# Compass Diversified Holdings: Form 10-Q for the period ended Sep 30, 2012

- Company: [Compass Diversified Holdings](/companies/codi.md) (CIK 1345126)
- Form: 10-Q
- Filed: 2012-11-07
- Accepted by EDGAR: Nov 7, 2012, 16:17 ET
- Period: 2012-09-30
- Accession: 0001193125-12-457480
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1345126/000119312512457480/d398049d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1345126/000119312512457480/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2012-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2012-07-01 to 2012-09-30 | $241.2m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2012-01-01 to 2012-09-30 | $666.6m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2012-07-01 to 2012-09-30 | $164.3m | us-gaap:CostOfGoodsSold |
| Cost of revenue | 9 months, 2012-01-01 to 2012-09-30 | $455.0m | us-gaap:CostOfGoodsSold |
| Gross profit | 3 months, 2012-07-01 to 2012-09-30 | $76.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2012-01-01 to 2012-09-30 | $211.5m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2012-07-01 to 2012-09-30 | $39.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2012-01-01 to 2012-09-30 | $119.8m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2012-07-01 to 2012-09-30 | $20.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2012-01-01 to 2012-09-30 | $49.5m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2012-07-01 to 2012-09-30 | $5.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2012-01-01 to 2012-09-30 | $19.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2012-07-01 to 2012-09-30 | $7.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2012-01-01 to 2012-09-30 | $17.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2012-07-01 to 2012-09-30 | $3.5m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2012-01-01 to 2012-09-30 | $2.8m | us-gaap:NetIncomeLoss |
| Operating cash flow | 9 months, 2012-01-01 to 2012-09-30 | $21.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2012-01-01 to 2012-09-30 | $9.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2012-01-01 to 2012-09-30 | $52.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2012-09-30 | $20.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2012-09-30 | $296.0m | us-gaap:AssetsCurrent |
| Total assets | at 2012-09-30 | $989.8m | us-gaap:Assets |
| Current liabilities | at 2012-09-30 | $127.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2012-09-30 | $498.4m | us-gaap:Liabilities |
| Long-term debt | at 2012-09-30 | $262.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2012-09-30 | $2.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2012-09-30 | $436.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 117,906 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 and in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 9, 2012.***

### Overview

Compass Diversified Holdings, a Delaware statutory trust, was formed 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;
- 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 whom 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 and is highly unusual in the marketplace for acquisitions in which we operate.

### 2012 Nine-months Highlights

### Acquisition of Arnold Magnetics

On March 5, 2012, we purchased a 96.6% controlling interest (on a primary and fully diluted basis) in Arnold Magnetics, with headquarters in Rochester, NY. Arnold Magnetics has an operating history of more than 100 years and is a leading global manufacturer of engineered magnetic solutions for a wide range of specialty applications and end-markets, including energy, medical, aerospace and defense, consumer electronics, general industrial and automotive. From its nine manufacturing facilities located in the United States, the United Kingdom, Switzerland and China, Arnold produces high performance permanent magnets, flexible magnets and precision foil products that are mission critical in motors, generators, sensors and other systems and components. Based on its long-term relationships, Arnold Magnetics has built a diverse and blue-chip customer base totaling more than 2,000 clients worldwide.

The purchase price, including proceeds from non-controlling interests, was approximately $130.5 million (excluding acquisition-related costs) and was based on a total enterprise value of $124.2 million and included approximately $6.3 million in cash and working capital. Acquisition related costs were approximately $4.8 million. We funded the acquisition through available cash on hand and a draw of $25 million on our Revolving Credit Facility. Arnold’s management and certain other investors invested in the transaction alongside us, collectively representing approximately 3.4% in initial non-controlling interest on a primary and fully diluted basis. CGM acted as an advisor to the Company in the transaction and received fees and expense payments totaling approximately $1.2 million.

### Preferred Stock Redemption

On March 6, 2012, we redeemed CamelBak’s 11% convertible preferred stock for $45.3 million plus accrued dividends of $2.7 million, from an affiliate of CGI Magyar Holdings LLC, CODI’s largest shareholder. The redemption was funded with available cash on hand.

### Debt Re-pricing

On April 2, 2012, we exercised our option for an incremental term loan in the amount of $30 million. The incremental term loan was issued at 99% of par value and increased the term loans outstanding under the Credit Facility from approximately $224.4 million to approximately $254.4 million. In addition, in connection with the option we reduced the margin on Term Loan Facility LIBOR Loans from 6.00% to 5.00%, Base Rate Loans from 5.00% to 4.00% and reduced the LIBOR floor from 1.50% to 1.25%. We paid an amendment fee of approximately $2.2 million, and incurred additional fees and expenses of approximately $0.6 million. Net proceeds from this incremental term loan were used to reduce outstanding loans on the Revolving Credit Facility.

### Sale of HALO

On May 1, 2012, we sold all of the issued and outstanding capital stock of HALO to Candlelight Investment Holdings, Inc. The total enterprise value received for HALO was $76.5 million.

At the closing, we received approximately $66.5 million in cash in respect of our debt and equity interests in HALO and for the payment of accrued interest and fees after payments to non-controlling shareholders and payment of all transaction expenses. The net proceeds were used to repay outstanding debt under our Revolving Credit Facility. Our proceeds from the disposition approximate our carrying value of HALO. We recorded a loss on the sale of HALO of $0.5 million.

The transaction is subject to typical escrow requirements and adjustments for certain changes in the working capital of HALO. The HALO purchase agreement contains customary representations, warranties, covenants and indemnification provisions.

### Outlook

Net sales during the nine months ended September 30, 2012 increased at five of our eight businesses when compared to the same period of 2011. The preliminary estimate of U.S. gross domestic product (“GDP”), a measure of the total production of goods and services in the United States, increased during the third quarter of 2012 at the seasonally adjusted annualized rate of 2.0%, compared to 1.3% in the second quarter of 2012. The increased rate of growth is an indication that government and consumer spending is marginally increasing. Each of our businesses are impacted by the overall economic environment including both consumer spending and increasing commodity and fuel costs. Additionally, American Furniture Manufacturing Inc. (“AFM” or “American Furniture”) is also significantly affected by continued tight consumer credit markets and the depressed housing market which is evident in the decrease in quarter over quarter sales in the third quarter of 2012.

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.

### Results of Operations

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

| May 16, 2006 | August 1, 2006 | August 31, 2007 | January 4, 2008 | March 31, 2010 |
| --- | --- | --- | --- | --- |
| Advanced Circuits | Tridien | American Furniture | Fox | Liberty Safe |

| September 16, 2010 | August 24, 2011 | March 5, 2012 |
| --- | --- | --- |
| ERGObaby | CamelBak | Arnold Magnetics |

In the following results of operations, we provide: (i) actual consolidated results of operations for the three and nine months ended September 30, 2012 and 2011, which includes the historical results of operations of our businesses (operating segments) from the date of acquisition and recasts prior period reporting for business sold during the periods presented (Staffmark and Halo) and: (ii) comparative results of operations for each of our businesses on a stand-alone basis for the three and nine-months ended September 30, 2012 and 2011 which include relevant pro-forma adjustments to historical results of operations and explanations, where appropriate, for the 2012 acquisition and 2011 acquisition.

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

*(in thousands)*

|  | Three months ended September 30, 2012 | Three months ended September 30, 2011 | Nine months ended September 30, 2012 | Nine months ended September 30, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $241,228 | $168,667 | $666,571 | $446,451 |
| Cost of sales | 164,281 | 117,837 | 455,036 | 311,168 |
| Gross profit | 76,947 | 50,830 | 211,535 | 135,283 |
| Staffing, selling, general and administrative expense | 39,422 | 30,395 | 119,756 | 77,347 |
| Fees to manager | 4,429 | 4,792 | 13,294 | 11,707 |
| Supplemental put expense | 5,029 | 1,200 | 6,391 | 6,095 |
| Amortization of intangibles | 7,699 | 5,509 | 22,639 | 14,943 |
| Impairment expense | — | — | — | 7,700 |
| Income (loss) from operations | $20,368 | $8,934 | $49,455 | $17,491 |

30

#### Net sales

On a consolidated basis, net sales increased $72.6 million and $220.1 million during the three and nine month periods ended September 30, 2012, respectively, compared to the same periods in 2011. These increases for both the three and nine month periods are due principally to increased revenues (and in the case of Arnold Magnetics and CamelBak, incremental revenues) at each of our operating segments with the exception of American Furniture and Tridien and for the quarter only, CamelBak. We realized revenues totaling approximately $68.6 million and $196.9 million in the three and nine months ended September 30, 2012 at Arnold Magnetics and CamelBak, which we acquired in March 2012 and August 2011, respectively. Refer to “Results of Operations – Our Businesses” for a more detailed analysis of net sales for each 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 businesses. 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 $46.4 million and $143.9 million during the three and nine month periods ended September 30, 2012, respectively, compared to the same periods in 2011. These increases are due almost entirely to the corresponding increase in net sales. Gross profit as a percentage of net sales totaled approximately 31.9% and 30.1% of net sales for the three month periods ended September 30, 2012 and 2011, respectively. Gross profit as a percentage of net sales totaled approximately 31.7% and 30.3% of net sales for the nine month periods ended September 30, 2012 and 2011, respectively. The increase in gross profit percentage for both the three and nine months ended September 30, 2012 compared to the same periods in 2011 is principally attributable to the inclusion of CamelBak results of operations in both periods of 2012, compared to just thirty-six days in 2011. CamelBak’s profit margin during the nine months ended September 30, 2012 was approximately 46.0%. Refer to “Results of Operations – Our Businesses” for a more detailed analysis of cost of sales for each business segment.

#### Selling, general and administrative expense

On a consolidated basis, selling, general and administrative expense increased approximately $9.1 million and $42.4 million in the three and nine month periods ended September 30, 2012, respectively, compared to the same periods in 2011. The majority of these increases are due principally to increases in costs directly tied to sales, such as commissions and direct customer support services, and selling, general and administrative costs at Arnold Magnetics and CamelBak during 2012. Refer to “Results of Operations – Our Businesses”, for a more detailed analysis of selling, general and administrative expense by segment.

