Compass Diversified Holdings - Quarter Report: 2009 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

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

COMPASS DIVERSIFIED HOLDINGS

(Exact name of registrant as specified in its charter)

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

COMPASS GROUP DIVERSIFIED HOLDINGS LLC

(Exact name of registrant as specified in its charter)

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

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

Yes þ No o

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

      Indicate by check mark 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, 2009, there were 36,625,000 shares of
Compass Diversified Holdings outstanding.

 

 

COMPASS DIVERSIFIED HOLDINGS

QUARTERLY REPORT ON FORM 10-Q
For the period ended June 30, 2009

TABLE OF CONTENTS

		Page
		Number
Forward-looking Statements
Part I            Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of June 30, 2009 (unaudited) and December 31, 2008			5
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008 (unaudited)			6
Condensed Consolidated Statement of Stockholders’ Equity for the six months ended June 30, 2009 (unaudited)			7
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008 (unaudited)			8
Notes to Condensed Consolidated Financial Statements (unaudited)			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			21
Item 3. Quantitative and Qualitative Disclosures About Market Risk			41
Item 4. Controls and Procedures			41
Part II            Other Information
Item 1. Legal Proceedings			42
Item 1A. Risk Factors			42
Item 4. Submission of Matters to a Vote of Security Holders			43
Item 6. Exhibits			44
Signatures			45
Exhibit Index			47

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. (doing business as Staffmark) (“Staffmark”), Crosman Acquisition Corporation, Compass AC Holdings, Inc. and Silvue Technologies Group, Inc.;

• the “2008 acquisitions” refer to, collectively, the acquisitions of Fox Factory Inc. and Staffmark Investment LLC;

• 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 $340 million Revolving Credit Facility provided by the Credit Agreement that matures in December 2012;

• the “Term Loan Facility” refer to the $77.0 million Term Loan Facility, as of June 30, 2009, 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 reinvestment 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)		2009				2008
		(unaudited)
Assets
Current assets:
Cash and cash equivalents		$	58,152			$	97,473
Accounts receivable, less allowances of $4,962 at June 30, 2009 and $4,824 at December 31, 2008			140,020				164,035
Inventories			55,396				50,909
Prepaid expenses and other current assets			28,811				22,784
Total current assets			282,379				335,201
Property, plant and equipment, net			27,818				30,763
Goodwill			288,522				339,095
Intangible assets, net			229,155				249,489
Deferred debt issuance costs, less accumulated amortization of $4,227 at June 30, 2009 and $3,317 at December 31, 2008			6,221				8,251
Other non-current assets			18,286				21,537
Total assets		$	852,381			$	984,336
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable		$	36,920			$	48,699
Accrued expenses			56,817				57,109
Due to related party			3,121				604
Current portion, long-term debt			2,500				2,000
Current portion of workers’ compensation liability			28,667				26,916
Other current liabilities			2,636				4,042
Total current liabilities			130,661				139,370
Supplemental put obligation			4,994				13,411
Deferred income taxes			61,117				86,138
Long-term debt			75,000				151,000
Workers’ compensation liability			42,642				40,852
Other non-current liabilities			6,907				9,687
Total liabilities			321,321				440,458
Stockholders’ equity
Trust shares, no par value, 500,000 authorized; 36,625 issued and outstanding at June 30, 2009; 31,525 issued and outstanding at December 31, 2008			485,843				443,705
Accumulated other comprehensive loss			(2,330	)			(5,242	)
Accumulated earnings (deficit)			(22,144	)			25,984
Total stockholders’ equity attributable to Holdings			461,369				464,447
Noncontrolling interest (See Note B)			69,691				79,431
Total stockholders’ equity			531,060				543,878
Total liabilities and stockholders’ equity		$	852,381			$	984,336

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Operations
(unaudited)

		Three months Ended June 30,								Six months Ended June 30,
(in thousands, except per share data)		2009				2008				2009				2008
Net sales		$	118,178			$	128,738			$	230,090			$	243,882
Service revenues			169,350				270,172				332,352				506,163
Total revenues			287,528				398,910				562,442				750,045
Cost of sales			80,396				87,545				159,073				167,322
Cost of services			142,966				223,504				281,594				420,054
Gross profit			64,166				87,861				121,775				162,669
Operating expenses:
Staffing expense			17,539				27,470				38,479				52,540
Selling, general and administrative expense			34,239				41,842				71,994				78,524
Supplemental put expense (reversal)			(258	)			4,276				(8,417	)			6,594
Management fees			3,422				3,544				6,494				7,195
Amortization expense			6,250				6,131				12,446				12,261
Impairment expense			—				—				59,800				—
Operating income (loss)			2,974				4,598				(59,021	)			5,555
Other income (expense):
Interest income			16				266				77				581
Interest expense			(2,695	)			(4,674	)			(6,237	)			(9,346	)
Amortization of debt issuance costs			(440	)			(497	)			(910	)			(982	)
Loss on debt repayment			—				—				(3,652	)			—
Other income (expense), net			(611	)			102				(690	)			357
Loss from continuing operations before income taxes			(756	)			(205	)			(70,433	)			(3,835	)
Income tax expense (benefit)			(606	)			848				(28,050	)			555
Loss from continuing operations			(150	)			(1,053	)			(42,383	)			(4,390	)
Income from discontinued operations, net of income tax			—				2,577				—				4,607
Gain on sale of discontinued operations, net of income tax			—				72,296				—				72,296
Net income (loss)			(150	)			73,820				(42,383	)			72,513
Net income (loss) attributable to noncontrolling interest			(777	)			1,218				(15,692	)			705
Net income (loss) attributable to Holdings		$	627			$	72,602			$	(26,691	)		$	71,808
Amounts attributable to Holdings:
Income (loss) from continuing operations		$	627			$	(2,271	)		$	(26,691	)		$	(5,095	)
Discontinued operations, net of income tax			—				74,873				—				76,903
Net income (loss) attributable to Holdings		$	627			$	72,602			$	(26,691	)		$	71,808
Basic and fully diluted net income (loss) per share attributable to Holdings:
Continuing operations		$	0.02			$	(0.07	)		$	(0.83	)		$	(0.16	)
Discontinued operations			—				2.37				—				2.44
Basic and fully diluted net income (loss) per share attributable to Holdings		$	0.02			$	2.30			$	(0.83	)		$	2.28
Weighted average number of shares of trust stock outstanding — basic and fully diluted			32,758				31,525				32,145				31,525
Cash distributions declared per share		$	0.34			$	0.325			$	0.68			$	0.65

