Compass Diversified Holdings - Quarter Report: 2008 June (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

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

For the quarterly period ended June 30, 2008

or

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

For the transition period from                      to                     

COMPASS DIVERSIFIED HOLDINGS

Delaware		0-51937		57-6218917
(State or other jurisdiction of incorporation or organization)		(Commission file number)		(I.R.S. employer identification number)

COMPASS GROUP DIVERSIFIED HOLDINGS LLC

Delaware		0-51938		20-3812051
(State or other jurisdiction of incorporation or organization)		(Commission file number)		(I.R.S. employer identification number)

Sixty One Wilton Road
Second Floor
Westport, CT 06880
(203) 221-1703
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

     Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ     No o

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

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer   o (Do not check if a smaller reporting company)		Smaller Reporting Company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o     No þ

As of August 1, 2008, there were 31,525,000 shares of
Compass Diversified Holdings outstanding.

 

 

COMPASS DIVERSIFIED HOLDINGS

QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2008

TABLE OF CONTENTS

					Page
					Number
			Forward-looking Statements			4
Part I			Financial Information
	Item 1.		Financial Statements:
			Condensed Consolidated Balance Sheets as of June 30, 2008 (unaudited) and December 31, 2007			5
			Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2008 and 2007 (unaudited)			6
			Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2008 (unaudited)			7
			Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2008 and 2007 (unaudited)			8
			Notes to Condensed Consolidated Financial Statements (unaudited)			9
	Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
	Item 3.		Quantitative and Qualitative Disclosures About Market Risk			38
	Item 4.		Controls and Procedures			38
Part II			Other Information			39
	Item 1.		Legal Proceedings			39
	Item 1A.		Risk Factors			39
	Item 4.		Submission of Matters to a Vote of Security Holders			40
	Item 6.		Exhibits			41
	Signatures					42
	Exhibit Index					44

NOTE TO READER

In reading this Quarterly Report on Form 10-Q, references to:

	•		the “Trust” and “Holdings” refer to Compass Diversified Holdings;
	•		“businesses” refer to, collectively, the businesses controlled by the Company;
	•		the “Company” refer to Compass Group Diversified Holdings LLC;
	•		the “Manager” refer to Compass Group Management LLC (“CGM”);
	•		the “initial businesses” refer to, collectively, CBS Personnel Holdings, Inc., Crosman Acquisition Corporation, Compass AC Holdings, Inc. and Silvue Technologies Group, Inc.;
	•		the “2007 acquisitions” refer to, collectively, the acquisitions of Aeroglide Corporation, HALO Branded Solutions and American Furniture Manufacturing;
	•		the “2008 acquisitions” refer to, collectively, the acquisitions of Fox Factory Inc. and Staffmark Investment LLC;
	•		the “2007 disposition” refers to, the sale of Crosman Acquisition Corporation;
	•		the “2008 dispositions” refer to, collectively, the sales of Aeroglide Corporation and Silvue Technologies Group, Inc.;
	•		the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of April 25, 2007;
	•		the “Credit Agreement” refer to the Credit Agreement with a group of lenders led by Madison Capital, LLC which provides for a Revolving Credit Facility and a Term Loan Facility;
	•		the “Revolving Credit Facility” refer to the $325 million Revolving Credit Facility provided by the Credit Agreement that matures in December 2012;
	•		the “Term Loan Facility” refer to the $154 million Term Loan Facility, as of June 30, 2008, provided by the Credit Agreement that matures in December 2013;
	•		the “LLC Agreement” refer to the second amended and restated operating agreement of the Company dated as of January 9, 2007; and
	•		“we”, “us” and “our” refer to the Trust, the Company and the businesses together.

FORWARD-LOOKING STATEMENTS

     This Quarterly Report on Form 10-Q, contains both historical and forward-looking statements. We may, in some cases, use words such as “project,” “predict,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:

	•		our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve any future acquisitions;
	•		our ability to remove CGM and CGM’s right to resign;
	•		our organizational structure, which may limit our ability to meet our dividend and distribution policy;
	•		our ability to service and comply with the terms of our indebtedness;
	•		our cash flow available for distribution and our ability to make distributions in the future to our shareholders;
	•		our ability to pay the management fee, profit allocation when due and to pay the put price if and when due;
	•		our ability to make and finance future acquisitions;
	•		our ability to implement our acquisition and management strategies;
	•		the regulatory environment in which our businesses operate;
	•		trends in the industries in which our businesses operate;
	•		changes in general economic or business conditions or economic or demographic trends in the United States and other countries in which we have a presence, including changes in interest rates and inflation;
	•		environmental risks affecting the business or operations of our businesses;
	•		our and CGM’s ability to retain or replace qualified employees of our businesses and CGM;
	•		costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
	•		extraordinary or force majeure events affecting the business or operations of our businesses.

     Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.

     In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.

PART I
FINANCIAL INFORMATION

ITEM 1. — FINANCIAL STATEMENTS

Compass Diversified Holdings

Condensed Consolidated Balance Sheets

		June 30,				December 31,
(in thousands)		2008				2007
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	100,221			$	115,500
Accounts receivable, less allowances of $7,106 at June 30, 2008 and $3,204 at December 31, 2007			184,841				111,718
Inventories			55,581				35,492
Prepaid expenses and other current assets			39,782				11,088
Current assets of discontinued operations			—				25,443
Total current assets			380,425				299,241
Property, plant and equipment, net			30,593				20,437
Goodwill			311,953				218,817
Intangible assets, net			261,874				163,378
Deferred debt issuance costs, less accumulated amortization of $2,330 at June 30, 2008 and $1,348 at December 31, 2007			8,979				9,613
Other non-current assets			18,421				17,549
Assets of discontinued operations			—				98,967
Total assets		$	1,012,245			$	828,002
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	46,794			$	34,306
Accrued expenses			82,156				33,969
Due to related party			823				814
Current portion, long-term debt			2,000				2,000
Profit allocation due to Manager			15,000				—
Current portion of workers’ compensation liability			28,018				6,881
Other current liabilities			757				560
Current liabilities of discontinued operations			—				28,083
Total current liabilities			175,548				106,613
Supplemental put obligation			13,570				21,976
Deferred income taxes			62,691				59,478
Long-term debt			152,000				148,000
Workers’ compensation liability			38,561				16,791
Other non-current liabilities			5,262				4,628
Non-current liabilities of discontinued operations			—				15,799
Total liabilities			447,632				373,285
Minority interests			79,207				21,867
Stockholders’ equity
Trust shares, no par value, 500,000 authorized; 31,525 shares issued and outstanding at June 30, 2008 and December 31, 2007			423,213				443,705
Accumulated other comprehensive income			1,240				—
Accumulated earnings (deficit)			60,953				(10,855	)
Total stockholders’ equity			485,406				432,850
Total liabilities and stockholders’ equity		$	1,012,245			$	828,002