#### 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 September 30, 2012 and 2011, we incurred approximately $4.4 million and $4.8 million, respectively, in expense for these fees. For the nine months ended September 30, 2012 and 2011 we incurred approximately $13.3 million and $11.7 million, respectively, in expense for these fees. The increase in management fees for the nine months ended September 30, 2012 compared to the same period in 2011 is due to management fees recast as a component of discontinued operations in the 2011 periods resulting from the sale of Staffmark and HALO. The remaining change is due to the increase in consolidated adjusted net assets as of September 30, 2012 in connection with the CamelBak acquisition in August 2011 and the Arnold Magnetics acquisition in March 2012, offset in part by the decrease in consolidated adjusted net assets in connection with the sales of Staffmark and HALO.

#### 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 it upon termination of the Management Services Agreement. We accrue for the supplemental put expense on a quarterly basis. For the three and nine months ended September 30, 2012, we incurred approximately $5.0 million and $6.4 million, respectively, in expense compared to $1.2 million and $6.1 million for the corresponding periods in 2011. The change in supplemental put expense in all periods presented is attributable to the increase or decrease in the estimated fair value of our businesses during each of those periods.

#### Impairment expense

We incurred an impairment charge in the first quarter of 2011 totaling $7.7 million, which is reflected in the operating results for the nine months ended September 30, 2011, at our American Furniture business segment, based on 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. As of September 30, 2012, the balance of goodwill carried at American Furniture is zero.

We completed our annual impairment analysis of goodwill as of March 31, 2012 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 nine month periods ending September 30, 2012 and September 30, 2011, 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 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 2011 and into the first and second quarter of 2012 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. On May 23, 2012 Advanced Circuits acquired the assets of Universal Circuits (“UCI”) for approximately $2.8 million. Universal Circuits supplies PCBs to major military, aerospace, and medical original equipment manufacturers and contract manufacturers. UCI’s Minnesota facility meets certain Department of Defense clearance requirements and is noted for custom and advanced technologies. Universal Circuits’ sales are primarily in the long-lead sector. For the three and nine-months ended September 30, 2012 the consolidated results of operations of Advanced Circuits includes net sales of Universal Circuits aggregating $3.5 million and $4.9 million, respectively, and gross profit of Universal Circuits aggregating $.08 million and $1.1 million, respectively. The following Results of Operations does not include any operating results from these two acquisitions prior to their respective date of acquisition.

### Results of Operations

The table below summarizes the income from operations data for Advanced Circuits for the three and nine month periods ended September 30, 2012 and September 30, 2011.

*(in thousands)*

|  | Three months ended September 30, 2012 | September 30, 2011 | Nine months ended September 30, 2012 | September 30, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $22,229 | $19,592 | $62,878 | $59,905 |
| Cost of sales | 11,540 | 8,934 | 31,272 | 26,776 |
| Gross profit | 10,689 | 10,658 | 31,606 | 33,129 |
| Selling, general and administrative expense | 3,522 | 3,167 | 10,595 | 9,988 |
| Fees to manager | 125 | 125 | 375 | 375 |
| Amortization of intangibles | 769 | 757 | 2,287 | 2,270 |
| Income from operations | $6,273 | $6,609 | $18,349 | $20,496 |

***Three months ended September 30, 2012 compared to the three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 increased approximately $2.6 million or 13.5%, over the corresponding three month period ended September 30, 2011. The increase in net sales is the result of an increase in gross sales of prototype PCBs ($0.2 million), long-lead PCBs ($2.6 million) and assembly revenue ($0.4 million) during the three months ended September 30, 2012 compared to the same period of 2011, offset in part by a decrease in sales of quick-turn production PCBs ($0.2 million) and an increase in promotion and discount charges ($0.3 million). The increase in sales of long-lead PCBs is largely due to sales during the third quarter of 2012 attributable to Universal Circuits.

Sales from quick-turn and prototype PCBs represented approximately 56% of net sales during the three months ended September 30, 2012 compared to approximately 64% during 2011. The decrease in proportion of quick-turn and prototype PCB sales to total sales is a function of the addition of Universal Circuit’s 2012 long-lead sales.

#### Cost of sales

Cost of sales for the three months ended September 30, 2012 increased approximately $2.6 million from the comparable period in 2011 principally resulting from the increase in sales. Gross profit as a percentage of sales decreased during the three months ended September 30, 2012 (48.1% at September 30, 2012, compared to 54.4% at September 30, 2011). This decrease in margin is the result of: (i) the increase in promotional pricing, principally related to long-lead PCB sales during the three months ended September 30, 2012 and (ii) sales attributable to Universal Circuits, and a larger proportion of assembly sales during the three months ended September 30, 2012, each of which carry lower margins.

#### Selling, general and administrative expense

Selling, general and administrative expense increased approximately $0.4 million during the three months ended September 30, 2012 compared to the same period in 2011 due to acquisition related costs in connection with the acquisition of Universal Circuits totaling approximately $0.4 million.

#### Income from operations

Operating income for the three months ended September 30, 2012 was approximately $6.3 million compared to $6.6 million earned in the same period in 2011, a decrease of approximately $0.3 million, principally as a result of those factors described above.

***Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 increased approximately $3.0 million or 5.0%, over the corresponding nine month period ended September 30, 2011. The increase in net sales is a result of an increase in gross sales of prototype and quick-turn production PCBs ($2.0 million), long-lead PCBs ($1.2 million) and assembly revenue ($1.9 million) during the nine months ended September 30, 2012 compared to the same period of 2011, offset in part by an increase in promotion and discount charges ($1.9 million). The increase in sales in the quick turn sector during 2012 compared to 2011 is due in part to quick-turn sales attributable to Universal Circuits. The increase in promotion and discount charges in 2012 compared to the same period of 2011 are principally the result of discounting and price promotions incurred during 2012 in response to competitor’s pricing in the long-lead sector. The increase in sales of long-lead PCBs are largely due to sales during the second and third quarters of 2012 attributable to Universal Circuits.

Sales of quick-turn and prototype PCBs represented approximately 61.5% of net sales during the nine months ended September 30, 2012 compared to 63.2% in 2011.

#### Cost of sales

Cost of sales for the nine months ended September 30, 2012 increased approximately $4.5 million from the comparable period in 2011 due principally to the increase in sales. Gross profit as a percentage of sales decreased during the nine months ended September 30, 2012 (50.3% at September 30, 2012 compared to 55.3% at September 30, 2011). This decrease in margin is the result of: (i) the promotional pricing in long-lead PCB sales during the nine months ended September 30, 2012 noted above and (ii) sales attributable to Universal Circuits, and a larger proportion of assembly sales during the nine months ended September 30, 2012, each which carry lower margins

#### Selling, general and administrative expense

Selling, general and administrative expense increased approximately $0.6 million during the nine months ended September 30, 2012 compared to the same period in 2011 due principally to acquisition related costs in connection with the acquisition of Universal Circuits of approximately $0.4 million.

#### Income from operations

Operating income for the nine months ended September 30, 2012 was approximately $18.3 million compared to $20.5 million earned in the same period in 2011, a decrease of approximately $2.1 million, 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 most products in its line to its customers within 48 hours of receiving an order.

American Furniture implemented a revised standard costing system in the year 2011 which required American Furniture to reclassify certain costs between cost of sales and selling, general and administrative expenses. The change in format consisted of reclassifying the trucking fleet expenses from selling, general and administrative expenses into cost of sales as well as re-classifying certain manufacturing related expenses including rent, insurance, utilities and workers’ compensation from selling, general and administrative costs to cost of sales. Management believes that the format of reporting cost of sales going forward together with the revised standard costing system and the revaluation of standard costs will allow management to timely react to changes in supply costs, product demand and overall price structure which in turn should eliminate the accumulation of lower margin product, allow for more advantageous product procurement and allow for proper utilization of available assets. The reclassification from selling, general and administrative expense to cost of sales during the three and nine months ended September 30, 2011 was $1.5 million and $4.6 million, respectively.

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 loss from operations data for American Furniture for the three and nine month periods ended September 30, 2012 and September 30, 2011.

*(in thousands)*

|  | Three months ended September 30, 2012 | September 30, 2011 | Nine months ended September 30, 2012 | September 30, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $20,728 | $23,695 | $72,359 | $83,112 |
| Cost of sales | 19,534 | 23,463 | 67,548 | 78,210 |
| Gross profit | 1,194 | 232 | 4,811 | 4,902 |
| Selling, general and administrative expense | 1,762 | 2,196 | 5,804 | 7,545 |
| Fees to manager | — | — | — | 125 |
| Amortization of intangibles | 13 | 546 | 39 | 1,637 |
| Impairment expense | — | — | — | 7,700 |
| Loss from operations | $(581) | $(2,510) | $(1,032) | $(12,105) |

***Three months ended September 30, 2012 compared to the three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 decreased approximately $3.0 million, or 12.5% over the corresponding three months ended September 30, 2011. During the three month period ending September 30, 2012, stationary product gross sales and motion product sales decreased approximately $3.1 million and $0.5 million, respectively, while recliner sales increased approximately $1.0 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 September 30, 2012 compared to 2011. The decrease in gross sales in the stationary and motion product categories and other products is principally the result of a soft current retail environment and increased competition in pricing in our promotional furniture category during the three months ended September 30, 2012. The increase in recliner product sales is the result of supplying product to one of our largest customers for their recliner promotion event. We expect that sales for the remainder of the fiscal year will continue to be challenged by the current retail environment.

#### Cost of sales

Cost of sales decreased approximately $3.9 million in the three months ended September 30, 2012 compared to the same period of 2011 and is due primarily to the corresponding decrease in sales. Gross profit as a percentage of sales was 5.8% in the three months ended September 30, 2012 compared to 1.0% in the same period of 2011. The increase in gross profit as a percentage of sales of approximately 4.8% during the three months ended September 30, 2012 is principally attributable to a $1.2 million write off taken in 2011 to adjust overhead absorption in inventory resulting from adjustments to its standard costs in July 2011.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended September 30, 2012 decreased approximately $0.4 million compared to the same period of 2011. This decrease is primarily due to decreased costs of advertising and marketing ($0.2 million) and administrative salaries and benefits ($0.2 million) during the three months ended September 30, 2012 compared to the same period of 2011.