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)

																		Total
														Accumulated				Stockholders’
										Accumulated				Other				Equity					Non-				Total
		Number of								Earnings				Comprehensive				Attributable					Controlling				Stockholders’
(in thousands)		Shares				Amount				(Deficit)				Loss				to Holdings					Interest				Equity
Balance — December 31, 2008			31,525			$	443,705			$	25,984			$	(5,242	)		$	464,447				$	79,431			$	543,878
Net income (loss)			—				—				(26,691	)			—				(26,691	)				(15,692	)			(42,383	)
Other comprehensive income — cash flow hedge			—				—				—				2,912				2,912					—				2,912
Comprehensive income (loss)			—				—				(26,691	)			2,912				(23,779	)				(15,692	)			(39,471	)
Issuance of Trust shares, net of offering costs			5,100				42,138				—				—				42,138					—				42,138
Option activity attributable to noncontrolling interest			—				—				—								—					1,044				1,044
Contribution of noncontrolling interest related to Staffmark exchange (see Note O)																								4,859				4,859
Contribution from noncontrolling interest holders			—				—				—				—				—					49				49
Distributions paid			—				—				(21,437	)			—				(21,437	)				—				(21,437	)
Balance — June 30, 2009			36,625			$	485,843			$	(22,144	)		$	(2,330	)		$	461,369				$	69,691			$	531,060

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Cash Flows
(unaudited)

		Six months Ended June 30,
(in thousands)		2009				2008
Cash flows from operating activities:
Net income (loss)		$	(42,383	)		$	72,513
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Gain on sale of 2008 dispositions			—				(72,296	)
Depreciation expense			4,313				4,814
Amortization expense			12,446				13,404
Impairment expense			59,800				—
Amortization of debt issuance costs			910				982
Supplemental put expense (reversal)			(8,417	)			6,594
Noncontrolling interests related to discontinued operations			—				549
Noncontrolling stockholder charges			460				1,134
Deferred taxes			(26,489	)			(5,761	)
Loss on debt repayment			3,652				—
Other			(221	)			(162	)
Changes in operating assets and liabilities, net of acquisition:
Decrease in accounts receivable			25,518				7,722
Increase in inventories			(4,209	)			(5,070	)
Increase in prepaid expenses and other current assets			(2,594	)			(17,170	)
Increase/(decrease) in accounts payable and accrued expenses			(6,014	)			17,801
Net cash provided by operating activities			16,772				25,054
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired			(1,713	)			(172,550	)
Purchases of property and equipment			(1,787	)			(7,148	)
Proceeds from 2008 dispositions			—				153,070
Other investing activities			188				(303	)
Net cash used in investing activities			(3,312	)			(26,931	)
Cash flows from financing activities:
Proceeds from the issuance of Trust shares, net			42,138				—
Borrowings under Credit Agreement			2,000				80,000
Repayments under Credit Agreement			(77,500	)			(76,532	)
Distributions paid			(21,437	)			(20,492	)
Swap termination fee			(2,517	)			—
Changes in noncontrolling interest			4,908				—
Other			(373	)			(156	)
Net cash used in financing activities			(52,781	)			(17,180	)
Foreign currency adjustment			—				(80	)
Net decrease in cash and cash equivalents			(39,321	)			(19,137	)
Cash and cash equivalents — beginning of period			97,473				119,358
Cash and cash equivalents — end of period		$	58,152			$	100,221

Supplemental non-cash financing and investing activity for the six months ended June 30, 2008:

- Issuance of CBS Personnel’s common stock valued at $47.9 million in connection with the acquisition of Staffmark LLC.

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Notes to Condensed Consolidated Financial Statements (unaudited)
June 30, 2009

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-month and six-month periods ended June 30, 2009 and June 30, 2008, 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 prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. G.A.A.P.”) and 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 as amended for the year ended December 31, 2008.

Changes in basis of presentation

The 2008 financial information has been recast so that the basis of presentation is consistent with that of the 2009 financial information. This recast reflects (i) the financial condition and results of operations of Aeroglide Holdings, Inc. (“Aeroglide”) and Silvue Technologies Group, Inc. (“Silvue”) as discontinued operations for all periods presented; and (ii) the adoption of Financial Accounting Standards Board Statement No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51” (“SFAS No. 160”).

