# Compass Diversified Holdings: Form 10-Q for the period ended Jun 30, 2010

- Company: [Compass Diversified Holdings](/companies/codi.md) (CIK 1345126)
- Form: 10-Q
- Filed: 2010-08-09
- Accepted by EDGAR: Aug 9, 2010, 12:17 ET
- Period: 2010-06-30
- Accession: 0000950123-10-074803
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1345126/000095012310074803/w79454e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1345126/000095012310074803/

## Management's discussion and analysis

As filed, 75,254 characters.

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

### Overview

Compass Diversified Holdings, a Delaware statutory trust, was 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 subsidiaries involves:

- utilizing structured incentive compensation programs tailored to each business to attract, recruit and retain talented managers to operate our businesses;
- regularly monitoring financial and operational performance, instilling consistent financial discipline, and supporting management in the development and implementation of information systems to effectively achieve these goals;
- assisting management in their analysis and pursuit of prudent organic cash flow growth strategies (both revenue and cost related);
- identifying and working with management to execute attractive external growth and acquisition opportunities; and
- forming strong subsidiary level boards of directors to supplement management in their development and implementation of strategic goals and objectives.

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

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

We have begun to see a recent uptick in deal flow activity compared to fiscal 2009 even though deal flow is below activity experienced in years prior to 2009.

### 2010 Highlights

#### Acquisitions

On March 31, 2010, we purchased a controlling interest in Liberty Safe and Security Products, Inc. (“Liberty” or “Liberty Safe”), with headquarters in Payson, Utah. Liberty is a premier designer, manufacturer and marketer of home and gun safes in North America. Liberty manufactures and sells a wide range of home and gun safes in a broad assortment of sizes, features and styles which are sold in various sporting goods, farm and fleet and home improvement retailers. We made loans to and purchased a controlling interest in Liberty for approximately $69.6 million, representing approximately 88% of the equity in Liberty on a fully diluted basis. We incurred approximately $1.5 million in transaction costs in addition to the purchase price.

On March 11, 2010, our majority owned subsidiary Advanced Circuits acquired Circuit Express, Inc. (“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. We incurred approximately $0.3 million in transaction costs in addition to the purchase price.

#### Common stock offering

On April 13, 2010, we completed a public offering of 5,250,000 Trust shares (including the underwriter’s over-allotment completed April 23, 2010) at an offering price of $15.10 per share. The net proceeds to us, after deducting underwriter’s discount and offering costs, totaled approximately $75.0 million. We used $70.0 million of the proceeds to pay down our Revolving Credit Facility.

#### Outlook

Sales and operating income during the first half of 2010 increased at each of our businesses, with the exception of Liberty Safe, when compared to the first six months of 2009 and seasonally adjusted fourth quarter of 2009. These results are consistent with the increase in the overall economy. Gross domestic product (“GDP”), a measure of the total production of goods and services, increased during the first two quarters of 2010. This marks the fourth sequential quarterly increase in the GDP following four consecutive decreases. We are cautiously optimistic and believe that we will experience continued growth in sales and operating income at each of our businesses, with the possible exception of Liberty Safe, through the remainder of 2010. In addition, although we believe the economy will rebound in 2010 relative to 2009, we also believe that credit will remain scarce, which may benefit our acquisition model, as we do not rely on separate third-party financing as a component to closing on our acquisitions.

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

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

22

### 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 |  |  |  |  |  |

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

*(in thousands)*

|  | Three months ended June 30, 2010 | Three months ended June 30, 2009 Pro-forma(1) | Six months ended June 30, 2010 Pro-forma(1) | Six months ended June 30, 2009 Pro-forma(1) |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $404,322 | $305,079 | $773,874 | $598,044 |
| Cost of sales | 318,630 | 235,353 | 612,349 | 466,880 |
| Gross profit | 85,692 | 69,726 | 161,525 | 131,164 |
| Staffing, selling, general and administrative expense | 62,855 | 54,042 | 125,215 | 114,589 |
| Fees to manager | 3,709 | 3,547 | 7,498 | 6,744 |
| Supplemental put expense (reversal) | 2,565 | (258) | 16,991 | (8,417) |
| Amortization of intangibles | 7,477 | 7,540 | 14,890 | 15,026 |
| Impairment expense | — | — | — | 59,800 |
| Income (loss) from operations | $9,086 | $4,855 | $(3,069) | $(56,578) |

(1) *Pro-forma results of operations include pro-forma adjustments in connection with our acquisition of Liberty Safe on March 31, 2010. See Results of Operations — Our Businesses for a more detailed discussion of these adjustments.*

#### Net sales

On a consolidated basis, net sales increased $99.2 million and $175.8 million in the three and pro-forma six month periods ended June 30, 2010, respectively, compared to the same pro-forma periods in 2009. These increases for both the three and six month periods are due principally to increased revenues at Staffmark, Advanced Circuits, American Furniture, Tridien, Fox and Halo segments offset in part by decreased net sales at Liberty Safe. Revenues at Staffmark increased $82.0 million and $136.4 million during the three and six month periods ended June 30, 2010 compared to the same periods in 2009. Refer to Results of Operations — Our Businesses for a more detailed analysis of net sales.

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

#### Cost of sales

On a consolidated basis, cost of sales increased approximately $83.3 million and $145.5 million in the three and pro-forma six month periods ended June 30, 2010, respectively, compared to the same pro-forma periods in 2009. These increases are due almost entirely to the corresponding increase in net sales. Refer to Results of Operations — Our Businesses for a more detailed analysis of cost of sales.

#### Staffing, selling, general and administrative expense

On a consolidated basis, staffing, selling, general and administrative expense increased approximately $8.8 million and $10.6 million in the three and pro-forma six month periods ended June 30, 2010, respectively, compared to the same pro-forma periods in 2009. These increases are due principally to (i) increases in costs directly tied to sales, such as commissions and direct customer support services; (ii) acquisition costs directly related to our first quarter platform and add-on acquisitions totaling approximately $1.9 million; and (iii) non-cash stock compensation expense at Advanced Circuits totaling approximately $3.8 million. Refer to Results of Operations — Our Businesses for a more detailed analysis of staffing, selling, general and administrative expense by segment. At the corporate level, selling, general and administrative expense increased approximately $2.2 million and $2.0 million in the three and six months ended June 30, 2010, respectively compared to the same periods in 2009. This increase is principally due to a non-cash charge of approximately $2.3 million related to the increase in value of a call option granted by the Company in 2008 to the former CEO of Tridien.