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

		Three-months				Three-months				Six-months				Six-months
		Ended				Ended				Ended				Ended
(in thousands, except per share data)		June 30, 2008				June 30, 2007				June 30, 2008				June 30, 2007
Net sales		$	128,738			$	54,602			$	243,882			$	84,596
Service revenues			270,172				142,911				506,163				278,332
			398,910				197,513				750,045				362,928
Cost of sales			87,545				33,100				167,322				50,781
Cost of services			223,504				116,724				420,054				228,128
Gross profit			87,861				47,689				162,669				84,019
Operating expenses:
Staffing expense			27,470				14,470				52,540				28,482
Selling, general and administrative expense			41,842				22,613				78,524				36,824
Supplemental put expense			4,276				1,024				6,594				2,417
Fees to manager			3,544				2,388				7,195				4,442
Amortization expense			6,131				2,969				12,261				5,588
Operating income			4,598				4,225				5,555				6,266
Other income (expense):
Interest income			266				728				581				1,327
Interest expense			(4,674	)			(1,557	)			(9,346	)			(3,031	)
Amortization of debt issuance costs			(497	)			(283	)			(982	)			(553	)
Other income (expense), net			102				(5	)			357				1
Income (loss) from continuing operations before income taxes and minority interest			(205	)			3,108				(3,835	)			4,010
Provision for income taxes			848				1,650				555				2,675
Minority interest			1,218				76				705				(99	)
Income (loss) from continuing operations			(2,271	)			1,382				(5,095	)			1,434
Income from discontinued operations, net of income tax			2,577				1,150				4,607				1,981
Gain on sale of discontinued operations, net of income tax			72,296				—				72,296				36,038
Net income		$	72,602			$	2,532			$	71,808			$	39,453
Basic and fully diluted income (loss) per share from continuing operations		$	(0.07	)		$	0.05			$	(0.16	)		$	0.06
Basic and fully diluted income per share from discontinued operations			2.37				0.04				2.44				1.61
Basic and fully diluted net income per share		$	2.30			$	0.09			$	2.28			$	1.67
Weighted average number of shares of trust stock outstanding - basic and fully diluted			31,525				26,837				31,525				23,661
Cash distributions declared per share		$	0.325			$	0.30			$	0.65			$	0.60

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)

														Accumulated
										Accumulated				Other				Total
		Number of								Earnings				Comprehensive				Stockholders’
(in thousands)		Shares				Amount				(Deficit)				Income				Equity
Balance — December 31, 2007			31,525			$	443,705			$	(10,855	)		$	—			$	432,850
Distributions paid							(20,492	)			—				—				(20,492	)
Other comprehensive income - cash flow hedge			—				—				—				1,240				1,240
Net income			—				—				71,808				—				71,808
Balance — June 30, 2008			31,525			$	423,213			$	60,953			$	1,240			$	485,406

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

		Six Months				Six Months
		Ended				Ended
(in thousands)		June 30, 2008				June 30, 2007
Cash flows from operating activities:
Net income		$	71,808			$	39,453
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of 2008 dispositions			(72,296	)
Gain on sale of 2007 disposition			—				(36,038	)
Depreciation expense			4,814				2,127
Amortization expense			13,404				9,413
Amortization of debt issuance costs			982				549
Supplemental put expense			6,594				2,417
Minority interests			1,254				249
Minority stockholder charges			1,134				(117	)
Deferred taxes			(5,761	)			(1,156	)
Other			(162	)			—
Changes in operating assets and liabilities, net of acquisition:
Decrease/(increase) in accounts receivable			7,722				(2,666	)
Increase in inventories			(5,070	)			(806	)
(Increase)/decrease in prepaid expenses and other current assets			(17,170	)			522
Increase/(decrease) in accounts payable and accrued expenses			17,886				(366	)
Decrease in supplemental put obligation			—				(7,880	)
Other			(85	)			—
Net cash provided by operating activities			25,054				5,701
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired			(172,550	)			(127,937	)
Purchases of property and equipment			(7,148	)			(3,835	)
Proceeds from 2008 dispositions			153,070				—
Proceeds from 2007 disposition			—				119,856
Other investing activities			(303	)			—
Net cash used in investing activities			(26,931	)			(11,916	)
Cash flows from financing activities:
Proceeds from the issuance of Trust shares, net			—				168,672
Repayments under Credit Agreement			(76,532	)			(196,764	)
Borrowings under Credit Agreement			80,000				111,800
Debt issuance costs			—				(860	)
Distributions paid			(20,492	)			(12,270	)
Other			(156	)			1,911
Net cash (used in) provided by financing activities			(17,180	)			72,489
Foreign currency adjustment			(80	)			(52	)
Net (decrease) increase in cash and cash equivalents			(19,137	)			66,222
Cash and cash equivalents — beginning of period			119,358				7,006
Cash and cash equivalents — end of period		$	100,221			$	73,228
Cash related to discontinued operations		$	—			$	1,229

Supplemental non-cash financing and investing activity:

The Company’s subsidiary, CBS Personnel purchased all the capital stock of Staffmark on January 21, 2008 (see Note D). In conjunction with the acquisition, CBS Personnel issued, in lieu of cash, common stock of CBS Personnel valued at $47.9 million as part of the purchase price.

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Note A — Organization and Business Operations

Compass Diversified Holdings, a Delaware statutory trust (“Holdings”), was organized in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the “Company”), was also formed on November 18, 2005. Compass Group Management LLC, a Delaware limited liability company (“CGM” or the “Manager”), was the sole owner of 100% of the Interests of the Company as defined in the Company’s operating agreement, dated as of November 18, 2005, which were subsequently reclassified as the “Allocation Interests” pursuant to the Company’s amended and restated operating agreement, dated as of April 25, 2006 (as amended and restated, the “LLC Agreement”).

Note B — Presentation and Principles of Consolidation

The condensed consolidated financial statements for the three-and six-month periods ended June 30, 2008 and 2007, (recast for discontinued operations), are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

The condensed consolidated financial statements include the accounts of Compass Diversified Holdings and all majority owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.

Note C —Recent Accounting Pronouncements

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement.

Note D — Acquisition of Businesses

Acquisition of Fox Factory

On January 4, 2008, Fox Factory Holding Corp., a subsidiary of the Company, entered into a Share Purchase Agreement with Fox Factory, Inc. (“Fox”) and Robert C. Fox, Jr., the sole shareholder of Fox, to purchase, and consummated the purchase of all of the issued and outstanding capital stock of Fox. Fox management invested in the transaction alongside CODI resulting in an initial minority ownership of approximately 24%.

Headquartered in Watsonville, California, Fox is a designer, manufacturer and marketer of high end suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts both as a tier one supplier to leading action sport original equipment manufacturers and provides after-market products to retailers and distributors. The Company made loans to and purchased a controlling interest in Fox for approximately $80.4 million, representing approximately 76.0% of the outstanding common stock on a primary basis and 69.8% on a fully diluted basis.

Identifiable intangible assets recorded as a result of this acquisition aggregated approximately $57.5 million and includes the value assigned to trademarks of $13.3 million which is not subject to amortization.

The Company’s Manager, acted as an advisor to the Company in the transaction, and received fees and expense payments totaling approximately $0.85 million.

