UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

(Mark One)

þ		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

DIAMOND FOODS, INC.

Delaware (State of Incorporation)		20-2556965 (IRS Employer Identification No.)
600 Montgomery Street, 17th Floor San Francisco, California (Address of Principal Executive Offices)		94111-2702 (Zip Code)

415-912-3180
(Telephone No.)

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

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

     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 o No þ

     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 þ No o

     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 o No o

     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. þ

     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):

     Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2). Yes o No þ

     As of January 31, 2010, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $557,213,849 based on the closing sale price as reported on the NASDAQ Stock Market. As of August 31, 2010, there were 21,868,820 shares of common stock outstanding.

     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.		Business		3
Item 1A.		Risk Factors		8
Item 1B.		Unresolved Staff Comments		16
Item 2.		Properties		16
Item 3.		Legal Proceedings		16
Item 4.		Removed and Reserved		16
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		16
Item 6.		Selected Financial Data		17
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 7A.		Quantitative and Qualitative Disclosure About Market Risk		23
Item 8.		Financial Statements and Supplementary Data		24
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		49
Item 9A.		Controls and Procedures		50
Item 9B.		Other Information		50
PART III
Item 10.		Directors, Executive Officers and Corporate Governance		51
Item 11.		Executive Compensation		51
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		51
Item 13.		Certain Relationships and Related Transactions, and Director Independence		51
Item 14.		Principal Accounting Fees and Services		51
PART IV
Item 15.		Exhibits and Financial Statement Schedules		51
Signatures				54
EX-21.01
EX-23.01
EX-31.01
EX-31.02
EX-32.01

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 the discussion under “Business — Our Strategy” and 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 2011 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. On March 31, 2010, we completed our acquisition of 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 brand Kettle 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 and other retail channels.

     We have five product lines:

	•		Snack. We sell snack products under the Emerald, Pop Secret and Kettle 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 with the acquisition of the Pop Secret microwave popcorn from General Mills, Inc. Microwave popcorn products are offered in a variety of traditional flavors, as well as a “better-for-you” product offering featuring 100-calorie packs. On March 31, 2010, we complemented our snack portfolio with the acquisition of Kettle Foods, a leading premium potato chip company. Kettle 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. 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.

	•		Retail In-shell. We sell in-shell nuts under the Diamond of California brand, primarily during the winter holiday season. These products are typically available in grocery store produce sections, mass merchandisers and club stores.
	•		International Non-Retail. 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.
	•		North American Ingredient/Food Service. We market ingredient and food service nuts under the Diamond of California brand to food processors, restaurants, bakeries and food service companies and their suppliers. Our 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,
		2010				2009				2008
Snack		$	321.4			$	188.9			$	88.6
Culinary			217.5				241.9				239.9
In-shell			31.5				34.3				41.9
Total Retail			570.4				465.1				370.4
International Non-Retail			69.2				68.9				101.6
North American Ingredient/Food Service			38.0				34.5				56.9
Other			2.6				2.4				2.6
Total Non-Retail			109.8				105.8				161.1
Total Net Sales		$	680.2			$	570.9			$	531.5

     Sales to Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), accounted for approximately 17%, 21% and 22% of our net sales for the years ended July 31, 2010, 2009 and 2008, respectively. Sales to Costco Wholesale Corporation accounted for 12%, 13% and 13% of our net sales for the years ended July 31, 2010, 2009 and 2008, 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.

Our Strategy

     Our goal is to continue to grow our revenues by increasing our market share in the snack category, while strengthening our position as the number one marketer and distributor of culinary nuts. In addition, we intend to expand our profit margins by increasing sales of higher-margin retail products at a faster rate than non-retail products and by reducing costs. To achieve these goals we intend to:

     Increase market share in the snack industry. We plan to promote our broad line of snack products by aggressively investing in creative advertising, marketing and promotional programs. We believe our continued investments in national advertising campaigns will help differentiate our products and improve our competitive position. National consolidation of retailers has created a need for distribution efficiencies, such as fewer stock keeping units or SKUs, conservation of warehouse space, supply chain support, and national merchandising. We believe we are capable of providing efficiencies of this nature. We intend to gain additional market share in the snack market by exploiting our national brand and distribution systems, and by cross promoting our nut, popcorn, potato and tortilla chip products.

     Improve margins. We intend to increase our margins through optimizing product mix, investing in capital improvements, leveraging scale in operating expenses and other cost reduction activities. We expect a greater proportion of our sales in the future to be represented by higher-margin products. We plan to invest capital for projects that lower our costs and optimize the location, function and utilization of our processing, storage and distribution facilities. We are also investing in additional processing and packaging equipment as our brands grow. We expect that these investments will increase our productivity and flexibility, enabling us to serve our customers better and improve our margins.

     Expand and improve our position in distribution channels. We plan to expand in existing sales channels, such as mass merchandisers and club stores, and introduce our snack products in new distribution channels. We plan to leverage our existing supply chain management capabilities to cost-effectively distribute our products through these new channels.