#### Fees to manager

Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three-months ended June 30, 2010 and pro-forma three months ended June 30, 2009, we incurred approximately $3.7 million and $3.5 million, respectively, in expense for these fees. For the pro-forma six-months ended June 30, 2010 and 2009 we incurred approximately $7.5 million and $6.7 million, respectively, in expense for these fees. The increase in management fees for the three and pro-forma six months ended June 30, 2010 is due principally to the increase in consolidated adjusted net assets as of June 30, 2010 resulting from the Liberty Safe acquisition and the increased sales and operating income from our existing businesses in 2010.

#### Supplemental put expense

Concurrent with the IPO, we entered into a Supplemental Put Agreement with our Manager pursuant to which our Manager has the right to cause us to purchase the allocation interests then owned by them upon termination of the Management Services Agreement. We accrue for the supplemental put expense on a quarterly basis. For the three and six-months ended June 30, 2010 we incurred approximately $2.6 million and $17.0 million, respectively, in expense compared to a reversal of these charges of $0.3 million and $8.4 million for the corresponding periods in 2009. The increase in supplemental put expense in both the three and six months ended June 30, 2010 compared to the same periods in 2009 is attributable to the increase in the fair value of our businesses during 2010.

#### Impairment expense

We incurred an impairment charge in the first quarter of 2009 totaling $59.8 million. The portion of the impairment charge that was attributable to impaired goodwill at Staffmark was $50.0 million. The remaining $9.8 million reflected a write off of the unamortized CBS Personnel trade name as a result of rebranding the business to Staffmark. We have completed our annual impairment analysis of goodwill as of March 31, 2010 and there was no indication of goodwill impairment at any of our reporting units.

### Results of Operations — Our Businesses

The following discussion reflects a comparison of the historical, and where appropriate, pro-forma results of operations for each of our businesses for the three- and six-month periods ending June 30, 2010 and June 30, 2009, which we believe is the most meaningful comparison in explaining the comparative financial performance of each of our businesses. The following results of operations are not necessarily indicative of the results to be expected for the full year going forward.

### Advanced Circuits

### Overview

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

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

On March 11, 2010, Advanced Circuits acquired Circuit Express, an Arizona based provider of high technology, quick-turn PCBs for approximately $16.1 million. This acquisition expands Advanced Circuits capabilities and provides immediate access to manufacturing capabilities of more advanced higher tech PCBs as well as the ability to provide manufacturing services to the U.S. military and defense related accounts. Circuit Express operating results for the period from March 11, 2010 to June 30, 2010 only, are included in the following table.

### Results of Operations

The table below summarizes the income from operations data for Advanced Circuits for the three- and six-month periods ended June 30, 2010 and June 30, 2009.

*(in thousands)*

|  | Three-months ended June 30, 2010 | June 30, 2009 | Six-months ended June 30, 2010 | June 30, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $19,382 | $10,775 | $33,866 | $22,763 |
| Cost of sales | 8,817 | 4,603 | 15,034 | 9,654 |
| Gross profit | 10,565 | 6,172 | 18,832 | 13,109 |
| Selling, general and administrative expense | 3,425 | 979 | 10,030 | 3,501 |
| Fees to manager | 125 | 125 | 250 | 250 |
| Amortization of intangibles | 757 | 668 | 1,350 | 1,334 |
| Income from operations | $6,258 | $4,400 | $7,202 | $8,024 |

***Three months ended June 30, 2010 compared to the three months ended June 30, 2009.***

#### Net sales

Net sales for the three months ended June 30, 2010 were approximately $19.4 million compared to approximately $10.8 million for the same period in 2009, an increase of approximately $8.6 million or 79.9%. Increased sales from long-lead time and sub-contract PCBs ($3.3 million), quick-turn production ($2.4 million) and prototype PCBs ($2.3 million) are primarily responsible for this increase. Assembly sales increased approximately $0.6 million during the three months ended June 30, 2010. Sales from quick-turn and prototype PCBs represented approximately 63.9% of gross sales in the three months ended June 30, 2010 compared to 70.0% in the same period of 2009. Quick turn and prototype sales as a percentage of sales was higher than normal in 2009 due to the significant reduction in long-lead and sub-contract PCBs. The 2010 results are more in line with previous quarters. Net sales attributable to Circuit Express during the quarter were approximately $5.2 million.

#### Cost of sales

Cost of sales for the three months ended June 30, 2010 increased approximately $4.2 million. This increase is principally due to the corresponding increase in sales. Gross profit as a percentage of sales was 54.5% during the three months ended June 30, 2010 compared to 57.3% in 2009. The decrease in gross profit as a percentage of sales in 2010 is largely the result of lower margins earned on the Circuit Express sales during the quarter.

#### Selling, general and administrative expense

Selling, general and administrative expense increased $2.4 million during the three months ended June 30, 2010 compared to the same period in 2009. This increase is due principally to the impact of reversing a portion of the management loan forgiveness cost of $1.3 million in 2009 coupled with the costs associated with operating Circuit Express in 2010, which totaled approximately $1.3 million during the quarter, offset in part by minor decreases in other costs.

#### Income from operations

Income from operations for the three months ended June 30, 2010 was approximately $6.3 million, an increase of $1.9 million over the same period in 2009, primarily as a result of those factors described above.

### Six months ended June 30, 2010 compared to the six months ended June 30, 2009.

#### Net sales

Net sales for the six months ended June 30, 2010 were approximately $33.9 million compared to approximately $22.8 million for the same period in 2009, an increase of approximately $11.1 million or 48.8%. Increased sales from long-lead time and sub-contract PCBs ($4.6 million), quick-turn production ($3.1 million) and prototype PCBs ($2.5 million) are principally responsible for the increase. Assembly sales increased $0.7 million in 2010. Sales from quick-turn and prototype PCBs represented approximately 63.4% of net sales in the six months ended June 30, 2010 compared to 73.3% in the same period of 2009. The 2009 percentage of sales for quick turn and prototype sales was higher than normal because those sales were impacted less by the then slumping economy. Net sales attributable to Circuit Express were approximately $6.2 million during 2010.

