails to pay (i) when and as required to be paid herein, any amount of principal of any Loan or any L/C Obligation, or (ii) within three Business Days after the same becomes due, any interest on any Loan or on any L/C Obligation, or any fee due hereunder, or (iii) within five days after the same becomes due, any other amount payable hereunder or under any other Loan Document; or
(b) Specific Covenants. (i) The Borrower fails to perform or observe any term, covenant or agreement contained in any of Section 6.01, 6.02, 6.03 , 6.05 , 6.10 , 6.11 , 6.12 or 6.20 or Article VII, (ii) any Guarantor fails to perform or observe any term, covenant or agreement contained in the Guaranty or (iii) any Loan Party fails to perform or observe any term, covenant or agreement contained in the Collateral Agreement or the Mortgages; or
(c) Other Defaults. Any Loan Party fails to perform or observe any other covenant or agreement (not specified in subsection (a) or (b) above) contained in any Loan Document on its part to be performed or observed and such failure continues for 30 days; or
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(d) Representations and Warranties. Any representation, warranty, certification or statement of fact made or deemed made by or on behalf of the Borrower or any other Loan Party herein, in any other Loan Document, or in any document delivered in connection herewith or therewith shall be incorrect or misleading when made or deemed made; or
(e) Cross-Default. (i) The Borrower or any Subsidiary (A) fails to make any payment when due (whether by scheduled maturity, required prepayment, acceleration, demand, or otherwise) in respect of any Indebtedness or Guarantee (other than Indebtedness hereunder and Indebtedness under Swap Contracts) having an aggregate principal amount (including undrawn committed or available amounts and including amounts owing to all creditors under any combined or syndicated credit arrangement) of more than the Threshold Amount, or (B) fails to observe or perform any other agreement or condition relating to any such Indebtedness or Guarantee or contained in any instrument or agreement evidencing, securing or relating thereto, or any other event occurs, in each case after any applicable grace, cure or notice period, the effect of which default or other event is to cause, or to permit the holder or holders of such Indebtedness or the beneficiary or beneficiaries of such Guarantee (or a trustee or agent on behalf of such holder or holders or beneficiary or beneficiaries) to cause, with the giving of notice if required, such Indebtedness to be demanded or to become due or to be repurchased, prepaid, defeased or redeemed (automatically or otherwise), or an offer to repurchase, prepay, defease or redeem such Indebtedness to be made, prior to its stated maturity, or such Guarantee to become payable or cash collateral in respect thereof to be demanded; or (ii) there occurs under any Swap Contract an Early Termination Date (as defined, or as such comparable term may be used and defined, in such Swap Contract) resulting from (A) any event of default under such Swap Contract as to which the Borrower or any Subsidiary is the Defaulting Party (as defined, or as such comparable term may be used and defined, in such Swap Contract) or (B) any Termination Event (as defined, or as such comparable term may be used and defined, in such Swap Contract) under such Swap Contract as to which the Borrower or any Subsidiary is an Affected Party (as defined, or as such comparable term may be used and defined, in such Swap Contract) and, in either event, the Swap Termination Value owed by the Borrower or such Subsidiary as a result thereof is greater than the Threshold Amount; or
(f) Insolvency Proceedings, Etc. Any Loan Party or any of its Subsidiaries institutes or consents to the institution of any proceeding under any Debtor Relief Law, or makes an assignment for the benefit of creditors; or applies for or consents to the appointment of any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer for it or for all or any material part of its property; or any receiver, trustee, custodian, conservator, liquidator, rehabilitator or similar officer is appointed without the application or consent of such Person and the appointment continues undischarged or unstayed for 60 calendar days; or any proceeding under any Debtor Relief Law relating to any such Person or to all or any material part of its property is instituted without the consent of such Person and continues undismissed or unstayed for 60 calendar days, or an order for relief is entered in any such proceeding; or
(g) Inability to Pay Debts; Attachment. (i) The Borrower or any Subsidiary becomes unable or admits in writing its inability or fails generally to pay its debts as they become due, or (ii) any writ or warrant of attachment or execution or similar process is issued or levied against all or any material part of the property of any such Person and is not released, vacated or fully bonded within 30 days after its issue or levy; or
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(h) Judgments. There is entered against the Borrower or any Subsidiary (i) one or more final judgments or orders for the payment of money in an aggregate amount (as to all such judgments or orders) exceeding the Threshold Amount (to the extent not covered by independent third-party insurance as to which the insurer does not dispute coverage), or (ii) any one or more non-monetary final judgments that have, or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and, in either case, (A) enforcement proceedings are commenced by any creditor upon such judgment or order, or (B) there is a period of 30 consecutive days during which a stay of enforcement of such judgment, by reason of a pending appeal or otherwise, is not in effect; or
(i) ERISA. (i) An ERISA Event occurs with respect to a Pension Plan or Multiemployer Plan which has resulted or could reasonably be expected to result in liability of the Borrower under Title IV of ERISA to the Pension Plan, Multiemployer Plan or the PBGC in an aggregate amount in excess of the Threshold Amount, or (ii) the Borrower or any ERISA Affiliate fails to pay when due, after the expiration of any applicable grace period, any installment payment with respect to its withdrawal liability under Section 4201 of ERISA under a Multiemployer Plan in an aggregate amount in excess of the Threshold Amount; or
(j) Invalidity of Loan Documents. Any provision of any Loan Document, at any time after its execution and delivery and for any reason other than as expressly permitted hereunder or thereunder or satisfaction in full of all the Obligations, ceases to be in full force and effect; or any Loan Party or any other Person contests in any manner the validity or enforceability of any provision of any Loan Document; or any Loan Party denies that it has any or further liability or obligation under any Loan Document, or purports to revoke, terminate or rescind any provision of any Loan Document; or
(k) Change of Control. There occurs any Change of Control; or
(l) Collateral Documents. Any Collateral Document after delivery thereof pursuant to the Effectiveness Agreement, 6.12 or 6.20 shall for any reason (other than pursuant to the terms hereof) cease to create a valid and perfected first priority Lien (subject to Permitted Liens) on the Collateral purported to be covered thereby.
8.02 Remedies Upon Event of Default. If any Event of Default occurs and is continuing, the Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, take any or all of the following actions:
(a) declare the commitment of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions to be terminated, whereupon such commitments and obligation shall be terminated;
(b) declare the unpaid principal amount of all outstanding Loans, all interest accrued and unpaid thereon, and all other amounts owing or payable hereunder or under any other Loan Document to be immediately due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby expressly waived by the Borrower;
(c) require that the Borrower Cash Collateralize the L/C Obligations (in an amount equal to the then Outstanding Amount thereof); and
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(d) exercise on behalf of itself, the Lenders and the L/C Issuer all rights and remedies available to it, the Lenders and the L/C Issuer under the Loan Documents;
provided, however, that upon the occurrence of an actual or deemed entry of an order for relief with respect to the Borrower under the Bankruptcy Code of the United States, the obligation of each Lender to make Loans and any obligation of the L/C Issuer to make L/C Credit Extensions shall automatically terminate, the unpaid principal amount of all outstanding Loans and all interest and other amounts as aforesaid shall automatically become due and payable, and the obligation of the Borrower to Cash Collateralize the L/C Obligations as aforesaid shall automatically become effective, in each case without further act of the Administrative Agent or any Lender.
8.03 Application of Funds. After the exercise of remedies provided for in Section 8.02 (or after the Loans have automatically become immediately due and payable and the L/C Obligations have automatically been required to be Cash Collateralized as set forth in the proviso to Section 8.02 ), any amounts received on account of the Obligations shall, subject to the provisions of Sections 2.16 and 2.17 , be applied by the Administrative Agent in the following order:
First, to payment of that portion of the Obligations constituting fees, indemnities, expenses and other amounts (including fees, charges and disbursements of counsel to the Administrative Agent and amounts payable under Article III ) payable to the Administrative Agent in its capacity as such;
Second, to payment of that portion of the Obligations constituting fees, indemnities and other amounts (other than principal, interest and Letter of Credit Fees) payable to the Lenders and the L/C Issuer (including fees, charges and disbursements of counsel to the respective Lenders and the L/C Issuer (including fees and time charges for attorneys who may be employees of any Lender or the L/C Issuer) and amounts payable under Article III ), ratably among them in proportion to the respective amounts described in this clause Second payable to them;
Third, to payment of that portion of the Obligations constituting accrued and unpaid Letter of Credit Fees and interest on the Loans, L/C Borrowings and other Obligations, ratably among the Lenders and the L/C Issuer in proportion to the respective amounts described in this clause Third payable to them;
Fourth, to (a) payment of that portion of the Obligations constituting (i) unpaid principal of the Loans and L/C Borrowings and (ii) unpaid Obligations owing by any Loan Party under any Secured Hedge Agreements or Secured Cash Management Agreements and (b) Cash Collateralize that portion of L/C Obligations comprised of the aggregate undrawn amount of Letters of Credit (to the extent not otherwise Cash Collateralized by the Borrower pursuant to Sections 2.03 and 2.16 ), ratably among the Lenders (and, in the case of such Secured Hedge Agreements or Secured Cash Management Agreements, the Hedge Banks and the Cash Management Banks) and the L/C Issuer in proportion to the respective amounts described in this clause Fourth held by them; and
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Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by Law.
Subject to Sections 2.03(c) and 2.16, amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fourth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above.
Notwithstanding the foregoing, Obligations arising under Secured Cash Management Agreements and Secured Hedge Agreements shall be excluded from the application described above if the Administrative Agent has not received written notice thereof (expressly stating that such Obligations shall be subject to the application described above), together with such supporting documentation as the Administrative Agent may request, from the applicable Cash Management Bank or Hedge Bank, as the case may be. Each Cash Management Bank or Hedge Bank not a party to the Credit Agreement that has given the notice contemplated by the preceding sentence shall, by such notice, be deemed to have acknowledged and accepted the appointment of the Administrative Agent pursuant to the terms of Article IX hereof for itself and its Affiliates as if a “Lender” party hereto.
ARTICLE IX.
ADMINISTRATIVE AGENT
9.01 Appointment and Authority. (a) Each of the Lenders and the L/C Issuer hereby irrevocably appoints Bank of America to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. The provisions of this Article are solely for the benefit of the Administrative Agent, the Lenders and the L/C Issuer, and the Borrower shall not have rights as a third party beneficiary of any of such provisions.
(b) The Administrative Agent shall also act as the “collateral agent” under the Loan Documents, and each of the Lenders (including in its capacities as a potential Hedge Bank and a potential Cash Management Bank) and the L/C Issuer hereby irrevocably appoints and authorizes the Administrative Agent to act as the agent of such Lender and the L/C Issuer for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by any of the Loan Parties to secure any of the Obligations, together with such powers and discretion as are reasonably incidental thereto. In this connection, the Administrative Agent, as “collateral agent” and any co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent pursuant to Section 9.05 for purposes of holding or enforcing any Lien on the Collateral (or any portion thereof) granted under the Collateral Documents, or for exercising any rights and remedies thereunder at the direction of the Administrative Agent), shall be entitled to the benefits of all provisions of this Article IX and Article X (including Section 10.04(c) , as though such co-agents, sub-agents and attorneys-in-fact were the “collateral agent” under the Loan Documents) as if set forth in full herein with respect thereto.
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9.02 Rights as a Lender. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.
9.03 Exculpatory Provisions. The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents. Without limiting the generality of the foregoing, the Administrative Agent:
(a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing;
(b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law; and
(c) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.
The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Sections 10.01 and 8.02 ) or (ii) in the absence of its own gross negligence or willful misconduct. The Administrative Agent shall be deemed not to have knowledge of any Default unless and until notice describing such Default is given to the Administrative Agent by the Borrower, a Lender or the L/C Issuer.
The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document, or the creation, perfection or priority of any Lien purported to be created by the Collateral Documents, (v) the value or the sufficiency of any Collateral, or (vi) the satisfaction of any condition set forth in Article IV or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent.
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9.04 Reliance by Administrative Agent.
The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan, or the issuance of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or the L/C Issuer, the Administrative Agent may presume that such condition is satisfactory to such Lender or the L/C Issuer unless the Administrative Agent shall have received notice to the contrary from such Lender or the L/C Issuer prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
9.05 Delegation of Duties. The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent.
9.06 Resignation of Administrative Agent. The Administrative Agent may at any time give notice of its resignation to the Lenders, the L/C Issuer and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower, to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may on behalf of the Lenders and the L/C Issuer, appoint a successor Administrative Agent meeting the qualifications set forth above; provided that if the Administrative Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment, then such resignation shall nonetheless become effective in accordance with such notice and (a) the retiring Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders or the L/C Issuer under any of the Loan Documents, the retiring Administrative Agent shall continue to hold such collateral security until such time as a successor Administrative Agent is appointed)
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and (b) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender and the L/C Issuer directly, until such time as the Required Lenders appoint a successor Administrative Agent as provided for above in this Section. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent, and the retiring Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Section). The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring Administrative Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article and Section 10.04 shall continue in effect for the benefit of such retiring Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent was acting as Administrative Agent.
Any resignation by Bank of America as Administrative Agent pursuant to this Section shall also constitute its resignation as L/C Issuer and Swing Line Lender. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, (i) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring L/C Issuer and Swing Line Lender, (ii) the retiring L/C Issuer and Swing Line Lender shall be discharged from all of their respective duties and obligations hereunder or under the other Loan Documents, and (iii) the successor L/C Issuer shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to the retiring L/C Issuer to effectively assume the obligations of the retiring L/C Issuer with respect to such Letters of Credit.
9.07 Non-Reliance on Administrative Agent and Other Lenders. Each Lender and the L/C Issuer acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and the L/C Issuer also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.
9.08 No Other Duties, Etc. Anything herein to the contrary notwithstanding, none of the Book Managers, Arrangers, Syndication Agents or others listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent, a Lender or the L/C Issuer hereunder.
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9.09 Administrative Agent May File Proofs of Claim. In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to any Loan Party, the Administrative Agent (irrespective of whether the principal of any Loan or L/C Obligation shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise.
(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, L/C Obligations and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders, the L/C Issuer and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders, the L/C Issuer and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders, the L/C Issuer and the Administrative Agent under Sections 2.03(i) and (j) , 2.09 and 10.04 ) allowed in such judicial proceeding; and
(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and the L/C Issuer to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders and the L/C Issuer, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 2.09 and 10.04 .
Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or consent to or accept or adopt on behalf of any Lender or the L/C Issuer any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or the L/C Issuer to authorize the Administrative Agent to vote in respect of the claim of any Lender or the L/C Issuer in any such proceeding.
9.10 Collateral and Guaranty Matters. The Lenders (including in its capacities as a potential Cash Management Bank and a potential Hedge Bank) and the L/C Issuer irrevocably authorize the Administrative Agent, at its option and in its discretion;
(a) to release any Lien on any property granted to or held by the Administrative Agent under any Loan Document (i) upon termination of the Aggregate Commitments and payment in full of all Obligations (other than (A) contingent indemnification obligations and (B) subject to Section 9.11 , obligations and liabilities under Secured Cash Management Agreements and Secured Hedge Agreements) and the expiration or termination of all Letters of Credit (other than Letters of Credit as to which other arrangements satisfactory to the Administrative Agent and the L/C Issuer shall have been made), (ii) that is sold or to be sold as part of or in connection with any sale permitted hereunder or under any other Loan Document, or (iii) if approved, authorized or ratified in writing in accordance with Section 10.01 ;
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(b) to release any Guarantor from its obligations under the Guaranty (i) upon termination of the Aggregate Commitments and payment in full of all Obligations (other than (A) contingent indemnification obligations and (B) subject to Section 9.11 , obligations and liabilities under Secured Cash Management Agreements and Secured Hedge Agreements) or (iii) if approved, authorized or ratified in writing in accordance with Section 10.01 ;
(c) to release any Guarantor from its obligations under the Guaranty if such Person ceases to be a Subsidiary as a result of a transaction permitted hereunder;
(d) to subordinate any Lien on any property granted to or held by the Administrative Agent under any Loan Document to the holder of any Lien on such property that is permitted by Section 7.01(i) ;
(e) notwithstanding anything contained herein or in the other Loan Documents to the contrary, to release all Collateral (exclusive of Cash Collateral and all guarantees) upon the satisfaction of the following conditions:
(i) no Default shall have occurred and be continuing at the time of the proposed release;
(ii) the Borrower’s Consolidated Leverage Ratio shall be 2.50 to 1.00 or less for at least two (2) consecutive fiscal quarters; and
(iii) the aggregate amount of outstanding Term Loans shall be less than $100,000,000.
The Administrative Agent and the Lenders agree that the Collateral shall be released upon the satisfaction of the conditions set forth in Section 9.10(e) above; provided , that if, following any such release, the Borrower’s Consolidated Leverage Ratio shall be greater than 2.50 to 1.00 for two (2) consecutive fiscal quarters, then, at the Borrowers expense, all Collateral released in accordance with the foregoing shall be provided by the Borrower and the Loan Parties as collateral security on the terms and conditions set forth in the Collateral Documents.
Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agent’s authority to release or subordinate its interest in particular types or items of property, or to release any Guarantor from its obligations under the Guaranty pursuant to this Section 9.10 . In each case as specified in this Section 9.10 , the Administrative Agent will, at the Borrower’s expense, execute and deliver to the applicable Loan Party such documents as such Loan Party may reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted under the Collateral Documents or to subordinate its interest in such item, or to release such Guarantor from its obligations under the Guaranty, in each case in accordance with the terms of the Loan Documents and this Section 9.10 .
9.11 Secured Cash Management Agreements and Secured Hedge Agreements. No Cash Management Bank or Hedge Bank that obtains the benefits of Section 8.03 , any Guaranty or any Collateral by virtue of the provisions hereof or of any Guaranty or any Collateral Document shall have any right to notice of any action or to consent to, direct or object to any action hereunder or under any other Loan Document or otherwise in respect of the Collateral (including the release or impairment of any Collateral) other than in its capacity as a Lender and, in such case, only to the extent expressly provided in the Loan Documents. Notwithstanding any
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other provision of this Article IX to the contrary, the Administrative Agent shall not be required to verify the payment of, or that other satisfactory arrangements have been made with respect to, Obligations arising under Secured Cash Management Agreements and Secured Hedge Agreements unless the Administrative Agent has received written notice of such Obligations, together with such supporting documentation as the Administrative Agent may request, from the applicable Cash Management Bank or Hedge Bank, as the case may be.
ARTICLE X.
MISCELLANEOUS
10.01 Amendments, Etc. No amendment or waiver of any provision of this Agreement or any other Loan Document, and no consent to any departure by the Borrower or any other Loan Party therefrom, shall be effective unless in writing signed by the Required Lenders and the Borrower or the applicable Loan Party, as the case may be, and acknowledged by the Administrative Agent, and each such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given; provided , however , that no such amendment, waiver or consent shall:
(a) waive any condition set forth in the Effectiveness Agreement without the written consent of each Lender;
(b) without limiting the generality of clause (a) above, waive any condition set forth in Section 4.02 as to any Credit Extension under a particular Facility without the written consent of the Required Revolving Lenders or the Required Term Loan Lenders, as the case may be;
(c) extend or increase the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 8.02) without the written consent of such Lender;
(d) postpone any date fixed by this Agreement or any other Loan Document for any payment (excluding mandatory prepayments pursuant to Section 2.05(b) ) of principal, interest, fees or other amounts due to the Lenders (or any of them) or any scheduled or mandatory reduction of any Facility hereunder or under any other Loan Document without the written consent of each Appropriate Lender directly affected thereby;
(e) reduce the principal of, or the rate of interest specified herein on, any Loan or L/C Borrowing, or (subject to clause (iv) of the second proviso to this Section 10.01 ) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender directly affected thereby; provided , however , that only the consent of the Required Lenders shall be necessary (i) to amend the definition of “Default Rate” or to waive any obligation of the Borrower to pay interest or Letter of Credit Fees at the Default Rate or (ii) to amend any financial covenant hereunder (or any defined term used therein) even if the effect of such amendment would be to reduce the rate of interest on any Loan or L/C Borrowing or to reduce any fee payable hereunder;
(f) change (i) Section 8.03 in a manner that would alter the pro rata sharing of payments required thereby without the written consent of each Lender or (ii) the order of application of any reduction in the Commitments or any prepayment of Loans among the Facilities from the application thereof set forth in the applicable provisions of Section 2.05(b) or 2.06(b) , respectively, in any manner that materially and adversely affects the Lenders under a Facility without the written consent of (i) if such Facility is the Term Loan Facility, the Required Term Loan Lenders, and (ii) if such Facility is the Revolving Credit Facility, the Required Revolving Lenders;
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(g) change (i) any provision of this Section 10.01 or the definition of “Required Lenders” or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder (other than the definitions specified in clause (ii) of this Section 10.01(g) ), without the written consent of each Lender or (ii) the definition of “Required Revolving Lenders” or “Required Term Loan Lenders” without the written consent of each Lender under the applicable Facility;
(h) release all or substantially all of the value of the Guaranty without the written consent of each Lender, except to the extent the release of any Guarantor is permitted pursuant to Section 9.10 (in which case such release may be made by the Administrative Agent acting alone);
(i) release all or substantially all of the Collateral in any transaction or series of related transactions, without the written consent of each Lender, except to the extent the release of any Collateral is permitted pursuant to Section 9.10 (in which case such release may be made by the Administrative Agent acting alone);
(j) impose any greater restriction on the ability of any Lender under a Facility to assign any of its rights or obligations hereunder without the written consent of (i) if such Facility is the Term Loan Facility, the Required Term Loan Lenders, and (ii) if such Facility is the Revolving Credit Facility, the Required Revolving Lenders;
and, provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by the L/C Issuer in addition to the Lenders required above, affect the rights or duties of the L/C Issuer under this Agreement or any Issuer Document relating to any Letter of Credit issued or to be issued by it, in each case, relating to any Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless in writing and signed by the Swing Line Lender in addition to the Lenders required above, affect the rights or duties of the Swing Line Lender under this Agreement; (iii) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; and (iv) the Engagement Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder (and any amendment, waiver or consent which by its terms requires the consent of all Lenders or each affected Lender may be effected with the consent of the applicable Lenders other than Defaulting Lenders), except that (x) the Commitment of any Defaulting Lender may not be increased or extended without the consent of such Lender and (y) any waiver, amendment or modification requiring the consent of all Lenders or each affected Lender that by its terms affects any Defaulting Lenders more adversely than other affected Lenders shall require the consent of such Defaulting Lender.
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10.02 Notices; Effectiveness; Electronic Communication.
(a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in subsection (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopier as follows, and all notices and other communications expressly permitted hereunder to be given by telephone shall be made to the applicable telephone number, as follows:
(i) if to the Borrower, the Administrative Agent, the L/C Issuer or the Swing Line Lender, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 10.02 ; and
(ii) if to any other Lender, to the address, telecopier number, electronic mail address or telephone number specified in its Administrative Questionnaire.
Notices and other communications sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices and other communications sent by telecopier shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices and other communications delivered through electronic communications to the extent provided in subsection (b) below, shall be effective as provided in such subsection (b).
(b) Electronic Communications. Notices and other communications to the Lenders and the L/C Issuer hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or the L/C Issuer pursuant to Article II if such Lender or the L/C Issuer, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications.
Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next business day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
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(c) The Platform. THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE AGENT PARTIES (AS DEFINED BELOW) DO NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIM LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY ANY AGENT PARTY IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM. In no event shall the Administrative Agent or any of its Related Parties (collectively, the “ Agent Parties ”) have any liability to the Borrower, any Lender, the L/C Issuer or any other Person for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of the Borrower’s or the Administrative Agent’s transmission of Borrower Materials through the Internet, except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by a final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided , however , that in no event shall any Agent Party have any liability to the Borrower, any Lender, the L/C Issuer or any other Person for indirect, special, incidental, consequential or punitive damages (as opposed to direct or actual damages).
(d) Change of Address, Etc. Each of the Borrower, the Administrative Agent, the L/C Issuer and the Swing Line Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each other Lender may change its address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower, the Administrative Agent, the L/C Issuer and the Swing Line Lender. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender. Furthermore, each Public Lender agrees to cause at least one individual at or on behalf of such Public Lender to at all times have selected the “Private Side Information” or similar designation on the content declaration screen of the Platform in order to enable such Public Lender or its delegate, in accordance with such Public Lender’s compliance procedures and applicable Law, including United States Federal and state securities Laws, to make reference to Borrower Materials that are not made available through the “Public Side Information” portion of the Platform and that may contain material non-public information with respect to the Borrower or its securities for purposes of United States Federal or state securities laws.
(e) Reliance by Administrative Agent, L/C Issuer and Lenders. The Administrative Agent, the L/C Issuer and the Lenders shall be entitled to rely and act upon any notices (including telephonic Committed Loan Notices and Swing Line Loan Notices) purportedly given by or on behalf of the Borrower even if (i) such notices were not made in a manner specified herein, were incomplete or were not preceded or followed by any other form of notice specified herein, or (ii) the terms thereof, as understood by the recipient, varied from any confirmation thereof. The Borrower shall indemnify the Administrative Agent, the L/C Issuer, each Lender and the Related Parties of each of them from all losses, costs, expenses and liabilities resulting from the reliance by such Person on each notice purportedly given by or on behalf of the Borrower. All telephonic notices to and other telephonic communications with the Administrative Agent may be recorded by the Administrative Agent, and each of the parties hereto hereby consents to such recording.
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10.03 No Waiver; Cumulative Remedies; Enforcement. No failure by any Lender, the L/C Issuer or the Administrative Agent to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Loan Documents against the Loan Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, the Administrative Agent in accordance with Section 8.02 for the benefit of all the Lenders and the L/C Issuer; provided , however , that the foregoing shall not prohibit (a) the Administrative Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Administrative Agent) hereunder and under the other Loan Documents, (b) the L/C Issuer or the Swing Line Lender from exercising the rights and remedies that inure to its benefit (solely in its capacity as L/C Issuer or Swing Line Lender, as the case may be) hereunder and under the other Loan Documents, (c) any Lender from exercising setoff rights in accordance with Section 10.08 (subject to the terms of Section 2.13 ), or (d) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to any Loan Party under any Debtor Relief Law; and provided , further , that if at any time there is no Person acting as Administrative Agent hereunder and under the other Loan Documents, then (i) the Required Lenders shall have the rights otherwise ascribed to the Administrative Agent pursuant to Section 8.02 and (ii) in addition to the matters set forth in clauses (b), (c) and (d) of the preceding proviso and subject to Section 2.13 , any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.
10.04 Expenses; Indemnity; Damage Waiver.
(a) Costs and Expenses. The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent), in connection with the syndication of the credit facilities provided for herein, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable out-of-pocket expenses incurred by the L/C Issuer in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all out-of-pocket expenses incurred by the Administrative Agent, any Lender or the L/C Issuer (including the fees, charges and disbursements of any counsel for the Administrative Agent, any Lender or the L/C Issuer), in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (B) in connection with the Loans made or Letters of Credit issued hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit.
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(b) Indemnification by the Borrower. The Borrower shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender and the L/C Issuer, and each Related Party of any of the foregoing Persons (each such Person being called an “ Indemnitee ”) against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses (including the fees, charges and disbursements of any counsel for any Indemnitee), and shall indemnify and hold harmless each Indemnitee from all fees and time charges and disbursements for attorneys who may be employees of any Indemnitee, incurred by any Indemnitee or asserted against any Indemnitee by any third party or by the Borrower or any other Loan Party arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder, the consummation of the transactions contemplated hereby or thereby, or, in the case of the Administrative Agent (and any sub-agent thereof) and its Related Parties only, the administration of this Agreement and the other Loan Documents (including in respect of any matters addressed in Section 3.01 ), (ii) any Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the L/C Issuer to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of its Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of its Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by the Borrower or any other Loan Party, and regardless of whether any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee or (y) result from a claim brought by the Borrower or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee’s obligations hereunder or under any other Loan Document, if the Borrower or such other Loan Party has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction.
(c) Reimbursement by Lenders. To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under subsection (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), the L/C Issuer or any Related Party of any of the foregoing, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), the L/C Issuer or such Related Party, as the case may be, such Lender’s Applicable Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent) or the L/C Issuer in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent) or L/C Issuer in connection with such capacity. The obligations of the Lenders under this subsection (c) are subject to the provisions of Section 2.12(d) .
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(d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof. No Indemnitee referred to in subsection (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed to such unintended recipients by such Indemnitee through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby other than for direct or actual damages resulting from the gross negligence or willful misconduct of such Indemnitee as determined by a final and nonappealable judgment of a court of competent jurisdiction.
(e) Payments. All amounts due under this Section shall be payable not later than ten Business Days after demand therefor.
(f) Survival. The agreements in this Section shall survive the resignation of the Administrative Agent, the L/C Issuer and the Swing Line Lender, the replacement of any Lender, the termination of the Aggregate Commitments and the repayment, satisfaction or discharge of all the other Obligations.
10.05 Payments Set Aside. To the extent that any payment by or on behalf of the Borrower is made to the Administrative Agent, the L/C Issuer or any Lender, or the Administrative Agent, the L/C Issuer or any Lender exercises its right of setoff, and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent, the L/C Issuer or such Lender in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Law or otherwise, then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such setoff had not occurred, and (b) each Lender and the L/C Issuer severally agrees to pay to the Administrative Agent upon demand its applicable share (without duplication) of any amount so recovered from or repaid by the Administrative Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per annum equal to the Federal Funds Rate from time to time in effect. The obligations of the Lenders and the L/C Issuer under clause (b) of the preceding sentence shall survive the payment in full of the Obligations and the termination of this Agreement.
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10.06 Successors and Assigns.
(a) Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of subsection (b) of this Section, (ii) by way of participation in accordance with the provisions of subsection (d) of this Section, or (iii) by way of pledge or assignment of a security interest subject to the restrictions of subsection (f) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in subsection (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the L/C Issuer and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) Assignments by Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans (including for purposes of this subsection (b), participations in L/C Obligations and in Swing Line Loans) at the time owing to it); provided that any such assignment shall be subject to the following conditions:
(i) Minimum Amounts.
(A) in the case of an assignment of the entire remaining amount of the assigning Lender’s Commitment under any Facility and the Loans at the time owing to it under such Facility or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
(B) in any case not described in subsection (b)(i)(A) of this Section, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment, determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if “Trade Date” is specified in the Assignment and Assumption, as of the Trade Date, shall not be less than $5,000,000, in the case of any assignment in respect of the Revolving Credit Facility, or $1,000,000, in the case of any assignment in respect of the Term Facility unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided , however , that concurrent assignments to members of an Assignee Group and concurrent assignments from members of an Assignee Group to a single Eligible Assignee (or to an Eligible Assignee and members of its Assignee Group) will be treated as a single assignment for purposes of determining whether such minimum amount has been met.
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(ii) Proportionate Amounts. Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement with respect to the Loans or the Commitment assigned, except that this clause (ii) shall not (A) apply to the Swing Line Lender’s rights and obligations in respect of Swing Line Loans or (B) prohibit any Lender from assigning all or a portion of its rights and obligations among separate Facilities on a non-pro rata basis;
(iii) Required Consents. No consent shall be required for any assignment except to the extent required by subsection (b)(i)(B) of this Section and, in addition:
(A) the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless (1) an Event of Default has occurred and is continuing at the time of such assignment or (2) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; provided that the Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within five Business Days after having received notice thereof;
(B) the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of (1) any Term Commitment or Revolving Credit Commitment if such assignment is to a Person that is not a Lender with a Commitment in respect of the applicable Facility, an Affiliate of such Lender or an Approved Fund with respect to such Lender or (2) any Term Loan to a Person that is not a Lender, an Affiliate of a Lender or an Approved Fund;
(C) the consent of the L/C Issuer (such consent not to be unreasonably withheld or delayed) shall be required for any assignment that increases the obligation of the assignee to participate in exposure under one or more Letters of Credit (whether or not then outstanding); and
(D) the consent of the Swing Line Lender (such consent not to be unreasonably withheld or delayed) shall be required for any assignment in respect of the Revolving Credit Facility.
(iv) Assignment and Assumption. The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee in the amount of $3,500; provided , however , that the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
(v) No Assignment to Certain Persons. No such assignment shall be made (A) to the Borrower or any of the Borrower’s Affiliates or Subsidiaries or (B) to a Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing Persons described in this clause (B).
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(vi) No Assignment to Natural Persons. No such assignment shall be made to a natural person
(vii) Certain Additional Payments. In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Administrative Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other compensating actions, including funding, with the consent of the Borrower and the Administrative Agent, the applicable pro rata share of Loans previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (x) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Administrative Agent or any Lender hereunder (and interest accrued thereon) and (y) acquire (and fund as appropriate) its full pro rata share of all Loans and participations in Letters of Credit and Swing Line Loans in accordance with its Applicable Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under applicable Law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs
Subject to acceptance and recording thereof by the Administrative Agent pursuant to subsection (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 3.01 , 3.04 , 3.05 , and 10.04 with respect to facts and circumstances occurring prior to the effective date of such assignment. Upon request, the Borrower (at its expense) shall execute and deliver a Note to the assignee Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this subsection shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with subsection (d) of this Section.
(c) Register. The Administrative Agent, acting solely for this purpose as an agent of the Borrower (and such agency being solely for tax purposes), shall maintain at the Administrative Agent’s Office a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitments of, and principal amounts of the Loans and L/C Obligations owing to, each Lender pursuant to the terms hereof from time to time (the “ Register ”). The entries in the Register shall be conclusive, and the Borrower, the Administrative Agent and the Lenders may treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. In addition, the Administrative Agent shall maintain on the Register information regarding the designation, and revocation of designation, of any Lender as a Defaulting Lender. The Register shall be available for inspection by the Borrower and any Lender, at any reasonable time and from time to time upon reasonable prior notice.
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(d) Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural person, a Defaulting Lender or the Borrower or any of the Borrower’s Affiliates or Subsidiaries) (each, a “ Participant ”) in all or a portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans (including such Lender’s participations in L/C Obligations and/or Swing Line Loans) owing to it); provided that (i) such Lender’s obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent, the Lenders and the L/C Issuer shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, waiver or other modification described in the first proviso to Section 10.01 that affects such Participant. Subject to subsection (e) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.01 , 3.04 and 3.05 to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to subsection (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 10.08 as though it were a Lender, provided such Participant agrees to be subject to Section 2.13 as though it were a Lender.
(e) Limitations upon Participant Rights. A Participant shall not be entitled to receive any greater payment under Section 3.01 or 3.04 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower’s prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 3.01 unless the Borrower is notified of the participation sold to such Participant and such Participant agrees, for the benefit of the Borrower, to comply with Section 3.01(e) as though it were a Lender.
(f) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement (including under its Note, if any) to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
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(g) Resignation as L/C Issuer or Swing Line Lender after Assignment. Notwithstanding anything to the contrary contained herein, if at any time Bank of America assigns all of its Revolving Credit Commitment and Revolving Credit Loans pursuant to subsection (b) above, Bank of America may, (i) upon 30 days’ notice to the Borrower and the Lenders, resign as L/C Issuer and/or (ii) upon 30 days’ notice to the Borrower, resign as Swing Line Lender. In the event of any such resignation as L/C Issuer or Swing Line Lender, the Borrower shall be entitled to appoint from among the Lenders a successor L/C Issuer or Swing Line Lender hereunder; provided , however , that no failure by the Borrower to appoint any such successor shall affect the resignation of Bank of America as L/C Issuer or Swing Line Lender, as the case may be. If Bank of America resigns as L/C Issuer, it shall retain all the rights, powers, privileges and duties of the L/C Issuer hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation as L/C Issuer and all L/C Obligations with respect thereto (including the right to require the Lenders to make Base Rate Loans or fund risk participations in Unreimbursed Amounts pursuant to Section 2.03(c) ). If Bank of America resigns as Swing Line Lender, it shall retain all the rights of the Swing Line Lender provided for hereunder with respect to Swing Line Loans made by it and outstanding as of the effective date of such resignation, including the right to require the Lenders to make Base Rate Loans or fund risk participations in outstanding Swing Line Loans pursuant to Section 2.04(c) . Upon the appointment of a successor L/C Issuer and/or Swing Line Lender, (a) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring L/C Issuer or Swing Line Lender, as the case may be, and (b) the successor L/C Issuer shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to Bank of America to effectively assume the obligations of Bank of America with respect to such Letters of Credit.
10.07 Treatment of Certain Information; Confidentiality. Each of the Administrative Agent, the Lenders and the L/C Issuer agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Affiliates’ respective partners, directors, officers, employees, agents, trustees, advisors and representatives (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent requested by any regulatory authority purporting to have jurisdiction over it (including any self-regulatory authority, such as the National Association of Insurance Commissioners), (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process, (d) to any other party hereto, (e) in connection with the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement or any Eligible Assignee invited to be a Lender pursuant to Section 2.(14)(c) or Section 2.15(c) or (ii) any actual or prospective counterparty (or its advisors) to any swap or derivative transaction relating to the Borrower and its obligations, (g) with the consent of the Borrower or (h) to the extent such Information (x) becomes publicly available other than as a result of a breach of this Section or (y) becomes available to the Administrative Agent, any Lender, the L/C Issuer or any of their respective Affiliates on a nonconfidential basis from a source other than the Borrower.
115
For purposes of this Section, “Information” means all information received from the Borrower or any Subsidiary relating to the Borrower or any Subsidiary or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the L/C Issuer on a nonconfidential basis prior to disclosure by the Borrower or any Subsidiary, provided that, in the case of information received from the Borrower or any Subsidiary after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
Each of the Administrative Agent, the Lenders and the L/C Issuer acknowledges that (a) the Information may include material non-public information concerning the Borrower or a Subsidiary, as the case may be, (b) it has developed compliance procedures regarding the use of material non-public information and (c) it will handle such material non-public information in accordance with applicable Law, including United States Federal and state securities Laws.
10.08 Right of Setoff . If an Event of Default shall have occurred and be continuing, each Lender, the L/C Issuer and each of their respective Affiliates is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent, to the fullest extent permitted by applicable law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender, the L/C Issuer or any such Affiliate to or for the credit or the account of the Borrower against any and all of the obligations of the Borrower now or hereafter existing under this Agreement or any other Loan Document to such Lender or the L/C Issuer, irrespective of whether or not such Lender or the L/C Issuer shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrower may be contingent or unmatured or are owed to a branch or office of such Lender or the L/C Issuer different from the branch or office holding such deposit or obligated on such indebtedness; provided that in the event that any Defaulting Lender shall exercise any such right of setoff, (x) all amounts so set off shall be paid over immediately to the Administrative Agent for further application in accordance with the provisions of Section 2.17 and, pending such payment, shall be segregated by such Defaulting Lender from its other funds and deemed held in trust for the benefit of the Administrative Agent and the Lenders, and (y) the Defaulting Lender shall provide promptly to the Administrative Agent a statement describing in reasonable detail the Obligations owing to such Defaulting Lender as to which it exercised such right of setoff. The rights of each Lender, the L/C Issuer and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender, the L/C Issuer or their respective Affiliates may have. Each Lender and the L/C Issuer agrees to notify the Borrower and the Administrative Agent promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.
116
10.09 Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum rate of non-usurious interest permitted by applicable Law (the “ Maximum Rate ”). If the Administrative Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the Borrower. In determining whether the interest contracted for, charged, or received by the Administrative Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable Law, (a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b) exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations hereunder.
10.10 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in the Effectiveness Agreement, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or other electronic imaging means shall be effective as delivery of a manually executed counterpart of this Agreement.
10.11 Survival of Representations and Warranties. All representations and warranties made hereunder and in any other Loan Document or other document delivered pursuant hereto or thereto or in connection herewith or therewith shall survive the execution and delivery hereof and thereof. Such representations and warranties have been or will be relied upon by the Administrative Agent and each Lender, regardless of any investigation made by the Administrative Agent or any Lender or on their behalf and notwithstanding that the Administrative Agent or any Lender may have had notice or knowledge of any Default at the time of any Credit Extension, and shall continue in full force and effect as long as any Loan or any other Obligation hereunder shall remain unpaid or unsatisfied or any Letter of Credit shall remain outstanding.
10.12 Severability. If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, then, to the fullest extent permitted by law, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without limiting the foregoing provisions of this Section 10.12 , if and to the extent that the enforceability of any provisions in this Agreement relating to Defaulting Lenders shall be limited by Debtor Relief Laws, as determined in good faith by the Administrative Agent, the L/C Issuer or the Swing Line Lender, as applicable, then such provisions shall be deemed to be in effect only to the extent not so limited.
117
10.13 Replacement of Lenders. If any Lender requests compensation under Section 3.04, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 3.01 , or if any Lender is a Defaulting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 10.06 ), all of its interests, rights and obligations under this Agreement and the related Loan Documents to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that:
(a) the Borrower shall have paid to the Administrative Agent the assignment fee specified in Section 10.06(b);
(b) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and L/C Advances, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 3.05 ) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);
(c) in the case of any such assignment resulting from a claim for compensation under Section 3.04 or payments required to be made pursuant to Section 3.01 , such assignment will result in a reduction in such compensation or payments thereafter; and
(d) such assignment does not conflict with applicable Laws.
A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
10.14 Governing Law; Jurisdiction; Etc.
(a) GOVERNING LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS, UNLESS OTHERWISE EXPRESSLY SET FORTH THEREIN, SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
(b) SUBMISSION TO JURISDICTION. THE BORROWER IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO
118
AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT, ANY LENDER OR THE L/C ISSUER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST THE BORROWER OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
(c) WAIVER OF VENUE. THE BORROWER IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
(d) SERVICE OF PROCESS. EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.02 . NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.
10.15 Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
10.16 California Judicial Reference. If any action or proceeding is filed in a court of the State of California by or against any party hereto in connection with any of the transactions contemplated by this Agreement or any other Loan Document, (a) the court shall, and is hereby directed to, make a general reference pursuant to California Code of Civil Procedure Section 638 to a referee (who shall be a single active or retired judge) to hear and determine all of the issues in such action or proceeding (whether of fact or of law) and to report a statement of decision, provided that at the option of any party to such proceeding, any such issues pertaining to a “provisional remedy” as defined in California Code of Civil Procedure Section 1281.8 shall be heard and determined by the court, and (b) without limiting the generality of Section 10.04 , the Borrower shall be solely responsible to pay all fees and expenses of any referee appointed in such action or proceeding.
