Compass Diversified Holdings - 10-Q quarterly report FY

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

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

     This Quarterly Report on Form 10-Q, contains both historical and forward-looking statements. We may, in some cases, use words such as “project,” “predict,” “believe,” “anticipate,” “plan,” “expect,” “estimate,” “intend,” “should,” “would,” “could,” “potentially,” or “may,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements in this Quarterly Report on Form 10-Q are subject to a number of risks and uncertainties, some of which are beyond our control, including, among other things:

     Our actual results, performance, prospects or opportunities could differ materially from those expressed in or implied by the forward-looking statements. Additional risks of which we are not currently aware or which we currently deem immaterial could also cause our actual results to differ.

     In light of these risks, uncertainties and assumptions, you should not place undue reliance on any forward-looking statements. The forward-looking events discussed in this Quarterly Report on Form 10-Q may not occur. These forward-looking statements are made as of the date of this Quarterly Report. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances, whether as a result of new information, future events or otherwise, except as required by law.

Compass Diversified Holdings, a Delaware statutory trust (“Holdings”), was organized in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability company (the “Company”), was also formed on November 18, 2005. Compass Group Management LLC, a Delaware limited liability company (“CGM” or the “Manager”), was the sole owner of 100% of the Interests of the Company as defined in the Company’s operating agreement, dated as of November 18, 2005, which were subsequently reclassified as the “Allocation Interests” pursuant to the Company’s amended and restated operating agreement, dated as of April 25, 2006 (as amended and restated, the “LLC Agreement”).

The condensed consolidated financial statements for the three-and nine-month periods ended September 30, 2008 and 2007, (recast for discontinued operations), are unaudited, and in the opinion of management, contain all adjustments necessary for a fair presentation of the condensed consolidated financial statements. Such adjustments consist solely of normal recurring items. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the annual consolidated financial statements and accompanying notes of the Company. These interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007.

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

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133” (“SFAS 161”). This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS 161 applies to all derivative instruments within the scope of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) as well as related hedged items, bifurcated derivatives, and non-derivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement.

In May 2008, the FASB issued SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles . The purpose of this statement is to improve financial reporting by providing a consistent framework for determining applicable accounting principles to be used in the preparation of financial statements presented in conformity with accounting principles generally accepted in the United States of America. SFAS No. 162 will become effective 60 days after the SEC’s approval. The Company believes that the adoption of this standard on the effective date will not have a material effect on its consolidated financial statements.

On October 10, 2008, the FASB staff issued Staff Position (FSP) No. SFAS 157-3, “ Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active ” which amends SFAS No. 157 by incorporating an example to illustrate key considerations in determining the fair value of a financial asset in an inactive market. FSP 157-3 was effective on October 10, 2008. The Company has adopted provisions of SFAS No. 157 and incorporated the considerations of this FSP in determining the fair value of its financial assets. FSP 157-3 did not have a material impact on the Company’s financial statements.

On January 4, 2008, Fox Factory Holding Corp., a subsidiary of the Company, entered into a Share Purchase Agreement with Fox Factory, Inc. (“Fox”) and Robert C. Fox, Jr., the sole shareholder of Fox, to purchase, and consummated the purchase of 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 76.0% 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 minority 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.

Identifiable intangible assets recorded as a result of this acquisition aggregated approximately $57.5 million and includes the value assigned to trademarks of $13.3 million which is not subject to amortization.

The Company’s Manager, acted as an advisor to the Company in the transaction, and received fees and expense payments totaling approximately $0.9 million.

On January 21, 2008, the Company’s majority-owned subsidiary, CBS Personnel, acquired Staffmark Investment LLC (“Staffmark”), a privately held personnel services provider. Staffmark is a leading provider of commercial staffing services in the United States. Staffmark provides staffing services in more than 30 states through more than 200 branches and on-site locations. The majority of Staffmark’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 is 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 for a total purchase price of approximately $128.6 million, exclusive of transaction fees and closing costs of $5.2 million. Staffmark has become a wholly-owned subsidiary of CBS Personnel and Staffmark’s results of operations are included in CBS Personnel’s financial statements from the date of acquisition..

The aggregate purchase price consisted of cash and 1,929,089 shares of CBS Personnel common stock, valued at approximately $47.9 million. The fair value of the CBS Personnel stock issued and transferred to Staffmark 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 stock”) in exchange for all of the membership units of Staffmark, gave the holders of Staffmark’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 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.