#### Cost of sales

Cost of sales for the six months ended June 30, 2010 was approximately $15.0 million compared to approximately $9.7 million for the same period in 2009, an increase of approximately $5.4 million or 55.7%. The increase in cost of sales is almost entirely due to the increase in sales. Gross profit as a percentage of sales was 55.6% in 2010 compared to 57.6% during the six months ended June 30, 2009. The decrease in gross profit as a percentage of sales in 2010 is largely the result of lower margins earned on the Circuit Express sales during 2010.

#### Selling, general and administrative expense

Selling, general and administrative expense increased approximately $6.5 million in the six months ended June 30, 2010 compared to same period in 2009 due to a combination of the following; (i) the reversal of loan forgiveness charges in 2009 ($1.2 million); (ii) non-cash stock compensation costs resulting from options issued to management in 2010 ($3.8 million), and (iii) overhead costs directly associated with Circuit Express ($1.6 million).

#### Income from operations

Income from operations was approximately $7.2 million for the six months ended June 30, 2010 compared to $8.0 million for the same period in 2009, a decrease of $0.8 million based principally on the factors described above.

### American Furniture

### Overview

Founded in 1998 and headquartered in Ecru, Mississippi, American Furniture is a leading U.S. manufacturer of upholstered furniture, focused exclusively on the promotional segment of the furniture industry. American Furniture offers a broad product line of stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products, sold primarily at retail price points ranging between $199 and $699. American Furniture is a low-cost manufacturer and is able to ship any product in its line within 48 hours of receiving an order.

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

### Results of Operations

The table below summarizes the income from operations data for American Furniture for the three and six-month periods ended June 30, 2010 and June 30, 2009.

*(in thousands)*

|  | Three-months ended June 30, 2010 | June 30, 2009 | Six-months ended June 30, 2010 | June 30, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $33,308 | $34,080 | $77,288 | $75,584 |
| Cost of sales | 26,874 | 26,746 | 62,819 | 60,311 |
| Gross profit | 6,434 | 7,334 | 14,469 | 15,273 |
| Selling, general and administrative expense | 4,578 | 4,519 | 9,229 | 9,397 |
| Fees to manager | 125 | 125 | 250 | 250 |
| Amortization of intangibles | 546 | 733 | 1,092 | 1,467 |
| Income from operations | $1,185 | $1,957 | $3,898 | $4,159 |

26

***Three months ended June 30, 2010 compared to the three months ended June 30, 2009.***

#### Net sales

Net sales for the three months ended June 30, 2010 decreased approximately $0.8 million over the corresponding three months ended June 30, 2009. Stationary product net sales increased approximately $0.1 million and recliner product sales increased $0.2 million, offset in part by a decrease in motion product sales totaling approximately $1.0 million. Net sales of other products (tables, rugs) increased approximately $0.1 million in 2010. The increase in stationary product sales is due primarily to an improved retail environment, particularly in the lower cost categories. The decrease in motion product sales is the result of the softer retail environment in the more expensive product categories such as our motion products and the increasing presence of Asian import products which often offers a better overall value proposition to customers.

#### Cost of sales

Cost of sales was flat in the three months ended June 30, 2010 compared to the same period of 2009 despite the decrease in sales. Gross profit as a percentage of sales was 19.3% in the three months ended June 30, 2010 compared to 21.5% in the corresponding period in 2009. The decrease in gross profit as a percentage of sales of approximately 220 basis points in 2010 is principally attributable to greater business interruption insurance proceeds recorded in the second quarter of 2009 which accounts for almost 1.5% of the quarter over quarter increase. Excluding the insurance proceeds in 2009, gross profit decreased approximately 0.7% in 2010, which is largely attributable to the increase in fuel prices and freight cost.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2010, increased approximately $0.1 million compared to the same period of 2009. This increase is primarily due to higher advertising costs.

#### Amortization of intangibles

Intangible amortization decreased approximately $0.2 million in the quarter ended June 30, 2010 compared to the same period in 2009 due to the expiration of non-compete agreements that were being amortized in 2009.

#### Income from operations

Income from operations decreased approximately $0.8 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009, principally due to the factors described above.

### Six months ended June 30, 2010 compared to the six months ended June 30, 2009.

#### Net sales

Net sales for the six months ended June 30, 2010 increased approximately $1.7 million over the corresponding six months ended June 30, 2009. Stationary product net sales increased approximately $3.6 million and recliner product sales increased $0.6 million, offset in part by a decrease in motion product sales totaling approximately $2.5 million. The increase in stationary product sales is due primarily to an improved retail environment, particularly in the lower cost categories. The decrease in motion product sales is the result of the softer retail environment in the more expensive product categories such as our motion products and the increasing presence of Asian import products which often offers a better overall value proposition to customers.

#### Cost of sales

Cost of sales increased by approximately $2.5 million in the six months ended June 30, 2010 compared to the same period of 2009 and is due to the corresponding increase in sales. Gross profit as a percentage of sales was 18.7% in the six months ended June 30, 2010 compared to 20.2% in the corresponding period in 2009. The decrease in gross profit as a percentage of sales of approximately 150 basis points in 2010 is principally attributable to greater business interruption insurance proceeds recorded in the first half of 2009, which accounts for almost 1.7% of the quarter over quarter increase. Excluding the insurance proceeds in 2009, gross profit increased approximately 0.2% in 2010, which is the result of the combination of labor savings due to the increasing number of cut and sew kits from China, offset in part by increases in fuel and freight costs.

#### Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2010, decreased approximately $0.2 million compared to the same period of 2009. This decrease period over period is primarily due to lower insurance expense for 2010 ($0.5 million), offset in part by an increase in bad debt expense ($0.3 million).

#### Amortization of intangibles

Intangible amortization decreased approximately $0.4 million in the quarter ended June 30, 2010 compared to the same period in 2009 due to the expiration of non-compete agreements that were being amortized in 2009.