Acquisition of Staffmark

On January 21, 2008, the Company’s majority-owned subsidiary, CBS Personnel, acquired Staffmark Investment LLC (“Staffmark”), a privately held personnel services provider. Under the terms of the Purchase Agreement, CBS Personnel purchased all of the outstanding equity interests of Staffmark for a total purchase price of approximately $128.6 million, exclusive of transaction fees and closing costs of $5.2 million. Staffmark has become a wholly-owned subsidiary of CBS Personnel and Staffmark’s results of operations are included in CBS Personnel’s financial statements from the date of acquisition. Staffmark is a leading provider of commercial staffing services in the United States. Staffmark provides staffing services in more than 30 states through more than 200 branches and on-site locations. The majority of Staffmark’s revenues are derived from light industrial staffing, with the balance of revenues derived from administrative and transportation staffing, permanent placement services and managed solutions. Similar to CBS Personnel, Staffmark is one of the largest privately held staffing companies in the United States.

The aggregate purchase price consisted of cash and 1,929,089 shares of CBS Personnel common stock, valued at approximately $47.9 million. The fair value of the CBS Personnel stock issued and transferred to Staffmark as partial consideration in the acquisition was determined based on an analysis of financial and market data of publicly traded companies deemed comparable to CBS Personnel, together with relevant multiples of recent merged, sold or acquired companies comparable to CBS Personnel.

The acquisition agreement pursuant to which CBS Personnel issued cash and 1,929,089 shares of CBS Personnel common stock (the “Staffmark stock”) in exchange for all of the membership units of Staffmark, gave the holders of Staffmark’s membership units a non-transferable right (“put right”), to direct the Company, on or after January 21, 2011, to either: (i) promptly initiate such commercially reasonable actions that would result in a sale of CBS Personnel or (ii) offer to purchase the Staffmark stock at its then fair market value, if such right was not otherwise extinguished pursuant to the terms of the acquisition agreement. The put right is extinguishable at any time if either a public offering of the shares of CBS Personnel or sale of CBS Personnel has occurred.

Identifiable intangible assets recorded as a result of this acquisition aggregated approximately $50.1 million.

The Company’s ownership percentage of CBS Personnel is 68.7% on a primary basis and 66.7% on a fully diluted basis subsequent to the Staffmark acquisition.

Compass Group Management LLC, our manager, acted as an advisor to CBS Personnel in the transaction, and received fees and expense payments totaling approximately $1.23 million.

Unaudited Pro Forma Information

The following unaudited pro forma data for the six months ended June 30, 2008 and 2007 gives effect to the acquisitions of Fox and Staffmark, as described above, as if the acquisitions had been completed as of January 1, 2008 and January 1, 2007, respectively. The pro forma data gives effect to actual operating results and adjustments to interest expense, amortization and depreciation expense, management fees and minority interests in the acquired businesses. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transactions had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.

Six- months ended June 30, 2008
(in thousands, except per share data)		Total
Net sales		$	781,118
Income (loss) from continuing operations before income taxes and minority interests		$	(4,009	)
Net income (loss)		$	71,369
Basic and fully diluted income per share		$	2.26

Six- months ended June 30, 2007
(in thousands, except per share data)		Total
Net sales		$	693,289
Income (loss) from continuing operations before income taxes and minority interests		$	(896	)
Net income (loss)		$	36,829
Basic and fully diluted income per share		$	1.56

Note E — Disposition of Businesses

2007 Disposition

On January 5, 2007, the Company sold its majority owned subsidiary, Crosman Acquisition Corporation (“Crosman”) for $143.0 million. The Company’s share of the net proceeds, after accounting for the redemption of Crosman’s minority holders and the payment of CGM’s profit allocation of $7.9 million, was approximately $110.0 million. The Company recognized a gain on the sale in the first quarter of fiscal 2007 of approximately $36.0 million or $1.77 per share.

2008 Dispositions

On June 24, 2008, the Company sold its majority owned subsidiary, Aeroglide Corporation (“Aeroglide”), for a total enterprise value of $95.0 million. The Company’s share of the net proceeds, after accounting for (i) redemption of Aeroglide’s minority holders; (ii) payment of transaction expenses; and (iii) CGM’s profit allocation, totaled $78.3 million. The Company recognized a gain on the sale in the second quarter of fiscal 2008 of $34.0 million or $1.08 per share.

On June 25, 2008, the Company sold its majority owned subsidiary, Silvue Technologies Group, Inc. (“Silvue”), for a total enterprise value of $95.0 million. The Company’s share of the net proceeds, after accounting for (i) redemption of Silvue’s minority holders; (ii) payment of transaction expenses; and (iii) CGM’s profit allocation, totaled $62.9 million. The Company recognized a gain on the sale in the second quarter of fiscal 2008 of $38.3 million or $1.22 per share.

Approximately $65 million of the Company’s net proceeds from the 2008 dispositions were used to repay amounts outstanding under the Company’s Revolving Credit Facility. It is anticipated that the remaining net proceeds from the 2008 dispositions will be invested in short term investment securities pending future application for partial funding of future acquisitions when identified.

Summarized operating results for the 2008 dispositions through the dates of the respective sales were as follows:

		Aeroglide Corporation
		For the Period								For the Period
		April 1, 2008				For the Three Months				January 1, 2008				For the Six Months
		through Disposition				Ended June 30, 2007				through Disposition				Ended June 30, 2007
Net sales		$	18,138			$	15,151			$	34,294			$	20,563
Operating income			3,021				89				5,041				241
Other income (expense)			(8	)			(9	)			(11	)			(3	)
Provision (benefit) for income taxes			835				(363	)			1,274				(449	)
Minority interests			160				(17	)			239				33
Income from discontinued operations (1)		$	2,018			$	460			$	3,517			$	654

		Silvue Technologies Group, Inc.
		For the Period								For the Period
		April 1, 2008				For the Three Months				January 1, 2008				For the Six Months
		through Disposition				Ended June 30, 2007				through Disposition				Ended June 30, 2007
Net sales		$	6,000			$	5,555			$	11,465			$	11,047
Operating income			1,400				1,195				2,416				2,408
Other income (expense)			(146	)			7				(83	)			(4	)
Provision for income taxes			527				364				933				762
Minority interests			168				148				310				315
Income from discontinued operations(1)		$	559			$	690			$	1,090			$	1,327

The following table presents summary balance sheet information for the 2008 dispositions as of December 31, 2007:

		December 31, 2007
		Aeroglide				Silvue				Total
Assets:
Cash		$	1,901			$	1,957			$	3,858
Accounts receivable, net			10,496				2,829				13,325
Inventory			2,156				691				2,847
Earnings in excess of billings			4,244				—				4,244
Other current assets			432				737				1,169
Current assets of discontinued operations		$	19,229			$	6,214			$	25,443
Property, plant and equipment, net			6,625				1,681				8,306
Goodwill			29,863				18,461				48,324
Intangible assets, net			17,512				23,408				40,920
Other non-current assets			873				544				1,417
Non-current assets of discontinued operations		$	54,873			$	44,094			$	98,967
Liabilities:
Accounts payable			5,454				650				6,104
Accrued expenses			4,377				4,032				8,409
Deferred revenue			10,756				—				10,756
Revolving credit facility			—				2,814				2,814
Current liabilities of discontinued operations		$	20,587			$	7,496			$	28,083
Deferred income taxes			377				9,375				9,752
Minority interests			2,507				3,352				5,859
Other non-current liabilities			—				188				188
Non-current liabilities of discontinued operations		$	2,884			$	12,915			$	15,799

Note F — Business segment data

At June 30, 2008, the Company has six reportable business segments. Each business segment represents an acquisition. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.