Seasonality

Earnings of certain of the Company’s business segments are seasonal in nature. Earnings from AFM Holdings Corporation (“AFM” or “American Furniture”) are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Earnings from CBS Personnel Holdings, Inc. (doing business as Staffmark) (“Staffmark”) are typically lower in the first quarter of each year than in other quarters due to reduced seasonal demand for temporary staffing services and to lower gross margins during that period associated with the front-end loading of certain payroll taxes and other payments associated with payroll paid to our employees. Earnings from HALO Lee Wayne LLC (“HALO”) are typically highest in the months of September through December of each year primarily as the result of calendar sales and holiday promotions. HALO generates approximately two-thirds of its operating income in the months of September through December.

Goodwill

The Company completed its 2008 annual goodwill impairment testing as of April 30, 2008 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). During the quarter ended March 31, 2009, the Company changed the date of its annual goodwill impairment testing to March 31 in order to move the impairment testing to a fiscal quarter ending date when data necessary to perform the annual testing is more readily available and more robust. The Company believes that the resulting change in accounting principle related to the annual testing date did not delay, accelerate, or avoid an impairment charge. The Company determined that the change in accounting principle related to the annual testing date is preferable under the circumstances and does not result in adjustments to the Company’s financial statements when applied retrospectively. Please refer to Note G for the results of the Company’s 2009 annual impairment testing.

Consolidation

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

Note C —Recent accounting pronouncements

In March 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination” (“FSP FAS 141(R)-1”), which amends the guidance in SFAS 141 (revised), “Business Combinations” (“SFAS 141R”) for the initial recognition and measurement, subsequent measurement, and disclosures of assets and liabilities arising from contingencies in a business combination. In addition, FSP FAS 141(R)-1 amends the existing guidance related to accounting for pre-existing contingent consideration assumed as part of the business combination. FSP FAS 141(R)-1 is effective for the Company January 1, 2009. The adoption of SFAS 141R and FSP FAS 141(R)-1 did not have a significant impact on the Company’s Condensed Consolidated Financial Statements. However, any business combinations entered into in the future may impact the Company’s Condensed Consolidated Financial Statements as a result of the potential earnings volatility due to the changes described above.

The FASB issued the following new accounting standards on April 9, 2009. The Company adopted each standard in the second quarter of 2009, and the adoption of these standards did not have a material impact on the Company’s consolidated financial statements.

FSP FAS No. 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“FSP No. 115-2 and FAS No. 124-2”)

FSP FAS No. 115-2 and FAS No. 124-2 modifies the other-than-temporary impairment guidance for debt securities through increased consistency in the timing of impairment recognition and enhanced disclosures related to the credit and noncredit components of impaired debt securities that are not expected to be sold. In addition, increased disclosures are required for both debt and equity securities regarding expected cash flows, credit losses, and an aging of securities with unrealized losses.

FSP FAS No. 107-1 and APB Opinion No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS No. 107-1 and APB Opinion No. 28-1”)

FSP FAS No. 107-1 and APB Opinion No. 28-1 requires fair value disclosures for financial instruments that are not reflected in the Condensed Consolidated Balance Sheets at fair value. Prior to the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the fair values of those assets and liabilities were disclosed only once each year. With the issuance of FSP FAS No. 107-1 and APB Opinion No. 28-1, the Company is now required to disclose this information on a quarterly basis, providing quantitative and qualitative information about fair value estimates for all financial instruments not measured in the Condensed Consolidated Balance Sheets at fair value.

FSP FAS No. 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (“FSP FAS No. 157-4”)

FSP FAS No. 157-4 clarifies the methodology used to determine fair value when there is no active market or where the price inputs being used represent distressed sales. FSP FAS No. 157-4 also reaffirms the objective of fair value measurement, as stated in FAS No. 157, “Fair Value Measurements,” which is to reflect how much an asset would be sold for in an orderly transaction. It also reaffirms the need to use judgment to determine if a formerly active market has become inactive, as well as to determine fair values when markets have become inactive. FSP FAS No. 157-4 will be applied prospectively.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which is effective for the Company June 30, 2009. SFAS 165 provides guidance for disclosing events that occur after the balance sheet date, but before financial statements are issued or available to be issued. The adoption of SFAS 165 did not have a significant impact on the Company’s Condensed Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46 (Revised December 2003), Consolidation of Variable Interest Entities” (“SFAS 167”), which is effective for the Company January 1, 2010. SFAS 167 revises factors that should be considered by a reporting entity when determining whether an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. SFAS 167 also includes revised financial statement disclosures regarding the reporting entity’s involvement and risk exposure. The Company does not expect the adoption of SFAS 167 will have an impact on the Company’s Condensed Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a replacement of FASB Statement No. 162” (“SFAS 168”), which is effective for the Company July 1, 2009. SFAS 168 does not alter current U.S. GAAP, but rather integrates existing accounting standards with other authoritative guidance. Under SFAS 168 there will be a single source of authoritative U.S. GAAP for nongovernmental entities and will supersede all other previously issued non-SEC accounting and reporting guidance. The adoption of SFAS 168 will not have an impact on the Company’s Condensed Consolidated Financial Statements.