#### Income from operations

Income from operations decreased approximately $0.3 million in the six-months ended June 30, 2010 compared to the same period in 2009 principally due to the factors described above.

### Fox Factory

### Overview

Fox Factory (“Fox”) headquartered in Watsonville, California, is a branded action sports company that designs, manufactures and markets high-performance suspension products and components for mountain bikes and powered vehicles, which include; snowmobiles, watercraft, 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 utilizing its suspension products. As a result, Fox’s suspension components are incorporated by original equipment manufacturers (“OEM”) customers on their high-performance models at the top of their product lines. OEMs leverage 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 over 200 OEM and over 7,600 Aftermarket customers across its market.

### Results of Operations

The table below summarizes the income from operations data for Fox Factory for the three- and six-month periods ended June 30, 2010 and June 30, 2009.

*(in thousands)*

|  | Three-months ended June 30, 2010 | June 30, 2009 | Six-months ended June 30, 2010 | June 30, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $34,658 | $29,855 | $67,390 | $49,960 |
| Cost of sales | 24,776 | 21,380 | 48,034 | 36,259 |
| Gross profit | 9,882 | 8,475 | 19,356 | 13,701 |
| Selling, general and administrative expense | 5,439 | 5,021 | 10,622 | 9,667 |
| Fees to manager | 125 | 125 | 250 | 250 |
| Amortization of intangibles | 1,304 | 1,304 | 2,608 | 2,608 |
| Income from operations | $3,014 | $2,025 | $5,876 | $1,176 |

***Three months ended June 30, 2010 compared to the three months ended June 30, 2009.***

#### Net sales

Net sales for the three months ended June 30, 2010 increased $4.8 million or 16.1% compared to the corresponding three months ended June 30, 2009. The increase in net sales is primarily attributable to increases in sales in the powered vehicles sector. Sales increases in the powered vehicles sector were largely due to increases in sales of suspension products to Ford Motor Company for use in its F-150 Raptor off-road pickup, and sales to ATV OEMs.

#### Cost of sales

Cost of sales for the three months ended June 30, 2010 increased approximately $3.4 million compared to the corresponding period in 2009. 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 was fairly flat during the three months ended June 30, 2010 (28.5% at June 30, 2010 vs. 28.4% at June 30, 2009) as efficiencies achieved associated with the increase in volume were offset in part by an unfavorable channel mix in 2010 as a larger proportion of total net sales were in the OEM category, which typically carries lower margins than Aftermarket sales.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2010 increased $0.4 million over the corresponding three month period in 2009. This increase is the result of increases in engineering, sales and marketing costs to support the sales growth.

#### Income from operations

Income from operations for the three months ended June 30, 2010 increased approximately $1.0 million compared to the corresponding period in 2009 based principally on the increase in net sales and other factors described above.

#### Six months ended June 30, 2010 compared to the six months ended June 30, 2009.

#### Net sales

Net sales for the six months ended June 30, 2010 increased $17.4 million or 34.9% compared to the corresponding six month period ended June 30, 2009. The increase in net sales is largely attributable to increases in sales in the mountain biking sector as well as increases in sales in the powered vehicles sector. Sales increases in the mountain biking sector were due to strong sales at the end of Fox’s prior model year compared to seasonally weak sales in 2009. Sales increases in the powered vehicles sector were largely due to increases in sales of suspension products to Ford Motor Company for use in its F-150 Raptor off-road pickup, and sales to ATV OEMs.

#### Cost of sales

Cost of sales for the six months ended June 30, 2010 increased approximately $11.8 million compared to the corresponding period in 2009. 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 increased during the six months ended June 30, 2010 (28.7% at June 30, 2010 vs. 27.4% at June 30, 2009) due to manufacturing efficiencies achieved associated with the increase in volume. This was offset in part by an unfavorable channel mix in 2010 as a larger proportion of total net sales were in the OEM category which typically carries lower margins than Aftermarket sales.

#### Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2010 increased $1.0 million over the corresponding six month period in 2009. This increase is the result of increases in engineering, sales and marketing costs to support the sales growth.

#### Income from operations

Income from operations for the six months ended June 30, 2010 increased approximately $4.7 million compared to the corresponding period in 2009 based principally on the significant increase in net sales and other factors 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 35,000 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. Over 90% of products sold by HALO 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 700 account executives.

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

Distribution of promotional products is seasonal. Typically, HALO expects to realize approximately 45% of its sales and over 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 income from operations data for HALO for the three-month and six-month periods ended June 30, 2010 and June 30, 2009:

*(in thousands)*

|  | Three-months ended June 30, 2010 | June 30, 2009 | Six-months ended June 30, 2010 | June 30, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $35,277 | $29,461 | $64,981 | $56,172 |
| Cost of sales | 21,599 | 17,705 | 39,574 | 34,678 |
| Gross profit | 13,678 | 11,756 | 25,407 | 21,494 |
| Selling, general and administrative expense | 12,714 | 11,059 | 24,476 | 22,089 |
| Fees to manager | 125 | 125 | 250 | 250 |
| Amortization of intangibles | 601 | 637 | 1,218 | 1,272 |
| Income (loss) from operations | $238 | $(65) | $(537) | $(2,117) |

***Three-months ended June 30, 2010 compared to the three-months ended June 30, 2009.***

#### Net sales

Net sales for the three months ended June 30, 2010 increased approximately $5.8 million or 19.7% over the corresponding three months ended June 30, 2009. Net sales attributable to acquisitions made since June 30, 2009 accounted for approximately $1.2 million in net sales during the three months ended June 30, 2010. Sales to existing accounts increased approximately $4.6 million during the three months ended June 30, 2010 compared to the same period in 2009 as a result of increased advertising spending in 2010 compared to 2009 due to more favorable overall economic conditions.

#### Cost of sales

Cost of sales for the three months ended June 30, 2010 increased approximately $3.9 million compared to the same period in 2009. 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 net sales totaled approximately 38.8% and 39.9% of net sales for the three-month periods ended June 30, 2010 and June 30, 2009, respectively. The decrease in gross profit as a percentage of sales in 2010 is due to an unfavorable sales channel mix compared to the second quarter of 2009.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2010 increased approximately $1.7 million compared to the same period in 2009. This increase is largely the result of increased direct commission expense as a result of the increase in net sales ($1.0 million), increases in Halo’s group insurance expense ($0.3 million) and increases in sales and use tax.