     Pursue additional growth opportunities. To maintain and grow our market share in the culinary aisle and expand our presence in the snack industry, we may make additional strategic acquisitions, enter into strategic alliances or pursue other external growth opportunities. In particular, we intend to identify opportunities that will allow us to:

•

introduce new products that are complementary to our existing product lines and can be marketed through our existing sales force and leverage our production and distribution systems;

•

build the value of our brands; and

•

enhance or leverage our processing and distribution capabilities to lower our costs.

Principal Products

     We market and sell the following products:

Category				Products				Product Features
Snack		•		Glazed nuts		•		Patented glazing process combined with unique flavors
		•		Roasted and mixed nuts		•		Wide variety of natural and roasted nuts in a range of package formats
		•		Trail mix		•		Unique blends and nutritionally dense products, some featuring unique, patent pending roasted nuts
		•		Breakfast trail mix		•		Conveniently packaged trail mix marketed as a nutritional and convenient option for breakfast, sold in the granola bar section of retailers
		•		Natural snack products for the produce aisle		•		Nuts and seeds, trail/snack mixes, dried fruits and sweet snacks sold in the produce aisle
		•		Microwave popcorn		•		Packaged in a variety of sizes and flavors including 94% Fat Free Butter
		•		Potato chips		•		Premium, all-natural, kettle-cooked and baked potato chips packaged in single serve, multi-pack and sharing sizes in multiple flavors
		•		Tortilla chips		•		Premium all-natural tortilla chips made with organic corn packaged in sharing size in six varieties of all naturally seasoned flavors
Culinary		•		Shelled nuts		•		Whole, sliced, slivered, chopped and ground nuts
		•		Pegboard nuts		•		Recipe ready packages ranging from 2.25-ounce to 4.0-ounce sizes
		•		Glazed nuts		•		Patented glazing process combined with unique flavors
		•		Harvest Reserve Premium nuts		•		Premium specialty nuts sold in resealable bags

Category				Products				Product Features
Retail In-shell		•		Various uncracked nuts, cleaned and/or polished		•		Packaged in clear visible bags, mesh bags and bulk display units
		•		Mixed nuts		•		Various package sizes ranging from one-pound bags to 25- kilogram sacks, with nut sizes ranging from baby to jumbo
International Non-Retail		•		In-shell nuts		•		Various uncracked nuts, cleaned and/or polished, packaged in clear visible bags, mesh bags and bulk display units
		•		Shelled and processed nuts		•		Whole, sliced, chopped, diced and ground nuts
		•		Custom-processed nuts		•		Food processor product of uniform size and consistent color
North American Ingredient/Food Service		•		Shelled and processed nuts		•		Whole, sliced, chopped, diced and ground nuts
		•		Custom-processed nuts		•		Food processor product of uniform size and consistent color
		•		Glazed nuts		•		Various large package sizes (ranging from 2 pounds to 30 pounds) tailored for business usage, with flexible processing and packaging operations

     We offer our products in an array of packages to meet different market needs. Our snack nut products are sold in various “on-the-go” package styles, including resealable foil bags and resealable plastic containers. For example, we offer Emerald snack products in immediate consumption packages (2.5-ounce) designed primarily for convenience store sales. We also offer snack products in 20-ounce to 38-ounce PET containers and bags for the club channel. With colorful, eye-catching labels and ergonomically designed, lightweight canisters, our products look and feel different than our competitors’ products, which have traditionally been marketed with understated labels in heavy glass or composite canisters. We offer microwave popcorn products in various package sizes, including 100-calorie snack size. We offer premium all-natural potato chips in a variety of flavors, styles and package sizes in both the natural food and mainstream chip aisles, and have recently introduced the Kettle Brand® TIAS! Tortilla Chips in the United States in six flavors, all made of certified organic corn, expeller pressed oil, and all natural seasonings. We sell our culinary nut products in packages that are smaller and more convenient to use than our traditional one-pound packages, and have broadened their appeal and differentiated them from our competitors’ products.

     Each of our product lines offers “better for you” options for consumers. Our Emerald snack nut line has 100-calorie packs in five flavors for consumers seeking a convenient way to control portion size. Our Pop Secret brand has several pack sizes of 94% Fat Free microwave popcorn, as well as 100-calorie packs offering portion control. Our Kettle brand offers a baked line of potato chips with 65% less fat than traditional potato chips and we offer a 100-calorie pack size for portion control. Most of our Diamond culinary nuts are all natural with no added seasonings or calories.

Marketing

     We believe that our marketing efforts are fundamental to the success of our business. Advertising expenses were $33.0 million in 2010, $28.8 million in 2009 and $20.5 million in 2008. We develop marketing strategies specific to each product line, focusing on building brand awareness, attracting new consumers and increasing consumption. 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. Marketing to ingredient/food service customers is focused on trade-oriented activities.