Note D — Discontinued operations

2008 Dispositions

On June 24, 2008, the Company sold its majority owned subsidiary, Aeroglide, for a total enterprise value of $95.0 million. In addition, on June 25, 2008, the Company sold its majority owned subsidiary, Silvue, for a total enterprise value of $95.0 million. Summarized operating results for the 2008 dispositions for the three and six months ended June 30, 2008 were as follows (in thousands):

		Aeroglide								Silvue
		For the Period				For the Period				For the Period				For the Period
		April 1, 2008				January 1, 2008				April 1, 2008				January 1, 2008
		through Disposition				through Disposition				through Disposition				through Disposition
Net sales		$	18,138			$	34,294			$	6,000			$	11,465
Operating income			3,021				5,041				1,400				2,416
Other expense			(8	)			(11	)			(146	)			(83	)
Provision for income taxes			835				1,274				527				933
Noncontrolling interest			160				239				168				310
Income from discontinued operations (1)		$	2,018			$	3,517			$	559			$	1,090

Note E — Business segment data

At June 30, 2009, the Company had 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. ACI is headquartered in Aurora, Colorado.
	•		AFM 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 $999. AFM is a low-cost manufacturer and is able to ship any product in its line within 48 hours of receiving an order. AFM is headquartered in Ecru, Mississippi and its products are sold in the United States.
	•		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 Florida and its products are sold primarily in North America.
	•		Fox Factory Holding Corp. (“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. Fox is headquartered in Watsonville, California and its products are sold worldwide.
	•		HALO, operating under the brand names of HALO and Lee Wayne, serves as a one-stop shop for over 40,000 customers providing design, sourcing, and 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 1,000 account executives. HALO is headquartered in Sterling, Illinois.
	•		CBS Personnel Holdings, Inc. (doing business as Staffmark) (“Staffmark”), a human resources outsourcing firm, is a provider of temporary staffing services in the United States. Staffmark serves approximately 6,500 corporate and small business clients. Staffmark also offers employee leasing services, permanent staffing and temporary-to-permanent placement services. Staffmark is headquartered in Cincinnati, Ohio.

The tabular information that follows shows data of reportable segments reconciled to amounts reflected in the consolidated financial statements. The operations of each of the businesses are included in consolidated operating results as of their date of acquisition. Revenues from geographic locations outside the United States were not material for each reportable segment, except Fox, in each of the periods presented below. Fox recorded net sales to locations outside the United States of $21.0 million and $34.4 million for the three and six months ended June 30, 2009, respectively, and $24.7 million and $40.1 million for the three and six months ended June 30, 2008. There were no significant inter-segment transactions.

Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the performance of each business. Segment profit excludes acquisition related amounts and charges not pushed down to the segments, which are reflected in Corporate and other.

A disaggregation of the Company’s consolidated revenue and other financial data for the three and six months ended June 30, 2009 and 2008 is presented below (in thousands):

Net sales of business segments

		Three-months Ended June 30,								Six-months Ended June 30,
		2009				2008				2009				2008
ACI		$	10,775			$	14,293			$	22,763			$	28,578
American Furniture			34,080				31,261				75,584				68,441
Anodyne			14,007				12,977				25,611				24,444
Fox			29,855				34,415				49,960				57,852
Halo			29,461				35,792				56,172				64,567
Staffmark			169,350				270,172				332,352				506,163
Total			287,528				398,910				562,442				750,045
Reconciliation of segment revenues to consolidated revenues:
Corporate and other			—				—				—				—
Total consolidated revenues		$	287,528			$	398,910			$	562,442			$	750,045

Profit (loss) of business segments⁽¹⁾

		Three-months Ended June 30,								Six-months Ended June 30,
		2009				2008				2009				2008
ACI		$	4,400			$	4,455			$	8,024			$	9,238
American Furniture			1,957				1,218				4,159				4,926
Anodyne			1,727				1,099				2,871				1,555
Fox			2,025				3,160				1,176				2,962
Halo			(65	)			529				(2,117	)			(246	)
Staffmark (2)			(1,459	)			4,346				(59,930	)			5,755
Total			8,585				14,807				(45,817	)			24,190
Reconciliation of segment profit (loss) to consolidated loss from continuing operations before income taxes:
Interest expense, net			(2,679	)			(4,408	)			(6,160	)			(8,765	)
Other income (expense)			(611	)			102				(690	)			357
Corporate and other (3)			(6,051	)			(10,706	)			(17,766	)			(19,617	)
Total consolidated loss from continuing operations before income taxes		$	(756	)		$	(205	)		$	(70,433	)		$	(3,835	)

		Accounts Receivable				Accounts Receivable
		June 30,				December 31,
		2009				2008
ACI		$	2,310			$	3,131
American Furniture			12,101				11,149
Anodyne			7,128				6,919
Fox			15,283				10,201
Halo			18,151				29,358
Staffmark			90,009				108,101
Total			144,982				168,859
Reconciliation of segment data to consolidated totals:
Corporate and other			—				—
Total			144,982				168,859
Allowance for doubtful accounts			(4,962	)			(4,824	)
Total consolidated net accounts receivable		$	140,020			$	164,035

																		Depreciation and								Depreciation and
																		Amortization Expense								Amortization Expense
										Identifiable				Identifiable				for the Three-months								for the Six-months
		Goodwill				Goodwill				Assets				Assets				Ended June 30,								Ended June 30,
		June 30, 2009				Dec. 31, 2008				June 30, 2009(1)				Dec. 31, 2008(1)				2009				2008				2009				2008
ACI		$	50,717			$	50,659			$	19,932			$	20,309			$	947			$	917			$	1,890			$	1,826
American Furniture			41,435				41,435				61,144				67,752				971				950				1,960				1,861
Anodyne			19,555				22,747				22,379				23,784				691				692				1,357				1,353
Fox			31,372				31,372				81,793				83,246				1,601				1,625				3,249				3,518
Halo			39,553				40,184				48,950				46,291				839				773				1,694				1,475
Staffmark			89,715				139,715				87,673				84,947				1,992				2,166				4,020				3,878
Total			272,347				326,112				321,871				326,329				7,041				7,123				14,170				13,911
Reconciliation of segment data to consolidated total:
Corporate and other identifiable assets			—				—				101,968				154,877				1,318				1,194				2,589				2,391
Amortization of debt issuance costs			—				—				—				—				440				497				910				982
Goodwill carried at Corporate level (2)			16,175				12,983				—				—				—				—				—				—
Total		$	288,522			$	339,095			$	423,839			$	481,206			$	8,799			$	8,814			$	17,669			$	17,284

