Annual Report to Our Owners
C O M P A S S D I V E R S I F I E D H O L D I N G S
Sixty One Wilton Road
Westport, CT 06880
www.compassdiversifiedholdings.co m
C O M P A S S D I V E R S I F I E D H O L D I N G S
Compass Diversified Holdings (“CODI”) offers our shareholders an opportunity to own profitable middle market
businesses that hold highly defensible positions in their individual market niches.
We own controlling interests in our subsidiary businesses, which maximizes our ability to impact their performance.
Our model for creating shareholder value involves discipline in identifying and valuing businesses and proactive
engagement with the management teams of the companies we acquire. From time to time, we will monetize our interest
in those subsidiaries if we believe that doing so will maximize value to our owners.
We deliver an extraordinarily high level of transparency in our financial reporting and governance processes. We
believe our owners deserve and should demand nothing less.
As of December 31, 2009, CODI owned and managed six diverse subsidiaries; we believe that these businesses will
continue to produce stable and growing cash flows over the long term, enabling us both to invest in the long-term growth
of the company and to make distributions of cash to our shareholders.
C o n t e n t
Letter to Our Owners....................................................................................................................................................
Your Companies................................................................................................................................................................
CODI Governance..............................................................................................................................................................
Owner Information............................................................................................................................................................
Financial Review................................................................................................................................................................
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C O D I I n f o r m a t i o n
Company Headquarters...............................................................................................61 Wilton Road, Second Floor Westport, CT 06880, (203) 221-1703
Independent Auditors...................................................................................................................................................................Grant Thornton LLP, New York, NY
Common Stock Listing................................................................................................................................................NASDAQ Global Select Market, Ticker: CODI
Transfer Agent...................................................................BNY Mellon Shareholder Services, 111 Founders Plaza, Suite 1100 East Hartford, CT 06108
Investor Relations Contact..........................................................................................Leon Berman, The IGB Group, (212) 477-8438, LBerman@igbir.com
Annual Meeting of Shareholders..................May 26, 2010, 9:00 a.m., EST, The Doubletree Hotel, 789 Connecticut Avenue Norwalk, CT 06854
Website......................................................................................................................................................................................www.compassdiversifiedholdings.com
Opposite Page Top to Bottom:
John Yacoub, CEO Advanced Circuits; Mike Thomas, CEO American Furniture Manufacturing; Abbey Daniels, CEO Anodyne Medical Device;
Bob Kaswen, CEO Fox Racing Shox; Marc Simon, CEO Halo Branded Solutions; Fred Kohnke, CEO Staffmark
30%
Cert no. SGS-COC-004989
C O D I 2 0 0 9 A n n u a l
R e p o r t / L e t t e r t o O u r O w n e r s
Dear Friends,
We started last year’s letter by referencing the ancient curse, “May you live
in interesting times.” Well, if nothing else, 2009 certainly was interesting.
For CODI, it was a testing period for each of our companies. When we
acquire businesses, we focus on certain key criteria:
• ‘reason to exist,’ as evidenced by pricing or margin outperformance
relative to industry competitors;
• strong and aligned management teams;
• tangible and understandable opportunities to work with management
to materially impact cash flow;
• long term industry dynamics that are positive and favor the company’s
positioning within its industry; and
• valuation and terms that are attractive relative to these factors and the
company’s expected level of cash flow generation.
Tough economic climates challenge all businesses, but we believe that
companies that meet the above criteria not only survive through difficult
times, but use these periods as an opportunity to grow. A healthy eco-
nomic environment generally allows companies to protect their existing
businesses. In contrast, we have found that economic turbulence is a
catalyst for companies with real reasons to exist to increase market share
at the expense of less differentiated and less well capitalized com-
petitors, recruit available or disaffected managers who have the ability to
add value over the long term and acquire complementary businesses at
attractive valuations.
Reason to exist is about proprietary technologies or products, valued
brands, low cost and superior capabilities in manufacturing and insti-
tutionally valued customer relationships. The existence of these factors
leads to economic returns that are better than those of competitors in
good times. In tough times, these factors enable companies to emerge
from a downturn stronger than they were before.
1
So how did our companies do? Very well, we think. For
the full year, five of our six businesses, in the aggregate,
generated approximately the same level of cash flow in
2009 as they did in 2008. The sixth and most cycli-
cal business, Staffmark, appears to us to have gained
market share relative to its competitors, finished the
year with an outstanding fourth quarter and is off to a
terrific start in 2010.
We are pleased with this performance. Our satisfaction
is even greater considering that our companies were
not managed during 2009 to maximize every dollar of
cash flow. While cost containment is always an impor-
tant focus, our businesses were actively encouraged
in 2009 to retain and add valuable managers, pursue
expansion opportunities where they were available
and produce product and inventory in a manner that
allowed them to increase sales to existing major cus-
tomers and add new customers.
Fox Racing Shox expanded its presence in a variety
of end markets beyond its core mountain bike mar-
ket. American Furniture Manufacturing increased its
sales capabilities through the addition of senior sales
professionals and expansion of showroom space. Ad-
vanced Circuits and Halo consummated complemen-
tary and accretive tuck in acquisitions, and Anodyne
Medical Device continued to take advantage of very
positive demographic trends supporting its products.
We expect to reap the benefits from 2009 for years
to come.
At Staffmark, we ended the year strongly, ultimately
generating a higher level of full year cash flow than we
expected at any point during the year. Most important-
ly, this performance was achieved without negatively
impacting our core ability to provide human resource
solutions to our customers. From an industry point
of view, providers of contract staffing services created
real value for their customers, allowing companies to
reduce costs in response to lower product demand,
while maintaining the ability to grow at the appropri-
ate time. We expect a continued gradual long term
shift in overall work force composition, as employers
opt for the flexibility and employee selectivity afforded
by staffing solutions providers such as Staffmark.
In 2009, we maintained our conservative position
on leverage and used our financial capacity to make
certain selected small add-on acquisitions and allow
our companies to grow organically. We were unable
to find a new platform opportunity that met our crite-
ria – particularly the combination of ‘reason to exist’
and ‘attractive valuation.’ We enter 2010 optimistic
that we will add to our family of companies in the near
future.
We believe that the current credit environment is fa-
vorable for our ability to consummate attractive acqui-
sitions. This is due to our capital structure, in which
equity and debt capital is raised at the parent level,
allowing us to acquire businesses without the need for
transaction specific financing, which is very difficult
to obtain at this time. While we will continue to be
patient and cautious in acquiring new subsidiaries,
we are finding our structure to be a competitive ad-
vantage, and expect it to continue to be so throughout
2010 and beyond.
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“We’ll remember 2009
as a good year for CODI,
one in which each of our
businesses strengthened
their relative market
position.”
C O D I 2 0 0 9 A n n u a l
R e p o r t / L e t t e r t o O u r O w n e r s
In summary, please be assured that we and each of our
subsidiary management teams are intensely focused
on long term cash flow generation and the building
of intrinsic value on behalf of our owners. Our busi-
ness model allows us to reap the benefits of owning
niche industry market leaders, while also having sig-
nificant industry, customer and geographic diver-
sity. As we predicted in last year’s letter, difficulties
in the economy have clearly impacted certain of our
businesses more than others; however, we believe the
performance of our companies on the whole to have
been strong. We are also confident that each of our
six businesses is more strongly positioned within its
industry than it was twelve months ago.
Personally, I would like to once again thank the em-
ployees of The Compass Group and our family of
companies for their hard work and dedication during
2009. It was a real comfort for me this year to know
the quality and competence of the stewards we have at
each of our businesses. Thank you also to our owners
for your confidence and trust. It is your company; we
try to manage it every day as we believe you would.
Very Truly Yours,
I. Joseph Massoud
Chief Executive Officer
3
in Aurora,
Headquartered
Colorado, and
in
founded
1989, Advanced Circuits is
the preeminent North Ameri-
can manufacturer of quick-
turn, prototype and produc-
circuit
rigid printed
tion
boards (“PCBs”). Customers
include
research and de-
velopment professionals at
corporations and academic
institutions
the United
in
States and Canada. Advanced
Circuits is able to meet its
over 10,000 customers’ de-
mands
responsiveness,
quality and timely delivery
shipping high quality,
by
for
custom PCBs in as little as 24
hours. To learn more about
Advanced Circuits, please visit
www.4pcb.com.
Headquartered
in Ecru,
Mississippi, and founded in
1998, American Furniture is
a leading manufacturer of up-
holstered furniture targeted at
the promotional segment of the
industry. American Furniture
offers a broad product line of
stationary and motion furni-
ture, including sofas, loveseats,
sectionals, recliners and acces-
sory products. American Fur-
niture’s merchandising strategy
focuses on a limited number of
popular, high volume styles and
colors adapted from proven de-
signs. American Furniture has
Headquartered
in Coral
Springs, Florida, and founded
in 2006, Anodyne is focused
on the design and manufacture
of medical support surfaces
and treatment devices designed
to treat and prevent various
types of ulcers that frequently
form on immobile patients.
Anodyne offers its customers
a full spectrum of powered and
static support surfaces based
on both polyurethane foam
and air based technologies.
Anodyne maintains manufac-
turing operations throughout
the United States to better
the ability to ship any product
serve
its national customer
in its line within 48 hours of re-
base. To learn more about
ceiving an order. To learn more
Anodyne, please visit www.
about American Furniture, please
anodynemedicaldevice.com.
visit www.americanfurn.net.
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C O D I 2 0 0 9 A n n u a l
R e p o r t / Y o u r C o m p a n i e s
and
founded
Headquartered in Cincinnati,
Ohio,
in
1970, Staffmark is a top ten
provider of staffing services in
the United States. The compa-
ny provides staffing solutions
across a comprehensive range
of disciplines from its over
300 branch locations. Staff-
mark’s customized approach
and market specific knowledge
are competitive advantages in
a dynamic labor and economic
environment. The company
serves more than 6,000 cus-
tomers and 34,000 temporary
employees every week. To learn
more about Staffmark, please
visit www.staffmark.com.
Headquartered in Watsonville,
California, and founded in
1974, Fox is a well recognized
designer, manufacturer and
marketer of high-end suspen-
sion products for mountain
vehicles,
all-terrain
bikes,
snowmobiles and other off-
road vehicles. Fox acts as
a tier one supplier to leading
action sport original equip-
ment manufacturers and pro-
vides aftermarket products to
retailers and distributors. To
learn more about Fox, please
visit www.foxracingshox.com.
Headquartered in Sterling,
Illinois, and founded in 1952,
HALO is a leading distribu-
tor of customized promo-
tional products. HALO’s ac-
count executives work with
a diverse group of end cus-
tomers to develop the most
effective means of commu-
nicating a logo or marketing
message to a target audience.
Operating under the brand
names HALO and Lee Wayne,
HALO provides its more than
40,000 customers a one-stop
resource for design, sourcing,
management and fulfillment
of their promotional products
needs. To learn more about
Halo, please visit www.halo.com.
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C O D I 2 0 0 9 A n n u a l R e p o r t / C O D I G o v e r n a n c e - Y o u r B o a r d o f D i r e c t o r s
Sean Day has served as chairman of the board of directors of
the Company since April 2006. Mr. Day is the president of
Seagin International and was the chairman of our manager’s
predecessor from 1999 to 2006. Previously, Mr. Day was with
Navios Corporation and Citicorp Venture Capital. Mr. Day is
currently the chairman of the boards of directors of Teekay
Corporation; Teekay Offshore GP LLC, the general partner
of Teekay Offshore Partners LP; Teekay GP L.L.C., the general
partner of Teekay LNG Partners LP; Teekay Tankers Limited
and a member of the board of directors of Kirby Corpora-
tion, all NYSE listed companies. Mr. Day is a graduate of the
University of Capetown and Oxford University.
Jim Bottiglieri has served as a director of the Company
since December 2005, as well as its chief financial officer
since its inception on November 18, 2005. Mr. Bottiglieri
has also been an executive vice president of our manager
since 2005. Previously, Mr. Bottiglieri was the senior vice
president/controller of Web-
MD Corporation. Prior to that,
Mr. Bottiglieri was with Star
Gas Corporation and a prede-
cessor firm to KPMG LLP. Mr.
Bottiglieri serves as a director
for all of our subsidiary com-
panies, except CBS Personnel
Holdings, Inc. Mr. Bottiglieri is
a graduate of Pace University.
Gordon Burns has served as
a director of the Company
since May 2008. Mr. Burns
has been a private investor since 1998. Previously he was
responsible for investment banking at UBS Securities and
before that was a managing director at Salomon Brothers
Inc. Mr. Burns is a graduate of Yale University and the Har-
vard Business School. Mr. Burns served on the board of di-
rectors and audit committee of Aztar Corporation, a NYSE
listed company, from 1998-2007.
Harold Edwards has served as a director of the Company
since April 2006. Mr. Edwards has been the president and
chief executive officer of Limoneira Company, an agricultur-
al, real estate and community development company, since
November 2004. Previously, Mr. Edwards was the president
of Puritan Medical Products, a division of Airgas Inc. Prior
to that, Mr. Edwards held management positions with Fisher
Scientific International, Inc., Cargill, Inc., Agribrands Inter-
national and the Ralston Purina Company. Mr. Edwards is
currently a member of the boards of directors of Limoneira
Company and Calavo Growers, Inc., a NASDAQ listed com-
pany. Mr. Edwards is a graduate of Lewis and Clark College
and The American Graduate School of International Man-
agement (Thunderbird).
Gene Ewing has served as a director of the Company since
April 2006. Mr. Ewing has been the managing member of
Deeper Water Consulting, LLC, a private wealth and busi-
ness consulting company since March, 2004. Previously, Mr.
Ewing was with the Fifth Third Bank. Prior to that, Mr. Ewing
was a partner at Arthur Andersen LLP. Mr. Ewing is on advi-
sory boards for the business schools at Northern Kentucky
University and the University of Kentucky. Mr. Ewing is also
the chairman of the board of directors of CBS Personnel
Holdings, Inc. and a director of a private trust company lo-
cated in Wyoming. Mr. Ewing is a graduate of the University
of Kentucky.
Mark Lazarus has served as
a director of the Company
since April 2006. Mr. Laza-
rus has been the president,
media and marketing, of
CSE, a sports and entertain-
ment company, since August
2008. Previously, Mr. Lazarus
was the president of Turner
from
Entertainment Group
2003 through 2008. Prior
to that, Mr. Lazarus served
in a variety of other roles for
Turner Broadcasting and also worked for Backer, Spielvo-
gel, Bates, Inc. and NBC Cable. Mr. Lazarus currently is
a member of the board of directors of Cincinnati Bell, a
NYSE listed company. Mr. Lazarus is a graduate of Vander-
bilt University.
Joe Massoud has served as a director of the Company since
December 2005, as well as its chief executive officer since
its inception on November 18, 2005. Mr. Massoud has also
been the managing partner of our manager and its prede-
cessor since 1998. Previously, Mr. Massoud was with Petro-
leum Heat and Power, Inc., Colony Capital, Inc., and McKin-
sey & Co. Mr. Massoud currently serves as a director for all
of our subsidiary companies, as well as for Teekay GP L.L.C.,
the general partner of Teekay LNG Partners LP, a NYSE com-
pany. Mr. Massoud is a graduate of Claremont McKenna Col-
lege and the Harvard Business School.
Front Row: Jim Bottiglieri, Sean Day, Joe Massoud
Back Row: Harold Edwards, Gene Ewing, Gordon Burns, Not pictured: Mark Lazarus
6
C O D I 2 0 0 9 A n n u a l R e p o r t / G o v e r n a n c e - C o m m i t t e e s
The Company’s operating agreement gives our board the authority to delegate its powers to committees appointed
by the board. All of our standing committees are comprised solely of independent directors. We have three standing
committees - the audit committee, the compensation committee and the nominating and corporate governance committee.
The Audit Committee is comprised entirely of indepen-
dent directors who meet the independence requirements of
the NASDAQ Stock Market and includes at least one “audit
committee financial expert,” as required by applicable SEC
regulations. The audit committee is responsible for, among
other things:
• retaining and overseeing our independent accountants;
• assisting the Company’s board of directors in its over-
sight of the integrity of our financial statements, the
qualifications, independence and performance of our
independent auditors and our compliance with legal and
regulatory requirements;
• reviewing and approving the plan and scope of the in-
ternal and external audit;
• pre-approving any non-audit services provided by our
independent auditors;
• approving the fees to be paid to our independent audi-
tors;
• reviewing with our chief executive officer and chief fi-
nancial officer and independent auditors the adequacy
and effectiveness of our internal controls;
• preparing the audit committee report to be filed with
the SEC; and
• reviewing and assessing annually the audit committee’s
performance and the adequacy of its charter.
Messrs. Burns, Ewing, and Edwards serve on our audit com-
mittee, and the board has determined that Mr. Ewing quali-
fies as an audit committee financial expert as defined by the
SEC.
The Compensation Committee is comprised entirely of in-
dependent directors who meet the independence require-
ments of the NASDAQ Stock Market. The responsibilities of
the compensation committee include:
• reviewing our manager’s performance of its obligations
under the management services agreement;
• reviewing the remuneration of our manager and ap-
proving the reimbursement paid to our manager for the
compensation of its financial staff;
• determining the compensation of our independent di-
rectors;
• granting rights to indemnification and reimbursement
of expenses to our manager; and
• making recommendations to the board regarding equi-
ty-based and incentive compensation plans, polices and
programs.
Messrs. Edwards, Ewing and Lazarus serve on our compensa-
tion committee.
The Nominating & Corporate Governance Committee is
comprised entirely of independent directors who meet the
independence requirements of the NASDAQ Stock Market.
The nominating and corporate governance committee is re-
sponsible for, among other things:
• recommending the number of directors to comprise the
board of directors;
• identifying and evaluating individuals qualified to be-
come members of the board of directors and soliciting
recommendations for director nominees from the chair-
man and chief executive officer of the company;
• recommending to the board of directors the directors’
nominees for each annual shareholders’ meeting;
• recommending to the board of directors the candi-
dates for filling vacancies that may occur between annual
shareholders’ meetings;
• reviewing independent director compensation and
board processes, self-evaluations and polices;
• overseeing compliance with our code of ethics and con-
duct by our officers and directors; and
• monitoring developments in the law and practice of
corporate governance.
Messrs. Lazarus, Burns, and Edwards serve on our nominat-
ing and corporate governance committee.
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C O D I 2 0 0 9 A n n u a l
R e p o r t / O w n e r I n f o r m a t i o n
Trading
Our stock trades on the NASDAQ Global Select Market under the symbol “CODI”. During fiscal year 2009, the highest and
lowest trading prices per share were $13.33 and $6.89, respectively. As of December 31, 2009, we had 36,625,000 shares
outstanding that were held by approximately 10,000 beneficial holders.
Distributions
Pursuant to our distribution policy, we declared distributions of $1.36 per share for the year ended December 31, 2009.
The declaration and payment of any distribution will be subject to a decision by our board of directors. In making such
a decision, our board will take into account such matters as general business conditions, our specific financial condition,
results of operations and capital requirements, as well as any other factors that it deems relevant.
Tax Reporting
CODI shareholders receive their tax information on a Form K-1. We endeavor to provide this tax information as early as
possible, and made information for tax year 2009 available for our shareholders as of February 26, 2010. Tax information
is both mailed to shareholders and available on our website. We expect the items of income reported on Form K-1 to our
shareholders to remain fairly limited, and to include interest income, dividend income, capital gains, interest expense and
other expense.
Website
CODI’s website is www.compassdiversifiedholdings.com. On our website, shareholders can find our press releases, SEC
documents, investor events, and tax reporting, as well as information on our corporate governance procedures, subsidiary
companies, and board of directors.
Distributions Paid Since IPO
$4
$3
$2
$1
0
0
$1.36
$1.33
Total
Distributions
Paid
Since IPO
$4.64
$1.25
$0.70
2006
2007
2008
2009
8
Fin an cial
R eview
9
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Form 10-K
For the fiscal year ended December 31, 2009
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-51937
Compass Diversified Holdings
(Exact name of registrant as specified in its charter)
Delaware
(Jurisdiction of incorporation or organization)
57-6218917
(I.R.S. Employer Identification No.)
Commission File Number: 0-51938
Compass Group Diversified Holdings LLC
(Exact name of registrant as specified in its charter)
Delaware
(Jurisdiction of incorporation or organization)
20-3812051
(I.R.S. Employer Identification No.)
Sixty One Wilton Road
Second Floor
Westport, CT
(Address of principal executive offices)
06880
(Zip Code)
(203) 221-1703
(Registrants’ telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Shares representing beneficial interests in Compass Diversified Holdings
(“trust shares”)
Name of Each Exchange on Which Registered
NASDAQ Stock Market, Inc.
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark if the registrants are collectively a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrants are collectively not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing
requirements for the past 90 days. Yes No
Indicate by check mark whether the registrants have submitted electronically and posted on their corporate website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrants’ knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
Indicate by check mark whether the registrants are collectively a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting
company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company
Indicate by check mark whether the registrants are collectively a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No
The aggregate market value of the outstanding shares of trust stock held by non-affiliates of Compass Diversified Holdings at June 30, 2009 was
$225,149,562 based on the closing price on the NASDAQ Global Select Market on that date. For purposes of the foregoing calculation only, all directors
and officers of the registrant have been deemed affiliates.
There were 36,625,000 shares of trust stock without par value outstanding at February 26, 2010.
Documents Incorporated by Reference
Certain information in the registrant’s definitive proxy statement to be filed with the Commission relating to the registrant’s 2010 Annual Meeting of
Stockholders is incorporated by reference into Part III.
Table of Contents
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
Quantitative and Qualitative Disclosures about Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure
Controls and Procedures
Other Information
Directors, and Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
Certain Relationships and Related Transactions and Director Independence
Principal Accountant Fees and Services
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Page
4
47
63
63
64
64
65
67
69
97
98
98
98
98
99
99
99
99
99
100
1
NOTE TO READER
In reading this Annual Report on Form 10-K, references to:
• the “Trust” and “Holdings” refer to Compass Diversified Holdings;
• “businesses”, “operating segments”, subsidiaries and “reporting units” all refer to, collectively, the
businesses controlled by the Company;
• the “Company” refer to Compass Group Diversified Holdings LLC;
• the “Manager” refer to Compass Group Management LLC (“CGM”);
• the “initial businesses” refer to, collectively, CBS Personnel Holdings, Inc., Crosman Acquisition
Corporation, Compass AC Holdings, Inc. and Silvue Technologies Group, Inc.;
• the “2007 acquisitions” refer to, collectively, the acquisitions of Aeroglide Corporation, HALO Branded
Solutions and American Furniture Manufacturing;
• the “2008 acquisitions” refer to, collectively, the acquisitions of Fox Factory Inc. and Staffmark Investment
LLC;
• the “2007 disposition” refers to, the sale of Crosman Acquisition Corporation;
• the “2008 dispositions” refer to, collectively, the sales of Aeroglide Corporation and Silvue Technologies
Group, Inc.;
• the “Trust Agreement” refer to the amended and restated Trust Agreement of the Trust dated as of April 25,
2007;
• the “Credit Agreement” refer to the Credit Agreement with a group of lenders led by Madison Capital, LLC
which provides for a Revolving Credit Facility and a Term Loan Facility;
• the “Revolving Credit Facility” refer to the $340 million Revolving Credit Facility provided by the Credit
Agreement that matures in December 2012;
• the “Term Loan Facility” refer to the $76.0 million Term Loan Facility, as of December 31, 2009, provided
by the Credit Agreement that matures in December 2013;
• the “LLC Agreement” refer to the second amended and restated operating agreement of the Company dated
as of January 9, 2007; and
• “we”, “us” and “our” refer to the Trust, the Company and the businesses together.
2
Statement Regarding Forward-Looking Disclosure
This Annual Report on Form 10-K, including the sections entitled “Risk Factors,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Business,” contains forward-looking statements. We may, in some cases, use
words such as “project,” “predict,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,”
“potentially,” or “may” or other words that convey uncertainty of future events or outcomes to identify these forward-looking
statements. Forward-looking statements in this prospectus are subject to a number of risks and uncertainties, some of which are
beyond our control, including, among other things:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
our ability to successfully operate our businesses on a combined basis, and to effectively integrate and improve any future
acquisitions;
our ability to remove our Manager and our Manager’s right to resign;
our trust and organizational structure, which may limit our ability to meet our dividend and distribution policy;
our ability to service and comply with the terms of our indebtedness;
our cash flow available for distribution and our ability to make distributions in the future to our shareholders;
our ability to pay the management fee, profit allocation when due and pay the put price if and when due;
our ability to make and finance future acquisitions;
our ability to implement our acquisition and management strategies;
the regulatory environment in which our businesses operate;
trends in the industries in which our businesses operate;
changes in general economic or business conditions or economic or demographic trends in the United States and other countries in
which we have a presence, including changes in interest rates and inflation;
environmental risks affecting the business or operations of our businesses;
our and our Manager’s ability to retain or replace qualified employees of our businesses and our Manager;
costs and effects of legal and administrative proceedings, settlements, investigations and claims; and
extraordinary or force majeure events affecting the business or operations of our businesses.
Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-
looking statements. A description of some of the risks that could cause our actual results to differ appears under the section “Risk
Factors”. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual
results to differ.
In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The
forward-looking events discussed in this Annual Report on Form 10-K may not occur. These forward-looking statements are made
as of the date of this Annual Report. We undertake no obligation to publicly update or revise any forward-looking statements to
reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by
law.
3
ITEM 1. BUSINESS
PART I
Compass Diversified Holdings, a Delaware statutory trust (“Holdings”, or the “Trust”), was incorporated in Delaware
on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company (the
“Company”), was also formed on November 18, 2005. The Trust and the Company (collectively “CODI”) were formed
to acquire and manage a group of small and middle-market businesses headquartered in North America. The Trust is
the sole owner of 100% of the Trust Interests, as defined in our LLC Agreement, of the Company. Pursuant to that
LLC Agreement, the Trust owns an identical number of Trust Interests in the Company as exist for the number of
outstanding shares of the Trust. Accordingly, our shareholders are treated as beneficial owners of Trust Interests in the
Company and, as such, are subject to tax under partnership income tax provisions.
The Company is the operating entity with a board of directors whose corporate governance responsibilities are similar
to that of a Delaware corporation. The Company’s board of directors oversees the management of the Company and
our businesses and the performance of Compass Group Management LLC (“CGM” or our “Manager”). Our Manager
is the sole owner of our Allocation Interests, as defined in our LLC Agreement.
Overview
We acquire controlling interests in and actively manage businesses that we believe operate in industries with long-term
macroeconomic growth opportunities, and that have positive and stable cash flows, face minimal threats of
technological or competitive obsolescence and have strong management teams largely in place.
Our unique public structure provides investors with an opportunity to participate in the ownership and growth of
companies which have historically been owned by private equity firms, wealthy individuals or families. Through the
acquisition of a diversified group of businesses with these characteristics, we also offer investors an opportunity to
diversify their own portfolio risk while participating in the ongoing cash flows of those businesses through the receipt
of distributions.
Our disciplined approach to our target market provides opportunities to methodically purchase attractive businesses at
values that are accretive to our shareholders. For sellers of businesses, our unique structure allows us to acquire
businesses efficiently with little or no financing contingencies and, following acquisition, to provide our businesses
with substantial access to growth capital.
We believe that private company operators and corporate parents looking to sell their businesses may consider us an
attractive purchaser because of our ability to:
• provide ongoing strategic and financial support for their businesses;
• maintain a long-term outlook as to the ownership of those businesses where such an outlook is required for
maximization of our shareholders’ return on investment; and
• consummate transactions efficiently without being dependent on third-party financing on a transaction-by-
transaction basis.
In particular, we believe that our outlook on length of ownership and active management on our part may alleviate the
concern that many private company operators and parent companies may have with regard to their businesses going
through multiple sale processes in a short period of time. We believe this outlook both reduces the risk that businesses
may be sold at unfavorable points in the overall market cycle and enhances our ability to develop a comprehensive
strategy to grow the earnings and cash flows of our businesses, which we expect will better enable us to meet our long-
term objective of paying distributions to our shareholders and increasing shareholder value. Finally, we have found that
our ability to acquire businesses without the cumbersome delays and conditions typical of third party transactional
financing can be very appealing to sellers of businesses who are interested in confidentiality and certainty to close.
We believe our management team’s strong relationships with industry executives, accountants, attorneys, business
brokers, commercial and investment bankers, and other potential sources of acquisition opportunities offer us
substantial opportunities to assess small to middle market businesses that may be available for acquisition. In addition,
the flexibility, creativity, experience and expertise of our management team in structuring transactions allows us to
consider non-traditional and complex transactions tailored to fit a specific acquisition target.
4
In terms of the businesses in which we have a controlling interest as of December 31, 2009, we believe that these
businesses have strong management teams, operate in strong markets with defensible market niches and maintain long
standing customer relationships. We believe that the strength of this model, which provides for significant industry,
customer and geographic diversity, has become even more apparent in the current challenging economic environment.
2009 Highlights
Term Loan Facility pay down
On February 18, 2009, the Company reduced its debt and repaid at par, from cash on its balance sheet, $75.0 million of
debt under its Term Loan Facility due in December of 2013.
Equity offering
On June 9, 2009 we completed a public offering of 5,100,000 shares at $8.85 per share raising $45.1 million in gross
proceeds. The net proceeds to the Company, after deducting underwriter’s discount and offering costs totaled
approximately $42.1 million.
2009 distributions
We increased our quarterly distribution to $0.34 per share during the third quarter of 2008. For the year 2009 we
maintained this quarterly distribution and declared distributions to our shareholders totaling $1.36 per share during the
year.
The following is a brief summary of the businesses in which we own a controlling interest at December 31, 2009:
Advanced Circuits
Compass AC Holdings, Inc. (“Advanced Circuits or ACI”), headquartered in Aurora, Colorado, is a provider of
prototype,, quick-turn and production rigid printed circuit boards, or “PCBs”, throughout the United States. PCBs are a
vital component of virtually all electronic products. The prototype and quick-turn portions of the PCB industry are
characterized by customers requiring high levels of responsiveness, technical support and timely delivery. We made
loans to and purchased a controlling interest in Advanced Circuits, on May 16, 2006, for approximately $81.0 million.
We currently own 70.2% of the outstanding stock of Advanced Circuits on a primary and fully diluted basis.
American Furniture
AFM Holding Corporation (“American Furniture” or “AFM”) headquartered in Ecru, Mississippi, is a leader in the
manufacturing of low-cost upholstered stationary and motion furniture, including sofas, loveseats, sectionals, recliners
and complementary products to the promotional furniture market. We made loans to and purchased a controlling
interest in AFM on August 31, 2007 for approximately $97.0 million. We currently own 93.9% of AFM’s outstanding
stock on a primary basis and 84.5% on a fully diluted basis.
Anodyne
Anodyne Medical Device, Inc. (“Anodyne”) 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. Anodyne is one of the nation’s leading designers and
manufacturers of specialty therapeutic support surfaces and is able to manufacture products in multiple locations to
better serve a national customer base. We made loans to and purchased a controlling interest in Anodyne from CGI on
August 1, 2006 for approximately $31.0 million. We currently own 74.4% of the outstanding capital stock on a primary
basis and 61.7% on a fully diluted basis.
Fox
Fox Factory Holding Corp. headquartered in Watsonville, California, is a designer, manufacturer and marketer of high
end suspension products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles, collectively
referred to as power sports. Fox acts both as a tier one supplier to leading action sport original equipment manufacturers
(“OEM”) and provides after-market products to retailers and distributors (“Aftermarket”). Fox’s products are
recognized as the industry’s performance leaders by retailers and end-users alike. We made loans to and purchased a
controlling interest in Fox, on January 4, 2008, for approximately $80.4 million. We currently own 75.5% of the
outstanding common stock on a primary basis and 67.5% on a fully diluted basis.
HALO
HALO Lee Wayne LLC, operating under the brand names of HALO and Lee Wayne (“HALO”), headquartered in
Sterling, Illinois, serves as a one-stop shop for approximately 38,000 customers providing design, sourcing,
management and fulfillment services across all categories of its customer promotional product needs in effectively
5
communicating a logo or marketing message to a target audience. HALO has established itself as a leader in the
promotional products and marketing industry through its focus on servicing its group of over 600 account executives.
We made loans to and purchased a controlling interest in HALO on February 28, 2007 for approximately $62.0 million.
We currently own 88.7% of the outstanding common stock on a primary basis and 72.8% on a fully diluted basis.
Staffmark
CBS Personnel Holdings Inc., (“CBS Personnel”, which was rebranded as “Staffmark” in February 2009)
headquartered in Cincinnati, Ohio, is a provider of temporary staffing services in the United States. In order to provide
its more than 6,500 clients with tailored staffing services to fulfill their human resources needs, Staffmark also offers
employee leasing services, permanent staffing and temporary-to-permanent placement services. We made loans to and
purchased a controlling interest in CBS Personnel Holdings Inc, on May 16, 2006, for approximately $128.0 million.
On January 21, 2008, CBS Personnel Holdings, Inc. acquired Staffmark Investment LLC for approximately $133.8
million, including fees and transaction costs. Like CBS Personnel Holdings Inc., Staffmark Investment LLC was one of
the leading providers of commercial staffing services in the United States, providing staffing services in 30 states. CBS
Personnel Holdings, Inc repaid $80.0 million in Staffmark Investment LLC indebtedness and issued $47.9 million in
CBS Personnel Holdings, Inc common stock for all the equity interests in Staffmark LLC.
In April 2009, the Company amended the Staffmark intercompany credit agreement which, among other things,
recapitalized a portion of Staffmark’s long-term debt by exchanging $35.0 million of unsecured debt for Staffmark
common stock. Our ownership percentage of the outstanding capital stock of Staffmark is currently 76.2% on a
primary basis and 69.4% on a fully diluted basis.
Our businesses also represent our operating segments.
Tax Reporting
Information returns will be filed by the trust and the company with the IRS, as required, with respect to income, gain,
loss, deduction and other items derived from the company’s activities. The company has and will file a partnership
return with the IRS and intends to issue a Schedule K-1 to the trustee. The trustee intends to provide information to
each holder of shares using a monthly convention as the calculation period. For 2009, and future years, the trust has,
and will continue to file a Form 1065 and issue Schedules K-1 to shareholders. For 2009, we delivered the Schedule K-
1 to shareholders within the same time frame as we delivered the schedule to shareholders for the 2008 and 2007
taxable year. The relevant and necessary information for tax purposes is readily available electronically through our
website. Each holder will be deemed to have consented to provide relevant information, and if the shares are held
through a broker or other nominee, to allow such broker or other nominee to provide such information as is reasonably
requested by us for purposes of complying with our tax reporting obligations.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC Forms S-1 and S-3 under the Securities Act, and Forms 10-Q, 10-K, and 8-K under the
Exchange Act, which include exhibits, schedules and amendments. In addition, copies of such reports are available free
of charge that can be accessed indirectly through our website http://www.compassdiversifiedholdings.com and are
available as soon as reasonably practicable after such documents are electronically filed or furnished with the SEC.
6
Public
Shareholders
Pharos I
LLC2
“Pharos”
<1%
78%
21.0%
CGI1
CGI Magyar
Holdings LLC
CGI Seagin
Holdings LLC5
Compass
Diversified
Holdings
“Trust”
Trust Interests
Compass Group
Diversified
Holdings LLC
“Company”
Controlling
Equity Interests
Non-managing
Member
Allocation Interests4
Sostratus LLC2
“Sostratus”
Non-managing
Member
Management
Services Agreement
Compass Group
Management3
LLC
“Manager”
ACI
AFM
Anodyne
Fox
HALO
Staffmark
(1) CGI and its affiliates beneficially own approximately 21.0% of the Trust shares and is our single largest
holder. Mr. Massoud is not a director, officer or member of CGI or any of its affiliates.
(2) Owned by members of our Manager, including Mr. Massoud as managing member.
(3) Mr. Massoud is the managing member.
(4)
The Allocation Interests, which carry the right to receive a profit allocation, represent less than 0.1%
equity interest in the Company.
(5) Mr. Day is a non-managing member.
7
Our Manager
Our Manager, CGM, has been engaged to manage the day-to-day operations and affairs of the Company and to execute
our strategy, as discussed below. Our management team has worked together since 1998. Collectively, our
management team has approximately 90 years of experience in acquiring and managing small and middle market
businesses. We believe our Manager is unique in the marketplace in terms of the success and experience of its
employees in acquiring and managing diverse businesses of the size and general nature of our businesses. We believe
this experience will provide us with an advantage in executing our overall strategy. Our management team devotes a
majority of its time to the affairs of the Company.
We have entered into a management services agreement (the “Management Services Agreement”) pursuant to which
our Manager manages the day-to-day operations and affairs of the Company and oversees the management and
operations of our businesses. We pay our Manager a quarterly management fee for the services it performs on our
behalf. In addition, our Manager receives a profit allocation with respect to its Allocation Interests in us. See Part III,
Item 13 “Certain Relationships and Related Transactions” for further descriptions of the management fees and profit
allocation to be paid to our Manager. In consideration of our Manager’s acquisition of the Allocation Interests, we
entered into a Supplemental Put agreement with our Manager pursuant to which our Manager has the right to cause us
to purchase its Allocation Interests upon termination of the Management Services Agreement. Our Manager owns
100% of the Allocation Interests of the Company, for which it paid $100,000.
The Company’s Chief Executive Officer and Chief Financial Officer are employees of our Manager and have been
seconded to us. Neither the Trust nor the Company has any other employees. Although our Chief Executive Officer
and Chief Financial Officer are employees of our Manager, they report directly to the Company’s board of directors.
The management fee paid to our Manager covers all expenses related to the services performed by our Manager,
including the compensation of our Chief Executive Officer and other personnel providing services to us. The Company
reimburses our Manager for the salary and related costs and expenses of our Chief Financial Officer and his staff, who
dedicate substantially all of their time to the affairs of the Company.
See Part III, Item 13, “Certain Relationships and Related Party Transactions and Director Independence”.
Market Opportunity
We acquire and actively manage small to middle market businesses. We characterize small to middle market
businesses as those that generate annual cash flows of up to $60 million. We believe that the merger and acquisition
market for small to middle market businesses is highly fragmented and provides opportunities to purchase businesses at
attractive prices. We believe that the following factors contribute to lower acquisition multiples for small to middle
market businesses:
•
•
•
•
there are fewer potential acquirers for these businesses;
third-party financing generally is less available for these acquisitions;
sellers of these businesses frequently consider non-economic factors, such as continuing board membership or
the effect of the sale on their employees; and
these businesses are less frequently sold pursuant to an auction process.
We believe that opportunities exist to augment existing management at such businesses and improve the performance of
these businesses upon their acquisition. In the past, our management team has acquired businesses that were owned by
entrepreneurs or large corporate parents. In these cases, our management team has frequently found that there have
been opportunities to further build upon the management teams of acquired businesses beyond those in existence at the
time of acquisition. In addition, our management team has frequently found that financial reporting and management
information systems of acquired businesses may be improved, both of which can lead to improvements in earnings and
cash flow. Finally, because these businesses tend to be too small to have their own corporate development efforts, we
believe opportunities exist to assist these businesses as they pursue organic or external growth strategies that were often
not pursued by their previous owners. We believe the current financing environment is conducive to our ability to
consummate acquisitions.
8
Our Strategy
We have two primary strategies that we use in order to provide distributions to our shareholders and increase
shareholder value. First, we focus on growing the earnings and cash flow from our businesses. We believe that the
scale and scope of our businesses give us a diverse base of cash flow upon which to further build. Second, we identify,
perform due diligence on, negotiate and consummate additional platform acquisitions of small to middle market
businesses in attractive industry sectors in accordance with acquisition criteria established by the board of directors
Management Strategy
Our management strategy involves the proactive financial and operational management of the businesses we own in
order to pay distributions to our shareholders and increase shareholder value. Our Manager oversees and supports the
management teams of each of our businesses by, among other things:
•
•
•
•
recruiting and retaining talented managers to operate our businesses using structured incentive compensation
programs, including minority equity ownership, tailored to each business;
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 growth strategies;
identifying and working with management to execute attractive external growth and acquisition opportunities;
• assist management in controlling and right-sizing overhead costs, particularly in the current challenging
economic environment; and
•
forming strong subsidiary level boards of directors to supplement management in their development and
implementation of strategic goals and objectives.
Specifically, while our businesses have different growth opportunities and potential rates of growth, we expect our
Manager to work with the management teams of each of our businesses to increase the value of, and cash generated by,
each business through various initiatives, including:
• making selective capital investments to expand geographic reach, increase capacity, or reduce manufacturing
costs of our businesses;
•
•
•
investing in product research and development for new products, processes or services for customers;
improving and expanding existing sales and marketing programs;
pursuing reductions in operating costs through improved operational efficiency or outsourcing of certain
processes and products; and
•
consolidating or improving management of certain overhead functions.
In terms of the difficult economic environment we are currently facing, we and each of our subsidiary management
teams have been, and will continue to be, intensely focused on performance and cost control measures through this
economic cycle.
Our businesses typically acquire and integrate complementary businesses. We believe that complementary acquisitions
will improve our overall financial and operational performance by allowing us to:
•
•
•
•
leverage manufacturing and distribution operations;
leverage branding and marketing programs, as well as customer relationships;
add experienced management or management expertise;
increase market share and penetrate new markets; and
9
•
realize cost synergies by allocating the corporate overhead expenses of our businesses across a larger number of
businesses and by implementing and coordinating improved management practices.
We incur third party debt financing almost entirely at the Company level, which we use, in combination with our equity
capital, to provide debt financing to each of our businesses and to acquire additional businesses We believe this
financing structure is beneficial to the financial and operational activities of each of our businesses by aligning our
interests as both equity holders of, and lenders to, our businesses, in a manner that we believe is more efficient than our
businesses borrowing from third-party lenders.
Acquisition Strategy
Our acquisition strategy involves the acquisition of businesses that we expect to produce stable and growing earnings
and cash flow. In this respect, we expect to make acquisitions in industries other than those in which our businesses
currently operate if we believe an acquisition presents an attractive opportunity. We believe that attractive
opportunities will continue to present themselves, as private sector owners seek to monetize their interests in
longstanding and privately-held businesses and large corporate parents seek to dispose of their “non-core” operations.
Our ideal acquisition candidate has the following characteristics:
•
is an established North American based company;
• maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
•
•
has a solid and proven management team with meaningful incentives;
has low technological and/or product obsolescence risk; and
• maintains a diversified customer and supplier base.
We benefit from our Manager’s ability to identify potential diverse acquisition opportunities in a variety of industries.
In addition, we rely upon our management team’s experience and expertise in researching and valuing prospective
target businesses, as well as negotiating the ultimate acquisition of such target businesses. In particular, because there
may be a lack of information available about these target businesses, which may make it more difficult to understand or
appropriately value such target businesses, on our behalf, our Manager:
•
•
•
•
•
•
engages in a substantial level of internal and third-party due diligence;
critically evaluates the management team;
identifies and assesses any financial and operational strengths and weaknesses of the target business;
analyzes comparable businesses to assess financial and operational performances relative to industry
competitors;
actively researches and evaluates information on the relevant industry; and
thoroughly negotiates appropriate terms and conditions of any acquisition.
The process of acquiring new businesses is both time-consuming and complex. Our management team historically has
taken from two to twenty-four months to perform due diligence, negotiate and close acquisitions. Although our
management team is always at various stages of evaluating several transactions at any given time, there may be periods
of time during which our management team does not recommend any new acquisitions to us.
Upon acquisition of a new business, we rely on our manager’s team’s experience and expertise to work efficiently and
effectively with the management of the new business to jointly develop and execute a successful business plan.
We believe, due to our financing structure, in which both equity and debt capital are raised at the Company level,
allowing us to acquire businesses without transaction specific financing, that the current difficult financing environment
is conducive to our ability to consummate transactions that may be attractive in both the short- and long-term.
10
In addition to acquiring businesses, we sell businesses that we own from time to time when attractive opportunities arise
that outweigh the value that we believe we will be able to bring such businesses consistent with our long-term
investment strategy. As such, our decision to sell a business is based on our belief that doing so will increase
shareholder value to a greater extent than through our continued ownership of that business. Upon the sale of a
business, we may use the proceeds to retire debt or retain proceeds for acquisitions or general corporate purposes. We
do not expect to make special distributions at the time of a sale of one of our businesses; instead, we expect to pay
shareholder distributions over time through the earnings and cash flows of our businesses.
Since our inception in May 2006, we have recorded gains on sales of our businesses of over $100 million, or $3.00 per
share. We sold Crosman in January 2007 and Aeroglide and Silvue in June 2008. We sold Crosman, our majority
owned recreational products company for approximately $143 million and our net proceeds and gain on sale were
approximately $110 million and $36 million, respectively. We sold Aeroglide, our majority owned designer and
manufacturer of industrial drying and cooling equipment for approximately $95 million and our net proceeds and gain
on sale were approximately $78 million and $34 million, respectively. Finally, we sold Silvue, our majority owned
developer and producer of proprietary, high performance liquid coating systems for approximately $95 million and our
net proceeds and gain on sale were approximately $64 million and $39 million, respectively.
Strategic Advantages
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we
are well-positioned to acquire additional businesses. Our management team has strong relationships with business
brokers, investment and commercial bankers, accountants, attorneys and other potential sources of acquisition
opportunities. In addition, our management team also has a successful track record of acquiring and managing small to
middle market businesses in various industries. In negotiating these acquisitions, we believe our management team has
been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs,
transitions of family-owned businesses, management buy-outs and reorganizations.
Our management team has a large network of over 2,000 deal intermediaries who we expect to expose us to potential
acquisitions. Through this network, as well as our management team’s proprietary transaction sourcing efforts, we have
a substantial pipeline of potential acquisition targets. Our management team also has a well established network of
contacts, including professional managers, attorneys, accountants and other third-party consultants and advisors, who
may be available to assist us in the performance of due diligence and the negotiation of acquisitions, as well as the
management and operation of our acquired businesses.
Finally, because we intend to fund acquisitions through the utilization of our Revolving Credit Facility, we expect to
minimize the delays and closing conditions typically associated with transaction specific financing, as is typically the
case in such acquisitions. We believe this advantage is a powerful one, especially in the current credit environment, and
is highly unusual in the marketplace for acquisitions in which we operate.
Valuation and Due Diligence
When evaluating businesses or assets for acquisition, our management team performs a rigorous due diligence and
financial evaluation process. In doing so, we evaluate the operations of the target business as well as the outlook for the
industry in which the target business operates. While valuation of a business is, by definition, a subjective process, we
define valuations under a variety of analyses, including:
•
•
•
•
discounted cash flow analyses;
evaluation of trading values of comparable companies;
expected value matrices; and
examination of recent transactions.
One outcome of this process is a projection of the expected cash flows from the target business. A further outcome is
an understanding of the types and levels of risk associated with those projections. While future performance and
projections are always uncertain, we believe that with detailed due diligence, future cash flows will be better estimated
and the prospects for operating the business in the future better evaluated. To assist us in identifying material risks and
validating key assumptions in our financial and operational analysis, in addition to our own analysis, we engage third-
party experts to review key risk areas, including legal, tax, regulatory, accounting, insurance and environmental. We
also engage technical, operational or industry consultants, as necessary.
11
A further critical component of the evaluation of potential target businesses is the assessment of the capability of the
existing management team, including recent performance, expertise, experience, culture and incentives to perform.
Where necessary, and consistent with our management strategy, we actively seek to augment, supplement or replace
existing members of management who we believe are not likely to execute our business plan for the target business.
Similarly, we analyze and evaluate the financial and operational information systems of target businesses and, where
necessary, we enhance and improve those existing systems that are deemed to be inadequate or insufficient to support
our business plan for the target business.
Financing
We have a Credit Agreement with a group of lenders led by Madison Capital, LLC. The Credit Agreement provides for
a Revolving Credit Facility totaling $340.0 million, subject to borrowing base restrictions, and a Term Loan Facility
totaling $76.0 million. The Term Loan Facility requires quarterly payments of $0.5 million that commenced March 31,
2008, and a final payment of the outstanding principal balance on December 7, 2013. The Revolving Credit
Facility matures on December 7, 2012.
On February 18, 2009, we repaid $75.0 million of the outstanding Term Loan Facility with the unused portion of the
proceeds from the sale of Aeroglide and Silvue in 2008.
The Credit Agreement provides for letters of credit under the Revolving Credit Facility in an aggregate face amount not
to exceed $100 million outstanding at any time. At no time may the (i) aggregate principal amount of all amounts
outstanding under the Revolving Credit Facility, plus (ii) the aggregate amount of all outstanding letters of credit,
exceed the borrowing availability under the Credit Agreement. At December 31, 2009, we had outstanding letters of
credit totaling $66.2 million. The borrowing availability under the Revolving Credit Facility at December 31, 2009 was
approximately $136.8 million.
The Credit Agreement is secured by all of the assets of the Company, including all of its equity interests in, and loans
to, its subsidiaries. (See Note K to the consolidated financial statements for more detail regarding our Credit
Agreement).
We intend to finance future acquisitions through our Revolving Credit Facility, cash on hand and additional equity and
debt financings. We believe, and it has been our experience, that having the ability to finance our acquisitions with the
capital resources raised by us, rather than negotiating separate third party financing specifically relating to the
acquisition of individual businesses, provides us with an advantage in acquiring attractive businesses by minimizing
delay and closing conditions that are often related to acquisition-specific financings. This is especially true given the
recent disruptions in the overall economy and current volatility in the financial markets. In this respect, we believe that
in the future, we may need to pursue additional debt or equity financings, or offer equity in Holdings or target
businesses to the sellers of such target businesses, in order to fund multiple future acquisitions.
Our Businesses
Advanced Circuits
Overview
Advanced Circuits, headquartered in Aurora, Colorado, is a provider of prototype, quick-turn and production rigid
printed circuit boards, or PCBs, throughout the United States. Advanced Circuits also provides its customers with
assembly services in order to meet its customers’ complete PCB needs. The prototype and quick-turn portions of the
PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely
delivery. Due to the critical roles that PCBs play in the research and development process of electronics, customers
often place more emphasis on the turnaround time and quality of a customized PCB than on the price. Advanced
Circuits meets this market need by manufacturing and delivering custom PCBs in as little as 24 hours, providing
customers with over 98% error-free production and real-time customer service and product tracking 24 hours per day.
In each of the years 2009, 2008 and 2007 approximately 66% of Advanced Circuits’ net sales were derived from highly
profitable prototype and quick-turn production PCBs. Advanced Circuits’ success is demonstrated by its broad base of
over 10,000 customers with which it does business throughout the year. These customers represent numerous end
markets, and for each of the years ended December 31, 2009, 2008 and 2007, no single customer accounted for more
than 2% of net sales. Advanced Circuits’ senior management, collectively, has approximately 90 years of experience in
the electronic components manufacturing industry and closely related industries.
12
For the full fiscal years ended December 31, 2009, 2008 and 2007, Advanced Circuits had net sales of approximately
$46.5 million, $55.4 million and $52.3 million, respectively and operating income of $16.3 million, $17.7 million and
$17.1 million, respectively. Advanced Circuits had total assets of $72.6 million at December 31, 2009. Net sales from
Advanced Circuits represented 3.7%, 3.6% and 6.2% of our consolidated net sales for the years 2009, 2008 and 2007,
respectively.
History of Advanced Circuits
Advanced Circuits commenced operations in 1989 through the acquisition of the assets of a small Denver based PCB
manufacturer, Seiko Circuits. During its first years of operations, Advanced Circuits focused exclusively on
manufacturing high volume, production run PCBs with a small group of proportionately large customers. In 1992, after
the loss of a significant customer, Advanced Circuits made a strategic shift to limit its dependence on any one customer.
As a result, Advanced Circuits began focusing on developing a diverse customer base, and in particular, on providing
research and development professionals at equipment manufacturers and academic institutions with low volume,
customized prototype and quick-turn PCBs.
In 1997 Advanced Circuits increased its capacity and consolidated its facilities into its current headquarters in Aurora,
Colorado. During 2001 through 2003, despite a recession and a reduction in United States PCB manufacturing,
Advanced Circuits’ sales expanded by 29% as its research and development focused customer base continued to require
PCBs to perform day-to-day activities. In 2003, to support its growth, Advanced Circuits expanded its PCB
manufacturing facility by approximately 37,000 square feet or approximately 150%.
We purchased a controlling interest in Advanced Circuits on May 16, 2006.