119
10.17 No Advisory or Fiduciary Responsibility. In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document), the Borrower acknowledges and agrees that: (i) (A) the arranging and other services regarding this Agreement provided by the Administrative Agent, the Arrangers and the Syndication Agents, are arm’s-length commercial transactions between the Borrower and its Affiliates, on the one hand, and the Administrative Agent, the Arrangers and the Syndication Agents, on the other hand, (B) the Borrower has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) the Borrower is capable of evaluating, and understands and accepts, the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents; (ii) (A) the Administrative Agent and the Arrangers each is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for the Borrower or any of its Affiliates, or any other Person and (B) neither the Administrative Agent, the Arrangers nor the Syndication Agents has any obligation to the Borrower or any of its Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; and (iii) the Administrative Agent, the Arrangers and the Syndication Agents and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower and its Affiliates, and neither the Administrative Agent, the Arrangers nor the Syndication Agents has any obligation to disclose any of such interests to the Borrower or its Affiliates. To the fullest extent permitted by law, the Borrower hereby waives and releases any claims that it may have against the Administrative Agent, the Arrangers and the Syndication Agents with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated hereby.
10.18 Electronic Execution of Assignments and Certain Other Documents. The words “execution,” “signed,” “signature,” and words of like import in any Assignment and Assumption or in any amendment or other modification hereof (including waivers and consents) shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
10.19 USA PATRIOT Act. Each Lender that is subject to the Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Borrower that pursuant to the requirements of the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “ Act ”), it is required to obtain, verify and record information that identifies the Borrower, which information includes the name and address of the Borrower and other information that will allow such Lender or the Administrative Agent, as applicable, to identify the Borrower in accordance with the Act. The Borrower shall, promptly following a request by the Administrative Agent or any Lender, provide all documentation and other information that the Administrative Agent or such Lender requests in order to comply with its ongoing obligations under applicable “know your customer” and anti-money laundering rules and regulations, including the Act.
120
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
DIAMOND FOODS, INC.
By:
/s/ Steven M. Neil
Name:
Steven M. Neil
Title:
Executive Vice President,
Chief Financial and
Administrative Officer
Diamond Foods, Inc.
Credit Agreement
Signature Pages
BANK OF AMERICA, N.A., as
Administrative Agent
By:
/s/ Ken Puro
Name:
Ken Puro
Title:
Vice President
Diamond Foods, Inc.
Credit Agreement
Signature Pages
BANK OF AMERICA, N.A., as a Lender, L/C Issuer and Swing Line Lender
By:
/s/ Ken Puro
Name:
Ken Puro
Title:
Vice President
Diamond Foods, Inc.
Credit Agreement
Signature Pages
[LENDER]
By:
Name:
Title:
Diamond Foods, Inc.
Credit Agreement
Signature Pages
SCHEDULE 1.01
EXISTING LETTERS OF CREDIT
Irrevocable Standby Letters of Credit with Bank of America, N.A.:
Identification Number: 3099964
Amount: $63,607
Expiration Date: May 1, 2010
Beneficiary: Caxton Health Holdings, LLC
Identification Number: 3100200
Amount: $1,950,000
Expiration Date: August 1, 2010
Beneficiary: The Travelers Indemnity Company
Identification Number: 3099963
Outstanding Balance: $240,000
Expiration Date: August 1, 2010
Beneficiary: Federal Insurance Company
1
SCHEDULE 2.01
COMMITMENTS AND APPLICABLE PERCENTAGES
Lender
Term Loan
Commitment
Revolving Credit
Commitment
Term Applicable
Percentage
Revolving Credit
Applicable
Percentage
Bank of America, N.A.
$
68,333,333.33
$
34,166,666.67
17.083333333
%
17.083333333
%
Barclays Bank PLC
$
68,333,333.33
$
34,166,666.67
17.083333333
%
17.083333333
%
Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York Branch
$
58,333,333.33
$
29,166,666.67
14.583333333
%
14.583333333
%
Bank of Montreal
$
58,333,333.33
$
29,166,666.67
14.583333333
%
14.583333333
%
SunTrust Bank
$
50,000,000.00
$
25,000,000.00
12.500000000
%
12.500000000
%
HSBC Bank USA, National Association
$
26,666,666.67
$
13,333,333.33
6.666666667
%
6.666666667
%
CoBank, ACB
$
26,666,666.67
$
13,333,333.33
6.666666667
%
6.666666667
%
Bank of the West
$
23,333,333.33
$
11,666,666.67
5.833333333
%
5.833333333
%
KeyBank National Association
$
20,000,000.00
$
10,000,000.00
5.000000000
%
5.000000000
%
Total
$
400,000,000
$
200,000,000
100.000000000
%
100.000000000
%
2
SCHEDULE 5.08(b)
LIENS
Debtor
Filing
Secured Party
Principal Amount
of Obligations
Secured
Collateral
Diamond Foods, Inc.
Initial Filing Date:
07-06-2007
Number 72563194
Jurisdiction:
Delaware
Raymond Leasing Corporation
$
7,776
Leased Equipment
Diamond Foods, Inc.
Initial Filing Date:
08-01-2007
Number 72916483
Jurisdiction:
Delaware
Raymond Leasing Corporation
$
41,004
Leased Equipment
Diamond Foods, Inc.
Initial Filing Date:
10-23-2007
Number 74009519
Jurisdiction:
Delaware
Raymond Leasing Corporation
$
26,712
Leased Equipment
Diamond Foods, Inc.
Initial Filing Date:
06-10-2009
Number 91846234
Jurisdiction:
Delaware
Mainline Financial Services, LLC
$
163,071
Leased Equipment
Diamond Foods, Inc.
Initial Filing Date:
07-06-2009
Number 92160098
Jurisdiction:
Delaware
Thermo Fisher Financial Services Inc.
$
219,739
Leased Equipment
Diamond Foods, Inc.
Initial Filing Date:
01-13-2004
Number 0401660680*
Jurisdiction:
California
Continuation Date:
10-30-2008
Number 0871769571*
Farm Credit Leasing Services Corporation
$
235,664
Leased Equipment
Diamond Foods, Inc.
Initial Filing Date:
11-01-2007
Number 077135728939*
Jurisdiction:
California
Toyota Motor Credit Corporation
$
808,806
Equipment*
3
Debtor
Filing
Secured Party
Principal Amount of
Obligations Secured
Collateral
Diamond Foods, Inc.
Initial Filing Date:
11-08-2007
Number 077136692162*
Jurisdiction:
California
Diamond Foods, Inc.
Initial Filing Date:
12-31-2007
Number 087142224393*
Jurisdiction:
California
Diamond Foods, Inc.
Initial Filing Date:
09-17-2008
Numbers
087172412284*
087172413437*
087172413790*
087172413811*
087172414064*
087172414185*
087172414448*
087172414569*
087172414680*
087172414701*
087172419130*
087182669047*
097189220735*
Jurisdiction:
California
Kettle Foods, Inc.
Initial Filing Date
12-30-09
Number 8430522
Jurisdiction:
Oregon
Fluid Connector Products, Inc.
$
1,365
Leased Equipment
Kettle Foods, Inc.
Initial Filing Date
11-06-2009
Number 8394691
Jurisdiction:
Oregon
Great America Leasing Corporation
$
176,586
Leased Equipment
Kettle Foods, Inc.
Initial Filing Date
06-11-2007
Number 7645017
Jurisdiction:
Oregon
AEL Financial, LLC
$
187,667 ($121,135
remaining balance)
Leased Equipment
4
Debtor
Filing
Secured Party
Principal Amount
of Obligations
Secured
Collateral
Kettle Foods, Inc.
Initial Filing Date
05-04-2007
Number: 7609300
Jurisdiction:
Oregon
AEL Financial, LLC
Kettle Foods, Inc.
Initial Filing Date
05-04-2007
Number: 7609322
Jurisdiction:
Oregon
AEL Financial, LLC
Kettle Foods, Inc.
Initial Filing Date
04-09-2007
Number 7580273
Jurisdiction:
Oregon
Wisconsin Department of Commerce
$
510,000
Equipment
Kettle Foods
Initial Filing Date
09-19-2006
Number 7393763
Jurisdiction:
Oregon
Refuse Disposal Systems, LLC
$
4,500
Equipment
*
This UCC financing statement was not filed in the jurisdiction of incorporation of the company and as such is not a valid security interest.
5
SCHEDULE 5.08(c)
OWNED REAL PROPERTY
Stockton:
1050 S. Diamond Street
Stockton, CA 95205
County: San Joaquin
Record Owner: Diamond Foods, Inc.
Book Value: $4,770,732
Estimated Fair Value: $4,770,732
Live Oak:
2600 Juniper Street
Live Oak, CA 95953
County: Sutter
Record Owner: Diamond Foods, Inc.
Book Value: $17,802
Estimated Fair Value: $17,802
Linden:
19525 E. Main Street
Linden, CA 95236
County: San Joaquin
Record Owner: Diamond Foods, Inc.
Book Value: $56,665
Estimated Fair Value: $56,665
Modesto:
395 Mitchell Road
Modesto, CA 95354
County: Stanislaus
Record Owner: Diamond Foods, Inc.
Book Value: None
Estimated Fair Value: None
Robertsdale:
18815 Fairgrounds Road
Robertsdale, AL 36567
County: Baldwin
Record Owner: Diamond Foods, Inc.
Book Value: $485,839
Estimated Fair Value: $485,839
Salem:
3125 Kettle Court SE
Salem, Oregon 97301
County: Marion
Record Owner: Lion/Stove Investments Ltd.
Book Value: £2,550,425
Estimated Fair Value: $5,585,000
6
Beloit:
Lot 46, Gateway Business Park
Beloit, Wisconsin 53511
County: Rock
Record Owner: Kettle Foods Holdings, Inc.
Book Value: $377,828
Estimated Fair Value: $377,828
Norwich:
38 Barnard Road
Bowthorpe, Norwich, NR5 9JP
Record Owner: Lion/Stove Investments Ltd.
Book Value: £5,412,816
Estimated Fair Value: Unknown
38 Barnard Road (adjoining plot of land)
Bowthorpe, Norwich, NR5 9JP
Record Owner: Lion/Stove Investments Ltd.
Book Value: Included Above
Estimated Fair Value: Unknown
7
SCHEDULE 5.08(d)(i)
LEASED REAL PROPERTY (LESSEE)
San Francisco:
600 Montgomery Street, 17th Floor
San Francisco, CA 94111
County: San Francisco
Annual Rent: $651,030
Lessor: Bank of America
Lessee: Diamond Foods, Inc.
Expiration: December 31, 2013
600 Montgomery Street, 33rd Floor
San Francisco, CA 94111
County: San Francisco
Annual Rent: $417,024
Lessor: Bank of America
Lessee: Diamond Foods, Inc.
Expiration: November 28, 2010
Fishers:
11899 Exit Five Parkway
Fishers, IN 46037-7938
County: Hamilton
Annual Rent: $689,976
Lessor: Snackpack, LLC
Lessee: Diamond Foods, Inc.
Expiration: October 15, 2015
11899 Exit Five Parkway
Fishers, IN 46037-7938
County: Hamilton
Annual Rent: $425,424
Lessor: Snackpack, LLC
Lessee: Diamond Foods, Inc.
Expiration: July 31, 2019
Van Buren:
4943 North 900 East
Van Buren, IN 46991
County: Grant
Annual Rent: $500.00 (land lease only)
Lessor: Weaver
Lessee: Diamond Foods, Inc.
Expiration: June 30, 2014
Oak Brook:
800 Enterprise Drive, Suite 210
Oak Brook, IL 60523
8
County: DuPage
Annual Rent: $44,412
Lessor: Enterprise Partners, LLC
Lessee: Diamond Foods, Inc.
Expiration: October 31, 2013
Rogers:
5417 Pinnacle Point Drive, Suite 402
Rogers, AR 72758
County: Benton
Annual Rent: $31,632
Lessor: Pinnacle Point Properties, LLC
Lessee: Diamond Foods, Inc.
Expiration: May 31, 2010
Visalia:
515 N. Ben Maddox Way
Visalia, CA 93292
County: Tulare
Annual Rent: none (operating expenses paid only)
Lessor: Sequoia Walnut Growers, Inc.
Lessee: Diamond Foods, Inc.
Expiration: Agreement provides for an annual evergreen clause.
Salem:
3950 - 3951 Fairview Industrial Drive SE
Salem, Oregon 97302
County: Marion
Annual Rent: $613,788
Lessor: Cascadia Canyon LLC
Lessee: Kettle Foods, Inc.
Expiration: December 31, 2012
2842 & 2854 19th Street SE
Salem, Oregon 97302
County: Marion
Annual Rent: $54,648
Lessor: Cedar Holdings LLC
Lessee: Kettle Foods, Inc.
Expiration: Month to month with 180 days notice to terminate
3125 Kettle Court SE
Salem, Oregon 97301
County: Marion
Annual Rent: $666,204
Lessor: Lion/Stove Investments Limited
Lessee: Kettle Foods, Inc.
Expiration: December 1, 2018
9
Tualatin:
19824 SE 72nd Avenue
Suite 101
Tualatin, Oregon 9706
County: Washington
Annual Rent: $32,361
Lessor: Sagert Ridge LLC
Lessee: Kettle Foods, Inc.
Expiration: September 14, 2014
Beloit:
Lot 46, Gateway Business Park
Beloit, Wisconsin 53511
Annual Rent: $460,740
County: Rock
Lessor: Alliance Development Corp.
Lessee: Kettle Foods, Inc.
Expiration: June 30, 2018
Norwich:
38 Barnard Road
Bowthorpe, Norwich, NR5 9JP
Annual Rent: £694,554
Lessor: Lion/Stove Investments Ltd
Lessee: Kettle Foods Ltd
Expiration: September 30, 2016
Unit 9 Harling Road
Snetterton, Norwich, NR16 2JU
Annual Rent: £371,200
Lessor: Richard Johnston Limited
Lessee: Kettle Foods Ltd
Expiration: September 30, 2012
Unit 5 Harling Road (from March 29, 2010)
Snetterton, Norwich NR16 2JU
Annual Rent:£126,000
Lessor: Richard Johnston Limited
Lessee: Kettle Foods Ltd
Expiration: December 31, 2010
10
SCHEDULE 5.08(d)(ii)
LEASED REAL PROPERTY (LESSOR)
San Francisco:
600 Montgomery Street, 33rd Floor
San Francisco, CA 94111
County: San Francisco
Annual Rent: $417,024
Lessor: Diamond Foods, Inc.
Lessee: PRJ Holdings
Expiration: November 28, 2011
Salem:
3125 Kettle Court SE
Salem, Oregon
County: Marion
Annual Rent: $666,204
Lessor: Lion/Stove Investments Limited
Lessee: Kettle Foods, Inc.
Expiration: December 1, 2018
Norwich:
38 Barnard Road (and adjoining land)
Bowthorpe, Norwich, NR5 9JP
Annual Rent: £694,554
Lessor: Lion/Stove Investments Ltd
Lessee: Kettle Foods Ltd
Expiration: September 30, 2016
11
SCHEDULE 5.08(e)
EXISTING INVESTMENTS
The disclosures in Schedule 5.13 are hereby incorporated by reference.
Borrower holds an interest in undistributed earnings in CoBank, ACB (“ CoBank ”) based on Borrower’s prior loan balances under its Master Loan Agreement with CoBank, which was terminated on September 15, 2008. Undistributed earnings are paid out annually and the final balance is to be received by Borrower in 2018.
Intercompany Loan Agreement by and among Kettle Foods Ltd. and Lion/Stove Acquisition Limited dated as of October 19, 2009 (the “ LSA Intercompany Loan ”). Additional details regarding such loan are set forth below:
Amount: £12,276,231
Obligor: Lion/Stove Acquisition Limited
Maturity: As agreed between borrower and lender
Intercompany Loan Agreement by and among Diamond Foods, Inc. and DFKA Ltd dated as of March 31, 2010 (the “Diamond Intercompany Loan ”). Additional details regarding such loan are set forth below:
Amount: $410,000,000
Obligor: Diamond Foods, Inc.
Maturity: February 25, 2015
Intercompany Loan Agreement by and among DFKA Ltd and Diamond Foods, Inc. dated as of March 31, 2010 (the “Diamond 2 Intercompany Loan ”). Additional details regarding such loan are set forth below:
Amount: US$1,000
Obligor: DFKA Ltd
Maturity: February 25, 2015
12
SCHEDULE 5.13
SUBSIDIARIES; OTHER EQUITY INVESTMENTS
Schedule 5.13(a)
Diamond of Europe GmbH, a wholly-owned subsidiary of the Borrower, which is currently dormant.
Diamond Nut Company of California, Inc., a wholly-owned subsidiary of the Borrower.
DFKA Ltd., a wholly-owned subsidiary of the Borrower.
The following entities will be owned by DFKA Ltd. through a chain of ownership as of the Initial Funding Date:
Kettle – LLC
Authorized Securities:
Membership Certificate (1 Unit)
Owner:
Lion/Stove Acquisition Limited (1 Unit)
Kettle Foods Holdings, Inc.
Authorized Securities:
Common Stock (3,000 Shares)
Owner:
Lion/Stove Acquisition Limited (CS-1 / 1,000 and CS-2 / 1,000)
Kettle Foods, Inc.
Authorized Securities:
Class A Common Stock (100,000,000), Class B Common Stock (400,000,000), Preferred Stock (2,268,000)
Owner:
Kettle Foods Holdings, Inc. (Class A / 50,000,000 Class B / 149,000,402 and Preferred / 2,286,000)
Lion/Stove Luxembourg Investment 2 S.a.r.l
Authorized Securities:
4,619 Ordinary Shares and 408,053 Preferred Shares
Owner:
DFKA Ltd.
Lion/Stove Holdings Ltd
Authorized Securities:
2 Ordinary Shares
Owner:
Lion/Stove Luxembourg Investment 2 S.a.r.l.
Lion/Stove Acquisition Ltd
Authorized Securities:
2 Ordinary Shares
Owner:
Lion/Stove Holdings Ltd
Lion/Stove Investments Ltd
Authorized Securities:
110001 Ordinary Shares (held by Lion/Stove Acquisition Ltd), 5789 Ordinary Shares and 41521053 Preference Shares (held by Lion/Stove Intermediate Ltd)
Owners:
Lion/Stove Acquisition Ltd
Lion/Stove Intermediate Ltd
Lion/Stove Intermediate Ltd
Authorized Securities:
421100 Ordinary Shares
Owner:
Kettle Foods Holdings, Inc.
13
Kettle Foods Ltd
Authorized Securities:
100 Ordinary Shares
Owner:
Lion/Stove Investments Ltd
Kettle Express Ltd (Dissolved)
Authorized Securities:
2 Ordinary Shares
Owner:
Kettle Foods Ltd
Kettle Foods Import Ltd (Dissolved)
Authorized Securities:
100 Ordinary Shares
Owner:
Kettle Foods Ltd
14
SCHEDULE 6.20
REAL PROPERTY SUBJECT TO MORTGAGES
Stockton:
1050 S. Diamond Street
Stockton, CA 95205
County: San Joaquin
Record Owner: Diamond Foods, Inc.
Book Value: $4,770,732
Estimated Fair Value: $4,770,732
Live Oak:
2600 Juniper Street
Live Oak, CA 95953
County: Sutter
Record Owner: Diamond Foods, Inc.
Book Value: $17,802
Estimated Fair Value: $17,802
Linden:
19525 E. Main Street
Linden, CA 95236
County: San Joaquin
Record Owner: Diamond Foods, Inc.
Book Value: $56,665
Estimated Fair Value: $56,665
Modesto:
395 Mitchell Road
Modesto, CA 95354
County: Stanislaus
Record Owner: Diamond Foods, Inc.
Book Value: None
Estimated Fair Value: None
Robertsdale:
18815 Fairgrounds Road
Robertsdale, AL 36567
County: Baldwin
Record Owner: Diamond Foods, Inc.
Book Value: $485,839
Estimated Fair Value: $485,839
Salem:
3125 Kettle Court SE
Salem, Oregon 97301
County: Marion
Record Owner: Lion/Stove Investments Ltd.
Book Value: £2,550,425
Estimated Fair Value: $5,585,000
15
Beloit:
Lot 46, Gateway Business Park
Beloit, Wisconsin 53511
County: Rock
Record Owner: Kettle Foods Holdings, Inc.
Book Value: $377,828
Estimated Fair Value: $377,828
16
SCHEDULE 7.03
EXISTING INDEBTEDNESS
Major Economic Development Loan between Kettle Foods, Inc. and the State of Wisconsin Department of Commerce, dated November 26, 2006. Additional details regarding such loan are set forth below:
Amount: $510,000
Secured: Yes
Guaranteed: No
Maturity: June 1, 2013
The LSA Intercompany Loan.
The Diamond Intercompany Loan.
The Diamond 2 Intercompany Loan.
Capital Leases:
•
between Diamond Foods, Inc. and Xerox Corporation, dated April 1, 2006.
•
between Diamond Foods, Inc. and Thermo Fisher Scientific Inc., dated June 26, 2009.
17
SCHEDULE 10.02
ADMINISTRATIVE AGENT’S OFFICE,
CERTAIN ADDRESSES FOR NOTICES
BORROWER:
Diamond Foods, Inc.
600 Montgomery Street, 17th Floor
San Francisco, California 94111
Attention:
Chief Financial Officer (with a copy to General Counsel)
Telephone:
[Redacted]
Facsimile:
[Redacted]
E-mail:
[Redacted]@diamondfoods.com (with copies to [Redacted]@diamondfoods.com and
[Redacted]@diamondfoods.com)
Website Address: www.diamondfoods.com
U.S. Taxpayer Identification Number:202-55-6965
ADMINISTRATIVE AGENT:
Administrative Agent’s Office
(for payments and Requests for Credit Extensions):
BANK OF AMERICA, N.A.
2001 Clayton Road, 2nd Floor
Concord, CA 94520
Mail Code: [Redacted]
Attention: [Redacted]
Telephone: [Redacted]
Facsimile: [Redacted]
E-mail: [Redacted]@baml.com
Wiring instructions:
BANK OF AMERICA
New York, NY
ABA No.: [Redacted]
Account No.: [Redacted]
Account Name: [Redacted]
Reference: Diamond Foods
18
Other Notices as Administrative Agent :
BANK OF AMERICA, N.A.
800 Fifth Avenue, Floor 17
Seattle, WA 98104
Mail Code: [Redacted]
Attention: [Redacted]
Telephone: [Redacted]
Facsimile: [Redacted]
E-mail: [Redacted]@baml.com
L/C ISSUER:
Bank of America, N.A. as L/C Issuer :
BANK OF AMERICA, N.A.
Trade Operations – Los Angeles #226521
1000 West Temple Street, Suite Level 7
Mail Code: [Redacted]
Los Angeles, CA 90017-1466
Attention: [Redacted]
Telephone: [Redacted]
Facsimile: [Redacted]
SWING LINE LENDER:
Bank of America, N.A. as Swing Line Lender :
Bank of America, N.A.
2001 Clayton Road, 2nd Floor
Concord, CA 94520
Mail Code: [Redacted]
Attention: [Redacted]
Telephone: [Redacted]
Facsimile: [Redacted]
E-mail: [Redacted]@baml.com
Wiring instructions:
Bank of America, N.A.
Dallas TX
ABA No.: [Redacted]
Account No.: [Redacted]
Account Name: [Redacted]
Reference: Diamond Foods, Inc.
19
EXHIBIT A
FORM OF COMMITTED LOAN NOTICE
Date: ,
To: Bank of America, N.A., as Administrative Agent
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement, dated as of February 25, 2010 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “ Agreement ;” the terms defined therein being used herein as therein defined), among Diamond Foods, Inc., a Delaware corporation (the “ Borrower ”), the Lenders from time to time party thereto, and Bank of America, NA., as Administrative Agent, L/C Issuer and Swing Line Lender.
The undersigned hereby requests (select one):
¨
A Borrowing of [Revolving Credit][Term] Loans
¨
A conversion or continuation of [Revolving Credit][Term] Loans
1.
On (a Business Day).
2.
In the amount of $
3.
Comprised of
[Type of Loan requested]
4.
For Eurodollar Rate Loans: with an Interest Period of weeks/ months.1
[The Revolving Credit Borrowing requested herein complies with the proviso to the first sentence of Section 2.01(b) of the Agreement.]2
1
Period must conform to the periods permitted in the definition of Interest Period in the Credit Agreement.
2
Include this sentence in the case of a Revolving Credit Borrowing.
Form of Committed Loan Notice
A - 1
The Borrower hereby represents and warrants that the conditions specified in Sections 4.02(a), (b) and (c) of the Agreement shall be satisfied on and as of the date of the applicable Credit Extension (other than in the case of a conversion of Loans to another Type, or a continuation of Eurodollar Rate Loans).
DIAMOND FOODS, INC.
By:
Name:
Title:
Form of Committed Loan Notice
A - 2
EXHIBIT B
FORM OF SWING LINE LOAN NOTICE
Date: ,
To:
Bank of America, N.A., as Swing Line Lender
Bank of America, N.A., as Administrative Agent
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement, dated as of February 25, 2010 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “ Agreement ;” the terms defined therein being used herein as therein defined), among Diamond Foods, Inc., a Delaware corporation (the “ Borrower ”), the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender.
The undersigned hereby requests a Swing Line Loan:
1.
On (a Business Day).
2.
In the amount of $ .
The Swing Line Borrowing requested herein complies with the requirements of the provisos to the first sentence of Section 2.04(a) of the Agreement.
The Borrower hereby represents and warrants that the conditions specified in Sections 4.02(a), (b) and (c) of the Agreement shall be satisfied on and as of the date of the applicable Credit Extension.
DIAMOND FOODS, INC.
By:
Name:
Title:
Form of Swing Line Loan Notice
B - 1
EXHIBIT C-1
FORM OF TERM NOTE
,
FOR VALUE RECEIVED, the undersigned (the “Borrower”), hereby promises to pay to or registered assigns (the “ Lender ”), in accordance with the provisions of the Agreement (as hereinafter defined), the principal amount of the Term Loan from time to time made by the Lender to the Borrower under that certain Credit Agreement, dated as of February 25, 2010 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “ Agreement ;” the terms defined therein being used herein as therein defined), among the Borrower, the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender.
The Borrower promises to pay interest on the unpaid principal amount of the Term Loan made by the Lender from the date of such Loan until such principal amount is paid in full, at such interest rates and at such times as provided in the Agreement. All payments of principal and interest shall be made to the Administrative Agent for the account of the Lender in Dollars in immediately available funds at the Administrative Agent’s Office. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement.
This Term Note is one of the Term Notes referred to in the Agreement, is entitled to the benefits thereof and may be prepaid in whole or in part subject to the terms and conditions provided therein. This Term Note is also entitled to the benefits of the Guaranty. Upon the occurrence and continuation of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Term Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. The Term Loan made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business. The Lender may also attach schedules to this Term Note and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto.
The Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Term Note.
Form of Term Note
C-1 - 1
THIS TERM NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
DIAMOND FOODS, INC.
By:
Name:
Title:
Form of Term Note
C-1 - 2
LOANS AND PAYMENTS WITH RESPECT THERETO
Date
Type of
Loan Made
Amount of
Loan Made
End of
Interest
Period
Amount of
Principal or
Interest Paid
This Date
Outstanding
Principal
Balance This
Date
Notation
Made By
Form of Term Note
C-1 - 3
EXHIBIT C-2
FORM OF REVOLVING CREDIT NOTE
,
FOR VALUE RECEIVED, the undersigned (the “Borrower”), hereby promises to pay to or registered assigns (the “ Lender ”), in accordance with the provisions of the Agreement (as hereinafter defined), the principal amount of each Revolving Credit Loan from time to time made by the Lender to the Borrower under that certain Credit Agreement, dated as of February 25, 2010 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “ Agreement ;” the terms defined therein being used herein as therein defined), among the Borrower, the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender.
The Borrower promises to pay interest on the unpaid principal amount of each Revolving Credit Loan from the date of such Loan until such principal amount is paid in full, at such interest rates and at such times as provided in the Agreement. Except as otherwise provided in Section 2.04(f) of the Agreement with respect to Swing Line Loans, all payments of principal and interest shall be made to the Administrative Agent for the account of the Lender in Dollars in immediately available funds at the Administrative Agent’s Office. If any amount is not paid in full when due hereunder, such unpaid amount shall bear interest, to be paid upon demand, from the due date thereof until the date of actual payment (and before as well as after judgment) computed at the per annum rate set forth in the Agreement.
This Revolving Credit Note is one of the Revolving Credit Notes referred to in the Agreement, is entitled to the benefits thereof and may be prepaid in whole or in part subject to the terms and conditions provided therein. This Revolving Credit Note is also entitled to the benefits of the Guaranty. Upon the occurrence and continuation of one or more of the Events of Default specified in the Agreement, all amounts then remaining unpaid on this Revolving Credit Note shall become, or may be declared to be, immediately due and payable all as provided in the Agreement. Revolving Credit Loans made by the Lender shall be evidenced by one or more loan accounts or records maintained by the Lender in the ordinary course of business. The Lender may also attach schedules to this Revolving Credit Note and endorse thereon the date, amount and maturity of its Revolving Credit Loans and payments with respect thereto.
The Borrower, for itself, its successors and assigns, hereby waives diligence, presentment, protest and demand and notice of protest, demand, dishonor and non-payment of this Revolving Credit Note.
Form of Revolving Credit Note
C-2 - 1
THIS REVOLVING CREDIT NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
DIAMOND FOODS, INC.
By:
Name:
Title:
Form of Revolving Credit Note
C-2 - 2
LOANS AND PAYMENTS WITH RESPECT THERETO
Date
Type of
Loan Made
Amount of
Loan Made
End of
Interest
Period
Amount of
Principal or
Interest Paid
This Date
Outstanding
Principal
Balance This
Date
Notation
Made By
Form of Revolving Credit Note
C-2 - 3
EXHIBIT D
FORM OF COMPLIANCE CERTIFICATE
Financial Statement Date: ,
To: Bank of America, N.A., as Administrative Agent
Ladies and Gentlemen:
Reference is made to that certain Credit Agreement, dated as of February 25, 2010 (as amended, restated, extended, supplemented or otherwise modified in writing from time to time, the “ Agreement ;” the terms defined therein being used herein as therein defined), among Diamond Foods, Inc., a Delaware corporation (the “ Borrower ”), the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer and Swing Line Lender.
The undersigned Responsible Officer1 hereby certifies as of the date hereof that he/she is the of the Borrower, and that, as such, he/she is authorized to execute and deliver this Certificate to the Administrative Agent on the behalf of the Borrower, and that:
[Use following paragraph 1 for fiscal year-end financial statements]
1. The Borrower has delivered the year-end audited financial statements required by Section 6.01(a) of the Agreement for the fiscal year of the Borrower ended as of the above date, together with the report and opinion of an independent certified public accountant required by such section. Pursuant to Section 4.9 of the Collateral Agreement, attached hereto is a listing of all new material Intellectual Property (as defined in the Collateral Agreement) for which an initial filing was made during such fiscal year.
[Use following paragraph 1 for fiscal quarter-end financial statements]
1. The Borrower has delivered the unaudited financial statements required by Section 6.01(b) of the Agreement for the fiscal quarter of the Borrower ended as of the above date. Such consolidated financial statements fairly present the financial condition, results of operations and cash flows of the Borrower and its Subsidiaries in accordance with GAAP as at such date and for such period, subject only to normal year-end audit adjustments and the absence of footnotes.
2. The undersigned has reviewed and is familiar with the terms of the Agreement and has made, or has caused to be made under his/her supervision, a detailed review of the transactions and condition (financial or otherwise) of the Borrower during the accounting period covered by such financial statements.
1
This certificate should be from the chief executive officer, chief financial officer or treasurer of the Borrower.
Form of Compliance Certificate
D - 1
3. A review of the activities of the Borrower during such fiscal period has been made under the supervision of the undersigned with a view to determining whether during such fiscal period the Borrower performed and observed all its Obligations under the Loan Documents, and
[select one:]
[to the best knowledge of the undersigned, during such fiscal period the Borrower performed and observed each covenant and condition of the Loan Documents applicable to it, and no Default has occurred and is continuing.]
—or—
[to the best knowledge of the undersigned, the following covenants or conditions have not been performed or observed and the following is a list of each such Default and its nature and status:]
4. The financial covenant calculations set forth on Schedules 1 and 2 attached hereto are true and accurate on and as of the date of this Certificate.
[Signature Page Follows]
Form of Compliance Certificate
D - 2
IN WITNESS WHEREOF, the undersigned has executed this Certificate as of , .
DIAMOND FOODS, INC.
By:
Name:
Title:
Form of Compliance Certificate
D - 3
For the Quarter/Year ended , (“Statement Date”)
SCHEDULE 1
to the Compliance Certificate
($ in 000’s)
I. Section 7.11 (a) — Consolidated Leverage Ratio.
A. Consolidated Funded Indebtedness at Statement Date
$
B. Consolidated EBITDA for Measurement Period ending on above date (“Subject Period”):
$
1. Consolidated Net Income for Subject Period:
$
2. Consolidated Interest Charges for Subject Period:
$
3. Provision for Federal, state, local and foreign income taxes (calculated net of Federal, state, local and foreign income tax credits) for Subject Period:
$
4. Depreciation expenses for Subject Period:
$
5. Amortization expenses for Subject Period:
$
6. Non-recurring expenses reducing Consolidated Net Income which do not represent a cash item in such period (or any future period) for Subject Period:
$
7. Non-cash charges or expenses related to stock-based compensation for Subject Period:
$
8. Cash or non-cash charges in connection with Permitted Acquisitions (other than the Acquisition), (not to exceed $1,000,000 in any fiscal year) for Subject Period:
$
9. Cash or non-cash charges in connection with the Acquisition (i) incurred prior to the later to occur of (A) April 30, 2010 and (B) the Initial Funding Date, in an amount not to exceed $10,000,000 in the aggregate and (ii) without duplication of the preceding clause (i), incurred in connection with severance or restructuring costs by the end of the fiscal year ending July 31, 2011 with respect to the personnel, assets and operations of the Acquired Business in an amount not to exceed $5,000,000 in the aggregate for Subject Period:
$
Form of Compliance Certificate
10. The amount of the purchase price and related transaction costs of any acquisition required to be expensed during such period that would otherwise have been classified as goodwill prior to the implementation of FAS 141R; provided such expense is non-cash for Subject Period:
$
11. Consolidated EBITDA (Lines I.B.1 + 2 + 3 + 4 + 5 + 6 + 7 + 8 + 9+10):
$
C. Consolidated Leverage Ratio (Line I.A ÷ Line I.B10):
$
Maximum permitted:
Period
Maximum Consolidated
Leverage Ratio
Initial Funding Date through April 29, 2011
4.75 to 1.00
April 30, 2011 through April 29, 2012
4.25 to 1.00
April 30, 2012 through April 29, 2013
3.75 to 1.00
April 30, 2013 through April 29, 2014
3.50 to 1.00
April 30, 2014 and thereafter
3.25 to 1.00
II. Section 7.11(b) — Consolidated Fixed Charge Coverage Ratio
A. Consolidated EBITDA for Subject Period (Line I.B.11 above):
$
B. Capital Expenditures for Subject Period:
$
C. Aggregate amount of Federal, state, local and foreign income taxes paid in cash for Subject Period:
$
D. Consolidated Interest Charges for Subject Period (Line I.B2 above):
$
E. Aggregate principal amount of all regularly scheduled principal payments or redemptions of Indebtedness for Subject Period:
$
F. Aggregate amount of all Restricted Payments for Subject Period:
$
G. Consolidated Fixed Charge Coverage Ratio ([Line II.A] – [Sum of Line II.B – Line II.C] ÷ [Sum of Line II.D + Line II.E + Line II.F]):
Form of Compliance Certificate
Minimum permitted:
Four Fiscal Quarters Ending
Minimum Consolidated Fixed
Charge Coverage Ratio
Initial Funding Date through October 30, 2012
1.10 to 1.00
October 31, 2012 through October 30, 2013
1.20 to 1.00
October 31, 2013 and each fiscal quarter-end thereafter
1.25 to 1.00
Form of Compliance Certificate
For the Quarter/Year ended (“Statement Date”)
SCHEDULE 2
to the Compliance Certificate
($ in 000’s)
Consolidated EBITDA
(in accordance with the definition of Consolidated EBITDA
as set forth in the Agreement)
Consolidated
Quarter
Ended
Quarter
Ended
Quarter
Ended
Quarter
Ended
Twelve
Months
Ended
EBITDA
Consolidated Net Income
+ Consolidated Interest Charges
+ income taxes (net of income tax credits)
+ depreciation expense
+ amortization expense
+ non-recurring non-cash reductions
+ non-cash charges related to stock-based compensation
+ cash or non-cash charges in connection with Permitted Acquisitions (other than the Acquisition)
+ cash or non-cash charges in connection with the Acquisition (i) incurred prior to the later to occur of (A) April 30, 2010 and (B) the Initial Funding Date, in an amount not to
Form of Compliance Certificate
Consolidated
Quarter
Ended
Quarter
Ended
Quarter
Ended
Quarter
Ended
Twelve
Months
Ended
EBITDA
exceed $10,000,000 in the aggregate and (ii) without duplication of the preceding clause (i), incurred in connection with severance or restructuring costs by the end of the fiscal year ending July 31, 2011 with respect to the personnel, assets and operations of the Acquired Business in an amount not to exceed $5,000,000 in the aggregate
+ amount of the purchase price and related transaction costs of any acquisition required to be expensed during such period that would otherwise have been classified as goodwill prior to the implementation of FAS 141R; provided such expense is non-cash for Subject Period
= Consolidated EBITDA
Form of Compliance Certificate
EXHIBIT E-1
ASSIGNMENT AND ASSUMPTION
This Assignment and Assumption (this “Assignment and Assumption”) is dated as of the Effective Date set forth below and is entered into by and between [the][each] 1 Assignor identified in item 1 below ([the][each, an] “ Assignor ”) and [the][each] 2 Assignee identified in item 2 below ([the][each, an] “ Assignee ”). [It is understood and agreed that the rights and obligations of [the Assignors][the Assignees] 3 hereunder are several and not joint.] 4 Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (the “ Credit Agreement ”), receipt of a copy of which is hereby acknowledged by the Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, [the][each] Assignor hereby irrevocably sells and assigns to [the Assignee][the respective Assignees], and [the][each] Assignee hereby irrevocably purchases and assumes from [the Assignor][the respective Assignors], subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of [the Assignor’s][the respective Assignors’] rights and obligations in [its capacity as a Lender][their respective capacities as Lenders] under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of [the Assignor][the respective Assignors] under the respective facilities identified below (including, without limitation, the Letters of Credit and the Swing Line Loans included in such facilities 5 ) and (ii) to the extent permitted to be assigned under applicable law, all claims, suits, causes of action and any other right of [the Assignor (in its capacity as a Lender)][the respective Assignors (in their respective capacities as Lenders)] against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned by [the][any] Assignor to [the][any] Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as [the][an] “ Assigned Interest ”). Each such sale and assignment is without recourse to
1
For bracketed language here and elsewhere in this form relating to the Assignor(s), if the assignment is from a single Assignor, choose the first bracketed language. If the assignment is from multiple Assignors, choose the second bracketed language.
2
For bracketed language here and elsewhere in this form relating to the Assignee(s), if the assignment is to a single Assignee, choose the first bracketed language. If the assignment is to multiple Assignees, choose the second bracketed language.
3
Select as appropriate.
4
Include bracketed language if there are either multiple Assignors or multiple Assignees.
5
Include all applicable subfacilities.
Form of Assignment and Assumption
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[the][any] Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by [the][any] Assignor.
1.
Assignor[s]:
2.
Assignee[s]:
[for each Assignee, indicate [Affiliate][Approved Fund] of [identify Lender]]
3.
Borrower: Diamond Foods, Inc.
4.
Administrative Agent: Bank of America, N.A., as the administrative agent under the Credit Agreement
5.
Credit Agreement: Credit Agreement, dated as of February 25, 2010 among Diamond Foods, Inc., as Borrower, the Lenders from time to time party thereto, and Bank of America, N.A., as Administrative Agent, L/C Issuer, and Swing Line Lender
6.
Assigned Interest:
Assignor[s]6
Assignee[s]7
Facility
Assigned 8
Aggregate
Amount of
Commitment/
Loans
for all Lenders 9
Amount of
Commitment/
Loans
Assigned
Percentage
Assigned of
Commitment/
Loans 10
CUSIP
Number
$
$
%
$
$
%
$
$
%
[7.
Trade Date: ]11
Effective Date: , 20 [TO BE INSERTED BY ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR.]
The terms set forth in this Assignment and Assumption are hereby agreed to:
6
List each Assignor, as appropriate.
7
List each Assignee, as appropriate.
8
Fill in the appropriate terminology for the types of facilities under the Credit Agreement that are being assigned under this Assignment (e.g. “Revolving Credit Commitment”, “Term Loan Commitment”, etc.).
9
Amounts in this column and in the column immediately to the right to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date.
10
Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder.
11
To be completed if the Assignor and the Assignee intend that the minimum assignment amount is to be determined as of the Trade Date.
Form of Assignment and Assumption
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ASSIGNOR
[NAME OF ASSIGNOR]
By:
Title:
ASSIGNEE
[NAME OF ASSIGNEE]
By:
Title:
[Consented to and]12 Accepted:
BANK OF AMERICA, N.A., as Administrative Agent
By:
Title:
[Consented to:]13
DIAMOND FOODS, INC., as Borrower
By:
Title:
12
To be added only if the consent of the Administrative Agent is required by the terms of the Credit Agreement.
13
To be added only if the consent of the Borrower and/or other parties (e.g. Swing Line Lender, L/C Issuer) is required by the terms of the Credit Agreement.
Form of Assignment and Assumption
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ANNEX 1 TO ASSIGNMENT AND ASSUMPTION
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations and Warranties.
