Compass Diversified Holdings - Quarter Report: 2011 March (Form 10-Q)

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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 March 31, 2011


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

(Exact name of registrant as specified in its charter)


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

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o 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


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

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 May 1, 2011, there were 46,725,000 shares of Compass Diversified Holdings outstanding.

COMPASS DIVERSIFIED HOLDINGS

QUARTERLY REPORT ON FORM 10-Q
For the period ended March 31, 2011

TABLE OF CONTENTS


	Page
	Number
Forward-looking Statements		4
Part I Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010		5
Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 (unaudited)		6
Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2011 (unaudited)		7
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (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		41

Item 4. Controls and Procedures		41

Part II Other Information
Item 1. Legal Proceedings		42
Item 1A. Risk Factors		42
Item 6. Exhibits		43
Signatures		44
Exhibit Index		46
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

NOTE TO READER

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

	•		the “Trust” and “Holdings” refer to Compass Diversified Holdings;

	•		“businesses”, “operating segments”, “subsidiaries” and “reporting units” 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, Staffmark Holdings, Inc. (“Staffmark”), Crosman Acquisition Corporation, Compass AC Holdings, Inc. and Silvue Technologies Group, Inc.;

	•		the “2010 acquisitions” refer to, collectively, the acquisitions of Liberty Safe and Security Products, LLC and ERGObaby Carrier, Inc.;

	•		the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of December 21, 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 $73.5 million Term Loan Facility, as of March 31, 2011, 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 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 supplemental 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


	March 31,			December 31,
(in thousands)	2011			2010
	(unaudited)
Assets
Current assets:
Cash and cash equivalents	$	17,120		$	13,536
Accounts receivable, less allowances of $4,554 at March 31, 2011 and $5,481 at December 31, 2010		204,237			208,487
Inventories		77,831			77,412
Prepaid expenses and other current assets		29,343			33,904

Total current assets		328,531			333,339
Property, plant and equipment, net		35,407			33,484
Goodwill		319,766			325,851
Intangible assets, net		260,099			269,672
Deferred debt issuance costs, less accumulated amortization of $7,341 at March 31, 2011 and $6,882 at December 31, 2010		3,389			3,822
Other non-current assets		23,861			17,873

Total assets	$	971,053		$	984,041


Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	53,199		$	53,197
Accrued expenses		95,412			74,302
Due to related party		3,380			2,692
Distribution payable		16,821			—
Current portion of supplemental put obligation		6,300			—
Current portion, long-term debt		2,000			2,000
Current portion of workers’ compensation liability		17,943			18,170
Other current liabilities		689			1,043

Total current liabilities		195,744			151,404
Supplemental put obligation		41,526			44,598
Deferred income taxes		73,606			74,457
Long-term debt		78,500			94,000
Workers’ compensation liability		40,902			40,588
Other non-current liabilities		2,534			3,084

Total liabilities		432,812			408,131

Stockholders’ equity
Trust shares, no par value, 500,000 authorized; 46,725 shares issued and outstanding at March 31, 2011 and December 31, 2010		638,759			638,763
Accumulated other comprehensive loss		—			(143	)
Accumulated deficit		(190,232	)		(150,550	)

Total stockholders’ equity attributable to Holdings		448,527			488,070
Noncontrolling interest		89,714			87,840

Total stockholders’ equity		538,241			575,910

Total liabilities and stockholders’ equity	$	971,053		$	984,041

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Operations

(unaudited)


	Three months ended March 31,
(in thousands, except per share data)	2011			2010
Net sales	$	177,326		$	136,218
Service revenues		246,799			217,401

Total revenues		424,125			353,619
Cost of sales		119,687			94,067
Cost of services		214,850			188,526

Gross profit		89,588			71,026

Operating expenses:
Staffing expense		22,115			19,607
Selling, general and administrative expense		46,397			42,381
Supplemental put expense		3,228			14,426
Management fees		3,843			3,664
Amortization expense		7,702			6,123
Impairment expense		7,700			—

Operating loss		(1,397	)		(15,175	)

Other income (expense):
Interest income		2			15
Interest expense		(2,539	)		(2,701	)
Amortization of debt issuance costs		(459	)		(418	)
Other income (expense), net		246			180

Loss before income taxes		(4,147	)		(18,099	)
Provision (benefit) for income taxes		2,420			(2,812	)

Net loss		(6,567	)		(15,287	)
Net income attributable to noncontrolling interest		407			682

Net loss attributable to Holdings	$	(6,974	)	$	(15,969	)



Basic and fully diluted loss per share attributable to Holdings
	$	(0.15	)	$	(0.44	)


Weighted average number of shares of trust stock outstanding — basic and fully diluted		46,725			36,625

Cash distributions declared per share	$	0.36		$	0.34

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statement of Stockholders’ Equity
(unaudited)


												Total
									Accumulated			Stockholders’
									Other			Equity			Non-		Total
	Number of					Accumulated			Comprehensive			Attributable			Controlling		Stockholders’
(in thousands)	Shares		Amount			Deficit			Loss			to Holdings			Interest		Equity
Balance — January 1, 2011		46,725	$	638,763		$	(150,550	)	$	(143	)	$	488,070		$	87,840	$	575,910
Net loss		—		—			(6,974	)		—			(6,974	)		407		(6,567	)
Other comprehensive income — cash flow hedge gain		—		—			—			143			143			—		143

Comprehensive income (loss)		—		—			(6,974	)		143			(6,831	)		407		(6,424	)
Offering costs from the issuance of Trust Shares in 2010		—		(4	)		—			—			(4	)		—		(4	)
Option activity attributable to noncontrolling interest holders		—		—			—			—			—			1,467		1,467
Distributions declared and unpaid		—		—			(16,821	)		—			(16,821	)		—		(16,821	)
Distributions paid		—		—			(15,887	)		—			(15,887	)		—		(15,887	)

Balance — March 31, 2011		46,725	$	638,759		$	(190,232	)	$	—		$	448,527		$	89,714	$	538,241

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Condensed Consolidated Statements of Cash Flows

(unaudited)


	Three months ended March 31,
(in thousands)	2011			2010
Cash flows from operating activities:
Net loss	$	(6,567	)	$	(15,287	)

Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation expense		2,427			1,882
Amortization expense		7,887			6,123
Impairment expense		7,700			—
Amortization of debt issuance costs		459			418
Supplemental put expense		3,228			14,426
Noncontrolling stockholder charges and other		852			4,370
Deferred taxes		(993	)		(2,121	)
Other		292			(210	)
Changes in operating assets and liabilities, net of acquisition:
Decrease in accounts receivable		5,041			310
Increase in inventories		(654	)		(49	)
Increase in prepaid expenses and other current assets		(3,302	)		(724	)
Increase in accounts payable and accrued expenses		23,388			7,241

Net cash provided by operating activities		39,758			16,379


Cash flows from investing activities:
Acquisitions, net of cash acquired		—			(83,708	)
Purchases of property and equipment		(4,565	)		(964	)
Other investing activities		62			14

Net cash used in investing activities		(4,503	)		(84,658	)


Cash flows from financing activities:
Borrowings under Credit Agreement		—			71,500
Repayments under Credit Agreement		(15,500	)		(2,000	)
Distributions paid		(15,887	)		(12,452	)
Net proceeds provided by noncontrolling interest		—			2,085
Debt issuance costs		—			(155	)
Other		(284	)		(50	)

Net cash provided by (used in) financing activities		(31,671	)		58,928

Net increase (decrease) in cash and cash equivalents		3,584			(9,351	)
Cash and cash equivalents — beginning of period		13,536			31,495

Cash and cash equivalents — end of period	$	17,120		$	22,144


Supplemental cash flow disclosure of financing activities:
Dividends declared but not yet paid	$	16,821		$	—

See notes to condensed consolidated financial statements.

Compass Diversified Holdings

Notes to Condensed Consolidated Financial Statements (unaudited)
March 31, 2011

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”).

The Company is a controlling owner of eight businesses, or operating segments, at March 31, 2011. The operating segments are as follows: Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), AFM Holdings Corporation (“AFM” or “American Furniture”), The ERGO Baby Carrier, Inc. (“ERGObaby”), Fox Factory, Inc. (“Fox”), HALO Lee Wayne LLC (“HALO”), Liberty Safe and Security Products, LLC (“Liberty Safe” or “Liberty”), Staffmark Holdings, Inc. (“Staffmark”), and Tridien Medical (“Tridien”). Refer to Note D for further discussion of the operating segments.

Note B — Presentation and principles of consolidation

The condensed consolidated financial statements for the three-month periods ended March 31, 2011 and March 31, 2010, 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 or any subsequent interim period. The condensed consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 for the year ended December 31, 2010.

Seasonality

Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from AFM are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Earnings from 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 associated with payroll paid to its employees. Earnings from 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. Revenue and earnings from Fox are typically highest in the third quarter, coinciding with the delivery of product for the new bike year.

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 January 2010, the FASB issued amended guidance to enhance disclosure requirements related to fair value measurements. The amended guidance for Level 1 and Level 2 fair value measurements was effective for the Company January 1, 2010. The amended guidance for Level 3 fair value measurements was effective for the Company January 1, 2011. The guidance requires disclosures of amounts and reasons for transfers in and out of Level 1 and Level 2 recurring fair value measurements as well as additional information related to activities in the reconciliation of Level 3 fair value measurements. The guidance expanded the disclosures related to the level of disaggregation of assets and liabilities and information about inputs and valuation techniques. The adoption of this amended guidance did not have a significant impact on the condensed consolidated financial statements.

In December 2010, the FASB issued amended guidance for performing goodwill impairment tests, which was effective for the Company January 1, 2011. The amended guidance requires reporting units with zero or negative carrying amounts to be

assessed to determine if it is more likely than not that goodwill impairment exists. As part of this assessment, entities should consider all qualitative factors that could impact the carrying value. The adoption of this amended guidance did not have a significant impact on the condensed consolidated financial statements.

Note D — Operating segment data

At March 31, 2011, the Company had eight reportable operating segments. Each operating segment represents an acquisition. The Company’s operating 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:

	•		Advanced Circuits, an electronic components manufacturing company, is a provider of prototype, quick-turn and production rigid printed circuit boards. ACI manufactures and delivers custom printed circuit boards to customers mainly in North America. ACI is headquartered in Aurora, Colorado.

	•		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 $1,399. 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.

	•		ERGObaby is a premier designer, marketer and distributor of babywearing products and accessories. ERGObaby’s reputation for product innovation, reliability and safety has led to numerous awards and accolades from consumer surveys and publications. ERGObaby offers a broad range of wearable baby carriers and related products that are sold through more than 900 retailers and web shops in the United States and internationally. ERGObaby is headquartered in Pukalani, Hawaii.

	•		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 serves as a one-stop shop for approximately 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 870 account executives. HALO is headquartered in Sterling, Illinois.

	•		Liberty Safe is a designer, manufacturer and marketer of premium home and gun safes in North America. From its over 200,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Liberty is headquartered in Payson, Utah.

	•		Staffmark, a national provider of contingent workforce solutions that serves the temporary staffing needs of employers throughout the United States, provides a full spectrum of light industrial and clerical staffing solutions. Staffmark is headquartered in Cincinnati, Ohio.

	•		Tridien is a leading designer and manufacturer of powered and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is headquartered in Coral Springs, Florida and its products are sold primarily in North America.