Note F — Property, plant and equipment and inventory

Property, plant and equipment is comprised of the following at June 30, 2009 and December 31, 2008 (in thousands):

						December 31,
		June 30, 2009				2008
Machinery, equipment and software		$	26,788			$	26,024
Office furniture and equipment			10,111				10,501
Leasehold improvements			6,134				6,030
			43,033				42,555
Less: accumulated depreciation			(15,215	)			(11,792	)
Total		$	27,818			$	30,763

Depreciation expense was $2.1 million and $4.3 million for the three and six months ended June 30, 2009, respectively, and $2.2 million and $4.0 million for the three and six months ended June 30, 2008, respectively.

Inventory is comprised of the following at June 30, 2009 and December 31, 2008 (in thousands):

		June 30,				December 31,
		2009				2008
Raw materials and supplies		$	38,613			$	34,405
Finished goods			17,944				17,571
Less: obsolescence reserve			(1,161	)			(1,067	)
Total		$	55,396			$	50,909

Note G — Goodwill and other intangible assets

Goodwill impairment

The Company completed its 2009 annual goodwill impairment testing in accordance with SFAS No. 142 as of March 31, 2009. This annual impairment test involved a two-step process. The first step of the impairment test involved comparing the fair values of the applicable reporting units with their aggregate carrying values, including goodwill.

The Company determined fair values for each of its reporting units using both the income and market approach. For purposes of the income approach, fair value was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. The Company used its internal forecasts to estimate future cash flows and included an estimate of long-term future growth rates based on its most recent views of the long-term outlook for each business. Actual results may differ from those assumed in the forecasts. Discount rates were derived by applying market derived inputs and analyzing published rates for industries comparable to the Company’s reporting units. The Company used discount rates that are commensurate with the risks and uncertainty inherent in the financial markets generally and in the internally developed forecasts. Discount rates used in these reporting unit valuations ranged from approximately 15% to 16%. Valuations using the market approach reflect prices and other relevant observable information generated by market transactions involving businesses comparable to the Company’s reporting units. The Company assesses the valuation methodology under the market approach based upon the relevance and availability of data at the time of performing the valuation and weighs the methodologies appropriately.

Based on the results of the annual impairment tests performed as of March 31, 2009, an indication of impairment existed at the Company’s Staffmark reporting unit. In each of the other businesses (reporting units) the result of the annual goodwill impairment test indicated that the fair value of the business exceeded its carrying value. Based on the results of the second step of the impairment test, the Company estimated that the carrying value of the Staffmark goodwill exceeded its fair value by approximately $50.0 million. As a result of this shortfall, the Company recorded a $50.0 million pretax goodwill impairment charge to impairment expense on the Condensed Consolidated Statement of Operations during the six months ended June 30, 2009. The carrying amount of Staffmark exceeded its fair value due to the recent and projected significant decrease in revenue and operating profit at Staffmark resulting from the negative impact on temporary staffing and permanent placement revenues due to the depressed macroeconomic conditions and downward employment trends. The results of the annual impairment tests performed as of April 30, 2008 indicated that the fair values of the reporting units (businesses) exceeded their carrying values and, therefore, goodwill was not impaired. Accordingly, there were no charges for goodwill impairment in the six months ended June 30, 2008.

Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a number of factors including actual operating results, future business plans, economic projections and market data. Actual results may differ from forecasted results. While no impairment was indicated in the Company’s step one goodwill impairment tests in the reporting units other than Staffmark, if current economic conditions persist longer or deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could change in future periods for each of the Company’s reporting units.

The goodwill impairment charge does not have any adverse effect on the covenant calculations or compliance under the Company’s Credit Agreement.

A reconciliation of the change in the carrying value of goodwill for the six months ended June 30, 2009 and the year ended December 31, 2008, is as follows (in thousands):

Balance at January 1, 2008		$	218,817
Acquisition of businesses			117,031
Acquired goodwill in connection with Anodyne CEO promissory note			3,191
Adjustment to purchase accounting			56
Balance at December 31, 2008			339,095
Impairment at the Staffmark business segment			(50,000	)
Acquisition of businesses (1)			1,009
Adjustment to purchase accounting			(1,582	)
Balance at June 30, 2009		$	288,522

Other intangible assets

In connection with the annual goodwill impairment testing, we tested other indefinite-lived intangible assets at our Staffmark reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair value of the CBS Personnel trade name (an indefinite-lived asset), based principally on the phase-out of the CBS Personnel trade name and rebranding of the reporting unit to Staffmark beginning in February 2009. The fair value of the CBS Personnel trade name was determined by applying the income approach to forecasted revenues at the Staffmark reporting unit. The result of this

analysis indicated that the carrying value of the trade name ($10.6 million) exceeded its fair value ($0.8 million) by approximately $9.8 million. Therefore, an impairment charge of $9.8 million was recorded to impairment expense on the Condensed Consolidated Statement of Operations for the six months ended June 30, 2009. The remaining balance ($0.8 million) of the CBS Personnel trade name will be amortized over 2.75 years.