#### Amortization of intangibles

Amortization expense decreased slightly (less than $0.1 million) in the three months ended June 30, 2010 compared to the same period in 2009. This decrease is the result of intangible assets from certain prior year acquisitions that have become amortized.

#### Income (loss) from operations

Income from operations increased $0.3 million in the three months ended June 30, 2010 compared to the three months ended June 30, 2009 based on the factors described above, particularly the increase in net sales.

### Six months ended June 30, 2010 compared to the six months ended June 30, 2009.

#### Net sales

Net sales for the six months ended June 30, 2010 increased approximately $8.8 million or 15.7% over the corresponding period in 2009. Net sales attributable to acquisitions made since June 30, 2009 accounted for approximately $1.4 million in net sales during the six months ended June 30, 2010. Sales to existing accounts increased approximately $7.4 million during the six months ended June 30, 2010 compared to the same period in 2009 as a result of increased advertising spending in 2010 compared to 2009 due to more favorable overall economic conditions.

#### Cost of sales

Cost of sales for the six months ended June 30, 2010 increased approximately $4.9 million compared to the same period in 2009. 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 net sales totaled approximately 39.1% and 38.3% of net sales for the six month periods ended June 30, 2010 and June 30, 2009, respectively. The increase in gross profit as a percentage of sales in 2010 is due to a favorable sales channel mix experienced in the first quarter of 2010.

#### Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2010 increased approximately $2.4 million. This increase is largely the result of increased direct commission expense in 2010 as a result of the increase in net sales ($1.6 million), increased group insurance expense ($0.3 million) and increased sales and use taxes incurred ($0.2 million).

#### Amortization of intangibles

Amortization expense decreased slightly (less than $0.1 million) in the six months ended June 30, 2010 compared to the same period in 2009. This decrease is the result of intangible assets from certain prior year acquisitions that have become amortized.

#### Loss from operations

Loss from operations was approximately $0.5 million and $2.1 million during the six months ended June 30, 2010 and 2009, respectively, based principally on those factors 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.

### Pro-forma Results of Operations

The table below summarizes the results of operations for Liberty Safe for the three-months ended June 30, 2010 and the pro-forma results of operations data for the three-months ended June 30, 2009 and the pro-forma results of operations for the six-month periods ended June 30, 2010 and 2009. We acquired Liberty Safe on March 31, 2010. The following operating results are reported as if we acquired Liberty Safe on January 1, 2009.

*(in thousands)*

|  | Three-months ended June 30, 2010 | June 30, 2009 (Pro-forma) | Six-months ended June 30, 2010 (Pro-forma) | June 30, 2009 (Pro-forma) |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $13,579 | $17,551 | $29,512 | $35,602 |
| Cost of sales | 10,185 | 11,991 | 21,311 | 26,213 |
| Gross profit | 3,394 | 5,560 | 8,201 | 9,389 |
| Selling, general and administrative expense (a) | 2,148 | 2,264 | 3,970 | 4,116 |
| Fees to manager | 125 | 125 | 250 | 250 |
| Amortization of intangibles (b) | 1,290 | 1,290 | 2,580 | 2,580 |
| Income (loss) from operations | $(169) | $1,881 | $1,401 | $2,443 |

*Pro-forma results of operations of Liberty Safe for the three months ended June 30, 2009 and the six-month periods ended June 30, 2010 and 2009 include the following pro-forma adjustments:*

(a) Selling, general and administrative costs were reduced by $4.9 million in the six-months ended June 30, 2010, representing an adjustment for one-time transaction costs incurred as a result of our purchase.

(b) An increase in amortization of intangible assets totaling $0.6 million in both the three-month period ended June 30, 2009 and six-month period ended June 30, 2010 and $1.2 million in the six-month period ended June 30, 2009. This adjustment is a result of and was derived from the purchase price allocation in connection with our acquisition of Liberty Safe.

31

***Three-months ended June 30, 2010 compared to the pro-forma three-months ended June 30, 2009.***

#### Net sales

Net sales for the three months ended June 30, 2010 decreased approximately $4.0 million over the corresponding three months ended June 30, 2009. National sales were approximately $7.8 million in the three months ended June 30, 2010 compared to $11.0 million in the same period in 2009 representing a decrease of $3.2 million or 29.1%. Dealer sales totaled approximately $5.8 million in the three months ended June 30, 2010 compared to $6.6 million in the same period in 2009 representing a decrease of $0.8 million or 12.1%. The significant decrease in National sales in 2010 is principally the result of one customer who experienced low demand for its private label product safes, which represented a new product line supplied by Liberty Safe. Historically, this customer represented approximately 25% of Liberty Safe’s National sales. Sales through the remainder of 2010 are expected to be lower than 2009 for this customer. The decline in Dealer sales is due to less product demand in 2010 compared to 2009 due to greater than average sales in 2009 resulting from customers’ anticipation of stricter gun laws being enacted by the new Federal administration.

#### Cost of sales

Cost of sales for the three months ended June 30, 2010 decreased approximately $1.8 million. The decrease in cost of sales is primarily attributable to the decrease in net sales for the same period. Gross profit as a percentage of net sales totaled approximately 25.0% and 31.7% of net sales for the three-month periods ended June 30, 2010 and June 30, 2009, respectively. The decrease in gross profit as a percentage of sales for the three months ended June 30, 2010 compared to 2009 is attributable to; (i) an unfavorable sales mix in 2010; (ii) unfavorable manufacturing absorption rates in 2010 due to the decline in production volume; and (iii) increases in freight costs due to higher fuel prices.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2010, decreased approximately $0.1 million compared to the same period in 2009. This decrease is largely the result of decreased direct commission expense and co-op advertising as a result of the decline in net sales during the second quarter of 2010.

#### Income (loss) from operations

Income (loss) from operations decreased $2.0 million in the three months ended June 30, 2010 to a loss of $0.1 million compared to the three months ended June 30, 2009 based on the factors described above, particularly the decline in net sales.