The tabular information that follows shows data of each of the operating segments reconciled to amounts reflected in the condensed consolidated financial statements. The operations of each of the operating segments are included in consolidated operating results as of their date of acquisition. Revenues from geographic locations outside the United States were not material for any operating segment, except Fox and ERGObaby, in each of the periods presented below. Fox recorded net sales to locations outside the United States, principally Europe and Asia, of $27.9 million and $21.4 million for the three months ended March 31, 2011 and 2010, respectively. Of the Asian sales, sales to Taiwan totaled $8.6 million and $8.1 million for the three months ended March 31, 2011 and 2010, respectively. ERGObaby recorded net sales to locations outside the United States of $8.1 million for the three months ended March 31, 2011. 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 certain charges from the acquisitions of the Company’s initial businesses 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 months ended March 31, 2011 and 2010 is presented below (in thousands):

Net sales of operating segments


	Three Months Ended March 31,
	2011		2010
ACI	$	20,293	$	14,484
American Furniture		35,940		43,980
ERGObaby		11,471		—
Fox		42,880		32,732
Halo		32,686		29,704
Liberty		20,203		—
Staffmark		246,799		217,402
Tridien		13,853		15,317

Total		424,125		353,619
Reconciliation of segment revenues to consolidated revenues:
Corporate and other		—		—

Total consolidated revenues	$	424,125	$	353,619

Profit (loss) of operating segments ⁽¹⁾


	Three Months Ended March 31,
	2011			2010
ACI	$	7,082		$	944
American Furniture (2)		(7,998	)		2,713
ERGObaby		2,384			—
Fox		5,024			2,862
Halo		(451	)		(775	)
Liberty		896			(1,450	)
Staffmark		(336	)		(832	)
Tridien		1,243			2,234

Total		7,844			5,696
Reconciliation of segment profit to consolidated loss before income taxes:
Interest expense, net		(2,537	)		(2,686	)
Other income		246			180
Corporate and other (3)		(9,700	)		(21,289	)

Total consolidated loss before income taxes	$	(4,147	)	$	(18,099	)


(1)		Segment profit (loss) represents operating income (loss).

(2)		Includes $7.7 million of goodwill and intangible asset impairment charges during the three months ended March 31, 2011. See Note F.

(3)		Includes fair value adjustments related to the supplemental put liability and the call option of a noncontrolling shareholder. See Note H.


	Accounts			Accounts
	Receivable			Receivable
	March 31, 2011			December 31, 2010
*Accounts receivable*
ACI	$	5,815		$	5,694
American Furniture		16,007			13,543
ERGObaby		4,911			3,273
Fox		15,871			17,482
Halo		20,740			29,761
Liberty		12,378			9,720
Staffmark		126,735			128,491
Tridien		6,334			6,004


Total		208,791			213,968

Reconciliation of segment to consolidated totals:
Corporate and other		—			—

Total		208,791			213,968
Allowance for doubtful accounts		(4,554	)		(5,481	)

Total consolidated net accounts receivable	$	204,237		$	208,487



									Depreciation and
					Identifiable				Amortization Expense
	Goodwill		Goodwill		Assets		Identifiable		for the Three Months
	Mar. 31,		Dec. 31,		Mar. 31,		Assets		Ended Mar. 31,
	2011		2010		2011⁽¹⁾		Dec. 31, 2010⁽¹⁾		2011		2010
*Goodwill and identifiable assets of operating segments*
ACI	$	57,615	$	57,615	$	28,851	$	28,919	$	1,102	$	905
American Furniture (3)		—		5,900		53,813		60,067		771		776
ERGObaby		33,397		33,397		58,554		59,248		684		—
Fox		31,372		31,372		86,030		82,295		1,625		1,526
Halo		39,252		39,252		44,466		41,304		812		840
Liberty		32,685		32,870		37,946		40,917		1,612		—
Staffmark		89,715		89,715		76,304		77,830		1,883		1,895
Tridien		19,555		19,555		18,844		18,774		581		608

Total		303,591		309,676		404,808		409,354		9,070		6,550
Reconciliation of segment to consolidated total:
Corporate and other identifiable assets		—		—		42,242		40,349		1,244		1,455
Amortization of debt issuance costs		—		—		—		—		459		418
Goodwill carried at Corporate level ⁽²⁾		16,175		16,175		—		—		—		—

Total	$	319,766	$	325,851	$	447,050	$	449,703	$	10,773	$	8,423


(1)		Does not include accounts receivable balances per schedule above.

(2)		Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the segments. This amount is allocated back to the respective segments for purposes of goodwill impairment testing.

(3)		Refer to Note F for discussion regarding American Furniture’s goodwill impairment recorded during the three months ended March 31, 2011.

Other segment

Staffmark

On April 12, 2011, Staffmark filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of Staffmark’s common stock. The Company currently owns approximately 68.5% of Staffmark’s common stock, on a fully diluted basis.

ERGObaby

In connection with the acquisition of ERGObaby in September 2010, the Company recorded contingent consideration of $0.2 million during 2010, its then fair value. The contingent consideration relates to the $2.0 million additional cash payment the sellers would be entitled to in the event ERGObaby’s net sales, as determined on a consolidated basis in accordance with U.S. GAAP, for the fiscal year ending December 31, 2011 are equal to or greater than a contractually agreed upon fixed amount. If the sellers do not reach this sales goal for the fiscal year ended December 31, 2011, the sellers would not be entitled to any payment. During the three months ended March 31, 2011, the Company recorded an increase in the fair value of the contingent consideration of $0.5 million associated with the increased probability of obtaining the contractually agreed upon sales goal for 2011. Refer to Note H for valuation techniques applied to the contingent consideration liability.

Note E — Property, plant and equipment and inventory

Property, plant and equipment is comprised of the following at March 31, 2011 and December 31, 2010 (in thousands):


	March 31,			December 31,
	2011			2010
Machinery, equipment and software	$	43,408		$	42,421
Office furniture and equipment		3,544			2,812
Leasehold improvements		11,688			9,551

		58,640			54,784
Less: accumulated depreciation		(23,233	)		(21,300	)

Total	$	35,407		$	33,484

Depreciation expense was $2.4 million and $1.9 million for the three months ended March 31, 2011 and 2010, respectively.

Inventory is comprised of the following at March 31, 2011 and December 31, 2010 (in thousands):


	March 31,			December 31,
	2011			2010
Raw materials and supplies	$	51,414		$	47,444
Finished goods		28,366			31,830
Less: obsolescence reserve		(1,949	)		(1,862	)

Total	$	77,831		$	77,412

Note F — Goodwill and other intangible assets

Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business acquisitions. Indefinite lived intangible assets, representing trademarks and trade names, are not amortized until their useful life is determined to no longer be indefinite. Goodwill and indefinite lived intangible assets are tested for impairment at least annually as of March 31, or unless a triggering event occurs, by comparing the fair value of each reporting unit to its carrying value.

2011 Annual goodwill impairment testing

The Company conducted its annual goodwill impairment testing as of March 31, 2011. At each of the reporting units tested, the units’ fair value exceeded carrying value with the exception of American Furniture. The carrying amount of American Furniture exceeded its fair value due to the significant decrease in revenue and operating profit at American Furniture resulting from the negative impact on the promotional furniture market due to the significant decline in the U.S. housing market, high unemployment rates and aggressive pricing employed by its competitors. As a result of the carrying amount of goodwill exceeding its fair value, the Company recorded a $5.9 million impairment charge as of March 31, 2011 which represented the remaining balance of goodwill on American Furniture’s balance sheet. The Company recorded a goodwill impairment charge totaling $35.5 million in the third quarter of 2010.

trade name exceeded its fair value by approximately $1.8 million. The fair value of the American Furniture trade name was determined by applying the relief from royalty technique to forecasted revenues at the American Furniture reporting unit.

The impairment charge related to the American Furniture reporting unit reflects the preliminary result from the impairment analysis performed and is subject to finalization of certain fair value estimates being performed with the assistance of an outside independent valuation specialist, and may be adjusted when all aspects of the analysis are completed. The Company expects to finalize the goodwill impairment analysis during the second quarter of fiscal 2011. Any adjustments to the estimate of impairment as a result of completion of this evaluation are currently expected to be recorded in the condensed consolidated financial statements in the second quarter of fiscal 2011.

Of the remaining seven reporting units as of March 31, 2011 the fair value of one of the reporting units was not substantially in excess of its carrying value. Information from the preliminary step-one impairment test for this reporting unit is as follows:


Reporting Unit	Percentage fair value of goodwill exceeds carrying value			Carrying value of goodwill @ March 31, 2011
HALO		9.7	%	$39.2 million

A one percent increase in the discount rate, from 13% to 14%, would have impacted the fair value of HALO by approximately $5.0 million and would have required the Company to perform a step-two analysis that may have resulted in an impairment charge for HALO as of March 31, 2011. Factors that could potentially trigger a subsequent interim impairment review in the future and possible impairment loss at the HALO reporting unit include significant underperformance relative to future operating results or significant negative industry or economic trends.

The estimates employed and judgment used in determining critical accounting estimates have not changed significantly from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Annual Report on Form 10-K, for the year ended December 31, 2010, as filed with the SEC.

2010 Annual goodwill impairment testing

The Company completed its 2010 annual goodwill impairment testing as of March 31, 2010. For each reporting unit, the analysis indicated that the fair value of the reporting unit exceeded its carrying value and as a result the carrying value of goodwill was not impaired.

A reconciliation of the change in the carrying value of goodwill for the three months ended March 31, 2011 and the year ended December 31, 2010, is as follows (in thousands):


	Three months			Year ended
	ended March 31,			December 31,
	2011			2010
Beginning balance:
Goodwill	$	411,386		$	338,028
Accumulated impairment losses		(85,535	)		(50,000	)

		325,851			288,028

Impairment losses		(5,900	)		(35,535	)
Acquisition of businesses (1)		—			73,492
Adjustment to purchase accounting		(185	)		(134	)

Total adjustments		(6,085	)		37,823


Ending balance:
Goodwill		411,201			411,386
Accumulated impairment losses		(91,435	)		(85,535	)

	$	319,766		$	325,851


⁽¹⁾		Relates to the purchase of ERGObaby, Liberty Safe, Circuit Express and Relay Gear in 2010.

Other intangible assets

Other intangible assets are comprised of the following at March 31, 2011 and December 31, 2010 (in thousands):


	March 31,			December 31,			Weighted Average
	2011			2010			Useful Lives
Customer relationships	$	231,623		$	231,783			12
Technology		44,879			44,879			8
Trade names, subject to amortization		26,080			26,080			12
Licensing and non-compete agreements		10,048			10,048			4
Distributor relations and other		985			896			4

		313,615			313,686

Accumulated amortization customer relationships		(73,648	)		(68,304	)
Accumulated amortization technology		(17,989	)		(16,663	)
Accumulated amortization trade names, subject to amortization		(5,464	)		(4,963	)
Accumulated amortization licensing and non-compete agreements		(6,100	)		(5,640	)
Accumulated amortization distributor relations and other		(645	)		(574	)

Total accumulated amortization		(103,846	)		(96,144	)
Trade names, not subject to amortization		50,330			52,130

Total intangibles, net	$	260,099		$	269,672

Amortization expense related to intangible assets was $7.9 million and $6.1 million for the three months ended March 31, 2011 and 2010, respectively.

Note G — Debt

The Credit Agreement at March 31, 2011 provides for a Revolving Credit Facility totaling $340 million, subject to borrowing base restrictions, which matures in December 2012, and a Term Loan Facility with a balance of $73.5 million at March 31, 2011, 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 carrying value of the Term Loan Facility as of March 31, 2011 approximated fair value, 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 $7.0 million in outstanding borrowings under its Revolving Credit Facility at March 31, 2011. The Company had approximately $253.6 million in borrowing base availability under its Revolving Credit Facility at March 31, 2011. Letters of credit outstanding at March 31, 2011 totaled approximately $68.9 million. At March 31, 2011, the Company was in compliance with all covenants.