A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

	•		Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), an electronic components manufacturing company, is a provider of prototype and quick-turn printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers mainly in North America.
	•		American Furniture Manufacturing, Inc. (“AFM” or “American Furniture”) is a leading domestic manufacturer of upholstered furniture for the promotional segment of the marketplace. AFM offers a broad product line of stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products, sold primarily at retail price points ranging between $199 and $699. AFM is a low-cost manufacturer and is able to ship any product in its line within 48 hours of receiving an order.
	•		Anodyne Medical Device, Inc. (“Anodyne”), a medical support surfaces company, is a manufacturer of patient positioning devices primarily used for the prevention and treatment of pressure wounds experienced by patients with limited or no mobility. Anodyne is headquartered in California and its products are sold primarily in North America.
	•		CBS Personnel Holdings, Inc. (“CBS” or “CBS Personnel”), a human resources outsourcing firm, is a provider of temporary staffing services in the United States. CBS Personnel serves approximately 6,500 corporate and small business clients. CBS Personnel also offers employee leasing services, permanent staffing and temporary-to-permanent placement services.
	•		Fox Factory, Inc. (“Fox”) is a designer, manufacturer and marketer of high end suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts as both a tier one supplier to leading action sport original equipment manufacturers and provides after-market products to retailers and distributors.
	•		Halo Branded Solutions, Inc. (“Halo”), operating under the brand names of Halo and Lee Wayne, serves as a one-stop shop for over 30,000 customers providing design, sourcing, management and fulfillment services across all categories of its customer promotional product needs. Halo has established itself as a leader in the promotional products and marketing industry through its focus on service through its approximately 700 account executives.

The tabular information that follows shows data of reportable segments reconciled to amounts reflected in the Condensed Consolidated Financial Statements. The operations of each of the businesses are included in consolidated operating results as of their date of acquisition. There are no inter-segment transactions.

A disaggregation of the Company’s consolidated revenue and other financial data for the three and six-month periods ended June 30, 2008 and June 30, 2007, is presented below (in thousands).

		Three-months				Three-months				Six-months				Six-months
		Ended				Ended				Ended				Ended
Net sales of business segments		June 30, 2008				June 30, 2007				June 30, 2008				June 30, 2007
ACI		$	14,293			$	13,044			$	28,578			$	26,123
American Furniture			31,261				—				68,441				—
Anodyne			12,977				9,126				24,444				18,513
CBS Personnel			270,172				142,911				506,163				278,332
Fox			34,415				—				57,852				—
Halo			35,792				32,432				64,567				39,960
Total			398,910				197,513				750,045				362,928
Reconciliation of segment revenues to consolidated revenues:
Corporate and other			—				—				—				—
Total consolidated revenues		$	398,910			$	197,513			$	750,045			$	362,928

		Three-months				Three-months				Six-months				Six-months
		Ended				Ended				Ended				Ended
Profit of business segments(1)		June 30, 2008				June 30, 2007				June 30, 2008				June 30, 2007
ACI		$	4,455			$	4,070			$	9,238			$	9,195
American Furniture			1,218				—				4,926				—
Anodyne			1,099				351				1,555				699
CBS Personnel			4,346				4,946				5,755				8,365
Fox			3,160				—				2,962				—
Halo			529				573				(246	)			3
Total			14,807				9,940				24,190				18,262
Reconciliation of segment profit to consolidated income (loss) from continuing operations before income taxes and minority interest:
Interest expense, net			(4,408	)			(829	)			(8,765	)			(1,704	)
Other income (expense)			102				(5	)			357				1
Corporate and other (2)			(10,706	)			(5,998	)			(19,617	)			(12,549	)
Total consolidated income (loss) from continuing operations before income taxes and minority interest		$	(205	)		$	3,108			$	(3,835	)		$	4,010

		Accounts				Accounts
		Receivable				Receivable
		as of				as of
		June 30, 2008				Dec. 31, 2007
Accounts receivable and allowances
ACI		$	3,426			$	2,913
American Furniture			11,045				10,965
Anodyne			7,270				8,687
CBS Personnel			129,869				62,537
Fox			17,528				—
Halo			22,809				29,820
Total			191,947				114,922
Reconciliation of segments to consolidated total:
Corporate and other			—				—
Total			191,947				114,922
Allowance for doubtful accounts			(7,106	)			(3,204	)
Total consolidated net accounts receivable		$	184,841			$	111,718

																		Depreciation and								Depreciation and
																		Amortization Expense								Amortization Expense
										Identifiable				Identifiable				for Three-months								for Six-months
		Goodwill				Goodwill				Assets				Assets				Ended June 30,								Ended June 30,
		June 30, 2008				Dec. 31, 2007				June 30, 2008(3)				Dec. 31, 2007(3)				2008				2007				2008				2007
Goodwill and identifiable assets of business segments
ACI		$	50,659			$	50,659			$	21,945			$	22,608			$	917			$	909				$1,826			$	1,763
American Furniture			41,471				41,471				74,588				71,110				950								1,861
Anodyne			19,555				19,555				24,694				25,713				692				450				1,353				948
CBS Personnel			139,153				60,768				89,557				24,808				2,166				498				3,878				1,090
Fox			9,472				—				88,271				—				1,625								3,518
Halo			38,660				33,381				48,412				41,645				773				671				1,475				880
Total			298,970				205,834				347,467				185,884				7,123				2,528				13,911				4,681
Reconciliation of segments to consolidated amount:
Corporate and other identifiable assets			—				—				167,984				249,184				1,194				1,519				2,391				2,400
Identifiable assets of disc. ops.			—				—								62,398
Amortization of debt issuance costs			—				—				—				—				497				283				982				553
Goodwill carried at Corporate level (4)			12,983				12,983				—				—
Total		$	311,953			$	218,817			$	515,451			$	497,466			$	8,814			$	4,330			$	17,284			$	7,634

Note G — Property, plant and equipment and inventory

Property, plant and equipment is comprised of the following at June 30, 2008 and December 31, 2007 (in thousands):

		June 30,				December 31,
		2008				2007
		(Unaudited)
Machinery and equipment		$	23,373			$	12,062
Office furniture and equipment			10,139				8,564
Buildings and building improvements			1,266				1,184
Leasehold improvements			4,371				3,252
			39,149				25,062
Less: accumulated depreciation			(8,556	)			(4,625	)
Total		$	30,593			$	20,437

Depreciation expense was $2.2 million and $4.0 million for the three- and six-month periods ended June 30, 2008, respectively. These amounts exclude $0.2 million and $0.2 million of depreciation expense for the three months ended June 30, 2008 for Aeroglide and Silvue, respectively, and $0.5 million and $0.3 million of depreciation expense for the six months ended June 30, 2008 for Aeroglide and Silvue, respectively.