Industry
The PCB industry, which consists of both large global PCB manufacturers and small regional PCB manufacturers, is a
vital component to all electronic equipment supply chains as PCBs serve as the foundation for virtually all electronic
products, including cellular telephones, appliances, personal computers, routers, switches and network servers. PCBs
are used by manufacturers of these types of electronic products, as well as by persons and teams engaged in research
and development of new types of equipment and technologies. According to IPC’s 2009 Industry Analysis and
Forecast for Rigid PCB’s in North America (published August 2009, which we refer to as the IPC 2009 Analysis, the
global PCB market, including both captive and merchant production, including both rigid and flex boards grew at a
CAGR of over 8% from $31.6 billion in 2002 to an estimated $50.7 billion in 2008.
In contrast to global trends, however, production of PCBs in North America has declined by over 50% since 2000, to
approximately $3.47 billion in 2008, and is expected to grow slightly over the next several years according to the IPC
2009 Analysis, The rapid decline in United States production was caused by (i) reduced demand for and spending on
PCBs following the technology and telecom industry decline in early 2000; and (ii) increased competition for volume
production of PCBs from Asian competitors benefiting from both lower labor costs and less restrictive waste and
environmental regulations. While Asian manufacturers have made large market share gains in the PCB industry
overall, prototype production, some of the more complex volume production and military production have remained
strong in the United States.
Both globally and domestically, the PCB market can be separated into three categories based on required lead time and
order volume:
•
Prototype PCBs — These PCBs are typically manufactured for customers in research and development
departments of original equipment manufacturers, or OEMs, and academic institutions. Prototype PCBs are
manufactured to the specifications of the customer, within certain manufacturing guidelines designed to
increase speed and reduce production costs. Prototyping is a critical stage in the research and development of
new products. These prototypes are used in the design and launch of new electronic equipment and are
typically ordered in volumes of 1 to 50 PCBs. Because the prototype is used primarily in the research and
development phase of a new electronic product, the life cycle is relatively short and requires accelerated
delivery time frames of usually less than five days and very high, error-free quality. Order, production and
delivery time, as well as responsiveness with respect to each, are key factors for customers as PCBs are
indispensable to their research and development activities.
• Quick-Turn Production PCBs — These PCBs are used for intermediate stages of testing for new products
prior to full scale production. After a new product has successfully completed the prototype phase, customers
undergo test marketing and other technical testing. This stage requires production of larger quantities of PCBs
13
in a short period of time, generally 10 days or less, while it does not yet require high production volumes. This
transition stage between low-volume prototype production and volume production is known as quick-turn
production. Manufacturing specifications conform strictly to end product requirements and order quantities are
typically in volumes of 10 to 500. Similar to prototype PCBs, response time remains crucial as the delivery of
quick-turn PCBs can be a gating item in the development of electronic products. Orders for quick-turn
production PCBs conform specifically to the customer’s exact end product requirements.
• Volume Production PCBs — These PCBs, which we sometimes refer to as “long lead” and “sub-contract”
are used in the full scale production of electronic equipment and specifications conform strictly to end product
requirements. Volume Production PCBs are ordered in large quantities, usually over 100 units, and response
time is less important, ranging between 15 days to 10 weeks or more.
These categories can be further distinguished based on board complexity, with each portion facing different competitive
threats. Advanced Circuits competes largely in the prototype and quick-turn production portions of the North American
market, which have not been significantly impacted by the Asian based manufacturers due to the quick response time
required for these products. The North American prototype and quick-turn production sectors combined represent
approximately $1.2 billion in the PCB production industry in 2008 according to the IPC 2009 Analysis.
Several significant trends are present within the PCB manufacturing industry, including:
•
•
•
Increasing Customer Demand for Quick-Turn Production Services — Rapid advances in technology are
significantly shortening product life-cycles and placing increased pressure on OEMs to develop new products
in shorter periods of time. In response to these pressures, OEMs invest heavily in research and development,
which results in a demand for PCB companies that can offer engineering support and quick-turn production
services to minimize the product development process.
Increasing Complexity of Electronic Equipment — OEMs are continually designing more complex and
higher performance electronic equipment, requiring sophisticated PCBs. To satisfy the demand for more
advanced electronic products, PCBs are produced using exotic materials and increasingly have higher layer
counts and greater component densities. Maintaining the production infrastructure necessary to manufacture
PCBs of increasing complexity often requires significant capital expenditures and has acted to reduce the
competitiveness of local and regional PCB manufacturers lacking the scale to make such investments.
Shifting of High Volume Production to Asia — Asian based manufacturers of PCBs are capitalizing on their
lower labor costs and are increasing their market share of volume production of PCBs used, for example, in
high-volume consumer electronics applications, such as personal computers and cell phones. Asian based
manufacturers have been generally unable to meet the lead time requirements for prototype or quick-turn PCB
production or the volume production of the most complex PCBs. This “off shoring” of high-volume production
orders has placed increased pricing pressure and margin compression on many small domestic manufacturers
that are no longer operating at full capacity. Many of these small producers are choosing to cease operations,
rather than operate at a loss, as their scale, plant design and customer relationships do not allow them to focus
profitably on the prototype and quick-turn sectors of the market.
Products and Services
A PCB is comprised of layers of laminate and contains patterns of electrical circuitry to connect electronic components.
Advanced Circuits typically manufactures 2 to 12 layer PCBs, and has the capability to manufacture up to 14 layer
PCBs. The level of PCB complexity is determined by several characteristics, including size, layer count, density (line
width and spacing), materials and functionality. Beyond complexity, a PCB’s unit cost is determined by the quantity of
identical units ordered, as engineering and production setup costs per unit decrease with order volume, and required
production time, as longer times often allow increased efficiencies and better production management. Advanced
Circuits primarily manufactures lower complexity PCBs.
To manufacture PCBs, Advanced Circuits generally receives circuit designs from its customers in the form of computer
data files emailed to one of its sales representatives or uploaded on its interactive website. These files are then
reviewed to ensure data accuracy and product manufacturability. While processing these computer files, Advanced
Circuits generates images of the circuit patterns that are then physically developed on individual layers, using advanced
photographic processes. Through a variety of plating and etching processes, conductive materials are selectively added
and removed to form horizontal layers of thin circuits, called traces, which are separated by insulating material. A
finished multilayer PCB laminates together a number of layers of circuitry. Vertical connections between layers are
14
achieved by metallic plating through small holes, called vias. Vias are made by highly specialized drilling equipment
capable of achieving extremely fine tolerances with high accuracy.
the PCB design verification stage using
Advanced Circuits assists its customers throughout the life-cycle of their products, from product conception through
volume production. Advanced Circuits works closely with customers throughout each phase of the PCB development
process, beginning with
tool,
FreeDFM.comTM, which was launched in 2002, enables customers to receive a free manufacturability assessment report
within minutes, resolving design problems that would prohibit manufacturability before the order process is completed
and manufacturing begins. The combination of Advanced Circuits’ user-friendly website and its design verification
tool reduces the amount of human labor involved in the manufacture of each order as PCBs move from Advanced
Circuits’ website directly to its computer numerical control, or CNC, machines for production, saving Advanced
Circuits and customers cost and time. As a result of its ability to rapidly and reliably respond to the critical customer
requirements, Advanced Circuits generally receives a premium for their prototype and quick-turn PCBs as compared to
volume production PCBs.
its unique online FreeDFM.com
Advanced Circuits manufactures all high margin prototypes and quick-turn orders internally but often utilizes external
partners to manufacture production orders that do not fit within its capabilities or capacity constraints at a given time.
As a result, Advanced Circuits constantly adjusts the portion of volume production PCBs produced internally to both
maximize profitability and ensure that internal capacity is fully utilized.
The following table shows Advanced Circuits’ gross revenue by products and services for the periods indicated:
Gross Sales by Products and Services(1)
Year Ended December 31,
2008
2007
2009
Prototype Production ...........................................................................
Quick-Turn Production ........................................................................
Volume Production (including assembly) ...........................................
Third Party ..........................................................................................
Total ....................................................................................................
(1) As a percentage of gross sales, exclusive of sale discounts.
30.6%
36.4%
30.1%
2.9%
100.0%
31.6%
34.4%
27.5%
6.5%
100.0%
32.2%
33.0%
22.3%
12.5%
100.0%
Competitive Strengths
Advanced Circuits has established itself as a leading provider of prototype and quick-turn PCBs in North America and
focuses on satisfying customer demand for on-time delivery of high-quality PCBs. Advanced Circuits’ management
believes the following factors differentiate it from many industry competitors:
• Numerous Unique Orders Per Day — For the year ended December 31, 2009, Advanced Circuits received an
average approximately 300 customer orders per day. Due to the large quantity of orders received, Advanced
Circuits is able to combine multiple orders in a single panel design prior to production. Through this process,
Advanced Circuits is able to reduce the number of costly, labor intensive equipment set-ups required to
complete several manufacturing orders. As labor represents the single largest cost of production, management
believes this capability gives Advanced Circuits a unique advantage over other industry participants. Advanced
Circuits maintains proprietary software that maximizes the number of units placed on any one panel design. A
single panel set-up typically accommodates 1 to 12 orders. Further, as a “critical mass” of like orders is
required to maximize the efficiency of this process, management believes Advanced Circuits is uniquely
positioned as a low cost manufacturer of prototype and quick-turn PCBs.
• Diverse Customer Base — Advanced Circuits possesses a customer base with little industry or customer
concentration exposure. During fiscal year ended December 31, 2009, Advanced Circuits did business with
over 10,000 customers and added approximately 214 new customers per month. For each of the years ended
December 31, 2009, 2008 and 2007 no customer represented over 2% of net sales.
• Highly Responsive Culture and Organization — A key strength of Advanced Circuits is its ability to quickly
respond to customer orders and complete the production process. In contrast to many competitors that require a
day or more to offer price quotes on prototype or quick-turn production, Advanced Circuits offers its customers
quotes within seconds and the ability to place or track orders any time of day. In addition, Advanced Circuits’
production facility operates three shifts per day and is able to ship a customer’s product within 24 hours of
receiving its order.
15
•
Proprietary FreeDFM.com Software — Advanced Circuits offers its customers unique design verification
services through its online FreeDFM.com tool. This tool, which was launched in 2002, enables customers to
receive a free manufacturability assessment report, within minutes, resolving design problems before customers
place their orders. The service is relied upon by many of Advanced Circuits’ customers to reduce design errors
and minimize production costs. Beyond improved customer service, FreeDFM.com has the added benefit of
improving the efficiency of Advanced Circuits’ engineers, as many routine design problems, which typically
require an engineer’s time and attention to identify, are identified and sent back to customers automatically.
• Established Partner Network — Advanced Circuits has established third party production relationships with
PCB manufacturers in North America and Asia. Through these relationships, Advanced Circuits is able to
offer its customers a complete suite of products including those outside of its core production capabilities.
Additionally, these relationships allow Advanced Circuits to outsource orders for volume production and focus
internal capacity on higher margin, short lead time, production and quick-turn manufacturing.
Business Strategies
Advanced Circuits’ management is focused on strategies to increase market share and further improve operating
efficiencies. The following is a discussion of these strategies:
•
Increase Portion of Revenue from Prototype and Quick-Turn Production — Advanced Circuits’
management believes it can grow revenues and cash flow by continuing to leverage its core prototype and
quick-turn capabilities. Over its history, Advanced Circuits has developed a suite of capabilities that
management believes allow it to offer a combination of price and customer service unequaled in the market.
Advanced Circuits intends to leverage this factor, as well as its core skill set, to increase net sales derived from
higher margin prototype and quick-turn production PCBs. In this respect, marketing and advertising efforts
focus on attracting and acquiring customers that are likely to require these premium services. And while
production composition may shift, growth in these products and services is not expected to come at the expense
of declining sales in volume production PCBs, as Advanced Circuits intends to leverage its extensive network
of third-party manufacturing partners to continue to meet customers’ demand for these services.
• Acquire Customers from Local and Regional Competitors — Advanced Circuits’ management believes the
majority of its competition for prototype and quick-turn PCB orders comes from smaller scale local and
regional PCB manufacturers. As an early mover in the prototype and quick-turn sector of the PCB market,
Advanced Circuits has been able to grow faster and achieve greater production efficiencies than many industry
participants. Management believes Advanced Circuits can continue to use these advantages to gain market
share. Further, Advanced Circuits has begun to enter into prototype and quick-turn manufacturing relationships
with several subscale local and regional PCB manufacturers. According to a November 2009 IPC study;
approximately 309 PCB manufacturers operate in the United States with only 26 generating annual sales in
excess of $20 million. Management believes that while many of these manufacturers maintain strong,
longstanding customer relationships, they are unable to produce PCBs with short turn-around times at
competitive prices. As a result, Advanced Circuits has an opportunity for growth by providing production
support to these manufacturers or direct support to the customers of these manufacturers, whereby the
manufacturers act more as a broker for the relationship.
• Remain Committed to Customers and Employees — Advanced Circuits has remained focused on providing
the highest quality product and service to its customers. We believe this focus has allowed Advanced Circuits
to achieve its outstanding delivery and quality record. Advanced Circuits’ management believes this reputation
is a key competitive differentiator and is focused on maintaining and building upon it. Similarly, management
believes its committed base of employees is a key differentiating factor. Advanced Circuits currently has a
profit sharing program and tri-annual bonuses for all of its employees. Management also occasionally sets
additional performance targets for individuals and departments and establishes rewards, such as lunch
celebrations or paid vacations, if these goals are met. Management believes that Advanced Circuits’ emphasis
on sharing rewards and creating a positive work environment has led to increased loyalty. As a result,
Advanced Circuits plans on continuing to focus on similar programs to maintain this competitive advantage.
Research and Development
Advanced Circuits engages in continual research and development activities in the ordinary course of business to
update or strengthen its order processing, production and delivery systems. By engaging in these activities, Advanced
16
Circuits expects to maintain and build upon the competitive strengths from which it benefits currently. Research and
development expenses were not material in each of the years 2009, 2008 and 2007.
Customers
Advanced Circuits’ focus on customer service and product quality has resulted in a broad base of customers in a variety
of end markets, including industrial, consumer, telecommunications, aerospace/defense, biotechnology and electronics
manufacturing. These customers range in size from large, blue-chip manufacturers to small, not-for-profit university
engineering departments. The following table sets forth management’s estimate of Advanced Circuits’ approximate
customer breakdown by industry sector for the fiscal years ended December 31, 2009, 2008 and 2007:
Industry Sector
2009
Customer
2008
Customer
2007
Customer
Distribution
Distribution
Distribution
Electrical Equipment and Components ...................
Measuring Instruments ............................................
Electronics Manufacturing Services .......................
Engineer Services ...................................................
Industrial and Commercial Machinery....................
Business Services ....................................................
Wholesale Trade-Durable Goods ............................
Educational Institutions ..........................................
Transportation Equipment ......................................
All Other Sectors Combined ...................................
Total .......................................................................
33%
13%
15%
5%
8%
2%
1%
8%
10%
5%
100%
32%
12%
16%
5%
8%
2%
2%
6%
8%
9%
100%
35%
15%
13%
5%
5%
5%
3%
5%
5%
9%
100%
Management estimates that over 90% of its orders are generated from existing customers. Moreover, approximately
65% of Advanced Circuits’ orders in each of the years 2009, 2008 and 2007 were delivered within five days.
Sales and Marketing
Advanced Circuits has established a “consumer products” marketing strategy to both acquire new customers and retain
existing customers. Advanced Circuits uses initiatives such as direct mail postcards, web banners, aggressive pricing
specials and proactive outbound customer call programs as part of this strategy. Advanced Circuits spends
approximately 2% of net sales each year on its marketing initiatives and advertising and has 26 employees dedicated to
its marketing and sales efforts. These individuals are organized geographically and each is responsible for a region of
North America. The sales team takes a systematic approach to placing sales calls and receiving inquiries and, on
average, will place over 300 outbound sales calls and receive between 160 and 200 inbound phone inquiries per day.
Beyond proactive customer acquisition initiatives, management believes a substantial portion of new customers are
acquired through referrals from existing customers. In addition, other customers are acquired over the internet where
Advanced Circuits generates over 90% of its orders from its website.
Once a new client is acquired, Advanced Circuits offers an easy to use customer-oriented website and proprietary online
design and review tools to ensure high levels of retention. By maintaining contact with its customers to ensure
satisfaction with each order, Advanced Circuits believes it has developed strong customer loyalty, as demonstrated by
over 90% of its orders being received from existing customers. Included in each customer order is an Advanced
Circuits pre-paid “bounce-back” card on which a customer can evaluate Advanced Circuits’ services and send back any
comments or recommendations. Each of these cards is read by senior members of management, and Advanced Circuits
adjusts its services to respond to the requests of its customer base.
Substantially all revenue is derived from sales within the United States.
Advanced Circuits, due to the volume of prototype and quick turn sales, had a negligible amount in firm backlog orders
at December 31, 2009 and 2008.
17
Competition
There are currently an estimated 309 active domestic PCB manufacturers. Advanced Circuits’ competitors differ
amongst its products and services.
Competitors in the prototype and quick-turn PCBs production industry include larger companies as well as small
domestic manufacturers. The three largest independent domestic prototype and quick-turn PCB manufacturers in North
America are DDI Corp., TTM Technologies, Inc. and Viasystems Group, Inc. . Though each of these companies
produces prototype PCBs to varying degrees, in many ways they are not direct competitors with Advanced Circuits. In
recent years, each of these firms has primarily focused on producing boards with higher layer counts in response to the
off shoring of low and medium layer count technology to Asia. Compared to Advanced Circuits, prototype and quick-
turn PCB production accounts for much smaller portions of each of these firm’s revenues. Further, these competitors
often have much greater customer concentrations and a greater portion of sales through large electronics manufacturing
services intermediaries. Beyond large, public companies, Advanced Circuits’ competitors include numerous small,
local and regional manufacturers, often with revenues under $20 million that have long-term customer relationships and
typically produce both prototype and quick-turn PCBs and production PCBs for small OEMs and EMS companies. The
competitive factors in prototype and quick-turn production PCBs are response time, quality, error-free production and
customer service. Competitors in the long lead-time production PCBs generally include large companies, including
Asian manufacturers, where price is the key competitive factor.
New market entrants into prototype and quick-turn production PCBs confront substantial barriers including significant
investments in equipment, highly skilled workforce with extensive engineering knowledge and compliance with
environmental regulations. Beyond these tangible barriers, Advanced Circuits’ management believes that its network of
customers, established over the last two decades, would be very difficult for a competitor to replicate.
Suppliers
Advanced Circuits’ raw materials inventory is small relative to sales and must be regularly and rapidly replenished.
Advanced Circuits uses a just-in-time procurement practice to maintain raw materials inventory at low levels.
Additionally, Advanced Circuits has established consignment relationships with several vendors allowing it to pay for
raw materials as used. Because it provides primarily lower-volume quick-turn services, this inventory policy does not
hamper its ability to complete customer orders. Raw material costs constituted approximately 16.9%, 16.1% and 14.8%
of net sales for each of the fiscal years ended December 31, 2009, 2008 and 2007, respectively.
The primary raw materials that are used in production are core materials, such as copper clad layers of glass and
chemical solutions, and copper and gold for plating operations, photographic film and carbide drill bits. Multiple
suppliers and sources exist for all materials. Adequate amounts of all raw materials have been available in the past, and
Advanced Circuits’ management believes this will continue in the foreseeable future. Advanced Circuits works closely
with its suppliers to incorporate technological advances in the raw materials they purchase. Advanced Circuits does not
believe that it has significant exposure to fluctuations in raw material prices. Though Advanced Circuits’ primary raw
material, laminates (epoxy, glass and copper), have experienced increases in price in 2009, the impact on its margins
accounted for less than a 2% increase in cost of sales as a percentage of net sales. The fact that price is not the primary
factor affecting the purchase decision of many of Advanced Circuits’ customers, has allowed management to
historically pass along a portion of raw material price increases to its customers.
Intellectual Property
Advanced Circuits seeks to protect certain proprietary technology by entering into confidentiality and non-disclosure
agreements with its employees, consultants and customers, as needed, and generally limits access to and distribution of
its proprietary information and processes. Advanced Circuits’ management does not believe that patents are critical to
protecting Advanced Circuits’ core intellectual property, but, rather, that its effective and quick execution of fabrication
techniques, its website FreeDFM.comTM and its highly skilled workforce are the primary factors in maintaining its
competitive position.
Advanced Circuits uses the following brand names: FreeDFM.comTM, 4pcb.comTM, 4PCB.comTM, 33each.comTM,
barebonespcb.comTM and Advanced CircuitsTM. These trade names have strong brand equity and are material to
Advanced Circuits’ business.
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Regulatory Environment
Advanced Circuits manufacturing operations and facilities are subject to evolving federal, state and local environmental
and occupational health and safety laws and regulations. These include laws and regulations governing air emissions,
wastewater discharge and the storage and handling of chemicals and hazardous substances. Advanced Circuits’
management believes that Advanced Circuits is in compliance, in all material respects, with applicable environmental
and occupational health and safety laws and regulations. New requirements, more stringent application of existing
requirements, or discovery of previously unknown environmental conditions may result in material environmental
expenditures in the future. Advanced Circuits has been recognized three times for exemplary environmental
compliance as it was awarded the Denver Metro Wastewater Reclamation District Gold Award for the years 2002, 2003
and 2005, 2006 and 2008.
Employees
As of December 31, 2009, Advanced Circuits employed 234 persons. Of these employees, there were 26 in sales and
marketing, 6 in information technology, 8 in accounting and finance, 32 in engineering, 12 in shipping and
maintenance, 143 in production and 7 in management. None of Advanced Circuits’ employees are subject to collective
bargaining agreements. Advanced Circuits believes its relationship with its employees is good.
American Furniture
Overview
American Furniture, headquartered in Ecru, Mississippi, is a manufacturer of upholstered furniture sold to large-scale
furniture distributors and retailers. American Furniture operates almost exclusively in the promotional upholstered
segment of the furniture industry which is characterized by affordable prices, standard designs and immediate
availability to retail consumers. American Furniture was founded in 1998. The current management team has been in
place since 2004 led by CEO Mike Thomas. American Furniture’s products are adapted from established designs in
the following categories, (i) stationary, (ii) motion, (iii) recliner and (iv)other related products including 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.
On February, 12, 2008, American Furniture’s 1.1 million square foot corporate office and manufacturing facility in
Ecru, MS was partially destroyed in a fire. Approximately 750 thousand square feet of the facility was impacted by the
fire. The executive offices were fundamentally unaffected. The recliner and motion plant, although largely unaffected,
suffered some smoke damage but resumed operations on February 21, 2008. There were no injuries related to the fire.
The Company temporarily moved its stationary production lines into other facilities. In addition to its 45 thousand
square foot ‘flex’ facility, management secured 320 thousand square feet of additional manufacturing and warehouse
space in the surrounding Pontotoc area. These temporary stationary production facilities provided American Furniture
with approximately 90% of the pre-fire stationary production capabilities for the months of April, through November.
Orders for motion and recliner products were addressed by the production facilities that were largely unaffected by the
fire at the Ecru facility. On November 7, 2008 the damaged manufacturing facility was fully restored and operating.
For the full fiscal years ended December 31, 2009, 2008 and 2007 American Furniture had net sales of approximately
$142.0 million, $130.9 million and $156.6 million and operating income of $6.5 million, $5.1 million and $11.8
million, respectively. American Furniture had total assets of $115.8 million at December 31, 2009. Net sales from
American Furniture represented 11.4%, 8.5% and 5.6% of our consolidated net sales for the years ended December 31,
2009, 2008 and 2007, respectively.
History of American Furniture
American Furniture was founded in 1998 with an exclusive focus on promotional upholstered furniture, offering a
unique value proposition combining consistent high-quality, attractively priced products and 48-hour quick-ship
service. As American Furniture has grown, it has maintained a disciplined, production focused strategy with proven
merchandising ideally suited to serve one of the fastest growing segments of the retail furniture marketplace,
promotional furniture. AFM began operations in 1998 with four assembly lines housed in a 60,000 sq. ft. facility. By
2002, American Furniture had achieved revenues in excess of $120 million and grew operations into a 600,000 sq. ft.
facility in Houlka, MS. In 2004 American Furniture was sold by its founder to a group of private investors who
installed a new management structure led by Mr. Mike Thomas. Mr. Thomas successfully hired a new executive team
19
and grew American Furniture’s administrative infrastructure in order to build a solid foundation to support future
growth. In 2005, American Furniture aggressively pursued Asian sourcing for fabrics and other assorted materials.
Today American Furniture is a leading manufacturer of promotional upholstered furniture operating from an
approximately 1.1 million sq. ft. of manufacturing and warehouse facility completely restored from the February 2008
fire.
We acquired a controlling interest in American Furniture on August 31, 2007.
Industry
AFM is the leading manufacturer of upholstered furniture serving the promotional segment of the U.S. furniture
industry. The domestic furniture industry over the past twenty years has realized consistent growth driven by several
factors including (i) a long-term favorable housing market and consistent growth in the purchase of second homes, (ii)
favorable demographic trends (i.e., graying/baby-boom population) and (iii) overall rise in consumer spending have all
contributed to the expansion of the domestic furniture industry prior to 2008.
AFM participates largely in the promotional upholstered furniture industry. Within the U.S. residential retail furniture
marketplace, products are typically positioned in the “promotional”, “good”, “better”, or “best” category. The scale of
the categories is intended to reflect an increasing level of quality, appearance and correspondingly price. At the
wholesale level, the promotional segment of the upholstered furniture industry we believe accounts for $3.4 billion in
sales. Promotional upholstered furniture manufacturers typically offer a limited range of products in a discrete number
of styles and/or designs, allowing immediate delivery to retail customers at well-established retail price points.
Specifically, promotional upholstered furniture is generally priced by product at the retail level as outlined below:
Stationary Sofas – From $299 to $499
Recliners – From $99 to $299
Stationary Sectionals – Up to $799
Motion Sofas – Up to $699
Motion Sectionals – Up to $1,399
Promotionally priced products are among the best-selling lines within the overall upholstered furniture category and are
expected to outpace the overall upholstered market over the next five years. The popularity of promotional furniture is
attributable to (i) the segment’s consistent product quality (based on focused manufacturing on a few key furniture
pieces), and (ii) its value pricing, which appeals to the broadest cross-section of the furniture consumers.
AFM competes exclusively in the promotional segment, selling upholstered furniture in both the stationary and motion
categories. In the retail furniture landscape, promotional furniture is a growing catalyst of floor traffic and sales
volumes for mass market furniture retailers. Recurring promotional programs have become core to retailer strategies
given its immediate availability to customers and just-in-time strategies employed within the industry which limit
retailer inventory requirements,.
Within the wholesale market, wholesale shipments from Asian suppliers, we believe, have grown steadily as a percent
of total wholesale shipments. Asian upholstered imports have grown significantly in the past ten years. We believe
their impact on AFM has been far less than the industry as a whole within the promotional upholstered furniture, due to
the low price points and resulting shipping costs as a percent of a piece’s total value.
Overall conditions for the furniture industry have been difficult over the past year. New housing starts are down
significantly and consumers continue to be faced with general economic uncertainty fueled by deteriorating consumer
credit markets and lagging consumer confidence as a result of erratic financial markets. All of this has significantly
impacted big ticket consumer purchases such as furniture.
Off-shore Imports
Furniture manufactured in Asia emerged as an important driver of the U.S. residential furniture market beginning in the
mid-1990s. While off-shore manufacturers, particularly Chinese and Vietnamese manufacturers, have affected the
entire industry, the import trend, has impacted different segments of the industry at varying levels.
Case-goods and metal furniture have proven to be more susceptible to Asian competition than upholstered furniture,
due to the stack ability and assembly characteristics, resulting in efficient freight consolidation. Upholstered furniture
cannot be broken down and shipped efficiently to the U.S. such that the resulting freight costs tend to out weigh the
labor and material savings achieved through offshore manufacturing. As a result, domestic upholstered manufacturers
have largely managed to compete effectively against Asian competitors when compared to other segments of the
20
furniture industry. In addition, manufacturers in the promotional segment of the upholstered industry are even further
insulated from offshore competition due not only to overall freight costs but also freight costs when compared to
wholesale price of the product together with the prolonged lead-times to retailers and end customers in a market
segment characterized very short lead-times and immediate delivery to the end consumer.
Retail price points in the promotional segment of the upholstered industry range from $99 - $1,399, whereas shipping
costs from Asia on a per piece basis are generally in excess of $100 per piece ($3,000 - $4,000) per standard 40 foot
container not including domestic shipping and insurance costs).
In addition to the increased cost, lead times also hinder Asian manufacturers’ ability to effectively compete in the
promotional upholstered industry. As mentioned previously, retailers use promotional furniture to drive store traffic
and provide immediately delivery to the end-user of value-priced, quality upholstered furniture products. AFM aims to
ship customer orders 48 hours following receipt of an order with delivery occurring 1 – 3 days following depending on
the customers’ location within the U.S. Asian manufacturers typically require at least 50 days (or 7 – 8 weeks
depending on business days) from order receipt to customer delivery, resulting in a significant amount of increased
inventory management and advertising planning in order to effectively source upholstered product from overseas
manufacturers.
In spite of these drawbacks we have recently experienced significantly more competition in 2009 from upholstered
Asian imports in the more expensive motion product category. Asian manufacturers have demonstrated an ability to
create a high quality motion product at a cost that maintains a competitive price point even with the added shipping
costs. American Furniture is considering adding a motion product import to complement its current motion product
line in fiscal 2010.
Products and Services
AFM manufactures two basic categories of promotional upholstered products, stationary and motion. Stationary
products include sofas, loveseats and sectionals, these products accounted for approximately 70%, 63% and 64% of
sales in fiscal 2009, 2008 and 2007, respectively. Motion products include single rocking recliner chairs, sofas with
reclining end seats, loveseats with seats that rock together or separately and reclining sectionals with storage
compartments. Motion and reclining products contributed approximately 28%, 34% and 33% of fiscal 2009, 2008 and
2007 gross sales, respectively. Beginning in 2005, AFM added a line of imported accent tables to its product mix to
provide customers with complimentary accessory offering to AFM’s core furniture lines. For 2009, 2008 and 2007,
accent tables and other miscellaneous revenue accounted for approximately 2%-4% of gross sales. AFM’s core product
offerings with average retail prices are summarized below:
26 styles of stationary sofas, loveseats and chairs - $299 - $499
13 styles of recliners - $99 - $399
5 styles of motion sofas - $499 - $599
3 styles of stationary sectionals - Up to $799
2 style of motion sectionals - $999 - $1,399
AFM’s products utilize common components and frames with limited fabric options, allowing AFM to reproduce
established styles at value prices. Since 2004, AFM has continuously introduced new styles which typically replace
older designs and are primarily slight variations to existing products. AFM builds its products to stock and maintains
adequate inventory levels to facilitate shipment to customers within 48 hours of an order. AFM’s quick-ship strategy
allows customers to better manage inventory and product promotions yet maintain the ability to provide immediate
availability to retail customers, a key attribute within the promotional furniture segment of the furniture industry.
Product Development
AFM can re-engineer a new design, create a prototype and begin to solicit customer feedback within two weeks. AFM
carefully controls its product line such that new styles typically replace older designs. As a result, AFM requires
approximately 60 days to 90 days to wind-down a discontinued line and begin shipping truckload quantities of new
designs to customers.
Manufacturing
AFM utilizes an assembly-line manufacturing process with a four day production cycle divided into four functions,
cutting, sewing, backfill and upholstery. Employees are specialized by function and are compensated on a piece-rate
basis. The limited number of styles and designs minimizes scheduling and line changes and each function is simplified
by the use of common components. AFM uses one standard seat spring, one standard back spring and one standard
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cushion in each category of upholstery.. AFM’s piece-rate compensation plan and streamlined manufacturing process
combine to give AFM a low cost structure
AFM’s efficient manufacturing process combined with its inventory strategy is designed to facilitate AFM’s 48-hour
quick-ship service covering the entire product line. AFM’s expedited shipping capacity enables retailers to improve
inventory turns and reduce lost sales due to stock-outs. AFM’s warehoused inventory is loaded on the delivery truck
within 48 hours of order placement and typically arrives at a customer location within three days of shipping.
AFM delivers the majority of its products through a combination of its in-house trucking fleet and third-party freight
service providers. Freight costs are generally paid by the customer, including fuel surcharges. AFM utilized third-party
freight providers for approximately 70% of its customer shipments in 2009 compared to approximately 50% in prior
years. We estimate that this saved approximately $1.0 million in 2009 in overall freight costs.
Competitive Strengths
We believe that AFM is among the lowest-cost domestic manufacturers of promotional upholstered furniture. AFM
maintains a competitive cost basis through an assembly-line production model and build-to-stock strategy. Specifically,
AFM generates economies of scale through:
•
Long runs of a limited number of standardized frames;
The application of common components throughout the entire production line; and
•
• A standard offering of only two to four fabric options per frame.
In addition, management has aligned AFM’s high-volume manufacturing strategy with a piece-rate incentive structure
for its direct labor force. This structure drives workforce productivity. The incentive system also provides floor
personnel with the opportunity to earn annual compensation at or above local standards, thereby facilitating AFM’s
recruiting and retention efforts.
AFM’s efficient build-to-stock manufacturing operation facilitates AFM’s strategy of offering its customers shipment
of product within 48 hours of order receipt. In turn, AFM’s customers are able to offer their retail customers quality,
value-priced upholstered furniture for immediate delivery upon the day of sale, while only maintaining limited
quantities of product inventory.
AFM serves a diverse base of approximately 750 customers. Within its broader customer base, AFM specifically
targets independent furniture retailers at the national, multi-regional and regional levels. AFM’s value proposition and
the ability to ship any product within 48 hours, is highly valued by this segment of the marketplace that focuses broadly
on demographic segments that demand immediate delivery of popular styles at competitive prices.
Barriers to Significant Asian Competition
The availability of low-cost Asian products has had a far-reaching impact on the broader home furnishings market in
the United States over the past ten years. In contrast to manufacturers serving other segments. Until recently, AFM has
had minimal exposure to off-shore competition due to the following:
• AFM’s efficient, low-cost production model;
• Mass retailers’ short lead-time demands and unwillingness to accept excess inventory risk; and
• High costs (e.g., freight, damage, shrink) of shipping upholstered furniture direct from Asia.
Recently, we have begun to see more competition in the motion product category from Asian imported product. These
products typically offer customers better value in terms of construction and price when compared to our motion
product. Our margin for motion product has typically been less than stationary. We are considering adding motion
imported product in 2010 to complement our existing motion line. We believe this can be done with little or no impact
to our current gross margins.
Business Strategies
Increase sales with new and existing customers
While AFM currently supplies many of the top furniture retailers, AFM believes it can further augment its
customer base and is pursuing new business opportunities with selected national and regional furniture retailers,
as well as in other channels, including Rent-To-Own (“RTO”) and mass merchandisers. In addition, many
existing customers currently purchase only a portion of AFM’s product line, representing an opportunity for
AFM to increase sales to existing customers by augmenting customers’ entire promotional product line. In
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order to focus additional attention to major customers and expand product–line sell-through to these customers,
the Company added significant infrastructure to its sales and marketing organization since 2005, increasing its
sales representative network while also subdividing sales territories to allow representatives to focus more
closely on the expansion of existing relationships and the addition of new customers. On line sales expanded in
2009 growing to approximately 7% of sales. This was accomplished through sales to national and regional
internet marketing firms.
• Product development
AFM’s merchandising strategy focuses on satisfying the changing needs of retailers and consumers in a manner
that meets AFM’s production strategy. AFM’s management and sales staff monitor the furniture market to
identify new trends and popular styles at higher price points. AFM subsequently ensures that it can cost
effectively replicate a new style with standardized components and limited cover options, after which AFM will
build a prototype to determine if the product can be reproduced at acceptable margin levels.
• Asian sourcing of components
In 2004, AFM implemented a program to purchase raw materials from the lowest-cost source available in the
marketplace. The Company hired a director of Asian sourcing in May 2005 to lead this effort. Currently, AFM
sources the vast majority of its fabric, legs, show wood, chaises, ottomans, correlate chairs and accent tables
from Asian vendors. AFM believes there are additional opportunities to lower purchasing costs through this
initiative.
• Strategic acquisitions
AFM has in the past and will continue to evaluate strategic acquisitions to augment its existing business. In
particular, acquisitions may provide AFM with an opportunity to expand geographically, add additional product
lines or achieve operational synergies.
• Pursue cost savings initiatives
Currently, AFM is aggressively pursuing expense reduction, cost cutting programs and cash preservation
initiatives throughout all parts of its business.
Customers
AFM serves a base of approximately 750 customers comprised of retailers and distributors at the regional, multi-
regional and national levels. In 2009, 2008 and 2007, AFM’s top 20 customers accounted for approximately 62%,
56% and 51%, respectively, of AFM’s total sales, with the top customer, Value City, accounting for approximately
24%, 22% and 19% of total sales in 2009, 2008 and 2007, respectively. Other than this customer, no single customer
accounted for more than 6.5% of total sales in 2009, 2008 or 2007.
Sales and Marketing
AFM has a sales force consisting of 15 independent, outside representatives that exclusively sell AFM’s products in an
assigned geographic territory of up to six states. Sales representatives are compensated on a 100% commission basis.
AFM maintains two permanent showrooms in High Point, NC and Tupelo, MS, host cities for furniture industry trade
shows (High Point in April and October and Tupelo in January and August). In addition, AFM leases showroom space
for the furniture trade show in Las Vegas NV. Trade shows provide opportunities for AFM to display its existing
products and introduce new designs into the marketplace.
American Furniture’s business is seasonal. Net sales have historically been higher in the period of January through
April of each fiscal year. We believe this seasonality is due in part to consumer demand increasing resulting from
income tax refunds. Substantially all revenue is derived from sales within the United States.
Marketing at the retail level is typically handled by AFM’s customers. AFM does not advertise specific products on its
own, but provides product information and pictures for retailers to include in newspaper and various insert
advertisements. AFM’s products are typically included in retailers’ recurring promotional programs as the products
drive floor traffic and sales volume due to low price points.
AFM had approximately $6.9 million and $4.9 million in firm backlog orders at December 31, 2009 and 2008,
respectively.
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Competition
AFM competes with selected large national manufacturers that produce and sell promotional products. However,
promotional upholstered furniture often represents only a small percentage of revenue for these participants. Also, large
diversified manufacturers tend not to place specific emphasis on developing quick-ship capabilities specifically for their
promotional offerings. Therefore, AFM competes primarily with several smaller manufacturers that are typically
thinly-capitalized, family owned businesses that we believe do not have the capacity, manufacturing capabilities,
sourcing expertise or access to capital in order to build critical production volumes. Competition within the segment is
largely based on value and delivery lead times, as opposed to product differentiation, providing AFM and its quick-ship
capabilities with a key competitive advantage within the industry. AFM’s primary competitors include United
Furniture Industries, Albany Industries and Hughes Furniture, Ashley Furniture and Corinthian.
Suppliers
AFM’s top supplier, Independent Furniture Supply (“Independent”), is 50% owned by Mr. Thomas, AFM's CEO. AFM
purchases polyfoam from Independent on an arms-length basis and AFM performs regular audits to verify market
pricing. AFM does not have long-term supply contracts with Independent or any other suppliers. A majority of AFM’s
domestic suppliers are located near AFM due to a concentration of furniture manufacturers in northeastern Mississippi.
Several of AFM’s key raw materials, including lumber, plywood and polyfoam, are sourced locally with alternative
suppliers available at competitive prices, if necessary. In order to continually manage material costs, AFM actively
sources products from Asia. AFM imports legs, show wood, chaises, ottomans, correlate chairs, accent tables and the
majority of its fabric from China-based suppliers. The prices charged by manufacturers of products such as petro-
chemicals and wire rod, which are the primary materials purchased by our suppliers of foam and drawn wire declined in
2009. It is too early to determine if we will realize a like kind reduction in our raw material costs in 2010 as our
vendors may reduce supplies in an effort to maintain higher prices. These actions would delay or eliminate price
reductions from our suppliers. Raw material cost as a percent of sales was approximately 59%, 59% and 58% in 2009,
2008 and 2007, respectively.
Regulatory Environment
AFM’s manufacturing operations, facilities and operations are subject to evolving federal, state and local environmental
and occupational health and safety laws and regulations. Such laws and regulations govern air emissions, wastewater
discharge and the storage and handling of chemicals and hazardous substances. AFM believes that it is in compliance,
in all material respects, with applicable environmental and occupational health and safety laws and regulations. New
requirements, more stringent application of existing requirements, or discovery of previously unknown environmental
conditions may result in material environmental expenditures in the future
Employees
As of December 31, 2009, American Furniture employed 832 persons. Of these employees, 758 were in production
shipping and purchasing with the remainder serving in executive, administrative office and other capacities. None of
AFM’s employees are subject to collective bargaining agreements. We believe that AFM’s relationship with its
employees is good.
Anodyne
Overview
Anodyne, headquartered in Coral Springs, Florida, is a leading designer and manufacturer of powered and non-powered
medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term care and home
health care markets. The Anodyne group of companies provides its customers with the opportunity to source leading
surface technologies from the designer and manufacturer.
Anodyne develops products both independently and in partnership with large distribution intermediaries. Medical
distribution companies then sell or rent the therapeutic surfaces, sometimes in conjunction with bed frames and
accessories to one of three end markets: (i) acute care, (ii) long term care and (iii) home health care. The level of
sophistication largely varies for each product, as some patients require simple foam mattress beds (“non-powered”
support surfaces) while others may require electronically controlled, low air loss, lateral rotation, pulmonary therapy or
alternating pressure surfaces (“powered” support surfaces). The design, engineering and manufacturing of all products
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are completed in-house (with the exception of PrimaTech products, which are manufactured in Taiwan) and are FDA
compliant.
For the full fiscal years ended December 31, 2009, 2008 and 2007, Anodyne had net sales of approximately $54.1
million, $54.2 million and $44.2 million, and operating income of $7.4 million, $4.2 million and $2.9 million,
respectively. Anodyne had total assets of $49.0 million at December 31, 2009. Net sales from Anodyne represented
4.3%, 3.5% and 5.2% of our consolidated net sales for fiscal years 2009, 2008 and 2007, respectively.
History
Anodyne was initially formed in February 2006 by CGI and Hollywood Capital, Inc., a private investment management
firm led by Anodyne’s former Chief Executive Officer, to acquire AMF and SenTech, located in Corona, CA and Coral
Springs, FL, respectively. AMF Support Surfaces, Inc. is a leading manufacturer of non-powered mattress systems,
seating cushions and patient positing devices. SenTech is a leading designer and manufacturer of advanced
electronically controlled, powered, alternating pressure, pulmonary therapy, low air loss and lateral rotation specialty
support surfaces for the wound care industry. Prior to its acquisition SenTech had established a premium brand as a
result of its proprietary technologies, in the less price sensitive therapeutic market while AMF competed primarily in
the preventive care market.
On October 5, 2006, Anodyne acquired the patient positioning device business of Anatomic. The acquired operations
were merged into Anodyne’s operations. Anatomic is a leading supplier of operating suite patient positioning devices
and support surfaces focused on the price sensitive long term care and home healthcare markets.
On June 27, 2007, Anodyne purchased PrimaTech, a lower price-point distributor of powered medical support surfaces
to the long term care and home healthcare markets. PrimaTech’s products are predominately designed in the US and
manufactured pursuant to an exclusive manufacturing agreement with an FDA registered manufacturing partner located
in Taiwan.
In October 2008, Anodyne and Hollywood Capital, Inc. terminated their management services agreement which
provided for, among other things, two principals of Hollywood Capital, Inc., resigning from their roles of Chief
Executive Officer and Chief Financial Officer of Anodyne. Upon termination of the agreement, Anodyne appointed a
new Chief Executive Officer and a new Chief Financial Officer.
We purchased a controlling interest in Anodyne from CGI on August 1, 2006.
Industry
The medical support surfaces industry is fragmented and comprised of many small participants and niche
manufacturers. Anodyne’s consolidation platform allows customers to source all leading support surface technologies
for the acute care, long term care and home health care from a single source. Anodyne is a vertically integrated
company with engineering, design and research, manufacturing and support performed in house to quickly bring new,
innovative products and technologies to market while maintaining high quality standards in its manufacturing process.
Immobility caused by injury, old age, chronic illness or obesity is the main cause for the development of pressure
ulcers. In these cases, the person lying in the same position for a long period of time puts pressure on the bony
prominence of the body surface. This pressure, if continued for a sustained period, can close blood capillaries that
provide oxygen and nutrition to the skin. Over a period of time, these cells deprived of oxygen, begin to break down
and form sores. In addition to constant or excessive pressure, other contributing factors to the development of pressure
ulcers include heat, friction and sheer, or pull on the skin due to the underlying fabric.
The prevalence rate of pressure ulcers in acute care facilities has been seen as high as 34%, with costs of treatment as
high as $70,000 per ulcer, causing an estimated burden of an additional 22 million Medicare hospital days. Further it
has been reported that another 2% to 28% of all nursing home patients suffer from decubitus ulcers. We believe that
providing the right therapeutic support surfaces is a necessary intervention for these ulcers. Management believes the
need for medical support surfaces will continue to grow due to several favorable demographic and industry trends
including the increasing incidence of obesity in the United States, increasing life expectancies, and an increasing
emphasis on prevention of pressure ulcers by hospitals and long term care facilities.
According to the Centers for Disease Control and Prevention, between the years 1980 and 2000, obesity rates more than
doubled among adults in the United States. Studies have shown that this increase in obesity has been a key factor in
rising medical costs over the last 15 years. According to one study done at Emory University, increases in obesity rates
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have accounted for 27% of the increase in health care spending between 1987 and 2001. As an individual’s weight
increases, so to does the probability that the individual will become immobile and, according to studies performed at the
University of North Carolina, greater than 40% of obese adults aged 54 to 73 were at least partially immobile. As
individuals become less mobile, they are more likely to require either preventative mattresses to better disperse weight
and reduce pressure areas or therapeutic mattresses to shift weight and pressure. Similar to how obesity increases the
occurrence of immobility, so too does an aging society. As life expectancy expands in the US due to improved health
care and nutrition, so too does the probability that an individual will be immobile for a portion of their lives. In
addition, as individual’s age, skin becomes more susceptible to breakdown increasing the likelihood of developing
pressure ulcers.
Beyond favorable demographic trends, Anodyne’s management believes healthcare institutions are placing an increased
emphasis on the prevention of pressure ulcers. According to recent Medicare guidelines, hospitals would no longer be
reimbursed for the treatment of in-house acquired wounds, resulting in management’s expectations for a greater focus
by hospitals in preventing and treating such wounds. The end result is that if an at-risk patient develops pressure ulcers
while at the hospital; the hospital is required to bear the cost of healing. As a result of increasing litigation and the high
cost of healing pressures ulcers, healthcare institutions are now focusing on using pressure relief equipment to reduce
the incidence of in-house acquired pressure ulcers.
Products and Services
Specialty beds, mattress replacements and mattress overlays (i.e. therapeutic surfaces) are the primary products
currently available for pressure relief and pressure reduction to treat and prevent decubitus ulcers. The market for
specialty beds and therapeutic surfaces include the acute care centers, long-term care centers, nursing home centers and
home healthcare settings. Medical therapeutic surfaces are designed to have preventative and/or therapeutic uses. The
basic product categories are as follows:
• Powered Support Surfaces: Mattresses which can be used for therapy or prevention and are typically
manufactured using an electronic power source with air cylinders or a combination of air cylinders and foam and
provide either Alternating Pressure, Low Air Loss, or Lateral Rotation. Alternating Pressure Systems are
designed to inflate alternate cylinders while contiguous cylinders deflate in an alternating pattern. The
alternating inflation and deflation prevents sustained pressure on an area of skin by shifting pressure from one
area to another. This type of therapy provides movement under the patient’s skin to eliminate both excessive
and constant pressure, the leading cause of bed sores. The powered control unit provides automatic changes in
the distribution of air pressure. Anodyne’s Alternating Pressure Systems in the SenTech line incorporate its
intellectual property in the way these automatic changes take place. This patented technology allows for a more
comfortable surface with aggressive therapeutic alternating pressure. Another typical type of powered surface
is Lateral Rotation which can aid in laterally turning a patient to reduce risks associated with fluid building up in
a patient’s lungs. A feature often found in Powered Surfaces is Low Air Loss that allows air to flow from the
mattress to address the moisture and temperature environment on the patient’s skin, contributing factors to bed
sores. Anodyne currently produces patented designs for the performance of both Alternating Pressure and Low
Air Loss mattress systems which management believes provides the optimum healing therapy for the patient.
Powered support surfaces are typically used in acute care settings and when more aggressive therapy is needed.
• Non-Powered Support Surfaces: Consists of mattresses which have no powered elements. Their support
material can be composed of foam, air, water, gel or a combination of these. In the case of water, air or gel
materials, they are held in place with containment bladders. Non-powered mattress replacement systems help
redistribute a patient’s body weight to lessen forces on pressure points by envelopment into the surface. These
products address the excessive pressure under a patient, but do not address the constant pressure applied to an
area. Non-powered surfaces are generally used for prevention rather than treatment and currently comprise the
majority of support surfaces. Currently Anodyne manufactures a broad range of non-powered mattress systems
using air, foam and gel.
• Positioning devices: Positioning devices are used to position patients for procedures as well as to minimize the
likelihood of developing a pressure ulcer during those procedures. Anodyne offers a complete range of foam
positioning devices.
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Competition
The competition in the medical support surfaces market is based predominantly on product performance, features, price
and durability. Other factors may include the technological ability of a manufacturer to customize their product
offering to meet the needs of large distributors. Anodyne competes with manufacturers of varying sizes who then sell
predominantly through distributors to the acute care, long term care and home health care markets. Specific
competitors include Gaymar Industries, Inc., Span America and other smaller competitors. Anodyne differentiates
itself from these competitors based on its patented technologies, quality of the products it manufacturers as well as its
design and engineering capabilities to produce a full spectrum of surfaces that provide the greatest therapeutic outcome
for every price point. Many competitors specialize in the production of a single type of support surface, and often
outsource certain manufacturing as skills required to develop and manufacture products vary by materials used,
Anodyne is able to offer its customers a full spectrum of support surfaces nationwide.
The companies listed below have been identified by management as Anodyne’s primary competitors.
Gaymar Industries, Inc.: Gaymar, a portfolio company of private equity firm Nautic Partners, develops, manufactures
and markets medical devices for temperature and pressure ulcer management. Gaymar’s pressure ulcer management
system includes, mattress replacement systems, pressure relieving overlays, lateral rotation systems, table and stretcher
pads, chair cushions and heel care devices.
Span America Medical Systems (NASDAQ: SPAN): ($55.9 million in fiscal 2009 sales) Span America’s medical
division includes the sales of skin care products, bedside mats, and foam mattress overlays and replacement mattresses,
including the PressureGuard therapeutic mattress, Span-Aid patient positioners (used to elevate and support body parts)
and Dish pressure-relief seat cushions to aid wound healing. Span America reported that less than half their revenue in
2009 was attributed to their therapeutic surface segment. Span America also supplies safety catheters and makes
specialty packaging products for use in outdoor furniture.
Business Strategies
Anodyne’s management is focused on strategies to grow revenues, improve operating efficiency and improving gross
margins. Of particular note, Anodyne has completed four acquisitions since its inception and has achieved numerous
benefits to this consolidation within the support surfaces industry. The following is a discussion of these strategies:
• Offer customers high quality, consistent product, on a national basis – Products produced by Anodyne and
its competitors are typically bulky in nature and may not be conducive to shipping. Management believes that
many of its competitors do not have the scale or resources required to produce support surfaces for national
distributors and believes that customers value manufacturers with the scale and sophistication required to meet
these needs. All Anodyne facilities have achieved ISO-13485, offering customers the highest standards of
quality.
• Leverage scale to provide industry leading research and development – Medical therapeutic surfaces are
becoming increasingly technologically advanced. Anodyne’s management believes that many smaller
competitors do not have the resources required to effectively meet the changing needs of their customers and
believes that increased scale and investments in engineering and technology will allow it to better serve its
customers through industry leading research, technology, and development.
• Pursue cost savings through scale purchasing and operational improvements – Many of the products used
to manufacture medical support surfaces are standard in nature and management believes that increased scale
achieved through acquisitions will allow it to benefit from lower cost of materials and therefore lower cost of
sales.
Research and Development
Anodyne develops surfaces both independently and in partnership with large distribution intermediaries. Initial steps of
product development are typically made independently. Larger distribution market participants will typically require
further product development testing to ensure mattress systems have the desired properties while smaller distributors
will tend to buy more standardized products, especially on the non-powered products. Anodyne has dedicated
professionals, including individuals focused on process engineering, design engineering, and electrical engineering,
working on the development of the company’s next generation of therapeutic surfaces and is currently investing in its
future focus of advanced wound care technologies.