Identifiable intangible assets recorded as a result of this acquisition aggregated approximately $50.1 million.

The Company’s ownership percentage of CBS Personnel is 68.7% on a primary basis and 66.7% on a fully diluted basis subsequent to the Staffmark 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.

The following unaudited pro forma data for the nine months ended September 30, 2008 and 2007 gives effect to the acquisitions of Fox and Staffmark, as described above, as if the acquisitions had been completed as of January 1, 2008 and January 1, 2007, respectively. The pro forma data gives effect to actual operating results and adjustments to interest expense, amortization and depreciation expense, management fees and minority interests in the acquired businesses. The information is provided for illustrative purposes only and is not necessarily indicative of the operating results that would have occurred if the transactions had been consummated on the date indicated, nor is it necessarily indicative of future operating results of the consolidated companies, and should not be construed as representing results for any future period.

On January 5, 2007, the Company sold its majority owned subsidiary, Crosman Acquisition Corporation (“Crosman”) for $143.0 million. The Company’s share of the net proceeds, after accounting for the redemption of Crosman’s minority holders and the payment of CGM’s profit allocation of $7.9 million, was approximately $110.0 million. The Company recognized a gain on the sale in the first quarter of fiscal 2007 of approximately $36.0 million or $1.77 per share.

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 minority 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 minority 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 $39.0 million or $1.24 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. It is anticipated that the remaining net proceeds from the 2008 dispositions will be invested in short term investment-grade securities pending future application for partial funding of future acquisitions when identified.

Summarized operating results for the 2008 dispositions through the dates of the respective sales were as follows:

The results for the three and nine-month periods ended September 30, 2007 exclude $1.0 million and $2.4 million, respectively, of intercompany interest expense.

The results for the three and nine-month periods ended September 30, 2007 exclude $0.4 million and $1.2 million, respectively, of intercompany interest expense.

The following table presents summary balance sheet information for the 2008 dispositions as of December 31, 2007:

At September 30, 2008, the Company has six reportable business segments. Each business segment represents an acquisition. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies.

A description of each of the reportable segments and the types of products and services from which each segment derives its revenues is as follows:

The tabular information that follows shows data of reportable segments reconciled to amounts reflected in the Condensed Consolidated Financial Statements. The operations of each of the businesses are included in consolidated operating results as of their date of acquisition. There are no inter-segment transactions.

A disaggregation of the Company’s consolidated revenue and other financial data for the three and nine-month periods ended September 30, 2008 and 2007, is presented below (in thousands).

Property, plant and equipment is comprised of the following at September 30, 2008 and December 31, 2007 (in thousands):

Depreciation expense was $2.2 million and $6.2 million for the three- and nine-month periods ended September 30, 2008, respectively. These amounts exclude $0.5 million and $0.3 million of depreciation expense for Aeroglide and Silvue, respectively, for the nine months ended September 30, 2008.

Inventory is comprised of the following at September 30, 2008 and December 31, 2007 (in thousands):

A reconciliation of the change in the carrying value of goodwill for the nine-month period ended September 30, 2008 and the year ended December 31, 2007 is as follows (in thousands):

Other intangible assets subject to amortization are comprised of the following at September 30, 2008 (in thousands):

Amortization expense was $6.2 million and $18.4 million during the three- and nine-month periods ended September 30, 2008, respectively. These amounts exclude $0.8 million and $0.3 million of amortization expense for the nine months ended September 30, 2008 for Aeroglide and Silvue, respectively.

At September 30, 2008, the Company had $153.5 million outstanding of its Term Loan Facility under its Credit Agreement. The Credit Agreement provides for a Revolving Credit Facility totaling $325 million which matures in December 2012 and a Term Loan Facility totaling $153.5 million which matures in December 2013. The Term Loan Facility requires quarterly payments of $0.5 million with a final payment of the outstanding principal balance due on December 7, 2013. The Credit Agreement permits the Company to increase, over the next two years, the amount available under the Revolving Credit Facility by up to $25 million and the Term Loan Facility by up to $145 million, subject to certain restrictions and Lender approval.

The Company increased its Revolving Credit Facility from $325 million to $340 million on August 4, 2008. The Company had no outstanding borrowings under its Revolving Credit Facility at September 30, 2008.