     Our consumer-targeted marketing campaigns include television, print and on-line 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 features key sport venues suited to our product demographic. We design and provide point-of-purchase displays for use by our retail customers. These displays and other shelving and pegboard 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. Our public relations efforts include distribution of free consumer publications designed to educate consumers about diet and health, in addition to the convenience and versatility of nuts as both a snack and recipe ingredient. We also conduct news media outreach programs and use our websites for product promotion and consumer entertainment. We offer samples and reach out to 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, our 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. We have consolidated our brokerage network into one national broker in 2010. Our distributor network carries our Kettle brand potato chips to grocery, convenience and natural food stores in various parts of the United States. 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 own production facilities in Alabama, California, Indiana, Oregon, Wisconsin, and Norwich, England, and from leased warehouse and distribution facilities in California, Georgia, Illinois, Indiana, New Jersey, Oregon, Wisconsin, 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

     We develop many of our snack and culinary nut and popcorn products through an arrangement with Mattson & Company, an independent food product development firm. This arrangement enables us to use top-quality talent to develop innovative products quickly, particularly for our snack product lines, while minimizing product development costs. Our management team works closely with Mattson & Company throughout all phases of new product development. We develop our potato chip products through our internal product development professionals.

     Once new products have been identified and developed, our internal production staff 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 our Stockton, California, Robertsdale, Alabama, and Fishers, Indiana facilities; our popcorn products are primarily processed and packaged in our 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. 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, 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 distributors (such as Planters), nut processors, national popcorn distributors (such as Orville Redenbacher’s), regional and national potato chip distributors (such as Frito-Lay) and regional 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 2010, 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

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, pecans from Mexico, and pine nuts from China and Turkey. Outside of our nut products, we obtain corn from our primary third party co-packer, 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 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 of various durations related to nut processing methods and a number of U.S. patents acquired from General Mills of various durations related to popcorn pouches, flavoring and microwave technologies. While these patents 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, pecans and almonds, our principal nut raw materials, 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 during this period.

Employees

     As of July 31, 2010, we had 1,467 full-time employees consisting of 1,013 production and distribution employees, 371 administrative and corporate employees, and 83 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. In 2010, we entered into a five-year collective bargaining agreement with these employees. 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 harm our sales or cause consumers to avoid our products.

     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 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 and also reduce our sales for an extended period. Product recalls and product liability claims could increase our expenses and have a material 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 costs of legal and regulatory compliance.

     As a food company, we are subject to extensive government regulation, including regulation of the manufacturing, importation, processing, packaging, storage, distribution and labeling of our products. 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. California’s Proposition 65 requires warning labels on products sold in California that contain any substance listed as having been found to cause cancer or birth defects. California has placed on the Proposition 65 list a naturally-occurring chemical compound, known as acrylamide, that is formed in the process of cooking many foods, including potato chips. Through our Kettle Foods business, we have entered into a settlement agreement with the California Attorney General to reduce the level of acrylamide in our products by December 2011. If consumer concerns about acrylamide increase, demand for affected products could decline and our revenues could be harmed. 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 a material 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.

     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 write off inventory and to lose sales. 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 profitability.

     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 risks, including difficulties integrating the acquired operations, 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.

     Changes in the food industry, including changing dietary trends and consumer preferences, 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.

     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. These costs fluctuate significantly over time. 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 substantially harm our business and results of operations.

     Our raw materials are subject to fluctuations in availability and price.

     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, ingredients and processing oils, are subject to risks inherent to farming, such as crop size, quality and yield fluctuations caused by poor weather and growing conditions, pest and disease problems, and other factors beyond our control. Nut, corn and potato market prices fluctuate based on supply and demand. If the supply of nuts does not expand to meet any increases in demand, our costs will increase. With respect to corn, since the price we pay for popcorn is based in part on the futures price of Number 2 Yellow Corn, if corn supply does not expand to meet demand, our costs for popcorn will increase. Potato supply shortages and resulting price increases could adversely impact our profitability. High prices might dampen growth of consumer demand for our products. Currently, we do not hedge against changes in nut, corn or potato commodity prices.

     From time to time, we may have large inventories of raw nut material. If there is a decline in the prices we can obtain for finished product, a significant portion of our inventories could decline in value, and this might result in a write-down of inventory. Any write-down of inventory would adversely impact our operating results.

     The principal co-packer for our popcorn products acquires raw corn on our behalf, directly from farmers, to meet our annual supply needs that we estimate in advance of the harvest. If we underestimate the amount of popcorn we will need, then we may have less product available to sell, which could reduce potential sales revenues. If we overestimate our anticipated needs, we may be forced to carry more inventory than we can profitably sell, which would adversely impact our operating results. The price we pay for popcorn is based in part on the Number 2 Yellow Corn futures price quoted on the Chicago Board of Trade for a time and date of our choosing. If we do not optimize the time at which we establish the price of popcorn, and as a result pay a higher price than we planned, our margins and profitability may decline.

     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 a material adverse effect on our potato chip operations. In particular, a sudden scarcity, substantial price increase, or unavailability of ingredients could materially 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.

     If we are unable to compete effectively in the markets in which we operate, our results of operations would be negatively affected.

     In general, competition in our markets is based on product quality, price, brand recognition and brand loyalty. 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. We compete for shelf space in retail grocery, convenience, drug, mass merchandiser and club stores, many of whom have significant purchasing power. 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 operate in this environment effectively. In addition, some channels through which we sell our snack products, such as drug and convenience stores, are different than those that we typically use for our culinary and in-shell products, and we have less experience in these channels than many of our competitors. Furthermore, competition in other channels, such as club stores, involves a sales cycle that can be one year or longer and may require displacing incumbent vendors who have longer relationships with the buyers. 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 adversely impact our business.