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Anodyne is working to develop the next generation of products in surfaces as well as advanced wound care devices. The
new product development process often requires 2 to 6 months for prevention products and 12-24 months for treatment
products, of research, engineering and testing cooperation. Anodyne will provide technical support and repair services for
its products as well, a differentiating characteristic valued by its customers. During the each of the years 2009, 2008 and
2007, Anodyne incurred $0.9 million in research and development costs and is expected to nearly double this spending for
2010. This increase in spending is to allow the company to focus on both the next generation products as well as research
and development of new wound care technologies.
Customers
Support surfaces are primarily sold through distributors, who either rent or sell to acute care (hospitals) facilities, long
term care facilities and home health care organizations. The acute care distribution market for support surfaces is
dominated by large suppliers such as Stryker Corporation, Hill-Rom Holdings Inc. and Kinetic Concepts, Inc. Other
national distributors usually provide specific types of support surface technology. Beyond national distribution
intermediaries there are numerous smaller more regional distributors who will purchase support surfaces developed by
Anodyne as certain brand lines are known in the market as providing proven therapy.
Anodyne has developed a full range of support surface products that are sold or rented to healthcare distributors and
occasionally sold directly to the end customer. Anodyne also provides technical support and repair services for its
products, an offering valued by all customers. While contracts with large distributors typically do not include minimum
purchase orders, agreements typically call for rolling forecasts of orders to be given at the end of each month for the
following three months.
Sales and Marketing
Approximately 50%, 33.7% and 34.5% of Anodyne’s sales have been to its two largest customers in 2009, 2008 and
2007, respectively. Anodyne’s top ten customers accounted for 80.1%, 76.9% and 72.9% of gross sales in 2009, 2008
and 2007, respectively. Anodyne’s largest customer accounted for approximately 25% of sales in 2009.
Substantially all revenue is derived from sales within the United States.
Anodyne had approximately $3.1 million and $1.7 million in firm backlog orders at December 31, 2009 and 2008,
respectively.
Suppliers
Anodyne’s two primary raw materials used in manufacturing are polyurethane foam and fabric (primarily nylon and
polycarbonate fabrics). Among Anodyne’s largest raw material suppliers are Foamex International, Inc., Dartex
Coatings, Inc. and Uretek, LLC. Anodyne uses multiple suppliers for foam and fabric and believes that these raw
materials are in adequate supply and are available from many suppliers at competitive prices. We expect these costs,
particularly those related to polyurethane foam to increase during fiscal 2010 due to recent trends in related commodity
prices. Actions taken by manufacturers of petro-chemical commodities such as capacity reductions could influence
price changes from our supplier.
Intellectual Property
Anodyne has six patents issued, filed from 1996 to 2005, and has thirteen filed and pending patents.
Regulatory Environment
The Federal Food, Drug and Cosmetic Act (the “FDCA”), and regulations issued or proposed there under, provide for
regulation by the Food and Drug Administration (the “FDA”) of the marketing, manufacture, labeling, packaging and
distribution of medial devices, including Anodyne’s products. These regulations require, among other things that
medical device manufacturers register with the FDA, list devices manufactured by them, and file various inspections by
regulatory authorities and must comply with good manufacturing practices as required by the FDA and state regulatory
authorities. Anodyne’s management believes that the company is in substantial compliance with all applicable
regulations.
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Employees
As of December 31, 2009, Anodyne employed 205 persons in all its locations together with 137 temporary employees.
None of Anodyne’s employees are subject to collective bargaining agreements. We believe that Anodyne’s relationship
with its employees is good.
Fox
Overview
Fox headquartered in Watsonville, California, is a branded action sports company that designs, manufactures and
markets high-performance suspension products and components for mountain bikes, 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 utilizing its suspension products. As a result, Fox’s suspension
components are incorporated by OEM customers on their high-performance models at the top of their product lines.
OEMs leverage the strength of Fox’s brand to maintain and expand their own sales and margins. In the Aftermarket
segment, customers seeking higher performance select Fox’s suspension components to enhance their existing
equipment.
Fox sells to over 200 OEM and over 7,600 Aftermarket customers across its market segments. In each of the years
2009, 2008 and 2007, approximately 76%, 76% and 75% of net sales were to OEM customers with the remaining sales
to Aftermarket customers. Fox’s senior management, collectively, has approximately 100 years of experience in the
suspension design and manufacturing industry and other closely related industries.
For the full fiscal years ended December 31, 2009, 2008 and 2007, Fox had net sales of approximately $121.5 million,
$131.7 million, and $105.7 million and operating income of $10.7 million, $10.7 million and $2.4 million, respectively.
Fox had total assets of $120.3 million at December 31, 2009. Fox’s net sales represented $9.7%, and 8.6% of our
consolidated net sales for the years ended December 31, 2009 and 2008, respectively.
History of Fox
Fox was founded by Bob Fox in 1974 when, having participated in motocross racing, he sought to create a racing
suspension shock that was not prone to overheating like most of the shocks available at that time. Working in a friend’s
garage, Mr. Fox created the “Fox Air-Shox”. The product was successful and within two years it was used to win the
U.S. 500cc National Motocross Championship.
In 1978, Fox began producing high performance suspension products for off-road and motorcycle racing. From 1978 to
1983, Fox suspension users won the 500cc Grand Prix (motocross), Baja 1000 (off-road), AMA Super Bike
(motorcycle road racing) and Indy 500 (auto racing) generating greater market awareness for the Fox brand especially
among racing enthusiasts.
As Fox grew, the company applied the same core suspension technologies developed for motocross racing to other
categories. In 1987, Fox entered the snowmobile market. By 1993, Fox began supplying the mountain bike industry
with rear shocks before offering front fork suspensions in 2001. Fox entered the ATV and other off-road markets in
2002.
We purchased a majority interest in Fox on January 4, 2008.
Industry
Fox provides suspension products for mountain biking and powered vehicles, such as, snowmobiles, all-terrain/utility
vehicles, motorcycling/motocross and off-road/specialty vehicles. Over the last three fiscal years mountain biking has
represented approximately 80% of Fox’s gross sales and powered vehicles have represented approximately 20% of
gross sales.
Mountain Biking - In 2008, the US bike market generated over $6.0 billion of sales according to the National Bicycle
Dealers Association. Mountain bike related sales accounted for approximately 28.5% of this total according to U.S.
Department of Commerce statistics, Gluskin Townley Estimates. These sales were primarily conducted through three
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channels: mass merchants, chain sporting goods and Independent Bike Dealers (IBDs). These channels are
differentiated by the price, quality and selection of the mountain bikes they offer, with the IBD segment consisting of
premium priced and highly technical performance bikes.
Mountain biking enthusiasts typically have strong preferences concerning not only the OEM brand but also for the
components used by OEM manufacturers. Shocks, forks, wheels and drive-trains strongly influence customers’ buying
decisions. OEMs have formed partnerships with premium component manufacturers having strong brands in order to
generate increased sales of their fully assembled bikes. Fox’s components are generally selected by OEMs participating
in the IBD segment and by Aftermarket consumers seeking increased performance characteristics.
Snowmobiles – In 2008, management estimates that the worldwide market for new snowmobiles was $1.5 billion. Fox
management estimates replacement parts, accessories and clothing accounted for an additional $1.1 billion.
Snowmobiling can be segmented into the following categories: Performance/crossover snowmobiles used for a variety
of activities including racing; Touring/utility snowmobiles that are more comfortable and often seat two people;
Mountain snowmobiles that are performance-oriented, focusing on vertical geography; Trail snowmobiles that are
primarily used for riding groomed and un-groomed trails; and Youth snowmobiles. Fox provides suspension products in
each of these categories.
As a way to stimulate demand for new snowmobiles and entice customers to purchase more premium priced
snowmobiles, OEMs will select Fox shocks. Additionally, OEMs offer the Fox’s shock absorbers as upgrades on less
expensive models. Aftermarket customers will select Fox components for increased performance characteristics.
All-Terrain Vehicles – In 2008, the worldwide ATV market was $6.2 billion according to management’s estimates.
The market for all-terrain vehicles (ATVs) and utility vehicles can be divided into four segments: Recreation/Utility
ATVs that are primarily used for trail riding, hunting and farming; Sport ATVs are high performance, two-wheel drive
machines used for racing and aggressive trail riding; Youth ATVs; and Side-by-Side ATVs. Fox develops and sells
shocks into the performance and racing sport, youth and side-by-side sub-segments of the ATV market.
Similar to the snowmobile industry, OEMs will stimulate demand for new ATVs and entice customers to purchase
more premium priced ATVs by selecting Fox’s shocks for their premium models. Additionally, OEMs offer the
company’s shock absorbers as upgrades on less expensive models. Aftermarket sales are comprised of customers
seeking enhanced performance characteristics.
Motorcycles/Motocross - In 2008, the U.S. retail sales of motorcycles was $8.3 billion according to management
estimates. The motorcycle market consists of all classes of on-road and off-road motorcycles. There are three main
categories: On-highway motorcycles that are primarily used on paved roads; Dual motorcycles that are used for both on
and off-road activities; and Off-highway motorcycles that are only certified for off-road use. The Off-road category is
further segmented into motocross, off-road which includes youth motocross and youth off-road. Currently, OEM needs
for suspension products are largely filled by captive suppliers in this category. As such, Fox has focused on the
Aftermarket performance racing segments. Aftermarket sales are comprised of customers seeking enhanced
performance characteristics.
Off-Road Vehicles– In 2008, the US retail sales of specialty automotive products were $31.8 billion according to the
Specialty Equipment Market Association. Of that, $9.4 billion came from suspension and handling equipment. Off-
road vehicles can be divided into five segments: off-road trucks, buggies, sand buggies, rock crawlers and lifted trucks.
Consumers in the truck, buggy, sand buggy and rock crawler categories range from serious racers and enthusiasts to
individuals involved primarily in recreational activities. The lifted truck segment, which consists of vehicles that in
many cases never leave the highway, is divided generally by price point. Fox’s products target the high-end price point
for each of these five segments. Off-road vehicles are generally customized vehicles with aftermarket components
unlike OEM vehicles although some OEM manufacturers are offering limited edition vehicles. Fox primarily sells to
Aftermarket consumers seeking increased performance characteristics but has begun some limited sales to OEM
manufacturers. FOX also provides suspension to the US Government either directly or through tier one manufacturers.
Products and Services
Fox designs and manufactures suspension products that dissipate the energy and force generated by various action sport
activities. A suspension product allows wheels to move up and down to absorb bumps and shocks while keeping the
tires in contact with the ground for better control. Fox’s products use aerospace alloys and feature adjustable
suspension, progressive spring rates, and low weight combined with structural rigidity. Fox suspension products
improve user control for greater performance while maximizing comfort levels.
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Each suspension product built at Fox’s manufacturing facilities is assembled according to precise specifications at
multiple stages throughout the assembly process to ensure consistently high performance levels and customer
satisfaction. Finished parts are built in multiple assembly cells and on an assembly line using precise tooling to ensure
manufacturing consistency and product functionality. Fox has developed a number of highly sophisticated assembly
machines to ensure consistent high quality.
Competitive Strengths
Proprietary Engineering Expertise – Fox maintains a broad base of technical innovation and design that has been
developed over the past 35 years. Fox’s technical expertise enables the development and production of some of the
most advanced suspension products available in the market. With its history of innovation and design, Fox has created
a deep portfolio of key intellectual property related to suspension technology and applications.
Highly Recognizable Brand – Driven by a long history of innovation, Fox has created a highly respected and well-
known brand for advanced suspension products. A product branded with the FOX Racing Shox logo represents the
highest level of technical performance for enthusiasts and professionals who require suspension systems capable of
handling demanding conditions. The FOX Racing Shox logo is prominently displayed on all of Fox’s products and
provides a halo effect for complementary products.
Strong Blue-Chip Customer Relationships – Given the long history of performance for Fox’s suspension products,
OEM customers seeking the highest level of quality and technical features for suspension have developed strong long-
term relationships with the company.
Business Strategies
Expand Revenues from Powered Vehicles Business – Fox’s focus on developing premier suspension technologies
continues to create complementary opportunities across this segment. For example, Fox currently supplies shocks to
Ford’s Special Vehicle Division specifically for its F-150 SVT Raptor Off-Road Truck. Additionally, Fox is currently
in discussions with participants in numerous other industries including military applications.
Expand Aftermarket Sales – The sale of aftermarket parts typically carries higher gross margins than a similar OEM
sale. Fox is further investing in its Aftermarket sales infrastructure to foster sales growth in 2010 and beyond. One of
the simplest and most effective ways for customers to improve their performance is the purchase and installation of an
aftermarket Fox suspension product when compared to the expense of purchasing an entirely new platform.
International Growth – Due to the successful efforts of Fox’s operations teams, distribution to foreign OEMs and
distributors is well-established. By selectively increasing infrastructure and honing its focus on identified opportunities,
Fox plans to continue its international sales growth. International sales represented 69%, 70% and 67% of net sales in
fiscal 2009, 2008 and 2007, respectively.
Pursue New Market Trends and Opportunities – New trends in action sports can lead to significant market
opportunities. Fox’s close association with racing and its professionals allows it to see new trends as they emerge.
Depending on the trend, Fox will develop new products that address these needs.
Research and Development
Fox’s products are among the most technically advanced and rigorously engineered in their markets. They are
specifically designed to function and perform under diverse and extreme conditions. Fox’s research and development
effort is at the core of its strategy of product innovation and market leadership. Fox’s products feature a combination of
innovative design, high-quality materials, functionality and performance elements and are recognized as being the
leaders or among the leaders in all of the market segments in which they participate.
Fox has an eleven person core research and development team, which has collectively over 167 years of combined
industry experience. In addition to the core engineering group, a large number of other Fox staff members, who also use
the company’s products, contribute to the research and development effort at various stages. This may take the form of
initial brainstorming sessions or ride testing products in development. Product development also includes collaborating
with customers, field testing by sponsored race teams and working with grass roots riders. This feedback helps ensure
products will meet the company’s demanding standards of excellence as well as the constantly changing needs of
professional and recreational end users.
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Fox’s research and development activities are supported by state-of-the-art engineering software design tools, integrated
manufacturing facilities and a performance testing center equipped to ensure product safety, durability and superior
performance. The testing center collects data and tests products prior to and after commercial introduction. Suspension
products undergo a variety of rigorous performance and accelerated life tests. Research and development costs totaled
$3.0 million, $2.6 million and $2.0 million in each of the years 2009, 2008 and 2007, respectively.
Customers
Fox’s reputation for product quality, durability and technical excellence has resulted in a customer base that includes
some of the world’s leading OEMs and a loyal following of knowledgeable and experienced end users. Fox’s OEM
customers are market leaders in their respective categories, and help define, as well as respond to, consumer trends in
their respective industries. These customers provide exceptional market support for Fox by including the company’s
products on their highest-performing models. OEMs will often use Fox’s components to improve the marketability and
demand of their own products.
Fox sells to over 200 OEM customers and over 7,600 Aftermarket customers across its market segments. One customer
accounted for approximately 10.8%, 10.7% and 12.8% of net sales for the years ended December 31, 2009, 2008 and
2007, respectively. Fox’s top 10 customers accounted for approximately 50.0%, 48.1% and 47.1% of net sales in 2009,
2008 and 2007. International sales totaled $84.0 million, $92.5 million and $70.5 million in each of the years 2009,
2008 and 2007, respectively. Sales to Taiwan totaled $35.6 million, $44.8 million and $37.3 million in 2009, 2008 and
2007, respectively. Sales attributable to countries outside the United States are based on shipment location. The
international sales amounts provided do not necessarily reflect the end customer location as many of our products are
assembled at international locations with the ultimate customer located in the United States.
Sales and Marketing
Fox employs 14 dedicated sales professionals. Each divisional sales person is fully dedicated to servicing either OEM
or Aftermarket customers ensuring that Fox’s customers receive only the most capable person to address their unique
needs. Fox strongly believes that providing the best service to its end customers is essential in maintaining its
reputational excellence in the marketplace. The sales force receives training on the latest Fox products and technologies
in addition to attending trade shows to increase its market knowledge.
The primary goal of the marketing program is to promote the technical superiority of Fox’s innovative products. Fox
increases brand awareness and equity with end users through several marketing channels including: advertisements in
publications and websites; team and individual sponsorships; support and promotion at outdoor events; trade shows;
website development; and dealer support.
Approximately 2% of net sales were spent on advertising and marketing costs in each of the years 2009, 2008 and 2007.
Fox’s business is somewhat seasonal. Historically, net sales are highest during the fiscal quarters ended June and
September. We believe this seasonality is due to consumer demand for new products containing our shocks increasing
due to the summer outdoor recreation season.
Fox had approximately $24.1 million and $14.9 million in firm backlog orders at December 31, 2009 and 2008,
respectively.
Competition
Competition in the high-end performance segment of the suspension market revolves around technical features,
performance and durability, customer service, price and reliable order execution. While price is a factor in all
purchasing decisions, customers consider Fox’s products to be an outstanding value proposition given their significant
performance and other attributes.
Fox competes with several large suspension providers as well as numerous small manufacturers who provide branded
and unbranded products. These competitors can be segmented into the following categories:
Mountain Biking – Fox competes with several companies that manufacture front and rear mountain bike suspension
products. Management believes these include RockShox (a subsidiary of SRAM Corporation), Tenneco Marzocchi
S.r.l. (a subsidiary of Tenneco Inc.), Manitou (a subsidiary of HB Performance Systems), SR Suntour and DT Swiss (a
subsidiary of Vereinigte Drahtwerke AG).
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Snowmobiles – Within the snowmobile market, Management believes its main competitor is KYB (Kayaba Industry
Co., Ltd.). Other suppliers include Öhlins Racing AB, Walker Evans Racing, Works Performance Products and Penske
Racing Shocks / Custom Axis, Inc.
All-Terrain Vehicles – A large percentage of the shocks supplied to OEM ATV manufacturers are the result of either
long-term supplier relationships or captive business units associated with a specific OEM. Alternatively, ATV
manufacturers source suspensions from a variety of suspension manufacturers depending on the final application and
performance requirements.
Fox’s management believes its primary competitor outside of captive OEM suppliers is ZF Sachs (ZF Friedrichshafen
AG) . Aftermarket shocks are available from large OEMs plus a number of primarily aftermarket suppliers including
Elka Suspension Inc., Öhlins Racing AB, Works Performance Products and Penske Racing Shocks / Custom Axis, Inc.
Off-Road Vehicles – Within the off-road vehicle category, Fox competes with both branded and unbranded
competitors. The two largest competitors to Fox in management’s opinion are ThyssenKrupp Bilstein Suspension
GmbH (“Bilstein”) and King Shock Technology, Inc. (“King Shock”). Other competitors include Sway-A-Way, Pro
Comp Suspension, Edelbrock Corporation and Walker Evans Racing.
Suppliers
Fox works closely with its supply base, and depends upon certain suppliers to provide raw inputs, such as forgings and
castings and molded polymers that have been optimized for weight, structural integrity, wear and cost. Fox typically has
no firm contractual sourcing agreements with these suppliers other than purchase orders.
Additionally, Fox internally manufactures over 600 different components. Depending on component requirements, raw
inputs go through a combination of machining processes including computer numeric control machines, drill stations
and lathes. Fox utilizes manufacturing models and workflow analysis tools to minimize bottlenecks and maximize
capital asset utilization. After initial machining, components are then outsourced to specialized manufacturers for
plating, grinding, anodizing and reaming.
Fox’s primary raw materials used in production are aluminum and magnesium. Fox uses multiple suppliers for these
raw materials and believes that these raw materials are in adequate supply and are available from many suppliers at
competitive prices.
Intellectual Property
Fox relies upon a combination of patents, trademarks, trade names, licensing arrangements, trade secrets, know-how
and proprietary technology in order to secure and protect its intellectual property rights.
Fox’s in-house intellectual property department and in-house counsel diligently protect its new technologies with
patents and trademarks and vigorously defend against patent infringement lawsuits. Fox currently owns 20 patents on
proprietary technologies for shock absorbers and front fork suspension products and has an additional 42 patent pending
applications at the U.S. and European Patent Offices. Fox’s patent portfolio makes it an impediment to competitors to
introduce products with comparable features.
Regulatory Environment
Fox’s manufacturing and assembly operations, its facilities and operations are subject to evolving federal, state and
local environmental and occupational health and safety laws and regulations. These include laws and regulations
governing air emissions, wastewater discharge and the storage and handling of chemicals and hazardous substances.
Management believes that Fox is in compliance, in all material respects, with applicable environmental and
occupational health and safety laws and regulations. New requirements, more stringent application of existing
requirements, or discovery of previously unknown environmental conditions could result in material environmental
expenditures in the future.
Additionally, Fox is subject to the jurisdiction of the United States Consumer Product Safety Commission (CPSC) and
other federal, state and foreign regulatory bodies. Under CPSC regulations, a manufacturer of consumer goods is
obligated to notify the CPSC, if, among other things, the manufacturer becomes aware that one of its products has a
defect that could create a substantial risk of injury. If the manufacturer has not already undertaken to do so, the CPSC
may require a manufacturer to recall a product, which may involve product repair, replacement or refund. Fox has never
had any of its products recalled.
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Employees
As of December 31, 2009, Fox employed approximately 408 persons. Of these employees approximately 56 were in
sales, marketing and customer service, 38 were in engineering and 285 were in operations and IT with the remainder
serving in executive and administrative capacities. None of Fox’s employees are subject to collective bargaining
agreements. We believe that Fox’s relationship with its employees is good.
HALO
Overview
Headquartered in Sterling, IL, HALO is an independent provider of customized drop-ship promotional products in the
U.S. and operates under the well-known brand names of HALO and Lee Wayne. Through an extensive group of
dedicated sales professionals, HALO serves as a one-stop shop for approximately 38,000 customers throughout the U.S.
HALO is involved in the design, sourcing, management and fulfillment of promotional products across several product
categories, including apparel, calendars, writing instruments, drink ware and office accessories. HALO’s sales
professionals work with customers and vendors to develop the most effective means of communicating a logo or
marketing message to a target audience. A large majority of products sold are drop shipped, reducing the company’s
inventory risk.
We believe HALO is the largest promotional products business in the customized, drop ship sub-sector of the highly
fragmented $19.8 billion domestic promotional products market. We believe HALO’s size and scale enables
specialization and efficiency in back office functions that cannot be replicated by smaller, independent operators. This
scale generates purchasing power with vendors and allows HALO to consolidate purchases across its client base to
achieve improved product pricing.
For the fiscal years ended December 31, 2009, 2008, and 2007 HALO had net sales of approximately $139.3 million,
$159.8 million and $144.3 million and operating income of $2.8 million $5.3 million and $5.7 million in fiscal 2009,
2008 and 2007, respectively. HALO had total assets of $107.6 million at December 31, 2009. Net sales from HALO
represented 11.2%, 10.4% and 15.3% of our total consolidated net sales for fiscal 2009, 2008 and 2007, respectively.
History of HALO
HALO was founded in 1952 under its predecessor Lee Wayne Corporation. Lee Wayne Corporation was acquired in
the early 1990s by HA-LO Industries, Inc., a provider of advertising and marketing services. In 2004, the entity formed
to acquire the domestic promotional product assets of HA-LO Industries, Inc. and was renamed HALO Branded
Solutions, Inc.
HALO acquired Tasco, a promotional products distributor in 2007, Goldman Promotions, a promotional products
distributor in April 2008, the promotional products distributor division of Eskco, Inc in November 2008 and the
promotional products distributor Ad-Nov in March 2009.
We acquired a majority interest in HALO on February 28, 2007.
Industry
Promotional products provide companies with targeted marketing and long term exposure. Given the effectiveness of this
type of brand endorsement, approximately In contrast to general advertising, promotional products enable targeted
marketing to individuals and yield long term exposure from repeated use. Growth has been driven by the efficacy of
promotional products in creating and enhancing brand awareness.
The promotional products industry generally involves coordination between suppliers, distributors and account executives.
Suppliers manufacture promotional goods either internally or through outsourced manufacturers and produce catalogs for
account executives to use when selling products. Following receipt of a product order, representatives work with their
respective distributors to administer and process the transaction, typically following up to ensure delivery.
HALO competes in a sub sector of the promotional products market that consists of merchandise which is customized or
decorated with logos, team names or special events. While nearly any consumer product can serve as a marketing tool
when branded, a majority of promotional products sold are in the apparel, writing instruments, calendars, drink ware,
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business accessories or bag categories. Management believes the promotional products distribution industry is
fragmented, with over 21,000 distributors in the United States, the considerable majority of which are small firms with one
to five account executives, generating sales of under $2.5 million.
The market can be broadly segregated into two large service categories: drop ship and program or fulfillment. A drop ship
order is typically one time in nature and may be related to an event or single marketing campaign. Drop ship distributors
do not take inventory of the product; instead, sales representatives assist customers in designing a solution to achieve its
marketing objective, such as brand or company awareness, customer acquisition or customer retention. Drop ship
distributors then source the product from one of thousands of suppliers to the industry, arrange the necessary embroidering,
decorating, or other customization, and coordinate delivery to the client. Alternatively, providers of fulfillment services
develop larger programs that involve corporate branding or incentive programs. Fulfillment distributors design programs
with the customer, take inventory of product and ship over time to customer locations as requested.
Products and Services
HALO is one of the leading providers of promotional products that stimulate brand awareness, customer acquisition,
and customer retention. HALO offers drop ship and fulfillment services, although drop ship services comprise a large
majority of revenue. Through a sales force that has both broad geographic coverage and deep industry expertise,
HALO provides promotional products to thousands of companies in the U.S. and Canada.
Categories
Apparel
Business Accessories
Calendars
Writing Instruments
Recognition Awards
Other Items
Examples of Common Promotional Products
Examples
Jackets, sweaters, hats, golf shirts
Calculators, briefcases, desk accessories
Wall and desk calendars, appointment planners
Pens, pencils, markers, highlighters
Trophies, plaques
Crystal ware, key chains, watches, mugs, golf
accessories
HALO and its sales professionals assist customers in identifying and designing promotional products that increase the
awareness and appeal of brands, products, companies and organizations. HALO sales people regularly play a
consultative role with customers in the development of promotional materials, resulting in an array of product sourcing.
HALO also provides fulfillment services on a selective basis.
As a result of its focus on automation, management has implemented what it believes to be an industry leading and
proprietary information system to supplement HALO’s customer service operation. The system is tailored to support
the unique needs of its customers and provides the flexibility required to integrate an acquisition or respond to a
customer demand. The information system supports all aspects of the business, including order processing, billing,
accounting, fulfillment and inventory management.
Competitive Strengths
HALO has established itself as a leading distributor in the promotional products industry. HALO’s management
believes the following factors differentiate it from many industry competitors.
•
Industry Leading, Scalable Back Office Infrastructure — HALO’s management team believes that an
important factor in attracting and retaining high quality account executives is providing an efficient and
effective order processing and administrative system. HALO’s customer service organization provides
critical support functions for its sales force including order entry, product sourcing, order tracking, vendor
payment, customer billing and collections. HALO’s scale in the industry has allowed it to make information
technology and personnel investments to create a sophisticated infrastructure that management believes
differentiates it from many smaller industry participants.
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•
•
Diverse Customer Base Characterized by Long-Standing Relationships — HALO’s revenue base
possesses little customer, end market or geographic concentration. It currently does business with
approximately 38,000 customers in various end markets. For the fiscal years ended December 31, 2009,
2008 and 2007, HALO’s top ten customers represented less than 20% of its revenues. HALO’s team of
account executives are often deeply involved in their local communities and possess deep and long standing
relationships with customers of all sizes.
Extensive Relationships with a Broad Base of Suppliers — HALO’s management believes its
relationships with a wide range of suppliers of promotional products allows HALO to offer its end
customers the most complete line of items in the industry.
Business Strategies
•
•
Attract and Retain Account Executives — As HALO’s infrastructure is relatively fixed, it derives
significant incremental contribution from the addition of account executives. Further, HALO’s management
believes it has developed a combination of service and compensation that allows it to offer account
executives a value proposition superior to those offered by its competitors.
Optimize the Productivity of Account Executives — The management team of HALO continuously strives
to increase the productivity of its account executives. HALO routinely provides its account executives with
marketing support tools and training. In addition, for larger accounts, HALO works with account executives
to develop proprietary solutions that allow customers to better measure and track their programs, thereby
increasing their loyalty.
• Restructure costs – In light of the severe economic pressures HALO has reduced its expenses to more
appropriately align its cost structure with anticipated reductions in revenue due to the current economic
downturn. These expense reductions address most aspects of HALO’s business.
•
Selectively Acquire and Integrate — HALO’s management believes that HALO is well positioned to take
advantage of the industry’s fragmentation and economies of scale. In the past, HALO has achieved
significant synergies by acquiring and integrating other distributors. Recognizing this opportunity, HALO’s
management team is constantly evaluating potential acquisition opportunities. We believe that current
economic conditions may enhance our opportunities to make desirable acquisitions.
Customers
HALO has developed relationships with a diverse base of approximately 38,000 customers. HALO’s customers include
a number of Fortune 500 companies as well as privately held businesses that rely on HALO as their sole marketing
services provider.
Sales and Marketing
HALO’s revenue is generated through its sales force, which consults directly with clients to develop a solution that best
meets their needs for each order and/or utilizes HALO’s infrastructure to build customized websites that act as online
company stores. HALO’s back office receives orders from internal sales representatives via phone, fax or email.
HALO’s tracking systems allow sales representatives to ensure that products are drop shipped directly from the vendor
to the customer on time. HALO’s salespeople are based throughout the U.S. in order to better serve a geographically
diverse customer base.
HALO historically recognizes approximately 70% of its net sales in the fiscal quarters ended September and December
due to calendar sales and corporate demand during the holiday season. In 2009, approximately 79% of net sales
occurred in the fiscal quarters ended in September and December.
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The following represents Halo’s management estimates of product category sales as a percent of gross sales in fiscal
2009 and 2008:
(Percent of sales by product category is not available for fiscal 2007)
Product category
Apparel
Office accessories
Bags
Writing instruments
Calendars
Jewelry/awards
Drink ware
Other
Percent of
sales
20%
15%
14%
14%
12%
5%
4%
16%
100%
Substantially all revenue is derived from sales within the United States.
HALO had approximately $14.4 million and $14.6 million in firm backlog orders at December 31, 2009 and 2008,
respectively.
Competition
We believe HALO is the largest drop ship promotional products distributor in the U.S. Management believes the
promotional products distribution industry is fragmented, with over 21,000 distributors in the United States, the
considerable majority of which are small firms with one to five account executives, generating sales of under $2.5 million.
Industry players can be segmented into the following categories, or a combination thereof:
• Full Service – Companies that provide a wide array of services to a range of customers, including multinational
clients. Full service offerings include both the drop shipment and fulfillment business models. HALO is a full
service distributor.
• Inventory Based – Distributors that provide inventory programs for large corporations. Inventory based
providers are generally capital intensive, often requiring a large investment to maintain a broad inventory of
SKUs.
• Franchisers – Distributors that process and finance orders for a franchise fee. Franchisers do not offer back
office support and typically attract distributors with lower credit profiles and those with available time to
perform customer service functions.
• Consumer Products Manufacturers – Some customer product manufacturers provide promotional products.
Consumer product manufacturers, for whom promotional products is a non-core business, do not customarily
invest in the necessary infrastructure to meet the support needs of industry sales professionals.
Competition in the promotional product industry revolves around product assortment, price, customer service and
reliable order execution. In addition, given the intimate relationships account executives enjoy with their customers,
industry participants also compete to retain and recruit top earners who posses a meaningful existing book of business.
Suppliers
HALO purchases products and services from over 4,000 companies. One supplier accounted for approximately 8% of
purchases in the year ended December 31, 2009. If circumstances required us to replace this supplier we believe we
could do so with minimal interruption in our product flow and at a negligible incremental cost.
Employees
As of December 31, 2009, HALO employed approximately 447 full-time employees and approximately 672
independent sales representatives. None of HALO’s employees are subject to collective bargaining agreements. We
believe that HALO’s relationship with its employees is good.
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Staffmark
Overview
Staffmark, headquartered in Cincinnati, Ohio, is a provider of temporary staffing services in the United States.
Staffmark currently operates under the brand name Staffmark, (see page 45 “rebranding of CBS Personnel”). Staffmark
also provides its clients with other complementary human resource service offerings such as employee leasing services,
permanent staffing and temporary-to-hire placement services. Staffmark operated more than 200 branch locations in
various cities in 29 states during 2009. Staffmark and its subsidiaries have been associated with quality service in their
markets for more than 30 years. Staffmark is one of the top 10 commercial staffing companies in the United States.
CBS Personnel Holdings, Inc acquired Staffmark Investment LLC, a large privately held provider of temporary staffing
services in January 2008. Find more information at www.staffmark.com.
Staffmark serves approximately 6,400 corporate and small business clients and on an average week places over 34,000
temporary employees in a broad range of industries, including manufacturing, transportation, retail, distribution,
warehousing, automotive supply, construction, industrial, healthcare and financial sectors. We believe the quality of
Staffmark’s branch operations and its strong sales force provides it with a competitive advantage over other placement
services. Staffmark’s senior management, collectively, has over 80 years of experience in the human resource
outsourcing industry and other closely related industries.
For each of the fiscal years ended December 31, 2009, 2008 and 2007, Staffmark had revenues totaling approximately
$745.3 million, $1.0 billion and $1.2 billion, and operating income (loss) of $(55.6) million, $16.1 million and $31.6
million, respectively, on a pro-forma basis, as if CBS Personnel Holdings, Inc had acquired Staffmark Investment LLC
on January 1, 2007. Staffmark wrote off $50.0 million in goodwill during 2009. Staffmark had total assets of $277.7
million at December 31, 2009. Revenues from Staffmark represented 59.7%, 65.4% and 67.7% of our consolidated net
sales for 2009, 2008 and 2007, respectively.
History of Staffmark
In August 1999, CGI acquired Columbia Staffing through a newly formed holding company. Columbia Staffing was a
provider of light industrial, clerical, medical, and technical personnel to clients throughout the southeast. In October
2000, CGI acquired through the same holding company CBS Personnel Services, Inc. a Cincinnati-based provider of
human resources outsourcing. CBS Personnel Services, Inc. began operations in 1971 and is a provider of temporary
staffing services in Ohio, Kentucky and Indiana, with a particularly strong presence in the metropolitan markets of
Cincinnati, Dayton, Columbus, Lexington, Louisville, and Indianapolis. The name of the holding company that made
these acquisitions was later changed to CBS Personnel Holdings, Inc.
In 2004, CBS Personnel Holdings, Inc. expanded geographically through the acquisition of Venturi Staffing Partners
(“VSP”), formerly a wholly owned subsidiary of Venturi Partners Inc. VSP wass a provider of temporary staffing,
temp-to-hire and permanent placement services operating through branch offices located primarily in economically
diverse metropolitan markets including Boston, New York, Atlanta, Charlotte, Houston and Dallas, as well as both
Southern and Northern California. Approximately 60% of VSP’s temporary staffing revenue related to the clerical
staffing, 24% related to light industrial staffing and the remaining 16% related to niche/other. Based on its geographic
presence, VSP was a complementary acquisition for CBS Personnel Holdings, Inc. as their combined operations did not
overlap and the merger created a more national presence for CBS Personnel.
In November 2006, CBS Personnel Holdings, Inc. acquired substantially all of the assets of Strategic Edge Solutions
(“SES”). This acquisition gave CBS Personnel Holdings, Inc. a presence in the Baltimore, MD area while significantly
increasing its presence in the Chicago, IL area. SES derived the majority of its revenues from the light industrial
market.
On January 21, 2008, CBS Personnel Holdings, Inc. acquired Staffmark Investment LLC and Staffmark Investment
LLC has become a wholly-owned subsidiary of CBS Personnel Holdings, Inc. Staffmark Investment LLC was a leading
provider of commercial staffing services in the United States. Staffmark Investment LLC provided staffing services in
over 29 states through more than 200 branches and on-site locations. The majority of Staffmark Investment LLC’s
revenues are derived from light industrial staffing, with the balance of revenues derived from administrative and
transportation staffing, permanent placement services and managed solutions. Similar to CBS Personnel Holdings, Inc.,
Staffmark Investment LLC was one of the largest privately held staffing companies in the United States.
We purchased a majority interest in CBS Personnel Holdings, Inc. on May 16, 2006.
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Industry
According to Staffing Industry Analysts, Inc., the staffing industry generated approximately $125.7 billion in revenues
in 2008. The staffing industry is comprised of four product lines: (i) temporary staffing; (ii) employee leasing; (iii)
permanent placement; and (iv) outplacement, representing approximately 74.0%, 8.0%, 17.0% and 1% of the market,
respectively. The temporary staffing business declined by 5.1% in 2008 according to Staffing Industry Analysts, Inc.
Over 98% of Staffmark’s revenues are generated through temporary staffing.
Staffmark competes largely in the light industrial and clerical categories of the temporary staffing industry. The light
industrial category is comprised of unskilled and semi-skilled workers in manufacturing, distribution, logistics and
other similar industries. The clerical category is comprised of administrative personnel, data entry professionals, call
center employees, receptionists, clerks and similar employees.
According to the U.S. Bureau of Labor Statistics, or BLS, net employment in the Temporary Help Services industry has
grown by approximately 70.1% from 1990 to 2009. Further, BLS has projected that the employment services sector is
expected to be the second fastest growing sector of the economy for employment growth between 2006 and 2016.
Companies today are operating in a more global and competitive environment, which requires them to respond quickly
to fluctuating demand for their products and services. As a result of the recent economic recession (2008-2009)
companies seek greater workforce flexibility translating to an increasing demand for temporary staffing services. The
Temporary Help Services Industry is cyclical though, and through September 2009, net employment declined by
approximately 34.9% before beginning to trend upward from October through December 2009. Additionally, we
believe this growing demand for temporary staffing should remain consistent in the near future as temporary staffing
becomes an integral component of corporate human capital strategy.
Fiscal 2009 was a very difficult year for the temporary staffing industry. The already weak economic conditions and
employment trends in the U.S., present at the start of 2009, continued to worsen, with the most notable decrease in the
first half of 2009. We have seen a slight increase in temporary staffing during the 2009 fourth quarter and year-to-date
2010.
Services
Staffmark provides temporary staffing services tailored to meet each client’s unique staffing requirements. Staffmark
maintains a strong reputation in its markets for providing complete staffing services that includes both high quality
candidates and superior client service. Staffmark’s management believes it is one of only a few staffing services
companies in each of its markets that is capable of fulfilling the staffing requirements of both small, local clients and
larger, regional or national accounts. To position itself as a key provider of human resources to its clients, Staffmark
has developed an approach to service that focuses on:
•
•
providing excellent service to existing clients in a consistent and efficient manner;
cross selling service offerings to existing clients to increase revenue per client;
• marketing services to prospective clients to expand the client base; and
•
providing incentives to employees through well-balanced incentive and bonus plans to encourage increased
sales per client and the establishment of new client relationships.
Staffmark offers its clients a broad range of staffing services including the following:
•
•
•
temporary staffing services in categories such as light industrial, clerical, healthcare, construction,
transportation, professional and technical staffing;
employee leasing and related administrative services; and
temporary-to-hire and permanent placement services.
Temporary Staffing Services
Staffmark endeavors to understand and address the individual staffing needs of its clients and has the ability to serve a
wide variety of clients, from small companies with specific personnel needs to large companies with extensive and
varied requirements. Staffmark devotes significant resources to the development of customized programs designed to
39
fulfill the client’s need for certain services with quality personnel in a prompt and efficient manner. Staffmark’s
primary temporary staffing categories are described below.
• Light Industrial — A substantial portion of Staffmark’s temporary staffing revenues are derived from the
placement of low-to mid-skilled temporary workers in the light industrial category, which comprises primarily
the distribution (“pick-and-pack”) and light manufacturing (such as assembly-line work in factories) sectors of
the economy. Approximately 72%, 72% and 58% of Staffmark’s temporary staffing revenues were derived
from light industrial in the years 2009, 2008 and 2007, respectively.
• Clerical — Staffmark provides clerical workers that have been screened, reference-checked and tested for
computer ability, typing speed, word processing and data entry capabilities. Clerical workers are often
employed at client call centers and corporate offices. Approximately 20%, 21% and 31% of Staffmark’s
temporary staffing revenues were derived from clerical in the years 2009, 2008 and 2007, respectively.
• Technical — Staffmark provides placement candidates in a variety of skilled technical capacities, including
plant managers, engineering management, operations managers, designers, draftsmen, engineers, materials
management, line supervisors, electronic assemblers, laboratory assistants and quality control personnel.
Approximately 2%, 3% and 3% of Staffmark’s temporary staffing revenues were derived from technical for the
fiscal years ended December 31, 2009, 2008 and 2007, respectively.
• Healthcare — Through its expert placement agents in its Columbia Healthcare division, Staffmark provides
trained candidates in the following healthcare categories: medical office personnel, medical technicians,
rehabilitation professionals, management and administrative personnel and radiology technicians, among
others. Approximately 1% of Staffmark’s temporary staffing revenues were derived from healthcare for the
fiscal years ended December 31, 2009 and 2008 and 2% of Staffmark’s temporary staffing revenues were
derived from healthcare in fiscal 2007.
• Niche/Other — In addition to the light industrial, clerical, healthcare and technical categories, Staffmark also
provides certain niche staffing services, placing candidates in the skilled industrial, construction and
transportation sectors, among others. Staffmark’s wide array of niche service offerings allows it to meet a broad
range of client needs. Moreover, these niche services typically generate higher margins for Staffmark.
Approximately 5%, 4% and 6% of Staffmark’s temporary staffing revenues were derived from niche/other for
the fiscal years ended December 31, 2009, 2008 and 2007, respectively.
As part of its service offerings, Staffmark provides an on-site program to clients employing, generally 50 to 75, or more
of its temporary employees. The on-site program manager works full-time at the client’s location to help manage the
client’s temporary staffing and related human resources needs and provides detailed administrative support and
reporting systems, which reduce the client’s workload and costs while allowing its management to focus on increasing
productivity and revenues. Staffmark’s management believes this on-site program offering creates strong relationships
with its clients by providing consistency and quality in the management of clients’ human resources and administrative
functions. In addition, through its on-site program, Staffmark often gains visibility into the demand for temporary
staffing services in new markets, which has helped management identify possible areas for geographic expansion.
Employee Leasing Services
Employee Leasing Services while accounting for less than 2% of Staffmark’s total revenue provides a valuable
complementary product offering to its temporary staffing services. Through the employee leasing and administrative
service offerings of its Employee Management Services, or EMS, division, Staffmark provides administrative services,
handling the client’s payroll, risk management, unemployment services, human resources support and employee benefit
programs, which in turn results in reduced administrative requirements for employers and, most importantly, by having
EMS take over the non-productive administrative burdens of an organization, affords clients the ability to focus on their
core businesses.
EMS also offers a full line of benefits for employers to provide to their employees, including medical, dental, vision,
disability, life insurance, 401(k) retirement and other premium options. As a result of economies of scale, clients are
offered multiple plan and premium options at affordable rates. Staffmark’s clients have the flexibility to determine what
benefits to offer and how to implement the program in order to attract more qualified employees
Temporary-to-Hire and Permanent Placement Services
Complementary to its temporary staffing and employee leasing services, Staffmark offers temporary-to-hire and
permanent placement services, often as a result of requests made through its temporary staffing activities. In addition,
40
temporary workers will sometimes be hired on a permanent basis by the clients to whom they are assigned. Staffmark
earns fees for permanent placements, in addition to the revenues generated from providing these workers on a
temporary basis before they are hired as permanent employees.
Competitive Strengths
Staffmark has established itself as strong and dependable providers of staffing and other resource services by
responding to its customers’ staffing needs in a timely and cost effective manner. A key to Staffmark’s success has
been its long history as well as the number of offices it operates in each of its markets. This strategy has allowed
Staffmark to build a premium reputation in each of its markets and has resulted in the following competitive strengths:
• Large Employee Database/Customer List — Over the course of its history, Staffmark’s management
believes Staffmark has built a significant presence in most of its markets in terms of both clients and
employees. Staffmark is successful in recruiting additional employees because of its reputation as having
numerous job openings with a wide variety of clients. Staffmark attracts clients due in part to its large database
of reliable employees with wide ranging skill sets. Staffmark’s employee database and client list have been
built over a number of years in each of its markets and serve as a major competitive strength in most of its
markets.
• Higher Operating Margins — By establishing multiple offices in the majority of the markets in which it
operates, Staffmark is able to better leverage its selling, general and administrative expenses at the regional and
field level and create higher operating income margins than its less dense competitors.
•
Scalable Business Model — By having multiple office locations in each of its markets, Staffmark is able to
quickly scale its business model in both good and bad economic environments. In response to the current
economic downturn, Staffmark has enacted a strategy which includes reducing costs and closing offices.
Staffmark is capitalizing on synergies from the Staffmark acquisition, which allows for further contraction of
offices and reduction of costs without abandoning clients or employees in markets.
• Marketing Synergies — By having a number of offices in the majority of its markets, Staffmark allocates
additional resources to marketing and selling and amortizes those costs over a larger office network. For
example, while many of its competitors use selling branch managers who split time between operations and
sales, Staffmark uses outside sales reps that are exclusively focused on bringing in new sales.
Business Strategies
Staffmark’s business strategy is to (i) leverage its position in its existing markets, (ii) build a presence in contiguous
markets, and (iii) pursue and selectively acquire other staffing resource providers.
•
Invest in its Existing Markets — In many of its existing markets, Staffmark has multiple branch locations.
Staffmark plans on continuing to invest in these existing markets through the opening of additional branch
locations and the hiring of additional sales and operations employees when it is economically prudent to do so.
In addition, Staffmark is offering complementary human resource services to its existing clients such as full
time recruiting, consulting, and administrative outsourcing. Staffmark has implemented an incentive plan that
highly rewards its employees for selling services beyond its traditional temporary staffing services.
• Build a Presence in Contiguous Markets — Staffmark plans on opening new branch locations in markets
contiguous to those in which it operates when it is economically prudent. Staffmark believes that the cost and
time required to establish profitable branch locations is minimized through expansion into contiguous markets
as costs associated with advertising and administrative overhead are reduced due to proximity.
• Pursue Selective Acquisitions — Staffmark views acquisitions, such as the SES acquisition in
November 2006 and Staffmark in January 2008, as attractive means to enter into a new geographical market,
and in the case of Staffmark, increasing its market share in existing markets
Clients
Staffmark serves approximately 6,400 clients in a broad range of industries, including manufacturing, technical,
transportation, retail, distribution, warehousing, automotive supply, construction, industrial, healthcare services and
financial. These clients range in size from small, local firms to large, regional or national corporations. Staffmark’s top
ten clients accounted for approximately 23.1% and 21.5% of gross revenues in 2009 and 2008, respectively.
41
Staffmark’s client assignments can vary from a period of a few days to long-term, annual or multi-year contracts. We
believe Staffmark has a strong relationship with its clients.
Sales, Marketing and Recruiting Efforts
Staffmark’s marketing efforts are principally focused on branch-level development of local business relationships.
Local salespeople are incentivized to recruit new clients and increase usage by existing clients through their
compensation programs, as well as through numerous contests and competitions. Regional or Company-based
specialists are utilized to assist local salespeople in closing potentially large accounts, particularly where they may
involve an on-site presence by Staffmark. On a regional and national level, efforts are made to expand and align its
services to fulfill the needs of clients with multiple locations, which may also include using on-site Staffmark
professionals and the opening of additional offices to better serve a client’s broader geographic needs.
Staffmark actively recruits in each community in which it operates, through educational institutions, evening and
weekend interviewing and open houses. At the corporate level, Staffmark maintains an in-house web-based job posting
and resume process which facilitates distribution of job descriptions to national and local online job boards. Individuals
may also submit a resume through Staffmark’s website.
At each branch location, local salespeople are incentivized to recruit new clients and increase usage by existing clients
through their compensation programs, as well as through numerous contests and competitions. Regional or company-
based marketing specialists are utilized to assist local salespeople in closing potentially large accounts, particularly when it
may involve an on-site presence by Staffmark.
On an initial engagement, particularly for clients with larger temporary staffing assignments (10+ temporary workers), a
Staffmark staff member will arrive on-site to register all employees hired for a particular assignment. If, for any reason,
not all employees assigned to the job site arrive, the on-site Staffmark staff member can immediately react and oftentimes
correct the shortfall within a matter of hours, ensuring that 100% of a client’s staffing needs are fulfilled.
Staffmark’s marketing activities are designed to effectively service and reach all current and prospective clients at the
local, regional and national level, resulting in brand recognition and loyalty throughout many levels of a client’s
organization.
Following a prospective employee’s identification, Staffmark systematically evaluates each candidate prior to
placement. The employee application process includes an interview, skills assessment test, education verification and
reference verification, and may include drug screening and background checks depending upon customer requirements.
Staffmark’s business is somewhat seasonal. Historically, demand for temporary staffing is highest during the fiscal
quarters ending September and December. We believe this seasonality is due to increased outdoor activities and
projects during the summer months and the increased retail activity during the holiday season.
Substantially all revenue is derived from sales within the United States.
Competition
The temporary staffing industry is highly fragmented and, according to the U.S. Census Bureau in 2008, was comprised
of approximately 4,500 service providers. According to the Census Bureau’s latest Economic Census in 2002, the vast
majority of service providers generate less than $10 million in annual revenues. Staffing services firms with more than
10 establishments account for only 1.6% of the total number of service providers, or 187 companies, but generate
49.3% of revenues in the temporary staffing industry. The largest publicly owned companies specializing in temporary
staffing services are Adecco, Randstad, Kelly Services Inc., Allegis Group, Manpower, and Robert Half. The
employee leasing industry consists of approximately 4,500 service providers. Our largest national competitors in
employee leasing include Administaff, Inc., Gevity HR, and the employee leasing divisions of large business service
companies such as Automatic Data Processing, Inc., and Paychex, Inc.
Staffmark competes with both large national and small local staffing companies in its markets for clients. Competition
in the temporary staffing industry, we believe, revolves around quality of service, reputation and price.
Notwithstanding this level of competition, Staffmark’s management believes Staffmark benefits from a number of
competitive advantages, including:
• multiple offices in its core markets;
•
long-standing relationships with its clients;
42
•
a large database of qualified temporary workers which enables Staffmark to fill orders rapidly;
• well-recognized brands and leadership positions in its core markets; and
•
a reputation for treating employees well and offering competitive benefits.
Numerous competitors, both large and small, have exited or significantly reduced their presence in many of Staffmark’s
markets. Staffmark’s management believes that this trend has resulted from the increasing importance of scale, client
demands for broader services and reduced costs, and the difficulty that the strong positions of market leaders, such as
Staffmark, present for competitors attempting to grow their client base.
Historically, in periods of economic prosperity, the number of firms providing temporary services has increased
significantly due to the combination of a favorable economic climate and low barriers to entry. Recessionary periods
generally result in a reduction in the number of competitors through consolidation and closures; however, this reduction
has proven to be for a limited time and as such a limited window of opportunity for consolidation, as the following
periods of economic recovery have led to a return in growth in the number of competitors.
Due to the difficult current economic environment that arose in fiscal 2008 and continued through most of 2009, we
believe many of our smaller, local competitors have struggled and we anticipate further consolidation in the near term.
We view this as an opportunity to potentially increase our market share in 2010 and beyond.
Staffmark competes for qualified employee candidates in each of the markets in which it operates. Management
believes that Staffmark’s scale and concentration in each of its markets provides it with recruiting advantages. Key
among the factors affecting a candidate’s choice of employers is the likelihood of reassignment following the
completion of an initial engagement. Staffmark typically has numerous clients with significantly different hiring
patterns in each of its markets, increasing the likelihood that it can reassign individual employees and limit the amount
of time an employee is in transition. As employee referrals are a key component of its recruiting efforts, management
believes local market share is also key to its ability to identify qualified candidates.
Trade names
Staffmark uses the following tradenames: CBS Personnel TM, CBS Personnel Services TM, Columbia Staffing TM,
Columbia Healthcare Services TM, Venturi Staffing Partners TM and Staffmark TM. We believe these trade names have
strong brand equity in their markets and have significant value to Staffmark’s business.
43
Facilities
Staffmark, headquartered in Cincinnati, Ohio, currently provides staffing services through its 208 branch offices located
in 29 states. Average revenue per branch was approximately $2.6 million in 2009 and 75% of the branches were
profitable. Staffmark also operated on-site locations, which accounted for approximately $197 million in revenues in
2009. The following table shows the number of branch offices located in each state in which Staffmark operates and
the employee hours billed by branch offices and on-site locations for the fiscal year ended December 31, 2009.
