BIG HEART PET BRANDS 10-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended April 27, 2014

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

For the transition period from to

Commission file number 333-107830-05

BIG HEART PET BRANDS

(Exact name of registrant as specified in its charter)

Delaware

75-3064217

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

One Maritime Plaza, San Francisco, California 94111

(Address of principal executive offices including zip code)

(415) 247-3000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act: NONE

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

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

The Company is privately held. All of its common stock is owned by Blue Acquisition Group, Inc. There is no trading in the Company’s common stock and therefore an aggregate market value based on sales or bid and asked prices is not determinable.

The number of shares outstanding of the Company’s common stock, par value $0.01, as of close of business on July 1, 2014, was 10.

LOGO

BIG HEART PET BRANDS

For the Fiscal Year Ended April 27, 2014

TABLE OF CONTENTS


		Page
	PART I

Item 1.	Business		3

Item 1A.	Risk Factors		9

Item 1B.	Unresolved Staff Comments		19

Item 2.	Properties		19

Item 3.	Legal Proceedings		20

Item 4.	Mine Safety Disclosures		20

	PART II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		20

Item 6.	Selected Financial Data		22

Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		23

Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		41

Item 8.	Financial Statements and Supplementary Data		43

Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		88

Item 9A.	Controls and Procedures		88

Item 9B.	Other Information		89

	PART III

Item 10.	Directors, Executive Officers and Corporate Governance		90

Item 11.	Executive Compensation		95

Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		124

Item 13.	Certain Relationships and Related Transactions, and Director Independence		127

Item 14.	Principal Accounting Fees and Services		130

	PART IV

Item 15.	Exhibits, Financial Statement Schedules		131

Signatures			132

Power of Attorney			133

Exhibit Index			134

Special Note Regarding Forward-Looking Statements

This Annual Report on Form 10-K, including the sections entitled “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Securities Exchange Act of 1934. Statements that are not historical facts, including statements about our beliefs or expectations, are forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terms such as “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” or “continue” or the negative of these terms or other comparable terms.

Forward-looking statements are based on our plans, estimates, expectations and assumptions as of the date of this Annual Report on Form 10-K, and are subject to risks and uncertainties that may cause actual results to differ materially from the forward-looking statements. Accordingly, you should not place undue reliance on them. A detailed discussion of the known risks and uncertainties that could cause actual results and events to differ materially from such forward-looking statements is included in the section entitled “Risk Factors” (refer to Part I, Item 1A of this Annual Report on Form 10-K). All forward-looking statements in this Annual Report on Form 10-K are made only as of the date of this report. We undertake no obligation, other than as required by law, to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Helpful Information

Big Heart Pet Brands was previously known as Del Monte Corporation, changing its name in connection with the sale of the Consumer Products Business on February 18, 2014. As used throughout this Annual Report on Form 10-K, “Big Heart Pet” or “the Company” means Big Heart Pet Brands and its consolidated subsidiaries, “DMC” means Del Monte Corporation, and “DMFC” means Del Monte Foods Company.

Big Heart Pet’s fiscal year ends on the Sunday closest to April 30, and its fiscal quarters typically end on the Sunday closest to the end of July, October and January. As used throughout this Form 10-K,“fiscal 2015” means Big Heart Pet’s fiscal year ending May 3, 2015; “fiscal 2014” means Big Heart Pet’s fiscal year ended April 27, 2014;“fiscal 2013” means Big Heart Pet’s fiscal year ended April 28, 2013; “fiscal 2012” means Big Heart Pet’s fiscal year ended April 29, 2012; “fiscal 2011” means the twelve months ended May 1, 2011; and “fiscal 2010” means Big Heart Pet’s fiscal year ended May 2, 2010. On March 8, 2011, we were acquired by an investor group led by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Capital, L.P. (“Centerview”). The acquisition (also referred to as the “Merger”) was effected by the merger of Blue Merger Sub Inc. (“Blue Sub”) with and into DMFC, with DMFC being the surviving corporation. As a result of the Merger, DMFC became a wholly-owned subsidiary of Blue Acquisition Group, Inc. (“Parent”).

On April 26, 2011, DMFC merged with and into DMC, with DMC being the surviving corporation. As a result of this merger, DMC became a direct wholly-owned subsidiary of Parent. Prior to the merger on April 26, 2011, our filings with the Securities and Exchange Commission can be found under Del Monte Foods Company.

Market Data

Unless otherwise indicated, all statements presented in this Annual Report on Form 10-K regarding Big Heart Pet’s brands and market share reflect the U.S. only and are Big Heart Pet’s major outlet estimates of equivalent case volume for pet food (except wet cat food) while dollars are used for pet snacks and wet cat food, which we believe is a more appropriate measure for these categories. These estimates are based on scanner data from multiple sources, primarily Nielsen Scanner data and are intended to reflect estimates for all major retail channels (which include grocery, Walmart, club stores, dollar stores and pet specialty stores). We have not independently verified information obtained from Nielsen. The data for pet products includes dry dog food, wet dog food, dry cat food, wet cat food, chewy dog snacks, biscuit crunchy dog snacks, long-lasting chew dog snacks and cat treats. References to fiscal 2014 market share refer to the 52-week period ended April 26, 2014. References to trends for the categories in which we compete are based on internal estimates of dollar sales calculated from data obtained primarily through Nielsen Scanner data and are intended to reflect estimates for major retail channels (which include grocery, Walmart, club stores, dollar stores and pet specialty stores).

Trademarks

Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs, Milo’s Kitchen, Meaty Bone, Snausages, Jerky Treats, Alley Cat, Pounce, among others, are registered or unregistered trademarks of Big Heart Pet Brands (including its subsidiaries).

PART I

Item 1.

Business

Overview

Big Heart Pet Brands and its consolidated subsidiaries (“Big Heart Pet” or the “Company”) is the largest U. S. standalone producer, distributor and marketer of premium quality, branded pet food and pet snacks, generating approximately $2.2 billion in net sales from continuing operations in fiscal 2014. Our portfolio of brands, with a foundation in dog and cat food and treats, strives to cater to every pet life stage and every family’s budget through the availability and accessibility of our products. Our pet food and pet snacks brands include well-known household brands such as Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs, Milo’s Kitchen and other brand names. Our products are sold nationwide, in all channels serving retail markets, as well as certain export markets. At April 27, 2014, our principal facilities consisted of five production facilities and four distribution centers in the United States.

We believe our diversified, multi-category product line provides us with a competitive advantage in selling to the retail grocery industry. We sell our products in the U.S. retail dry grocery market primarily through club stores, supercenters, grocery chains, dollar stores, pet specialty stores and mass merchandisers. We believe we have developed strong relationships with our customers which provides a solid foundation for our business. We have the #1 U.S. market share in dog snacks (excluding rawhide) which is one of the highest growth portions of the $21 billion pet category. In addition, our Natural Balance brand is the #2 brand in pet specialty where we have distribution, which also has experienced high growth well above the average for the pet category.

As described below, we recently completed the sale of our Consumer Products Business. As we transition to a new pet only company, we have aligned our purpose, commitments and values to our pet only focus.

Our Purpose

We nurture the bond between pets and the people who love them – making every day special.

Our Commitment

We are committed to the well-being of pets and the people who love them. We show our hearts. We listen. We do what matters. All of this is at the core of our values and guiding principles.

Our Values

Integrity – Integrity in the quality of our brands, our solutions, and our actions – drives every decision we make. We readily embrace the responsibility of being trusted. And we trust that the people we work with – inside and outside the company – will do what they say.

Courage – We know that people and their pets, our colleagues, and our partners depend on us to make the right call, even when it’s a tough one.

Action – We live our purpose every day. We act on it by anticipating and responding to the needs of people, pets, and everyone we work with. Our actions are disciplined, decisive, and timely.

Our Commitment to Community

We are committed to the communities in which we operate. To that end, we engage in a number of programs and partnerships supporting our communities by encouraging employees to volunteer and by providing financial support to certain non-profit organizations committed to the well-being of pets. Our new Giving Program aims to enable us to live our values and show our hearts by supporting pet causes aligned with our purpose and other causes that support the communities where we live and work.

History of Big Heart Pet Brands

Our predecessor was originally incorporated in 1916 and was a publicly traded company until its acquisition in 1979 by the predecessor of RJR Nabisco, Inc. From 1979 to 1999, our predecessor’s business went through a number of ownership changes and divestitures. In February 1999, Del Monte Foods Company (“DMFC”) became a publicly traded company and was listed on the New York Stock Exchange under the symbol “DLM.” DMFC remained a publicly traded company until March 2011 (see description of the “Merger” below).

From 1997 to 2001, we completed several acquisitions related to Consumer Products brands.

On December 20, 2002, we acquired certain businesses from H.J. Heinz Company (the “2002 Merger”), including their U.S. and Canadian pet food and pet snacks, North American tuna, U.S. retail private label soup and U.S. infant feeding businesses (the “2002 Acquired Businesses”). The 2002 Acquired Businesses included brand names such as 9Lives, Kibbles ‘n Bits, Pup-Peroni, Snausages, Pounce, StarKist and College Inn. Subsequently, we sold the North American tuna and U.S. retail private label soup and U.S. infant feeding businesses.

On May 19, 2006, we completed the acquisition of Meow Mix Holdings, Inc. and its subsidiaries (“Meow Mix”), the maker of Meow Mix brand cat food and Alley Cat brand cat food. Effective July 2, 2006, we completed the acquisition of certain pet product assets, including the Milk-Bone brand, from Kraft Foods Global, Inc.

On March 8, 2011, we were acquired by an investor group led by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Capital, L.P. (“Centerview”). Under the terms of the merger agreement, DMFC’s stockholders received $19.00 per share in cash. The acquisition (also referred to as the “Merger”) was effected by the merger of Blue Merger Sub Inc. (“Blue Sub”) with and into DMFC, with DMFC being the surviving corporation. As a result of the Merger, DMFC became a wholly-owned subsidiary of Blue Acquisition Group, Inc. (“Parent”). DMFC stockholders approved the transaction on March 7, 2011. DMFC’s common stock ceased trading on the New York Stock Exchange before the opening of the market on March 9, 2011.

On April 26, 2011, DMFC merged with and into DMC, with DMC being the surviving corporation. As a result of this merger, DMC became a direct wholly-owned subsidiary of Parent.

On July 15, 2013, we completed the acquisition of Natural Balance Pet Foods, Inc. (“Natural Balance”), maker of premium pet products for dogs and cats sold throughout North America.

On October 9, 2013, DMC entered into a Purchase Agreement (the “Purchase Agreement”) with Del Monte Pacific Limited and its subsidiary, Del Monte Foods Consumer Products, Inc. (now known as “Del Monte Foods, Inc.”), (the “Acquiror”). Pursuant to the terms of the Purchase Agreement, we sold to the Acquiror the interests of certain subsidiaries related to our Consumer Products business (the “Consumer Products Business”) and generally all assets primarily related to the Consumer Products Business for a purchase price of $1,675.0 million, subject to a post-closing working capital adjustment. The Acquiror assumed related liabilities (other than certain specified excluded liabilities). The transaction closed on February 18, 2014. In connection with the sale of the Consumer Products Business, DMC changed its name to Big Heart Pet Brands.

Big Heart Pet was incorporated in Delaware in June 2002 under the name SKF Foods, Inc. Big Heart Pet maintains its principal executive office at One Maritime Plaza, San Francisco, CA 94111. Big Heart Pet’s telephone number is (415) 247-3000 and our website is www.bigheartpet.com.

Our periodic and current reports, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to such reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), are available free of charge on our website as soon as reasonably practicable after such material is electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”).

The Industry

Overall

The United States consumer packaged goods industry is generally characterized by relatively stable long-term growth, based on modest price and population increases. Companies are facing challenges due to the current competitive promotional environment and the reduced capability to price to cover costs and maintain margins. Companies have found a greater need to differentiate their products through innovation to drive growth. In total, we believe that the long-term fundamentals for the overall consumer packaged goods industry are favorable, particularly for branded manufacturers with an ability to innovate based on consumer insights through strong, well-known brands, to effectively price and to successfully partner with customers who are industry leaders. While overall consumption growth across the consumer packaged goods industry is expected to be stable over the long-term, we believe that certain categories that best meet consumer needs and align to consumer trends, such as pet products where we are focused, will continue to benefit from both higher margins and higher growth potential.

Our categories are affected primarily by pet population and secondarily by consumer’s economic situation (which impacts their shopping and consumption behaviors). Home ownership is a key driver of pet population growth and new housing starts are up nearly 10% as of May 2014 versus a year ago according to the census bureau. As a result, we expect pet population to grow at a modest rate over the next several years.

The pet category reflects the changing North American economic climate characterized by differentiated growth for value oriented and premium products. We have seen consumers migrate away from the grocery channel to value channels and pet specialty stores. Pet specialty stores tend to specialize in pet care across food, snacks, services and education, and have a stronger focus on natural and organic products. The pet specialty stores have realized strong historical growth by offering a wider selection of pet food and snacks and therefore have a greater focus on innovative products that are differentiated from those available in the mainstream channels.

“Humanization” of pets continues to be a key driving factor in the growth of the pet market. The growing importance of pets as part of the family and increased rates of value-added new pet product entries have contributed to significant growth in this category. We believe that trends in the human food and snacks categories are closely mirrored by those in pet; including premium snacks and food with recognizable ingredients, home-made positioning, as well as functional benefits such as vitamins, oral care, allergy mitigation, weight management and arthritis. The humanization trend and consideration of pets as family members will offer opportunities for value-add product innovation which is the core of our focus across pet food and snacks.

We face competition throughout our product lines from well-established branded businesses operating globally, nationally or regionally with single or multiple branded product lines. We also face competition from private label manufacturers that compete for consumer preference, distribution, shelf space and merchandising support. We compete based upon our brand recognition and loyalty, quality, innovation, taste, nutrition, breadth of our product line, price and convenience. In part due to the humanization trend, we have seen private label penetration continue to decline below levels seen in human consumer packaged goods categories.

The market share data presented below are estimates based primarily on Nielsen Scanner data and include all major retail channels (which include grocery stores, Walmart, club stores, dollar stores and pet specialty stores). References to trends for the categories in which we compete are based on internal estimates calculated from data obtained primarily through Nielsen Scanner data and are intended to reflect estimates for all major retail channels.

Market Size and Market Share

Unless otherwise indicated, all statements presented in this Annual Report on Form 10-K regarding market size and Big Heart Pet’s brands and market share reflect the U.S. only and are Big Heart Pet’s major outlet estimates of equivalent case volume for pet food (except wet cat food) while dollars are used for pet snacks and wet cat food, which we believe is a more appropriate measure for these categories. These estimates are based on scanner data from multiple sources, primarily Nielsen Scanner data, and are intended to reflect estimates for all major retail channels (which include grocery stores, Walmart, club stores, dollar stores and pet specialty stores).

Our pet products participate in a market with annual retail sales of approximately $21 billion in calendar 2013. This market has a compound annual growth rate of approximately 4% over the last ten years and has experienced consistent growth. The categories in which we compete are dry and wet dog food, dry and wet cat food, dog snacks and cat snacks. We believe that growth in the pet food and snacks categories will continue to be fueled by the importance of pets as part of the family and growth in the pet population. Over half of all American households own a dog or a cat. We have seen the growth in the pet snacks category, where we have the #1 market share, exceed the growth of the overall pet category. The percentage of U.S. households owning a dog or cat has increased slightly over the past few years, hitting a new high in 2013.

Reportable Segment

We have a single operating segment: Pet Products, which manufactures, markets and sells branded and private label dry and wet pet food and pet snacks.

For financial information for the operating segment, refer to “Note 16. Segment and Geographic Information” of our consolidated financial statements in this Annual Report on Form 10-K.

Company Products

Our portfolio of brands represents some of the leading pet food and pet snacks brands in the United States, and strives to cater to every pet life stage and every family’s budget through the availability and accessibility of our products. Our pet products portfolio includes well-recognized national brands such as Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni and Milo’s Kitchen, as well as other brand names and private label products. We hold the #1 market share in the dog snacks category (excluding rawhide), the #2 market share in both the dry and wet cat food categories, and the #3 market share in the dry dog category.

The products in the pet food categories are marketed under nationally recognized brands. Meow Mix brand is a great tasting cat food brand and has long standing association with a distinctive jingle and slogan “The taste cats ask for by name.” 9Lives is another great tasting cat food brand and has ties to a widely recognizable spokescat—Morris. Kibbles ‘n Bits is a taste oriented brand made with a distinct combination of crunchy, moist and meaty pieces. Natural Balance is a premium brand anchored in natural ingredients and multiple varieties including grain free, limited ingredient diets and canned food. In late fiscal 2014, we invested marketing and trade spending in support of the launch of Meow Mix Tender Centers with Vitality Bursts and Meow Mix Soufflés, Nature’s Recipe Pure Essentials and Kibbles ‘n Bits American Grill with fully integrated marketing campaigns which will largely benefit fiscal 2015.

Our pet snacks portfolio includes many strong brands in one of the fastest growing areas of the pet food industry. We have a diverse and expanding pet snacks portfolio, including brands such as Milk-Bone, Pup-Peroni and Milo’s Kitchen. Milk-Bone dog snacks include the widest available selection of branded biscuits, supported by the brand’s longstanding health and wellness positioning. Pup-Peroni dog snacks are indulgent soft and chewy snacks. Milo’s Kitchen full line of dog snacks delivers well against the observed

consumer need for real ingredient products. In response to consumer preference, all Milo’s Kitchen products are made in the U.S. with U.S.-sourced meat. Our pet snacks portfolio also includes the well-established brands Canine Carry Outs, Meaty Bone, Snausages, Jerky Treats and Pounce. In late fiscal 2014, we invested marketing and trade spending in support of the launch of new Milk-Bone Brushing Chews with a fully integrated marketing campaign which will largely benefit fiscal 2015 and Milo’s Kitchen products with meat now sourced 100% from the U.S.

We compete in the pet food and pet snacks categories with highly recognized brands that deliver great taste, nutrition, variety and value. We face competition from other branded pet food and pet snack products manufactured by companies such as Nestle Purina, Mars, Colgate-Palmolive Company, Procter & Gamble and Blue Buffalo. In addition, we face competition from smaller branded and private label pet food and pet snack products.

Sales and Marketing

We use a direct sales force and independent food brokers to sell our products to our customers in different channels. A direct sales force is used for most of our sales to grocery, club store, supercenter and mass merchandiser customers. We use a combination of a direct sales force and some food brokers for other channels such as pet specialty, dollar stores, drug stores, convenience stores, military, and private label. These brokers are paid commissions which vary based on the scope of services provided. We use a broker for our sales of pet products in Canada. Within the grocery channel and certain other channels, we manage retail in-store conditions through our primary broker and generally pay a variable rate fee for this retail coverage.

We believe that a focused and consistent marketing strategy is critical to the growth of our brands, and we have increased our investment in our brands, including marketing and trade spending, maintaining competitive levels. Our marketing programs include insights market research, new product development, pricing strategy, advertising, publicity, consumer promotion and package design. Collectively, our marketing programs are designed to strengthen our brand equities, generate awareness of new items and stimulate trial among our target consumers. We also partner with our customers to develop trade promotion programs which deliver merchandising and price promotions to our consumers.

Foreign Sales and Operations

Revenues from Foreign Countries

Our foreign sales are consummated mainly through our wholly-owned Canadian subsidiary, importers and distributors, and in some instances, U.S. exporters. For financial information regarding foreign sales, refer to “Note 16. Segment and Geographic Information” of our consolidated financial statements in this Annual Report on Form 10-K.

Foreign Operations

We have a subsidiary located in Canada.

Geographic Location of Fixed Assets

At April 27, 2014, substantially all of our fixed assets are located in the United States.

Customers

Most major retailers that sell food in the U.S. carry our products, and we have developed strong relationships over the long term with the majority of customers across the retail grocery trade and pet specialty stores.

Walmart, which includes Walmart’s stores, supercenters and neighborhood markets along with Sam’s Club, is our most significant customer. On a consolidated basis for fiscal 2014, sales to Walmart represented approximately 39.0% of our overall list sales, which approximates our gross sales, compared to 43.7% of list sales in fiscal 2013. The percentage of sales to Walmart decreased from fiscal 2013 to fiscal 2014 as a result of the acquisition of Natural Balance, as Natural Balance sales are primarily in the independent and pet specialty channels. In addition, our top 10 customers represented approximately 72.3% of our list sales for fiscal 2014.

Supply

We purchase certain commodities such as soybean meal, corn and wheat. For these commodities, we maintain a hedging program designed to limit the economic impact of price volatility associated with anticipated commodity purchases. Coverage of these hedges may range up to 24 months of projected production requirements. See “Item 1A. Risk Factors—If our assessments and assumptions about commodity prices, as well as ingredient and other prices and interest and currency exchange rates, prove to be incorrect in connection with our hedging or forward-buy efforts or planning cycles, our costs may be greater than anticipated and our financial results could be adversely affected. Volatility in commodities, interest rates and other hedged items will impact our results of operations.” We generally purchase meat, meat by-products (including fats and oils), vitamins/flavorings, flour and other ingredients through supply agreements or on the open market.

We have a long-term supply agreement with a supplier covering the purchase of metal cans. Currently, our agreement grants our supplier the exclusive right, subject to certain specified exceptions, to supply metal cans for our products. The agreement expires December 31, 2015. Pricing under the agreement is adjusted up to twice a year to reflect changes in metal costs and annually to reflect changes in the costs of manufacturing.

Production and Distribution

Production

At the end of fiscal 2014, our products were primarily manufactured in our five production facilities located in the U.S. We also use 16 co-packers and 12 re-packers located within the U.S., Canada and Thailand to supplement production capacity. Our facilities are located in Pennsylvania, Kansas, Alabama and New York and supply products for both the U.S. and Canadian markets.

Utilizing co-packers provides us with the flexibility to produce a large variety of products. We have a co-pack agreement to source all of our Pup-Peroni pet snacks and all of our Milo’s Kitchen pet snacks from one co-packer located in the U.S. All of our Natural Balance products are currently co-packed.

Our co-packers have been selected based on their quality controls, production capabilities and their specific product category expertise, and we partner with them to improve and expand our product offerings. Certain of our pet snack brands are supplied by a sole-source co-packer located in the U.S.

We have invested significant resources to improve operating margins by reducing costs and increasing productivity. Our efficiency initiatives have focused on selecting better and more efficient manufacturers, managing freight costs, leveraging warehouse expenses and reducing ingredient and packaging costs through increased volume buys, contract consolidation, direct purchasing and price negotiation.

Distribution

Customers can order products to be delivered via third-party trucking, on a customer pickup basis or by rail. Distribution centers provide casing, labeling and special packaging and other services. From time to time we evaluate our distribution center network and, accordingly, may make changes to our network, particularly in connection with an acquisition. See “Item 2. Properties” for a listing of the principal distribution centers owned or leased by us. In addition, our distribution network includes third-party distribution centers. See “Item 1A. Risk Factors—We rely upon a number of third parties to manage or provide distribution centers for our products. Failures by these third parties could adversely affect our business.”

Research and Development

Our research and development organization provides product, packaging and process development. The organization also coordinates with and provides direct support to research and development activities of our co-packers related to our products. For fiscal 2014, fiscal 2013 and fiscal 2012, research and development expenditures were $25.8 million $21.7 million, and $18.6 million, respectively. We operate a research and development facility in California where we develop new products and product line extensions and research existing products. We employ scientists, engineers and researchers and are equipped with pilot shops and test kitchens. In addition to the costs above, our research and development organization oversees our quality and safety programs.

Intellectual Property

We own a number of registered and unregistered trademarks for use in connection with our products, including the following registered trademarks: Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs and Milo’s Kitchen.

Brand name recognition and the product quality associated with our brands are key factors in the success of our products. The current registrations of these trademarks in the United States and foreign countries are effective for varying periods of time, and may be renewed periodically, provided that we, as the registered owner, or our licensees where applicable, comply with all applicable renewal requirements including, where necessary, the continued use of the trademarks in connection with similar goods. We are not aware of any material challenge to our ownership of our major trademarks. Our registered and unregistered trademarks relate primarily to North America and South America. We generally did not acquire trademark rights for the 2002 Acquired Businesses outside of the territories identified above. As a result, we may be restricted from selling products under the brands relating to the 2002 Acquired Businesses in other territories to the extent these trademark rights are owned by another party.

We have granted various security and tangible interests in our trademarks and related trade names, copyrights, patents, trade secrets and other intellectual property to our creditors, in connection with our credit facilities.

As of April 27, 2014, we owned 29 issued U.S. patents covering methods for animal foods and related designs, formulations, manufacturing processes, equipment and packaging. These patents expire between 2018 and 2031 and cannot be renewed. Our patents are generally not material to our business.

Governmental Regulation; Environmental Compliance and Sustainability

As a manufacturer and marketer of pet products, our operations are subject to extensive regulation by various federal government agencies, including the Food and Drug Administration, the United States Department of Agriculture, U.S. Customs and Border Protection, Environmental Protection Agency and the Federal Trade Commission (“FTC”), as well as state and local agencies, with respect to registrations, production processes, product attributes, packaging, labeling, storage and distribution. Under various statutes and regulations, these agencies prescribe requirements and establish standards for safety, purity, performance and labeling. Our products must comply with all applicable laws and regulations, including food and drug laws, of the jurisdictions in which they are manufactured and marketed, such as the Federal Food, Drug and Cosmetic Act of 1938, as amended, and the Federal Fair Packaging and Labeling Act of 1966, as amended. In addition, advertising of our products is subject to regulation by the FTC, and our operations are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act. Our manufacturing facilities and products are subject to periodic inspection by federal, state and local authorities. We seek to comply with all such laws and regulations and to obtain any necessary permits and licenses. We believe our facilities and practices are sufficient to maintain material compliance with current applicable governmental laws, regulations, permits and licenses. Nevertheless, we cannot guarantee that we are currently in compliance with all applicable laws, regulations, or requirements for permits or licenses nor that we will be able to comply with any future laws and regulations or requirements for necessary permits and licenses. Our failure to comply with applicable laws and regulations or obtain any necessary permits and licenses could subject us to civil remedies including fines, injunctions, recalls or seizures, as well as potential criminal sanctions. See “Item 1A. Risk Factors—Government regulation, scrutiny, warnings and public perception could increase our costs of production and increase legal and regulatory expenses.”