Inventory is comprised of the following at June 30, 2008 and December 31, 2007 (in thousands):

		June 30,				December 31,
		2008				2007
		(Unaudited)
Raw materials and supplies		$	43,330			$	20,899
Finished goods			13,230				15,062
Less: obsolescence reserve			(979	)			(469	)
Total		$	55,581			$	35,492

Note H — Goodwill and other intangible assets

A reconciliation of the change in the carrying value of goodwill for the six-month period ended June 30, 2008 and the year ended December 31, 2007 is as follows (in thousands):

Balance at Jan. 1, 2007		$	140,690
Acquisition of businesses (1)			76,387
Adjustment to purchase accounting (1)			1,740
Balance at Dec. 31, 2007			218,817
Acquisition of businesses (1)			93,096
Adjustment to purchase accounting(1)			40
Balance at June 30, 2008		$	311,953

Other Intangible assets subject to amortization are comprised of the following at June 30, 2008 (in thousands):

		June 30, 2008
Customer relations		$	187,701
Technology			37,959
Licensing agreements and anti-piracy covenants			28,911
Distributor relations and backlog			1,380
			255,951
Accumulated amortization			(30,847	)
Trade names, not subject to amortization			36,770
Total		$	261,874

Amortization expense was $6.1 million and $12.3 million during the three- and six-month periods ended June 30, 2008, respectively. These amounts exclude $0.4 million and $0.2 million of amortization expense for the three months ended June 30, 2008 for Aeroglide and Silvue, respectively, and $0.8 million and $0.3 million of amortization expense for the six months ended June 30, 2008 for Aeroglide and Silvue, respectively.

Note I — Debt

On June 30, 2008, the Company had $154.0 million outstanding of its Term Loan Facility under its Credit Agreement. The Credit Agreement provides for a Revolving Credit Facility totaling $325 million which matures in December 2012 and a Term Loan Facility totaling $154.0 million which matures in December 2013. The Term Loan Facility requires quarterly payments of $0.5 million with a final payment of the outstanding principal balance due on December 7, 2013. The Credit Agreement permits the Company to increase, over the next two years, the amount available under the Revolving Credit Facility by up to $25 million and the Term Loan Facility by up to $145 million, subject to certain restrictions and Lender approval.

The Company increased its Revolving Credit Facility to $340 million on August 4, 2008. The Company had no outstanding borrowings under its Revolving Credit Facility at June 30, 2008.

The Company had approximately $291.5 million in borrowing base availability under its Revolving Credit Facility at June 30, 2008. Letters of credit outstanding at June 30, 2008 totaled approximately $64.0 million.

At June 30, 2008, the Company was in compliance with all covenants.

On January 22, 2008, we entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of $140 million of Term Loan debt at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The Swap is designated as a cash flow hedge and is anticipated to be highly effective.

Note J — Fair Value Measurement

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies to other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model.

In February 2008 the FASB issued FASB Staff Positions (“FSP”) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases,” (“SFAS 13”) and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities. Non-recurring non-financial assets and non-financial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in our annual goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and those initially measured at fair value in a business combination.

Valuation Hierarchy

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are 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. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of June 30, 2008 (in thousands):

Fair Value Measurements at June 30, 2008

Quoted

Significant

prices in

other

Significant

Total Carrying

active

observable

unobservable

Value at

markets

inputs

inputs

June 30, 2008

(Level 1)

(Level 2)

(Level 3)

Derivative asset — interest rate swap

$

1,240

$

—

$

1,240

$

—

Supplemental put

28,570

—

—

28,570

A reconciliation of the change in the carrying value of our level 3, supplemental put liability for the three- and six-month periods ended June 30, 2008 is as follows (in thousands):

Balance at January 1, 2008		$	21,976
Charges included in earnings			6,594
Other adjustments			—
Balance at June 30, 2008		$	28,570
Balance at April 1, 2008		$	24,294
Charges included in earnings			4,276
Other adjustments			—
Balance at June 30, 2008		$	28,570

Valuation Techniques

The Company’s derivative instrument consists of an over-the-counter (OTC) contract which is not traded on a public exchange. The fair value of the Company’s interest rate swap contract was determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. As such the Company categorized its interest rate swap contract as Level 2.

Our Manager, CGM is also the owner of 100% of the allocation interests in the Company. Concurrent with the IPO, CGM and the Company entered into a Supplemental Put Agreement, which requires the Company to acquire these allocation interests upon termination of the Management Services Agreement. Essentially, the put rights granted to CGM require us to acquire CGM’s allocation interests in the Company at a price based on a percentage of the increase in fair value in the Company’s businesses over its original basis in those businesses. Each fiscal quarter we estimate the fair value of our businesses using a discounted future cash flow model for the purpose of determining our potential liability associated with the Supplemental Put Agreement. We use the following key assumptions in measuring the fair value of the supplemental put; (i) financial and market data of publicly traded companies deemed to be comparable to each of our businesses and (ii) financial and market data of comparable merged, sold or acquired companies. Any change in the potential liability is accrued currently as a non-cash adjustment to earnings. The implementation of SFAS 157 did not result in any material changes to the models or processes used to value this liability.

Note K — Derivative Instruments and Hedging Activities

On January 22, 2008 the Company entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of $140 million at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The Swap is designated as a cash flow hedge and is anticipated to be highly effective.

The Company is using the Swap to manage interest rate exposure. The Swap is designated as a cash flow hedge, accordingly, changes in the fair value of the swap are recorded in stockholders equity as a component of accumulated other comprehensive income. At June 30, 2008, the unrealized gain on the Swap, reflected in accumulated other comprehensive income, was approximately $1.2 million.

Note L — Comprehensive income

The following table sets forth the computation of comprehensive income for the six months ended June 30, 2008 and June 30, 2007, respectively:

		Six-months ended June 30,
		2008				2007
Net income		$	71,808			$	39,453
Other comprehensive income:
Unrealized gain on cash flow hedge			1,240				—
Total comprehensive income		$	73,048			$	39,453

Note M — Stockholder’s equity

The Trust is authorized to issue 500,000,000 Trust shares and the Company is authorized to issue a corresponding number of LLC interests. The Company will at all times have the identical number of LLC interests outstanding as Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled to one vote per share on any matter with respect to which members of the Company are entitled to vote.

	•		On January 30, 2008 the Company paid a distribution of $0.325 per share to holders of record as of January 25, 2008.
	•		On April 25, 2008 the Company paid a distribution of $0.325 per share to holders of record as of April 22, 2008.
	•		On July 29, 2008 the Company paid a distribution of $0.325 per share to holders of record as of July 24, 2008.

Note N — Commitments and contingencies

In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that their outcome will have a material adverse effect on the Company’s consolidated financial position or results of operations.

American Furniture Fire

On February, 12, 2008, American Furniture’s 1.2 million square foot corporate office and manufacturing facility in Ecru, Mississippi was partially destroyed in a fire. Approximately 750 thousand square feet of the facility was impacted by the fire. The executive offices were fundamentally unaffected. The recliner and motion plant, although largely unaffected, suffered some smoke damage but resumed operations on February 21, 2008. There were no injuries related to the fire.

Temporarily, the Company has moved its stationary production lines into other facilities. In addition to its 45 thousand square foot ‘flex’ facility, management has secured two additional leased facilities on a short-term basis (the Landmark Plant and the Oxford Plant) which combined, provide 320 thousand square feet of additional manufacturing and warehouse space in the surrounding Pontotoc area. The production lines at the ‘flex’ facility were operating on February 18, 2008. Production lines at the Landmark Plant were operating on February 26, 2008 and the production lines at the Oxford Plant were operating by April 7, 2008. These temporary stationary production lines are fully operational and provide the company with over 90% of the pre-fire stationary production capabilities. Orders for stationary products are being addressed by these temporary facilities, whereas the orders for motion and recliner products are being addressed by the production facilities that were largely unaffected by the fire at the Ecru facility.