***Pro-forma six months ended June 30, 2010 compared to the pro-forma six months ended June 30, 2009.***

#### Net sales

Net sales for the six months ended June 30, 2010 decreased approximately $6.1 million over the corresponding six months ended June 30, 2009. National sales were approximately $16.7 million in the six months ended June 30, 2010 compared to $22.0 million in the same period in 2009, representing a decrease of $5.3 million or 24.1%. Dealer sales totaled approximately $12.8 million in the six months ended June 30, 2010 compared to $13.6 million in the same period in 2009 representing a decrease of $0.8 million or 5.9%. The significant decrease in National sales in 2010 is principally the result of one customer who experienced low demand for its private label product safes, which represented a new product line supplied by Liberty Safe. Historically, this customer represents approximately 25% of Liberty Safe’s National sales. Sales through the remainder of 2010 are expected to be lower than 2009 for this customer. The decline in Dealer sales is due to less product demand in 2010 compared to 2009 due to greater than average sales in 2009 resulting from customers’ anticipation of stricter gun laws being enacted by the new Federal administration. We expect total 2010 net sales to be lower than 2009 net sales.

#### Cost of sales

Cost of sales for the six months ended June 30, 2010 decreased approximately $4.9 million. The decrease in cost of sales is primarily attributable to the decrease in net sales for the same period. Gross profit as a percentage of net sales totaled approximately 27.8% and 26.4% of net sales for the six-month periods ended June 30, 2010 and June 30, 2009, respectively. The increase in gross profit as a percentage of sales of 1.4% for the six months ended June 30, 2010 compared to 2009 is attributable to a favorable sales mix and lower freight costs.

#### Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2010, decreased approximately $0.1 million compared to the same period in 2009. This decrease is largely the result of decreased direct commission expense and co-op advertising as a result of the decline in net sales during 2010.

#### Income from operations

Income from operations decreased $1.0 million in the six months ended June 30, 2010 compared to the six months ended June 30, 2009 based on the factors described above, particularly the decline in net sales.

### Staffmark

### Overview

Staffmark, a provider of temporary staffing services in the United States, provides a wide range of human resources services, including temporary staffing services, employee leasing services, and permanent staffing and temporary-to-permanent placement services. Staffmark serves over 6,400 corporate and small business clients and during an average week places over 38,000 employees in a broad range of industries. These industries include manufacturing, transportation, retail, distribution, warehousing, and automotive supply, as well as, construction, industrial, healthcare and financial sectors.

Staffmark’s business strategy includes maximizing production in existing offices, increasing the number of offices within a market when conditions warrant, and expanding organically into contiguous markets where it can benefit from shared management and administrative expenses. Staffmark typically enters into new markets through acquisitions. Staffmark continues to view acquisitions as an attractive means to enter new geographic markets.

Fiscal 2008 and 2009 were challenging years for the temporary staffing industry. The already-weak economic conditions and employment trends in the U.S., present during 2008, continued to worsen as the year progressed and continued through the first three quarters of fiscal 2009. Economic conditions and employment trends showed positive signs of improvement in the fourth quarter of 2009 and has continued through 2010 to date.

### Results of Operations

The table below summarizes the income from operations data for Staffmark for the three and six- month periods ended June 30, 2010 and 2009

*(in thousands)*

|  | Three-months ended June 30, 2010 | June 30, 2009 | Six-months ended June 30, 2010 | June 30, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Service revenues | $251,354 | $169,350 | $468,756 | $332,352 |
| Cost of services | 215,175 | 142,966 | 403,700 | 281,594 |
| Gross profit | 36,179 | 26,384 | 65,056 | 50,758 |
| Staffing, selling, general and administrative expense | 28,688 | 26,420 | 56,910 | 57,842 |
| Fees to manager | 22 | 210 | 283 | 420 |
| Amortization of intangibles | 1,226 | 1,213 | 2,452 | 2,426 |
| Impairment expense | — | — | — | 50,000 |
| Income (loss) from operations | $6,243 | $(1,459) | $5,411 | $(59,930) |

***Three months ended June 30, 2010 compared to the three months ended June 30, 2009.***

#### Service revenues

Service revenues for the three months ended June 30, 2010 increased $82.0 million over the corresponding three months ended June 30, 2009. This increase in revenues reflects increased demand for temporary staffing services (primarily light industrial). We continue to witness temporary staffing job creation and signs of a strengthening global economy, although significant uncertainty remains.

#### Cost of services

Direct cost of services for the three months ended June 30, 2010 increased approximately $72.2 million 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 14.4% and 15.6% of revenues for the three-month periods ended June 30,

2010 and 2009, respectively. The primary reason for the decrease in the gross profit margin is the result of higher unemployment taxes in 2010 as a result of increased funding required for various states’ depleted unemployment reserves.

#### Staffing, selling, general and administrative expense

Staffing, selling, general and administrative expense for the three months ended June 30, 2010 increased approximately $2.3 million compared to the same period a year ago. Management reduced overhead costs, consolidated facilities and closed unprofitable branches in order to mitigate the negative impact of the weak economic environment throughout 2009. The increase is primarily driven by increased staffing expense, which is directly tied to increased service volume.

#### Income (loss) from operations

Income (loss) from operations increased approximately $7.7 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009 based principally on the factors described above.

### Six months ended June 30, 2010 compared to the six months ended June 30, 2009.

#### Service revenues

Service revenues for the six months ended June 30, 2010 increased approximately $136.4 million over the corresponding six months ended June 30, 2009. This increase in revenues reflects increased demand for temporary staffing services (primarily light industrial). Approximately $1.2 million of the increase is related to increased revenues for permanent staffing services. We continue to witness temporary staffing job creation and signs of a strengthening global economy, although significant uncertainty remains.

#### Cost of revenues

Direct cost of revenues for the six months ended June 30, 2010 increased approximately $122.1 million 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 13.9% and 15.3% of revenues for the six-month periods ended June 30, 2010 and 2009, respectively. The majority of the decrease in the gross profit margin is the result of two factors: (i) unemployment taxes are higher in 2010 as a result of increased funding required for various states’ depleted unemployment reserves; and (ii) downward market pricing pressure resulting from the recent economic downturn.