#### Loss from operations

Loss from operations totaled approximately $0.6 million for the three months ended September 30, 2012 compared to a loss from operations of approximately $2.5 million in the three months ended September 30, 2011, principally due to those factors described above.

***Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 decreased approximately $10.8 million, or 12.9%, over the corresponding nine months ended September 30, 2011. During the nine month period ending September 30, 2012, stationary product gross sales and motion product sales decreased approximately $10.0 million, and $1.2 million, respectively, while recliner sales increased approximately $1.1 million. Sales of other products and a reduction in fuel surcharges were responsible for the remaining decrease in net sales during the nine months ended September 30, 2012 compared to 2011. The decrease in gross sales in the stationary and motion product categories and other products is principally the result of a soft current retail environment and increased competition in pricing in our promotional furniture category during the nine months ended September 30, 2012 and to a lesser extent our inability to ship certain products during the first quarter 2012 due to a delay in receiving fabric kits that we outsourced to China. The increase in recliner product sales is the result of supplying product to one of our largest customers for their recliner promotion event. We expect that sales for the remainder of the fiscal year will continue to be challenged by the current retail environment.

#### Cost of sales

Cost of sales decreased approximately $10.7 million in the nine months ended September 30, 2012 compared to the same period of 2011 and is due primarily to the corresponding decrease in sales. Gross profit as a percentage of sales was 6.6% in the nine months ended September 30, 2012 compared to 5.9% in 2011. The increase in gross profit as a percentage of sales of approximately 0.7% during the nine months ended September 30, 2012 is principally attributable to a $1.2 million write off taken in 2011 to adjust overhead absorption in inventory resulting from adjustments to its standard costs in July 2011.

#### Selling, general and administrative expense

Selling, general and administrative expense for the nine months ended September 30, 2012, decreased approximately $1.7 million compared to the same period of 2011. This decrease is primarily due to decreased costs of advertising and marketing ($0.4 million) and administrative salaries and benefits ($1.1 million) during the nine months ended September 30, 2012 compared to the same period of 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 nine months ended September 30, 2011. This impairment charge eliminated the remaining balance of goodwill. The $1.8 million impairment charge to American Furniture’s trade name is in addition to $3.3 million in impairment charges to its trade name expensed in 2010. The impairment charges resulted from the annual analysis of goodwill and were necessary based on the deterioration of the promotional furniture market in 2011. There were no impairment charges for American Furniture during the comparable 2012 period and only $0.5 million in intangible assets are currently on its balance sheet.

#### Loss from operations

Loss from operations totaled approximately $1.0 million for the nine months ended September 30, 2012 compared to a loss from operations of approximately $12.1 million in the nine months ended September 30, 2011, principally due the factors described above, particularly the impairment charge in 2011.

### Arnold Magnetics

### Overview

Founded in 1895 and headquartered in Rochester, New York, Arnold Magnetics is a manufacturer of engineered, application specific permanent magnets. Arnold Magnetics products are used in applications such as general industrial, reprographic systems, aerospace and defense, advertising and promotional, consumer and appliance, energy, automotive and medical technology. Arnold Magnetics is the largest U.S. manufacturer of engineered magnets as well as only one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Arnold operates a 70,000 sq. ft. manufacturing assembly and distribution facility in Rochester, New York with nine additional facilities worldwide, in countries including the United Kingdom, Switzerland and China. Arnold serves customers via three primary product sectors:

- Permanent Magnet and Assemblies and Reprographics (“PMAG”) (approximately 70% of sales) – High performance magnets for precision motor/generator sensors as well as beam focusing applications and reprographic applications;
- Flexmag (approximately 20% of net sales) – Flexible bonded magnets for advertising, consumer and industrial applications; and
- Rolled Products (approximately 10% of net sales) – Ultra thin metal foil products utilizing magnetic and non- magnetic alloys.

Arnold Magnetics is also a 50% partner in a China rare earth mine-to-magnet joint venture. Arnold Magnetics accounts for its activity in the joint venture utilizing the equity method of accounting. Gains and losses from the joint venture are not material during the three and nine months ended September 30, 2012.

On March 5, 2012, we made loans to and purchased a controlling interest in Arnold Magnetics for approximately $131 million, representing approximately 96.6% of the equity in Arnold Magnetics.

### Pro-forma Results of Operations

*(in thousands)*

|  | Three months ended September 30, 2012 (Pro-forma) | September 30, 2011 (Pro-forma) | Nine months ended September 30, 2012 (Pro-forma) | September 30, 2011 (Pro-forma) |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $31,951 | $35,873 | $99,036 | $102,750 |
| Cost of sales (a) | 25,060 | 28,624 | 76,463 | 80,753 |
| Gross profit | 6,891 | 7,249 | 22,573 | 21,997 |
| Selling, general and administrative expense (b) | 3,740 | 3,925 | 12,070 | 11,869 |
| Fees to manager (c) | 125 | 125 | 375 | 375 |
| Amortization of intangibles (d) | 874 | 875 | 2,642 | 2,572 |
| Income from operations | $2,152 | $2,324 | $7,486 | $7,182 |

*Pro-forma results of operations of Arnold Magnetics for the three and nine months ended September 30, 2012 and 2011 include the following pro-forma adjustments, applied to historical results as if we acquired Arnold Magnetics on January 1, 2011:*

(a) Cost of sales for the nine months ended September 30, 2011 does not include $1.6 million of amortization expense associated with the inventory fair value step-up as a result of and derived from the purchase price allocation in connection with our purchase.

(b) Selling, general and administrative costs were reduced by approximately $0.1 million and $12.4 million in the three and nine-months ended September 30, 2012, respectively, representing adjustments for one-time transaction costs incurred as a result of our purchase.

(c) Represents management fees that would have been payable to the Manager in each period presented.

(d) Represents an increase in amortization of intangible assets totaling $0.7 million in the three month period ended September 30, 2011 and $0.6 million and $2.0 million in the nine months ended September 30, 2012 and 2011, respectively. These adjustments are the result of and were derived from the purchase price allocation in connection with our acquisition.

***Pro forma three months ended September 30, 2012 compared to the pro forma three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 were approximately $32.0 million, a decrease of $3.9 million, or 10.9%, compared to the same period in 2011. The decrease in net sales is a result of decreased sales in the PMAG ($3.3 million), Flexmag ($0.1 million) and Rolled product ($0.5 million) sectors. PMAG sales represented approximately 72.7% of net sales for the three months ended September 30, 2012 compared to 74.1% for the same period in 2011. The decrease in sales is principally attributable to a decrease in reprographic application sales, a component of PMAG, during the three-months ended September 30, 2012 compared to the same period in 2011.

International sales were $13.9 million during the three months ended September 30, 2012 compared to $17.1 million during the same period in 2011, a decrease of $3.3 million or 19%.

#### Cost of sales

Cost of sales for the three months ended September 30, 2012 were approximately $25.1 million compared to approximately $28.6 million in the same period of 2011. The decrease of $3.6 million is due principally to the corresponding decrease in sales. Gross profit as a percentage of sales increased from 20.2% for the quarter ended September 30, 2011 to 21.6% in the quarter ended September 30, 2012. The increase is attributable to increased margins in the PMAG sector due to a more favorable customer/product sales mix, due in part to the decrease in reprographic application sales during the three months ended September 30, 2012 compared to the same period in 2011.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended September 30, 2012 was approximately $3.7 million or 11.7% of net sales compared to $3.9 million or 10.9% of net sales during the same period in 2011.

#### Income from operations

Income from operations was approximately $2.2 million during the three months ended September 30, 2012 compared to $2.3 million in the three months ended September 30, 2011.

***Pro forma nine months ended September 30, 2012 compared to the pro forma nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 were approximately $99.0 million, a decrease of $3.7 million, or 3.6%, compared to the same period in 2011. The decrease in net sales is a result of decreased sales in the PMAG product sector ($2.5 million) and decreases in sales in the Flexmag ($0.2 million) and Rolled Products ($1.0 million) sectors. PMAG sales represented approximately 73.0% of net sales for the nine months ended September 30, 2012 compared to 72.8% for the same period in 2011. The decrease in PMAG sales during the nine months ended September 30, 2012 compared to the same period in 2011 is principally attributable to lower reprographic application sales, a component of PMAG.

International sales were $44.0 million during the nine months ended September 30, 2012 compared to $47.0 million during the same period in 2011, a decrease of $3.0 million or 6%.

#### Cost of sales

Cost of sales for the nine months ended September 30, 2012 were approximately $76.5 million compared to approximately $80.8 million in the same period of 2011. The decrease of $4.3 million is due principally to the corresponding decrease in sales. Gross profit as a percentage of sales increased from 21.4% for the nine months ended September 30, 2011 to 22.8% in the nine months ended September 30, 2012. The increase is attributable to increased margins in the PMAG sector due to a more favorable customer/product sales mix, due in part to a decrease in reprographic application sales during the nine months ended September 30, 2012 compared to the same period in 2011, offset in part by a decrease in margins at its Rolled Product sector due to an unfavorable customer/product sales mix.

#### Selling, general and administrative expense

Selling, general and administrative expense for the nine months ended September 30, 2012 increased to approximately $12.1 million or 12.2% of net sales compared to $11.9 million or 11.6% of net sales for the same period in 2011. The $0.2 million increase in selling, general and administrative expenses incurred during the nine months ended September 30, 2012 compared to the same period in 2011 is attributable to initial increases in personnel costs and benefits and third party services to support growth initiatives.

#### Income from operations

Income from operations for the nine months ended September 30, 2012 was approximately $7.5 million, an increase of $0.3 million when compared to the same period in 2011, based on the factors described above.

### CamelBak

### Overview

CamelBak, headquartered in Petaluma, California, is a premier designer and manufacturer of personal hydration products for outdoor, recreation and military applications. CamelBak offers a broad range of recreational and military personal hydration systems (“Hydration Systems”), reusable water bottles (“Bottles”), specialty military gloves (“Gloves”) and performance accessories (“Accessories”).

As the leading supplier of hydration products to specialty outdoor, cycling and military retailers, CamelBak maintains the leading market share position in recreational markets for hands-free hydration packs and the leading market share position for reusable water bottles in specialty channels. CamelBak is also the dominant supplier of hydration systems to the military, with a leading market share in post-issue hydration systems. Over its more than 20-year history, CamelBak has developed a reputation as the preferred supplier for the hydration needs of the most demanding athletes and soldiers. Across its markets, CamelBak is respected for its innovation, leadership and authenticity.