     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 top customer, Wal-Mart Stores, Inc. (which includes sales to both Sam’s Club and Wal-Mart), represented approximately 17% of our total net sales for the year ended July 31, 2010. Sales to Costco Wholesale Corporation represented 12% of our total net sales for the year ended July 31, 2010. The loss of these 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.

     Because we experience seasonal fluctuations in our sales, our quarterly results will fluctuate and our annual performance will depend largely on results from our first two quarters.

     Our business is highly seasonal, reflecting the general pattern of peak consumer demand for nut products during the months of October, November and December. Typically, a substantial portion of our revenues are earned during our first and second fiscal quarters. We generally experience lower revenues during our third and fourth fiscal quarters and in the future may incur losses in these quarters. Sales in the first and second fiscal quarters accounted for approximately 54% of our revenues for the year ended July 31, 2010. If sales in these quarters are lower than expected, our operating results would be adversely affected, and it would have a disproportionately large impact on our annual operating results.

     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 a material 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.

     Bioterrorism legislation could disrupt our supply of imported nuts.

     The U.S. Food and Drug Administration, or FDA, is responsible for developing and implementing food safety measures. The Public Health Security and Bioterrorism Preparedness and Response Act of 2002, which we refer to as the Bioterrorism Act, was enacted to protect the U.S. food supply. It includes provisions authorizing the Secretary of Health and Human Services to take action to protect the nation’s food supply against the threat of intentional contamination. The Bioterrorism Act requires us to register with the FDA as a U.S. Food Manufacturing Company, and to retain records about our sources of raw materials and the recipients of our finished goods. The Bioterrorism Act and related rules also result in higher costs for plant security and product safety, as well as general compliance costs. If we are unable to pass higher costs on to our customers, our results of operations and financial condition may be adversely affected.

     The current global economic downturn may materially and adversely affect our business, financial condition and results of operations.

     Unfavorable economic conditions, including the impact of recessions in the United States and throughout the world, 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, the economic situation 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 materially and adversely affect our business, financial condition and results of operations.

     Our business 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. The production and distribution employees working in our Stockton, California plant are members of the International Brotherhood of Teamsters. If a work stoppage or slow down were to occur under our collective bargaining agreement, it could adversely affect our business and disrupt our operations.

     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 2010, sales outside the United States, primarily in the United Kingdom, Canada, South Korea, Germany, Turkey, Japan, Netherlands, Spain and Italy accounted for approximately 18.6% of our net sales. With the acquisition of Kettle Foods, 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;
	•		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;
	•		import or export licensing requirements imposed by governments;
	•		foreign currency exchange and transfer restrictions;
	•		differing labor standards;
	•		differing levels of protection of intellectual property;
	•		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; and
	•		potentially burdensome taxation and changes in foreign tax laws.

     Any of these international business risks could have a material and adverse effect on our operating results.

     As a private company, Kettle Foods may not have had in place an adequate system of internal control over financial reporting that we will need to manage that business effectively as part of a public company.

     Kettle Foods was a private company that was not previously subject to financial reporting on the basis of accounting principles generally accepted in the United States and had not been subject to periodic reporting as a public company. There can be no assurance

that the Kettle Foods system of internal control over financial reporting would meet the standards required for public companies. Establishing, testing and maintaining an effective system of internal control over financial reporting requires significant resources and time commitments on the part of our management and our finance and accounting staff, may require additional staffing and infrastructure investments, and would increase our costs of doing business. Moreover, if we discover aspects of the Kettle Foods internal controls that need improvement, we cannot be certain that our remedial measures will be effective. Any failure to implement required new or improved controls, or difficulties encountered in their implementation could harm our operating results or increase our risk of material weakness in internal controls.

     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 shares, 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, 2010, the carrying value of goodwill and other intangible assets totaled approximately $845.8 million, compared to total assets of approximately $1,225.9 million and total shareholders’ equity of approximately $379.9 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 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 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 adapt to changing technologies and technical requirements;
	•		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 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 recently acquired three production facilities in the Kettle Foods transaction consisting of approximately 66,000 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

     In March 2008, a former grower and an organization named Walnut Producers of California filed suit against us in San Joaquin County Superior Court claiming, among other things, breach of contract relating to alleged underpayment for walnut deliveries for the 2005 and 2006 crop years. The plaintiffs purport to represent a class of walnut growers who entered into contracts with us. In May 2008, we argued a motion in front of the judge in the case requesting, among other things, that all class action allegations be struck from the plaintiffs’ complaint. In August 2008, the court granted our motion. The plaintiffs appealed the court’s ruling, and in August 2010, the Court of Appeals ruled against the plaintiffs and affirmed the trial court’s decision to strike the class allegation from the complaint. We intend to continue to vigorously defend ourselves against the plaintiffs’ allegations.

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

Item 4. Removed and Reserved

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:

										Dividends
		High				Low				Declared
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
Year Ended July 31, 2009:
Fourth Quarter		$	30.39			$	22.67			$	0.045
Third Quarter		$	29.25			$	19.85			$	0.045
Second Quarter		$	31.94			$	18.39			$	0.045
First Quarter		$	32.14			$	23.50			$	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, 2010, we had approximately 1,045 holders of record of our common stock, although we believe that there are a larger number of beneficial owners.