#### Staffing, selling, general and administrative expense

Staffing, selling, general and administrative expense for the six months ended June 30, 2010 decreased approximately $0.9 million compared to the same period a year ago. Management reduced overhead costs, consolidated facilities and closed unprofitable branches in order to mitigate the negative impact of the weak economic environment throughout 2009. Management continues to control its costs; limiting its spending increases to areas required to support increased service volumes and financial performance.

#### Impairment expense

Based on the results of our annual goodwill impairment test in March 2009 we determined that the carrying amount of Staffmark exceeded its fair value by approximately $50.0 million as of March 31, 2009. Therefore, we recorded a $50.0 million pretax goodwill impairment charge for the six months ended June 30, 2009. We performed the annual goodwill impairment test as of March 31, 2010 and our results indicate that no impairment of goodwill was evident as of March 31, 2010.

#### Income (loss) from operations

Income (loss) from operations increased approximately $65.3 million for the six months ended June 30, 2010 compared to the six months ended June 30, 2009 based principally on the factors described above.

### Tridien Medical

### Overview

Tridien Medical (formerly known as Anodyne Medical Device, Inc.) (“Tridien”) 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- and six-month periods ended June 30, 2010 and June 30, 2009.

*(in thousands)*

|  | Three-months ended June 30, 2010 | June 30, 2009 | Six-months ended June 30, 2010 | June 30, 2009 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $16,764 | $14,007 | $32,081 | $25,611 |
| Cost of sales | 11,208 | 9,964 | 21,884 | 18,179 |
| Gross profit | 5,556 | 4,043 | 10,197 | 7,432 |
| Selling, general and administrative expense | 1,690 | 1,857 | 3,634 | 3,645 |
| Fees to manager | 88 | 88 | 175 | 175 |
| Amortization of intangibles | 376 | 371 | 752 | 741 |
| Income from operations | $3,402 | $1,727 | $5,636 | $2,871 |

***Three months ended June 30, 2010 compared to the three months ended June 30, 2009.***

#### Net sales

Net sales for the three months ended June 30, 2010 increased approximately $2.8 million over the corresponding three months ended June 30, 2009. Net sales increases were realized from powered support surfaces of $2.0 million, positioning products of $0.6 million non-powered support surfaces of $0.2 million. Sales of powered support surfaces are showing some degree of recovery in 2010 over 2009. Non-powered support surfaces and patient positioning products represented approximately 70.3% of sales in the second quarter of 2010 compared to 78.3% in 2009.

#### Cost of sales

Cost of sales increased approximately $1.2 million in the three months ended June 30, 2010 compared to the same period of 2009, primarily due to increases in net sales. Gross profit as a percentage of sales was 33.1% in the three months ended June 30, 2010 compared to 28.9% in the corresponding period in 2009. The increase of 4.2% of gross profit as a percentage of net sales in 2010 is principally due to labor efficiencies realized, favorable absorption rates on fixed manufacturing overhead and increased revenue on higher margin powered products in 2010.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended June 30, 2010 decreased approximately $0.2 million compared to the same period of 2009. This decrease is principally the result of a reduction in costs associated with the closure of the Oklahoma office and distribution center in the second quarter of 2009 offset in part by increased spending on engineering and product development.

#### Income from operations

Income from operations increased approximately $1.7 million for the three months ended June 30, 2010 compared to the three months ended June 30, 2009, due principally to those factors described above.

### Six months ended June 30, 2010 compared to the six months ended June 30, 2009.

#### Net sales

Net sales for the six months ended June 30, 2010 increased approximately $6.5 million over the corresponding six months ended June 30, 2009. Sales of non-powered support surfaces increased by $4.2 million while sales of powered support services and positioning products increased by $1.5 million and $0.8 million, respectively, in the first six months of 2010. Non-powered support surfaces and patient positioning products represented approximately 75.4% of sales during the six-months ended June 30, 2010 compared to 75.0% of sales during the same period in 2009.

#### Cost of sales

Cost of sales increased approximately $3.7 million in the six months ended June 30, 2010 compared to the same period of 2009, primarily due to the increase in net sales. Gross profit as a percentage of sales was 31.8% in the six months ended June 30, 2010 compared to 29.0% in the corresponding period in 2009. The increase of 2.8% of gross profit in 2010 is principally due to labor and manufacturing efficiencies realized during the period and the increase in higher margin powered product sales in 2010 when compared to 2009.

#### Selling, general and administrative expense

Selling, general and administrative expense for the six months ended June 30, 2010 were approximately the same as compared to the same period of 2009. Increases in engineering and product development spending were offset by savings from the closure of the Oklahoma office and distribution center in the second quarter of 2009.

#### Income from operations

Income from operations for the six months ended June 30, 2010 increased approximately $2.8 million over the corresponding period in 2009, due principally to those factors described above.

### Liquidity and Capital Resources

For the six months ended June 30, 2010, on a consolidated basis, cash flows provided by operating activities totaled approximately $7.6 million, which represents a $9.2 million decrease in cash provided by operations compared to the six-month period ended June 30, 2009. This decrease is due to the use of operating assets to support the increase in sales and operating activity at each of our businesses. Consolidated net loss, adjusted for non-cash activity, improved by approximately $20.7 million in the six-months ended June 30, 2010 compared to the same period in 2009.

Cash flows used in investing activities totaled approximately $85.9 million, which reflects maintenance capital expenditures of approximately $2.2 million and costs associated with platform and add-on acquisitions totaling approximately $83.7 million. We anticipate increases in capital expenditures during the remainder of fiscal 2010. Total capital expenditures for fiscal 2010 are expected to aggregate approximately $8.0 million.

Cash flows provided by financing activities totaled approximately $62.0 million, principally reflecting: (i) distributions paid to shareholders during the year totaling approximately $26.7 million; (ii) borrowings under our Revolving Credit Facility of $12.7 million and repayments of our Term Loan Facility of $1.0 million; (iii) proceeds from our April 2010 stock offering of $75.0 million; and (iv) receipt of approximately $2.1 million from investments in our recent acquisitions by noncontrolling shareholders.

At June 30, 2010, we had approximately $15.1 million of cash and cash equivalents on hand. The majority of our cash is 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.