The Company has estimated the total insurance claim resulting from the fire at its American Furniture facility in Ecru, Mississippi will approximate $30.0 million of which approximately $25.0 million was accrued as of June 30, 2008. The difference between the total claim and what was recorded through June 30, 2008 is largely due to business interruption insurance that will be recorded throughout fiscal 2008. Payments of approximately $12.2 million were received from the insurance carriers to date reducing the receivable balance to approximately $12.8 million at June 30, 2008. The $25.0 million of insurance receivables initially accrued, consisted of approximately $11.0 million for destroyed or damaged inventory, $10.0 million to restore the manufacturing facility to its pre-fire condition, $1.0 million for replacement costs for machinery and equipment destroyed in the fire and $3.0 million for expected business interruption insurance which is the estimate of the loss from the fire on the Company’s results. The Company also accrued $9.5 million for the cost to restore the manufacturing facility as a current liability at June 30, 2008 since American Furniture has the obligation under its lease to restore this facility back to its original condition. The Company is currently in the process of evaluating its claims with its insurance carriers, and as such the insurance claims may be subject to refinement.

The three and six month results of operations for the periods ended June 30, 2008 for American Furniture reflect a reduction in cost of sales of approximately $0.5 million and $0.9 million, respectively and a reduction of selling, general and administrative expenses of approximately $1.3 million and $2.8 million, respectively, which reflects the expected benefit of the business interruption insurance proceeds to be received. The split of the business insurance accrual between cost of sales and selling, general and administrative expensewas done to reflect a normalized gross profit percentage based on the actual sales level achieved with the balance recorded as a negative selling and general administrative expense item reflecting the estimated loss of operating income resulting from the fire. The Company expects that the facility will be fully restored and operating by the end of fiscal 2008.

Note O — Subsequent event

On August 8, 2008 the Company exchanged a promissory note, due August 15, 2008, totaling approximately $6.9 million (including accrued interest) due from the CEO of Anodyne in exchange for shares of stock of Anodyne held by the CEO. In addition, the CEO of Anodyne was granted an option to purchase approximately 10% of the outstanding shares of Anodyne, at a strike price exceeding the exchange price, from the Company in the future for which the CEO exchanged Anodyne stock valued at $0.2 million as consideration.

As a result of the above transaction the Company’s ownership percentage in Anodyne increased to approximately 67% on a primary basis and 57% on a fully diluted basis.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This item 2 contains forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control. Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ, including those discussed in the sections entitled “Forward-Looking Statements” and “Risk Factors” included elsewhere in this Quarterly Report as well as those risk factors discussed in the section entitled “Risk Factors” in our annual report on Form 10-K.

Overview

Compass Diversified Holdings, a Delaware statutory trust, was organized in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company, was also formed on November 18, 2005. In accordance with the Trust Agreement, dated as of April 25, 2006 (the “Trust Agreement”), the Trust is sole owner of 100% of the Trust Interests (as defined in the LLC Agreement) of the Company and, pursuant to the LLC Agreement, the Company has outstanding, the identical number of Trust Interests as the number of outstanding shares of the Trust. The Manager is the sole owner of the Allocation Interests of the Company. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.

The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. We characterize small to middle market businesses as those that generate annual cash flows of up to $40 million. We focus on companies of this size because of our belief that these companies are often more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.

In pursuing new acquisitions, we seek businesses with the following characteristics:

•		North American base of operations;
•		stable and growing earnings and cash flow;
•		maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
•		solid and proven management team with meaningful incentives;
•		low technological and/or product obsolescence risk; and
•		a diversified customer and supplier base.
		Our management team’s strategy for our subsidiaries involves:
•		utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses;
•		regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
•		assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);
•		identifying and working with management to execute attractive external growth and acquisition opportunities; and
•		forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.

Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are positioned to acquire additional attractive businesses. Our management team has a large network of over 2,000 deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through this network, as well as our management team’s active proprietary transaction sourcing efforts, we typically have a substantial pipeline of potential acquisition targets. In consummating transactions, our management team has, in the past, been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs, transitions of family-owned businesses, management buy-outs and reorganizations. We believe the flexibility, creativity, experience and expertise of our management team in structuring transactions provides us with a strategic advantage by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition target.

In addition, because we intend to fund acquisitions through the utilization of our Credit Agreement, we do not expect to be subject to delays in or conditions by closing acquisitions that would be typically associated with transaction specific financing, as is typically the case in such acquisitions. We believe this advantage is a powerful one and is highly unusual in the marketplace for acquisitions in which we operate.

Areas of focus in 2008

The areas of focus for 2008, which are generally applicable to each of our businesses, continue to include:

•		Achieving productivity savings and price increases to offset inflation and a weakening macroeconomic climate;
•		Achieving sales growth, technological excellence and manufacturing capability through global expansion of our existing businesses, especially focused on emerging regions in China;
•		Continuing to grow through disciplined acquisition and rigorous integration processes;
•		Proactively managing raw material cost increases, particularly commodity costs; and
•		Driving free cash flow through increased net income and effective working capital management enabling continued investment in our businesses, strategic acquisitions, and enabling us to return value to our shareholders.

2008 highlights

Acquisition of Fox Factory

On January 4, 2008, we purchased a controlling interest in Fox, headquartered in Watsonville, California. Fox is a designer, manufacturer and marketer of high end suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts both as a tier one supplier to leading action sport original equipment manufacturers and provides after-market products to retailers and distributors. We made loans to and purchased a controlling interest in Fox for approximately $80.4 million, representing approximately 76.0% of the outstanding equity.

Acquisition of Staffmark

On January 21, 2008, CBS Personnel purchased all of the outstanding equity interests of Staffmark. Staffmark is a leading provider of commercial staffing services in the United States. Staffmark provides staffing services in more than 30 states through more than 200 branches and on-site locations. The majority of Staffmark’s revenues are derived from light industrial staffing, with the balance of revenues derived from administrative and transportation staffing, permanent placement services and managed solutions. Similar to CBS Personnel, Staffmark is one of the largest privately held staffing companies in the United States.

Under the terms of the Stock Purchase Agreement, CBS Personnel purchased all of the outstanding equity interests of Staffmark for a total purchase price, including fees and transaction costs, of approximately $133.7 million. The aggregate purchase price consisted of cash and 1,929,089 shares of CBS Personnel common stock, valued at approximately $47.9 million. Our ownership percentage of CBS Personnel is 68.7% on a primary basis and 66.7% on a fully diluted basis subsequent to the Staffmark acquisition.

American Furniture Fire

On February, 12, 2008, American Furniture’s 1.2 million square foot corporate office and manufacturing facility in Ecru, MS was partially destroyed in a fire. Approximately 750 thousand square feet of the facility was impacted by the fire. The executive offices were fundamentally unaffected. The recliner and motion plant, although largely unaffected, suffered some smoke damage but resumed operations on February 21, 2008. There were no injuries related to the fire.