On August 24, 2011, we made loans to and purchased a controlling interest in CamelBak for approximately $258.6 million, representing 90% of the equity in CamelBak.

### Results of Operations and Pro forma Results of Operations

The table below summarizes the pro-forma income from operations data for CamelBak for the three and nine month periods ended September 30, 2012 and September 30, 2011.

*(in thousands)*

|  | Three months ended September 30, 2012 | September 30, 2011 (Pro-forma) | Nine months ended September 30, 2012 | September 30, 2011 (Pro-forma) |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $36,672 | $38,319 | $121,140 | $114,695 |
| Cost of sales (a) | 20,050 | 22,771 | 65,400 | 68,025 |
| Gross profit | 16,622 | 15,548 | 55,740 | 46,670 |
| Selling, general and administrative expense (b) | 9,067 | 7,303 | 27,160 | 22,676 |
| Fees to manager (c) | 125 | 125 | 375 | 375 |
| Amortization of intangibles (d) | 2,345 | 2,180 | 7,100 | 6,936 |
| Income from operations | $5,085 | $5,940 | $21,105 | $16,683 |

*Pro-forma results of operations of CamelBak for the three and nine month periods ended September 30, 2012 and 2011 include the following pro-forma adjustments, applied to historical results as if we acquired CamelBak on January 1, 2011:*

(a) Cost of sales for the nine months ended September 30, 2011 does not include $6.0 million of amortization expense associated with the inventory fair value step-up as a result of and derived from the purchase price allocation in connection with our purchase.

(b) Selling, general and administrative costs were reduced by approximately $7.0 million in the three and nine-months ended September 30, 2011 representing an adjustment for one-time transaction costs incurred as a result of our purchase.

(c) Represents management fees that would have been payable to the Manager in each period presented.

(d) An increase in amortization of intangible assets totaling $1.8 million and $5.4 million, respectively, in the three and nine month periods ended September 30, 2012 and $1.3 million and $5.6 million, respectively in the three and nine months ended September 30, 2011. These adjustments are the result of and were derived from the purchase price allocation in connection with our acquisition.

***Three months ended September 30, 2012 compared to the pro forma three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 were approximately $36.7 million, a decrease of $1.6 million, or 4.3%, compared to the same period in 2011. The decrease in gross sales is a result of decreased sales in Hydration Systems ($0.1 million), Accessories ($1.1 million) and Gloves ($3.9 million) offset in part by an increase in Bottle sales ($3.3 million). The decrease in Glove sales during the three months ended September 30, 2012 compared to the same period in 2011 is due to decreased demand from the U.S. military, resulting principally from a drawdown of U.S. combat troops during the period and the absence of sales from a direct contract with the U.S. Military that was not in effect in 2012. The increase in Bottle sales is principally due to the expansion of offerings in Bottles, such as the introduction of eddyTM and the continued expansion in its customer base, including new and existing customers.

Hydration Systems and Bottles represented approximately 86% of gross sales for the three months ended September 30, 2012 compared to 74% for the same period in 2011. This increase is due in large part to the significant decrease in Glove sales. Military sales represented approximately 38% of gross sales for the three months ended September 30, 2012 compared to 45% for the same period in 2011. International sales represented approximately 14% of gross sales for the three months ended September 30, 2012 compared to 16% for the same period in 2011.

#### Cost of sales

Cost of sales for the three months ended September 30, 2012 were approximately $20.1 million compared to approximately $22.8 million in the same period of 2011. The decrease of $2.7 million is due principally to the corresponding decrease in net sales and the significant decrease in Glove sales. Gross profit as a percentage of sales increased to 45.3% for the quarter ended September 30, 2012 compared to 40.6% in the quarter ended September 30, 2011. The increase is attributable to a favorable sales mix during the quarter ended September 30, 2012 compared to last year’s quarter, and the decrease in Glove sales as a percentage of total sales. Gloves carry a lower gross profit margin than CamelBak’s other product lines.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended September 30, 2012 increased to approximately $9.1 million or 24.7% of net sales compared to $7.3 million or 19.1% of net sales for the same period of 2011. The $1.8 million increase in selling, general and administrative expense incurred during the three months ended September 30, 2012 compared to the same period in 2011 is attributable to: (i) increases in compensation expense ($0.8 million), (ii) increases in marketing costs ($0.4 million) and (iii) an increase in bad debt expense totaling $0.2 million, with the balance of the increase due principally to increased infrastructure costs and general overhead, which together with the increases noted above were necessary to support expansion in connection with growth initiatives.

#### Income from operations

Income from operations for the three months ended September 30, 2012 was $5.1 million, a decrease of $0.9 million when compared to the same period in 2011, principally based on the factors described above.

***Nine months ended September 30, 2012 compared to the pro forma nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 were approximately $121.1 million, an increase of $6.4 million, or 5.6%, compared to the same period in 2011. The increase in gross sales is a result of increased sales in Hydration Systems ($10.1 million) and Bottles ($8.2 million) offset in part by a decrease in sales of Gloves ($9.2 million) and Accessories ($1.2 million). The increased Bottle and Hydration Systems sales during the nine months ended September 30, 2012 compared to the same period in 2011 is attributable to the continued success of “Antidote”, CamelBak’s new reservoir for the recreational Hydration Systems line, introduced in 2011, the expansion of offerings in Bottles, such as the introduction of eddyTM, and the continued expansion in its customer base, including new and existing customers, for all product lines. CamelBak began providing Hydration Systems as a subcontractor as part of the United States Marine Corps pack program beginning at the end of 2011, which contributed to the increase in Hydration Systems sales in the first nine months of 2012 compared to 2011. CamelBak anticipates fulfillment of this contract during the first quarter of 2013. The decrease in Glove sales during the nine months ended September 30, 2012 compared to the same period in 2011 is due to decreased demand from the U.S. military, resulting principally from a drawdown of U.S. combat troops during the period and the absence of sales from a direct contract with the U.S. Military that was not in effect in 2012.

Sales of Hydration Systems and Bottles represented approximately 85% of gross sales for the nine months ended September 30, 2012 compared to 74% for the same period in 2011. Military sales represented approximately 38% of gross sales for the nine months ended September 30, 2012 compared to 42% for the same period in 2011. International sales represented approximately 17% of gross sales for the nine months ended September 30, 2012 compared to 18% for the same period in 2011.

#### Cost of sales

Cost of sales for the nine months ended September 30, 2012 were approximately $65.4 million compared to approximately $68.0 million in the same period of 2011. The decrease of $2.6 million is due principally to the decrease in Glove sales. Gross profit as a percentage of sales increased to 46.0% for the nine months ended September 30, 2012 compared to 40.7% for the same period in 2011. The increase is attributable to a favorable sales mix during the nine months ended September 30, 2012 compared to last year, and the decrease in Glove sales as a percentage of total sales. Gloves carry a lower gross profit margin than CamelBak’s other product lines.

#### Selling, general and administrative expense

Selling, general and administrative expense for the nine months ended September 30, 2012 increased to approximately $27.2 million or 22.4% of net sales compared to $22.7 million or 19.8% of net sales for the same period of 2011. The $4.5 million increase in selling, general and administrative expense incurred during the nine months ended September 30, 2012 compared to the same period in 2011 is attributable to: (i) increases in sales commissions ($0.7 million), (ii) increases in marketing costs ($0.5 million), (iii) increases in rent and professional fees ($0.5 million) and (iv) increases in compensation expense ($2.1 million). The balance of the increase is due principally to increased infrastructure costs and general overhead, which together with the increases noted above were necessary to support expansion in connection with growth initiatives.

#### Income from operations

Income from operations for the nine months ended September 30, 2012 was approximately $21.1 million, an increase of $4.4 million when compared to the same period in 2011, based on the factors described above.

### ERGObaby

### Overview

ERGObaby, with headquarters in Los Angeles, California, 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 50 countries. ERGObaby’s product lines include baby carriers (organic and standard), accessories and Orbit Baby’s travel systems.

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

On November 18, 2011 ERGObaby acquired Orbit Baby. Orbit Baby produces and markets a premium line of stroller travel systems. Orbit Baby’s high-quality products include car seats, strollers and bassinets that are interchangeable using a patented hub ring. The results of operations for ERGObaby for the three and nine months ended September 30, 2011 do not include Orbit Baby operating results.

### Results of Operations

The table below summarizes the income from operations for the three months and nine months ended September 30, 2012 and September 30, 2011.

*(in thousands)*

|  | Three months ended September 30, 2012 | September 30, 2011 | Nine months ended September 30, 2012 | September 30, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $18,540 | $10,726 | $45,565 | $33,383 |
| Cost of sales (a) | 7,149 | 3,602 | 17,690 | 11,627 |
| Gross profit | 11,391 | 7,124 | 27,875 | 21,756 |
| Selling, general and administrative expense | 6,283 | 4,023 | 17,301 | 12,504 |
| Fees to manager | 125 | 125 | 375 | 375 |
| Amortization of intangibles | 743 | 429 | 2,294 | 1,287 |
| Income from operations | $4,240 | $2,547 | $7,905 | $7,590 |

***Three months ended September 30, 2012 compared to the three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 were $18.5 million, an increase of $7.8 million or 72.9% compared to the same period in 2011. Domestic sales were approximately $7.4 million in the three months ended September 30, 2012 compared to approximately $4.4 million in the same period for 2011. The increase is primarily attributable to Orbit Baby sales of $2.4 million in the 2012 period. International sales were approximately $11.2 million in the three months ended September 30, 2012 compared to $6.4 million in 2011, an increase of $4.8 million or 75%. Orbit Baby’s international sales were $1.4 million during the three months ended September 30, 2012. The remaining increase in international sales is due to an increase in sales in Asia and South America.

Excluding Orbit Baby sales of approximately $3.8 million in the three months ended September 30, 2012, baby carriers represented 89.4% of net sales in the quarter ended September 30, 2012 compared to 86.5% during the same period of 2011.