     We had no repurchases of common stock during the three months ended July 31, 2010.

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, 2010:

		Year Ended July 31,
		2010				2009				2008				2007				2006
		(In thousands, except per share information)
Statements of operations:
Net sales		$	680,162			$	570,940			$	531,492			$	522,585			$	477,205
Cost of sales			519,161				435,344				443,490				443,945				411,809
Gross profit			161,001				135,596				88,002				78,640				65,396
Operating expenses:
Selling, general and administrative			64,301				60,971				43,613				42,541				37,046
Advertising			32,962				28,785				20,508				20,445				17,977
Restructuring and other costs, net			—				—				—				(15	)			3,442
Loss on termination of defined benefit plan			—				—				—				3,054				—
Acquisition and integration related expenses			11,508				—				—				—				—
Total operating expenses			108,771				89,756				64,121				66,025				58,465
Income from operations			52,230				45,840				23,881				12,615				6,931
Interest expense, net			10,180				6,255				1,040				1,291				295
Other expenses, net			1,849				898				—				98				310
Income before income taxes			40,201				38,687				22,841				11,226				6,326
Income taxes (tax benefits)			13,990				14,944				8,085				2,793				(1,010	)
Net income		$	26,211			$	23,743			$	14,756			$	8,433			$	7,336
Earnings per share
Basic		$	1.40			$	1.45			$	0.92			$	0.53			$	0.47
Diluted		$	1.36			$	1.42			$	0.91			$	0.53			$	0.47
Shares used to compute earnings per share
Basic			18,313				16,073				15,767				15,359				15,069
Diluted			18,843				16,391				15,825				15,359				15,069
Dividends declared per share		$	0.18			$	0.18			$	0.18			$	0.12			$	0.09

		Year Ended July 31,
		2010				2009				2008				2007				2006
		(In thousands)
Balance sheet data:
Cash and cash equivalents		$	5,642			$	24,802			$	74,279			$	33,755			$	35,614
Working capital			72,168				51,422				121,516				100,527				87,689
Total assets			1,225,872				394,892				273,267				236,403				253,032
Total debt, including short-term debt			556,100				115,085				20,204				20,507				20,000
Total stockholders’ equity			379,943				173,341				146,223				125,341				110,826

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 $680 million in fiscal year 2010. 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. On March 31, 2010, we completed our acquisition of 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 brand Kettle to our existing portfolio of leading brands in the snack industry. The results of Kettle Foods operations are included in our financial statements from the date of acquisition. In general, we sell directly to retailers, particularly large 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 also sell our products to mass merchandisers, club stores, convenience stores and through other retail channels.

     Our business is seasonal. For example, in 2010 and 2009, we recognized 54% and 61% of our net sales for the full fiscal year in the first six months of the year. 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 December, and approximately 50% in May. 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. 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.

     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 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, we would recognize an impairment loss in the amount of such excess. Our impairment assessment employs present value techniques and involves the use of significant estimates and assumptions, including a projection of future revenues, gross margins, operating costs and cash flows, as well as general economic and market conditions and the impact of planned business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Actual results may differ from these estimates. 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.

     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

     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.

     Net sales by channel (in thousands):

		Year Ended July 31,								% Change from
		2010				2009				2009 to 2010
Retail (1)		$	570,416			$	465,126				22.6	%
International Non-Retail			69,206				68,890				0.5	%
North American Ingredient/Food Service			37,953				34,504				10.0	%
Other			2,587				2,420				6.9	%
Total		$	680,162			$	570,940				19.1	%

     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 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.

     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.

     2009 Compared to 2008

     Net sales were $570.9 million and $531.5 million for the years ended July 31, 2009 and 2008. The increase in net sales was primarily due to increased snack sales, including sales related to our acquisition of Pop Secret in September 2008, offset in part by lower pricing realized for certain culinary and ingredient products.

     Net sales by channel (in thousands):

		Year Ended July 31,								% Change from
		2009				2008				2008 to 2009
Retail (1)		$	465,126			$	370,411				25.6	%
International Non-Retail			68,890				101,640				-32.2	%
North American Ingredient/Food Service			34,504				56,869				-39.3	%
Other			2,420				2,572				-5.9	%
Total		$	570,940			$	531,492				7.4	%

     The increase in Retail sales for the year ended July 31, 2009 resulted from higher sales of snack products (including Pop Secret), which increased by 113.2%. This was offset in part by lower sales of in-shell products. International Non-Retail and North American Ingredient/Food Service sales declined primarily as a result of lower volume and price deflation associated with lower input costs.

     Gross profit. Gross profit as a percentage of net sales was 23.7% and 16.6% for the years ended July 31, 2009 and 2008. Gross profit increased mainly due to favorable product mix, transitioning product sales to retail from international and ingredient, favorable impact of Pop Secret sales, favorable input costs and the result of cost efficiency initiatives.

     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 $61.0 million and $43.6 million, and 10.7% and 8.2% as a percentage of net sales, for the years ended July 31, 2009 and 2008. The increase in selling, general and administrative expenses is primarily the result of work force additions and incremental operating expenses associated with the Pop Secret acquisition in September 2008.