1.1. Assignor. [The][Each] Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of [the][[the relevant] Assigned Interest, (ii) [the][such] Assigned Interest is free and clear of any lien, encumbrance or other adverse claim and (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.
1.2. Assignee. [The][Each] Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets all the requirements to be an assignee under Section 10.06(b)(iii) and (v) of the Credit Agreement (subject to such consents, if any, as may be required under Section 10.06(b)(iii) of the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of [the][the relevant] Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to acquire assets of the type represented by [the][such] Assigned Interest and either it, or the Person exercising discretion in making its decision to acquire [the][such] Assigned Interest, is experienced in acquiring assets of such type, (v) it has received a copy of the Credit Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements delivered pursuant to Section 6.01 thereof, as applicable, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the][such] Assigned Interest, (vi) it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the][such] Assigned Interest, and (vii) if it is a Foreign Lender, attached hereto is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by [the][such] Assignee; and (b) agrees that (i) it will, independently and without reliance upon the Administrative Agent, [the][any] Assignor or any other Lender, and based on such documents and information as it
Form of Assignment and Assumption
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shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.
2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of [the][each] Assigned Interest (including payments of principal, interest, fees and other amounts) to [the][the relevant] Assignor for amounts which have accrued to but excluding the Effective Date and to [the][the relevant] Assignee for amounts which have accrued from and after the Effective Date.
3. General Provisions . This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.
Form of Assignment and Assumption
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EXHIBIT E-2
FORM OF ADMINISTRATIVE QUESTIONNAIRE
[To be attached]
Form of Administrative Questionnaire
ADMINISTRATIVE DETAILS REPLY FORM — US DOLLAR ONLY
CONFIDENTIAL
FAX ALONG WITH COMMITMENT LETTER TO:
FAX #
I. Borrower Name:
Diamond Foods, Inc.
$ Type of Credit Facility
II.
Legal Name of Lender of Record for Signature Page:
• Signing Credit Agreement
YES
NO
• Coming in via Assignment
YES
NO
III. Type of Lender:
(Bank, Asset Manager, Broker/Dealer, CLO/CDO, Finance Company, Hedge Fund, Insurance, Mutual Fund, Pension Fund, Other Regulated Investment Fund, Special Purpose Vehicle, Other — please specify)
IV. Domestic Address:
V. Eurodollar Address:
VI. Contact Information:
Syndicate level information (which may contain material non-public information about the Borrower and its related parties or their respective securities will be made available to the Credit Contact(s). The Credit Contacts identified must be able to receive such information in accordance with his/her institution’s compliance procedures and applicable laws, including Federal and State securities laws.
Credit Contact
Primary
Operations Contact
Secondary
Operations Contact
Name:
Title:
Address:
Telephone:
Facsimile:
E Mail Address:
IntraLinks E Mail Address:
Does Secondary Operations Contact need copy of notices? YES NO
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ADMINISTRATIVE DETAILS REPLY FORM — US DOLLAR ONLY
CONFIDENTIAL
Letter of Credit Contact
Draft
Documentation Contact
Legal Counsel
Name:
Title:
Address:
Telephone:
Facsimile:
E Mail Address:
VII. Lender’s Standby Letter of Credit, Commercial Letter of Credit, and Bankers’ Acceptance Fed Wire Payment Instructions (if applicable):
Pay to:
(Bank Name)
(ABA #)
(Account #)
(Attention)
VIII. Lender’s Fed Wire Payment Instructions:
Pay to:
(Bank Name)
(ABA #)
(City/State)
(Account #)
(Account Name)
(Attention)
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ADMINISTRATIVE DETAILS REPLY FORM — US DOLLAR ONLY
CONFIDENTIAL
IX. Organizational Structure and Tax Status
Please refer to the enclosed withholding tax instructions below and then complete this section accordingly:
Lender Taxpayer Identification Number (TIN): -
Tax Withholding Form Delivered to Bank of America*:
W-9
W-8BEN
W-8ECI
W-8EXP
W-8IMY
Tax Contact
Name:
Title:
Address:
Telephone:
Facsimile:
E Mail Address:
NON—U.S. LENDER INSTITUTIONS
1. Corporations:
If your institution is incorporated outside of the United States for U.S. federal income tax purposes, and is the beneficial owner of the interest and other income it receives, you must complete one of the following three tax forms, as applicable to your institution: a.) Form W-8BEN (Certificate of Foreign Status of Beneficial Owner), b.) Form W-8ECI (Income Effectively Connected to a U.S. Trade or Business), or c.) Form W-8EXP (Certificate of Foreign Government or Governmental Agency).
A U.S. taxpayer identification number is required for any institution submitting a Form W-8 ECI. It is also required on Form W-8BEN for certain institutions claiming the benefits of a tax treaty with the U.S. Please refer to the instructions when completing the form applicable to your institution. In addition, please be advised that U.S. tax regulations do not permit the acceptance of faxed forms. An original tax form must be submitted.
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ADMINISTRATIVE DETAILS REPLY FORM — US DOLLAR ONLY
CONFIDENTIAL
2. Flow-Through Entities
If your institution is organized outside the U.S., and is classified for U.S. federal income tax purposes as either a Partnership, Trust, Qualified or Non-Qualified Intermediary, or other non-U.S. flow-through entity, an original Form W-8IMY (Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U.S. branches for United States Tax Withholding) must be completed by the intermediary together with a withholding statement. Flow- through entities other than Qualified Intermediaries are required to include tax forms for each of the underlying beneficial owners.
Please refer to the instructions when completing this form. In addition, please be advised that U.S. tax regulations do not permit the acceptance of faxed forms. Original tax form(s) must be submitted.
U.S. LENDER INSTITUTIONS:
If your institution is incorporated or organized within the United States, you must complete and return Form W-9 (Request for Taxpayer Identification Number and Certification). Please be advised that we require an original form W-9.
Pursuant to the language contained in the tax section of the Credit Agreement, the applicable tax form for your institution must be completed and returned on or prior to the date on which your institution becomes a lender under this Credit Agreement. Failure to provide the proper tax form when requested will subject your institution to U.S. tax withholding.
*
Additional guidance and instructions as to where to submit this documentation can be found at this link:
Tax Form Tool Kt
(2006) (2). doc
X. Bank of America Payment Instructions:
Pay to: Bank of America, N.A.
ABA #
New York, NY
Acct. #
Attn:
Ref:
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EXHIBIT F
FORM OF GUARANTY
[To be attached]
Form of Guaranty
FORM OF CONTINUING SUBSIDIARY GUARANTY
FOR VALUE RECEIVED, the sufficiency of which is hereby acknowledged, and in consideration of credit and/or financial accommodations heretofore or hereafter from time to time made or granted to DIAMOND FOODS, INC., a Delaware corporation (the “ Borrower ”), pursuant to the Credit Agreement dated as of even date herewith by and among the Borrower, the lenders party thereto from time to time (collectively, the “ Lenders ”), and BANK OF AMERICA, N.A., as administrative agent for the Lenders (the “ Administrative Agent ”) (as amended restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), the undersigned Guarantor (whether one or more, the “ Guarantor ”, and if more than one, jointly and severally) hereby furnishes its guaranty of the Guaranteed Obligations (as hereinafter defined) as follows:
1. Guaranty. The Guarantor hereby absolutely and unconditionally guarantees, as a guaranty of payment and performance and not merely as a guaranty of collection, prompt payment when due, whether at stated maturity, by required prepayment, upon acceleration, demand or otherwise, and at all times thereafter, of all “Obligations” (as such term is defined in the Credit Agreement) and any and all existing and future indebtedness and liabilities of every kind, nature and character, direct or indirect, absolute or contingent, liquidated or unliquidated, voluntary or involuntary and whether for principal, interest, premiums, fees indemnities, damages, costs, expenses or otherwise, of the Borrower to the Administrative Agent and any other Secured Party arising under the Credit Agreement, any other Loan Documents, any Secured Hedge Agreement, any Secured Cash Management Agreement and any instruments, agreements or other documents of any kind or nature now or hereafter executed in connection therewith (including all renewals, extensions, amendments, refinancings, restatements and other modifications thereof and all costs, attorneys’ fees and expenses incurred by the Administrative Agent or any other Secured Party in connection with the collection or enforcement thereof), and whether recovery upon such indebtedness and liabilities may be or hereafter become unenforceable or shall be an allowed or disallowed claim under any proceeding or case commenced by or against any Guarantor or the Borrower under the Bankruptcy Code (Title 11, United States Code), any successor statute or any other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally (collectively, “ Debtor Relief Laws ”), and including interest that accrues after the commencement by or against the Borrower of any proceeding under any Debtor Relief Laws (collectively, the “ Guaranteed Obligations ”). The books and records of the Administrative Agent and, in the absence of manifest error, the books and records of each Secured Party showing the amount of the Guaranteed Obligations shall be admissible in evidence in any action or proceeding, and shall be binding upon the Guarantor and conclusive for the purpose of establishing the amount of the Guaranteed Obligations. This Guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the Guaranteed Obligations or any instrument or agreement evidencing any Guaranteed Obligations, or by the existence, validity, enforceability, perfection, non-perfection or extent of any collateral therefor, or by any fact or circumstance relating to the Guaranteed Obligations which might otherwise constitute a defense to the obligations of the Guarantor under this Guaranty (other than payment and performance in full of the Guaranteed Obligations), and the Guarantor hereby irrevocably waives any defenses it may now have or
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hereafter acquire in any way relating to any or all of the foregoing (other than payment and performance in full of the Guaranteed Obligations). Anything contained herein to the contrary notwithstanding, the obligations of the Guarantor hereunder at any time shall be limited to an aggregate amount equal to the largest amount that would not render its obligations hereunder subject to avoidance as a fraudulent transfer or conveyance under Section 548 of the Bankruptcy Code (Title 11, United States Code) or any comparable provisions of any similar federal or state law.
2. No Setoff or Deductions; Taxes; Payments. The Guarantor represents and warrants that it is organized and resident in the jurisdiction set forth underneath its signature on the signature pages hereto. The Guarantor shall make all payments hereunder without setoff or counterclaim and free and clear of and without deduction for any taxes, levies, imposts, duties, charges, fees, deductions, withholdings, compulsory loans, restrictions or conditions of any nature now or hereafter imposed or levied by any jurisdiction or any political subdivision thereof or taxing or other authority therein unless the Guarantor is compelled by law to make such deduction or withholding (other than Excluded Taxes). If any such obligation (other than one arising with respect to Excluded Taxes) is imposed upon the Guarantor with respect to any amount payable by it hereunder, the Guarantor will pay to the Administrative Agent or such other Secured Party, on the date on which such amount is due and payable hereunder, such additional amount in Dollars as shall be necessary to enable the Administrative Agent or such other Secured Party to receive the same net amount which the Administrative Agent or such other Secured Party would have received on such due date had no such obligation been imposed upon the Guarantor. The Guarantor will deliver promptly to the Administrative Agent or such other Secured Party certificates or other valid vouchers for all taxes or other charges deducted from or paid with respect to payments made by the Guarantor hereunder. The obligations of the Guarantor under this paragraph shall survive the payment in full of the Guaranteed Obligations and termination of this Guaranty.
3. Rights of Administrative Agent and Other Secured Parties. The Guarantor consents and agrees that the Administrative Agent and the other Secured Parties may, at any time and from time to time, without notice or demand, and without affecting the enforceability or continuing effectiveness hereof: (a) amend, extend, renew, compromise, discharge, accelerate or otherwise change the time for payment or the terms of the Guaranteed Obligations or any part thereof; (b) take, hold, exchange, enforce, waive, release, fail to perfect, sell, or otherwise dispose of any security for the payment of this Guaranty or any Guaranteed Obligations; (c) apply such security and direct the order or manner of sale thereof as the Administrative Agent and the other Secured Parties in their sole discretion may determine; and (d) release or substitute one or more of any endorsers or other guarantors of any of the Guaranteed Obligations. Without limiting the generality of the foregoing, the Guarantor consents to the taking of, or failure to take, any action which might in any manner or to any extent vary the risks of the Guarantor under this Guaranty or which, but for this provision, might operate as a discharge of the Guarantor.
4. Certain Waivers. The Guarantor waives (a) any defense arising by reason of any disability or other defense of the Borrower or any other guarantor, or the cessation from any cause whatsoever (including any act or omission of the Administrative Agent or any other Secured Party) of the liability of the Borrower other than indefeasible payment and performance
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in full of the Guaranteed Obligations; (b) any defense based on any claim that the Guarantor’s obligations exceed or are more burdensome than those of the Borrower; (c) the benefit of any statute of limitations affecting the Guarantor’s liability hereunder; (d) any right to require the Administrative Agent or any other Secured Party to proceed against the Borrower, proceed against or exhaust any security for the Obligations, or pursue any other remedy in the Administrative Agent’s or any other Secured Party’s power whatsoever; (e) any benefit of and any right to participate in any security now or hereafter held by the Administrative Agent or any other Secured Party; and (f) to the fullest extent permitted by law, any and all other defenses or benefits that may be derived from or afforded by applicable law limiting the liability of or exonerating guarantors or sureties. The Guarantor expressly waives all setoffs and counterclaims and all presentments, demands for payment or performance, notices of nonpayment or nonperformance, protests, notices of protest, notices of dishonor and all other notices or demands of any kind or nature whatsoever with respect to the Guaranteed Obligations, and all notices of acceptance of this Guaranty or of the existence, creation or incurrence of new or additional Guaranteed Obligations. The Guarantor waives any rights and defenses that are or may become available to the Guarantor by reason of Sections 2787 to 2855, inclusive, 2899 and 3433 of the California Civil Code. As provided below, this Guaranty shall be governed by, and construed in accordance with, the laws of the State of New York. The foregoing waivers and the provisions hereinafter set forth in this Guaranty that pertain to California law are included solely out of an abundance of caution and shall not be construed to mean that any of the above referenced provisions of California law are in any way applicable to this Guaranty or the Guaranteed Obligations.
5. Obligations Independent. The obligations of the Guarantor hereunder are those of primary obligor, and not merely as surety, and are independent of the Guaranteed Obligations and the obligations of any other guarantor, and a separate action may be brought against the Guarantor to enforce this Guaranty whether or not the Borrower or any other person or entity is joined as a party.
6. Subrogation. The Guarantor shall not exercise any right of subrogation, contribution, indemnity, reimbursement or similar rights with respect to any payments it makes under this Guaranty until all of the Guaranteed Obligations and any amounts payable under this Guaranty have been indefeasibly paid and performed in full and any commitments of the Administrative Agent and each other Secured Party or facilities provided by the Administrative Agent and each other Secured Party with respect to the Guaranteed Obligations are terminated. If any amounts are paid to the Guarantor in violation of the foregoing limitation, then such amounts shall be held in trust for the benefit of the Administrative Agent and the other Secured Parties and shall forthwith be paid to the Administrative Agent (for the benefit of itself and the other Secured Parties) to reduce the amount of the Guaranteed Obligations, whether matured or unmatured.
7. Contribution. Subject to Paragraph 6 above, at any time there is more than one Guarantor with respect to the Guaranteed Obligations, each Guarantor hereby agrees with each other Guarantor that if any Guarantor shall make an Excess Payment (as defined below), such Guarantor shall have a right of contribution from each other Guarantor in an amount equal to such other Guarantor’s Contribution Share (as defined below) of such Excess Payment (as defined below). The payment obligations of any Guarantor under this Paragraph 7 shall be
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subordinate and subject in right of payment to the Guaranteed Obligations until such time as the Guaranteed Obligations have been indefeasibly paid and performed in full, and no Guarantor shall exercise any right or remedy under this Paragraph 7 against any other Guarantor until such Guaranteed Obligations have been indefeasibly paid and performed in full.
For purposes of this Paragraph 7:
(a) “Excess Payment” shall mean the amount paid by any Guarantor in excess of its Ratable Share of any Guaranteed Obligations;
(b) “Ratable Share” shall mean, for any Guarantor in respect of any payment of Guaranteed Obligations, the ratio (expressed as a percentage) as of the date of such payment of Guaranteed Obligations of (i) the amount by which the aggregate present fair salable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including probable contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (ii) the amount by which the aggregate present fair salable value of all assets and other properties of all of the Guarantors exceeds the amount of all of the debts and liabilities (including probable contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Guarantors hereunder) of the Guarantors; provided, however, that, for purposes of calculating the Ratable Shares of the Guarantors in respect of any payment of Guaranteed Obligations, any Guarantor that became a Guarantor subsequent to the date of any such payment shall be deemed to have been a Guarantor on the date of such payment and the financial information for such Guarantor as of the date such Guarantor became a Guarantor shall be utilized for such Guarantor in connection with such payment; and
(c) “Contribution Share” shall mean, for any Guarantor in respect of any Excess Payment made by any other Guarantor, the ratio (expressed as a percentage) as of the date of such Excess Payment of (i) the amount by which the aggregate present fair salable value of all of its assets and properties exceeds the amount of all debts and liabilities of such Guarantor (including probable contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of such Guarantor hereunder) to (ii) the amount by which the aggregate present fair salable value of all assets and other properties of the Guarantors other than the maker of such Excess Payment exceeds the amount of all of the debts and liabilities (including probable contingent, subordinated, unmatured, and unliquidated liabilities, but excluding the obligations of the Guarantors) of the Guarantors other than the maker of such Excess Payment; provided , however, that, for purposes of calculating the Contribution Shares of the Guarantors in respect of any Excess Payment, any Guarantor that became a Guarantor subsequent to the date of any such Excess Payment shall be deemed to have been a Guarantor on the date of such Excess Payment and the financial information for such Guarantor as of the date such Guarantor became a Guarantor shall be utilized for such Guarantor in connection with such Excess Payment.
Each Guarantor recognizes and acknowledges that the rights to contribution arising hereunder shall constitute an asset in favor of the party entitled to such contribution. This
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Paragraph 7 shall not be deemed to affect any right of subrogation, indemnity, reimbursement or contribution that any Guarantor may have under applicable Law against the Borrower in respect of any payment of Guaranteed Obligations.
8. Termination; Reinstatement. This Guaranty is a continuing and irrevocable guaranty of all Guaranteed Obligations now or hereafter existing and shall remain in full force and effect until all Guaranteed Obligations and any other amounts payable under this Guaranty are indefeasibly paid in full in cash and any commitments of the Administrative Agent and each other Secured Party or facilities provided by the Administrative Agent and each other Secured Party with respect to the Guaranteed Obligations are terminated. Notwithstanding the foregoing, this Guaranty shall continue in full force and effect or be revived, as the case may be, if any payment by or on behalf of the Borrower or the Guarantor is made, or the Administrative Agent and any other Secured Party exercises its right of setoff, in respect of the Guaranteed Obligations and such payment or the proceeds of such setoff or any part thereof is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including pursuant to any settlement entered into by the Administrative Agent or any other Secured Party in its discretion) to be repaid to a trustee, receiver or any other party, in connection with any proceeding under any Debtor Relief Laws or otherwise, all as if such payment had not been made or such setoff had not occurred and whether or not the Administrative Agent or any other Secured Party is in possession of or has released this Guaranty and regardless of any prior revocation, rescission, termination or reduction. The obligations of the Guarantor under this paragraph shall survive termination of this Guaranty.
9. Subordination. The Guarantor hereby subordinates the payment of all obligations and indebtedness of the Borrower owing to the Guarantor, whether now existing or hereafter arising, including but not limited to any obligation of the Borrower to the Guarantor as subrogee of the Administrative Agent and any other Secured Party or resulting from the Guarantor’s performance under this Guaranty, to the indefeasible payment in full in cash of all Guaranteed Obligations, provided that , the Borrower may make ordinary course payments to the Guarantor unless an Event of Default has occurred and is continuing. If the Administrative Agent so requests when an Event of Default has occurred and is continuing, any such obligation or indebtedness of the Borrower to the Guarantor shall be enforced and performance received by the Guarantor as trustee for the Administrative Agent and the proceeds thereof, as well as any other amounts received by the Guarantor in violation of this Paragraph 9 , shall be paid over to the Administrative Agent on account of the Guaranteed Obligations, but without reducing or affecting in any manner the liability of the Guarantor under this Guaranty.
10. Stay of Acceleration. In the event that acceleration of the time for payment of any of the Guaranteed Obligations is stayed, in connection with any case commenced by or against the Borrower or the Guarantor under any Debtor Relief Laws, or otherwise, all such amounts shall nonetheless be payable by the Guarantor immediately upon demand by the Administrative Agent.
11. Expenses. The Guarantor shall pay all out-of-pocket expenses (including attorneys’ fees and expenses) in any way relating to the enforcement or protection of the Administrative Agent’s and each other Secured Party’s rights under this Guaranty or in respect of the Guaranteed Obligations, including any incurred during any “workout” or restructuring in
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respect of the Guaranteed Obligations and any incurred in the preservation, protection or enforcement of any rights of the Administrative Agent and each other Secured Party in any proceeding under any Debtor Relief Laws. The obligations of the Guarantor under this paragraph shall survive the payment in full of the Guaranteed Obligations and termination of this Guaranty.
12. Miscellaneous. No provision of this Guaranty may be waived, amended, supplemented or modified, except by a written instrument executed by the Administrative Agent and the Guarantor. No failure by the Administrative Agent or any other Secured Party to exercise, and no delay in exercising, any right, remedy or power hereunder shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy or power hereunder preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies herein provided are cumulative and not exclusive of any remedies provided by law or in equity. The unenforceability or invalidity of any provision of this Guaranty shall not affect the enforceability or validity of any other provision herein. Unless otherwise agreed by the Administrative Agent and the Guarantor in writing, this Guaranty is not intended to supersede or otherwise affect any other guaranty now or hereafter given by the Guarantor or any other guarantor for the benefit of the Administrative Agent and the other Secured Parties or any term or provision thereof. Capitalized terms used herein but not defined herein shall have the meanings given thereto in the Credit Agreement.
13. Condition of Borrower. The Guarantor acknowledges and agrees that it has the sole responsibility for, and has adequate means of, obtaining from the Borrower and any other guarantor such information concerning the financial condition, business and operations of the Borrower and any such other guarantor as the Guarantor requires, and that the Administrative Agent and the other Secured Parties have no duty, and the Guarantor is not relying on the Administrative Agent or any other Secured Party at any time, to disclose to the Guarantor any information relating to the business, operations or financial condition of the Borrower or any other guarantor (the guarantor waiving any duty on the part of the Administrative Agent and the other Secured Parties to disclose such information and any defense relating to the failure to provide the same).
14. Setoff. If and to the extent any payment is not made when due hereunder, the Guarantor hereby irrevocably authorizes each Secured Party and each of their respective Affiliates at any time and from time to time, after obtaining the prior written consent of the Administrative Agent, to the fullest extent permitted by applicable Laws, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Secured Party or any such Affiliate to or for the credit or the account of the Guarantor against any and all of the obligations of the Guarantor now or hereafter existing under this Agreement, any other Loan Document, any Secured Hedge Agreement or any Secured Cash Management Agreement to such Secured Party, irrespective of whether or not such Secured Party shall have made any demand under this Agreement or any other Loan Document, any Secured Hedge Agreement or any Secured Cash Management Agreement and although such obligations of the Guarantor may be contingent or unmatured or are owed to a branch or office of such Secured Party different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Secured Party and its respective Affiliates under this Section are in addition to other rights
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and remedies (including other rights of setoff) that such Secured Party or its respective Affiliates may have. Each Secured Party agrees to notify the Guarantor promptly after any such setoff and application, provided that the failure to give such notice shall not affect the validity of such setoff and application.
15. Representations and Warranties. The Guarantor represents and warrants that (a) it is duly organized and in good standing under the laws of the jurisdiction of its organization and has full capacity and right to make and perform this Guaranty, and all necessary authority has been obtained; (b) this Guaranty constitutes its legal, valid and binding obligation enforceable against the Guarantor in accordance with its terms; (c) the making and performance of this Guaranty does not and will not violate the provisions of any applicable law, regulation or order, and does not and will not result in the breach of, or constitute a default or require any consent under, any material agreement, instrument, or document to which it is a party or by which it or any of its property may be bound or affected, except in each case any breach, default or consent that could not reasonably be expected to have a Material Adverse Effect; and (d) all consents, approvals, licenses and authorizations of, and filings and registrations with, any governmental authority required under applicable law and regulations for the making and performance of this Guaranty have been obtained or made and are in full force and effect.
16. Indemnification and Survival. Without limitation on any other obligations of the Guarantor or remedies of the Administrative Agent or any other Secured Party under this Guaranty, the Guarantor shall, to the fullest extent permitted by law, indemnify, defend and save and hold harmless the Administrative Agent and each other Secured Party from and against, and shall pay on demand, any and all damages, losses, liabilities and expenses (including attorneys’ fees and expenses and the allocated cost and disbursements of internal legal counsel) that may be suffered or incurred by the Administrative Agent or any other Secured Party in connection with or as a result of any failure of any Guaranteed Obligations to be the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their terms. The obligations of the Guarantor under this paragraph shall survive the payment in full of the Guaranteed Obligations and termination of this Guaranty.
17. Governing Law; Jurisdiction; Service of Process.
(a) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
(b) SUBMISSION TO JURISDICTION. EACH GUARANTOR IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY
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APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT, ANY LENDER OR THE L/C ISSUER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST ANY GRANTOR OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
(c) WAIVER OF VENUE. EACH GUARANTOR IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
(d) SERVICE OF PROCESS. EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 10.02 OF THE CREDIT AGREEMENT. NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.
18. Waiver of Jury Trial; California Judicial Reference.
(a) Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
(b) California Judicial Reference. If any action or proceeding is filed in a court of the State of California by or against any party hereto in connection with any of the transactions contemplated by this Agreement or any other Loan Document, (a) the court shall, and is hereby directed to, make a general reference pursuant to California Code of Civil Procedure Section 638
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to a referee (who shall be a single active or retired judge) to hear and determine all of the issues in such action or proceeding (whether of fact or of law) and to report a statement of decision, provided that at the option of any party to such proceeding, any such issues pertaining to a “provisional remedy” as defined in California Code of Civil Procedure Section 1281.8 shall be heard and determined by the court and (b) without limiting the generality of Section 10.04 of the Credit Agreement, the Grantors, on a joint and several basis, shall be solely responsible to pay all fees and expenses of any referee appointed in such action or proceeding.
19. Additional Guarantor Waivers and Agreements.
(a) The Guarantor understands and acknowledges that if the Administrative Agent or any other Secured Party forecloses judicially or nonjudicially against any real property security for the Guaranteed Obligations, that foreclosure could impair or destroy any ability that the Guarantor may have to seek reimbursement, contribution, or indemnification from the Borrower or others based on any right the Guarantor may have of subrogation, reimbursement, contribution, or indemnification for any amounts paid by the Guarantor under this Guaranty. The Guarantor further understands and acknowledges that in the absence of this paragraph, such potential impairment or destruction of the Guarantor’s rights, if any, may entitle the Guarantor to assert a defense to this Guaranty based on Section 580d of the California Code of Civil Procedure as interpreted in Union Bank v. Gradsky , 265 Cal.App.2d 40 (1968). By executing this Guaranty, the Guarantor freely, irrevocably, and unconditionally: (i) waives and relinquishes that defense and agrees that the Guarantor will be fully liable under this Guaranty even though the Administrative Agent or any other Secured Party may foreclose, either by judicial foreclosure or by exercise of power of sale, any deed of trust securing the Guaranteed Obligations; (ii) agrees that the Guarantor will not assert that defense in any action or proceeding which the Administrative Agent or any other Secured Party may commence to enforce this Guaranty; (iii) acknowledges and agrees that the rights and defenses waived by the Guarantor in this Guaranty include any right or defense that the Guarantor may have had or be entitled to assert based on or arising out of any one or more of Sections 580a, 580b, 580d, or 726 of the California Code of Civil Procedure or Section 2848 of the California Civil Code; and (iv) acknowledges and agrees that the Administrative Agent and each other Secured Party is relying on this waiver in creating the Guaranteed Obligations, and that this waiver is a material part of the consideration which the Administrative Agent and each other Secured Party is receiving for creating the Guaranteed Obligations.
(b) The Guarantor waives all rights and defenses that the Guarantor may have because any of the Guaranteed Obligations is secured by real property. This means, among other things: (i) the Administrative Agent and each other Secured Party may collect from the Guarantor without first foreclosing on any real or personal property collateral pledged by the Borrower or any other person; and (ii) if the Administrative Agent or any other Secured Party forecloses on any real property collateral pledged by the Borrower or any other Person: (A) the amount of the Guaranteed Obligations may be reduced only by the price for which the collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price, and (B) the Administrative Agent or any other Secured Party may collect from the Guarantor even if the Administrative Agent or any other Secured Party, by foreclosing on the real property collateral, has destroyed any right the Guarantor may have to collect from the Borrower or any other Person. This is an unconditional and irrevocable waiver of any rights and defenses the Guarantor
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may have because any of the Guaranteed Obligations is secured by real property. These rights and defenses include, but are not limited to, any right or defenses based upon Section 580a, 580b, 580d, or 726 of the California Code of Civil Procedure.
(c) The Guarantor waives any right or defense it may have at law or equity, including California Code of Civil Procedure Section 580a, to a fair market value hearing or action to determine a deficiency judgment after a foreclosure.
[Signature Pages Follow]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date first above written.
DIAMOND NUT COMPANY OF CALIFORNIA, INC.
By:
Name:
Title:
Jurisdiction of Organization: California
EXHIBIT G
FORM OF COLLATERAL AGREEMENT
[To be attached]
Form of Collateral Agreement
FORM OF COLLATERAL AGREEMENT
Dated as of [ ], 2010
among
DIAMOND FOODS, INC.,
and certain of its Subsidiaries,
as Grantors,
in favor of
BANK OF AMERICA, N.A.,
as Administrative Agent,
Table of Contents
Page
ARTICLE I DEFINED TERMS
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SECTION 1.1
Terms Defined in the Uniform Commercial Code
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SECTION 1.2
Definitions
G-2
SECTION 1.3
Other Interpretive Provisions
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ARTICLE II SECURITY INTEREST
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SECTION 2.1
Grant of Security Interest
G-6
SECTION 2.2
Partnership/LLC Interests
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SECTION 2.3
Grantors Remain Liable
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ARTICLE III REPRESENTATIONS AND WARRANTIES
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SECTION 3.1
General Representations
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SECTION 3.2
Perfected First Priority Liens
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SECTION 3.3
Title, No Other Liens
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SECTION 3.4
State of Organization; Location of Inventory, Equipment and Fixtures; other Information
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SECTION 3.5
Accounts
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SECTION 3.6
Chattel Paper
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SECTION 3.7
Commercial Tort Claims
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SECTION 3.8
Deposit Accounts and Securities Accounts
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SECTION 3.9
Intellectual Property
G-11
SECTION 3.10
Inventory
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SECTION 3.11
Investment Property; Partnership/LLC Interests
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SECTION 3.12
Instruments
G-11
SECTION 3.13
Farm Products
G-11
SECTION 3.14
Government Contracts
G-11
SECTION 3.15
Aircraft
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ARTICLE IV COVENANTS
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SECTION 4.1
Maintenance of Perfected Security Interest; Further Information
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SECTION 4.2
Maintenance of Insurance
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SECTION 4.3
Changes in Locations; Changes in Name or Structure
G-12
SECTION 4.4
Required Notifications
G-13
SECTION 4.5
Delivery Covenants
G-13
SECTION 4.6
Control Covenants
G-13
SECTION 4.7
Filing Covenants
G-14
SECTION 4.8
Accounts
G-14
SECTION 4.9
Intellectual Property
G-15
SECTION 4.10
Investment Property; Partnership/LLC Interests
G-15
SECTION 4.11
Vehicles
G-15
SECTION 4.12
Government Contracts
G-16
SECTION 4.13
Further Assurances
G-16
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ARTICLE V REMEDIAL PROVISIONS
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SECTION 5.1
General Remedies
G-16
SECTION 5.2
Specific Remedies
G-17
SECTION 5.3
Registration Rights
G-19
SECTION 5.4
Application of Proceeds
G-20
SECTION 5.5
Waiver, Deficiency
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ARTICLE VI THE ADMINISTRATIVE AGENT
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SECTION 6.1
Administrative Agent’s Appointment as Attorney-In-Fact
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SECTION 6.2
Duty of Administrative Agent
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SECTION 6.3
Authority of Administrative Agent
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ARTICLE VII MISCELLANEOUS
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SECTION 7.1
Amendments, Waivers and Consents
G-23
SECTION 7.2
Notices
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SECTION 7.3
No Waiver, Cumulative Remedies
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SECTION 7.4
Expenses, Indemnification, Waiver of Consequential Damages, etc.
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SECTION 7.5
Successors and Assigns
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SECTION 7.6
Survival of Indemnities
G-24
SECTION 7.7
Right of Setoff
G-25
SECTION 7.8
Counterparts; Integration; Effectiveness
G-25
SECTION 7.9
Severability
G-25
SECTION 7.10
Governing Law; Jurisdiction; Service of Process
G-25
SECTION 7.11
Waiver of Jury Trial; California Judicial Reference
G-26
SECTION 7.12
Injunctive Relief
G-27
SECTION 7.13
Acknowledgements
G-27
SECTION 7.14
Releases
G-28
SECTION 7.15
Additional Grantors
G-28
SECTION 7.16
All Powers Coupled with Interest
G-28
SECTION 7.17
No Conflict
G-28
SECTION 7.18
Judgment Currency
G-28
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SCHEDULES:
Schedule 3.4
Exact Legal Name; Jurisdiction of Organization; Taxpayer Identification Number; Registered Organization Number; Mailing Address; Chief Executive Office and other Locations
Schedule 3.7
Commercial Tort Claims
Schedule 3.8
Deposit Accounts
Schedule 3.9
Intellectual Property
Schedule 3.11
Investment Property and Partnership/LLC Interests
Schedule 3.12
Instruments
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COLLATERAL AGREEMENT (this “Agreement”), dated as of [ ], 2010, among DIAMOND FOODS, INC., a Delaware corporation (the “ Borrower ”), each of the Guarantors (as defined in the Credit Agreement referred to below) and identified on the signature pages hereto and any Additional Grantor (as defined below) who may become party to this Agreement (such Guarantors and Additional Grantors, collectively with the Borrower, the “ Grantors ”), in favor of BANK OF AMERICA, N.A., as Administrative Agent (in such capacity, the “ Administrative Agent ”) for the ratable benefit of the Secured Parties.
STATEMENT OF PURPOSE
Pursuant to the Credit Agreement, dated as of even date herewith by and among the Borrower, the Parent, the banks and other financial institutions from time to time party thereto (the “ Lenders ”) and the Administrative Agent (as amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”), the Lenders have agreed to make Credit Extensions to the Borrower upon the terms and subject to the conditions set forth therein.
Pursuant to the terms of one or more Guaranties of even date herewith, the Guarantors who are parties hereto have guaranteed the payment and performance of the Obligations.
It is a condition precedent to the obligation of the Lenders to make their respective Credit Extensions to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Administrative Agent, for the ratable benefit of the Secured Parties.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective Credit Extensions to the Borrower thereunder, each Grantor hereby agrees with the Administrative Agent, for the ratable benefit of the Secured Parties, as follows:
ARTICLE I
DEFINED TERMS
SECTION 1.1 Terms Defined in the Uniform Commercial Code.
(a) The following terms when used in this Agreement shall have the meanings assigned to them in the UCC (as defined in the Credit Agreement) as in effect from time to time: “ Accession ”, “ Account ”, “ Account Debtor ”, “ Authenticate ”, “ Certificated Security ”, “ Chattel Paper ”; “ Commercial Tort Claim ”, “ Deposit Account ”, “ Documents ”, “ Electronic Chattel Paper ”, “ Equipment ”, “ Farm Products ” “ Fixture ”, “ General Intangible ”, “ Goods ”, “ Instrument ”, “ Inventory ”, “ Investment Company Security ”, “ Investment Property ”, “ Letter of Credit Rights ”, “ Proceeds ”, “ Record ”, “ Registered Organization ”, “ Securities Account ”, “ Securities Entitlement ”, “ Securities Intermediary ”, “ Security ”, “ Supporting Obligation ”, “ Tangible Chattel Paper ”, and “ Uncertificated Security ”.
(b) Terms defined in the UCC and not otherwise defined herein or in the Credit Agreement shall have the meaning assigned in the UCC as in effect from time to time.
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SECTION 1.2 Definitions. The following terms when used in this Agreement shall have the meanings assigned to them below:
“Additional Grantor” means each Subsidiary of the Borrower which hereafter becomes a Grantor pursuant to Section 7.15 (as required pursuant to Section 6.12 of the Credit Agreement).
“Agreement” means this Collateral Agreement, as amended, restated, supplemented or otherwise modified from time to time.
“Assignment of Claims Act” means the Assignment of Claims Act of 1940 (41 U.S.C. Section 15, 31 U.S.C. Section 3737, and 31 U.S.C. Section 3727), including all amendments thereto and regulations promulgated thereunder.
“Collateral” has the meaning assigned thereto in Section 2.1.
“Collateral Account” has the meaning assigned thereto in Section 5.2.
“Control” means the manner in which “control” is achieved under the UCC with respect to any Collateral for which the UCC specifies a method of achieving “control”.
“Controlled Depository” has the meaning assigned thereto in Section 4.6.
“Controlled Intermediary” has the meaning assigned thereto in Section 4.6.
“Copyrights” means collectively, all of the following of any Grantor: (a) all copyrights, rights and interests in copyrights, works protectable by copyright, copyright registrations and copyright applications anywhere in the world, including, without limitation, those listed on Schedule 3.9 hereto, (b) all extensions, and renewals of any of the foregoing, (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past, present or future infringements of any of the foregoing, (d) the right to sue for past, present or future infringements of any of the foregoing and (e) all rights corresponding to any of the foregoing throughout the world.
“Copyright Licenses” means any agreement now or hereafter in existence naming any Grantor as licensor or licensee, including, without limitation, those listed in Schedule 3.9 , granting any right under any Copyright, including, without limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright.
“Effective Endorsement and Assignment” means, with respect to any specific type of Collateral, all such endorsements, assignments and other instruments of transfer reasonably requested by the Administrative Agent with respect to the Security Interest granted in such Collateral, and in each case, in form and substance reasonably satisfactory to the Administrative Agent.
“Excess Collateral” has the meaning assigned thereto in Section 4.6(c).
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“Excluded Deposit Account” means, collectively, (a) all Deposit Accounts established solely for the purpose of funding payroll and other compensation and benefits to employees and (b) so long as no Default or Event of Default has occurred and is continuing, Deposit Accounts with amounts on deposit that, when aggregated with the amounts on deposit in all other Deposit Accounts for which a control agreement has not been obtained (other than those specified in clause (a)), do not exceed $100,000.
“Government Contract” means a contract between any Grantor and an agency, department or instrumentality of the United States or any other jurisdiction or any state, municipal or local Governmental Authority located in the United States or any other jurisdiction or all obligations of any such Governmental Authority arising under any Account now or hereafter owing by any such Governmental Authority, as account debtor, to any Grantor.
“Grantors” has the meaning set forth in the Preamble of this Agreement.
“Intellectual Property” means collectively, all of the following of any Grantor: (a) all systems software, applications software and internet rights, including, without limitation, screen displays and formats, internet domain names, web sites (including web links), program structures, sequence and organization, all documentation for such software, including, without limitation, user manuals, flowcharts, programmer’s notes, functional specifications, and operations manuals, all formulas, processes, ideas and know-how embodied in any of the foregoing, and all program materials, flowcharts, notes and outlines created in connection with any of the foregoing, whether or not patentable or copyrightable, (b) concepts, discoveries, inventions, improvements and ideas, (c) any useful information relating to the items described in clause (a) or (b), including know-how, technology, engineering drawings, reports, design information, trade secrets, practices, laboratory notebooks, specifications, test procedures, maintenance manuals, research, development, manufacturing, marketing, merchandising, selling, purchasing and accounting, (d) Patents and Patent Licenses, Copyrights and Copyright Licenses, Trademarks and Trademark Licenses, and (e) other licenses to use any of the items described in the foregoing clauses (a), (b), (c) and (d) or any other similar items of such Grantor necessary for the conduct of its business.
“Issuer” means any issuer of any Investment Property or Partnership/LLC Interests (including, without limitation, any Issuer as defined in the UCC).
“Obligations” means with respect to the Borrower, the meaning assigned thereto in the Credit Agreement, and with respect to each Guarantor, the obligations of such Guarantor under the Guaranty executed by such Guarantor.
“Partnership/LLC Agreement” has the meaning set forth in Section 2.2(a).
“Partnership/LLC Interests” means, with respect to any Grantor, the entire partnership, membership interest or limited liability company interest, as applicable, of such Grantor in each partnership, limited partnership or limited liability company owned thereby, including, without limitation, such Grantor’s capital account, its interest as a partner or member, as applicable, in the net cash flow, net profit and net loss, and items of income, gain, loss, deduction and credit of any such partnership, limited partnership or limited liability company, as applicable, such
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Grantor’s interest in all distributions made or to be made by any such partnership, limited partnership or limited liability company, as applicable, to such Grantor and all of the other economic rights, titles and interests of such Grantor as a partner or member, as applicable, of any such partnership, limited partnership or limited liability company, as applicable, whether set forth in the partnership agreement or membership agreement, as applicable, of such partnership, limited partnership or limited liability company, as applicable, by separate agreement or otherwise.
“Patents” means collectively, all of the following of any Grantor: (a) all patents, rights and interests in patents, patent disclosures, patentable inventions and patent applications anywhere in the world, including, without limitation, those listed on Schedule 3.9 hereto, (b) all improvements thereto, reissues, continuations (in whole or in part), divisionals, reexaminations and renewals and extensions of any of the foregoing, (c) all income, royalties, damages or payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past, present or future infringements of any of the foregoing, (d) the right to sue for past, present and future infringements of any of the foregoing and (e) all rights corresponding to any of the foregoing throughout the world.
“Patent License” means all agreements now or hereafter in existence, whether written, implied or oral, providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including, without limitation, any of the foregoing referred to in Schedule 3.9 hereto.