As a result of our pet products processing and packaging activities, we are subject to numerous environmental laws and regulations. These laws and regulations govern the treatment, handling, storage and disposal of materials and waste and the remediation of contaminated properties. Violations or non-compliance with these laws and regulations could result in the imposition of fines or civil liability against us by governmental entities or private parties. We seek to comply with these laws and regulations. Outside the United States, we are also subject to applicable multi-national, national and local environmental laws and regulations in the host countries where we do business. However, we cannot predict the extent to which the enforcement of any existing or future environmental law or regulation may affect our operations. Among the environmental matters currently affecting us are the following:

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We are in the process of remediating soil and groundwater contamination at our Decatur, AL property associated with the presence of hydrocarbons that resulted from the operations of a prior owner of the property. This facility was acquired in May 2006 in the Meow Mix acquisition. In connection with our purchase accounting for the Meow Mix acquisition, reserves were established that we believe will be adequate to cover any liability that may result from this contamination.

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We have completed soil and groundwater investigation and remediation at our Terminal Island, CA property as part of the closure and demolition of a facility which was operated by a joint venture to which a former subsidiary was a party. We assumed these liabilities in connection with the 2002 Merger. In addition, we have additional remediation and restoration obligations at our Terminal Island property related to facilities which we still occupy. We believe that we have adequate reserves to cover any material liability that may result from these investigations and remediation.

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A group of potentially responsible parties (the “PRP Group”) at the BKK landfill in Southern California has notified us that we are a potentially responsible party at the site and that we may be liable for the costs of environmental investigation and remediation. The PRP Group has incurred costs to perform maintenance and repair of the site and expects to investigate potential groundwater contamination in the future. We believe we have accrued our best estimate of the liability that may result from the current phase of investigation and remediation. We cannot at this time reasonably estimate any additional potential exposure at the site above the amount already accrued.

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Governmental authorities and private claimants have notified us that we may be liable for environmental investigation and remediation costs at certain contaminated sites, including certain third-party sites at which we disposed of wastes. We may be liable for remediation costs at these sites as a result of alleged leaks, spills, releases or disposal of certain wastes or other substances at these sites. Based upon the information currently available, we do not expect that our liability for the remaining sites will be material. We may receive additional claims that we are potentially liable for environmental investigation and remediation costs at other sites in the future.

Our environmental expenditures in recent years have related to wastewater treatment systems, settlement of environmental litigation and remediation activities. We project that we will spend approximately $0.5 million in fiscal 2015 on capital projects and other

expenditures in connection with environmental compliance for our existing businesses, primarily for compliance with wastewater treatment and remediation activities. We believe that our environmental matters for fiscal 2015 will not have a material adverse effect on our financial position or results of operations; however a number of factors may affect our environmental compliance costs or accruals. See “Item 1A. Risk Factors—We are subject to environmental regulation and environmental risks, which may adversely affect our business. Climate change or concerns regarding climate change may increase environmental regulation and environmental risks.”

In addition to our environmental compliance efforts, we are engaged in a variety of sustainability activities, including initiatives designed to reduce our use of energy and resources and to reduce our waste. Sustainability is also an area of interest for certain of our customers and consumers and, particularly in light of concerns regarding climate change, may become an area of increased focus. Additionally, sustainability and environmental matters are areas of increased legislative focus. See “Item 1A. Risk Factors—We are subject to environmental regulation and environmental risks, which may adversely affect our business. Climate change or concerns regarding climate change may increase environmental regulation and environmental risk,” “—Adverse weather conditions (caused by climate change or otherwise), natural disasters, pestilences and other natural conditions can affect crops and other inputs, which can adversely affect our operations and our results of operations” and “—The loss of a significant customer, certain actions by a significant customer or financial difficulties of a significant customer could adversely affect our results of operations.”

Employees

As of April 27, 2014, we employed approximately 2,200 full-time employees and approximately 250 part-time employees in the U.S. and abroad. We consider our relationship with our employees to be good.

As of April 27, 2014, we had seven collective bargaining agreements with seven union locals covering approximately 45% of our hourly employees. Of these employees, approximately 28% are covered under collective bargaining agreements scheduled to expire in fiscal 2015, approximately 1% are covered under collective bargaining agreements scheduled to expire in fiscal 2016 to 2019, and approximately 71% are covered under collective bargaining agreements scheduled to expire in fiscal 2020. These agreements are subject to negotiation and renewal. Failure to renew any of our significant collective bargaining agreements could result in a strike or work stoppage that could materially adversely affect our operations.

Item 1A.

Risk Factors

Factors that May Affect Our Future Results

We are subject to many risks and uncertainties (including, without limitation, our results of operations and cash flows). Some of the risks and uncertainties that may cause our financial performance, business or operations to vary or that may materially or adversely affect our financial performance are discussed below. The risks and uncertainties described in this Annual Report on Form 10-K are not the only ones facing us. Additional risks and uncertainties that currently are not known to us or that we currently believe are immaterial also may adversely affect our financial performance, business or operations.

The categories in which we participate are highly competitive and, if we are not able to compete effectively, our results of operations could be adversely affected.

The categories in which we participate are highly competitive. There are numerous brands and products that compete for shelf space and sales, with competition based primarily upon brand recognition and loyalty, quality, innovation, taste, nutrition, breadth of product line, price and convenience. We compete with a significant number of companies of varying sizes, including divisions or subsidiaries of larger companies. Our branded products face strong competition from other national and regional brands, as well as private label products that are generally sold at lower prices and imports. A number of our competitors have broader product lines, substantially greater financial and other resources and/or lower fixed costs than we have. Our competitors may succeed in developing new or enhanced products that are more attractive to customers or consumers than ours. These competitors may also prove to be more successful in marketing and selling their products than we are; and may be better able to increase prices to reflect cost pressures. We may not compete successfully with these other companies or maintain or grow the distribution of our products. We cannot predict the pricing or promotional activities of our competitors or whether they will have a negative effect on us. Many of our competitors engage in aggressive pricing and promotional activities. There are competitive pressures and other factors which could cause our products to lose market share or decline in sales or result in significant price or margin erosion, which would have a material adverse effect on our business, financial condition and results of operations.

We rely upon co-packers to provide our supply of some products. Any failure by co-packers to fulfill their obligations or any termination or renegotiation of our co-pack agreements could adversely affect our results of operations.

We have a number of supply agreements with co-packers that require them to provide us with specific finished products. For some of our products we essentially rely upon a single co-packer as our sole-source for the product. We also anticipate that we will rely on sole

suppliers for certain future products. The failure for any reason of any such sole-source or other co-packer to fulfill its obligations under the applicable agreements with us or the termination or renegotiation of any such co-pack agreement could result in disruptions to our supply of finished goods and have an adverse effect on our results of operations. Additionally, from time to time, a co-packer may experience financial difficulties, bankruptcy or other business disruptions, which could disrupt our supply of finished goods or require that we incur additional expense by providing financial accommodations to the co-packer or taking other steps to seek to minimize or avoid supply disruption, such as establishing a new co-pack arrangement with another provider. During an economic downturn, our co-packers may be more susceptible to experiencing such financial difficulties, bankruptcies or other business disruptions. A new co-pack arrangement may not be available on terms as favorable to us as the existing co-pack arrangement, if at all.

If ingredients we use in our products are contaminated, our results of operations could be adversely affected.

We buy ingredients and commodities that we use in producing our products from third-party suppliers. If these materials are alleged or prove to include contaminants affecting the safety or quality of our products, we may need to find alternate materials for our products, delay production of our products, or discard or otherwise dispose of our products, which could adversely affect our results of operations. Additionally, if the presence of such contaminants are not alleged or discovered until after the affected product has been distributed, we may need to withdraw or recall the affected product and we may experience adverse publicity or product liability claims. In either case, our results of operations could be adversely affected.

If our products are alleged to cause injury or illness or fail to comply with governmental regulations, we may suffer adverse public relations, need to recall our products and experience product liability claims.

We may be exposed to product recalls, including voluntary recalls or withdrawals, and adverse public relations if our products are alleged to cause injury or illness or if we are alleged to have mislabeled or misbranded our products or otherwise violated governmental regulations. We may also voluntarily recall or withdraw products that we consider below our standards, whether for taste, appearance or otherwise, in order to protect our brand reputation. For example, in January 2013, we initiated a voluntary recall of certain of our Milo’s Kitchen dog snacks. Consumer or customer concerns (whether justified or not) regarding the safety of our products could adversely affect our business. A product recall or withdrawal could result in substantial and unexpected expenditures, destruction of product inventory, and lost sales due to the unavailability of the product for a period of time, which could reduce profitability and cash flow. In addition, a product recall or withdrawal may require significant management attention. Product recalls, product liability claims (even if unmerited or unsuccessful), or any other events that cause consumers to no longer associate our brands with high quality and safe products may also result in adverse publicity, hurt the value of our brands, lead to a decline in consumer confidence in and demand for our products, and lead to increased scrutiny by federal and state regulatory agencies of our operations, which could have a material adverse effect on our brands, business, results of operations and financial condition. We also may be subject to product liability claims and adverse public relations if consumption, use or opening of our products is alleged to cause injury or illness. While we carry product liability insurance, our insurance may not be adequate to cover all liabilities we may incur in connection with product liability claims. For example, punitive damages are generally not covered by insurance. In addition, we may not be able to continue to maintain our existing insurance, obtain comparable insurance at a reasonable cost, if at all, or secure additional coverage (which may result in future product liability claims being uninsured). A product liability judgment against us or our agreement to settle a product liability claim could also result in substantial and unexpected expenditures, which would reduce profitability and cash flow. In addition, even if product liability claims against us are not successful or are not fully pursued, these claims could be costly and time-consuming and may require management to spend time defending the claims rather than operating our business.

We may be unable to successfully introduce new products, reposition existing products or anticipate changes in pet or consumer preferences, which could adversely affect our results of operations.

Our future business and financial performance depend, in part, on our ability to successfully introduce new products and improved products, reposition existing products, and anticipate and offer products that appeal to the changing tastes, dietary trends and product packaging preferences of consumers and their pets in the market categories in which we compete. Innovation plays a significant role in the competitive landscape and is a significant driver of sales and share growth in the categories in which we compete. We cannot be certain that opportunities for product innovation will exist or that we will be able to successfully introduce new products or reposition existing products. We incur significant development and marketing costs in connection with the introduction of new products or repositioning of existing products. Successfully launching and selling new products puts pressure on our sales and marketing resources, and we may fail to invest sufficient funds behind a new product introduction to make it successful. If customers and consumers do not accept a new product, then the introduction of a new product can reduce our operating income as introduction costs, including slotting fees, may exceed revenues. If we are not able to anticipate, identify or develop and market products that respond to changes in pet or consumer preferences or if our new product introductions or repositioned products fail to gain consumer acceptance, we may not grow our business as anticipated, and our results of operations could be adversely affected.

If we are unable to maintain or increase prices for our products, our results of operations may be adversely affected.

We rely in part on price increases to neutralize cost increases and improve the profitability of our business. Our ability to effectively implement price increases or otherwise raise prices for our products can be affected by a number of factors, including competition, category limitations, market demand and economic conditions, including inflationary pressures. During challenging economic times, our ability to increase the prices of certain of our products may be particularly constrained. Additionally, customers may pressure us to rescind price increases that we have announced or already implemented (either through a change in list price or increased promotional activity). If we are unable to maintain or increase prices for our products (or must increase promotional activity), our results of operations could be adversely affected. Furthermore, price increases generally result in volume losses, as consumers purchase fewer units. If such losses (also referred to as the elasticity impact) are greater than expected or if we lose distribution due to a price increase (which may result from a customer response or otherwise), our results of operations could be adversely affected.

The inputs, commodities and ingredients that we require are subject to price increases and shortages that could adversely affect our results of operations.

The primary inputs, commodities and ingredients that we use include energy (including natural gas), fuel, packaging, grains (including corn), sugar, spices, meats, meat by-products, soybean meal, fats, oils and chemicals. Prices for these and other items we use may be volatile and we may experience shortages in these items due to factors beyond our control, such as commodity market fluctuations, availability of supply, increased demand (whether for the item we require or for other items, which in turn impacts the item we require), weather conditions, natural disasters, currency fluctuations, governmental regulations (including import restrictions), agricultural programs or issues, energy programs, labor strikes and the financial health of our suppliers. Input, commodity and ingredient price increases or shortages may result in higher costs or interrupt our production schedules, each of which could have a material adverse effect on our results of operations. Production delays could lead to reduced sales volumes and profitability as well as loss of market share. Higher costs could adversely impact our earnings. For example, fuel prices affect our transportation costs for both ingredients and finished product and natural gas prices also affect our production costs. If we are not able to implement our productivity initiatives or increase our product prices to offset price increases of our inputs, commodities and ingredients, as a result of consumer sensitivity to pricing or otherwise, or if sales volumes decline due to price increases, our results of operations could be adversely affected. Our competitors may be better able than we are to implement productivity initiatives or effect price increases or to otherwise pass along cost increases to their customers. Moreover, if we increase our prices in response to increased costs, we may need to increase marketing spending, including trade promotion spending, in order to retain our market share. Such increased marketing spending may significantly offset the benefits, if any, of any price increase and negatively impact our results of operations.

We may not be able to successfully implement initiatives to improve productivity and streamline operations to control or reduce costs. Failure to implement such initiatives could adversely affect our results of operations.

Because our ability to effectively implement price increases for our products can be affected by factors outside of our control, our profitability and growth depend significantly on our efforts to control our operating costs. Because many of our costs, such as energy and logistics costs, packaging costs and ingredient and commodity costs, are affected by factors outside or substantially outside our control, we generally must seek to control or reduce costs through operating efficiency or other initiatives. If we are not able to identify and complete initiatives designed to control or reduce costs and increase operating efficiency on time or within budget, our results of operations could be adversely impacted. In addition, if the cost savings initiatives we have implemented to date, or any future cost-savings initiatives, do not generate expected cost savings, our results of operations could be adversely affected.

The loss of a significant customer, certain actions by a significant customer or financial difficulties of a significant customer could adversely affect our results of operations.

A relatively limited number of customers account for a large percentage of our total sales. During fiscal 2014, our top customer, Walmart (including Walmart’s stores and supercenters as well as Sam’s Club), represented approximately 39.0% of our overall list sales, which approximates our gross sales. Our ten largest customers represented approximately 72.3% of our overall list sales. These percentages may increase if there is consolidation among existing food retailers or if mass merchandisers grow disproportionately to their competition. We expect that a significant portion of our revenues will continue to be derived from a small number of customers; however, there can be no assurance that these customers will continue to purchase our products in the same quantities as they have in the past. Our customers are generally not contractually obligated to purchase from us. Changes in our customers’ strategies, including a reduction in the number of brands they carry, shipping strategies, or a shift of shelf space to or increased emphasis on private label products (including “store brands”) may adversely affect our sales. Requirements that may be imposed on us by our customers, such as sustainability, inventory management or product specification requirements, may have an adverse effect on our results of operations. Additionally, especially during economic downturns, our customers may face financial difficulties, bankruptcy or other business disruptions that may impact their operations and their purchases from us and may affect their ability to pay us for products purchased from us. Customers may grow their inventory in anticipation of a price increase, or in anticipation of, or during, our

promotional events, which typically provide for reduced prices during a specified time or other customer or consumer incentives. To the extent customers seek to reduce their usual or customary inventory levels or change their practices regarding purchases in excess of consumer consumption, our sales and results of operations would be adversely impacted in that period. If our sales of products to one or more of our significant customers are reduced, this reduction could have a material adverse effect on our business, financial condition and results of operations.

Our substantial indebtedness could adversely affect our operations and financial condition.

As of April 27, 2014, we had a total of $2,626.4 million of indebtedness, primarily relating to $900.0 million aggregate principal amount of 7.625% Senior Notes due 2019 (the “Notes”) and $1,726.4 million outstanding under a senior secured term loan credit agreement, dated as of March 8, 2011 (the “Term Loan Facility”). Additionally, as of April 27, 2014, we had $161.6 million of availability under a $225.0 million senior secured asset-based revolving facility (the “ABL Facility” and, together with the Term Loan Facility, the “Credit Facilities”). Our high level of indebtedness could have important consequences, such as:

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requiring a substantial portion of our cash flows to be dedicated to debt service payments instead of funding growth, working capital, capital expenditures, investments or acquisitions or other cash requirements;

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reducing our flexibility to adjust to changing business conditions or obtain additional financing;

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exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Credit Facilities, are at variable rates of interest.

If our cash from operations is not sufficient to meet our operating needs, expenditures and debt service obligations, our business would be adversely impacted. Additionally, we may be required to refinance our debt, sell assets, borrow additional money or raise equity. We may be unable to take such actions on acceptable terms or at all.

Our ability to generate cash to meet our operating needs, expenditures and debt service obligations will depend on our future performance and financial condition, which will be affected by financial, business, economic, legislative, regulatory and other factors, including potential changes in costs, pricing, the success of product innovation and marketing, pressure from competitors, consumer preferences and other matters discussed in this Annual Report on Form 10-K (including this “Risk Factors” section). If our cash flow and capital resources are insufficient to fund our debt service obligations and other cash needs, we could face substantial liquidity problems and could be forced to reduce or delay investments and capital expenditures or to dispose of material assets or operations, seek additional debt or equity capital or restructure or refinance our indebtedness. The Credit Facilities and indenture governing the Notes may restrict our ability to take these actions and we may not be able to effect any such alternative measures on commercially reasonable terms or at all. In addition, any downgrade of our debt ratings by any of the major rating agencies, which could result from our financial performance, acquisitions or other factors, could also negatively impact our access to additional debt financing (including leasing) or refinancing on favorable terms, or at all. Even if we are successful in taking any such alternative actions, such actions may materially and adversely affect our financial position and results of operations and such actions may not allow us to meet our scheduled debt service obligations.

If we cannot make scheduled payments on our debt, we would be in default and holders of the Notes could declare all outstanding principal and interest to be due and payable, the lenders under the ABL Facility could terminate their commitments to loan money, and our secured lenders under the ABL Facility and Term Loan Facility could declare all outstanding principal and interest to be due and payable and foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation.

Restrictive covenants in the Credit Facilities and the indenture governing the Notes may restrict our operational flexibility. If we fail to comply with these restrictions, we may be required to repay our debt, which would materially and adversely affect our financial position and results of operations.

The Credit Facilities and the indenture governing the Notes include certain restrictive covenants that impose significant operating and financial restrictions on us and may limit our ability to engage in acts that may be in our best interests, such as making strategic acquisitions, divestitures or investments or otherwise pursuing business opportunities that may be in our interests. These covenants include restrictions on our ability to:

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incur additional indebtedness and guarantee indebtedness;

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pay dividends or make other distributions in respect of, or repurchase or redeem, stock and warrants, options or other rights to acquire stock;

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prepay, redeem or repurchase certain debt;

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make loans, investments and other restricted payments;

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sell or otherwise dispose of assets;

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incur liens;

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enter into transactions with affiliates;

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alter the businesses we conduct;

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enter into agreements restricting our subsidiaries’ ability to pay dividends; and

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consolidate, merge or sell all or substantially all of our assets.

In addition, the ABL Facility requires that we maintain an adjusted fixed charge coverage ratio of 1.0 to 1.0 for periods during which we have borrowed a significant majority of the available amounts under the ABL Facility. Our ability to meet this financial ratio will depend upon our future performance and may be affected by events beyond our control (including factors discussed in this “Risk Factors” section). We may not be able to comply with this ratio.

A breach of the covenants in the Credit Facilities or the indenture governing the Notes could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross-acceleration or cross-default provision applies. In addition, an event of default under the Credit Facilities would permit the lenders under our ABL Facility to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay the amounts due and payable under the Credit Facilities, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders or noteholders accelerate the repayment of our borrowings, we may not have sufficient assets to repay that indebtedness, which would materially and adversely affect our financial position and results of operations.

Despite our significant indebtedness, we may still be able to incur substantially more debt in the future. This could further exacerbate the risks to our financial condition and business described above.

We may be able to incur significant additional indebtedness in the future. For example, as of April 27, 2014, we had $161.6 million of availability under our ABL Facility. Although the Credit Facilities and the indenture governing the Notes contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also will not prevent us from incurring obligations that do not constitute indebtedness. In addition, our ABL Facility could be increased, subject only to the consent of the new or existing lenders providing such increases, such that the aggregate principal amount of commitments under the ABL Facility does not exceed $325.0 million. We also can incur up to an additional $500.0 million of secured indebtedness under the Term Loan Facility if certain specified conditions are met, subject also to the consent of the new or existing lenders providing such additional loans. If our current debt level increases, the related risks we face could intensify.

Our variable rate indebtedness subjects us to interest rate risk, which could cause our debt service obligations to increase significantly.

Borrowings under our Credit Facilities are at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income and cash flows, including cash available for servicing our indebtedness, will correspondingly decrease. Assuming indebtedness of $1,888.0 million under our Credit Facilities (reflecting the $1,726.4 million outstanding under the Term Loan Facility and the $161.6 million available under the ABL Facility as of April 27, 2014), and taking into account our interest rate swaps in effect as of April 27, 2014 as described under “Item 7A. Quantitative and Qualitative Disclosures about Market Risk,” each quarter point change in interest rates would result in an $0.4 million change in annual interest expense on our indebtedness under the ABL Facility and, if interest rates rise above the LIBOR floor of 0.75%, each quarter point change in interest rates would result in a $2.1 million change in annual interest expense on our indebtedness under the Term Loan Facility. In the future, we may enter into additional interest rate swaps that involve the exchange of floating for fixed rate interest payments in order to reduce interest rate volatility. However, we may not maintain interest rate swaps with respect to all of our variable rate indebtedness, and any swaps we enter into (including our existing swaps) may not fully mitigate our interest rate risk, may prove disadvantageous, or may create additional risks, including risks discussed elsewhere in this “Risk Factors” section.

If the financial institutions that are part of the syndicate of our ABL Facility fail to extend credit under our facility or reduce the borrowing base under our ABL Facility, our liquidity and results of operations may be adversely affected.

Each financial institution that is part of the syndicate for our ABL Facility is responsible on a several, but not joint, basis for providing a portion of the loans to be made under our facility. If any participant or group of participants with a significant portion of the commitments in our ABL Facility fails to satisfy its or their respective obligations to extend credit under the facility and we are unable to find a replacement for such participant or participants on a timely basis (if at all), our liquidity may be adversely affected. In addition, the financial institutions that are part of the syndicate of our ABL Facility may reduce the borrowing base under our ABL Facility in certain circumstances. If our liquidity under our ABL Facility is materially adversely impacted, our results of operations could be materially adversely affected.

Increases in logistics and other transportation-related costs could materially adversely impact our results of operations. Our ability to competitively serve our customers depends on the cost and availability of reliable transportation.

Logistics and other transportation related costs have a significant impact on our results of operations. We use multiple forms of transportation to bring our products to the market. They include ships, trucks, intermodals and railcars. Disruption to the timely supply of these services or increases in the cost of these services for any reason, including availability or cost of fuel, regulations affecting the industry, service failures by our third-party logistics service provider, availability of various modes of transportation, or natural disasters (which may impact the transportation infrastructure or demand for transportation services), could have an adverse effect on our ability to serve our customers, and could have a material adverse effect on our financial performance.

If our assessments and assumptions about commodity prices, as well as ingredient and other prices and interest and currency exchange rates, prove to be incorrect in connection with our hedging or forward-buy efforts or planning cycles, our costs may be greater than anticipated and our financial results could be adversely affected. Volatility in commodities, interest rates and other hedged items will impact our results of operations.

We generally use commodity futures and options to reduce the price volatility associated with anticipated commodity purchases of corn, wheat and soybean meal used in the production of certain of our products. Additionally, we typically use hedging programs relating to interest rates, currency, natural gas and diesel fuel. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for a discussion of our current hedging and derivatives programs. We may cease any of our current programs or use other hedging or derivative programs in the future. The extent of our hedges at any given time depends on our assessment of the markets for these commodities, diesel fuel, natural gas, and capital, including our assumptions about future prices, currency exchange rates and interest rates. For example, if we believe market prices for the commodities we use are unusually high, we may choose to hedge less, or even none, of our upcoming requirements. If we fail to hedge and prices, interest rates or currency exchange rates subsequently increase, or if we institute a hedge and prices, interest rates or currency exchange rates subsequently decrease, our costs may be greater than anticipated or greater than our competitors’ costs and our financial results could be adversely affected. Additionally, changes in the value of our commodities and other derivatives accounted for as economic hedges are recorded directly as other income or expense. As of April 27, 2014, the Company had both cash flow hedges and economic hedges. Accordingly, volatility in interest rates, commodities and other hedged items associated with our economic hedges could result in volatility in our results of operations.

Transformative plans involve risk and may adversely affect our business and financial results.

We currently have and may in the future contemplate and adopt plans intended to effect significant change within our Company. For example, in fiscal 2012, we implemented a new strategic plan for which we incurred costs and may incur future costs. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Strategy” for a description of our strategic plan. Our current strategic plan involves a number of initiatives which may tax our management resources. Our future plans, if any, may, but need not, involve closure or disposal of plants, distribution centers, businesses or other assets as well as headcount reductions or reductions in our number of product offerings, which could increase our expenses and adversely affect our results of operations. Divesting plants, distribution centers, businesses or other assets or changes in strategy may also adversely impact our results of operations due to related write-offs or the acceleration of remediation expenses or due to the loss of operating income that may be associated with any such disposed business. Additionally, restructuring or disposition efforts may divert management’s and other employees’ attention from other business concerns or may otherwise disrupt our business. We may be unable to complete dispositions we may desire to undertake at targeted prices, if at all, which may adversely impact our financial results and our ability to implement our business strategies. Currently, we receive income from a transition services agreement related to the sale of our Consumer Products Business to offset certain of our overhead costs. If we are not successful in reducing overhead costs prior to the end of the transition services agreement, our results of operations could be adversely affected. In addition, the success of our strategic plan and efforts to grow our business depends on the contributions and abilities of key executives, as well as sales, marketing (including innovation) and other personnel. Our success also depends, in part, on our continuing ability to identify, hire, train and retain highly qualified personnel. Competition for these employees can be intense, especially in the San Francisco Bay Area where our headquarters is located. We may not be able to attract, assimilate or retain qualified personnel in the future, and our failure to do so could adversely affect our business.

We may not be successful in our future acquisition or other strategic transaction endeavors, if any, which could have an adverse effect on our business and results of operations.

We have historically engaged in acquisition activity and we may in the future engage in acquisitions or other strategic transactions, such as joint ventures or investments in other entities. We may be unable to identify suitable targets, opportunistic or otherwise, for acquisitions or other strategic transactions in the future. If we identify a suitable candidate, our ability to successfully implement the strategic transaction would depend on a variety of factors, including our ability to obtain financing on acceptable terms and to comply with the restrictions contained in our debt agreements. If we need to obtain our lenders’ consent to a strategic transaction, they may refuse to provide such consent or condition their consent on our compliance with additional restrictive covenants that limit our operating flexibility. Strategic transactions, such as the Natural Balance Pet Foods, Inc. acquisition completed in July 2013, involve risks, including those associated with integrating the operations or maintaining the operations as separate (as applicable), financial reporting, disparate technologies and personnel of acquired companies, joint ventures or related companies; managing geographically dispersed operations, joint ventures or other strategic investments; the diversion of management’s attention from other business concerns; the inherent risks in entering markets, channels or lines of business in which we have either limited or no direct experience; unknown risks; and the potential loss of key employees, customers and strategic partners of acquired companies, joint ventures or companies in which we may make strategic investments. We may not successfully integrate any businesses or technologies we may acquire or strategically develop in the future and may not achieve anticipated revenue and cost benefits relating to any such strategic transactions. Strategic transactions may be expensive, time consuming and may strain our resources. Strategic transactions may not be accretive and may negatively impact our results of operations as a result of, among other things, the incurrence of debt, write-offs of goodwill and amortization expenses of other intangible assets.