#### Cost of sales

Cost of sales for the three months ended September 30, 2012 were approximately $7.1 million compared to $3.6 million in the same period of 2011. The increase of $3.5 million is due principally to the increase in sales in the same period. Gross profit as a percentage of sales decreased from 66.4% for the quarter ended September 30, 2011 to 61.4% for the quarter ended September 30, 2012. The 5.0% decrease is primarily attributable to lower margin Orbit Baby product sales in the September 30, 2012 period and a larger proportion of international baby carriers in the third quarter of 2012 compared to 2011. International baby carrier sales generate a lower gross profit margin than domestic baby carrier sales.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended September 30, 2012 increased to approximately $6.3 million and represented 33.9% of net sales compared to $4.0 million or 37.5% of net sales for the same period of 2011. The increase of $2.3 million is primarily attributable to the selling, general and administrative expenses of Orbit Baby ($1.6 million), offset in part by a decrease in professional fees in the third quarter of 2012 ($0.3 million), each as compared to the 2011 third quarter, and the impact of an earn-out provision that was reversed in the third quarter of 2011 ($1.0 million).

#### Amortization of intangibles

Amortization expense increased $0.3 million in the three months ended September 30, 2012 compared to the same period in 2011 as a result of amortizing those intangible assets acquired as part of the purchase of Orbit Baby.

#### Income from operations

Income from operations for the three months ended September 30, 2012 was $4.2 million compared to $2.5 million in the same period of 2011. The $1.7 million increase is due principally to those factors described above.

***Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 were $45.6 million, an increase of $12.2 million or 36.5% compared to the same period in 2011. The increase is primarily attributable to Orbit Baby sales of $9.4 million during the nine months ended September 30, 2012 with the remaining 2012 increase attributable to baby carrier and accessory sales. Domestic sales were approximately $18.9 million in the nine months ended September 30, 2012 compared to approximately $11.9 million in the same period for 2011. The increase of $7.0 million or 58.7% is primarily attributable to Orbit Baby sales of $6.3 million in the 2012 period. International sales were approximately $26.7 million in the nine months ended September 30, 2012 compared to $21.5 million in 2011, an increase of $5.2 million or 24.2%. Orbit Baby’s international sales were $3.1 million in the nine months ended September 30, 2012.

Excluding Orbit Baby sales of $9.4 million, baby carriers represented 88.9% of sales in the nine months ended September 30, 2012 compared to 87.8 % during the same period of 2011.

#### Cost of sales

Cost of sales for the nine months ended September 30, 2012 were approximately $17.7 million compared to $11.6 million in the same period of 2011. The increase of $6.1 million is due principally to the increase in sales in the same period. Gross profit as a percentage of sales decreased from 65.2% for the nine months ended September 30, 2011 to 61.2% in 2012. The 4.0% decrease is primarily attributable to lower margin Orbit Baby product sales in the September 30, 2012 period and a larger proportion of international baby carriers during the nine months ended September 30, 2012 compared to the same period in 2011. International baby carrier sales generate a lower gross profit margin than domestic baby carrier sales.

#### Selling, general and administrative expense

Selling, general and administrative expense for the nine months ended September 30, 2012 increased to approximately $17.3 million or 38.0% of net sales compared to $12.5 million or 37.5% of net sales for the same period of 2011. The increase of $4.8 million is primarily attributable to the selling, general and administrative expenses of Orbit Baby ($4.1 million) and to a lesser extent the impact of an earn-out provision that was reversed in the third quarter of 2011 ($0.2 million) and an increase in marketing and personnel costs ($1.1 million) to support growth initiatives, offset in part by a decrease in bad debt expense ($0.4 million) at the baby carrier level during the nine-months ended September 30, 2012 compared to the same period in 2011.

#### Amortization of intangibles

Amortization expense increased $1.0 million in the nine months ended September 30, 2012 compared to the same period in 2011 as a result of amortizing those intangible assets acquired as part of the purchase of Orbit Baby.

#### Income from operations

Income from operations for the nine months ended September 30, 2012 increased approximately $0.3 million to $7.9 million compared to the same period in 2011, due principally to those factors described above.

### Fox Factory

### Overview

Fox, headquartered in Scotts Valley, 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 manufacturers (“OEM”) on their high-performance models at the top of their product lines in the mountain bike and powered vehicle 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 160 OEM and 7,600 Aftermarket customers across its market segments. In each of the years 2011, 2010 and 2009, approximately 80%, 78% 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 Factory for the three and nine month periods ended September 30, 2012 and September 30, 2011.

*(in thousands)*

|  | Three months ended September 30, 2012 | September 30, 2011 | Nine months ended September 30, 2012 | September 30, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $72,865 | $61,689 | $179,256 | $150,464 |
| Cost of sales | 52,746 | 42,816 | 129,593 | 105,787 |
| Gross profit | 20,119 | 18,873 | 49,663 | 44,677 |
| Selling, general and administrative expense | 7,662 | 7,427 | 23,177 | 20,746 |
| Fees to manager | 125 | 125 | 375 | 375 |
| Amortization of intangibles | 1,341 | 1,304 | 3,974 | 3,913 |
| Income from operations | $10,991 | $10,017 | $22,137 | $19,643 |

***Three months ended September 30, 2012 compared to the three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 increased approximately $11.2 million, or 18.1%, compared to the corresponding period in 2011. Sales growth was driven by sales to OEM which increased $9.6 million to $60.2 million during the three months ended September 30, 2012 compared to $50.6 million for the same period in 2011. The increase in net sales is largely driven by increased spec with our customers. The remaining increase in net sales totaling $1.6 million reflects increased sales to Aftermarket customers in the third fiscal quarter of 2012 compared to the same period in 2011.

#### Cost of sales

Cost of sales for the three months ended September 30, 2012 increased approximately $9.9 million compared to the corresponding period in 2011. The increase in cost of sales is primarily due to increased net sales during the three months ended September 30, 2012 compared to the same period of 2011. Gross profit as a percentage of sales was approximately 27.6% for the three months ended September 30, 2012 compared to 30.6% for the same period in 2011. The 3.0% decrease in gross profit as a percentage of sales during 2012 is largely attributable to the increased overhead costs associated with consolidating our Watsonville operations, increased costs associated with expanding our Taiwanese operations and increased warranty costs and expedited freight costs incurred during the third quarter of 2012 compared to the same period of 2011.

#### Selling, general and administrative expense

Selling, general and administrative expense increased approximately $0.2 million during the three months ended September 30, 2012 compared to the same period in 2011. This increase is primarily the result of increases in employee related costs to support company growth during the three months ended September 30, 2012.

#### Income from operations

Income from operations for the three months ended September 30, 2012 increased approximately $1.0 million to $11.0 million compared to the corresponding period in 2011, based principally on the increase in net sales, offset in part by the increases in selling, general and administrative costs, all as described above.

***Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 increased approximately $28.8 million, or 19.1%, compared to the corresponding period in 2011. Sales growth was driven by sales to OEM which increased $23.9 million to $143.5 million during the nine months ended September 30, 2012 compared to $119.6 million for the same period in 2011. The increase in net sales is largely driven by increased spec with our customers and to a lesser degree by increased demand for carryover product. The remaining increase in net sales totaling $4.9 million reflects increased sales to Aftermarket customers in the nine months ended September 30, 2012 compared to the same period in 2011.

#### Cost of sales

Cost of sales for the nine months ended September 30, 2012 increased approximately $23.8 million compared to the corresponding period in 2011. The increase in cost of sales is primarily due to increased net sales during 2012. Gross profit as a percentage of sales was approximately 27.7% for the nine months ended September 30, 2012 compared to 29.7% for the same period in 2011. The 2.0% decrease in gross profit as a percentage of sales during 2012 is largely attributable to the increased overhead costs associated with consolidating our Watsonville operations; increased costs associated with expanding our Taiwanese operations and increased expedited freight costs and warranty costs. WHY?

#### Selling, general and administrative expense

Selling, general and administrative expense increased approximately $2.4 million during the nine months ended September 30, 2012 compared to the same period in 2011. This increase is primarily the result of increases in employee costs necessary to support company growth during the nine months ended September 30, 2012 compared to the same period in 2011, and costs incurred in connection with a debt recapitalization ($0.8 million) which occurred during June 2012 (see – “Related Party Transactions and Certain Transactions Involving our Businesses”).

#### Income from operations

Income from operations for the nine months ended September 30, 2012 increased approximately $2.5 million to $22.1 million compared to the corresponding period in 2011, based principally on the increase in net sales, offset in part by the increases in selling, general and administrative costs, all 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”) in addition to various sporting goods and home improvement retail outlets (“Non-Dealer” or “National account”). Liberty has the largest independent dealer network in the industry.

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

On March 31, 2010 we made loans to and purchased a controlling interest in Liberty Safe for approximately $70.2 million, representing 96.2% of the equity in Liberty Safe.

### Results of Operations

The table below summarizes the results of operations for Liberty Safe for the three months ended September 30, 2012 and the three months ended September 30, 2011. It also summarizes the results of operations for the nine month period ended September 30, 2012 and the results of operations for the nine months ended September 30, 2011.

*(in thousands)*

|  | Three months ended September 30, 2012 | September 30, 2011 | Nine months ended September 30, 2012 | September 30, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $23,385 | $21,786 | $67,000 | $60,611 |
| Cost of sales | 17,109 | 16,365 | 49,921 | 45,297 |
| Gross profit | 6,276 | 5,421 | 17,079 | 15,314 |
| Selling, general and administrative expense | 2,870 | 2,545 | 8,682 | 7,686 |
| Fees to manager | 125 | 125 | 375 | 375 |
| Amortization of intangibles | 1,230 | 1,294 | 3,754 | 3,883 |
| Income from operations | $2,051 | $1,457 | $4,268 | $3,370 |

***Three months ended September 30, 2012 compared to the three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 increased approximately $1.6 million, or 7.3%, over the corresponding three months ended September 30, 2011. Non-Dealer sales were approximately $12.6 million in the three months ended September 30, 2012 compared to $13.9 million in the same period in 2011 representing a decrease of $1.3 million or 9.4%. Dealer sales totaled approximately $10.8 million in the three months ended September 30, 2012 compared to $7.9 million in the same period in 2011 representing an increase of $2.9 million or 37.6%. The decrease in Non-Dealer sales in 2012 is due in large part to the absence of sales in the third quarter of 2012 in connection with a large National retail account’s holiday program which generated approximately $3.0 million in sales during the third quarter of 2011. The significant increase in net sales at the Dealer level is the result of strong demand for Liberty branded product. Management believes that the increased sales at the Dealer level continues to be bolstered by its national advertising campaign in conjunction with those accounts that maintain consistent Liberty Safe product advertising at the local level.