     Advertising. Advertising expense was $28.8 million and $20.5 million, and 5.0% and 3.9% as a percentage of net sales, for the years ended July 31, 2009 and 2008. The increase in advertising was primarily due to the production and airing of three new Emerald TV commercials and increased media spending associated with the Diamond, Emerald and Pop Secret brands.

     Interest expense, net. Net interest expense was $6.3 million and $1.0 million, and 1.1% and 0.2% as a percentage of net sales, for the years ended July 31, 2009 and 2008. The increase was mainly due to borrowings used to fund the Pop Secret acquisition.

     Other expense, net. 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, 2009 was 38.6%, and included the effect of discrete tax items, primarily the recognition of certain state tax credits. For the year ended July 31, 2008, the combined effective federal and state tax rate was 35.4%, and included the effect of discrete tax items, primarily the recognition of certain state tax credits.

Liquidity and Capital Resources

     Our liquidity is dependent upon funds generated from operations and external sources of financing.

     During the year ended July 31, 2010, cash used in operating activities 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 2010 compared to $198.1 million in 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 2010 compared to $95.2 million in 2009. The increase was primarily attributable to long-term borrowings used to fund the Kettle Foods acquisition and to our equity offering.

     Cash provided by operating activities during the year ended July 31, 2009 was $53.4 million compared to $47.1 million during the year ended July 31, 2008. The increase in cash from operating activities was primarily due to improved profitability. Cash used in investing activities was $198.1 million in 2009 compared to $6.3 million in 2008. This increase was mainly due to the acquisition of Pop Secret for approximately $190 million. Cash provided by financing activities was $95.2 million in 2009 compared to $0.3 million of cash used in financing activities in 2008. This change was mainly attributable to long-term borrowings used to fund the Pop Secret acquisition, offset by repayments.

     On February 25, 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. The Company used the borrowings under the Secured Credit Facility to fund a portion of the Kettle Foods acquisition and to fund ongoing operations.

     Our new Secured Credit Facility consists of a $200 million revolving credit facility, of which $166 million was outstanding as of July 31, 2010, and a $400 million term loan facility, of which $390 million was outstanding as of July 31, 2010. Scheduled principal payments on the term loan are $40 million in fiscal year 2011, $40 million in 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. Borrowings under the Secured Credit Facility will bear interest, at Diamond’s option, at either the agent’s base rate or the London Interbank Offered Rate (“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 Earnings before interest, taxes, depreciation and amortization (“EBITDA”). Substantially all of the Company’s tangible and intangible assets are considered collateral security under the Secured Credit Facility.

     The new 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, 2010 and 2009, we were in compliance with all applicable covenants under the Secured Credit Facility and the predecessor credit facility, respectively.

     On March 10, 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.

     Working capital and stockholders’ equity were $72.2 million and $379.9 million at July 31, 2010 compared to $51.4 million and $173.3 million at July 31, 2009. The increase in working capital was due to increases in receivables and inventory related to the Kettle Foods acquisition, offset by increases in current portion of long term debt and payables.

     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, 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, 2010 were as follows (in millions):

		Payments Due by Period
						Less than				1-3				3-5				More than
		Total				1 Year				Years				Years				5 Years
Revolving line of credit		$	166.1			$	—			$	—			$	166.1			$	—
Long-term obligations			390.0				40.0				80.0				270.0				—
Interest on long-term obligations (a)			54.5				14.3				24.0				16.2				—
Operating leases			18.7				4.6				6.7				3.8				3.6
Purchase commitments (b)			76.5				76.5				—				—				—
Pension liability			24.2				0.5				4.3				1.4				18.0
Long-term deferred tax liabilities (c)			144.8				—				—				—				144.8
Other long-term liabilities (d)			9.3				0.1				0.3				0.3				8.6
Total		$	884.1			$	136.0			$	115.3			$	457.8			$	175.0

Off-Balance Sheet Arrangements

     As of July 31, 2010, 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 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.

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 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, 2010 to a 100 basis point increase or decrease in interest rates would be a decrease or increase of pretax income of approximately $0.1 million.

     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, 2010 are not expected to result in a significant impact on future earnings or cash flows. Additionally, our sales of finished goods and purchases of raw materials and supplies from outside the U.S. are generally denominated in U.S. dollars. However, in July, we entered into a series of foreign exchange collars to hedge a portion of our expected Canadian Dollar denominated sales of Kettle Foods between September 2010 and January 2011. 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

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, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended July 31, 2010. We also have audited the Company’s internal control over financial reporting as of July 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in “Management’s Report on Internal Control over Financial Reporting”, management excluded from its assessment the internal control over financial reporting at Kettle Foods, which was acquired on March 31, 2010 and whose financial statements constitute less than 10% of consolidated assets, and less than 15% of consolidated net sales of the consolidated financial statement amounts as of and for the year ended July 31, 2010. Accordingly, our audit did not include the internal control over financial reporting at Kettle Foods. 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, 2010 and 2009, and the results of their operations and their cash flows for each of the three years in the period ended July 31, 2010, 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, 2010, 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
October 5, 2010

DIAMOND FOODS, INC.