“Restricted Securities Collateral” has the meaning assigned thereto in Section 5.3.
“Sanctioned Person” means a person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/enforcement/ofac/sdn/index.html, or as otherwise published from time to time.
“Securities Act” means the Securities Act of 1933, including all amendments thereto and regulations promulgated thereunder.
“Security Interests” means the security interests granted pursuant to Article II, as well as all other security interests created or assigned as additional security for the Obligations pursuant to the provisions of the other Loan Documents.
“Trademarks” means collectively all of the following of any Grantor: (a) all trademarks, rights and interests in trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, trade dress, service marks, logos, other business identifiers, together with translations, adaptations, derivations and combinations thereof, prints and labels on which any of the foregoing have appeared or appear, whether registered or unregistered, all registrations and recordings thereof, and all applications in connection therewith (other than each application to register any trademark or service mark prior to the filing under applicable Law of a verified statement of use for such trademark or service mark) anywhere in the world, including, without limitation, those listed on Schedule 3.9 hereto, (b) all extensions
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and renewals of any of the foregoing, (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past, present or future infringements of any of the foregoing, (d) the right to sue for past, present or future infringements of any of the foregoing and (e) all rights corresponding to any of the foregoing (including the goodwill) throughout the world.
“Trademark License” means any agreement now or hereafter in existence, whether written or oral, providing for the grant by or to any Grantor of any right to use any Trademark, including, without limitation, any of the foregoing referred to in Schedule 3.9 .
“Vehicles” means all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title under the laws of any state, all tires and all other appurtenances to any of the foregoing.
SECTION 1.3 Other Interpretive Provisions. Terms defined in the Credit Agreement and not otherwise defined herein shall have the meanings assigned thereto in the Credit Agreement. With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document: (a) the definitions of terms herein shall apply equally to the singular and plural forms of the terms defined, (b) whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms, (c) the words “include”, “includes” and “including” shall be deemed to be followed by the phrase “without limitation”, (d) the word “will” shall be construed to have the same meaning and effect as the word “shall”, (e) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document, as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (f) any reference herein to any Person shall be construed to include such Person’s permitted successors and assigns, (g) the words “herein”, “hereof” and “hereunder”, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (h) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (i) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights, (j) the term “documents” includes any and all instruments, documents, agreements, certificates, notices, reports, financial statements and other writings, however evidenced, whether in physical or electronic form, (k) in the computation of periods of time from a specified date to a later specified date, the word “from” means “from and including;” the words “to” and “until” each mean “to but excluding;” and the word “through” means “to and including”, (l) Section headings herein and in the other Loan Documents are included for convenience of reference only and shall not affect the interpretation of this Agreement or any other Loan Document and (m) where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantor’s Collateral or the relevant part thereof. To the extent that a direct conflict between the provisions of this Agreement and the provisions of the Credit Agreement (other than with respect to any provision of this Agreement relating to the grant, pledge and assignment of the Security Interest in the Collateral or the exercise of remedies with respect thereto), the Credit Agreement shall govern.
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ARTICLE II
SECURITY INTEREST
SECTION 2.1 Grant of Security Interest. Each Grantor respectively hereby grants, pledges and collaterally assigns to the Administrative Agent, in each case for the ratable benefit of the Secured Parties, a security interest in all of such Grantor’s right, title and interest in the following property, now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest, and wherever located or deemed located (collectively, the “ Collateral ”), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Obligations:
(a) all Accounts;
(b) all cash and currency;
(c) all Chattel Paper;
(d) all Commercial Tort Claims identified on Schedule 3.7;
(e) all Deposit Accounts;
(f) all Documents;
(g) all Equipment;
(h) all Fixtures;
(i) all General Intangibles;
(j) all Instruments;
(k) all Intellectual Property;
(l) all Inventory;
(m) all Investment Property;
(n) all Letter of Credit Rights;
(o) all licenses and permits;
(p) all Vehicles;
(q) all Goods and all other personal property not otherwise described above;
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(r) all books and records pertaining to the Collateral; and
(s) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing, all Accessions to any of the foregoing and all collateral security and Supporting Obligations (as now or hereafter defined in the UCC) given by any Person with respect to any of the foregoing.
provided, that (i) any Security Interest on any Capital Stock or other ownership interests issued by any Foreign Subsidiary shall be limited to sixty-six percent (66%) of all issued and outstanding shares of all classes of voting Capital Stock of each first tier Foreign Subsidiary and one hundred percent (100%) of the non-voting Capital Stock of such first tier Foreign Subsidiary and (ii) the Security Interests granted herein shall not extend to, and the term “Collateral” shall not include, (A) any obligation or property of any kind due from, owed by or belonging to any Sanctioned Person or (B) any rights under any lease, instrument, contract or agreement of any Grantor to the extent that the granting of a security interest therein would, under the express terms of such lease, instrument, contract or agreement, (I) be prohibited or restricted or (II) result in a breach of the terms of, constitute a default under or result in a termination of any such lease, instrument, contract or agreement governing such right, unless (x) such prohibition or restriction is not enforceable or is otherwise ineffective under applicable Law (but then, only to the extent rendered unenforceable or otherwise ineffective under applicable Law) or (y) consent to such security interest has been obtained from any applicable third party. Notwithstanding any of the foregoing, such proviso shall not affect, limit, restrict or impair the grant by any Grantor of a Security Interest in any Account or any money or other amounts due and payable to any Grantor or to become due and payable to any Grantor under any such lease, instrument, contract or agreement unless such security interest in such Account, money or other amount due and payable is also specifically prohibited or restricted by the terms of such lease, instrument, contract or other agreement or such security interest in such Account, money or other amount due and payable would expressly constitute a default under or would expressly grant a party a termination right under any such lease, instrument, contract or agreement governing such right unless, in each case, (x) such prohibition is not enforceable or is otherwise ineffective under applicable Law (but then, only to the extent rendered unenforceable or otherwise ineffective under applicable Law) or (y) consent to such security interest has been obtained from any applicable third party; provided further , that notwithstanding anything to the contrary contained in the foregoing proviso, the Security Interests granted herein shall immediately and automatically attach to and the term “Collateral” shall immediately and automatically include the rights under any such lease, instrument, contract or agreement and in such Account, money, or other amounts due and payable to any Grantor at such time as such prohibition, restriction, event of default or termination right terminates or is waived or consent to such security interest has been obtained from any applicable third party.
Notwithstanding the foregoing, the payment and performance of the Obligations shall not be secured by any Swap Contract between any Grantor and any Secured Party.
SECTION 2.2 Partnership/LLC Interests.
(a) Subject to Section 7.14, each limited liability agreement, operating agreement, membership agreement, partnership agreement or similar agreement relating to any
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Partnership/LLC Interests issued by a Domestic Subsidiary (as amended, restated, supplemented or otherwise modified from time to time, a “ Partnership/LLC Agreement ”) is amended by this Section 2.2 to permit each member, manager and partner that is a Grantor to pledge all of the Partnership/LLC Interests in which such Grantor has rights to and grant and collaterally assign to the Secured Parties a lien and security interest in its Partnership/LLC Interests in which such Grantor has rights without any further consent, approval or action by any other party, including, without limitation, any other party to any Partnership/LLC Agreement or otherwise.
(b) Upon the occurrence and during the continuance of an Event of Default, the Administrative Agent or its designees shall have the right (but not the obligation) to be substituted for the applicable Grantor as a member, manager or partner under the applicable Partnership/LLC Agreement and the Administrative Agent shall have all rights, powers and benefits of such Grantor as a member, manager or partner, as applicable, under such Partnership/LLC Agreement. For avoidance of doubt, such rights, powers and benefits of a substituted member shall include all voting and other rights and not merely the rights of an economic interest holder. So long as this Agreement remains in effect, no further consent, approval or action by any other party including, without limitation, any other party to the Partnership/LLC Agreement or otherwise shall be necessary to permit the Administrative Agent to be substituted as a member, manager or partner pursuant to this paragraph. The rights, powers and benefits granted pursuant to this paragraph shall inure to the benefit of the Administrative Agent, on its own behalf and on behalf of the other Secured Parties, and each of their respective successors, assigns and designated agents, as intended third party beneficiaries.
(c) Each applicable Grantor and each applicable Issuer agrees that so long as this Agreement remains in effect, no Partnership/LLC Agreement shall be amended to modify the provisions of this Section 2.2 without the prior written consent of the Administrative Agent.
SECTION 2.3 Grantors Remain Liable. Anything herein to the contrary notwithstanding: (a) each Grantor shall remain liable to perform all of its duties and obligations under the contracts and agreements included in the Collateral to the same extent as if this Agreement had not been executed, (b) the exercise by the Administrative Agent or any other Secured Party of any of the rights hereunder shall not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, (c) neither the Administrative Agent nor any other Secured Party shall have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, nor shall the Administrative Agent or any other Secured Party be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder, and (d) neither the Administrative Agent nor any other Secured Party shall have any liability in contract or tort for any Grantor’s acts or omissions.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective Credit Extensions to the Borrower thereunder, each Grantor hereby represents and warrants to the Administrative Agent and each other Secured Party that:
SECTION 3.1 General Representations. Each of the representations and warranties contained in Section 5.01, Section 5.02, Section 5.03 and Section 5.04 of the Credit Agreement are true and correct in all material respects as of the date of this Agreement (except (a) for any such representation and warranty that is subject to materiality or Material Adverse Effect qualifications, in which case such representation and warranty shall true and correct in all respects and (b) any representation and warranty made as of an earlier date, which representation and warranty shall remain true and correct as of such earlier date).
SECTION 3.2 Perfected First Priority Liens. Each financing statement naming any Grantor as a debtor is in appropriate form for filing in the appropriate filing offices specified on Schedule 3.4 . The Security Interests granted pursuant to this Agreement (a) constitute valid security interests in all of the Collateral in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, as collateral security for the Obligations, and (b): (i) when UCC financing statements containing an adequate description of the Collateral shall have been filed in the offices specified in Schedule 3.4 , will constitute perfected security interests in all right, title and interest of such Grantor in the Collateral to the extent that a security interest therein may be perfected by filing pursuant to the UCC, prior to all other Liens and rights of others therein except for Permitted Liens; (ii) when each Copyright security agreement has been filed with the United States Copyright Office, will constitute perfected security interests in all right, title and interest of such Grantor in the Intellectual Property therein described, prior to all other Liens and rights of others therein except for Permitted Liens; and (iii) when each control agreement has been executed and delivered to the Administrative Agent, will constitute perfected security interests in all right, title and interest of the Grantors in the Deposit Accounts and Securities Accounts, as applicable, subject thereto, prior to all other Liens and rights of others therein and subject to no adverse claims except for Permitted Liens.
SECTION 3.3 Title, No Other Liens. Except for the Security Interests, each Grantor owns each item of the Collateral free and clear of any and all Liens or claims other than Permitted Liens. No Grantor has authenticated any agreement authorizing any secured party thereunder to file a financing statement with respect to any Lien, except to perfect Permitted Liens. No financing statement with respect to any Lien under the UCC of any state which names a Grantor as debtor or other public notice with respect to all or any part of the Collateral is on file or of record in any public office, except such as have been filed in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, pursuant to this Agreement or in connection with Permitted Liens. No Collateral is in the possession or Control of any Person asserting any claim thereto or security interest therein, except that (a) the Administrative Agent or its designee may have possession or Control of Collateral as contemplated hereby, (b) a depositary bank may have Control of a Deposit Account owned by a Grantor at such depositary bank and a Securities Intermediary may have Control over a Securities Account owned by a Grantor at such Securities Intermediary, in each case subject to the terms of any Deposit Account control agreement or Securities Account control agreement, as applicable, and to the extent required by Article IV , in favor of the Administrative Agent, and (c) a bailee, consignee or other Person may have possession of the Collateral as contemplated by, and so long as, the applicable Grantors have complied to the satisfaction of the Administrative Agent with the applicable provisions of Section 4.6(c) to the extent applicable.
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SECTION 3.4 State of Organization; Location of Inventory, Equipment and Fixtures; other Information.
(a) The exact legal name as of the date hereof of each Grantor is set forth on Schedule 3.4.
(b) Each Grantor is a Registered Organization organized under the laws of the jurisdiction or state identified on Schedule 3.4 under such Grantor’s name. The taxpayer identification number and Registered Organization number (if applicable) of each Grantor is set forth on Schedule 3.4 under such Grantor’s name.
(c) As of the date hereof, all Collateral of the Grantors consisting of Inventory and Equipment in excess of $250,000 and Fixtures (whether now owned or hereafter acquired) is (or will be) located at the locations specified on Schedule 3.4 , except as otherwise permitted hereunder.
(d) As of the date hereof, the mailing address, chief place of business, chief executive office and office where each Grantor keeps its books and records relating to the Accounts, Documents, General Intangibles, Instruments and Investment Property in which it has any interest is located at the locations specified on Schedule 3.4 under such Grantor’s name. As of the date hereof, no Grantor has any other places of business except those separately set forth on Schedule 3.4 under such Grantor’s name. No Grantor does business nor has done business during the past five years under any trade name or fictitious business name except as disclosed on Schedule 3.4 under such Grantor’s name. As of the date hereof, and except as disclosed on Schedule 3.4 under such Grantor’s name, no Grantor has acquired assets from any Person, other than assets acquired in the ordinary course of such Grantor’s business, during the past five years.
SECTION 3.5 Accounts. None of the Accounts is, nor will any hereafter arising Account be, evidenced by a promissory note or other Instrument (other than a check) that has not been pledged to the Administrative Agent in accordance with the terms hereof.
SECTION 3.6 Chattel Paper. As of the date hereof, no Grantor holds any Chattel Paper in the ordinary course of its business.
SECTION 3.7 Commercial Tort Claims. As of the date hereof, all Commercial Tort Claims owned by any Grantor are listed on Schedule 3.7.
SECTION 3.8 Deposit Accounts and Securities Accounts. As of the date hereof, all Deposit Accounts (including, without limitation, cash management accounts that are Deposit Accounts), securities accounts and lockboxes (including the: (a) owner of the account, (b) name and address of financial institution or securities broker where such accounts are located, (c) account numbers and (d) purpose or use of such account) owned by any Grantor are listed on Schedule 3.8 .
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SECTION 3.9 Intellectual Property.
(a) As of the date hereof, all Copyright registrations, Copyright applications, issued Patents, Patent applications, Trademark registrations and Trademark applications owned by any Grantor in its own name on the date hereof is listed on Schedule 3.9 .
(b) Except as set forth in Schedule 3.9, on the date hereof, none of the Intellectual Property owned by any Grantor is the subject of any written licensing or franchise agreement pursuant to which such Grantor is the licensor or franchisor, except as could not reasonably be expected to have a Material Adverse Effect.
SECTION 3.10 Inventory. The completion of the manufacturing process of such Inventory by a Person other than the applicable Grantor would be permitted under any contract to which such Grantor is a party or to which the Inventory is subject.
SECTION 3.11 Investment Property; Partnership/LLC Interests.
(a) As of the date hereof, all Investment Property (including, without limitation, Securities Accounts and cash management accounts that are Investment Property) and all Partnership/LLC Interests owned by any Grantor are listed on Schedule 3.11 .
(b) All Investment Property and all Partnership/LLC Interests issued by any Subsidiary to any Grantor (i) have been duly and validly issued and, if applicable, are fully paid and nonassessable, (ii) are beneficially owned as of record by such Grantor and (iii) constitute all the issued and outstanding Equity Interests of such Issuer issued to such Grantor.
(c) The Partnership/LLC Interests issued by any Domestic Subsidiary by their terms expressly provide that they are Securities governed by Article 8 of the UCC. Except to the extent prohibited by applicable Law, certificates have been issued and provided to the Administrative Agent (or are in the process of being issued and delivered in accordance with Section 6.12 of the Credit Agreement) with respect to the Partnership/LLC Interests. None of the Partnership/LLC Interests (i) are traded on a Securities exchange or in Securities markets, (ii) are Investment Company Securities or (iii) are held in a Securities Account.
SECTION 3.12 Instruments. As of the date hereof, no Grantor holds any Instruments or is named a payee of any promissory note or other evidence of indebtedness other than as set forth on Schedule 3.12 .
SECTION 3.13 Farm Products. None of the Collateral constitutes, or is the Proceeds of, Farm Products.
SECTION 3.14 Government Contracts. As of the date hereof, no Grantor is party to any contract with a Governmental Authority under which such Governmental Authority, as account debtor, owes a monetary obligation to any Grantor under any account.
SECTION 3.15 Aircraft. None of the Collateral constitutes, or is the proceeds of, (i) an aircraft, airframe, aircraft engine or related property, (ii) aircraft lease or (iii) any other interest in or to any of the foregoing.
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ARTICLE IV
COVENANTS
So long as any Lender shall have any Commitment under the Credit Agreement, any Loan or other Obligation hereunder shall remain unpaid or unsatisfied, or any Letter of Credit shall remain outstanding, unless consent has been obtained in the manner provided for in Section 7.1 , each Grantor covenants and agrees that:
SECTION 4.1 Maintenance of Perfected Security Interest; Further Information.
(a) Such Grantor shall maintain the Security Interest created by or pursuant to this Agreement as a first priority perfected Security Interest (subject only to Permitted Liens) and shall use its commercially reasonable efforts to defend such Security Interest against the claims and demands of all Persons whomsoever (other than holders of Permitted Liens).
(b) Such Grantor will furnish to the Administrative Agent upon the Administrative Agent’s reasonable request statements and schedules further identifying and describing the assets and property of such Grantor and such other reports in connection therewith as the Administrative Agent may reasonably request, all in reasonable detail.
SECTION 4.2 Maintenance of Insurance. Each Grantor shall maintain insurance covering the Collateral in accordance with the provisions of Section 6.07 of the Credit Agreement.
SECTION 4.3 Changes in Locations; Changes in Name or Structure. Such Grantor will not, except upon thirty (30) days’ prior written notice to the Administrative Agent (which time period may be reduced by the Administrative Agent in its sole discretion by written notice to such Grantor) and delivery to the Administrative Agent of (a) all additional financing statements and other instruments and documents reasonably requested by the Administrative Agent to maintain the validity, perfection and priority of the Security Interests and (b) if applicable, a written supplement to the Schedules of this Agreement (upon delivery of which the Schedules of this Agreement will be deemed amended thereby):
(i) permit any Deposit Account (other than Excluded Deposit Accounts) to be held by or at a depositary bank other than the depositary bank that held such Deposit Account as of the date hereof as set forth on Schedule 3.8 ;
(ii) permit any Investment Property (other than Certificated Securities delivered to the Administrative Agent pursuant to Section 4.5) to be held in a Securities Account of a Securities Intermediary that is not a Controlled Intermediary;
(iii) permit any of the Inventory or Equipment in excess of $250,000 or Fixtures to be kept at a location other than those listed on Schedule 3.4 for a period of greater than 30 days, except as otherwise permitted hereunder;
(iv) change its jurisdiction of organization or the location of its chief executive office from that identified on Schedule 3.4; or
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(v) change its legal name, identity or corporate or organizational structure to such an extent that any financing statement filed by the Administrative Agent in connection with this Agreement would become seriously misleading within the meaning of the UCC.
SECTION 4.4 Required Notifications. Such Grantor shall promptly notify the Administrative Agent, in writing, of: (a) any Lien (other than Permitted Liens) on any of the Collateral owned by such Grantor which would adversely affect the ability of the Administrative Agent to exercise any of its remedies hereunder, (b) any Collateral which, to the knowledge of such Grantor, constitutes a Government Contract, and (c) the acquisition or ownership by such Grantor of any (i) Commercial Tort Claim, (ii) Deposit Account (other than Excluded Deposit Accounts), or (iii) Investment Property after the date hereof.
SECTION 4.5 Delivery Covenants. Each Grantor and each Foreign Subsidiary (that is an Issuer and solely with respect to Investment Property pledged under this Agreement and under the Foreign Security Documents) will deliver and pledge to the Administrative Agent, for the ratable benefit of the Secured Parties, all Certificated Securities, Partnership/LLC Interests evidenced by a certificate, negotiable Documents, Instruments, and Tangible Chattel Paper owned or held by such Grantor, in each case, together with an Effective Endorsement and Assignment and all Supporting Obligations, as applicable, unless such delivery and pledge has been waived in writing by the Administrative Agent.
SECTION 4.6 Control Covenants.
(a) Such Grantor shall instruct (and otherwise use its commercially reasonable efforts to cause) (i) each depositary bank holding a Deposit Account (other than Excluded Deposit Accounts) owned by such Grantor and (ii) each Securities Intermediary holding any Investment Property owned by such Grantor, to execute and deliver a control agreement, sufficient to provide the Administrative Agent with Control of such Deposit Account or Investment Property and otherwise in form and substance reasonably satisfactory to the Administrative Agent (any such depositary bank executing and delivering any such control agreement, a “ Controlled Depositary ”, and any such Securities Intermediary executing and delivering any such control agreement, a “ Controlled Intermediary ”). In the event any such depositary bank or Securities Intermediary refuses to execute and deliver such control agreement, the Administrative Agent, in its sole discretion, may require the applicable Deposit Account and Investment Property to be transferred to the Administrative Agent or a Controlled Depositary or Controlled Intermediary, as applicable. After the date hereof, all Deposit Accounts (other than Excluded Deposit Accounts) and all Investment Property will be maintained with the Administrative Agent or with a Controlled Depository or a Controlled Intermediary, as applicable.
(b) Upon the written request of the Administrative Agent, each Grantor will take such actions and deliver all such agreements as are requested by the Administrative Agent to provide the Administrative Agent with Control of all Letter of Credit Rights and Electronic Chattel Paper owned or held by such Grantor, including, without limitation, with respect to any such Electronic Chattel Paper, by having the Administrative Agent identified as the assignee on the Record(s) pertaining to the single authoritative copy thereof.
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(c) If any Collateral (other than Collateral specifically subject to the provisions of Sections 4.6(a) and 4.6(b)), exceeding in value $100,000 in the aggregate (such Collateral exceeding such amount, the “ Excess Collateral ”) is at any time in the possession or control of any consignee, warehouseman, bailee (other than a carrier transporting Inventory in the ordinary course of business), processor, or any other third party, for a period of more than 30 days, such Grantor shall notify such Person in writing of the Security Interests created hereby, shall use its commercially reasonable efforts to obtain such Person’s written acknowledgment that, upon notice from the Administrative Agent that an Event of Default has occurred and is continuing, it shall hold all such Collateral for the benefit of the Administrative Agent subject to the Administrative Agent’s instructions, and shall use its commercially reasonable efforts to cause such Person to issue and deliver to the Administrative Agent warehouse receipts, bills of lading or any similar documents relating to such Collateral together with an Effective Endorsement and Assignment; provided that if such Grantor is not able to obtain such agreement and cause the delivery of such items, the Administrative Agent, in its sole discretion, may require such Excess Collateral to be moved to another location specified thereby. Further, each Grantor shall perfect and protect such Grantor’s ownership interests in all Inventory stored with a consignee against creditors of the consignee by filing and maintaining financing statements against the consignee reflecting the consignment arrangement filed in all appropriate filing offices, providing any written notices required by the UCC to notify any prior creditors of the consignee of the consignment arrangement, and taking such other actions as may be appropriate to perfect and protect such Grantor’s interests in such inventory under Section 2-326, Section 9-103, Section 9-324 and Section 9-505 of the UCC or otherwise. All such financing statements filed pursuant to this Section 4.6(c) shall be assigned, on the face thereof, to the Administrative Agent, for the ratable benefit of the Secured Parties.
SECTION 4.7 Filing Covenants. Pursuant to Section 9-509 of the UCC and any other applicable Law, such Grantor authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral without the signature of such Grantor in such form and in such offices as the Administrative Agent determines appropriate to perfect the Security Interests of the Administrative Agent under this Agreement. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of Collateral that describes such property in any other manner as the Administrative Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the Security Interest in the Collateral granted herein, including, without limitation, describing such property as “all assets” or “all personal property.” Further, a photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction. Such Grantor hereby authorizes, ratifies and confirms all financing statements and other filing or recording documents or instruments filed by the Administrative Agent prior to the date of this Agreement.
SECTION 4.8 Accounts.
(a) Each Grantor will deliver to the Administrative Agent a copy of each material demand, notice or document received by it that questions or calls into doubt the validity or enforceability of any material Account.
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(b) At any time during the continuance of a Default or an Event of Default, upon the Administrative Agent’s request and at the expense of the relevant Grantor, such Grantor shall cause independent public accountants or others reasonably satisfactory to the Administrative Agent to furnish to the Administrative Agent reports showing reconciliations, aging and test verifications of, and trial balances for, the Accounts.
SECTION 4.9 Intellectual Property. Whenever such Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any material Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall report such filing to the Administrative Agent on the date upon which the financial statements of the Parent and its Subsidiaries with respect to the fiscal year (or with respect to any filing during the last fiscal quarter of any fiscal year, the fiscal year end) in which such filing occurs are required to be provided pursuant to Section 6.01(a) of the Credit Agreement. Upon request of the Administrative Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers (including confirmatory searches and curative chain of title filings) as the Administrative Agent may reasonably request to evidence the security interest of the Secured Parties in any material Copyright, Patent or Trademark and the goodwill and General Intangibles of such Grantor relating thereto or represented thereby.
SECTION 4.10 Investment Property; Partnership/LLC Interests.
(a) Without the prior written consent of the Administrative Agent, such Grantor will not (i) vote to enable, or take any other action to permit, any applicable Issuer to issue any Investment Property or Partnership/LLC Interests, unless the applicable Grantor shall have complied with the applicable provisions of Section 6.12 of the Credit Agreement. Such Grantors will defend the right, title and interest of the Administrative Agent in and to any Investment Property and Partnership/LLC Interests against the claims and demands of all Persons whomsoever.
(b) If such Grantor shall become entitled to receive or shall receive (i) any Certificated Securities (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the ownership interests of any Issuer pledged pursuant to any Loan Document, whether in addition to, in substitution of, as a conversion of, or in exchange for, any Investment Property, or otherwise in respect thereof, or (ii) during the continuance of a Default or an Event of Default, any sums paid upon or in respect of any Investment Property upon the liquidation or dissolution of any Issuer, such Grantor shall accept the same as the agent of the Secured Parties, hold the same in trust for the Secured Parties, segregated from other funds of such Grantor, and promptly deliver the same to the Administrative Agent, on behalf of the Secured Parties, in accordance with the terms hereof.
SECTION 4.11 Vehicles. Upon the occurrence and during the continuance of an Event of Default, at the request of the Administrative Agent, all applications for certificates of title or ownership indicating the Administrative Agent’s first priority Lien on the Vehicle
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(subject to any Permitted Liens) covered by such certificate, and any other necessary documentation, shall be filed in each office in each jurisdiction which the Administrative Agent shall deem reasonably advisable to perfect its Liens on the Vehicles; provided that with respect to Vehicles subject to Permitted Liens, no such application or other documentation shall be required. Prior thereto, each certificate of title or ownership relating to each Vehicle of such Grantor shall be maintained by such Grantor in accordance with applicable Law to reflect the ownership interest of such Grantor.
SECTION 4.12 Government Contracts. Such Grantor shall promptly notify the Administrative Agent, in writing, if it enters into any Government Contract with a Governmental Authority under which such Governmental Authority, as account debtor, owes a material monetary obligation to such Grantor under any Account.
SECTION 4.13 Further Assurances. Upon the request of the Administrative Agent and at the sole expense of the Grantors, each Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, (i) with respect to Government Contracts, assignment agreements and notices of assignment duly executed by any Grantors party to such Government Contract in compliance with the Assignment of Claims Act (and/or analogous state, provincial or other applicable Law), and (ii) all customary applications, certificates, instruments, registration statements, and all other documents and papers the Administrative Agent may reasonably request, in each case as may be required by law or for the effective exercise of any rights under this Agreement.
ARTICLE V
REMEDIAL PROVISIONS
SECTION 5.1 General Remedies. If an Event of Default shall occur and be continuing, the Administrative Agent, on behalf of the Secured Parties, may exercise, in addition to all other rights and remedies granted to them under applicable Law in this Agreement and in any other instrument or agreement securing, evidencing or relating to the Obligations (including, without limitation, the Foreign Security Documents), all rights and remedies of a secured party under the UCC or any other applicable Law. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, broker’s board or office of the Administrative Agent or any other Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent may disclaim any
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warranties in connection with any sale or other disposition of the Collateral, including, without limitation, any warranties of title, possession, quiet enjoyment and the like. The Administrative Agent or any other Secured Party shall have the right upon any such public sale or sales, and, to the extent permitted by law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Administrative Agent’s request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at such Grantor’s premises or elsewhere. To the fullest extent permitted by applicable Law, each Grantor waives all claims, damages and demands it may acquire against the Administrative Agent or any other Secured Party arising out of the exercise by them of any rights hereunder except to the extent any such claims, damages, or demands result solely from the gross negligence or willful misconduct of the Administrative Agent or any other Secured Party, in each case against whom such claim is asserted. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition.
SECTION 5.2 Specific Remedies.
(a) The Administrative Agent hereby authorizes each Grantor to collect such Grantor’s Accounts in the ordinary course of its business; provided that, the Administrative Agent may curtail or terminate such authority at any time after the occurrence and during the continuance of an Event of Default.
(b) Upon the occurrence and during the continuance of an Event of Default:
(i) the Administrative Agent may communicate with Account Debtors of any Account subject to a Security Interest and, upon the request of the Administrative Agent, each Grantor shall notify (such notice to be in form and substance satisfactory to the Administrative Agent) its Account Debtors and parties to the Material Contracts subject to a Security Interest that such Accounts and the Material Contracts have been assigned to the Administrative Agent, for the ratable benefit of the Secured Parties;
(ii) upon the request of the Administrative Agent, each Grantor shall forward to the Administrative Agent, on the last Business Day of each week, deposit slips related to all cash, money, checks or any other similar items of payment received by the Grantor during such week, and copies of such checks or any other similar items of payment, together with a statement showing the application of all payments on the Collateral during such week and a collection report with regard thereto, in form and substance satisfactory to the Administrative Agent;
(iii) the Administrative Agent may deliver such notices and instructions in accordance with control agreements covering Deposit Accounts (other than Excluded Accounts) and/or Securities Accounts. In addition, at the request of the Administrative Agent, whenever any Grantor shall receive any cash, money, checks or any other similar items of payment relating to any Collateral (including any Proceeds of any Collateral), subject to the terms of any Permitted Liens, such Grantor agrees that it will, within one (1) Business Day of such receipt, deposit all such items of payment into a cash collateral
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account at the Administrative Agent (the “Collateral Account”) or in a Deposit Account (other than an Excluded Deposit Account) at a Controlled Depositary, and until such Grantor shall deposit such cash, money, checks or any other similar items of payment in the Collateral Account or in a Deposit Account (other than an Excluded Deposit Account) at a Controlled Depositary, such Grantor shall hold such cash, money, checks or any other similar items of payment in trust for the Secured Parties and as property of the Secured Parties, separate from the other funds of such Grantor, and the Administrative Agent shall have the right to transfer or direct the transfer of the balance of each Deposit Account (other than an Excluded Deposit Account) to the Collateral Account. All such Collateral and Proceeds of Collateral received by the Administrative Agent hereunder shall be held by the Administrative Agent in the Collateral Account as collateral security for all the Obligations and shall not constitute payment thereof until applied as provided in Section 5.4 ;
(iv) the Administrative Agent shall have the right to receive any and all cash dividends, payments or distributions made in respect of any Investment Property, any Partnership/LLC Interests or any other Proceeds paid in respect of any Investment Property or any Partnership/LLC Interests, and any or all of any Investment Property or any Partnership/LLC Interests may, at the option of the Administrative Agent and the Lenders, be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such Investment Property or such Partnership/LLC Interests at any meeting of shareholders, partners or members of the relevant Issuers and (B) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Investment Property or such Partnership/LLC Interests as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of the Investment Property or any and all of the Partnership/LLC Interests upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate, partnership or limited liability company structure of any Issuer or upon the exercise by any Grantor or the Administrative Agent of any right, privilege or option pertaining to such Investment Property or such Partnership/LLC Interests, and in connection therewith, the right to deposit and deliver any and all of the Investment Property or any and all of the Partnership/LLC Interests with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine), all without liability except to account for property actually received by it; but the Administrative Agent shall have no duty to any Grantor to exercise any such right, privilege or option and the Administrative Agent and the other Secured Parties shall not be responsible for any failure to do so or delay in so doing. In furtherance thereof, each Grantor hereby authorizes and instructs each Issuer with respect to any Collateral consisting of Investment Property and Partnership/LLC Interests to (i) comply with any instruction received by it from the Administrative Agent in writing that (A) states that an Event of Default has occurred and is continuing and (B) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying following receipt of such notice and prior to notice that such Event of Default is no longer continuing, and (ii) except as otherwise expressly permitted hereby, pay any dividends, distributions or other payments with respect to any Investment Property, or any Partnership/LLC Interests directly to the Administrative Agent; and
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(v) the Administrative Agent shall be entitled to (but shall not be required to): (A) proceed to perform any and all obligations of the applicable Grantor under any Material Contract and exercise all rights of such Grantor thereunder as fully as such Grantor itself could, (B) do all other acts which the Administrative Agent may deem necessary or proper to protect its Security Interest granted hereunder, provided such acts are not inconsistent with or in violation of the terms of any of the Credit Agreement, of the other Loan Documents or applicable Law, and (C) sell, assign or otherwise transfer any Material Contract in accordance with the Credit Agreement, the other Loan Documents and applicable Law, subject, however, to the prior approval of each other party to such Material Contract, to the extent required under the Material Contract.
(c) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the relevant Grantor of the Administrative Agent’s intent to exercise its corresponding rights pursuant to Section 5.2(b) , each Grantor shall be permitted to receive all cash dividends, payments or other distributions made in respect of any Investment Property and any Partnership/LLC Interests, in each case to the extent permitted in the Credit Agreement, and to exercise all voting and other corporate, company and partnership rights with respect to any Investment Property and any Partnership/LLC Interests; provided that, no vote shall be cast or other corporate, company and partnership right exercised or other action taken which, in the Administrative Agent’s reasonable judgment, would impair the Collateral in any material respect or which would result in a Default or Event of Default under any provision of the Credit Agreement, this Agreement or any other Loan Document.
SECTION 5.3 Registration Rights.
(a) If an Event of Default has occurred and is continuing and the Administrative Agent shall determine that in order to exercise its right to sell any or all of the Collateral it is necessary or advisable to have such Collateral registered under the provisions of the Securities Act (any such Collateral, the “ Restricted Securities Collateral ”), the relevant Grantor will cause each applicable Issuer (and the officers and directors thereof) to (i) execute and deliver all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Administrative Agent, necessary or advisable to register such Restricted Securities Collateral, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) use its commercially reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of such Restricted Securities Collateral, or that portion thereof to be sold, and (iii) make all amendments thereto and/or to the related prospectus which, in the opinion of the Administrative Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto. Each Grantor agrees to cause each applicable Issuer (and the officers and directors thereof) to comply with the provisions of the securities or “Blue Sky” laws of any and all jurisdictions which the Administrative Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of the Securities Act.
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(b) Each Grantor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Restricted Securities Collateral, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers which will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and agrees that any such private sale shall not be deemed to have been made in a commercially unreasonable manner solely as a result of such circumstances. The Administrative Agent shall be under no obligation to delay a sale of any of the Restricted Securities Collateral for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.
(c) Each Grantor agrees to use its commercially reasonable efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Restricted Securities Collateral valid and binding and in compliance with any and all other applicable Laws.
Each Grantor further agrees that a breach of any of the covenants contained in this Section 5.3 will cause irreparable injury to the Administrative Agent and the other Secured Parties, that the Administrative Agent and the other Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 5.3 shall be specifically enforceable against such Grantor, and such Grantor hereby waives and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred under the Credit Agreement.
SECTION 5.4 Application of Proceeds. At such intervals as may be agreed upon by the Borrower and the Administrative Agent, or, if an Event of Default shall have occurred and be continuing, at any time at the Administrative Agent’s election, the Administrative Agent may apply all or any part of the Collateral or any Proceeds of the Collateral in payment in whole or in part of the Obligations (after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the other Secured Parties hereunder, including, without limitation, reasonable attorneys’ fees and disbursements) in accordance with Section 8.03 of the Credit Agreement. Only after (a) the payment by the Administrative Agent of any other amount required by any provision of applicable Law, including, without limitation, Section 9-610 and Section 9-615 of the UCC and (b) the payment in full of the Obligations and the termination of the Commitments, shall the Administrative Agent account for the surplus, if any, to any Grantor, or to whomever may be lawfully entitled to receive the same (if such Person is not a Grantor).
SECTION 5.5 Waiver, Deficiency. Each Grantor hereby waives, to the extent permitted by applicable Law, all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any applicable Law in order to prevent or delay the enforcement of this Agreement or the absolute sale of the Collateral or any portion thereof. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of
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the Collateral are insufficient to pay its Obligations and the fees and disbursements of any attorneys employed by the Administrative Agent or any other Secured Party to collect such deficiency.
ARTICLE VI
THE ADMINISTRATIVE AGENT
SECTION 6.1 Administrative Agent’s Appointment as Attorney-In-Fact.
(a) Each Grantor hereby irrevocably constitutes and appoints the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, to take any and all appropriate action and to execute any and all documents and instruments which may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives the Administrative Agent the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following ( provided that the power of attorney granted under this Section 6.1 may only be exercised upon the occurrence and during the continuance of an Event of Default):
(i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account or Material Contract subject to a Security Interest or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under any Account or Material Contract subject to a Security Interest or with respect to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Administrative Agent may request to evidence the Administrative Agent’s and the Secured Parties’ security interest in such Intellectual Property and the goodwill and General Intangibles of such Grantor relating thereto or represented thereby;
(iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;
(iv) execute, in connection with any sale provided for in this Agreement, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and
(v) (A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the
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Administrative Agent or as the Administrative Agent shall direct; (B) ask or demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (E) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (F) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; (G) assign or license any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), for such term or terms, on such conditions, and in such manner, as the Administrative Agent shall in its sole discretion determine; and (H) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent was the absolute owner thereof for all purposes, and do, at the Administrative Agent’s option and such Grantor’s expense, at any time, or from time to time, all acts and things which the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Security Interests of the Secured Parties therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.
(b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement in accordance with the provisions of Section 6.1(a) .
(c) The reasonable expenses of the Administrative Agent incurred in connection with actions taken pursuant to the terms of this Agreement, together with interest thereon at a rate per annum equal to the Default Rate (imposed in accordance with the terms of the Credit Agreement) for Base Rate Loans under the Credit Agreement, from the date of payment by the Administrative Agent to the date reimbursed by the relevant Grantor, shall be payable by such Grantor to the Administrative Agent not later than ten Business Days after demand therefor.
(d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof in accordance with Section 6.1(a) . All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the Security Interests created hereby are released.
SECTION 6.2 Duty of Administrative Agent. The sole duty of the Administrative Agent with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar property for its own account. Neither the Administrative Agent, any other Secured Party nor any of their respective officers, directors, employees or agents shall be liable for failure to demand, collect or realize upon any of
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the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the other Secured Parties hereunder are solely to protect the interests of the Administrative Agent and the other Secured Parties in the Collateral and shall not impose any duty upon the Administrative Agent or any other Secured Party to exercise any such powers. The Administrative Agent and the other Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their officers, directors, employees or agents shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.
SECTION 6.3 Authority of Administrative Agent. Each Grantor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting or arising out of this Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Grantors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement to make any inquiry respecting such authority.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Amendments, Waivers and Consents. None of the terms, covenants, agreements or conditions of this Agreement may be amended, supplemented or otherwise modified, nor may they be waived, nor may any consent be given, except in accordance with Section 10.01 of the Credit Agreement.
SECTION 7.2 Notices. All notices and communications hereunder shall be given to the addresses and otherwise made in accordance with Section 10.02 of the Credit Agreement; provided that notices and communications to the Grantors shall be directed to the Grantors, at the address of the Borrower set forth in Section 10.02 of the Credit Agreement.
SECTION 7.3 No Waiver, Cumulative Remedies. No failure by any Secured Party to exercise, and no delay by any such Person in exercising, any right, remedy, power or privilege hereunder or under any other Loan Document shall operate as a waiver thereof; nor shall any single or partial exercise of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, remedy, power or privilege. The rights, remedies, powers and privileges herein provided and provided under each other Loan Document are cumulative and not exclusive of any rights, remedies, powers and privileges provided by law.
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SECTION 7.4 Expenses, Indemnification, Waiver of Consequential Damages, etc.
(a) Each Grantor, jointly and severally, shall pay all reasonable out-of-pocket expenses incurred by the Administrative Agent and each other Secured Party pursuant to, and in accordance with, the applicable provisions of Section 10.04 of the Credit Agreement.
(b) Each Grantor, jointly and severally, shall indemnify each Indemnitee pursuant to, and in accordance with, Section 10.04 of the Credit Agreement.
(c) Notwithstanding anything to the contrary contained in this Agreement, to the fullest extent permitted by applicable Law, no Grantor shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Credit Extensions or the use of the proceeds thereof.
(d) No Indemnitee referred to in this Section 7.4 shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed to such unintended recipients by such Indemnitee through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby other than for direct or actual damages resulting from the gross negligence or willful misconduct of such Indemnitee as determined by a final and nonappealable judgment of a court of competent jurisdiction.
(e) Each Grantor agrees to pay, and to save the Administrative Agent and the other Secured Parties harmless from, any and all liabilities with respect to, or resulting from any such Grantor’s delay in paying, any and all stamp, excise, sales withholding or other taxes which may be payable or determined to be payable in connection with any of the transactions contemplated by this Agreement.
(f) All amounts due under this Section 7.4 shall be payable promptly after demand therefor.
SECTION 7.5 Successors and Assigns. The provisions of this Agreement shall be binding upon and shall inure to the benefit of each Grantor (and shall bind all Persons who become bound as a Grantor to this Agreement), the Administrative Agent and the other Secured Parties and their respective successors and permitted assigns; provided that no Grantor may assign or otherwise, transfer any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and the Lenders (except as otherwise provided by the Credit Agreement).