The following table provides the Company’s debt holdings at March 31, 2011 and December 31, 2010 (in thousands):


	March 31,			December 31,
	2011			2010
Revolving credit facility	$	7,000		$	22,000
Term loan facility		73,500			74,000

Total debt	$	80,500		$	96,000

Less: Current portion, term loan facility		(2,000	)		(2,000	)
Less: Current portion, revolving credit facility		—			—

Long term debt	$	78,500		$	94,000

Note H — Fair value measurement

The following table provides the assets and liabilities carried at fair value measured on a recurring basis at March 31, 2011 and December 31, 2010 (in thousands):


	Fair Value Measurements at March 31, 2011
	Carrying
Liabilities:	Value		Level 1		Level 2		Level 3
Supplemental put obligation (including current portion)	$	47,826	$	—	$	—	$	47,826
Call option of noncontrolling shareholder ⁽¹⁾		600		—		—		600
Put option of noncontrolling shareholders ⁽²⁾		50		—		—		50
Contingent consideration related to ERGObaby acquisition ⁽³⁾		677		—		—		677


⁽¹⁾		Represents a noncontrolling shareholder’s call option to purchase additional common stock in Tridien.

⁽²⁾		Represents put options issued to noncontrolling shareholders in connection with the Liberty acquisition.

⁽³⁾		Represents contingent consideration liability related to the acquisition of ERGObaby in September 2010.


	Fair Value Measurements at December 31, 2010
	Carrying
Liabilities:	Value		Level 1		Level 2		Level 3
Derivative liability — interest rate swap	$	143	$	—	$	143	$	—
Supplemental put obligation		44,598		—		—		44,598
Call option of noncontrolling shareholder		1,200		—		—		1,200
Put option of noncontrolling shareholders		50		—		—		50
Contingent consideration related to ERGObaby acquisition		177		—		—		177

A reconciliation of the change in the carrying value of our level 3 supplemental put liability (including current portion) from January 1, 2011 through March 31, 2011 and from January 1, 2010 through March 31, 2010 is as follows (in thousands):


	2011		2010
Balance at January 1	$	44,598	$	12,082
Supplemental put expense		3,228		14,426

Balance at March 31	$	47,826	$	26,508

A reconciliation of the change in the carrying value of our level 3 call option of a noncontrolling shareholder from January 1, 2011 through March 31, 2011 is as follows (in thousands):


	2011
Balance at January 1	$	1,200
Fair Value adjustment to Call option		(600	)

Balance at March 31	$	600

A reconciliation of the change in the carrying value of our level 3 contingent consideration liability at ERGObaby from January 1, 2011 through March 31, 2011 is as follows (in thousands):


	2011
Balance at January 1	$	177
Fair Value adjustment to contingent consideration liability		500

Balance at March 31	$	677

Valuation Techniques

Interest rate swap:

The Company’s derivative instrument consisted of an over-the-counter (OTC) interest rate swap contract which was not traded on a public exchange. The fair value of the Company’s interest rate swap contract was determined based on inputs that were readily available in public markets or could be derived from information available in publicly quoted markets. The swap expired in January 2011. See Note I.

Supplemental put:

The Company and CGM entered into a Supplemental Put Agreement, which requires the Company to acquire the Allocation Interests owned by CGM upon termination of the Management Services Agreement. Essentially, the put right granted to CGM requires the Company to acquire CGM’s Allocation Interests in the Company at a price based on 20% of the company’s profits upon clearance of a 7% annualized hurdle rate. Each fiscal quarter the Company estimates the fair value of this potential liability associated with the Supplemental Put Agreement. Any change in the potential liability is accrued currently as a non-cash adjustment to earnings. The increase in the supplemental put liability during the three months ended March 31, 2011, was primarily related to increases in the estimated values of the Advanced Circuits and Fox operating segments.

Options of noncontrolling shareholders:

The call 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 the call option of the noncontrolling shareholder as Level 3.

The put options of noncontrolling shareholders were 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 the put options of the noncontrolling shareholders as Level 3.

Contingent consideration:

The fair value of this contingent consideration liability for ERGObaby was valued assuming a percentage probability of achieving the agreed upon sales goal, discounted to present value utilizing a discounted cash flow model.

The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of March 31, 2011 (in thousands):


									Gains/(losses)
	Fair Value Measurements at Mar. 31, 2011								Three months ended
	Carrying								Mar. 31,
Assets:	Value		Level 1		Level 2		Level 3		2011			2010
Goodwill ⁽¹⁾	$	—	$	—	$	—	$	—	$	(5,900	)	$	—
Trade name ⁽²⁾		1,200		—		—		1,200		(1,800	)	$	—


⁽¹⁾		Represents the fair value of goodwill at the AFM business segment subsequent to the goodwill impairment charge recognized during the first quarter of 2011. See Note F for further discussion regarding impairment and valuation techniques applied.

⁽²⁾		Represents the fair value of AFM’s trade name at the AFM business segment subsequent to the impairment charge recognized during the first quarter of 2011.

Note I — 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 its Term Loan Facility borrowings at 7.35%. The Swap was designated as a cash flow hedge and expired in January 2011.

The Company’s objective for entering into the Swap was to manage the interest rate exposure on a portion of its Term Loan Facility by fixing its interest rate at 7.35% and avoiding the potential variability of interest rate fluctuations. For the three months ended March 31, 2011 and 2010, the Company recorded a $0.1 million gain and $0.3 million gain, respectively, to accumulated other comprehensive loss, which reflects that portion of comprehensive income (loss) reclassified to net income (loss).

Note J — Comprehensive loss

The following table sets forth the computation of comprehensive loss for the three months ended March 31, 2011 and 2010 (in thousands):


	Three months ended
	March 31,
	2011			2010
Net loss attributable to Holdings	$	(6,974	)	$	(15,969	)
Other comprehensive income:
Unrealized gain on cash flow hedge		143			319

Total other comprehensive income		143			319

Total comprehensive loss	$	(6,831	)	$	(15,650	)

Note K — 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.

Distributions:

	•		On January 28, 2011, the Company paid a distribution of $0.34 per share to holders of record as of January 21, 2011.

	•		On March 8, 2011, the Company declared a distribution of $0.36 per share and paid it on April 12, 2011 to holders of record as of March 29, 2011.

Note L — Warranties

The Company’s ERGObaby, Fox, Liberty and Tridien operating 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 three months ended March 31, 2011 and the year ended December 31, 2010 is as follows (in thousands):


	March 31,			December 31,
	2011			2010
Beginning balance	$	3,237		$	1,529
Accrual		605			2,872
Warranty payments		(461	)		(1,726	)
Other (1)		—			562

Ending balance	$	3,381		$	3,237


⁽¹⁾		Represents warranty liabilities acquired in 2010 related to Liberty Safe and ERGObaby.

Note M — Noncontrolling interest

Noncontrolling interest represents the portion of the Company’s majority-owned subsidiary’s net income and equity that is owned by noncontrolling shareholders.

The following tables reflect the Company’s ownership percentage of its majority owned operating segments and related noncontrolling interest balances as of March 31, 2011 and December 31, 2010:


	% Ownership				% Ownership
	March 31, 2011				December 31, 2010
	Primary		Fully Diluted		Primary		Fully Diluted
ACI		69.6		69.4		69.6		69.4
American Furniture		99.9		91.4		99.9		91.4
ERGObaby		83.9		79.9		83.9		79.9
FOX		75.7		68.1		75.7		68.1
HALO		88.7		72.8		88.7		72.8
Liberty		96.2		87.7		96.2		87.7
Staffmark		76.2		68.5		76.2		68.5
Tridien		73.9		61.8		73.9		61.8


	Noncontrolling Interest Balances
	March 31,			December 31,
(in thousands)	2011			2010
ACI	$	2,326		$	2,326
American Furniture		(109	)		(163	)
ERGObaby		7,265			7,087
FOX		14,248			13,373
HALO		3,128			3,211
Liberty		1,214			1,156
Staffmark		51,560			50,962
Tridien		9,982			9,788
CGM		100			100

	$	89,714		$	87,840

Note N — Income taxes

Each fiscal quarter the Company estimates its annual effective tax rate and applies that rate to its interim earnings. In this regard, the Company reflects the tax impact of certain unusual or infrequently occurring items and the effects of changes in tax laws or rates in the interim period in which they occur.

The computation of the annual estimated effective tax rate in each interim period requires certain estimates and significant judgment, including the projected operating income for the year, projections of the proportion of income earned and taxed in other jurisdictions, permanent and temporary differences and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, as additional information is obtained or as the tax environment changes.

Our effective income tax rate (benefit) for the three months ended March 31, 2011 and 2010 was 58.4% and (15.5)%, respectively. The effective income tax rate for the three months ended March 31, 2011 includes a significant loss at the Company’s parent, which is taxed as a partnership, and is due largely to interest expense and to the expense associated with the supplemental put.

The reconciliation between the Federal Statutory Rate and the effective income tax rate for the three months ended March 31, 2011 and 2010 are as follows:


	Three months ended March 31,
	2011			2010
United States Federal Statutory Rate		(35.0	%)		(35.0	%)
Foreign and State income taxes (net of Federal benefits)		8.9			0.4
Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders		27.8			32.3
Credit utilization		(25.5	)		(5.8	)
Quarterly effective tax rate adjustment		23.0			(13.1	)
Impairment expense		49.8			—
Other		9.4			5.7

Effective income tax rate		58.4	%		(15.5	%)


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” 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 for the year ended December 31, 2010.

Overview

Compass Diversified Holdings, a Delaware statutory trust, was incorporated 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 businesses 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.

We are dependent on the earnings of, and cash receipts from our businesses to meet our corporate overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any minority interests in these businesses, are generally 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.

2011 Highlights

Increase in quarterly distribution

On March 29, 2011 we declared a first quarter distribution of $0.36 per share payable April 12, 2011, which represented an increase of $0.02 per share.

Staffmark preliminary prospectus filing

On April 12, 2011, Staffmark Holdings, Inc. (“Staffmark”) filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of Staffmark’s common stock. We currently own approximately 68.5% of Staffmark’s common stock, on a fully diluted basis.

Outlook

Sales and operating income during the first quarter of 2011 increased at six of our eight businesses when compared to the first quarter of 2010. The estimate of gross domestic product (“GDP”), a measure of the total production of goods and services, increased during the first quarter of 2011 at the seasonally adjusted annualized rate of 1.8%, compared to 3.1% in the four quarter of 2010. Although this marks the seventh consecutive sequential quarterly increase in the GDP following four consecutive quarterly decreases the decreased rate of growth is an indication that consumer spending has slowed down. Each of our businesses is impacted by the overall economic environment including both consumer spending and increasing commodity and fuel costs. Additionally, American Furniture is also significantly affected by continued tight credit markets and the depressed housing market which is evident in the significant decrease in quarter over quarter sales and operating profit in the first quarter of 2011.

We believe that we will experience sustained modest top-line growth in each of our businesses, with the exception of American Furniture and Tridien, through the remainder of fiscal 2011, although we cannot accurately predict the impact that rising commodity costs, such as steel, cotton and fuel will have on our gross profit margins if current market conditions continue to exist and we are not able to successfully raise prices to offset the cost increases.

We also believe that the current credit environment may continue to benefit our acquisition model as we do not rely on separate third-party financing as a component to closing.