The Company had approximately $284.9 million in borrowing base availability under its Revolving Credit Facility at September 30, 2008. Letters of credit outstanding at September 30, 2008 totaled approximately $64.0 million.

At September 30, 2008, the Company was in compliance with all covenants.

On January 22, 2008, we entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of $140 million of Term Loan debt at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The Swap is designated as a cash flow hedge and is anticipated to be highly effective.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” (“SFAS 157”), which is effective for fiscal years beginning after November 15, 2007 and for interim periods within those years. This statement defines fair value, establishes a framework for measuring fair value and expands the related disclosure requirements. This statement applies to other accounting pronouncements that require or permit fair value measurements. The statement indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. SFAS 157 defines fair value based upon an exit price model.

In February 2008 the FASB issued FASB Staff Positions (“FSP”) 157-1 and 157-2. FSP 157-1 amends SFAS 157 to exclude SFAS No. 13, “Accounting for Leases,” (“SFAS 13”) and its related interpretive accounting pronouncements that address leasing transactions, while FSP 157-2 delays the effective date of the application of SFAS 157 to fiscal years beginning after November 15, 2008 for all non-financial assets and non-financial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis.

The Company adopted SFAS 157 as of January 1, 2008, with the exception of the application of the statement to non-recurring non-financial assets and non-financial liabilities. Non-recurring non-financial assets and non-financial liabilities for which we have not applied the provisions of SFAS 157 include those measured at fair value in our annual goodwill impairment testing, indefinite lived intangible assets measured at fair value for impairment testing, asset retirement obligations initially measured at fair value, and those initially measured at fair value in a business combination.

Valuation Hierarchy

SFAS 157 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our 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 September 30, 2008 (in thousands):

A reconciliation of the change in the carrying value of our level 3, supplemental put liability for the three- and nine-month periods ended September 30, 2008 is as follows (in thousands):

The Company’s derivative instrument consists of an over-the-counter (OTC) 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 minority shareholder was determined based on inputs that are readily available in public markets or can be derived from information available in publicly quoted markets. As such the Company categorized its interest rate swap contract and the stock option of the minority shareholder as Level 2.

Our Manager, 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 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 we estimate the fair value of our businesses using a discounted future cash flow model for the purpose of determining our potential liability associated with the Supplemental Put Agreement. We use 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 our businesses and (ii) financial and market data of comparable merged, sold or acquired companies. Any change in the potential liability is accrued currently as a non-cash adjustment to earnings. The implementation of SFAS 157 did not result in any material changes to the models or processes used to value this liability.

On January 22, 2008 the Company entered into a three-year interest rate swap (“Swap”) agreement with a bank, fixing the rate of $140 million at 7.35% on a like amount of variable rate Term Loan Facility borrowings. The Swap is designated as a cash flow hedge and is anticipated to be highly effective.

The Company is using the Swap to manage interest rate exposure. The Swap is designated as a cash flow hedge, accordingly, changes in the fair value of the swap are recorded in stockholders equity as a component of accumulated other comprehensive income. At September 30, 2008, the unrealized gain on the Swap, reflected in accumulated other comprehensive income, was approximately $0.4 million.

The following table sets forth the computation of comprehensive income for the nine months ended September 30, 2008 and September 30, 2007, respectively:

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.

In the normal course of business, the Company and its subsidiaries are involved in various claims and legal proceedings. While the ultimate resolution of these matters has yet to be determined, the Company does not believe that their outcome will have a material adverse effect on the Company’s consolidated financial position or results of operations.

On February, 12, 2008, American Furniture’s 1.2 million square foot corporate office and manufacturing facility in Ecru, Mississippi 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. As of November 7, 2008 the damaged manufacturing facility and corporate office were substantially restored and operating.

The three and nine month results of operations for the periods ended September 30, 2008 for American Furniture reflect a reduction in cost of sales of approximately $1.3 million for the nine-month period and a reduction of selling, general and administrative expenses of approximately $0.3 million and $3.1 million, respectively, which reflects the expected benefit of the business interruption insurance proceeds to be received. The split of the business insurance accrual between cost of sales and selling, general and administrative expense was done to reflect a normalized gross profit percentage based on the actual sales level achieved with the balance recorded as a negative selling and general administrative expense item reflecting the estimated loss of operating income resulting from the fire. The Company is currently in the process of evaluating its claims with its insurance carriers, and as such the insurance claims may be subject to refinement.