State
Number of
Branch
Offices
Employee
Hours
Billed
(000’s)
CA
OH
TN
AR
TX
KY
NC
PA
IL
IN
GA
SC
MD
MA
VA
NV
NJ
WA
AZ
NY
KS
MS
AL
CO
CT
OK
DE
OR
MO
WI
30
23
14
17
17
10
12
8
10
8
7
8
5
2
4
4
4
3
3
3
2
2
2
2
2
2
1
1
1
1
7,404
6,418
6,108
3,900
4,234
2,202
2,181
2,462
2,226
2,070
2,092
1,449
1,168
225
1,115
715
1,102
278
475
416
911
396
509
490
324
185
1,000
291
196
230
208
52,772
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All of the above branch offices, along with Staffmark’s principal executive offices in Cincinnati, Ohio, are leased.
Lease terms for branch offices are generally short and can range from one to five years. Staffmark does not anticipate
any difficulty in renewing these leases or in finding alternative sites in the ordinary course of business. With regard to
the recent Staffmark acquisition a significant majority of the branches are not in overlapping markets.
Regulatory Environment
In the United States, temporary employment services firms are considered the legal employers of their temporary
workers. Therefore, state and federal laws regulating the employer/employee relationship, such as tax withholding and
reporting, social security and retirement, equal employment opportunity and Title VII Civil Rights laws and workers’
compensation, including those governing self-insured employers under the workers’ compensation systems in various
states, govern Staffmark’s operations. By entering into a co-employer relationship with employees who are assigned to
work at client locations, Staffmark assumes certain obligations and responsibilities of an employer under these federal
and state laws. Because many of these federal and state laws were enacted prior to the development of nontraditional
employment relationships, such as professional employer, temporary employment, and outsourcing arrangements, many
of these laws do not specifically address the obligations and responsibilities of nontraditional employers. In addition,
the definition of “employer” under these laws is not uniform.
Although compliance with these requirements imposes some additional financial risk on Staffmark, particularly with
respect to those clients who breach their payment obligation to Staffmark, such compliance has not had a material
adverse impact on Staffmark’s business to date. Staffmark believes that its operations are in compliance in all material
respects with applicable federal and state laws.
Workers’ Compensation Program
As the employer of record, Staffmark is responsible for complying with applicable statutory requirements for workers’
compensation coverage. State law (and for certain types of employees, federal law) generally mandates that an
employer reimburse its employees for the costs of medical care and other specified benefits for injuries or illnesses,
including catastrophic injuries and fatalities, incurred in the course and scope of employment. The benefits payable for
various categories of claims are determined by state regulation and vary with the severity and nature of the injury or
illness and other specified factors. In return for this guaranteed protection, workers’ compensation is considered the
exclusive remedy and employees are generally precluded from seeking other damages from their employer for
workplace injuries. Most states require employers to maintain workers’ compensation insurance or otherwise
demonstrate financial responsibility to meet workers’ compensation obligations to employees.
In many states, employers who meet certain financial and other requirements may be permitted to self-insure. Staffmark
self-insures its workers’ compensation exposure for a portion of its employees. Regulations governing self-insured
employers in each jurisdiction typically require the employer to maintain surety deposits of government securities,
letters of credit or other financial instruments to support workers’ compensation claims in the event the employer is
unable to pay for such claims.
As an employer with self-insurance and large deductible plans for workers compensation, Staffmark’s workers’
compensation expense is tied directly to the incidence and severity of workplace injuries to its employees. Staffmark
seeks to contain its workers’ compensation costs through a proactive front-end client selection process in order to
mitigate the acceptance of high risk situations together with an aggressive approach to claims management, including
assigning injured workers, whenever possible, to short-term assignments which accommodate the workers’ physical
limitations, performing a thorough and prompt on-site investigation of claims filed by employees, working with
physicians to encourage efficient medical management of cases, denying questionable claims and attempting to
negotiate early settlements to mitigate contingent and future costs and liabilities. Higher costs for each occurrence,
either due to increased medical costs or duration of time, may result in higher workers’ compensation costs to Staffmark
with a corresponding material adverse effect on its financial condition, business and results of operations.
Employees
As of December 31, 2009, Staffmark employed approximately 135 individuals in its corporate staff and approximately
888 staff members in its field operations. During the year ended December 31, 2009, 2008 and 2007, Staffmark placed,
on average, over 34,000, 38,000 and 23,000 temporary personnel, not including leased personnel, on engagements of
varying durations on a weekly basis. None of Staffmark’s employees are subject to collective bargaining agreements.
We believe that Staffmark’s relationship with its employees is good.
45
Temporary employees placed by Staffmark are generally Staffmark’s employees while they are working on
assignments. As the employer of its temporary employees, Staffmark maintains responsibility for applicable payroll
taxes and the administration of the employee’s share of such taxes.
Rebranding of CBS Personnel to Staffmark
On February 27, 2009 Staffmark became the new name of the combined CBS Personnel, Staffmark, and Venturi
Staffing organizations and was recognized by a new corporate identity. The decision to rebrand the three companies
under the Staffmark name was the result of twelve months of strategic planning, with emphasis on gathering broad-
based feedback from customers and employees throughout all geographic locations. Throughout this document we
refer to Staffmark when discussing the combined operations of CBS Personnel Holdings, Inc., Staffmark and Venturi
Staffing.
46
ITEM 1A - RISK FACTORS
Risks Related to Our Business and Structure
We are a Company with limited history and may not be able to continue to successfully manage our businesses on a
combined basis.
We were formed on November 18, 2005 and have conducted operations since May 16, 2006. Although our
management team has, collectively, over 90 years of experience in acquiring and managing small and middle market
businesses, our failure to continue to develop and maintain effective systems and procedures, including accounting and
financial reporting systems, to manage our operations as a consolidated public company, may negatively impact our
ability to optimize the performance of our Company, which could adversely affect our ability to pay distributions to our
shareholders. In addition, in that case, our consolidated financial statements might not be indicative of our financial
condition, business and results of operations.
Our future success is dependent on the employees of our Manager and the management teams of our businesses, the
loss of any of whom could materially adversely affect our financial condition, business and results of operations.
Our future success depends, to a significant extent, on the continued services of the employees of our Manager, most of
whom have worked together for a number of years. While our Manager will have employment agreements with certain
of its employees, including our Chief Financial Officer, these employment agreements may not prevent our Manager’s
employees from leaving or from competing with us in the future. Our Manager does not have an employment
agreement with our Chief Executive Officer.
The future success of our businesses also depends on their respective management teams because we operate our
businesses on a stand-alone basis, primarily relying on existing management teams for management of their day-to-day
operations. Consequently, their operational success, as well as the success of our internal growth strategy, will be
dependent on the continued efforts of the management teams of the businesses. We provide such persons with equity
incentives in their respective businesses and have employment agreements and/or non-competition agreements with
certain persons we have identified as key to their businesses. However, these measures may not prevent the departure
of these managers. The loss of services of one or more members of our management team or the management team at
one of our businesses could materially adversely affect our financial condition, business and results of operations.
We face risks with respect to the evaluation and management of future platform or add-on acquisitions.
A component of our strategy is to continue to acquire additional platform subsidiaries, as well as add-on businesses for
our existing businesses. Generally, because such acquisition targets are held privately, we may experience difficulty in
evaluating potential target businesses as the information concerning these businesses is not publicly available. In
addition, we and our subsidiary companies may have difficulty effectively managing or integrating acquisitions. We
may experience greater than expected costs or difficulties relating to such acquisition, in which case, we might not
achieve the anticipated returns from any particular acquisition, which may have a material adverse effect on our
financial condition, business and results of operations.
We may not be able to successfully fund future acquisitions of new businesses due to the lack of availability of debt
or equity financing at the Company level on acceptable terms, which could impede the implementation of our
acquisition strategy and materially adversely impact our financial condition, business and results of operations.
In order to make future acquisitions, we intend to raise capital primarily through debt financing at the Company level,
additional equity offerings, the sale of stock or assets of our businesses, and by offering equity in the Trust or our
businesses to the sellers of target businesses or by undertaking a combination of any of the above. Since the timing and
size of acquisitions cannot be readily predicted, we may need to be able to obtain funding on short notice to benefit
fully from attractive acquisition opportunities. Such funding may not be available on acceptable terms. In addition, the
level of our indebtedness may impact our ability to borrow at the Company level. Another source of capital for us may
be the sale of additional shares, subject to market conditions and investor demand for the shares at prices that we
consider to be in the interests of our shareholders. These risks may materially adversely affect our ability to pursue our
acquisition strategy successfully and materially adversely affect our financial condition, business and results of
operations.
47
While we intend to make regular cash distributions to our shareholders, the Company’s board of directors has full
authority and discretion over the distributions of the Company, other than the profit allocation, and it may decide to
reduce or eliminate distributions at any time, which may materially adversely affect the market price for our shares.
To date, we have declared and paid quarterly distributions, and although we intend to pursue a policy of paying regular
distributions, the Company’s board of directors has full authority and discretion to determine whether or not a
distribution by the Company should be declared and paid to the Trust and in turn to our shareholders, as well as the
amount and timing of any distribution. In addition, the management fee, profit allocation and put price will be payment
obligations of the Company and, as a result, will be paid, along with other Company obligations, prior to the payment
of distributions to our shareholders. The Company’s board of directors may, based on their review of our financial
condition and results of operations and pending acquisitions, determine to reduce or eliminate distributions, which may
have a material adverse effect on the market price of our shares.
We will rely entirely on receipts from our businesses to make distributions to our shareholders.
The Trust’s sole asset is its interest in the Company, which holds controlling interests in our businesses. Therefore, we
are dependent upon the ability of our businesses to generate earnings and cash flow and distribute them to us in the
form of interest and principal payments on indebtedness and, from time to time, dividends on equity to enable us, first,
to satisfy our financial obligations and, second, and to make distributions to our shareholders. This ability may be
subject to limitations under laws of the jurisdictions in which they are incorporated or organized. If, as a consequence of
these various restrictions, we are unable to generate sufficient receipts from our businesses, we may not be able to
declare, or may have to delay or cancel payment of, distributions to our shareholders.
We do not own 100% of our businesses. While the Company is to receive cash payments from our businesses which
are in the form of interest payments, debt repayment and dividends and dividends, if any dividends were to be paid by
our businesses, they would be shared pro rata with the minority shareholders of our businesses and the amounts of
dividends made to minority shareholders would not be available to us for any purpose, including Company debt service
or distributions to our shareholders. Any proceeds from the sale of a business will be allocated among us and the
minority shareholders of the business that is sold.
The Company’s board of directors has the power to change the terms of our shares in its sole discretion in ways with
which you may disagree.
As an owner of our shares, you may disagree with changes made to the terms of our shares, and you may disagree with
the Company’s board of directors’ decision that the changes made to the terms of the shares are not materially adverse
to you as a shareholder or that they do not alter the characterization of the Trust. Your recourse, if you disagree, will be
limited because our Trust Agreement gives broad authority and discretion to our board of directors. However, the Trust
Agreement does not relieve the Company’s board of directors from any fiduciary obligation that is imposed on them
pursuant to applicable law. In addition, we may change the nature of the shares to be issued to raise additional equity
and remain a fixed-investment trust for tax purposes.
Certain provisions of the LLC Agreement of the Company and the Trust Agreement make it difficult for third parties
to acquire control of the Trust and the Company and could deprive you of the opportunity to obtain a takeover
premium for your shares.
The amended and restated LLC Agreement of the Company, which we refer to as the LLC Agreement, and the
amended and restated Trust Agreement of the Trust, which we refer to as the Trust Agreement, contain a number of
provisions that could make it more difficult for a third party to acquire, or may discourage a third party from acquiring,
control of the Trust and the Company. These provisions include, among others:
•
•
restrictions on the Company’s ability to enter into certain transactions with our major shareholders, with
the exception of our Manager, modeled on the limitation contained in Section 203 of the Delaware
General Corporation Law, or DGCL;
allowing only the Company’s board of directors to fill newly created directorships, for those directors
who are elected by our shareholders, and allowing only our Manager, as holder of the Allocation Interests,
to fill vacancies with respect to the class of directors appointed by our Manager;
•
requiring that directors elected by our shareholders be removed, with or without cause, only by a vote of
85% of our shareholders;
48
•
•
•
requiring advance notice for nominations of candidates for election to the Company’s board of directors
or for proposing matters that can be acted upon by our shareholders at a shareholders’ meeting;
having a substantial number of additional authorized but unissued shares that may be issued without
shareholder action;
providing the Company’s board of directors with certain authority to amend the LLC Agreement and the
Trust Agreement, subject to certain voting and consent rights of the holders of trust interests and
Allocation Interests;
•
providing for a staggered board of directors of the Company, the effect of which could be to deter a proxy
contest for control of the Company’s board of directors or a hostile takeover; and
•
limitations regarding calling special meetings and written consents of our shareholders.
These provisions, as well as other provisions in the LLC Agreement and Trust Agreement may delay, defer or prevent a
transaction or a change in control that might otherwise result in you obtaining a takeover premium for your shares.
We may have conflicts of interest with the minority shareholders of our businesses.
The boards of directors of our respective businesses have fiduciary duties to all their shareholders, including the
Company and minority shareholders. As a result, they may make decisions that are in the best interests of their
shareholders generally but which are not necessarily in the best interest of the Company or our shareholders. In dealings
with the Company, the directors of our businesses may have conflicts of interest and decisions may have to be made
without the participation of directors appointed by the Company, and such decisions may be different from those that
we would make.
Our third party credit facility exposes us to additional risks associated with leverage and inhibits our operating
flexibility and reduces cash flow available for distributions to our shareholders.
At December 31, 2009, we had approximately $76.0 million outstanding under our Term Loan Facility and $0.5 million
outstanding borrowings on our Revolving Credit Facility. We expect to increase our level of debt in the future. The
terms of our Revolving Credit Facility contains a number of affirmative and restrictive covenants that, among other
things, require us to:
• Maintain a minimum level of cash flow;
•
leverage new businesses we acquire to a minimum specified level at the time of acquisition;
•
keep our total debt to cash flow at or below a ratio of 3.5 to 1; and
• make acquisitions that satisfy certain specified minimum criteria.
If we violate any of these covenants, our lender may accelerate the maturity of any debt outstanding and we may be
prohibited from making any distributions to our shareholders. Such debt is secured by all of our assets, including the
stock we own in our businesses and the rights we have under the loan agreements with our businesses. Our ability to
meet our debt service obligations may be affected by events beyond our control and will depend primarily upon cash
produced by our businesses. Any failure to comply with the terms of our indebtedness could materially adversely affect
us.
Changes in interest rates could materially adversely affect us.
Our Credit Agreement bears interest at floating rates which will generally change as interest rates change. We bear the
risk that the rates we are charged by our lender will increase faster than the earnings and cash flow of our businesses,
which could reduce profitability, adversely affect our ability to service our debt, cause us to breach covenants contained
in our Revolving Credit Facility and reduce cash flow available for distribution, any of which could materially
adversely affect us.
[
49
We may engage in a business transaction with one or more target businesses that have relationships with our
officers, our directors, our Manager or CGI, which may create potential conflicts of interest.
We may decide to acquire one or more businesses with which our officers, our directors, our Manager or CGI have a
relationship. While we might obtain a fairness opinion from an independent investment banking firm, potential conflicts
of interest may still exist with respect to a particular acquisition, and, as a result, the terms of the acquisition of a target
business may not be as advantageous to our shareholders as it would have been absent any conflicts of interest.
We are exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act of
2002.
We are required to comply with Section 404 of the Sarbanes-Oxley Act of 2002. While we have concluded that at
December 31, 2009 we have no material weaknesses in our internal controls over financial reporting we cannot assure
you that we will not have a material weakness in the future. A “material weakness” is a control deficiency, or
combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the
annual or interim financial statements will not be prevented or detected. If we fail to maintain a system of internal
controls over financial reporting that meets the requirements of Section 404, we might be subject to sanctions or
investigation by regulatory authorities such as the SEC or by the NASDAQ Stock Market LLC. Additionally, failure to
comply with Section 404 or the report by us of a material weakness may cause investors to lose confidence in our
financial statements and our stock price may be adversely affected. If we fail to remedy any material weakness, our
financial statements may be inaccurate, we may not have access to the capital markets, and our stock price may be
adversely affected
CGI may exercise significant influence over the Company.
CGI, through a wholly owned subsidiary, owns 7,681,000 or approximately 21% of our shares and may have significant
influence over the election of directors in the future.
If, in the future, we cease to control and operate our businesses, we may be deemed to be an investment company
under the Investment Company Act of 1940, as amended.
Under the terms of the LLC Agreement, we have the latitude to make investments in businesses that we will not operate
or control. If we make significant investments in businesses that we do not operate or control or cease to operate and
control our businesses, we may be deemed to be an investment company under the Investment Company Act of 1940,
as amended, or the Investment Company Act. If we were deemed to be an investment company, we would either have
to register as an investment company under the Investment Company Act, obtain exemptive relief from the SEC or
modify our investments or organizational structure or our contract rights to fall outside the definition of an investment
company. Registering as an investment company could, among other things, materially adversely affect our financial
condition, business and results of operations, materially limit our ability to borrow funds or engage in other transactions
involving leverage and require us to add directors who are independent of us or our Manager and otherwise will subject
us to additional regulation that will be costly and time-consuming.
Risks Relating to Our Manager
Our Chief Executive Officer, directors, Manager and management team may allocate some of their time to other
businesses, thereby causing conflicts of interest in their determination as to how much time to devote to our affairs,
which may materially adversely affect our operations.
While the members of our management team anticipate devoting a substantial amount of their time to the affairs of the
Company, only Mr. James Bottiglieri, our Chief Financial Officer, devotes substantially all of his time to our affairs.
Our Chief Executive Officer, directors, Manager and members of our management team may engage in other business
activities. This may result in a conflict of interest in allocating their time between our operations and our management
and operations of other businesses. Their other business endeavors may be related to CGI, which will continue to own
several businesses that were managed by our management team prior to our initial public offering, or affiliates of CGI
as well as other parties. Conflicts of interest that arise over the allocation of time may not always be resolved in our
favor and may materially adversely affect our operations. See the section entitled “Certain Relationships and Related
Party Transactions” for the potential conflicts of interest of which you should be aware.
50
Our Manager and its affiliates, including members of our management team, may engage in activities that compete
with us or our businesses.
While our management team intends to devote a substantial majority of their time to the affairs of the Company, and
while our Manager and its affiliates currently do not manage any other businesses that are in similar lines of business as
our businesses, and while our Manager must present all opportunities that meet the Company’s acquisition and
disposition criteria to the Company’s board of directors, neither our management team nor our Manager is expressly
prohibited from investing in or managing other entities, including those that are in the same or similar line of business
as our businesses. In this regard, the management services agreement and the obligation to provide management
services will not create a mutually exclusive relationship between our Manager and its affiliates, on the one hand, and
the Company, on the other.
Our Manager need not present an acquisition or disposition opportunity to us if our Manager determines on its own
that such acquisition or disposition opportunity does not meet the Company’s acquisition or disposition criteria.
Our Manager will review any acquisition or disposition opportunity presented to the Manager to determine if it satisfies
the Company’s acquisition or disposition criteria, as established by the Company’s board of directors from time to time.
If our Manager determines, in its sole discretion, that an opportunity fits our criteria, our Manager will refer the
opportunity to the Company’s board of directors for its authorization and approval prior to the consummation thereof;
opportunities that our Manager determines do not fit our criteria do not need to be presented to the Company’s board of
directors for consideration. If such an opportunity is ultimately profitable, we will have not participated in such
opportunity. Upon a determination by the Company’s board of directors not to promptly pursue an opportunity
presented to it by our Manager in whole or in part, our Manager will be unrestricted in its ability to pursue such
opportunity, or any part that we do not promptly pursue, on its own or refer such opportunity to other entities, including
its affiliates.
We cannot remove our Manager solely for poor performance, which could limit our ability to improve our
performance and could materially adversely affect the market price of our shares.
Under the terms of the management services agreement, our Manager cannot be removed as a result of
underperformance. Instead, the Company’s board of directors can only remove our Manager in certain limited
circumstances or upon a vote by the majority of the Company’s board of directors and the majority of our shareholders
to terminate the management services agreement. This limitation could materially adversely affect the market price of
our shares.
We may have difficulty severing ties with our Chief Executive Officer, Mr. Massoud.
Under the management services agreement, the Company’s board of directors may, after due consultation with our
Manager, at any time request that our Manager replace any individual seconded to the Company and our Manager will,
as promptly as practicable, replace any such individual. However, because Mr. Massoud is the managing member of
our Manager with a significant ownership interest therein, we may have difficulty completely severing ties with
Mr. Massoud absent terminating the management services agreement and our relationship with our Manager.
If the management services agreement is terminated, our Manager, as holder of the Allocation Interests in the
Company, has the right to cause the Company to purchase such Allocation Interests, which may materially adversely
affect our liquidity and ability to grow.
If the management services agreement is terminated at any time other than as a result of our Manager’s resignation or if
our Manager resigns on any date that is at least three years after the closing of our initial public offering, our Manager
will have the right, but not the obligation, for one year from the date of termination or resignation, as the case may be,
to cause the Company to purchase the Allocation Interests for the put price. If our Manager elects to cause the
Company to purchase its Allocation Interests, we are obligated to do so and, until we have done so, our ability to
conduct our business, including incurring debt, would be restricted and, accordingly, our liquidity and ability to grow
may be adversely affected.
51
Our Manager can resign on 90 days’ notice and we may not be able to find a suitable replacement within that time,
resulting in a disruption in our operations that could materially adversely affect our financial condition, business
and results of operations as well as the market price of our shares.
Our Manager has the right, under the management services agreement, to resign at any time on 90 days’ written notice,
whether we have found a replacement or not. If our Manager resigns, we may not be able to contract with a new
manager or hire internal management with similar expertise and ability to provide the same or equivalent services on
acceptable terms within 90 days, or at all, in which case our operations are likely to experience a disruption, our
financial condition, business and results of operations as well as our ability to pay distributions are likely to be
adversely affected and the market price of our shares may decline. In addition, the coordination of our internal
management, acquisition activities and supervision of our businesses is likely to suffer if we are unable to identify and
reach an agreement with a single institution or group of executives having the expertise possessed by our Manager and
its affiliates. Even if we are able to retain comparable management, whether internal or external, the integration of such
management and their lack of familiarity with our businesses may result in additional costs and time delays that could
materially adversely affect our financial condition, business and results of operations.
The liability associated with the supplemental put agreement is difficult to estimate and may be subject to substantial
period-to-period changes, thereby significantly impacting our future results of operations.
The Company will record the supplemental put agreement at its fair value at each balance sheet date by recording any
change in fair value through its income statement. The fair value of the supplemental put agreement is largely related to
the value of the profit allocation that our Manager, as holder of Allocation Interests, will receive. The valuation of the
supplemental put agreement requires the use of complex financial models, which require sensitive assumptions and
estimates. If our assumptions and estimates result in an over-estimation or under-estimation of the fair value of the
supplemental put agreement, the resulting fluctuation in related liabilities could cause a material adverse effect on our
future results of operations.
We must pay our Manager the management fee regardless of our performance.
Our Manager is entitled to receive a management fee that is based on our adjusted net assets, as defined in the
management services agreement, regardless of the performance of our businesses. The calculation of the management
fee is unrelated to the Company’s net income. As a result, the management fee may incentivize our Manager to increase
the amount of our assets, through, for example, the acquisition of additional assets or the incurrence of third party debt
rather than increase the performance of our businesses.
[
We cannot determine the amount of the management fee that will be paid over time with any certainty.
The management fee paid to CGM for the year ended December 31, 2009, was $12.8 million. The management fee is
calculated by reference to the Company’s adjusted net assets, which will be impacted by the acquisition or disposition
of businesses, which can be significantly influenced by our Manager, as well as the performance of our businesses and
other businesses we may acquire in the future. Changes in adjusted net assets and in the resulting management fee
could be significant, resulting in a material adverse effect on the Company’s results of operations. In addition, if the
performance of the Company declines, assuming adjusted net assets remains the same, management fees will increase
as a percentage of the Company’s net income.
We cannot determine the amount of profit allocation that will be paid over time with any certainty.
We cannot determine the amount of profit allocation that will be paid over time with any certainty. Such determination
would be dependent on the potential sale proceeds received for any of our businesses and the performance of the
Company and its businesses over a multi-year period of time, among other factors that cannot be predicted with
certainty at this time. Such factors may have a significant impact on the amount of any profit allocation to be paid.
Likewise, such determination would be dependent on whether certain hurdles were surpassed giving rise to a payment
of profit allocation. Any amounts paid in respect of the profit allocation are unrelated to the management fee earned for
performance of services under the management services agreement.
52
The fees to be paid to our Manager pursuant to the management services agreement, the offsetting management
services agreements and transaction services agreements and the profit allocation to be paid to our Manager, as
holder of the Allocation Interests, pursuant to the LLC Agreement may significantly reduce the amount of cash
available for distribution to our shareholders.
Under the management services agreement, the Company will be obligated to pay a management fee to and, subject to
certain conditions, reimburse the costs and out-of-pocket expenses of our Manager incurred on behalf of the Company
in connection with the provision of services to the Company. Similarly, our businesses will be obligated to pay fees to
and reimburse the costs and expenses of our Manager pursuant to any offsetting management services agreements
entered into between our Manager and one of our businesses, or any transaction services agreements to which such
businesses are a party. In addition, our Manager, as holder of the Allocation Interests, will be entitled to receive profit
allocations and may be entitled to receive the put price. While it is difficult to quantify with any certainty the actual
amount of any such payments in the future, we do expect that such amounts could be substantial. See the section
entitled “Certain Relationships and Related Party Transactions” for more information about these payment obligations
of the Company. The management fee, profit allocation and put price will be payment obligations of the Company and,
as a result, will be paid, along with other Company obligations, prior to the payment of distributions to shareholders. As
a result, the payment of these amounts may significantly reduce the amount of cash flow available for distribution to
our shareholders.
Our Manager’s influence on conducting our operations, including on our conducting of transactions, gives it the
ability to increase its fees and compensation to our Chief Executive Officer, which may reduce the amount of cash
flow available for distribution to our shareholders.
Under the terms of the management services agreement, our Manager is paid a management fee calculated as a
percentage of the Company’s adjusted net assets for certain items and is unrelated to net income or any other
performance base or measure. Our Manager, which Mr. Massoud, our Chief Executive Officer, controls, may advise us
to consummate transactions, incur third party debt or conduct our operations in a manner that, in our Manager’s
reasonable discretion, are necessary to the future growth of our businesses and are in the best interests of our
shareholders. These transactions, however, may increase the amount of fees paid to our Manager. In addition,
Mr. Massoud’s compensation is paid by our Manager from the management fee it receives from the Company. Our
Manager’s ability to increase its fees, through the influence it has over our operations, may increase the compensation
paid by our Manager to Mr. Massoud. Our Manager’s ability to influence the management fee paid to it by us could
reduce the amount of cash flow available for distribution to our shareholders.
Fees paid by the Company and our businesses pursuant to transaction services agreements do not offset fees payable
under the management services agreement and will be in addition to the management fee payable by the Company
under the management services agreement.
The management services agreement provides that our businesses may enter into transaction services agreements with
our Manager pursuant to which our businesses will pay fees to our Manager. See the section entitled “Certain
Relationships and Related Party Transactions” for more information about these agreements. Unlike fees paid under
the offsetting management services agreements, fees that are paid pursuant to such transaction services agreements will
not reduce the management fee payable by the Company. Therefore, such fees will be in excess of the management fee
payable by the Company.
The fees to be paid to our Manager pursuant to these transaction service agreements will be paid prior to any principal,
interest or dividend payments to be paid to the Company by our businesses, which will reduce the amount of cash flow
available for distributions to shareholders.
Our Manager’s profit allocation may induce it to make suboptimal decisions regarding our operations.
Our Manager, as holder of 100% of the Allocation Interests in the Company, will receive a profit allocation based on
ongoing cash flows and capital gains in excess of a hurdle rate. In this respect, a calculation and payment of profit
allocation may be triggered upon the sale of one of our businesses. As a result, our Manager may be incentivized to
recommend the sale of one or more of our businesses to the Company’s board of directors at a time that may not
optimal for our shareholders.
53
The obligations to pay the management fee and profit allocation, including the put price, may cause the Company to
liquidate assets or incur debt.
If we do not have sufficient liquid assets to pay the management fee and profit allocation, including the put price, when
such payments are due, we may be required to liquidate assets or incur debt in order to make such payments. This
circumstance could materially adversely affect our liquidity and ability to make distributions to our shareholders.
Risks Related to Taxation
Our shareholders will be subject to tax on their share of the Company’s taxable income, which taxes or taxable
income could exceed the cash distributions they receive from the Trust.
For so long as the Company or the Trust (if it is treated as a tax partnership) would not be required to register as an
investment company under the Investment Company Act of 1940 and at least 90% of our gross income for each taxable
year constitutes ‘‘qualifying income’’ within the meaning of Section 7704(d) of the Internal Revenue Code of 1986, as
amended (the ‘‘Code’’), on a continuing basis, we will be treated, for U.S. federal income tax purposes, as a partnership
and not as an association or a publicly traded partnership taxable as a corporation. In that case our shareholders will be
subject to U.S. federal income tax and, possibly, state, local and foreign income tax, on their share of the Company’s
taxable income, which taxes or taxable income could exceed the cash distributions they receive from the Trust. There
is, accordingly, a risk that our shareholders may not receive cash distributions equal to their portion of our taxable
income or sufficient in amount even to satisfy their personal tax liability those results from that income. This may
result from gains on the sale or exchange of stock or debt of subsidiaries that will be allocated to shareholders who hold
(or are deemed to hold) shares on the day such gains were realized if there is no corresponding distribution of the
proceeds from such sales, or where a shareholder disposes of shares after an allocation of gain but before proceeds (if
any) are distributed by the Company. Shareholders may also realize income in excess of distributions due to the
Company’s use of cash from operations or sales proceeds for uses other than to make distributions to shareholders,
including funding acquisitions, satisfying short- and long-term working capital needs of our businesses, or satisfying
known or unknown liabilities. In addition, certain financial covenants with the Company’s lenders may limit or prohibit
the distribution of cash to shareholders. The Company’s board of directors is also free to change the Company’s
distribution policy. The Company is under no obligation to make distributions to shareholders equal to or in excess of
their portion of our taxable income or sufficient in amount even to satisfy the tax liability that results from that income.
All of the Company’s income could be subject to an entity-level tax in the United States, which could result in a
material reduction in cash flow available for distribution to holders of shares of the Trust and thus could result in a
substantial reduction in the value of the shares.
We do not expect the Company to be characterized as a corporation so long as it would not be required to register as an
investment company under the Investment Company Act of 1940 and 90% or more of its gross income for each taxable
year constitutes “qualifying income.” The Company expects to receive more than 90% of its gross income each year
from dividends, interest and gains on sales of stock or debt instruments, including principally from or with respect to
stock or debt of corporations in which the Company holds a majority interest. The Company intends to treat all such
dividends, interest and gains as “qualifying income.”
If the Company fails to satisfy this “qualifying income” exception, the Company will be treated as a corporation for
U.S. federal (and certain state and local) income tax purposes, and would be required to pay income tax at regular
corporate rates on its income. Taxation of the Company as a corporation could result in a material reduction in
distributions to our shareholders and after-tax return and, thus, could likely result in a reduction in the value of, or
materially adversely affect the market price of, the shares of the Trust.
A shareholder may recognize a greater taxable gain (or a smaller tax loss) on a disposition of shares than expected
because of the treatment of debt under the partnership tax accounting rules.
We may incur debt for a variety of reasons, including for acquisitions as well as other purposes. Under partnership tax
accounting principles (which apply to the Company), debt of the Company generally will be allocable to our
shareholders, who will realize the benefit of including their allocable share of the debt in the tax basis of their
investment in shares. At the time a shareholder later sells shares, the selling shareholder’s amount realized on the sale
will include not only the sales price of the shares but also the shareholder’s portion of the Company’s debt allocable to
his shares (which is treated as proceeds from the sale of those shares). Depending on the nature of the Company’s
activities after having incurred the debt, and the utilization of the borrowed funds, a later sale of shares could result in a
larger taxable gain (or a smaller tax loss) than anticipated.
54
Our structure involves complex provisions of U.S. federal income tax law for which no clear precedent or authority
may be available. Our structure also is subject to potential legislative, judicial or administrative change and differing
interpretations, possibly on a retroactive basis.
The U.S. federal income tax treatment of holders of the Shares depends in some instances on determinations of fact and
interpretations of complex provisions of U.S. federal income tax law for which no clear precedent or authority may be
available. You should be aware that the U.S. federal income tax rules are constantly under review by persons involved
in the legislative process, the IRS, and the U.S. Treasury Department, frequently resulting in revised interpretations of
established concepts, statutory changes, revisions to regulations and other modifications and interpretations. The IRS
pays close attention to the proper application of tax laws to partnerships. The present U.S. federal income tax treatment
of an investment in the Shares may be modified by administrative, legislative or judicial interpretation at any time, and
any such action may affect investments and commitments previously made. For example, changes to the U.S. federal
tax laws and interpretations thereof could make it more difficult or impossible to meet the qualifying income exception
for us to be treated as a partnership for U.S. federal income tax purposes that is not taxable as a corporation, affect or
cause us to change our investments and commitments, affect the tax considerations of an investment in us and adversely
affect an investment in our Shares. Our organizational documents and agreements permit the Board of Directors to
modify our operating agreement from time to time, without the consent of the holders of Shares, in order to address
certain changes in U.S. federal income tax regulations, legislation or interpretation. In some circumstances, such
revisions could have a material adverse impact on some or all of the holders of our Shares. Moreover, we will apply
certain assumptions and conventions in an attempt to comply with applicable rules and to report income, gain,
deduction, loss and credit to holders in a manner that reflects such holders’ beneficial ownership of partnership items,
taking into account variation in ownership interests during each taxable year because of trading activity. However, these
assumptions and conventions may not be in compliance with all aspects of applicable tax requirements. It is possible
that the IRS will assert successfully that the conventions and assumptions used by us do not satisfy the technical
requirements of the Code and/or Treasury regulations and could require that items of income, gain, deductions, loss or
credit, including interest deductions, be adjusted, reallocated, or disallowed, in a manner that adversely affects holders
of the Shares.
Risks Relating Generally to Our Businesses
The recent disruption in the overall economy and the financial markets will adversely impact our business.
Many industries, including our businesses, have been affected by current economic factors, including the significant
deterioration of global economic conditions, declines in employment levels, and shifts in consumer spending patterns.
The recent disruptions in the overall economy and volatility in the financial markets have greatly reduced, and may
continue to reduce, consumer confidence in the economy, negatively affecting consumer spending, which could be
harmful to our financial position. Disruptions in the overall economy may also lead to a lower collection rate on billings
as consumers or businesses are unable to pay their bills in a timely fashion. Decreased cash flow generated from our
products may adversely affect our financial position and our ability to fund our operations. In addition, macro economic
disruptions, as well as the restructuring of various commercial and investment banking organizations, could adversely
affect our ability to access the credit markets. The disruption in the credit markets may also adversely affect the
availability of financing to support our strategy for growth through future acquisitions. There is a risk that government
responses to the disruptions in the financial markets will not restore consumer confidence, stabilize the markets, or
increase liquidity and the availability of credit.
Impairment of our intangible assets could result in significant charges that would adversely impact our future
operating results.
We have significant intangible assets, including goodwill with an indefinite life, which are susceptible to valuation
adjustments as a result of changes in various factors or conditions. The most significant intangible assets on our balance
sheet are goodwill, technologies, customer relationships and trademarks we acquired when we acquired our businesses
and Staffmark. Customer relationships are amortized on a straight line basis based upon the pattern in which the
economic benefits of customer relationships are being utilized. Other identifiable intangible assets are amortized on a
straight-line basis over their estimated useful lives. We assess the potential impairment of goodwill and indefinite lived
intangible assets on an annual basis, as well as whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. We assess definite lived intangible assets whenever events or changes in circumstances
indicate that the carrying value may not be recoverable.
55
Factors that could trigger impairment include the following:
•
significant underperformance relative to historical or projected future operating results;
•
significant changes in the manner of or use of the acquired assets or the strategy for our overall
business;
•
significant negative industry or economic trends;
•
significant decline in our stock price for a sustained period;
•
changes in our organization or management reporting structure could result in additional reporting
units, which may require alternative methods of estimating fair values or greater desegregation or
aggregation in our analysis by reporting unit; and
•
a decline in our market capitalization below net book value.
As of December 31, 2009, we had identified indefinite lived intangible assets with a carrying value in our financial
statements of $216.4 million, and goodwill of $288.0 million.
During the year ended December 31, 2009 we wrote off $50.0 million of goodwill associated with Staffmark. We also
wrote off $9.8 million in intangible assets associated with the rebranding of the CBS Personnel name to Staffmark in
2009.
Further adverse changes in the operations of our businesses or other unforeseeable factors could result in an impairment
charge in future periods that would impact our results of operations and financial position in that period.
Our businesses are subject to unplanned business interruptions which may adversely affect our performance.
Operational interruptions and unplanned events at one or more of our production facilities, such as explosions, fires,
inclement weather, natural disasters, accidents, transportation interruptions and supply could cause substantial losses in
our production capacity. Furthermore, because customers may be dependent on planned deliveries from us, customers
that have to reschedule their own operations due to our delivery delays may be able to pursue financial claims against
us, and we may incur costs to correct such problems in addition to any liability resulting from such claims. Such
interruptions may also harm our reputation among actual and potential customers, potentially resulting in a loss of
business. To the extent these losses are not covered by insurance, our financial position, results of operations and cash
flows may be adversely affected by such events.
Our businesses rely and may rely on their intellectual property and licenses to use others’ intellectual property, for
competitive advantage. If our businesses are unable to protect their intellectual property, are unable to obtain or
retain licenses to use other’s intellectual property, or if they infringe upon or are alleged to have infringed upon
others’ intellectual property, it could have a material adverse affect on their financial condition, business and results
of operations.
Each businesses’ success depends in part on their, or licenses to use others’, brand names, proprietary technology and
manufacturing techniques. These businesses rely on a combination of patents, trademarks, copyrights, trade secrets,
confidentiality procedures and contractual provisions to protect their intellectual property rights. The steps they have
taken to protect their intellectual property rights may not prevent third parties from using their intellectual property and
other proprietary information without their authorization or independently developing intellectual property and other
proprietary information that is similar. In addition, the laws of foreign countries may not protect our businesses’
intellectual property rights effectively or to the same extent as the laws of the United States. Stopping unauthorized use
of their proprietary information and intellectual property, and defending claims that they have made unauthorized use of
others’ proprietary information or intellectual property, may be difficult, time-consuming and costly. The use of their
intellectual property and other proprietary information by others, and the use by others of their intellectual property and
proprietary information, could reduce or eliminate any competitive advantage they have developed, cause them to lose
sales or otherwise harm their business.
56
Our businesses may become involved in legal proceedings and claims in the future either to protect their intellectual
property or to defend allegations that they have infringed upon others’ intellectual property rights. These claims and any
resulting litigation could subject them to significant liability for damages and invalidate their property rights. In
addition, these lawsuits, regardless of their merits, could be time consuming and expensive to resolve and could divert
management’s time and attention. The costs associated with any of these actions could be substantial and could have a
material adverse affect on their financial condition, business and results of operations.
The operations and research and development of some of our businesses’ services and technology depend on the
collective experience of their technical employees. If these employees were to leave our businesses and take this
knowledge, our businesses’ operations and their ability to compete effectively could be materially adversely
impacted.
The future success of some of our businesses depends upon the continued service of their technical personnel who have
developed and continue to develop their technology and products. If any of these employees leave our businesses, the
loss of their technical knowledge and experience may materially adversely affect the operations and research and
development of current and future services. We may also be unable to attract technical individuals with comparable
experience because competition for such technical personnel is intense. If our businesses are not able to replace their
technical personnel with new employees or attract additional technical individuals, their operations may suffer as they
may be unable to keep up with innovations in their respective industries. As a result, their ability to continue to compete
effectively and their operations may be materially adversely affected.
If our businesses are unable to continue the technological innovation and successful commercial introduction of
new products and services, their financial condition, business and results of operations could be materially adversely
affected.
The industries in which our businesses operate, or may operate, experience periodic technological changes and ongoing
product improvements. Their results of operations depend significantly on the development of commercially viable new
products, product grades and applications, as well as production technologies and their ability to integrate new
technologies. Our future growth will depend on their ability to gauge the direction of the commercial and technological
progress in all key end-use markets and upon their ability to successfully develop, manufacture and market products in
such changing end-use markets. In this regard, they must make ongoing capital investments.
In addition, their customers may introduce new generations of their own products, which may require new or increased
technological and performance specifications, requiring our businesses to develop customized products. Our businesses
may not be successful in developing new products and technology that satisfy their customers’ demand and their
customers may not accept any of their new products. If our businesses fail to keep pace with evolving technological
innovations or fail to modify their products in response to their customers’ needs in a timely manner, then their
financial condition, business and results of operations could be materially adversely affected as a result of reduced sales
of their products and sunk developmental costs. These developments may require our personnel staffing business to
seek better educated and trained workers, who may not be available in sufficient numbers.
Our businesses could experience fluctuations in the costs of raw materials as a result of inflation and other
economic conditions, which fluctuations could have a material adverse effect on their financial condition, business
and results of operations.
Changes in inflation could materially adversely affect the costs and availability of raw materials used in our
manufacturing businesses, and changes in fuel costs likely will affect the costs of transporting materials from our
suppliers and shipping goods to our customers, as well as the effective areas from which we can recruit temporary
staffing personnel. For example, for Advanced Circuits, the principal raw materials consist of copper and glass and
represent approximately 16.9% of net sales in 2009. Prices for these key raw materials may fluctuate during periods of
high demand. The ability by these businesses to offset the effect of increases in raw material prices by increasing their
prices is uncertain. If these businesses are unable to cover price increases of these raw materials, their financial
condition, business and results of operations could be materially adversely affected.
Our businesses do not have and may not have long-term contracts with their customers and clients and the loss of
customers and clients could materially adversely affect their financial condition, business and results of operations.
Our businesses are and may be, based primarily upon individual orders and sales with their customers and clients. Our
businesses historically have not entered into long-term supply contracts with their customers and clients. As such, their
customers and clients could cease using their services or buying their products from them at any time and for any
57
reason. The fact that they do not enter into long-term contracts with their customers and clients means that they have no
recourse in the event a customer or client no longer wants to use their services or purchase products from them. If a
significant number of their customers or clients elect not to use their services or purchase their products, it could
materially adversely affect their financial condition, business and results of operations.
Our businesses are and may be subject to federal, state and foreign environmental laws and regulations that expose
them to potential financial liability. Complying with applicable environmental laws requires significant resources,
and if our businesses fail to comply, they could be subject to substantial liability.
Some of the facilities and operations of our businesses are and may be subject to a variety of federal, state and foreign
environmental laws and regulations including laws and regulations pertaining to the handling, storage and
transportation of raw materials, products and wastes, which require and will continue to require significant expenditures
to remain in compliance with such laws and regulations currently in place and in the future. Compliance with current
and future environmental laws is a major consideration for our businesses as any material violations of these laws can
lead to substantial liability, revocations of discharge permits, fines or penalties. Because some of our businesses use
hazardous materials and generate hazardous wastes in their operations, they may be subject to potential financial
liability for costs associated with the investigation and remediation of their own sites, or sites at which they have
arranged for the disposal of hazardous wastes, if such sites become contaminated. Even if they fully comply with
applicable environmental laws and are not directly at fault for the contamination, our businesses may still be liable.
Costs associated with these risks could have a material adverse effect on our financial condition, business and results of
operations.
Defects in the products provided by our companies could result in financial or other damages to those customers,
which could result in reduced demand for our companies’ products and/or liability claims against our companies.
Some of the products our businesses produce could potentially result in product liability suits against them. Some of
our companies manufacture products to customer specifications that are highly complex and critical to customer
operations. Defects in products could result in customer dissatisfaction or a reduction in or cancellation of future
purchases or liability claims against our companies. If these defects occur frequently, our reputation may be impaired.
Defects in products could also result in financial or other damages to customers, for which our companies may be asked
or required to compensate their customers. Any of these outcomes could negatively impact our financial condition,
business and results of operations.
Some of our businesses are subject to certain risks associated with the movement of businesses offshore.
Some of our businesses are potentially at risk of losing business to competitors operating in lower cost countries. An
additional risk is the movement offshore of some of our businesses’ customers, leading them to procure products or
services from more closely located companies. Either of these factors could negatively impact our financial condition,
business and results of operations.
Loss of key customers of some of our businesses could negatively impact financial condition.
Some of our businesses have significant exposure to certain key customers, the loss of which could negatively impact
our financial condition, business and results of operations.
Our businesses are subject to certain risks associated with their foreign operations or business they conduct in
foreign jurisdictions.
Some of our businesses have and may have operations or conduct business outside the United States. Certain risks are
inherent in operating or conducting business in foreign jurisdictions, including exposure to local economic conditions;
difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; longer payment
cycles for foreign customers; adverse currency exchange controls; exposure to risks associated with changes in foreign
exchange rates; potential adverse changes in political environments; withholding taxes and restrictions on the
withdrawal of foreign investments and earnings; export and import restrictions; difficulties in enforcing intellectual
property rights; and required compliance with a variety of foreign laws and regulations. These risks individually and
collectively have the potential to negatively impact our financial condition, business and results of operations.
58
Risks Related to Advanced Circuits
Unless Advanced Circuits is able to respond to technological change at least as quickly as its competitors, its services
could be rendered obsolete, which could materially adversely affect its financial condition, business and results of
operations.
The market for Advanced Circuits’ services is characterized by rapidly changing technology and continuing process
development. The future success of its business will depend in large part upon its ability to maintain and enhance its
technological capabilities, retain qualified engineering and technical personnel, develop and market services that meet
evolving customer needs and successfully anticipate and respond to technological changes on a cost-effective and
timely basis. Advanced Circuits’ core manufacturing capabilities are for 2 to 12 layer printed circuit boards. Trends
towards miniaturization and increased performance of electronic products are dictating the use of printed circuit boards
with increased layer counts. If this trend continues Advanced Circuits may not be able to effectively respond to the
technological requirements of the changing market. If it determines that new technologies and equipment are required
to remain competitive, the development, acquisition and implementation of these technologies may require significant
capital investments. It may be unable to obtain capital for these purposes in the future, and investments in new
technologies may not result in commercially viable technological processes. Any failure to anticipate and adapt to its
customers’ changing technological needs and requirements or retain qualified engineering and technical personnel
could materially adversely affect its financial condition, business and results of operations.
Advanced Circuits’ customers operate in industries that experience rapid technological change resulting in short
product life cycles and as a result, if the product life cycles of its customers slow materially, and research and
development expenditures are reduced, its financial condition, business and results of operations will be materially
adversely affected.
Advanced Circuits’ customers compete in markets that are characterized by rapidly changing technology, evolving
industry standards and continuous improvement in products and services. These conditions frequently result in short
product life cycles. As professionals operating in research and development departments represent the majority of
Advanced Circuits’ net sales, the rapid development of electronic products is a key driver of Advanced Circuits’ sales
and operating performance. Any decline in the development and introduction of new electronic products could slow the
demand for Advanced Circuits’ services and could have a material adverse effect on its financial condition, business
and results of operations.
Electronics manufacturing services corporations are increasingly acting as intermediaries, positioning themselves
between PCB manufacturers and OEMS, which could reduce operating margins.
Advanced Circuits’ OEM customers are increasingly outsourcing the assembly of equipment to third party
manufacturers. These third party manufacturers typically assemble products for multiple customers and often purchase
circuit boards from Advanced Circuits in larger quantities than OEM manufacturers. The ability of Advanced Circuits
to sell products to these customers at margins comparable to historical averages is uncertain. Any material erosion in
margins could have a material adverse effect on Advanced Circuits’ financial condition, business and results of
operations.
Risks Related to American Furniture Manufacturing
Competition from larger furniture manufacturers may adversely affect American Furniture Manufacturing’s
business and operating results.
The residential upholstered furniture industry is highly competitive. Certain of American Furniture Manufacturing’s
competitors are larger, have broader product lines and offer widely-advertised, well-known, branded products. If such
larger competitors introduce additional products in the promotional segment of the upholstered furniture market, the
segment in which American Furniture Manufacturing primarily participates, it may negatively impact American
Furniture Manufacturing’s market share and financial performance.
59
Risks Related to Anodyne
Certain of Anodyne’s products are subject to regulation by the FDA.
Certain of Anodyne’s mattress products are Class II devices within Section 201(h) of the Federal FDCA (21 USC
§321(h), and, as such, are subject to the requirements of the FDCA and certain rules and regulations of the FDA. Prior
to our acquisition of Anodyne, one of its subsidiaries received a warning letter from the FDA in connection with certain
deficiencies identified during a regular FDA audit, including noncompliance with certain design control requirements,
certain of the good manufacturing practice regulations defined in 21 C.F.R. 820 and certain record keeping
requirements. Anodyne’s subsidiary has undertaken corrective measures to address the deficiencies and continues to
fully cooperate with the FDA. Anodyne is vulnerable to actions that may be taken by the FDA which have a material
adverse effect on Anodyne and/or its business. The FDA has the authority to inspect without notice, and to take any
disciplinary action that it sees fit.
A change in Medicare Reimbursement Guidelines may reduce demand for Anodyne’s products.
Certain changes in Medicare Reimbursement Guidelines may reduce demand for medical support surfaces and have a
material effect on Anodyne’s operating performance.
Two of Anodyne’s largest customers represented approximately 50% of its gross sales in 2009.
Anodyne has significant exposure to two key customers. The loss of either customer could negatively impact
Anodyne’s financial condition, business and results of operations.
Risks Related to Fox
Growth in popularity of alternative recreational activities may reduce demand for mountain bikes and off road
products which would reduce demand for Fox’s products.
Mountain biking and other off-road sports compete against numerous recreational activities for share of time and spend
of enthusiasts. Any growth in popularity of other outdoor activities at the expense of mountain biking and off-road
sports could lead to a decrease in demand for the company’s product’s and could materially adversely affect Fox’s
financial condition, business and results of operations.
Risks Related to HALO
Increases in the portion of existing customers and potential customers buying directly from manufacturers or
exclusively over the internet could have a material adverse affect on the business of HALO.
The promotional products industry supply chain is comprised of multiple levels. As a distributor, HALO does not
manufacturer or decorate the promotional products it sells. Additionally, in recent years there have been a number of
suppliers and distributors who have attempted to sell directly to customers over the internet with varying levels of
success. Though management believes distributors and account executives play crucial roles in the industry supply
chain, increases in the portion of end customers buying directly from manufacturers or exclusively through the internet
could have a material adverse affect on the business of HALO.
The loss of a significant number of account executives could adversely affect the business of HALO.
HALO relies on its large staff of account executives to develop and maintain relationships with end customers.
HALO’s sales force is comprised of both full time employees and sub-contractors. These professionals have
relationships with customers of varying sizes and profitability. Though management believes its compensation
structure and support of its sales forces is comparable or better than many industry participants, there can be no
assurances that HALO will be able to retain their continuing services. The loss of a significant number of account
executives could adversely affect the business of HALO.
60
HALO relies on suppliers for the timely delivery of products to end customers. Delays in the delivery of promotional
products to customers could adversely affect HALO’s results of operations.
HALO often relies on many of its suppliers to ship directly to its end customers (“drop-shipments”). Delays in the
shipment of products or supply shortages in promotional products in high demand could affect HALO’s standing with
its end customers and adversely affect HALO’s results of operations.
Risks Related to Staffmark
Staffmark’s business depends on its ability to attract and retain qualified staffing personnel that possess the skills
demanded by its clients.
As a provider of temporary staffing services, the success of Staffmark’s business depends on its ability to attract and
retain qualified staffing personnel who possess the skills and experience necessary to meet the requirements of its
clients or to successfully bid for new client projects. Staffmark must continually evaluate and upgrade its base of
available qualified personnel through recruiting and training programs to keep pace with changing client needs and
emerging technologies. Staffmark’s ability to attract and retain qualified staffing personnel could be impaired by rapid
improvement in economic conditions resulting in lower unemployment, increases in compensation or increased
competition. During periods of economic growth, Staffmark faces increasing competition for retaining and recruiting
qualified staffing personnel, which in turn leads to greater advertising and recruiting costs and increased salary
expenses. If Staffmark cannot attract and retain qualified staffing personnel, the quality of its services may deteriorate
and its financial condition, business and results of operations may be materially adversely affected.
