Share-Based Compensation:

We account for share-based compensation as required by ASC 718-10, Compensation – Stock Compensation, ("ASC 718-10") which requires companies to recognize compensation expense in the amount equal to the fair value of all share-based payments granted to employees. Under ASC 718-10, we recognize share-based compensation ratably over the service period applicable to the award. ASC 718-10 also requires that excess tax benefits be reflected as financing cash flows.

Successor Share-Based Compensation

Stock Options

In conjunction with the Merger, certain senior level employees of the Company were granted stock options in Holdings, effectively granted as of September 28, 2012, under the terms of the Sky Growth Holdings Corporation 2012 Equity Incentive Plan. The share-based compensation expense relating to awards to those persons has been pushed down from Holdings to the Company.

Each optionee received two equal tranches of stock options. Tranche 1 options vest based upon continued employment over a five year period, ratably 20% each annual period. Our policy is to recognize expense for this type of award on a straight-line basis over the requisite service period for the entire award (5 years). Tranche 2 options vest based upon continued employment and the Company achieving specified annual or bi-annual EBITDA targets. Compensation expense will be recognized on a graded vesting schedule. In circumstances where the specified annual or bi-annual EBITDA targets are not met, Tranche 2 options may also vest in amounts of either 50% or 100% of the original award in the event of an initial public offering or other sale of Holdings to a third party buyer (a market condition) that returns a specified level of proceeds calculated as a multiple of the equity invested in the Company by the Sponsor.

We used the Black-Scholes stock option pricing model to estimate the fair value of all Tranche 1 options and Tranche 2 options without a market condition (i.e., Tranche 2 options with service and performance conditions only).

The Tranche 2 options with a market condition were valued using a Monte Carlo simulation. The Monte Carlo simulation developed a range of projected outcomes of the market condition by projecting potential share prices over a 5 year simulation and determining if the share price had reached the specified level of proceeds stipulated in the equity plan. We ran one million simulations and concluded the fair value of the Tranche 2 options with market condition as the average of present value of the payoffs across all simulations.

A summary of the calculated estimated grant date fair value per option is as follows:



	Three months ended		Three months ended
	March 31,		March 31,
Fair value of stock options	2014		2013
TRANCHE 1		$0.67		$0.67
TRANCHE 2 without market condition		$0.68		$0.68
TRANCHE 2 with market condition		$0.76		$0.76

For Tranche 2 options, each quarter we will evaluate the probability of the Company achieving the annual or the bi-annual EBITDA targets (“Vesting Event A”) and the probability of an initial public offering or other sale of the Company to a third party buyer (“Vesting Event B”). If it is probable that the Company will achieve Vesting Event A, then the Company will recognize expense for Tranche 2 options at the $0.68 per option value with any necessary adjustments to expense to be equal to the ratable expense as of the end of that particular quarter end. If it is probable that the Company will achieve Vesting Event B, then the Company will recognize expense for Tranche 2 options at the $0.76 per option value (which is the fair value taking into account the market condition) with any necessary adjustment to expense to be equal to the ratable expense as of the end of that particular quarter end.

We granted a member of the Board of Directors of Holdings stock options in Holdings during the three months ended March 31, 2013 under similar terms as the Tranche 1 options granted as of September 28, 2012 under the Sky Growth Holdings Corporation 2012 Equity Incentive Plan. These stock options vest based upon continued service over an approximate five year period, ratably 20% each period ending September 28^th. We will recognize expense on a straight-line basis over the requisite service period for the entire award. The share-based compensation expense relating to the award has been pushed down from Holdings to the Company. We used the Black-Scholes stock option pricing model to estimate the fair value of the stock option awards.

Set forth below is the impact on our results of operations of recording share-based compensation from stock options ($ amounts in thousands):



	Three months ended			Three months ended
	March 31,			March 31,
	2014			2013
Cost of goods sold	$	89		$	223
Selling, general and administrative	830			2,011
Total, pre-tax	$	919		$	2,234
Tax effect of share-based compensation	(340		)	(827		)
Total, net of tax	$	579		$	1,407

The following is a summary of our stock option activity (shares in thousands):



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
TRANCHE 1
Balance at December 31, 2013	21,830			$1.00
Granted	625		1.40
Exercised	—		1.00
Forfeited	(200	)	1.00
Balance at March 31, 2014	22,255			$1.01	8.5	$	8,902
Exercisable at March 31, 2014	4,366			$1.00	8.5	$	1,746
Vested and expected to vest at March 31, 2014	21,512			$1.01	8.5	$	8,605