On August 8, 2008 the Company exchanged a promissory 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.

In addition, 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.

As a result of the above transactions the Company’s ownership percentage in Anodyne increased to approximately 67% on a primary basis and 57% on a fully diluted basis.

Compass Diversified Holdings, a Delaware statutory trust, was organized in Delaware on November 18, 2005. Compass Group Diversified Holdings, LLC, a Delaware limited liability Company, was also formed on November 18, 2005. In accordance with the Trust Agreement, 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. The Manager is the sole owner of the Allocation Interests of the Company. The Company is the operating entity with a board of directors and other corporate governance responsibilities, similar to that of a Delaware corporation.

The Trust and the Company were formed to acquire and manage a group of small and middle-market businesses headquartered in North America. We characterize small to middle market businesses as those that generate annual cash flows of up to $40 million. We focus on companies of this size because of our belief that these companies are often more able to achieve growth rates above those of their relevant industries and are also frequently more susceptible to efforts to improve earnings and cash flow.

In pursuing new acquisitions, we seek businesses with the following characteristics:

Based on the experience of our management team and its ability to identify and negotiate acquisitions, we believe we are positioned to acquire additional attractive businesses. Our management team has a large network of 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 Credit Agreement, 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, particularly in the current credit environment, and is highly unusual in the marketplace for acquisitions in which we operate.

The areas of focus for Q4 2008 and fiscal 2009, which are generally applicable to each of our businesses, include:

The current deteriorating macroeconomic environment presents a challenging market for our businesses, particularly CBS Personnel, American Furniture and Halo, in which it will be difficult to achieve cash flow growth in the short term. However, we believe increased value to our shareholders can still be achieved through a combination of a focus on innovation to support productivity and disciplined expense control, while we continue to invest prudently for long-term profitable growth.

On January 4, 2008, we purchased a controlling interest in Fox, 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. We made loans to and purchased a controlling interest in Fox for approximately $80.4 million, representing approximately 76.0% of the outstanding equity.

On January 21, 2008, CBS Personnel purchased all of the outstanding equity interests of Staffmark. Staffmark is a leading provider of commercial staffing services in the United States. Staffmark provides staffing services in more than 30 states through more than 200 branches and on-site locations. The majority of Staffmark’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 is one of the largest privately held staffing companies in the United States.

Under the terms of the Stock Purchase Agreement, CBS Personnel purchased all of the outstanding equity interests of Staffmark for a total purchase price, including fees and transaction costs, of approximately $133.8 million. The aggregate purchase price consisted of cash and 1,929,089 shares of CBS Personnel common stock, valued at approximately $47.9 million. Our ownership percentage of CBS Personnel is 68.7% on a primary basis and 66.7% on a fully diluted basis subsequent to the Staffmark acquisition.

On February, 12, 2008, American Furniture’s 1.2 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. As of November 7, 2008 the damaged manufacturing facility and corporate offices were substantially restored and operating.

The nine-month results of operations for American Furniture reflect a reduction in cost of sales of approximately $1.3 million and a reduction of selling, general and administrative expenses of approximately $3.1 million which reflects the expected benefit of the business interruption insurance proceeds to be received. The split of the business insurance accrual between cost of sales and selling general and administrative expense was done to reflect a normalized gross profit percentage based on the actual sales level achieved with the balance recorded as a negative selling and general administrative expense item reflecting the estimated loss of operating income resulting from the fire.

On June 24, 2008, we sold our majority owned subsidiary, Aeroglide, for a total enterprise value of $95.0 million. Our share of the net proceeds, after accounting for the redemption of Aeroglide’s minority holders and payment of transaction expenses totaled $85.6 million. Our Manager was paid a profit allocation from this sale in August 2008, totaling approximately $7.3 million. We recognized a gain on the sale of approximately $34.0 million or $1.08 per share.

On June 25, 2008, we sold our majority owned subsidiary, Silvue, for a total enterprise value of $95.0 million. Our share of the net proceeds, after accounting for the redemption of Aeroglide’s minority holders and payment of transaction expenses totaled $71.3 million. Our Manager was paid a profit allocation from this sale in August 2008, totaling approximately $7.7 million. We recognized a gain on the sale of approximately $39.0 million or $1.24 per share.