Customer relocation of positions filled by Staffmark may materially adversely affect Staffmark’s financial condition,
business and results of operations
Many companies have built offshore operations, moved their operations to offshore sites that have lower employment
costs or outsourced certain functions. If Staffmark’s customers relocate positions filled by Staffmark, this would have a
material adverse effect on the financial condition, business and results of operations of Staffmark.
Staffmark assumes the obligation to make wage, tax and regulatory payments for its employees, and as a result, it is
exposed to client credit risks.
Staffmark generally assumes responsibility for and manages the risks associated with its employees’ payroll
obligations, including liability for payment of salaries and wages (including payroll taxes), as well as group health and
retirement benefits for its leased employees. These obligations are fixed, whether or not its clients make payments
required by services agreements, which exposes Staffmark to credit risks of its clients, primarily relating to
uncollateralized accounts receivables. If Staffmark fails to successfully manage its credit risk, its financial condition,
business and results of operations may be materially adversely affected.
Staffmark is exposed to employment-related claims and costs and periodic litigation that could materially adversely
affect its financial condition, business and results of operations.
The temporary services business entails employing individuals and placing such individuals in clients’ workplaces.
Staffmark’s ability to control the workplace environment of its clients is limited. As the employer of record of its
temporary employees, it incurs a risk of liability to its temporary employees and clients for various workplace events,
including claims of misconduct or negligence on the part of its employees; discrimination or harassment claims against
its employees, or claims by its employees of discrimination or harassment by its clients; immigration-related claims;
claims relating to violations of wage, hour and other workplace regulations; claims relating to employee benefits,
entitlements to employee benefits, or errors in the calculation or administration of such benefits; and possible claims
relating to misuse of customer confidential information, misappropriation of assets or other similar claims. Staffmark
may incur fines and other losses and negative publicity with respect to any of these situations. Some the claims may
result in litigation, which is expensive and distracts management’s attention from the operations of Staffmark’s
business. Furthermore, while Staffmark maintains insurance with respect to many of these items, it, may not be able to
continue to obtain insurance at a cost that does not have a material adverse effect upon it. As a result, such claims
(whether by reason of it not having insurance or by reason of such claims being outside the scope of its insurance) may
have a material adverse effect on Staffmark’s financial condition, business and results of operations.
61
Staffmark’s workers’ compensation loss reserves may be inadequate to cover its ultimate liability for workers’
compensation costs.
Staffmark self-insures its workers’ compensation exposure for certain employees. The calculation of the workers’
compensation reserves involves the use of certain actuarial assumptions and estimates. Accordingly, reserves do not
represent an exact calculation of liability. Reserves can be affected by both internal and external events, such as adverse
developments on existing claims or changes in medical costs, claims handling procedures, administrative costs,
inflation, and legal trends and legislative changes. As a result, reserves may not be adequate.
If reserves are insufficient to cover the actual losses, Staffmark would have to increase its reserves and incur charges to
its earnings that could be material.
Any significant economic downturn could result in our clients using fewer temporary and contract workers or
becoming unable to pay us for our services on a timely basis or at all, which would materially adversely affect our
business.
Because demand for recruitment services is sensitive to changes in the level of economic activity, our business may
suffer during economic downturns. As economic activity begins to slow down, companies tend to reduce their use of
temporary and contract workers before undertaking layoffs of their regular employees, resulting in decreased demand
for temporary and contract workers. Significant declines in demand, and thus in revenues, can result in expense de-
leveraging, which would result in lower profit levels.
In addition, during economic downturns companies may slow the rate at which they pay their vendors or become unable
to pay their debts as they become due. If any of our significant clients does not pay amounts owed to us in a timely
manner or becomes unable to pay such amounts to us at a time when we have substantial amounts receivable from such
client, our cash flow and profitability may suffer.
State unemployment insurance expense is a direct cost of doing business in the Staffing Industry. State unemployment
tax rates are established based on a company’s specific experience rate of unemployment claims and a state’s required
funding for total claims. Economic downturns may result in a higher occurrence of unemployment claims resulting in
higher state unemployment tax rates. Additionally, as states are paying more in total prolonged claims during an
economic downturn, states may increase unemployment tax rates to employers, regardless of the employer’s specific
experience. This would result in higher direct costs to Staffmark.
62
ITEM 1B. UNRESOLVED STAFF COMMENTS
NONE
ITEM 2. – PROPERTIES
Advanced Circuits
Advanced Circuits operations are located in a 61,058 square foot building in Aurora, Colorado. This facility is leased
and comprises both the factory and office space. The lease term is for 15 years with a renewal option for an additional
10 years.
American Furniture
American Furniture operates primarily from a manufacturing and warehousing facility located in Ecru, MS, of which
approximately 750,000 square feet was refurbished in 2008 as a result of damage caused by a fire in 2008. This 1.1
million square foot facility includes 350,000 square feet of manufacturing space, 750,000 square feet of warehouse
space and 82 shipping docks. AFM can add additional manufacturing lines within its existing footprint to
accommodate demand during peak times. In addition to AFM’s primary manufacturing facility, AFM leases
approximately 300,000 square feet of warehouse and small manufacturing space within the vicinity of its primary Ecru
facility. AFM also leases showroom space in High Point, North Carolina and Tupelo Mississippi, allowing it to
showcase its products to buyers and during trade shows held in the area.
Anodyne
Anodyne leases a 33,000 square foot facility in Coral Springs, Florida, which houses its manufacturing and distribution
operations for the east coast. It also leases an 81,000 square foot facility in Corona, California, which houses the
manufacturing and distribution facilities for the west coast.
Fox
Fox’s corporate headquarters and main manufacturing facilities are located in an 86,000 square foot facility located in
Watsonville California. In addition, Fox leases five other smaller facilities totaling approximately 50,000 square feet in
the surrounding Watsonville area.
HALO
HALO distributes its products through a leased 40,000 square foot office facility and a 57,000 square foot fulfillment
warehouse, both of which are located in Sterling, IL. Due to its high percentage of drop shipments, HALO is able to
operate from a much smaller warehouse than a similar size company with a traditional inventory-based business model.
HALO also maintains a small IT department in Oak Brook, IL and an office for its CEO in Chicago.
The following table shows the number of offices located in each state and the function of each office as of
December 31, 2009.
State
Function
Offices
Square feet
California
Illinois
Louisiana
Ohio
Tennessee
Missouri
Kansas
Maryland
Florida
Oklahoma
Georgia
Sales
Administration
Information Technology
Warehousing
Sales
Administration
Sales
Administration
Sales
Sales
Sales
Administration
Sales
2
2
1
2
1
2
1
1
1
1
1
1
1
11,222
25,450
4,766
72,000
1,919
3,796
8,804
5,960
2,618
800
1,000
5,500
1,550
Staffmark
Staffmark’s principal executive offices are located in Cincinnati, Ohio where it leases 38,867 square feet of office
space. Staffmark provides staffing services through 208 branch offices located in 29 states which include branch
63
offices and locations for its recent Staffmark acquisition. Lease terms for the branch offices typically run from 3 to 5
years.
Our corporate offices are located in Westport, Connecticut, where we lease approximately 1,500 square feet from our
Manager.
We believe that our properties at each of our businesses are sufficient to meet our present needs and we do not
anticipate any difficulty in securing additional space, as needed, on acceptable terms.
ITEM 3. - LEGAL PROCEEDINGS
In the normal course of business, we are involved in various claims and legal proceedings. While the ultimate
resolution of these matters has yet to be determined, we do not believe that their outcome will have a material adverse
effect on our financial position or results of operations.
ITEM 4. - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
RESERVED
64
Part II
Item 5. - Market for Registrants’ Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities
Market Information
Our Trust stock trades on the NASDAQ Global Select Market under the symbol “CODI.” The following table sets forth
the high and low closing prices per share as reported by the NASDAQ Global Select Market during the periods
indicated. The highest and lowest prices per share of Trust stock were $6.89 and $15.58, respectively, for the periods
presented below:
Quarter Ended
December 31, 2009
September 30, 2009
June 30, 2009
March 31, 2009
December 31, 2008
September 30, 2008
June 30, 2008
March 31, 2008
High
13.33
11.15
10.32
12.20
14.44
14.64
13.75
15.58
Low
Distribution
Declared
9.87
7.94
7.63
6.89
7.52
9.51
10.75
10.89
0.34
0.34
0.34
0.34
0.34
0.34
0.325
0.325
COMPARATIVE PERFORMANCE OF SHARES OF TRUST STOCK
The performance graph shown below compares the change in cumulative total shareholder return on shares of Trust
stock with the NASDAQ Stock Market Index (US) and the NASDAQ Other Finance Index (US) from May 16, 2006,
when we completed our initial public offering, through the quarter ended December 31, 2009. The graph sets the
beginning value of shares of Trust stock and the indices at $100, and assumes that all quarterly dividends were
reinvested at the time of payment. This graph does not forecast future performance of shares of Trust stock.
135
120
105
90
75
60
45
30
15
0
5/16/2006
6/30/2006
9/29/2006
12/29/2006
3/31/07
6/29/07
9/28/07
12/31/07
3/31/08
6/30/08
9/30/08
12/31/08
3/31/09
6/30/09
9/30/09
12/31/09
Compass Diversified Holdings
NASDAQ Other Finance Index (US)
NASDAQ Stock Market Index (US)
65
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
June 30, 2006
September 30, 2006
December 31, 2006
$ 94.88
$ 97.44
$ 94.03
$ 102.73
$ 101.31
$ 104.02
$ 117.00
$ 108.35
$ 107.59
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
March 31, 2007
$ 116.32
$ 108.64
$ 104.70
June 30, 2007
$ 125.83
$ 116.78
$ 112.86
September 30,
2007
$ 115.41
$ 121.19
$ 107.18
December 31,
2007
$ 109.10
$ 118.98
$ 108.11
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
March 31, 2008
$ 98.39
$ 102.24
$ 86.86
June 30, 2008
$ 87.54
$ 102.86
$ 85.52
September 30,
2008
December 31,
2008
$ 90.41
$ 109.45
$ 93.84
$ 70.75
$ 90.56 $ 57.91
Data
Compass Diversified Holdings
NASDAQ Stock Market Index
NASDAQ Other Finance Index
Shareholders
March 31, 2009
$ 73.55
$ 68.57
$ 55.01
June 30, 2009
$ 68.75
$ 82.32
$ 68.57
September 30,
2009
$ 91.64
$ 95.21
$ 74.63
December 31,
2009
$ 114.42
$ 101.80
$ 75.76
As of February 26, 2010 we had 36,625,000 shares of Trust stock outstanding that were held by twelve holders of
record; however, we believe the number of beneficial owners of our shares is over 9,000.
Distributions
For the years 2008 and 2009 we have declared and paid quarterly cash distributions to holders of record as follows:
Quarter Ended
Declaration Date
Payment Date
Distribution Per Share
December 31, 2009
January 11, 2010
January 28, 2010
$0.34
September 30, 2009
October 8, 2009
October 29, 2009
$0.34
June 30, 2009
July 10, 2009
July 30, 2009
$0.34
March 31, 2009
April 9, 2009
April 30, 2009
$0.34
December 31, 2008
January 8, 2009
January 30, 2009
$0.34
September 30, 2008
October 9, 2008
October 31, 2008
$0.34
June 30, 2008
July 10, 2008
July 29, 2008
$0.325
March 31, 2008
April 5, 2008
April 25, 2008
$0.325
We currently intend to continue to declare and pay regular quarterly cash distributions on all outstanding shares through
fiscal 2010. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity
and Capital Resources” in Part II, Item 7.
66
ITEM 6. - SELECTED FINANCIAL DATA
The following table sets forth selected historical and other data of the Company and should be read in conjunction with
the more detailed consolidated financial statements included elsewhere in this report.
Selected financial data below includes the results of operations, cash flow and balance sheet data of the Company for
the years ended December 31, 2009, 2008, 2007, 2006 and 2005. We were incorporated on November 18, 2005
(“inception”). Financial data included for the year ended December 31, 2005, includes minimal activity experienced
from inception to December 31, 2005. We completed our IPO on May 16, 2006 and used the proceeds of the IPO and
separate private placement transactions that closed in conjunction with our IPO, and from our third party credit facility,
to purchase controlling interests in four of our initial operating subsidiaries. The following table details our acquisitions
and dispositions subsequent to our IPO.
Acquisitions:
Advanced Circuits(1)
CBS Personnel(1)
Crosman(1)
Silvue(1)
Anodyne
Aeroglide
HALO
American Furniture
Fox
Staffmark LLC(2)
(1) Represent initial operating subsidiaries.
(2) Staffmark LLC was acquired by CBS Personnel.
Acquisition Date
May 16, 2006
May 16, 2006
May 16, 2006
May 16, 2006
August 1, 2006
February 28, 2007
February 28, 2007
August 31, 2007
January 4, 2008
January 21, 2008
Disposition Date
n/a
n/a
January 5, 2007
June 25, 2008
n/a
June 24, 2008
n/a
n/a
n/a
n/a
The operating results for Crosman are reflected as discontinued operations in 2006 and are not included in the operating
data below. The operating results for Aeroglide are reflected as discontinued operations in 2008 and 2007 and are not
included in the data below. The operating results for Silvue are reflected as discontinued operations in 2008, 2007 and
2006 and as such are not included in the operating data below. Financial data included below only includes activity in
our operating subsidiaries from their respective dates of acquisition.
Statements of Operations Data:
Net sales ...................................................................................................................
Cost of sales .............................................................................................................
Gross profit ...............................................................................................................
Operating expenses:...................................................................................................
Staffing .....................................................................................................................
Selling, general and administrative ............................................................................
Supplemental put expense (reversal).........................................................................
Management fees ......................................................................................................
Amortization expense ................................................................................................
Impairment expense...................................................................................................
Operating income (loss) ............................................................................................
Income (loss) from continuing operations...................................................................
Income and gain from discontinued operations ..........................................................
Net income (loss).......................................................................................................
Net income (loss) attributable to noncontrolling interest ............................................
Net income (loss) attributable to Holdings (1), (2)
Basic and fully diluted income (loss) per share attributable to Holdings:
Year ended December 31,
2009
$ 1,248,740
976,991
271,749
2008
$ 1,538,473
1,196,206
342,267
2007
$ 841,791
636,008
205,783
2006
$ 395,173
307,014
88,159
2005
$ -
-
-
74,279
145,948
(1,329)
13,100
24,609
59,800
(44,658)
(39,645)
-
(39,645)
(13,375)
$ (26,270)
102,438
165,768
6,382
15,205
24,605
-
27,869
3,817
77,970
81,787
3,493
$ 78,294
56,207
94,426
7,400
10,120
12,679
-
24,951
10,051
41,314
51,365
10,997
$ 40,368
34,345
31,605
22,456
4,158
5,814
-
(10,219)
(27,973)
9,831
(18,142)
1,107
$ (19,249)
-
1
-
-
-
-
(1)
(1)
-
(1)
-
$ (1)
Continuing operations..........................................................................................
Discontinued operations.......................................................................................
Basic and fully diluted income (loss) per share attributable to Holdings......................
$ (0.76)
-
$ (0.76)
$ 0.01
2.47
$ 2.48
$ (0.04)
1.50
$ 1.46
$ (2)
0.77
$ (1.52)
$ -
-
$ -
Cash Flow Data:
Cash provided by operating activities ........................................................................
Cash used in investing activities ................................................................................
Cash (used in) provided by financing activities ..........................................................
Net (decrease) increase in cash and cash equivalents..................................................
$ 20,213
(4,982)
(81,209)
(65,978)
$ 40,549
(24,793)
(37,561)
(21,885)
$ 41,772
(114,158)
184,882
112,352
$ 20,563
(362,286)
351,073
9,610
$ -
-
100
100
(1) Includes gains on the sales of Aeroglide and Silvue in 2008 of $34.0 million and $39.4 million, respectively, and Crosman in 2007 of $36.0 million.
(2) Includes a charge to net income of $10.0 million for distributions made at the subsidiary (ACI) level in excess of cumulative earnings in 2007.
67
2009
2008
December 31,
2007
2006
2005
Balance Sheet Data:
Current assets ..................................................................................................
Total assets ......................................................................................................
Current liabilities .............................................................................................
Long-term debt ................................................................................................
Total liabilities .................................................................................................
Noncontrolling interests ...................................................................................
Shareholders’ equity (deficit) attributable to Holdings.......................................
$
275,027
831,012
129,887
74,000
322,946
70,905
437,161
$
335,201
984,336
139,370
151,000
440,458
79,431
464,447
$
299,241
828,002
106,613
148,000
373,285
21,867
432,850
$ 135,121
496,382
155,534
-
221,934
17,734
255,711
$ 3,408
3,408
3,309
-
3,309
100
(1)
68
ITEM 7. - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This item 7 contains forward-looking statements. Forward-looking statements in this Annual Report on Form 10-K
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 Annual Report.
Overview
Compass Diversified Holdings, a Delaware statutory trust, was incorporated in Delaware on November 18, 2005.
Compass Group Diversified Holdings, LLC, a Delaware limited liability Company, was also formed on November 18,
2005. In accordance with the Trust Agreement, the Trust is sole owner of 100% of the Trust Interests (as defined in the
LLC Agreement) of the Company and, pursuant to the LLC Agreement, the Company has outstanding, the identical
number of Trust Interests as the number of outstanding shares of the Trust. The Manager is the sole owner of the
Allocation Interests of the Company. The Company is the operating entity with a board of directors and other corporate
governance responsibilities, similar to that of a Delaware corporation.
The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses
headquartered in North America. We characterize small and middle market businesses as those that generate annual
cash flows of up to $60 million. We focus on companies of this size because we believe that these companies are more
able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts
to improve earnings and cash flow.
In pursuing new acquisitions, we seek businesses with the following characteristics:
• North American base of operations;
•
stable and growing earnings and cash flow;
• maintains a significant market share in defensible industry niche (i.e., has a “reason to exist”);
•
•
•
solid and proven management team with meaningful incentives;
low technological and/or product obsolescence risk; and
a diversified customer and supplier base.
Our management team’s strategy for our subsidiaries involves:
•
•
•
•
•
utilizing structured incentive compensation programs tailored to each business in order 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.
69
Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we
are well positioned to acquire additional attractive businesses. Our management team has a large network of over 2,000
deal intermediaries to whom it actively markets and who we expect to expose us to potential acquisitions. Through this
network, as well as our management team’s active proprietary transaction sourcing efforts, we typically have a
substantial pipeline of potential acquisition targets. In consummating transactions, our management team has, in the
past, been able to successfully navigate complex situations surrounding acquisitions, including corporate spin-offs,
transitions of family-owned businesses, management buy-outs and reorganizations. We believe the flexibility,
creativity, experience and expertise of our management team in structuring transactions provides us with a strategic
advantage by allowing us to consider non-traditional and complex transactions tailored to fit a specific acquisition
target.
In addition, because we intend to fund acquisitions through the utilization of our 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.
Initial public offering and Company formation
On May 16, 2006, we completed our initial public offering of 13,500,000 shares of the Trust at an offering price of
$15.00 per share (the “IPO”). Total net proceeds from the IPO, after deducting the underwriters’ discounts,
commissions and financial advisory fee, were approximately $188.3 million. On May 16, 2006, we also completed the
private placement of 5,733,333 shares to CGI for approximately $86.0 million and completed the private placement of
266,667 shares to Pharos I LLC, an entity controlled by Mr. Massoud, the Chief Executive Officer of the Company, and
owned by our management team, for approximately $4.0 million. CGI also purchased 666,667 shares for $10.0 million
through the IPO.
Subsequent to the IPO the Company’s board of directors engaged the Manager to externally manage the day-to-day
operations and affairs of the Company, oversee the management and operations of the businesses and to perform those
services customarily performed by executive officers of a public company.
From May 16, 2006 through December 31, 2009, we purchased nine businesses (each of our businesses is treated as a
separate business segment) and disposed of three, as follows:
Acquisitions
• On May 16, 2006, we made loans to and purchased a controlling interest in CBS Personnel Holdings, Inc.,
which we refer to as Staffmark, for approximately $128 million. As of December 31, 2009, we own
approximately 76.2% of the common stock on a primary basis and 69.4% on a fully diluted basis.
• On May 16, 2006, we made loans to and purchased a controlling interest in Crosman for approximately $73
million representing at the time of purchase approximately 75.4% of the outstanding common stock on both a
primary and fully diluted basis.
• On May 16, 2006, we made loans to and purchased a controlling interest in Advanced Circuits for
approximately $81 million. As of December 31, 2009, we own approximately 70.2% of the common stock on
a primary and fully diluted basis.
• On May 16, 2006, we made loans to and purchased a controlling interest in Silvue for approximately $36
million, representing at the time of purchase approximately 72.3% of the outstanding stock on both a primary
and fully diluted basis.
• On August 1, 2006, we made loans to and purchased a controlling interest in Anodyne for approximately $31
million. As of December 31, 2009, we own approximately 74.4% of the common stock on a primary basis
and 61.7% on a fully diluted basis.
• On February 28, 2007, we made loans to and purchased a controlling interest in Aeroglide for approximately
$58 million, representing at the time of purchase approximately 88.9% of the outstanding stock on a primary
basis and approximately 73.9% on a fully diluted basis.
• On February 28, 2007, we made loans to and purchased a controlling interest in HALO was purchased for
approximately $62 million. As of December 31, 2009, we own approximately 88.7% of the common stock on
a primary basis and 72.8% on a fully diluted basis.
• On August 28, 2007, we made loans to and purchased a controlling interest in American Furniture for
approximately $97 million. As of December 31, 2009, we own approximately 93.9% of the common stock on
a primary basis and 84.5% on a fully diluted basis.
70
• On January 4, 2008, we made loans to and purchased a controlling interest in Fox for approximately $80.4
million. As of December 31, 2009, we own approximately 75.5% of the common stock on a primary basis
and 67.5% on a fully diluted basis.
We did not acquire any new businesses during the year ended 2009. The acquisition market picked up
considerably during the fourth quarter of 2009 where we began seeing more quality acquisition candidates.
Dispositions
• On January 5, 2007, we sold all of our interest in Crosman, for approximately $143 million. We recorded a
gain on the sale in the first quarter of 2007 of approximately $36 million.
• On June 24, 2008, we sold all of our interest in Aeroglide, for approximately $95 million. We recorded a gain
on the sale in the second quarter of 2008 of approximately $34 million.
• On June 25, 2008, we sold all of our interest in Silvue, for approximately $95 million. We recorded a gain on
the sale in the second quarter of 2008 of approximately $39 million.
We are dependent on the earnings of, and cash receipts from, the businesses that we own in order to meet our corporate
overhead and management fee expenses and to pay distributions. These earnings and distributions, net of any
noncontrolling interest in these businesses, are available to:
• meet capital expenditure requirements, management fees and corporate overhead charges;
•
fund distributions from the businesses to the Company; and
• be distributed by the Trust to shareholders.
2009 Highlights
Term Loan Facility pay down
On February 18, 2009, the Company reduced its debt and repaid at par, from cash on its balance sheet, $75.0 million of
long term debt under its Term Loan Facility due in December of 2013.
Equity offering
On June 9, 2009 we successfully completed a public offering of 5.1 million Trust shares at $8.85 per share raising $45.1
million in gross proceeds. The net proceeds to the Company, after deducting underwriter’s discount and offering costs
totaled approximately $42.1 million.
2009 Distributions
We increased our quarterly distribution to $0.34 per share during the third quarter of 2008. For the 2009 fiscal year we
declared distributions to our shareholders totaling $1.36 per share.
Areas for focus in 2010
The areas of focus for 2010, which are generally applicable to each of our businesses, include:
• Taking advantage, where possible, of the current economic downturn by growing market share in each of our
market niche leading companies at the expense of less well capitalized competitors;
• Achieving sales growth, technological excellence and manufacturing capability through global expansion;
• Continuing to grow through disciplined, strategic acquisitions and rigorous integration processes;
• Continue to pursue expense reduction and cost savings through contraction in discretionary spending, and
reductions in workforce and production levels in response to lower production volume;
• Driving free cash flow through increased net income and effective working capital management enabling
continued investment in our businesses, strategic acquisitions, and enabling us to return value to our
shareholders; and
71
Results of Operations
We were formed on November 18, 2005 and acquired our existing businesses (segments) as follows:
May 16, 2006
August 1, 2006
February 28, 2007
August 31, 2007
January 4, 2008
Advanced Circuits
Anodyne
HALO
American Furniture
Fox
Staffmark
Fiscal 2009, 2008 and 2007 represents a full year of operating results included in our consolidated results of operations
for only three of our businesses. The remaining three businesses were acquired during fiscal 2007 and 2008 (see table
above). As a result, we cannot provide a meaningful comparison of our historical consolidated results of operations for
the year ended December 31, 2009 with the two prior years. In the following results of operations, we provide (i) our
consolidated results of operations for the years ended December 31, 2009, 2008 and 2007, which includes the historical
results of operations of our businesses (segments) from the date of acquisition and (ii) comparative historical results of
operations for each of our businesses on a stand-alone basis, for each of the years ended December 31, 2009, 2008 and
2007, together with relevant pro-forma adjustments.
Consolidated Results of Operations — Compass Diversified Holdings
Years Ended December 31,
2009
2008
2007
Net sales
Cost of sales
Gross profit
Staffing, selling, general and administrative expense
Management fees
Supplemental put expense (reversal)
Amortization of intangibles
Impairment expense
Operating income (loss)
$ 1,248,740
976,991
271,749
220,227
13,100
(1,329)
24,609
59,800
$ (44,658)
(in thousands)
1,538,473
1,196,206
342,267
$ 841,791
636,008
205,783
268,206
15,205
6,382
24,605
-
150,633
10,120
7,400
12,679
-
$ 27,869
$ 24,951
Net sales
On a consolidated basis net sales decreased approximately $289.7 million in the year ended December 31, 2009
compared to 2008. This decrease in net sales in 2009 is due principally to decreased revenues at our Staffmark,
Advanced Circuits, Anodyne, Fox and Halo operating segments offset in part by increased net sales at American
Furniture. Revenues at Staffmark decreased $261.0 million during the year ended December 31, 2009 compared with
the same period in 2008. On a consolidated basis net sales increased approximately $696.7 million in the year ended
December 31, 2008 compared to 2007. The increase is primarily attributable to increased revenues at Staffmark
resulting from the acquisition of Staffmark LLC on January 23, 2008 ($436.5 million) and net sales attributable to our
majority owned subsidiary, Fox, also acquired in January 2008 ($131.7 million). Refer to “Results of Operations – Our
Businesses” for a more detailed analysis of net sales and revenues by operating segment.
We do not generate any revenues apart from those generated by the businesses we own. We may generate interest
income on the investment of available funds, but expect such earnings to be minimal. Our investment in our businesses
is typically in the form of loans from the Company to such businesses, as well as equity interests in those companies.
Cash flows coming to the Trust and the Company are the result of interest payments on those loans, amortization of
those loans and, dividends on our equity ownership. However, on a consolidated basis these items are eliminated.
Cost of sales
On a consolidated basis cost of sales decreased approximately $219.2 million in the year ended December 31, 2009
compared to 2008 and increased approximately $560.2 million in the year ended December 31, 2008 compared to 2007.
These charges are due almost entirely to the corresponding decrease/increase in net sales referred to above. Refer to
“Results of Operations – Our Businesses” for a more detailed analysis of cost of sales expense by operating segment.
Staffing, selling, general and administrative expense
On a consolidated basis, staffing, selling, general and administrative expense decreased approximately $48.0 million in
the year ended December 31, 2009 compared to 2008. The 2009 vs. 2008 year over year decrease is due principally to
cost cutting measures enacted at the operating segment level in response to the softening economy and its negative
72
impact on sales and operating income in 2009. Additionally, costs directly tied to sales, such as commission expense,
declined as a direct result of the decrease in net sales. On a consolidated basis staffing, selling, general and
administrative costs increased approximately $117.6 million in the year ended December 31, 2008 compared to the
same period in 2007. The 2008 vs. 2007 year over year increase is due principally to our 2008 acquisitions and full year
results of our 2007 acquisitions. At the corporate level general and administrative costs decreased approximately $1.3
million for the year ended December 31, 2009 compared to the same period in 2008 due principally to lower costs for
professional fees being incurred in 2009 in connection with Sarbanes Oxley compliance. For the year ended December
31 2008 costs at the corporate level increased approximately $2.0 million compared to the comparable period in 2007
due principally to increased salaries and wages and professional fees. - Please refer to “Results of Operations – Our
Businesses” for a more detailed analysis of staffing, selling, general and administrative expense by operating segment.
Management fees
Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0%
annualized) of our adjusted net assets, which is defined in the Management Services Agreement (see Related Party
Transactions). For the years ended December 31, 2009, 2008 and 2007 we incurred approximately $12.8 million, $14.7
million and $10.1 million, respectively, in expense for these fees. The decrease in Management fees in 2009 compared
to 2008 is due principally to the decrease in consolidated adjusted net assets at December 31, 2009 resulting from the
$75.0 million pay down of our Term Loan Facility with available cash in February 2009 and the $59.8 million
impairment charge in 2009. The increase in Management fees in 2008 compared to 2007 is principally due to the
increase in consolidated adjusted net assets in 2008 as a result of LLC’s acquisition of Staffmark in January 2008 and
our acquisition of Fox in January 2008, offset in part by the sale of Aeroglide and Silvue in June 2008. Staffmark paid
approximately $0.3 million and $0.5 million during the year ended December 31, 2009 and 2008, respectively, to the
predecessor owner of Staffmark. - Please refer to “Related Party Transactions and Certain Transactions Involving our
Businesses for more information about the Management Services Agreement.
Supplemental put expense
In 2006 we entered into a Supplemental Put Agreement with our Manager pursuant to which our Manager has the right
to cause us to purchase the Allocation Interests then owned by them upon termination of the Management Services
Agreement. The Company accrued approximately $6.4 million and $7.4 million in expense during the years ended
December 31, 2008 and 2007, respectively, and reversed approximately $1.3 million in charges in 2009 in connection
with this agreement. This expense represents that portion of the estimated increase in the fair value of our businesses
over our original basis in those businesses that our Manager is entitled to if the Management Services Agreement were
terminated or those businesses were sold - Please refer to “Related Party Transactions and Certain Transactions
Involving our Businesses for more information about the Supplemental Put Agreement.
Impairment expense
Based on the results of our annual impairment tests performed as of March 31, 2009 an indication of impairment
existed at the Staffmark reporting unit. In each of our other businesses (reporting units) the result of the annual
goodwill impairment test indicated that the fair value of the business exceeded its carrying value. Based on the results
of the second step of the impairment test at Staffmark, we estimated that the carrying value of Staffmark goodwill
exceeded its fair value by approximately $50.0 million. As a result of this shortfall, we recorded a $50.0 million pretax
goodwill impairment charge for 2009. The results of the annual impairment tests performed as of April 30, 2008 and
2007 indicated that the fair values of the reporting units (businesses) exceeded their carrying values and, therefore,
goodwill was not impaired. Accordingly, there were no charges for goodwill impairment in 2008 or 2007.
In connection with the annual goodwill impairment we tested other indefinite-lived intangible assets at our Staffmark
reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair value of the CBS
Personnel trade name, based principally on the discontinuance of the use of the CBS Personnel trade name and
rebranding of the reporting units business to Staffmark beginning in February 2009. During 2009, we recorded an asset
impairment charge of approximately $9.8 million at the corporate level to decrease the carrying value of the CBS
personnel trade name to its fair value.
Results of Operations — Our Businesses
As previously discussed, we acquired our businesses on various acquisition dates beginning May 16, 2006 (see table
above). As a result, our consolidated operating results only include the results of operations since the acquisition date
associated with each of our businesses. The following discussion reflects a comparison of the historical results of
operations for each of our initial businesses (segments), for the complete fiscal years ending December 31, 2009, 2008
and 2007. In addition, the historical results of operations for Staffmark include the results of Staffmark (acquired on
January 21, 2008) as if CBS acquired Staffmark as of January 1, 2007. For the 2008 acquisitions and 2007 acquisitions
73
the following discussion reflects comparative historical results of operations for the entire fiscal years ending December
31, 2009, 2008 and 2007 as if we had acquired the businesses on January 1, 2007. When appropriate, relevant pro-
forma adjustments are reflected in the historical operating results. Adjustments to depreciation and amortization
resulting from purchase allocations that were not “pushed down” to a business are not included as a component of
operating results. We believe this presentation enhances the discussion and provides a more meaningful comparison of
operating results. The following operating results of our businesses are not necessarily indicative of the results to be
expected for a full year, going forward.
Advanced Circuits
Overview
Advanced Circuits is a provider of prototype, quick-turn and volume production PCBs to customers throughout the
United States. Collectively, prototype and quick-turn PCBs represent approximately 66.0% of Advanced Circuits’ gross
revenues. Prototype and quick-turn PCBs typically command higher margins than volume production PCB’s 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 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.
Results of Operations
The table below summarizes the statement of operations for Advanced Circuits for the fiscal years ending December 31,
2009, 2008 and 2007.
Year Ended December 31,
2009
Net sales ........................................................................................
Cost of sales ..................................................................................
Gross profit ..............................................................................
Selling, general and administrative expenses ...............................
Management fees ..........................................................................
Amortization of intangibles ..........................................................
Income from operations ...........................................................
$ 46,518
19,958
26,560
7,367
375
2,521
$ 16,297
2008
(in thousands)
$ 55,449
23,781
31,668
10,872
500
2,631
$ 17,665
2007
$ 52,292
23,139
29,153
8,914
500
2,661
$ 17,078
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008
Net sales
Net sales for the year ended December 31, 2009 were approximately $46.5 million compared to approximately $55.4
million for the year ended December 31, 2008, a decrease of approximately $8.9 million or 16.1%. The decrease in net
sales is due to decreased sales in quick-turn ($2.1 million) and prototype ($3.4 million) production PCBs. In addition
long-lead and sub-contract sales decreased approximately $4.7 million. These decreases were offset in part by an
increase in assembly sales of $1.1 million. Quick-turn production PCBs represented approximately 36.3% of gross sales
for the year ended December 31, 2009 compared to approximately 34.4% for the fiscal year ended December 31, 2008.
Prototype production represented approximately 30.6% of gross sales for the year ended December 31, 2009 compared
to approximately 31.6% for the same period in 2008. Long-lead production and sub-contract sales as a percentage of
gross sales decreased to approximately 28.3% of gross sales for the fiscal year 2009 compared to approximately 31.7%
74
for fiscal 2008. Assembly sales represented approximately 4.8% of gross sales in 2009 compared to approximately
2.3% in 2008.
The decline in net sales in each of the PCB categories in 2009 when compared to 2008 is attributable to the economic
slowdown in 2009 and the adverse impact it had on our customers during the year. Based on fourth quarter 2009 orders
and 2010 orders to date we currently anticipate modest sales increases in 2010 in each of these product sectors.
Cost of sales
Cost of sales for the fiscal year ended December 31, 2009 was approximately $20.0 million compared to approximately
$23.8 million for the year ended December 31, 2008, a decrease of approximately $3.8 million or 16.1%. The decrease
in cost of sales was largely due to the decrease in net sales. Gross profit as a percent of net sales in each of the years
ended December 31, 2009 and 2008 was approximately 57.1%.
Selling, general and administrative expenses
Selling, general and administrative expenses decreased approximately $3.5 million during the year ended December 31,
2009 compared to the corresponding period in 2008. Approximately $2.2 million of the decrease is attributable to
reduced loan forgiveness charges in 2009, compared to 2008, which include a reversal of prior year charges totaling
approximately $1.6 million. The remaining decrease of approximately $1.3 million is principally due to decreases in
personnel, salaries and wages and associated benefits due principally to lower net sales in 2009. ACI will not incur any
charges related to the officer loan forgiveness in 2010. See Significant Related Party Transactions – Advanced
Circuits.
Income from operations
Income from operations for the year ended December 31, 2009 was $16.3 million compared to $17.7 million for the
year ended December 31, 2008, a decrease of $1.4 million. This decrease primarily was the result of decreased net sales
and other factors described above.
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 was approximately $55.4 million compared to approximately $52.3
million for the year ended December 31, 2007, an increase of approximately $3.2 million or 6.0%. The increase in net
sales was largely due to increased sales in quick-turn and prototype production PCBs, which increased by
approximately $0.8 million and $2.1 million, respectively. Quick-turn production PCBs represented approximately
34.4% of gross sales for the year ended December 31, 2008 compared to approximately 33.0% for the fiscal year ended
December 31, 2007. Prototype production represented approximately 31.6% of gross sales for the year ended December
31, 2008 compared to approximately 32.2% for the same period in 2007. Long-lead production and other sales as a
percentage of gross sales increased to approximately 31.7% of gross sales for the fiscal year 2008 compared to
approximately 32.1% for the fiscal 2007, as this segment of the company’s business is typically driven more by
economic conditions than either quick-turn or prototype production.
Cost of sales
Cost of sales for the fiscal year ended December 31, 2008 was approximately $23.8 million compared to approximately
$23.1 million for the year ended December 31, 2007, an increase of approximately $0.6 million or 2.8%. The increase
in cost of sales was largely due to the increase in net sales. Gross profit as a percent of net sales increased by
approximately 1.3% to approximately 57.1% for the year ended December 31, 2008 compared to approximately 55.8%
for the year ended December 31, 2007, largely as a result of increased production efficiencies, due to increased volume,
offset in part by slight increases in raw material costs.
Selling, general and administrative expenses
Selling, general and administrative expenses increased $2.0 million during the year ended December 31, 2008
compared to the corresponding period in 2007. In 2008, Advanced Circuits incurred non-cash charges aggregating
approximately $1.6 million reflecting loan forgiveness arrangements provided to Advanced Circuits’s senior
management associated with CGI’s initial acquisition of Advanced Circuits, compared to $0.3 million in 2007. The
2007 loan forgiveness charge was only $0.3 million due to an over accrual of the charge in 2006. The remaining
increase of approximately $0.7 million is principally due to increases in personnel, salaries and wages and associated
benefits.
75
Income from operations
Income from operations for the year ended December 31, 2008 was $17.7 million compared to $17.1 million for the
year ended December 31, 2007, an increase of $0.6 million. This increase primarily was the result of increased net sales
and other factors described above.
American Furniture
Overview
Founded in 1998 and headquartered in Ecru, Mississippi, American Furniture is a leading U.S. manufacturer of
upholstered furniture, focused exclusively on the promotional segment of the furniture industry. American Furniture
offers a broad product line of stationary and motion furniture, including sofas, loveseats, sectionals, recliners and
complementary products, sold primarily at retail price points ranging between $199 and $999. American Furniture is a
low-cost manufacturer and is able to ship any product in its line to its approximately 750 customers, within 48 hours of
receiving an order.
On February, 12, 2008, American Furniture’s 1.1 million square foot corporate office and manufacturing facility in
Ecru, MS was partially destroyed in a fire. Approximately 750 thousand square feet of the facility was impacted by the
fire. The executive offices were fundamentally unaffected. The recliner and motion plant, although largely unaffected,
suffered some smoke damage but resumed operations on February 21, 2008. There were no injuries related to the fire.
The Company temporarily moved its stationary production lines into other facilities. In addition to its 45 thousand
square foot ‘flex’ facility, management secured 320 thousand square feet of additional manufacturing and warehouse
space in the surrounding Pontotoc area. These temporary stationary production facilities provided the company with
approximately 90% of the pre-fire stationary production capabilities for the months of April, through November. Orders
for motion and recliner products were addressed by the production facilities that were largely unaffected by the fire at
the Ecru, MS facility. On November 7, 2008 the damaged manufacturing facility was fully restored and operating.
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 results of operations for American Furniture for the fiscal year ending December 31,
2009 and 2008 and the pro-forma results of operations for the year ended December 31, 2007. We purchased a
controlling interest in American Furniture on August 31, 2007. The following operating results are reported as if we
acquired American Furniture on January 1, 2007.
Year Ended December 31,
2009
2008
2007
(Pro-forma)
Net sales ................................................................................................
Cost of sales...........................................................................................
Gross profit ......................................................................................
Selling, general and administrative expenses (a) ..................................
Management fees ...................................................................................
Amortization of intangibles (b) ............................................................
Income from operations ...................................................................
$ 141,971
114,345
27,626
18,081
375
2,683
$ 6,487
(in thousands)
$ 130,949
104,540
26,409
17,853
500
2,933
$ 5,123
$ 156,635
120,739
35,896
20,672
500
2,933
$ 11,791
Prior period results of operations of American Furniture for the year ended December 31, 2007 include the following pro-forma
adjustments:
(a) Selling, general and administrative expenses were reduced by $2.8 million, representing one-time transaction costs incurred by
the seller.
(b) A reduction in charges to amortization of intangible assets totaling $0.7 million, as a result of, and derived from, the purchase
price allocation in connection with our acquisition of American Furniture in August 2007.
76
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008
Net sales
Net sales for the year ended December 31, 2009 were $142.0 million compared to $130.9 million for the same period in
2008, an increase of $11.0 million or 8.4%. Stationary product sales increased approximately $16.7 million for the year
ended December 31, 2009 compared to the same period in 2008. Motion and Recliner product sales decreased
approximately $4.5 million, while Table and Occasional sales decreased $1.0 million for the year ended December 31,
2009 compared to the same period in 2008. The increase in net sales of stationary product was principally due to the
inability to ship product in 2008 as a result of the lack of product resulting from the fire that destroyed the finished
goods warehouse and most of the manufacturing facilities in February 2008. The decrease in net sales of motion
product in 2009 is the result of the continuing soft retail environment in the more expensive retail categories and a
larger presence of Asian import product in the motion category in 2009. We expect this trend to continue through the
first fiscal quarter of 2010, which historically represents AFM’s strongest fiscal quarter. Stationary product represented
70% of net sales in 2009 compared to 63.5% in 2008.
Cost of sales
Cost of sales increased approximately $9.8 million for the year ended December 31, 2009 compared to the same period
of 2008 and is due principally to the corresponding increase in sales. Gross profit as a percent of sales was 19.5% for
the year ended December 31, 2009 compared to 20.2% in the corresponding period in 2008. The decrease in gross
profit as a percent of sales of 0.7% for the year ended December 31, 2009 compared to the same period in 2008 is
attributable to an increase in third-party shipping cost (2.0%) and raw material costs (0.8%) offset in part by labor
efficiencies achieved due to the increased volume and a greater use of imported cut and sew kits (1.9%). During the
year ended December 31, 2009 management estimates that it utilized third-party carriers for approximately 70% of its
customer shipments compared to approximately 50% during 2008. Historically, American Furniture has charged third-
party shipping costs to cost of sales and in-house shipping costs to selling expense. (See below for offsetting variance
in in-house shipping costs).
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2009 increased approximately $0.2
million over the corresponding period in 2008. This increase is largely a product of the business interruption insurance
proceeds recorded during 2008 totaling approximately $3.1 million (none was recorded in selling, general and
administrative expense in 2009), increases in sales commissions and insurance expense totaling $0.8 million in 2009
offset by a reduction in in-house shipping costs totaling $3.7 million in 2009.
Income from operations
Income from operations increased approximately $1.4 million for the year ended December 31, 2009 over the
corresponding period in 2008, primarily due to the increase in net sales, and other factors as described above.
Fiscal Year Ended December 31, 2008 Compared to Pro-forma Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 were $130.9 million compared to $156.6 million for the same period in
2007, a decrease of $25.7 million or 16.4%. Stationary product sales decreased approximately $19.0 million for the year
ended December 31, 2008 compared to the same period in 2007. Motion and Recliner product sales decreased
approximately $5.8 million, while Table and Occasional sales decreased $0.3 million for the year ended December 31,
2008 compared to the same period in 2007. These decreases in sales are due principally to the fire that destroyed the
finished goods warehouse and a large part of the manufacturing facility in February 2008. Management believes that
the softer economy in 2008 is also responsible, although to a lesser extent, for the decrease in sales volume.
Cost of sales
Cost of sales decreased approximately $16.2 million for the year ended December 31, 2008 compared to the same
period of 2007 and is due principally to the corresponding decrease in sales. Gross profit as a percent of sales was
20.2% for the year ended December 31, 2008 compared to 22.9% in the corresponding period in 2007. This decrease in
margin is attributable to raw material price increases in 2008, particularly foam and steel, and to a lesser extent labor
inefficiencies incurred in the manufacturing recovery process due to multiple temporary production facilities being
utilized for much of the year and associated overtime costs incurred, resulting from the fire in February 2008. As of
November 7, 2008, we have rebuilt our primary production facility destroyed in the fire, and as such do not expect to
incur additional labor inefficiency costs in the future
77
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008 decreased approximately $2.8
million over the corresponding period in 2007. This decrease is primarily due to the business interruption insurance
proceeds recorded during the period of approximately $3.1 million. Also contributing to the decrease was a reduction of
$0.5 million in commissions paid and $0.4 million in insurance expense during the period due to significant reduction
in net sales caused by the fire. These decreases were offset in part by increases in fuel costs of $0.5 million and
increases in property taxes and legal costs of $0.7 million during the year ended December 31, 2008 compared to 2007.
Income from operations
Income from operations decreased approximately $6.7 million for the year ended December 31, 2008 over the
corresponding period in 2007, primarily due to the decrease in net sales, related gross profit margins and other factors
as described above.
Anodyne
Overview
Anodyne, with operations headquartered in Coral Springs, Florida, is a leading designer and manufacturer of powered
and non-powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term
care and home health care markets.
The Anodyne group of companies provides its customers with the opportunity to source all therapeutic surface
technologies from a single fully integrated supplier.
Anodyne develops products both independently and in partnership with large distribution intermediaries. Medical
distribution companies then sell or rent the Anodyne portfolio of products to one of three end markets: (i) acute care,
(ii) long term care and (iii) home healthcare . The level of sophistication largely varies for each product, as some
patients require simple foam surfaces (“non-powered”) while others may require electronically controlled, low air loss,
lateral rotation, pulmonary therapy or alternating pressure surfaces (“powered”). The design, engineering and
manufacturing of all products are completed in-house (with the exception of PrimaTech products, which are
manufactured in Taiwan) and are Food and Drug Administration (“FDA”) compliant. We purchased a controlling
interest in Anodyne from CGI on July 31, 2006.
Results of Operations
The table below summarizes the results of operations for Anodyne for the fiscal years ending December 31, 2009, 2008
and 2007.
Year Ended December 31,
2009
2008
2007
Net sales .........................................................................................
Cost of sales ...................................................................................
Gross profit ...............................................................................
Selling, general and administrative expenses ................................
Management fees ...........................................................................
Amortization of intangibles ...........................................................
Income from operations ............................................................
(in thousands)
$ 54,075
37,982
16,093
6,947
263
1,483
$ 7,400
$ 54,199
40,683
13,516
7,455
350
1,483
$ 4,228
$ 44,189
33,073
11,116
6,502
350
1,328
$ 2,936
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008
Net sales
Net sales for the year ended December 31, 2009 were approximately $54.1 million compared to approximately $54.2
million for the same period in 2008, a decrease of $0.1 million. Sales of non-powered products (including patient
positioning devices) totaled $42.6 million during the year ended December 31, 2009 representing an increase of $6.8
78
million compared to the same period in 2008. Non-powered product sales attributable to new product offerings were
$1.4 million in the year ended December 31, 2009. The remaining increase in sales of non-powered products in 2009 is
principally attributable to sales of a modified 2008 product release to a key existing customer’s new national account.
Non-powered sales represented approximately 78.7% of net sales in 2009 compared to 66.1% in 2008. Sales of
powered products totaled $11.4 million during the year ended December 31, 2009, a $6.9 million decrease when
compared to the same period in 2008. The significant decrease in powered sales in 2009 reflects substantial cutbacks in
healthcare institutional spending experienced during the period, particularly in the higher priced, more capital intensive
products such as our powered product offerings. We believe that these purchasing levels have stabilized and current
indications suggest a potential for modest increases in powered product sales in 2010 compared to 2009. Powered sales
represented approximately 21.3% of net sales in 2009 compared to 33.9% in 2008.
Cost of sales
Cost of sales decreased approximately $2.7 million for the year ended December 31, 2009 compared to the same period
in 2008. Gross profit as a percentage of sales was 29.8% for the year ended December 31, 2009 compared to 24.9% in
the corresponding period in 2008. The decrease in cost of sales together with the significant increase in gross profit as a
percentage of sales of 4.9% in 2009 is principally due to (i) lower raw material costs (3.7%) (ii) labor and material
manufacturing efficiencies realized in 2009 (4.2%), particularly as it related to a portion of new product sales in 2008
and (ii) other reductions in manufacturing overhead offset in part by an unfavorable sales mix in 2009 (3.0%), as
powered products carry a higher margin than non-powered.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2009 decreased approximately
$0.5 million compared to the same period in 2008. This decrease is principally due to a reduction in costs attributable
to Hollywood Capital, a former management group that was comprised of the previous CEO and CFO. The Hollywood
Capital management services agreement was terminated in October 2008.
Income from operations
Income from operations increased approximately $3.2 million to $7.4 million for the year ended December 31, 2009
compared to the same period in 2008, principally as a result of the significant increase in gross profit margins, the
reduction in overhead cost and other factors described above.
Fiscal Year Ended December 31, 2008 Compared to Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 were approximately $54.2 million compared to approximately $44.2
million for the same period in 2007, an increase of $10.0 million or 22.7%. Sales reflecting new product introductions
to new customers, year over year growth to existing customers and price increases totaled approximately $9.0 million.
Sales associated with PrimaTech, which was purchased in June 2007, accounted for $1.0 million of this increase.
During the fourth quarter of 2008, the general economic slowdown in the United States showed significant signs of
contraction in health care capital budgets.
Cost of sales
Cost of sales increased approximately $7.6 million for the year ended December 31, 2008 compared to the same period
in 2007 and is principally due to the corresponding increases in sales, raw material costs and manufacturing
infrastructure costs. Gross profit as a percent of sales decreased slightly to approximately 24.9% for the year ended
December 31, 2008 compared to 25.2% in the same period of 2007. This decrease is due to increases in manufacturing
infrastructure costs, raw materials and the timing between cost increases and sales price increases. Raw materials,
particularly polyurethane foam and fabric generally represent approximately 50% of cost of sales.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008 increased approximately
$1.0 million compared to the same period in 2007. This increase is largely the result of increased costs associated with
the acquisition of PrimaTech totaling $0.4 million and $0.7 million of increased costs related to administrative staff and
associated costs necessary to support the increase in sales, and new product development. These increases were offset
in part by a reduction in costs totaling $0.1 million, attributable to Hollywood Capital, a former management group that
was comprised of the former CEO and CFO. The Hollywood Capital management services agreement was terminated
in October 2008. We expect annual savings of approximately $0.7 million going forward as a result of terminating the
Hollywood Capital arrangement.
79
Amortization expense
Amortization expense increased approximately $0.2 million in the year ended December 31, 2008 compared to the
corresponding period in 2007, due principally to the full year impact of amortization in fiscal 2008 in connection with
the intangible assets realized as part of the add-on acquisition of PrimaTech in June 2007.
Income from operations
Income from operations increased approximately $1.3 million to $4.2 million for the year ended December 31, 2008
compared to the same period in 2007, principally as a result of the significant increase in net sales offset in part by
higher infrastructure costs necessary to support the increase in sales volume and other factors described above.
Fox
Overview
Fox, headquartered in Watsonville, California, is a branded action sports company that designs, manufactures and
markets high-performance suspension products for mountain bikes and power sports, which include; snowmobiles,
motorcycles, all-terrain vehicles ATVs, and other off-road vehicles.
Fox’s products are recognized by manufacturers and consumers as being among the most technically advanced
suspension products currently available in the marketplace. Fox’s technical success is demonstrated by its dominance of
award winning performances by professional athletes across its suspension products. As a result, Fox’s suspension
components are incorporated by OEM customers on their high-performance models at the top of their product lines in
the mountain bike and power sports sector. OEMs capitalize on the strength of Fox’s brand to maintain and expand
their own sales and margins. In the Aftermarket segment, customers seeking higher performance select Fox’s
suspension components to enhance their existing equipment.
Fox sells to more than 200 OEM and 7,600 Aftermarket customers across its market segments. In each of the years
2009, 2008 and 2007, approximately 76%, 76% and 75% of net sales were to OEM customers. The remaining net sales
were to Aftermarket customers. Sales of suspension components to the mountain bike sector represent a significant
majority of both OE and Aftermarket sales in each of the years ended December 31, 2009, 2008 and 2007.