Government regulation, scrutiny, warnings and public perception could increase our costs of production and increase legal and regulatory expenses.

Manufacturing, processing, labeling, packaging, storing and distributing pet products are activities subject to extensive federal, state and local regulation, as well as foreign regulation. In the United States, these aspects of our operations are regulated by the U.S. Food and Drug Administration (“FDA”), the United States Department of Agriculture (“USDA”) and various state and local public health and agricultural agencies. On January 4, 2011, the FDA Food Safety Modernization Act, which is intended to ensure food safety, was enacted. This Act provides direct recall authority to the FDA and includes a number of other provisions designed to enhance food safety, including increased inspections by the FDA of domestic and foreign food facilities and increased review of food products imported into the United States. In addition to periodic government agency inspections affecting our operations, generally, our operations which produce meat and poultry products are subject to mandatory continuous on-site inspections by the USDA. Complying with government regulation, including federal Country of Origin Labeling (“COOL”) requirements, can be costly or may otherwise adversely affect our business. Our business is also affected by import and export controls and similar laws and regulations, both in the United States and elsewhere. Issues such as national security or health and safety, which slow or otherwise restrict imports or exports, could adversely affect our business. In addition, the modification of existing laws or regulations or the introduction of new laws or regulations could require us to make material expenditures or otherwise adversely affect the way that we have historically operated our business.

Our operating results depend, in part, on the sufficiency and effectiveness of our marketing and trade spending programs.

In general, due to the highly competitive nature of the business in which we compete, we must execute effective and efficient marketing investments and trade spending programs with respect to our businesses overall to sustain our competitive position in our markets. Marketing investments may be costly. Additionally, we may, from time to time, change our marketing and trade spending strategies, including the timing or nature of our related promotional programs. The sufficiency and effectiveness of our marketing and trade spending practices is important to our ability to retain or improve our market share or margins. If our marketing and trade spending programs are not successful or if we fail to implement sufficient and effective marketing and trade spending programs, our business, results of operations and financial condition may be adversely affected.

Our business operations could be disrupted if our information technology systems fail to perform adequately.

The efficient operation of our business depends on our information technology systems, some of which are managed by third-party service providers. We rely on our information technology systems to effectively manage our business data, communications, supply chain, order entry and fulfillment, and other business processes. The failure of our information technology systems to perform as we anticipate could disrupt our business and could result in transaction errors, processing inefficiencies, and the loss of sales and

customers, causing our business and results of operations to suffer. In addition, our information technology systems may be vulnerable to damage or interruption from circumstances beyond our control, including fire, natural disasters, power outages, systems failures, security breaches, cyber attacks and viruses. Any such damage or interruption could have a material adverse effect on our business.

We are in the process of developing a company-wide, cloud-based enterprise resource planning system during fiscal 2015. Our anticipated system implementation may not result in improvements that outweigh its costs and may disrupt our operations. If we are unable to successfully plan, design or implement this new system, it could have a material adverse effect on our financial position, results of operations and cash flows. The system implementation subjects us to substantial costs and inherent risks associated with migrating from our legacy systems. These costs and risks could include, but are not limited to:

•

inability to fill customer orders accurately and on a timely basis, or at all;

•

inability to process payments to vendors accurately and in a timely manner;

•

disruption of our internal control structure;

•

inability to fulfill our SEC or other governmental reporting requirements in a timely or accurate manner;

•

inability to fulfill federal, state and local tax filing requirements in a timely or accurate manner;

•

increased demands on management and staff time to the detriment of other corporate initiatives; and

•

significant capital and operating expenditures.

Adverse weather conditions (caused by climate change or otherwise), natural disasters, pestilences and other natural conditions can affect crops and other inputs, which can adversely affect our operations and our results of operations.

The commodities and ingredients that we use in the production of our products (including grain and soybean meal) are vulnerable to adverse weather conditions and natural disasters, such as floods, droughts, frosts, earthquakes and pestilences. Adverse weather conditions may be impacted by climate change and other factors. Adverse weather conditions and natural disasters can reduce crop size and crop quality, which in turn could reduce our supplies of ingredients, or increase the prices of our ingredients. Competing manufacturers may be affected differently by weather conditions and natural disasters depending on the location of their supplies or operations. If our supplies of ingredients are reduced, we may not be able to find enough supplemental supply sources on favorable terms, if at all, which could impact our ability to supply product to our customers and adversely affect our business, financial condition and results of operations. Increased costs for ingredients or other inputs could also adversely affect our business, financial condition and results of operations as described in “—The inputs, commodities and ingredients that we require are subject to price increases and shortages that could adversely affect our results of operations.”

Natural disasters can disrupt our operations, which could adversely affect our results of operations.

A natural disaster such as an earthquake, tornado, fire, flood, or severe storm or other catastrophic event affecting our operating activities or major facilities, could cause an interruption or delay in our business and loss of inventory and/or data or render us unable to accept and fulfill customer orders in a timely manner, or at all. We are particularly susceptible to earthquakes as our executive offices and our research center are located in California where earthquakes periodically occur. Additionally, some of our production facilities are located in places where tornados periodically occur, such as Alabama and Kansas. If our operations are damaged by an earthquake, tornado or other disaster, we may be subject to supply interruptions, destruction of our facilities and products or other business disruptions, which could adversely affect our business and results of operations.

A change in the assumptions used to value our reporting unit or our indefinite-lived intangible assets could result in goodwill or other intangible asset impairment charges, which would adversely affect our results of operations.

As of April 27, 2014, our goodwill totaled $2,113.4 million. We typically test goodwill of our reporting unit for impairment at least annually. Events indicative of a potential impairment (such as a decrease in the cash flow relating to the reporting unit) may cause us to perform additional tests for impairment and may also cause us to change our judgments or assumptions. Goodwill is considered impaired if the book value of the reporting unit containing the goodwill exceeds its estimated fair value. For goodwill, we determine the estimated fair value of a reporting unit using the income approach (which is based on the cash flows the reporting unit is expected to generate over its remaining life) and the market approach (which is based on market multiples of similar businesses). As of April 27, 2014, the book value of our capitalized brand names that we have determined have indefinite lives (“Non-Amortizing Brands”) was $1,389.9 million. We typically test our Non-Amortizing Brands for impairment at least annually. Events indicative of a potential impairment (such as a significant decline in the expected sales associated with a brand) may cause us to perform additional

tests for impairment. Non-Amortizing Brands are considered impaired if the book value for the brand exceeds its estimated fair value. We determine the estimated fair value of a Non-Amortizing Brand using the relief from royalty method (which is based upon the estimated rent or royalty we would pay for the use of a brand name if we did not own it). Considerable judgment by us is necessary in estimating future cash flows, market interest rates, discount factors, and other factors used in the income approach, market approach or relief from royalty method used to value goodwill and Non-Amortizing Brands. Many of these factors reflect our assumptions regarding the future performance of our business, which may be impacted by risks discussed elsewhere in this “Risk Factors” section. If we change our judgments or assumptions used in valuing our goodwill or other intangible assets in connection with any future impairment tests, we may conclude that the estimated fair value of the goodwill or Non-Amortizing Brand (as applicable) is less than the book value. This would result in a write down of the goodwill or Non-Amortizing Brand book value to the estimated fair value and recognition of an impairment charge. Any such impairment charge would adversely affect our earnings and could be material.

Disruption of our supply chain could adversely affect our business and results of operations.

Our ability and the ability of our suppliers, co-packers and other business partners to make, move and sell products are critical to our success. Damage or disruption to our or their manufacturing or distribution capabilities due to weather, natural disaster, fire, terrorism, pandemics, strikes or other reasons (including other reasons discussed elsewhere in this “Risk Factors” section) could impair our ability to manufacture or sell our products. Failure to take adequate steps to mitigate the likelihood or potential impact of such events, or to effectively manage such events if they occur, particularly when a product is sourced from a single supplier or location, could adversely affect our business and results of operations.

We rely upon a number of third parties to manage or provide distribution centers for our products. Failures by these third parties could adversely affect our business.

A number of our distribution centers are managed by third parties. Additionally, we also use third-party distribution centers, which may distribute our products as well as the products of other companies. Activity at these distribution centers could be disrupted by a number of factors, including, labor issues, failure to meet customer standards, bankruptcy or other financial issues affecting the third-party providers, or other matters affecting any such third party’s ability to service our customers effectively. Any disruption of these distribution centers could adversely affect our business.

We rely primarily on a single company to provide us with logistics services and any failure by this provider to effectively service us could adversely affect our business.

Our logistics requirements in connection with transporting our products are handled primarily by a third-party logistics service provider. Such services include: scheduling and coordinating transportation of finished products to our distribution centers and customers; shipment tracking; freight dispatch services; transportation related payment services; and filing, collecting and resolving freight claims. Any sudden or unexpected disruption of these services for any reason could significantly disrupt our business.

We are subject to environmental regulation and environmental risks, which may adversely affect our business. Climate change or concerns regarding climate change may increase environmental regulation and environmental risks.

As a result of our processing operations, we are subject to numerous environmental laws and regulations. Many of these laws and regulations are becoming increasingly stringent and compliance with them is becoming increasingly expensive. Changes in environmental conditions may result in existing legislation having a greater impact on us. Additionally, we may be subject to new legislation and regulation in the future. For example, increasing concern about climate change may result in additional federal and state legal and regulatory requirements to reduce or mitigate the effects of green-house gas emissions. Compliance with environmental legislation and regulations, particularly if they are more aggressive than our current sustainability measures used to monitor our emissions and improve our energy efficiency, may increase our costs and adversely affect our results of operations. We cannot predict the extent to which any environmental law or regulation that may be enacted or enforced in the future may affect our operations. We have been named as a potentially responsible party (“PRP”) and may be liable for environmental investigation and remediation costs at some designated “Superfund Sites” under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), or under similar state laws. We are defending ourselves in these actions as we believe appropriate. However, these matters may adversely impact our financial position or results of operations. We may in the future be named as a PRP at other currently or previously owned or operated sites, and additional remediation requirements could be imposed on us. We are currently conducting investigation and remedial activities at some locations, and other properties where we conduct or have conducted operations could be identified for investigation or proposed for listing under CERCLA or similar state laws in the future. Costs to investigate and remediate any such contamination could be material. Additionally, we will be required to conduct an investigation and, to the extent necessary, remedial activities at facilities in Terminal Island, CA. There can be no assurances that existing accruals will be sufficient to cover such activities. Also, under the Federal Food, Drug and Cosmetic Act and the Food Quality Protection Act of

1996, the U.S. Environmental Protection Agency is involved in a series of regulatory actions relating to the evaluation and use of pesticides in the food industry. The effect of these actions and future actions on the availability and use of pesticides could adversely impact our financial position or results of operations. If the cost of compliance with applicable environmental laws or regulations increases, our business and results of operations could be negatively impacted.

Volatility in the equity markets or interest rates could substantially increase our pension costs and have a negative impact on our results of operations.

We sponsor a qualified defined benefit pension plan and various other nonqualified retirement and supplemental retirement plans. The difference between plan obligations and assets, or the funded status of the defined benefit pension plan, significantly affects net periodic benefit costs of our pension plan and our ongoing funding requirements of that plan. The qualified defined benefit pension plan is funded with trust assets invested in a diversified portfolio of debt and equity securities and other investments. Among other factors, changes in interest rates, investment returns and the market value of plan assets can (i) affect the level of plan funding; (ii) cause volatility in the net periodic pension cost; and (iii) increase our future contribution requirements. In or following an economic environment characterized by declining investment returns and interest rates, we may be required to make additional cash contributions to our pension plan and recognize further increases in our net pension cost to satisfy our funding requirements. A significant decrease in investment returns or the market value of plan assets or a significant decrease in interest rates could increase our net periodic pension costs and adversely affect our results of operations. A significant increase in our contribution requirements with respect to our qualified defined benefit pension plan could have an adverse impact on our cash flow.

Our results may be negatively impacted if consumers do not maintain their favorable perception of our brands. Consumers’ perception of our brands can be influenced by negative posts or comments about our brands on social or digital media.

We believe that maintaining and continually enhancing the value of our brands is critical to the success of our business. Brand value is based in large part on consumer perceptions. Success in promoting and enhancing brand value depends in large part on our ability to provide high-quality products. Brand value could diminish significantly due to a number of factors, including consumer perception that we have acted in an irresponsible manner, adverse publicity about our products (whether or not valid), our failure to maintain the quality of our products, the failure of our products to deliver consistently positive consumer experiences, or the products becoming unavailable to consumers. The growing use of social and digital media by consumers increases the speed and extent that information and opinions can be shared. Negative posts or comments about us or our brands or products on social or digital media could damage our brands and reputation. If we do not maintain the favorable perception of our brands, our results of operations could be negatively impacted.

If we are not successful in protecting our intellectual property rights, we may harm our ability to compete.

Our brand names and trademarks, such as the marks Meow Mix, Milk-Bone, Kibbles ‘n Bits and Natural Balance are important to our business. We rely on trademark, copyright, trade secret, patent and other intellectual property laws, as well as nondisclosure and confidentiality agreements and other methods, to protect our proprietary information, technologies and processes. We also have obligations with respect to the non-use and non-disclosure of third-party intellectual property. We may need to engage in litigation or similar activities to enforce our intellectual property rights, to protect our trade secrets or to determine the validity and scope of proprietary rights of others. Any such litigation could require us to expend significant resources and divert the efforts and attention of our management and other personnel from our business operations. The steps we take to prevent misappropriation, infringement or other violation of our intellectual property or the intellectual property of others may not be successful. In addition, effective patent, copyright, trademark and trade secret protection may be unavailable or limited for some of our trademarks and patents in some foreign countries. Failure to protect our intellectual property could harm our business and results of operations.

Intellectual property infringement or violation claims may adversely impact our results of operations.

We may be subject to claims by others that we infringe on their intellectual property or otherwise violate their intellectual property rights. To the extent we develop, introduce and acquire products, such risk may be exacerbated. We have in the past been subject to such claims. Claims of infringement or violation may require us to engage in litigation to determine the scope and validity of such claims, change our products or cease selling certain products. Any of such events may adversely impact our results of operations.

Our business could be harmed by strikes or work stoppages by Big Heart Pet Brands employees.

As of April 27, 2014, we have seven collective bargaining agreements with seven union locals covering approximately 45% of our hourly employees. Of these employees, approximately 28% are covered under collective bargaining agreements scheduled to expire in fiscal 2015, approximately 1% are covered under collective bargaining agreements scheduled to expire in fiscal 2016 to 2019, and

approximately 71% are covered under collective bargaining agreements that are scheduled to expire in fiscal 2020. We may not be able to negotiate these or other collective bargaining agreements on the same or more favorable terms as the current agreements, or at all, without production interruptions caused by labor stoppages. If a strike or work stoppage were to occur in connection with negotiations of our significant collective bargaining agreements, or as a result of disputes under our collective bargaining agreements with labor unions, our business, financial condition and results of operations could be materially adversely affected.

Funds affiliated with KKR, Vestar and Centerview (collectively, the “Sponsors”), as well as AlpInvest, indirectly own substantially all of the equity interests in us and may have conflicts of interest with us or the holders of our indebtedness in the future.

Investment funds affiliated with the Sponsors and other investors collectively own substantially all of our outstanding equity securities, and the Sponsors’ designees hold substantially all of the seats on our board of directors. As a result, affiliates of the Sponsors and other investors have control over our decisions to enter into any corporate transaction and have the ability to prevent any transaction that requires the approval of stockholders, regardless of whether others believe that any such transactions are in their own best interests. For example, affiliates of the Sponsors and other investors could collectively cause us to make acquisitions that increase the amount of our indebtedness or to sell assets, or could cause us to issue additional capital stock or declare dividends. So long as investment funds affiliated with the Sponsors and other investors continue to indirectly own a significant amount of the outstanding shares of our common stock or otherwise control a majority of our board of directors, affiliates of the Sponsors and other investors will continue to be able to strongly influence or effectively control our decisions. The Credit Facilities and the indenture governing the Notes permit us to pay advisory and other fees, pay dividends and make other restricted payments to the Sponsors under certain circumstances and the Sponsors or their affiliates may have an interest in our doing so. In addition, the Sponsors and other investors have no obligation to provide us with any additional debt or equity financing.

Additionally, the Sponsors and other investors are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us or that supply us with goods and services. The Sponsors and other investors may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us. See “Part III, Item 13. Certain Relationships and Related Party Transactions, and Director Independence.”

Item 1B.

Unresolved Staff Comments

None.

Item 2.

Properties

As of April 27, 2014, as listed below, our principal facilities included five production facilities and four distribution centers in the U.S. Our combined production facilities total approximately 1.8 million square feet of owned property, while our distribution centers total approximately 1.0 million square feet of owned property and approximately 0.8 million square feet of leased property. We generally own our production facilities. Our Company-managed distribution centers are owned or leased by us. We also have various other warehousing and storage facilities, which are primarily leased facilities. Our leases are generally long-term. Certain of our owned real properties are subject to first lien mortgages and second lien mortgages in favor of the lenders under our senior secured term loan facility and our senior secured asset-based revolving credit facility, respectively.

The following table lists our principal production facilities and distribution centers owned or leased by us as of April 27, 2014:


Location
Production Facilities

United States:
Decatur, AL
Topeka, KS
Lawrence, KS
Buffalo, NY
Bloomsburg, PA

Distribution Centers

United States:
Fontana, CA
Kankakee, IL
Topeka, KS
Bloomsburg, PA

Our principal administrative headquarters are located in leased office space in San Francisco, CA. We also lease additional administrative facilities in Pittsburgh, PA. Our research and development facilities in Terminal Island, CA are located on leased land.

Additionally, we have agreements with third-parties who provide distribution center operations. Under these agreements, the third-party leases the facility and operates the distribution center. We pay a service fee based on the services they provide for us. These agreements generally have terms ranging from 3 to 5 years. In connection with the sale of our Consumer Products Business, we executed a transition services agreement which provides warehousing services at former Company facilities now owned or operated by the Acquiror. This agreement has a term of one year, subject to extension based on mutual agreement of the parties.

As of April 27, 2014, we had certain properties held for sale with a net book value of $9.5 million.

We believe our facilities are suitable and adequate for our business and have sufficient capacity for the purposes for which they are currently intended.

Item 3.

Legal Proceedings

For a description of our material pending legal proceedings, see “Note 15. Commitments and Contingencies” of our consolidated financial statements included in Part II, “Item 8. Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, which is incorporated herein by reference.

Item 4.

Mine Safety Disclosures

None.

PART II

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market and Dividend Information

As of April 27, 2014, our outstanding common stock was privately held, and there was no established public trading market for our common stock.

We have not paid or declared dividends since the Merger on March 8, 2011.

We expect to continue to use cash flows from operations (and other sources of cash, if any) to finance our working capital needs, to develop and grow our business (including capital expenditures), to reduce debt, to fund contributions to our defined benefit plans and for general corporate purposes. We may from time to time consider other uses for our cash flows from operations and other sources of

cash. Such uses may include, but are not limited to, acquisitions or future transformation or restructuring plans. Currently, there are no plans to pay dividends. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources” for a description of the restrictions on our ability to pay dividends.

Issuances of Unregistered Securities

There were no issuances of unregistered securities in the year ended April 27, 2014.

Issuer Purchases of Equity Securities

No Big Heart Pet shares were repurchased during fiscal 2014.

Item 6. Selected Financial Data

The following tables set forth our selected historical financial data as of and for the periods indicated (in millions). The selected historical financial data presented below was derived from the audited Consolidated Balance Sheets as of April 27, 2014, April 28, 2013, April 29, 2012, May 1, 2011, and May 2, 2010 respectively, and the audited Consolidated Statements of Operations for fiscal 2014, fiscal 2013, fiscal 2012, the periods March 8, 2011 through May 1, 2011, and May 3, 2010 through March 7, 2011, and fiscal 2010, respectively, as audited by KPMG LLP. The following information is qualified by reference to, and should be read in conjunction with, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data.” The historical results are not necessarily indicative of results to be expected in any future period.


	Successor								Predecessor
	Fiscal 2014		Fiscal 2013		Fiscal 2012		March 8, 2011 through May 1, 2011 (b)		May 3, 2010 through March 7, 2011 (c)		Fiscal 2010

Statements of operations data (a):
Net sales	$	2,190.1	$	1,989.0	$	1,860.8	$	271.0	$	1,513.2	$	1,750.0
Cost of products sold		1,408.8		1,301.0		1,219.4		216.6		885.7		1,052.1

Gross profit		781.3		688.0		641.4		54.4		627.5		697.9
Selling, general and administrative expense		526.5		454.9		431.9		72.2		328.3		448.5
Transaction and related costs		-		-		-		82.8		68.8		-

Operating income (loss)		254.8		233.1		209.5		(100.6)		230.4		249.4
Loss on partial debt extinguishment		52.4		9.1		-		15.8		-		24.8
Interest expense		219.2		248.1		250.3		28.2		65.8		90.7
Other (income) expense, net		(12.1)		(9.8)		49.6		30.2		0.4		12.3

Income (loss) from continuing operations before income taxes		(4.7)		(14.3)		(90.4)		(174.8)		164.2		121.6
Provision (benefit) for income taxes		3.1		(8.3)		(23.5)		(57.9)		71.1		44.7

Income (loss) from continuing operations		(7.8)		(6.0)		(66.9)		(116.9)		93.1		76.9
Income (loss) from discontinued operations before income taxes		(75.1)		152.7		154.0		21.5		195.8		261.7
Provision for income taxes		47.3		54.5		54.5		9.1		66.1		94.3

Income (loss) from discontinued operations		(122.4)		98.2		99.5		12.4		129.7		167.4

Net income (loss)	$	(130.2)	$	92.2	$	32.6	$	(104.5)	$	222.8	$	244.3



	Successor										Predecessor
	April 27, 2014		April 28, 2013		April 29, 2012		May 1, 2011				May 2, 2010
Balance sheet data (a):
Total assets	$	5,363.6	$	7,363.1	$	7,243.1	$	7,203.7			$	4,288.9
Long-term debt, excluding current portion		2,603.0		3,902.7		3,883.0		3,973.1				1,255.2
Stockholder’s equity		1,488.1		1,593.9		1,501.3		1,485.4				1,827.4


	Successor								Predecessor
	Fiscal 2014		Fiscal 2013		Fiscal 2012		March 8, 2011 through May 1, 2011 (b)		May 3, 2010 through March 7, 2011 (c)		Fiscal 2010
Cash flow data (a):
Cash flows provided by (used in) operating activities	$	(409.1)	$	306.3	$	340.7	$	85.2	$	254.3	$	355.9
Cash flows provided by (used in) investing activities		1,305.5		(116.4)		(122.8)		(3,882.7)		(66.1)		(104.9)
Cash flows provided by (used in) financing activities		(1,379.5)		(0.6)		(23.7)		4,002.6		(91.5)		(336.2)
Capital expenditures		79.6		108.0		81.8		25.8		66.1		104.9

(a)

For all periods presented, the operating results of the Consumer Products Business and StarKist Seafood Business have been classified as discontinued operations. We have combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories in the Consolidated Statements of Cash Flows for all periods presented.

(b)	The financial results for the period March 8, 2011 through May 1, 2011 represent the 8-week Successor period reflecting the Merger.

(c)	The financial results for the period May 3, 2010 through March 7, 2011 represent the 44-week Predecessor period prior to the Merger.

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion summarizes the significant factors affecting our consolidated operating results, financial condition and liquidity during the three-year period ended April 27, 2014. This discussion should be read in conjunction with our consolidated financial statements for the fiscal years ended April 27, 2014, April 28, 2013, and April 29, 2012 and related notes included elsewhere in this Annual Report on Form 10-K. These historical financial statements may not be indicative of our future performance. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains a number of forward-looking statements, all of which are based on our current expectations and could be affected by the uncertainties and risks described throughout this filing, particularly in “Item 1A. Risk Factors.”

Discontinued Operations

On October 9, 2013, we entered into a Purchase Agreement (the “Purchase Agreement”) with Del Monte Pacific Limited (“DMPL”) and its subsidiary, Del Monte Foods Consumer Products, Inc. (now known as Del Monte Foods, Inc.), (the “Acquiror”). Pursuant to the terms of the Purchase Agreement, we sold to the Acquiror the interests of certain subsidiaries related to our Consumer Products business (the “Consumer Products Business”) and generally all assets primarily related to the Consumer Products Business (the “Transferred Assets”) for a purchase price of $1,675.0 million, subject to a post-closing working capital adjustment. The Acquiror assumed related liabilities (other than certain specified excluded liabilities). The transaction closed on February 18, 2014. In connection with the closing, we received approximately $110 million in incremental proceeds representing the preliminary working capital adjustment subject to a true-up in accordance with the terms of the Purchase Agreement. See “Executive Overview” below regarding the use of the proceeds from the sale. Following the divestiture, we changed our name from Del Monte Corporation (“DMC”) to Big Heart Pet Brands.

Accordingly, the results of the Consumer Products Business have been reported as discontinued operations for all periods presented. Expenses allocated to discontinued operations are limited to selling, administrative and distribution expenses that were directly attributable to the Consumer Products Business. Consequently, certain expenses that have historically been allocated to the Consumer Products Business are not included in discontinued operations.

We have combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories in the Consolidated Statements of Cash Flows of our consolidated financial statements in this Annual Report on Form 10-K for all periods presented.

From closing, we will have continuing involvement with the Acquiror under the terms of a transition services agreement and expect to have continuing cash flows with the discontinued operation for at least 12 months after the transaction close date. Our continuing involvement will include providing continued information technology, accounting, and administrative service functions during the term of the agreement.

The discussion below in “Executive Overview” and “Results of Operations” refers to continuing operations only, unless otherwise stated.

Merger

On March 8, 2011, we were acquired by an investor group led by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Capital, L.P. (“Centerview”). Under the terms of the merger agreement, the stockholders of Del Monte Foods Company (“DMFC”) received $19.00 per share in cash. The acquisition (also referred to as the “Merger”) was effected by the merger of Blue Merger Sub Inc. (“Blue Sub”) with and into DMFC, with DMFC being the surviving corporation. As a result of the Merger, DMFC became a wholly-owned subsidiary of Blue Acquisition Group, Inc. (“Parent”). DMFC stockholders approved the transaction on March 7, 2011. DMFC’s common stock ceased trading on the New York Stock Exchange before the opening of the market on March 9, 2011.