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	March 31, 2010
Advanced Circuits	Tridien	HALO	American Furniture	Fox	Liberty Safe
Staffmark


September 16, 2010
ERGObaby

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


	Three months			Three months
	ended			ended
(in thousands)	March 31, 2011			March 31, 2010
Net sales	$	424,125		$	353,619
Cost of sales		334,537			282,593

Gross profit		89,588			71,026

Staffing, selling, general and administrative expense		68,512			61,988
Fees to Manager		3,843			3,664
Supplemental put expense		3,228			14,426
Amortization of intangibles		7,702			6,123
Impairment expense		7,700			—

Operating loss	$	(1,397	)	$	(15,175	)

Net sales

On a consolidated basis, net sales for the first quarter of 2011 increased by approximately $70.5 million or 19.9% when compared to last year’s first quarter. Net sales during the three-months ended March 31, 2011 attributable to the 2010 acquisitions were $31.7 million. Increased revenues at Staffmark and Fox during the three-month period ended March 31, 2011 compared to the same period in 2010 is responsible for the majority of the remaining increase in net sales during the current quarter. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of net sales by business segment.

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 are 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 $51.9 million during the three month period ended March 31, 2011 compared to the corresponding period in 2010. This increase is due almost entirely to the corresponding increase in net sales referred to above. Gross profit as a percentage of sales increased approximately 100 basis points to approximately 21.1% during the first quarter of 2011 compared to 20.1% in 2010. Gross profit as a percentage of sales for the 2010 acquisitions are higher than the average margin of our other businesses which helped increase the 2011 average gross profit margin. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of cost of sales by business segment.

Staffing, selling, general and administrative expense

On a consolidated basis, staffing, selling, general and administrative expense increased approximately $6.5 million during the three month period ended March 31, 2011 compared to the corresponding period in 2010. This increase is due principally to: (i) increases in costs directly tied to sales such as commissions and direct customer support services; (ii) increases in selling general and administrative expenses attributable to the 2010 acquisitions totaling $5.4 million during the first quarter of 2011, offset in part by non-cash stock compensation expense incurred at Advanced Circuits totaling approximately $3.8 million in the first quarter of 2010 with no like-kind charge incurred during the most recent quarter. Refer to “Results of Operations — Our Businesses” for a more detailed analysis of staffing, selling, general and administrative expense by business segment. At the corporate level, staffing, selling, general and administrative expense decreased $0.2 million during the three months ended March 31, 2011 compared to the same period in 2010.

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 March 31, 2011 we incurred approximately $3.8 million in expense for these fees compared to $3.7 million for the corresponding period in 2010.

Supplemental put expense

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. This charge represents the estimated increase/decrease in the value of our businesses over our basis in those businesses together with the increase/decrease in the contribution portion of the profit allocation that our

Manager would be entitled to if the Management Services Agreement were terminated. During the three months ended March 31, 2011, we incurred approximately $3.2 million in supplemental put expense based on higher overall valuations attributed to our subsidiaries compared to valuations determined as of December 31, 2010. During the three months ended March 31, 2010, we incurred approximately $14.4 million in supplemental put expense based on higher overall valuations attributed to our subsidiaries compared to valuations determined as of December 31, 2009. The change in supplemental put expense in the three months ended March 31, 2011 and March 31, 2010 is attributable to the increase in the fair value of our businesses.

Impairment expense

We incurred an impairment charge in the first quarter of 2011 totaling $7.7 million at our American Furniture business segment based on our preliminary analysis of step one of our annual goodwill impairment analysis. The portion of the impairment charge that was attributable to impaired goodwill at American Furniture was $5.9 million. The remaining $1.8 million charge reflected a write down of the unamortized balance of American Furniture’s intangible asset, its trade name. The write downs were necessary based on the further deterioration of the promotional furniture market.

We have completed our preliminary annual impairment analysis of goodwill as of March 31, 2011 and there is no indication of goodwill impairment at any of our other reporting units at this time.

Results of Operations — Our Businesses

The following discussion reflects a comparison of the historical results of operations of each of our businesses for the three-month periods ending March 31, 2011 and March 31, 2010 on a stand-alone basis. The results of operations for the 2010 acquisitions include appropriate pro-forma adjustments and explanations. We believe this is the most meaningful comparison of the operating results for each of our business segments. The following results of operations of our businesses are not necessarily indicative of the results to be expected for a full year.

Advanced Circuits

Overview

Advanced Circuits is a provider of prototype, quick-turn and volume production PCBs to customers throughout the United States. Collectively, prototype and quick-turn PCBs represent over 60% of Advanced Circuits’ gross revenues. Prototype and quick-turn PCBs typically command higher margins than volume production PCBs given that customers require high levels of responsiveness, technical support and timely delivery of 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 rates 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 increased steadily through 2008 (2009 saw a slight reduction) and increased again in 2010 and into the first quarter of 2011 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 and anticipates that demand will be impacted less by current economic conditions than by its longer lead time production business, which is driven more by consumer purchasing patterns and capital investments by businesses.

We purchased a controlling interest in Advanced Circuits on May 16, 2006.

On March 11, 2010, Advanced Circuits acquired Circuit Express based in Tempe, Arizona for approximately $16.1 million. Circuit Express focuses on quick-turn manufacturing of prototype and low-volume quantities of rigid PCBs primarily for aerospace and defense related customers. In the following discussion of results of operations we may refer to Circuits Express as ACI-Tempe.

Results of Operations

The table below summarizes the income from operations data for Advanced Circuits for the three-month periods ended March 31, 2011 and March 31, 2010.


	Three-months ended
(in thousands)	March 31, 2011		March 31, 2010
Net sales	$	20,293	$	14,484
Cost of sales		8,928		6,217

Gross profit		11,365		8,267

Selling, general and administrative expense		3,401		6,604
Fees to manager		125		126
Amortization of intangibles		757		593

Income from operations	$	7,082	$	944

Three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Net sales

Net sales for the three months ended March 31, 2011 increased approximately $5.8 million or 40.1% over the corresponding three month period ended March 31, 2010. The increase in net sales is a result of increased gross sales in long-lead time PCBs ($1.8 million), quick-turn production and prototype PCBs ($3.3 million) and assembly revenue ($0.5 million). Sales from quick-turn and prototype PCBs represented approximately 62% of net sales in 2011 compared to 63% in 2010. Net sales attributable to ACI-Tempe were approximately $5.1 million in the quarter ended March 31, 2011 compared to $1.1 in the same period in 2010. Results of operations for ACI-Tempe for the first quarter of 2010 only included twenty days of operations.

Cost of sales

Cost of sales for the three months ended March 31, 2011 increased approximately $2.7 million from the comparable period in 2010. This increase is principally due to the corresponding increase in sales. Gross profit as a percentage of sales decreased during the three months ended March 31, 2011 (56.0% at March 31, 2011 as compared to 57.1% at March 31, 2010) largely as a result of the lower margins earned on the larger proportion of ACI-Tempe sales during the quarter.

Selling, general and administrative expense

Selling, general and administrative expense decreased approximately $3.2 million during the three months ended March 31, 2011 compared to the same period in 2010 due principally to non-cash stock compensation issued to management in January 2010 totaling approximately $3.8 million, and $0.3 million in direct acquisition costs incurred in acquiring ACI-Tempe in the three-months ended March 31, 2010. Ignoring these one-time 2010 charges, selling, general and administrative expense increased approximately $0.9 million during the three months ended March 31, 2011 compared to the same period in 2010. ACI-Tempe incurred $0.9 million in selling, general and administrative costs in the three-months ended March 31, 2011 compared to approximately $0.2 million reflected in ACI’s expenses in 2010, an increase of $0.7 million.

Income from operations

Operating income for the three months ended March 31, 2011 was approximately $7.1 million, an increase of approximately $6.1 million compared to $0.9 million earned in the same period in 2010, principally as a result of those 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 $1,399. American Furniture is a low-cost manufacturer and is able to ship any product in its line to over 800 customers 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 tables and rugs. 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 (loss) from operations data for American Furniture for the three-month periods ended March 31, 2011 and March 31, 2010.


	Three-months ended
(in thousands)	March 31, 2011			March 31, 2010
Net sales	$	35,940		$	43,980
Cost of sales		31,290			35,946

Gross profit		4,650			8,034

Selling, general and administrative expense		4,277			4,650
Fees to manager		125			125
Amortization of intangibles		546			546
Impairment expense		7,700			—

Income (loss) from operations	$	(7,998	)	$	2,713

Three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Net sales

Net sales for the three months ended March 31, 2011 decreased approximately $8.0 million, or 18.3% over the corresponding three months ended March 31, 2010. Stationary product net sales decreased approximately $4.2 million, recliner product sales decreased approximately $2.7 million, and motion product sales decreased approximately $0.8 million. Sales of other products and a reduction in fuel surcharges were responsible for the remaining decrease in net sales during the three-months ended March 31, 2011 compared to 2010. The decrease in net sales in all categories is the result of an extremely soft current retail environment and increased competition in pricing in our promotional furniture category during the first quarter of 2011. Sales to AFM’s largest customer decreased $7.0 million in the first quarter of 2011 compared to 2010. The first fiscal quarter of each year is typically AFM’s largest quarter in terms of net sales.

Cost of sales

Cost of sales decreased approximately $4.7 million in the three months ended March 31, 2011 compared to the same period of 2010 and is due primarily to the corresponding decrease in sales. Gross profit as a percentage of sales was 12.9% in the three months ended March 31, 2011 compared to 18.3% in 2010. The decrease in gross profit as a percentage of sales of approximately 5.4% during the three months ended March 31, 2011 is principally attributable to: (i) reduced selling prices during the first quarter of 2011 that were necessary based on aggressive competitor pricing; (ii) increases in overhead absorption rates on finished goods during the current quarter due to the decrease in production volume, and; (iii) raw material price increases. These increases were offset in part by a slight reduction in third-party shipping costs as a greater proportion of delivery was done in-house during the quarter ended March 31, 2011 and those costs are currently reflected in selling, general and administrative expenses.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2011, decreased approximately $0.4 million compared to the same period of 2010. This decrease is primarily due to decreased costs of insurance, bad debt expense and sales commissions. AFM initiated cost cutting measures during the quarter such as reducing headcount and consolidating warehouse facilities which will begin to reflect savings in subsequent quarters during fiscal 2011.

Impairment expense

American Furniture incurred an impairment charge to its goodwill ($5.9 million) and unamortized trade name ($1.8 million), aggregating $7.7 million, during the three months ended March 31, 2011. During the year ended 2010 American Furniture wrote down $35.5 million of its goodwill asset leaving a balance of $5.9 million. The impairment charge noted above eliminates the remaining balance of goodwill. The $1.8 million impairment charge to American Furniture’s trade name is on top of $3.3 million in impairment charges to its trade name expensed in 2010. The remaining intangible asset balance

attributable to trade name after the latest impairment charge is $1.2 million. There were no impairment charges for American Furniture during the comparable 2010 first quarter. The impairment charges resulted from the preliminary results from the annual step one analysis of goodwill and were necessary based on the further deterioration of the promotional furniture market.

Income (loss) from operations

Loss from operations totaled approximately $8.0 million for the three months ended March 31, 2011 compared to income from operations of approximately $2.7 million in the three months ended March 31, 2010, principally due the impairment charges and other factors described above.