Results of Operations
The table below summarizes the results of operations for Fox for the fiscal years ending December 31, 2009, 2008 and
the pro-forma results of operations for the year ended December 31, 2007. We purchased a controlling interest in Fox
on January 4, 2008. The following operating results are reported as if we acquired Fox on January 1, 2007.
Year Ended December 31,
2009
2008
2007
(Pro-forma)
Net sales ................................................................................................
Cost of sales (a) ....................................................................................
Gross profit ......................................................................................
Selling, general and administrative expenses (b) ..................................
Management fees (c ) ............................................................................
Amortization of intangibles (d) ............................................................
Income from operations ...................................................................
$ 121,519
87,038
34,481
18,231
375
5,217
$ 10,658
(in thousands)
$ 131,734
95,844
35,890
19,182
500
5,501
$ 10,707
$ 105,726
81,765
23,961
15,818
500
5,233
$ 2,410
Prior period results of operations of Fox for the year ended December 31, 2007 include the following pro-forma adjustments:
(a) An increase in cost of sales totaling $0.3 million, reflecting additional depreciation expense as a result of, and derived from, the
purchase price allocation in connection with our acquisition of Fox in January 2008.
(b) An increase in selling, general and administrative expense totaling $0.1 million reflecting additional depreciation expense as a
result of, and derived from, the purchase price allocation in connection with our acquisition of Fox in January 2008.
(c) An increase in management fees totaling $0.5 million reflecting quarterly fees that would have been due to our Manager in
connection with our Management Services Agreement.
(d) An increase in amortization of intangible assets totaling $5.2 million reflecting amortization expense as a result of, and derived
from, the purchase price allocation in connection with our acquisition of Fox in January 2008.
80
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008
Net sales
Net sales for the year ended December 31, 2009 decreased $10.2 million, or 7.8%, versus the corresponding period in
2008. OEM sales declined $7.8 million to $92.5 million for the year ended December 31, 2009 compared to $100.3
million for the same period in 2008. The decrease in net sales is attributable to a decrease in sales in the mountain
biking sector totaling $12.7 million, offset in part by increases in sales to the powered vehicles sector totaling
approximately $4.9 million. The decrease in sales in the mountain biking sector during the year ended December 31,
2009 is due to the impact of the global economic recession experienced in 2009 which created excess capacity in the
industry, particularly in the first half of the year. The increase in sales to the powered vehicle sector during 2009 is the
result of sales of new suspension components to Ford Motor Company for use in its F-150 Raptor Off-road pickup and
increases in sales of suspension components to the ATV market. Aftermarket sales declined $2.4 million to $29.0
million for the year ended December 31, 2009 compared to $31.4 million in the same period in 2008. This decrease is
largely attributable to decreases in net sales in the mountain bike sector due to the negative impact of the global
recession.
International OEM and After market sales were $84.0 million in 2009 compared to $92.5 million in 2008 a decrease of
$8.5 million or 9.2%. This decrease is due to the global economic recession experienced in 2009 resulting in a
temporary oversupply issue in the industry.
Cost of sales
Cost of sales for the year ended December 31, 2009 decreased approximately $8.8 million, or 9.2%, compared to the
corresponding period in 2008. The decrease in cost of sales is primarily attributable to the decrease in net sales for the
same period. Gross profit as a percentage of sales increased to 28.4% at December 31, 2009 from 27.2% at December
31, 2008, largely due to reduced overhead costs, lower freight costs as supply chain improvements reduced the
necessity to air ship product, lower product warranty costs as high quality products continue to reduce these costs, and
lower material and component costs in 2009 all as compared to 2008.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2009 decreased approximately $1.0
million over the corresponding period in 2008. This decrease is the result of decreases in 2009 in (i) marketing costs
($0.5 million), (ii) a decline in bad debt expense ($0.25 million), and decreases in other administrative costs compared
to 2008.
Income from operations
Income from operations for the year ended December 31, 2009 decreased less than $0.1 million compared to the
corresponding period in 2008, based principally on the decline in net sales, offset by the cost savings described above.
Fiscal Year Ended December 31, 2008 Compared to Pro-forma Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 increased $26.0 million, or 24.6%, over the corresponding period in
2007. Sales growth was driven largely by OEM sales in mountain biking and power sports which totaled approximately
$100.3 million for the year ended December 31, 2008 compared to $79.0 million in the same period of 2007. This
represents an increase of $21.3 million, or 27.0%. Aftermarket sales totaled approximately $31.4 million in 2008
compared to $26.7 million in 2007, an increase of $4.7 million, or 17.6%. These OEM and Aftermarket sales increases
are principally the result of well received new model year products, particularly in mountain biking. International OEM
and After market sales were $92.5 million in 2008 compared to $70.5 million in 2007 an increase of $22.0 million or
31.2%. In addition, there was a temporary plant shutdown in fiscal 2007 which also contributed, although to a much
lesser extent, to the increase in 2008 sales compared to 2007.
Cost of sales
Cost of sales for the year ended December 31, 2008 increased approximately $14.1 million, or 17.2%, over the
corresponding period in 2007. The increase in cost of sales is primarily attributable to the increase in net sales for the
same period. Gross profit as a percentage of sales increased to 27.2% at December 31, 2008 from 22.7% at December
31, 2007, largely due to improved manufacturing efficiencies associated with the overall increase in sales and lower
freight costs as supply chain improvements reduced the necessity to air ship product, offset in part by increased raw
material costs.
81
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008 increased $3.4 million over the
corresponding period in 2007. This increase is the result of increases in administrative, engineering, sales and
marketing costs to drive and support the significant sales growth. Marketing costs increased $1.6 million and research
and development costs increased $0.6 million in 2008 compared to 2007.
Income from operations
Income from operations for the year ended December 31, 2008 increased approximately $8.3 million over the
corresponding period in 2007 based principally on the significant increase in sales and related gross profit and other
factors, described above.
HALO
Overview
Operating under the brand names of HALO and Lee Wayne, headquartered in Sterling, IL, HALO is an independent
provider of customized drop-ship promotional products in the U.S. Through an extensive group of dedicated sales
professionals, HALO serves as a one-stop shop for approximately 38,000 customers throughout the U.S. HALO is
involved in the design, sourcing, management and fulfillment of promotional products across several product
categories, including apparel, calendars, writing instruments, drink ware and office accessories. HALO’s sales
professionals work with customers and vendors to develop the most effective means of communicating a logo or
marketing message to a target audience. Approximately 95% of products sold are drop shipped, resulting in minimal
inventory risk. HALO has established itself as a leader in the promotional products and marketing industry through its
focus on service through its approximately 700 account executives.
HALO acquired Goldman Promotions, a promotional products distributor, in April 2008, the promotional products
distributor division of Eskco, Inc., in November 2008 and the promotional products distributor AdNov in March 2009.
Distribution of promotional products is seasonal. Typically, HALO expects to realize approximately 45% of its sales
and 70% of its operating income in the months of September through December, due principally to calendar sales and
corporate holiday promotions.
Results of Operations
The table below summarizes the results of operations for HALO for the fiscal year ending December 31, 2009 and 2008
and the pro-forma results of operations for the year ended December 31, 2007. We purchased a controlling interest in
HALO on February 28, 2007. The following operating results are reported as if we acquired HALO on January 1,
2007.
Year Ended December 31,
2009
2008
2007
(Pro-forma)
Net sales ................................................................................................
Cost of sales...........................................................................................
Gross profit ......................................................................................
Selling, general and administrative expenses (a) ..................................
Management fees (b) .............................................................................
Amortization of intangibles (c) .............................................................
Income from operations ...................................................................
$ 139,317
84,883
54,434
48,714
375
2,498
$ 2,847
(in thousands)
$ 159,797
98,845
60,952
52,806
500
2,357
$ 5,289
$ 144,342
88,939
55,403
47,069
500
2,110
$ 5,724
Prior period results of operations of HALO for the year ended December 31, 2007 includes the following pro-forma adjustments:
(a) An increase in selling, general and administrative expense totaling $0.3 million reflecting additional depreciation expense as a
result of, and derived from, the purchase price allocation in connection with our acquisition of HALO in February 2007.
(b) An increase in management fees totaling $0.1 million, reflecting additional quarterly fees that would have been due to our
Manager in connection with our Management Services Agreement.
(c) An increase in amortization of intangible assets totaling $0.3 million reflecting additional amortization expense as a result of, and
derived from, the purchase price allocation in connection with our acquisition of HALO in February 2007.
82
Fiscal Year Ended December 31, 2009 Compared to Fiscal Year Ended December 31, 2008
Net sales
Net sales for the year ended December 31, 2009 were $139.3 million, compared to $159.8 million for the same period
in 2008, a decrease of $20.5 million or 12.8%. Sales increases attributable to accounts acquired in 2008 and 2009
accounted for approximately $9.4 million of increased sales in 2009, offset by a decrease in sales to existing customers
totaling approximately $29.9 million in 2009 compared to 2008. This decrease in sales to existing customers is
attributable to decreases in sales order volume as customers of all sizes have cut back on merchandising expenditures in
response to the economic recession which began in the latter half of 2008 and continued through 2009. Halo’s top ten
customers in 2009 and 2008, represented 11.8% and 14.9% of gross sales, respectively.
Cost of sales
Cost of sales for the year ended December 31, 2009 decreased approximately $14.0 million compared to the same
period in 2008. The decrease in cost of sales is primarily attributable to the decrease in net sales for the same period.
Gross profit as a percentage of net sales totaled approximately 39.1% and 38.1% of net sales in each of the years ended
December 31, 2009 and 2008, respectively. The increase in gross profit as a percent of sales is due to (i) a favorable
sales mix in 2009 compared to 2008, (ii) efficiencies realized in shipping and increased supplier rebates during 2009,
and (iii) the procurement of more favorable pricing from calendar suppliers.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2009, decreased approximately $4.1
million compared to the same period in 2008. This decrease is largely the result of decreases in the year ended
December 31, 2009 compared to the same period in 2008 for sales commission expense and salaries and wages
attributable to the decline in net sales and cost cutting measures ($4.3 million) and other overhead costs ($0.6 million),
offset in part by increases in 2009 for health insurance costs ($0.5 million) and bad debt expense ($0.3 million).
Amortization expense
Amortization expense for the year ended December 31, 2009 increased approximately $0.1 million compared to the
same period in 2008. This increase is principally due to the amortization expense of intangible assets recognized in
connection with a March 2009 acquisition.
Income from operations
Income from operations decreased approximately $2.4 million for the year ended December 31, 2009 compared to the
same period in 2008 due principally to the decrease in net sales to existing customers offset in part by lower selling,
general and administrative costs, as described above.
Fiscal Year Ended December 31, 2008 Compared to Pro-forma Fiscal Year Ended December 31, 2007
Net sales
Net sales for the year ended December 31, 2008 were $159.8 million, compared to $144.3 million for the same period
in 2007, an increase of $15.5 million or 10.7%. Sales increases to accounts from acquisitions made in 2008 and 2007
accounted for approximately $22.8 million of increased sales offset by a decrease in sales to existing customers totaling
approximately $7.3 million. This decrease in sales to existing customers is attributable to decreases in sales order
volume as customers have cut back on merchandising expenditures in response to the economic slowdown and
worsening global economic conditions. We expect that current unfavorable economic conditions will continue and may
result in lower volume orders from existing customers in 2009 as advertising budgets are continuing to be pared in
response to the current economic climate.
Cost of sales
Cost of sales for the year ended December 31, 2008 increased approximately $9.9 million compared to the same period
in 2007. The increase in cost of sales is primarily attributable to the increase in net sales for the same period. Gross
profit as a percentage of net sales totaled approximately 38.1% and 38.4% of net sales in each of the years ended
December 31, 2008 and 2007, respectively. The slight decrease in gross profit as a percent of sales is due to
unfavorable product mix.
Selling, general and administrative expenses
Selling, general and administrative expenses for the year ended December 31, 2008, increased approximately
$5.7 million compared to the same period in 2007. This increase is largely the result of increased direct commission
expense attributable to the increase in net sales, totaling approximately $2.5 million, increased administrative and
personnel costs incurred as a result of the increase in the number of independent sales representatives in 2007, totaling
$2.5 million, and one-time integration costs of our 2008 acquisitions, totaling approximately $0.9 million. In response
83
to the severe economic slowdown, HALO plans to reduce overhead costs in 2009 and curtail discretionary spending by
approximately $2.0 million in order to more appropriately align its cost structure with anticipated reductions in net
sales.
Amortization expense
Amortization expense for the year ended December 31, 2008 increased approximately $0.2 million compared to the
same period in 2007. This increase is principally due to the amortization expense of intangible assets recognized in
connection with the two acquisitions in 2008.
Income from operations
Income from operations decreased approximately $0.4 million for the year ended December 31, 2008 compared to the
same period in 2007 due principally to the decrease in sales to existing customers and the increase in integration costs
and other administrative costs associated with the acquisitions made in 2008, offset in part by the increase in gross
profit contributions from sales associated with the acquisitions.
Staffmark
Overview
Staffmark a provider of temporary staffing services in the United States, provides a wide range of human resource
services, including temporary staffing services, employee leasing services, and permanent staffing and temporary-to-
hire placement services. Staffmark serves over 6,400 corporate and small business clients and during an average week
places over 34,000 employees in a broad range of industries, including manufacturing, transportation, retail,
distribution, warehousing, automotive supply, construction, industrial, healthcare and financial sectors.
Staffmark’s business strategy includes maximizing production in existing offices, increasing the number of offices
within a market when conditions warrant, and expanding organically into contiguous markets where it can benefit from
shared management and administrative expenses. Staffmark typically enters new markets through acquisition. In
keeping with these strategies, on January 21, 2008, CBS Personnel Holdings, Inc. acquired Staffmark Investment LLC
and its subsidiaries. The acquisition essentially doubled the revenues of Staffmark. This acquisition gave CBS
Personnel a presence in Arkansas, Tennessee, Colorado, Oklahoma, and Arizona, while significantly increasing its
presence in California, Texas, the Carolinas, New York and the New England area. While no specific acquisitions are
currently contemplated at this time, Staffmark continues to view acquisitions as an attractive means to enter new
geographic markets.
Fiscal 2008 and 2009 were extremely challenging years for the temporary staffing industry. The already-weak
economic conditions and employment trends in the U.S., present during the first half of fiscal 2008 continued to worsen
as the year progressed and continued through the first three quarters of 2009 before showing signs of improvement
during the fourth quarter of 2009.
According to a U.S. Bureau of Labor Statistics report dated January 2010, since the recession began in December of
2007; 7.6 million jobs have been lost. From October 2009 through December 2009, job losses averaged 69,000 per
month, compared with losses averaging 645,000 per month from November 2008 to April 2009 and 307,000 per month
from May 2009 through September 2009. Temporary help services employment has risen by 166,000 since reaching a
low point in July 2009, and in December 2009 added 47,000 jobs.
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Results of Operations
The table below summarizes the income from operations for Staffmark for the year ended December 31, 2009 and pro-
forma results of operations for each of the fiscal years ended December 31, 2008 and 2007. We purchased a controlling
interest in CBS Personnel Holdings, Inc. on May 16, 2006. The following operating results were prepared as if
Staffmark was acquired on January 1, 2007.
Years Ended December 31,
Service revenues ....................................................................................
Cost of services ......................................................................................
Gross profit .......................................................................................
Staffing, selling, general and administrative expenses ..........................
Management fees (a) ..............................................................................
Amortization of intangibles (b) ..............................................................
Impairment expense ...............................................................................
Income (loss) from operations ..........................................................
2009
2008
Pro-forma
(in thousands)
$ 1,037,418
859,026
178,392
155,453
1,761
5,082
-
$ (55,603) $ 16,096
$ 745,340
632,800
112,540
112,358
931
4,854
50,000
2007
Pro-forma
$ 1,153,144
951,272
201,872
163,193
1,930
5,155
-
$ 31,594
Combined results of operations of CBS Personnel and Staffmark for the years ended December 31, 2008 and 2007 include the
following pro-forma adjustments:
(a) An increase in management fees totaling $0.9 million in 2007 reflecting quarterly fees that would have been due to our Manager
in connection with our Management Services Agreement based on the incremental Staffmark LLC net revenues
(b) An increase in amortization of intangible assets totaling $0.3 million and $4.0 million in 2008 and 2007, respectively, reflecting
increased amortization expense as a result of, and derived from, the purchase price allocation in connection with CBS Personnel’s
acquisition of Staffmark LLC in January 2008.
Fiscal Year Ended December 31, 2009 compared to Pro-forma Fiscal Year Ended December 31, 2008
Service revenues
Revenues for the year ended December 31, 2009 decreased approximately $292.1 million, or 28.2%, compared to the
same period in 2008. The reduction in revenues reflects reduced demand for temporary staffing services (primarily
clerical and light industrial) as a result of the downturn in the economy. Approximately $7.5 million of the decrease is
related to reduced revenues for permanent staffing services as clients were affected by weaker economic conditions. In
the fourth quarter of 2009 and to date in 2010 we have witnessed modest temporary staffing job creation which may
signal a strengthening global ecconomy, although significant uncertainty remains. Permanent staffing revenues have
historically lagged rebounds in temporary staffing revenues.
Cost of services
Cost of services for the year ended December 31, 2009 decreased approximately $226.2 million compared to the same
period in 2008. This decrease is principally the direct result of the decrease in service revenues. Gross margin was
approximately 15.1% and 17.2% of revenues for the years ended December 31, 2009 and December 31, 2008,
respectively. The decrease in margins is primarily the result of (i) reduced permanent staffing services, which carries a
significantly higher profit margin, (ii) downward pricing pressure experienced from our temporary staffing services
clients, and (iii) increases in workers’ compensation and unemployment insurance costs. The significant reduction in
permanent staffing services is responsible for approximately 1.0% of the 2.1% margin decrease.
Staffing, selling, general and administrative expenses
Staffing, selling, general and administrative expenses for the year ended December 31, 2009 decreased approximately
$43.1 million compared to the same period in 2008. Management has taken measures to reduce overhead costs,
consolidate facilities and close unprofitable branches in order to mitigate the negative impact that the current weak
economic environment has had on our top-line revenues. We incurred approximately $2.0 million in one-time cost for
non-recurring expenses related to the integration of the Staffmark and CBS Personnel and one-time non-recurring
restructuring costs associated with the reduction in overhead costs during the year ended December 31, 2009. For the
year ended December 31, 2008 costs associated with the Staffmark integration totaled approximately $7.4 million.
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Management fees
Management fees are based on a formula of gross revenues. The decrease in management fees in 2009 compared to
2008 is principally the result of the significant decrease in revenues in 2009 compared to 2008.
Impairment expense
Based on the results of our annual goodwill impairment test performed as of March 31, 2009, an indication of goodwill
impairment existed. Based on the results of the second step of the goodwill impairment test, we calculated that the
carrying amount of goodwill exceeded its fair value by approximately $50.0 million. Therefore, we recorded a
$50.0 million pretax goodwill impairment charge during the year ended December 31, 2009. The carrying amount of
goodwill exceeded the fair value due to the recent and projected significant decrease in revenue and operating profit at
Staffmark resulting from the negative impact on temporary staffing and permanent placement revenues due to the
depressed macroeconomic conditions and downward employment trends. We do not expect to incur any additional
impairment charges at this reporting unit during 2010.
Income (loss) from operations
The weakened economy significantly affected our operating results in fiscal 2009. For the year ended December 31,
2009, income from operations decreased approximately $71.7 million to a loss of approximately $55.6 million
compared to the same period in 2008 principally as a result of the impairment charge and the significant decline in
revenues.
Pro-forma Fiscal Year Ended December 31, 2008 compared to Pro-forma Fiscal Year Ended December 31, 2007
Service revenues
Revenues for the year ended December 31, 2008 decreased approximately $115.7 million, or 10.0%, compared to the
same period in 2007. The reduction in revenues reflects reduced demand for temporary staffing services (primarily
clerical and light industrial) as a result of the downturn in the economy. Approximately $3.2 million of the decrease is
related to reduced revenues for permanent staffing services as clients were affected by weaker economic conditions.
Cost of services
Cost of services for the year ended December 31, 2008 decreased approximately $92.2 million compared to the same
period in 2007. This decrease is principally the direct result of the decrease in service revenues. Gross margin was
approximately 17.2% and 17.5% of revenues for the years ended December 31, 2008 and December 31, 2007,
respectively. The decrease in margins is primarily the result of reduced permanent staffing services, which carries a
higher profit margin.
Staffing, selling, general and administrative expenses
Staffing, selling, general and administrative expenses for the year ended December 31, 2008 decreased approximately
$7.7 million compared to the same period in 2007. Comparative year over year staffing, selling, general and
administrative costs decreased approximately $15.1 million principally due to achievement of synergies from the
Staffmark acquisition and cost reduction efforts in response to the economic downturn. This decrease was offset by
approximately $7.4 million in one-time integration costs associated with the integration of the Staffmark operations
during 2008. We have taken measures beginning in the fourth quarter of 2008 to reduce overhead costs, consolidate
facilities and close unprofitable branches in order to mitigate the negative impact of the current economic environment.
This cost reduction program continued through fiscal 2009. These cost savings wiere offset in part by additional
Staffmark integration and one-time costs of approximately $1.3 million in 2009
Management fees
Management fees are based on a formula of net revenues. The decrease in management fees in 2008 compared to 2007
is a direct result of the decrease in revenues in 2008 compared to 2007. The decrease was offset by an additional $0.5
million paid to a separate manager of Staffmark, unrelated to CGM.
Income from operations
The weakened economy significantly affected our operating results in fiscal 2008. For the year ended December 31,
2008, income from operations decreased approximately $15.5 million to approximately $16.1 million compared to the
same period in 2007. Based on the impact that the current economic deterioration has had and will continue to have on
the employment markets and temporary staffing industry, and other factors described above, we expect income from
operations to decline significantly in 2009.
86
Liquidity and Capital Resources
At December 31, 2009, on a consolidated basis, cash flows provided by operating activities totaled approximately $20.2
million, which reflects the results of operations of all six of our businesses for the year ended December 31, 2009.
Consolidated net loss in 2009 totaling $39.6 million coupled with $13.7 million in negative cash flow attributable to
working capital was more than offset by non-cash charges included in the consolidated net loss for the year. Cash flows
provided by operations in 2008 totaled approximately $40.5 million. The $20.3 million decrease in operating cash flow
is attributable to a decline in net sales and operating profits at our businesses due principally to the depressed economic
environment experienced during the year.
Cash flows used in investing activities totaled approximately $5.0 million for the year ended December 31, 2009, which
reflects approximately $3.6 million in capital expenditures and $1.4 million in add-on acquisition costs at Advanced
Circuits and Halo. We expect to use considerably more cash in investing activities in 2010 for planned acquisitions and
greater capital expenditures at each of our businesses.
Cash flows used in financing activities totaled approximately $81.2 million for the year ended December 31, 2009,
principally reflecting: (i) distributions paid to shareholders during the year totaling approximately $46.3 million; (ii)
scheduled amortization of our Term Loan Facility of $2.0 million; and (iii) repayment of our Term Loan Facility of
$75.0 million together with $2.5 million in cancellation fees paid for terminating that portion of an interest rate swap
connected to the Term Loan Facility repaid. These cash outflows were offset in part by net proceeds from our June
2009 stock offering totaling $42.1 million and net proceeds received from non-controlling shareholders totaling $2.5
million during 2009.
At December 31, 2009 we had approximately $31.5 million of cash and cash equivalents on hand. The majority of our
cash is invested in short-term U.S. government securities and corporate debt securities and is maintained in accordance
with the Company’s investment policy, which identifies allowable investments and specifies credit quality standards.
The primary objective of our investment activities is the preservation of principal and minimizing risk. We do not hold
any investments for trading purposes.
At December 31, 2009 we had the following outstanding loans due from each of our businesses:
• Advanced Circuits — $48.0 million;
• American Furniture — $70.4 million;
• Anodyne — $16.1 million;
• Staffmark — $83.7 million;
• Fox — $40.5 million; and
• HALO — $44.8 million.
Each loan has a scheduled maturity and each business is entitled to repay all or a portion of the principal amount of the
outstanding loans, without penalty, prior to maturity. At December 31, 2009, all of our businesses were in compliance
with their financial covenants with us.
In May 2009 we amended the Staffmark inter-company credit agreement which, among other things, recapitalized a
portion of Staffmark’s long-term debt by exchanging $35.0 million of unsecured debt for common stock in Staffmark.
A noncontrolling shareholder participated in this exchange. As a result of this transaction we currently own 76.2% of
the outstanding common stock of Staffmark on a primary basis and 69.4% on a fully diluted basis.
Our primary source of cash is from the receipt of interest and principal on our outstanding loans to our businesses.
Accordingly, we are dependent upon the earnings and cash flow of these businesses, which are available for (i)
operating expenses; (ii) payment of principal and interest under our Credit Agreement; (iii) payments to CGM due or
potentially 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. A liability of approximately
$12.1 million is reflected in our consolidated balance sheet, which represents our estimated liability for potential
obligation to CGM at December 31, 2009.
On June 9, 2009, we completed a secondary offering of 5,100,000 Trust shares at an offering price of $8.85 per share.
Our net proceeds after deducting underwriter’s discount and offering costs, totaled approximately $42.1 million.
87
We believe that we currently have sufficient liquidity and capital resources, which include amounts available under our
Revolving Credit Facility, to meet our existing obligations, including quarterly distributions to our shareholders, as
approved by our Board of Directors, over the next twelve months.
On December 7, 2007 we amended our existing $250 million credit facility with a group of lenders led by Madison
Capital, LLC. The current Credit Agreement provides for a Revolving Credit Facility totaling $340 million which
matures in December 2012 and a Term Loan Facility totaling $76.0 million. The Term Loan Facility requires quarterly
payments of $0.5 million that commenced March 31, 2008 with a final payment of the outstanding principal balance
due on December 7, 2013.
The Revolving Credit Facility allows for loans at either base rate the London Interbank Offer Rate, or LIBOR. Base
rate loans bear interest at a fluctuating rate per annum equal to the greater of (i) the prime rate of interest published by
the Wall Street Journal and (ii) the sum of the Federal Funds Rate plus 0.5% for the relevant period, plus a margin
ranging from 1.50% to 2.50% based upon the ratio of total debt to adjusted consolidated earnings before interest
expense, tax expense, and depreciation and amortization expenses for such period (the “Total Debt to EBITDA Ratio”).
LIBOR loans bear interest at a fluctuating rate per annum equal to for the relevant period plus a margin ranging from
2.50% to 3.50% based on the Total Debt to EBITDA Ratio. We are required to pay commitment fees ranging between
0.75% and 1.25% per annum on the unused portion of the Revolving Credit Facility. At December 31, 2009 we had
$0.5 million in borrowings outstanding under our Revolving Credit Facility and $136.8 million available.
The Term Loan Facility bears interest at either base rate or LIBOR. Base rate loans bear interest at a fluctuating rate
per annum equal to the greater of (i) the prime rate of interest published by the Wall Street Journal and (ii) the sum of
the Federal Funds Rate plus 0.5% for the relevant period plus a margin of 3.0%. LIBOR loans bear interest at a
fluctuating rate per annum equal to the LIBOR, for the relevant period plus a margin of 4.0%. At December 31, 2009
we had $76.0 million in borrowings outstanding under our Term Loan Facility.
The following table reflects required and actual financial ratios as of December 31, 2009 included as part of the
affirmative covenants in our Credit Agreement:
Description of Required Covenant Ratio
Covenant Ratio Requirement
Actual Ratio
Fixed Charge Coverage Ratio
Interest Coverage Ratio
Total Debt to Consolidated EBITDA
greater than or equal to 1.5:1.0
greater than or equal to 2.75:1.0
less than or equal to 3.5:1.0
3.09:1.0
4.25:1.0
1.65:1.0
On January 22, 2008 we entered into a three-year interest rate swap agreement with our bank lenders, fixing the rate of
$140 million at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The interest rate swap is
intended to mitigate the impact of fluctuations in interest rates and effectively converts $140 million of our floating-rate
Term Loan Facility to a fixed rate basis for a period of three years. On February 18, 2009, we terminated $70.0 million
of our outstanding interest rate swap in connection with the repayment of $75.0 million of our Term Loan Facility.
Termination fees totaled $2.5 million, which represented the fair value of the terminated portion of the swap as of
February 18, 2009.
Our Term Loan Facility received a B1 rating from Moody’s Investors Service (“Moody’s”), and a BB- rating from
Standard and Poor’s Rating Services and our Revolving Credit Facility received a Ba1 rating from Moody’s, reflective
of our strong cash flow relative to debt, and industry diversification of our businesses.
We intend to use the availability under our Revolving Credit Facility to pursue acquisitions of additional platform and
add-on businesses in 2010 and beyond, to the extent permitted under our Credit Agreement, and to provide for working
capital needs.
We completed our annual goodwill impairment testing as of March 31, 2009. At each of our reporting units, the units’
fair value exceeded carrying value with the exception of Staffmark. The carrying amount of Staffmark exceeded its fair
value due primarily to the significant decrease in revenue and operating profit at Staffmark resulting from the negative
impact on temporary staffing and permanent placement revenues due to macroeconomic conditions and downward
employment trends experienced in 2008 and 2009. As a result, we performed the second step of the goodwill
impairment test in order to determine the amount of impairment loss. The second step of the goodwill impairment test
involved comparing the implied fair value of Staffmark’s goodwill with the carrying value of that goodwill. This
comparison resulted in a goodwill impairment charge of $50.0 million, which was recorded in impairment expense on
the consolidated statement of operations.
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At March 31, 2009, our last annual impairment test date, the fair value of two of our reporting units, not including
Staffmark, exceeded the carrying value of the reporting unit by less than ten percent. The goodwill allocated to each of
these reporting units at December 31, 2009 is as follows:
Reporting Unit
American Furniture
Halo
Goodwill allocated
$41.4 million
$39.1 million
We perform our annual impairment test on March 31 of each fiscal year. Estimating the fair value of reporting units
involves the use of estimates and significant judgments that are based on a number of factors including actual operating
results. If current conditions change from those expected, it is reasonably possible that the judgments and estimates
described above could change in future periods. Due to the minimal amount that these reporting units’ fair value
exceeded their carrying value at March 31, 2009 it is possible that on March 31, 2010, our next annual impairment test
date, if conditions change adversely from what we currently expect we could experience a goodwill impairment charge.
89
The table below details cash receipts and payments that are not reflected on our income statement in order to provide an
additional measure of management’s estimate of cash flow available for distribution (“CAD”). CAD is a non-GAAP
measure that we believe provides additional information to our shareholders in order to enable them to evaluate our
ability to make anticipated quarterly distributions. Because other entities do not necessarily calculate CAD the same
way we do, our presentation of CAD may not be comparable to similarly titled measures provided by other entities. We
believe that our historic and future CAD, together with our cash balances and access to cash via our debt facilities, 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)
Net income attributable to Holdings
Adjustment to reconcile net income (loss) to cash provided by operating activities ...............
Depreciation and amortization .............................................................................................
Supplemental put (reversal) expense ....................................................................................
Noncontrolling shareholders’ notes and other .....................................................................
Deferred taxes .....................................................................................................................
Gain (loss) on sales of businesses ........................................................................................
Amortization of debt issuance cost .......................................................................................
Loss on Term Facility payment ............................................................................................
Impairment charges ..............................................................................................................
Other ....................................................................................................................................
Changes in operating assets and liabilities ..........................................................................
Net cash provided by operating activities
Plus:
Year Ended
December 31,
2009
Year Ended
December 31,
2008
$ (39,645)
$ 81,787
32,996
(1,329)
1,555
(24,964)
-
1,776
3,652
59,800
107
(13,735)
20,213
35,021
6,382
3,376
(8,911)
(73,363)
1,969
-
-
381
(6,093)
40,549
Unused fee on Revolving Credit Facility (1) .........................................................................
Staffmark integration and restructuring ................................................................................
Changes in operating assets and liabilities ...........................................................................
3,454
4,076
13,735
3,139
8,826
6,093
Less:
Interest income due from minority shareholders at Advanced Circuits (2) ..........................
Less:
1,047
-
Maintenance capital expenditures (3)
Advanced Circuits ............................................................................................................
Aeroglide ..........................................................................................................................
American Furniture .........................................................................................................
Anodyne ..........................................................................................................................
Fox ..................................................................................................................................
Staffmark .........................................................................................................................
HALO ..............................................................................................................................
Silvue ...............................................................................................................................
Estimated cash flow available for distribution (CAD) ...............................................................
251
-
501
513
741
901
496
-
$ 37,028
983
210
1,438
1,425
1,601
1,589
795
-
$ 50,566
Distribution paid April ..............................................................................................................
Distribution paid July ................................................................................................................
Distribution paid October ..........................................................................................................
Distribution paid January ..........................................................................................................
$ (10,718)
(12,452)
(12,453)
(12,452)
$ (10,246)
(10,246)
(10,718)
(10,718)
Total distributions
$ (48,075)
$ (41,928)
(1) Represents the commitment fee on the unused portion of our Revolving Credit Facility.
(2) Represents interest income on loans to Advanced Circuit’s management (see related parties).
(3) Represents maintenance capital expenditures that were funded from operating cash flow and excludes
approximately $3.5 million of growth capital expenditures for the year ended December 31, 2008.
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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 of each year, coinciding with homeowners’ tax refunds. Cash flows
from Staffmark are typically lower in the first quarter of each year than in other quarters due to reduced seasonal
demand for temporary staffing services and to lower gross margins during that period associated with the front-end
loading of certain taxes and other payments associated with payroll paid to our employees. Cash flows from HALO are
typically highest in the months of September through December of each year primarily as the result of calendar sales
and holiday promotions. HALO generates approximately two-thirds of its operating income in the months of
September through December
Related Party Transactions and Certain Transactions Involving our Businesses
We have entered into the following related party transactions with our Manager, CGM:
• Management Services Agreement
•
LLC Agreement
Supplemental Put Agreement
Cost Reimbursement and Fees
•
•
Management Services Agreement
We entered into a management services agreement (“Management Services Agreement”) with CGM effective May 16,
2006. The Management Services Agreement provides for, among other things, CGM to perform services for us in
exchange for a management fee paid quarterly and equal to 0.5% of our adjusted net assets. We amended the
Management Services Agreement on November 8, 2006, to clarify that adjusted net assets are not reduced by non-cash
charges associated with the Supplemental Put Agreement. The management fee is required to be paid prior to the
payment of any distributions to shareholders. For the year ended December 31, 2009, 2008 and 2007, we incurred
$12.8 million, $14.7 million and $10.1 million, respectively, in management fees to CGM.
Staffmark paid management fees of approximately $0.3 million and $0.7million for the years ended December 31, 2009
and 2008, respectively to a separate manager of Staffmark, unrelated to CGM.
LLC Agreement
As distinguished from its provision of providing management services to us, pursuant to the Management Services
Agreement, CGM is the owner of 100% of the Allocation Interests in us. CGM paid $0.1 million for these Allocation
Interests and has the right to cause us to purchase the Allocation Interests it owns. The Allocation Interests give CGM
the right to distributions pursuant to a profit allocation formula upon the occurrence of certain events. Certain events
include, but are not limited to, the dispositions of subsidiaries. In connection with the dispositions of Silvue and
Aeroglide in 2008 we paid CGM a profit allocation of $14.9 million. In connection with the disposition of Crosman in
2006, we paid CGM a profit allocation of $7.9 million. No profit allocations were paid to CGM in 2009.
Supplemental Put Agreement
Concurrent with the IPO, we and CGM entered into a Supplemental Put Agreement, which may require us to acquire
the Allocation Interests, described above, upon termination of the Management Services Agreement. Essentially, the
put rights granted to CGM require us to acquire CGM’s Allocation Interests in us at a price based on a percentage of the
increase in fair value in our businesses over our basis in those businesses. Each fiscal quarter we estimate the fair value
of our businesses for the purpose of determining our potential liability associated with the Supplemental Put
Agreement. Any change in the potential liability is accrued currently as a non-cash adjustment to earnings. For the
years ended December 31, 2008 and 2007, we recognized approximately $6.4 million and $7.4 million in expense
related to the Supplemental Put Agreement. For the year ended December 31, 2009 we reversed approximately $1.3
million in expenses related to this agreement.
Cost Reimbursement and Fees
We reimbursed our Manager, CGM, approximately $2.6 million, $2.6 million and $01.8 million, principally for
occupancy and staffing costs incurred by CGM on our behalf during the years ended December 31, 2009, 2008 and
2007, respectively.
CGM acted as an advisor for each of the 2008 acquisitions (Fox and Staffmark) for which it received transaction service
and expense payments in an aggregate amount of approximately $2.0 million. CGM acted as an advisor for each of the
2007 acquisitions (Aeroglide, HALO and American Furniture) for which it received transaction service and expense
payments in an aggregate amount of approximately $2.1 million. No advisor fees were paid to CGM in 2009.
91
We have entered into the following significant related party transactions with our businesses:
Anodyne
On August 8, 2008 we exchanged a note due August 15, 2008, totaling approximately $6.9 million (including accrued
interest) due from Mark Bidner, the former CEO of Anodyne in exchange for shares of stock of Anodyne held by the
CEO. In addition, Mr. Bidner was granted an option to purchase approximately 10% of the outstanding shares of
Anodyne, at a strike price exceeding the exchange price, from us in the future for which Mr. Bidner exchanged
Anodyne stock valued at $0.2 million (the fair value of the option at the date of grant) as consideration.
On August 5, 2008 we exchanged $1.5 million in term debt due from Anodyne for 15,500 shares of common stock and
13,950 shares of convertible preferred stock of Anodyne.
Advanced Circuits
In connection with the acquisition of Advanced Circuits by CGI in September 2005, Advanced Circuits loaned certain
officers and members of management of Advanced Circuits $3.4 million for the purchase of 136,364 shares of
Advanced Circuit’s common stock. On January 1, 2006, Advanced Circuits loaned certain officers and members of
management of Advanced Circuits $4.8 million for the purchase of an additional 193,366 shares of Advanced Circuit’s
common stock. The notes bared interest at 6% and interest is added to the notes. The notes were due in September
2010 and December 2010 and are subject to mandatory prepayment provisions if certain conditions are met.
In connection with the issuance of the notes as described above, Advanced Circuits implemented a performance
incentive program whereby the notes could either be partially or completely forgiven based upon the achievement of
certain pre-defined financial performance targets. The measurement date for determination of any potential loan
forgiveness is based on the financial performance of Advanced Circuits for the fiscal year ended December 31, 2010.
During each of the fiscal years 2008, 2007 and 2006, ACI accrued approximately $1.6 million for this loan forgiveness.
This expense has been classified as a component of general and administrative expense
On January 12, 2010 the promissory notes and loan forgiveness arrangements referred to above were amended as
follows: (i) $5.8 million of the outstanding loans and interest were forgiven with the remaining balance, $4.7 million
repaid in Class A common stock valued at $47.50 per share, (ii) 0.1million stock options were granted at an exercise
price of $89.27 per share. The options are outstanding for ten years and vested at the grant date. The effect of this
amendment was reflected as of December 31, 2009.
On October 10, 2007, we entered into an amendment to our inter-company loan agreement (the “Amendment”) with
ACI dated as of May 16, 2006, between us and ACI (the “Loan Agreement”). The Loan Agreement was amended to (i)
provide for additional term loan borrowings of $47.0 million and to permit the proceeds thereof to fund cash
distributions totaling $47.0 million by ACI to Compass AC Holdings, Inc. (“ACH”), ACI’s sole shareholder, and by
ACH to its shareholders, including us, (ii) extend the maturity dates of the loans under the Loan Agreement, and (iii)
modify certain financial covenants of ACI under the Loan Agreement. Our share of the cash distribution was
approximately $33.0 million with approximately $14.0 million being distributed to ACH’s other shareholders. All
other material terms and conditions of the Loan Agreement were unchanged.
American Furniture
AFM’s largest supplier, Independent Furniture Supply (“Independent”), is 50% owned by Mike Thomas, AFM's CEO.
AFM purchases polyfoam from Independent on an arms-length basis and AFM performs regular audits to verify market
pricing. AFM does not have any long-term supply contracts with Independent. Total purchases from Independent
during 2009 and 2008 totaled approximately $19.4 and $18.4 million, respectively. From August 31, 2007 (acquisition
date) to December 31, 2007, purchases from Independent totaled approximately $8.4 million.
Fox
Fox leases its principal manufacturing and office facilities in Watsonville, California from Robert Fox, a founder, Chief
Engineering Officer and noncontrolling shareholder of Fox. The term of the lease is through July of 2018 and the rental
payments can be adjusted annually for a cost-of-living increase based upon the consumer price index. Fox is
responsible for all real estate taxes, insurance and maintenance related to this property. The leased facilities are 86,000
square feet and Fox paid rent under this lease of approximately $1.1 million and $1.0 million for each of the years
ended December 31, 2009 and 2008, respectively.
92
Staffmark
In April 2009, we amended the Staffmark intercompany credit agreement which, among other things, recapitalized a
portion of Staffmark’s long-term debt by exchanging $35.0 million of debt for Staffmark common stock. As a result of
this transaction, the Company’s ownership percentage of the outstanding stock of Staffmark increased. In addition, as a
result of the exchange the Company received cash from a noncontrolling shareholder and recorded an increase to
noncontrolling interest of $4.9 million.
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 December 31, 2009 (in thousands).
Total
Less than 1 Year
1-3 Years
3-5 Years
5 Years
More than
Long-term debt obligations (a)
$
103,800
$
10,348
$
20,487
$
72,965
$
-
Capital lease obligations
Operating lease obligations (b)
Purchase obligations (c)
Supplemental put obligation (d)
765
58,083
144,414
12,082
261
12,120
84,440
-
412
14,480
32,972
-
92
8,667
27,002
-
-
22,816
-
-
$
319,144
$
107,169
$
68,351
$
108,726
$
22,816
(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.
(c) Reflects non-cancelable commitments as of December 31, 2009, including: (i) shareholder distributions of $49.8
million, (ii) management fees of $13.5 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 fiscal quarter. The amount approved for future quarters may differ from the amount included in this
schedule.
(d) The supplemental put obligation represents the long-term portion of an estimated liability accrued as if our
Management Services Agreement with CGM had been terminated. This agreement has not been terminated and
there is no basis upon which to determine a date in the future, if any, that this amount will be paid.
The table does not include the long-term portion of the actuarially developed reserve for workers compensation, which
does not provide for annual estimated payments beyond one year. This liability, totaling approximately $38.9 million at
December 31, 2009, is included in our consolidated balance sheet as a component of workers’ compensation liability.
Critical Accounting Estimates
The following discussion relates to critical accounting policies for the Company, the Trust and each of our businesses.
The preparation of our financial statements in conformity with GAAP will require 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. Our critical
accounting estimates are discussed below. These critical accounting estimates are reviewed by our independent auditors
and the audit committee of our board of directors.
Supplemental Put Agreement
In connection with our Management Services Agreement, we entered into a supplemental put agreement with our
Manager pursuant to which our Manager has the right to cause the Company to purchase the Allocation Interests then
owned by our Manager upon termination of the management services agreement for a price to be determined in
accordance with the supplemental put agreement. We adjust the supplemental put agreement to its fair value quarterly
93
by recording any change in value through the income statement. The fair value of the supplemental put agreement is
largely related to the value of the profit allocation that our Manager, as holder of Allocation Interests, will receive. The
valuation of the supplemental put agreement requires the use of complex models, which require highly sensitive
assumptions and estimates. Annually, we confer with outside experts as to the reasonableness of our assumptions and
estimates. The impact of over-estimating or under-estimating the value of the supplemental put agreement could have a
material effect on operating results. In addition, the value of the supplemental put agreement is subject to the volatility
of our operations which may result in significant fluctuation in the value assigned to this supplemental put agreement.
Revenue Recognition
We recognize revenue when it is realized or realizable and earned. We consider revenue realized or realizable and
earned when it has persuasive evidence of an arrangement, the product has been shipped or the services have been
provided to the customer, the sales price is fixed or determinable and collectibility is reasonably assured. Provisions for
customer returns and other allowances based on historical experience are recognized at the time the related sale is
recognized.
Staffmark recognizes revenue for temporary staffing services at the time services are provided by Staffmark employees
and reports revenue based on gross billings to customers. Revenue from Staffmark employee leasing services is
recorded at the time services are provided. Such revenue is reported on a net basis (gross billings to clients less
worksite employee salaries, wages and payroll-related taxes). We believe that net revenue accounting for leasing
services more closely depicts the transactions with its leasing customers and is consistent with guidelines outlined in
authoritative guidance. The effect of using this method of accounting is to report lower revenue than would be
otherwise reported.
Business Combinations
The acquisitions of our businesses are accounted for under the purchase method of accounting. The amounts assigned
to the identifiable assets acquired and liabilities assumed in connection with acquisitions are based on estimated fair
values as of the date of the acquisition, with the remainder, if any, to be recorded as identifiable intangibles or goodwill.
The fair values are determined by our management team, taking into consideration information supplied by the
management of the acquired entities and other relevant information. Such information typically includes valuations
supplied by independent appraisal experts for significant business combinations. The valuations are generally based
upon future cash flow projections for the acquired assets, discounted to present value. The determination of fair values
requires significant judgment both by our management team and by outside experts engaged to assist in this process.
This judgment could result in either a higher or lower value assigned to amortizable or depreciable assets. The impact
could result in either higher or lower amortization and/or depreciation expense.
Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of the assets acquired. We are required to
perform impairment reviews at least annually and more frequently in certain circumstances.
The goodwill impairment test is a two-step process, which requires management to make judgments in determining
certain assumptions used in the calculation. The first step of the process consists of estimating the fair value of each of
our reporting units based on a discounted cash flow model using revenue and profit forecast and a market approach
which compares peer data and multiples. We then compare those estimated fair values with the carrying values, which
include allocated goodwill. If the estimated fair value is less than the carrying value, a second step is performed to
compute the amount of the impairment by determining an “implied fair value” of goodwill. The determination of a
reporting unit’s “implied fair value” of goodwill requires the allocation of the estimated fair value of the reporting unit
to the assets and liabilities of the reporting unit. Any unallocated fair value represents the “implied fair value” of
goodwill, which is then compared to its corresponding carrying value. We cannot predict the occurrence of certain
future events that might adversely affect the reported value of goodwill and/or intangible assets. Such events include,
but are not limited to, strategic decisions made in response to economic and competitive conditions, the impact of the
economic environment on our customer base, and material adverse effects in relationships with significant customers.
The “implied fair value” of reporting units is determined by management and generally is based upon future cash flow
projections for the reporting unit, discounted to present value and market comparison to comparable peer companies.
We use outside valuation experts to assist us in determining and evaluating the fair value of our reporting units.
We completed our annual goodwill impairment testing as of March 31, 2009. At each of our reporting units, the units’
fair value exceeded carrying value with the exception of Staffmark. The carrying amount of Staffmark exceeded its fair
94
value due primarily to the significant decrease in revenue and operating profit at Staffmark resulting from the negative
impact on temporary staffing and permanent placement revenues due to macroeconomic conditions and downward
employment trends experienced in 2008 and 2009. As a result, we performed the second step of the goodwill
impairment test in order to determine the amount of impairment loss. The second step of the goodwill impairment test
involved comparing the implied fair value of Staffmark’s goodwill with the carrying value of that goodwill. This
comparison resulted in a goodwill impairment charge of $50.0 million, which was recorded in impairment expense on
the consolidated statement of operations.
In connection with the annual goodwill impairment testing, we tested other indefinite-lived intangible assets at our
Staffmark reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair value of
the CBS Personnel trade name (an indefinite-lived asset), based principally on the discontinuance of the CBS Personnel
trade name and rebranding of the reporting unit to Staffmark in February 2009. The fair value of the CBS Personnel
trade name was determined by applying the relief from royalty technique to forecasted revenues at the Staffmark
reporting unit. The result of this analysis indicated that the carrying value of the trade name ($10.6 million) exceeded
its fair value ($0.8 million) by $9.8 million. Therefore, an impairment charge of $9.8 million is recorded in impairment
expense on the consolidated statement of operations for the year ended December 31, 2009. The remaining balance
($0.8 million) of the CBS Personnel trade name is being amortized over 2.75 years. (See footnote I to our
Consolidated Financial Statements).
Long-lived intangible assets subject to amortization, including customer relationships, non-compete agreements and
technology are amortized using the straight-line method over the estimated useful lives of the intangible assets, which
we determine based on the consideration of several factors including the period of time the asset is expected to remain
in service. We evaluate the carrying value and remaining useful lives of intangible assets subject to amortization
whenever indications of impairment are present.
The determination of fair values and estimated useful lives requires significant judgment both by our management team
and by outside experts engaged to assist in this process. This judgment could result in either a higher or lower value
assigned to our reporting units and intangible assets. The impact could result in either higher or lower amortization
and/or the incurrence of an impairment charge
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts on an entity-by-entity basis with consideration for historical
loss experience, customer payment patterns and current economic trends. The Company reviews the adequacy of the
allowance for doubtful accounts on a periodic basis and adjusts the balance, if necessary. The determination of the
adequacy of the allowance for doubtful accounts requires significant judgment by management. The impact of either
over or under estimating the allowance could have a material effect on future operating results.
Workers’ Compensation Liability
Staffmark is an employer with both self-insurance and large deductible plans for its worker’s compensation exposure.
Staffmark establishes reserves based upon its experience and expectations as to its ultimate liability for those claims
using developmental factors based upon historical claim experience. Staffmark continually evaluates the potential for
change in loss estimates with the support of qualified actuaries. As of December 31, 2009, Staffmark had
approximately $61.0 million in workers’ compensation liability related to claims, reserves and settlements. The
ultimate settlement of this liability could differ materially from the assumptions used to calculate this liability, which
could have a material adverse effect on future operating results.
Deferred Tax Assets
Several of our majority owned subsidiaries have deferred tax assets recorded at December 31, 2009 which in total
amount to approximately $22.7 million. These deferred tax assets are comprised primarily of reserves not currently
deductible for tax purposes. The temporary differences that have resulted in the recording of these tax assets may be
used to offset taxable income in future periods, reducing the amount of taxes we might otherwise be required to pay.
Realization of the deferred tax assets is dependent on generating sufficient future taxable income. Based upon the
expected future results of operations, we believe it is more likely than not that we will generate sufficient future taxable
income to realize the benefit of existing temporary differences, although there can be no assurance of this. The impact
of not realizing these deferred tax assets would result in an increase in income tax expense for such period when the
determination was made that the assets are not realizable. (See Note M – “Income taxes in the Notes to Consolidated
Financial Statements”)
95
Recent Accounting Pronouncements
Refer to footnote B to our consolidated financial statements.
96
ITEM 7A. - Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Sensitivity
At December 31, 2009, we were exposed to interest rate risk primarily through borrowings under our Credit Agreement
because borrowings under this agreement are subject to variable interest rates. We had outstanding $76.0 million under
the Term Loan Facility and $0.5 million outstanding under the Revolving Credit Facility portions of our Credit
Agreement at December 31, 2009. We fixed $70.0 million of the Term Loan Facility borrowings with a “floating-to-
fixed” interest rate swap with a bank. This swap effectively fixes the interest rate on the last $70.0 million of our Term
Debt at 7.35% through 2010. Our exposure to fluctuation in variable interest on the remaining $6.0 million in Term
Debt and $0.5 million in Revolving Debt is not deemed to be material to our financial condition or results of operations.
We expect to borrow under our Revolving Credit Facility in the future in order to finance our short term working
capital needs and future acquisitions.
Exchange Rate Sensitivity
At December 31, 2009, we were not exposed to significant foreign currency exchange rate risks that could have a
material effect on our financial condition or results of operations.
Credit Risk
We are exposed to credit risk associated with cash equivalents, investments, and trade receivables. We do not believe
that our cash equivalents or investments present significant credit risks because the counterparties to the instruments
consist of major financial institutions and we manage the notional amount of contracts entered into with any one
counterparty. Our cash and cash equivalents at December 31, 2009 consists principally of (i) treasury and Government
backed securities money market funds, (ii)insured prime money market funds, (iii) FDIC insured Certificates of
Deposit, (iv) Commercial Paper and, cash balances in several non-interest bearing checking accounts. Substantially all
trade receivable balances of our businesses are unsecured. The concentration of credit risk with respect to trade
receivables is limited by the large number of customers in our customer base and their dispersion across various
industries and geographic areas. Although we have a large number of customers who are dispersed across different
industries and geographic areas, a prolonged economic downturn could increase our exposure to credit risk on our trade
receivables. We perform ongoing credit evaluations of our customers and maintain an allowance for potential credit
losses.