On April 26, 2011, DMFC merged with and into DMC, with DMC being the surviving corporation. As a result of this merger, DMC became a direct wholly-owned subsidiary of Parent.

Fiscal Year

Our fiscal year ends on the Sunday closest to April 30. Every five or six years, depending on leap years, our fiscal year has 53 weeks. Fiscal 2014, fiscal 2013, and fiscal 2012 each contained 52 weeks. Fiscal 2015 will contain 53 weeks.

Background

Big Heart Pet Brands and its consolidated subsidiaries (“Big Heart Pet” or the “Company”) is the largest U.S. standalone producers, distributors and marketers of premium quality, branded pet food and pet snack products, with brands for dogs and cats such as Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs, Milo’s Kitchen and other brand names.

Key Performance Indicators

The following tables set forth some of our key performance indicators that we utilize to assess results of operations (dollars in millions):


	Fiscal 2014		Fiscal 2013		Change		% Change		Volume (a)		Rate (b)

Net sales	$	2,190.1	$	1,989.0	$	201.1		10.1%		7.5%		2.6%
Cost of products sold		1,408.8		1,301.0		107.8		8.3%		9.8%		(1.5%)

Gross profit		781.3		688.0		93.3		13.6%
Selling, general and administrative (“SG&A”) expense		526.5		454.9		71.6		15.7%

Operating income	$	254.8	$	233.1	$	21.7		9.3%


Gross margin		35.7%		34.6%

SG&A as a % of net sales		24.0%		22.9%

Operating income margin		11.6%		11.7%

(a)	This column represents the change, as compared to the prior year period, due to volume. Volume represents the change resulting from the number of units sold, exclusive of any change in price. Volume changes in the above table include elasticity, the volume decline associated with price increases.

(b)	This column represents the change, as compared to the prior year period, attributable to per unit changes in net sales or cost of products sold, as well as mix. Mix represents the change attributable to shifts in volume across products or channels.


	Trailing Twelve Months Ended April 27, 2014		Trailing Twelve Months Ended April 28, 2013

Adjusted EBITDA (as specified in our debt agreements (c))	$	449.8	$	418.2
Ratio of net debt to Adjusted EBITDA (d)		5.6x		5.7x

(c)	Refer to “Reconciliation of Non-GAAP Financial Measures” below.

(d)

Net debt is calculated as total debt at the end of the period (including both short-term borrowings and long-term debt and excluding debt discount) less cash and cash equivalents, and includes both continuing and discontinued operations. For fiscal 2013, Adjusted EBITDA used in the calculation of the ratio includes the Adjusted EBITDA of the Consumer Products Business as this was prior to the sale of the Consumer Products Business.

Executive Overview

On February 18, 2014, we completed the sale of our Consumer Products Business as described above, and the results of the Consumer Products Business are reported as discontinued operations. In connection with the sale of the Consumer Products Business, we changed our name to Big Heart Pet Brands. Unless otherwise noted, the amounts discussed below are for continuing operations only.

On February 24, 2014, we repaid $881.0 million of the outstanding balance of our Senior Secured Term Loan from the after tax net proceeds from the sale of the Consumer Products Business and repriced and extended the maturity. On March 6, 2014, we refinanced

our Senior Secured Asset-Based Revolving Credit Facility with a new $225.0 million, five-year ABL Facility. On March 13, 2014, we used a portion of the remaining net proceeds from the sale to redeem $400.0 million of our Senior Notes due 2019 at a redemption price equal to 103.813% of their aggregate principal amount plus accrued and unpaid interest to the redemption date, as announced on February 11, 2014. As a result, we lowered our leverage and reduced our weighted average cost of debt. In connection with these debt pay down and modification activities, we incurred certain costs, including redemption premiums and non-cash write offs of deferred financing fees, in the fourth quarter of fiscal 2014.

On July 15, 2013, we completed the acquisition of Natural Balance, maker of premium pet products for dogs and cats sold throughout North America.

In fiscal 2014 our net sales were $2,190.1 million, operating income was $254.8 million and loss from continuing operations was $7.8 million. In fiscal 2013, we achieved net sales of $1,989.0 million, operating income of $233.1 million and loss from continuing operations was $6.0 million.

Net sales increased $201.1 million in fiscal 2014 driven by the acquisition of Natural Balance.

Operating income in fiscal 2014 increased by $21.7 million driven by the increase in net sales, partially offset by increased marketing costs.

Adjusted EBITDA was $449.8 million for the trailing twelve months ended April 27, 2014 and $418.2 million for the trailing twelve months ended April 28, 2013. Our ratio of net debt to Adjusted EBITDA was 5.6x for the trailing twelve months ended April 27, 2014 and 5.7x for the trailing twelve months ended April 28, 2013 (For fiscal 2013, Adjusted EBITDA used in the calculation of the ratio includes the Adjusted EBITDA of the Consumer Products Business as this was prior to the sale of the Consumer Products Business.) Refer to “Reconciliation of Non-GAAP Financial Measures” below for a reconciliation of these measures to the most directly comparable GAAP measures as presented in our financial statements.

At April 27, 2014, our total debt was $2,626.4 million. As a result of the amendment to our Senior Secured Term Loan Credit Agreement in February 2014, no excess annual cash flow payment will be due for the fiscal year ended April 27, 2014.

As we transition to a new pet only company, we have aligned our purpose, commitment and values to our pet only focus.

Strategy

Our strategic direction, which we refer to as the 4C’s, focuses on our Consumers, Customers, Capabilities and Costs. Each of the 4C’s work together to define the strategic destination to which we aspire, which will drive our financial performance:

Consumers—Our goal is to create compelling brand value propositions grounded in superior insights and fueled by appropriate portfolio roles, brand investment and innovation.

Customers—We will strive to emerge as the strategic supplier of choice for our customers, jointly serving our consumers across channels with differentiated category insight, customer and shopper marketing, and category and retail execution.

Capabilities—We aspire to evolve our culture to meet marketplace needs by creating competitive and cutting-edge capabilities and a compelling employee value proposition.

Costs—Our plan is to create a focused, efficient, service-oriented cost structure with top-tier productivity and business processes.

Underlying the 4C’s is our culture. Our strategy requires that the entire organization work with cross-functional alignment and collaboration, an eye toward continuous improvement, and a focus on the consumer and customer. The culture needs to activate our core values and be the foundational platform upon which business priorities and strategies are enabled.

The 4 C’s form the fundamental elements of our strategy with a focus on our pet snack brands, the pet specialty channel and our mainstream food brands (generally distributed in grocery stores, club stores and supercenters). We seek to gain keen insights into our consumers’ needs and to delight their pets. We make products that create a better future for pets, brands that people love to buy and experiences that strengthen the bond between pets and the people who love them.

Results of Operations

Fiscal 2014 vs. Fiscal 2013

Net sales

Net sales increased by $201.1 million, or 10.1%, in fiscal 2014 compared to fiscal 2013. The increase was primarily due to the acquisition of Natural Balance. New product sales also benefitted net sales, offset by a decline in existing products reflecting the impact of the prior year voluntary recall of certain Milo’s Kitchen products and the continued competitive environment experienced by our mainstream food brands.

Cost of products sold

Cost of products sold increased by $107.8 million, or 8.3%, in fiscal 2014 compared to fiscal 2013. This increase was primarily due to the higher sales volumes mentioned above, partially offset by productivity savings and the absence of the costs of the recall.

While the impact of economic hedge transactions is reflected in other (income) expense, we are now utilizing and expect to continue to utilize hedge accounting treatment for certain of our hedging transactions which began to impact cost of products sold in the second quarter of fiscal 2014. See other (income) expense below.

Gross margin

Our gross margin percentage for fiscal 2014 increased 1.1 points to 35.7% compared to 34.6% in fiscal 2013. The increase was primarily due to cost savings, including the absence of the recall costs described above. Pricing positively impacted gross margin, offset by unfavorable product mix.

Selling, general and administrative expense

Selling, general and administrative (“SG&A”) expense increased by $71.6 million, or 15.7%, during fiscal 2014 compared to fiscal 2013. This increase was primarily driven by increased marketing expense as well as the Natural Balance acquisition, including the amortization of intangibles, and costs associated with the sale of the Consumer Products Business.

Operating income

Operating income increased by $21.7 million, or 9.3%, during fiscal 2014 compared to fiscal 2013, primarily due to the increased net sales mentioned above as well as productivity savings and the absence of the prior year costs associated with the recall, partially offset by increased marketing costs, the acquisition of Natural Balance and costs associated with the sale of the Consumer Products Business.

Loss on partial debt extinguishment

The loss on partial debt extinguishment in fiscal 2014 represents the write off of debt issuance costs related to the early repayment of debt and the excess cash flow payment, as well as the redemption premium paid in connection with the redemption of a portion of the 7.625% Notes. The loss on partial debt extinguishment in fiscal 2013 represents the write off of debt issuance costs related to the excess cash flow payment and debt repricing.

Interest expense

Interest expense decreased by $28.9 million, or 11.6%, in fiscal 2014 compared to fiscal 2013. This decrease was driven primarily by lower rates and lower average debt balances.

Other (income) expense, net

Other income of $12.1 million and $9.8 million for fiscal 2014 and fiscal 2013, respectively, was comprised primarily of gains on commodity hedging contracts, partially offset by losses on interest rate hedging contracts.

Provision (benefit) for income taxes

The effective tax rate for continuing operations for fiscal 2014 was (66.0%) compared to 58.0% for fiscal 2013. The effective tax rate in fiscal 2014 was impacted by unfavorable changes in state tax rates and state tax law, as well as non-deductible transaction costs, coupled with a near break-even pre-tax loss. We expect our effective tax rate to be between 37% and 39% in fiscal 2015.

Income (loss) from discontinued operations

Loss from discontinued operations for fiscal 2014 was $122.4 million and resulted primarily from an impairment charge of $193.8 million. Income from discontinued operations for fiscal 2013 was $98.2 million and represented the operations of the Consumer Products Business. Lower sales also contributed to the decrease.

Reconciliation of Non-GAAP Financial Measures

Adjusted EBITDA

We report our financial results in accordance with generally accepted accounting principles in the United States (“GAAP”). In this Annual Report on Form 10-K, we also provide certain non-GAAP financial measures—Adjusted EBITDA and ratio of net debt to Adjusted EBITDA. We present Adjusted EBITDA because we believe that it is an important supplemental measure relating to our financial condition since it is used in certain covenants in the indenture that governs our 7.625% Senior Notes due 2019 (referred to therein as “EBITDA”) and the credit agreements relating to our term loan and revolver (referred to therein as “Consolidated EBITDA”). We present the ratio of net debt to Adjusted EBITDA because it is used internally to focus management on year-over-year changes in our leverage and we believe this information is also helpful to investors. We use Adjusted EBITDA in this leverage measure because we believe our investors are familiar with Adjusted EBITDA and that consistency in presentation of EBITDA-related measures is helpful to investors.

EBITDA is defined as income before interest expense, provision for income taxes, and depreciation and amortization. Adjusted EBITDA is defined as EBITDA, further adjusted as required by the definitions of “EBITDA” and “Consolidated EBITDA” contained in our indenture and credit agreements. Our presentation of Adjusted EBITDA has limitations as an analytical tool. Adjusted EBITDA is not a measure of liquidity or profitability and should not be considered as an alternative to net income, operating income, net cash provided by operating activities or any other measure determined in accordance with GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of cash flow for management’s discretionary use, as it does not consider debt service requirements, obligations under the monitoring agreement with our Sponsors, capital expenditures or other non-discretionary expenditures that are not deducted from the measure.

We caution investors that our presentation of Adjusted EBITDA and ratio of net debt to Adjusted EBITDA may not be comparable to similarly titled measures of other companies.


	Trailing Twelve Months Ended
	April 27, 2014		April 28, 2013
	(in millions)
Reconciliation:
Operating income	$	254.8	$	233.1
Other income (expense)		12.1		9.8
Adjustments to derive EBITDA:
Depreciation and amortization expense⁽¹⁾		100.3		102.1
Amortization of debt issuance costs and debt discount⁽²⁾		(20.8)		(24.2)

EBITDA	$	346.4	$	320.8
Non-cash charges		3.5		3.9
Derivative transactions⁽³⁾		13.8		(0.9)
Non-cash stock based compensation		14.5		7.3
Non-recurring (gains) losses		-		14.1
Merger/acquisition-related items		13.2		9.0
Disposed business reclassification⁽⁴⁾		28.5		32.9
Business optimization charges		15.4		20.7
Other		14.5		10.4

Adjusted EBITDA	$	449.8	$	418.2	⁽⁵⁾


Adjustment to present prior year leverage on a comparable basis	$	-	$	178.5	⁽⁶⁾



Denominator for calculation of ratio of net debt to Adjusted EBITDA	$	449.8	$	596.7	⁽⁶⁾


Net Debt⁽⁷⁾		2,513.6		3,390.9

Ratio of net debt to Adjusted EBITDA		5.6x		5.7x

⁽¹⁾ Represents depreciation and amortization expense for continuing operations only. Includes $7.8 million of accelerated depreciation in the trailing twelve months ended April 28, 2013, related to the closure of our Kingsburg, California facility.

⁽²⁾ Represents adjustments to exclude amortization of debt issuance costs and debt discount reflected in depreciation and amortization because such costs are not deducted in arriving at operating income.

⁽³⁾ Represents adjustments needed to reflect only the cash impact of derivative transactions in the calculation of Adjusted EBITDA.

⁽⁴⁾ Represents overhead costs historically allocated to the Consumer Products segment (not reflected in discontinued operations in accordance with generally accepted accounting principles). This reclassification is required to determine Adjusted EBITDA, excluding the Consumer Products Business (a disposed business as defined in our credit agreements), for the trailing twelve months ended April 27, 2014 and April 28, 2013. Subsequent to the divestiture of the Consumer Products Business, such overhead costs will be borne by Big Heart Pet Brands to the extent the costs are not offset by income from a transition services agreement (in place until February 2015) or reduced by cost saving initiatives.

⁽⁵⁾ For comparability, Adjusted EBITDA for the trailing twelve months ended April 28, 2013 has been recast to exclude the Consumer Products Business. See also (1) above.

⁽⁶⁾ According to the terms of our credit agreements, Adjusted EBITDA shall exclude the EBITDA of any business that has been sold. As such, Adjusted EBITDA for the trailing twelve months ended April 27, 2014 excludes the Adjusted EBITDA of the Consumer Products Business as it was sold prior to the end of the period. For the trailing twelve months ended April 28, 2013, Adjusted EBITDA used in the calculation of the ratio of net debt to Adjusted EBITDA includes the Adjusted EBITDA of the Consumer Products Business as it had not been sold as of April 28, 2013.

⁽⁷⁾ Net debt is calculated as total debt at the end of the period (including both short-term borrowings and long-term debt and excluding debt discount) less cash and cash equivalents, and includes both continuing and discontinued operations.

Fiscal 2013 vs. Fiscal 2012

Net sales


	Fiscal 2013		Fiscal 2012		Change		% Change		Volume (a)		Rate (b)
	(in millions)

Net sales:
Pet Products	$	1,989.0	$	1,860.8	$	128.2		6.9%		2.9%		4.0%

(a)	This column represents the change, as compared to the prior year period, due to volume. Volume represents the change resulting from the number of units sold, exclusive of any change in price. Volume changes in the above table include elasticity, the volume decline associated with price increases.

(b)	This column represents the change, as compared to the prior year period, attributable to per unit changes in net sales or cost of products sold, as well as mix. Mix represents the change attributable to shifts in volume across products or channels.

Net sales increased $128.2 million, or 6.9%, in fiscal 2013 compared to fiscal 2012. The increase was driven by net pricing and new product sales, partially offset by elasticity. New product sales included Meow Mix Tender Centers, Pup-Peroni Mix Stix, Meow Mix Paté Toppers, and Milk-Bone Trail Mix.

Cost of products sold

Cost of products sold increased by $81.6 million, or 6.7%, in fiscal 2013 compared to fiscal 2012. This increase was primarily due to higher ingredient costs as well as the higher sales volumes mentioned above, partially offset by productivity savings.

The impact of hedging is reflected in other (income) expense. See other (income) expense below.

Gross margin

Our gross margin percentage for fiscal 2013 remained flat at 34.6% compared to fiscal 2012. The positive impact of pricing was offset by increased costs as well as unfavorable product mix.

Selling, general and administrative expense

Selling, general and administrative expense increased by $23.0 million, or 5.3%, during fiscal 2013 compared to fiscal 2012. This increase was primarily driven by increased marketing expense and increased compensation costs under our Annual Incentive Plan, partially offset by lower consulting costs in fiscal 2013.

Operating income

Operating income increased by $23.6 million, or 11.3%, during fiscal 2013 compared to fiscal 2012, primarily due to the increased net sales mentioned above as well as productivity, partially offset by increased operating costs, increased marketing costs and higher compensation costs under our Annual Incentive Plan. The increased operating costs were primarily due to higher ingredient costs. Operating income for fiscal 2013 was also impacted by approximately $10.1 million of costs associated with the voluntary recall of certain of our Milo’s Kitchen chicken dog treat products, net of expected insurance recoveries.

Loss on partial debt extinguishment

The loss on partial debt extinguishment in fiscal 2013 represents the write off of debt issuance costs related to the excess cash flow payment and the repricing of debt.

Interest expense

Interest expense decreased by $2.2 million, or 0.9%, in fiscal 2013 compared to fiscal 2012. This decrease was driven primarily lower average debt balances.

Other (income) expense, net

Other income of $9.8 million for fiscal 2013 was comprised primarily of gains on commodity hedging contracts, partially offset by losses on interest rate hedging contracts. The gains on commodity hedging contracts recorded in fiscal 2013 partially offset both ingredient cost increases seen in cost of products sold above and ingredient cost increases that we expect to see in future quarters. Other expense of $49.6 million for fiscal 2012 was comprised primarily of losses on interest rate hedging contracts.

Provision (benefit) for income taxes

The effective tax rate for continuing operations for fiscal 2013 was 58.0% compared to 26.0% for fiscal 2012. The change in the effective tax rate was primarily due to the non-deductibility of certain severance related expenses in fiscal 2012, along with a decrease in state taxes resulting from a change in state tax law in fiscal 2013.

Income (loss) from discontinued operations

Income from discontinued operations for fiscal 2013 was $98.2 million compared to $99.5 million for fiscal 2012 and represented the operations of the Consumer Products Business.

Liquidity and Capital Resources

Our most significant cash needs relate to the production of our products. In addition, our cash is used for the repayment, including interest and fees, of our primary debt obligations (i.e. our revolver and our term loans, our senior notes and, if necessary, our letters of credit), contributions to our pension plan, expenditures for capital assets, lease payments for some of our equipment and properties and other general business purposes. We have also used cash for acquisitions, legal settlements and transformation and restructuring plans. We may from time to time consider other uses for our cash flow from operations and other sources of cash. Such uses may include, but are not limited to, future acquisitions, transformation or restructuring plans. Our primary sources of cash are typically funds we receive as payment for the products we produce and sell and from our revolving credit facility.

We made contributions to our pension plan of $10.0 million for fiscal 2014. We currently meet and plan to continue to meet the minimum funding levels required under the Pension Protection Act of 2006 (the “Act”). The Act imposes certain consequences on our pension plan if it does not meet the minimum funding levels. We have made contributions in excess of our required minimum amounts during fiscal 2014 and 2013 and is more than 100% funded as of April 27, 2014. Due to uncertainties of future funding levels as well as plan financial returns, we cannot predict whether we will continue to achieve specified plan funding thresholds. We currently expect to make a contribution of approximately $8 million in fiscal 2015.

We believe that cash on hand, cash flow from operations and availability under our revolver will provide adequate funds for our working capital needs, planned capital expenditures, debt service obligations and planned pension plan contributions for at least the next 12 months.

On July 11, 2013, we purchased a minority equity interest in a co-packer for $14.6 million. The investment is accounted for under the equity method and is stated at cost plus our share of undistributed earnings or losses.

On July 15, 2013, we completed the acquisition of Natural Balance, a California corporation and maker of premium pet products for dogs and cats sold throughout North America. The total cost of the acquisition was $331.4 million. The total cost of the acquisition is subject to a post-closing working capital adjustment which was initially due from us 90 days after closing. Final agreement of the working capital adjustment with the seller has not yet occurred.

Discontinued Operations

On October 9, 2013, DMC entered into a Purchase Agreement with Del Monte Pacific Limited (“DMPL”) and its subsidiary, Del Monte Foods Consumer Products, Inc. (now known as “Del Monte Foods, Inc.”), (the “Acquiror”). Pursuant to the terms of the Purchase Agreement, we sold to the Acquiror the interests of certain subsidiaries related to our Consumer Products business (the “Consumer Products Business”) and generally all assets primarily related to the Consumer Products Business (the “Transferred Assets”) for a purchase price of $1,675.0 million, subject to a post-closing working capital adjustment. The Acquiror also assumed related liabilities (other than certain specified excluded liabilities). The transaction closed February 18, 2014. In connection with the closing, we received approximately $110 million in incremental proceeds representing the preliminary working capital adjustment subject to a true-up in accordance with the terms of the Purchase Agreement. We have used a portion of the net proceeds from the sale to repay debt and to pay taxes due in connection with the sale. See further discussion below.

Description of Indebtedness

The summary of our indebtedness and restrictive and financial covenants set forth below is qualified by reference to our senior secured term loan credit agreement, our senior secured asset-based revolving facility, our senior note indenture, and the amendments thereto, all of which are set forth as exhibits to our public filings with the Securities and Exchange Commission (“SEC”).

Senior Secured Term Loan Credit Agreement

We are party to a senior secured term loan credit agreement (the “Senior Secured Term Loan Credit Agreement”) with the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other agents named therein, that initially provided for a $2,700.0 million senior secured term loan B facility (with all related loan documents, and as amended from time to time, the “Term Loan Facility”) with an original term of seven years.

On February 24, 2014, we repaid $881.0 million of the Term Loan Facility from the after-tax net proceeds from the sale of our Consumer Products Business and entered into an amendment to our Senior Secured Term Loan Credit Agreement. The amendment, among other things, (1) lowered the LIBOR rate floor on term loans under the credit agreement from 1.00% to 0.75% and the base rate floor from 2.00% to 1.75%; (2) established the applicable interest margin at 2.75% on LIBOR rate loans and 1.75% on base rate loans; and (3) extended the maturity date of the initial term loans to March 8, 2020 from March 8, 2018.

Interest Rates. Loans under the amended Term Loan Facility bear interest at a rate equal to an applicable margin, plus, at our option, either (i) a LIBOR rate (with a floor of 0.75%) or (ii) a base rate (with a floor of 1.75%) equal to the highest of (a) the federal funds rate plus 0.50%, (b) JPMorgan Chase Bank, N.A.’s “prime rate” and (c) the one-month LIBOR rate plus 1.00%. As of April 27, 2014, the applicable margin with respect to LIBOR borrowings is 2.75% and with respect to base rate borrowings is 1.75%.

Principal Payments. The amended Term Loan Facility generally requires quarterly scheduled principal payments of 0.25% of the outstanding principal per quarter from June 30, 2014 to December 31, 2019. The balance is due in full on the maturity date of March 8, 2020. Scheduled principal payments with respect to the Term Loan Facility are subject to reduction following any mandatory or voluntary prepayments on terms and conditions set forth in the Senior Secured Term Loan Credit Agreement. On June 27, 2013, we made a payment of $74.5 million representing the annual excess cash flow payment due for the fiscal year ended April 28, 2013. As a result of the amendment described above, no annual excess cash flow payment will be due for fiscal 2014. As of April 27, 2014, the amount of outstanding loans under the Term Loan Facility was $1,726.4 million and the blended interest rate payable was 3.50%, or 4.96% after giving effect to our interest rate swaps. See “Note 8. Derivative Financial Instruments” to our consolidated financial statements in this Annual Report on Form 10-K for a discussion of our interest rate swaps.

The Senior Secured Term Loan Credit Agreement also requires us to prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with, among other things:

• 50% (which percentage will be reduced to 25% if our leverage ratio is 5.5x or less and to -% if our leverage ratio is 4.5x or less) of our annual excess cash flow, as defined in the Senior Secured Term Loan Credit Agreement;

• 100% of the net cash proceeds of certain casualty events and non-ordinary course asset sales or other dispositions of property for a purchase price above $10 million, in each case, subject to our right to reinvest the proceeds; and

• 100% of the net cash proceeds of any incurrence of debt, other than proceeds from debt permitted under the Senior Secured Term Loan Credit Agreement.

Ability to Incur Additional Indebtedness. We have the right to request an additional $500.0 million plus an additional amount of secured indebtedness under the Term Loan Facility. Lenders under this facility are under no obligation to provide any such additional loans, and any such borrowings will be subject to customary conditions precedent, including satisfaction of a prescribed leverage ratio, subject to the identification of willing lenders and other customary conditions precedent.

Senior Secured Asset-Based Revolving Credit Agreement

We have historically maintained a revolver for flexibility to fund our seasonal working capital needs and for other general corporate purposes. Following the sale of our Consumer Products Business, we no longer expect to have material changes in working capital needs due to seasonality. On March 6, 2014, we refinanced our credit agreement (the “Senior Secured Asset-Based Revolving Credit Facility”) with JPMorgan Chase Bank, N.A., as administrative agent, and the other lenders and agents parties thereto, that provides for a new $225.0 million facility (with all related loan documents, and as amended from time to time, the “ABL Facility”) with a term of five years.

Interest Rates. Borrowings under the ABL Facility bear interest at an initial interest rate equal to an applicable margin, plus, at our option, either (i) a LIBOR rate, or (ii) a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) JPMorgan Chase Bank, N.A.’s “prime rate” and (c) the one-month LIBOR rate plus 1.00%. The applicable margin with respect to LIBOR borrowings is currently 1.50% (and may increase to 1.75% depending on average excess availability) and with respect to base rate borrowings is currently 0.50% (and may increase to 0.75% depending on average excess availability).

Commitment Fees. In addition to paying interest on outstanding principal under the ABL Facility, we are required to pay a commitment fee of 0.25% per annum in respect of the unutilized commitments thereunder. We must also pay customary letter of credit fees and fronting fees for each letter of credit issued.