ERGObaby

Overview

ERGObaby, with headquarters in Pukalani, Hawaii, is a premier designer, marketer and distributor of baby wearing products and accessories. ERGObaby offers a broad range of wearable baby carriers and related products that are sold through more than 900 retailers and web shops in the United States and internationally in approximately 20 countries. ERGObaby has two main product lines: baby carriers (organic and standard) and accessories.

On September 16, 2010 we made loans to and purchased a controlling interest in ERGObaby for approximately $85.2 million, representing 84% of the equity in ERGObaby. ERGObaby’s reputation for product innovation, reliability and safety has lead to numerous awards and accolades from consumer surveys and publications, including Parenting Magazine, Pregnancy Magazine and Wired Magazine.

Results of Operations

The table below summarizes the pro-forma income from operations data for ERGObaby for the three-month periods ended March 31, 2011 and March 31, 2010.


	Three-months ended
	March 31, 2011		March 31, 2010
(in thousands)	(pro-forma)		(pro-forma)
Net sales	$	11,471	$	7,610
Cost of services (a)		4,172		2,286

Gross profit		7,299		5,324

Selling, general and administrative expense		4,127		2,403
Fees to manager (b)		125		125
Amortization of intangibles (c)		429		429

Income from operations	$	2,618	$	2,367

Pro-forma results of operations of ERGObaby for the three-month periods ended March 31, 2011 and 2010 includes the following pro-forma adjustments applied to historical results:


(a)		Cost of sales for the quarter ended March 31, 2011 does not include $0.2 million of amortization expense associated with the inventory fair value step-up recorded in 2011 as a result of and derived from the purchase price allocation in connection with our purchase.

(b)		Represents management fees that would have been payable to the Manager in 2010.

(c)		An increase in amortization of intangible assets totaling $0.4 million in 2010. This adjustment is a result of and was derived from the purchase price allocation in connection with our acquisition.

Pro forma three-month ended March 31, 2011 compared to the pro forma three-months ended March 31, 2010.

Net sales

Net sales for the three-months ended March 31, 2011 were $11.5 million, an increase of $3.9 million or 50.7% compared to the same period in 2010. Domestic sales were approximately $3.4 million in the three months ended March 31,

2011 compared to approximately $3.6 million in the same period for 2010 as shipments to several large domestic consolidators decreased during the 2011 quarter. The number of domestic retail outlets ERGObaby’s products sold to increased from 689 as of March 31, 2010 to 906 as of March 31, 2011. Excluding the impact of sales to consolidators in each of the periods, domestic sales increased approximately 15.7% during the three-month period ended March 31, 2011 compared to the same period in 2010. International sales were approximately $8.1 million in the three months ended March 31, 2011 compared to $4.1 million in 2010, an increase of $4.0 million or 99.7%. This significant increase is primarily attributable to continued increases in sales to distributors in Asia, principally Japan and Korea, and the addition of new distributors during 2011 in Myanmar, Malaysia, the Caribbean, UAE and Mexico. Baby carriers represented 88.5% of sales for the three months ended March 31, 2011 compared to 89.1% for the same period in 2010. The remaining net sales in each of the three-month periods ended March 31, 2011 and 2010 reflect accessory sales.

Cost of sales

Cost of sales for the three-months ended March 31, 2011 were approximately $4.2 million compared to $2.3 million in the same period of 2010. The increase of $1.9 million is due principally to the increase in sales in the same period. Gross profit as a percentage of sales decreased from 70.0% for the quarter ended March 31, 2010 to 63.6% in 2011. The decrease is attributable to: (i) a greater percentage of organic baby carriers sold in 2011. Organic baby carriers are standard baby carriers made with organic cotton and generate a lower gross profit margin of approximately 61%, compared to approximately 71% for standard carriers. 48.6% of baby carrier sales were organic baby carriers in the first three months of 2011 compared to 46.3% in the same period of 2010; (ii) a greater percentage of net sales were international sales in the first three-months of 2011 compared to 2010. International sales generally carry a lower price point and as a result generate lower gross profit margins. On average, the gross profit margin on international sales are 59% compared to 72% for domestic sales.

Selling, general and administrative expense

Selling, general and administrative expense for the three-months ended March 31, 2011 increased to approximately $4.1 million or 36.0% of net sales compared to $2.4 million or 31.6% of net sales for the same period of 2010. The increase of $1.7 million is attributable in part to an increase of $0.5 million in a liability related to an earn-out provision with ERGObaby’s former owner as of March 31, 2011. The earn-out provision provides for a payment to ERGObaby’s former owner of $2.0 million if net sales meet or exceed an agreed upon hurdle rate in calendar year 2011. As of March 31, 2011, we estimate that there is a 35% probability that the hurdle will be met, which is an increase in the estimated probability of 10% utilized to calculate the liability as of December 31, 2010. The remaining increase in expenses during the three-months ended March 31, 2011 compared to the same period in 2010 is due principally to increases in sales commissions, marketing campaigns and personnel costs related to expansion initiatives and general overhead, in order to support the current and anticipated increased sales volume.

Income from operations

Income from operations for the three-months ended March 31, 2011 increased approximately $0.3 million to $2.6 million compared to the same period in 2010 based principally on the factors described above.

Fox Factory

Overview

Fox, headquartered in Watsonville, California, is a branded action sports company that designs, manufactures and markets high-performance suspension products for mountain bikes and power sports, which include: snowmobiles, motorcycles, all-terrain vehicles ATVs, and other off-road vehicles.

Fox’s products are recognized by manufacturers and consumers as being among the most technically advanced suspension products currently available in the marketplace. Fox’s technical success is demonstrated by its dominance of award winning performances by professional athletes across its suspension products. As a result, Fox’s suspension components are incorporated by original equipment manufacturer (“OEM”) customers on their high-performance models at the top of their product lines in the mountain bike and power sports sector. OEMs capitalize on the strength of Fox’s brand to maintain and expand their own sales and margins. In the Aftermarket segment, customers seeking higher performance select Fox’s suspension components to enhance their existing equipment.

Fox sells to more than 200 OEM and 7,600 Aftermarket customers across its market segments. In each of the years 2010, 2009 and 2008, approximately 78%, 76% and 76% of net sales were to OEM customers. The remaining net sales were to Aftermarket customers.

Results of Operations

The table below summarizes the income from operations data for Fox for the three-month periods ended March 31, 2011 and March 31, 2010.


	Three-months ended
(in thousands)	March 31, 2011		March 31, 2010
Net sales	$	42,880	$	32,732
Cost of sales		29,903		23,258

Gross profit		12,977		9,474

Selling, general and administrative expense		6,524		5,183
Fees to manager		125		125
Amortization of intangibles		1,304		1,304

Income from operations	$	5,024	$	2,862

Three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Net sales

Net sales for the three-months ended March 31, 2011 increased approximately $10.1 million, or 31.0%, compared to the corresponding period in 2010. OEM sales increased $8.4 million to $34.0 million during the three-months ended March 31, 2011 compared to $25.6 million for the same period in 2010. The increase in OEM net sales is attributable to increases in sales in the mountain biking sector totaling $3.9 million (18.2%) and increases in sales in the powered vehicles sector totaling approximately $4.5 million (107%). The increase in OEM sales in the mountain biking sector during the three-months ended March 31, 2011 is due to inventory replenishment at OEM’s during the first quarter of 2011 that did not occur during 2010 due to greater inventory carry over from 2009 resulting from the depressed sales volume in 2009. The significant increase in OEM sales to the powered vehicle sector during the three-months ended March 31, 2011 is the result of an increase in sales to Ford Motor Company for use in its F-150 Raptor Off-road pickup truck and increases in sales of suspension components to the ATV market. Aftermarket sales increased approximately $1.8 million to $8.9 million during the three months ended March 31, 2011 compared to $7.1 million in the same period in 2010. This increase is attributable to increases in Aftermarket net sales in the powered vehicles sector totaling approximately $1.0 million and the mountain biking sector totaling approximately $0.8 million.

International OEM and Aftermarket sales were $27.9 million during the three-months ended March 31, 2011 compared to $21.4 million during the same period in 2010, an increase of $6.5 million or 30.4%.

Cost of sales

Cost of sales for the three-months ended March 31, 2011 increased approximately $6.6 million, or 28.6%, compared to the corresponding period in 2010. The increase in cost of sales is attributable to the increase in net sales for the same period. Gross profit as a percentage of sales was approximately 30.3% for the three-months ended March 31, 2011 compared to 28.9% for the same period in 2010. The 1.4% increase in gross profit as a percentage of sales during 2011 is attributable to positive leverage achieved due to the increased production volume as well as a favorable product sales mix in the first quarter of 2011 compared to the 2010 quarter.

Selling, general and administrative expense

Selling, general and administrative expense increased approximately $1.3 million during the three-months ended March 31, 2011 compared to the same period in 2010. This increase is the result of increases in (i) marketing costs ($0.3 million), (ii) engineering costs ($0.5 million), and (iii) other administrative costs ($0.5 million) during the three-months ended March 31, 2011, compared to 2010, principally to support the significant increase in sales.

Income from operations

Income from operations for the three-months ended March 31, 2011 increased approximately $2.2 million to $5.0 million compared to the corresponding period in 2010, based principally on the significant increase in net sales, offset in part by the increases in selling, general and administrative costs, all as described above.

Halo

Overview

Operating under the brand names of HALO and Lee Wayne, headquartered in Sterling, IL, HALO is an independent provider of customized drop-ship promotional products in the U.S. Through an extensive group of dedicated sales professionals, HALO serves as a one-stop shop for over 40,000 customers throughout the U.S. HALO is involved in the design, sourcing, management and fulfillment of promotional products across several product categories, including apparel, calendars, writing instruments, drink ware and office accessories. HALO’s sales professionals work with customers and vendors to develop the most effective means of communicating a logo or marketing message to a target audience. Approximately 90% of products sold are drop shipped, resulting in minimal inventory risk. HALO has established itself as a leader in the promotional products and marketing industry through its focus on service through its approximately 870 account executives.

HALO acquired the promotional products distributor Relay Gear in February 2010.

Distribution of promotional products is seasonal. Management estimates that HALO expects to realize approximately 45% of its sales and 70% of its operating income in the months of September through December, due principally to calendar sales and corporate holiday promotions.

Results of Operations

The table below summarizes the loss from operations data for HALO for the three month periods ended March 31, 2011 and March 31, 2010.


	Three-months ended
(in thousands)	March 31, 2011			March 31, 2010
Net sales	$	32,686		$	29,704
Cost of sales		19,946			17,974

Gross profit		12,740			11,730

Selling, general and administrative expense		12,458			11,762
Fees to manager		125			125
Amortization of intangibles		608			618

Loss from operations	$	(451	)	$	(775	)

Three-months ended March 31, 2011 compared to the three-months ended March 31, 2010.

Net sales

Net sales for the three months ended March 31, 2011 increased approximately $3.0 million or 10.0% compared to the same period in 2010. Sales increases attributable to accounts acquired as part of the Relay Gear acquisition in February 2010 accounted for approximately $0.4 million of the increase in net sales in the three-months ended March 31, 2011, while sales to existing customers increased by $2.6 million. Increased sales to many of our larger customer accounts for a majority of the increase.

Cost of sales

Cost of sales for the three months ended March 31, 2011 increased approximately $2.0 million compared to the same period in 2010. The increase in cost of sales is primarily attributable to the corresponding increase in net sales for the same period. Gross profit as a percentage of net sales totaled approximately 39.0% and 39.5% of net sales for the three month periods ended March 31, 2011 and 2010, respectively. The decrease in gross margin percentage for the three months ended March 31, 2011 is attributable to an unfavorable sales mix during the quarter compared to the same period in 2010. A greater proportion of sales were to larger accounts, many which carry a lower margin.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2011 increased approximately $0.7 million compared to the same period in 2010. Direct commission expenses increased by approximately $0.5 million as a result of

increased sales in 2011 together with an increase of $0.2 million in other general and administrative expenses, mostly volume related.