#### Cost of sales

Cost of sales for the three months ended September 30, 2012 increased approximately $0.7 million. 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 26.8% and 24.9% of net sales for the three month periods ended September 30, 2012 and September 30, 2011, respectively. The increase in gross profit as a percentage of sales for the three months ended September 30, 2012 compared to 2011 is principally attributable to Dealer and Non-Dealer price increases enacted during the second and third quarter of 2012, and a favorable sales mix.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended September 30, 2012, increased approximately $0.3 million compared to the same period in 2011. This increase is largely the result of increased direct commission expense and co-op advertising costs, both related to growth initiatives and the increase in sales.

#### Income from operations

Income from operations was approximately $2.1 million for the three months ended September 30, 2012, representing an increase of $0.6 million compared to the same period in 2011. The improved operating results are principally due to the factors described above, particularly the increase in net sales.

***Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 increased approximately $6.4 million, or 10.5%, over the corresponding nine months ended September 30, 2011. Non-Dealer sales were approximately $38.3 million in the nine months ended September 30, 2012 compared to $37.0 million in the same period in 2011, representing an increase of $1.3 million or 3.5%. Dealer sales totaled approximately $28.7 million in the nine months ended September 30, 2012 compared to $23.6 million in the same period in 2011, representing an increase of $5.1 million or 21.6%. The increase in Non-Dealer sales in 2012 is due in large part to increased sales in the sporting goods channel. These increases were offset in part by the absence of sales in the third quarter of 2012, in connection with a large National retail account’s holiday program which generated approximately $3.0 million in sales during the third quarter of 2011. The increase in net sales at the Dealer level is the result of strong demand for Liberty branded product. Management believes that the increased sales at the Dealer level continue to be bolstered by its national advertising campaign in conjunction with those accounts that maintain consistent Liberty Safe product advertising at the local level.

#### Cost of sales

Cost of sales for the nine months ended September 30, 2012 increased approximately $4.6 million. 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 25.5% and 25.3% of net sales for the nine month periods ended September 30, 2012 and September 30, 2011, respectively. The increase in gross profit as a percentage of sales for the nine months ended September 30, 2012 compared to 2011 is principally attributable to Dealer and Non-Dealer price increases enacted during the second and third quarter of 2012, and a favorable sales mix.

#### Selling, general and administrative expense

Selling, general and administrative expense for the nine months ended September 30, 2012, increased approximately $1.0 million compared to the same period in 2011. This increase is principally the result of increases in the following costs to support the significant increase in sales, particularly commission expense and co-op advertising ($0.3 million), and personnel costs ($0.3 million) all to support growth initiatives and the resultant increase in net sales.

#### Income from operations

Income from operations was approximately $4.3 million for the nine months ended September 30, 2012 representing an increase of $0.9 million compared to the same period in 2011, which reflected operating income of $3.4 million. The improved operating results are principally due to the factors described above, particularly the increase in net sales.

### 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 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 most products are completed in-house (with a portion of our products 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 nine month periods ended September 30, 2012 and September 30, 2011.

*(in thousands)*

|  | Three months ended September 30, 2012 | September 30, 2011 | Nine months ended September 30, 2012 | September 30, 2011 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $14,858 | $15,120 | $42,586 | $42,917 |
| Cost of sales | 11,092 | 11,064 | 31,793 | 31,429 |
| Gross profit | 3,766 | 4,056 | 10,793 | 11,488 |
| Selling, general and administrative expense | 2,222 | 1,969 | 6,497 | 6,225 |
| Fees to manager | 88 | 88 | 263 | 263 |
| Amortization of intangibles | 326 | 330 | 979 | 989 |
| Income from operations | $1,130 | $1,669 | $3,054 | $4,011 |

***Three months ended September 30, 2012 compared to the three months ended September 30, 2011.***

#### Net sales

Net sales for the three months ended September 30, 2012 decreased approximately $0.3 million or 1.7% over the corresponding three months ended September 30, 2011. Net sales of non-powered support surfaces and patient positioning devices totaled $11.9 million in each of the three-month periods ended September 30, 2012 and 2011. Net sales of powered products totaled $2.9 million during the three months ended September 30, 2012 compared to $3.2 million in 2011, a decrease of $0.3 million or 7.1%, largely due to a periodic fleet upgrade from a large customer.

#### Cost of sales

Cost of sales were flat in the quarter ended September 30, 2012 compared to the same period in 2011, despite the decrease in sales. Gross profit as a percentage of sales was 25.3% in the three months ended September 30, 2012 compared to 26.8% in the corresponding period in 2011. The decrease in gross profit as a percentage of sales of 1.5% in the three months ended September 30, 2012 compared to the same period of 2011 is due to an unfavorable product sales mix.

#### Selling, general and administrative expense

Selling, general and administrative expense for the three months ended September 30, 2012 increased approximately $0.3 million compared to the same period of 2011. This increase is attributable to an increased spending on new product development.

#### Income from operations

Income from operations decreased approximately $0.5 million to $1.1 million for the three months ended September 30, 2012 compared to $1.6 million in the three months ended September 30, 2011 and is attributable to those factors described above. The Medical Device Tax, a 2.3% excise tax included as part of the Affordable Care act signed into law in 2010, will be levied on Tridien revenues beginning in 2013. If we are not able to pass these charges through to our customers it will have a negative impact on our results of operation in 2013.

***Nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.***

#### Net sales

Net sales for the nine months ended September 30, 2012 decreased approximately $0.3 million or 1.0% compared to the corresponding nine months ended September 30, 2011. Net sales of non-powered support surfaces and patient positioning devices totaled $34.7 million in 2012 compared to $34.5 million during the same period in 2011, an increase of $0.3 million or 1.0%. Net sales of powered products totaled $7.8 million during the nine months ended September 30, 2012 compared to $8.5 million in 2011, a decrease of $0.6 million or 7.2%, largely due to a periodic fleet upgrade from a large customer.

#### Cost of sales

Cost of sales increased approximately $0.4 million in the nine months ended September 30, 2012 compared to the same period of 2011 primarily as a result of incremental costs incurred related to a new Midwest manufacturing facility. Gross profit as a percentage of sales was 25.3% in the nine months ended September 30, 2012 compared to 26.8% in the corresponding period in 2011. In addition to the costs associated with our new manufacturing and distribution facility, the decrease in gross profit as a percentage of sales in the nine months ended September 30, 2012 compared to the same period of 2011 is due to an unfavorable product sales mix.

#### Selling, general and administrative expense

Selling, general and administrative expense for the nine months ended September 30, 2012 increased 0.3 million compared to the same period in 2011. The increase is due to an increase in spending on new product development and spending on growth initiatives.

#### Income from operations

Income from operations decreased approximately $1.0 million to $3.1 million for the nine months ended September 30, 2012 compared to $4.0 million in the nine months ended September 30, 2011, due principally to those factors described above.

### Liquidity and Capital Resources

For the nine months ended September 30, 2012, on a consolidated basis, cash flows provided by operating activities totaled approximately $21.4 million, which represents a $36.4 million decrease in cash provided by operations compared to the nine months ended September 30, 2011. This decrease is the result of (i) capital investment associated with the build-up of inventories in 2012 ($22.4 million), (ii) the additional pay down of the supplemental put liability to our Manager in 2012 compared to 2011 ($6.8 million), and: (iii) the decrease in net income during the nine months ended September 30, 2012 compared to 2011 ($4.6 million).

For the nine months ended September 30, 2012, on a consolidated basis, cash flows used in investing activities totaled approximately $77.8 million, which reflects the acquisition of Arnold Magnetics ($124.1 million), further investment in existing portfolio companies ($16.3 million) and capital expenditures ($9.7 million) offset in part by proceeds from the sale of Halo ($66.5 million) and Staffmark ($5.0 million).

For the nine months ended September 30, 2012, on a consolidated basis, cash flows used in financing activities totaled approximately $55.8 million, principally reflecting distributions paid to shareholders of CODI during the year ($52.2 million) and non-controlling shareholders ($16.3 million), the cost of redemption of preferred stock and accumulated interest at Camelback ($48.0 million) offset in part by net borrowings on our Credit Facility ($46.6 million) and the sale of stock to non-controlling shareholders ($11.8 million).

At September 30, 2012, we had approximately $20.0 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.

As of September 30, 2012, we had the following outstanding loans due from each of our businesses:

- Advanced Circuits — $57.4 million;
- American Furniture — $16.4 million;
- Arnold Magnetics — $81.6 million;
- CamelBak — $138.2 million;
- ERGObaby — $55.6 million;
- Fox — $73.5 million;
- Liberty — $40.9 million; and
- Tridien — $0 million.

Each loan to our businesses has a scheduled maturity date and each business is entitled to repay all or a portion of the principal amount of the outstanding loans, without penalty, prior to maturity. We are required to fund, in the form of an additional equity investment, any shortfall in the difference between Adjusted EBITDA and Fixed Charges as defined in American Furniture’s credit agreement with us. Per the Maintenance Agreement the shortfall that we are required to fund, AFM is in turn required to pay down on its term debt with us. The amount of the shortfall at September 30, 2012 is approximately $0.8 million.

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 Facility; (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 recognized a non-cash charge to earnings of approximately $6.4 million during the nine months ended September 30, 2012 in order to reflect an increase in our estimated liability in connection with the Supplemental Put Agreement between us and CGM. A liability of approximately $42.2 million is reflected in our condensed consolidated balance sheet, which represents our estimated liability for this obligation at September 30, 2012. During the nine months ended September 30, 2012, we paid CGM $13.7 million in connection with the profit allocation earned on the sale of Staffmark.

The current portion of the supplemental put liability of $5.2 million represents an accrual for the contribution-based profit allocation that will be paid to our Manager during the second quarter of 2013. This accrual primarily represents the contribution-based profit for the fifth anniversary date of Fox and reduces the overall supplemental put liability when paid.