Availability under the ABL Facility. Availability under the ABL Facility is subject to a borrowing base. The borrowing base, determined at the time of calculation, is an amount equal to: (a) 85% of eligible accounts receivable and (b) 85% of the net orderly liquidation value of eligible inventory, (provided that net orderly liquidation value cannot exceed the net book value) of the borrowers under the facility at such time, less customary reserves. The ABL Facility will mature, and the commitments thereunder will terminate, on March 6, 2019. We borrowed $234.6 million under our former ABL Facility during the nine months ended January 26, 2014 and repaid a total of $234.6 million. We have not made any borrowings under the new ABL Facility. As of April 27, 2014, there were no loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $33.4 million, and the net availability under the ABL Facility was $161.6 million.

The ABL Facility includes a sub-limit for letters of credit and for borrowings on same-day notice, referred to as “swingline loans.” We are the lead borrower under the ABL Facility and other domestic subsidiaries may be designated as borrowers on a joint and several basis.

Ability to Incur Additional Indebtedness. The commitments under the ABL Facility may be increased, subject only to the consent of the new or existing lenders providing such increases, such that the aggregate principal amount of commitments does not exceed $325 million. The lenders under this facility are under no obligation to provide any such additional commitments, and any increase in commitments will be subject to customary conditions precedent. Notwithstanding any such increase in the facility size, our ability to borrow under the facility will remain limited at all times by the borrowing base (to the extent the borrowing base is less than the commitments).

Guarantee of Obligations under the Senior Secured Term Loan Credit Agreement and Senior Secured Asset-Based Revolving Credit Agreement

All our obligations under the Senior Secured Term Loan Credit Agreement and Senior Secured Asset-Based Revolving Credit Agreement are unconditionally guaranteed by Parent and by substantially all our existing and future, direct and indirect, wholly-owned material restricted domestic subsidiaries, subject to certain exceptions. Subsequent to the July acquisition described above, Natural Balance became a guarantor subsidiary under our debt agreements.

Senior Notes Due 2019

We have $900.0 million of senior notes due February 15, 2019 with a stated interest rate of 7.625% (the “7.625% Notes”). The indenture governing the senior notes is hereinafter referred to as the “Senior Notes Indenture.” On March 13, 2014, we used a portion of the net proceeds from the sale of our Consumer Products Business to redeem $400.0 million of our 7.625% Notes at a redemption price equal to 103.813% of their aggregate principal amount plus accrued and unpaid interest to the redemption date.

Interest Rate. Interest on the 7.625% Notes is payable semi-annually on February 15 and August 15 of each year commencing August 15, 2011.

Guarantee. The 7.625% Notes are required to be fully and unconditionally guaranteed by each of our existing and future domestic restricted subsidiaries that guarantee our obligations under the Term Loan Facility and ABL Facility.

Redemption Rights. We may redeem all or a part of the 7.625% Notes at a premium ranging from 103.813% to 101.906% of the aggregate principal amount. Beginning on February 15, 2016, we may redeem all or a part of the 7.625% Notes at face value. Any redemption as described above is subject to the concurrent payment of accrued and unpaid interest, if any, upon redemption.

Security Interests

Indebtedness under the Term Loan Facility is generally secured by a first priority lien on substantially all of our assets other than inventories and accounts receivable, and by a second priority lien with respect to inventories and accounts receivable. The ABL Facility is generally secured by a first priority lien on our inventories and accounts receivable and by a second priority lien on substantially all of our other assets. The 7.625% Notes are our senior unsecured obligations and rank senior in right of payment to any future indebtedness and other obligations that expressly provide for their subordination to the 7.625% Notes; rank equally in right of payment to all of the existing and future unsecured indebtedness; are effectively subordinated to all of the existing and future secured debt (including obligations under the Term Loan Facility and ABL Facility described above) to the extent of the value of the collateral securing such debt; and are structurally subordinated to all existing and future liabilities, including trade payables, of the non-guarantor subsidiaries, to the extent of the assets of those subsidiaries.

Deferred Debt Issuance and Debt Extinguishment Costs

During fiscal 2014, we wrote off certain deferred debt issuance costs of $32.7 million and unamortized discount of $1.5 million, primarily in connection with the amendment, refinancing and redemption described above, as well as the excess cash flow payment made on June 27, 2013.

In connection with entering into an amendment to the Senior Secured Term Loan Credit Agreement and a new Senior Secured Asset-Based Revolving Credit Agreement, we capitalized $1.2 million and expensed $2.9 million of debt issuance costs. These costs are being amortized as interest expense over the term of the related debt instrument. In connection with the tender offers for the 7.625% Notes, we recognized $15.3 million of expense (included in loss on partial debt extinguishment) which represents the redemption premium.

Maturities

As of April 27, 2014, mandatory payments of long-term debt (representing debt under the Term Loan Facility and the 7.625% Notes) are as follows (in millions)¹:


2015	$	17.3
2016		17.3
2017		17.3
2018		17.3
2019		917.3
Thereafter		1,639.9

¹ Does not reflect any excess cash flow or other principal prepayments beyond fiscal 2015 that may be required under the terms of the amended Senior Secured Term Loan Credit Agreement, as described above.

Restrictive and Financial Covenants

The Term Loan Facility, ABL Facility and the Senior Notes Indenture contain restrictive covenants that limit our ability and the ability of our subsidiaries to take certain actions.

our restricted subsidiaries, to incur additional indebtedness, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions or repurchase our capital stock, make investments, loans or advances, prepay certain indebtedness, engage in certain transactions with affiliates, amend agreements governing certain subordinated indebtedness adverse to the lenders, and change our lines of business.

Senior Notes Indenture Restrictive Covenants. The restrictive covenants in the Senior Notes Indenture include covenants limiting our ability and the ability of our restricted subsidiaries to incur additional indebtedness or issue certain types of preferred stock, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions, repurchase our capital stock, make investments, prepay certain indebtedness, and engage in certain transactions with affiliates, as well as limiting the ability of our restricted subsidiaries to create restrictions on payments to us.

Financial Maintenance Covenants. The Term Loan Facility, ABL Facility and Senior Notes Indenture generally do not require that we comply with financial maintenance covenants. The ABL Facility, however, contains a financial covenant that applies if availability under the ABL Facility falls below a certain level.

Effect of Restrictive and Financial Covenants. The restrictive and financial covenants in the Senior Secured Term Loan Credit Agreement, the Senior Secured Asset-Based Revolving Credit Agreement and Senior Notes Indenture may adversely affect our ability to finance our future operations or capital needs or engage in other business activities that may be in our interest, such as acquisitions. We believe that we are currently in compliance with all of our applicable covenants and were in compliance therewith as of April 27, 2014. Compliance with these covenants is monitored periodically in order to assess the likelihood of continued compliance. Our ability to continue to comply with these covenants may be affected by events beyond our control. If we are unable to comply with the covenants under the Senior Secured Term Loan Credit Agreement, the Senior Secured Asset-Based Revolving Credit Agreement and Senior Notes Indenture, there would be a default, which, if not waived, could result in the acceleration of a significant portion of our indebtedness. See “Item 1A. Risk Factors—Restrictive covenants in the Credit Facilities and the indenture governing the Notes may restrict our operational flexibility. If we fail to comply with these restrictions, we may be required to repay our debt, which would materially and adversely affect our financial position and results of operations.”

Off-Balance Sheet Arrangements and Contractual Obligations and Commitments

Off-balance sheet arrangements are generally limited to the future payments under non-cancelable operating leases, which totaled $96.4 million as of April 27, 2014.

Contractual and Other Cash Obligations

The following table summarizes our contractual and other cash obligations at April 27, 2014:


	Payments due by period

	Total		Less than 1 year		1 - 3 years		3 - 5 years		More than 5 years

	(in millions)

Long-term debt obligations (1)	$	3,442.8	$	171.2	$	339.9	$	1,222.4	$	1,709.3
Capital lease obligations		-		-		-		-		-
Operating lease obligations		96.4		21.1		31.9		23.1		20.3
Purchase obligations (2)		1,174.9		401.4		249.7		242.9		280.9
Other long-term liabilities reflected on the Balance Sheet (3)		88.1		-		34.4		16.0		37.7

Total contractual obligations	$	4,802.2	$	593.7	$	655.9	$	1,504.4	$	2,048.2

(1) Includes interest expense calculated using the stated interest rate for the 7.625% Notes and the interest rate at April 27, 2014 for the Term Loan Facility, as described above. Does not reflect any excess cash flow payments or other principal prepayments that may be required under the terms of the Senior Secured Term Loan Credit Agreement, as described above.

(2) Purchase obligations consist primarily of fixed commitments under ingredient, packaging, co-pack and other agreements. The amounts presented in the table do not include items already recorded in accounts payable and accrued expenses at April 27, 2014, nor does the table reflect obligations we are likely to incur based on our plans, but are not currently obligated to pay. Many of our contracts are requirement contracts and currently do not represent a firm commitment to purchase from our suppliers, and therefore, are not reflected in the above table. However, certain of our suppliers commit resources based on our planned purchases and we would likely be liable for a portion of their expenses if we deviated from our communicated plans. In the above table, we have included estimates of the probable “breakage” expenses we would incur with these suppliers if we stopped purchasing from them as of April 27, 2014. Aggregate future payments under employment agreements are estimated generally assuming that each such employee

will continue providing services for the next five fiscal years, that salaries remain at April 27, 2014 levels, and that annual incentive awards to be paid with respect to each fiscal year shall be equal to the amounts actually paid with respect to fiscal 2013, the most recent period for which annual incentive awards have been paid as of April 27, 2014. Aggregate future payments under the monitoring agreement with the Sponsors are estimated as the minimum payment for five years.

(3) As of April 27, 2014, we had non-current unrecognized tax benefits of $8.4 million ($7.3 million net of tax benefits). We are not able to reasonably estimate the timing of future cash flows related to this amount. As a result, this amount is not included in the table above.

Standby Letters of Credit

We have standby letters of credit for certain obligations related to insurance requirements. The majority of our standby letters of credit are automatically renewed annually, unless the issuer gives cancellation notice in advance. On April 27, 2014, we had $33.4 million of outstanding standby letters of credit.

Cash Flow

In fiscal 2014, our cash and cash equivalents decreased by $481.4 million. In fiscal 2013 and fiscal 2012, our cash and cash equivalents increased by $191.4 million and $197.6 million, respectively.


	Fiscal 2014		Fiscal 2013		Fiscal 2012
	(in millions)

Net cash provided by (used in) operating activities	$	(409.1)	$	306.3	$	340.7
Net cash provided by (used in) investing activities		1,305.5		(116.4)		(122.8)
Net cash used in financing activities		(1,379.5)		(0.6)		(23.7)

Net cash used in operating activities during fiscal 2014 was $409.1 million compared to net cash provided by operating activities of $306.3 million in fiscal 2013. This decrease was driven primarily by the sale of the Consumer Products Business. We made approximately $365 million of income tax payments related to the sale. Additionally, cash flow from operations was negatively impacted by the annual packing of inventory for the Consumer Products Business along with lower sales for the Consumer Products Business. Inventories in our continuing pet business were also higher to support new product launches.

Cash provided by operating activities during fiscal 2013 decreased $34.4 million compared to fiscal 2012. This decrease was driven primarily by the absence of a prior year $61.7 million income tax refund and unfavorable timing of accounts payable payments in fiscal 2013. This decrease was partially offset by the absence of fiscal 2012 merger related payments.

Investing Activities

Cash provided by investing activities was $1,305.5 million during fiscal 2014, which included $1,740.8 million of net proceeds from the sale of our Consumer Products Business, partially offset by $334.6 million for the purchase of Natural Balance and $79.6 million of capital expenditures.

Cash used in investing activities was $116.4 million during fiscal 2013, of which $108.0 million represented capital expenditures and $12.0 million was for the purchase of a fruit processing plant and warehouse facility based in Yakima County, Washington out of the bankruptcy estate of Snokist Growers.

Cash used in investing activities was $122.8 million during fiscal 2012, of which $81.8 million represented capital expenditures and $41.0 million related to amounts paid in connection with the Merger (relating to our financial contribution to the shareholder litigation settlement).

Capital spending for fiscal 2015 is expected to approximate $70 million to $80 million and is expected to be funded by cash on hand and cash generated by operating activities. In addition to capital expenditures, we enter into operating leases to support our ongoing operations. The decision to lease, rather than purchase, an asset is the result of a number of considerations, including the cost of funds,

the useful life of the asset, its residual value and technological obsolescence. Additionally, some equipment is proprietary to the lessor and cannot be purchased. All material asset-financing decisions include an evaluation of the potential impact of the financing on our debt agreements, including applicable financial covenants.

Financing Activities

During fiscal 2014, we made term loan principal payments of $955.5 million (including the excess cash flow payment of $74.5 million due for fiscal 2013 and $881 million term loan repayment), redeemed $400.0 million of our 7.625% Notes, and had net repayments on short-term borrowings of $1.0 million.

During fiscal 2013, we made term loan principal payments of $97.8 million (including the excess cash flow payment of $91.1 million due for fiscal 2012), borrowed an additional $100.0 million on our term loan and had net borrowings on foreign short-term borrowings of $1.4 million.

During fiscal 2012, we made term loan principal payments of $20.3 million and made net repayments on foreign short-term borrowings of $5.3 million.

Critical Accounting Policies and Estimates

Our discussion and analysis of the financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we reevaluate our estimates, including those related to trade promotions, goodwill and intangibles, retirement benefits, and retained-insurance liabilities. Estimates in the assumptions used in the valuation of our stock compensation expense are updated periodically and reflect conditions that existed at the time of each new issuance of stock awards. We base estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the book values of assets and liabilities that are not readily apparent from other sources. For all of these estimates, we caution that future events rarely develop exactly as forecasted and therefore, these estimates routinely require adjustment.

Management has discussed the selection of critical accounting policies and estimates with the Audit Committee of the Board of Directors, and the Audit Committee has reviewed our disclosure relating to critical accounting policies and estimates in this Annual Report on Form 10-K. Our significant accounting policies are described in “Note 2. Significant Accounting Policies” to our consolidated financial statements in this Annual Report on Form 10-K. The following is a summary of the more significant judgments and estimates used in the preparation of our financial statements:

Trade Promotions

Trade promotions are an important component of the sales and marketing of our products, and are critical to the support of our business. Trade spending includes amounts paid to encourage retailers to offer temporary price reductions for the sale of our products to consumers, to advertise our products in their circulars, to obtain favorable display positions in their stores, and to obtain shelf space. We accrue for trade promotions, primarily at the time products are sold to customers, by reducing sales and recording a corresponding accrued liability. The amount we accrue 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. Our original estimated costs of trade promotions are reasonably likely to change in the future as a result of changes in trends with regard to customer and consumer participation, particularly for new programs and for programs related to the introduction of new products. We perform monthly evaluations of our outstanding trade promotions; making adjustments, where appropriate, to reflect changes in our estimates. The ultimate cost of a trade promotion program is dependent on the relative success of the events and the actions and level of deductions taken by our customers for amounts they consider due to them. Final determination of the permissible trade promotion amounts due to a customer generally may take up to 18 months from the product shipment date. Our evaluations during fiscal 2014 resulted in a net decrease to the trade promotion liability and increase in net sales from continuing operations of $1.4 million which related to prior year activity. Our evaluations during fiscal 2013 resulted in a net decrease to the trade promotion liability and increase in net sales from continuing operations of $0.3 million which related to prior year activity.

Goodwill and Intangibles

Big Heart Pet produces, distributes and markets products under many different brand names (also referred to as trademarks). During an acquisition, the purchase price is allocated to identifiable assets and liabilities, including brand names and other intangibles, based on estimated fair value, with any remaining purchase price recorded as goodwill. As a result of the Merger, we applied the acquisition method of accounting and established a new basis of accounting on March 8, 2011. Accordingly, each of our active brand names now has a value on our balance sheet.

We have evaluated our capitalized brand names and determined that some have lives that generally range from 5 to 22 years (“Amortizing Brands”) and others have indefinite lives (“Non-Amortizing Brands”). Non-Amortizing Brands typically have significant market share and a history of strong earnings and cash flow, which we expect to continue into the foreseeable future.

Amortizing Brands are amortized over their estimated lives. We review the asset groups containing Amortizing Brands (including related tangible assets) for impairment whenever events or changes in circumstances indicate that the book value of an asset group may not be recoverable. An asset or asset group is considered impaired if its book value exceeds the undiscounted future net cash flow the asset or asset group is expected to generate. If an asset or asset group is considered to be impaired, the impairment to be recognized is measured by the amount by which the book value of the asset exceeds its fair value. Non-Amortizing Brands and goodwill are not amortized, but are instead tested for impairment at least annually. Non-Amortizing Brands are considered impaired if the book value exceeds the estimated fair value. The goodwill impairment test is a two-step process. Initially, we compare the book value of net assets to the fair value of the reporting unit that has goodwill assigned to it. If the fair value is determined to be less than the book value, a second step is performed to compute the amount of the impairment.

The estimated fair value of our Non-Amortizing Brands is determined using the relief from royalty method, which is based upon the estimated rent or royalty we would pay for the use of a brand name if we did not own it. For goodwill, the estimated fair value of a reporting unit is determined using the income approach, which is based on the cash flows that the unit is expected to generate over its remaining life, and the market approach, which is based on market multiples of similar businesses. Our reporting unit is the same as our operating segment—Pet Products—reflecting the way that we manage our business. Annually, we engage third-party valuation experts to assist in this process. Considerable management judgment is necessary in estimating future cash flows, market interest rates, discount rates and other factors affecting the valuation of goodwill and intangibles, including the operating and macroeconomic factors that may affect them. We use historical financial information, internal plans and projections, and industry information in making such estimates.

We did not recognize any impairment charges for our goodwill, Amortizing Brands, or Non-Amortizing Brands during fiscal 2014, fiscal 2013, or fiscal 2012. As of April 27, 2014, we had $2,113.4 million of goodwill, $1,389.9 million of Non-Amortizing Brands, $29.4 million of Amortizing Brands, net of amortization and $735.9 million of customer relationships, net of amortization. The Meow Mix and Milk-Bone brands together, comprise 55% of Non-Amortizing Brands.

We have not identified any events that lead us to believe that goodwill or Non-Amortizing brands are impaired as of April 27, 2014. In our fiscal 2014 impairment test, fair value exceeded the book value of net assets by approximately 35%. Additionally, the fair value of our Non-Amortizing Brands each exceeded the book value by at least 10%, except for one brand representing 22% of our Non-Amortizing Brands for which fair value exceeded book value by approximately 3%. Our forecasts utilized in our fiscal 2014 impairment test assume, among other things, that we will achieve sales growth by successfully executing new product innovation supported by broad consumer messaging campaigns (including various forms of advertising, media and shopper marketing) which will improve category trends, enhance our pricing power, improve our share performance and facilitate further new product innovation. If these initiatives do not achieve the desired results, future impairment losses may occur.

Stock Compensation Expense

We believe an effective way to align the interests of certain employees with those of our equity stakeholders are through employee stock-based incentives. Stock options are stock-based incentives in which employees benefit to the extent that the price for the stock underlying the option exceeds the strike price of the stock option before expiration. A stock option is the right to purchase a share of common stock at a predetermined exercise price. Restricted stock-based incentives are incentives in which employees receive the right to own shares of common stock and do not require the employee to pay an exercise price. Restricted stock-based incentives include restricted stock, restricted stock units, performance share units and performance accelerated restricted stock units. We follow the fair value method of accounting for stock compensation expense, under which employee stock option grants and other stock-based compensation are expensed over the vesting period, based on the fair value at the time the stock option is granted.

Parent has issued to certain of our executive officers and other employees service-based stock options, performance-based stock options and restricted common stock. Service-based stock options and performance-based stock options generally vest over a four or five year period and the term may not be more than ten-years from the date of its grant. Performance-based stock options vest only if certain pre-determined performance criteria are met. Certain shares of restricted common stock vest in equal annual installments over a three-year period. We measure stock compensation expense at the date of grant using the Black-Scholes option pricing model. This model estimates the fair value of the options based on a number of assumptions, such as expected option life, interest rates, the current fair market value and expected volatility of common stock and expected dividends.

During fiscal 2014, Parent modified the EBITDA-related financial target for fiscal 2014 for certain outstanding performance-based stock options due to the sale of the Consumer Products Business and the acquisition of Natural Balance.

Valuation of Service-based stock options. The fair value of service-based stock options granted during fiscal 2014 was $2.2 million. The following table presents the weighted-average valuation assumptions used for the recognition of stock compensation expense for stock options granted during the periods indicated:


	Fiscal		Fiscal
	2014		2013
Expected life (in years)		5.9		5.9
Expected volatility		45.0%		45.0%
Risk-free interest rate		1.03%		1.03%
Dividend yield		0.0%		0.0%

Weighted average exercise price	$	5.96	$	5.00
Weighted average option value	$	2.57	$	2.16

Valuation of Performance-based stock options. The fair value of performance-based stock options granted during fiscal 2014 was $1.1 million. The following table presents the weighted-average valuation assumptions used for the recognition of stock compensation expense for stock options granted during the periods indicated:


	Fiscal		Fiscal
	2014		2013
Expected life (in years)		5.9		5.4
Expected volatility		45.0%		45.0%
Risk-free interest rate		1.03%		0.9%
Dividend yield		0.0%		0.0%

Weighted average exercise price	$	5.96	$	5.00
Weighted average option value	$	2.57	$	2.16

Sensitivity of Assumptions (1). For service-based and performance-based stock options granted during fiscal 2014, if we assumed a 100 basis point change in the following assumptions or a one-year change in the expected life, the value of a newly granted hypothetical stock option would increase (decrease) by the following percentages:


	+100 Basis Points		-100 Basis Points
Expected life		7.5%		(8.4%)
Expected volatility		1.9%		(1.9%)
Risk-free interest rate		4.0%		(4.0%)
Dividend yield		(9.4%)		NA

(1) Sensitivity to changes in assumptions was determined using the Black-Scholes option pricing model with the following assumptions: stock price equal to the fair value on the date of grant, exercise price equal to the weighted-average exercise price of options granted during fiscal 2014, expected life of 5.9 years, risk-free interest rate based on the weighted-average rate for five-year and seven-year Treasury constant maturity bonds on the date of grant, average stock volatility based on the historical volatilities of comparable companies over a historical period that matches the expected life of the options on the date of grant, and expected dividend yield of 0%.

Retirement Benefits

We sponsor a qualified defined benefit pension plan (“pension benefits” or “pension plan”) and several other unfunded retirement benefit plans (“other benefits”) providing certain medical, dental and life insurance benefits to eligible retired, salaried, non-union hourly and union employees. We also sponsor defined contribution plans and multi-employer plans for our eligible employees. The amount of pension benefits eligible retirees receive is based on their earnings and age and the amount of other benefits retirees receive are based on meeting certain age and service requirements at retirement. Generally, other benefits are subject to plan maximums, such that we and retirees both share in the cost of these benefits.

Our Assumptions

We utilize third-party actuaries to assist us in calculating the expense and liabilities related to pension benefits and other benefits. Pension benefits and other benefits which are expected to be paid are expensed over the employees’ expected service period. The actuaries measure our annual pension benefits and other benefits expense by relying on certain assumptions made by us. Such assumptions include:

•

The discount rate used to determine projected benefit obligation and net periodic benefit cost (pension benefits and other benefits);

•

The expected long-term rate of return on assets (pension benefits);

•

The rate of increase in compensation levels (pension benefits); and

•

Other factors including employee turnover, retirement age, mortality and health care cost trend rates.

These assumptions reflect our historical experience and our best judgment regarding future expectations. The assumptions, the plan assets and the plan obligations are used to measure our annual pension benefits and other benefits expense.

Since the pension benefits and other benefits liabilities are measured on a discounted basis, the discount rate is a significant assumption. The discount rate was determined based on an analysis of interest rates for high-quality, long-term corporate debt at the measurement date. In order to appropriately match the bond maturities with expected future cash payments, we utilize differing bond portfolios to estimate the discount rates for pension benefits and other benefits. The discount rate used to determine the projected benefit obligation as of the balance sheet date is the rate in effect at the measurement date. The same rate is also used to determine pension benefits and other benefits expense for the following fiscal year. The long-term rate of return for the pension plan’s assets is based on our historical experience, our pension plan’s investment guidelines and our expectations for long-term rates of return. Our pension plan’s investment guidelines are established based upon an evaluation of market conditions, tolerance for risk, and cash requirements for benefit payments.

The following table presents the weighted-average assumptions used to determine our projected benefit obligations for our pension benefits and other benefits:


	April 27, 2014		April 28, 2013
Pension benefits
Discount rate		4.60%		3.90%
Rate of increase in compensation levels		3.94%		3.69%
Other benefits
Discount rate		4.85%		4.25%

The following table presents the weighted-average assumptions used to determine our net periodic benefit cost for our pension benefits and other benefits:


	Fiscal 2014		Fiscal 2013		Fiscal 2012
Pension benefits
Discount rate		4.07%		4.60%		5.50%
Rate of increase in compensation levels		3.69%		3.68%		4.69%
Long-term rate of return on plan assets		7.20%		7.25%		7.50%
Other benefits
Discount rate		4.41%		4.90%		5.75%

For measurement purposes, an annual rate of increase in the per capita cost of covered health care benefits was assumed as indicated below:


Plan	Fiscal 2014		Fiscal 2013		Fiscal 2012
Preferred provider organization and associated indemnity plans		7.80%		8.10%		8.40%
Health maintenance organization plans		8.30%		8.70%		9.10%
Dental and vision plans		5.00%		5.00%		5.00%

The rate of increase is assumed to decline gradually to 4.0% for the preferred provider organization and associated indemnity plans, as well as for the health maintenance organization plans.

Sensitivity of Assumptions

If we assumed a 100 basis point change in the following assumptions, our projected benefit obligation as of April 27, 2014 and net periodic benefit cost for continuing operations for fiscal 2015 would increase (decrease) by the following amounts (in millions):


	+100 Basis Points		-100 Basis Points
Pension benefits
Discount rate used in determining projected benefit obligation	$	(11.1)	$	13.2
Discount rate used in determining net periodic benefit cost		0.1		(0.2)
Long-term rate of return on plan assets used in determining net periodic benefit cost		(1.3)		1.3
Other benefits
Discount rate used in determining projected benefit obligation		(3.7)		4.6
Discount rate used in determining net periodic benefit cost		(0.8)		0.9

The health care cost trend rate assumption has a significant effect on the amounts reported. The following table presents the impact of a 1% increase or decrease of the health care cost trend rate on the projected benefit obligation and the aggregate of the service and interest cost components of net periodic benefit cost for other benefits for continuing operations, as of April 27, 2014 and for the year then ended, respectively (in millions):


		1% Increase			1% Decrease
Projected benefit obligation at April 27, 2014 increase/(decrease)	$		4.2	$		(3.5	)
Aggregate of service and interest rate cost components of net periodic benefit cost for fiscal 2014 increase/(decrease)			0.9			(0.7	)

Future Expense

For fiscal 2015, pension benefits expense for continuing operations is expected to be approximately $3.9 million. Other benefits expense for fiscal 2015 is currently estimated to be approximately a net credit of $0.1 million as the net amortization gain exceeds service and interest costs. These estimates incorporate our fiscal 2015 assumptions. Actual future pension benefit and other benefit expense amounts may vary depending upon the accuracy of original assumptions and future assumptions.