97
ITEM 8. – FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and financial statement schedules referred to in the index contained on page F-1
of this report are incorporated herein by reference.
ITEM 9. – CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
NONE
ITEM 9A – CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
(a) Management’s Evaluation of Disclosure Controls and Procedures. The Company’s management, with the
participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of
the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report.
Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as
of December 31, 2009, the Company’s disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it
files or submits under the Exchange Act and in ensuring that information required to be disclosed by the Company in
such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer
and Chief Financial Officer, as appropriate to allow timely discussions regarding require disclosure.
(b) Information with respect to Report of Management on Internal Control over Financial Reporting is contained on
page F- 2 of this Annual Report on Form 10-K and is incorporated herein by reference.
(c) Information with respect to Report of Independent Registered Public Accounting Firm on Internal Control over
Financial Reporting is contained on page F- 3 of this Annual Report on Form 10-K and is incorporated herein by
reference.
(d) Changes in Internal Control over Financial Reporting. There have not been any changes in the Company’s
internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange
Act) during our fourth fiscal quarter to which this Annual Report on Form 10-K relates that have materially affected, or
are reasonably likely to materially affect, the Company’s internal control over financial reporting.
ITEM 9B. – OTHER INFORMATION
None
98
PART III
.ITEM 10. – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information concerning our executive officers is incorporated herein by reference to information included in the Proxy
Statement for our 2010 Annual Meeting of Shareholders.
Information with respect to our directors and the nomination process is incorporated herein by reference to information
included in the Proxy Statement for our 2010 Annual Meeting of Shareholders.
Information regarding our audit committee and our audit committee financial experts is incorporated herein by
reference to information included in the Proxy Statement for our 2010 Annual Meeting of Shareholders.
Information required by Item 405 of Regulation S-K is incorporated herein by reference to information included in the
Proxy Statement for our 2010 Annual Meeting of Shareholders.
The audit committee operates under a written charter, which reflects NASDAQ listing standards and Sarbanes-Oxley
Act requirements regarding audit committees. A copy of the charter is incorporated herein by reference to Exhibit A to
the Proxy Statement for our 2010 Annual Meeting of Shareholders and is available on the company’s website at
www.compassdiversifiedholdings.com. We intend to satisfy any disclosure requirement under Item 5.05 of Form 8-K
regarding an amendment to, or waiver from, a provision of this charter by posting such information on our web site at
the address and location specified above.
ITEM 11. – EXECUTIVE COMPENSATION
Information with respect to executive compensation is incorporated herein by reference to information included in the
Proxy Statement for our 2010 Annual Meeting of Shareholders.
ITEM 12. - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information with respect to security ownership of certain beneficial owners and management is incorporated herein by
reference to information included in the Proxy Statement for our 2010 Annual Meeting of Shareholders.
ITEM 13. - CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Information with respect to such contractual relationships is incorporated herein by reference to the information in the
Proxy Statement for our 2010 Annual Meeting of Shareholders.
ITEM 14. – PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information with respect to principal accounting fees and services and pre-approval policies are incorporated herein by
reference to information included in the Proxy Statement for our 2010 Annual Meeting of Shareholders
99
PART IV
ITEM 15. – EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
1.
2.
3.
Financial Statements
See “Index to Consolidated Financial Statements and Supplemental Data” set forth on page F-1.
Financial Statement schedule
See “Index to Consolidated Financial Statements and Supplemental Data” set forth on page F-1.
Exhibits
See “Index to Exhibits”. Set forth on Page E-1.
100
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE
COMPASS GROUP DIVERSIFIED HOLDINGS LLC
Date: March 9, 2010
By: /s/ I. Joseph Massoud
I. Joseph Massoud
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ I. Joseph Massoud
I. Joseph Massoud
/s/ James J. Bottiglieri
James J. Bottiglieri
/s/C. Sean Day
C. Sean Day
/s/D. Eugene Ewing
D. Eugene Ewing
/s/Harold S. Edwards
Harold S. Edwards
/s/Mark H. Lazarus
Mark H. Lazarus
/s/Gordon Burns
Gordon Burns
Chief Executive Officer
(Principal Executive Officer)
and Director
Chief Financial Officer
(Principal Financial and Accounting
Officer)
and Director
March 9, 2010
March 9, 2010
Director
March 9, 2010
Director
March 9, 2010
Director
March 9, 2010
Director
March 9, 2010
Director
March 9, 2010
101
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURE
Date: March 9, 2010
COMPASS DIVERSIFIED HOLDINGS LLC
By: /s/ James J. Bottiglieri
James J. Bottiglieri
Regular Trustee
102
Compass Diversified Holdings
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND SUPPLEMENTAL FINANCIAL DATA
Historical Financial Statements:
Report of Management on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2009 and December 31, 2008
Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007
Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007
Notes to Consolidated Financial Statements
Supplemental Financial Data:
The following supplementary financial data of the registrant and its subsidiaries required to be included in
Item 15(a) (2) of Form 10-K are listed below:
Schedule II – Valuation and Qualifying Accounts
All other schedules not listed above have been omitted as not applicable or because the required
information is included in the Consolidated Financial Statements or in the notes thereto.
Page
Numbers
F-2
F-3
F-4
F-5
F-6
F-7
F-8
F-9
S-1
F-1
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of Compass Diversified Holdings is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of
1934. Compass’ internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation and fair presentation of financial statements issued
for external purposes in accordance with accounting principles generally accepted in the United States of America
(US GAAP). Compass’ internal control over financial reporting includes those policies and procedures that:
• pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of assets of the company;
• provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with U.S. GAAP, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the
company; and
• provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use
or disposition of assets of the company that could have a material effect on the consolidated financial
statements.
Internal control over financial reporting includes the entity level environment, controls activities, monitoring and
internal auditing practices and actions taken by management to correct deficiencies as identified.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
Management assessed the effectiveness of Compass’ internal control over financial reporting as of December 31,
2009. In making this assessment, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on this
assessment, management determined that Compass maintained effective internal control over financial reporting as of
December 31, 2009.
The effectiveness of our internal control over financial reporting has been audited by Grant Thornton, LLP an
independent registered public accounting firm, as stated in their report which appears on page F-3.
March 9, 2010
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors of Compass Diversified Holdings
We have audited Compass Diversified Holdings (formerly Compass Diversified Trust) (a Delaware Trust) and
subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). Compass Diversified Holdings and subsidiaries’ management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility
is to express an opinion on Compass Diversified Holdings and subsidiaries’ internal control over financial reporting
based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in all material respects. Our audit included
obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness
exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s internal control over financial reporting includes those policies
and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
In our opinion, Compass Diversified Holdings and subsidiaries maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2009, based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of Compass Diversified Holdings and subsidiaries as of December 31, 2009 and
2008, and the related consolidated statements of operations, stockholders’ equity, cash flows, and financial statement
schedule listed in the index appearing under Item 15(a)(2) for each of the three years in the period ended December 31,
2009, and our report dated March 9, 2010 expressed an unqualified opinion thereon.
/s/ Grant Thornton LLP
New York, New York
March 9, 2010
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors of Compass Diversified Holdings
We have audited the accompanying consolidated balance sheets of Compass Diversified Holdings (a Delaware Trust)
and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December 31, 2009. Our audits of the basic
financial statements include the financial statement schedule listed in the index appearing under Item 15(a)(2). These
financial statements and financial schedule are the responsibility of the Company’s management. Our responsibility is
to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the
financial position of Compass Diversified Holdings and subsidiaries as of December 31, 2009 and 2008, and the results
of their operations and their cash flows for each for each of the three years in the period ended December 31, 2009 in
conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the
related financial statement schedule when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), Compass Diversified Holdings and subsidiaries’ internal control over financial reporting as of December 31,
2009, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) and our report dated March 9, 2010 expressed an unqualified
opinion thereon.
/s/ Grant Thornton LLP
New York, New York
March 9, 2010
F-4
Compass Diversified Holdings
Consolidated Balance Sheets
(in thousands )
December 31,
2009
2008
Assets
Current assets:
Cash and cash equivalents.............................................................................................
Accounts receivable, less allowances of $5,409 at December 31, 2009
$ 31,495
$ 97,473
and $4,824 at December 31, 2008........................................................................... 165,550
51,727
26,255
275,027
25,502
288,028
216,365
Inventories.....................................................................................................................
Prepaid expenses and other current assets.....................................................................
Total current assets.....................................................................................................
Property, plant and equipment, net................................................................................
Goodwill........................................................................................................................
Intangible assets, net......................................................................................................
Deferred debt issuance costs, less accumulated amortization of
164,035
50,909
22,784
335,201
30,763
339,095
249,489
$5,093 at December 31, 2009 and $3,317 at December 31, 2008............................ 5,326
20,764
$ 831,012
Other non-current assets................................................................................................
Total assets
8,251
21,537
$ 984,336
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable...........................................................................................................
Accrued expenses..........................................................................................................
Due to related party.......................................................................................................
Current portion, long-term debt.....................................................................................
Current portion of workers’ compensation liability.......................................................
Other current liabilities..................................................................................................
Total current liabilities...............................................................................................
Supplemental put obligation..........................................................................................
Deferred income taxes...................................................................................................
Long-term debt..............................................................................................................
Workers’ compensation liability....................................................................................
Other non-current liabilities..........................................................................................
Total liabilities
$ 45,089
54,306
3,300
2,500
22,126
2,566
129,887
12,082
60,397
74,000
38,913
7,667
322,946
$ 48,699
57,109
604
2,000
26,916
4,042
139,370
13,411
86,138
151,000
40,852
9,687
440,458
Stockholders’ equity
Trust shares, no par value, 500,000 authorized; 36,625 shares issued
and outstanding at December 31, 2009 and 31,525 shares issued and
outstanding at December 31, 2008........................................................................... 485,790
(2,001)
(46,628)
437,161
70,905
508,066
$ 831,012
Accumulated other comprehensive loss.........................................................................
Accumulated earnings (deficit)......................................................................................
Total stockholders’ equity attributable to Holdings.................................................
Noncontrolling interest..................................................................................................
Total stockholders’ equity.............................................................................................
Total liabilities and stockholders’ equity
443,705
(5,242)
25,984
464,447
79,431
543,878
$ 984,336
See notes to consolidated financial statements.
F-5
Compass Diversified Holdings
Consolidated Statements of Operations
Year ended December 31,
2009
2008
2007
(in thousands, except per share data)
Net sales..............................................................................................................................................
$ 503,400
$ 532,127
$ 271,911
Service revenues..................................................................................................................................
745,340
1,006,346
569,880
Total revenues
1,248,740
1,538,473
841,791
Cost of sales........................................................................................................................................
344,191
363,675
171,665
Cost of services...................................................................................................................................
632,800
832,531
464,343
Gross profit
Operating expenses:
271,749
342,267
205,783
Staffing expense..........................................................................................................................
74,279
102,438
56,207
Selling, general and administrative expense................................................................................
145,948
165,768
94,426
Supplemental put expense (reversal)...........................................................................................
(1,329)
6,382
7,400
Management fees.........................................................................................................................
13,100
15,205
10,120
Amortization expense..................................................................................................................
24,609
24,605
12,679
Impairment expense.....................................................................................................................
59,800
-
-
Operating income (loss)
Other income (expense):
(44,658)
27,869
24,951
Interest income............................................................................................................................
1,178
1,377
2,520
Interest expense...........................................................................................................................
(11,736)
(17,828)
(6,994)
Amortization of debt issuance costs............................................................................................
(1,776)
(1,969)
(1,232)
Loss on debt extinguishment.......................................................................................................
(3,652)
-
-
Other income (expense), net........................................................................................................
(282)
894
(26)
Income (loss) from continuing operations before income taxes
(60,926)
10,343
19,219
Provision (benefit) for income taxes..............................................................................................
(21,281)
6,526
9,168
Income (loss) from continuing operations
Income from discontinued operations, net of income tax..............................................................
(39,645)
-
3,817
4,607
10,051
5,480
Gain on sale of discontinued operations, net of income tax..........................................................
-
73,363
35,834
Net income (loss)
Net income (loss) attributable to noncontrolling interest ..............................................................
Net income (loss) attributable to Holdings
Amounts attributable to Holdings:
(39,645)
81,787
51,365
(13,375)
$ (26,270)
3,493
$ 78,294
10,997
$ 40,368
Income (loss) from continuing operations.....................................................................................
$ (26,270)
$ 324
$ (946)
Income from discontinued operations, net of income tax..............................................................
-
4,607
5,480
Gain on sale of discontinued operations, net of income tax...........................................................
Net income (loss) attributable to Holdings
-
$ (26,270)
73,363
$ 78,294
35,834
$ 40,368
Basic and fully diluted income (loss) per share attributable to Holdings:
Continuing operations...................................................................................................................
Discontinued operations................................................................................................................
Basic and fully diluted income (loss) per share attributable to Holdings
$ (0.76)
$ 0.01
$ (0.04)
-
$ (0.76)
2.47
$ 2.48
1.50
$ 1.46
Weighted average number of shares of trust stock outstanding – basic and fully diluted
34,403
31,525
27,629
Cash distributions declared per share
$ 1.36
$ 1.33
$ 1.25
See notes to consolidated financial statements.
F-6
Compass Diversified Holdings
Consolidated Statements of Stockholders’ Equity
Total
Accumulated
Stockholders'
Accumulated
Other
Equity
Non-
Total
(in thousands)
Number of
Earnings
Comprehensive
Attributable
Controlling
Stockholders’
Shares
Amount
(Deficit)
Loss
to Holdings
Interest
Equity
Balance — January 1, 2007
20,450
$ 274,961
$ (19,250)
$ -
$ 255,711
$ 17,734
$ 273,445
Net income.....................................................................................................................
-
-
40,368
-
40,368
10,997
51,365
Comprehensive income...............................................................................................
-
-
40,368
-
40,368
10,997
51,365
Issuance of Trust shares, net of offering costs.................................................................
11,075
168,744
-
-
168,744
-
168,744
Distribution to noncontrolling interest (See Note N).......................................................
-
-
-
-
-
(13,987)
(13,987)
Issuance of stock by noncontrolling interest....................................................................
-
-
-
-
-
7,270
7,270
Option activity attributable to noncontrolling interest......................................................
-
-
-
-
-
728
728
Redemption of noncontrolling interest............................................................................
-
-
-
-
-
(875)
(875)
Distributions paid...........................................................................................................
-
-
(31,973)
-
(31,973)
-
(31,973)
Balance — December 31, 2007
31,525
443,705
(10,855)
-
432,850
21,867
454,717
Net income.....................................................................................................................
-
-
78,294
-
78,294
3,493
81,787
Other comprehensive loss – cash flow hedge loss............................................................
-
-
-
(5,242)
(5,242)
-
(5,242)
Comprehensive income (loss)......................................................................................
-
-
78,294
(5,242)
73,052
3,493
76,545
Transfer from noncontrolling interest (See Note N)........................................................
-
-
-
-
-
(3,900)
(3,900)
Issuance of stock by noncontrolling interest:
Staffmark acquisition (See Note C).............................................................................
-
-
-
-
-
47,899
47,899
Fox acquisition (See Note C)......................................................................................
-
-
-
-
-
7,725
7,725
Option activity attributable to noncontrolling interest......................................................
-
-
-
-
-
2,347
2,347
Distributions paid...........................................................................................................
-
-
(41,455)
-
(41,455)
-
(41,455)
Balance — December 31, 2008
31,525
443,705
25,984
(5,242)
464,447
79,431
543,878
Net loss..........................................................................................................................
-
-
(26,270)
-
(26,270)
(13,375)
(39,645)
Other comprehensive income – cash flow hedge gain......................................................
-
-
-
724
724
-
724
Other comprehensive income – cash flow hedge reclassification to earnings....................
-
-
-
2,517
2,517
-
2,517
Comprehensive income (loss)......................................................................................
-
-
(26,270)
3,241
(23,029)
(13,375)
(36,404)
Issuance of Trust shares, net of offering costs.................................................................
5,100
42,085
-
-
42,085
-
42,085
Option activity attributable to noncontrolling interest......................................................
-
-
-
-
-
2,303
2,303
Contribution of noncontrolling interest related to
Staffmark recapitalization (see Note N)...................................................................
-
-
-
-
-
5,497
5,497
Contribution from noncontrolling interest holders...........................................................
-
-
-
-
-
49
49
Redemption of noncontrolling interest holders................................................................
-
-
-
-
-
(3,000)
(3,000)
Distributions paid...........................................................................................................
-
-
(46,342)
-
(46,342)
-
(46,342)
Balance — December 31, 2009
36,625
$ 485,790
$ (46,628)
$ (2,001)
$ 437,161
$ 70,905
$ 508,066
See notes to consolidated financial statements.
F-7
Compass Diversified Holdings
Consolidated Statements of Cash Flows
2009
Year ended December 31,
2008
2007
(in thousands)
Cash flows from operating activities:
Net income (loss) attributable to Holdings................................................................
$ (39,645)
$ 81,787
$ 51,365
Adjustments to reconcile net income (loss) to net cash provided by operating
activities:
Gains on sales of dispositions...............................................................................
-
(73,363)
(35,834)
Depreciation expense............................................................................................
8,387
9,276
5,010
Amortization expense...........................................................................................
24,609
25,745
19,097
Impairment expense..............................................................................................
59,800
-
-
Amortization of debt issuance costs......................................................................
1,776
1,969
1,224
Loss on debt extinguishment.................................................................................
3,652
-
-
Supplemental put expense (reversal).....................................................................
(1,329)
6,382
7,400
Noncontrolling interests related to discontinued operations.................................
-
549
943
Noncontrolling stockholder charges and other......................................................
1,555
2,827
1,080
Deferred taxes.......................................................................................................
(24,964)
(8,911)
(1,295)
Other.....................................................................................................................
107
381
86
Changes in operating assets and liabilities, net of acquisition:
(Increase)/decrease in accounts receivable............................................................
143
29,970
(13,233)
(Increase)/decrease in inventories.........................................................................
(557)
102
(5,772)
(Increase)/decrease in prepaid expenses and other current assets..........................
(4,442)
(3,874)
2,003
Increase/(decrease) in accounts payable and accrued expenses.............................
(8,879)
(17,344)
17,578
Payment of supplemental put obligation...............................................................
-
(14,947)
(7,880)
Net cash provided by operating activities
20,213
40,549
41,772
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired.........................................................
(1,435)
(167,546)
(225,112)
Purchases of property and equipment........................................................................
(3,585)
(11,576)
(8,698)
Proceeds from dispositions........................................................................................
-
154,156
119,652
Other investing activities...........................................................................................
38
173
-
Net cash used in investing activities
(4,982)
(24,793)
(114,158)
Cash flows from financing activities:
Proceeds from the issuance of Trust shares, net.........................................................
42,085
-
168,744
Borrowings under Credit Agreement.........................................................................
3,000
90,000
311,977
Repayments under Credit Agreement........................................................................
(79,500)
(87,532)
(246,800)
Distributions paid......................................................................................................
(46,342)
(41,455)
(31,973)
Distributions paid Advanced Circuits........................................................................
-
-
(13,987)
Swap termination fee.................................................................................................
(2,517)
-
-
Net proceeds provided by noncontrolling interest.....................................................
2,546
2,251
-
Debt issuance costs....................................................................................................
-
(552)
(5,776)
Other..........................................................................................................................
(481)
(273)
2,697
Net cash (used in) provided by financing activities
(81,209)
(37,561)
184,882
Foreign currency adjustment.....................................................................................
-
(80)
(144)
Net increase/(decrease) in cash and cash equivalents
(65,978)
(21,885)
112,352
Cash and cash equivalents — beginning of period....................................................
Cash and cash equivalents — end of period..............................................................
97,473
$ 31,495
119,358
$ 97,473
7,006
$ 119,358
Cash related to discontinued operations....................................................................
$ -
$ -
$ 3,858
Supplemental non-cash financing and investing activity:
- Issuance of CBS Personnel's common stock valued at $47.9 million during 2008 in connection with the acquisition of Staffmark LLC. See Note C.
- Acquisition of $7.0 million of Anodyne common stock during 2008 in connection with the extinguishment of a promissory note due the
Company by an employee of Anodyne. See Note R.
- Capital leases totaling $0.9 million were entered into during 2008.
See notes to consolidated financial statements.
F-8
Compass Diversified Holdings
Notes to Consolidated Financial Statements
December 31, 2009
Note A — Organization and Business Operations
Compass Diversified Holdings, a Delaware statutory trust (“the Trust”), was incorporated in Delaware on November
18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company (the “Company”), was
also formed on November 18, 2005. Compass Group Management LLC, a Delaware limited liability Company
(“CGM” or the “Manager”), was the sole owner of 100% of the interests of the Company (as defined in the Company’s
operating agreement, dated as of November 18, 2005), which were subsequently reclassified as the “Allocation
Interests” pursuant to the Company’s amended and restated operating agreement, dated as of April 25, 2006 (as
amended and restated, the “LLC Agreement”) (see Note R - Related Parties).
The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses
headquartered in North America. In accordance with the amended and restated Trust Agreement, dated as of April 25,
2006 (the “Trust Agreement”), the Trust is sole owner of 100% of the Trust Interests (as defined in the LLC
Agreement) of the Company and, pursuant to the LLC Agreement, the Company has, outstanding, the identical number
of Trust Interests as the number of outstanding shares of the Trust. Compass Group Diversified Holdings, LLC, a
Delaware limited liability company is the operating entity with a board of directors and other corporate governance
responsibilities, similar to that of a Delaware corporation.
Note B — Summary of Significant Accounting Policies
Accounting principles
The Company’s consolidated financial statements are prepared in accordance with accounting principles generally
accepted in the United States of America (US GAAP).
Basis of presentation
The results of operations for the years ended December 31, 2009, 2008 and 2007 represent the results of operations of
the Company’s acquired businesses from the date of their acquisition by the Company, and therefore are not indicative
of the results to be expected for the full year. Certain prior year amounts have been reclassified to conform to the
current year’s presentation.
Principles of consolidation
The consolidated financial statements include the accounts of the Trust and the Company, as well as the businesses
acquired as of their respective acquisition date. All significant intercompany accounts and transactions have been
eliminated in consolidation. Discontinued operating entities are reflected as discontinued operations in the Company’s
results of operations and statements of financial position.
The acquisition of businesses that the Company owns or controls more than a 50% share of the voting interest are
accounted for under the purchase method of accounting. The amount assigned to the identifiable assets acquired and
the liabilities assumed is based on the estimated fair values as of the date of acquisition, with the remainder, if any,
recorded as goodwill.
Discontinued operations
On June 24, 2008, the Company sold its majority owned subsidiary, Aeroglide Corporation (“Aeroglide”), for a total
enterprise value of $95.0 million. As a result, the results of operations of Aeroglide for the periods from its acquisition
on February 28, 2007 through December 31, 2007, and from January 1, 2008 through the date of sale on June 24, 2008,
are reported as discontinued operations in accordance with authoritative guidance.
On June 25, 2008, the Company sold its majority owned subsidiary, Silvue Technologies Group, Inc. (“Silvue”), for a
total enterprise value of $95.0 million. As a result, the results of operations of Silvue for the periods from January 1,
2007 through December 31, 2007 and from January 1, 2008 through the date of sale on June 25, 2008, are reported as
discontinued operations in accordance with authoritative guidance.
F-9
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. It is possible that in 2010 actual conditions could be worse than anticipated when
we developed our estimates and assumptions, which could materially affect our results of operations and financial
position. Such changes could result in future impairment of goodwill, intangibles and long-lived assets, inventory
obsolescence, establishment of valuation allowances on deferred tax assets and increased tax liabilities. Actual results
could differ from those estimates.
Fair value of financial instruments
The carrying value of the Company’s financial instruments, including cash, accounts receivable and accounts payable
approximate their fair value due to their short term nature. Term Debt with a carrying value of $76.0 million at
December 31, 2009 had a fair value of approximately $71.9 million. The fair value is based on interest rates that are
currently available to the Company for issuance of debt with similar terms and remaining maturities.
Revenue recognition
In accordance with authoritative guidance on revenue recognition, the Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery has occurred or services have been rendered, the sellers price to the buyer is
fixed and determinable, and collection is reasonably assured. Shipping and handling costs are charged to operations
when incurred and are classified as a component of cost of sales.
Advanced Circuits
Revenue is recognized upon shipment of product to the customer, net of sales returns and allowances. Appropriate
reserves are established for anticipated returns and allowances based on past experience. Revenue is typically recorded
at F.O.B. shipping point but for sales of certain custom products, revenue is recognized upon completion and customer
acceptance.
American Furniture
Revenue is recognized upon shipment of product to the customer, net of sales returns and allowances. Appropriate
reserves are established for anticipated returns and allowances based on past experience. Revenue is typically recorded
at F.O.B. shipping point.
Anodyne
Revenue is recognized upon shipment of product to the customer, net of sales returns and allowances. Appropriate
reserves are established for anticipated returns and allowances based on past experience. Revenue is typically recorded
at F.O.B. shipping point.
Fox
Revenue is recognized upon shipment of product to the customer, net of sales returns and allowances. Appropriate
reserves are established for anticipated returns and allowances based on past experience. Revenue is typically recorded
at F.O.B. shipping point.
HALO
Revenue is recognized when an arrangement exists, the promotional or premium products have been shipped, fees are
fixed and determinable, and the collection of the resulting receivables is probable. Over 90% of HALO’s sales are
drop-shipped and recorded FOB shipping point.
Staffmark
Revenue from temporary staffing services is recognized at the time services are provided by the Company employees
and is reported based on gross billings to customers. Revenue from employee leasing services is recorded at the time
services are provided and is reported on a net basis (gross billings to clients less worksite employee salaries and payroll-
related taxes). Revenue is recognized for permanent placement services at the employee start date.
Cash equivalents
The Company considers all highly liquid investments with original maturities of three months or less to be cash
equivalents.
F-10
Allowance for doubtful accounts
The Company uses estimates to determine the amount of the allowance for doubtful accounts in order to reduce
accounts receivable to their estimated net realizable value. The Company estimates the amount of the required
allowance by reviewing the status of past-due receivables and analyzing historical bad debt trends. The Company’s
estimate also includes analyzing existing economic conditions. When the Company becomes aware of circumstances
that may impair a specific customer’s ability to meet its financial obligations subsequent to the original sale, the
Company will record an allowance against amounts due, and thereby reduce the net receivable to the amount it
reasonably believes will be collectible.
Inventories
Inventories consist of manufactured goods and purchased goods acquired for resale. Inventories are stated at the lower
of cost or market, determined on the first-in, first-out method. Cost includes raw materials, direct labor and
manufacturing overhead. Market value is based on current replacement cost for raw materials and supplies and on net
realizable value for finished goods.
Property, plant and equipment
Property, plant and equipment is recorded at cost. The cost of major additions or betterments is capitalized, while
maintenance and repairs that do not improve or extend the useful lives of the related assets are expensed as incurred.
Depreciation is provided principally on the straight-line method over estimated useful lives. Leasehold improvements
are amortized over the life of the lease or the life of the improvement, whichever is shorter.
The useful lives are as follows:
Machinery, equipment and software
Office furniture and equipment
Leasehold improvements
2 to 10 years
2 to 7 years
Shorter of useful life or lease term
Property, plant and equipment and other long-lived assets, that have useful lives, are evaluated for impairment when
events or changes in circumstances indicate that the carrying value of the assets may not be recoverable. Upon the
occurrence of a triggering event, the asset is reviewed to assess whether the estimated undiscounted cash flows expected
from the use of the asset plus residual value from the ultimate disposal exceeds the carrying value of the asset. If the
carrying value exceeds the estimated recoverable amounts, the asset is written down to the estimated present value of
the expected future cash flows from using the asset.
Goodwill and intangible assets
Goodwill represents the difference between purchase cost and the fair value of net assets acquired in business
acquisitions. Indefinite lived intangible assets, representing trademarks and trade names, are not amortized until their
useful life is determined to no longer be indefinite. Goodwill and indefinite lived intangible assets are tested for
impairment at least annually, unless circumstances otherwise dictate, by comparing the fair value of each reporting unit
to its carrying value. Fair value is determined using a discounted cash flow methodology and a comparable company
analysis and includes management’s assumptions on revenue, growth rates, operating margins, appropriate discount
rates and expected capital expenditures. Impairments, if any, are charged directly to earnings. Intangible assets with a
useful life include customer relations, technology and licensing agreements that are subject to amortization, and are
evaluated for impairment whenever events or changes in circumstances indicate that the carrying value of the assets
may not be fully recoverable.
During fiscal year 2009, the Company changed the date of its annual goodwill impairment testing from April 30 to
March 31 in order to move the impairment testing to a fiscal quarter ending date when data necessary to perform the
annual testing is more readily available and more robust. The Company believes that the resulting change in accounting
principle related to the annual testing date did not delay, accelerate, or avoid an impairment charge. The Company
determined that the change in accounting principle related to the annual testing date is preferable under the
circumstances and does not result in adjustments to the Company’s financial statements when applied retrospectively.
Please refer to Note I for the results of the Company’s 2009 annual impairment testing.
Deferred debt issuance costs
Deferred debt issuance costs represent the costs associated with the issuance of debt instruments and are amortized over
the life of the related debt instrument.
F-11
Workers’ compensation liability
Workers’ compensation liability represents estimated costs of self insurance associated with workers’ compensation at
the Company’s Staffmark operating segment. The reserves for workers’ compensation are based upon actuarial
assumptions of individual case estimates and incurred but not reported (“IBNR”) losses. At December 31, 2009 and
2008, the current portion of these reserves is included as a component of current portion of workers’ compensation
liability and the non-current portion is included as a component of workers’ compensation liability on the consolidated
balance sheets.
Warranties
The Company’s Fox and Anodyne operating segments estimate the exposure to warranty claims based on both current
and historical product sales data and warranty costs incurred. The Company assesses the adequacy of its recorded
warranty liability quarterly and adjusts the amount as necessary.
Supplemental put
Distinct from its role as Manager of the Company, CGM is also the owner of 100% of the Allocation Interests in the
Company. Concurrent with the IPO, CGM and the Company entered into a Supplemental Put Agreement, which may
require the Company to acquire these Allocation Interests upon termination of the Management Services Agreement.
Essentially, the put right granted to CGM requires the Company to acquire CGM’s Allocation Interests in the Company
at a price based on 20% of the company’s profits upon clearance of a 7% annualized hurdle rate. Each fiscal quarter the
Company estimates the fair value of this potential liability associated with the Supplemental Put Agreement. Any
change in the potential liability is accrued currently as a non-cash adjustment to earnings. For the year ended December
31, 2009 the Company reversed $1.3 million of expense related to the Supplemental Put Agreement. For the years
ended December 31, 2008 and 2007, the Company recognized approximately $6.4 million and $7.4 million,
respectively, in expense related to the Supplemental Put Agreement. Upon the sale of any of the majority owned
subsidiaries, the Company will be obligated to pay CGM the amount of the supplemental put liability allocated to the
sold subsidiary.
Derivatives and hedging
The Company utilizes an interest rate swap (derivative) to manage risks related to interest rates on the last $70.0 million
of its Term Loan Facility (“swap”). The Company has elected hedge accounting treatment to account for its swap and
has designated the swap as a cash flow hedge and as a result unrealized changes in fair value of the hedge are reflected
in comprehensive income (loss).
On February 18, 2009, the Company terminated a portion of its swap early in connection with the repayment of $75.0
million of the Term Loan Facility. In connection with the termination, the Company reclassified $2.5 million from
accumulated other comprehensive loss into earnings. Refer to Note L for additional information.
Noncontrolling interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income that is owned by
noncontrolling shareholders.
In January 2009, the Company adopted authoritative guidance relating to its accounting for noncontrolling
shareholders. The authoritative guidance requires reporting entities to present noncontrolling interests as equity (as
opposed to as a liability or mezzanine equity) and provides guidance on the accounting for transactions between an
entity and noncontrolling interests. The adoption of the authoritative guidance resulted in the presentation of
noncontrolling interest as a component of equity on the Consolidated Balance Sheets and income attributable to
noncontrolling interest on the Consolidated Statements of Operations.
Income taxes
Deferred income taxes are calculated under the liability method. Deferred income taxes are provided for the differences
between the basis of assets and liabilities for financial reporting and income tax purposes at the enacted tax rates. A
valuation allowance is established when necessary to reduce deferred tax assets to the amount that is expected to be
more likely than not realized.
Earnings per share
Basic and fully diluted income (loss) per share attributable to Holdings is computed on a weighted average basis.
The weighted average number of Trust shares outstanding for fiscal 2007 was computed based on 20,450,000 shares
outstanding for the period from January 1, 2007 through December 31, 2007 and 9,875,000 additional shares
outstanding issued in connection with the Company’s secondary offering for the period from May 8, 2007 through
December 31, 2007, and 1,200,000 shares outstanding issued in connection with the over-allotment for the period from
F-12
May 20, 2007 through December 31, 2007. The weighted average number of Trust shares outstanding for fiscal 2008
was computed based on 31,525,000 shares outstanding for the entire fiscal year. The weighted average number of Trust
shares outstanding for fiscal 2009 was computed based on 31,525,000 shares outstanding for the period from January 1,
2009 through December 31, 2009 and 5,100,000 additional shares outstanding issued in connection with the Company’s
secondary offering for the period from June 9, 2009 through December 31, 2009.
The Company did not have any option plan or other potentially dilutive securities outstanding during the years ended
December 31, 2009, 2008 and 2007.
Advertising costs
Advertising costs are expensed as incurred and included in selling, general and administrative expense in the
consolidated statements of operations. Advertising costs were $3.3 million, $5.5 million and $4.0 million during the
years ended December 31, 2009, 2008 and 2007, respectively.
Research and development
Research and development costs are expensed as incurred and included in selling, general and administrative expense in
the consolidated statements of operations. The Company incurred research and development expense of $3.9 million,
$3.5 million and $0.9 million during the years ended December 31, 2009, 2008 and 2007, respectively.
Employee retirement plans
The Company and many of its operating segments sponsor defined contribution retirement plans, such as 401(k) or
profit sharing plans. Employee contributions to the plan are subject to regulatory limitations and the specific plan
provisions. The Company and its operating segments may match these contributions up to levels specified in the plans
and may make additional discretionary contributions as determined by management. The total employer contributions
to these plans were $0.5 million, $2.1 million and $1.3 million for the years ended December 31, 2009, 2008 and 2007,
respectively.
Seasonality
Earnings of certain of the Company’s operating segments are seasonal in nature. Earnings from AFM Holdings
Corporation (“AFM” or “American Furniture”) are typically highest in the months of January through April of each
year, coinciding with homeowners’ tax refunds. Earnings from Staffmark are typically lower in the first quarter of each
year than in other quarters due to reduced seasonal demand for temporary staffing services and to lower gross margins
during that period associated with the front-end loading of certain payroll taxes and other payments associated with
payroll paid to our employees. Earnings from HALO Lee Wayne LLC (“HALO”) are typically highest in the months
of September through December of each year primarily as the result of calendar sales and holiday promotions. HALO
generates approximately two-thirds of its operating income in the months of September through December.
Recent accounting pronouncements
In March 2009, the Financial Accounting Standards Board (“FASB”) issued additional authoritative guidance on
business combinations, specifically, for the initial recognition and measurement, subsequent measurement, and
disclosures of assets and liabilities arising from contingencies in a business combination as well as for pre-existing
contingent consideration assumed as part of the business combination. This guidance is effective for the Company
January 1, 2009.
In April 2009, the FASB amended authoritative guidance on disclosures about the fair value of financial instruments,
which is effective for the Company June 30, 2009. The amended guidance requires a publicly traded company to
include disclosures about the fair value of its financial instruments whenever it issues summarized financial information
for interim reporting periods. In addition, the guidance requires an entity to disclose either in the body or the
accompanying notes of its summarized financial information the fair value of all financial instruments for which it is
practicable to estimate that value, whether recognized or not recognized in the statement of financial position. The
adoption of this guidance did not have a significant impact on the Company’s Consolidated Financial Statements.
In May 2009, the FASB issued authoritative guidance on subsequent events, which is effective for the Company
June 30, 2009. This guidance addresses the disclosure of events that occur after the balance sheet date, but before
financial statements are filed with the Securities and Exchange Commission. The adoption of this guidance did not have
a significant impact on the Company’s Consolidated Financial Statements.
In June 2009, the FASB issued amendments to authoritative guidance on consolidation of variable interest entities,
which will be effective for the Company January 1, 2010. The amended guidance revises factors that should be
considered by a reporting entity when determining whether an entity that is insufficiently capitalized or is not controlled
through voting (or similar rights) should be consolidated. This guidance also includes revised financial statement
F-13
disclosures regarding the reporting entity’s involvement and risk exposure. The Company does not expect the adoption
of this guidance will have a significant impact on the Company’s Consolidated Financial Statements.
In June 2009, the FASB issued The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles (the “FASB Codification”), which is effective for the Company July 1, 2009. The FASB
Codification does not alter current U.S. GAAP, but rather integrates existing accounting standards with other
authoritative guidance. Under the FASB Codification there is a single source of authoritative U.S. GAAP for
nongovernmental entities and this has superseded all other previously issued non-SEC accounting and reporting
guidance. The adoption of the FASB Codification did not have any impact on the Company’s Consolidated Financial
Statements.
In August 2009, the FASB amended authoritative guidance for determining the fair value of liabilities, which was
effective October 1, 2009. The amended guidance reiterates that the fair value measurement of a liability (1) should be
based on the assumption that the liability was transferred to a market participant on the measurement date and
(2) should include the risk of nonperformance. In addition, the guidance establishes a hierarchy for determining the fair
value of liabilities. Specifically, an entity must first determine whether a quoted price, from an active market, is
available for identical liabilities before utilizing an alternative valuation technique. The adoption of this guidance did
not have a significant impact on the Company’s Consolidated Financial Statements.
In September 2009, the Emerging Issues Task Force reached a consensus related to revenue arrangements with multiple
deliverables. The consensus will be issued by the FASB as an update to authoritative guidance for revenue recognition
and will be effective for the Company January 1, 2011. The updated guidance will revise how the estimated selling
price of each deliverable in a multiple element arrangement is determined when the deliverables do not have stand-
alone evidence of value. In addition, the revised guidance will require additional disclosures about the methods and
assumptions used to evaluate multiple element arrangements and to identify the significant deliverables within those
arrangements. The Company does not expect the adoption of this guidance will have a significant impact on the
Company’s Consolidated Financial Statements.
In December 2009, the FASB amended authoritative guidance related to accounting for transfers and servicing of
financial assets and extinguishments of liabilities. The guidance will be effective beginning January 1, 2010. The
guidance eliminates the concept of a qualifying special-purpose entity and changes the criteria for derecognizing
financial assets. In addition, the guidance will require additional disclosures related to a company’s continued
involvement with financial assets that have been transferred. The adoption of this amended guidance will not have a
significant impact on the Company’s Consolidated Financial Statements.
In December 2009, the FASB amended authoritative guidance for consolidating variable interest entities. The guidance
will be effective beginning January 1, 2010. Specifically, the guidance revises factors that should be considered by a
reporting entity when determining whether an entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. This guidance also includes revised financial statement disclosures regarding
the reporting entity’s involvement, including significant risk exposures as a result of that involvement, and the impact
the relationship has on the reporting entity’s financial statements. The adoption of this amended guidance will not have
a significant impact on the Company’s Consolidated Financial Statements.
Note C - Acquisition of Businesses
From January 1, 2008 through December 31, 2009, the Company completed two acquisitions as follows:
January 4, 2008
January 21, 2008
FOX
Staffmark LLC(1)
(1) Staffmark Investment LLC (“Staffmark LLC”) was acquired by the Staffmark operating segment. In February 2009, CBS
Personnel rebranded under the Staffmark trade name, as a result the Company renamed its CBS Personnel operating segment
to Staffmark.
Allocation of Purchase Price
The acquisition of controlling interests in each of the Company’s businesses has been accounted for under the purchase
method of accounting. The purchase price allocation was based on estimates of the fair value of the assets acquired and
F-14
liabilities assumed. The fair values assigned to the acquired assets were developed from information supplied by
management and valuations supplied by independent appraisal experts. The results of operations of each of the
Company’s acquisitions are included in the consolidated financial statements from the date of acquisition. In
accordance with authoritative guidance, a deferred tax liability aggregating $25.3 million was recorded to reflect the net
increase in the financial accounting basis of the assets acquired over their related income tax basis in 2008.
2008 Acquisitions
Fox Factory
On January 4, 2008, Fox Factory Holding Corp., a subsidiary of the Company, entered into an agreement with Fox
Factory, Inc. (“Fox”) and Robert C. Fox, Jr., the sole shareholder of Fox, to purchase all of the issued and outstanding
capital stock of Fox. The Company made loans to and purchased a controlling interest in Fox for approximately
$80.4 million, representing approximately 75.5% of the outstanding common stock on a primary basis and 69.8% on a
fully diluted basis. Fox management invested in the transaction alongside CODI resulting in an initial noncontrolling
ownership of approximately 24.0%.
Headquartered in Watsonville, California, Fox is a designer, manufacturer and marketer of high end suspension
products for mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts both as a tier one
supplier to leading action sport original equipment manufacturers and provides after-market products to retailers and
distributors.
In connection with the allocation of the purchase price and intangible asset valuation, goodwill of $31.3 million and
intangible assets subject to amortization of $44.2 million were recorded. The intangible assets recorded include $11.7
million of customer relationships with useful lives ranging from 8 to 12 years and $32.5 million of technology with an
estimated useful life of 8 years. In addition, intangible assets recorded include the value assigned to trademarks of
$13.3 million which is not subject to amortization. The Company does not expect the goodwill will be deductible for
tax purposes. Fox’s results of operations are reported as a separate operating segment and are included in the
Company’s consolidated results of operations from the date of acquisition.
The Company’s Manager acted as an advisor to the Company in the transaction and received fees and expense
payments totaling approximately $0.8 million.
Staffmark
On January 21, 2008, the Company’s majority-owned subsidiary, CBS Personnel (now doing business as Staffmark),
acquired Staffmark LLC, a privately held personnel services provider. Staffmark LLC is a leading provider of
commercial staffing services in the United States. Staffmark LLC provides staffing services in more than 30 states
through more than 200 branches and on-site locations. The majority of Staffmark LLC’s revenues are derived from
light industrial staffing, with the balance of revenues derived from administrative and transportation staffing, permanent
placement services and managed solutions. Similar to CBS Personnel, Staffmark Investment LLC was one of the largest
privately held staffing companies in the United States. Under the terms of the purchase agreement, CBS Personnel
purchased all of the outstanding equity interests of Staffmark LLC for a total purchase price of approximately $128.6
million, exclusive of transaction fees and closing costs of $5.2 million. Staffmark LLC has become a wholly-owned
subsidiary of CBS Personnel and Staffmark LLC’s results of operations are included in the Staffmark operating
segment from the date of acquisition. In February 2009, CBS Personnel rebranded under the Staffmark trade name, as a
result the Company renamed its CBS Personnel operating segment to Staffmark.
The aggregate purchase price consisted of cash and 1,929,089 shares of CBS Personnel common stock, valued at
approximately $47.9 million, for a total purchase price of approximately $80 million. The fair value of the CBS
Personnel stock issued and transferred to Staffmark LLC as partial consideration in the acquisition was determined
based on an analysis of financial and market data of publicly traded companies deemed comparable to CBS Personnel,
together with relevant multiples of recent merged, sold or acquired companies comparable to CBS Personnel.
The acquisition agreement pursuant to which CBS Personnel issued cash and 1,929,089 shares of CBS Personnel
common stock (the “Staffmark LLC stock”) in exchange for all of the membership units of Staffmark LLC, gave the
holders of Staffmark LLC’s membership units a non-transferable right (“put right”), to direct the Company, on or after
January 21, 2011, to either: (i) promptly initiate such commercially reasonable actions that would result in a sale of
CBS Personnel or (ii) offer to purchase the Staffmark LLC stock at its then fair market value, if such right was not
otherwise extinguished pursuant to the terms of the acquisition agreement. The put right is extinguishable at any time if
either a public offering of the shares of CBS Personnel or sale of CBS Personnel has occurred.
F-15
In connection with the allocation of the purchase price and intangible asset valuation, goodwill of $78.9 million and
intangible assets subject to amortization of $50.1 million were recorded. The intangible assets recorded include $24.5
million of customer relationships with an estimated useful life of 12 years, $24.5 million of trademarks with an
estimated useful life of 15 years and $1.1 million of licensing agreements with an estimated useful life of 3 years. The
Company expects $58.4 million of goodwill will be deductible for tax purposes.
The Company’s ownership percentage of CBS Personnel is 66.4% on a primary basis and 62.4% on a fully diluted basis
subsequent to the Staffmark LLC acquisition.
The Company’s Manager acted as an advisor to CBS Personnel in the transaction and received fees and expense
payments totaling approximately $1.2 million.
Other acquisitions
In addition to the acquisitions discussed above, the Company’s operating segments, Anodyne and HALO, acquired add-
on businesses during 2008 and 2009. In 2008, the Company’s HALO operating segment acquired three add-on
businesses for a total purchase price aggregating approximately $10.3 million. Goodwill of $6.8 million was initially
recorded in connection with these acquisitions. In addition to goodwill, HALO recorded $2.7 million related to
customer relationships with an estimated useful life of 15 years and $0.2 million of non-compete agreements with an
estimated useful life of 3 years. In 2009, the HALO operating segment acquired one add-on business for a total
purchase price aggregating approximately $1.0 million. Goodwill of $0.4 million was initially recorded in connection
with these acquisitions. In addition to goodwill, HALO recorded $0.4 million related to customer relationships with an
estimated useful life of 15 years. Also in 2009, the Company’s ACI operating segment acquired one add-on business
for approximately $0.4 million. Goodwill of $0.1 million was recorded in connection with this acquisition. In addition
to goodwill, ACI recorded $0.3 million related to customer relationships with an estimated useful life of 9 years.
Note D – Discontinued Operations
2007 Disposition
On January 5, 2007, the Company sold its majority owned subsidiary, Crosman Acquisition Corporation (“Crosman”),
for a total enterprise value of $143.0 million. The Company’s share of the net proceeds, after accounting for the
redemption of Crosman’s noncontrolling holders and the payment of CGM’s profit allocation, was approximately
$110.0 million. The Company recognized a gain on the sale of $36.0 million, or $1.77 per share.
2008 Dispositions
On June 24, 2008, the Company sold its majority owned subsidiary, Aeroglide Corporation (“Aeroglide”), for a total
enterprise value of $95.0 million. The Company’s share of the net proceeds, after accounting for (i) redemption of
Aeroglide’s noncontrolling holders; (ii) payment of transaction expenses; and (iii) CGM’s profit allocation; totaled
$78.3 million. The Company recognized a gain on the sale of $34.0 million, or $1.08 per share.
On June 25, 2008, the Company sold its majority owned subsidiary, Silvue Technologies Group, Inc. (“Silvue”), for a
total enterprise value of $95.0 million. The Company’s share of the net proceeds, after accounting for (i) redemption of
Silvue’s noncontrolling holders; (ii) payment of transaction expenses; and (iii) CGM’s profit allocation; totaled $63.6
million. The Company recognized a gain on the sale of $39.4 million, or $1.25 per share.
Approximately $65 million of the Company’s net proceeds from the 2008 dispositions were used to repay amounts
outstanding under the Company’s Revolving Credit Facility. The remainder of the net proceeds was used to repay $70.0
million of the Term Debt Facility in February 2009 and for general corporate purposes.
Summarized operating results for the 2008 dispositions through the dates of the respective sales were as follows (in
thousands):
F-16
Aeroglide
For the Period
January 1, 2008
For the Year
through Disposition
Ended December 31, 2007
Net sales.....................................................................
$
34,294
$
53,591
Operating income.......................................................
Other expense.............................................................
Provision (benefit) for income taxes...........................
Noncontrolling interest...............................................
Income from discontinued
5,041
(11)
1,274
239
2,488
(17)
(323)
156
operations (1)..........................................................
$
3,517
$
2,638
(1) The results above for the period from January 1, 2008 through disposition exclude $1.6 million of intercompany interest expense.
The results for the year ended December 31, 2007 exclude $3.3 million of intercompany interest expense.
Silvue
For the Period
January 1, 2008
For the Year
through Disposition
Ended December 31, 2007
Net sales.....................................................................
$
11,465
$
22,521
Operating income.......................................................
Other expense.............................................................
Provision for income taxes.........................................
Noncontrolling interest...............................................
Income from discontinued
2,416
(83)
933
310
5,536
(61)
1,846
787
operations(1)...........................................................
$
1,090
$
2,842
(1) The results above for the period from January 1, 2008 through disposition exclude $0.6 million of intercompany interest expense.
The results for the year ended December 31, 2007 exclude $1.5 million of intercompany interest expense.
Note E – Operating Segment Data
At December 31, 2009, the Company had six reportable operating segments. Each operating segment represents an
acquisition (Staffmark LLC is included in the Staffmark operating segment). The Company’s operating segments are
strategic business units that offer different products and services. They are managed separately because each business
requires different technology and marketing strategies.
A description of each of the reportable segments and the types of products and services from which each segment
derives its revenues is as follows:
• Compass AC Holdings, Inc. (“ACI” or “Advanced Circuits”), an electronic components manufacturing
company, is a provider of prototype, quick-turn and production rigid printed circuit boards. ACI manufactures
and delivers custom printed circuit boards to customers mainly in North America. ACI is headquartered in
Aurora, Colorado.
• American Furniture Manufacturing, Inc. (“AFM” or “American Furniture”) is a leading domestic manufacturer
of upholstered furniture for the promotional segment of the marketplace. AFM offers a broad product line of
stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products,
sold primarily at retail price points ranging between $199 and $999. AFM is a low-cost manufacturer and is
able to ship any product in its line within 48 hours of receiving an order. AFM is headquartered in Ecru,
Mississippi and its products are sold in the United States.
F-17
• Anodyne Medical Device, Inc. (“Anodyne”), is a leading designer and manufacturer of powered and non-
powered medical therapeutic support surfaces and patient positioning devices serving the acute care, long-term
care and home health care market Anodyne is headquartered in Coral Springs, Florida and its products are
sold primarily in North America.
• Fox Factory, Inc. (“Fox”) is a designer, manufacturer and marketer of high end suspension products for
mountain bikes, all-terrain vehicles, snowmobiles and other off-road vehicles. Fox acts as both a tier one
supplier to leading action sport original equipment manufacturers and provides after-market products to
retailers and distributors. Fox is headquartered in Watsonville, California and its products are sold worldwide.
• HALO Branded Solutions, Inc. (“HALO”), operating under the brand names of HALO and Lee Wayne, serves
as a one-stop shop for approximately 38,000 customers providing design, sourcing, management and
fulfillment services across all categories of its customer promotional product needs. HALO has established
itself as a leader in the promotional products and marketing industry through its focus on service through its
approximately 1,000 account executives. Halo is headquartered in Sterling, Illinois.
• CBS Personnel Holdings, Inc. (doing business as Staffmark) (“Staffmark”), a human resources outsourcing
firm, is a provider of temporary staffing services in the United States. Staffmark serves approximately 6,500
corporate and small business clients. Staffmark also offers employee leasing services, permanent staffing and
temporary-to-permanent placement services. Staffmark is headquartered in Cincinnati, Ohio.
The tabular information that follows shows data of operating segments reconciled to amounts reflected in the
consolidated financial statements. The operations of each of the operating segments are included in consolidated
operating results as of their date of acquisition. Revenues from geographic locations outside the United States were not
material for each operating segment, except Fox, in each of the years presented below. Fox recorded net sales to
locations outside the United States, principally Asia, of $84.0 million, $92.5 million and $70.5 million for the years
ended December 31, 2009, 2008 and 2007, respectively. There were no significant inter-segment transactions.
Segment profit is determined based on internal performance measures used by the Chief Executive Officer to assess the
performance of each business. Segment profit excludes acquisition related amounts and charges not pushed down to
the segments and are reflected in Corporate and other.
A disaggregation of the Company’s consolidated revenue and other financial data for the years ended December 31,
2009, 2008 and 2007 is presented below (in thousands):
Net sales of operating segments
Year Ended December 31,
2009
2008
2007
ACI.........................................................................................................
$ 46,518
$ 55,449
$ 52,292
American Furniture................................................................................
141,971
130,949
46,981
Anodyne.................................................................................................
54,075
54,199
44,189
Fox.........................................................................................................
121,519
131,734
-
Halo........................................................................................................
139,317
159,797
128,449
Staffmark................................................................................................