CONSOLIDATED BALANCE SHEETS

		July 31,
		2010				2009
		(In thousands, except share and
		per share information)
ASSETS
Current assets:
Cash and cash equivalents		$	5,642			$	24,802
Trade receivables, net			65,553				33,492
Inventories			143,405				85,027
Deferred income taxes			10,497				13,109
Prepaid income taxes			9,225				—
Prepaid expenses and other current assets			5,767				3,594
Total current assets			240,089				160,024
Property, plant and equipment, net			117,816				51,115
Deferred income taxes			13,625				6,230
Goodwill			396,788				76,076
Other intangible assets, net			449,018				97,883
Other long-term assets			8,536				3,564
Total assets		$	1,225,872			$	394,892
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt		$	40,000			$	15,000
Accounts payable and accrued liabilities			92,166				64,453
Payable to growers			35,755				29,149
Total current liabilities			167,921				108,602
Long-term obligations			516,100				100,085
Deferred income taxes			144,755				1,221
Other liabilities			17,153				11,643
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				17
Treasury stock, at cost: 229,606 and 201,777 shares at July 31, 2010 and 2009			(5,050	)			(4,256	)
Additional paid-in capital			307,032				122,817
Accumulated other comprehensive loss			(869	)			(1,296	)
Retained earnings			78,808				56,059
Total stockholders’ equity			379,943				173,341
Total liabilities and stockholders’ equity		$	1,225,872			$	394,892

See notes to consolidated financial statements.

DIAMOND FOODS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

		Year Ended July 31,
		2010				2009				2008
		(In thousands, except per share information)
Net sales		$	680,162			$	570,940			$	531,492
Cost of sales			519,161				435,344				443,490
Gross profit			161,001				135,596				88,002
Operating expenses:
Selling, general and administrative			64,301				60,971				43,613
Advertising			32,962				28,785				20,508
Acquisition and integration related expenses			11,508				—				—
Total operating expenses			108,771				89,756				64,121
Income from operations			52,230				45,840				23,881
Interest expense, net			10,180				6,255				1,040
Other expense, net			1,849				898				—
Income before income taxes			40,201				38,687				22,841
Income taxes			13,990				14,944				8,085
Net income		$	26,211			$	23,743			$	14,756
Earnings per share
Basic		$	1.40			$	1.45			$	0.92
Diluted		$	1.36			$	1.42			$	0.91
Shares used to compute earnings per share
Basic			18,313				16,073				15,767
Diluted			18,843				16,391				15,825
Dividends declared per share		$	0.18			$	0.18			$	0.18

See notes to consolidated financial statements.

DIAMOND FOODS, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

																						Accumulated
														Additional								Other				Total
		Common Stock								Treasury				Paid-In				Retained				Comprehensive				Stockholders’
		Shares				Amount				Stock				Capital				Earnings				Income (Loss)				Equity
		(In thousands, except share information)
Balance, July 31, 2007			15,764,647			$	16			$	(1,436	)		$	101,106			$	23,422			$	2,233			$	125,341
Shares issued under ESPP and upon stock option exercises			233,710												3,972												3,972
Stock compensation expense			257,649												6,893												6,893
Tax benefit from ESPP and stock option transactions															579												579
Treasury stock repurchased			(75,235	)							(1,767	)															(1,767	)
Dividends paid																			(2,902	)							(2,902	)
Comprehensive income:
Net income																			14,756								14,756
Change in pension liabilities																							(646	)			(646	)
Other comprehensive income																							(3	)			(3	)
Total comprehensive income:			—				—				—				—				—				—				14,107
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

See notes to consolidated financial statements.

DIAMOND FOODS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

		Year Ended July 31,
		2010				2009					2008
						(In thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	26,211			$	23,743			$	14,756
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization			17,154				11,362				6,420
Deferred income taxes			7,072				(2,800	)			(3,022	)
Excess tax benefit from ESPP and stock option transactions			(434	)			(1,067	)			(579	)
Stock-based compensation			3,231				3,901				6,893
Other, net			1,109				858				4
Changes in assets and liabilities (excluding business acquired):
Trade receivables			(2,873	)			12,764				4,406
Inventories			(45,852	)			10,316				2,093
Prepaid expenses and income taxes and other current assets			(6,437	)			1,053				10
Accounts payable and accrued liabilities			(12,068	)			21,231				16,054
Payable to growers			6,606				(27,793	)			(175	)
Other, net			4,693				(200	)			216
Net cash provided by (used in) operating activities			(1,588	)			53,368				47,076
CASH FLOWS FROM INVESTING ACTIVITIES:
Net proceeds from sale of property, plant and equipment			289				129				12
Purchases of property, plant, and equipment			(11,790	)			(7,994	)			(6,583	)
Acquisition of Pop Secret			833				(190,224	)			—
Acquisition of Kettle Foods, net of cash acquired			(616,222	)			—				—
Other			329				4				299
Net cash used in investing activities			(626,561	)			(198,085	)			(6,272	)
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			(9,900	)			—				—
Proceeds from issuance of long-term debt			400,000				125,000				—
Debt issuance costs			(8,852	)			(1,973	)			—
Payment of long-term debt and notes payable			(125,119	)			(30,141	)			(162	)
Gross proceeds from equity offering			191,475				—				—
Equity offering costs			(11,738	)			—				—
Dividends paid			(3,462	)			(2,960	)			(2,902	)
Excess tax benefit from ESPP and stock option transactions			434				1,067				579
Other, net			24				4,247				2,205
Net cash provided by (used in) financing activities			608,862				95,240				(280	)
Effect of exchange rate changes on cash			127				—				—
Net increase (decrease) in cash and cash equivalents			(19,160	)			(49,477	)			40,524
Cash and cash equivalents:
Beginning of period			24,802				74,279				33,755
End of period		$	5,642			$	24,802			$	74,279
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest		$	9,088			$	5,989			$	1,183
Income taxes			11,113				19,438				5,945
Non-cash investing activities:
Accrued capital expenditures			1,076				497				391