Sale of the Consumer Products Business

Following the sale of the Consumer Products Business, we transferred a significant amount of the plan obligations and plan assets for the pension benefits and other benefits, as well as the related components of net periodic benefit costs, for the transferred employees and retirees of the Consumer Products Business to the Acquiror. See “Note 4. Discontinued Operations” to our consolidated financial statements in this Annual Report on Form 10-K for a summary, as of February 18, 2014, of the assets and liabilities transferred to the Acquiror. As a result of the plan spinoffs, the Company recognized a significant non-cash settlement loss, partially offset by a non-cash curtailment gain, in discontinued operations in the fourth quarter of fiscal 2014.

Retained-Insurance Liabilities

Our business exposes us to the risk of liabilities arising out of our operations. For example, liabilities may arise out of claims of employees, customers or other third parties for personal injury or property damage occurring in the course of our operations. We manage these risks through various insurance contracts from third-party insurance carriers. We, however, retain an insurance risk for the deductible portion of each claim. For example, the deductible under our loss-sensitive worker’s compensation insurance policy is up to $0.5 million per claim. A third-party actuary is engaged to assist us in estimating the ultimate costs of certain retained insurance risks. Actuarial determination of our estimated retained-insurance liability is based upon the following factors:

• Losses which have been reported and incurred by us;

• Losses which we have knowledge of but have not yet been reported to us;

• Losses which we have no knowledge of but are projected based on historical information from both our Company and our industry; and

• The projected costs to resolve these estimated losses.

Our estimate of retained-insurance liabilities is subject to change as new events or circumstances develop which might materially impact the ultimate cost to settle these losses. During fiscal 2014 we reduced our retained-insurance liabilities related to the prior year by approximately $1.2 million primarily as a result of favorable claims history. During fiscal 2013 we experienced no significant adjustments to our estimates.

Recently Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to comprehensive income. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. This new accounting pronouncement is effective for fiscal years and interim periods within those years, beginning after December 15, 2012, with early adoption permitted. Accordingly, we have included the enhanced disclosure in “Note 12. Accumulated Other Comprehensive Income (Loss)” of our consolidated financial statements in this Annual Report on Form 10-K.

In May 2014, the FASB issued an ASU related to revenue from contracts with customers. The new standard provides a five-step approach to be applied to all contracts with customers. The ASU also requires expanded disclosures about revenue recognition. The ASU is effective for us for annual reporting periods beginning after December 15, 2016, including interim periods. Early adoption is not permitted. We are currently evaluating this guidance and the impact it will have on our consolidated financial statements.

Item 7A.

Quantitative and Qualitative Disclosures about Market Risk

We have a risk management program that was adopted with the objective of minimizing our exposure to changes in interest rates, commodity, transportation, foreign currency exchange rates and other input price exposures. We do not trade or use instruments with the objective of earning financial gains on price fluctuations alone or use instruments where there are no underlying exposures. We believe that the use of derivative instruments to manage risk is in our best interest. As of April 27, 2014, we had both cash flow and economic hedges.

During fiscal 2014, we were primarily exposed to the risk of loss resulting from adverse changes in interest rates, commodity and other input prices, as well as foreign currency exchange rates.

Interest Rates: Our debt primarily consists of floating rate term loans and fixed rate notes. We historically maintained our floating rate revolver for flexibility to fund seasonal working capital needs and for other uses of cash. Following the sale of the Consumer Products Business during fiscal 2014, we no longer expect to have material changes in working capital due to seasonality. Interest expense on our floating rate debt is typically calculated based on a fixed spread over a reference rate, such as LIBOR (also known as the Eurodollar rate). Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given amount of floating rate debt.

From time to time, we manage a portion of our interest rate risk related to floating rate debt by entering into interest rate swaps in which we receive floating rate payments and make fixed rate payments. We currently account for these interest rate swaps as economic hedges. On April 12, 2011 we entered into interest rate swaps with a total notional amount of $900.0 million as the fixed rate payer and effective date of September 4, 2012. The interest rate swaps fix LIBOR at 3.029% for the term of the swaps. The swaps have a maturity date of September 1, 2015.

On August 13, 2010, the Company entered into interest rate swaps with a total notional amount of $300.0 million as the fixed rate payer and an effective date of February 1, 2011. The interest rate swaps expired during fiscal 2014 on February 3, 2014 and fixed LIBOR at 1.368% for the term of the swaps.

The fair values of our interest rate swaps from continuing operations were recorded as current liabilities of $25.4 million and non-current liabilities of $9.8 million at April 27, 2014. The fair values of our interest rate swaps from continuing operations were recorded as current liabilities of $28.4 million and non-current liabilities of $33.5 million at April 28, 2013.

Assuming average floating rate term loans during the fiscal year ended April 27, 2014 and average revolver borrowings during the year, a hypothetical one percentage point increase in interest rates would increase interest expense by approximately $13.9 million annually.

Commodities: Certain commodities such as soybean meal, corn, wheat, soybean oil, diesel fuel and natural gas (collectively, “commodity contracts”) are used in the production or transportation of our products. As part of our commodity risk management activities, we use derivative financial instruments, primarily futures, swaps, options and swaptions (an option on a swap), to reduce the effect of changing prices and as a mechanism to procure the underlying commodity where applicable. These contracts may have a term up to 24 months. We account for these commodities derivatives as either economic or cash flow hedges. Changes in the value of economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses is deferred in equity and recognized as part of cost of products sold in the appropriate period and the ineffective portion is recognized as other (income) expense.

The fair values of our commodities hedges from continuing operations were recorded as current assets of $9.4 million at April 27, 2014. The fair values of our commodities hedges from continuing operations were recorded as current assets of $3.0 million and current liabilities of $9.7 million at April 28, 2013.

The sensitivity analyses presented below (in millions) reflect potential losses of fair value resulting from hypothetical changes in market prices related to commodities. Sensitivity analyses do not consider the actions we may take to mitigate our exposure to changes, nor do they consider the effects such hypothetical adverse changes may have on overall economic activity. Actual changes in market prices may differ from hypothetical changes.

Foreign Currency: From time to time, we manage our exposure to fluctuations in foreign currency exchange rates by entering into forward contracts to cover a portion of our projected expenditures paid in local currency. These contracts may have a term of up to 24 months. We account for these contracts as either economic hedges or cash flow hedges. Changes in the value of the economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses was deferred in equity and recognized as part of cost of products sold in the appropriate period and the ineffective portion is recognized as other (income) expense. We did not have any outstanding foreign currency hedges as of April 27, 2014 because we believe it is not in our best interest at this time. We did not have any outstanding foreign currency hedges in continuing operations as of April 28, 2013.We may again in the future enter into foreign currency forward contracts.

Item 8.

Financial Statements and Supplementary Data

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS


	Page
Report of Independent Registered Public Accounting Firm—KPMG LLP		44
Consolidated Balance Sheets—April 27, 2014 and April 28, 2013		45
Consolidated Statements of Operations—for fiscal years ended April 27, 2014, April 28, 2013, and April 29, 2012		46
Consolidated Statements of Comprehensive Income (Loss) —for fiscal years ended April 27, 2014, April 28, 2013, and April 29, 2012		47
Consolidated Statements of Stockholder’s Equity – for fiscal years ended April 27, 2014, April 28, 2013, and April 29, 2012		48
Consolidated Statements of Cash Flows—for fiscal years ended April 27, 2014, April 28, 2013, and April 29, 2012		49
Notes to the Consolidated Financial Statements		50

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholder

Big Heart Pet Brands

We have audited the accompanying consolidated balance sheets of Big Heart Pet Brands and subsidiaries as of April 27, 2014 and April 28, 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholder’s equity and cash flows for each of the years ended April 27, 2014, April 28, 2013 and April 29, 2012. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Big Heart Pet Brands and subsidiaries as of April 27, 2014 and April 28, 2013, and the results of their operations and their cash flows for each of the years ended April 27, 2014, April 28, 2013 and April 29, 2012, in conformity with U.S. generally accepted accounting principles.

/s/ KPMG LLP

San Francisco, California

July 3, 2014

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

CONSOLIDATED BALANCE SHEETS

(in millions, except share and per share data)


		April 27,			April 28,
		2014			2013
ASSETS

Cash and cash equivalents	$		112.8	$		581.4
Trade accounts receivable, net of allowance			127.2			96.9
Inventories, net			227.5			168.8
Prepaid expenses and other current assets			164.3			70.6
Discontinued operations-assets			-			2,085.2

Total current assets			631.8			3,002.9

Property, plant and equipment, net			375.4			357.2
Goodwill			2,113.4			1,976.1
Intangible assets, net			2,155.2			1,919.8
Other assets, net			87.8			107.1

Total assets	$		5,363.6	$		7,363.1


LIABILITIES AND STOCKHOLDER’S EQUITY

Accounts payable and accrued expenses	$		367.8	$		329.5
Current portion of long-term debt			17.3			74.5
Discontinued operations-liabilities			-			346.4

Total current liabilities			385.1			750.4

Long-term debt, net of discount			2,603.0			3,902.7
Deferred tax liabilities			792.1			965.6
Other non-current liabilities			95.3			150.5

Total liabilities			3,875.5			5,769.2


Stockholder’s equity:
Common stock ($0.01 par value per share, shares authorized: 1,000; 10 issued and outstanding)			-			-
Additional paid-in capital			1,589.6			1,590.0
Accumulated other comprehensive income (loss)			8.4			(16.4)
Retained earnings (accumulated deficit)			(109.9)			20.3

Total stockholder’s equity			1,488.1			1,593.9

Total liabilities and stockholder’s equity	$		5,363.6	$		7,363.1

See accompanying Notes to the Consolidated Financial Statements.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions)


		Fiscal			Fiscal			Fiscal
		2014			2013			2012
Net sales	$		2,190.1	$		1,989.0	$		1,860.8
Cost of products sold			1,408.8			1,301.0			1,219.4

Gross profit			781.3			688.0			641.4
Selling, general and administrative expense			526.5			454.9			431.9

Operating income			254.8			233.1			209.5
Loss on partial debt extinguishment			52.4			9.1			-
Interest expense			219.2			248.1			250.3
Other (income) expense, net			(12.1)			(9.8)			49.6

Loss from continuing operations before income taxes			(4.7)			(14.3)			(90.4)
Provision (benefit) for income taxes			3.1			(8.3)			(23.5)

Loss from continuing operations			(7.8)			(6.0)			(66.9)
Income (loss) from discontinued operations before income taxes			(75.1)			152.7			154.0
Provision for income taxes			47.3			54.5			54.5

Income (loss) from discontinued operations			(122.4)			98.2			99.5

Net income (loss)	$		(130.2)	$		92.2	$		32.6

See accompanying Notes to the Consolidated Financial Statements.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in millions)


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Net income (loss)	$		(130.2)	$		92.2	$		32.6

Other comprehensive income (loss):
Foreign currency translation adjustments			0.8			(0.6)			(0.6)
Pension and other postretirement benefits adjustments:
Pension liability adjustment (net of applicable tax expense (benefit) of $9.4, $2.3, and $(11.1), respectively)			15.1			3.6			(17.8)
Gain (loss) on cash flow hedging instruments (net of applicable tax expense (benefit) of $5.5, $(4.1), and $0.0, respectively)			8.9			(6.5)			-

Total other comprehensive income (loss)			24.8			(3.5)			(18.4)

Comprehensive income (loss)	$		(105.4)	$		88.7	$		14.2

See accompanying Notes to the Consolidated Financial Statements

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

(in millions, except per share data)


	Common Stock						Additional Paid-in			Accumulated Other Comprehensive			Retained Earnings/ (Accumulated			Total Stockholder’s
	Shares			Amount			Capital			Income (Loss)			Deficit)			Equity
Balances at May 1, 2011		-	$		-	$		1,584.4	$		5.5	$		(104.5)	$		1,485.4
Capital contribution, net		-			-			2.0			-			-			2.0
Net Income		-			-			-			-			32.6			32.6
Other comprehensive loss		-			-			-			(18.4)			-			(18.4)
Liability from the repurchase and cancellation of rollover options		-			-			(10.0)			-			-			(10.0)
Stock compensation expense		-			-			9.7			-			-			9.7

Balances at April 29, 2012		-			-			1,586.1			(12.9)			(71.9)			1,501.3
Net Income		-			-			-			-			92.2			92.2
Other comprehensive loss		-			-			-			(3.5)			-			(3.5)
Liability from the repurchase and cancellation of rollover options		-			-			(3.4)			-			-			(3.4)
Stock compensation expense		-			-			7.3			-			-			7.3

Balances at April 28, 2013		-			-			1,590.0			(16.4)			20.3			1,593.9
Net Loss		-			-			-			-			(130.2)			(130.2)
Other comprehensive income		-			-			-			24.8			-			24.8
Liability from the repurchase and cancellation of rollover options		-			-			(11.7)			-			-			(11.7)
Stock compensation expense		-			-			10.6			-			-			10.6
Capital contribution, net		-			-			0.7			-			-			0.7

Balance at April 27, 2014		-	$		-	$		1,589.6	$		8.4	$		(109.9)	$		1,488.1

See accompanying Notes to the Consolidated Financial Statements.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

CONSOLIDATED STATEMENTS OF CASH FLOWS¹

(in millions)


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Operating activities:
Net income (loss)	$		(130.2)	$		92.2	$		32.6
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization			127.5			154.5			149.8
Deferred taxes			(305.7)			(9.6)			15.5
Write off of debt issuance costs and loss on debt refinancing/repricing			37.1			9.1			-
Redemption premium on senior subordinated notes redeemed			15.3			-			-
Gain on disposition of Consumer Products Business			(1.2)			-			-
Loss on asset disposals			7.7			5.6			3.6
Stock compensation expense			14.5			7.3			9.7
Unrealized (gain) loss on derivative financial instruments			(33.1)			(38.1)			53.4
Impairment on assets held for sale			193.8			-			-
Other items, net			(1.3)			(0.1)			0.2
Changes in operating assets and liabilities:
Trade accounts receivable, net			(26.6)			(1.0)			6.7
Inventories			(219.1)			24.0			14.3
Prepaid expenses and other current assets			(31.8)			18.1			41.2
Other assets, net			(17.1)			(2.8)			-
Accounts payable and accrued expenses			(37.4)			53.4			25.7
Other non-current liabilities			(1.5)			(6.3)			(12.0)

Net cash provided by (used in) operating activities			(409.1)			306.3			340.7

Investing activities:
Merger, net of cash acquired			-			-			(41.0)
Capital expenditures			(79.6)			(108.0)			(81.8)
Net costs from asset disposals			(2.6)			-			-
Cash used in business acquisition, net of cash acquired			(334.6)			-			-
Payment for asset acquisition			-			(12.0)			-
Net proceeds from sale of Consumer Products Business			1,740.8			-			-
Purchase of equity method investments			(18.5)			-			-
Other items, net			-			3.6			-

Net cash provided by (used in) investing activities			1,305.5			(116.4)			(122.8)

Financing activities:
Capital contribution, net			0.7			-			2.0
Proceeds from short-term borrowings			239.9			9.3			8.4
Payments on short-term borrowings			(240.9)			(7.9)			(13.7)
Proceeds from long-term debt			-			100.0			-
Principal payments on long-term debt			(1,355.5)			(97.8)			(20.3)
Payments of debt-related costs			(23.7)			(4.2)			(0.1)

Net cash used in financing activities			(1,379.5)			(0.6)			(23.7)

Effect of exchange rate changes on cash and cash equivalents			1.7			2.1			3.4
Net change in cash and cash equivalents			(481.4)			191.4			197.6
Cash and cash equivalents at beginning of period			594.2			402.8			205.2

Cash and cash equivalents at end of period	$		112.8	$		594.2	$		402.8

¹	The Company has combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories.

See accompanying Notes to the Consolidated Financial Statements.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

April 27, 2014

Note 1.

Business and Basis of Presentation

On March 8, 2011, Del Monte Foods Company (“DMFC”) was acquired by an investor group led by funds affiliated with Kohlberg Kravis Roberts & Co. L.P. (“KKR”), Vestar Capital Partners (“Vestar”) and Centerview Capital, L.P. (“Centerview,”) and together with KKR and Vestar, the “Sponsors”). The acquisition (also referred to as the “Merger”) was effected by the merger of Blue Merger Sub Inc. (“Blue Sub”) with and into DMFC, with DMFC being the surviving corporation. As a result of the Merger, DMFC became a wholly-owned subsidiary of Blue Acquisition Group, Inc. (“Parent”). Del Monte Corporation (“DMC,” together with its consolidated subsidiaries, “Del Monte”) was a direct, wholly-owned subsidiary of DMFC. On April 26, 2011, DMFC merged with and into DMC, with DMC being the surviving corporation. In connection with the sale of the Consumer Products Business (see “Discontinued Operations and Assets Held for Sale” below) on February 18, 2014, DMC changed its name to Big Heart Pet Brands (together with its consolidated subsidiaries, “Big Heart Pet” or the “Company”).

The Company operates on a 52 or 53-week fiscal year ending on the Sunday closest to April 30. The results of operations for fiscal 2014, fiscal 2013, and fiscal 2012 each contain 52 weeks.

Big Heart Pet Brands is the largest U.S. standalone producer, distributor and marketer of premium quality, branded pet food and pet snacks. The Company’s pet food and pet snacks brands include Meow Mix, Milk-Bone, Kibbles ‘n Bits, 9Lives, Natural Balance, Pup-Peroni, Gravy Train, Nature’s Recipe, Canine Carry Outs, Milo’s Kitchen and other brand names. The Company has one operating segment: Pet Products, which manufactures markets and sells branded and private label dry and wet pet food and pet snacks. The former Consumer Products segment is now reported as discontinued operations. The Consumer Products segment manufactured, marketed and sold branded and private label shelf-stable products, including fruit, vegetable, tomato and broth products with food brands that included Del Monte, Contadina, College Inn, S&W and other brand names. See “Discontinued Operations and Assets Held for Sale” below for details on the divestiture.

As described in Note 5, on July 15, 2013, the Company completed the acquisition of Natural Balance Pet Foods, Inc. (“Natural Balance”), by obtaining 100% of the voting interest of Natural Balance. Natural Balance is a maker of premium pet products for dogs and cats sold throughout North America.

On July 11, 2013, the Company purchased a minority equity interest in a co-packer for $14.6 million. The investment is accounted for under the equity method and is stated at cost plus the Company’s share of undistributed earnings.

On September 16, 2013, DMC formed a joint venture with a supplier. Investments through April 27, 2014 totaled $3.9 million. The investment is accounted for under the equity method and is stated at cost plus the Company’s share of undistributed earnings.

Discontinued Operations and Assets Held for Sale

On October 9, 2013, DMC entered into a Purchase Agreement (the “Purchase Agreement”) with Del Monte Pacific Limited (“DMPL”) and its subsidiary, Del Monte Foods Consumer Products, Inc. (now known as Del Monte Foods, Inc.), (the “Acquiror”). Pursuant to the terms of the Purchase Agreement, the Company sold to the Acquiror the interests of certain subsidiaries related to the Company’s Consumer Products business (the “Consumer Products Business”) and generally all assets primarily related to the Consumer Products Business (the “Transferred Assets”) for a purchase price of $1,675.0 million, subject to a post-closing working capital adjustment. The Acquiror assumed the related liabilities (other than certain specified excluded liabilities). The transaction closed on February 18, 2014 and the Company received gross proceeds equal to the purchase price plus an incremental preliminary working capital adjustment of approximately $110 million, subject to a true-up in accordance with the terms of the Purchase Agreement. See Note 7 for use of the after tax net proceeds in connection with the sale. From closing, the Company will have continuing involvement with the Acquiror under the terms of a transition services agreement and expects to have continuing cash flows with the discontinued operation for at least 12 months after the transaction close date. Management assessed the nature of its continuing involvement, which includes providing continued information technology, accounting and administrative service functions during the term of the agreement, and continuing cash flows and determined them to not be significant.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

attributable to the Consumer Products Business. Consequently, certain expenses that have historically been allocated to the Consumer Products Business are not included in discontinued operations. The Company has combined cash flows from discontinued operations with cash flows from continuing operations within the operating, investing and financing categories in the Consolidated Statements of Cash Flows for all periods presented.

Any net proceeds not committed for reinvestment within 12 months of the transaction closing date were required to be used to repay debt. As such, interest expense has not been allocated to discontinued operations.

Unless otherwise noted, all subsequent footnote disclosures represent continuing operations with the exception of Note 4, which details the assets and liabilities of discontinued operations for the periods presented, as well as the results of operations for discontinued operations.

Note 2.

Significant Accounting Policies

Trade Promotions: Accruals for trade promotions are recorded primarily at the time a product is sold to the customer based on expected levels of performance. Settlement of these liabilities typically occurs in subsequent periods through an off-invoice allowance at the time of sale or through an authorized process for deductions taken by a customer from amounts otherwise due to the Company. Deductions are offset against related trade promotion accruals. The original estimated costs of trade promotions are reasonably likely to change in the future. Evaluations of the trade promotion liability are performed monthly and adjustments are made where appropriate to reflect changes in the Company’s estimates. Trade spending is recorded as a reduction to gross sales.

Goodwill and Intangibles with Indefinite Lives: The Company does not amortize goodwill and intangible assets with indefinite lives, but instead tests for impairment at least annually. Additional impairment tests may be performed between annual tests if circumstances indicate that a potential impairment exists. The Company has designated the first day of the fourth fiscal quarter as the annual impairment testing date, at which time the Company engages third-party valuation experts to assist in the valuation of its intangible assets with indefinite lives and reporting units that have goodwill assigned to them.

When conducting the annual impairment test for goodwill, the Company compares the estimated fair value of a reporting unit containing goodwill to its book value. The estimated fair value is computed using two approaches: the income approach, which is the present value of expected cash flows, discounted at a risk-adjusted weighted-average cost of capital; and the market approach, which is based on using market multiples of companies in similar lines of business. If the fair value of the reporting unit is determined to be more than its book value, no goodwill impairment is recognized.

If the fair value of the reporting unit is determined to be less than its book value, actual goodwill impairment, if any, is computed using a second step of the impairment test. The second step requires the fair value of the reporting unit to be allocated to all the assets and liabilities of the reporting unit as if the reporting unit had been acquired in a business combination at the date of the impairment test. The excess of the fair value of the reporting unit over the fair value of assets less liabilities is the implied value of goodwill and is used to determine the amount of impairment.

For intangible assets with indefinite lives, estimated fair value is determined using the relief from royalty method, which is based upon the estimated rent or royalty the Company would pay for the use of a brand name if the Company did not own it and discounted at a risk-adjusted weighted-average cost of capital.

In estimating discounted future cash flows, management uses historical financial information, as well as the Company’s operating plans and projections, which include assumptions regarding sales trends and profitability, as well as macroeconomic factors. Considerable judgment is necessary in estimating future cash flows, market interest rates, discount rates, and other factors used in the income approach, market approach or relief from royalty method used to value goodwill and intangible assets with indefinite lives. Different assumptions regarding future performance, discount rates or other factors could result in future impairment losses.

Retirement Benefits: The Company sponsors a qualified defined benefit pension plan and several unfunded defined benefit postretirement plans, providing certain medical, dental and life insurance and other benefits to eligible retired, salaried, non-union hourly and union employees. Under the direction of the Company, third-party actuaries utilize statistical and other factors to anticipate future events in calculating an estimate of the expense and liabilities related to these plans. The actuarial reports are used by the

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Company in estimating the expenses and liabilities related to these plans. The factors utilized by the Company’s actuaries include assumptions about the discount rate, expected return on plan assets, the health care cost trend rate, withdrawal and mortality rates and the rate of increase in compensation levels. These assumptions may differ materially from actual results due to changing market and economic conditions, higher or lower withdrawal rates or longer or shorter mortality of participants. These differences may impact the amount of retirement benefit expense recorded by the Company in future periods. The funded status of the Company’s pension and other postretirement plans is recorded as an asset or a liability and all unrecognized gains or losses, net of tax, are recorded as a component of accumulated other comprehensive income (loss) (“AOCI”) within stockholder’s equity.

Stock Compensation Expense: The Company expenses employee stock option grants and other stock-based compensation over the vesting period, based on the fair value on the date the stock-based compensation was granted. The Company recognizes stock compensation expense for performance-based stock options over the implied service periods when the Company believes it is probable that the performance targets, as defined in the stock agreements, will be achieved.

Cash Equivalents: The Company considers all highly liquid investments with an original maturity date of three months or less to be cash equivalents.

Inventories: The cost of finished products inventories includes raw materials, direct labor, certain freight and warehousing costs and indirect production and overhead costs. Inventories are stated at the lower of cost or market. The Company uses the first-in, first-out (“FIFO”) method to value its inventories.

Property, Plant and Equipment and Depreciation: Property, plant and equipment are stated at cost and are depreciated over their estimated useful lives, using the straight-line method. Maintenance and repairs are expensed as incurred. Significant expenditures that increase useful lives are capitalized. The principal estimated useful lives generally are as follows:


		Useful lives
Land improvements		5-40 years
Building and leasehold improvements		10-50 years
Machinery and equipment		10-20 years
Computers and software		3-7 years

Depreciation of plant and equipment and leasehold amortization was as follows (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Depreciation and amortization	$		39.2	$		48.4	$		44.1

The Company’s capitalization of software development costs for internal use begins in the application development stage and ends when the asset is placed into service. The Company amortizes such costs using the straight-line method over estimated useful lives. Including costs paid to third-party vendors, the Company capitalized the following related to systems supporting the Company’s infrastructure (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Capitalized software development costs	$		9.9	$		6.9	$		7.4

The Company had certain assets classified as held for sale for continuing operations with a net book value of $9.5 million as of April 27, 2014. The Company did not have any assets classified as held for sale for continuing operations as of April 28, 2013.

Long-lived Assets: The Company reviews asset groups containing long-lived assets held and used (including intangible assets with finite lives) and assets held for sale for impairment whenever events or changes in circumstances indicate that the book value of an asset may not be recoverable. If an evaluation of recoverability was required, the estimated undiscounted future cash flows associated with the asset or asset group would be compared to the asset’s book value to determine if a write-down was required. If the

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

undiscounted cash flows are less than the book value, an impairment loss is recorded to the extent that the book value exceeds the fair value. If management has committed to a plan to dispose of long-lived assets, the assets to be disposed of are reported at the lower of book value or fair value less estimated costs to sell.

The Company’s intangible assets with estimable lives generally have lives ranging between 5 and 22 years and are amortized on a straight-line basis.