Other intangible assets subject to amortization are comprised of the following at June 30, 2009 and December 31, 2008 (in thousands):

										Weighted
		June 30,				December 31,				Average
		2009				2008				Useful Lives
Customer relationships		$	189,391			$	187,669				12
Technology			37,959				37,959				8
Trade names, subject to amortization			25,300				24,500				12
Licensing and non-compete agreements			4,461				4,416				3
Distributor relations and backlog			1,380				1,380				4
			258,491				255,924
Accumulated amortization customer relations			(40,507	)			(32,287	)
Accumulated amortization technology			(8,874	)			(6,388	)
Accumulated amortization trade names, subject to amortization			(2,012	)			(1,531	)
Accumulated amortization licensing and non-compete agreements			(3,562	)			(2,369	)
Accumulated amortization distributor relations and backlog			(713	)			(630	)
Total accumulated amortization			(55,668	)			(43,205	)
Trade names, not subject to amortization (1)			26,332				36,770
Total		$	229,155			$	249,489

Amortization expense was $6.3 million and $12.4 million for the three and six months ended June 30, 2009, respectively, and $6.1 million and $12.3 million for the three and six months ended June 30, 2008, respectively.

Note H — Debt

At June 30, 2009, the Company had $77.0 million outstanding of its Term Loan Facility under its Credit Agreement. The Credit Agreement provides for a Revolving Credit Facility totaling $340 million which matures in December 2012 and a Term Loan Facility totaling $77.0 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 $10 million, subject to certain restrictions and Lender approval. The fair value of the Term Loan Facility as of June 30, 2009 was approximately $68.3 million, and was calculated based on interest rates that are currently available to the Company for issuance of debt with similar terms and remaining maturities.

The Company had $0.5 million outstanding borrowings under its Revolving Credit Facility at June 30, 2009. The Company had approximately $183.3 million in borrowing base availability under its Revolving Credit Facility at June 30, 2009. Letters of credit outstanding at June 30, 2009 totaled approximately $68.7 million. At June 30, 2009, the Company was in compliance with all covenants.

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 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.

On February 18, 2009, the Company reduced its debt and repaid at par, from cash on its balance sheet, $75.0 million of debt under its Term Loan Facility due in December of 2013. In connection with the repayment, the Company also terminated $70.0 million of its $140.0 million interest rate swap at a cost of approximately $2.5 million. The Company reclassified this amount from accumulated other comprehensive loss into earnings during the first quarter of 2009. In addition, the Company

expensed $1.1 million of capitalized debt issuance costs in the first quarter of 2009 in connection with the debt repayment. Both of these amounts are included in Loss on debt repayment in the Condensed Consolidated Statement of Operations.

Note I — Fair value measurement

The Company adopted SFAS No. 157, “Fair Value Measurements,” (“SFAS No. 157”), as of January 1, 2008. SFAS No. 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 the Company’s 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, 2009 and December 31, 2008 (in thousands):

		Fair Value Measurements at June 30, 2009
		Carrying
Liabilities:		Value				Level 1				Level 2				Level 3
Derivative liability — interest rate swap		$	2,330			$	—			$	2,330			$	—
Supplemental put obligation			4,994				—				—				4,994
Stock option of minority shareholder (1)			200				—				—				200

		Fair Value Measurements at December 31, 2008
		Carrying
Liabilities:		Value				Level 1				Level 2				Level 3
Derivative liability — interest rate swap		$	5,242			$	—			$	5,242			$	—
Supplemental put obligation			13,411				—				—				13,411
Stock option of minority shareholder			200				—				200				—

A reconciliation of the change in the carrying value of our level 3, supplemental put liability from January 1, 2009 through June 30, 2009 and from January 1, 2008 through June 30, 2008 is as follows (in thousands):

		2009				2008
Balance at January 1		$	13,411			$	21,976
Supplemental put expense (reversal)			(8,159	)			2,318
Balance at April 1			5,252				24,294
Supplemental put expense (reversal)			(258	)			4,276
Balance at June 30		$	4,994			$	28,570

Valuation Techniques

The Company’s derivative instrument consists of an over-the-counter (OTC) interest rate swap 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. The stock option of the noncontrolling shareholder was determined based on inputs that were not readily available in public markets or able to be derived from information available in publicly quoted markets. As such, the Company categorized its interest rate swap contract as Level 2 and the stock option of the noncontrolling shareholder as Level 3.

The Company’s Manager, CGM is the owner of 100% of the Allocation Interests in the Company. Concurrent with our initial public offering in 2006 (“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 the Company estimates the fair value of its businesses using a discounted future cash flow model for the purpose of determining

the potential liability associated with the Supplemental Put Agreement. The Company uses 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 the Company’s businesses and (ii) financial and market data of comparable merged, sold or acquired companies. Any change in the potential liability is accrued currently as an 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.