As noted above, we acquired our businesses on various dates through January 4, 2008. As a result, we cannot provide a meaningful comparison of our consolidated results of operations for the entire three- and nine-month periods ended September 30, 2008 compared to the same periods in 2007. In the following results of operations, we provide: (i) our consolidated results of operations for the three and nine months ended September 30, 2008 and September 30, 2007, which includes the results of operations of our businesses (segments) from the date of acquisition, and (ii) comparative results of operations for each of our businesses, on a stand-alone basis, for each of the three and nine-month periods ended September 30, 2008 and 2007 which include pro-forma results of operations for businesses acquired subsequent to January 1, 2007 that include pro-forma operating data for periods prior to our acquisition of the business in order to provide meaningful comparative data.

On a consolidated basis, net sales increased approximately $198.1 million and $585.2 million in the three and nine month periods ended September 30, 2008, respectively. The majority of this increase is due to: (i) increased revenues ($350.1 million year -to-date) at CBS Personnel principally resulting from the acquisition of Staffmark in January 2008 by CBS Personnel; (ii) increased net sales in 2008 attributable to our majority owned subsidiary American Furniture purchased in August 2007 ($94.9 million year-to-date); (iii) increased net sales in 2008 attributable to our majority owned subsidiary, Fox Factory purchased in January 2008 ($101.2 million year-to-date) and (iv) increased net sales attributable to HALO in 2008 ($24.6 million), purchased on February 28, 2007. Refer to the following results of operations by segment for a more detailed analysis of net sales by segment.

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

On a consolidated basis, cost of sales increased approximately $160.7 million and $469.2 million in the three and nine month periods ended September 30, 2008, respectively. These increases are due almost entirely to the corresponding increase in net sales referred to above. Refer to the following results of operations by segment for a more detailed analysis of cost of sales.

On a consolidated basis, selling, general and administrative expense increased approximately $30.2 million and $96.0 million in the three and nine month periods ended September 30, 2008, respectively. This increase is due to those costs associated with the acquisitions consummated subsequent to January 1, 2007, which include Halo, American Furniture and Fox and the add -on acquisition, Staffmark. Refer to the following results of operations by segment for a more detailed analysis of selling, general and administrative expense by segment. At the corporate level selling, general and administrative costs increased $0.8 million and $1.3 million in the three and nine months ended September 30, 2008 compared to the same periods in 2007 due principally to increased salaries and professional fees resulting from the increased size and scope of the operations.

Pursuant to the Management Services Agreement, we pay CGM a quarterly management fee equal to 0.5% (2.0% annually) of our consolidated adjusted net assets. We accrue for the management fee on a quarterly basis. For the three-months ended September 30, 2008 and 2007 we incurred approximately $3.8 million and $2.5 million, respectively, in expense for these fees. For the nine-months ended September 30, 2008 and 2007 we incurred approximately $11.0 million and $6.9 million, respectively, in expense for these fees. The increase in management fees for both the three and nine months ended September 30, 2008 is due to the increase in consolidated adjusted net assets resulting from our acquisitions of new businesses and Staffmark.

Concurrent with the 2006 IPO, we entered into a Supplemental Put Agreement with our Manager pursuant to which our Manager has the right to cause us to purchase the allocation interests then owned by them upon termination of the Management Services Agreement. We accrued approximately $5.8 million and $4.6 million in non-cash expense during the nine-months ended September 30, 2008 and September 30, 2007, respectively in connection with this agreement. During the three months ended September 30, 2008 we reversed approximately $0.8 million in supplemental put expense based on lower valuations attributed to some of our subsidiaries compared to valuations determined as of June 30, 2008. This expense represents that portion of the estimated increase/decrease in the value of our original businesses over our basis in those businesses that our Manager is entitled to if the Management Services Agreement were terminated or those businesses were sold. The change in supplemental put cost in both the three- and nine-months ended September 30, 2008 is attributable to the decrease/increase in the fair value of our businesses.

On a consolidated basis, amortization expense of intangible assets increased approximately $2.8 million and $9.5 million in the three- and nine-month periods ended September 30, 2008, respectively. These increases are due entirely to the recognition of intangible assets and the attendant amortization directly related to the purchase price allocations performed for each of our acquisitions since January 2007. Refer to the following results of operations by segment for a more detailed analysis of intangible asset amortization expense.