745,340
1,006,345
569,880
Total
1,248,740
1,538,473
841,791
Reconciliation of segment revenues to consolidated revenues:
Corporate and other................................................................................
-
-
-
Total consolidated revenues
$ 1,248,740
$ 1,538,473
$ 841,791
F-18
Profit of operating segments (1)
Year Ended December 31,
2009
2008
2007
ACI.........................................................................................................
$ 16,297
$ 17,665
$ 17,078
American Furniture................................................................................
6,487
5,123
2,702
Anodyne.................................................................................................
7,400
4,228
2,936
Fox.........................................................................................................
10,658
10,707
-
Halo........................................................................................................
2,847
5,289
7,006
Staffmark(2)...........................................................................................
(55,603)
16,768
22,542
Total
(11,914)
59,780
52,264
Reconciliation of segment profit to consolidated income (loss)
from continuing operations before income taxes:
Interest expense, net...............................................................................
(10,558)
(16,451)
(4,474)
Loss on debt extinguishment..................................................................
(3,652)
-
-
Other income (expense)..........................................................................
(282)
894
(26)
Corporate and other (3)..........................................................................
(34,520)
(33,880)
(28,545)
Total consolidated income (loss) from continuing operations before
income taxes
$ (60,926)
$ 10,343
$ 19,219
Includes $50.0 million of goodwill impairment during the year ended December 31, 2009. See Note I.
(1) Segment profit represents operating income (loss).
(2)
(3) Corporate and other consists of charges at the corporate level and purchase accounting adjustments not “pushed down” to the segment. In
addition, Corporate and other includes $9.8 million of Staffmark’s intangible asset impairment during the year ended December 31, 2009,
not “pushed down” to the segment. See Note I.
Accounts receivable
Accounts
Receivable
December 31, 2009
Accounts
Receivable
December 31, 2008
ACI................................................................................................ $ 2,762
American Furniture........................................................................ 12,032
Anodyne......................................................................................... 9,078
Fox................................................................................................. 15,590
Halo............................................................................................... 25,103
Staffmark....................................................................................... 106,394
Total
170,959
Reconciliation of segment to consolidated totals:
$ 3,131
11,149
6,919
10,201
29,358
108,101
168,859
Corporate and other.......................................................................
Total
-
170,959
-
168,859
Allowance for doubtful accounts
Total consolidated net accounts receivable
(5,409)
$ 165,550
(4,824)
$ 164,035
F-19
Goodwill
Goodwill
Assets
Assets
Identifiable
Identifiable
Depreciation and
Amortization Expense
for the Year
Ended December 31,
Dec. 31, 2009
Dec. 31, 2008
Dec. 31, 2009(1)
Dec. 31, 2008(1)
2009
2008
2007
Goodwill and identifiable assets
of operating segments
ACI......................................................
$ 50,716
$ 50,659
$ 19,252
$ 20,309
$ 3,642
$ 3,741
$ 3,588
American Furniture...............................
41,435
41,435
63,123
67,752
3,654
3,704
1,160
Anodyne...............................................
19,555
19,555
20,584
23,784
2,623
2,740
2,338
Fox.......................................................
31,372
31,372
73,714
83,246
6,509
6,716
-
Halo......................................................
39,060
40,184
43,647
46,291
3,351
3,157
2,280
Staffmark (3)........................................
89,715
139,715
85,230
84,947
7,880
8,214
2,316
Total
271,853
322,920
305,550
326,329
27,659
28,272
11,682
Reconciliation of segment to
consolidated total:
Corporate and other identifiable assets
Identifiable assets of disc. ops.
Amortization of debt issuance costs
Goodwill carried at Corporate level (2)
-
-
71,884
154,877
5,337
4,857
4,806
-
-
-
-
-
-
-
-
-
-
-
1,776
1,969
1,232
16,175
16,175
-
-
-
-
-
Total
$ 288,028
$ 339,095
$ 377,434
$ 481,206
$ 34,772
$ 35,098
$ 17,720
(1) Not including accounts receivable scheduled above.
(2) Represents goodwill resulting from purchase accounting adjustments not “pushed down” to the respective segment. Goodwill is allocated back to
the respective segment for purposes of impairment testing.
(3) Includes $50.0 million of goodwill impairment during the year ended December 31, 2009. See Note I.
Note F – Inventories
Inventory is comprised of the following (in thousands):
December 31,
2009
December 31,
2008
Raw materials and supplies................................
Finished goods...................................................
Less: obsolescence reserve.................................
Total
$ 34,764
18,003
(1,040)
$ 51,727
$ 34,405
17,571
(1,067)
$ 50,909
Note G – Property, Plant and Equipment
Property, plant and equipment is comprised of the following (in thousands):
Machinery, equipment and software
Office furniture and equipment
Leasehold improvements
Less: accumulated depreciation
Total
December 31,
2009
December 31,
2008
$ 23,842
8,837
6,182
38,861
(13,359)
$ 25,502
$ 26,024
10,501
6,030
42,555
(11,792)
$ 30,763
Depreciation expense was approximately $8.4 million, $8.5 million and $3.8 million for the years ended December 31,
2009, 2008 and 2007, respectively.
F-20
Note H - Commitments and Contingencies
Leases
The Company leases office facilities, computer equipment and software under various operating arrangements. The
future minimum rental commitments at December 31, 2009 under operating leases having an initial or remaining non-
cancelable term of one year or more are as follows (in thousands):
2010
2011
2012
2013
2014
Thereafter
$
12,120
8,278
6,202
4,627
4,040
22,816
58,083
$
The Company’s rent expense for the fiscal years ended December 31, 2009, 2008 and 2007 totaled $14.1 million, $16.5
million and $8.3 million, respectively.
Legal Proceedings
In the normal course of business, the Company and its subsidiaries are involved in various claims and legal
proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe
that an unfavorable outcome will have a material adverse effect on the Company’s consolidated financial position or
results of operations.
Note I - Goodwill and Other Intangible Assets
Goodwill impairment
The Company performed its 2009 annual goodwill impairment testing in accordance with guidelines issued by the
FASB as of March 31, 2009. This annual impairment test involved a two-step process. The first step of the impairment
test involved comparing the fair values of the applicable reporting units with their aggregate carrying values, including
goodwill. The Company’s reporting units are the same as its operating segments.
The Company determined fair values for each of its reporting units using both the income and market approach. For
purposes of the income approach, fair value was determined based on the present value of estimated future cash flows,
discounted at an appropriate risk-adjusted rate. The Company used its internal forecasts to estimate future cash flows
and included an estimate of long-term future growth rates based on its most recent views of the long-term outlook for
each business. Discount rates were derived by applying market derived inputs and analyzing published rates for
industries comparable to the Company’s reporting units. The Company used discount rates that are commensurate with
the risks and uncertainty inherent in the financial markets generally and in the internally developed forecasts. Discount
rates used in these reporting unit valuations ranged from approximately 15% to 16%. Valuations using the market
approach reflect prices and other relevant observable information generated by market transactions involving businesses
comparable to the Company’s reporting units. The Company assesses the valuation methodology under the market
approach based upon the relevance and availability of data at the time of performing the valuation and weighs the
methodologies appropriately.
Based on the results of the annual impairment tests performed as of March 31, 2009, an indication of impairment
existed at the Company’s Staffmark reporting unit. In each of the other reporting units the result of the annual
goodwill impairment test indicated that the fair value of the reporting unit exceeded its carrying value. Based on the
results of the second step of the impairment test, the Company estimated that the carrying value of the Staffmark
goodwill exceeded its fair value by approximately $50.0 million. As a result of this shortfall, the Company recorded a
$50.0 million pretax goodwill impairment charge to impairment expense on the Consolidated Statement of Operations
during the year ended December 31, 2009. The carrying amount of Staffmark exceeded its fair value due to the recent
and projected significant decrease in revenue and operating profit at Staffmark resulting from the negative impact on
temporary staffing and permanent placement revenues due to the depressed U.S. macroeconomic conditions resulting in
downward employment trends. The results of the annual impairment tests performed as of April 30, 2008, and April
30, 2007 indicated that the fair values of the reporting units exceeded their carrying values and, therefore, goodwill was
not impaired. Accordingly, there were no charges for goodwill impairment in the year ended December 31, 2008 or
December 31, 2007.
F-21
Estimating the fair value of reporting units involves the use of estimates and significant judgments that are based on a
number of factors including actual operating results, future business plans, economic projections and market data.
Actual results may differ from forecasted results. While no impairment was indicated in the Company’s step one
goodwill impairment tests in the reporting units other than Staffmark, if current economic conditions persist longer or
deteriorate further than expected, it is reasonably possible that the judgments and estimates described above could
change in future periods for each of the Company’s reporting units.
The goodwill impairment charge did not have any adverse effect on the covenant calculations or compliance under the
Company’s Credit Agreement.
A reconciliation of the change in the carrying value of goodwill for the periods ended December 31, 2009 and 2008 are
as follows (in thousands):
2009
2008
Beginning balance as of January 1:
Goodwill............................................................................................................................................. $ 339,095
-
Accumulated impairment losses.........................................................................................................
339,095
(50,000)
Impairment losses...............................................................................................................................
Acquisition of businesses (1).............................................................................................................. 1,009
Acquired goodwill in connection with Anodyne CEO promissory note (See Note R)....................... -
Adjustment to purchase accounting (2).............................................................................................. (2,076)
Total adjustments........................................................................................................................... (51,067)
Ending balance as of December 31:
Goodwill............................................................................................................................................. 338,028
(50,000)
Accumulated impairment losses.........................................................................................................
$ 288,028
$ 218,817
-
218,817
-
117,031
3,191
56
120,278
339,095
-
$ 339,095
(1) The Company’s HALO and ACI business segments each acquired one add-on acquisition during the year ended December 31, 2009.
(2) Primarily represents adjustments to purchase accounting related to three acquisitions in 2008 by the HALO operating segment.
Approximately $141.7 million of goodwill is deductible for income tax purposes at December 31, 2009.
Other intangible assets
In connection with the annual goodwill impairment testing, the Company tested other indefinite-lived intangible assets
at the Staffmark reporting unit. As a result of this analysis we determined that the carrying value exceeded the fair
value of the CBS Personnel trade name (an indefinite-lived asset), based principally on the phase-out of the CBS
Personnel trade name and rebranding of the reporting unit to Staffmark beginning in February 2009. The fair value of
the CBS Personnel trade name was determined by applying the income approach to forecasted revenues at the
Staffmark reporting unit. The result of this analysis indicated that the carrying value of the trade name ($10.6 million)
exceeded its fair value ($0.8 million) by approximately $9.8 million. Therefore, an impairment charge of $9.8 million
was recorded to impairment expense on the Consolidated Statement of Operations for the year ended December 31,
2009. The remaining balance ($0.8 million) of the CBS Personnel trade name is being amortized over 2.75 years.
F-22
Other intangible assets subject to amortization are comprised of the following at December 31, 2009 and 2008 (in
thousands):
December 31,
2009
2008
Weighted
Average
Useful Lives
$
$
Customer relationships..................................................................................................
Technology....................................................................................................................
Trade names, subject to amortization............................................................................
Licensing and non-compete agreements........................................................................
Distributor relations......................................................................................................
Accumulated amortization customer relationships........................................................
Accumulated amortization technology..........................................................................
Accumulated amortization trade names, subject to amortization..................................
Accumulated amortization licensing and non-compete agreements..............................
Accumulated amortization distributor relations............................................................
Total accumulated amortization....................................................................................
Trade names, not subject to amortization (1)................................................................
Total
188,773
37,959
25,300
4,451
1,380
257,863
(48,677)
(11,360)
(3,383)
(3,613)
(797)
(67,830)
26,332
216,365
$
$
187,669
37,959
24,500
4,416
1,380
255,924
(32,287)
(6,388)
(1,531)
(2,369)
(630)
(43,205)
36,770
249,489
12
8
12
3
4
(1) As discussed above, the Company’s CBS Personnel trade name was impaired during the year ended December 31, 2009. As a result, the
Company recorded an impairment charge of $9.8 million during the year ended December 31, 2009.
Estimated charges to amortization expense of intangible assets over the next five years, is as follows, (in thousands):
2010
2011
2012
2013
2014
$
23,580
22,921
22,558
22,438
22,272
113,769
$
The Company’s amortization expense of intangible assets for the fiscal years ended December 31, 2009, 2008 and 2007
totaled $24.6 million, $24.6 million and $12.7 million, respectively.
Note J — Fair Value Measurement
The Company adopted the fair value guidelines issued by the FASB as of January 1, 2008. These guidelines establish a
valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the
inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical
assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are
observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full
term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used
to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is
determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December
31, 2009 and 2008 (in thousands):
F-23
Liabilities:
Derivative liability – interest rate swap
Supplemental put obligation
Stock option of minority shareholder (1)
Fair Value Measurements at December 31, 2009
Carrying
Value
Level 1
Level 2
Level 3
$ 2,001
$ -
$ 2,001
$ -
12,082 - - 12,082
200
-
-
200
(1) Represents a former employee’s option to purchase additional common stock in Anodyne. See Note R.
Liabilities:
Derivative liability – interest rate swap
Supplemental put obligation
Stock option of minority shareholder (1)
Fair Value Measurements at December 31, 2008
Carrying
Value
Level 1
Level 2
Level 3
$ 5,242
$ -
$ 5,242
$ -
13,411 - - 13,411
200
-
200
-
(1) Represents a former employee’s option to purchase additional common stock in Anodyne. See Note R.
A reconciliation of the change in the carrying value of the Company’s level 3, supplemental put liability for the year
ended December 31, 2009 and 2008 is as follows (in thousands):
Balance at January 1
2009
2008
$ 13,411
$ 21,976
Supplemental put expense (reversal)
(1,329)
6,382
Payment of supplemental put liability
Balance at December 31
-
(14,947)
$
12,082
$
13,411
Valuation Techniques
The Company’s derivative instrument consists of an over-the-counter (OTC) interest rate swap contract which is not
traded on a public exchange. The fair value of the Company’s interest rate swap contract was determined based on
inputs that are readily available in public markets or can be derived from information available in publicly quoted
markets. The stock option of the noncontrolling shareholder was determined based on inputs that were not readily
available in public markets or able to be derived from information available in publicly quoted markets. As such, the
Company categorized its interest rate swap contract as Level 2 and the stock option of the noncontrolling shareholder as
Level 3.
The Company’s Manager, CGM is the owner of 100% of the Allocation Interests in the Company. Concurrent with our
initial public offering in 2006, CGM and the Company entered into a Supplemental Put Agreement, which requires the
Company to acquire these Allocation Interests upon termination of the Management Services Agreement. Essentially,
the put rights granted to CGM require us to acquire CGM’s Allocation Interests in the Company at a price based on a
percentage of the increase in fair value in the Company’s businesses over its original basis in those businesses. Each
fiscal quarter the Company estimates the fair value of its businesses for the purpose of determining the potential
liability associated with the Supplemental Put Agreement. The Company uses the following key assumptions in
measuring the fair value of the supplemental put: (i) financial and market data of publicly traded companies deemed to
be comparable to each of the Company’s businesses and (ii) financial and market data of comparable merged, sold or
acquired companies. Any change in the potential liability is accrued currently as an adjustment to earnings. The
implementation of fair value guidelines issued by the FASB did not result in any material changes to the models or
processes used to value this liability.
During 2009, the inputs utilized in connection with the fair value analysis of the Stock option of a noncontrolling
shareholder were no longer available in publicly quoted markets. As a result, the inputs were unobservable and the fair
value was moved from the Level 2 column to the Level 3 column of the table above. The following table details the
change in the Company’s Level 3 liabilities (in thousands):
Balance at January 1, 2009
Transfer in from Level 2
Balance at December 31, 2009
$ -
200
$ 200
F-24
The following table provides the assets and liabilities carried at fair value measured on a non-recurring basis as of
December 31, 2009 (in thousands):
Fair Value Measurements at Dec. 31, 2009
Gains/(losses)
Year Ended Dec. 31,
Carrying
Value
Assets:
Goodwill (1)
Level 1
Level 2
Level 3
2009
2008
$ 88,640
$ -
$ -
$ 88,640
$ (50,000)
$ -
(1) Represents the fair value of goodwill at the Staffmark operating segment, including a $1.1 million reduction in goodwill allocated from
the corporate level, subsequent to the goodwill impairment charge recognized during the year ended December 31, 2009. See Note I
for further discussion regarding impairment and valuation techniques.
Note K – Debt
On December 7, 2007, the Company entered into its current Credit Agreement with a group of lenders led by Madison
Capital, LLC (“Madison”). The Credit Agreement amended provides for a Revolving Credit Facility totaling $340.0
million and a Term Loan Facility with a balance of $76.0 million at December 31, 2009, (collectively “Credit
Agreement”). The Term Loan Facility requires quarterly payments of $0.5 million that commenced March 31, 2008,
with a final payment of the outstanding principal balance due on December 7, 2013. In 2009 the Company repaid $75.0
million in term debt in addition to the quarterly amortization with a portion of the unused proceeds from the sale of two
of its operating segments in 2008. The Revolving Credit Facility matures on December 7, 2012. Availability under the
Revolving Credit Facility is limited to the lesser of $340 million or the Company’s borrowing base at the time of
borrowing. The Company incurred approximately $5.8 million in fees and costs for the arrangement of the Credit
Agreement during 2007. These costs were capitalized and are being amortized over the life of the loans. Approximately
$1.8 million, $2.0 million and $1.2 million were amortized to debt issuance cost in 2009, 2008 and 2007, respectively,
in connection with these capitalized costs.
The Revolving Credit Facility allows for loans at either base rate or LIBOR. Base rate loans bear interest at a
fluctuating rate per annum equal to the greater of (i) the prime rate of interest published by the Wall Street Journal and
(ii) the sum of the Federal Funds Rate plus 0.5% for the relevant period, plus a margin ranging from 1.50% to 2.50%,
based upon the ratio of total debt to adjusted consolidated earnings before interest expense, tax expense, and
depreciation and amortization expenses for such period (the “Total Debt to EBITDA Ratio”). LIBOR loans bear
interest at a fluctuating rate per annum equal to the London Interbank Offer Rate, or LIBOR, for the relevant period
plus a margin ranging from 2.50% to 3.50% based on the Total Debt to EBITDA Ratio. The Company is required to
pay commitment fees ranging between 0.75% and 1.25% per annum on the unused portion of the Revolving Credit
Facility. The Company recorded commitment fees of $3.5 million, $3.1 million and $2.7 million during 2009, 2008
and 2007 respectively, to interest expense.
The Term Loan Facility bears interest at either base rate or the London Interbank Offer Rate (“LIBOR”). Base rate
loans bear interest at a fluctuating rate per annum equal to the greater of (i) the prime rate of interest published by the
Wall Street Journal and (ii) the sum of the Federal Funds Rate plus 0.5% for the relevant period plus a margin of 3.0%.
LIBOR loans bear interest at a fluctuating rate per annum equal to LIBOR for the relevant period plus a margin of
4.0%.
The Company is subject to certain customary affirmative and restrictive covenants arising under the Credit Agreement.
In addition, the Company is required to maintain certain financial ratios under the Revolving Credit Facility. The
Company was in compliance with all covenants at December 31, 2009. The following table reflects required and actual
financial ratios as of December 31, 2009 included as part of the affirmative covenants in our Credit Agreement:
Description of Required Covenant Ratio
Fixed Charge Coverage Ratio..................................... greater than or equal to 1.5:1.0
Interest Coverage Ratio.............................................. greater than or equal to 2.75:1.0
Total Debt to Consolidated EBITDA......................... less than or equal to 3.5:1.0
Covenant Ratio Requirement
Actual Ratio
3.09:1.0
4.25:1.0
1.65:1.0
A breach of any of these covenants will be an event of default under the Credit Agreement. Upon the occurrence of an
event of default under the Credit Agreement, the Revolving Credit Facility may be terminated, the Term Loan and all
outstanding loans and other obligations under the Credit Agreement may become immediately due and payable and any
letters of credit then outstanding may be required to be cash collateralized, and the Agent and the Lenders may exercise
any rights or remedies available to them under the Credit Agreement, the Collateral Agreement or any other documents
F-25
delivered in connection therewith. Any such event would materially impair the Company’s ability to conduct its
business.
The Credit Agreement allows for letters of credit in an aggregate face amount of up to $100.0 million. Letters of credit
outstanding at December 31, 2009 and 2008 totaled approximately $66.2 million and $61.9 million, respectively. Letter
of credit fees recorded to interest expense during the years ended December 31, 2009, 2008 and 2007 aggregated
approximately $1.7 million, $1.7 million and $0.6 million, respectively.
The Credit Agreement is secured by a first priority lien on all the assets of the Company, including, but not limited to,
the capital stock of the businesses, loan receivables from the Company’s businesses, cash and other assets. The
Revolving Credit Facility also requires that the loan agreements between the Company and its businesses be secured by
a first priority lien on the assets of the businesses subject to the letters of credit issued by third party lenders on behalf
of such businesses.
On February 18, 2009, the Company reduced its debt and repaid at par, from cash on its balance sheet, $75.0 million of
debt under its Term Loan Facility. The Company expensed $1.1 million of capitalized debt issuance costs in
connection with the debt repayment. This amount is included in Loss on debt extinguishment in the Consolidated
Statement of Operations.
At December 31, 2009, the Company had $0.5 million in revolving credit commitments outstanding and availability of
approximately $136.8 million under its Revolving Credit Facility. At December 31, 2009, the Company had $76.0
million in Term Loan Facility (“Term Loans”) outstanding. The Company intends to use the availability under the
Revolving Credit Facility to pursue acquisitions of additional businesses to the extent permitted under its Credit
Agreement and to provide for working capital needs.
Annual maturities of our Term Loan Facility and Revolving Credit Facility are scheduled as follows:
2010
2011
2012
2013
2014
Thereafter
$
2,000
2,000
2,500
70,000
-
-
$
76,500
Note L - Derivative Instruments and Hedging Activities
On January 22, 2008, the Company entered into a three-year fixed-for-floating interest rate swap for $140.0 million
with its bank lenders in order to reduce the risk of changes in cash flows associated with the variable interest payments
on the last $140.0 million of debt outstanding under its Term Loan Facility. The swap effectively fixed the interest rate
at 7.35% on the last $140.0 million of the Company’s outstanding Term Loan Facility. The swap expires in January
2011. The objective of the swap is to hedge the risk of changes in cash flows associated with the future interest
payments on variable rate Term Loan Facility debt with a notional amount of $140.0 million. The cash flow from the
swap is expected to offset any changes in the interest payments on the last $140.0 million of variable rate Term Debt
due to changes in the three-month LIBOR rate. On February 18, 2009, the Company terminated $70.0 million of the
swap in connection with the repayment of $75.0 million of the Term Loan Facility. In connection with the termination,
the Company reclassified $2.5 million from accumulated other comprehensive loss into earnings during the year ended
December 31, 2009.
The swap is a hedge of future specified cash flows. As a result, the swap is a derivative and was designated as a hedging
instrument at the initiation of the swap. The Company has applied cash flow hedge accounting. At the end of each
period, the swap is recorded in the consolidated balance sheet at fair value, in either other assets if it is an asset position,
or in accrued liabilities if it is in a liability position. Any related increases or decreases in the fair value are recognized
on the Company’s consolidated balance sheet within accumulated other comprehensive income.
The Company assesses the effectiveness of its swap on a quarterly basis. The Company has considered the impact of
the current credit crisis in the United States in assessing the risk of counterparty default. The Company believes that it is
still likely that the counterparty for these swaps will continue to perform throughout the contract period, and as a result
F-26
continues to deem the swaps as effective hedging instruments. A counterparty default risk is considered in the valuation
of the interest rate swaps.
At December 31, 2009, management has assessed and concluded that its cash flow hedge (swap) has no ineffectiveness,
as determined by the Change in Variable Cash Flows method due to the following conditions being met: (i) the floating
rate leg of the swap and the hedged variable cash flows are based on three-month LIBOR; (ii) the interest rate reset
dates of the floating rate leg of the swap and the hedged variable cash flows of the last $70.0 million of variable rate
Term Loan Facility debt are the same; (iii) the hedging relationship does not contain any other basis differences; and
(iv) the likelihood of the obligor not defaulting is assessed as being probable. If the Company partially or fully
extinguishes the floating rate debt payments being hedged or were to terminate the interest swap, a portion or all of the
gains or losses that have accumulated in other comprehensive income would be recognized in earnings at that time.
Prospective and retrospective assessments of the ineffectiveness of the hedge have been and will be made at the end of
each fiscal quarter.
At December 31, 2009, the unrealized loss on the swap, reflected in accumulated other comprehensive income, was
approximately $2.0 million.
The following table provides the fair value of the Company’s cash flow hedge as well as its location on the balance
sheet as of December 31, 2009 and 2008 (in thousands):
December 31,
December 31,
2009
2008
Balance Sheet
Location
Liability
Cash flow hedge current
$
1,620
$
2,691
Other current liabilities
Cash flow hedge non-current
381
2,551
Other non-current liabilities
Total
$
2,001
$
5,242
Note M – Income Taxes
Compass Diversified Holdings and Compass Group Diversified Holdings LLC are classified as partnerships for U.S.
Federal income tax purposes and are not subject to income taxes. Each of the Company’s majority owned subsidiaries
are subject to Federal and state income taxes.
Components of the Company’s income tax provision (benefit) are as follows (in thousands):
Current taxes
2009
Federal................................................................................... $ 1,997
State....................................................................................... 1,686
3,683
Total current taxes
Deferred taxes:
Years ended December 31,
2008
$ 13,386
2,276
15,662
2007
$ 8,422
1,094
9,516
Federal................................................................................... (24,519)
State....................................................................................... (445)
(24,964)
$ (21,281)
Total deferred taxes
Total tax provision (benefit)
(8,379)
(757)
(9,136)
$ 6,526
(50)
(298)
(348)
$ 9,168
F-27
The tax effects of temporary differences that have resulted in the creation of deferred tax assets and deferred tax
liabilities at December 31, 2009 and 2008 are as follows:
(in thousands)
December 31,
2009
2008
Deferred tax assets:
Tax credits..................................................................................
Accounts receivable and allowances...........................................
Workers’ compensation..............................................................
Accrued expenses.......................................................................
Loan forgiveness.........................................................................
Other...........................................................................................
Total deferred tax assets
$ 43
1,631
14,952
4,340
111
1,649
$ 22,726
$ 266
1,127
14,716
3,901
677
2,892
$ 23,579
Deferred tax liabilities:
Intangible assets..........................................................................
Property and equipment..............................................................
Prepaid and other expenses.........................................................
Total deferred tax liabilities
$ (54,867)
(3,636)
(1,894)
$ (60,397)
$ (81,334)
(2,516)
(2,288)
$ (86,138)
Total net deferred tax liability
$ (37,671)
$ (62,559)
For the years ending December 31, 2009 and 2008, the Company recognized approximately $60.4 million and $86.1
million, respectively in deferred tax liabilities. A significant portion of the balance in deferred tax liabilities reflects
temporary differences in the basis of property and equipment and intangible assets related to the Company’s purchase
accounting adjustments in connection with the acquisition of certain of the businesses. For financial accounting
purposes the Company recognized a significant increase in the fair values of the intangible assets and property and
equipment. For income tax purposes the existing, pre-acquisition tax basis of the intangible assets and property and
equipment is utilized. In order to reflect the increase in the financial accounting basis over the existing tax basis, a
deferred tax liability was recorded. This liability will decrease in future periods as these temporary differences reverse.
There was no valuation allowance at December 31, 2009 or 2008. A valuation allowance is provided whenever it is
more likely than not that some or all of deferred assets recorded may not be realized.
The reconciliation between the Federal Statutory Rate and the effective income tax rate for 2009, 2008 and 2007 are as
follows:
United States Federal Statutory Rate..........................................
State income taxes (net of Federal benefits)...............................
Expenses of Compass Group Diversified Holdings, LLC
2009
Years ended December 31,
2008
2007
(35.0%)
1.3
35.0%
9.5
35.0%
2.7
representing a pass through to shareholders........................... 4.6
(4.2)
(1.7)
(35.0%)
Credit utilization.........................................................................
Other...........................................................................................
Effective income tax rate
36.5
(24.1)
6.2
63.1%
12.9
(4.5)
1.6
47.7%
F-28
The Company adopted the authoritative provisions of accounting guidance on uncertainty in income taxes on January 1,
2007. The adoption did not result in a cumulative adjustment to the Company’s accumulated earnings. A reconciliation
of the amount of unrecognized tax benefits for 2009 and 2008 are as follows (in thousands):
Balance at January 1, 2007.................................................... $ -
Additions for 2007 tax positions........................................ 15
Additions for prior years’ tax positions.............................. 103
Balance at December 31, 2007.............................................. 118
Additions for prior years’ tax positions.............................. 27
Reductions for prior years’ tax positions........................... (44)
Balance at December 31, 2008.............................................. 101
Additions for prior years’ tax positions.............................. 1,635
Reductions for prior years’ tax positions........................... (11)
Balance at December 31, 2009.............................................. $ 1,725
Included in the unrecognized tax benefits at December 31, 2009 and 2008 is $1.4 million and $21 thousand,
respectively, of tax benefits that, if recognized, would affect the Company’s effective tax rate. The Company accrues
interest and penalties related to uncertain tax positions, at December 31, 2009 and 2008, there is $127 thousand and
$133 thousand accrued, respectively. Such amounts are included in the Provision (benefit) for income taxes in the
accompanying consolidated statements of operations. The change in the unrecognized tax benefits during 2009 is
primarily due to the uncertainty of the deductibility of amortization and depreciation established as part of initial
purchase price allocations in 2008. It is expected that the amount of unrecognized tax benefits will change in the next
twelve months. However, we do not expect the change to have a significant impact on our consolidated results of
operations or financial position.
The Company and its operating segments file U.S. federal and state income tax returns in many jurisdictions with
varying statutes of limitations. The 2005 through 2009 tax years generally remain subject to examinations by the taxing
authorities.
Note N- Noncontrolling interest
Noncontrolling interest represents the portion of a majority-owned subsidiary’s net income and equity that is owned by
noncontrolling shareholders.
The following tables reflect the Company’s percent ownership (on a primary basis), of its majority owned subsidiaries,
which the Company refers to as its businesses, or operating segments, and related noncontrolling interest balances as of
December 31, 2009 and 2008:
ACI
American Furniture
Anodyne
FOX
HALO
Staffmark
(in thousands)
ACI
American Furniture
Anodyne
FOX
HALO
Staffmark
Compass
% Ownership
December 31, 2009
70.2
93.9
74.4
75.5
88.7
76.2
% Ownership
December 31, 2008
70.2
93.9
67.0
75.5
88.3
66.4
% Ownership
December 31, 2007
70.2
93.9
43.5
-
88.3
96.5
Noncontrolling Interest
Balances as of
December 31, 2009
Noncontrolling Interest
Balances as of
December 31, 2008
-
$
2,110
8,398
10,946
3,065
46,286
100
70,905
$
-
$
1,910
10,146
9,290
3,060
54,925
100
79,431
$
F-29
ACI
On October 10, 2007 as part of ACI’s amendment to its credit agreement with the Company, ACI distributed
approximately $47.0 million in cash distributions to Compass AC Holdings, Inc. (“ACH”), ACI’s sole shareholder, and
by ACH to its shareholders, including the Company. The Company’s share of the cash distribution was approximately
$33.0 million with approximately $14.0 million being distributed to ACH’s other shareholders. The Company funded
this distribution by making additional borrowings to ACI of $47.0 million.
The noncontrolling interests’ share of the distribution exceeded Advanced Circuit’s cumulative earnings (“excess
distribution”) by approximately $10.0 million as of December 31, 2007. As a result, in accordance with accounting
guidance, the excess distribution of approximately $10.0 million was charged to noncontrolling interest in the
Company’s consolidated income statement, where it is effectively absorbed by the majority interest. This excess
distribution will be absorbed in the future against noncontrolling interest income, if any, of Advanced Circuits.
Anodyne
On August 8, 2008, the Company exchanged a Promissory Note (Refer to Note R) due August 15, 2008, totaling
approximately $6.9 million (including accrued interest) due from the CEO of Anodyne in exchange for shares of stock
of Anodyne held by the CEO. As a result of this exchange of shares, noncontrolling interest decreased by
approximately $3.9 million in 2008.
In September 2009, Anodyne redeemed outstanding shares of Anodyne stock from a noncontrolling interest holder of
Anodyne for $3.0 million. This payment is included in net proceeds provided by noncontrolling interest on the
Company’s Consolidated Statement of Cash Flows.
Staffmark
During 2009, the Company amended the Staffmark intercompany credit agreement which, among other things,
recapitalized a portion of Staffmark’s long-term debt by exchanging $35.0 million of debt for Staffmark common stock.
As a result of this transaction, the Company’s ownership percentage of the outstanding stock of Staffmark increased
and the noncontrolling interest in Staffmark decreased. In addition, as a result of the exchange the Company received
cash from a noncontrolling shareholder and recorded an increase to noncontrolling interest of $5.5 million. The receipt
of the noncontrolling shareholder contribution is included in Net proceeds provided by noncontrolling interest on the
Company’s Consolidated Statement of Cash Flows.
Note O- Stockholder’s Equity
Trust Shares
The Trust is authorized to issue 500,000,000 Trust shares and the Company is authorized to issue a corresponding
number of LLC interests. The Company will, at all times, have the identical number of LLC interests outstanding as
Trust shares. Each Trust share represents an undivided beneficial interest in the Trust, and each Trust share is entitled
to one vote per share on any matter with respect to which members of the Company are entitled to vote.
On May 16, 2006, the Company completed its initial public offering of 13,500,000 shares of the Trust at an offering
price of $15.00 per share (“the IPO”). Total net proceeds from the IPO, after deducting the underwriters’ discounts,
commissions and financial advisory fee, were approximately $188.3 million. On May 16, 2006, the Company also
completed the private placement of 5,733,333 shares to Compass Group Investments, Inc. (“CGI”) for approximately
$86.0 million and completed the private placement of 266,667 shares to Pharos I LLC, an entity controlled by Mr.
Massoud, the Chief Executive Officer of the Company, and owned by the Company’s management team, for
approximately $4.0 million. CGI also purchased 666,667 shares for $10.0 million through the IPO.
In connection with the purchase of Anodyne on July 31, 2006, the Company issued 950,000 shares of the Trust as part
of the payment price. The shares were valued at $13.77 per share for a total of $13.1 million.
On May 8, 2007, the Company completed a secondary public offering of 9,200,000 trust shares (including the
underwriter’s over-allotment of 1,200,000 shares) at an offering price of $16.00 per share. Simultaneous with the sale
of the trust shares to the public, CGI purchased, through a wholly-owned subsidiary, 1,875,000 trust shares at $16.00
per share in a separate private placement. The net proceeds of the secondary offering to the Company, after deducting
underwriter’s discount and offering costs totaled approximately $168.7 million. The Company used a portion of the net
proceeds to repay the outstanding balance on its Revolving Credit Facility.
F-30
On June 9, 2009, the Company completed a secondary offering of 5,100,000 Trust shares at an offering price of $8.85
per share. The net proceeds to the Company, after deducting underwriter’s discount and offering costs totaled
approximately $42.1 million.
Distributions
During the year ended December 31, 2008, the Company paid the following distributions:
• On January 30, 2008, the Company paid a distribution of $0.325 per share to holders of record as of
January 25, 2008;
• On April 25, 2008, the Company paid a distribution of $0.325 per share to holders of record as of
April 22, 2008;
• On July 29, 2008, the Company paid a distribution of $0.325 per share to holders of record as of July
24, 2008; and
• On October 31, 2008, the Company paid a distribution of $0.34 per share to holders of record as of
October 24, 2008.
During the year ended December 31, 2009, the Company paid the following distributions:
• On January 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of
January 23, 2009.
• On April 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of April
23, 2009.
• On July 30, 2009, the Company paid a distribution of $0.34 per share to holders of record as of July
24, 2009.
• On October 29, 2009, the Company paid a distribution of $0.34 per share to holders of record as of
October 23, 2009.
On January 28, 2010, the Company paid a distribution of $0.34 per share to holders of record as of January 22, 2010.
In connection with the adoption of FASB’s noncontrolling interest guidelines, on January 1, 2009, the Company
reclassified noncontrolling interest to stockholders’ equity. This reclassification was applied prospectively with the
exception of presentation and disclosure requirements which were applied retrospectively for all periods presented.
Note P – Unaudited Quarterly Financial Data
The following table presents the unaudited quarterly financial data. This information has been prepared on a basis
consistent with that of the audited consolidated financial statements and all necessary material adjustments, consisting
of normal recurring accruals and adjustments, have been included to present fairly the unaudited quarterly financial
data. The quarterly results of operations for these periods are not necessarily indicative of future results of operations.
The per share calculations for each of the quarters are based on the weighted average number of shares for each period;
therefore, the sum of the quarters may not necessarily be equal to the full year per share amount.
F-31
(in thousands)
December 31,
2009
September 30,
2009
June 30,
2009
March 31,
2009
Total revenues..............................................................................................
Gross profit..................................................................................................
Operating income.........................................................................................
Income (loss) from continuing operations.....................................................
Net income (loss) attributable to Holdings....................................................
$
$
$
$
362,059
78,910
6,461
(1,680)
(1,680)
324,239
71,064
7,902
2,101
2,101
287,528
64,166
2,974
627
627
274,914
57,609
(61,995)
(27,318)
(27,318)
$
$
$
$
Basic and fully diluted income (loss) per share
attributable to Holdings:...........................................................................
$
(0.05)
$
0.06
$
0.02
$
(0.87)
(in thousands)
December 31,
2008
September 30,
2008
June 30,
2008
March 31,
2008
Total revenues..............................................................................................
Gross profit..................................................................................................
Operating income.........................................................................................
Income (loss) from continuing operations.....................................................
Income from discontinued operations, net of income taxes...........................
Net income (loss) attributable to Holdings....................................................
Basic and fully diluted income (loss) per share attributable to
Holdings:
Continuing operations............................................................................
Discontinued operations.........................................................................
Basic and fully diluted income (loss) per share
$
$
$
$
374,827
88,603
8,952
797
431
1,228
413,601
90,995
13,362
4,622
636
5,258
398,910
87,861
4,598
(2,271)
74,873
72,602
351,135
74,808
957
(2,824)
2,030
(794)
$
$
$
$
$
0.03
0.01
$
0.15
0.02
$
(0.07)
2.37
$
(0.09)
0.06
attributable to Holdings................................................................................
$
0.04
$
0.17
$
2.30
$
(0.03)
Note Q – Supplemental Data
Supplemental Balance Sheet Data (in thousands):
Summary of accrued expenses:
Accrued payroll and fringes............
Accrued taxes.................................
Income taxes payable......................
Accrued interest..............................
Other accrued expenses..................
Total
Warrantly liability:
Beginning balance..........................
Acrual.............................................
Warranty payments.........................
Ending balance...............................
December 31,
2009
December 31,
2008
$ 23,480
9,758
3,597
1,912
15,559
$ 54,306
December 31,
2009
$
1,577
1,451
(1,499)
$ 1,529
$ 25,035
9,034
1,762
3,512
17,766
$ 57,109
December 31,
2008
$
1,059
2,050
(1,532)
$ 1,577
Supplemental Statement of Operations Data:
In connection with fire at the AFM manufacturing facility in February 2008, the Company recorded business
interruption proceeds of $1.3 million to offset cost of sales and $3.1 million to offset selling, general and administrative
expense during the year ended December 31, 2008. The Company recorded business interruption proceeds totaling
approximately $1.5 million to offset cost of sales during the year ended December 31, 2009.
F-32
Supplemental Cash Flow Statement Data (in thousands):
December 31,
2009
December 31,
2008
December 31,
2007
Interest paid....................................
Taxes paid.......................................
$ 12,527
7,709
$ 15,754
15,971
$ 6,489
12,136
Note R – Related Party Transactions
The Company has entered into the following related party transactions with its Manager, CGM:
• Management Services Agreement
•
LLC Agreement
Supplemental Put Agreement
Cost Reimbursement and Fees
•
•
Management Services Agreement - The Company entered into a management services agreement (“Management
Services Agreement”) with CGM effective May 16, 2006. The Management Services Agreement provides for, among
other things, CGM to perform services for the Company in exchange for a management fee paid quarterly and equal to
0.5% of the Company’s adjusted net assets. The Company amended the Management Services Agreement on
November 8, 2006, to clarify that adjusted net assets are not reduced by non-cash charges associated with the
Supplemental Put Agreement, which amendment was unanimously approved by the Compensation Committee and the
Board of Directors. The management fee is required to be paid prior to the payment of any distributions to
shareholders.
For the year ended December 31, 2009, 2008 and 2007, the Company incurred the following management fees to CGM,
by entity (in thousands):
December 31,
2009
Advanced Circuits.................... $ 375
American Furniture..................
375
Anodyne...................................
263
FOX.........................................
375
HALO......................................
375
Staffmark..................................
389
Corporate.................................
10,678
12,830
$
December 31,
2008
$ 500
500
350
496
500
1,241
11,144
14,731
$
December 31,
2007
$ 500
167
350
-
417
1,055
7,631
10,120
$
Staffmark paid management fees of approximately $0.3 million and $0.5 million for the years ended December 31,
2009 and 2008, respectively, to a separate manager of Staffmark LLC, unrelated to CGM.
Approximately $3.3 million and $0.6 million of the management fees incurred were unpaid as of December 31, 2009
and 2008, respectively, and included in Due to related party on the consolidated balance sheets.
LLC Agreement – In addition to providing management services to the Company, pursuant to the Management Services
Agreement, CGM owns 100% of the Allocation Interests in the Company. CGM paid $0.1 million for these Allocation
Interests and has the right to cause the Company to purchase the Allocation Interests it owns. The Allocation Interests
give CGM the right to distributions pursuant to a profit allocation formula upon the occurrence of certain events.
Certain events include, but are not limited to, the dispositions of subsidiaries. In connection with the dispositions of
Silvue and Aeroglide in 2008 the Company paid CGM a profit allocation of $14.9 million.
Supplemental Put Agreement - Concurrent with the IPO, CGM and the Company entered into a Supplemental Put
Agreement, which may require the Company to acquire these Allocation Interests upon termination of the Management
Services Agreement. Essentially, the put rights granted to CGM require the Company to acquire CGM’s Allocation
Interests in the Company at a price based on a percentage of the increase in fair value in the Company’s businesses over
F-33
its basis in those businesses. Each fiscal quarter the Company estimates the fair value of its businesses for the purpose
of determining its potential liability associated with the Supplemental Put Agreement. Any change in the potential
liability is accrued currently as an adjustment to earnings. For the year ended December 31, 2009, the Company
reversed expense related to the Supplemental Put Agreement of approximately $1.3 million. For the years ended
December 31, 2008 and 2007, the Company recognized approximately $6.4 million and $7.4 million in expense related
to the Supplemental Put Agreement. The Company paid approximately $14.9 million to CGM during the year ended
December 31, 2008 related to the profit allocation for the dispositions of Aeroglide and Silvue.
Cost Reimbursement and Fees
The Company reimbursed its Manager, CGM, approximately $2.7 million, $2.6 million and $1.8 million, principally for
occupancy and staffing costs incurred by CGM on the Company’s behalf during the years ended December 31, 2009,
2008 and 2007, respectively.
CGM acted as an advisor for each of the 2008 acquisitions (Fox and Staffmark) for which it received transaction service
and expense payments of approximately $2.0 million. CGM acted as an advisor for each of the 2007 acquisitions
(Aeroglide, HALO and American Furniture) for which it received transaction service and expense payments of
approximately $2.1 million.
The Company has entered into the following significant related party transactions with its subsidiaries:
Anodyne
On July 31, 2006, the Company acquired from CGI and its wholly-owned, indirect subsidiary, Compass Medical
Mattress Partners, LP (the “Seller”) approximately 47.3% of the outstanding capital stock, on a fully-diluted basis, of
Anodyne, representing approximately 69.8% of the voting power of all Anodyne stock. On the same date, the
Company entered into a Note Purchase and Sale Agreement with CGI and the Seller for the purchase from the Seller of
a Promissory Note (“Note”) issued by a borrower controlled by Anodyne’s chief executive officer. The Note was
secured by shares of Anodyne stock and guaranteed by Anodyne’s chief executive officer. The Note accrued interest at
the rate of 13% per annum and was added to the Note’s principal balance. The Note was to mature on August 15, 2008.
The Company recorded interest income totaling $0.5 million and $0.8 million in 2008 and 2007, respectively, related to
this note.
On August 8, 2008 the Company exchanged the aforementioned Note, due August 15, 2008, totaling approximately
$6.9 million (including accrued interest) due from the CEO of Anodyne in exchange for shares of stock of Anodyne
held by the CEO. In addition, the CEO of Anodyne was granted an option to purchase approximately 10% of the
outstanding shares of Anodyne, at a strike price exceeding the exchange price, from the Company in the future for
which the CEO exchanged Anodyne stock valued at $0.2 million (the fair value of the option at the date of grant) as
consideration.
On August 5, 2008, the Company exchanged $1.5 million in term debt due from Anodyne for 15,500 shares of common
stock and 13,950 shares of convertible preferred stock of Anodyne.
Refer to Note N for the impact on noncontrolling interest with respect to these transactions.
Advanced Circuits
In connection with the acquisition of Advanced Circuits by CGI, Advanced Circuits loaned certain officers and
members of management of Advanced Circuits $8.2 million for the purchase of shares of Advanced Circuit’s common
stock in late 2005 and early 2006. The notes bared interest at 6% and interest was added to the notes. Advanced
Circuits implemented a performance incentive program whereby the notes could either be partially or completely
forgiven based upon the achievement of certain pre-defined financial performance targets. The original measurement
date for determination of any potential loan forgiveness was based on the financial performance of Advanced Circuits
for the fiscal year ended December 31, 2010. Advanced Circuits had been accruing loan forgiveness over the service
period measured from the issuance of the notes until the original measurement date of December 31, 2010. However,
the Company accelerated the loan forgiveness to January 2010 and as a result, forgave a portion of the loan balance as
described below. AS a result Advanced Circuits reversed $0.7 million of loan forgiveness previously accrued in prior
years during the year ended December 31, 2009. In addition, the Company recorded the amount of interest due over the
original service period of the loan by increasing the loan forgiveness accrual by $1.3 million and by recording $1.1
million of interest income during the year ended December 31, 2009. During each of the fiscal years 2008 and 2007,
ACI accrued approximately $1.6 million for this loan forgiveness. This expense has been classified as a component of
general and administrative expense. Approximately $5.8 million and $5.2 million is reflected as a component of other
non-current liabilities in the consolidated balances sheet as of December 31, 2009 and 2008, respectively.
F-34
On January 12, 2010 the promissory notes and loan forgiveness arrangements referred to above were amended as
follows: (i) $5.8 million of the outstanding loans and interest were forgiven with the remaining balance, $4.7 million
repaid in Class A common stock valued at $47.50 per share, (ii) 0.1 million stock options were granted at an exercise
price of $89.27 per share. The options are outstanding for ten years and vested at the grant date. The effect of this
amendment was reflected as of December 31, 2009.
Refer to Note N for the impact on noncontrolling interest with respect to this transaction.
American Furniture
AFM’s largest supplier, Independent Furniture Supply (“Independent”), is 50% owned by Mike Thomas, AFM's CEO.
AFM purchases polyfoam from Independent on an arms-length basis and AFM performs regular audits to verify market
pricing. AFM does not have any long-term supply contracts with Independent. Total purchases from Independent
during 2009 and 2008 totaled approximately $19.4 million and $18.4 million, respectively. From August 31, 2007
(acquisition date) through December 31, 2007, purchases from Independent totaled approximately $8.4 million. The
Company had unpaid balances due to Independent of $2.2 million and $2.3 million as of December 31, 2009 and
December 31, 2008, respectively.
Fox
The Company leases its principal manufacturing and office facilities in Watsonville, California from Robert Fox, a
founder, Chief Engineering Officer and noncontrolling shareholder of Fox. The term of the lease is through July of
2018 and the rental payments can be adjusted annually for a cost-of-living increase based upon the consumer price
index. Fox is responsible for all real estate taxes, insurance and maintenance related to this property. The leased
facilities are 86,000 square feet and Fox paid rent under this lease of approximately $1.1 million and $1.0 million for
the years ended December 31, 2009 and 2008, respectively.
Staffmark
During 2009, the Company amended the Staffmark intercompany credit agreement which, among other things,
recapitalized a portion of Staffmark’s long-term debt by exchanging $35.0 million of debt for Staffmark common stock.
As a result of this transaction, the Company’s ownership percentage of the outstanding stock of Staffmark increased
and the noncontrolling interest in Staffmark decreased. In addition, as a result of the exchange the Company received
cash from a noncontrolling shareholder and recorded an increase to noncontrolling interest of $5.5 million. The receipt
of the noncontrolling shareholder contribution is included in Net proceeds provided by noncontrolling interest on the
Company’s Consolidated Statement of Cash Flows.
F-35
SCHEDULE II –Valuation and Qualifying Accounts
(in thousands)
Balance at
beginning
of Year
Additions
Charge to
Costs and
Expense
Other
Deductions
Balance at
end of
Year
Allowance for doubtful accounts - 2007
Allowance for doubtful accounts - 2008
Allowance for doubtful accounts - 2009
Valuation allowance for deferred tax
assets – 2007
Valuation allowance for deferred tax
assets - 2008
Valuation allowance for deferred tax
assets - 2009
$ 3,307
$ 3,204
$ 4,824
$ -
$ 359
$ -
$ 2,134
$ 3,917
$ 5,999
$ 359
$ -
$ -
$ 825(1)
$ 1,778(1)
$ -
$ 3,062(2)
$ 4,075(2)
$ 5,414(2)
$ 3,204
$ 4,824
$ 5,409
$ -
$
-
$ 359
$ -
$ 359(3)
$ -
$
-
$ -
$ -
(1) Represents opening allowance balances related to current year acquisitions.
(2) Represent write-offs and rebate payments.
(3) Represents utilization of deferred tax asset and corresponding removal of valuation allowance.
S-1
Compass Diversified Holdings (“CODI”) offers our shareholders an opportunity to own profitable middle market
businesses that hold highly defensible positions in their individual market niches.
We own controlling interests in our subsidiary businesses, which maximizes our ability to impact their performance.
Our model for creating shareholder value involves discipline in identifying and valuing businesses and proactive
engagement with the management teams of the companies we acquire. From time to time, we will monetize our interest
in those subsidiaries if we believe that doing so will maximize value to our owners.
We deliver an extraordinarily high level of transparency in our financial reporting and governance processes. We
believe our owners deserve and should demand nothing less.
As of December 31, 2009, CODI owned and managed six diverse subsidiaries; we believe that these businesses will
continue to produce stable and growing cash flows over the long term, enabling us both to invest in the long-term growth
of the company and to make distributions of cash to our shareholders.
C o n t e n t
Letter to Our Owners....................................................................................................................................................
Your Companies................................................................................................................................................................
CODI Governance..............................................................................................................................................................
Owner Information............................................................................................................................................................
Financial Review................................................................................................................................................................
1
4
6
8
9
C O D I I n f o r m a t i o n
Company Headquarters...............................................................................................61 Wilton Road, Second Floor Westport, CT 06880, (203) 221-1703
Independent Auditors...................................................................................................................................................................Grant Thornton LLP, New York, NY
Common Stock Listing................................................................................................................................................NASDAQ Global Select Market, Ticker: CODI
Transfer Agent...................................................................BNY Mellon Shareholder Services, 111 Founders Plaza, Suite 1100 East Hartford, CT 06108
Investor Relations Contact..........................................................................................Leon Berman, The IGB Group, (212) 477-8438, LBerman@igbir.com
Annual Meeting of Shareholders..................May 26, 2010, 9:00 a.m., EST, The Doubletree Hotel, 789 Connecticut Avenue Norwalk, CT 06854
Website......................................................................................................................................................................................www.compassdiversifiedholdings.com
Opposite Page Top to Bottom:
John Yacoub, CEO Advanced Circuits; Mike Thomas, CEO American Furniture Manufacturing; Abbey Daniels, CEO Anodyne Medical Device;
Bob Kaswen, CEO Fox Racing Shox; Marc Simon, CEO Halo Branded Solutions; Fred Kohnke, CEO Staffmark
30%
Cert no. SGS-COC-004989
Annual Report to Our Owners
C O M P A S S D I V E R S I F I E D H O L D I N G S
Sixty One Wilton Road
Westport, CT 06880
www.compassdiversifiedholdings.co m
C O M P A S S D I V E R S I F I E D H O L D I N G S