(12) Commitments and Contingencies
In November 2011 and December 2011, 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. 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 its former independent auditor as defendants. The amended complaint purports to allege claims covering the period from October 5, 2010 through February 8, 2012, and seeks compensatory damages, interest thereon, costs and expenses incurred in the action and other relief. On September 28, 2012, Diamond moved to dismiss the action. On November 30, 2012, the court denied Diamond’s motion allowing the matter to proceed with respect to Diamond and the former executive officers, and dismissed claims against Diamond’s former independent auditor with leave to amend. On December 21, 2012, Diamond and the former executive officers filed answers to the amended complaint. On May 6, 2013, the court certified a class in the consolidated action. Thereafter, the parties reached a proposed agreement subject to final court approval, to settle the action. On August 21, 2013, a motion for preliminary approval of the settlement was filed which was granted on September 26, 2013. A final approval hearing is currently scheduled for January 9, 2014. Pursuant to the terms of the preliminarily approved settlement, Diamond would pay a total of $11.0 million in cash and issue 4.45 million shares of common stock to a settlement fund to resolve all claims asserted on behalf of investors who purchased or otherwise acquired Diamond stock between October 5, 2010 and February 8, 2012, inclusive. A portion of the $11.0 million in cash would be funded by Diamond’s insurers. The total amount of director and officer liability coverage available under Diamond’s insurance policies is $30 million. As of July 31, 2013, insurers had paid approximately $12.9 million in insurable expenses. As of July 31, 2013, Diamond had recorded a $15.5 million receivable, $12.1 million which will be used for the settlement and other legal expenses and $3.4 million for the shareholder derivative settlement. In addition, Diamond expects to receive $1.6 million related to the shareholder derivative settlement in the first quarter of fiscal 2014 which will be recorded as a gain. Pursuant to the preliminary approval motion, the estimated value of the 4.45 million shares of Diamond’s common stock was valued at $85.1 million based on the closing market price of Diamond’s common stock on the day before the preliminary approval motion was filed, August 20, 2013. The value of the 4.45 million shares of common stock at July 31, 2013 was $90.7 million. With respect to the 4.45 million shares, Diamond would have the ability to privately place, or conduct a public offering of, the shares with the consent of the lead plaintiff and its counsel, prior to distribution of the settlement fund. In that event, the settlement fund would include the proceeds of the offering in lieu of the settlement shares. Refer to Note 17 to the Notes to the Consolidated Financial Statements.
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 Diamond’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 Diamond’s board, and Diamond’s former independent 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 former independent 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. Following mediation efforts, an agreement in principle to settle all derivative claims on behalf of Diamond was reached by plaintiffs and the current and former executive officers and members of Diamond’s board. The agreement also sought to resolve certain litigation demands by various shareholders of Diamond Foods, as well as the Astor BK Realty Trust v. Diamond Foods, Inc. action pending in the Court of Chancery for the State of Delaware pursuant to 8 Del. C. §220. On May 29, 2013, plaintiffs filed a motion for preliminary approval of the settlement. On June 14, 2013, the court preliminarily approved the settlement. On August 19, 2013, the court entered an order granting final approval of the settlement and judgment was entered the same day. As part of the settlement, Diamond’s insurers were required to pay Diamond $5.0 million, of which $3.4 million was reimbursement of fees to be paid by Diamond to plaintiffs’ attorneys. These fees were recorded as a liability as of July 31, 2013 with a corresponding receivable from the insurers. $1.6 million of the $5.0 million settlement will be recorded as a gain in the first quarter of fiscal 2014. On September 23, 2013 a Notice of Appeal was filed by one of the plaintiffs in the dismissed federal derivative case, In re Diamond Foods, Inc., Derivative Litigation.
In re Diamond Foods, Inc., Derivative Litigation
Beginning on November 28, 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 Diamond’s 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 Diamond’s board of directors as individual defendants, and also adding Diamond’s former independent 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 Diamond’s former independent 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. Diamond filed his answering brief on November 27, 2012 and appellant filed his reply brief on December 28, 2012.
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. On August 26, 2013, in connection with the settlement of the shareholder derivative claims in In re Diamond Foods Inc., Shareholder Derivative Litigation, the action was dismissed with prejudice.
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.
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, 2013, the Company had $4.8 million of letters of credit outstanding related to normal business transactions and commitments of $1.2 million to purchase new equipment.
Operating lease expense for the fiscal 2013, 2012 and 2011 were $5.3 million, $5.5 million and $4.7 million, respectively.
At July 31, 2013, future minimum payments under non-cancelable operating leases (primarily for real property) were as follows:
| Operating Leases | ||||
|
2014 |
$ | 4,910 | ||
|
2015 |
4,101 | |||
|
2016 |
2,991 | |||
|
2017 |
2,577 | |||
|
2018 |
2,511 | |||
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Thereafter |
7,059 | |||
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Total |
$ | 24,149 | ||
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At July 31, 2013, future minimum payments under non-cancelable capital leases (primarily for real property) were as follows:
| Capital Leases | ||||
|
2014 |
$ | 3,156 | ||
|
2015 |
3,156 | |||
|
2016 |
3,156 | |||
|
2017 |
3,083 | |||
|
2018 |
1,503 | |||
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Thereafter |
1,465 | |||
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Total minimum payments |
15,519 | |||
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Less amount representing interest |
(2,334 | ) | ||
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Present value of capital lease obligations |
$ | 13,185 | ||
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