SECTION 7.6 Survival of Indemnities. Notwithstanding any termination of this Agreement, the indemnities to which the Administrative Agent and the other Secured Parties are entitled under the provisions of Section 7.4 and any other provision of this Agreement and the other Loan Documents shall continue in full force and effect and shall protect the Administrative Agent and the other Secured Parties against events arising after such termination as well as before.
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SECTION 7.7 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Secured Party and each of its respective Affiliates is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent, to the fullest extent permitted by applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Secured Party or any such Affiliate to or for the credit or the account of such Grantor against any and all of the obligations of such Grantor now or hereafter existing under this Agreement or any other Loan Document to such Secured Party irrespective of whether or not such Secured Party shall have made any demand under this Agreement or any other Loan Document and although such obligations of such Grantor may be contingent or unmatured or are owed to a branch or office of such Secured Party different from the branch or office holding such deposit or obligated on such indebtedness. The rights of each Secured Party and its respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Secured Party or its respective Affiliates may have. Each Secured Party agrees to notify such Grantor and the Administrative Agent promptly after any such set off and application; provided that the failure to give such notice shall not affect the validity of such set off and application.
SECTION 7.8 Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. This Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.
SECTION 7.9 Severability. If any provision of this Agreement or the other Loan Documents is held to be illegal, invalid or unenforceable, (a) the legality, validity and enforceability of the remaining provisions of this Agreement and the other Loan Documents shall not be affected or impaired thereby and (b) the parties shall endeavor in good faith negotiations to replace the illegal, invalid or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the illegal, invalid or unenforceable provisions. The invalidity of a provision in a particular jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction.
SECTION 7.10 Governing Law; Jurisdiction; Service of Process.
(b) GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
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(c) SUBMISSION TO JURISDICTION. EACH GRANTOR IRREVOCABLY AND UNCONDITIONALLY SUBMITS, FOR ITSELF AND ITS PROPERTY, TO THE NONEXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK SITTING IN NEW YORK COUNTY AND OF THE UNITED STATES DISTRICT COURT OF THE SOUTHERN DISTRICT OF NEW YORK, AND ANY APPELLATE COURT FROM ANY THEREOF, IN ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT, OR FOR RECOGNITION OR ENFORCEMENT OF ANY JUDGMENT, AND EACH OF THE PARTIES HERETO IRREVOCABLY AND UNCONDITIONALLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK STATE COURT OR, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN SUCH FEDERAL COURT. EACH OF THE PARTIES HERETO AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PROVIDED BY LAW. NOTHING IN THIS AGREEMENT OR IN ANY OTHER LOAN DOCUMENT SHALL AFFECT ANY RIGHT THAT THE ADMINISTRATIVE AGENT, ANY LENDER OR THE L/C ISSUER MAY OTHERWISE HAVE TO BRING ANY ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AGAINST ANY GRANTOR OR ITS PROPERTIES IN THE COURTS OF ANY JURISDICTION.
(d) WAIVER OF VENUE. EACH GRANTOR IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT IN ANY COURT REFERRED TO IN PARAGRAPH (B) OF THIS SECTION. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, THE DEFENSE OF AN INCONVENIENT FORUM TO THE MAINTENANCE OF SUCH ACTION OR PROCEEDING IN ANY SUCH COURT.
(e) SERVICE OF PROCESS. EACH PARTY HERETO IRREVOCABLY CONSENTS TO SERVICE OF PROCESS IN THE MANNER PROVIDED FOR NOTICES IN SECTION 7.2 . NOTHING IN THIS AGREEMENT WILL AFFECT THE RIGHT OF ANY PARTY HERETO TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY APPLICABLE LAW.
SECTION 7.11 Waiver of Jury Trial; California Judicial Reference.
(a) Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR
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OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
(b) California Judicial Reference. If any action or proceeding is filed in a court of the State of California by or against any party hereto in connection with any of the transactions contemplated by this Agreement or any other Loan Document, (a) the court shall, and is hereby directed to, make a general reference pursuant to California Code of Civil Procedure Section 638 to a referee (who shall be a single active or retired judge) to hear and determine all of the issues in such action or proceeding (whether of fact or of law) and to report a statement of decision, provided that at the option of any party to such proceeding, any such issues pertaining to a “provisional remedy” as defined in California Code of Civil Procedure Section 1281.8 shall be heard and determined by the court and (b) without limiting the generality of Section 7.4 , the Grantors, on a joint and several basis, shall be solely responsible to pay all fees and expenses of any referee appointed in such action or proceeding.
SECTION 7.12 Injunctive Relief. The Grantors recognize that, in the event the Grantors fail to perform, observe or discharge any of their obligations or liabilities under this Agreement or any other Loan Document, any remedy of law may prove to be inadequate relief to the Administrative Agent and the other Secured Parties. Therefore, the Grantors agree that the Administrative Agent and the other Secured Parties, at the option of the Administrative Agent and the other Secured Parties, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.
SECTION 7.13 Acknowledgements.
(a) Each Grantor hereby acknowledges that: (i) it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party, (ii) it has received a copy of the Credit Agreement and has reviewed and understands same, (iii) neither the Administrative Agent nor any other Secured Party has any fiduciary relationship with or duty to any Grantor arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Grantors, on the one hand, and the Administrative Agent and the other Secured Parties, on the other hand, in connection herewith or therewith is solely that of debtor and creditor, and (iv) no joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby or thereby among the Secured Parties or among the Grantors and the Secured Parties.
(b) Each Issuer party to this Agreement acknowledges receipt of a copy of this Agreement and agrees to be bound thereby and to comply with the terms thereof insofar as such terms are applicable to it. Each Issuer agrees to provide such notices to the Administrative Agent as may be necessary to give full effect to the provisions of this Agreement.
G - 27
SECTION 7.14 Releases. The Administrative Agent will release any Lien on any property granted to or held by the Administrative Agent under any Loan Document (a) upon termination of the Aggregate Commitments and payment in full of all Obligations (other than (i) contingent indemnification obligations and (ii) subject to Section 9.11 of the Credit Agreement, obligations and liabilities under Secured Cash Management Agreements and Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank of Hedge Bank shall have been made) and the expiration or termination of all Letters of Credit (other than Letters of Credit as to which other arrangements satisfactory to the Administrative Agent and the L/C Issuer shall have been made), (b) that is sold or to be sold as part of or in connection with any sale permitted under the Credit Agreement or under any other Loan Document, or (c) if approved, authorized or ratified in writing in accordance with Section 7.1 .
SECTION 7.15 Additional Grantors. Each Subsidiary of the Borrower that is required to become a party to this Agreement pursuant to Section 6.12 of the Credit Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of a joinder agreement (which shall include supplemental schedules to this Agreement with respect to each such new Grantor) in form and substance reasonably satisfactory to the Administrative Agent.
SECTION 7.16 All Powers Coupled with Interest. All powers of attorney and other authorizations granted to the Secured Parties, the Administrative Agent and any Persons designated by the Administrative Agent or any other Secured Party pursuant to any provisions of this Agreement or any of the other Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Obligations remain unpaid or unsatisfied, any of the Commitments remain in effect or the Credit Facility has not been terminated.
SECTION 7.17 No Conflict. To the extent that any of the terms or provisions of this Agreement with respect to a Foreign Subsidiary directly conflict with the terms and provisions of the Foreign Security Documents also applying to a Grantor, the provisions of the Foreign Security Documents shall control; provided that the inclusion of supplemental rights or remedies in favor of the Administrative Agent or the Lenders in any other Loan Document shall not be deemed a conflict with this Agreement.
SECTION 7.18 Judgment Currency. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of each Grantor in respect of any such sum due from it to the Administrative Agent or any Lender hereunder or under the other Loan Documents shall, notwithstanding any judgment in a currency (the “Judgment Currency”) other than Dollars, be discharged only to the extent that on the Business Day following receipt by the Administrative Agent or such Lender, as the case may be, of any sum adjudged to be so due in the Judgment Currency, the Administrative Agent or such Lender, as the case may be, may in accordance with normal banking procedures purchase Dollars with the Judgment Currency. If the amount of Dollars so purchased is less than the sum originally due to the Administrative Agent or any Lender from the Grantor in Dollars, each Grantor agrees, as a separate obligation and notwithstanding any such judgment, to indemnify
G - 28
the Administrative Agent or such Lender, as the case may be, against such loss. If the amount of Dollars so purchased is greater than the sum originally due from any Grantor to the Administrative Agent or any Lender in Dollars, the Administrative Agent or such Lender, as the case may be, agrees to return the amount of any excess to the applicable Grantor (or to any other Person who may be entitled thereto under applicable Law).
[Signature Pages to Follow]
G - 29
IN WITNESS WHEREOF, the parties hereto have caused this Collateral Agreement to be executed under seal by their duly authorized officers, all as of the day and year first written above.
DIAMOND FOODS, INC., as Grantor
By:
Name:
Title:
DIAMOND NUT COMPANY OF CALIFORNIA, INC., as Grantor
By:
Name:
Title:
[INSERT OTHER GRANTORS], as Grantor
By:
Name:
Title:
[Signature Pages Continue]
Diamond Foods, Inc.
Collateral Agreement
Signature Pages
BANK OF AMERICA, N.A.,
as Administrative Agent
By:
Name:
Title:
Diamond Foods, Inc.
Collateral Agreement
Signature Pages
SCHEDULE 3.4
to
Collateral Agreement
Exact Legal Name; Jurisdiction of Organization; Taxpayer Identification Number; Registered
Organization Number; Mailing Address; Chief Executive Office and other Locations
SCHEDULE 3.7
to
Collateral Agreement
Commercial Tort Claims
SCHEDULE 3.8
to
Collateral Agreement
Deposit Accounts
Grantor
Financial Institution
Account Number
Address of Financial
Institution
Account Purpose
SCHEDULE 3.9
to
Collateral Agreement
Intellectual Property
1. The listing of Trademarks (as defined in the Collateral Agreement) should include: (a) the Trademark; (b) Registration Number or Serial Number; (c) the Owner; (d) the Filing Date; (e) the Registration Date (if applicable); (f) the Date Affidavit of Use and/or Renewal is Due; and (g) Whether the Affidavit of Use and/or Renewal has been filed.
2. The listing of Trademark Licenses (as defined in the Collateral Agreement) should include: (a) Name and Address of Licensee/Licensor; (b) Date; (c) List of each Trademark Licensed/Assigned; and (d) Description of product to which license/assignment applies.
3. The listing of Patents (as defined in the Collateral Agreement) should include: (a) Country; (b) Patent Number; (c) Issue Date; and (d) Title of Invention.
4. The listing of Patent (as defined in the Collateral Agreement) applications should include: (a) Application Number; (b) Filing Date; and (c) Title of Invention.
5. The listing of Patent Licenses (as defined in the Collateral Agreement) should include: (a) Name and Address of Licensee/Licensor; (b) Date; (c) List of each Patent Licensed/Assigned; and (d) Description of product to which license/assignment applies.
6. The listing of Copyrights (as defined in the Collateral Agreement) should include: (a) Registration Number; (b) Registration Date; (c) Title as listed in Registration; (d) Publication Date; (e) Creation Date; (f) Author; and(g) Subject Matter Covered.
7. The listing of Copyright Licenses (as defined in the Collateral Agreement) should include: (a) Name and Address of Licensee/Licensor; (b) Date; (c) Work Licensed or Assigned.
SCHEDULE 3.11
to
Collateral Agreement
Investment Property and Partnership/LLC Interests
Certificated Securities:
[Grantor]:
Name of Issuer
Class and Series
Par Value
Certificate Number
Percentage of Ownership
Interests of such Class and
Series
Securities Accounts (including cash management accounts that are Investment Property) and Uncertificated Securities:
[Grantor]:
Financial Institution
Account Number
Address of Financial
Institution
Account Purpose
Name of Issuer
Class and Series
Par Value
Percentage of Ownership
Interests of such Class and Series
Partnerships/LLC Interests:
[Grantor]:
Name of Issuer
(including identification of
type of entity)
Type of Ownership Interest
Certificate Number
(if any)
Percentage of Ownership
Interests of such Type
SCHEDULE 3.12
to
Collateral Agreement
Instruments
Exhibit 10.21
March 26, 2010
Bank of America, N.A.,
as Administrative Agent for the Lenders
WAl-501-17-32
800 5th Avenue Floor 17
Seattle WA 98104
Re:
Credit Agreement dated as of February 25, 2010 among Diamond Foods, Inc., a Delaware corporation (the “Borrower”), each lender from time to time party thereto (collectively, the “ Lenders ” and individually, a “ Lender ”) and Bank of America, N.A., as administrative agent (in such capacity, the “ Administrative Agent ”) (as amended, restated, supplemented or otherwise modified from time to time, the “ Credit Agreement ”). All capitalized terms used but not otherwise defined herein shall have the meanings set forth in the Credit Agreement.
Ladies and Gentlemen:
The Borrower has consummated the Equity Issuance pursuant to that certain prospectus supplement filed with the SEC on or about March 8, 2010 (such Equity Issuance, the “ March 2010 Equity Issuance ”) with proceeds (net of the underwriters’ discount) of the March 2010 Equity Issuance totaling approximately $181.4 million. The Borrower hereby requests that the Lenders agree to amend (A) the definition of “Excluded Issuance”, as set forth in Section 1.01 of the Credit Agreement to specifically include the March 2010 Equity Issuance, (B) the definition of “foreign Security Documents”, as set forth in Section 1.01 of the Credit Agreement by inserting “, any foreign guaranty agreements” after “charges,” (C) the definition of “Secured Hedge Agreement” as set forth in Section 1.01 of the Credit Agreement by inserting “, commodity Swap Contract,” after “any interest rate Swap Contract” and (D) Section 7.02(c) of the Credit Agreement to permit investments by Foreign Subsidiaries in other Foreign Subsidiaries.
Accordingly, upon execution of this letter agreement by the Required Lenders, and notwithstanding any provision of the Credit Agreement or any other Loan Document to the contrary, you hereby agree that, effective as of February 25, 2010, the Credit Agreement is hereby amended as follows: (1) clause (c) of the definition of the “Excluded Issuance” in the Credit Agreement is hereby amended and restated in its entirety to read “the Equity Issuance made pursuant to that certain prospectus supplement filed with the SEC on or about March 8, 2010”, (2) the definition of “Foreign Security Documents” is hereby amended to insert “, any foreign guaranty agreements” after the word “charges,” (3) the definition of “Secured hedge Agreement” is hereby amended to insert “, commodity Swap Contract,” after the phrase “any interest rate Swap Contract” and (4) the following new clause (v) is inserted at the end of Section 7.02(c) : “and (v) Investments by any Foreign Subsidiary (that is not a Loan Party) in any other Foreign Subsidiary”.
This letter agreement may be executed in counterparts with each counterpart constituting an original and all of the counterparts, once executed, constituting but one original. Except as expressly provided herein, the Credit Agreement and the other Loan Documents shall remain unmodified and in full force and effect. This letter agreement shall constitute a “Loan Document.”
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
DIAMOND FOODS, INC., as Borrower
By:
/s/ Steven M. Neil
Name:
Steven M. Neil
Title:
Executive Vice President, Chief Financial
and Administrative Officer
Diamond Foods, Inc.
Amendment
Signature Pages
Accepted and Agreed:
BANK OF AMERICA, N.A., as Administrative Agent
By:
/s/ Ken Puro
Name:
Ken Puro
Title:
Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
Accepted and Agreed:
BANK OF AMERICA, N.A., as Lender
By:
/s/ Ronald J. Drobny
Name:
Ronald J. Drobny
Title:
Senior Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
BARCLAYS BANK, PLC, as a Lender
By:
/s/ Ritam Bhalla
Name:
Ritam Bhalla
Title:
Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
COÖPERATIEVE CENTRALE RAIFFEISEN-
BOERENLEENBANK B.A. “RABOBANK
NEDERLAND” NEW YORK BRANCH, as a
Lender
By:
/s/ Deborah Dias
Name:
Deborah Dias
Title:
Executive Director
By:
/s/ Rebecca O. Morrow
Name:
Rebecca O. Morrow
Title:
Executive Director
Diamond Foods, Inc.
Amendment
Signature Pages
SUNTRUST BANK, as a Lender
By:
/s/ Gabe Bonfield
Name:
Gabe Bonfield
Title:
Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
HSBC BANK, as a Lender
By:
/s/ Katherine Wolfe
Name:
Katherine Wolfe
Title:
Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
COBANK, ACB, as a Lender
By:
/s/ Hal Nelson
Name:
Hal Nelson
Title:
Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
BANK OF THE WEST, as a Lender
By:
/s/ Casey Garten
Name:
Casey Garten
Title:
Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
KEYBANK NATIONAL ASSOCIATION, as a
Lender
By:
/s/ Marianne T. Meil
Name:
Marianne T. Meil
Title:
Sr. Vice President
Diamond Foods, Inc.
Amendment
Signature Pages
Exhibit 10.24
WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT
This WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT (this “Agreement”) is made as of July 27, 2012 and entered into by and among Diamond Foods, Inc., (the “ Borrower ”), the Subsidiaries of the Borrower identified on the signature pages hereto as guarantors (collectively, the “ Guarantors ”), Bank of America, N.A., as Administrative Agent (in such capacity, the “ Administrative Agent ”), and the lenders party hereto (collectively, the “ Lenders ”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement (defined below).
RECITALS
A. The Loan Parties, the Lenders and the Administrative Agent have entered into that certain Credit Agreement dated as of February 25, 2010 (as amended, restated, supplemented or otherwise modified, the “ Credit Agreement ”), pursuant to which the Lenders have agreed to make the Loans and other extensions of credit, all upon the terms and conditions set forth in the Credit Agreement.
B. During the month of January 2012, Kettle Foods Ltd. entered into a lease of certain equipment (the “Kettle UK Lease”), which lease is guaranteed by Diamond Foods, Inc. The Kettle UK Lease was initially classified as an operating lease for accounting purposes. The Loan Parties and their advisors have since concluded that the Kettle UK Lease should have been classified as a capital lease. Kettle Foods Ltd. is a Subsidiary but not a Guarantor.
C. Certain Events of Default have occurred and, in certain cases, are continuing as a result of the Kettle UK Lease. Specifically, Events of Default may exist or have existed as a result of (i) the incurrence of a capital lease by a Subsidiary that is not a Loan Party, (ii) the Loan Parties’ exceeding of the aggregate amount of Indebtedness permitted under Section 7.03(e) of the Credit Agreement for the fiscal quarter ended January 31, 2012 and the fiscal quarter ended April 30, 2012, (iii) the Loan Parties’ having made, or been deemed to make, representations regarding the absence of Defaults notwithstanding the foregoing Defaults, and (iv) the Loan Parties’ failure to notify the Administrative Agent and the Lenders of the foregoing Defaults (collectively, the “ Acknowledged Events of Default ”).
D. The Loan Parties have requested that the Required Lenders and the Administrative Agent permanently waive the Acknowledged Events of Default and agree to certain amendments to the Credit Agreement.
E. The Required Lenders and the Administrative Agent are willing to agree to such waiver and amendments subject to the terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the parties agree as follows:
1. Existing Defaults. Each of the Loan Parties acknowledges that the Acknowledged Events of Default have occurred and are continuing.
2. Waiver. Subject to the other terms and conditions of this Agreement, the Administrative Agent and the Required Lenders hereby permanently waive the Acknowledged Events of Default as well as the right to exercise any rights or remedies that the Administrative Agent or any Lender has or may have had exclusively with respect thereto. This waiver is limited solely to the Acknowledged Events of Default, and nothing contained in this Agreement shall be deemed to constitute a waiver of any other rights or remedies the Administrative Agent or any Lender may have under the Credit Agreement or any
1
other Loan Documents or under applicable law. Nothing herein shall modify or affect the obligations of the Loan Parties to comply with the terms of the Credit Agreement as amended hereby and the other Loan Documents from and after the date hereof.
3. Amendments to the Credit Agreement. The Administrative Agent, the Required Lenders and the Borrower agree to amend the Credit Agreement by:
(a) inserting the following definitions in Section 1.01 in the appropriate alphabetical order:
“Fourth Amendment” means that certain Waiver and Fourth Amendment to Credit Agreement by and among the Loan Parties, the Administrative Agent and the Lenders party thereto dated as of the Fourth Amendment Effective Date.
“Fourth Amendment Effective Date” shall have the meaning given to such term in the Fourth Amendment.
(b) replacing the words “Borrower or any Guarantor” in Section 7.03(e) with the words “Borrower or any Subsidiary”.
4. Conditions Precedent. This Agreement shall become effective upon the date of satisfaction of each of the following conditions (such date, the “ Fourth Amendment Effective Date ”):
(a) the Administrative Agent shall have received duly executed counterparts of this Agreement from the Borrower, each of the Guarantors and Lenders constituting Required Lenders; and
(b) the Administrative Agent shall have received a duly executed, corresponding amendment to and waiver under the Oaktree Loan in form reasonably acceptable to the Administrative Agent.
5. Estoppel, Acknowledgement and Reaffirmation. Each of the Loan Parties acknowledges and confirms that as of July 23, 2012, the aggregate principal amount of the Term Loan Facility was $220,000,000.00, the aggregate principal amount outstanding under the Revolving Credit Facility was $204,800,000.00 (which amount includes the aggregate principal amount of $2,800,000.00 in respect of all Letters of Credit), and the aggregate principal amount of the Swing Line Loan was $0.00, which amounts constitute valid and subsisting obligations of the Loan Parties to the Lenders that are not subject to any credits, offsets, defenses, claims, counterclaims or adjustments of any kind. The Borrower hereby (i) acknowledges its obligations under the Loan Documents, (ii) reaffirms that each of the Liens created and granted pursuant to the Loan Documents is valid, subsisting, perfected and of the priority required pursuant to the Loan Documents and (iii) acknowledges that this Agreement shall in no manner impair or otherwise adversely affect such Liens.
6. Representations and Warranties. Each Loan Party hereby represents and warrants to the Administrative Agent and the Lenders that (a) each Loan Party has the legal power and authority to execute and deliver this Agreement; (b) the officers of each Loan Party executing this Agreement have been duly authorized to execute and deliver the same and bind each Loan Party with respect to the provisions hereof; (c) the execution and delivery hereof by each Loan Party and the performance and observance by each Loan Party of the provisions hereof do not violate or conflict with any organizational document of any Loan Party or any law applicable to any Loan Party or result in a breach of any provision of or constitute a default under any other agreement, instrument or document binding upon or
2
enforceable against any Loan Party; (d) Wimbledon Acquisition LLC and Diamond Foods Brazil Holding LLC are Subsidiaries of the Borrower that do not constitute Material Subsidiaries; (e) except with respect to the Acknowledged Events of Default, no Default or Event of Default exists under the Credit Agreement, nor will any occur immediately after the execution and delivery of this Agreement or by the performance or observance of any provision hereof; (f) no Loan Party is aware of any claim or offset against, or defense or counterclaim to, any Loan Party’s obligations or liabilities under the Credit Agreement or any other Loan Document; (g) this Agreement and each document executed by each Loan Party in connection herewith constitute valid and binding obligations of the applicable Loan Party in every respect, enforceable in accordance with their terms; and (h) all representations and warranties made by such Loan Party and contained in this Agreement or any other Loan Document to which it is a party are true and correct in all material respects (other than such representations and warranties that are untrue or otherwise inaccurate solely and directly as a result of the Acknowledged Events of Default) on and as of the date of this Agreement to the same extent as though made on and as of such date, except to the extent that any thereof expressly relate to an earlier date.
7. Further Assurances. Each of the parties hereto agrees to execute and deliver, or to cause to be executed and delivered, all such instruments as may reasonably be requested to effectuate the intent and purposes, and to carry out the terms, of this Agreement.
8. Release. Each Loan Party hereby waives and releases the Administrative Agent and the Lenders and their respective directors, officers, employees, agents, attorneys, affiliates and subsidiaries (each a “ Releasee ”) from any and all claims, offsets, defenses and counterclaims, known and unknown, that any Loan Party may have as of the date of this Agreement based upon, relating to, or arising out of the Obligations and related transactions in any way. Each Loan Party intends the foregoing release to cover, encompass, release and extinguish, among other things, all claims and matters that might otherwise be reserved by California Civil Code Section 1542, which provides as follows:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.”
Notwithstanding the foregoing, this Section 8 shall not constitute a release of the performance by the Administrative Agent or any Lender after the date hereof of their respective express obligations under the Loan Documents.
9. Covenant Not to Sue. Each Loan Party, on behalf of itself and its successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably, covenants and agrees with and in favor of each Releasee that it will not sue (at law, in equity, in any regulatory proceeding or otherwise) any Releasee on the basis of any claim released, remised and discharged by such Loan Party pursuant to Section 8 above. If any Loan Party or any of its successors, assigns or other legal representations violates the foregoing covenant, such Loan Party, for itself and its successors, assigns and legal representatives, agrees to pay, in addition to such other damages as any Releasee may sustain as a result of such violation, all attorneys’ fees and costs incurred by any Releasee as a result of such violation.
10. Payment of Fees and Expenses. The Loan Parties shall reimburse the Administrative Agent and each Lender for all fees and expenses of the Administrative Agent and each Lender, in accordance with the terms and conditions of the Credit Agreement, (including without limitation, all reasonable fees and expenses of counsel to the Administrative Agent and counsel to each Lender) incurred in connection with the Loan Documents, including without limitation this Agreement.
3
11. Loan Documents Unaffected. Except as otherwise specifically provided herein, all provisions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and be unaffected hereby. The parties hereto acknowledge and agree that this Agreement constitutes a “Loan Document” under the terms of the Credit Agreement.
12. No Other Promises or Inducements. There are no promises or inducements that have been made to any party hereto to cause such party to enter into this Agreement other than those that are set forth in this Agreement. This Agreement has been entered into by the Borrower and each Guarantor freely, voluntarily, with full knowledge, and without duress, and, in executing this Agreement, neither the Borrower nor any Guarantor is relying on any other representations, either written or oral, express or implied, made to the Borrower or any Guarantor by the Administrative Agent. The Borrower and each Guarantor agrees that the consideration received by the Borrowers under this Agreement has been actual and adequate.
13. No Course of Dealing. Each Loan Party acknowledges and agrees that, (a) this Agreement is not intended to, nor shall it, establish any course of dealing between the Loan Parties, the Administrative Agent and the Lenders that is inconsistent with the express terms of the Credit Agreement or any other Loan Document, (b) notwithstanding any course of dealing between the Loan Parties, the Administrative Agent and the Lenders prior to the date hereof, except as set forth herein, the Lenders shall not be obligated to make any Loan, except in accordance with the terms and conditions of this Agreement and the Credit Agreement, and (c) except with respect to the Acknowledged Events of Default, neither the Administrative Agent nor any Lender shall be under any obligation to forbear from exercising any of its rights or remedies upon the occurrence of any Default or Event of Default. Nothing herein modifies the agreements among the Administrative Agent and the Lenders with respect to the exercise of their respective rights and remedies under the terms of the Credit Agreement.
14. No Waiver of Rights. No waiver shall be deemed to be made by any party hereunder of any of its rights hereunder unless the same shall be in writing signed on behalf of such party.
15. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
16. Entire Agreement. This Agreement sets forth the entire agreement and understanding among the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements, and undertakings of every kind and nature among them with respect to the subject matter hereof.
17. Counterparts. This Agreement may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts and by facsimile signature, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement.
18. Severability Of Provisions; Captions; Attachments. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. The captions to Sections and subsections herein are inserted for convenience only and shall be ignored in interpreting the provisions of this Agreement.
4
19. JURY TRIAL WAIVER. EACH OF THE UNDERSIGNED, TO THE EXTENT PERMITTED BY LAW, HEREBY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG THEM, OR ANY OF THEM, ARISING OUT OF, IN CONNECTION WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION WITH THIS AGREEMENT OR ANY DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO.
[Signature pages follow.]
5
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date and year first above written.
BORROWER:
DIAMOND FOODS, INC.
By:
/s/ Brian J. Driscoll
Name:
Title:
GUARANTORS:
KETTLE FOODS HOLDINGS, INC.
By:
/s/ Brian J. Driscoll
Name:
Title:
KETTLE FOODS, INC.
By:
/s/ Brian J. Driscoll
Name:
Title:
DFKA, LTD.
By:
/s/ Brian J. Driscoll
Name:
Title:
LION/STOVE LUXEMBOURG INVESTMENT 2 S.A.R.L.
By:
/s/ Brian J. Driscoll
Name:
Title:
DFKA HOLDINGS LIMITED (F/K/A LION/STOVE HOLDINGS, LIMITED)
By:
/s/ Brian J. Driscoll
Name:
Title:
WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT
BANK OF AMERICA, N.A.,
as Administrative Agent
By:
/s/ Ken Puro
Name: Ken Puro
Title: Vice President
WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT
BANK OF AMERICA, N.A.,
as L/C Issuer and a Lender
By:
/s/ Thomas E. Brown
Name:
Thomas E. Brown
Title:
Senior Vice President
BANK OF THE WEST,
as a Lender
By:
/s/ Casey Garten
Name:
Casey Garten
Title:
Senior Vice President
BANK OF MONTREAL, as a Lender
By:
/s/ Katherine K. Robinson
Name:
Katherine K. Robinson
Title:
Vice President
CoBank, ACB,
as a Lender
By:
/s/ Ronald P. Seigley
Name:
Ronald P. Seigley
Title:
Senior Vice President
COOPERATIEVE CENTRALE RAIFFEISEN-BOERENLEENBANK B.A. “RABOBANK NEDERLAND”, NEW YORK BRANCH,
as a Lender
By:
/s/ Benjamin Matz
Name:
Benjamin Matz
Title:
Vice President
Barclays Bank PLC as a Lender
By:
/s/ Ronnie Glenn
Name:
Ronnie Glenn
Title:
Vice President
WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT
JPMorgan Chase Bank, N.A
By:
/s/ Alex Rogin
Name:
Alex Rogin
Title:
Vice President
Bank Leumi USA,
as a Lender
By:
/s/ Joung Hee Hong
Name:
Joung Hee Hong
Title:
First Vice President
COMPASS BANK,
as a Lender
By:
/s/ Mark Sunderland
Name:
Mark Sunderland
Title:
Senior Vice President
HSBC Bank USA, N.A.
as a Lender
By:
/s/ Stephen M. Ellsworth
Name:
Stephen M. Ellsworth
Title:
Vice President
FARM CREDIT SERVICES OF AMERICA, PCA,
as a Lender
By:
/s/ Brian Frevert
Name:
Brian Frevert
Title:
Vice President
UNITED FCS, PCA D/B/A FCS COMMERCIAL FINANCE GROUP,
as a Lender
By:
/s/ Daniel J. Best
Name:
Daniel J. Best
Title:
Vice President
WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT
GreenStone Farm Credit Services. ACA/FLCA,
as a Lender
By:
/s/ Jeff Pavlik
Name:
Jeff Pavlik
Title:
Vice President
1st Farm Credit Services, PCA,
as a Lender
By:
/s/ Corey J. Waldinger
Name:
Corey J. Waldinger
Title:
Vice President, Capital Markets
FARM CREDIT WEST, PCA,
as a Lender
By:
/s/ Ben Madonna
Name:
Ben Madonna
Title:
Vice President
Northwest Farm Credit Services,
as a Lender
By:
/s/ Brandon Stacey
Name:
Brandon Stacey
Title:
VP - Credit
WAIVER AND FOURTH AMENDMENT TO CREDIT AGREEMENT
Exhibit 10.25
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
This WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT (this “Agreement”) is made as of August 23, 2012 and entered into by and among Diamond Foods, Inc., (the “ Borrower ”), the Subsidiaries of the Borrower identified on the signature pages hereto as guarantors (collectively, the “ Guarantors ”), Bank of America, N.A., as Administrative Agent (in such capacity, the “ Administrative Agent ”), and the lenders party hereto (collectively, the “ Lenders ”). Capitalized terms used herein and not otherwise defined shall have the meanings ascribed thereto in the Credit Agreement (defined below).
RECITALS
A. The Loan Parties, the Lenders and the Administrative Agent have entered into that certain Credit Agreement dated as of February 25, 2010 (as amended, restated, supplemented or otherwise modified, the “ Credit Agreement ”), pursuant to which the Lenders have agreed to make the Loans and other extensions of credit, all upon the terms and conditions set forth in the Credit Agreement.
B. Kettle Foods, Inc. is party to a lease of certain equipment dated May 1, 2011 (the “Kettle US Lease”). The Kettle US Lease was initially classified as an operating lease for accounting purposes. The Loan Parties and their advisors have since concluded that the Kettle US Lease should have been classified as a capital lease.
C. Certain Events of Default have occurred and, in certain cases, are continuing as a result of the Kettle US Lease. Specifically, Events of Default may exist or have existed as a result of (i) the Loan Parties’ exceeding of the aggregate amount of Indebtedness permitted under Section 7.03(e) of the Credit Agreement from and after May 1, 2011 as a result of the Kettle US Lease, (ii) the Loan Parties’ having made, or been deemed to make, representations regarding the absence of Defaults notwithstanding the foregoing Defaults, and (iii) the Loan Parties’ failure to notify the Administrative Agent and the Lenders of the foregoing Defaults (collectively, the “ Acknowledged Events of Default ”).
D. The Loan Parties have requested that the Required Lenders and the Administrative Agent permanently waive the Acknowledged Events of Default and agree to certain amendments to the Credit Agreement.
E. The Required Lenders and the Administrative Agent are willing to agree to such waiver and amendments subject to the terms and conditions set forth in this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing, the parties agree as follows:
1. Existing Defaults. Each of the Loan Parties acknowledges that the Acknowledged Events of Default have occurred and are continuing.
2. Waiver. Subject to the other terms and conditions of this Agreement, the Administrative Agent and the Required Lenders hereby permanently waive the Acknowledged Events of Default as well as the right to exercise any rights or remedies that the Administrative Agent or any Lender has or may have had exclusively with respect thereto. This waiver is limited solely to the Acknowledged Events of Default, and nothing contained in this Agreement shall be deemed to constitute a waiver of any other rights or remedies the Administrative Agent or any Lender may have under the Credit Agreement or any other Loan Documents or under applicable law. Nothing herein shall modify or affect the obligations of
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the Loan Parties to comply with the terms of the Credit Agreement as amended hereby and the other Loan Documents from and after the date hereof.
3. Amendments to the Credit Agreement. The Administrative Agent, the Required Lenders and the Borrower agree to amend and restate the proviso at the end of Section 7.03(e) with the following:
“; provided, however, that the aggregate amount of all such Indebtedness at any one time outstanding pursuant to this clause (e) shall not exceed $31,000,000, which amount shall be reduced to $25,000,000 from and after December 31, 2013.”
4. Conditions Precedent. This Agreement shall become effective upon the date of satisfaction of each of the following conditions (such date, the “ Fifth Amendment Effective Date ”):
(a) the Administrative Agent shall have received duly executed counterparts of this Agreement from the Borrower, each of the Guarantors and Lenders constituting Required Lenders;
(b) the Administrative Agent shall have received a duly executed, corresponding amendment to and waiver under the Oaktree Loan in form reasonably acceptable to the Administrative Agent; and
(c) the Borrower shall have paid to the Administrative Agent for the pro rata benefit of each of the Lenders that execute this Agreement on or before 3:00 p.m. E.T. on August 22, 2012, an amendment fee in an aggregate amount equal to $100,000.
5. Estoppel, Acknowledgement and Reaffirmation. Each of the Loan Parties acknowledges and confirms that as of August 8, 2012, the aggregate principal amount of the Term Loan Facility was $219,090,909.09, the aggregate principal amount outstanding under the Revolving Credit Facility was $202,796,078.43 (which amount includes the aggregate principal amount of $2,800,000.00 in respect of all Letters of Credit), and the aggregate principal amount of the Swing Line Loan was $0.00, which amounts constitute valid and subsisting obligations of the Loan Parties to the Lenders that are not subject to any credits, offsets, defenses, claims, counterclaims or adjustments of any kind. The Borrower hereby (i) acknowledges its obligations under the Loan Documents, (ii) reaffirms that each of the Liens created and granted pursuant to the Loan Documents is valid, subsisting, perfected and of the priority required pursuant to the Loan Documents and (iii) acknowledges that this Agreement shall in no manner impair or otherwise adversely affect such Liens.
6. Representations and Warranties. Each Loan Party hereby represents and warrants to the Administrative Agent and the Lenders that (a) each Loan Party has the legal power and authority to execute and deliver this Agreement; (b) the officers of each Loan Party executing this Agreement have been duly authorized to execute and deliver the same and bind each Loan Party with respect to the provisions hereof; (c) the execution and delivery hereof by each Loan Party and the performance and observance by each Loan Party of the provisions hereof do not violate or conflict with any organizational document of any Loan Party or any law applicable to any Loan Party or result in a breach of any provision of or constitute a default under any other agreement, instrument or document binding upon or enforceable against any Loan Party; (d) Wimbledon Acquisition LLC and Diamond Foods Brazil Holding LLC are Subsidiaries of the Borrower that do not constitute Material Subsidiaries; (e) except with respect to the Acknowledged Events of Default, no Default or Event of Default exists under the Credit Agreement, nor will any occur immediately after the execution and delivery of this Agreement or by the performance or observance of any provision hereof; (f) no Loan Party is aware of any claim or offset against, or defense or counterclaim to, any Loan Party’s obligations or liabilities under the Credit
2
Agreement or any other Loan Document; (g) this Agreement and each document executed by each Loan Party in connection herewith constitute valid and binding obligations of the applicable Loan Party in every respect, enforceable in accordance with their terms; and (h) all representations and warranties made by such Loan Party and contained in this Agreement or any other Loan Document to which it is a party are true and correct in all material respects (other than such representations and warranties that are untrue or otherwise inaccurate solely and directly as a result of the Acknowledged Events of Default) on and as of the date of this Agreement to the same extent as though made on and as of such date, except to the extent that any thereof expressly relate to an earlier date.
7. Further Assurances. Each of the parties hereto agrees to execute and deliver, or to cause to be executed and delivered, all such instruments as may reasonably be requested to effectuate the intent and purposes, and to carry out the terms, of this Agreement.
8. Release. Each Loan Party hereby waives and releases the Administrative Agent and the Lenders and their respective directors, officers, employees, agents, attorneys, affiliates and subsidiaries (each a “ Releasee ”) from any and all claims, offsets, defenses and counterclaims, known and unknown, that any Loan Party may have as of the date of this Agreement based upon, relating to, or arising out of the Obligations and related transactions in any way. Each Loan Party intends the foregoing release to cover, encompass, release and extinguish, among other things, all claims and matters that might otherwise be reserved by California Civil Code Section 1542, which provides as follows:
“A general release does not extend to claims which the creditor does not know or suspect to exist in his or her favor at the time of executing the release, which if known by him or her must have materially affected his or her settlement with the debtor.”
Notwithstanding the foregoing, this Section 8 shall not constitute a release of the performance by the Administrative Agent or any Lender after the date hereof of their respective express obligations under the Loan Documents.
9. Covenant Not to Sue. Each Loan Party, on behalf of itself and its successors, assigns, and other legal representatives, hereby absolutely, unconditionally and irrevocably, covenants and agrees with and in favor of each Releasee that it will not sue (at law, in equity, in any regulatory proceeding or otherwise) any Releasee on the basis of any claim released, remised and discharged by such Loan Party pursuant to Section 8 above. If any Loan Party or any of its successors, assigns or other legal representations violates the foregoing covenant, such Loan Party, for itself and its successors, assigns and legal representatives, agrees to pay, in addition to such other damages as any Releasee may sustain as a result of such violation, all attorneys’ fees and costs incurred by any Releasee as a result of such violation.
10. Payment of Fees and Expenses. The Loan Parties shall reimburse the Administrative Agent and each Lender for all fees and expenses of the Administrative Agent and each Lender, in accordance with the terms and conditions of the Credit Agreement, (including without limitation, all reasonable fees and expenses of counsel to the Administrative Agent and counsel to each Lender) incurred in connection with the Loan Documents, including without limitation this Agreement.
11. Loan Documents Unaffected. Except as otherwise specifically provided herein, all provisions of the Credit Agreement and the other Loan Documents shall remain in full force and effect and be unaffected hereby. The parties hereto acknowledge and agree that this Agreement constitutes a “Loan Document” under the terms of the Credit Agreement.
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12. No Other Promises or Inducements. There are no promises or inducements that have been made to any party hereto to cause such party to enter into this Agreement other than those that are set forth in this Agreement. This Agreement has been entered into by the Borrower and each Guarantor freely, voluntarily, with full knowledge, and without duress, and, in executing this Agreement, neither the Borrower nor any Guarantor is relying on any other representations, either written or oral, express or implied, made to the Borrower or any Guarantor by the Administrative Agent. The Borrower and each Guarantor agrees that the consideration received by the Borrowers under this Agreement has been actual and adequate.
13. No Course of Dealing. Each Loan Party acknowledges and agrees that, (a) this Agreement is not intended to, nor shall it, establish any course of dealing between the Loan Parties, the Administrative Agent and the Lenders that is inconsistent with the express terms of the Credit Agreement or any other Loan Document, (b) notwithstanding any course of dealing between the Loan Parties, the Administrative Agent and the Lenders prior to the date hereof, except as set forth herein, the Lenders shall not be obligated to make any Loan, except in accordance with the terms and conditions of this Agreement and the Credit Agreement, and (c) except with respect to the Acknowledged Events of Default, neither the Administrative Agent nor any Lender shall be under any obligation to forbear from exercising any of its rights or remedies upon the occurrence of any Default or Event of Default. Nothing herein modifies the agreements among the Administrative Agent and the Lenders with respect to the exercise of their respective rights and remedies under the terms of the Credit Agreement.
14. No Waiver of Rights. No waiver shall be deemed to be made by any party hereunder of any of its rights hereunder unless the same shall be in writing signed on behalf of such party.
15. Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
16. Entire Agreement. This Agreement sets forth the entire agreement and understanding among the parties as to the subject matter hereof and merges and supersedes all prior discussions, agreements, and undertakings of every kind and nature among them with respect to the subject matter hereof.