During the first quarter of 2009, the inputs utilized in connection with the fair value analysis of the Stock option of noncontrolling shareholder were no longer available in publicly quoted markets. As a result, the inputs were unobservable and the fair value was moved from the Level 2 column to the Level 3 column of the table above. The following table details the change in the Company’s Level 3 liabilities (in thousands):

Balance at January 1, 2009		$	—
Transfer in from Level 2			200
Balance at June 30, 2009		$	200

The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of June 30, 2009 (in thousands):

		Fair Value Measurements at June 30, 2009																	Gains/(losses)
		Carrying																	Three months Ended June 30,								Six months Ended June 30,
Assets:		Value				Level 1				Level 2				Level 3					2009				2008				2009				2008
Goodwill (1)		$	88,640			$	—			$	—			$	88,640				$	—			$	—			$	(50,000	)		$	—

Note J — 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’s objective for entering into the Swap is to manage the interest rate exposure on its Term Loan Facility by fixing its interest rate at 7.35% and avoiding the potential variability of interest rate fluctuations. 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 loss. For the three and six months ended June 30, 2009, the Company recorded a $0.3 million gain and a $0.4 million gain to accumulated other comprehensive loss, respectively. For the three and six months ended June 30, 2008, the Company recorded a $3.7 million gain and a $1.2 million gain to accumulated other comprehensive loss, respectively.

On February 18, 2009, the Company terminated a portion of its Swap in connection with the repayment of $75.0 million of the Term Loan Facility. In connection with the termination, the Company reclassified $2.5 million from accumulated other comprehensive loss into earnings. This reclassification is included in Loss on debt repayment in the Condensed Consolidated Results of Operations.

The following table provides the fair value of the Company’s cash flow hedge as well as its location on the balance sheet as of June 30, 2009 and December 31, 2008 (in thousands):

		June 30,				December 31,				Balance Sheet
Liability		2009				2008				Location
Cash flow hedge current		$	1,565			$	2,691			Other current liabilities
Cash flow hedge non-current			765				2,551			Other non-current liabilities
Total		$	2,330			$	5,242

Note K — Comprehensive income (loss)

The following table sets forth the computation of comprehensive income (loss) for the three and six months ended June 30, 2009 and 2008 (in thousands):

		Three-months Ended								Six-months Ended
		June 30,								June 30,
		2009				2008				2009				2008
Net income (loss) attributable to Holdings		$	627			$	72,602			$	(26,691	)		$	71,808
Other comprehensive income:
Unrealized gain on cash flow hedge			266				3,667				395				1,240
Reclassification adjustment for cash flow hedge losses realized in net income (loss)			—				—				2,517				—
Total other comprehensive income			266				3,667				2,912				1,240
Total comprehensive income (loss)		$	893			$	76,269			$	(23,779	)		$	73,048

Note L — 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, 2009, the Company paid a distribution of $0.34 per share to holders of record as of January 23, 2009.

•

On April 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of April 23, 2009.

•

On July 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of July 24, 2009.

In connection with the adoption of SFAS No. 160 on January 1, 2009, the Company reclassified noncontrolling interest to stockholders’ equity. SFAS No. 160 was applied prospectively with the exception of presentation and disclosure requirements which shall be applied retrospectively for all periods presented.

On June 9, 2009, the Company completed a secondary offering of 5,100,000 Trust shares at an offering price of $8.85 per share. The net proceeds to the Company, after deducting underwriter’s discount and offering costs totaled approximately $42.1 million. The Company plans to use the proceeds for general corporate purposes.

Note M — Warranties

The Company’s Fox and Anodyne business segments estimate their exposure to warranty claims based on both current and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded warranty liability quarterly and adjusts the amount as necessary.

A reconciliation of the change in the carrying value of the Company’s warranty liability for the six months ended June 30, 2009 and the year ended December 31, 2008 is as follows (in thousands):

		Six Months				Year Ended
		Ended June 30,				December 31,
		2009				2008
Beginning balance		$	1,541			$	1,023
Accrual			775				2,050
Warranty payments			(651	)			(1,532	)
Ending balance		$	1,665			$	1,541

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.

Note O — Noncontrolling interest

In April 2009, the Company amended the Staffmark intercompany credit agreement which, among other things, recapitalized a portion of Staffmark’s long-term debt by exchanging $35.0 million of debt for Staffmark common stock. As a result of this transaction, the Company’s ownership percentage of the outstanding stock of Staffmark increased to 75.7% on a primary basis and 73.3% on a fully diluted basis, and the noncontrolling interest in Staffmark decreased from 33.7% to 24.3%. In addition, as a result of the exchange the Company received cash from a noncontrolling shareholder and recorded an increase to noncontrolling interest of $4.9 million. The receipt of the noncontrolling shareholder contribution is included in Changes in noncontrolling interest on the Company’s Condensed Consolidated Statement of Cash Flows.

Note P — Subsequent events

The Company has evaluated subsequent events through the filing of this Form 10-Q on August 10, 2009, and determined there have not been any events that have occurred that would require adjustments to the unaudited Condensed Consolidated Financial Statements.

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, 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 $60 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 nearly 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 Revolving Credit Facility, 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, especially in the current stagnant credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.

We are beginning to see a recent uptick in deal flow activity compared to the previous quarter even though deal flow is significantly below activity experienced in prior years.

Areas for focus in 2009

The areas of focus for 2009, which are generally applicable to each of our businesses, include:

•

Taking advantage, where possible, of the current economic downturn by growing market share in each of our market niche leading companies at the expense of less well capitalized competitors;

•

Achieving sales growth, technological excellence and manufacturing capability through global expansion;

•

Continuing to grow through disciplined, strategic acquisitions and rigorous integration processes;

•

Aggressively pursuing expense reduction and cost savings through contraction in discretionary spending and capital expenditures, and reductions in workforce and production levels in response to lower production volume;

•

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; and

•

Sharply curtailing costs to help counteract the current global economic crisis.