Deferred Debt Issuance Costs: The Company capitalizes costs associated with the issuance of debt instruments and amortizes these costs as interest expense over the term of the debt agreements. Amortization expense for deferred charges was as follows (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Amortization expense	$		19.8	$		23.2	$		24.3

Deferred debt issuance costs are included in other assets in the Consolidated Balance Sheets. Refer to Note 7 for a discussion of debt issuance costs for certain periods.

Derivative Financial Instruments: The Company uses derivative financial instruments for the purpose of managing risks associated with interest rates, commodity, transportation, foreign currency exchange rates and other input price exposures. The Company does not trade or use instruments with the objective of earning financial gains on interest rate, foreign currency, commodity or other fluctuations alone, nor does it use instruments where there are not underlying exposures. All derivative instruments are recorded in the Consolidated Balance Sheets at fair value.

The Company utilizes hedging instruments whose change in fair value acts as an economic hedge but does not meet the requirements to receive hedge accounting treatment (“economic hedge”). For derivatives designated as economic hedges, all changes in fair value are recognized in other (income) expense. In addition, the Company has utilized derivative contracts designated as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). The effective portion of the change in the fair value of a derivative that is designated as a cash flow hedge is recognized in other comprehensive income (loss) (“OCI”). The gain or loss included in OCI is subsequently reclassified into earnings in the Consolidated Statements of Operations as the hedged item in the same period that the hedge transaction affected net income (loss). The ineffective portion of a change in fair value of a cash flow hedge is recognized in other (income) expense. The settlement of a cash flow hedging instrument is classified as an operating activity in the Consolidated Statements of Cash Flows. As of April 27, 2014, the Company had both cash flow hedges and economic hedges.

Fair Value of Financial Instruments: The Company has both fixed and floating rate debt. The Company uses Level 2 inputs to estimate the fair value of such debt.

The following table provides the book value and fair value of the Company’s fixed rate notes (in millions):


		April 27, 2014						April 28, 2013
		Book value			Fair value			Book value			Fair value

Senior Notes	$		900.0	$		938.3	$		1,300.0	$		1,381.3

The book value of the Company’s floating rate debt instruments approximates fair value. Fair value for both fixed and floating rate debt was estimated based on quoted market prices from the trading desk of a nationally recognized investment bank. As the Senior Notes are only available to investors through certain brokerage firms, and as a result not actively traded, the Company has classified this debt as Level 2 of the fair value hierarchy. See Note 9 for a discussion regarding the fair value hierarchy and the definition of Levels 1, 2 and 3.

Income Taxes: The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement book values of existing assets and liabilities and their respective tax bases, and for tax losses and tax credit carryforwards. Deferred tax assets and liabilities are

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. An uncertain tax position is recognized if it is determined that it is more likely than not to be sustained upon examination. The tax position is measured as the largest amount of benefit that is greater than fifty percent likely of being realized upon ultimate settlement. The Company files a consolidated return with Parent. The Company allocates current and deferred taxes to each member as if it were a separate taxpayer.

Asset Retirement Obligations: Asset retirement obligations generally apply to legal obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction or development and the normal operation of a long-lived asset. The Company assesses asset retirement obligations on a periodic basis. If a reasonable estimate of fair value can be made, the fair value of a liability for an asset retirement obligation is recognized in the period in which it is incurred or a change in estimate occurs. Associated asset retirement costs are capitalized as part of the book value of the long-lived asset. Over time the liability increases reflecting the accretion of the obligation from its present value to the amount the Company will pay to extinguish the liability and the capitalized asset retirement costs are depreciated over the useful lives of the related assets. As of April 27, 2014 and April 28, 2013, the asset retirement obligation totaled $4.6 million and $4.3 million, respectively. In addition, certain of the Company’s production facilities may contain asbestos that would have to be removed if such facilities were to be demolished or undergo a major renovation. The Company cannot reasonably estimate the fair value of the liability for asbestos removal at its production facilities, and because the timing of the settlement of any such liability is not currently determinable, has not recorded an asset retirement obligation for these matters.

Retained-Insurance Liabilities: The Company accrues for retained-insurance risks associated with the deductible portion of any potential liabilities that might arise out of claims of employees, customers or other third parties for personal injury or property damage occurring in the course of the Company’s operations. A third-party actuary is engaged to assist the Company in estimating the ultimate costs associated with certain retained insurance risks. Additionally, the Company’s estimate of retained-insurance liabilities is subject to change as new events or circumstances develop which might materially impact the ultimate cost to settle these losses.

Environmental Remediation: The Company accrues for losses associated with environmental remediation obligations when such losses are probable and the amounts of such losses are reasonably estimable. Accruals for estimated losses from environmental remediation obligations are recognized no later than the completion of the remedial feasibility study. Such accruals are adjusted as further information develops or circumstances change.

Comprehensive Income (Loss): Comprehensive income (loss) is comprised of net income (loss) and OCI. OCI is comprised of pension and other postretirement employee benefit adjustments, net of tax, currency translation adjustments and net unrealized gains or losses on cash flow hedging instruments, net of tax.

Revenue Recognition: The Company recognizes revenue from sales of products, and related costs of products sold, where persuasive evidence of an arrangement exists, delivery has occurred, the seller’s price is fixed or determinable and collectability is reasonably assured. This generally occurs when the customer receives the product or at the time title passes to the customer. Customers generally do not have the right to return product unless damaged or defective. Net sales is comprised of gross sales reduced by customer returns, consumer promotion costs relating to coupon redemption, trade promotions, performance allowances, customer pick-up allowances and discounts.

Concentration of Credit Risk: A relatively limited number of customers account for a large percentage of the Company’s total sales. One customer accounted for a substantial portion of the Company’s list sales, which approximates gross sales. The table below shows the percentage of list sales for the leading customer, as well as the top ten customers for the periods indicated:


	Fiscal 2014	Fiscal 2013	Fiscal 2012
Leading customer	39.0%	43.7%	43.8%
Top ten customers	72.3%	74.0%	72.4%

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

The leading customer accounted for approximately 36.6% and 44.6% of trade accounts receivable as of April 27, 2014 and April 28, 2013, respectively. The Company closely monitors the credit risk associated with its customers.

Coupon Redemption: Coupon redemption costs are accrued in the period in which the coupons are offered based on estimates of redemption rates that are developed by management. Management’s estimates are based on recommendations from independent coupon redemption clearing-houses, as well as historical information. Should actual redemption rates vary from amounts estimated, adjustments to accruals may be required. Coupon redemption costs are recorded as a reduction to gross sales.

Cost of Products Sold: Cost of products sold represents expenses incurred that are directly connected with bringing the products to a salable condition. These costs include raw materials, packaging, labor, certain transportation and warehousing costs, as well as overhead expenses.

Foreign Currency Transactions: Gains and losses from foreign currency transactions (transactions denominated in a currency other than the functional currency) are included in other (income) expense.

Advertising Expense: Costs associated with advertising are generally expensed as incurred and included in selling, general and administrative expense. Marketing expense, which includes advertising expense, was as follows for the periods indicated (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Marketing expense	$		154.4	$		121.3	$		99.0

Research and Development: Research and development costs are expensed as incurred and are included as a component of selling, general and administrative expense. Research and development costs were as follows for the periods indicated (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Research and development costs	$		25.8	$		21.7	$		18.6

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany accounts and transactions have been eliminated upon consolidation. The Company accounts for its investments in joint ventures under the equity method of accounting, under which the investment in the joint venture is adjusted for the Company’s share of the undistributed profit or loss of the joint venture.

Use of Estimates: The preparation of the consolidated financial statements, in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Recently Issued Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to comprehensive income. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. This new accounting pronouncement is effective for fiscal years and interim periods within those years, beginning after December 15, 2012, with early adoption permitted. Accordingly, the Company has included the enhanced disclosure in Note 12.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

In May 2014, the FASB issued an ASU related to revenue from contracts with customers. The new standard provides a five-step approach to be applied to all contracts with customers. The ASU also requires expanded disclosures about revenue recognition. For the Company, the ASU is effective for annual reporting periods beginning after December 15, 2016, including interim periods. Early adoption is not permitted. The Company is currently evaluating this guidance and the impact it will have on its consolidated financial statements.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Note 3.

Supplemental Financial Statement Information


		April 27, 2014			April 28, 2013
		(in millions)
Trade accounts receivable, net of allowance:
Trade	$		127.2	$		96.9
Allowance for doubtful accounts			-			-

Total	$		127.2	$		96.9


Inventories, net:
Finished products	$		191.5	$		138.6
Raw materials and in-process materials			24.5			18.8
Packaging materials and other			11.5			11.4

Total	$		227.5	$		168.8


Prepaid expenses and other current assets:
Prepaid expenses	$		93.4	$		30.0
Other current assets			70.9			40.6

Total	$		164.3	$		70.6


Property, plant and equipment, net:
Land and land improvements	$		12.4	$		12.4
Buildings and leasehold improvements			123.3			122.1
Machinery and equipment			256.8			222.9
Computers and software			58.8			47.2
Construction in progress			35.8			33.1

			487.1			437.7
Accumulated depreciation			(111.7)			(80.5)

Total	$		375.4	$		357.2


Accounts payable and accrued expenses:
Accounts payable-trade	$		175.9	$		153.8
Marketing, advertising and trade promotion			67.6			35.2
Accrued benefits, payroll and related costs			37.3			45.6
Accrued interest			21.2			33.7
Current portion of pension liability			8.5			10.0
Other current liabilities			57.3			51.2

Total	$		367.8	$		329.5


Other non-current liabilities:
Accrued postretirement benefits	$		29.8	$		55.6
Pension liability			17.1			25.7
Long-term hedge payable			9.8			33.5
Other non-current liabilities			38.6			35.7

Total	$		95.3	$		150.5


Accumulated other comprehensive income (loss)¹:
Foreign currency translation adjustments	$		-	$		(0.8)
Pension and other postretirement benefits adjustments, net of tax			6.0			(9.1)
Income (loss) on cash flow hedging instruments, net of tax			2.4			(6.5)

Total accumulated other comprehensive income (loss)	$		8.4	$		(16.4)

¹ Including discontinued operations.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Note 4. Discontinued Operations

Net sales from discontinued operations for fiscal 2014 (through the sale date), fiscal 2013, and fiscal 2012 were $1,330.7 million, $1,830.4 million, and $1,815.4 million, respectively. Income (loss) from discontinued operations before income taxes for fiscal 2014, fiscal 2013, and fiscal 2012 was $(75.1) million, $152.7 million, and $154.0 million, respectively. Depreciation and amortization expense from discontinued operations for fiscal 2014, fiscal 2013, and fiscal 2012 was $22.2 million, $43.9 million and $42.5 million, respectively.

Assets and liabilities of discontinued operations for the disposal group sold on February 18, 2014 included the following (in millions):


		February 18, 2014
Cash and cash equivalents	$		3.9
Trade accounts receivable, net of allowance			101.5
Inventories, net			742.1
Prepaid expenses and other assets			73.3
Property, plant and equipment, net			339.1
Goodwill			143.6
Intangible assets, net			669.6

Total discontinued operations-assets	$		2,073.1


Accounts payable and accrued expenses	$		155.3
Short-term borrowings			2.2
Pension and other post-retirement liabilities			129.8
Other liabilities			43.3

Total discontinued operations-liabilities	$		330.6

As of April 27, 2014, the Company had recorded a gross receivable of $16.3 million for the working capital adjustment, in accordance with the Purchase Agreement. Subsequent to fiscal year end, the Company received a Notice of Disagreement from the Acquiror disputing the working capital adjustment presented by the Company.

Assets and liabilities of discontinued operations classified as held for sale as of the date indicated are reflected at fair value less costs to sell and include the following (in millions):


		April 28, 2013
Cash and cash equivalents	$		12.8
Trade accounts receivable, net of allowance			94.8
Inventories, net			553.3
Prepaid expenses and other assets			69.5
Property, plant and equipment, net			406.7
Goodwill			143.6
Intangible assets, net			804.5

Total discontinued operations-assets	$		2,085.2


Accounts payable and accrued expenses	$		197.7
Short-term borrowings			3.2
Pension and other post-retirement liabilities			96.8
Other liabilities			48.7

Total discontinued operations-liabilities	$		346.4

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Income (loss) from discontinued operations during the fiscal year ended April 27, 2014 reflects a non-cash impairment charge of $193.8 million before income taxes, recognized in the second quarter of fiscal 2014, in the Consolidated Statements of Operations. The impairment was allocated between net property, plant and equipment and net intangible assets based on the relative book value. Income (loss) from discontinued operations before income taxes during the fiscal year ended April 27, 2014 reflects a gain recognized on sale of the Consumer Products Business of $1.2 million, exclusive of the non-cash impairment charge discussed above.

Deferred tax assets and liabilities, which result in future taxable or deductible amounts for the assets and liabilities related to the Consumer Products Business’ domestic operations, were not allocated to discontinued operations in accordance with GAAP.

Under the Purchase Agreement, and as defined therein, the Acquiror assumed all known or potential future legal liabilities related to the Consumer Products Business at the closing date of February 18, 2014.

Note 5. Natural Balance Acquisition

On July 15, 2013, DMC completed the acquisition of Natural Balance, a California corporation and maker of premium pet products for dogs and cats sold throughout North America. The total cost of the Natural Balance acquisition as of April 27, 2014, was $331.4 million and included an initial $341.1 million cash payment (including $26.2 million paid into an escrow account) and contingent consideration of $0.3 million, reduced by an estimated working capital adjustment and cash received from escrow. The total cost of the acquisition is subject to a post-closing working capital adjustment which was initially due from the Company 90 days after closing (see discussion below). Final agreement of the working capital adjustment has not yet occurred.

The acquisition was accounted for under the acquisition method. The purchase price was allocated to the identifiable assets and liabilities, including brand names, based on estimated fair value, with the remaining purchase price recorded as goodwill. The Company utilized an independent valuation firm to assist in estimating the fair value of Natural Balance’s real estate, machinery and equipment, and identifiable intangible assets.

As of April 27, 2014, the Company had recorded an adjustment to certain working capital accounts as of the acquisition date and a corresponding receivable for the working capital adjustment, as referred to above. The Company’s allocation of the purchase price to the net tangible and intangible assets acquired and liabilities assumed, including the working capital adjustments referred to above, is as follows (in millions):


		July 15, 2013
Cash and cash equivalents	$		3.9
Trade accounts receivable			10.9
Inventories			24.8
Prepaid expenses and other current assets			0.4
Property, plant and equipment			4.9
Goodwill			137.3
Identifiable intangible assets			280.7
Deferred tax assets			2.6
Other assets			1.9

Total assets acquired			467.4


Accounts payable and accrued expenses			20.7
Other current liabilities			3.0
Deferred tax liabilities			107.4
Other non-current liabilities			4.6
Contingent consideration			0.3

Total liabilities assumed			136.0

Net assets acquired	$		331.4

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

The acquisition of Natural Balance includes a contingent consideration arrangement that requires additional cash to be paid by the Company based on the future net sales of Natural Balance over a one year period. The range of the undiscounted amounts the Company could pay under the contingent consideration agreement is $0.0 million to $17.5 million, and is based on net sales measured for the 12 month period ending May 1, 2016 with payment due August 22, 2016. Contingent consideration recognized on the acquisition date was $0.3 million and was based on the purchase agreement. The fair value of the contingent consideration on the acquisition date was estimated by applying the income approach. As of April 27, 2014, the Company recorded a fair value adjustment to contingent consideration of $2.8 million, which is included in selling, general and administrative expense in fiscal 2014. The Company has classified the contingent consideration as Level 3 of the fair value hierarchy as it is based on unobservable inputs. Significant inputs and assumptions are management’s estimate of net sales using probability weighted estimates and the discount rate used to calculate the present value of the liability. Significant changes in any Level 3 input or assumption would result in increases or decreases to fair value measurements for contingent consideration. See Note 9 for a discussion regarding the fair value hierarchy and the definition of Levels 1, 2 and 3.

Goodwill is not deductible for tax purposes. The Company executed the acquisition of Natural Balance with the objective of complementing the Company’s substantial pet products portfolio and expanding sales in the high growth pet specialty channel.

The acquired business contributed net sales of $211.7 million from the acquisition date to April 27, 2014. The following unaudited pro forma financial information presents the combined results of operations of the Company, including Natural Balance, as if the acquisition had occurred as of the beginning of the periods presented. The unaudited pro forma financial information is not intended to represent or be indicative of the Company’s consolidated financial results of operations that would have been reported had the business combination been completed as of the beginning of the periods presented and should not be taken as indicative of the Company’s future consolidated results of operations (in millions):


		Fiscal 2014			Fiscal 2013

Net sales	$		2,240.3	$		2,233.8
Loss from continuing operations before income taxes			(3.9)			(16.6)
Loss from continuing operations			(7.3)			(7.4)

Note 6.

Goodwill and Intangible Assets

The following table presents the Company’s goodwill and intangible assets (in millions):


		April 27, 2014			April 28, 2013

Goodwill	$		2,113.4	$		1,976.1


Non-amortizable intangible assets:
Trademarks	$		1,389.9	$		1,266.6

Amortizable intangible assets:
Trademarks			39.3			39.3
Customer relationships			852.7			695.3

			892.0			734.6
Accumulated amortization			(126.7)			(81.4)

Amortizable intangible assets, net			765.3			653.2

Total intangible assets, net	$		2,155.2	$		1,919.8

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

During the fiscal year ended April 27, 2014, the Company’s goodwill and intangible assets increased by a total of $418.0 million, with a $123.3 million increase for non-amortizable trademarks, a $157.4 million increase for customer relationships, and a $137.3 million increase for goodwill, due to the Natural Balance acquisition (see Note 5).

Amortization expense for the periods indicated below was as follows (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Amortization expense	$		45.3	$		38.0	$		38.0

The following table presents expected amortization of intangible assets as of April 27, 2014, for each of the five succeeding fiscal years (in millions):


2015	$	47.3
2016		47.1
2017		46.7
2018		46.7
2019		46.7
Thereafter		530.8

As of April 27, 2014, the weighted-average life of the Company’s amortizable intangible assets was 19.3 years.

Note 7.

Short-Term Borrowings and Long-Term Debt

The Company’s long term debt consists of the following, as of the dates indicated (in millions):


		April 27, 2014			April 28, 2013

Long-term debt:
Term Loan Facility	$		1,726.4	$		2,681.9
Senior Notes			900.0			1,300.0

			2,626.4			3,981.9
Less unamortized discount			6.1			4.7
Less current portion			17.3			74.5

Total long-term debt	$		2,603.0	$		3,902.7

Senior Secured Term Loan Credit Agreement

The Company is a party to a senior secured term loan credit agreement (the “Senior Secured Term Loan Credit Agreement”) with the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, and the other agents named therein, that was initially dated March 8, 2011 and provided for a $2,700.0 million senior secured term loan B facility (with all related loan documents, as amended from time to time, the “Term Loan Facility”) with an original term of seven years.

On February 24, 2014, the Company repaid $881.0 million of the Term Loan Facility from the after-tax net proceeds from the sale of the Consumer Products Business and entered into an amendment to the Senior Secured Term Loan Credit Agreement. The amendment, among other things, (1) lowered the LIBOR rate floor on term loans under the credit agreement from 1.00% to 0.75% and the base rate floor from 2.00% to 1.75%; (2) established the applicable interest margin at 2.75% on LIBOR rate loans and 1.75% on base rate loans; and (3) extended the maturity date of the initial term loans to March 8, 2020 from March 8, 2018.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Interest Rates. Loans under the amended Term Loan Facility bear interest at a rate equal to an applicable margin, plus, at the Company’s option, either (i) a LIBOR rate (with a floor of 0.75%) or (ii) a base rate (with a floor of 1.75%) equal to the highest of (a) the federal funds rate plus 0.50%, (b) JPMorgan Chase Bank, N.A.’s “prime rate” and (c) the one-month LIBOR rate plus 1.00%. As of April 27, 2014, the applicable margin with respect to LIBOR borrowings was 2.75% and with respect to base rate borrowings is 1.75%.

Principal Payments. The amended Term Loan Facility generally requires quarterly scheduled principal payments of 0.25% of the outstanding principal per quarter from June 30, 2014 to December 31, 2019. The balance is due in full on the maturity date of March 8, 2020. Scheduled principal payments with respect to the Term Loan Facility are subject to reduction following any mandatory or voluntary prepayments on terms and conditions set forth in the Senior Secured Term Loan Credit Agreement. On June 27, 2013, the Company made a payment of $74.5 million representing the annual excess cash flow payment due for the fiscal year ended April 28, 2013. As a result of the amendment to the Senior Secured Term Loan Credit Agreement in February 2014, no annual excess cash flow payment will be due for fiscal 2014. As of April 27, 2014 the amount of outstanding loans under the Term Loan Facility was $1,726.4 million and the blended interest rate payable was 3.50%, or 4.96% after giving effect to the interest rate swaps. See Note 8 for a discussion of the Company’s interest rate swaps.

The Senior Secured Term Loan Credit Agreement also requires the Company to prepay outstanding loans under the Term Loan Facility, subject to certain exceptions, with, among other things:

•

50% (which percentage will be reduced to 25% if the Company’s leverage ratio is 5.5x or less and to -% if the Company’s leverage ratio is 4.5x or less) of the Company’s annual excess cash flow, as defined in the Senior Secured Term Loan Credit Agreement;

•

100% of the net cash proceeds of certain casualty events and non-ordinary course asset sales or other dispositions of property for a purchase price above $10 million, in each case, subject to the Company’s right to reinvest the proceeds; and

•

100% of the net cash proceeds of any incurrence of debt, other than proceeds from the debt permitted under the Senior Secured Term Loan Credit Agreement.

Ability to Incur Additional Indebtedness. The Company has the right to request an additional $500.0 million plus an additional amount of secured indebtedness under the Term Loan Facility. Lenders under this facility are under no obligation to provide any such additional loans, and any such borrowings will be subject to customary conditions precedent, including satisfaction of a prescribed leverage ratio, subject to the identification of willing lenders and other customary conditions precedent.

Senior Secured Asset-Based Revolving Credit Agreement

The Company has historically maintained a revolver for flexibility to fund seasonal working capital needs and for other general corporate purposes. Following the sale of the Consumer Products Business during fiscal 2014, the Company no longer expects to have material changes in working capital needs due to seasonality. On March 6, 2014, the Company refinanced its credit agreement (the “Senior Secured Asset-Based Revolving Credit Agreement”) with JPMorgan Chase Bank, N.A., as administrative agent, and other lenders and agents parties thereto, that provides for a new $225.0 million facility (with all related loan documents, and as amended from time to time, the “ABL Facility”) with a term of five years.

Interest Rates. Borrowings under the ABL Facility will bear interest at an initial interest rate equal to an applicable margin, plus, at the Company’s option, either (i) a LIBOR rate, or (ii) a base rate equal to the highest of (a) the federal funds rate plus 0.50%, (b) JPMorgan Chase Bank, N.A.’s “prime rate” and (c) the one-month LIBOR rate plus 1.00%. The applicable margin with respect to LIBOR borrowings is currently 1.50% (and may increase to 1.75% depending on average excess availability) and with respect to base rate borrowings is currently 0.50% (and may increase to 0.75% depending on average excess availability).

Commitment Fees. In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to pay a commitment fee at a rate of 0.25% per annum in respect of the unutilized commitments thereunder. The Company must also pay customary letter of credit fees and fronting fees for each letter of credit issued.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Availability under the ABL Facility. Availability under the ABL Facility is subject to a borrowing base. The borrowing base, determined at the time of calculation, is an amount equal to: (a) 85% of eligible accounts receivable and (b) 85% of the net orderly liquidation value of eligible inventory (provided that net orderly liquidation value cannot exceed the net book value), of the borrowers under the facility at such time, less customary reserves. The ABL Facility will mature, and the commitments thereunder will terminate, on March 6, 2019. As of April 27, 2014, there were no loans outstanding under the ABL Facility, the amount of letters of credit issued under the ABL Facility was $33.4 million and the net availability under the ABL facility was $161.6 million.

The ABL Facility includes a sub-limit for letters of credit and for borrowings on same-day notice, referred to as “swingline loans.” The Company is the lead borrower under the ABL Facility and other domestic subsidiaries may be designated as borrowers on a joint and several basis.

Availability to Incur Additional Indebtedness. The commitments under the ABL Facility may be increased, subject only to the consent of the new or existing lenders providing such increases, such that the aggregate principal amount of commitments does not exceed $325 million. The lenders under this facility are under no obligation to provide any such additional commitments, and any increase in commitments will be subject to customary conditions precedent. Notwithstanding any such increase in the facility size, the ability to borrow under the facility will remain limited at all times by the borrowing base (to the extent the borrowing base is less than the commitments).

Guarantee of Obligations under the Senior Secured Term Loan Credit Agreement and Senior Secured Asset-Based Revolving Credit Agreement

All obligations of the Company under the Senior Secured Term Loan Credit Agreement and Senior Secured Asset-Based Revolving Credit Agreement are unconditionally guaranteed by Parent and by substantially all existing and future, direct and indirect, wholly-owned material restricted domestic subsidiaries of the Company, subject to certain exceptions. Subsequent to the July acquisition described above, Natural Balance became a guarantor subsidiary under the debt agreements.

Senior Notes Due 2019

The Company has outstanding senior notes with an aggregate principal amount of $900.0 million due February 15, 2019 and a stated interest rate of 7.625% (the “Senior Notes”). The indenture governing the Senior Notes is hereinafter referred to as the “Senior Notes Indenture.” On March 13, 2014, the Company used a portion of the net proceeds from the sale of the Consumer Products Business to redeem $400.0 million of the Senior Notes at a redemption price equal to 103.813% of their aggregate principal amount plus accrued and unpaid interest to the redemption date, as announced on February 11, 2014.

Interest Rate. Interest on the Senior Notes is payable semi-annually on February 15 and August 15 of each year commencing August 15, 2011.

Guarantee. The Senior Notes are required to be fully and unconditionally guaranteed by each of the Company’s existing and future domestic restricted subsidiaries that guarantee its obligations under the Term Loan Facility and ABL Facility.

Redemption Rights. The Company has the option of redeeming all or a part of the Senior Notes at a premium ranging from 103.813% to 101.906% of the aggregate principal amount. Beginning on February 15, 2016, the Company may redeem all or a part of the Senior Notes at face value. Any redemption as described above is subject to the concurrent payment of accrued and unpaid interest, if any, upon redemption.