17. Counterparts. This Agreement may be executed in any number of counterparts, and by the parties hereto on the same or separate counterparts and by facsimile signature, and each such counterpart, when executed and delivered, shall be deemed to be an original, but all such counterparts shall together constitute but one and the same Agreement.
18. Severability Of Provisions; Captions; Attachments. Wherever possible each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law. Any provision of this Agreement that is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof or affecting the validity or enforceability of such provision in any other jurisdiction. The captions to Sections and subsections herein are inserted for convenience only and shall be ignored in interpreting the provisions of this Agreement.
19. JURY TRIAL WAIVER. EACH OF THE UNDERSIGNED, TO THE EXTENT PERMITTED BY LAW, HEREBY WAIVE ANY RIGHT TO HAVE A JURY PARTICIPATE IN RESOLVING ANY DISPUTE WHETHER SOUNDING IN CONTRACT, TORT, OR OTHERWISE, AMONG THEM, OR ANY OF THEM, ARISING OUT OF, IN CONNECTION WITH, RELATED TO OR INCIDENTAL TO THE RELATIONSHIP ESTABLISHED AMONG THEM IN CONNECTION
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WITH THIS AGREEMENT OR ANY DOCUMENT EXECUTED OR DELIVERED IN CONNECTION HEREWITH OR THE TRANSACTIONS RELATED THERETO.
[Signature pages follow.]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the date and year first above written.
BORROWER:
DIAMOND FOODS, INC.
By:
/s/ Brian J. Driscoll
Name:
Title:
GUARANTORS:
KETTLE FOODS HOLDINGS, INC.
By:
/s/ Brian J. Driscoll
Name:
Title:
KETTLE FOODS, INC.
By:
/s/ Brian J. Driscoll
Name:
Title:
DFKA, LTD.
By:
/s/ Brian J. Driscoll
Name:
Title:
LION/STOVE LUXEMBOURG INVESTMENT 2 S.A.R.L.
By:
/s/ Brian J. Driscoll
Name:
Title:
DFKA HOLDINGS LIMITED (F/K/A LION/STOVE HOLDINGS, LIMITED)
By:
/s/ Brian J. Driscoll
Name:
Title:
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
BANK OF AMERICA, N.A.,
as Administrative Agent
By:
/s/ Ken Puro
Name: Ken Puro
Title: Vice President
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
BANK OF AMERICA, N.A.,
as L/C Issuer and a Lender
By:
/s/ Thomas E. Brown
Name: Thomas E. Brown
Title: Senior Vice President
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
1st Farm Credit Services, PCA,
as a Lender
By:
/s/ Corey J. Waldinger
Name:
Corey J. Waldinger
Title:
Vice President, Capital Markets
Bank of the West, A California State Banking Corporation as a Lender
By:
/s/ Dennis Boesen
Name:
Dennis Boesen
Title:
Vice President
Barclays Bank PLC as a Lender
By:
/s/ Ronnie Glenn
Name:
Ronnie Glenn
Title:
Vice President
COMPASS BANK,
as a Lender
By:
/s/ Mark Sunderland
Name:
Mark Sunderland
Title:
Senior Vice President
CoBank, ACB,
as a Lender
By:
/s/ Ronald P. Seigley
Name:
Ronald P. Seigley
Title:
Senior Vice President
FARM CREDIT SERVICES OF AMERICA, PCA,
as a Lender
By:
/s/ Brian Frevert
Name:
Brian Frevert
Title:
Vice President
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
FARM CREDIT WEST, PCA,
as a Lender
By:
/s/ Ben Madonna
Name:
Ben Madonna
Title:
Vice President
GreenStone Farm Credit Services. ACA/FLCA,
as a Lender
By:
/s/ Jeff Pavlik
Name:
Jeff Pavlik
Title:
Vice President
HSBC Bank USA, NATIONAL ASSOCIATION
as a Lender
By:
/s/ Reginald Z. Burt
Name:
Reginald Z. Burt
Title:
Vice President
HSBC Bank USA, National Association
Israel Discount Bank of New York,
as a Lender
By:
/s/ Richard Miller
Name:
Richard Miller
Title:
First Vice President
BANK OF MONTREAL,
as a Lender
By:
/s/ Katherine K. Robinson
Name:
Katherine K. Robinson
Title:
Vice President
JPMORGAN CHASE BANK, N.A,
as a Lender
By:
/s/ Alex Rogin
Name:
Alex Rogin
Title:
Vice President
Key Bank
as a Lender
By:
/s/ Larry T. Burke
Name:
Larry T. Burke
Title:
S.V.P.
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
Northwest Farm Credit Services,
as a Lender
By:
/s/ Brandon Stacey
Name:
Brandon Stacey
Title:
VP - Credit
United FCS, PCA d/b/a FCS Commercial Finance Group,
as a Lender
By:
/s/ Lisa Caswell
Name:
Lisa Caswell
Title:
Vice President
WAIVER AND FIFTH AMENDMENT TO CREDIT AGREEMENT
Exhibit 21.01
Subsidiaries of Diamond Foods, Inc.
Subsidiary
Jurisdiction of Formation
DFKA Acquisition Ltd
United Kingdom
DFKA Holdings Ltd
United Kingdom
DFKA Intermediate Ltd
United Kingdom
DFKA Investment Ltd
United Kingdom
DFKA Ltd
United Kingdom
DFKA UK Holdings Ltd
United Kingdom
Diamond of Europe GmbH
Germany
Kettle Foods Holdings, Inc.
Delaware
Kettle Foods Ltd (UK operating company)
United Kingdom
Kettle Foods, Inc. (US operating company)
Oregon
Lion / Stove Luxembourg Investment 2 Sarl
Luxembourg
Wimbledon Acquisition LLC
Delaware
Diamond Foods Brazil Holding LLC
Delaware
EXHIBIT 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-169766, 333-162222, 333-153672, 333-140066, and 333-126743 on Form S-8, and Registration Statement No. 333-162221 on Form S-3 of our report relating to the consolidated financial statements of Diamond Foods, Inc. dated September 15, 2011, November 13, 2012, as to the effects of the restatement discussed in Note 15 and subsequent events in Note 17 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the restatement discussed in Note 15), and our report relating to the effectiveness of Diamond Foods, Inc.’s internal control over financial reporting dated September 15, 2011, November 13, 2012, as to the effects of the material weaknesses described in Management’s Report on Internal Control Over Financial Reporting (as revised) (which report expresses an adverse opinion on the effectiveness of Diamond Foods, Inc.’s internal control over financial reporting because of material weaknesses), appearing in this Annual Report on Form 10-K/A (Amendment No. 2) of Diamond Foods, Inc. for the year ended July 31, 2011.
/s/ Deloitte & Touche LLP
San Francisco, California
November 13, 2012
Exhibit 31.01
CERTIFICATION FOR FORM 10-K
I, Brian J. Driscoll, certify that:
1. I have reviewed this amendment no. 2 to annual report on Form 10-K/A of Diamond Foods, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By:
/s/ Brian J. Driscoll
Name: Brian J. Driscoll
Title: President and Chief Executive Officer
Date: November 14, 2012
Exhibit 31.02
CERTIFICATION FOR FORM 10-K
I, Michael Murphy, certify that:
1. I have reviewed this amendment no. 2 to annual report on Form 10-K/A of Diamond Foods, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By:
/s/ Michael Murphy
Name: Michael Murphy
Title: Interim Chief Financial Officer
Date: November 14, 2012
Exhibit 32.01
Certification by the Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Brian J. Driscoll, President and Chief Executive Officer of Diamond Foods, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K/A of the Company for the fiscal year ended July 31, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By:
/s/ Brian J. Driscoll
Brian J. Driscoll
President and Chief Executive Officer
Date: November 14, 2012
Certification by the Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Michael Murphy, Interim Chief Financial and Administrative Officer of Diamond Foods, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K/A of the Company for the fiscal year ended July 31, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By:
/s/ Michael Murphy
Michael Murphy
Interim Chief Financial Officer
Date: November 14, 2012
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 2011
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File No.: 000-51439
DIAMOND FOODS, INC.
(Exact name of registrant as specified in its charter)
Delaware
20-2556965
(State of Incorporation)
(IRS Employer Identification No.)
600 Montgomery Street, 13th Floor
San Francisco, California
94111-2702
(Address of Principal Executive Offices)
(Zip Code)
415-445-7444
(Telephone No.)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class:
Name of Exchange on Which Registered:
Common Stock, $0.001 par value
NASDAQ Global Select Market
Series A Junior Preferred Stock Purchase Right
NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to the Form 10-K. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
¨
Non-accelerated filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes ¨ No x
As of January 31, 2011, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,032,155,294 based on the closing sale price as reported on the NASDAQ Stock Market. As of August 31, 2011, there were 22,011,196 shares of common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant’s Proxy Statement for its 2011 Annual Meeting of Stockholders are incorporated by reference into Part III hereof.
TABLE OF CONTENTS
Page
PART I
Item 1.
03
Item 1A.
07
Item 1B.
15
Item 2.
15
Item 3.
15
Item 4.
15
PART II
Item 5.
16
Item 6.
17
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
17
Item 7A.
Quantitative and Qualitative Disclosure About Market Risk
25
Item 8.
Financial Statements and Supplementary Data
26
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
53
Item 9A.
53
Item 9B.
55
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
55
Item 11.
55
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
55
Item 13.
Certain Relationships and Related Transactions, and Director Independence
55
Item 14.
Principal Accounting Fees and Services
55
PART IV
Item 15.
Exhibits and Financial Statement Schedules
55
58
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
The statements contained in this Annual Report regarding our future financial and operating performance and results, business strategy, market prices, future commodity prices, supply of raw materials, plans and forecasts and other statements that are not historical facts are forward-looking statements. We have based these forward-looking statements on our assumptions, expectations, and projections about future events only as of the date of this Annual Report.
Our forward-looking statements include discussions of trends and anticipated developments under “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” We use the words “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,” “seek,” “may” and other similar expressions to identify forward-looking statements that discuss our future expectations, contain projections of our results of operations or financial condition or state other “forward-looking” information. These forward-looking statements also involve many risks and uncertainties that could cause actual results to differ from our expectations in material ways. Please refer to the risks and uncertainties discussed in the section titled “Risk Factors.” You also should carefully consider other cautionary statements elsewhere in this Annual Report and in other documents we file from time to time with the Securities and Exchange Commission (“SEC”), including the Quarterly Reports on Form 10-Q to be filed by us during our 2012 fiscal year. We do not undertake any obligation to update forward-looking statements to reflect events or circumstances occurring after the date of this report.
PART I
Item 1. Business
Overview
Diamond Foods, Inc. was incorporated in Delaware in 2005 as the successor to Diamond Walnut Growers, Inc., a member-owned California agricultural cooperative association. In July 2005, Diamond Walnut Growers, Inc. merged with and into Diamond Foods, Inc., converted from a cooperative association to a Delaware corporation and completed an initial public offering of Diamond Foods’ common stock. The terms “Diamond Foods,” “Diamond,” “Company,” “Registrant,” “we,” “us,” and “our” mean Diamond Foods, Inc. and its subsidiaries unless the context indicates otherwise.
We are an innovative packaged food company focused on building, acquiring and energizing brands. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our 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, we acquired the Pop Secret ® brand of microwave popcorn products, which provided us with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with our existing brands. In March 2010, we 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 our existing portfolio of leading brands in the snack industry. In April 2011, we announced that we entered into a definitive agreement with the Proctor & Gamble Company (“P&G”) to merge P&G’s Pringles business into our Company. We sell our 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.
We have three product lines:
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Snack. We sell snack products under the Emerald®, Pop Secret® and Kettle Brand® brands. Emerald products include roasted, glazed and flavored nuts, trail mixes, seeds, dried fruit and similar offerings packaged in innovative resealable containers. In September 2008, we expanded our snack product line
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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. In March 2010, we complemented our 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. Our 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. We sell 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. We also sell in-shell nuts under the Diamond of California ® brand, primarily during the winter holiday season. These products are typically available in produce sections of grocery stores, mass merchandisers and club stores.
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Non-Retail. Our non-retail nut business includes international markets and North American ingredient customers. We market ingredient nuts internationally under the Diamond of California ® brand to food processors, restaurants, bakeries and food service companies and their suppliers. We also sell in-shell nuts under the Diamond of California ® brand, primarily during the winter holiday season. Diamond’s institutional and industrial customers use our standard or customer-specified products to add flavor and enhance nutritional value and texture in their product offerings.
Our 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
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 our net sales for the years ended July 31, 2011, 2010 and 2009, respectively. Sales to Costco Wholesale Corporation accounted for 11%, 12%, and 13% of our net sales for the years ended July 31, 2011, 2010 and 2009, respectively. No other single customer accounted for more than 10% of our net sales.
Our disclosure reports that we file with the SEC are available free of charge on the Investor Relations page of our website, www.diamondfoods.com.
Marketing
We believe that our marketing efforts are fundamental to the success of our 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. We develop marketing strategies specific to each product line, focusing on building brand awareness and attracting consumers to our offerings. To maintain good customer relationships, these efforts are designed to establish a premium value proposition to minimize the impact on our customers’ private label sales.
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Our 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. Our television advertising airs on national network and cable channels and often are aired during key sporting events suited to our product demographic. We design and provide point-of- purchase displays for use by our retail customers. These displays help to merchandize our products in a consistent, eye-catching manner and make our products available for sale in multiple locations in a store, which increases impulse purchase opportunities. Our public relations and event sponsorship efforts are an important component of our overall marketing and brand awareness strategy. We offer samples and support active lifestyle consumers by sponsoring events such as marathons and other running events. Promotional activities associated with our ingredient/food service products include attending regional and national trade shows, trade publication advertising, and customer-specific marketing efforts. These promotional efforts highlight our commitment to quality assurance, processing and storage capabilities and product customization.
Sales and Distribution
In North America, we market our consumer products through our sales personnel directly to large national grocery, mass merchandiser, club, convenience stores and drug store chains. Our sales department also oversees our broker and distributor network. Our 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, we market our potato chip products through our sales personnel directly to national grocery, co-op and impulse store chains.
We distribute our products from our 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. Our sales administration and logistics departments manage the administration and fulfillment of customer orders. The majority of our products are shipped from our production, warehouse and distribution facilities by contract and common carriers.
Product Development and Production
Our innovation program is broken down into four phases. A cross-functional team leads this process from idea generation through commercialization. Our 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 an 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. We process and package most of our nut products at the Stockton, California, Robertsdale, Alabama, and Fishers, Indiana facilities; our popcorn products are primarily processed and packaged in the Van Buren, Indiana facility under a third-party co-pack arrangement; and our potato chips are processed and packaged at Salem, Oregon, Beloit, Wisconsin, and Norwich, England facilities. Periodically, we may use third parties to process and package a portion of our products when warranted by demand and specific technical requirements.
Competition
We operate in a highly competitive environment. Our products compete against food products sold by many regional and national companies, some of which are larger and have substantially greater resources than we do. We believe that additional competitors will enter the snack product market as large food companies begin to offer products that directly compete with our snack product offerings. We also compete 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 our markets is based on product quality,
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price, brand recognition and loyalty. The combination of the strength of our brands, our product quality and differentiation, as well as our broad channel distribution helps us to compete effectively in each of these categories. Our 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
We obtain our raw materials from domestic and international sources. We currently obtain a majority of our walnuts from growers located in California who have entered into long-term supply contracts with us. Additional walnuts may be purchased from time to time from other California walnut processors. We purchase our other nut requirements from domestic and international processors on the open market. For example, during 2011, all of the walnuts, peanuts and almonds we obtained were grown in the United States, most of our supply of hazelnuts came from the United States and our supply of pecans were sourced from the United States and northern Mexico. With respect to nut types sourced primarily from abroad, we import 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 our nut products, we obtain corn from our primary third party co-packer in the United States, with additional sourcing capabilities, if needed, from Argentina. We obtain potatoes from the United States and the United Kingdom, with additional sourcing capabilities, if needed, from Continental Europe.
We believe that we will be able to procure an adequate supply of raw materials for our 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.
We purchase all other supplies used in our business from third parties, including roasting oils, seasonings, plastic containers, foil bags, labels and other packaging materials. We believe that each of these supplies is available from multiple sources and that our business is not materially dependent upon any individual supplier relationship.
Trademarks and Patents
We market our products primarily under the Diamond®, Emerald®, Pop Secret® and Kettle Brand® brands, each of which are protected with trademark registration with the U.S. Patent and Trademark Office, as well as in various other jurisdictions. Our agreement with Blue Diamond Growers limits our use of the Diamond ® brand in connection with our marketing of snack nut products, but preserves our exclusive use of our Diamond brand for all culinary and in-shell nut products. We also own 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 the acquisition of Kettle Foods related to the manufacturing of chips and tortillas. While these patents, which have various durations, are an important element of our success, our business as a whole is not materially dependent on them. We expect to continue to renew for the foreseeable future those trademarks that are important to our business.
Seasonality
We experience seasonality in our business. Demand for our in-shell and culinary products is highest during the months of October, November and December. We purchase walnuts and pecans between August and February, and process them throughout the year until the following harvest. We purchase 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, our personnel, working capital requirements and inventories peak during the last four months of the calendar year. We experience seasonality in capacity utilization at our Stockton, California and Fishers, Indiana facilities associated with the annual walnut harvest.
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Employees
As of July 31, 2011, we 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. Our labor requirements typically peak during the last quarter of the calendar year, when we generally use temporary labor to supplement our full-time work force. Our production and distribution employees in the Stockton, California plant are members of the International Brotherhood of Teamsters. We consider relations with our employees to be good.
Item 1A. Risk Factors
This report contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from the results discussed or implied in such forward-looking statements due to such risks and uncertainties. Factors that may cause such a difference include, but are not limited to, those discussed below, in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and elsewhere in this report.
Risks Related to Our Business
We may be required to conduct product recalls and concerns with the safety and quality of food products could cause consumers to avoid our products and reduce our sales, net income, and liquidity.
The sale of food products for human consumption involves risk of injury to consumers. We face risks associated with product recalls and liability claims if our products become adulterated, mislabeled or misbranded, or cause injury, illness or death. Our 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 our products were to be tampered with, or otherwise tainted and we were unable to detect it prior to shipment, our products could be subject to a recall. Our ability to sell products could be reduced if governmental agencies conclude that our 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 our products to be unavailable for a period of time and reduce our sales. Adverse publicity could result in a loss of consumer confidence in our products, damage to our reputation and also reduce our sales for an extended period. Product recalls and product liability claims could increase our expenses and have an adverse effect on demand for our products and, consequently, reduce our sales, net income and liquidity.
Government regulations could increase our costs of production and our business could be adversely affected.
As a food company, we are subject to extensive government regulation, including regulation of the manufacturing, importation, processing, product quality, packaging, storage, distribution and labeling of our products. Furthermore, there may be changes in the legal and regulatory environment, and governmental entities or agencies in jurisdictions where we operate may impose new manufacturing, importation, processing, packaging, storage, distribution, labeling or other restrictions, which could increase our costs and affect our 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, we are required to warn about the presence of acrylamide and other potential carcinogens in our products. If consumer concerns about acrylamide increase, demand for affected products could decline and our revenues and business could be harmed. Our manufacturing operations are subject to various national, regional or state and local laws and regulations that require us to obtain licenses relating to customs, health and safety, building and land use and environmental protection. We are 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 our existing facilities, and our expansion into new operations and jurisdictions may require us to obtain new licenses
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and permits, and could require us to change our methods of operations, which could be costly. Failure to comply with applicable laws and regulations could subject us to civil remedies, including fines, injunctions, recalls or seizures, as well as possible criminal sanctions, all of which could have an adverse effect on our business.
A disruption at any of our production facilities would significantly decrease production, which could increase our cost of sales and reduce our net sales and income from operations.
We process and package our products in several domestic and international facilities and also have co-manufacturing agreements and co-pack arrangements with third parties. A temporary or extended interruption in operations at any of our 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 or any other reason, whether or not covered by insurance, could interrupt our manufacturing operations, disrupt communications with our customers and suppliers and cause us to lose sales and write off inventory. Any prolonged disruption in the operations of our facilities would have a significant negative impact on our ability to manufacture and package our products on our own and may cause us to seek additional third-party arrangements, thereby increasing production costs. These third parties may not be as efficient as we are and may not have the capabilities to process and package some of our products, which could adversely affect sales or operating income. Further, current and potential customers might not purchase our products if they perceive our 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 our business and the market price of our common stock.
We intend to review acquisition prospects that we believe could complement our 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 a material adverse effect on our business and the market price of our 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 we have limited prior experience, and potential loss of key employees of acquired organizations. We may be unable to integrate product lines or businesses that we acquire, which could have a material adverse effect on our business and on the market price of our common stock.
If we do not complete our acquisition of Pringles, our business, reputation and financial condition will be adversely affected.
In April 2011, we entered into an agreement to acquire the Pringles snack business from The Procter & Gamble Company (“P&G”). The value of the proposed transaction at April 5, 2011 was approximately $2.35 billion, consisting of $1.5 billion of our common stock and the assumption of $850 million of Pringles debt. The number of shares of our common stock to be issued in the transaction was based on $1.5 billion divided by the average of 60 days of daily volume weighted average prices (“VWAP”), or 60-day VWAP, of our common stock for the period ended March 28, 2011 of $51.47, which amounted to approximately 29.1 million shares of our common stock to be issued to Pringles stockholders in connection with the transaction. As of September 14, 2011, the value of the approximately 29.1 million shares of our common stock to be issued in the transaction was $2.2 billion. The transaction, which we expect to be completed by the end of 2011, is subject to approval by our stockholders and satisfaction of customary closing conditions and regulatory approvals. We cannot provide assurance that the acquisition of Pringles will be completed on schedule, or at all. If the acquisition is not completed, the share price of our common stock may drop to the extent that the market price of our stock reflects an assumption that a transaction will be completed. If we do not complete the Pringles acquisition, we will have incurred substantial expenses and diverted significant management time and resources from our ongoing business, without receiving any of the anticipated benefits of the acquisition. In addition, we could be required to pay P&G a termination fee of approximately $60 million. If the Pringles acquisition is not consummated, our business, reputation and financial condition will be adversely affected.
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If we do complete the Pringles acquisition, we may not realize some or all of its anticipated benefits, and we may encounter future difficulties with the integration of Pringles operations with our business.
Changes in the food industry, including changing dietary trends and consumer preferences and adverse publicity about the health effects of consuming some products, could reduce demand for our products.
Consumer tastes can change rapidly as a result of many factors, including shifting consumer preferences, dietary trends and purchasing patterns. Our growth is largely dependent on the snack market, where consumer preferences are particularly unpredictable. To address consumer preferences, we invest significant resources in research and development of new products. If we fail to anticipate, identify or react to consumer trends, or if new products we develop do not achieve acceptance by retailers or consumers, demand for our products could decline, which would in turn cause our revenue and profitability to be lower.
In addition, some of our 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 our brand’s image or lead to stricter regulations and greater scrutiny of food marketing practices. Increased legal or regulatory restrictions on our advertising, consumer promotions and marketing, or our response to such restrictions, could limit its efforts to maintain, extend and expand its brands. Moreover, adverse publicity about regulatory or legal action against us 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 our operations.
Increased costs associated with product processing and transportation, such as water, electricity, natural gas and fuel costs, could increase our expenses and reduce our profitability.
We require a substantial amount of energy and water to process our products. Transportation costs, including fuel and labor, also represent a significant portion of the cost of our products, because we use third party truck and rail companies to collect our raw materials and deliver our products to our distributors and customers. These costs fluctuate significantly over time due to factors that may be beyond our control, including increased fuel prices, adverse weather conditions or natural disasters, employee strikes and increased export and import restrictions. We may not be able to pass on increased costs of production or transportation to our customers. In addition, from time to time, transportation service providers have a backlog of shipping requests, which could impact our 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 our costs of production and adversely affect our profitability.
Our 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 our products, including 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, our potato chip products are dependent on suppliers providing us with an adequate supply of quality potatoes on a timely basis. The failure of suppliers to meet the specifications, quality standards or delivery schedules could have an adverse effect on our potato chip operations. In particular, a sudden scarcity, substantial price increase, or unavailability of ingredients could adversely affect our 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 our products which might
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dampen growth of consumer demand for our products. If we are unable to increase productivity to offset these increased costs or increase our prices, this could substantially harm our business and results of operations.
If the parties we depend upon for raw material supplies do not perform adequately, our ability to manufacture our products may be impaired, which could harm our business and results of operations.
We rely on third-party suppliers for the raw materials we use to manufacture our products, and our ability to manufacture our products depends on receiving adequate supplies on a timely basis, which may be difficult or uneconomical to procure. If we do not maintain good relationships with suppliers that are important to us or are unable to identify a replacement supplier or develop our own sourcing capabilities, our ability to manufacture our products may be harmed, which would result in interruptions in our business. In addition, even if we are able to find replacement suppliers when needed, we may not be able to enter into agreements with them on favorable terms and conditions, which could increase our costs of production. The occurrence of any of these risks could adversely affect our business and results of operations.
If we are unable to compete effectively in the markets in which we operate, our sales and profitability would be negatively affected.
In general, competition in our 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 the markets in which we operate, as well as challenges in maintaining profit margins. Our 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 we have. The greater scale and resources that may be available to our 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, we must be able to successfully respond to competitive factors, including pricing, promotional incentives and trade terms. We may need to reduce our prices in response to competition and to maintain our market share. Competition and customer pressures may restrict our ability to increase prices in response to commodity or other cost increases. We may also need to increase spending on marketing, advertising and new product innovation to maintain or increase our market share. If we are unable to compete effectively, we could be unable to increase the breadth of the distribution of our products or lose customers or distribution of products, which could have an adverse impact on our sales and profitability.
The loss of any major customer could decrease sales and adversely impact our net income.
We depend on a few significant customers for a large proportion of our net sales. This concentration has become more pronounced with the trend toward consolidation in the retail grocery store industry. Sales to our largest customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 15% of our total net sales for the year ended July 31, 2011. Sales to our second largest customer, Costco Wholesale Corporation, represented 11% of our total net sales for the year ended July 31, 2011. The success of our business is dependent on our 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 our business. The loss of any major customers, or any other significant customer, or a material decrease in their purchases from us, could result in decreased sales and adversely impact our net income.
Our proprietary brands and packaging designs are essential to the value of our business, and the inability to protect, and costs associated with protecting, our intellectual property could harm the value of our brands and adversely affect our business and results of operations.
Our success depends significantly on our know-how and other intellectual property. We rely on a combination of trademarks, service marks, trade secrets, patents, copyrights and similar rights to protect our intellectual property. Our success also depends in large part on our continued ability to use existing trademarks and service marks in order to maintain and increase brand awareness and further develop our brand.
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Our efforts to protect our intellectual property may not be adequate, third parties may misappropriate or infringe on our intellectual property or develop more efficient and advanced technologies, our patents expire over time and third parties may use such previously patented technology to compete against us, and our third-party manufacturers and partners may disclose our trade secrets. From time to time, we engage in litigation to protect our 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 our business and results of operations.
We depend on our key personnel and if we lose the services of any of these individuals, or fail to attract and retain additional key personnel, we may not be able to implement our business strategy or operate our business effectively.
Our future success largely depends on the contributions of our senior management team. We believe that these individuals’ expertise and knowledge about our industry and their respective fields and their relationships with other individuals in our industry are critical factors to our continued growth and success. We do not carry key person insurance. The loss of the services of any member of our senior management team could have an adverse effect on our business and prospects. Our success also depends upon our ability to attract and retain additional qualified sales, marketing and other personnel .
Economic downturns may adversely affect our business, financial condition and results of operations.
Unfavorable economic conditions may negatively affect our business and financial results. These economic conditions could negatively impact consumer demand for our products, the mix of our products’ sales, our ability to collect accounts receivable on a timely basis, the ability of suppliers to provide the materials required in our operations and our ability to obtain financing or to otherwise access the capital markets. Additionally, unfavorable economic conditions could have an impact on our lenders or customers, causing them to fail to meet their obligations to us. The occurrence of any of these risks could adversely affect our business, financial condition and results of operations.
Our business and operations could be negatively impacted if we fail to maintain satisfactory labor relations.
The success of our business depends substantially upon our ability to maintain satisfactory relations with our employees. Our production workforce in one of our facilities belongs to a union and is covered by a collective bargaining agreement. Strikes or work stoppages and interruptions could occur if we are unable to renew this agreement on satisfactory terms. If a work stoppage or slow down were to occur, it could adversely affect our business and disrupt our operations. The terms and conditions of existing or renegotiated agreements also could increase our costs or otherwise affect our ability to fully implement future operational changes to our business.
Our business, financial condition and results of operations could be adversely affected by the political and economic conditions of the countries in which we conduct business and other factors related to our international operations.
We conduct a substantial amount of business with vendors and customers located outside the United States. During 2011, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Japan, Germany, Netherlands, Turkey, China, and Spain accounted for approximately 30.0% of our net sales. With the pending merger with Pringles, we expect a substantial increase in the percentage of our products sold in countries other than the United States. In addition, we expect an increase of our operations and employees that are located outside of the United States. Many factors relating to our international operations and to particular countries in which we operate could have a material negative impact on our 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 our workforce as well as our local suppliers and customers;
•
earthquakes, tsunamis, floods or other major disasters which may limit the supply of nuts or other products that we purchase 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 our operations or property could be subject to nationalization and expropriation;
•
varying practices of the regulatory, tax, judicial and administrative bodies in the jurisdictions where we operate, 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 our business, financial condition and results of operations.
A material impairment in the carrying value of acquired goodwill or other intangible assets could negatively affect our consolidated operating results and net worth.
A significant portion of our 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 our 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 approximately $858.4 million, compared to total assets of approximately $1,288.4 million and total shareholders’ equity of approximately $454.8 million.
Risks Related to Indebtedness
As a result of our acquisition of Kettle Foods, we are highly leveraged, which could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.
In connection with the Kettle Foods acquisition, we entered into a Secured Credit Facility and incurred a substantial amount of additional debt. Our ability to make scheduled payments or to refinance our indebtedness depends on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may not be able to maintain a level of cash flow from operations sufficient to permit us to pay the principal, premium, if any, and interest on our indebtedness. If our cash flows and capital resources are insufficient to fund our debt service
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obligations, we may be forced to reduce or delay capital expenditures, sell assets or operations, seek additional capital or restructure or refinance our indebtedness. We may not be able to take any of these actions, and these actions may not be successful or permit us to meet our scheduled debt service obligations and these actions may not be permitted under the terms of our existing or future debt agreements. In the absence of such operating results and resources, we could face liquidity problems and might be required to dispose of material assets or operations to meet our debt service and other obligations. Since our debt agreements restrict our ability to dispose of assets, we may not be able to consummate such dispositions, and this could result in our inability to meet our debt service obligations.
This high degree of leverage could have other important consequences, including:
•
increasing our vulnerability to adverse economic, industry or competitive developments;
•
exposing us to the risk of increased interest rates because our secured credit facility is at variable rates of interest;
•
making it more difficult to satisfy obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including restrictive covenants and borrowing conditions, could result in an event of default under the agreements governing the indebtedness;
•
restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;
•
limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; and
•
placing us at a competitive disadvantage compared to competitors who are less highly leveraged and who therefore, may be able to take advantage of opportunities that our leverage prevents us from pursuing.
Despite our high initial indebtedness level, we may be able to incur significant additional amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness.
We may be able to incur substantial additional indebtedness in the future. Although existing agreements governing our 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 our and our subsidiaries’ existing debt levels, the related risks that we now face would increase.
The debt agreements contain restrictions that may limit our flexibility in operating our business.
Our secured credit facility contains various covenants that may limit our ability to engage in specified types of transactions. These covenants limit our 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 our assets; and
•
enter into certain transactions with our affiliates.
A breach of any of these covenants could result in a default of the secured credit facility agreement. Upon the occurrence of an event of default under the secured credit facility, the lenders could elect to declare all
13
amounts outstanding under the secured credit facility to be immediately due and payable and terminate all commitments to extend further credit. If we were unable to repay those amounts, the lenders under the secured credit facility could proceed against the collateral granted to them to secure that indebtedness.
Risks Related to Our Common Stock
The market price of our common stock is volatile and may result in investors selling shares of our common stock at a loss.
The trading price of our common stock is volatile and subject to fluctuations in price in response to various factors, many of which are beyond our control, including:
•
our operating performance and the performance of other similar companies;
•
changes in our revenues or earnings estimates or recommendations by any securities analysts who may decide to follow our stock or our industry;
•
publication of research reports about us or our industry by any securities analysts who may decide to follow our stock or our industry;
•
speculation in the press or investment community;
•
terrorist acts; and
•
general market conditions, including economic factors unrelated to our 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 us could result in substantial costs and divert our management’s attention and resources.
Our ability to raise capital in the future may be limited, and our failure to raise capital when needed could prevent us from executing our growth strategy.
The timing and amount of our working capital and capital expenditure requirements may vary significantly depending on many factors, including:
•
market acceptance of our 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 our capital resources are not sufficient to satisfy our liquidity needs, we 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 our stockholders. Additional debt would result in increased expenses and could result in covenants that would restrict our operations. With the exception of the secured credit facility, we have not made arrangements to obtain additional financing. We may not be able to obtain additional financing, if required, in amounts or on terms acceptable to us, or at all.
Anti-takeover provisions could make it more difficult for a third party to acquire us.
We have adopted a stockholder rights plan and will issue one preferred stock purchase right with each share of our common stock that we issue. Each right will entitle the holder to purchase one one-hundredth of a share of our Series A Junior Participating Preferred Stock. Under certain circumstances, if a person or group acquires 15% or more of our 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 our common stock or of any company into which we are merged having a value of $120.00. The rights expire in March 2015 unless
14
extended by our board of directors. Because the rights may substantially dilute the stock ownership of a person or group attempting to acquire us without the approval of our board of directors, our rights plan could make it more difficult for a third party to acquire us (or a significant percentage of our outstanding capital stock) without first negotiating with our board of directors regarding such acquisition.
In addition, our 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 our 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 our 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 our management, which could have an adverse effect on the market price of our stock. Further, we are 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 us 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.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We own our 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. We 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. We lease 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 us. 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 are non-cancellable operating leases which expire in 2015 and 2019. We own the Van Buren facility, in which a co-packer manufactures our popcorn products, which is approximately 40,000 square feet and is located on the co-packer’s manufacturing campus. Finally, we lease warehousing facilities in California, Georgia, Illinois, Indiana, New Jersey, Oregon, Wisconsin, Canada and the United Kingdom.
We believe that our facilities are generally well maintained and are in good operating condition, and will be adequate for our needs for the foreseeable future.
Item 3. Legal Proceedings
We are involved in various legal actions in the ordinary course of our business. Such matters are subject to many uncertainties that make their outcomes unpredictable. However, in our opinion, resolution of all legal matters is not expected to have an adverse effect on our financial condition, operating results or cash flows.
Item 4. Removed and Reserved
15
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock began trading on the NASDAQ National Market on July 21, 2005 under the symbol “DMND.” Prior to that date, there was not a public market for our common stock. On July 3, 2006, our common stock began to trade as a Global Select security on the NASDAQ Stock Market LLC. The following table sets forth for the periods indicated the high and low sales prices of our common stock on the NASDAQ Stock Market and quarterly cash dividends declared on common shares:
High
Low
Dividends
Declared
Year Ended July 31, 2011:
Fourth Quarter
$
79.37
$
62.78
$
0.045
Third Quarter
$
65.92
$
48.01
$
0.045
Second Quarter
$
55.97
$
42.96
$
0.045
First Quarter
$
45.24
$
37.91
$
0.045
Year Ended July 31, 2010:
Fourth Quarter
$
46.67
$
36.72
$
0.045
Third Quarter
$
46.36
$
34.27
$
0.045
Second Quarter
$
37.24
$
29.10
$
0.045
First Quarter
$
34.07
$
26.21
$
0.045
Certain of our credit agreements specify limitations on the amount of dividends that may be declared or paid in a fiscal year. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
As of August 31, 2011, we had approximately 1,011 holders of record of our common stock, although we believe that there are a larger number of beneficial owners.
The following are details of repurchases of common stock during the three months ended July 31, 2011:
Period
Total number
of shares
repurchased (1)
Average price
paid per
share
Total number of
shares repurchased
as part of publicly
announced plans
Approximate Dollar
value of shares
that may yet be
purchased under
the plans
Repurchases from May 1 – May 31, 2011
—
$
—
—
$
—
Repurchases from June 1 – June 30, 2011
1,258
$
72.64
—
$
—
Repurchases from July 1 – July 31, 2011
—
$
—
—
$
—
Total
1,258
$
72.64
—
$
—
(1)
All of the shares in the table above were originally granted to employees as restricted stock pursuant to our 2005 Equity Incentive Plan (“EIP”). Pursuant to the EIP, all of the shares reflected above were relinquished by employees in exchange for Diamond’s agreement to pay federal and state withholding obligations resulting from the vesting of the restricted stock. The repurchases reflected above were not made pursuant to a publicly announced plan.
16
Item 6. Selected Financial Data
The following table sets forth selected financial data for each of the fiscal years in the five year period ended July 31, 2011:
Year Ended July 31,
2011
2010
2009
2008
2007
(In thousands, except per share information)
Statements of operations:
Net sales
$
965,922
$
680,162
$
570,940
$
531,492
$
522,585
Cost of sales
714,775
519,161
435,344
443,490
443,945
Gross profit
251,147
161,001
135,596
88,002
78,640
Operating expenses:
Selling, general and administrative
96,960
64,301
60,971
43,613
42,541
Advertising
44,415
32,962
28,785
20,508
20,445
Loss on termination of defined benefit plan
—
—
—
—
3,054
Acquisition and integration related expenses
16,792
11,508
—
—
(15
)
Total operating expenses
158,167
108,771
89,756
64,121
66,025
Income from operations
92,980
52,230
45,840
23,881
12,615
Interest expense, net
23,840
10,180
6,255
1,040
1,291
Other expenses, net
—
1,849
898
—
98
Income before income taxes
69,140
40,201
38,687
22,841
11,226
Income taxes
18,929
13,990
14,944
8,085
2,793
Net income
$
50,211
$
26,211
$
23,743
$
14,756
$
8,433
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
Shares used to compute earnings per share
Basic
21,577
18,313
16,073
15,767
15,359
Diluted
22,242
18,843
16,391
15,825
15,359
Dividends declared per share
$
0.18
$
0.18
$
0.18
$
0.18
$
0.12
Year Ended July 31,
2011
2010
2009
2008
2007
(In thousands)
Balance sheet data:
Cash and cash equivalents
$
3,112
$
5,642
$
24,802
$
74,279
$
33,755
Working capital
90,279
72,168
51,422
121,516
100,527
Total assets
1,288,395
1,225,872
394,892
273,267
236,403
Total debt, including short-term debt
531,701
556,100
115,085
20,204
20,507
Total stockholders’ equity
454,795
379,943
173,341
146,223
125,341
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Summary
We are an innovative packaged food company focused on building, acquiring and energizing brands. Our company was founded in 1912 and has a proven track record of growth, which is reflected in the growth of our revenues from approximately $200 million in fiscal year 2000 to approximately $966 million in fiscal year 2011. We specialize in processing, marketing and distributing snack products and culinary, in-shell and ingredient nuts. In 2004, we complemented our 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, we acquired the Pop
17
Secret® brand of microwave popcorn products, which provided us with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with our existing brands. In March 2010, we 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 our existing portfolio of leading brands in the snack industry. In April 2011, we announced that we entered into a definitive agreement with the P&G to merge P&G’s Pringles business into our Company. We sell our 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.
Our business is seasonal. Demand for nut products, particularly in-shell nuts and to a lesser extent culinary nuts, is highest during the months of October, November and December. We receive walnuts during the period from September to November and process them throughout the year. As a result of this seasonality, our personnel and working capital requirements and walnut inventories peak during the last quarter of the calendar year. This seasonality also impacts capacity utilization at our facilities, which routinely operate at capacity for the last four months of the calendar year. Generally, we receive and pay for approximately 50% of the corn for popcorn in November, and approximately 50% in April. Accordingly, the working capital requirement of our popcorn and potato chip product lines is less seasonal than that of the tree nut product lines.
Critical Accounting Policies
Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of our assets, liabilities, revenues and expenses. We base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. Our critical accounting policies are set forth below.
Revenue Recognition. We recognize revenue when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the buyer (based upon terms of shipment), price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, introductory or slotting payments, coupons, promotion and marketing allowances. The amount we accrue for promotion is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer and consumer participation, and sales and payment trends with similar previously offered programs. Customers have the right to return certain products. Product returns are estimated based upon historical results and are reflected as a reduction in sales.
Inventories. All inventories are accounted for on a lower of cost (first-in, first-out) or market basis.
We have entered into long-term Walnut Purchase Agreements with growers, under which they deliver their entire walnut crop to us during the Fall harvest season and we determine the minimum price for this inventory by March 31, or later, of the following calendar year. The final price is determined no later than the end of the Company’s fiscal year. This purchase price will be a price determined by us in good faith, taking into account market conditions, crop size, quality, and nut varieties, among other relevant factors. Since the ultimate price to be paid will be determined subsequent to receiving the walnut crop, we must make an estimate of price for interim financial statements. Those estimates may subsequently change and the effect of the change could be significant.
Valuation of Long-lived and Intangible Assets and Goodwill. We periodically review long-lived assets and certain identifiable intangible assets for impairment in accordance with Accounting Standards Codification (“ASC”) 360, “ Property, Plant, and Equipment .” Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350, “ Intangibles — Goodwill and Other, ” or more often if there are indications of possible impairment.
18
The analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized, and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets exceeds their carrying value based on our current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in our business or for other reasons could result in the recognition of impairment losses.
For assets to be held and used, including acquired intangible assets subject to amortization, we initiate our review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process.
For brand intangible assets not subject to amortization, we test for impairment annually, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In testing brand intangibles for impairment, we compare the fair value with the carrying value. The determination of fair value is based on a discounted cash flow analysis, using inputs such as forecasted future revenues attributable to the brand, assumed royalty rates, and a risk-adjusted discount rate that approximates our estimated cost of capital. If the carrying value exceeds the estimated fair value, the brand intangible asset is considered impaired, and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of the brand intangible asset.