The following table provides the contribution-based profit for each of the businesses we control at September 30, 2012 and the respective quarter end in which each five year anniversary occurs, reconciled to the total supplemental put liability:

*(in thousands)*

|  | Contribution-based profit allocation accrual at September 30, 2012 | Quarter End of Fifth Anniversary Date of Acquisition |
| --- | ---: | --- |
| Advanced Circuits | $2,246 | June 30, 2016 |
| American Furniture | (13,791) | September 30, 2017 |
| Arnold Magnetics | (1,097) | March 31, 2017 |
| CamelBak | (744) | September 30, 2016 |
| ERGObaby | 539 | September 30, 2015 |
| FOX | 5,007 | March 31, 2013 |
| Liberty | (13) | March 31, 2015 |
| Tridien | (338) | September 30, 2016 |
| Total contribution-based profit portion | $(8,191) |  |
| Profit allocation due for HALO sale | 211 |  |
| Estimated gain on sale portion | 50,185 |  |
| Total supplemental put liability | $42,205 |  |

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 September 30, 2012 was paid on October 31, 2012 and was $17.4 million.

Our Credit Facility provides for the Revolving Credit Facility totaling $290 million which matures in October 2016 and a Term Loan Facility totaling approximately $253 million, which matures in October 2017.

On April 2, 2012, we exercised an option with our Lender to increase the Term Loan Facility by $30 million. In connection with the increase, we amended the pricing of the Term Loan Facility wherein borrowings under the facility now bear interest at LIBOR plus 5% with a floor of 1.25%. We incurred an amendment fee of approximately $2.2 million.

The Term Loan Facility requires quarterly payments of $0.6 million which commenced March 31, 2012, with a final payment of the outstanding principal balance due in October 2017.

At September 30, 2012, we had $19.0 million in outstanding borrowings under the Revolving Credit Facility.

We had approximately $269 million in borrowing base availability under this facility at September 30, 2012. Letters of credit totaling $1.7 million were outstanding at September 30, 2012. We currently have no exposure to failed financial institutions.

The following table reflects required and actual financial ratios as of September 30, 2012 included as part of the affirmative covenants in our Credit Facility:

|  |  |  |
| --- | --- | --- |
| Description of Required Covenant Ratio | Covenant Ratio Requirement | Actual Ratio |
| Fixed Charge Coverage Ratio | greater than or equal to 1.5:1.0 | 2.50:1.0 |
| Total Debt to EBITDA Ratio | less than or equal to 3.5:1.0 | 1.86:1.0 |

We intend to use the availability under our Credit Facility and cash on hand to pursue acquisitions of additional businesses to the extent permitted under our Credit Facility, to fund distributions and to provide for other working capital needs. We have considered the impact of recent market instability and credit availability in assessing the adequacy of our liquidity and capital resources.

#### Interest Expense

We incurred interest expense totaling $19.7 million for the nine months ended September 30, 2012 compared to $6.1 million for the same period in 2011. The components of interest expense are as follows (in thousands):

|  | Nine months ended September 30, 2012 | 2011 |
| --- | ---: | ---: |
| Interest on credit facilities | $13,375 | $3,847 |
| Unused fee on revolving credit facility | 1,984 | 2,041 |
| Amortization of original issue discount | 1,951 | — |
| Realized losses on interest rate hedges | — | 143 |
| Unrealized losses on interest rate derivatives | 2,108 | — |
| Amortization of interest rate cap | 165 | — |
| Letter of credit fees | 54 | 43 |
| Other | 23 | 31 |
| Interest expense | $19,660 | $6,105 |
| Average daily balance of debt outstanding | $270,886 | $128,170 |
| Effective interest rate | 9.7% | 6.4% |

#### Income Taxes

We incurred income tax expense of $17.1 million with an annual effective tax rate of 60.5% in the first nine months of 2012 compared to $9.4 million with an effective tax rate of 96.0% during the same period in 2011. A portion of the acquisition costs expensed in the nine months ended September 30, 2012 in connection with the Arnold and Universal Circuits acquisitions are not tax deductible and losses incurred at the Company, which is an LLC, are not tax deductible at the corporate level as those costs are passed through to the shareholders. For the first nine months of 2012, these two items accounted for 3.1% and 16.2%, respectively, of the increased effective tax rate compared to the Federal statutory rate at September 30, 2012. Goodwill impairment charges expensed in the nine months ended September 30, 2011 in connection with the American Furniture write-offs are not tax deductible and losses incurred at the Company, which is an LLC, are not tax deductible at the corporate level as those costs are passed through to the shareholders. For the first nine months of 2011, these two items accounted for 21.1% and 39.3%, respectively, of the increased effective tax rate compared to the Federal statutory rate at September 30, 2011. The components of income tax expense as a percentage of income from continuing operations before income taxes for the nine months ended September 30, 2012 and 2011 are as follows:

|  | Nine months ended September 30, 2012 | 2011 |
| --- | ---: | ---: |
| United States Federal Statutory Rate | 35.0% | 35.0% |
| Foreign and State income taxes (net of Federal benefits) | 9.0 | 10.3 |
| Expenses of Compass Group Diversified Holdings, LLC representing a pass through to shareholders (1) | 16.2 | 39.3 |
| Impact of subsidiary employee stock options | (2.0) | 2.7 |
| Domestic production activities deduction | (2.9) | (11.8) |
| Non-deductible acquisition costs | 3.1 | — |
| Impairment expense | — | 21.1 |
| Non-recognition of NOL carryforwards at AFM | 3.5 | — |
| Other | (1.4) | (0.6) |
| Effective income tax rate | 60.5% | 96.0% |

(1) The effective income tax rate for all periods includes a significant loss at the company’s parent, which is taxed as a partnership.

### 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 increases we will incur additional supplemental put charges and vice versa when the fair value of our businesses decreases; (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* provide 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 *Adj*u*sted EBITDA* to net income (loss), which we consider to be the most comparable GAAP financial measure *(in thousands):*

### Adjusted EBITDA

### Nine months ended September 30, 2012

|  | Consolidated | Corporate | Advanced Circuits | American Furniture | Arnold Magnetics | CamelBak | ERGObaby | Fox | Liberty | Tridien | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Income (loss) from continuing operations** | $11,178 | $(14,055) | $9,410 | $(2,413) | $(4,605) | $6,159 | $1,668 | $12,425 | $477 | $2,112 | $11,178 |
| Adjusted for: |  |  |  |  |  |  |  |  |  |  |  |
| Provision (benefit) for income taxes | 17,119 | (65) | 4,869 | — | (1,779) | 4,678 | 1,178 | 7,130 | 247 | 861 | 17,119 |
| Interest expense, net | 19,609 | 19,561 | (1) | 6 | (4) | 11 | 25 | 11 | — | — | 19,609 |
| Intercompany interest | — | (29,289) | 3,778 | 1,219 | 4,389 | 9,932 | 4,765 | 1,815 | 3,336 | 55 | — |
| Depreciation and amortization | 38,108 | (501) | 3,990 | 221 | 7,667 | 10,236 | 3,466 | 5,789 | 5,463 | 1,777 | 38,108 |
| **EBITDA** | 86,014 | (24,349) | 22,046 | (967) | 5,668 | 31,016 | 11,102 | 27,170 | 9,523 | 4,805 | 86,014 |
| (Gain) loss on sale of fixed assets | 281 | — | — | 48 | 2 | — | — | 250 | (19) | — | 281 |
| Non-controlling shareholder compensation | 3,250 | — | 18 | 163 | 35 | 682 | 333 | 1,733 | 218 | 68 | 3,250 |
| Acquisition expenses | 5,211 | 368 | 366 | — | 4,477 | — | — | — | — | — | 5,211 |
| Supplemental put expense | 6,391 | 6,391 | — | — | — | — | — | — | — | — | 6,391 |
| Management fees | 13,294 | 10,906 | 375 | — | 250 | 375 | 375 | 375 | 375 | 263 | 13,294 |
| **Adjusted EBITDA (a)** | $114,441 | $(6,684) | $22,805 | $(756) | $10,432 | $32,073 | $11,810 | $29,528 | $10,097 | $5,136 | $114,441 |

### Adjusted EBITDA

### Nine months ended September 30, 2011

|  | Consolidated | Corporate | Advanced Circuits | American Furniture | Arnold Magnetics CamelBak | ERGObaby | Fox | Liberty | Tridien | Consolidated |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| **Income (loss) from continuing operations** | $389 | $(11,487) | $10,280 | $(11,086) | $(3,330) | $2,109 | $11,772 | $(86) | $2,217 | $389 |
| Adjusted for: |  |  |  |  |  |  |  |  |  |  |
| Provision (benefit) for income taxes | 9,380 | (61) | 5,494 | (3,174) | (2,024) | 1,306 | 6,272 | 12 | 1,555 | 9,380 |
| Interest expense, net | 6,101 | 6,029 | (2) | 18 | 2 | 43 | 11 | — | — | 6,101 |
| Intercompany interest | — | (15,893) | 4,547 | 1,758 | 1,310 | 3,494 | 1,353 | 3,224 | 207 | — |
| Depreciation and amortization | 23,240 | 360 | 3,658 | 2,663 | 2,630 | 2,060 | 5,052 | 5,000 | 1,817 | 23,240 |
| **EBITDA** | 39,110 | (21,052) | 23,977 | (9,821) | (1,412) | 9,012 | 24,460 | 8,150 | 5,796 | 39,110 |
| (Gain) loss on sale of fixed assets | 72 | — | — | (12) | — | 15 | 61 | 8 | — | 72 |
| Non-controlling shareholder compensation | 351 | (1,175) | 8 | 162 | — | 308 | 746 | 195 | 107 | 351 |
| Impairment charges | 7,700 | — | — | 7,700 | — | — | — | — | — | 7,700 |
| Acquisition expenses | 4,374 | — | — | — | 4,374 | — | — | — | — | 4,374 |
| Decrease in earnout probability | (177) | — | — | — | — | (177) | — | — | — | (177) |
| Supplemental put expense | 6,095 | 6,095 | — | — | — | — | — | — | — | 6,095 |
| Management fees | 11,707 | 9,769 | 375 | 125 | 51 | 375 | 375 | 375 | 262 | 11,707 |
| **Adjusted EBITDA (a)(b)** | $69,232 | $(6,363) | $24,360 | $(1,846) | $3,013 | $9,533 | $25,642 | $8,728 | $6,165 | $69,232 |

***(a)*** As a result of the sale of our HALO subsidiary in May 2012, Adjusted EBITDA does not include EBITDA from HALO from the period January 1, 2012 through April 30, 2012 of $2.2 million and for the period of January 1, 2011 through September 30, 2011 of $7.8 million.