Loss from operations

Loss from operations was approximately $0.5 million for the three months ended March 31, 2011 compared to a loss of approximately $0.8 million in the three months ended March 31, 2010. The improved operating results are principally due to the increase in net sales offset in part by direct commission expense and a reduction in gross margins and other factors as described above.

Liberty Safe

Overview

Based in Payson, Utah and founded in 1988, Liberty Safe is the premier designer, manufacturer and marketer of home and gun safes in North America. From its over 200,000 square foot manufacturing facility, Liberty Safe produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles ranging from an entry level product to good, better and best products. Products are marketed under the Liberty brand, as well as a portfolio of licensed and private label brands, including Remington, Cabela’s and John Deere. Liberty Safe’s products are the market share leader and are sold through an independent dealer network (“Dealer sales”) in addition to various sporting goods and home improvement retail outlets (“National sales”). Liberty has the largest independent dealer network in the industry.

Historically, approximately 60% of Liberty Safe’s net sales are National sales and 40% are Dealer sales.

Results of Operations

The table below summarizes the income from operations data for Liberty Safe for the three-month period ended March 31, 2011 and the pro-forma income from operations for the three month period ended March 31, 2010.


	Three-months ended
(in thousands)	March 31, 2011		March 31, 2010
			(pro-forma)
Net sales	$	20,203	$	15,933
Cost of services		15,174		11,126

Gross profit		5,029		4,807

Selling, general and administrative expense (a)		2,714		1,822
Fees to manager (b)		125		125
Amortization of intangibles (c)		1,294		1,294

Income from operations	$	896	$	1,566

Pro-forma results of operations of Liberty Safe for the three-month period ended March 31, 2010 includes the following pro-forma adjustments applied to historical results:


(a)		Selling, general and administrative costs were reduced by approximately $1.5 million in the three-months ended March 31, 2010, representing an adjustment for one-time transaction costs incurred as a result of our purchase.

(b)		Represents management fees that would have been payable to the Manager.

(c)		An increase in amortization of intangible assets totaling $1.3 million in 2010. This adjustment is a result of and was derived from the purchase price allocation in connection with our acquisition.

Three months ended March 31, 2011 compared to the pro-forma three months ended March 31, 2010.

Net sales

Net sales for the quarter ended March 31, 2011 increased approximately $4.3 million or 26.8% compared to the corresponding three month period ending March 31, 2010. National sales were approximately $12.6 million in the three months ended March 31, 2011 compared to $8.9 million in the same period in 2010, representing an increase of $3.7 million or 41.6%. Dealer sales totaled approximately $7.6 million in the three months ended March 31, 2011 compared to $7.0 million in the same period in 2010 representing an increase of $0.6 million or 8.6%. The increase in National sales in 2011 is principally attributable to: (i) sales increases in connection with successfully returning one of our customers to selling a Liberty branded product during the three-

months ended March 31, 2011 which accounted for approximately $1.5 million of the increase, and; (ii) sales increases to Cabela’s, an existing customer during the first quarter of 2011 resulting from Liberty becoming the sole sourced provider of safes, which accounted for approximately $2.8 million of the sales increase. These increases were offset in part by a decrease in sales to other National account customers due to production capacity constraints.

The increase in Dealer sales of $0.6 million in the three months ended March 31, 2011 compared to the same period in 2010 is the result of across the board increased demand from our dealer network which we attribute to our ongoing national radio advertising campaign, together with strong co-op advertising by our dealers at the local level. Net sales at the Dealer level also suffered during the three-months ended March 31, 2011 due to production capacity constraints.

Sales backorders totaled approximately $24.5 million at March 31, 2011 compared to $7.3 million at December 31, 2010. We anticipate production capacity constraint issues to continue through the next two fiscal quarters and will begin to be relieved during the fourth quarter of 2011 with the delivery and installation of additional production equipment.

Cost of sales

Cost of sales for the three months ended March 31, 2011 increased approximately $4.0 million or 36.4%. The increase in cost of sales is primarily attributable to the increase in net sales for the same period. Gross profit as a percentage of sales totaled approximately 24.9% and 30.2% of net sales for the three-months ended March 31, 2011 and 2010, respectively. The decrease in gross profit as a percentage of sales of 5.3% for the three-months ended March 31, 2011 compared to the same period in 2010 is attributable to: (i) higher raw material costs; (ii) higher transportation costs, including costs associated with some inefficiencies in shipping in 2011 due to the production capacity constraints, and: (iii) a one-time sales promotion allowance to a customer during the first quarter of 2011 totaling $0.2 million. Liberty has recently announced a price increase on its product line that will take effect at the end of the second fiscal quarter of 2011 which is intended to offset a majority of the margin degradation.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2011 increased by approximately $0.9 million or 49% when compared to the same period in 2010. This increase is the result of: (i) $0.3 million incurred in connection with Liberty’s national radio advertising campaign during the first three months of 2011. We did not have this cost in the first quarter of 2010. ; (ii) increased sales commission expense ($0.3 million) resulting from the increase in net sales; (iii) increased co-op advertising costs ($0.2 million).

Income from operations

Income from operations decreased approximately $0.7 million to $0.9 million for the three months ended March 31, 2011 compared to $1.6 million in the three months ended March 31, 2010, due principally to those factors described above.

Staffmark

Overview

Staffmark, a national provider of contingent workforce solutions that serves the temporary staffing needs of employers throughout the United States, provides a full spectrum of light industrial and clerical staffing solutions. Staffmark has a client base of approximately 6,000 and currently places over 40,000 temporary employees weekly in a broad range of industries.

Staffmark is focused on establishing and maintaining a leading position within the markets in which it operates. It seeks to achieve this by winning its clients’ business one location at a time, and leveraging that success into a broader relationship where we service multiple client locations. As Staffmark’s client relationships develop, it enhances its position within markets by: (i) hiring additional sales and operations staff; (ii) opening branch and on-site locations; and (iii) making strategic acquisitions. This strategy enables Staffmark to gain operating leverage in its markets, raise the awareness of its brand and realize efficiencies of scale.

A closely monitored statistic within the temporary staffing industry is the temporary penetration rate, which measures the percent of the total United States workforce that is temporary versus full-time based on data from the United States Bureau of Labor Statistics. The temporary penetration rate in March 2011 was 1.73%, up slightly from 1.69% in December 2010, representing the highest level in thirty months.

On April 12, 2011, Staffmark filed a registration statement on Form S-1 with the Securities and Exchange Commission for a proposed initial public offering of its common stock.

Results of Operations

The table below summarizes the loss from operations data for Staffmark for the three-month period ended March 31, 2011 and March 31, 2010.


	Three-months ended
(in thousands)	March 31, 2011			March 31, 2010
Service revenues	$	246,799		$	217,402
Cost of services		214,850			188,526

Gross profit		31,949			28,876

Selling, general and administrative expense		30,849			28,221
Fees to manager		300			261
Amortization of intangibles		1,136			1,226

Loss from operations	$	(336	)	$	(832	)

Three months ended March 31, 2011 compared to the three months ended March 31, 2010

Service revenues

Service revenues for the three months ended March 31, 2011 increased $29.4 million or 13.5% over the corresponding three months ended March 31, 2010. This increase in revenues primarily reflects increased demand for temporary staffing services. Temporary staffing service revenue increases in light industrial ($22.2 million), clerical ($3.7 million) and managed services ($2.7 million) are principally responsible for the increase. Direct hire revenue increased approximately $0.2 million in the three months ended March 31, 2011 compared to the same period in 2010.

Cost of services

Direct cost of services for the three months ended March 31, 2011 increased approximately $26.3 million or 14.0% compared to the same period a year ago. This increase is principally the direct result of the increase in service revenues. Gross profit as a percentage of service revenue was approximately 12.9% and 13.3% of revenues for the three-month periods ended March 31, 2011 and 2010, respectively. The majority of the decrease in the gross profit margin of approximately 40 basis points (bps) is principally the result of higher state unemployment tax rates in 2011 resulting from further increases in funding required for various states’ depleted unemployment reserves, to the extent not recovered through pricing, offset in part (10bps) by the increased gross profit provided by the increase in direct hire revenues. Gross profit as a percentage of sales is historically lowest in the first fiscal quarter ended March 31 due to the front loading of certain employment taxes. We expect gross profit margins to steadily increase through the remainder of the year, although any increases in unemployment tax rates not fully recovered through pricing will have an adverse effect on our gross profit margins in the future.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2011 increased approximately $2.6 million compared to the same period a year ago. The increased costs incurred during the three months ended March 31, 2011 compared to 2010 are attributable to increases in overhead costs ($2.0 million), primarily in staffing expense, necessary to service the meaningful increase in revenues and overall operations in the first quarter of 2011 and a non-recurring, non-cash compensation charge related to a one-time cost for accelerating vesting rights in stock options ($0.6 million). Selling, general and administrative expense as a percentage of revenues was 12.5% during the three months ended March 31, 2011 compared to 13.0% during the same period in 2010.

Loss from operations

Loss from operations was $0.3 million for the three months ended March 31, 2011 compared to a loss from operations of $0.8 million in 2010, based principally on the factors described above.

Tridien

Overview

Tridien Medical, headquartered in Coral Springs, Florida, is a leading designer and manufacturer of powered and non-powered medical therapeutic support services and patient positioning devices serving the acute care, long-term care and

home health care markets. Tridien is one of the nation’s leading designers and manufacturers of specialty therapeutic support surfaces with manufacturing operations in multiple locations to better serve a national customer base.

Tridien, together with its subsidiary companies, provides customers the opportunity to source leading surface technologies from the designer and manufacturer.

Tridien develops products both independently and in partnership with large distribution intermediaries. Medical distribution companies then sell or rent the therapeutic support surfaces, sometimes in conjunction with bed frames and accessories to one of three end markets: (i) acute care, (ii) long term care and (iii) home health care. The level of sophistication largely varies for each product, as some patients require simple foam mattress beds (“non-powered” support surfaces) while others may require electronically controlled, low air loss, lateral rotation, pulmonary therapy or alternating pressure surfaces (“powered” support surfaces). The design, engineering and manufacturing of all products are completed in-house (with the exception of PrimaTech products, which are manufactured in Taiwan) and are FDA compliant.

Results of Operations

The table below summarizes the income from operations data for Tridien for the three-month periods ended March 31, 2011 and March 31, 2010.


	Three-months ended
(in thousands)	March 31, 2011		March 31, 2010
Net sales	$	13,853	$	15,317
Cost of sales		10,043		10,676

Gross profit		3,810		4,641

Selling, general and administrative expense		2,150		1,945
Fees to manager		87		87
Amortization of intangibles		330		375

Income from operations	$	1,243	$	2,234

Three months ended March 31, 2011 compared to the three months ended March 31, 2010.

Net sales

Net sales for the three months ended March 31, 2011 decreased approximately $1.5 million or 9.6% over the corresponding three months ended March 31, 2010. Net sales of non-powered support surfaces and patient positioning devices totaled $11.3 million in 2011 compared to $12.4 million during the same period in 2010, a decrease of 1.1 million or 8.9%. Net sales of powered products totaled $2.6 million during the three months ended March 31, 2011 compared to $3.0 million in 2010, a decrease of $0.4 million or 13.3%. Sales of non- powered support surface sales were lower in the first quarter of 2011 compared to the same period in 2010 due to higher than normal sales in the first quarter of 2010 as a result of $0.9 million in non-recurring sales to one customer who replaced its rental product manufactured by another company with product manufactured by Tridien.