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
TRANCHE 2
Balance at December 31, 2013	21,330			$1.00
Granted	625		1.40
Exercised	—		1.00
Forfeited	(200	)	1.00
Balance at March 31, 2014	21,755			$1.01	8.5	$	8,702
Exercisable at March 31, 2014	4,266			$1.00	8.5	$	1,706
Vested and expected to vest at March 31, 2014	21,012			$1.01	8.5	$	8,405

Rollover Options

As part of the Merger, certain employees of the Company were given the opportunity to exchange their stock options in Predecessor for stock options in Holdings (“Rollover Stock Options”). Sponsor was not legally or contractually required to replace Predecessor stock options with Holdings stock options, therefore the Rollover Stock Options were not part of the purchase price. The ratio of exchange was based on the intrinsic value of the Predecessor stock options at September 28, 2012.

The term of the Predecessor stock options exchanged for Holdings stock options were not extended. All Rollover Stock Options maintained their 10 year term from original grant date.

All of the Rollover Stock Options were either vested prior to September 27, 2012 or were accelerated vested on September 27, 2012 (date of the Predecessor shareholders’ meeting that approved the Merger) in accordance with the terms of the Predecessor stock option agreements. No additional vesting conditions were imposed on the holders of the Rollover Stock Options. All remaining unrecognized share-based compensation expense associated with the Rollover Stock Options was recognized during the Predecessor period.

The following is a summary of our Rollover Stock Options activity (shares and aggregate intrinsic value in thousands):



	Shares	Weighted Average Exercise Price		Weighted Average Remaining Life	Aggregate Intrinsic Value
Balance at December 31, 2013	17,351		$0.25
Granted	—	0.25
Exercised	—	0.25
Forfeited	—	0.25
Balance at March 31, 2014	17,351		$0.25	3.6	$	19,954
Exercisable at March 31, 2014	17,351		$0.25	3.6	$	19,954

Restricted Stock

In conjunction with the Merger, certain senior level employees were granted restricted stock units ("RSUs") in Holdings. The share-based compensation expense relating to awards to those persons has been pushed down from Holdings to the Company.

Each RSU has only a time-based service condition and will vest no later than the fifth anniversary of the grant date (September 28, 2017) upon fulfillment of the service condition.

The fair value of each RSU is based on fair value of each share of Holdings common stock on the grant date. The RSUs are classified as equity awards. The total calculated value, net of estimated forfeitures, will be recognized ratably over the 5 year vesting period.

Set forth below is the impact on our results of operations of recording share-based compensation from RSUs for the three-month period ended March 31, 2014 and 2013 ($ amounts in thousands):



	Three months ended			Three months ended
	March 31,			March 31,
	2014			2013
Cost of goods sold	$	—		$	3
Selling, general and administrative	23			31
Total, pre-tax	$	23		$	34
Tax effect of stock-based compensation	(9		)	(13		)
Total, net of tax	$	14		$	21

The following is a summary of our RSU activity for the three-month period ended March 31, 2014 (shares and aggregate intrinsic value in thousands):



	Shares	Weighted Average Grant Price		Aggregate Intrinsic Value
Balance at December 31, 2013	375		$1.00
Granted	—	1.00
Vested	—	1.00
Forfeited	—	1.00
Non-vested restricted stock unit balance at March 31, 2014	375		$1.00	$	525

Long-term Cash Incentive Awards

In conjunction with the Merger, certain employees were granted awards under the Long-term Cash Incentive Award Agreement incentive plan (the “Incentive Plan”) from Holdings. Each participant has the potential to receive a cash award based on specific achievements in the event of a transaction (e.g., initial public offering or sale of the company to a third party buyer) that returns a specified level of proceeds calculated as a multiple of the equity invested in the Company by the Sponsor. There is no vesting period under the Incentive Plan. The grantees must be employed by Sky Growth Holdings Corporation and its subsidiaries at the time of a transaction event in order to be eligible for a cash payment.

This plan is accounted for in accordance with ASC 450 and will be evaluated quarterly. If information available before the financial statements are issued indicates that it is probable that a liability had been incurred at the date of the financial statements then an accrual shall be made for the estimated cash payout. No amount was accrued for the Incentive Plan at March 31, 2014.