Security Interests

Indebtedness under the Term Loan Facility is generally secured by a first priority lien on substantially all of the Company’s assets other than inventories and accounts receivable, and by a second priority lien with respect to inventories and accounts receivable. The ABL Facility is generally secured by a first priority lien on the Company’s inventories and accounts receivable and by a second priority lien on substantially all of the Company’s other assets. The Senior Notes are the Company’s senior unsecured obligations and rank senior in right of payment to any future indebtedness and other obligations that expressly provide for their subordination to the Senior Notes; rank equally in right of payment to all of the existing and future unsecured indebtedness; are effectively subordinated to

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

all of the existing and future secured debt (including obligations under the Term Loan Facility and ABL Facility described above) to the extent of the value of the collateral securing such debt; and are structurally subordinated to all existing and future liabilities, including trade payables, of the non-guarantor subsidiaries, to the extent of the assets of those subsidiaries.

Deferred Debt Issuance and Debt Extinguishment Costs

During fiscal 2014, the Company wrote off certain deferred debt issuance costs of $32.7 million and unamortized discount of $1.5 million, primarily in connection with the amendment, refinancing and redemption described above, as well as the excess cash flow payment made on June 27, 2013.

In connection with entering into the amendment to the Senior Secured Term Loan Credit Agreement and a new Senior Secured Asset-Based Revolving Credit Agreement, the Company capitalized $1.2 million and expensed $2.9 million of debt issuance costs. The capitalized costs are being amortized as interest expense over the term of the related debt instrument. In connection with the tender offer for the Senior Notes, the Company recognized $15.3 million of expense (included in loss on partial debt extinguishment) which represents the redemption premium.

Maturities

As of April 27, 2014, mandatory payments of long-term debt (representing debt under the Term Loan Facility and the Senior Notes) are as follows (in millions)¹:


2015			$ 17.3
2016			17.3
2017			17.3
2018			17.3
2019			917.3
Thereafter			1,639.9

¹	Does not reflect any excess cash flow or other principal prepayments beyond fiscal 2015 that may be required under the terms of the amended Senior Secured Term Loan Credit Agreement, as described above.

Restrictive and Financial Covenants

The Term Loan Facility, ABL Facility and the Senior Notes Indenture contain restrictive covenants that limit the Company’s ability and the ability of its subsidiaries to take certain actions.

Term Loan Facility and ABL Facility Restrictive Covenants. The restrictive covenants in the Senior Secured Term Loan Credit Agreement and the Senior Secured Asset-Based Revolving Credit Agreement include covenants limiting the Company’s ability, and the ability of its restricted subsidiaries, to incur additional indebtedness, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions or repurchase its capital stock, make investments, loans or advances, prepay certain indebtedness, engage in certain transactions with affiliates, amend agreements governing certain subordinated indebtedness adverse to the lenders, and change its lines of business.

Senior Notes Indenture Restrictive Covenants. The restrictive covenants in the Senior Notes Indenture include covenants limiting the Company’s ability and the ability of its restricted subsidiaries to incur additional indebtedness or issue certain types of preferred stock, create liens, engage in mergers or consolidations, sell or transfer assets, pay dividends and distributions, repurchase its capital stock, make investments, prepay certain indebtedness, and engage in certain transactions with affiliates, as well as limiting the ability of the Company’s restricted subsidiaries to create restrictions on payments to the Company.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Financial Maintenance Covenants. The Term Loan Facility, ABL Facility and Senior Notes Indenture generally do not require that the Company comply with financial maintenance covenants. The ABL Facility, however, contains a financial covenant that applies if availability under the ABL Facility falls below a certain level.

Supplemental Disclosure of Cash Flow Information

The Company’s cash interest payments were as follows for the periods indicated (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Cash interest payments	$		210.9	$		219.3	$		223.7

Cash interest paid during periods presented does not include cash paid to interest rate swap counterparties.

Note 8.

Derivative Financial Instruments

The Company uses interest rate swaps, commodity swaps, futures, option and swaption (an option on a swap) contracts, as well as forward foreign currency contracts, to hedge market risks relating to possible adverse changes in interest rates, commodity, transportation, foreign currency exchange rates and other input price exposures. The Company continually monitors its positions and the credit ratings of the counterparties involved to mitigate the amount of credit exposure to any one party.

The Company designates each derivative contract as one of the following: (1) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”) or (2) a hedging instrument whose change in fair value is recognized to act as an economic hedge but does not meet the requirements to receive hedge accounting treatment (“economic hedge”). As of April 27, 2014, the Company had both cash flow and economic hedges.

Interest Rates: The Company’s debt primarily consists of floating rate term loans and fixed rate notes. The Company historically maintained its floating rate revolver for flexibility to fund seasonal working capital needs and for other uses of cash. Following the sale of the Consumer Products Business during fiscal 2014, the Company no longer expects to have material changes in working capital due to seasonality. Interest expense on the Company’s floating rate debt is typically calculated based on a fixed spread over a reference rate, such as LIBOR (also known as the Eurodollar rate). Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given amount of floating rate debt.

Swaps are recorded as an asset or liability in the Consolidated Balance Sheets at fair value. The Company currently accounts for these interest rate swaps as economic hedges and any gains and losses are recorded in other (income) expense, net.

The Company from time to time manages a portion of its interest rate risk related to floating rate debt by entering into interest rate swaps in which the Company receives floating rate payments and makes fixed rate payments. As of April 27, 2014, the following economic hedge swaps were outstanding:

Contract date

Notional amount
(in millions)

Fixed LIBOR rate

Effective date

Maturity date

April 12, 2011

900.0

3.029%

September 4, 2012

September 1, 2015

On August 13, 2010, the Company entered into interest rate swaps with a total notional amount of $300.0 million as the fixed rate payer and an effective date of February 1, 2011. The interest rate swaps fixed LIBOR at 1.368% for the term of the swaps and expired during fiscal 2014 on February 3, 2014.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

The fair values of the Company’s interest rate swaps were recorded as current liabilities of $25.4 million and non-current liabilities of $9.8 million at April 27, 2014. The fair values of the Company’s interest rate swaps were recorded as current liabilities of $28.4 million and non-current liabilities of $33.5 million at April 28, 2013.

Commodities: Certain commodities such as soybean meal, corn, wheat, soybean oil, diesel fuel and natural gas (collectively, “commodity contracts”) are used in the production and transportation of the Company’s products. Generally these commodities are purchased based upon market prices that are established with the vendor as part of the purchase process. The Company uses futures, swaps, and swaption or option contracts, as deemed appropriate; to reduce the effect of price fluctuations on anticipated purchases. These contracts may have a term of up to 24 months. The Company accounts for these commodities derivatives as either economic or cash flow hedges. Changes in the value of economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses is deferred in equity and recognized as part of cost of products sold in the appropriate period and the ineffective portion is recognized as other (income) expense, net.

The fair values of the Company’s commodities hedges were recorded as current assets of $9.4 million as of April 27, 2014. The fair values of the Company’s commodities hedges were recorded as current assets of $3.0 million and current liabilities of $9.7 million at April 28, 2013. The notional amounts of the Company’s commodity contracts as of the dates indicated (in millions):

Foreign Currency: From time to time, the Company manages its exposure to fluctuations in foreign currency exchange rates by entering into forward contracts to cover a portion of its projected expenditures paid in local currency. These contracts may have a term of up to 24 months. The Company accounted for these contracts as either economic hedges or cash flow hedges. Changes in the value of the economic hedges are recorded directly in earnings. For cash flow hedges, the effective portion of derivative gains and losses is deferred in equity and recognized as part of cost of products sold in the appropriate period and the ineffective portion is recognized as other (income) expense, net. Changes in the value of the economic hedges are recorded directly in earnings. The Company did not have any outstanding foreign currency hedges as of April 27, 2014 because the Company did not believe it was in its best interest at the time. The Company did not have any outstanding foreign currency hedges in continuing operations as of April 28, 2013. The Company may again in the future enter into foreign currency forward contracts.

Fair Value of Derivative Instruments

The fair value of derivative instruments recorded in the Consolidated Balance Sheets as of April 27, 2014 was as follows (in millions):


	Asset derivatives					Liability derivatives
Derivatives in economic hedging relationships	Balance Sheet location		Fair value			Balance Sheet location		Fair value

Interest rate contracts	Other non-current assets	$		-		Other non-current liabilities	$		9.8
Interest rate contracts	Prepaid expenses and other current assets			-		Accounts payable and accrued expenses			25.4
Commodity and other contracts	Prepaid expenses and other current assets			9.4	⁽¹⁾	Accounts payable and accrued expenses			-

Total		$		9.4			$		35.2

⁽¹⁾	Includes $7.6 million of commodity contracts (asset derivatives) designated as cash flow hedges.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

The fair value of derivative instruments recorded in the Consolidated Balance Sheets as of April 28, 2013 was as follows (in millions):

Asset derivatives

Liability derivatives

Derivatives in economic

hedging relationships

Balance Sheet
location

Fair value

Balance Sheet
location

Fair value

Interest rate contracts

Other non-current assets

Other non-current liabilities

33.5

Interest rate contracts

Prepaid expenses and other current assets

Accounts payable and accrued expenses

28.4

Commodity and other contracts

Prepaid expenses and other current assets

3.0

⁽¹⁾

Accounts payable and accrued expenses

9.7

⁽²⁾

Total

3.0

71.6

⁽¹⁾	Includes $0.2 million of commodity contracts (asset derivatives) designated as cash flow hedges.

⁽²⁾	Represents commodity contracts (liability derivatives) designated as cash flow hedges.

The effect of the Company’s economic hedges on other (income) expense, net in the Consolidated Statements of Operations for the periods indicated below was as follows (in millions):


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Interest rate contracts	$		2.0	$		12.3	$		52.1
Commodity and other contracts			(12.9)			(23.0)			(1.2)
Foreign currency exchange contracts			-			-			(1.4)

Included in other (income) expense, net	$		(10.9)	$		(10.7)	$		49.5

The effect of derivative instruments designated as cash flow hedges recorded for fiscal 2014, in the Consolidated Statements of Operations was as follows (in millions):


Derivatives in cash flow hedging relationships		(Gain) loss recognized in AOCI		Location of (gain) loss reclassified from AOCI		(Gain) loss reclassified from AOCI into income		Location of (gain) loss recognized in income (ineffective portion and amount excluded from effectiveness testing)		(Gain) loss recognized in income (ineffective portion and amount excluded from effectiveness testing)

Commodity and other contracts	$		(14.2)	Cost of products sold	$		7.7	Other (income) expense, net	$		(4.0)

The effect of derivative instruments designated as cash flow hedges recorded for fiscal 2013, in the Consolidated Statements of Operations was as follows (in millions):


Derivatives in cash flow hedging relationships		(Gain) loss recognized in AOCI		Location of (gain) loss reclassified from AOCI		(Gain) loss reclassified from AOCI into income		Location of (gain) loss recognized in income (ineffective portion and amount excluded from effectiveness testing)		(Gain) loss recognized in income (ineffective portion and amount excluded from effectiveness testing)

Commodity and other contracts	$		10.6	Cost of products sold	$		-	Other (income) expense, net	$		0.9

The Company did not have cash flow hedges during fiscal 2012.

At April 27, 2014, $6.5 million is expected to be reclassified from AOCI to cost of products sold within the next 12 months.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Note 9.

Fair Value Measurements

A three-tier fair value hierarchy is utilized to prioritize the inputs used in measuring fair value. The hierarchy gives the highest priority to quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels are defined as follows:

•

Level 1 Inputs—unadjusted quoted prices in active markets for identical assets or liabilities;

•

Level 2 Inputs—quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument; and

•

Level 3 Inputs—unobservable inputs reflecting the Company’s own assumptions in measuring the asset or liability at fair value.

The Company uses interest rate swaps, commodity contracts and forward foreign currency contracts to hedge market risks relating to possible adverse changes in interest rates, commodity prices, diesel fuel prices and foreign exchange rates.

The following table provides the fair values hierarchy for financial assets and liabilities measured on a recurring basis (in millions):


		Level 1						Level 2						Level 3
Description		April 27, 2014			April 28, 2013			April 27, 2014			April 28, 2013			April 27, 2014			April 28, 2013

Assets
Commodity and other contracts	$		7.5	$		2.1	$		1.9	$		0.9	$		-	$		-

Total			7.5			2.1			1.9			0.9			-			-


Liabilities
Interest rate contracts			-			-			35.2			61.9			-			-
Commodity and other contracts			-			4.3			-			5.4			-			-
Contingent consideration			-			-			-			-			3.1			-

Total	$		-	$		4.3	$		35.2	$		67.3	$		3.1	$		-

The Company’s determination of the fair value of its interest rate swaps was calculated using a discounted cash flow analysis based on the terms of the swap contracts and the observable interest rate curve. The Company’s futures and options contracts are traded on regulated exchanges such as the Chicago Board of Trade, Kansas City Board of Trade and the New York Mercantile Exchange. The Company values these contracts based on the daily settlement prices published by the exchanges on which the contracts are traded. The Company’s commodities swap and swaption contracts are traded over-the-counter and are valued based on the Chicago Board of Trade quoted prices for similar instruments in active markets or corroborated by observable market data available from the Energy Information Administration. The Company measures the fair value of foreign currency forward contracts using an income approach based on forward rates (obtained from market quotes for futures contracts with similar terms) less the contract rate multiplied by the notional amount. There were no foreign currency forward contracts outstanding as of April 27, 2014 and April 28, 2013.

The fair values of the fixed rate notes and floating rate debt are disclosed in Note 2. The fair values of the plan assets of the Company’s defined benefit pension plan are disclosed in Note 11.

Note 10.

Stock Plans

The 2011 Stock Incentive Plan for Key Employees of Blue Acquisition Group, Inc. and its Affiliates was adopted by the Board of Directors of Parent (the “Parent Board”) effective February 16, 2011 (the “2011 Plan”). The 2011 Plan provided for the grant of stock options and other stock based awards to key service providers of Parent and its affiliates, including the Company. 18,777,653 shares of common stock of Parent were initially reserved for grant under the plan, with such number to be automatically increased in the event the Parent Board and the Company’s Chief Executive Officer (“CEO”) make grant allocations that exceed such amount.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

During fiscal 2014, Parent granted 1,690,000 stock options. Under the automatic increase provisions of the 2011 Plan, 325,000 of additional shares of common stock of Parent were authorized for grant. As of April 27, 2014, 6,727,228 shares of common stock were available for future grant subject to the automatic increase provision described above.

During fiscal 2013, Parent granted 3,975,000 stock options. Under the automatic increase provisions of the 2011 Plan, 2,862,319 of additional shares of common stock of Parent were authorized for grant.

Generally, options granted under the 2011 Plan that are subject to service-based or performance-based vesting vest annually over four or five years and the term may not be more than ten years from the date of its grant. Following the termination of employment of an optionholder, shares received pursuant to the exercise of options generally remain subject to certain put and call rights which vary depending on the nature of the termination. In addition, in the event of certain change in control transactions, any outstanding portion of service-based options will become vested and exercisable, and, in the event of a certain change in control transaction pursuant to an event wherein the Sponsors realize a cash return on their interests in Parent greater than a predetermined target, all options subject to performance-based vesting will vest.

Performance-based stock options

There are two types of options subject to performance-based vesting under the 2011 Plan. The first type generally vests at the end of each fiscal year 2013 through 2016 if Parent achieves a pre-determined EBITDA-related financial target (“EBITDA Performance Options”) with respect to such fiscal year. The second type are options with vesting subject only to market-based vesting conditions (“Exit Return Performance Options”), where upon the occurrence of an event or transaction pursuant to which the Sponsors realize a cash return on their interests in Parent greater than a predetermined threshold, the options will vest depending on the extent to which the realized return exceeds such threshold.

During fiscal 2014, Parent granted 422,500 EBITDA Performance Options with a weighted-average grant date fair value of $2.57 per share to employees of the Company. During fiscal 2014, Parent modified the outstanding EBITDA Performance options to revise the EBITDA-related financial targets for fiscal 2014 due to the sale of the Consumer Products Business and the acquisition of Natural Balance. No incremental expense was recorded as a result of the modification. During fiscal 2013, Parent granted 993,750 EBITDA Performance Options with a weighted-average grant date fair value of $1.98 per share to employees of the Company.

The fair value for performance-based stock options granted was estimated at the date of grant using a Black-Scholes option pricing model. This model estimates the fair value of the options based on a number of assumptions, such as expected option life, interest rates, the current fair market value and expected volatility of common stock and expected dividends. The expected term of options granted was based on the “simplified” method. Expected stock price volatility was determined based on the historical volatilities of comparable companies over a historical period that matches the expected life of the options. The risk-free interest rate was based on the expected U.S. Treasury rate over the expected life. The dividend yield was based on the expectation that no dividends will be paid. The following table presents the weighted-average assumptions for performance-based stock options granted for the periods indicated:


	Fiscal 2014		Fiscal 2013

Expected life (in years)		5.9		5.4
Expected volatility		45.0%		45.0%
Risk-free interest rate		1.03%		0.9%
Dividend yield		0.0%		0.0%

During fiscal 2014 and fiscal 2013, Parent also granted 422,500 and 993,750 Exit Return Performance options, respectively. As the performance conditions associated with the Exit Return Performance Options are not probable of being achieved until the consummation of a liquidity event, the grant date fair value of these options is measured, but no stock compensation expense will be recognized until a liquidity event occurs and the target threshold is met.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Service-based stock options

The following table presents the service-based stock options granted and the weighted-average grant date fair value for the periods indicated:


		Fiscal 2014			Fiscal 2013			Fiscal 2012
Options granted			845,000			1,987,500			9,010,000
Weighted-average grant date fair value	$		2.57	$		2.16	$		2.21

Options granted under the 2011 Plan that are subject to service-based vesting are generally subject to partial accelerated vesting upon certain terminations of employment of the optionholder. In the event of the termination of an optionholder’s employment due to death or disability or, in the event of the termination of an optionholder’s employment by the Company without cause or by the optionholder for good reason after March 8, 2013, that portion of the service-based stock options that would have become vested upon the next annual vesting date will vest as of the employment termination date.

The fair value for service-based stock options granted was estimated at the date of grant using a Black-Scholes option pricing model with assumptions determined in the same manner as performance-based stock options described above. The following table presents the weighted-average assumptions for service-based stock options granted for the periods indicated:


	Fiscal 2014		Fiscal 2013		Fiscal 2012
Expected life (in years)		5.9		5.9		6.5
Expected volatility		45.0%		45.0%		45.0%
Risk-free interest rate		1.03%		1.03%		1.61%
Dividend yield		0.0%		0.0%		0.0%

Rollover stock options

Certain options granted under the 2011 Plan were issued in exchange for options to purchase DMFC’s common stock granted under the Company’s previous equity plans (the “Rollover Options”). There was a total of 9,385,492 Rollover Options granted with a fair value of $3.75 per share. During fiscal 2014, 701,867 Rollover Options were cancelled and repurchased in connection with executive departures and 5,444,483 remain outstanding as of April 27, 2014. During fiscal 2013 and fiscal 2012, 573,015 and 2,666,127, respectively, Rollover Options were cancelled and repurchased in connection with executive departures. The Company did not incur any expense in connection with the issuance of the Rollover Options because they were granted in exchange for options of equal value. The Rollover Options are fully vested, and generally remain subject to their original terms under the Company’s previous equity plans, with applicable adjustments to convert the exercise price and number of shares of such options. Further, Rollover Options do not count toward the shares of common stock available for grant under the 2011 Plan.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Stock option activity and related information during the periods indicated was as follows:


	Options Outstanding			Weighted- Average Exercise Price		Options Exercisable			Exercisable Weighted- Average Exercise Price
Balance at May 1, 2011		15,647,164	$		2.75		9,385,492	$		1.25
Granted		18,020,000			5.55
Forfeited		(1,821,329)			5.00
Exercised		-			-
Cancelled		(2,666,127)			1.25

Balance at April 29, 2012		29,179,708			4.48		8,825,417			2.26
Granted		3,975,000			5.00
Forfeited		(4,440,404)			5.00
Exercised		-			-
Cancelled		(573,015)			1.25

Balance at April 28, 2013		28,141,289			4.54		12,163,876			3.32
Granted		1,690,000			5.96
Forfeited		(5,077,715)			5.18
Exercised		-			-
Cancelled		(701,867)			1.25

Balance at April 27, 2014		24,051,707	$		4.60		13,832,001	$		3.85

Options forfeited represent the number of unvested options that were forfeited in connection with the termination of employment of the optionholders. Options cancelled represent the number of vested options that were subject to repurchase and cancellation by the Company in connection with the termination of employment of the optionholders. The weighted-average exercise price is generally equivalent to the fair value of common stock per share.

As of April 27, 2014, there was approximately $14.6 million of unrecognized stock compensation cost, which is expected to be recognized over a weighted-average period of 1.9 years. As of April 27, 2014, the weighted-average remaining contractual life of options outstanding was 6.6 years.

Restricted common stock

During fiscal 2012, Parent granted 1,366,199 shares of restricted common stock with a fair value and purchase price of $5.00 per share. The restricted shares generally vest over three years from the employee’s anniversary date of hire. During fiscal 2012, Parent also granted 400,000 shares of restricted common stock with a fair value and purchase price of $5.00 per share which were immediately vested.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014

Note 11.

Retirement Benefits

Defined Benefit Plans. The Company sponsors a qualified defined benefit pension plan (“pension benefits” or “pension plan”) and several unfunded defined benefit postretirement plans (“other benefits” or “postretirement plans”) providing certain medical, dental and life insurance benefits to eligible retired, salaried, non-union hourly and union employees. The details of such plans, including discontinued operations, are as follows (in millions):


		Pension benefits						Other benefits
		April 27, 2014			April 28, 2013			April 27, 2014			April 28, 2013
Change in benefit obligation:
Benefit obligation at beginning of period	$		499.6	$		466.4	$		138.3	$		157.9
Service cost			12.1			13.5			1.0			1.5
Interest cost			16.0			20.4			4.9			7.6
Actuarial (gain) loss			(23.2)			33.7			(15.1)			(24.4)
Benefits paid			(37.1)			(34.4)			(4.3)			(4.3)
Obligation transferred to Acquiror			(341.5)			-			(93.7)			-

Benefit obligation at end of period	$		125.9	$		499.6	$		31.1	$		138.3

Accumulated benefit obligation	$		121.4	$		484.1


Change in plan assets:
Fair value of plan assets at beginning of period	$		487.1	$		460.5	$		-	$		-
Actual gain on plan assets			32.1			46.0			-			-
Employer contributions			10.0			15.0			4.3			4.3
Benefits paid			(37.1)			(34.4)			(4.3)			(4.3)
Plan assets transferred to Acquiror¹			(356.2)			-			-			-

Fair value of plan assets at end of period	$		135.9	$		487.1	$		-	$		-

Funded status at end of period	$		10.0	$		(12.5)	$		(31.1)	$		(138.3)

Amounts recognized in the Consolidated Balance Sheets consist of:
Other non-current assets	$		10.0	$		-	$		-	$		-
Accounts payable and accrued expenses			-			(15.0)			(1.3)			(6.1)
Other non-current liabilities			-			2.5			(29.8)			(132.2)

Total	$		10.0	$		(12.5)	$		(31.1)	$		(138.3)

Amounts recognized in accumulated other comprehensive income/(loss) consist of:
Actuarial net gain (loss)	$		(0.1)	$		(43.4)	$		11.5	$		29.0

Total	$		(0.1)	$		(43.4)	$		11.5	$		29.0

The plans assets transferred to the Acquiror are an estimate which could differ from actual results. Please refer to discussion below regarding requirements under the Employee Retirement Income Security Act of 1974.

The components of net periodic benefit cost for the pension benefits and other benefits for the periods indicated, including discontinued operations, are as follows (in millions):


		Pension benefits
		Fiscal 2014			Fiscal 2013			Fiscal 2012
Components of net periodic benefit cost:
Service cost for benefits earned during the period	$		12.1	$		13.5	$		13.6
Interest cost on projected benefit obligation			16.0			20.4			23.0
Expected return on plan assets			(29.0)			(32.4)			(32.7)
Amortization of loss/(gain)			-			-			-
Settlement loss, net of curtailment gain			31.8			-			-

Net periodic benefit cost	$		30.9	$		1.5	$		3.9

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND SUBSIDIARIES)

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)

April 27, 2014


		Other benefits
		Fiscal 2014			Fiscal 2013			Fiscal 2012
Components of net periodic benefit cost:
Service cost for benefits earned during the period	$		1.0	$		1.5	$		1.5
Interest cost on projected benefit obligation			4.9			7.6			8.4
Expected return on plan assets			-			-			-
Amortization of gain			(2.3)			-			-
Settlement gain			(30.3)			-			-

Net periodic benefit cost (credit)	$		(26.7)	$		9.1	$		9.9

For fiscal 2015, pension benefits expense for continuing operations is expected to be approximately $3.9 million. Other benefits expense for fiscal 2015 is currently estimated to be approximately a net credit of $0.1 million as the net amortization gain exceeds service and interest costs. These estimates incorporate the Company’s fiscal 2015 assumptions. Actual future pension benefit and other benefit expense amounts may vary depending upon the accuracy of original assumptions and future assumptions.

Sale of the Consumer Products Business

Following the sale of the Consumer Products Business, the Company transferred a significant amount of the plan obligations and plan assets for the pension benefits and other benefits, as well as the related components of net periodic benefit costs, for the transferred employees and retirees of the Consumer Products Business to the Acquiror. Plan assets for pension benefits must be allocated to the Acquiror in accordance with the Employee Retirement Income Security Act of 1974 (“ERISA”) Section 4044, which the Company expects to be completed in fiscal 2015. The plan assets presented are an estimate which could differ from actual results.

Assumptions

Since the pension plan and other benefits liabilities are measured on a discounted basis, the discount rate is a significant assumption. The discount rate was determined based on an analysis of interest rates for high-quality, long-term corporate debt at each measurement date. In order to appropriately match the bond maturities with expected future cash payments, the Company utilizes differing bond portfolios to estimate the discount rates for the pension plan and for the other benefits. The discount rate used to determine the pension plan and other benefits projected benefit obligation as of the balance sheet date is the rate in effect at the measurement date. The same rate is also used to determine the pension plan and other benefits expense for the following fiscal year. The long-term rate of return for the pension plan’s assets is based on the Company’s historical experience, the pension plan’s investment guidelines and the Company’s expectations for long-term rates of return. The pension plan’s investment guidelines are established based upon an evaluation of market conditions, tolerance for risk and cash requirements for benefit payments.

The following table presents the weighted-average assumptions used to determine the projected benefit obligations for pension benefits and other benefits:


	April 27, 2014		April 28, 2013
Pension benefits
Discount rate		4.60%		3.90%
Rate of increase in compensation levels		3.94%		3.69%
Other benefits
Discount rate		4.85%		4.25%

The weighted-average assumptions for pension benefits and other benefits reflect a weighted-average assumption for the prior year as reported and an interim measurement in fiscal 2014 following the sale of Consumer Products Business.

BIG HEART PET BRANDS AND SUBSIDIARIES

(formerly known as DEL MONTE CORPORATION AND S

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