***(b)*** As a result of the sale of our Staffmark subsidiary in October 2011, Adjusted EBITDA does not include EBITDA from Staffmark from the period January 1, 2011 through September 30, 2011 of $23.6 million.

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 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)*

|  | Nine Months Ended September 30, 2012 | Nine Months Ended September 30, 2011 |
| --- | ---: | ---: |
| Net income | $9,546 | $14,169 |
| Adjustment to reconcile net income to cash provided by (used in) operating activities: |  |  |
| Depreciation and amortization | 37,873 | 33,353 |
| Impairment expense | — | 7,700 |
| Supplemental put expense | 6,391 | 6,095 |
| Amortization of original issue discount | 1,951 | — |
| Noncontrolling interests and noncontrolling stockholders charges | 3,250 | 2,210 |
| Amortization of debt issuance costs | 1,326 | 1,543 |
| Unrealized loss on interest rate swap | 2,108 | — |
| Deferred taxes | (2,315) | (5,687) |
| Other | 1,399 | 1,036 |
| Changes in operating assets and liabilities | (40,149) | (2,622) |
| Net cash provided by (used in) operating activities | 21,380 | 57,797 |
| Plus: |  |  |
| Unused fee on revolving credit facility (1) | 1,984 | 2,041 |
| Successful acquisition expense (2) | 5,211 | 4,197 |
| HALO sale related expenses (3) | 1,976 | — |
| Changes in operating assets and liabilities | 40,149 | 2,622 |
| Less: |  |  |
| Changes in operating assets and liabilities | — | — |
| Other | 597 | 930 |
| Maintenance capital expenditures: (4) |  |  |
| Compass Group Diversified Holdings LLC | — | — |
| Advanced Circuits | 470 | 1,570 |
| American Furniture | (157) | (35) |
| Arnold | 1,368 | — |
| CamelBak | 654 | 418 |
| ERGObaby | 463 | 736 |
| Fox | 3,252 | 443 |
| Halo (divested May 2012) | 320 | 888 |
| Liberty | 286 | 253 |
| Staffmark (divested October 2011) | — | 1,877 |
| Tridien | 620 | 1,317 |
| **Estimated cash flow available for distribution and reinvestment** | $62,827 | $58,260 |
| Distribution paid in April 2012/2011 | $(17,388) | $(16,821) |
| Distribution paid in July 2012/2011 | (17,388) | (16,821) |
| Distribution paid in October 2012/2011 | (17,388) | (17,388) |
|  | $(52,164) | $(51,030) |

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

(2) Represents successful acquisition transaction costs.

(3) Represents transaction costs incurred related to the sale of HALO, net of the related income tax benefit.

(4) Represents maintenance capital expenditures that were funded from operating cash flow, net of proceeds from sales of property, plant and equipment, and excludes growth capital expenditures of approximately $2.1 million and $7.6 million incurred during the nine months ended September 30, 2012 and 2011, respectively.

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. Revenue and earnings from Fox are typically highest in the third quarter, coinciding with the delivery of product for the new bike year. Earnings from Liberty are typically lowest in the second quarter due to lower demand for safes at the onset of summer. Earnings from CamelBak are typically higher in the spring and summer months as this corresponds with warmer weather in the Northern Hemisphere and an increase in hydration related activities.

### Related Party Transactions and Certain Transactions Involving our Businesses

#### Fox Debt Recapitalization

On June 18, 2012, we entered into an amendment to our inter-company loan agreement (the “Amendment”) with Fox (the “Loan Agreement”). The Loan Agreement was amended to (i) provide for term loan borrowings of $60 million and an increase to the revolving loan commitment of $2.0 million and to permit the proceeds thereof to fund cash distributions totaling $67.0 million by Fox to us and to its non-controlling shareholders, (ii) extend the maturity dates of the term loans under the Loan Agreement, and (iii) modify borrowing rates under the Loan Agreement. Our share of the cash distribution was approximately $50.7 million with approximately $16.3 million being distributed to Fox’s non-controlling shareholders. All other material terms and conditions of the Loan Agreement were unchanged. 44,028 stock options were exercised at the time of the distribution. We purchased 33,142 shares of Fox at fair value from non-controlling shareholders at the exercise date.

#### Purchase of Tridien Stock

On August 28, 2012 we purchased shares on stock of Anodyne from a group of Tridien’s non-controlling shareholders for an aggregate purchase price of approximately $1.9 million. As a result of this transaction our ownership interest in Tridien increased to 83.2% on a primary basis and 68.8% on a fully diluted basis.

### 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 September 30, 2012:

|  | Total | Less than 1 Year | 1-3 Years | 3-5 Years | More than 5 Years |
| --- | ---: | ---: | ---: | ---: | ---: |
| Long-term debt obligations (a) | $370,686 | $21,523 | $42,625 | $42,124 | $264,414 |
| Capital lease obligations | 339 | 192 | 147 | — | — |
| Operating lease obligations (b) | 68,377 | 11,806 | 21,914 | 15,452 | 19,205 |
| Purchase obligations (c) | 229,768 | 153,101 | 38,509 | 38,158 | — |
| Supplemental put obligation (d) | 37,005 | 5,007 | 539 | 2,246 | — |
| Total | $706,172 | $191,629 | $103,734 | $97,980 | $283,619 |

(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 September 30, 2012, including: (i) shareholder distributions of $69.6 million; (ii) management fees of $17.6 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.

### 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.

#### 2012 Annual goodwill impairment testing

Goodwill represents the excess amount of the purchase price over the fair value of the assets acquired. We are required to perform impairment reviews of goodwill balances at each of our Reporting Units (“RU”) at least annually and more frequently in certain circumstances. Each of our businesses represents a RU, except at Arnold, which comprises three reporting units. Each of our RU are subject to impairment review at March 31, 2012, which represents our annual date for impairment testing, with the exception of American Furniture. The balance of American Furniture’s goodwill was completely written off in 2011.

The Financial Accounting Standards Board (“FASB”) issued an accounting Standards Update 2011-08 (“ASU”) in September 2011 that permits companies to make a qualitative assessment of whether it is more likely than not that a RU fair value is less than it carrying amount before applying the two-step goodwill impairment test. If a company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount it is not required to perform the two-step impairment test for that reporting unit. This ASU is effective for fiscal years beginning after December 15, 2011. At March 31, 2012 we elected to use the qualitative assessment alternative to test goodwill for impairment for each of our RU that maintain a goodwill carrying value.

As prescribed by the ASU, factors to consider when making the qualitative assessment prior to performing Step 1 of the goodwill impairment test are as follows:

- Macroeconomic conditions such as deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets;
- Industry and market considerations such as deterioration in the environment in which an entity operates, an increased competitive environment, a decline (both absolute and relative to its peers) in market-dependent multiples or metrics, a change in the market for an entity’s products or services, or a regulatory or political development;
- Cost factors, such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows;
- Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual or planned revenue or earnings compared with actual and projected results of relevant prior periods;
- Other relevant entity-specific events such as litigation, contemplation of bankruptcy, or changes in management, key personnel, strategy, or customers;
- Events affecting a RU such as change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all or a portion, of a RU, the testing for recoverability of a significant asset group within a reporting unit, or a recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit; and
- Sustained decrease (both absolute and relative to its peers) in share price, if applicable.

In addition to considering the above factors we performed the following procedures as of March 31, 2012 for each of our RU;

- Compared and assessed trailing twelve month (“TTM”) net sales as of March 31, 2012 to TTM nets sales as of March 31, 2012:
- Compared and assessed TTM operating income as of March 31, 2012 to TTM operating income as of March 31, 2011;
- Compared and assessed TTM Adjusted EBITDA as of March 31, 2012 to Adjusted EBITDA as of March 31, 2011;
- Compared and assessed Adjusted EBITDA for the year-ended December 31, 2011 to budget;
- Compared and assessed Adjusted EBITDA for the three-months ended March 31, 2012 to budget;
- Compared the fair value of each of our RU to its carrying amount using the same metrics as those used in determining the value of the supplemental put as of March, 31 2012 and concluded that in each case the fair value of the RU was in excess of its carrying amount; and
- Performed market capitalization reconciliation for CODI and determined that CODI’s public market cap was significantly in excess of the fair value of its consolidated equity (derived from the supplemental put analysis prepared as of March 31, 2012).

Based on our qualitative assessment as outlined above we believe that it is not more likely than not that the fair value of each of our RU is less than its carrying amount at March 31, 2012.

### Recent Accounting Pronouncements

Refer to footnote C to our condensed consolidated financial statements.

## Market risk

As filed, 464 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, 2011 as filed with the SEC on March 7, 2012. 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, 2011.

## Controls and procedures

As filed, 1,693 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 September 30, 2012. 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 September 30, 2012.

In the first quarter of 2012, the Company acquired Arnold Magnetics (see Note D- Acquisition of Business to our Condensed Consolidated Financial Statements), which represented 16.2% of our total assets as of September 30, 2012. The Company is in the process of fully integrating Arnold into its internal controls over financial reporting and, in reliance on interpretive guidance issued by the SEC staff, disclosure of changes in internal control over financial reporting related to Arnold has been excluded. Other than as described above, in connection with the evaluation required by Exchange Act Rule 13a-15(d), Holdings’ 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 third quarter of 2012 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, 438 characters.

Except for the additional Risk Factor included in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, as filed with the SEC on May 9, 2012 for Arnold Magnetics, acquired on March 5, 2012, 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 2011 Annual Report on Form 10-K as filed with the SEC on March 7, 2012.

Filed Nov 7, 2012.
Source: SEC EDGAR, the filing index for accession 0001193125-12-457480. Last ingested by Listed: Nov 4, 2026, 17:19 ET. No prices; not investment advice.