We perform our annual goodwill impairment test required by ASC 350 as of June 30th of each year. In testing goodwill for impairment, we initially compare the fair value of the Company’s single reporting unit with the net book value of the Company since it represents the carrying value of the reporting unit. We have one operating and reportable segment. If the fair value of the reporting unit is less than the carrying value of the reporting unit, we perform an additional step to determine the implied fair value of goodwill. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all assets and liabilities and then computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, the excess represents the amount of goodwill impairment. Accordingly, we would recognize an impairment loss in the amount of such excess. We also consider the estimated fair value of our reporting unit in relation to the Company’s market capitalization.
We cannot guarantee that a material impairment charge will not be recorded in the future.
Employee Benefits. We incur various employment-related benefit costs with respect to qualified and nonqualified pension and deferred compensation plans. Assumptions are made related to discount rates used to value certain liabilities, assumed rates of return on assets in the plans, compensation increases, employee turnover and mortality rates. Different assumptions could result in the recognition of differing amounts of expense over different periods of time.
Income Taxes. We account for income taxes in accordance with ASC 740, “Income Taxes.” This guidance requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at current tax rates. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both our historical and anticipated earnings levels and is reviewed periodically to determine if any additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered.
19
There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which we operate. We may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. We evaluate our tax positions and establish liabilities in accordance with the guidance on uncertainty in income taxes. We review these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjust them accordingly.
Accounting for Stock-Based Compensation. We account for stock-based compensation arrangements, including stock option grants and restricted stock awards, in accordance with the provisions of ASC 718, “ Compensation — Stock Compensation .” Under this guidance, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. We use the Black-Scholes option pricing model to determine the fair value of stock options at the date of grant. This model requires us to make assumptions such as expected term, volatility, and forfeiture rates that determine the stock options’ fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results are not consistent with our assumptions and judgments used in estimating these factors, we may be required to increase or decrease compensation expense, which could be material to our results of operations.
Results of Operations
2011 Compared to 2010
Net sales were $965.9 million and $680.2 million for the years ended July 31, 2011 and 2010. The increase in net sales was primarily due to increased snack sales (including Kettle Foods). The impact of foreign exchange on our net sales was immaterial for the year ended July 31, 2011.
Net sales by channel (in thousands):
Year Ended July 31,
% Change from
2010 to 2011
2011
2010
Retail (1)
$
816,071
$
570,416
43.1
%
International Non-Retail
119,017
69,206
72.0
%
North American Ingredient/Food Service and Other
30,834
40,540
-23.9
%
Total Net Sales
$
965,922
$
680,162
42.0
%
(1)
Retail represents sales of our culinary, snack and in-shell products.
The increase in Retail sales for the year ended July 31, 2011 resulted from higher sales of snack products (including Kettle Foods), which increased by 72.1%. Retail sales for the prior year only included Kettle Foods sales for four months. International non-retail sales increased for the year ended July 31, 2011 mainly as a result of a record walnut crop, which after servicing retail customer demand was primarily shipped to international markets. North American ingredient/food service and other sales decreased primarily because the United States Department of Agriculture school lunch program was not offered in fiscal year 2011.
Gross profit. Gross profit as a percentage of net sales was 26.0% and 23.7% for the years ended July 31, 2011 and 2010. Gross profit as a percentage of net sales increased mainly due to retail sales mix, greater scale in snacks and manufacturing efficiencies, which offset some commodity price pressure and increased slotting and promotion for Emerald Breakfast on the go!.
Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation and facility costs. Selling, general and administrative expenses were $97.0
20
million and $64.3 million, and 10.0% and 9.5% as a percentage of net sales, for the years ended July 31, 2011 and 2010. The increase was primarily due to the addition of Kettle Foods, including the associated intangible amortization for customer relationships, as well as workforce additions.
Advertising. Advertising expenses were $44.4 million and $33.0 million, and 4.6% and 4.8% as a percentage of net sales, for the years ended July 31, 2011 and 2010. The increases in advertising expenses were primarily due to increased media spending associated with the Emerald Breakfast on the go! launch, as well as incremental Kettle Foods brand support.
Acquisition and integration related expenses. Acquisition related expenses associated with the pending Pringles merger and integration related expenses associated with Kettle Foods were $16.8 million for the year ended July 31, 2011. Acquisition and integration related expenses associated with Kettle Foods were $11.5 million for the year ended July 31, 2010. Additional acquisition and integration related expenses related to Pringles are expected throughout fiscal year 2012.
Interest expense, net. Net interest expense was $23.8 million and $10.2 million, and 2.5% and 1.5% as a percentage of net sales, for the years ended July 31, 2011 and 2010. The increase was primarily attributable to the borrowings used to fund the Kettle Foods acquisition.
Other expense, net. There was no net other expense for the year ended July 31, 2011. Net other expense was $1.8 million for the year ended July 31, 2010. The expense represented a loss on debt extinguishment when we replaced our existing credit facility with a new secured credit facility to fund the Kettle Foods acquisition.
Income taxes. The combined effective federal and state tax rate was 27.4% and 34.8% for the years ended July 31, 2011 and 2010. The lower effective tax rate for the year ended July 31, 2011 primarily reflects the influence from certain tax rate jurisdictions where we have Kettle Foods operations. A reduction in the corporate tax rate in the United Kingdom also contributed to the decrease.
2010 Compared to 2009
Net sales were $680.2 million and $570.9 million for the years ended July 31, 2010 and 2009. The increase in net sales was primarily due to increased snack sales (including Kettle Foods). This was offset in part by lower culinary sales.
Our net sales were as follows (in thousands):
Year Ended July 31,
% Change from
2009 to 2010
2010
2009
Retail (1)
$
570,416
$
465,126
22.6
%
International Non-Retail
69,206
68,890
0.5
%
North American Ingredient/Food Service and Other
40,540
36,924
9.8
%
Total Net Sales
$
680,162
$
570,940
19.1
%
(1)
Retail represents sales of our culinary, snack and in-shell products.
The increase in retail sales for the year ended July 31, 2010 resulted from higher sales of snack products (including Kettle Foods), which increased by 70.2%. This was offset in part by lower sales of culinary products as a result of lower pricing and elimination of low value added SKUs. North American ingredient/food service and other sales increased primarily as a result of higher volume and higher pricing.
Gross profit. Gross profit as a percentage of net sales was 23.7% for the years ended July 31, 2010 and 2009.
21
Selling, general and administrative. Selling, general and administrative expenses consist principally of salaries and benefits for sales and administrative personnel, brokerage, professional services, travel, non-manufacturing depreciation and facility costs. Selling, general and administrative expenses were $64.3 million and $61.0 million, and 9.5% and 10.7% as a percentage of net sales, for the years ended July 31, 2010 and 2009. The improvement as a percentage of net sales was primarily driven by greater scale in snack sales and higher costs during fiscal year 2009 associated with the Pop Secret acquisition.
Advertising. Advertising expense was $33.0 million and $28.8 million, and 4.8% and 5.0% as a percentage of net sales, for the years ended July 31, 2010 and 2009. The increase in advertising was primarily due to increased media spending associated with the snack brands (including Kettle Foods).
Acquisition and integration related expenses. Acquisition and integration related expenses associated with Kettle Foods were $11.5 million for the year ended July 31, 2010.
Interest expense, net. Net interest expense was $10.2 million and $6.3 million, and 1.5% and 1.1% as a percentage of net sales, for the years ended July 31, 2010 and 2009. For the year ended July 31, 2010, the increase was primarily attributable to the borrowings used to fund the Kettle Foods acquisition.
Other expense, net. Net other expense was $1.8 million for the year ended July 31, 2010. The expense represented a loss on debt extinguishment when we replaced our existing credit facility with a new secured credit facility to fund the Kettle Foods acquisition. Net other expense was $0.9 million for the year ended July 31, 2009 reflecting a $2.6 million payment on the early termination of debt, partially offset by a gain on the sale of emission reduction credits of $1.7 million.
Income taxes. The combined effective federal and state tax rate for the year ended July 31, 2010 was 34.8%. The lower effective tax rate for the year ended July 31, 2010 primarily reflects the influence from certain tax rate jurisdictions where we have Kettle Foods operations. For the year ended July 31, 2009, the combined effective federal and state tax rate for the year ended July 31, 2009 was 38.6%, and included the effect of discrete tax items, primarily the recognition of certain state tax credits.
Pending Pringles Merger
On April 5, 2011, we entered into a definitive agreement with The Procter & Gamble Company (“P&G”) to merge P&G’s Pringles business into our Company. The value of the proposed transaction at April 5, 2011 was approximately $2.35 billion, consisting of $1.5 billion of our common stock and the assumption of $850 million of Pringles debt. The number of shares of our common stock to be issued in the transaction was based on $1.5 billion divided by the average of 60 days of daily volume weighted average prices, or 60-day VWAP, of our common stock for the period ended March 28, 2011 of $51.47, which amounted to approximately 29.1 million shares of our common stock to be issued to Pringles stockholders in connection with the transaction. As of September 14, 2011, the value of the approximately 29.1 million shares of our common stock to be issued in the transaction was $2.2 billion. The parties have also agreed to a collar mechanism that would adjust the amount of debt assumed by us based upon our price during a trading period prior to the commencement of the Exchange Offer. The amount of debt to be assumed by us could increase by up to $200 million or decrease by up to $150 million based on this adjustment mechanism. The equity portion of the purchase price is represented by approximately 29.1 million shares.
The transaction, which is expected to be completed by the end of calendar 2011, is subject to approval by our stockholders and satisfaction of customary closing conditions and regulatory approvals. We expect to incur one-time costs of approximately $150 million, net of income taxes, related to the transaction over the next two years. P&G will also provide us with transition services for up to 12 months after closing. The merger will be accounted for as a purchase business combination and for accounting purposes, we will be treated as the acquiring entity.
22
Liquidity and Capital Resources
Our liquidity is dependent upon funds generated from operations and external sources of financing.
During the year ended July 31, 2011, cash provided by operating activities was $65.7 million compared to $1.6 million of cash used in operating activities during the year ended July 31, 2010. The increase in cash provided by operating activities was primarily due to improved profitability and inventory turnover. Cash used in investing activities was $43.2 million in fiscal year 2011 compared to $626.6 million in fiscal year 2010. The higher cash used in investing activities for the year ended July 31, 2010 was mainly due to the acquisition of Kettle Foods. Cash used in financing activities was $25.1 million in fiscal year 2011 compared to $608.9 million provided by financing activities in fiscal year 2010. The change from prior year was primarily attributable to long-term borrowings used to fund the Kettle Foods acquisition.
Cash used in operating activities during the year ended July 31, 2010 was $1.6 million compared to $53.4 million provided by operating activities during the year ended July 31, 2009. The decrease in cash from operating activities was primarily due to increased investments in inventory and the timing of accounts payable payments between years. Cash used in investing activities was $626.6 million in fiscal year 2010 compared to $198.1 million in fiscal year 2009. This increase was mainly due to the acquisition of Kettle Foods for approximately $616 million. Cash provided by financing activities was $608.9 million in fiscal year 2010 compared to $95.2 million in fiscal year 2009. The increase was primarily attributable to long-term borrowings used to fund the Kettle Foods acquisition and to our equity offering.
In February 2010, we entered into an agreement to replace our existing credit facility with a new five-year $600 million secured credit facility (the “Secured Credit Facility”) with a syndicate of lenders. We used the borrowings under the Secured Credit Facility to fund a portion of the Kettle Foods acquisition and to fund ongoing operations.
Our Secured Credit Facility consists of a $235 million revolving credit facility, of which $161 million was outstanding as of July 31, 2011, and a $400 million term loan facility, of which $350 million was outstanding as of July 31, 2011. Scheduled principal payments on the term loan are $40 million for fiscal year 2012 and each of the succeeding two years (due quarterly), and $10 million for each of the first two quarters in fiscal year 2015, with the remaining principal balance and any outstanding loans under the revolving credit facility to be repaid on the fifth anniversary of initial funding. In March 2011, the syndicate of lenders approved our request for an increase in our revolving credit facility by $35 million from $200 million, under the same terms, to fund our plant expansion and working capital requirements. In August 2011, the syndicate of lenders approved our request for an increase in our revolving credit facility by $50 million from $235 million to $285 million, under the same terms. Borrowings under the Secured Credit Facility will bear interest, at our option, at either the agent’s base rate or the London Interbank Offered Rate (“LIBOR”), plus a margin for LIBOR loans ranging from 2.25% to 3.50%, based on the consolidated leverage ratio which is defined as the ratio of total debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). Substantially all of our tangible and intangible assets are considered collateral security under the Secured Credit Facility.
The Secured Credit Facility also provides for customary affirmative and negative covenants, including a debt to EBITDA ratio and minimum fixed charge coverage ratio. As of July 31, 2011, we were in compliance with all applicable financial covenants under the Secured Credit Facility.
In March 2010, we issued 5,175,000 shares of common stock priced at $37.00 per share. After deducting the underwriting discount and other related expenses, we received total net proceeds from the sale of our common stock of approximately $179.7 million. The proceeds from the equity offering were used to fund a portion of the purchase price for the Kettle Foods acquisition.
23
On December 20, 2010, Kettle Foods obtained, and we guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $20.4 million was outstanding as of July 31, 2011. The principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan will be used to purchase equipment for our Beloit, Wisconsin plant expansion. Borrowed funds have been placed in an interest-bearing escrow account and will be made available as expenditures are approved for reimbursement. As the cash will be used to purchase non-current assets, such restricted cash has been classified as non-current on the balance sheet. The Guaranteed Loan also provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility. As of July 31, 2011, we were in compliance with all applicable financial covenants under the Guaranteed Loan.
Working capital and stockholders’ equity were $90.3 million and $454.8 million at July 31, 2011 compared to $72.2 million and $379.9 million at July 31, 2010. The increase in working capital was due to an increase in receivables, associated with higher sales levels, offset by an increase in accounts payable and accrued liabilities related to higher production and sales levels.
We believe our cash and cash equivalents and cash expected to be provided from our operations, in addition to borrowings available under our Secured Credit Facility and restricted cash provided by the Guaranteed Loan, will be sufficient to fund our contractual commitments, repay obligations as required, and fund our operational requirements for at least the next twelve months.
Contractual Obligations and Commitments
Contractual obligations and commitments at July 31, 2011 were as follows (in millions):
Payments Due by Period
Total
Less than
1 Year
1-3
Years
3-5
Years
More than
5 Years
Revolving line of credit
$
161.3
$
—
$
—
$
—
$
161.3
Long-term obligations
370.4
41.7
83.7
234.1
10.9
Interest on long-term obligations (a)
43.9
13.3
22.0
7.4
1.2
Operating leases
22.1
6.0
7.2
4.8
4.1
Purchase commitments (b)
89.7
83.6
6.1
—
—
Pension liability
26.9
0.6
5.1
1.5
19.7
Long-term deferred tax liabilities (c)
131.9
—
—
—
131.9
Other long-term liabilities (d)
11.7
0.8
0.9
0.4
9.6
Total
$
857.9
$
146.0
$
125.0
$
248.2
$
338.7
(a)
Amounts represent the expected cash interest payments on our long-term debt. Interest on our variable rate debt was forecasted using a LIBOR forward curve analysis as of July 31, 2011.
(b)
Commitments to purchase inventory and equipment. Excludes purchase commitments under Walnut Purchase Agreements due to uncertainty of pricing and quantity.
(c)
Primarily relates to intangible assets of Kettle Foods.
(d)
Excludes $0.7 million in deferred rent liabilities. Additionally, the liability for uncertain tax positions ($9.4 million at July 31, 2011, excluding associated interest and penalties) has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined.
Off-Balance Sheet Arrangements
As of July 31, 2011, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
24
Effects of Inflation
The most significant inflationary factor affecting our net sales and cost of sales is the change in market prices for purchased nuts, corn, potatoes, oils and other ingredients. The prices of these commodities are affected by world market conditions and are volatile in response to supply and demand, as well as political and economic events. The price fluctuations of these commodities do not necessarily correlate with the general inflation rate. Inflation is likely to however, adversely affect operating costs such as labor, energy and materials.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, “ Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations .” This guidance was issued to clarify that pro forma disclosures should be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The disclosures should also be accompanied by a narrative description of the nature and amount of material, nonrecurring pro forma adjustments. This new guidance is effective prospectively for business combinations consummated on or after the annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs .” This guidance changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This guidance requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income (OCI) in either a single continuous statement of comprehensive income or in two separate consecutive statements. The guidance does not change the components of OCI or when an item of OCI must be reclassified to net income, or the earnings per share calculation. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. We do not believe that the adoption of this guidance will have a material impact on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk. Our principal market risks are exposure to changes in commodity prices, interest rates on borrowings and foreign currency exchange rates.
Commodities Risk. The availability, size, quality, and cost of raw materials for the production of our products, including walnuts, pecans, peanuts, cashews, almonds, other nuts, corn, potatoes and oils are subject to risks inherent to farming, such as crop size and yield fluctuations caused by poor weather and growing conditions, pest and disease problems, and other factors beyond our control. Additionally, our supply of raw materials could be reduced if governmental agencies conclude that our 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.
Interest Rate Risk. We have established a formal investment policy to help minimize the exposure to our cash equivalents for changes in interest rates, which are primarily affected by credit quality and the type of cash equivalents we hold. These guidelines focus on managing liquidity and preserving principal. Our cash
25
equivalents are primarily held for liquidity purposes and are comprised of high quality investments with maturities of three months or less when purchased. With such a short maturity, our portfolio’s market value is relatively insensitive to interest rate changes.
The sensitivity of our cash and cash equivalent portfolio as of July 31, 2011 to a 100 basis point increase or decrease in interest rates would be a decrease or increase of pretax income of nil.
Interest rate volatility could also materially affect the fair value of our fixed rate debt, as well as the interest rate we pay on future borrowings under our lines of credit and revolver. The interest rate we pay on future borrowings under our lines of credit and revolver are dependent on the LIBOR.
Foreign Currency Exchange Risk. We have operations outside the U.S. with foreign currency denominated assets and liabilities, primarily in the United Kingdom. Because we have foreign currency denominated assets and liabilities, financial exposure may result, primarily from the timing of transactions and the movement of exchange rates.
The foreign currency balance sheet exposures as of July 31, 2011 are not expected to result in a significant impact on future earnings or cash flows. However, in July 2010, we entered into a series of foreign exchange collars to hedge a portion of our expected Canadian Dollar denominated receivables of Kettle Foods between September 2010 and January 2011, which were subsequently extended through July 2011. In September 2010, we entered into a series of foreign exchange participating forwards to hedge a portion of our expected Canadian Dollar denominated receivables of Emerald between November 2010 and August 2011.
Our sales of finished goods and purchases of raw materials and supplies from outside the U.S. are generally denominated in U.S. dollars. Thus, certain revenues and expenses have been, and are expected to be, subject to the effect of foreign currency fluctuations, and these fluctuations may have an impact on operating results.
Item 8. Financial Statements and Supplementary Data
26
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Diamond Foods, Inc.
San Francisco, California
We have audited the accompanying consolidated balance sheets of Diamond Foods, Inc. and subsidiaries (the “Company”) as of July 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2011. We also have audited the Company’s internal control over financial reporting as of July 31, 2011, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Diamond Foods, Inc. and subsidiaries as of July 31, 2011 and 2010, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2011, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of July 31, 2011, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Deloitte & Touche LLP
San Francisco, California
September 15, 2011
27
DIAMOND FOODS, INC.
CONSOLIDATED BALANCE SHEETS
July 31,
2011
2010
(In thousands, except share
and per share information)
ASSETS
Current assets:
Cash and cash equivalents
$
3,112
$
5,642
Trade receivables, net
98,218
65,553
Inventories
145,575
143,405
Deferred income taxes
13,249
10,497
Prepaid income taxes
2,783
9,225
Prepaid expenses and other current assets
13,102
5,767
Total current assets
276,039
240,089
Restricted cash
15,795
—
Property, plant and equipment, net
127,407
117,816
Deferred income taxes
3,870
13,625
Goodwill
407,587
396,788
Other intangible assets, net
450,855
449,018
Other long-term assets
6,842
8,536
Total assets
$
1,288,395
$
1,225,872
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt
$
41,700
$
40,000
Accounts payable and accrued liabilities
144,060
127,921
Total current liabilities
185,760
167,921
Long-term obligations
490,001
516,100
Deferred income taxes
131,870
144,755
Other liabilities
25,969
17,153
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value; Authorized: 5,000,000 shares; no shares issued or outstanding
—
—
Common stock, $0.001 par value; Authorized: 100,000,000 shares; 22,319,016 and 22,121,534 shares issued and 22,049,636 and 21,891,928 shares outstanding at July 31, 2011 and 2010, respectively
22
22
Treasury stock, at cost: 269,380 and 229,606 shares at July 31, 2011 and 2010
(6,867
)
(5,050
)
Additional paid-in capital
318,083
307,032
Accumulated other comprehensive loss
18,500
(869
)
Retained earnings
125,057
78,808
Total stockholders’ equity
454,795
379,943
Total liabilities and stockholders’ equity
$
1,288,395
$
1,225,872
See notes to consolidated financial statements.
28
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended July 31,
2011
2010
2009
(In thousands, except per share
information)
Net sales
$
965,922
$
680,162
$
570,940
Cost of sales
714,775
519,161
435,344
Gross profit
251,147
161,001
135,596
Operating expenses:
Selling, general and administrative
96,960
64,301
60,971
Advertising
44,415
32,962
28,785
Acquisition and integration related expenses
16,792
11,508
—
Total operating expenses
158,167
108,771
89,756
Income from operations
92,980
52,230
45,840
Interest expense, net
23,840
10,180
6,255
Other expense, net
—
1,849
898
Income before income taxes
69,140
40,201
38,687
Income taxes
18,929
13,990
14,944
Net income
$
50,211
$
26,211
$
23,743
Earnings per share:
Basic
$
2.28
$
1.40
$
1.45
Diluted
$
2.22
$
1.36
$
1.42
Shares used to compute earnings per share:
Basic
21,577
18,313
16,073
Diluted
22,242
18,843
16,391
Dividends declared per share
$
0.18
$
0.18
$
0.18
See notes to consolidated financial statements.
29
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Common Stock
Treasury
Stock
Additional
Paid-In
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders’
Equity
Shares
Amount
(In thousands, except share information)
Balance, July 31, 2008
16,180,771
$
16
$
(3,203
)
$
112,550
$
35,276
$
1,584
$
146,223
Shares issued under ESPP and upon stock option exercises
298,133
1
5,299
5,300
Stock compensation expense
115,587
3,901
3,901
Tax benefit from ESPP and stock option transactions
1,067
1,067
Treasury stock repurchased
(42,472
)
(1,053
)
(1,053
)
Dividends paid
(2,960
)
(2,960
)
Comprehensive income:
Net income
23,743
23,743
Change in pension liabilities
(2,743
)
(2,743
)
Other comprehensive income
(137
)
(137
)
Total comprehensive income:
—
—
—
—
—
—
20,863
Balance, July 31, 2009
16,552,019
17
(4,256
)
122,817
56,059
(1,296
)
173,341
Shares issued upon stock option exercises
44,574
818
818
Stock compensation expense
148,164
3,231
3,231
Tax benefit from stock
option transactions
434
434
Shares issued for equity offering
5,175,000
5
191,470
191,475
Equity offering costs
(11,738
)
(11,738
)
Treasury stock repurchased
(27,829
)
(794
)
(794
)
Dividends paid
(3,462
)
(3,462
)
Comprehensive income:
Net income
26,211
26,211
Change in pension liabilities
(773
)
(773
)
Foreign currency translation adjustment
1,477
1,477
Other comprehensive income
(277
)
(277
)
Total comprehensive income:
—
—
—
—
—
—
26,638
Balance, July 31, 2010
21,891,928
22
(5,050
)
307,032
78,808
(869
)
379,943
Shares issued upon stock option exercises
96,924
1,803
1,803
Stock compensation expense
100,558
6,974
6,974
Tax benefit from stock
option transactions
2,274
2,274
Treasury stock repurchased
(39,774
)
(1,817
)
(1,817
)
Dividends paid
(3,962
)
(3,962
)
Comprehensive income:
Net income
50,211
50,211
Change in pension liabilities
(659
)
(659
)
Foreign currency translation adjustment
19,930
19,930
Other comprehensive income
98
98
Total comprehensive income:
—
—
—
—
—
—
69,580
Balance, July 31, 2011
22,049,636
$
22
$
(6,867
)
$
318,083
$
125,057
$
18,500
$
454,795
See notes to consolidated financial statements.
30
DIAMOND FOODS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended July 31,
2011
2010
2009
(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
$
50,211
$
26,211
$
23,743
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization
29,465
17,154
11,362
Deferred income taxes
(7,534
)
7,072
(2,800
)
Excess tax benefit from stock option transactions
(2,274
)
(434
)
(1,067
)
Stock-based compensation
6,974
3,231
3,901
Other, net
1,055
1,109
858
Changes in assets and liabilities:
Trade receivables
(32,665
)
(2,873
)
12,764
Inventories
(2,170
)
(45,852
)
10,316
Prepaid expenses and income taxes and other current assets
(893
)
(6,437
)
1,053
Accounts payable and accrued liabilities
17,577
(5,462
)
(6,562
)
Other, net
5,921
4,693
(200
)
Net cash provided by (used in) operating activities
65,667
(1,588
)
53,368
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment
(27,703
)
(11,790
)
(7,994
)
Deposits of restricted cash
(21,200
)
—
—
Proceeds from restricted cash
5,405
—
—
Acquisitions, net of cash acquired
—
(615,389
)
(190,224
)
Other, net
262
618
133
Net cash used in investing activities
(43,236
)
(626,561
)
(198,085
)
CASH FLOWS FROM FINANCING ACTIVITIES:
Revolving line of credit borrowings under the Secured Credit Facility
—
176,000
—
Repayment of revolving line of credit under the Secured Credit Facility
(4,800
)
(9,900
)
—
Proceeds from issuance of long-term debt
21,350
400,000
125,000
Debt issuance costs
—
(8,852
)
(1,973
)
Payment of long-term debt and notes payable
(40,884
)
(125,119
)
(30,141
)
Gross proceeds from equity offering
—
191,475
—
Equity offering costs
—
(11,738
)
—
Dividends paid
(3,962
)
(3,462
)
(2,960
)
Excess tax benefit from stock option transactions
2,274
434
1,067
Other, net
940
24
4,247
Net cash (used in) provided by financing activities
(25,082
)
608,862
95,240
Effect of exchange rate changes on cash
121
127
—
Net decrease in cash and cash equivalents
(2,530
)
(19,160
)
(49,477
)
Cash and cash equivalents:
Beginning of period
5,642
24,802
74,279
End of period
$
3,112
$
5,642
$
24,802
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest
$
21,998
$
9,088
$
5,989
Income taxes
8,751
11,113
19,438
Non-cash investing activities:
Accrued capital expenditures
2,323
1,076
497
See notes to consolidated financial statements.
31
DIAMOND FOODS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2011, 2010 and 2009
(In thousands, except share and per share information unless otherwise noted)
(1) Organization and Significant Accounting Policies
Business
Diamond Foods, Inc. (the “Company” or “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 the Company with increased scale in the snack market, significant supply chain economies of scale and cross promotional opportunities with its 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. In April 2011, Diamond entered into a definitive agreement with Proctor & Gamble (“P&G”) to merge the Pringles business into Diamond. 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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”). Certain prior period amounts have been reclassified to conform to the current period presentation.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates.
On an ongoing basis, the Company evaluates its estimates, including those related to inventories, trade receivables, fair value of investments, useful lives of property, plant and equipment, intangible assets, goodwill and income taxes, among others. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for management’s judgments about the carrying values of assets and liabilities.
Certain Risks and Concentrations
The Company’s revenues are principally derived from the sale of snack, culinary, domestic in-shell, international and ingredient/food service nuts. Significant changes in customer buying behavior could adversely affect the Company’s operating results. Sales to the Company’s largest customer accounted for approximately 15%, 17% and 21% of net sales in 2011, 2010 and 2009, respectively. Sales to the second largest customer accounted for approximately 11%, 12% and 13% of net sales in 2011, 2010 and 2009, respectively.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.
32
Cash and Cash Equivalents
Cash and cash equivalents include investment of surplus cash in securities (primarily money market funds) with maturities at date of purchase of three months or less.
Inventories
All inventories are accounted for at the lower of cost (first-in, first-out) or market.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of assets ranging from 30 to 39 years for buildings and ranging from 3 to 15 years for equipment.
Slotting and Other Contractual Arrangements
In certain situations, the Company pays slotting fees to retail customers to acquire access to shelf space. These payments are recognized as a reduction of sales. In addition, the Company makes payments pursuant to contracts that stipulate the term of the agreement, the quantity and type of products to be sold and other requirements. Payments pursuant to these agreements are capitalized and included in other current and long-term assets, and are amortized on a straight-line basis over the term of the contract. The Company expenses payments if no written arrangement exists.
Impairment of Long-Lived and Intangible Assets and Goodwill
Management reviews long-lived assets and certain identifiable intangible assets with finite lives for impairment in accordance with ASC 360, “ Property, Plant, and Equipment .” Goodwill and intangible assets not subject to amortization are reviewed annually for impairment in accordance with ASC 350, “ Intangibles — Goodwill and Other, ” or more often if there are indications of possible impairment.
The analysis to determine whether or not an asset is impaired requires significant judgments that are dependent on internal forecasts, including estimated future cash flows, estimates of long-term growth rates for our business, the expected life over which cash flows will be realized, and assumed royalty and discount rates. Changes in these estimates and assumptions could materially affect the determination of fair value and any impairment charge. While the fair value of these assets exceeds their carrying value based on management’s current estimates and assumptions, materially different estimates and assumptions in the future in response to changing economic conditions, changes in the business or for other reasons could result in the recognition of impairment losses.
For assets to be held and used, including acquired intangible assets subject to amortization, the Company initiates a review whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability of an asset is measured by comparison of its carrying amount to the expected future undiscounted cash flows that the asset is expected to generate. Any impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Significant management judgment is required in this process.
The Company tests its brand intangible assets not subject to amortization for impairment annually, or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. In testing brand intangibles for impairment, Diamond compares the fair value with the carrying value. The determination of fair value is based on a discounted cash flow analysis, using inputs such as forecasted future revenues attributable to the brand, assumed royalty rates, and a risk-adjusted discount rate that approximates our estimated cost of capital. If the carrying value exceeds the estimated fair value, the brand intangible asset is considered impaired, and an impairment loss will be recognized in an amount equal to the excess of the carrying value over the fair value of the brand intangible asset.
33
The Company performs its annual goodwill impairment test required by ASC 350 as of June 30th of each year. In testing goodwill for impairment, Diamond initially compares the fair value of the Company’s single reporting unit with the net book value of the Company because it represents the carrying value of the reporting unit. Diamond has one operating and reportable segment. If fair value of the reporting unit is less than the carrying value of the reporting unit, we perform an additional step to determine the implied fair value of goodwill. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all assets and liabilities and then computing the excess of the reporting units’ fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, the excess represents the amount of goodwill impairment. Accordingly, the Company would recognize an impairment loss in the amount of such excess. The Company considers the estimated fair value of the reporting unit in relation to the Company’s market capitalization.
Revenue Recognition
The Company recognizes revenue when persuasive evidence of an arrangement exists, title and risk of loss has transferred to the buyer, price is fixed, delivery occurs and collection is reasonably assured. Revenues are recorded net of rebates, introductory or slotting payments, coupons, promotion and marketing allowances. The amount the Company accrues for promotion is based on an estimate of the level of performance of the trade promotion, which is dependent upon factors such as historical trends with similar promotions, expectations regarding customer and consumer participation, and sales and payment trends with similar previously offered programs. Customers have the right to return certain products. Product returns are estimated based upon historical results and are reflected as a reduction in sales.
Promotion and Advertising Costs
Promotional allowances, customer rebates, coupons and marketing allowances are recorded at the time the related revenue is recognized and are reflected as reductions of sales. Annual volume rebates, promotion, and marketing allowances are recorded based upon the terms of the arrangements. Coupon incentives are recorded at the time of distribution in amounts based on estimated redemption rates. The Company expenses advertising costs as incurred. Payments to reimburse customers for cooperative advertising programs are recorded in accordance with ASC 605-50, “ Revenue Recognition — Customer Payments and Incentives .”
Shipping and Handling Costs
Amounts billed to customers for shipping and handling costs are included in net sales. Shipping and handling costs are charged to cost of sales as incurred.
Acquisition and Integration Related Expenses
Acquisition and integration related expenses are costs incurred to effect a business combination and subsequently to integrate the acquired business into the Company. These expenses are shown as a separate line within operating expenses and are expensed as incurred. These expenses may include transaction related legal and consulting fees, as well as business and systems integration costs.
Income Taxes
Diamond accounts for income taxes in accordance with ASC 740, “Income Taxes.” which requires that deferred tax assets and liabilities be recognized for the tax effect of temporary differences between the financial statement and tax basis of recorded assets and liabilities at current tax rates. This guidance also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The recoverability of deferred tax assets is based on both the historical and anticipated earnings levels and is reviewed periodically to determine if any additional valuation allowance is necessary when it is more likely than not that amounts will not be recovered.
34
There are inherent uncertainties related to the interpretations of tax regulations in the jurisdictions in which the Company operates. Diamond may take tax positions that management believes are supportable, but are potentially subject to successful challenge by the applicable taxing authority. Tax positions are evaluated and liabilities are established in accordance with the guidance on uncertainty in income taxes. Diamond reviews these tax uncertainties in light of changing facts and circumstances, such as the progress of tax audits, and adjusts them accordingly.
Fair Value of Financial Instruments
The fair value of certain financial instruments, including cash and cash equivalents, trade receivables, accounts payable and accrued liabilities approximate the amounts recorded in the balance sheet because of the relatively short term nature of these financial instruments. The fair value of notes payable and long-term obligations at the end of each fiscal period approximates the amounts recorded in the balance sheet based on information available to Diamond with respect to current interest rates and terms for similar financial instruments.
Stock-Based Compensation
The Company accounts for stock-based compensation arrangements, including stock option grants and restricted stock awards, in accordance with ASC 718, “ Compensation — Stock Compensation .” Under this guidance, compensation cost is recognized based on the fair value of equity awards on the date of grant. The compensation cost is then amortized on a straight-line basis over the vesting period. The Black-Scholes option pricing model is used to determine the fair value of stock options at the date of grant. This model requires the Company to make assumptions such as expected term, dividends, volatility, and forfeiture rates that determine the stock options fair value. These key assumptions are based on historical information and judgment regarding market factors and trends. If actual results are not consistent with the Company’s assumptions and judgments used in estimating these factors, the Company may be required to increase or decrease compensation expense, which could be material to its results of operations.
Recent Accounting Pronouncements
In December 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-29, “ Business Combinations (Topic 805): Disclosure of Supplementary Pro Forma Information for Business Combinations .” This guidance was issued to clarify that pro forma disclosures should be presented as though the business combination that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period. The disclosures should also be accompanied by a narrative description of the nature and amount of material, nonrecurring pro forma adjustments. This new guidance is effective prospectively for business combinations consummated on or after the annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In May 2011, the FASB issued ASU No. 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. ” This guidance changes the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The guidance is effective for interim and annual periods beginning after December 15, 2011. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income.” This guidance requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income (OCI) in either a single continuous statement of comprehensive income or in two separate consecutive statements. The guidance does not change the components of OCI or when an item of OCI must be reclassified to net income, or the earnings per share calculation. The guidance is effective for fiscal years and interim periods within those years, beginning after December 15, 2011. Early adoption is permitted. The Company does not believe that the adoption of this guidance will have a material impact on its consolidated financial statements.
35
(2) Fair Value of Financial Instruments
The Company transacts business in foreign currencies and has international sales denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company may enter into foreign currency forward contracts, generally with monthly maturities over twelve months or less, to reduce the volatility of cash flows primarily related to forecasted revenue denominated in certain foreign currencies. The Company does not use foreign currency contracts for speculative or trading purposes. On the date a foreign currency forward contract is entered into, the Company designates the contract as a hedge, for a forecasted transaction, of the variability of cash flows to be received (“cash flow hedge”). The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as cash flow hedges to anticipated transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. Effective changes in derivative contracts designated and qualifying as cash flow hedges of forecasted revenue are reported in other comprehensive income. These gains and losses are reclassified into interest income or expense, as a component of revenue, in the same period as the hedged revenue is recognized. The Company includes time value in the assessment of effectiveness of the foreign currency derivatives. The ineffective portion of the hedge is recorded in interest expense or income. No hedge ineffectiveness for foreign currency derivatives was recorded for the year ended July 31, 2011 . The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows associated with forecasted foreign currency transactions is less than twelve months. Within the next twelve months, amounts expected to be reclassified from other comprehensive income to revenue for foreign currency derivatives are nil.
In the three months ended July 31, 2010, the Company entered into three interest rate swap agreements in accordance with Company policy to mitigate the impact of LIBOR based interest expense fluctuations on Company profitability. These swap agreements, with a total hedged notional amount of $100 million were entered into to hedge future cash interest payments associated with a portion of the Company’s variable rate bank debt. The Company has designated these swaps as cash flow hedges of future cash flows associated with its variable rate debt. All effective changes in the fair value of the designated swaps are recorded in other comprehensive income (loss) and are released to interest income or expense on a monthly basis as the hedged debt payments are accrued. Ineffective changes, if any, are recognized in interest income or expense immediately. For the year ended July 31, 2011, the Company recognized other comprehensive income of $84 based on the change in fair value of the swap agreements; no hedge ineffectiveness for these swap agreements was recognized in interest income or expense over the same period. Other comprehensive loss of $581 is expected to be reclassified to interest expense within the next twelve months.
The fair values of the Company’s derivative instruments as of July 31 were as follows:
Liability Derivatives
Balance Sheet Location
Fair Value
2011
2010
Derivatives designated as hedging instruments under ASC 815:
Interest rate contracts
Other current liabilities
$
(581
)
$
(668
)
Interest rate contracts
Other non-current liabilities
(4
)
—
Foreign currency contracts
Accounts payable and accrued liabilities
—
(12
)
Total derivatives designated as hedging instruments under ASC 815
$
(585
)
$
(680
)
Derivatives not designated as hedging instruments under ASC 815:
Foreign currency contracts
Accounts payable and accrued liabilities
$
(11
)
$
—
Total derivatives not designated as hedging instrument under ASC 815
$
(11
)
$
—
Total derivatives
$
(596
)
$
(680
)
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The effects of the Company’s derivative instruments on the Consolidated Statements of Operations for the years ended July 31 were as follows:
Derivatives in ASC 815 Cash
Flow Hedging Relationships
Amount of Loss
Recognized in
OCI on
Derivative
(Effective
Portion)
Location of Loss
Reclassified from
Accumulated OCI
into Income
(Effective
Portion)
Amount of
Loss
Reclassified
from
Accumulated
OCI into
Income
(Effective
Portion)
Location of Loss
Recognized in
Income on
Derivative
(Ineffective
Portion)
Amount of
Loss
Recognized in
Income on
Derivative
(Ineffective
Portion)
2011
2010
2011
2010
2011
2010
Interest rate contracts
$
(643
)
$
(479
)
Interest expense
$
(728
)
$
(52
)
Interest expense
$
—
$
—
Foreign currency contracts
(182
)
(12
)
Net sales
(194
)
—
Net sales
—
—
Total
$
(825
)
$
(491
)
$
(922
)
$
(52
)
$
—
$
—
Derivatives Not Designated as Hedging Instruments under ASC 815
Location of Loss Recognized in
Income on Derivative
Amount of Loss Recognized in
Income on Derivative
2011
2010
Foreign currency contracts
Interest expense
$
(145
)
$
—
Total
$
(145
)
$
—
ASC 820 requires that assets and liabilities carried at fair value be measured using the following three levels of inputs:
Level 1: Quoted market prices in active markets for identical assets or liabilities
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data
Level 3: Unobservable inputs that are not corroborated by market data
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company’s cash equivalents measured at fair value on a recurring basis was $586 as of July 31, 2010. These investments were classified as Level 1 based on quoted prices in active markets for identical assets, to value the cash equivalents. There were no cash equivalents as of July 31, 2011.
The Company’s derivative liabilities measured at fair value on a recurring basis were $596 and $680 as of July 31, 2011 and 2010. The Company has elected to use the income approach to value the derivative liabilities, using observable Level 2 market expectations at the measurement date and standard valuation techniques to convert future amounts to a single present amount assuming that participants are motivated, but not compelled to transact. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR for the first two years) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR cash and swap rates). Mid-market pricing is used as a practical expedient for fair value measurements. Under Accounting Standards Codification (“ASC”) 820, “ Fair Value Measurements and Disclosures, ” the fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments.
(3) Equity Offering and Stock-Based Compensation
In March 2010, the Company issued and sold 5,175,000 shares of its common stock for $37.00 per share. After deducting the underwriting discount and other related expenses, the Company received total net proceeds from the sale of its common stock of approximately $179.7 million. The proceeds from the equity offering were used to fund a portion of the purchase price for the Kettle Foods acquisition.
37
The Company uses a broad based equity incentive plan to help align employee and director incentives with stockholders’ interests. The 2005 Equity Incentive Plan (the “Plan”) was approved in March 2005 and provides for the awarding of options, restricted stock, stock bonuses, restricted stock units, and stock appreciation rights. The Compensation Committee of the Board of Directors administers the Plan. A total of 2,500,000 shares of common stock were initially reserved for issuance under the Plan, and the number of shares available for issuance under the Plan is increased by an amount equal to 2% of the Company’s total outstanding shares as of July 31 each year.
In 2005, the Company began granting shares of restricted stock and stock options under the Plan. The shares of restricted stock vest over three, four or five-year periods. The stock options expire in ten years and vest over three, four or five years. As of July 31, 2011, options to purchase 1,771,253 shares of common stock were outstanding, of which 1,235,297 were exercisable. At July 31, 2011, the Company had 685,187 shares available for future grant under the Plan.