As previously discussed, we acquired our businesses on various acquisition dates beginning on May 16, 2006 (see table above). As a result, our consolidated operating results and discussion above only include the results of operations since the acquisition date associated with the business. The following discussion reflects a comparison of the historical and where appropriate, pro-forma results of operations for each of our businesses for the three- and nine-month periods ending September 30, 2008 and September 30, 2007, which we believe is a more meaningful comparison in explaining the comparative financial performance of each of our businesses. The following results of operations are not necessarily indicative of the results to be expected for the full year going forward.

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

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

The table below summarizes the income from operations data for Advanced Circuits for the three- and nine-month periods ended September 30, 2008 and September 30, 2007:

Net sales for the three months ended September 30, 2008 increased approximately $1.2 million over the corresponding three month period ended September 30, 2007. The increase in net sales were a result of increased sales in long-lead time PCBs ($0.8 million), quick-turn production ($0.8 million) offset in part by a decrease in subcontract revenue ($0.5 million).

Cost of sales for the three months ended September 30, 2008 increased approximately $0.4 million. This increase is principally due to the corresponding increase in sales. Gross profit as a percentage of sales increased during the three months ended September 30, 2008 (57.7% at September 30, 2008 vs. 56.7% at September 30, 2007) largely as a result of increased manufacturing efficiencies realized due to increased capacity, offset in part by increases in raw material costs associated with commodity items such as glass, copper and gold.

Selling, general and administrative expense increased $0.4 million during the three months ended September 30, 2008 compared to the same period in 2007 due principally to increases in costs associated with employee retention programs and additional personnel.

Operating income for the three months ended September 30, 2008 was approximately $4.6 million an increase of $0.4 million over 2007 primarily as a result of those factors described above.

Net sales for the nine months ended September 30, 2008 was approximately $42.7 million compared to approximately $39.1 million for the same period in 2007, an increase of approximately $3.6 million or 9.3%. The increase in net sales was largely due to increased sales in quick-turn production PCBs, and Prototype PCBs which increased by approximately $2.0 million and $0.6 million, respectively, resulting from increased marketing efforts. Quick-turn production PCBs represented approximately 34.3% of gross sales for the nine-months ended September 30, 2008 as compared to approximately 32.9% for the same period in 2007. Prototype PCBs comprised approximately 31.4% of sales for the nine months ended September 30, 2008 compared to approximately 32.8% for the same period in 2007. Assembly sales increased $0.7 million and subcontract revenue decreased approximately $1.8 million in the nine-months ended September 30, 2008 compared to the same period in 2007.

Cost of sales for the nine months ended September 30, 2008 was approximately $18.2 million compared to approximately $17.0 million for the same period in 2007, an increase of approximately $1.1 million or 6.7%. The increase in cost of sales was largely due to the increase in sales. Gross profit as a percentage of net sales increased by approximately 1.0% to approximately 57.5% for the nine months ended September 30, 2008 as compared to approximately 56.5% for the same period in 2007 largely as a result of increased manufacturing efficiencies realized due to increased capacity, offset in part by increases in raw material costs associated with commodity items such as glass, copper and gold.

Selling, general and administrative expense increased approximately $2.1 million in the nine months ended September 30, 2008 compared to same period in 2007 largely as a result of reversing $1.2 million in liabilities related to management loan forgiveness arrangements in the first quarter of 2007. Not taking into account the 2007 reversal of loan forgiveness costs, selling, general and administrative costs increased approximately $0.9 million during the nine month period ended September 30, 2008 compared to the same period in 2007 due to increased advertising and personnel costs.

Income from operations was approximately $13.9 million for the nine months ended September 30, 2008 compared to approximately $13.4 million at September 30, 2007. The increase was based on the factors described above.

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 within 48 hours of receiving an order.

American Furniture’s products are adapted from established designs in the following categories: (i) motion and recliner; (ii) stationary; (iii) occasional chair and (iv) accent table. 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.