Temporarily, the Company moved its stationary production lines into other facilities. In addition to its 45 thousand square foot ‘flex’ facility, management has secured 166 thousand square feet of additional manufacturing and warehouse space in the surrounding Pontotoc area. The production lines at the ‘flex’ facility were operating on February 18, 2008 and the other temporary production lines were operating on February 26, 2008. These temporary stationary production lines are fully operational and provide the company with approximately 90% of the pre-fire stationary production capabilities. Orders for stationary products are being addressed by these temporary facilities, whereas the orders for motion and recliner products are being addressed by the production facilities that were largely unaffected by the fire at the Ecru facility. On April 1, 2008 management leased an additional 154,000 square foot facility for the production of stationary product. Orders for stationary products are being addressed by these temporary facilities, whereas the orders for motion and recliner products are being addressed by the production facilities that were largely unaffected by the fire at the Ecru facility. Management believes that production at AFM is currently at pre-fire production levels.

The six-month results of operations for American Furniture reflect a reduction in cost of sales of approximately $0.9 million and a reduction of selling, general and administrative expenses of approximately $2.8 million which reflects the expected benefit of the business interruption insurance proceeds to be received. The split of the business insurance accrual between cost of sales and selling general and administrative expense was done to reflect a normalized gross profit percentage based on the actual sales level achieved with the balance recorded as a negative selling and general administrative expense item reflecting the estimated loss of operating income resulting from the fire. The Company expects that the facility to be fully restored and operating by the end of fiscal 2008.

Aeroglide disposition

On June 24, 2008, we sold our majority owned subsidiary, Aeroglide, for a total enterprise value of $95.0 million. Our share of the net proceeds, after accounting for the redemption of Aeroglide’s minority holders and payment of transaction expenses totaled $85.6 million. Our Manager is due a profit allocation from this sale, which will be paid in August 2008, totaling approximately $7.3 million. We recognized a gain on the sale of approximately $34.0 million or $1.08 per share.

Silvue disposition

On June 25, 2008, we sold our majority owned subsidiary, Silvue, for a total enterprise value of $95.0 million. Our share of the net proceeds, after accounting for the redemption of Aeroglide’s minority holders and payment of transaction expenses totaled $70.6 million. Our Manager is due a profit allocation from this sale, which will be paid in August 2008, totaling approximately $7.7 million. We recognized a gain on the sale of approximately $38.3 million or $1.22 per share.

Results of Operations

We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:

May 16, 2006		August 1, 2006		February 28, 2007		August 31, 2007		January 4, 2008
Advanced Circuits		Anodyne		HALO		American Furniture		Fox Factory
CBS Personnel

As noted above, we acquired our businesses on various dates through January 4, 2008. As a result, we cannot provide a meaningful comparison of our consolidated results of operations for the entire three- and six-month periods ended June 30, 2008 compared to the same periods in 2007. In the following results of operations, we provide: (i) our consolidated results of operations for the three and six months ended June 30, 2008 and June 30, 2007, which includes the results of operations of our businesses (segments) from the date of acquisition, and (ii) comparative results of operations for each of our businesses, on a stand-alone basis, for each of the three and six-month periods ended June 30, 2008 and 2007 which include pro-forma results of operations for businesses acquired subsequent to January 1, 2007 that include pro-forma operating data for periods prior to our acquisition of the business in order to provide meaningful comparative data.

Consolidated Results of Operations — Compass Diversified Holdings and Compass Group Diversified Holdings LLC

		Three months				Three months				Six months				Six months
		ended				ended				ended				ended
(in thousands)		June 30, 2008				June 30, 2007				June 30, 2008				June 30, 2007
Net sales		$	398,910			$	197,513			$	750,045			$	362,928
Cost of sales			311,049				149,824				587,376				278,909
Gross profit			87,861				47,689				162,669				84,019
Selling, general and administrative expense			69,312				37,083				131,064				65,306
Fees to manager			3,544				2,388				7,195				4,442
Supplemental put cost			4,276				1,024				6,594				2,417
Amortization of intangibles			6,131				2,969				12,261				5,588
Operating income		$	4,598			$	4,225			$	5,555			$	6,266

Net sales

On a consolidated basis, net sales increased approximately $201.4 million and $387.1 million in the three and six month periods ended June 30, 2008, respectively. These increases are due principally to: (i) increased revenues ($251.9 million) resulting from the acquisition of Staffmark in January 2008 by CBS Personnel; (ii) net sales in 2008 attributable to our majority owned subsidiary American Furniture purchased in August 2007 ($68.4 million); (iii) net sales in 2008 attributable to our majority owned subsidiary, Fox Factory purchased in January 2008 ($57.9 million) and (iv) increased net sales attributable to HALO in 2008 ($24.6 million) purchased on February 28, 2007. Refer to the following results of operations by segment for a more detailed analysis of net sales.

We do not generate any revenues apart from those generated by the businesses we own. We may generate interest income on the investment of available funds, but expect such earnings to be minimal. Our investment in our businesses is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies. Cash flows coming to the Trust and the Company is the result of interest payments on those loans, amortization of those loans and, in the future, potentially, dividends on our equity ownership. However, on a consolidated basis these items will be eliminated.

Cost of sales

On a consolidated basis, cost of sales increased approximately $161.2 million and $308.5 million in the three and six month periods ended June 30, 2008, respectively. These increases are due almost entirely to the corresponding increase in net sales. Refer to the following results of operations by segment for a more detailed analysis of cost of sales.

Selling, general and administrative expense

On a consolidated basis, selling, general and administrative expense increased approximately $32.2 million and $65.8 million in the three and six month periods ended June 30, 2008, respectively. This increase is due to costs incurred for acquisitions consummated subsequent to January 1, 2007, which include Halo, American Furniture and Fox and the add -on acquisition, Staffmark. Refer to the following results of operations by segment for a more detailed analysis of selling, general and administrative expense by segment. At the corporate level selling, general and administrative costs increased $0.3 million and $0.7 million in the three and six months ended June 30, 2008 compared to the same periods in 2007 due principally to increased salaries and professional fees resulting from the increased size of the operations.

Fees to manager

Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three-months ended June 30, 2008 and 2007 we incurred approximately $3.5 and $2.4 million, respectively, in expense for these fees. For the six-months ended June 30, 2008 and 2007 we incurred approximately $7.2 and $4.4 million, respectively, in expense for these fees. The increase in management fees for both the three and six months ended June 30, 2008 is due to the increase in consolidated adjusted net assets resulting from our acquisitions of new businesses and Staffmark.

Supplemental put cost

Concurrent with the 2006 IPO, we entered into a Supplemental Put Agreement with our Manager pursuant to which our Manager has the right to cause us to purchase the allocation interests then owned by them upon termination of the Management Services Agreement. We accrued approximately $4.3 million and $1.0 million in non-cash expense during the three-months ended June 30, 2008 and June 30, 2007, respectively in connection with this agreement. We accrued approximately $6.6 million and $2.4 million in non-cash expense during the six-months ended June 30, 2008 and June 30, 2007, respectively in connection with this agreement. This expense represents that portion of the estimated increase in the value of our original businesses over our basis in those businesses that our Manager is entitled to if the Management Services Agreement were terminated or those businesses were sold. The increase in supplemental put cost in both the three and six months ended June 30, 2008 is attributable to the increase in the fair value of our businesses.