We do not know when economic conditions may improve, but we believe we are well positioned to fully participate in a market recovery when it occurs. In the meantime, we continue aggressive efforts to maximize liquidity and reduce costs and will take additional actions as market conditions warrant.

We are dependent on the earnings of, and cash receipts from, the businesses that we own to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any noncontrolling interests in these businesses, will be available:

	•		First, to meet capital expenditure requirements, management fees and corporate overhead expenses;
	•		Second, to fund distributions from the businesses to the Company; and
	•		Third, to be distributed by the Trust to shareholders.

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 Staffmark		Anodyne		HALO		American Furniture		Fox

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

														Pro-forma
		Three months				Three months				Six months				Six months
		ended				ended				ended				ended
		June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
Net sales		$	287,528			$	398,910			$	562,442			$	781,118
Cost of sales			223,362				311,049				440,667				613,870
Gross profit			64,166				87,861				121,775				167,248
Staffing, selling, general and administrative expense			51,778				69,312				110,473				136,028
Fees to manager			3,422				3,544				6,494				7,230
Supplemental put expense			(258	)			4,276				(8,417	)			6,594
Amortization of intangibles			6,250				6,131				12,446				12,562
Impairment expense			—				—				59,800				—
Income (loss) from operations		$	2,974			$	4,598			$	(59,021	)		$	4,834

Net sales

On a consolidated basis, net sales decreased $111.4 million and $218.7 million in the three and six month periods ended June 30, 2009 compared to the same periods in 2008. These decreases for both the three and six month periods are due principally to decreased revenues at Staffmark, Advanced Circuits, Fox and Halo segments offset in part by increased net sales at American Furniture and Anodyne. Revenues at Staffmark decreased $100.8 million and $204.9 million during the three and six month periods ended June 30, 2009 compared to the same periods in 2008. Refer to “Results of Operations — Our Businesses” 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 some cases, 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 decreased approximately $87.7 million and $173.2 million in the three and six month periods ended June 30, 2009, respectively. These decreases are due almost entirely to the corresponding decrease in net sales. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of cost of sales.

Staffing, selling, general and administrative expense

On a consolidated basis, staffing, selling, general and administrative expense decreased approximately $17.5 million and $25.6 million in the three and six month periods ended June 30, 2009, respectively. These decreases are due principally to cost cutting measures enacted at the segment level in response to the softening economy and its negative impact on sales and operating income. Additionally, costs directly tied to sales, such as commission expense declined as a direct result of the decrease in net sales. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of staffing, selling, general and administrative expense by segment. At the corporate level selling, general and administrative costs decreased approximately $0.2 million in the three and six months ended June 30, 2009 compared to the same periods in 2008.

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, 2009 and 2008 we incurred approximately $3.4 million and $3.5 million, respectively, in expense for these fees. For the six-months ended June 30, 2009 and 2008 we incurred approximately $6.5 million and $7.2 million, respectively, in expense for these fees. The

decrease in management fees for the six months ended June 30, 2009 is due principally to the decrease in consolidated adjusted net assets as of June 30, 2009 resulting from the $75.0 million pay down of our Term Loan Facility with available cash in February 2009.

Supplemental put expense

Concurrent with the 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 reversed approximately $0.3 million and $8.4 million in non-cash charges during the three and six-months ended June 30, 2009, respectively, based on lower valuations attributed to some of our subsidiaries compared to valuations determined at the beginning of the respective period. The decrease in supplemental put expense in both the three and six months ended June 30, 2009 compared to the same periods in 2008 is attributable to the decrease in the fair value of our businesses during 2009.

Impairment expense

Based on the results of our annual impairment tests performed as of March 31, 2009 an indication of impairment existed at the Staffmark reporting unit. In each of our other businesses (reporting units) the result of the annual goodwill impairment test indicated that the fair value of the business exceeded its carrying value. Based on the results of the second step of the impairment test at Staffmark, we estimated that the carrying value of Staffmark goodwill exceeded its fair value by approximately $50.0 million. As a result of this shortfall, we recorded a $50.0 million pretax goodwill impairment charge for the six months ended June 30, 2009. The results of the annual impairment tests performed as of April 30, 2008 indicated that the fair values of the reporting units (businesses) exceeded their carrying values and, therefore, goodwill was not impaired. Accordingly, there were no charges for goodwill impairment in the six months ended June 30, 2008.

In connection with the annual goodwill impairment we tested other indefinite-lived intangible assets at our Staffmark reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair value of the CBS Personnel trade name, based principally on the discontinuance of the CBS Personnel trade name and rebranding of the reporting units business to Staffmark beginning in February 2009. During the six months ended June 30, 2009, we recorded an asset impairment charge of approximately $9.8 million at the corporate level to decrease the carrying value of the CBS personnel trade name to its fair value.

Results of Operations — Our Businesses

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, 2009 and June 30, 2008, which we believe the most 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 remained strong in spite of lagging sales, 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 despite lagging sales in 2009 resulting from the global economic softening.

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, 2009 and June 30, 2008.

		Three-months ended								Six-months ended
(in thousands)		June 30, 2009				June 30, 2008				June 30, 2009				June 30, 2008
Net sales		$	10,775			$	14,293			$	22,763			$	28,578
Cost of sales			4,603				6,104				9,654				12,168
Gross profit			6,172				8,189				13,109				16,410
Selling, general and administrative expense			979				2,964				3,501				5,622
Fees to manager			125				124				250				250
Amortization of intangibles			668				646				1,334				1,300
Income from operations		$	4,400			$	4,455			$	8,024			$	9,238