The table below summarizes the income from operations data for American Furniture for the three and nine-month periods ended September 30, 2008 and the pro-forma income from operations for the three and nine-month periods ended September 30, 2007:

Net sales for the three months ended September 30, 2008 decreased approximately $1.3 million over the corresponding three months ended September 30, 2007. Stationary product sales decreased approximately $2.1 million due primarily to the continuing impact from the fire that destroyed the finished goods warehouse and most of the manufacturing facilities in February 2008. Motion sales increased by approximately $0.5 million in the quarter ended September 30, 2008 and sales in all other furniture categories were either flat or slightly higher in the 2008 quarter. The softer economy is also responsible, to a lesser extent, for lower sales volume and we expect that trend to continue throughout the current fiscal year and into 2009.

Cost of sales was approximately $25.3 million in each of the three month periods ended September 30, 2008 and 2007. Gross profit as a percentage of sales was 19.4% in the three months ended September 30, 2008 compared to 22.5% in the corresponding period in 2007. The decrease of 3.1% is attributable to raw material price increases, particularly foam and steel, and to a lesser extent continued labor inefficiencies incurred in the manufacturing recovery process due to multiple production facilities and overtime costs incurred, resulting from the fire in February 2008. Foam and steel prices are starting to decrease and we expect to realize the impact of these lower costs beginning in the first quarter of 2009.

Selling, general and administrative expense for the three months ended September 30, 2008 increased approximately $0.5 million. This increase is largely due to larger fuel cost ($0.4 million), legal costs and additional rent ($0.4 million) offset in part by business interruption insurance proceeds recorded during the quarter of approximately $0.3 million.

Income from operations decreased approximately $1.7 million to $0.2 million for the three months ended September 30, 2008 compared to the three months ended September 30, 2007 due principally to the reduction in sales and to other factors as described above.

Net sales for the nine months ended September 30, 2008 decreased $21.3 million from the corresponding nine months ended September 30, 2007. Stationary product sales decreased $16.3 million in the 2008 period and motion and recliner product sales decreased approximately $4.8 million. These decreases in net sales are the result of the continuing impact from the fire that destroyed the finished goods warehouse and most of the manufacturing facilities in February 2008. In addition to the fire, the impact of a softer economy was also responsible for the lower sales volume and we expect it to have a continuing impact throughout the current fiscal year and into 2009.

Cost of sales decreased approximately $14.3 million in the nine months ended September 30, 2008 compared to the same period of 2007 due principally to the corresponding decrease in sales. Gross profit as a percentage of sales was 20.8% in the nine months ended September 30, 2008 compared to 23.0% in the corresponding period in 2007. The reduction of 2.2% is attributable to raw material price increases during 2008, particularly foam and motion and recliner metal hardware, as well as manufacturing inefficiencies and an increase in overtime costs incurred that were necessary in the fire recovery process. Foam and steel prices are starting to decrease and we expect to realize the impact of these lower costs beginning in the first quarter of 2009.

Selling, general and administrative expense for the nine months ended September 30, 2008 decreased approximately $2.4 million compared to the same period of 2007. This decrease is primarily due to the business interruption proceeds recorded during the period of approximately $3.1 million. Also contributing to the decrease was a reduction of $0.4 million in commissions paid and $0.4 million in insurance expense during the period due to the significant reduction in net sales caused by the fire. These decreases were offset in part by increases in fuel costs of $0.8 million, legal costs totaling $0.3 million and increased property taxes and rent of $0.3 million during the nine months ended September 30, 2008 compared to 2007.

Income from operations decreased approximately $4.6 million for the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 primarily due to the decrease in net sales offset in part by the expected insurance proceeds recognized, as described above.

Anodyne, a specialty designer, manufacturer and distributor of medical devices, specifically patient support surfaces, was formed in February 2006 to purchase the assets and operations of AMF Support Surfaces, Inc (“AMF”) and SenTech Medical Systems, Inc. on February 15, 2006. On October 5, 2006, Anodyne purchased a third manufacturer and distributor of patient positioning devices, Anatomic Concepts, Inc. (“Anatomic”). Anatomic operations were merged into the AMF operations. On June 27, 2007 Anodyne purchased PrimaTech Medical Systems, Inc. (“PrimaTech”), a distributor of medical support surfaces focusing on the lower price point long-term and home care markets.

The support surfaces industry is fragmented and comprised of many small participants and niche manufacturers . Anodyne’s consolidation platform marks the first opportunity 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 products to market and maintain strict quality standards.

The table below summarizes the income from operations data for Anodyne for the three- and nine-month periods ended September 30, 2008 and September 30, 2007.