Amortization of intangibles

On a consolidated basis, amortization expense of intangible assets increased approximately $3.2 million and $6.7 million in the three- and six-month periods ended June 30, 2008, respectively. These increases are due entirely to the recognition of intangible assets and the attendant amortization directly related to the purchase price allocations performed for each of our acquisitions since January 2007. Refer to the following results of operations by segment for a more detailed analysis of intangible asset amortization expense.

Results of Operations — Our Businesses

As previously discussed, we acquired our businesses on various acquisition dates beginning May 16, 2006 (see table above). As a result, our consolidated operating results and discussion above only include the results of operations since the acquisition date associated with the business. The following discussion reflects a comparison of the historical and where appropriate, pro-forma results of operations for each of our businesses for the three- and six-month periods ending June 30, 2008 and June 30, 2007, which we believe is a more meaningful comparison in explaining the comparative financial performance of each of our businesses. The following results of operations are not necessarily indicative of the results to be expected for the full year going forward.

Advanced Circuits

Overview

Advanced Circuits is a provider of prototype, quick-turn and volume production printed circuit boards (“PCBs”) to customers throughout the United States. Collectively, prototype and quick-turn PCBs represent approximately two-thirds of Advanced Circuits’ gross revenues. Prototype and quick-turn PCBs typically command higher margins than volume production given that customers require high levels of responsiveness, technical support and timely delivery with respect to prototype and quick-turn PCBs and are willing to pay a premium for them. Advanced Circuits is able to meet its customers’ demands by manufacturing custom PCBs in as little as 24 hours, while maintaining over 98.0% error-free production rate and real-time customer service and product tracking 24 hours per day.

While global demand for PCBs has remained strong in recent years, industry wide domestic production has declined over 50% since 2000. In contrast, Advanced Circuits’ revenues have increased steadily as its customers’ prototype and quick-turn PCB requirements, such as small quantity orders and rapid turnaround, are less able to be met by low cost volume manufacturers in Asia and elsewhere. Advanced Circuits’ management anticipates that demand for its prototype and quick-turn printed circuit boards will remain strong.

Results of Operations

The table below summarizes the income from operations data for Advanced Circuits for the three- and six-month periods ended June 30, 2008 and June 30, 2007:

		Three-months ended								Six-months ended
(in thousands)		June 30, 2008				June 30, 2007				June 30, 2008				June 30, 2007
Net sales		$	14,293			$	13,044			$	28,578			$	26,123
Cost of sales			6,104				5,724				12,168				11,407
Gross profit			8,189				7,320				16,410				14,716
Selling, general and administrative expense			2,964				2,459				5,622				3,938
Fees to manager			124				126				250				252
Amortization of intangibles			646				665				1,300				1,331
Income from operations		$	4,455			$	4,070			$	9,238			$	9,195

Three months ended June 30, 2008 compared to the three months ended June 30, 2007.

Net sales

Net sales for the three months ended June 30, 2008 increased approximately $1.2 million over the corresponding three month period ended June 30, 2007. Increased sales from long-lead time PCBs ($0.4 million), quick-turn production ($0.6 million) and prototype PCBs ($0.2 million) are responsible for this increase.

Cost of sales

Cost of sales for the three months ended June 30, 2008 increased approximately $0.4 million. This increase is principally due to the corresponding increase in sales. Gross profit as a percentage of sales increased during the three months ended June 30, 2008 (57.3% at June 30, 2008 vs. 56.1% at June 30, 2007) largely as a result of increased manufacturing efficiencies realized due to increased capacity, offset in part by increases in raw material costs associated with commodity items such as glass, copper and gold.

Selling, general and administrative expense

Selling, general and administrative expense increased $0.5 million during the three months ended June 30, 2008 compared to the same period in 2007 due principally to increases in advertising costs and employee retention programs.

Income from operations

Operating income for the three months ended June 30, 2008 was approximately $4.5 million an increase of $0.4 million over 2007 primarily as a result of those factors described above.

Six months ended June 30, 2008 compared to the six months ended June 30, 2007.

Net sales

Net sales for the six months ended June 30, 2008 was approximately $28.6 million compared to approximately $26.1 million for the same period in 2007, an increase of approximately $2.5 million or 9.6%. The increase in net sales was largely due to increased sales in quick-turn production PCBs, and Prototype PCBs which increased by approximately $1.2 million and $0.7 million, respectively, resulting from increased marketing efforts. Quick-turn production PCBs represented approximately 64.6% of gross sales for the six-months ended June 30, 2008 as compared to approximately 64.1% for the same period in 2007. . Assembly sales increased $0.4 million in the six-months ended June 30, 2008 compared to the same period in 2007.

Cost of sales

Cost of sales for the six months ended June 30, 2008 was approximately $12.2 million compared to approximately $11.4 million for the same period in 2007, an increase of approximately $0.8 million or 6.7%. The increase in cost of sales was largely due to the increase in sales. Gross profit as a percentage of net sales increased by approximately 1.1% to approximately 57.4% for the six months ended June 30, 2008 as compared to approximately 56.3% for the same period in 2007 largely as a result of increased manufacturing efficiencies realized due to increased capacity, offset in part by increases in raw material costs associated with commodity items such as glass, copper and gold.

Selling, general and administrative expense

Selling, general and administrative expense increased approximately $1.7 million in the six months ended June 30, 2008 compared to same period in 2007 largely as a result of reversing $1.2 million in liabilities related to management loan forgiveness arrangements in the first quarter of 2007. Not taking into account the 2007 reversal of loan forgiveness costs, selling, general and administrative costs increased approximately $0.5 million during the six month period ended June 30, 2008 compared to the same period in 2007 due to increased advertising and personnel costs.

Income from operations

Income from operations was approximately $9.2 million for the six months ended June 30, 2008 and June 30, 2007, based on the factors described above.

American Furniture

Overview

Founded in 1998 and headquartered in Ecru, Mississippi, American Furniture is a leading U.S. manufacturer of upholstered furniture, focused exclusively on the promotional segment of the furniture industry. American Furniture offers a broad product line of stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products, sold primarily at retail price points ranging between $199 and $999. American Furniture is a low-cost manufacturer and is able to ship any product in its line within 48 hours of receiving an order.

American Furniture’s products are adapted from established designs in the following categories: (i) motion and recliner; (ii) stationary; (iii) occasional chair and (iv) accent table. American Furniture’s products are manufactured from common components and offer proven select fabric options, providing manufacturing efficiency and resulting in limited design risk or inventory obsolescence.

Results of Operations

The table below summarizes the income from operations data for American Furniture for the three and six-month periods ended June 30, 2008 and June 30, 2007:

		Three-months ended								Six-months ended
		June 30, 2008				June 30, 2007				June 30, 2008				June 30, 2007
(in thousands)						(Pro-forma)								(Pro-forma)
Net sales		$	31,261			$	35,560			$	68,441			$	88,512
Cost of sales			24,811				27,057				53,736				67,974
Gross profit			6,450				8,503				14,705				20,538
Selling, general and administrative expense			4,373				5,094				8,062				10,981
Fees to manager			125				125				250				250
Amortization of intangibles (a)			734				733				1,467				1,466
Income from operations		$	1,218			$	2,551			$	4,926			$	7,841