Cost of sales

Cost of sales decreased approximately $0.6 million in the three months ended March 31, 2011 compared to the same period of 2010 primarily as a result of the decrease in sales. Gross profit as a percentage of sales was 27.5% in the three months ended March 31, 2011 compared to 30.3% in the corresponding period in 2010. The decrease of 2.8% in 2011 is principally due to increases in foam costs, a major component in non-powered products, and the negative impact of selling price concessions made to customers in 2011 in exchange for long term purchase commitments.

Selling, general and administrative expense

Selling, general and administrative expense for the three months ended March 31, 2011 increased approximately $0.2 million compared to the same period of 2010. This increase is principally the result of increased spending on engineering resources and research and development in an effort to bring new and innovative products to market.

Income from operations

Income from operations decreased approximately $1.0 million to $1.2 million for the three months ended March 31, 2011 compared to $2.2 million in the three months ended March 31, 2010, due principally to those factors described above.

Liquidity and Capital Resources

For the three-months ended March 31, 2011, on a consolidated basis, cash flows provided by operating activities totaled approximately $39.8 million, which represents a $23.4 million increase compared to the three-month period ended March 31, 2010. This increase is the result of the cash generated at our business segments, specifically, Staffmark ($23.4 million), Advanced Circuits ($5.4 million), Fox ($5.2 million) and Liberty ($3.8 million). In each case the majority of the operating cash was used to pay down their intercompany loans.

Cash flows used in investing activities totaled approximately $4.5 million, which reflects maintenance capital expenditures of approximately $2.3 million and growth capital expenditures of $2.2 million. The majority of the growth capital expenditures were spent at Liberty Safe in order to increase in-house production capabilities.

Cash flows used in financing activities totaled approximately $31.7 million, principally reflecting: (i) distributions paid to shareholders during the quarter totaling approximately $15.9 million; (ii) repayments of our Term Loan Facility of $0.5 million; and (iii) repayments on our Revolving Credit Facility totaling $15.0 million.

At March 31, 2011 we had approximately $17.1 million of cash and cash equivalents on hand. The majority of our cash is in non-interest bearing checking accounts or invested in short-term money market accounts and is maintained in accordance with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards.

As of March 31, 2011, we had the following outstanding loans due from each of our businesses:

•		Advanced Circuits — $79.7 million;

•		American Furniture — $22.7 million;

•		ERGObaby — $46.4 million;

•		Fox — $30.5 million;

•		HALO — $44.6 million;

•		Liberty — $38.9 million;

•		Staffmark — $52.7 million; and

•		Tridien — $5.3 million.


.

Each loan to our businesses has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity.

Our primary source of cash is from the receipt of interest and principal on the outstanding loans to our businesses. Accordingly, we are dependent upon the earnings of and cash flow from these businesses, which are available for (i) operating expenses; (ii) payment of principal and interest under our Credit Agreement; (iii) payments to CGM due pursuant to the Management Services Agreement, the LLC Agreement, and the Supplemental Put Agreement; (iv) cash distributions to our shareholders; and (v) investments in future acquisitions. Payments made under (iii) above are required to be paid before distributions to shareholders and may be significant and exceed the funds held by us, which may require us to dispose of assets or incur debt to fund such expenditures.

We incurred non-cash charges to earnings of approximately $3.2 million during the three-months ended March 31, 2011 in order to recognize an increase in our estimated liability in connection with the Supplemental Put Agreement between us and CGM. A liability of approximately $47.8 million is reflected in our condensed consolidated balance sheet, which represents our estimated liability for this obligation at March 31, 2011.

The current portion of the supplemental put liability of $6.3 million represents an accrual for the contribution-based profit allocation we expect will be paid to our Manager during the third quarter of 2011. The Manager can elect to receive the positive contribution-based profit allocation payment for each of our business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business. This aforementioned accrual represents the contribution-based profit for the fifth anniversary date of Advanced Circuits and reduces the supplemental put liability when paid.

The following table provides the contribution-based profit for each of the businesses we control at March 31, 2011 and the respective quarter end in which each five year anniversary occurs, reconciled to the total supplemental put liability:


	Contribution
	based profit
	allocation			Quarter End of
	accrual at			Fifth Anniversary
(in thousands)	Mar. 31, 2011			Date of Acquisition
Advanced Circuits	$	6,300		June 30, 2011
American Furniture		(6,947	)	September 30, 2012
ERGObaby		(47	)	September 30, 2015
FOX		2,609		March 31, 2013
HALO		38		March 31, 2012
Liberty		(334	)	March 31, 2015
Staffmark		(5,257	)	June 30, 2011
Tridien		(122	)	September 30, 2011

Total contribution-based profit portion	$	(3,760	)
Estimated gain on sale portion		51,586

Total supplemental put liability	$	47,826

We believe that we currently have sufficient liquidity and resources to meet our existing obligations, including quarterly distributions to our shareholders, as approved by our Board of Directors, over the next twelve months. The quarterly distribution for the three months ended March 31, 2011 was paid on April 12, 2011 and was $16,821. We have considered the impact of recent market instability and credit availability in assessing the adequacy of our liquidity and capital resources.

Our Credit Agreement provides for a Revolving Credit Facility totaling $340 million which matures in December 2012 and a Term Loan Facility totaling $73.5 million, which matures in December 2013.

The Term Loan Facility requires quarterly payments of $0.5 million which commenced March 31, 2008, with a final payment of the outstanding principal balance due on December 7, 2013.

At March 31, 2011 we had $7.0 million in outstanding borrowings under the Revolving Credit Facility. We repaid $15.0 million on the Revolving Credit Facility during the first quarter of 2011.

We had approximately $253.6 million in borrowing base availability under this facility at March 31, 2011. Letters of Credit totaling $68.9 million were outstanding at March 31, 2011. We currently have no exposure to failed financial institutions.

The following table reflects required and actual financial ratios as of March 31, 2011 included as part of the affirmative covenants in our Credit Agreement:


Description of Required Covenant Ratio	Covenant Ratio Requirement	Actual Ratio
Fixed Charge Coverage Ratio	greater than or equal to 1.5:1.0	5.9:1.0
Interest Coverage Ratio	greater than or equal to 2.75:1.0	10.0:1.0
Leverage Ratio	less than or equal to 3.5:1.0	1.0:1.0

We intend to use the availability under our Credit Agreement and cash on hand to pursue acquisitions of additional businesses to the extent permitted under our Credit Agreement, to fund distributions and to provide for other working capital needs.

Reconciliation of Non-GAAP Financial Measures

From time to time we may publicly disclose certain “non-GAAP” financial measures in the course of our investor presentations, earnings releases, earnings conference calls or other venues. A non-GAAP financial measure is a numerical measure of historical or future performance, financial position or cash flow that excludes amounts, or is subject to adjustments that effectively exclude amounts, included in the most directly comparable measure calculated and presented in accordance with GAAP in our financial statements, and vice versa for measures that include amounts, or are subject to adjustments that effectively include amounts, that are excluded from the most directly comparable measure as calculated and presented. GAAP refers to generally accepted accounting principles in the United States.

Non-GAAP financial measures are provided as additional information to investors in order to provide them with an alternative method for assessing our financial condition and operating results. These measures are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

The tables below reconcile the most directly comparable GAAP financial measures to EBITDA, Adjusted EBITDA, and Cash Flow Available for Distribution and Reinvestment (“CAD”).

Reconciliation of Net income (Loss) to EBITDA and Adjusted EBITDA

EBITDA — Earnings before Interest, Income Taxes, Depreciation and Amortization (“EBITDA”) is calculated as net income (loss) before interest expense, income tax expense (benefit), depreciation expense and amortization expense. Amortization expenses consist of amortization of intangibles and debt charges, including debt issuance costs, discounts, etc.

Adjusted EBITDA — Is calculated utilizing the same calculation as described above in arriving at EBITDA further adjusted by; (i) non-controlling stockholder compensation, which generally consists of non-cash stock option expense; (ii) successful acquisition costs, which consist of transaction costs (legal, accounting , due diligences, etc,) incurred in connection with the successful acquisition of a business expensed during the period in compliance with ASC 805;(iii) increases or decreases in supplemental put charges, which reflect the estimated potential liability due to our manager that requires us to acquire their allocation interests in the Company at a price based on a percentage of the fair value in our businesses over their original basis plus a hurdle rate. Essentially, when the fair value of our businesses increase we will incur additional supplemental put charges and vice versa when the fair value of our businesses decrease; (iv) management fees, which reflect fees due quarterly to our manager in connection with our Management Services Agreement (“MSA’); (v) impairment charges, which reflect write downs to goodwill or other intangible assets and (vi) gains or losses recorded in connection with the sale of fixed assets.

We believe that EBITDA and Adjusted EBITDA provides useful information to investors and reflect important financial measures as they exclude the effects of items which reflect the impact of long-term investment decisions, rather than the performance of near term operations. When compared to net income (loss) these financial measures are limited in that they do not reflect the periodic costs of certain capital assets used in generating revenues of our businesses or the non-cash charges associated with impairments. This presentation also allows investors to view the performance of our businesses in a manner similar to the methods used by us and the management of our businesses, provides additional insight into our operating results and provides a measure for evaluating targeted businesses for acquisition.

We believe these measurements are also useful in measuring our ability to service debt and other payment obligations. EBITDA and Adjusted EBITDA are not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

The following table reconciles EBITDA and Adjusted EBITDA to net income (loss), which we consider to be the most comparable GAAP financial measure (in thousands):

Adjusted EBITDA
Three-months ended March 31, 2011


							Advanced			American
	Consolidated			Corporate			Circuits			Furniture			ERGO baby		HALO			Fox		Liberty			Staffmark			Tridien		Total
Net income (loss)	$	(6,567	)	$	(4,219	)	$	3,353		$	(7,801	)	$	680	$	(737	)	$	2,800	$	(155	)	$	(1,209	)	$	721	$	(6,567	)

Adjusted for:
Provision (benefit) for income taxes		2,420			(490	)		2,068			(1,160	)		428		(278	)		1,653		(38	)		(197	)		434		2,420
Interest expense, net		2,537			2,060			(1	)		7			13		—			—		—			458			—		2,537
Intercompany interest		—			(6,249	)		1,569			604			1,186		519			458		1,068			764			81		—
Depreciation and amortization		10,773			953			1,193			1,115			764		852			1,677		1,635			1,991			593		10,773


EBITDA	$	9,163		$	(7,945	)	$	8,182		$	(7,235	)	$	3,071	$	356		$	6,588	$	2,510		$	1,807		$	1,829	$	9,163

(Gain) loss on sale of fixed assets		53			—			—			(13	)		—		—			61		1			4			—		53
Non-controlling stockholder compensation		852			(600	)		—			56			68		—			196		65			1,052			15		852
Impairment charges		7,700			—			—			7,700			—		—			—		—			—			—		7,700
Increase in earnout probability		500			—			—			—			500		—			—		—			—			—		500
Supplemental put		3,228			3,228			—			—			—		—			—		—			—			—		3,228
Management fees		3,843			2,705			125			125			125		125			125		125			300			88		3,843


Adjusted EBITDA	$	25,339		$	(2,612	)	$	8,307		$	633		$	3,764	$	481		$	6,970	$	2,701		$	3,163		$	1,932	$	25,339

