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Warning: Diamond Foods Restatements May Contain Nutty Accounting

Diamond Foods should also have a detailed explanation of the root cause of its accounting issues, according to Wrede.

" Diamond Foods has limited its explanation of the cause of the restatements to a "breakdown of internal controls. We are looking for a more complete explanation of what went wrong and what steps have been put into place to ensure such a breakdown does not recur," Wrede adds.

Wrede also wants to see disclosure on when Diamond Foods will report fourth quarter 2012 earnings and those for the first quarter of 2013, with his understanding that the company has to file results by mid-December.

Given Diamond Foods complicated recapitalization agreement with Oaktree Capital, Wrede notes it's still uncertain whether the company will be able to cancel stock warrants at $10 a share due to Oaktree, and convert $75 million in debt to preferred stock carrying a 10% dividend. To not dilute shareholders by way of a warrant exercise at a depressed price, Diamond will need to secure $125 million pounds of walnuts by year-end within a gross profit target of $54.4 million and a 14.9% gross margin.

Three other issues Wrede highlights are clarity on the company's future cost structure in its walnut and snacks businesses, detail on the strength of its balance sheet given the prospect of shareholder lawsuits, and an outlook on how to grow the business now that Pringles has fallen into the hands of a competitor and suppliers are demanding higher costs.

The company also needs to appoint a permanent CFO and give investors a sense of whether it will replace restructuring specialists who have taken the reins of the company with permanent executives, according to Wrede.

Previous to Oaktree's investment, Diamond Foods' lenders agreed to a forbearance on its debt after the company suspended its dividend and began to work with financial advisor Dean Bradley Osborne to raise capital and maintain covenants.

In May, Diamond Foods hired Brian Driscoll, a former Hostess Brands and Kraft Foods executive as its new CEO.

Diamond Foods troubles began in February when an audit committee review of its finances found significant accounting inconsistencies for its walnut supplies, forcing the immediate suspension of its CEO Michael Mendes and CFO Steven Neil. The review also cast doubt on the accuracy of two years' worth of earnings statements, and delayed three quarters of earnings filings.

For more on Diamond Foods, see how it choked on Pringles.

-- Written by Antoine Gara in New York

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