We had the following outstanding loans due from each of our businesses:

- Advanced Circuits — approximately $53.6 million;
- American Furniture — approximately $70.0 million;
- Fox Factory — approximately $42.1 million;
- HALO — approximately $47.2 million;
- Liberty — approximately $41.8 million;
- Staffmark — approximately $85.4 million; and
- Tridien — approximately $10.7 million.

Each loan 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 $17.0 million during the six-months ended June 30, 2010 in order to recognize an increase in our estimated liability in connection with the Supplemental Put Agreement between us and CGM. A non-current liability of approximately $29.1 million is reflected in our condensed consolidated balance sheet, which represents our estimated liability for this obligation at June 30, 2010.

Our Credit Agreement provides for a Revolving Credit Facility totaling $340 million, subject to availability, which matures in December 2012 and a Term Loan Facility totaling $75.0 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. On January 22, 2008 we entered into a three-year interest rate swap agreement with a bank, fixing the rate of $70.0 million at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The interest rate swap was intended to mitigate the impact of fluctuations in interest rates and effectively converts $70 million of our floating-rate Term Facility Debt to a fixed- rate basis for a period of three years. The swap expires January 22, 2011.

At June 30, 2010 we had $13.2 million in outstanding borrowings under our Revolving Credit Facility. We had approximately $198.2 million in borrowing base availability under this facility at June 30, 2010. Letters of Credit totaling $67.7 million were outstanding at June 30, 2010. We currently have no exposure to failed financial institutions.

The following table reflects required and actual financial ratios as of June 30, 2010 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 | 5.32:1.0 |
| Interest Coverage Ratio | greater than or equal to 2.75:1.0 | 7.67:1.0 |
| Total Debt to Consolidated EBITDA | less than or equal to 3.5:1.0 | 0.84:1.0 |

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.

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. We have considered the impact of recent market instability and credit availability in assessing the adequacy of our liquidity and capital resources.

The table below details cash receipts and payments that are not reflected on our income statement in order to provide an additional measure of management’s estimate of cash flow available for distribution and reinvestment (“CAD”). CAD is a non-GAAP measure that we believe provides additional information to evaluate our ability to make anticipated quarterly distributions. It is not necessarily comparable with similar measures provided by other entities. We believe that CAD, together with future distributions and cash available from our businesses (net of reserves) will be sufficient to meet our anticipated distributions over the next twelve months. The table below reconciles CAD to net income and to cash flow provided by operating activities, which we consider to be the most directly comparable financial measure calculated and presented in accordance with GAAP.

*(in thousands)*

*(unaudited)*

*(unaudited)*

|  | Six months ended June 30, 2010 | Six months ended June 30, 2009 |
| --- | ---: | ---: |
| Net loss | $(16,030) | $(42,383) |
| Adjustment to reconcile net loss to cash provided by operating activities |  |  |
| Depreciation and amortization | 17,730 | 16,759 |
| Supplemental put expense | 16,991 | (8,417) |
| Stockholder charges | 7,441 | 460 |
| Impairment charges | — | 59,800 |
| Deferred taxes | (2,062) | (26,489) |
| Debt issuance costs | 836 | 910 |
| Loss on debt repayment | — | 3,652 |
| Other | (160) | (221) |
| Changes in operating assets and liabilities | (17,177) | 12,701 |
| Net cash provided by operating activities | 7,569 | 16,772 |
| Add (deduct): |  |  |
| Unused fee on revolving credit facility (1) | 1,629 | 1,710 |
| Successful acquisition costs | 1,924 |  |
| Staffmark integration and restructuring | — | 3,242 |
| Changes in operating assets and liabilities | 17,177 | (12,701) |
| Less: |  |  |
| Maintenance capital expenditures: |  |  |
| Compass Group Diversified Holdings LLC | — | — |
| Advanced Circuits | 71 | 34 |
| American Furniture | 22 | 322 |
| Tridien | 413 | 291 |
| Staffmark | 1,008 | 399 |
| Fox | 357 | 224 |
| Halo | 164 | 340 |
| Liberty | 146 | — |
| Estimated cash flow available for distribution | $26,118 | $7,413 |
| Distribution paid — April of 2010 and 2009 | $14,238 | $10,719 |
| Distribution paid — July of 2010 and 2009 | 14,238 | 12,452 |
|  | $28,476 | $23,171 |

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

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

Cash flows of certain of our businesses are seasonal in nature. Cash flows from American Furniture are typically highest in the months of January through April coinciding with income 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.

### 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 June 30, 2010:

|  | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-term debt obligations (a) | $111,968 | $23,753 | $17,729 | $70,486 | $— |
| Capital lease obligations | 1,427 | 923 | 412 | 92 | — |
| Operating lease obligations (b) | 62,097 | 12,346 | 17,066 | 11,217 | 21,468 |
| Purchase obligations (c) | 161,247 | 102,912 | 31,335 | 27,000 | — |
| Supplemental put obligation (d) | 29,073 | — | — | — | — |
|  | $365,812 | $139,934 | $66,542 | $108,795 | $21,468 |

(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 June 30, 2010, including: (i) shareholder distributions of $57 million, (ii) management fees of approximately $14 million per year over the next five years, (iii) commitment fees under our Revolving Credit Facility, and (iv) other obligations, including amounts due under employment agreements.

(d) The supplemental put obligation represents the long-term portion of an estimated 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 this amount will be paid.

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.

The estimates employed and judgment used in determining critical accounting estimates have not changed 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, 2009 as filed with the SEC.

### Recent Accounting Pronouncements

Refer to footnote C to our condensed consolidated financial statements.

## Market risk

As filed, 244 characters.

The quantitative and qualitative disclosures about market risk required by this item have not changed materially from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC on March 9, 2010.

## Controls and procedures

As filed, 1,144 characters.

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 June 30, 2010. 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 June 30, 2010.

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 second quarter of 2010 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

## Risk factors

As filed, 262 characters.

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 Annual Report on Form 10-K for the year ended December 31, 2009 as filed with the SEC on March 9, 2010.

Filed Aug 9, 2010.
Source: SEC EDGAR, the filing index for accession 0000950123-10-074803. Last ingested by Listed: Nov 4, 2026, 17:19 ET. No prices; not investment advice.