Adjusted EBITDA
Three-months ended March 31, 2010


							Advanced			American
	Consolidated			Corporate			Circuits			Furniture			ERGO baby		HALO			Fox		Liberty			Staffmark			Tridien		Total
Net income (loss)	$	(15,287	)	$	(17,741	)	$	169		$	659		$	—	$	(990	)	$	1,446	$	(1,450	)	$	1,345		$	1,275	$	(15,287	)

Adjusted for:
Provision (benefit) for income taxes		(2,812	)		(554	)		88			404			—		(510	)		769		—			(3,790	)		781		(2,812	)
Interest expense, net		2,686			2,227			(1	)		4			—		—			—		—			456			—		2,686
Intercompany interest		—			(4,883	)		654			1,585			—		675			593		—			1,207			169		—
Depreciation and amortization		8,423			1,545			940			835			—		882			1,581		—			2,021			619		8,423


EBITDA	$	(6,990	)	$	(19,406	)	$	1,850		$	3,487		$	—	$	57		$	4,389	$	(1,450	)	$	1,239		$	2,844	$	(6,990	)

(Gain) loss on sale of fixed assets		(2	)		—			—			(3	)		—		—			—		—			1			—		(2	)
Non-controlling stockholder compensation		4,370			50			3,774			54			—		—			92		—			370			30		4,370
Acquisition expenses		1,789			—			280			—			—		59			—		1,450			—			—		1,789
Supplemental put		14,426			14,426			—			—			—		—			—		—			—			—		14,426
Management fees		3,664			2,815			125			125			—		125			125		—			261			88		3,664


Adjusted EBITDA	$	17,257		$	(2,115	)	$	6,029		$	3,663		$	—	$	241		$	4,606	$	—		$	1,871		$	2,962	$	17,257

Reconciliation of Net income (Loss) to CAD

CAD is a non-GAAP measure that we believe provides additional, useful information to evaluate our ability to make anticipated quarterly distributions. CAD is not meant to be a substitute for GAAP, and may be different from or otherwise inconsistent with non-GAAP financial measures used by other companies.

The following table reconciles cash receipts and payments that are not reflected on our income statement to net loss and cash flows provided by operating activities, which we consider the most directly comparable GAAP financial measures in order to provide an additional measure of manage estimate of CAD.


	Three months ended			Three months ended
(in thousands)	March 31, 2011			March 31, 2010
	(unaudited)			(unaudited)
Net loss	$	(6,567	)	$	(15,287	)
Adjustment to reconcile net loss to cash provided by operating activities:
Depreciation and amortization		10,314			8,005
Supplemental put expense		3,228			14,426
Noncontrolling stockholder charges and other		1,144			4,160
Deferred taxes		(993	)		(2,121	)
Amortization of debt issuance costs		459			418
Impairment expense		7,700			—
Changes in operating assets and liabilities		24,473			6,778

Net cash provided by operating activities		39,758			16,379

Add (deduct):
Unused fee on revolving credit facility (1)		776			842
Successful acquisition expense (2)		500			1,789
Changes in operating assets and liabilities		(24,473	)		(6,778	)

Less:
Maintenance capital expenditures (3):
Advanced Circuits		57			40
American Furniture		(52	)		12
ERGObaby		185			—
Fox		140			151
HALO		448			89
Liberty		218			—
Staffmark		834			482
Tridien		437			176


Estimated cash flow available for distribution	$	14,294		$	11,282


Distribution — April 2011 and 2010	$	16,821		$	14,238


(1)		Represents the commitment fee on the unused portion of the Revolving Credit Facility.

(2)		Represents transaction costs for successful acquisitions that were expensed during the period.

(3)		Excludes growth capital expenditures of approximately $2.2 million in 2011.

Cash flows of certain of our businesses are seasonal in nature. Earnings from AFM are typically highest in the months of January through April of each year, coinciding with homeowners’ tax refunds. Cash flows from Staffmark are typically lower in the first quarter of each year than in other quarters due to: (i) reduced seasonal demand for temporary staffing services and (ii) lower gross margins earned during that period due to the front-end loading of certain payroll taxes and other costs associated with payroll paid to our employees. Cash flows from 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. Revenue and earnings from Fox are typically highest in the third quarter, coinciding with the delivery of product for the new bike year.

Contractual Obligations and Off-Balance Sheet Arrangements

We have no special purpose entities or off balance sheet arrangements, other than operating leases entered into in the ordinary course of business.

Long-term contractual obligations, except for our long-term debt obligations, are generally not recognized in our consolidated balance sheet. Non-cancelable purchase obligations are obligations we incur during the normal course of business, based on projected needs.

The table below summarizes the payment schedule of our contractual obligations at March 31, 2011:


			Less than						More than
	Total		1 Year		1-3 Years		3-5 Years		5 Years
Long-term debt obligations (a)	$	97,775	$	10,467	$	87,308	$	—	$	—
Capital lease obligations		711		245		455		11		—
Operating lease obligations (b)		61,915		12,202		19,409		11,757		18,547
Purchase obligations (c)		187,251		117,420		36,431		33,400		—
Supplemental put obligation (d)		41,526		—		2,603		—		—

Total			$	140,334	$	146,206	$	45,168	$	18,547


(a)		Reflects commitment fees and letter of credit fees under our Revolving Credit Facility and amounts due, together with interest on our Term Loan Facility.

(b)		Reflects various operating leases for office space, manufacturing facilities and equipment from third parties with various lease terms running from one to fourteen years.

(c)		Reflects non-cancelable commitments as of March 31, 2011, including: (i) shareholder distributions of $67.3 million, (ii) management fees of $16.7 million per year over the next five years and, (iii) other obligations, including amounts due under employment agreements. Distributions to our shareholders are approved by our Board of Directors each quarter. The amount ultimately approved as future quarterly distributions may differ from the amount included in this schedule.

(d)		The supplemental put obligation represents the estimated long term liability, accrued as if our management services agreement with CGM had been terminated. This agreement has not been terminated and there is no basis upon which to determine a date in the future, if any, that the estimated gain on sale portion will be paid. The Manager can elect to receive the positive contribution-based profit allocation payment for each of our business acquisitions during the 30-day period following the fifth anniversary of the date upon which we acquired a controlling interest in that business. See Liquidity and capital resources.

The table does not include the long-term portion of the actuarially developed reserve for workers compensation, included as a component of long-term liabilities, which does not provide for annual estimated payments beyond one year.

Critical Accounting Estimates

The preparation of our financial statements in conformity with GAAP requires management to adopt accounting policies and make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from these estimates under different assumptions and judgments and uncertainties, and potentially could result in materially different results under different conditions. These critical accounting estimates are reviewed periodically by our independent auditors and the audit committee of our board of directors.

2011 Annual goodwill impairment testing

We conducted our annual goodwill impairment testing as of March 31, 2011. At each of our reporting units tested, the units’ fair value exceeded carrying value with the exception of American Furniture. The carrying amount of American Furniture exceeded its fair value due to the significant decrease in revenue and operating profit at American Furniture resulting from the negative impact on the promotional furniture market due to the significant decline in the U.S. housing market, high unemployment rates and aggressive pricing employed by our competitors. As a result of the carrying amount of goodwill exceeding its fair value, we recorded a $5.9 million impairment charge as of March 31, 2011 which represented the remaining balance of goodwill on American Furniture’s balance sheet. We recorded a goodwill impairment charge totaling $35.5 million in the third quarter of 2010.

The carrying amount of American Furniture exceeded its fair value at March 31, 2011 by a significant amount due primarily to the significant decrease in revenue and operating profit together with management’s revised outlook on near term operating results. Further, the preliminary results of this analysis indicated that the carrying value of American Furniture’s trade name exceeded its fair value by approximately $1.8 million. The fair value of the American Furniture trade name was determined by applying the relief from royalty technique to forecasted revenues at the American Furniture reporting unit.

The impairment charge related to our American Furniture reporting unit reflects the preliminary result from the impairment analysis performed and is subject to finalization of certain fair value estimates being performed with the assistance of an outside independent valuation specialist, and may be adjusted when all aspects of the analysis are completed. We expect to finalize our goodwill impairment analysis during the second quarter of fiscal 2011. Any adjustments to our estimate of impairment as a result of completion of this evaluation are currently expected to be recorded in our consolidated financial statements in the second quarter of fiscal 2011.


Reporting Unit	Percentage fair value of goodwill exceeds carrying value			Carrying value of goodwill @ March 31, 2011
HALO		9.7	%	$39.2 million

A one percent increase in the discount rate, from 13% to 14%, would have impacted the fair value of HALO by approximately $5.0 million and would have required us to perform a step-two analysis that may have resulted in an impairment charge for HALO as of March 31, 2011. Factors that could potentially trigger a subsequent interim impairment review in the future and possible impairment loss at our HALO reporting unit include significant underperformance relative to future operating results or significant negative industry or economic trends.

Other than described above, the estimates employed and judgment used in determining critical accounting estimates have not changed significantly from those disclosed in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K, for the year ended December 31, 2010, as filed with the SEC.

Recent Accounting Pronouncements

Refer to footnote C to our condensed consolidated financial statements.

ITEM 3. — QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no significant changes to our market risk since December 31, 2010. For a discussion of our exposure to market risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures about Market Risk,” contained in our Annual Report on Form 10-K for the year ended December 31, 2010.

ITEM 4. — CONTROLS AND PROCEDURES

As required by Exchange Act Rule 13a-15(b), Holding’s Regular Trustees and the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, conducted an evaluation of the effectiveness of Holdings’ and the Company’s disclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e), as of March 31, 2011. Based on that evaluation, the Regular Trustees of Holdings’ and the Chief Executive Officer and Chief Financial Officer of the Company concluded that Holdings’ and the Company’s disclosure controls and procedures were effective as of March 31, 2011.

In connection with the evaluation required by Exchange Act Rule 13a-15(d), Holding’s Regular Trustees and the Company’s management, including the Chief Executive Officer and Chief Financial Officer of the Company, concluded that no changes in Holdings’ or the Company’s internal control over financial reporting occurred during the first quarter of 2011 that have materially affected, or are reasonably likely to materially affect, Holdings’ and the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal proceedings associated with the Company’s and Holdings’ business together with legal proceedings for the initial businesses have not changed materially from those disclosed in Part I, Item 3 of our 2010 Annual Report on Form 10-K as filed with the SEC on March 10, 2011.

ITEM 1A. RISK FACTORS

Risk factors and uncertainties associated with the Company’s and Holdings’ business have not changed materially from those disclosed in Part I, Item 1A of our 2010 Annual Report on Form 10-K as filed with the SEC on March 10, 2011.

ITEM 6. Exhibits


Exhibit Number		Description
	31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant

	31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant

	32.1	Section 1350 Certification of Chief Executive Officer of Registrant

	32.2	Section 1350 Certification of Chief Financial Officer of Registrant

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	COMPASS DIVERSIFIED HOLDINGS
	By:	/s/ James J. Bottiglieri
		James J. Bottiglieri
		Regular Trustee

Date: May 9, 2011

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	COMPASS GROUP DIVERSIFIED HOLDINGS LLC
	By:	/s/ James J. Bottiglieri
		James J. Bottiglieri
		Chief Financial Officer (Principal Financial and Accounting Officer)

Date: May 9, 2011

EXHIBIT INDEX


Exhibit No.		Description
	31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer of Registrant

	31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer of Registrant

	32.1	Section 1350 Certification of Chief Executive Officer of Registrant

	32.2	Section 1350 Certification of Chief Financial Officer of Registrant