ASC 718, “Compensation — Stock Compensation,” requires the recognition of compensation expense in an amount equal to the fair value of share-based awards. Beginning with the Company’s adoption of ASC 718 in August 2005, the fair value of all stock options granted subsequent to August 1, 2005 is recognized as an expense in the Company’s statement of operations, typically over the related vesting period of the options. The guidance requires use of fair value computed at the date of grant to measure share-based awards. The fair value of restricted stock awards is recognized as stock-based compensation expense over the vesting period, generally three, four or five years from date of grant or award. The Company recorded total stock-based compensation expense of $6,974, $3,231, and $3,901 for the years ended July 31, 2011, 2010, and 2009, respectively.
Stock Option Awards: The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities were estimated based on the Company’s implied historical volatility. The expected term of options granted and forfeiture rates were based on assumptions and historical data to the extent it is available. The risk-free rates were based on U.S. Treasury yields in effect at the time of the grant. For purposes of this valuation model, dividends are based on the historical rate. Assumptions used in the Black-Scholes model are presented below (for the year ended July 31):
2011
2010
2009
Average expected life, in years
6
6
6
Expected volatility
35.25
%
46.00
%
38.50
%
Risk-free interest rate
2.10
%
3.04
%
3.23
%
Dividend rate
0.34
%
0.50
%
0.70
%
38
The following table summarizes option activity during the years ended July 31, 2011, 2010 and 2009:
Number of
Shares
Weighted
Average Exercise
Price Per Share
Average
Remaining
Contractual Life
Aggregate
Intrinsic Value
(In thousands)
(In years)
(In thousands)
Outstanding at July 31, 2008
1,510
17.74
7.5
$
9,979
Granted
128
26.06
Exercised
(294
)
17.78
Cancelled
(12
)
17.24
Outstanding at July 31, 2009
1,332
18.54
6.9
$
12,871
Granted
191
40.79
Exercised
(45
)
18.35
Cancelled
(26
)
38.64
Outstanding at July 31, 2010
1,452
21.11
6.4
$
34,027
Granted
442
46.59
Exercised
(97
)
18.61
Cancelled
(26
)
38.61
Outstanding at July 31, 2011
1,771
27.34
6.3
$
78,551
Exercisable at July 31, 2009
1,107
17.76
6.6
$
11,562
Exercisable at July 31, 2010
1,218
18.32
5.9
$
31,939
Exercisable at July 31, 2011
1,235
19.98
5.1
$
63,756
The weighted average fair value of options granted during 2011, 2010 and 2009 was $16.37, $18.18 and $10.67, respectively. The total intrinsic value of options exercised during 2011, 2010 and 2009 was $3,035, $829 and $2,816, respectively. The total fair value of options vested during 2011, 2010 and 2009 was $2,004, $1,378 and $1,402, respectively.
Changes in the Company’s nonvested options during 2011 are summarized as follows:
Number of
Shares
Weighted
Average Grant
Date Fair Value
(In thousands)
Nonvested at July 31, 2010
234
$
15.28
Granted
442
16.37
Vested
(130
)
15.36
Cancelled
(10
)
18.18
Nonvested at July 31, 2011
536
16.08
As of July 31, 2011, there was $7.2 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a weighted average period of 2.2 years.
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Restricted Stock Awards: Restricted stock activity during 2011, 2010 and 2009 is summarized as follows:
Number of
Shares
Weighted
Average Grant
Date Fair Value
Per Share
(In thousands)
Outstanding at July 31, 2008
332
$
17.74
Granted
194
25.80
Vested
(111
)
18.02
Cancelled
(79
)
19.94
Outstanding at July 31, 2009
336
21.79
Granted
193
34.29
Vested
(76
)
20.92
Cancelled
(45
)
31.60
Outstanding at July 31, 2010
408
26.78
Granted
115
47.04
Vested
(115
)
24.51
Cancelled
(15
)
38.44
Outstanding at July 31, 2011
393
32.96
The total intrinsic value of restricted stock vested in 2011, 2010 and 2009 was $5,482, $2,192 and $2,771, respectively.
As of July 31, 2011, there was $9.9 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of 2.2 years.
(4) Earnings Per Share
ASC 260-10, “Earnings Per Share” impacted the determination and reporting of earnings per share by requiring the inclusion of restricted stock as participating securities, since they have the right to share in dividends, if declared, equally with common shareholders. Participating securities are allocated a proportional share of net income determined by dividing total weighted average participating securities by the sum of total weighted average common shares and participating securities (“the two-class method”). Including these shares in the Company’s earnings per share calculation during periods of net income has the effect of diluting both basic and diluted earnings per share.
The computations for basic and diluted earnings per share are as follows:
Year Ended July 31,
2011
2010
2009
Numerator:
Net income
$
50,211
$
26,211
$
23,743
Less: income allocated to participating securities
(912
)
(520
)
(486
)
Income attributable to common shareholders — basic
49,299
25,691
23,257
Add: undistributed income attributable to participating securities
843
505
469
Less: undistributed income reallocated to participating securities
(818
)
(490
)
(460
)
Income attributable to common shareholders — diluted
$
49,324
$
25,706
$
23,266
Denominator:
Weighted average shares outstanding — basic
21,577
18,313
16,073
Dilutive shares — stock options
665
530
318
Weighted average shares outstanding — diluted
22,242
18,843
16,391
Income per share attributable to common shareholders (1):
Basic
$
2.28
$
1.40
$
1.45
Diluted
$
2.22
$
1.36
$
1.42
(1)
Computations may reflect rounding adjustments.
40
Options to purchase 1,771,253, 1,451,963 and 1,331,737 shares of common stock were outstanding at July 31, 2011, 2010 and 2009, respectively. Options to purchase 87,500, 156,000 and 48,000 shares of common stock were not included in the computation of diluted earnings per share for 2011, 2010 and 2009 because their exercise prices were greater than the average market price of Diamond’s common stock of $54.62, $36.43 and $25.87, and therefore their effect would be antidilutive.
(5) Acquisition and Pending Transaction
Pending Pringles Merger
On April 5, 2011, Diamond entered into a definitive agreement with P&G to merge P&G’s Pringles business into the Company. The value of the proposed transaction at April 5, 2011 was approximately $2.35 billion, consisting of $1.5 billion in Diamond common stock and the assumption of $850 million of Pringles debt. 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. The purchase price will be represented by approximately 29.1 million shares of Diamond common stock.
The transaction, which is expected to be completed by the end of calendar 2011, is subject to approval by Diamond’s stockholders and satisfaction of customary closing conditions and regulatory approvals. The merger will be accounted for as a purchase business combination and for accounting purposes, Diamond will be treated as the acquiring entity.
Kettle Foods
In March 2010, Diamond completed its acquisition of Kettle Foods for a purchase price of approximately $616 million in cash. The acquisition was accounted for under the purchase method of accounting in accordance with ASC 805, “ Business Combinations .”
The total purchase price has been allocated to the estimated fair values of assets acquired and liabilities assumed as follows:
Accounts receivable
$
29,188
Inventory
12,526
Deferred tax asset
2,119
Prepaid expenses and other assets
3,617
Property, plant and equipment
66,289
Brand intangibles
235,000
Customer relationships
120,000
Goodwill
321,545
Assumed liabilities
(39,211
)
Deferred tax liabilities
(134,851
)
Purchase price
$
616,222
Goodwill associated with the Kettle Foods acquisition is not amortized and is not deductible for tax purposes.
Customer relationships of Kettle Foods will be amortized on a straight-line basis over an estimated life of 20 years. Brand intangibles relate to the “Kettle Foods” brand name, which has an indefinite life, and therefore is not amortizable.
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Pro Forma — Financial Information
The following reflects the unaudited pro forma combined results of operations of the Company and Kettle Foods as if the acquisition had taken place at the beginning of the fiscal years presented:
Year Ended July 31,
2010
2009
Net sales
$
854,579
$
828,863
Net income
$
36,474
$
28,643
Diluted earnings per share
$
1.63
$
1.31
The Company incurred a loss on extinguishment of debt of $1.8 million when Diamond replaced an existing credit facility with a new secured credit facility to fund the Kettle Foods acquisition. Additionally, the Company incurred acquisition and integration costs of $11.5 million during the year ended July 31, 2010. These amounts are included in the above pro forma results of operations for the twelve month periods for fiscal years 2010 and 2009.
The net sales and associated earnings Kettle Foods has contributed to Diamond’s results of operations are not determinable as certain operational and go-to-market activities of Kettle Foods have been integrated into Diamond.
(6) Intangible Assets and Goodwill
The changes in the carrying amount of goodwill were as follows:
Balance as of July 31, 2009:
$
76,076
Pop Secret purchase price allocation changes
(833
)
Acquisition of Kettle Foods
321,545
Balance as of July 31, 2010:
396,788
Translation adjustments
10,799
Balance as of July 31, 2011:
$
407,587
Other intangible assets consisted of the following at July 31:
2011
2010
Brand intangibles (not subject to amortization)
$
301,148
$
297,500
Intangible assets subject to amortization:
Customer contracts and related relationships
163,786
157,300
Total other intangible assets, gross
464,934
454,800
Less accumulated amortization on intangible assets:
Customer contracts and related relationships
(14,079
)
(5,782
)
Total other intangible assets, net
$
450,855
$
449,018
During the quarter ended July 31, 2009, the Company recorded a $1.2 million non-cash impairment charge to write off the unamortized balance of the Harmony/Homa trademark and trade names, since we no longer utilize them as primary trade dress and concluded that they have no future value. This amount was included in selling, general and administrative expenses on the Consolidated Statements of Operations.
Identifiable intangible asset amortization expense in each of the five succeeding years will amount to approximately $8,189.
42
For the years ended July 31, 2011, 2010 and 2009, the amortization period for identifiable intangible assets was approximately 20 years with amortization expense of approximately $7,865 , $3,865 and $1,761 recognized, respectively.
The Company also performed its 2011 annual impairment test of goodwill and non-amortizing intangible assets required by ASC 350 as of June 30, 2011. There were no goodwill impairments during 2011, 2010 and 2009.
(7) Notes Payable and Long-Term Obligations
In February 2010, Diamond entered into an agreement to replace an existing credit facility with a new five-year $600 million secured credit facility (the “Secured Credit Facility”) with a syndicate of lenders. The Company used the borrowings under the Secured Credit Facility to fund a portion of the Kettle Foods acquisition and to fund ongoing operations.
Diamond’s Secured Credit Facility consists of a $235 million revolving credit facility, of which $161 million was outstanding as of July 31, 2011, and a $400 million term loan facility, of which $350 million was outstanding as of July 31, 2011. Scheduled principal payments on the term loan are $40 million for fiscal year 2011 and each of the succeeding three years (due quarterly), and $10 million for each of the first two quarters in fiscal year 2015, with the remaining principal balance and any outstanding loans under the revolving credit facility to be repaid on the fifth anniversary of initial funding. In March 2011, the syndicate of lenders approved Diamond’s request for an increase in its revolving credit facility by $35 million from $200 million, under the same terms. In August 2011, the syndicate of lenders approved Diamond’s request for an increase in its revolving credit facility by $50 million from $235 million to $285 million, under the same terms. Borrowings under the Secured Credit Facility will bear interest, at Diamond’s option, at either the agent’s base rate or the LIBOR rate, plus a margin for LIBOR loans ranging from 2.25% to 3.50%, based on the consolidated leverage ratio which is defined as the ratio of total debt to EBITDA. For the year ended July 31, 2011, the blended interest rate was 3.92% for the Company’s consolidated borrowings. Substantially all of the Company’s tangible and intangible assets are considered collateral security under the Secured Credit Facility.
The Secured Credit Facility also provides for customary affirmative and negative covenants, including a debt to EBITDA ratio and minimum fixed charge coverage ratio. As of July 31, 2011, the Company was in compliance with all applicable financial covenants under the Secured Credit Facility.
On December 20, 2010, Kettle Foods obtained, and Diamond guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21 million, of which $20 million was outstanding as of July 31, 2011. The principal and interest payments are due monthly throughout the term of the loan. The Guaranteed Loan will be used to purchase equipment for the Beloit, Wisconsin plant expansion. Borrowed funds have been placed in an interest-bearing escrow account and will be made available as expenditures are approved for reimbursement. As the cash will be used to purchase non-current assets, such restricted cash has been classified as non-current on the balance sheet. The Guaranteed Loan also provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility.
(8) Balance Sheet Items
Inventories consisted of the following at July 31:
2011
2010
Raw materials and supplies
$
63,775
$
64,660
Work in process
20,798
23,768
Finished goods
61,002
54,977
Total
$
145,575
$
143,405
43
Accounts payable and accrued liabilities consisted of the following at July 31:
2011
2010
Accounts payable
$
66,245
$
42,784
Payable to growers
15,186
35,755
Accrued salaries and benefits
17,050
17,587
Accrued promotion
29,360
22,787
Accrued taxes
8,703
1,482
Other
7,516
7,526
Total
$
144,060
$
127,921
(9) Property, Plant and Equipment
Property, plant and equipment consisted of the following at July 31:
2011
2010
Land and improvements
$
10,822
$
10,012
Buildings and improvements
41,303
38,231
Machinery, equipment and software
168,974
164,926
Construction in progress
26,546
7,214
Total
247,645
220,383
Less accumulated depreciation
(120,238
)
(102,567
)
Property, plant and equipment, net
$
127,407
$
117,816
(10) Income Taxes
Income tax expense consisted of the following for the year ended July 31:
2011
2010
2009
Current
Federal
$
18,477
$
5,895
$
14,831
State
2,459
(665
)
2,913
Foreign
5,527
1,688
—
Total current
26,463
6,918
17,744
Deferred
Federal
(3,018
)
7,324
(2,830
)
State
(237
)
1,216
30
Foreign
(4,279
)
(1,468
)
—
Total deferred
(7,534
)
7,072
(2,800
)
Total tax provision
$
18,929
$
13,990
$
14,944
The components of earnings from continuing operations before income taxes, by tax jurisdiction, are as follows for the fiscal years ended July 31:
2011
2010
2009
United States
$
81,924
$
42,235
$
38,687
Foreign
(12,784
)
(2,034
)
—
Total
$
69,140
$
40,201
$
38,687
44
A reconciliation of the statutory federal income tax rate of 35% to Diamond’s effective income tax rate is as follows for the year ended July 31:
2011
2010
2009
Federal tax computed at the statutory rate
$
24,199
$
14,071
$
13,540
Stock-based compensation
162
(16
)
3
Domestic production activities deduction
(1,685
)
(371
)
(894
)
State taxes, net of federal impact
1,476
361
1,908
Acquisition costs
—
2,282
—
Foreign income tax rate differential
1,276
7
—
Changes in tax rates
(2,697
)
(1,271
)
—
Net benefit of certain interest
(4,404
)
(1,547
)
—
Other items, net
602
474
387
Income tax expense
$
18,929
$
13,990
$
14,944
Applicable U.S. income taxes have not been provided on approximately $19,803 of undistributed earnings of certain foreign subsidiaries at July 31, 2011, because these earnings are considered indefinitely reinvested. The net federal income tax liability that would arise if these earnings were not indefinitely reinvested is approximately $6,931. Applicable U.S. income taxes are provided on these earnings in the periods in which they are no longer considered indefinitely reinvested.
With respect to the Company’s stock option plans, realized tax benefits in excess of tax benefits recognized in net earnings are recorded as increases to additional paid-in capital. Excess tax benefits of approximately $2,274, $434, and $1,067, were realized and recorded to additional paid-in capital for the fiscal years 2011, 2010 and 2009, respectively.
The tax effect of temporary differences and net operating losses which give rise to deferred tax assets and liabilities consist of the following as of July 31:
2011
2010
Deferred tax assets:
Current:
Inventories
$
2,136
$
940
Receivables
253
378
Accruals
6,465
4,974
Compensation
3,896
3,661
State tax
499
258
Other
—
380
Total current
13,249
10,591
Non-current:
State tax credits
5,674
5,524
Retirement benefits
3,938
4,341
Employee stock compensation benefits
3,345
2,025
Acquisition costs
4,848
—
Other
3,578
2,706
Total non-current
21,383
14,596
45
2011
2010
Deferred tax liabilities:
Current
—
14
Non-current:
Property, plant and equipment
13,555
11,846
Intangibles
129,301
127,884
Other
6,527
6,076
Total non-current
149,383
145,806
Total deferred taxes, net
$
(114,751
)
$
(120,633
)
Composed of:
Net current deferred taxes
$
13,249
$
10,577
Net non-current deferred taxes
(128,000
)
(131,210
)
Total deferred taxes, net
$
(114,751
)
$
(120,633
)
Valuation allowances have been provided to reduce deferred tax assets to amounts considered recoverable. The Company’s valuation allowance was $613 as of July 31, 2011 and 2010.
As of July 31, 2011, the Company had no cumulative federal tax loss carryforwards and $12,657 of cumulative state tax loss carryforwards. State tax loss carryforwards will expire beginning fiscal 2017 through fiscal 2023. The Company also has a foreign net operating loss carryforward of $7,956 with no expiration period.
The state tax credits of $9,801 are California Enterprise Zone Credits, which have no expiration date.
The Company recognizes interest and penalties related to uncertain tax positions as a component of income tax expense. The Company had $65, $49 and $40, net of tax benefit, accrued for interest and $64, $12, and $1 accrued for penalties related to unrecognized tax benefits as of July 31, 2011, 2010 and 2009, respectively.
A reconciliation of the beginning and ending amount of the gross unrecognized tax benefits is as follows:
2011
2010
2009
Balance, beginning of year
$
2,611
$
313
$
233
Tax position related to current year:
Additions
7,348
2,586
—
Tax positions related to prior years:
Additions
2,575
10
227
Reductions
(11
)
—
—
Settlements
—
(269
)
(46
)
Statute of limitations closures
—
(29
)
(101
)
Balance, end of year
$
12,523
$
2,611
$
313
Included in the balance of unrecognized tax benefits at July 31, 2011, July 31, 2010 and July 31, 2009, respectively, are potential benefits of $9,759 $2,611, and $313 respectively, that if recognized, would affect the effective tax rate on earnings.
In the twelve months succeeding July 31, 2011, audit resolutions, lapse of statute of limitations, and filing the amended returns could potentially reduce total unrecognized tax benefits by up to $11,132.
The Company files income tax returns in the U.S. federal and various states, local and foreign jurisdictions. The Company’s income tax returns for fiscal year 2006 through fiscal year 2011 remain open to examination.
46
(11) Commitments and Contingencies
The Company is involved in various legal actions in the ordinary course of business. Such matters are subject to many uncertainties that make their ultimate outcomes unpredictable. However, in the opinion of management, resolution of all legal matters is not expected to have an adverse effect on the Company’s financial condition, operating results or cash flows.
At July 31, 2011, the Company had $2.6 million of letters of credit outstanding related to normal business transactions and commitments of $10.9 million to purchase new equipment.
Operating lease expense for the year ended July 31, 2011, 2010 and 2009 was $4.9 million, $3.2 million and $2.5 million, respectively.
At July 31, 2011, future minimum payments under non-cancelable operating leases (primarily for real property) were as follows:
2012
$
5,963
2013
4,248
2014
2,914
2015
2,694
2016
2,117
Thereafter
4,118
Total
$
22,054
(12) Segment Reporting
The Company operates in a single reportable segment: the processing, marketing, and distribution of culinary, in-shell and ingredient/food service nuts and snack products. The geographic presentation of net sales below is based on the destination of the sale. The “Europe” category consists primarily of United Kingdom, Germany, Netherlands, and Spain. The “Other” category consists primarily of Canada, South Korea, Japan, Turkey and China. The geographic distributions of the Company’s net sales were as follows for the year ended July 31:
2011
2010
2009
United States
$
676,063
$
553,977
$
486,614
Europe
161,365
64,909
33,743
Other
128,494
61,276
50,583
Total
$
965,922
$
680,162
$
570,940
Net sales by channel:
2011
2010
2009
Snack
$
553,165
$
321,422
$
188,900
Culinary and Retail In-shell
262,906
248,994
276,226
Total Retail
816,071
570,416
465,126
International Non-Retail
119,017
69,206
68,890
North American Ingredient/Food Service and Other
30,834
40,540
36,924
Total Non-Retail
149,851
109,746
105,814
Total Net Sales
$
965,922
$
680,162
$
570,940
47
The Company does not segregate long-lived assets between geographies for internal reporting. Therefore, asset-related information has not been presented.
(13) Valuation Reserves and Qualifying Accounts
Beginning
of Period
Charged to
Expense
Charged to
Reserve
End of
Period
Allowance for Doubtful Accounts
Year ended July 31, 2009
$
441
$
269
$
(210
)
$
500
Year ended July 31, 2010
500
106
—
606
Year ended July 31, 2011
606
55
(19
)
642
(14) Retirement Plans
Diamond provides retiree medical benefits and sponsors two defined benefit pension plans. One of the defined benefit plans is a qualified plan covering all bargaining unit employees and the other is a nonqualified plan for certain salaried employees. The amounts shown for pension benefits are combined amounts for all plans. Diamond uses a July 31 measurement date for its plans. Plan assets are held in trust and primarily include mutual funds and money market accounts. Any employee who joined the Company after January 15, 1999 is not entitled to retiree medical benefits.
In March 2010, the Company determined that the defined benefit pension plan for the bargaining unit employees would be frozen at July 31, 2010 in conjunction with the execution of a new union contract. This amendment was accounted for in accordance with ASC 715, “ Compensation — Retirement Benefits .”
Obligations and funded status of the remaining benefit plans at July 31 were:
Pension Benefits
Other Benefits
Change in Benefit Obligation
2011
2010
2011
2010
Benefit obligation at beginning of year
$
24,186
$
20,832
$
2,204
$
2,360
Service cost
79
728
65
63
Interest cost
1,258
1,198
107
133
Plan participants’ contributions
—
—
27
74
Plan amendments
—
(412
)
—
—
Actuarial loss (gain)
1,809
2,253
61
(267
)
Benefits paid
(464
)
(413
)
(195
)
(159
)
Benefit obligation at end of year
$
26,868
$
24,186
$
2,269
$
2,204
Pension Benefits
Other Benefits
Change in Plan Assets
2011
2010
2011
2010
Fair value of plan assets at beginning of year
$
13,144
$
12,120
$
—
$
—
Actual return on plan assets
1,771
1,320
—
—
Employer contribution
—
117
168
85
Plan participants’ contributions
—
—
27
74
Benefits paid
(464
)
(413
)
(195
)
(159
)
Fair value of plan assets at end of year
$
14,451
$
13,144
$
—
$
—
Funded status at end of year
$
(12,417
)
$
(11,042
)
$
(2,269
)
$
(2,204
)
48
Assets (liabilities) recognized in the consolidated balance sheets at July 31 consisted of:
Pension Benefits
Other Benefits
2011
2010
2011
2010
Current liabilities
$
—
$
—
$
(114
)
$
(117
)
Noncurrent liabilities
(12,417
)
(11,042
)
(2,155
)
(2,087
)
Total
$
(12,417
)
$
(11,042
)
$
(2,269
)
$
(2,204
)
Amounts recognized in accumulated other comprehensive income (pre-tax) as of July 31 consisted of:
Pension Benefits
Other Benefits
2011
2010
2011
2010
Net loss (gain)
$
9,545
$
9,120
$
(5,086
)
$
(5,942
)
Prior service cost
87
102
—
—
Total
$
9,632
$
9,222
$
(5,086
)
$
(5,942
)
The accumulated benefit obligation for all defined benefit pension plans was $24,400 and $21,772 at July 31, 2011 and 2010.
Information for pension plans with an accumulated benefit obligation in excess of plan assets as of July 31 was as follows:
2011
2010
Projected benefit obligation
$
26,868
$
24,186
Accumulated benefit obligation
24,400
21,772
Fair value of plan assets
14,451
13,144
Components of net periodic benefit cost for the year ended July 31 were as follows:
Pension Benefits
Other Benefits
2011
2010
2009
2011
2010
2009
Net Periodic Benefit Cost / (Income)
Service cost
$
79
$
728
$
475
$
65
$
63
$
103
Interest cost
1,258
1,198
1,062
107
133
284
Expected return on plan assets
(1,031
)
(952
)
(1,059
)
—
—
—
Amortization of prior service cost
16
26
26
—
—
—
Amortization of net (gain) loss
643
517
37
(795
)
(824
)
(539
)
Curtailment cost
—
3
—
—
—
—
Net periodic benefit cost / (income)
$
965
$
1,520
$
541
$
(623
)
$
(628
)
$
(152
)
The estimated net loss and prior service cost for the defined benefit pension plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $792 and $16, respectively. The estimated net gain and prior service cost for the other defined benefit postretirement plans that will be amortized from accumulated other comprehensive income into net periodic benefit cost over the next fiscal year are $771 and nil, respectively.
For calculation of retiree medical benefit cost, prior service cost is amortized on a straight-line basis over the average remaining years of service to full eligibility for benefits of the active plan participants. For calculation of net periodic pension cost, prior service cost is amortized on a straight-line basis over the average remaining years of service of the active plan participants.
49
Assumptions
Weighted-average assumptions used to determine benefit obligations at July 31 were as follows:
Pension Benefits
Other Benefits
2011
2010
2009
2011
2010
2009
Discount rate
5.00
%
5.28
%
5.80
%
4.70
%
5.00
%
5.80
%
Rate of compensation increase
5.50
5.50
5.50
N/A
N/A
N/A
Weighted-average assumptions used to determine net periodic benefit cost for the year ended July 31 were as follows:
Pension Benefits
Other Benefits
2011
2010
2009
2011
2010
2009
Discount rate
5.28
%
5.80
%
7.00
%
5.00
%
5.80
%
7.00
%
Expected long-term return on plan assets
8.00
8.00
8.00
N/A
N/A
N/A
Rate of compensation increase
5.50
5.50
5.50
N/A
N/A
N/A
The expected long-term rate of return on plan assets is based on the established asset allocation.
Assumed trend rates for medical plans were as follows:
2011
2010
2009
Health care cost trend rate assumed for next year
9.0
%
9.5
%
10.0
%
Rate to which the cost trend rate assumed to decline (the ultimate trend rate)
5.0
5.0
5.0
Year the rate reaches ultimate trend rate
2028
2020
2020
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
One
Percentage
Point
Increase
One
Percentage
Point
Decrease
Effect on total of service and interest cost
$
24
$
(20
)
Effect on post-retirement benefit obligation
250
(215
)
Plan Assets
Effective July 31, 2010, Diamond adopted the provisions of ASU No. 2010-06 on employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. The fair values of the Company’s pension plan assets by asset category were as follows (see Note 2 for description of levels):
Fair Value Measurements at July 31, 2011
Total
Level 1
Level 2
Level 3
Asset Category:
Cash and cash equivalents
$
419
$
—
$
419
$
—
Mutual funds — equity:
Domestic
5,681
5,681
—
—
International
2,180
2,180
—
—
Mutual funds — debt:
Government
1,909
1,909
—
—
Corporate
3,547
3,547
—
—
Other
715
715
—
—
Total
$
14,451
$
14,032
$
419
$
—
50
Fair Value Measurements at July 31, 2010
Total
Level 1
Level 2
Level 3
Asset Category:
Cash and cash equivalents
$
178
$
—
$
178
$
—
Mutual funds — equity:
Domestic
5,445
—
5,445
—
International
1,456
—
1,456
—
Pooled Funds
6,065
—
6,065
—
Total
$
13,144
$
—
$
13,144
$
—
Pension obligations and expenses are most sensitive to the expected return on pension plan assets and discount rate assumptions. Other post retirement benefit obligations and expenses are most sensitive to discount rate assumptions and health care cost trend rate. Diamond determines the expected return on pension plan assets based on an expectation of the average annual returns over an extended period of time. This expectation is based, in part, on the actual returns achieved by the Company’s pension plan in prior periods. The Company also considers the weighted average historical rates of return on securities with similar characteristics to those in which the Company’s pension assets are invested.
The investment objectives for the Diamond plans are to maximize total returns within reasonable and prudent levels of risk. The plan asset allocation is a key element in achieving the expected investment returns on plan assets. The current asset allocation strategy targets an allocation of 60% for equity securities and 40% for debt securities with adequate liquidity to meet expected cash flow needs. Actual asset allocation may fluctuate within acceptable ranges due to market value variability. If fluctuations cause an asset class to fall outside its strategic asset allocation range, the portfolio will be rebalanced as appropriate.
Cash Flows
Estimated future benefit payments, which reflect expected future service, as appropriate, expected to be paid are as follows:
Pension
Benefits
Other
Benefits
2012
$
549
$
114
2013
4,515
126
2014
648
155
2015
738
162
2016
753
159
2017 — 2021
4,481
826
51
Defined Contribution Plan
The Company also recognized defined contribution plan expenses of $1,151, $720 and $524 for the years ended July 31, 2011, 2010 and 2009, respectively.
(15) Quarterly Financial Information (unaudited)
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Year ended July 31, 2011
Net sales
$
252,566
$
257,592
$
222,991
$
232,773
Gross profit (1)
63,596
70,856
59,588
57,107
Operating expenses (2)
36,071
34,916
42,035
45,145
Net income
14,214
19,720
7,733
8,544
Basic earnings per share
0.65
0.90
0.35
0.39
Basic shares (in thousands)
21,489
21,565
21,604
21,652
Diluted earnings per share
0.64
0.87
0.34
0.37
Diluted shares (in thousands)
21,947
22,221
22,341
22,577
Year ended July 31, 2010
Net sales
$
180,641
$
184,169
$
138,734
$
176,618
Gross profit (3)
45,491
40,578
31,093
43,839
Operating expenses (4)
19,789
27,488
32,991
28,503
Net income (loss)
14,930
8,814
(4,273
)
6,740
Basic earnings (loss) per share
0.90
0.53
(0.22
)
0.31
Basic shares (in thousands)
16,269
16,280
19,313
21,503
Diluted earnings (loss) per share
0.88
0.52
(0.22
)
0.30
Diluted shares (in thousands)
16,685
16,764
19,313
22,097
(1)
Diamond revised its estimate for expected commodity costs to reflect change in market conditions. Accordingly, cost of sales resulted in a pre-tax decrease of approximately $1.5 million and a pre-tax increase of approximately $1.2 million, in the quarters ended April 30, 2011 and January 31, 2011, respectively, reflecting the impact on sales recognized during the previous quarters of fiscal year 2011. There was no change in the quarter ended July 31, 2011.
(2)
Includes acquisition and integration related expenses of $0.5 million, $0.9 million, $5.9 million and $9.5 million for the quarters ended October 30, 2010, January 31, 2011, April 30, 2011 and July 31, 2011, respectively.
(3)
Diamond revised its estimate for expected commodity costs to reflect change in market conditions. Accordingly, cost of sales resulted in a pre-tax decrease of approximately $1.1 million and $2.6 million in the quarters ended April 30, 2010 and January 31, 2010, respectively, reflecting the impact on sales recognized during the previous quarters of fiscal year 2010. There was no change in the quarter ended July 31, 2010.
(4)
Includes acquisition and integration related expenses of $10.2 million and $1.3 million for the quarters ended April 30, 2010 and July 31, 2010, respectively.
52
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Not applicable.
Item 9A. Controls and Procedures
We have established and currently maintain disclosure controls and procedures designed to provide reasonable assurance that material information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission and that any material information relating to the Company is recorded, processed, summarized and reported to our principal officers to allow timely decisions regarding required disclosures.
We acquired Kettle Foods on March 31, 2010, and as a result, we updated our internal control over financial reporting (as defined in Rule 13a-15(f) under the 1934 Act) during our fiscal year ended July 31, 2011, to include specific controls for Kettle Foods. Otherwise, there were no changes in our internal control over financial reporting during the year ended July 31, 2011 which have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
In conjunction with the close of each fiscal quarter, we conduct a review and evaluation, under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial and Administrative Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Our Chief Executive Officer and Chief Financial and Administrative Officer, based upon their evaluation as of July 31, 2011, the end of the fiscal quarter covered in this report, concluded that our disclosure controls and procedures were effective.
53
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The management of Diamond Foods, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our internal control system is designed to provide reasonable assurance regarding the preparation and fair presentation of our financial statements in accordance with generally accepted accounting principles.
An internal control over financial reporting system has inherent limitations and may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
We have used the framework set forth in the report entitled “Internal Control — Integrated Framework” published by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission to evaluate the effectiveness of our internal control over financial reporting as of July 31, 2011. Based on that evaluation, our management concluded that our internal control over financial reporting was effective as of July 31, 2011 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. We reviewed the results of management’s assessment with the Audit Committee of our Board of Directors.
Deloitte & Touche LLP, an independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting.
/s/ Michael J. Mendes
/s/ Steven M. Neil
Chairman of the Board, President and
Chief Executive Officer
Chief Financial and Administrative
Officer
September 15, 2011
54
Item 9B. Other Information
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item is incorporated by reference to disclosure under the subheadings “Proposal No. 1 — Election of Directors — Directors/Nominees,” “Executive Compensation — Executive Officers,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance and Board of Directors Matters” of the Company’s Proxy Statement for the 2012 Annual Meeting of Stockholders (the “2012 Proxy Statement”).
Item 11. Executive Compensation
The information required by this item is incorporated by reference to disclosure under the headings “Executive Compensation” and “Corporate Governance and Board of Directors Matters” in the 2012 Proxy Statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference to disclosure under the subheadings “Executive Compensation — Equity Compensation Plan Information” and “Stock Ownership of Principal Stockholders and Management” in the 2012 Proxy Statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference to the subheadings “Certain Relationships and Related Party Transactions” section of the 2012 Proxy Statement.
Item 14. Principal Accounting Fees and Services
The information required by this item is incorporated by reference from the “Proposal No. 2 — Ratification of Appointment of Independent Registered Public Accounting Firm — Audit Fees” section of the 2012 Proxy Statement.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
1. Financial Statements.
(a) Report of Independent Registered Public Accounting Firm
(b) Consolidated Balance Sheets at July 31, 2011 and 2010
(c) Consolidated Statements of Operations for the years ended July 31, 2011, 2010 and 2009
(d) Consolidated Statements of Stockholders’ Equity for the years ended July 31, 2011, 2010 and 2009
(e) Consolidated Statements of Cash Flows for the years ended July 31, 2011, 2010 and 2009
(f) Notes to the Consolidated Financial Statements
55
2. Financial Statement Schedules.
All schedules are omitted because the required information is included with the Consolidated Financial Statements, or notes thereto.
3. Exhibits.
The following exhibits are filed as part of this report or are incorporated by reference to exhibits previously filed with the SEC.
Number
Exhibit Title
Filed with
This Report
Incorporated by Reference
Form
File No.
Date Filed
2.01
Share Purchase Agreement, dated as of February 25, 2010, by and among Diamond Foods, Inc., DFKA Ltd and Lion/Stove Luxembourg Investment S.a.r.l.
8-K/A
000-51439
March 1, 2010
3.01
Certificate of Incorporation, as amended
S-1
333-123576
July 15, 2005
3.02
Restated Bylaws
S-1
333-123576
March 25, 2005
4.01
Form of Certificate for common stock
S-1
333-123576
July 18, 2005
10.01
Form of Indemnity Agreement between Registrant and each of its directors and executive officers
S-1
333-123576
March 25, 2005
10.02*
2005 Equity Incentive Plan and forms of stock option agreement, stock option exercise agreement and restricted stock purchase agreement
S-1
333-123576
March 25, 2005
10.03*
2005 Employee Stock Purchase Plan and form of subscription agreement
S-1
333-123576
March 25, 2005
10.04*
Diamond Walnut Growers, Inc. 401(k) Plan
S-1
333-123576
March 25, 2005
10.05*
Diamond Walnut Growers, Inc. Retirement Restoration Plan
S-1
333-123576
March 25, 2005
10.06*
Diamond of California Management Pension Plan
S-1
333-123576
March 25, 2005
10.07
Diamond Walnut Growers, Inc. Pension Plan, as restated
S-1
333-123576
March 25, 2005
10.08*
Employment Agreement, dated March 25, 1997, between Registrant and Michael J. Mendes
S-1
333-123576
March 25, 2005
10.10
Form of Walnut Purchase Agreement
S-1
333-123576
May 3, 2005
10.12
Rights Agreement, dated as of April 29, 2005, by and between Registrant and EquiServe Trust Company, N.A
S-1
333-123576
May 3, 2005
10.13*
Form of Change of Control and Retention Agreement between Registrant and each of its executive officers
S-1
333-123576
May 3, 2005
56
10.14
Amendment to Diamond Foods, Inc. Pension Plan
8-K
000-51439
September 20, 2006
10.15*
Form of Tax Withholding Agreement
8-K
000-51439
July 20, 2007
10.16*
Form of Stock Withholding Agreement
8-K
000-51439
January 10, 2007
10.17*
Offer Letter between Steven M. Neil and Diamond Foods, Inc.
10-Q
000-51439
March 11, 2008
10.18*
Offer Letter between Lloyd Johnson and Diamond Foods, Inc.
10-K
000-51439
July 31, 2008
10.19
Credit Agreement between Diamond Foods, Inc. and Bank of America, N.A., dated September 15, 2008
8-K
000-51439
September 17, 2008
10.20*
Offer Letter between Linda Segre and Diamond Foods, Inc.
10-K
000-51439
July 31, 2009
10.21
Credit Agreement, dated as of February 25, 2010, by and among Diamond Foods, Inc., the Lenders party thereto, Bank of America, N.A., Banc of America Securities LLC and Barclays Capital
8-K/A
000-51439
March 1, 2010
10.22
Transaction Agreement
8-K
000-51439
April 5, 2011
10.23
Separation Agreement
8-K
000-51439
April 5, 2011
21.01
List of Subsidiaries of Diamond Foods, Inc.
X
23.01
Consent of Independent Registered Public Accounting Firm
X
31.01
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
X
31.02
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
X
32.01
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
X
*
Indicates management contract or compensatory plan or arrangement
All other schedules, which are included in the applicable accounting regulations of the Securities and Exchange Commission, are not required here because they are not applicable.
57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
DIAMOND FOODS, INC.
By:
/s/ Steven M. Neil
Steven M. Neil
Chief Financial and Administrative Officer
Date: September 15, 2011
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name
Title
Signature Date
/s/ Michael J. Mendes
Michael J. Mendes
Chairman of the Board, President and Chief Executive
Officer and Director (principal executive officer)
September 15, 2011
/s/ Steven M. Neil
Steven M. Neil
Chief Financial and Administrative Officer and
Director (principal financial officer and principal
accounting officer)
September 15, 2011
/s/ Laurence M. Baer
Laurence M. Baer
Director
September 15, 2011
/s/ Edward A. Blechschmidt
Edward A. Blechschmidt
Director
September 15, 2011
/s/ John J. Gilbert
John J. Gilbert
Director
September 15, 2011
/s/ Robert M. Lea
Robert M. Lea
Director
September 15, 2011
/s/ Joseph P. Silveira
Joseph P. Silveira
Director
September 15, 2011
/s/ Glen C. Warren, Jr.
Glen C. Warren, Jr.
Director
September 15, 2011
/s/ Richard Wolford
Richard Wolford
Director
September 15, 2011
/s/ Robert J. Zollars
Robert J. Zollars
Director
September 15, 2011
58
EXHIBIT INDEX
Exhibit
Number
Exhibit Description
21.01
List of Subsidiaries of Diamond Foods, Inc.
23.01
Consent of Independent Registered Public Accounting Firm
31.01
Certification of Chief Executive Officer
31.02
Certification of Chief Financial Officer
32.01
Section 1350 Certifications of Chief Executive Officer and Chief Financial Officer
Exhibit 21.01
Subsidiaries of Diamond Foods, Inc.
Subsidiary
Jurisdiction of Formation
DFKA Acquisition Ltd
United Kingdom
DFKA Holdings Ltd
United Kingdom
DFKA Intermediate Ltd
United Kingdom
DFKA Investment Ltd
United Kingdom
DFKA Ltd
United Kingdom
DFKA UK Holdings Ltd
United Kingdom
Diamond of Europe GmbH
Germany
Kettle Foods Holdings, Inc.
Delaware
Kettle Foods Ltd (UK operating company)
United Kingdom
Kettle Foods, Inc. (US operating company)
Oregon
Lion / Stove Luxembourg Investment 2 Sarl
Luxembourg
Wimbledon Acquisition LLC
Delaware
Exhibit 23.01
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in Registration Statement Nos. 333-169766, 333-162222, 333-153672, 333-140066, and 333-126743 on Form S-8, and Registration Statement No. 333-162221 on Form S-3 of our report dated September 15, 2011, relating to the consolidated financial statements of Diamond Foods, Inc., and the effectiveness of Diamond Foods, Inc.’s internal control over financial reporting, appearing in this Annual Report on Form 10-K of Diamond Foods, Inc. for the year ended July 31, 2011.
/s/ Deloitte & Touche LLP
San Francisco, California
September 15, 2011
Exhibit 31.01
CERTIFICATION FOR FORM 10-K
I, Michael J. Mendes, certify that:
1. I have reviewed this annual report on Form 10-K of Diamond Foods, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By:
/s/ Michael J. Mendes
Name:
Michael J. Mendes
Title:
Chairman of the Board, President and
Chief Executive Officer
Date: September 15, 2011
Exhibit 31.02
CERTIFICATION FOR FORM 10-K
I, Steven M. Neil, certify that:
1. I have reviewed this annual report on Form 10-K of Diamond Foods, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
By:
/s/ Steven M. Neil
Name:
Steven M. Neil
Title:
Chief Financial and Administrative Officer
Date: September 15, 2011
Exhibit 32.01
Certification by the Chief Executive Officer Pursuant to 18 U. S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Michael J. Mendes, President and Chief Executive Officer of Diamond Foods, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the fiscal year ended July 31, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By:
/s/ Michael J. Mendes
Michael J. Mendes
Chairman of the Board, President and Chief Executive Officer
Date: September 15, 2011
Certification by the Chief Financial Officer Pursuant to 18 U. S. C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
I, Steven M. Neil, Chief Financial and Administrative Officer of Diamond Foods, Inc. (the “Company”), certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
(1) the Annual Report on Form 10-K of the Company for the fiscal year ended July 31, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)); and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
By:
/s/ Steven M. Neil
Steven M. Neil
Chief Financial and Administrative Officer
Date: September 15, 2011
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