See notes to consolidated financial statements.

DIAMOND FOODS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 31, 2010, 2009 and 2008
(In thousands, except share and per share information)

(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. On March 31, 2010, Diamond completed its acquisition of 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 brand Kettle to Diamond’s existing portfolio of leading brands in the snack industry. The results of Kettle Foods operations are included in Diamond’s financial statements from the date of acquisition. In general, Diamond sells directly to retailers, particularly large national grocery store and drug store chains, and indirectly through wholesale distributors to independent and small regional retail grocery store chains and convenience stores. Diamond also sells its products to mass merchandisers, club stores, convenience stores and through 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 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, retail in-shell, international non-retail and North American 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 17%, 21% and 22% of net sales in 2010, 2009 and 2008, respectively. Sales to the second largest customer accounted for approximately 12%, 13% and 13% of net sales in 2010, 2009 and 2008, 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.

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 three 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 intangibles 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.

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.

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.

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.

(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 option 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 option 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. Hedge ineffectiveness recorded for the year ended July 31, 2010 for foreign currency derivatives is immaterial. 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 six months. Amounts expected to be reclassified from other comprehensive income to revenue for foreign currency derivatives within the next twelve months are immaterial.

     In the first quarter of fiscal year 2009, the Company entered into an interest rate swap agreement in accordance with Company policy to mitigate the impact of LIBOR-based interest rate fluctuations on Company profitability. The swap agreement, with a total hedged notional amount of $47.5 million, was entered into to hedge future cash flows associated with a portion of the Company’s variable rate bank debt, which was used to finance the Pop Secret acquisition. On January 22, 2009, the company terminated this swap agreement, which was set to mature on October 30, 2009. As a result of this swap termination, the Company amortized the loss of approximately $695 from other comprehensive income to interest expense through October 30, 2009, the original life of the swap.

     In the second quarter of fiscal year 2009, the Company entered into a new interest rate swap agreement in accordance with Company policy to mitigate the impact of LIBOR-based interest rate fluctuations on Company profitability. On March 10, 2010, the Company terminated this swap agreement, which was to mature on January 15, 2011. Since the swap did not qualify for hedge accounting, the loss of approximately $184 was recorded in the Statement of Operations for the year ended July 31, 2010.

     In the quarter 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, 2010, the Company recognized other comprehensive loss of $666 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 $575 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, 2010 are as follows:

		Balance Sheet Location				Fair Value
Liability Derivatives
Derivatives designated as hedging instruments under ASC 815:
Interest rate contracts		Interest payable				$	(2	)
Interest rate contracts		Other current liabilities					(666	)
Cash flow forwards		Accounts payable and accrued liabilities					(12	)
Total						$	(680	)

     The effect of the Company’s derivative instruments on the Consolidated Statements of Operations for the year ended July 31, 2010 is summarized below:

Location of Loss

Amount of Loss

Amount of Loss

Reclassified from

Reclassified from

Location of Loss

Amount of Loss

Recognized in OCI on

Accumulated OCI into

Accumulated OCI into

Recognized in Income on

Recognized in Income on

Derivatives in ASC 815 Cash

Derivative (Effective

Income (Effective

Income (Effective

Derivative (Ineffective

Derivative (Ineffective

Flow Hedging Relationships

Portion)

Portion)

Portion)

Portion)

Portion)

Interest rate contracts

$

(479

)

Interest Expense

$

(52

)

Interest Expense

$

—

Cash flow forwards

(12

)

Revenue

—

Revenue

—

Total

$

(491

)

$

(52

)

$

—

     Effective August 1, 2009, the Company adopted the provisions of ASC 820, “Fair Value Measurements and Disclosures,” regarding nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The adoption did not have a material impact.

     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 following tables present the Company’s liabilities measured at fair value on a recurring basis as of July 31, 2010 and July 31, 2009:

						Quoted Prices in				Significant Other				Significant
						Active Markets for				Observable				Unobservable
						Identical Assets				Inputs				Inputs
Description		July 31, 2010				(Level 1)				(Level 2)				(Level 3)
Assets:
Cash equivalents		$	586			$	586			$	—			$	—
Total		$	586			$	586			$	—			$	—
Derivative liabilities:
Interest rate contracts		$	(668	)		$	—			$	(668	)		$	—
Cash flow forwards			(12	)			—				(12	)			—
Total		$	(680	)		$	—			$	(680	)		$	—